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His Majesty Sultan Qaboos bin Said - Oman Air by the vision of His Majesty Sultan Qaboos bin Said,...

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His Majesty Sultan Qaboos bin Said

Guided by the vision of His Majesty Sultan Qaboos bin Said, Oman Air contributes to the Sultanate of Oman in numerous ways. As Oman’s national carrier, our primary objective is to promote the Sultanate of Oman as a must-see destination across the world. We bring in tourism, which we help create through promotional efforts focused on attracting people to this beautiful nation, and consequentially contributing to the growth of the nation’s GDP. These efforts also encourage tourists to spend on hotel stays, travelling, shopping, dining and more. The cycle continues with tourism triggering the creation of better employment opportunities along with the development of the small and medium enterprise sector.

As we expand our wings to new destinations, investments in the development of new infrastructure increase. The expansion of Muscat International Airport nears completion, while new tourism projects are taking shape. We connect people to Oman and facilitate economic opportunities, thereby contributing to the nation’s overall growth.

Contributing to Building Our Nation

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ContentsOur Board of Directors …………………………………………………………. 08

Chairman’s Statement …………………………………………………………… 10

Chief Executive Officer’s Statement ………………………………………….... 14

Our Core Team…………………..……………………........................................ 18

Management Discussion and Analysis…………………..…………............… 40

Auditor’s Report on Corporate Governance…………………..……..............… 46

Corporate Governance Report…………………..…………………………........ 47

Auditor’s Report on Financial Statements…………………..……….............…. 52

Statement of Financial Position…………………..………………………........... 54

Statement of Comprehensive Income…………………..……………............… 55

Statement of Changes in Equity……….…………………..………….........…… 56 Statement of Cash Flows………………….…………………..……………….... 57

Notes to the Financial Statements………………….………………............…… 58

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Our Board of Directors(Standing from left to right)

Dr. Mohamed bin Ali bin Mohamed Al BarwaniDirector - Chairman, MB Holding

Eng. Ahmed bin Said bin Salim Al RawahiAdvisor to H.E. The Minister of Transport & Communicationsfor Civil Aviation Affairs

H.E. Mohsin bin Khamis bin Ghulam Al BalushiDirector - Advisor of the Ministry of Commerce & Industry

H.E. Maitha bint Saif bin Majid Al MahruqiDeputy Chairman - Undersecretary of the Ministry of Tourism

H.E. Darwish bin Ismail bin Ali Al BulushiChairman of the Board - Minister Responsible for Financial Affairs

Major General Sulaiman bin Mohamed Al HarthyDirector - Assistant Inspector General of Police and Customsfor Administrative and Financial Affairs

Sheikh/Nasser bin Sulaiman bin Hamed Al HarthyDirector General of Investments, Ministry of Finance

Mr. Vasudevan ThulasidasDirector - Aviation Expert (Advisor to the Board)

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 68 9

On behalf of the Board of Directors of Oman Air, it gives me great pleasure to welcome you to the 35th Annual General Meeting and to present to you the Annual Report for the financial year ending 31st December 2016.

Oman Air has continued its ambitious programme of expansion in 2016 with the introduction of four brand new Boeing 737-800s joining the Oman Air fleet. The carrier has operated B737s for many years and the aircraft provide the backbone of the airline’s long and medium haul fleet.

We have continued to upgrade our Airbus fleet. The first Airbus 330 to benefit from a comprehensive retrofit landed at Muscat International Airport from Paris in October 2016. This reflects our commitment to continue to invest in our award-winning on board experience.

The previous A330 interiors attracted enormous international acclaim when they were first unveiled in 2009 and the new A330 interiors surpass those high standards and customers are already delighted with the results.

Oman Air’s capacity has increased significantly over the last year, recording an increase in flight movements by more than 4000 flights to nearly 51,952 flights, compared with 2015. The number of round trips Oman Air offered in 2016 rose to 30,978 trips from the previous year’s 28,270 trips.

As a result of the increased capacity, Oman Air experienced a huge 21% increase in passenger numbers with over 7.7 million passengers travelling with the airline in 2016, compared to 6.4 million passengers in 2015.

Among the developments in 2016 are: the introduction of a double daily service to London Heathrow; from five times a week, to daily flights to Paris and increased frequencies on other European routes. The other recent additions to our network include, Manila, Jakarta, Singapore, Goa, Dhaka and Mashhad.

Chairman’s Statement

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The introduction of Guangzhou, China and Najaf, Iraq were the other major milestones of 2016. We also announced the start of our second destination in the UK with the new Muscat to Manchester daily service in May 2017.

While the fluctuating oil prices continue to affect the global economic outlook in general negatively, Oman Air’s revenues have increased during 2016 to OMR 472 million, an increase of 1% on 2015.

Oman Air is continuing with its broad human resources strategy of appreciating the skills, abilities, commitment and contributions of all staff, regardless of their backgrounds. The company has worked hard to increase the employment of Omani nationals and now over two thirds of the workforce originates from Oman.

2016 also saw a move to put Oman Air at the forefront of pilot and cabin crew training with the launch of the Oman Air Flight Training Centre (OAFTC) in October. It is a state-of-the-art facility that is the first of its kind in the Sultanate of Oman.

Oman Air continues to excel in other areas of the business. The amount of cargo that Oman Air handled in 2016 increased from 138,972 tonnes to approaching 159,618 tonnes.

Our Catering Services Division has won several new contracts including a three and a half year contract with British Airways. In the past year, Oman Air Catering Services produced an extra one million meals than were originally budgeted for, increasing productivity without compromising on quality.

Extensive work continues to improve the efficiency and effectiveness of every area of the business. Oman Air’s engineering division is preparing to move to a much bigger facility, productivity can only increase.

As a national carrier, one of our mandates is to contribute to the economic growth of the Sultanate by creating “air bridges” with brotherly and friendly countries to bring tourists from abroad, which is supporting tourism, and creating business opportunities between national businessmen in Oman and abroad.

The infrastructure to do this is now practically fully available; Muscat’s new airport is nearing completion after the opening of the new passenger terminal in Muscat, meaning that the home base for Oman Air will be state-of-the-art.

The contribution from Oman Air, as national airline, to the economy of the Sultanate of Oman is estimated at about RO 600 million.

I would like to take this opportunity to thank CEO Paul Gregorowitsch who has now completed his second year as CEO and continues to work tirelessly with the company’s staff to ensure that Oman Air runs at optimum efficiency, whilst maintaining the highest possible standards in all areas of our operation. I would also like to thank my esteemed colleagues on the Board of Directors, the Executive Committee and the Audit Committee for their unstinting support and vision.

On behalf of myself, the Board of Directors and the Executive Management, I would like to thank His Majesty Sultan Qaboos bin Said and his Government for their invaluable advice, timely encouragement and wise guidance. My colleagues on the Board and within Oman Air’s management would once again like to join me in expressing our gratitude to His Majesty for his vision, his kind benevolence and his support.

Darwish bin Ismail bin Ali Al Bulushi Chairman, Oman Air

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As the aviation industry in general continues to face a number of challenges, Oman Air has steered its way through an increasingly volatile, political and economic climate to make significant progress in its journey “To Become the Best”.

With the continued guidance and vision of His Majesty Sultan Qaboos bin Said, the trust and confidence of our respected Board and the leadership of our Chairman, Oman Air is continuing its ambitious journey by contributing massively to the national economy, of fleet and route expansion and product enhancement.

In 2016, over 7.7 million guests experienced Oman Air’s award-winning product, an increase of over 21% on 2015. The number of available seat kilometres grew to 24.8 billion, an increase of 20% and the number of flight movements grew to 51,952, an increase of 9%.

These positive growth figures mean that Oman Air has managed to increase its contribution to Oman’s GDP in 2016 to close to OMR 600 million as per the latest studies of Oxford Economics. This is projected to grow further to a staggering OMR 990 million in 2017; meaning that Oman Air will continue to create employment opportunities to Omani nationals, bringing tourists to the Sultanate, building global connections and supporting small and medium enterprises.

This worthwhile contribution to Oman’s economy can only be achieved by Oman Air’s continued growth and whilst we didn’t reach our targets for 2016, we have ambitious plans for 2017. Last year, net yield with respect to revenue per kilometre (RPK) fell by a little over 17% across the network due to a number of external factors. As a result of this, we have modified our growth targets slightly, but enhancing our fleet and network is the way to continue to stimulate demand and create stand out in an increasingly crowded market place.

I am delighted to say that Oman Air has continued to prove its worth on the international stage in 2016, with a raft of industry awards to add to its growing collection. Recent awards in 2016 include the World’s Leading Airline – Economy Class at the World Travel Awards in the Maldives, and Foreign Airline of the Year by Sector to the Middle East at the annual KLIA Awards, introduced in 2006 to recognise the best in Malaysian aviation industry. The coveted Signum

Chief Executive Officer’s Statement

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Virtutis, the seal of excellence, from the Seven Stars Luxury Hospitality and Lifestyle Awards 2016 and winner for the Best Airline in the Middle East, Africa and Europe. The accolades are not limited to the passenger operation; Oman Air Cargo was also awarded “Best Cargo Airline for Valuable Goods – North and East” at the India Cargo Awards 2016 held in Delhi.

The growing international recognition creates demand for Oman Air’s expanding network. Developments in the past year include: the introduction of a double daily service to London Heathrow; from five times a week, to daily flights to Paris and increased frequencies on other European routes. Manila, Jakarta, Singapore, Goa, Dhaka and Mashhad are other recent additions to the network. A major milestone at the end of 2016 was the introduction of Oman Air’s first destination in China, Guangzhou, launched in December and the commencement of the four times weekly flight to Najaf, Iraq in November last year. We also announced the start of our second destination in the UK with the new Muscat to Manchester daily service in May 2017.

Fleet expansion is critical to support the network expansion and 2016 saw the introduction of four brand new Boeing 737-800s joining the Oman Air fleet.

With the addition of the new Boeing 737–800, Oman Air’s fleet stands at 47. Currently Oman Air’s fleet consists of four Boeing 787 Dreamliners, six Airbus 330-300s, four Airbus 330-200s, five Boeing 737-900s, 23 Boeing 737-800s, one Boeing 737-700 and four Embraer 175s. Three more Boeing 737–800s are scheduled to join the fleet and this year, Oman Air will be unveiling new B787-9 Dreamliners and revamping the existing Airbus fleet.

Whilst continuing on our growth path we have also been consistently developing ways to make Oman Air more profitable without compromising on the very highest level of products and services. I would like to thank all our 7,633 employees who have contributed to our efficiency-improvement programmes, whilst enabling us to continue operating a much acclaimed, award-winning airline.

Oman Air also continues to invest in sustaining our award-winning services and products. New menus have been developed for First Class, Business Class and Economy Class customers flying on European sectors. We have introduced new and improved inflight entertainment systems, which offer an increased choice of recently-released Hollywood movies and a broader range of TV programmes. A new safety video which showcases the destination of Oman, together with its rich historical and cultural heritage has also been introduced. In addition, cabin crew will undergo enhanced training to ensure that all customers are offered the very best inflight service.

I feel incredibly proud of all we have managed to achieve in 2016 and whilst the path ahead is by no means smooth, we are very well-placed to continue with our expansion plans and to grow our contribution to Oman’s economy. None of this would be possible without the support and vision of His Majesty Sultan Qaboos bin Said, His Excellency Darwish bin Ismail bin Ali Al Bulushi, Minister Responsible for Financial Affairs and Chairman of our Board, the Board Members, the effective management of our Chief Officers, the dedication of all our colleagues and, of course, our loyal customers.

Paul Gregorowitsch Chief Executive Officer

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Our Core Team(Left to right) Mohammed Ba Omar –

Japeen Shah – Chief Financial Officer

Eng. Abdulaziz bin Saud Al Raisi – Chief Officer Management Affairs

Captain Ali bin Hassan Sulaiman – Chief Officer Flight Operations

Abdulrahman Al Busaidy – Chief Operating Officer

Paul Gregorowitsch – Chief Executive Officer

Salim bin Mohammed Al Kindy – Chief Technical Officer

Dr. Abdul Razaq Al Raisi -

Reidha -

Andrew Walsh – Chief Officer Service Delivery

Our Core Team(Left to right)

Eng. Abdulaziz bin Saud Al RaisiExecutive Vice President - Products and Brand Development

Captain Ali bin Hassan SulaimanExecutive Vice President & Chief Operations Officer

Japeen ShahExecutive Vice President & Chief Financial Officer

Abdulrahman Al BusaidyDeputy CEO & Chief Commercial Officer

Paul GregorowitschChief Executive Officer

Salim bin Mohammed Al KindyDeputy CEO & Executive Vice President Change

Dr. Abdulrazaq Al RaisiExecutive Vice President Corporate Services & Business Development

Ali Redha Al LawatiyaExecutive Vice President - Engineering & Maintenance

Andrew WalshExecutive Vice President - Transition Office (GH & CGO)

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Every single day, Oman Air flies in thousands of tourists from different parts of the world to experience the beautiful Sultanate of Oman, who are spoilt for choice with the natural springs and flowing wadis, pristine beaches and unending sand dunes, historic forts and traditional souqs, that the country has to offer.

Oman Air’s contribution to the national economy stands at about OMR 600 million for 2016. This has been achieved through the ever-increasing number of tourists we bring into the Sultanate, through the resulting employment opportunities being created for Omani nationals, and through supporting local small and medium enterprises. The overall contribution of the travel and tourism sector to the nation’s GDP is expected to grow by 6.0% to OMR 1,688.9 million (5.9% of GDP) in 2016 from OMR 1,593.8 million in 2015 (5.7% of GDP). It is forecast to rise by 6.0% p.a. to OMR 3,023.3 million by 2026.

Surge in tourism Oman Air’s contribution to the GDP of Oman

Om

ani R

ials

(In

Mill

ions

)

1100

1000

900

800

700

600

500

400

300

200

02011Year 2014 2016

420

600

333

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 620 21

Oman Air contributes to generating employment opportunities in the travel and tourism sector, both directly and indirectly. Employment in this sector is forecast to grow by 5.1% in 2016 to 56,000 jobs (2.8% of total employment) from 53,500 jobs directly generated in 2015 (2.7% of total employment). This includes employment opportunities among hotels, travel agents, restaurants and the wider leisure industry.

The total contribution of the travel and tourism sector to employment including the wider effects from investment is forecast to rise by 4.4% in 2016 to 116,500 jobs (5.9% of total employment) from 111,500 jobs in 2015 (5.7% of total employment). By 2026, the travel and tourism sector is forecast to support 164,000 jobs (7.9% of total employment), an increase of 3.5% per annum over the period.

Taking employment opportunities to a higher level

Employment Opportunities

Em

plo

ymen

t in

Trav

el a

nd T

ouri

sm

44500

5350056000

56000

45000

40000

35000

300002014Year 2015 2016

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The growth of tourism in Oman has affected an increasing demand for hotels, resorts and other leisure activities. Working to develop infrastructure like roads, ports and airports that support this growth, Oman has strengthened its position as a tourist destination, a manufacturing base and a transportation hub for the region. The new Muscat International Airport is nearing completion and is designed to handle 12 million passenger arrivals every year.

Consequently, the travel and tourism sector attracted an increase in capital investment of 4.6% in 2016 over OMR 245.5 million in 2015. This is further expected to rise by 5.8% per annum over the next ten years to OMR 450.4 million in 2026. The travel and tourism industry’s share of the total national investment will rise from 3.2% in 2016 to 4.0% in 2026.

The rewards of investmentsInvestment in Travel and Tourism

Om

ani R

ials

(In

Mill

ions

)

245.5

450.4460

250

1002015Year 2026

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 624 25

Oman also benefits from money spent by tourists (otherwise known as visitor exports) while in the country, such as hotel stays, travelling, dining and shopping. This is a key component of the direct contribution of the travel and tourism sector. In 2015, Oman generated OMR 679.9 million in visitor exports. In 2016, this is expected to grow by 5.4%, and the country is expected to attract 1,813,000 international tourist arrivals.

By 2026, international tourist arrivals are forecast to total 3,342,000, generating expenditure of OMR 1,481.3 million, an increase of 7.5% per annum. Oman Air is constantly expanding its network, to bring in more visitors to experience all that Oman has to offer and contribute towards building the nation further.

Rise in visitor exports Visitor Exports

743.8

679.9

1,481.31900

1500

1000

900

800

750

700

650

600Year 2014

Om

ani R

ials

(In

Mill

ions

)

2015 2026

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 626 27

With Oman being listed as one of the Top 10 travel destinations in the world by Vogue magazine and Lonely Planet, the number of international passenger arrivals continue to rise. In 2016, it registered a 16.9% increase with 5.54 million arrivals.

On the cargo front, following the successful launch of our joint venture company, ‘Oman Air SATS Cargo LLC’, we have seen the revenues for 2016 grow by 6%, which means not only was a profit made but the target was exceeded by 9%. For 2017, the bottom-line result is expected to improve by another 12% above the actual 2016 results.

Increasing passenger arrivals and cargo handling

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We strive hard to contribute to the growth of the economy and work towards our objective to become the best. This vision includes maintaining our standing as a luxury airline with a multi award-winning on-board product, and to saving costs without impacting the standard of the products we offer and our guest experience. The Awards we are honoured to receive year after year bear testimony to the quality of our products and services.

Reaping global rewards

2016 Awards •‘World’sLeadingBusinessClassAirline–MiddleEastandBestEconomyClassAirline– Middle East’ at the World Travel Awards

•OmanAir’sBusinessClassseatshavebeenselectedandfeaturedintheTransportation 2015 category at the Chicago Athenaeum Museum of Architecture and Design and Metropolitan Arts Press Ltd.’s Annual Good Design® Awards

•OmanAirreceivedtheBusinessDestinations‘BestBusinessClassAirline, Middle East’ Award

•OmanAirwonthe‘E-CommerceAwardintheWebsitescategory,theTraveland Tourism Award in the Apps category, and the Government Award in the Social Media category’, in recognition of Oman Air’s Facebook page and a Special Award for Best Social Media Campaign of the Year at the Oman Tech Awards

•OmanAirwasawardedthe‘BestInternationalAirline2016attheSouthIndiaTravel Awards’ held in Hyderabad, India

•OmanAirwasawarded'BestAirlineinEurope,MiddleEast&Africa'duringtheSeven Stars Luxury Hospitality & Lifestyle Awards in Marbella, Spain

•OmanAirCargohasbeenawarded‘BestCargoAirlineforValuableGoods–Northand East’ at the India Cargo Awards 2016 held in New Delhi

•ForthethirdyearrunningOmanAirhasbeenawarded‘World’sLeadingAirline– Economy Class’ at the World Travel Awards

•OmanAirwonthe‘WorldClassLoungeServicesoftheYear-2016’attheSignatureThe Luxury 100 Awards ceremony held in Muscat

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Oman continues to draw visitors with its natural beauty, variety of attractions, and hospitable culture, becoming one of the world’s must-visit destinations. To meet the increasing demand for travel, Oman Air’s footprint now spans over 50 international destinations, connecting people and businesses, and creating opportunities all over the world. In 2016 alone, we added three new destinations to our global network - the Iranian city of Mashhad, the holy city of Najaf in Iraq and Guangzhou in China. We also introduced the second daily, non-stop and direct service between Muscat and London Heathrow. Frequencies have also been increased on many more of our established routes including Frankfurt, Paris, and Zurich, while all of our Indian destinations now enjoy at least daily or double-daily services.

Global footprint

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AIRBUS A330-300 BOEING 737-900AIRBUS A330-200 BOEING 737-800 BOEING 737-700 EMBRAER 175

BOEING 787-8 DREAMLINER

On the occasion of the Sultanate’s 46th National Day, a new Boeing 737- 800 joined the Oman Air fleet. This was the sixth brand new Boeing 737-800 to join the young Oman Air fleet in 2016 as part of the airline’s expansion plan. Oman Air has operated B737s for many years and the aircraft provides the backbone of the airline’s long and medium haul fleet.

With the addition of the new Boeing 737-800, Oman Air’s fleet stood at 47 by the end of the year. This includes four Boeing 787 Dreamliners, six Airbus 330-300s, four Airbus 330-200s, five Boeing 737-900s, 23 Boeing 737-800s, one Boeing 737-700 and four Embraer 175s. Three more Boeing 737-800s are scheduled to join the fleet in 2017. Oman Air is steering ahead with a growth strategy that brings the fleet size to 56 aircraft and 61 destinations by 2023.

On wings of expansion

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Oman Air contributes to Oman’s social development in a big way by going beyond providing employment opportunities to Omani citizens across all levels of the company. In addition to sponsoring national career fairs, the airline has worked with Boeing to run workshops and seminars for young people and has made important investments in enhancing the skills, experience and capacity of Oman’s workforce.

The national carrier has a 4,200-plus strong Omani personnel, comprising more than 64% of our total employees. We strive to ensure that the training of our staff, especially our cabin crew, who are at the forefront of our operations in the air and are the international ambassadors for Oman, reflect our unmatched traditions of on-board hospitality and comfort.

Omanisationat the fore

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As part of its commitment to sustainable social development and supporting people with special needs, Oman Air supports the initiatives of the Ministry of Social Development (MOSD) to deliver a range of projects which provide help for these citizens to achieve their full potential. Among several other projects, Oman Air partnered with aircraft manufacturer Airbus to jointly host two school workshops to instill an appreciation of science and technology among today’s youth. Additional educational support has included the donation of a large number of Arabic and English language books to Oman’s Maktabati project, which encourages children of all ages to improve their reading skills, develop a love of reading and undertake beneficial hobbies during their leisure time.

*Details provided are from published sources.

Long-term impact for our community

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 638 39

Review of Financial Performance Key Performance Indicators

30,978Round trips

7.7 millionPassengers flown

74.4%Seat factor

24.8 billionASK or Capacity, measured asseat kilometres flown

18.5 billionRPK or Utilisation, measured aspassenger kilometres flown

13.1 hours per dayAircraft utilisation

51,952 flights Handled at Muscat International Airport

12.0 millionPassengers handled at Muscat International Airport

8.0 millionMeals catered to flights at Muscat International Airport

Management Discussion and Analysis

Financial and Sector Performance

Our net loss for the year 2016 was RO 129.820 million, compared to a net loss of RO 86.333 million in the year 2015, an increase of RO 43.487 million (+50%).

RevenueRevenue increased by RO 4.731 million or 1% over the previous year.

Revenue Composition in 2016 compared to 2015 is as follows:

Management Discussion and Analysis

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REVENUE COMPOSITION

A Scheduled Services – International 403.9 400.9B Scheduled Services – Domestic 25.1 23.5C Air Charter 12.2 13.2D Handling Fees – Engineering 6.2 5.0E Handling Fees – Others 17.3 17.6F Catering 2.8 3.6G Hotel & Other Revenue 4.9 3.9

2016 ROMillions

2015 ROMillions

F-1%

A-85%

B-5%

C-3%D-1%

E-4%G-1%

2015

F-1%

A-84%

B-5%

C-3%D-1%

E-4%G-2%

2016

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 640 41

Management Discussion and Analysis

Scheduled ServicesScheduled services revenue rose from RO 424.4 million in 2015 to RO 429.0 million in 2016, up RO 4.6 million or 1%. During the year, Oman Air commenced operations to Najaf, Mashhad and Guangzhou. Available Seat Capacity (ASK) increased by 20.4%. Utilization (RPK) increased by 25.5%, higher than increase in capacity resulting increase in average Seat Factor from 71.4% in 2015 to 74.4% in 2016. Average passenger yield decreased by 16.7%. Despite increasing competition from the major players, Oman Air has successfully established its presence on most of its routes. This has been achieved with continued focus on product, high frequencies, on-time performance, quick turnarounds, convenient flight timings, good connectivity and high standards of customer service both on the ground and in the air.

Air Charter ServicesAir charter services comprising of jet aircraft operations dedicated to Petroleum Development of Oman and Embraer aircraft operations dedicated to Occidental, Duqm and Sohar (discontinued from June 2016) recorded revenue of RO 12.2 million in 2016.

Handling FeesHandling revenue from airlines other than Oman Air for the year was RO 17.363 million compared to RO 17.610 million in last year, a decrease of RO 0.247 million or (-1%) which is mainly due to spin off of Cargo division with effect from April 2016 despite there is an increase in airport operations which is evident as below.

ss Airlines, other than Oman Air, increased their operations from 19,830 to 21,283 flights, (+7%)ss Wide body flight movement, other than Oman Air, decreased from 3,754 to 3,733 flights, (-1%) and narrow

body flight movement increased from 16,076 to 17,550 flights (+9%)

Management Discussion and Analysis

Catering

Catering revenue from airlines other than Oman Air for the year was RO 2.809 million, decrease of RO 0.806 million or (-22%) over the previous year’s revenue of RO 3.615 million.

Rooms, Food and Beverage Revenue

Revenue for the year was RO 2.818 million, a decrease of RO 0.450 million or 14% over the previous year’s revenue of RO 3.268 million, owing to worse market situation.

119,

785

8,31

1

40,8

41

124,

010

8,72

0

41,4

50

138,

972

10,3

19

47,8

23

159,

618

12,0

32

51,9

52

13,3

51

10,2

86

14,9

60

11,3

30

15,2

33

11,3

36

20,5

97

14,7

08

24,7

90

18,4

52

6,36

6

4,43

0

4,99

5

5,05

2

Flights Handled at Muscat International Airport

Passengers Handled at Muscat International Airport '000s

Cargo Tonnage Handled - Tonnes

20162012 2013 2014 2015

PASSENGERSNo. of Passengers '000s

7,71

0

OPERATING METRICS

ASK (Millions) RPK (Millions) Seat Factor (%)

2016 2012 2013 2014 2015

74.4%

77.0% 75.7% 74.4%

71.4%

0

5000

8000

12000

20000

25000

20162012 2013 2014 20150%

25%

50%

75%

100%

111,6

92

7,54

7

37,18

8

119,

785

8,31

1

40,8

41

124,

010

8,72

0

41,4

50

138,

972

10,3

19

47,8

23

159,

618

12,0

32

51,9

52

13,3

51

10,2

86

14,9

60

11,3

30

15,2

33

11,3

36

20,5

97

14,7

08

24,7

90

18,4

52

6,36

6

4,43

0

4,99

5

5,05

2

Flights Handled at Muscat International Airport

Passengers Handled at Muscat International Airport '000s

Cargo Tonnage Handled - Tonnes

20162012 2013 2014 2015

PASSENGERSNo. of Passengers '000s

7,71

0

OPERATING METRICS

ASK (Millions) RPK (Millions) Seat Factor (%)

2016 2012 2013 2014 2015

74.4%

77.0% 75.7% 74.4%

71.4%

0

5000

8000

12000

20000

25000

20162012 2013 2014 20150%

25%

50%

75%

100%

111,6

92

7,54

7

37,18

8

43,7

39

64,7

82

54,10

7

64,6

05

53,16

3

64,6

05

47,3

87

64,6

05

49,4

82

64,7

82

67.5% 83.8% 82.3% 73.3% 76.4%

2016

6,03

8

6,45

6

6,65

0

2012 2013 2014 2015

Meals upli�ed at Muscat International AirportNo. of Meals '000s

Note: Above includes, meal upli�ed for Oman Air

0

10000

20000

30000

40000

50000

60000

70000

2012 2013 2014 2015 2016

Total Available Rooms

Total Occupied Rooms Occupancy Ratio (%)

0%

25%

50%

75%

100%

7,54

3

7,99

4

43,7

39

64,7

82

54,10

7

64,6

05

53,16

3

64,6

05

47,3

87

64,6

05

49,4

82

64,7

82

67.5% 83.8% 82.3% 73.3% 76.4%

2016

6,03

8

6,45

6

6,65

0

2012 2013 2014 2015

Meals upli�ed at Muscat International AirportNo. of Meals '000s

Note: Above includes, meal upli�ed for Oman Air

0

10000

20000

30000

40000

50000

60000

70000

2012 2013 2014 2015 2016

Total Available Rooms

Total Occupied Rooms Occupancy Ratio (%)

0%

25%

50%

75%

100%

7,54

3

7,99

4

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 642 43

Expenditure

Net Expenditure increased by 10% from RO 534.163 million to RO 592.527 million.

Our Fuel cost decreased by RO 5.4 million or -4 % mainly due to decrease in Fuel Price. The average network fuel price was 1.41 USD/USG compared to 1.74 USD/USG in the previous year, down (-19%).

Maintenance costs and other aircraft operating expenses comprising of handling, landing, navigation, crew layover and simulator cost increased due to the increase in operations in comparison with the previous year.

Passenger related cost increased by RO 13.5 million or 29% compared to 21% increase in passenger traffic in 2016, due to increase in agency commissions paid on passenger tickets.

Our employee cost increased by RO 14.1 million or 11% compared to last year mainly due to increase in staff strength. The Company’s manpower increased from 6,778 in 2015 to 7,633 in 2016, up 12.6%. During the year, the increase in manpower was restricted to critical operational requirements to support the increase in operations and to positions that would add value in terms of enhanced customer service, productivity and profitability.

Depreciation increased by RO 7.1 million or 18% compared to last year, mainly attributable to capitalization of Simulator building, purchase of AMOS software and business class seats retrofit in A330-200 aircraft.

Impairment cost comprises of impairment of goodwill paid for acquisition of Hotel Golden Tulip, Seeb.

Concession Fee

The Company pays a concession fee to Oman Airport Management Company, the airport operator at Muscat and Salalah airports. The Company pays concession fee on its ground handling, cargo handling and catering revenue. The impact of the concession fee in 2016 was RO 2.438 million as against RO 1.733 million in 2015.

Management Discussion and Analysis Management Discussion and Analysis

Financial PositionNon-current assets decreased from RO 633.292 million in December 2015 to RO 601.083 million in December2016 mainly on account of sale and leaseback of two spare engines and refund of pre delivery payments on sale and lease back of four B737 aircraft during the year. This was partly offset by an increase on account of acquisition of intangible London slot.

During the year, the Government of Oman committed RO 59 million, reaffirming their support.

Non-current liabilities decreased by RO 0.473 million as at 31 December 2016, compared to 2015 mainly on account of repayment of long term loans availed for purchase of two B787 aircraft in the year 2015. Current liabilities increased by RO 82.578 million as at 31 December 2016, primarily attributable to availment of short term borrowings during the year.

Current assets increased by RO 43.502 million as at 31 December 2016 mainly due to amounts receivable from the Government of Oman towards capital infusion.

Internal ControlsThe Company has an adequate internal control system commensurate with its size and the nature of its business. The Internal Audit department continues to maintain its focus on internal controls in all critical activities. Further, Statutory audit, State audit and the Audit Committee augment review of internal controls within the Company. During 2016, no material lapse or weakness in controls has been identified.

The People of Oman AirWith its development as an airline of stature internationally, Oman Air has also become an employer of choice, offering premium employment and career development opportunities to a wide cross section of people.

In keeping with the national initiative that seeks to enhance job opportunities for Omani nationals, the airline prioritizes job offers to Omani nationals possessing the requisite skills.

The Company staff strength at 31 December 2016 was 7,633 employees. Oman Air achieved an Omanisation ratio of 64.4%, without compromise on the quality of service provided to customers. This is a significant achievement considering the fact that the airline requires staff with multi-linguistic skills to serve a wide spectrum of customers across the network.

Career Development Path programmes have been successfully implemented across key functions and responsibilities in all departments, and staffs are undergoing external and internal programmes to improve their skill sets.

5,56

2

5,83

1

6,32

2

6,77

8

7,63

3

66% 64% 59% 60%

64%*

2012 2013 2014 2015 0

1000

2000

3000

4000

5000

6000

8000

2016

MANPOWER STRENGTH AND OMANISATION RATIO

* As per Ministry of Manpower

0%

20%

40%

60%

80%

431,2

91

482,

424

504,

780

534,

163

592,

527

2012 2013 2014 2015

EXPENDITURERO '000s

2016

2016

COMPOSITION OF EXPENDITURE

Expenditure composition in 2016 compared to 2015 is as follows:

A Operating lease rentals on aircra� 56.2 36.0B Fuel cost 117.4 122.8C Other aircra� operating expenses 72.2 63.9D Maintenance cost 43.5 45.7E Passenger related cost 60.3 46.8

2016 ROMillion

2015 ROMillion

F Depreciation 45.6 38.5G Catering materials consumed 6.6 5.8H Employee cost 145.3 131.2I Others (Including insurance and impairment of goodwill) 45.4 43.3

2016 ROMillion

2015 ROMillion

A-7%

B-23%

2015

C-12%

D-9%E-9%

F-7%

G-1%

H-25%

I-7%A-10%

B-20%

C-12%

D-7%E-10%

F-8%

G-1%

H-24%

I-8%

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 644 45

In accordance with the Oman Air SAOC Manual of Guidelines for Corporate Governance we are pleased to present the fifteenth Corporate Governance Report of Oman Air (SAOC) (“the Company”) for the year ended 31 December 2016.

Code of Corporate Governance is mandatory for all the public companies listed in Muscat Securities Market (MSM). The Company is a closed Omani joint stock company (SAOC) and therefore is not required to comply with the CMA circular.

The External Auditors have obtained the corporate governance report prepared by the Executive Management and have verified whether the disclosure requirements are appropriate and in compliance with the requirements of the Manual of Guidelines for Corporate Governance as approved by the Board on 15/05/2013.

Company’s PhilosophyThe Company has and will continue to uphold the highest standards of corporate governance. The Company’s focus has been on best business practices that are ethical and fair while achieving the 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.

Board of DirectorsThe Company’s Board comprises of eight Directors. Seven Directors are appointed by the Cabinet of Ministers; six of them, including the Chairman represent the Government’s shareholding and one businessman to represent the private sector. The Government Nominees are Ministers, Undersecretaries and Directors in the Government undertakings. The eighth member has been appointed by the Board with relevant airline industry background. All the eight directors are Non-Executive Directors. Two of the Directors are independent.

Functions of the BoardThe Board appoints all members of the Executive Management (Chief Executive Officer and his direct reports) and decides their remuneration. The Board approves strategy, business plans and financial policies of the Company. The Board reviews policies and regulations governing the Company activities and specifies authorities and responsibilities of the 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 is in line with the Code of Corporate Governance, has been approved by the Board and implemented. The Board reviews the risk management strategy implemented by the Management to ensure that the major risks faced by the Company are adequately mitigated and the processes are in place to maintain 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, through the annual report, about the going concern status of the Company, with supporting assumptions.

Corporate Governance Report

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 646 47

Board Meetings

Number of Board meetings heldBoard Meeting No. Board Meeting Date

1/2016 10 Feb 2016

2/2016 24 Feb 2016

3/2016 16 Mar 2016

4/2016 20 Apr 2016

5/2016 3 Jul 2016

6/2016 16 Oct 2016

7/2016 7 Dec 2016

8/2016 21 Dec 2016

The annual general meeting of the shareholders was held on 16 March 2016 and was attended by six of the Board members.

Executive CommitteeThe purpose of the Executive Committee is to discharge the responsibilities of the Board of Directors to direct the business and affairs of Oman Air SAOC (the Company). The Committee has a supervisory role to ensure that the operations are carried out pursuant to the strategic vision of the Board and to follow up execution of the objectives and recommend the steps that shall be taken to achieve the goals of the Company in accordance with the decisions and recommendations of the Board.

During 2016 the Executive Committee members consisted of five members. Four members are non-executive and non-independent directors and the fifth member is non-executive and independent (being airline industry expert appointed by the Board). Five meetings of the Executive Committee were held during 2016.

Audit CommitteeDuring 2016 the Audit Committee consisted of three members. Two of the members are non-executive and non- independent, while the third member is non-executive and independent. Four meetings of the Audit Committee were held during 2016 to discuss issues concerning internal control, internal audit plans and internal / external audit reports, quarterly financial statements and other related issues. Human Resources CommitteeThe Human Resources Committee was constituted by the Board in July 2016.The purpose of the Human Resources Committee is to assist the Board in the effective discharge of its responsibilities to oversee establishment and implementation of appropriate human resources strategies and policies to achieve short and long term organizational objectives.

During 2016, the Human Resources Committee consisted of three members. Two of the members are non-executive and non-independent while the third member is non-executive and independent. Two meetings were held during 2016.

Corporate Governance Report

Remuneration MattersAll the directors including the Chairman are non-executive and do not draw any fixed salary from the Company except one director who had been appointed as a member and advisor to the Board with relevant airline industry background (until April 2016). He was paid retainer fees of RO 26,200 (as per terms of contract) until April 2016. After April 2016, he was appointed as a non-executive director and was paid sitting fees.

The total remuneration paid to the Board of Directors as sitting fees for financial year 2016 was RO 29,400 (2015 : RO 29,500) for the Board meetings, RO 6,850 (2015: RO 6000 ) for the Executive Committee meetings, RO 1,600 (2015 : RO NIL) for the Human Resources Committee meetings and RO 2,900 (2015 : 3,500) for the Audit Committee meetings.

Remuneration - Top Ten Executives

Total(RO Per Annum)

Salary 1,152,504

Allowances 245,816

PASI/ESB 58,094

Total 1,456,414 Related Party TransactionsSpecific related party transactions are disclosed as a separate report to the Shareholders at the annual general meeting.

Means of Communication with the Shareholders and InvestorsThe complete quarterly results are 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 website where airline related information is available.

Market Price DataDue to change in the status of the Company from General Omani Joint Stock Company (SAOG) to Closed Omani Joint Stock Company (SAOC), Oman Air shares are traded in the parallel third market of Muscat Securities Market effective May 2007. Hence, market price data is not available.

Distribution of ShareholdingThe major shareholders of the Company are as follows, with the Government of Sultanate of Oman being the major shareholder.

Corporate Governance Report

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 648 49

Major Shareholders

Name of the shareholder No. of Shares held Shareholding %

The Government of the Sultanate of Oman 737,664,445 99.933

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

There are no specific areas of non-compliance, except individual cases which are currently handled by the competent authorities.

Professional Profile of the Statutory Auditor

About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s more than 220,000 professionals are committed to making an impact that matters. About Deloitte & Touche (M.E.)Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is a leading professional services firm established in the Middle East region with uninterrupted presence since 1926.

Deloitte provides audit, tax, consulting, and financial advisory services through 26 offices in 15 countries with more than 3,300 partners, directors and staff. It is a Tier 1 Tax advisor in the GCC region since 2010 (according to the International Tax Review World Tax Rankings). It has also received numerous awards in the last few years which include best employer in the Middle East, best consulting firm, the Middle East Training & Development Excellence Award by the Institute of Chartered Accountants in England and Wales (ICAEW), as well as the best CSR integrated organization.

The total fee for the audit and quarterly presentation of financial statements to the Audit Committee is RO 32,500 for the year 2016.

Corporate Governance Report

Acknowledgement by the Board of Directors

The Board of Directors acknowledges:

• That the financial statements prepared by the management are in accordance with the applicable standards and rules applicable in the Sultanate of Oman.

• The review of the efficiency and adequacy of internal control system of the Company and compliance with internal rules and regulations.

• That there are no material things that affect the continuation of the company and its ability to continue its operations during the next financial year.

H.E. Darwish bin Ismail bin Ali Al BulushiChairman, Oman Air

Corporate Governance Report

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 650 51

Independent auditor’s reportto the shareholders 1Oman Air SAOC

Report on the financial statements

Opinion

We have audited the financial statements of Oman Air SAOC (the “Company”) which comprise the statement of financial position as at 31 December 2016, and the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes to the financial statements including a summary of significant accounting policies set out in pages 54 to 107.

In our opinion, the financial statements present fairly, in all material respects, the financial position of Oman Air SAOC as of 31 December 2016 and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the other ethical requirements that are relevant to our audit of the Company’s financial statements in Sultanate of Oman, and we have fulfilled our other ethical responsibilities. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Material uncertainty relating to going concern

We draw attention to note 2 which explains that the Company incurred a net loss of RO 129.82 million for the year ended 31 December 2016 with accumulated losses of RO 817.35 million as at 31 December 2016. As at 31 December 2016, the current liabilities exceed current assets by RO 191.94 million after taking into account a further RO 39 million receivable from Government as contribution to equity and operations resulted in cash outflows of RO 42.29 million for the year then ended. These conditions indicate the existence of a material uncertainty which may cast significant doubt about the Company’s ability to continue as going concern. Our opinion is not modified in respect of this matter.

Responsibilities of the Board of Directors for the financial statements

The Board of Directors (the “Board”) is responsible for the preparation and fair presentation of the financial statements in accordance with the International Financial Reporting Standards and the relevant disclosure requirements of the Commercial Companies Law of 1974, as amended and for such internal control as the Board determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Board is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Independent auditor’s report to the shareholders of 2Oman Air SAOC (continued)

Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional skepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with the Board regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

Report on other legal and regulatory requirements

Also, in our opinion, the financial statements comply, in all material aspects, with the relevant disclosure requirements of the Commercial Companies Law of 1974, as amended, of Sultanate of Oman.

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 652 53

Statement of Financial Position at 31 December 2016

Notes 31 December2016

31 December 2015

ASSETS RO’000 RO’000Non-current assetsAircraft, property, plant and equipment 6 541,782 604,595Goodwill 7 4,042 5,379Intangible assets 8 28,890 -Available for sale investments 9 530 514Equity accounted investments 10 6,224 1,884Long-term receivables 11 19,615 20,920Total non-current assets 601,083 633,292Current assetsInventories 12 18,444 15,459Trade and other receivables 13 112,003 67,501Term deposits 14 7,250 6,500Cash and bank balance 15 9,480 10,549

147,177 100,009Assets classified as held-for-sale 16 - 3,666Total current assets 147,177 103,675Total assets 748,260 736,967EQUITY AND LIABILITIES Capital and reservesShare capital 17 738,158 684,158Government contribution to equity 18 59,000 54,000Legal reserve 19 4,137 4,137Investments revaluation reserve 9 219 211Accumulated losses (817,349) (687,529)Total (deficit) / equity (15,835) 54,977Non-current liabilitiesProvision for maintenance of aircraft, engines and rotables 20 35,383 18,413Borrowings 21 348,558 367,694Employees’ end of service benefits 23 12,034 10,940Deferred tax liability 32 29,000 28,401Total non-current liabilities 424,975 425,448Current liabilitiesCurrent portion of provision for maintenance of aircraft,engines and rotables 20 11,244 11,217

Current portion of borrowings 21 148,820 103,992Bank overdrafts 15 11,224 -Trade and other payables 24 163,159 140,354Government grant - unutilised 25 4,673 979Total current liabilities 339,120 256,542Total liabilities 764,095 681,990Total equity and liabilities 748,260 736,967Net assets per share 26 - RO 0.080

Chairman Director

The accompanying notes form an integral part of these financial statements.

Statement of Profit or Loss and otherComprehensive Incomefor the year ended 31 December 2016

Notes 2016 2015

RO’000 RO’000Revenue 27 472,443 467,712Expenditure 28 (592,527) (534,163)

Operating loss (120,084) (66,451)

Interest and investment income 29 603 472Profit on disposal of shareholding in Oman Air Cargo LLC 5,798 -Share of profits from an equity accounted investments 10 3,181 1,868Increase / (decrease) in fair value of long-term receivables 41 (945)Finance costs 30 (16,322) (13,744)

Loss before concession fee and tax (126,783) (78,800)Concession fee 31 (2,438) (1,733)Loss before tax (129,221) (80,533)Taxation 32 (599) (5,800)Net loss for the year (129,820) (86,333)Other comprehensive incomeItem that will be classified to profit or loss:Fair value gain / (loss) on available for sale investments 9 8 (35)

Total loss and other comprehensive loss for the year (129,812) (86,368)

Loss per share - basic and diluted 33 (RO 0.174) (RO 0.126)

The accompanying notes form an integral part of these financial statements.

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 654 55

Stat

emen

t of C

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RO’0

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RO’0

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RO’0

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1 Jan

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201

5 54

6,04

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8,11

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137

246

(601

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87,3

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Net

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Statement of Cash Flows for the year ended 31 December 2016

2016 2015RO’000 RO’000

Cash flow from operating activities:Loss before tax (129,221) (80,533)Adjustments for:Impairment of goodwill 1,337 1,216Impairment loss on assets classified as held-for-sale - 997Increase in fair value of long term receivables (41) 945Depreciation on aircraft, property, plant and equipment 45,561 38,475Employees’ end of service benefits charged for the year 2,308 2,260Interest and investment income (603) (472)Share of profit from equity accounted investments (3,181) (1,868)Finance cost 16,322 13,744Allowance for doubtful debts 1,365 271Allowance for obsolete and slow moving inventories 670 93Profit on sale of assets held for sale (223) -Profit on sale of investment in cargo handling business (5,798) -Profit on sale of aircraft, property, plant and equipment (74) (511)

(71,578) (25,383)Working capital changes:Inventories (3,655) (617)Trade and other receivables (6,867) (9,430)Trade and other payables 22,806 9,023Provision for maintenance of aircraft, engines and rotables 16,997 4,532

Cash used in operations (42,297) (21,875)Finance charges paid (16,322) (13,744)Employees’ end of service benefits paid (1,214) (881)

Net cash used in operating activities (59,833) (36,500)

Cash flow from investing activities:Purchase of aircraft, property, plant and equipment 2,095 (69,972)Purchase of intangible asset (28,890) -Investment in Oman Air SATS Cargo LLC (1,159) -Investment in available for sale investments (9) -Proceeds from sale of aircraft, property, plant and equipment 21,035 57,400Proceeds from sale of assets held for sale 3,883 -Increase in term deposits (750) (923)Operating lease 1,346 (14,034)Interest and investment income received 603 472Dividend received from an equity accounted investee - 1,901

Net cash used in investing activities (1,846) (25,156)

Cash flow from financing activities:Government contribution to equity received 20,000 54,000Net movement in government grants 3,694 (3,575)Net movement in borrowings 25,692 2,032

Net cash flows from financing activities 49,386 52,457

Net change in cash and cash equivalents (12,293) (9,199)Cash and cash equivalents at the beginning of the year 10,549 19,748

Cash and cash equivalents at the end of the year (note 15) (1,744) 10,549

The accompanying notes form an integral part of these financial statements.

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Notes to the Financial Statementsfor the year ended 31 December 2016

1. General

Oman Air SAOC (“the Company”) is a closed Omani joint stock company registered under the Commercial Companies Law of 1974, as amended. The Company was formed under Royal Decree 52/81 dated 24 May 1981 and commenced its operations on 01 October 1981.

The principal activities of the Company are to transport passengers and freight on a scheduled and chartered basis and to provide ground handling, catering and other airline related services.

In an extraordinary general meeting held on 12 April 2009, the shareholders approved an amendment to the articles of association of the Company. The amended articles of association allow the Company to establish and manage restaurants, coffee shops, hotels, apartments, tourist utilities, both inside and outside the airports, within the Sultanate of Oman or abroad.

Acquisition of business

Effective 1 January 2009 the Company acquired Golden Tulip Seeb (“the Hotel”). The Hotel is a division of the Company and is not a separately registered entity. The Hotel was acquired by the Company as a going concern from the Ministry of Tourism, Government of the Sultanate of Oman.

As on 1 January 2009, the assets and liabilities of the Hotel were transferred to the Company except the land on which the Hotel is located. The Company has been given a right by the Government to use the said land on a rental basis initially for a period of 50 years, subsequently renewable with the mutual consent of both the parties.

Goodwill arising on acquisition: RO’000

Consideration transferred 16,000Add: additional consideration paid in 2010 738Less: fair value of identifiable net assets acquired (1,601)

Goodwill 15,137

Notes to the Financial Statementsfor the year ended 31 December 2016

2. Going concern

The Company incurred a net loss of RO 129.82 million (2015: RO 86.33 million) during the year ended 31 December 2016, with accumulated losses of RO 817.35 million (2015: RO 687.53 million) as at 31 December 2016 and operating cash outflows of RO 42.29 million (2015: outflows of RO 21.87 million). As at 31 December 2016, the current liabilities of the Company exceed current assets by RO 191.94 million (2015: RO 152.87 million). These conditions indicate the existence of a material uncertainty which may cast significant doubt about the Company’s ability to continue as a going concern. The financial statements have been prepared under the going concern basis on the assumption that the Company’s shareholders will continue to support the operations and the management will successfully implement its business plan to generate sufficient funds to support its operations and meet its liabilities as they fall due. The Government holds in excess of 99% of the Company’s equity and contributed an amount of RO 20 million with a further RO 39 million receivable (collected on 12 March 2017) making a total of RO 59 million towards equity (2015: RO 54 million) bringing the total contribution by the Government from 2009 to date to RO 727 million.

3. Adoption of new and revised International Financial Reporting Standards (IFRS)

3.1 New and revised IFRSs applied with no material effect on the financial statements

The following new and revised IFRSs, which became effective for annual periods beginning on or after 1 January 2016, have been adopted in these financial statements. The application of these revised IFRSs has not had any material impact on the amounts reported for the current and prior years but may affect the accounting for future transactions or arrangements.

• IFRS 14 Regulatory Deferral Accounts

• Amendments to IAS 1 Presentation of Financial Statements relating to Disclosure initiative

• Amendments to IFRS 11 Joint arrangements relating to accounting for acquisitions of interests injoint operations

• Amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets relating to clarification of acceptable methods of depreciation and amortisation

• Amendments to IAS 16 Property, Plant and Equipment and IAS 41 Agriculture: Bearer Plants

• Amendments to IAS 27 Separate Financial Statements relating to accounting investments in subsidiaries, joint ventures and associates to be optionally accounted for using the equity method in separate financial statements

• Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investment in Associates and Joint Ventures relating to applying the consolidation exception for investment entities

• Annual Improvements to IFRSs 2012 – 2014 Cycle covering amendments to IFRS 5, IFRS 7, IAS 19and IAS 34

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Notes to the Financial Statementsfor the year ended 31 December 2016

3. Adoption of new and revised International Financial Reporting Standards (IFRS) (continued)

3.2 New and revised IFRS in issue but not yet effective

The Company has not yet applied the following new and revised IFRSs that have been issued but are not yet effective:

New and revised IFRSs Effective for annual periods beginning on or after

Annual Improvements to IFRS Standards 2014 – 2016 Cycle amending IFRS 1, IFRS 12 and IAS 28

The amendments to IFRS 1 and IAS 28 are effective for annual periods beginning on or after 1 January 2018, the amendment to IFRS 12 for annual periods beginning on or after 1 January 2017

Amendments to IAS 12 Income Taxes relating to the recognition of deferred tax assets for unrealised losses

1 January 2017

Amendments to IAS 7 Statement of Cash Flows to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities.

1 January 2017

IFRIC 22 Foreign Currency Transactions and Advance ConsiderationThe interpretation addresses foreign currency transactions or parts of transactions where:• there is consideration that is denominated or priced in a

foreign currency; • the entity recognises a prepayment asset or a deferred

income liability in respect of that consideration, in advance of the recognition of the related asset, expense or income; and

• the prepayment asset or deferred income liability is non-monetary.

1 January 2018

Amendments to IFRS 2 Share Based Payment regarding classification and measurement of share based payment transactions

1 January 2018

Amendments to IFRS 4 Insurance Contracts: Relating to the different effective dates of IFRS 9 and the forthcoming new insurance contracts standard.

1 January 2018

Amendments to IAS 40 Investment Property: Amends paragraph 57 to state that an entity shall transfer a property to, or from, investment property when, and only when, there is evidence of a change in use. A change of use occurs if property meets, or ceases to meet, the definition of investment property. A change in management’s intentions for the use of a property by itself does not constitute evidence of a change in use. The paragraph has been amended to state that the list of examples therein is non-exhaustive.

1 January 2018

Amendments to IFRS 7 Financial Instruments: Disclosures relating to disclosures about the initial application of IFRS 9

When IFRS 9 is first applied

IFRS 7 Financial Instruments: Disclosures relating to the additional hedge accounting disclosures (and consequential amendments) resulting from the introduction of the hedge accounting chapter in IFRS 9

When IFRS 9 is first applied

Notes to the Financial Statementsfor the year ended 31 December 2016

3. Adoption of new and revised International Financial Reporting Standards (IFRS) (continued)

3.2 New and revised IFRS in issue but not yet effective (continued)

New and revised IFRSs Effective for annual periods beginning on or after

IFRS 9 Financial Instruments (revised versions in 2009, 2010, 2013 and 2014)IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in November 2013 to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in July 2014 mainly to include a) impairment requirements for financial assets and b) limited amendments to the classification and measurement requirements by introducing a ‘fair value through other comprehensive income’ (FVTOCI) measurement category for certain simple debt instruments.

A finalised version of IFRS 9 which contains accounting requirements for financial instruments, replacing IAS 39 Financial Instruments: Recognition and Measurement. The standard contains requirements in the following areas:

• Classification and measurement: Financial assets are classified by reference to the business model within which they are held and their contractual cash flow characteristics. The 2014 version of IFRS 9 introduces a ‘fair value through other comprehensive income’ category for certain debt instruments. Financial liabilities are classified in a similar manner to under IAS 39, however there are differences in the requirements applying to the measurement of an entity’s own credit risk.

• Impairment: The 2014 version of IFRS 9 introduces an ‘expected credit loss’ model for the measurement of the impairment of financial assets, so it is no longer necessary for a credit event to have occurred before a credit loss is recognised.

• Hedge accounting: Introduces a new hedge accounting model that is designed to be more closely aligned with how entities undertake risk management activities when hedging financial and non-financial risk exposures.

• Derecognition: The requirements for the derecognition of financial assets and liabilities are carried forward from IAS 39.

1 January 2018

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Notes to the Financial Statementsfor the year ended 31 December 2016

3. Adoption of new and revised International Financial Reporting Standards (IFRS) (continued)

3.2 New and revised IFRS in issue but not yet effective (continued)

New and revised IFRSs Effective for annual periods beginning on or after

IFRS 15 Revenue from Contracts with CustomersIn May 2014, IFRS 15 was issued which established a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related interpretations when it becomes effective.The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the standard introduces a 5-step approach to revenue recognition:

• Step 1: Identify the contract(s) with a customer.• Step 2: Identify the performance obligations in the contract.• Step 3: Determine the transaction price.• Step 4: Allocate the transaction price to the performance obligations

in the contract.• Step 5: Recognise revenue when (or as) the entity satisfies a

performance obligation.

Under IFRS 15, an entity recognises when (or as) a performance obligation is satisfied, i.e. when ‘control’ of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15.

1 January 2018

Amendments to IFRS 15 Revenue from Contracts with Customers to clarify three aspects of the standard (identifying performance obligations, principal versus agent considerations, and licensing) and to provide some transition relief for modified contracts and completed contracts.

1 January 2018

IFRS 16 LeasesIFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17.

1 January 2019

Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011) relating to the treatment of the sale or contribution of assets from and investor to its associate or joint venture.

Effective date deferred indefinitely

Notes to the Financial Statementsfor the year ended 31 December 2016

3. Adoption of new and revised International Financial Reporting Standards (“IFRS”) (continued)

The Board anticipates that these new standards, interpretations and amendments will be adopted in the Company’s financial statements as and when they are applicable and adoption of these new standards, interpretations and amendments, except for IFRS 9, IFRS 15 and IFRS 16, may have no material impact on the financial statements of the Company in the period of initial application.

Management anticipates that IFRS 15 and IFRS 9 will be adopted in the Company’s financial statements for the annual period beginning 1 January 2018 and that IFRS 16 will be adopted in the Company’s financial statements for the annual period beginning 1 January 2019. The application of IFRS 15 and IFRS 9 may have significant impact on amounts reported and disclosures made in the Company’s financial statements in respect of revenue from contracts with customers and the Company’s financial assets and financial liabilities and the application of IFRS 16 may have significant impact on amounts reported and disclosures made in the Company’s financial statements in respect of its leases.

However, it is not practicable to provide a reasonable estimate of effects of the application of these standards until the Company performs a detailed review.

4. Basis of preparation and summary of significant accounting policies

Statement of compliance

The financial statements have been prepared in accordance with International Financial Reporting Standards, (IFRS) and the requirements of the Commercial Companies Law of 1974, as amended.

A summary of significant accounting policies, which have been consistently applied by the Company and are consistent with those used in the previous year, is set out below:

Functional and presentation currency

These financial statements are presented in Rial Omani (“RO”), which is the Company’s functional currency. All financial information presented in RO has been rounded to the nearest thousands, except when otherwise indicated.

Basis of measurement

These financial statements are prepared on the historical cost basis except for available for sale financial assets which are measured at fair value.

Historical cost is generally based on the fair value of consideration given in exchange for goods and services.

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Notes to the Financial Statementsfor the year ended 31 December 2016

4. Basis of preparation and summary of significant accounting policies (continued)

Basis of measurement (continued)

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these financial statements is determined on such a basis.

In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

• Level1inputsarequotedprices(unadjusted)inactivemarketsforidenticalassetsorliabilitiesthat the entity can access at the measurement date;

• Level2inputsareinputs,otherthanquotedpricesincludedwithinLevel1,thatareobservableforthe asset or liability, either directly or indirectly; and

• Level3inputsareunobservableinputsfortheassetorliability.

Aircraft, property, plant and equipment

Aircraft, property, plant and equipment are stated at cost less accumulated depreciation and any identified impairment loss. Borrowing costs, net of interest income, which are directly attributable to acquisition of qualifying items of aircraft, property, plant and equipment, are capitalized as part of the cost of aircraft, property, plant and equipment.

An element of the cost of an aircraft is attributed on acquisition to prepaid maintenance and is depreciated over a period until the next maintenance event occurs based on the number of hours flows or cycles completed.

Subsequent expenditureSubsequent costs incurred which lend enhancement to future periods, such as long-term scheduled maintenance and major overhaul of aircraft and engines, are capitalised and depreciated over the length of period benefiting from these enhancements. All other maintenance costs are charged to the income statement as incurred. Other subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the item of aircraft, property, plant and equipment.

Cost of expenses incurred for regular inspections of air frame and engines are capitalized and depreciated over the period between consecutive inspections which is generally 8 and 3 years, respectively.

Notes to the Financial Statementsfor the year ended 31 December 2016

4. Basis of preparation and summary of significant accounting policies (continued)

Aircraft, property, plant and equipment (continued)

DepreciationDepreciation is recognised so as to write off the cost less estimated residual value of aircraft, property, plant and equipment (other than capital work in progress) on a straight line basis over the expected remaining useful economic life of the asset concerned. The useful lives are reviewed at each reporting date, with the effect of any changes in estimate accounted for on a prospective basis.

The gain or loss arising on the disposal or retirement of an item of aircraft, property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the profit or loss.

The estimated useful lives used for this purpose are: Years

Airframe and buyer furnished equipment (BFE) 10 - 25Engines and rotables 15Tools 5Buildings 5 to 25Plant and equipment 5 to 7.5Vehicles, office equipment and furniture 3 to 5

Pre-delivery and option payments made in respect of aircraft are recognized in capital work-in-progress at cost and are not depreciated.

Capital work-in-progress is stated at cost. When the assets are ready for their intended use, they are transferred from capital work-in-progress to the appropriate category under aircraft, property, plant and equipment and depreciated.

Non-current assets classified as held-for-sale

Non-current assets are classified as held-for-sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such asset and its sale is highly probable. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

Non-current assets classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell.

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Notes to the Financial Statementsfor the year ended 31 December 2016

4. Basis of preparation and summary of significant accounting policies (continued)

Intangible assets

(i) Goodwill

Goodwill arising due to acquisition of a new line of business is recognised as an asset at the date that control is acquired (“the acquisition date”). Goodwill is measured as an excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree, if any, over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to the Company’s cash-generating units expected to benefit from the synergies of the acquisition. Cash-generating units to which goodwill has been allocated are tested for impairment annually. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

(ii) Landing slot

Purchased landing slots are measured initially at cost. Following initial recognition, landing slots are measured at cost less accumulated impairment losses, if any.

Impairment of tangible and intangible assets

At the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell 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 which the estimates of future cash flows have not been adjusted.

Notes to the Financial Statementsfor the year ended 31 December 2016

4. Basis of preparation and summary of significant accounting policies (continued)

Impairment of tangible and intangible assets (continued)

If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of that asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset or cash generating unit in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

The Company as lessorRental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term.

The Company as lesseeAssets held under finance leases are initially recognised as assets of the Company at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.

Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Company’s general policy on borrowing costs. Contingent rentals are recognised as expenses in the periods in which they are incurred.

Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term.

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.

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Notes to the Financial Statementsfor the year ended 31 December 2016

4. Basis of preparation and summary of significant accounting policies (continued)

Leases (continued)

The Company as lessee (continued)In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

Gains and losses arising on sale and leaseback transaction resulting in an operating lease and where the sale price is at fair value, are recognized immediately in the profit and loss. Where the sale price is below fair value, any loss is recognised in the profit and loss, except where the loss is compensated for by future lease payments at below market price, it is deferred and amortised in proportion to the lease payments over the period for which asset is expected to be used. Where the sale price is above fair value, the excess over fair value is deferred and amortised over the period for which the asset is expected to be used.

Investment in an associate and joint venture

An associate is an entity over which the Company has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

The results and assets and liabilities of associates and joint ventures are incorporated in these financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for under IFRS 5 Non-currents Assets Held for Sale and Discontinued Operations. Under the equity method, investment in associates and joint ventures is carried in the statement of financial position at cost as adjusted for post-acquisition changes in the Company’s share of the net assets of the associate and joint venture, less any impairment in the value of individual investments. Losses of an associate or joint venture in excess of the Company’s interest in that associate or joint venture (which includes any long-term interests that, in substance, form part of the Company’s net investment in the associate) are recognized only to the extent that the Company has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture.

Notes to the Financial Statementsfor the year ended 31 December 2016

4. Basis of preparation and summary of significant accounting policies (continued)

Financial instruments

Financial assets and financial liabilities are recognized when the Company has become a party to the contractual provisions of the instrument. Financial assets are recognized and derecognized on the trade date when the Company becomes party to the contractual provisions of the instruments. The financial assets are initially recognized at fair value plus transactions costs. The financial assets which are non-derivative financial assets with fixed or determinable payments that are not quoted in active market are included in current assets, except for maturities greater than 12 months after the reporting date, which are classified as non-current assets.

Financial assetsThe principal financial assets are available for sale investments, long term receivables, cash and bank balances, term deposits and trade and other receivables.

Available for sale financial assets (AFS financial assets)Listed shares held by the Company that are traded in an active market are classified as AFS and are stated at fair value at the end of each reporting period. The Company also has other investments that are not traded in an active market but are also classified as AFS financial assets and stated at fair value because Management considers that fair value can be reliably measured. Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated in the cumulative change in fair values with the exception of impairment losses, which are recognised in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the cumulative change in fair values is reclassified to profit or loss.

Dividends on AFS equity instruments are recognised in profit or loss when the Company’s right to receive the dividends is established.

The fair value of AFS monetary financial assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the reporting date. The change in fair value attributable to translation differences that result from a change in amortised cost of the asset is recognised in the profit or loss, and other changes are recognised in other comprehensive income.

AFS equity investment that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity investments are measured at cost less any identified impairment losses at the end of each reporting period.

Long term receivables, trade and other receivables and term deposits Long term receivables, trade and other receivables and term deposits are initially measured at their fair value and subsequently measured at amortised cost, using the effective interest method. An allowance for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of receivables.

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Notes to the Financial Statementsfor the year ended 31 December 2016

4. Basis of preparation and summary of significant accounting policies (continued)

Financial instruments (continued)

Cash and cash equivalentsCash and cash equivalents comprise cash in hand, cash at bank and demand deposits. Cash equivalents are short term, highly liquid investments that are readily convertible to a known amount of cash which are subject to an insignificant risk of changes in value and have maturity of three months or less at the date of acquisition.

Classification as debt and equity instrumentsDebt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.

Equity instrumentsAn equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

Trade and other payablesTrade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are classified as non-current liabilities.

Trade and other payables and other financial liabilities are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. Settlement of borrowings are recognised over the respective terms of the agreements.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period to the net carrying amount on initial recognition.

Impairment

Financial assetsFinancial assets other than those at fair value through profit and loss, are assessed for indicators of impairment at the end of each reporting date. Financial assets are considered to be impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the asset have been affected.

Notes to the Financial Statementsfor the year ended 31 December 2016

4. Basis of preparation and summary of significant accounting policies (continued)

Impairment (continued)

For listed and unlisted equity investments classified as AFS financial assets, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment.

For all other financial assets, objective evidence of impairment could include:

• significantfinancialdifficultyoftheissuerorcounterparty;• breachofcontract,suchasadefaultordelinquencyininterestorprincipalpayments;or• itbecomingprobablethattheborrowerwillenterbankruptcyorfinancialre-organisation.

Certain categories of financial assets, such as trade receivables that are assessed not to be impaired individually, are subsequently assessed for impairment on a collective basis.

Objective evidence of impairment for a portfolio of receivables could include the Company’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the credit period as well as observable changes in national or local economic conditions that correlate with default on receivables.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of allowance account.

When a trade receivable is considered uncollectible, it is directly written off as bad. Subsequent recoveries of amounts previously written off are credited to the profit or loss.

Derecognition of financial assetsThe Company derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Company neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Company recognises its retained interest in the asset and an associated liability for amounts it may have to pay.

Derecognition of financial liabilitiesThe Company derecognises financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or expired.

Government grants

Government grants are not recognized until there is reasonable assurance that the Company will comply with the conditions attaching to them and that the grants will be received.

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 670 71

Notes to the Financial Statementsfor the year ended 31 December 2016

4. Basis of preparation and summary of significant accounting policies (continued)

Government grants (continued)

Government grants whose primary condition is that the Company should purchase, construct or otherwise acquire non-current assets are adjusted to the cost of non-current assets purchased, constructed or acquired and the unutilized portion of the grant is recognized as a liability in the statement of financial position.

Inventories

Inventories are stated at the lower of cost and net realisable value. Costs comprise purchase cost and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated principally using the weighted average method. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

Provisions

Provisions are recognised when the Company has a present obligation, legal or constructive as a result of a past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

Onerous contractsPresent obligations arising under onerous contracts are recognised and measured as provisions.An onerous contract is considered to exist where the Company has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

Employees’ end of service benefits

Provision for employees’ end of service benefits for non-Omani employees is made in accordance with the Oman Labour Law and is based on current remuneration and cumulative years of service at the reporting date.

End of service benefits for Omani employees are contributed in accordance with the terms of the Social Securities Law of 1991, and recognised as an expense in the profit or loss as incurred.

Notes to the Financial Statementsfor the year ended 31 December 2016

4. Basis of preparation and summary of significant accounting policies (continued)

Aircraft maintenance

For the aircraft under operating lease agreements, wherein the Company has an obligation to maintain the aircraft, accruals are made during the lease term for the obligation based on estimated future costs of major airframe and certain engine maintenance checks by making appropriate charges to the profit or loss calculated by reference to the number of hours or cycles operated and engineering estimates.

Expenditure for engine performance restoration costs covered by power-by-hour (fixed rate charged per hour) maintenance agreements is recorded as advance payment and capitalised upon completion of an overhaul.

Taxation

Income tax expense comprises current and deferred tax.

Current taxThe tax currently payable is calculated as per the fiscal regulations of the Sultanate of Oman, based on taxable profits for the year. Taxable profits differ from profit as reported in the statement of profit or loss and other comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible.

The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition, other than in a business combination, of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 672 73

Notes to the Financial Statementsfor the year ended 31 December 2016

4. Basis of preparation and summary of significant accounting policies (continued)

Taxation (continued)

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates and tax law that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax for the yearCurrent and deferred tax are recognised in the profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case the tax is also recognised in other comprehensive income or directly in equity.

Revenue

Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances.

Sale of goodsRevenue from sale of goods is recognised when risks and rewards of ownership are transferred to the customer and are stated net of discounts and return.

Rendering of servicesPassenger ticket and cargo airway bills revenue, net of commission, is recognised as current liabilities in an unearned revenue account until recognised as revenue when the transportation service is provided. Unused tickets are recognised as revenue after one year from the date of sale.

Dividend and interest incomeDividend revenue from investments is recognised when the shareholders’ right to receive payment has been established.

Interest income is accrued on a time proportion basis, with reference to the principal outstanding and at the effective profit rate applicable, which is the rate that exactly discounts estimated future cash receipts throughout the expected life of the financial asset to the asset’s net carrying amount.

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

Notes to the Financial Statementsfor the year ended 31 December 2016

4. Basis of preparation and summary of significant accounting policies (continued)

Foreign currencies

Transactions denominated in foreign currencies are initially translated into Rial Omani at the rates of exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in such currencies are translated at the rates prevailing as at the end of the reporting period. Gains and losses arising from foreign currency transactions are dealt with in the profit or loss.

Frequent flyer programme

The Company operates a frequent flyer programme that provides a variety of awards to programme members based on a mileage credit for flying with the Company and other airlines that participate in the programme. Members can also accrue miles by utilizing the services of non-airline programme participants.

The Company accounts for awards credits as a separately identifiable component of the sales transaction in which they are granted. The consideration in respect of the initial sale is allocated to award credits based on their fair value and is accounted for as a liability (other payable) in the statement of financial position. The fair value is determined using estimation techniques that take into account the fair value of awards for which miles could be redeemed. Miles accrued through utilizing the services of programme partners and paid for by the participating partners are also accounted for as deferred revenue until they are utilized. In these instances, a liability is not recognized for miles that are expected to expire.

Revenue is recognized in the profit or loss only when the Company fulfills its obligation by supplying free or discounted goods or services on redemption of the miles accrued.

Finance cost

Finance costs comprise interest expense on borrowings that are recognised in profit or loss and reclassifications of amounts previously recognised in other comprehensive income.

Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method.

Manufacturers’ credits

The Company receives credits from manufacturers in connection with the acquisition of certain aircraft and engines. Depending on their nature these credits are either recorded as a reduction to the cost of the related aircraft and engines or reduced from ongoing operating expenses. Where the aircraft are held under operating leases these credits are deferred and reduced from the operating lease rentals on a straight-line basis over the period of the related lease as deferred credits.

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 674 75

Notes to the Financial Statementsfor the year ended 31 December 2016

5. Critical accounting judgements and key sources of estimation uncertainty

The preparation of the financial statements in conformity with IFRSs requires Management to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Critical judgements in applying accounting policies

The following are the critical judgements, apart from those involving estimation, that management has made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

Valuation of unquoted investmentsValuation of unquoted investments is normally based on recent market transactions on an arm’s length basis, fair value of another instrument that is substantially the same, expected cash flows discounted at current rates for similar instruments or other valuation models.

Classification of investment in Oman Air SATS Cargo LLC as a joint ventureOman Air SATS Cargo LLC is a limited liability company whose legal form confers separation between the parties to the joint arrangement and the Company itself. Furthermore, there is no contractual arrangement or any other facts and circumstances that indicate that the parties to the joint arrangement have rights to the assets and obligations for the liabilities of the joint arrangement. Hence, Oman Air SATS Cargo LLC is classified as a joint venture of the Company.

Impairment of financial assetsThe Company determines whether AFS financial assets are impaired when there has been a significant or prolonged decline in their fair value below cost. This determination of what is significant or prolonged requires judgement. In making this judgement and to record whether an impairment occurred, the Company evaluates among other factors, the normal volatility in share price, the financial health of the investee, industry and sector performance, changes in technology and operational and financial cash flows.

Impairment of goodwill and other intangible assetsDetermining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation estimates the future cash flows expected to arise from the cash-generating-unit and a suitable discount rate in order to calculate present value. Where the actual future cash flows are less than expected, a material impairment loss may arise.

The recoverable amount of the landing slot acquired in 2016 has been determined based on value-in-use calculations using four year projections. The discount rate applied to cash flow projections is 10.6% and the forecast long term growth rate used to extrapolate the projections beyond four-year periods is 2%.

Notes to the Financial Statementsfor the year ended 31 December 2016

5. Critical accounting judgements and key sources of estimation uncertainty (continued)

Critical judgements in applying accounting policies (continued)

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year:

Leased aircraft maintenance costsThe Company incurs liabilities for maintenance costs in respect of its leased aircraft during the course of the lease term. These are a result of legal and constructive obligations in the lease contract in respect of the return conditions applied by lessors, which require aircraft airframes, engines, landing gear and auxiliary power units to reach at least a specified condition on their return at the end of the lease term. A charge is made in the profit or loss each month based on the number of flight hours or cycles used to build up an accrual to cover the cost of heavy-duty maintenance checks when they occur. Estimates involved in calculating the provision required include the expected date of the check, market conditions for heavy-duty maintenance checks pertaining at the expected date of check, the condition of asset at the time of the check, the likely utilisation of the asset in terms of either flying hours or cycles, and the regulations in relation to extensions to lives of life-limited parts, which form a significant proportion of the cost of heavy-duty maintenance costs of engines. Additional maintenance costs for aircraft engines are considered for accrual based on the estimates made by Engineering Department on the basis of operational requirements.

The Company is also required to pay maintenance reserves to lessors on a monthly basis, based on usage. These maintenance reserves are then returned to the Company on production of evidence that qualifying maintenance expenditure has been incurred. Maintenance reserves paid are deducted from the accruals made. In some instances, not all of the maintenance reserves paid can be recovered by the Company and therefore, are retained by the lessor at the end of the lease term.

Assumptions made in respect of the basis of the accruals are reviewed for all aircraft once a year. In addition, when further information becomes available which could materially change an estimate made, such as a heavy-duty maintenance check taking place, utilisation assumptions changing, or return conditions being re-negotiated, then specific estimates are reviewed immediately, and the accrual is reset accordingly.

Accrual for aircraft flying costsManagement accrues for the landing, parking, ground handling, and other charges applicable for each airport in which the Company operates flights on a monthly basis. These estimates are based on the rate of charges applicable to each airport based on the agreements and recent invoices received for the services obtained. Similarly, accruals for overflying charges are estimated based on the agreement entered with each country.

Actual charges may differ from the charges accrued and the differences are accounted for on a prospective basis.

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 676 77

Notes to the Financial Statementsfor the year ended 31 December 2016

5. Critical accounting judgements and key sources of estimation uncertainty (continued)

Critical judgements in applying accounting policies (continued)

Useful lives of aircraft, property, plant and equipmentThe cost of aircraft, property, plant and equipment is depreciated over the estimated useful life, which is based on expected usage of the asset, expected physical wear and tear, the repair and maintenance programme and technological obsolescence arising from changes using management’s best estimates.

Allowance for obsolete and slow moving inventoriesInventories are stated at the lower of cost and net realisable value. Adjustments to reduce the cost of inventory to its realisable value, if required, are made. Factors influencing these adjustments include changes in demand, product pricing, physical deterioration and quality issues. The fair value is determined based on the estimated selling price in the ordinary course of business less estimated cost of completion on sale, and a reasonable profit margin based on the efforts required to complete and sell the inventories.

Allowance for impaired debtsAn estimate of the collectible amount of trade receivables is made when collection of the full amount is no longer probable. This determination of whether these trade receivables are impaired entails the Company evaluating, the credit and liquidity position of the customers, historical recovery rates and collateral requirements from certain customers in certain circumstances. The difference between the estimated collectible amount and the book amount is recognised as an expense in the profit or loss. Any difference between the amounts actually collected in the future periods and the amounts expected will be recognised in the profit or loss at the time of collection.

Determination of fair value

Passenger revenue recognitionPassenger ticket sales are recognised as operating revenue when the transportation is provided. The value of unused tickets is included in unearned revenue as sales in advance of carriage in the statement of financial position and recognised as revenue at the end of one year from the date of sale. This is estimated based on historical trends and experience of the Company whereby tickets uplift occurs mainly within the first two years. The carrying amount of the Company’s sales in advance of carriage at 31 December 2016 is RO 40.011 million (2015: RO 37.666 million), included in unearned revenue of trade and other payables in note 24.

Frequent flyer programmeThe Company operates a frequent flyer programme that provides travel awards to programme members based on accumulated mileage. A portion of passenger revenue attributable to the awards of frequent flyer benefits is deferred until they are utilised. The deferment of the revenue is estimated based on the historical trends of breakage and redemption, which is then used to project the expected utilisation of these benefits. Any remaining unutilised benefits are recognised as revenue upon expiry. The carrying amount of the Company’s deferred revenue at 31 December 2016 is RO 2.686 million (2015: RO 2.725 million), included in other payables of trade and other payables in note 24.

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A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 678 79

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

6. Aircraft, property, plant and equipment (continued)

Capital work-in-progress includes pre-delivery payments in the amount of RO 22.04 million (2015: RO 47.58 million) for aircraft delivery between 2017 to 2023. Other movement in capital work-in-progress significantly represents sale and leaseback of aircraft during the year.

Borrowing costs capitalized during the year amounts to nil (2015: RO 1.712 million).

The net book value of aircraft held under finance lease amounted to RO 248.73 million at 31 December 2016 (2015: RO 261.92 million). Aircraft on finance lease are mortgaged in favour of the leasing company (note 22).

The net book value of aircraft also include an amount of RO 214.80 million (2015: RO 231.59 million) in respect of assets provided as security against term loans (note 21).

Land on which buildings have been constructed by the Company is owned by the Public Authority for Civil Aviation (PACA). In accordance with the combined term sheet agreement with the PACA, 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 International Airport (renamed Muscat International Airport effective from February 2008) and Salalah Airport (note 31).

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. The land on which the Hotel is situated is owned by the Ministry of Tourism and was made available for the use of the Hotel on 13 April 1985, for a period of 50 years.

The Company received a government grant of RO 14.956 million (2015 : RO 11.262 million) for the purchase of furniture and equipment for the Muscat and Salalah airports out of which RO 3.694 million was received during the current year (2015 : RO 11.262 million). As at 31 December 2016, the unutilised portion of the grant received amounting to RO 4.673 million (2015: RO 0.979 million) is presented as government grant (note 25).

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

7. Goodwill 2016 2015

RO’000 RO’000Cost

At 1 January and 31 December 15,137 15,137

Impairment1 January 9,758 8,542

Impairment loss recognised during the year (note 28) 1,337 1,216

31 December 11,095 9,758

Net book value 4,042 5,379

Impairment losses recognised in the year

The recoverable amount of the Hotel’s line of business was assessed by reference to the cash-generating unit’s value in use calculation which used cash flow projections covering a period of 4 years using a discount rate of 10% p.a.

The cash flow beyond 4 years have been extrapolated using a terminal growth rate of 2% which is the expected economic growth rate for hotel business.

The values assigned to the key assumptions represent management’s assessment of external sources and internal sources (historical data).

8. Intangible asset

Intangible asset represents landing slot purchased during the year at London Heathrow International Airport required to enable a double-daily service on the Muscat – London route. The carrying value of the landing slots is assessed for impairment annually as the landing slots are considered to have indefinite useful lives. The recoverable amount of the landing slots have been determined based on value-in-use calculations using four-year cash flow projections approved by management which take into account the overall incremental network effect of the double-daily service. The discount rate applied to calculate present value of incremental cash flows is 10.6% and the growth rate used to calculate the terminal value of projections beyond 4 years is 2%.

The management has used the average seat factor of 78% for year 2017 increasing annually by 2% over the forecast period capped at 84% for year 2020. Average revenue per passenger for year 2017 is taken as RO 112 increasing by 5% year-on-year over the forecast period.

The value in use is sensitive to the selection of average seat factor and average revenue per passenger. 1% decrease in average seat factor will decrease the value in use by 17% and 5% decrease in revenue per passenger will decrease value in use by 21%.

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 680 81

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

9. Available for sale investments

2016 2015RO’000 RO’000

1 January 514 549

Additions 8 -

Fair value changes during the year 8 (35)

31 December 530 514

Quoted local equity investments 422 414

Unquoted local equity investments 108 100

530 514

The movement in the investments revaluation reserve is as follows:

1 January 211 246

Fair value change during the year 8 (35)

31 December 219 211

Available for sale investments are analyzed as follows:

Fair value Cost2016 2015 2016 2015

RO’000 RO’000 RO’000 RO’000

Quoted local equity investments

Banks and investment 253 249 89 89

Services 169 165 30 30

422 414 119 119

Unquoted local equity investments

Services 108 100 108 100

530 514 227 219

Unquoted local investments are recorded at their net equity value. Management considers that the carrying value of unquoted local investments is not materially different from their fair value at the end of the reporting period.

At the current and prior year reporting date none of the Company’s investment holdings represents 10% or more of the investee’s share capital.

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

9. Available for sale investments (continued)

Details of the Company’s investment holding exceeding 10% of the market value of the Company’s total quoted investment portfolio as of 31 December 2016 are as follows:

Number of securities

Portfolio holding Fair value Cost

(’000) (%) RO’000 RO’000MSM quoted securities:National Finance Company SAOG 1,928 60 253 89

Gulf Hotels Oman SAOG 13 32 121 14

10. Equity accounted investments2016 2015

RO’000 RO’000

Cost 1,234 75

Changes in net assets at the beginning of the year 1,809 1,842

Share of profits for the year 3,181 1,868

Dividends received in the year - (1,901)

6,224 1,884

Equity accounted investments includes

i. 50% equity in Oman Sales and Services LLC, a limited liability company registered in the Sultanate of Oman, at a cost of RO 75,000.

ii. 67% equity in Oman Air SATS Cargo LLC, at a cost of RO 1,158,549. During the current year, the Company incorporated a separate entity for cargo handling division with an initial share capital of RO 500,000 pursuant to a restructuring plan approved by the shareholders of the Company in the EGM held on 25 October 2015. The assets and liabilities of cargo handling division was transferred to the newly formed entity, Oman Air SATS Cargo LLC, a limited liability company registered in the Sultanate of Oman.

Movement in equity accounted investee:

2016 2015

RO’000 RO’000

At 1 January 1,884 1,917

Additions during the year 1,159 -

Share of profits for the year 3,181 1,868

Dividends received in the year - (1,901)

At 31 December 6,224 1,884

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 682 83

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

10. Equity accounted investments (continued)

Summarised financial information of the equity accounted investee is as follows:

a) Oman Sales and Services LLC

RO in ’000 Total assets

Total liabilities

Net assets Income Expense Profit

Company share of

net assets

Company share of

profit

2016 12,504 4,767 7,737 25,002 21,027 3,975 3,869 1,988

2015 7,985 4,223 3,762 24,758 21,022 3,736 1,881 1,868

b) Oman Air SATS Cargo LLC

RO in ’000 Totalassets

Totalliabilities

Netassets Income Expense Profit

Company share of

net assets

Company share of

profit

2016 9,879 6,088 3,792 6,349 4,568 1,781 2,541 1,193

In year 2016, the Company has not received dividends from its investments in equity accounted investee (2015: RO 1.9 million).

11. Long-term receivables

Long-term receivables represent interest free security deposits placed to secure the lease of aircraft. Fair value of these deposits has been discounted based on an effective interest rate method using a discount rate of 1.686% (2015: 1.178%). The maturity profile of such deposits is as follows:

2016 2015

RO’000 RO’000

MaturityAfter 1 year 313 2,613

Between 2-5 years 3,798 2,431

5 years and beyond 15,504 15,876

19,615 20,920

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

12. Inventories2016 2015

RO’000 RO’000

Aircraft consumables 18,946 16,891Catering stock 399 370Passenger consumables 1,123 1,169General 921 977Hotel stock 104 135

21,493 19,542Less: transferred to assets held-for-sale (note 16) - (1,278)Allowance for obsolete and slow moving inventories (3,049) (2,805)

18,444 15,459

Movement in allowance for obsolete and slow moving inventories:

1 January 2,379 2,712

Charge for the year 670 93

Less: transferred to assets held-for-sale - (426)

31 December 3,049 2,379

13. Trade and other receivables

Airlines and charterers 5,344 4,309

Travel agents 25,166 26,664

Others 9,131 8,263

Ministries 1,448 1,938

41,089 41,174

Allowance for doubtful debts (2,460) (1,095)

Net trade receivables 38,629 40,079

Other receivables 26,787 20,005

Prepaid expenses 7,587 7,417

Government contribution to equity – receivable* 39,000 -

112,003 67,501

* Received on 12 March 2017

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 684 85

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

13. Trade and other receivables (continued)

Movement in allowance for doubtful debts : 2016 2015RO’000 RO’000

1 January 1,095 824Charge for the year (note 28) 1,365 271

31 December 2,460 1,095

Owing to the nature of the Company’s operations, it undertakes transactions with a large number of customers in various countries.

Trade receivables include amounts of RO 18.054 million (2015: RO 17.304 million) due in foreign currencies, mainly Euros and US Dollars.

14. Term deposits

Term deposits, in the amounts of RO 7.25 million (2015: RO 6.5 million), represent deposits with commercial banks in Oman.

These term deposits mature within six months from the end of the reporting period and are denominated in Rial Omani, earning interest ranging between 2.6% to 4.2% (2015: 1.75% to 2.35%) per annum.

15. Cash and cash equivalents

2016 2015RO’000 RO’000

Cash in hand 53 37Cash at bank 9,427 10,512

9,480 10,549Less: bank overdraft (11,224) -

Cash and cash equivalents (1,744) 10,549

Cash and bank balances include amounts aggregating RO 5.12 million (2015: RO 2.29 million) held with banks in India, Sri Lanka, Pakistan and Bangladesh in local currencies.

Prior approval from regulatory authorities of the respective countries is required for the transfer of these funds.

Bank overdrafts includes amounts drawn under the overdraft credit facility offered by banks based in Oman.

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

16. Assets classified as held-for-sale 2016 2015

RO’000 RO’000

Aircraft, engine, rotables and tools - 12,096Less: accumulated depreciation - (8,711)

Net carrying value of aircraft, engine, rotables and tools (note 6) - 3,385Inventory net of provision (note 12) - 1,278

- 4,663Impairment (note 28) - (997)

- 3,666

During the year, the Company disposed off the ATR aircraft classified as held-for-sale in the previous year. A profit of RO 0.223 million was recognised on the sale of held-for-sale assets during the year.

17. Share capital2016 2015

RO’000 RO’000

Authorised share capital (shares of RO 1 each) 800,000 700,000

Issued and paid up share capital (shares of RO 1 each) 738,158 684,158

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 Shareholding No. of shares2016 2015 2016 2015

Government of the Sultanate of Oman 99.933 99.928 737,664,445 683,663,285

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 686 87

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

18. Government contribution to equity

Government contribution to equity represents the Government’s contribution to provide finance for the Company’s operations and capital requirement.

In 2016, the authorised share capital of the Company was increased from RO 700 million to RO 800 million after the approval of shareholders at the Extraordinary General Meeting (“EGM”). Furthermore, equity injection of RO 54 million in 2015 disclosed in statement of changes in equity as ‘Government contribution to Equity’ has been converted into paid up capital in the same EGM.

During the current year, the Government contributed RO 20 million in cash and subsequently committed a further RO 39 million (received on 12 March 2017 – Note 13) for a total of RO 59 million (2015: RO 54 million) to equity disclosed in statement of changes in equity as ‘Government contribution to equity’. The contribution is expected to be converted into paid up capital after the approval of the shareholders at an Extraordinary General Meeting.

19. Legal reserve

In accordance with the Commercial Companies Law of 1974, as amended, 10% of the profit for the year is required to be transferred to a legal reserve until the reserve is equal to one third of the issued share capital. The Company may resolve to discontinue such annual transfers when the reserve totals one third of the issued share capital. During the year, the Company has not added to this reserve as the Company incurred net loss for the reporting periods.

20. Provision for maintenance of aircraft, engines and rotables

2016 2015RO’000 RO’000

-Current portion 11,244 11,217Non-current portion 35,383 18,413

46,627 29,630

Movement during the year is as follows:

At 1 January 29,630 25,098Additional provisions during the year 49,680 37,956Utilized during the year (32,683) (33,424)

At 31 December 46,627 29,630

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 be measured reliably. The amount to be incurred within the next year is shown under the current liabilities.

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

21. Borrowings

2016 2015RO’000 RO’000

Term loans 324,076 272,337Finance lease liabilities (note 22) 173,302 199,349

497,378 471,686

Non-current portionTerm loans 202,188 194,392Finance lease liabilities (note 22) 146,370 173,302

348,558 367,694

Current portionTerm loans 121,888 77,945Finance lease liabilities (note 22) 26,932 26,047

148,820 103,992 At 1 January 471,686 469,654Additions during the year 162,685 275,603Repayment during the year (136,993) (273,571)

At 31 December 497,378 471,686

Term loans other than short term loans are obtained from local and international banks to finance purchase of aircraft, engines and landing slots with interest rates ranging between 2.33% to 4.58% p.a. and with repayment periods between 6 years to 12 years and are secured against comfort letters / government guarantees. As at 31 December 2016, the Company was not in any breach of loan covenant (2015: NIL).

Short term loans are provided by local banks on unsecured basis.

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 688 89

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

22. Lease liabilities

Finance lease liabilities

Minimum lease payments Present value of minimumlease payments

2016 2015 2016 2015RO’000 RO’000 RO’000 RO’000

Not later than one year 32,532 32,640 26,932 26,047Later than one year and not later than five years 125,710 128,364 112,896 111,717

Later than five years 36,398 66,277 33,474 61,585

194,640 227,281 173,302 199,349Future finance charges (21,338) (27,932) - -

173,302 199,349 173,302 199,349

Finance leases are for a period of twelve years with interest rates ranging from 3.13% to 4.41% (2015: 2.33% to 4.41%) per annum. The aircraft are mortgaged in favour of the leasing companies.

Under the terms of the lease agreements no contingent rents are payable.

23. Employees’ end of service benefits

Movement in the provision for end of service benefits during the year is as follows:

2016 2015RO’000 RO’000

1 January 10,940 9,561Charge for the year (note 28) 2,308 2,260Payments during the year (1,214) (881)

31 December 12,034 10,940

24. Trade and other payables

Trade payables 19,853 17,163Unearned revenue 37,454 37,047Other payables 61,590 47,257Accrued expenses 44,262 38,887

163,159 140,354

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

24. Trade and other payables (continued)

Trade payables include aggregate amounts of RO 4.088 million (2015: RO 3.368 million) due in foreign currencies, mainly in Euro and US Dollars.

Unearned revenue relates to sales of scheduled passenger revenue which will be recognized when the Company fulfills its service obligation by providing flight services.

25. Government grant

The Company received a government grant of RO 14.956 million (2015: RO 11.262 million) for the purchase of furniture and equipment for the Muscat and Salalah airports out of which RO 3.694 million (RO 11.262 million) was received during the current year. As at 31 December 2016, the unutilised portion of the grant amounting to RO 4.673 million (2015: RO 0.979 million) is presented as liability, pending utilisation.

26. Net assets per share

Net assets per share is calculated by dividing the net assets at the year-end by the number of shares outstanding as follows:

2016 2015RO’000 RO’000

Net assets (RO’000) (54,835) 54,977

Number of shares outstanding at the year-end (’000s) 738,158 684,158

Net assets per share (RO) - 0.080

At 31 December 2016, the company has a deficit of assets.

27. Revenue

Scheduled services - international 403,920 400,915Scheduled services - domestic 25,067 23,495Handling fees – ground and cargo handling 17,363 17,610Air charter services 12,174 13,215Handling fees - engineering 6,209 4,957Catering 2,809 3,615Rooms, food and beverage revenue - Hotel 2,818 3,268Other revenue 2,083 637

472,443 467,712

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 690 91

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

28. Expenditure2016 2015

RO’000 RO’000

Employee costs 145,326 131,168Fuel cost 117,366 122,783Other aircraft operating expenses 72,269 63,912Passenger related costs 60,299 46,785Operating lease rentals on aircraft 56,201 36,245Depreciation (note 6) 45,561 38,475Maintenance cost 43,546 45,654Others 39,633 37,599Cost of catering materials consumed 6,615 5,794Insurance costs 1,795 1,782Allowance for doubtful debts (note 13) 1,365 271Impairment (note 7 & note 16) 1,337 2,213Omani training and development costs 1,077 1,318Management fee – hotel 137 164

592,527 534,163

Employee cost includes the following:

Wages and salaries 114,430 102,515Other benefits 22,402 20,665Increase in liability for employee benefits (note 23) 2,308 2,260Contribution to a defined retirement plan 6,186 5,728

145,326 131,168

29. Interest and investment income

Interest on term deposits 572 442Dividends 31 30

603 472

30. Finance cost

Interest on term loans 8,474 6,883Interest on finance lease 6,522 6,615Other finance cost 1,326 246

16,322 13,744

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

31. Aviation services agreement and combined term sheet agreement

In accordance with the aviation services agreement between the Company and the Ministry of Transport & Communications, Government of the Sultanate of Oman (the “Government”), the Company has been granted the right to operate domestic and international airline services, to provide aircraft passenger and cargo handling facilities, 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. Subsequently, the Company’s rights to operate its scheduled and charter airline services were extended for an indefinite period. In November 2015, new concession agreement has been effective with different method of calculation for concession fees according to which the Company will pay to OAMC concession fees based on the following.

Ground handling fee

: Maximum take-off weight of an aircraft (MTOW) and each departing passenger

RO 0.353/metric tonne of MTOW for full handling flights RO 0.088/metric tonne of MTOW for technical flights RO 0.125 per departing passenger

Cargo handling fee : 2% of monthly turnover from agency commission and 50% of demurrage collected from third parties.

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

Catering fees : 5% of the monthly Gross Revenue which is attributable to the provision of catering services to airlines with the exception to Oman Air, which is charged at 2%.

The operator collects a property fee for the land mass that is occupied by the catering service provider at the current airport in the amount ofRO 1.000 per sqm. payable monthly.

The catering service provider shall pay property rental fee in consideration of occupying and using the new catering premises (listed in Schedule 3 of the agreement ) as follows.Area within the building: RO 1.500 per sqm.Area outside the building: RO 0.500 per sqm.

During the year 2016, the following charges set out in the aviation services agreement are included in the financial statements in accordance with the new concession agreement entered into with Oman Airports Management Company SAOC in November 2015:

2016 2015RO’000 RO’000

Rent 261 283

Concession fee 2,438 1,733

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 692 93

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

32. Taxation

Recognized in statement of profit or loss and other comprehensive income

2016 2015RO’000 RO’000

Deferred tax 599 5,800

Recognized in statement of financial position

Non-current liabilityDeferred tax 29,000 28,401

The Company is subject to income tax at the rate of 12% (2015: 12%) of taxable income in excess of RO 30,000. No provision for income tax has been made in these financial statements in view of the tax losses incurred during the year. The tax returns of the Company for the years 2010 to 2015 have not yet been agreed with the Secretariat General for Taxation at the Ministry of Finance. The Board of Directors are of the opinion that additional taxes, if any, related to the open tax years would not be significant to the Company’s financial position as at 31 December 2016. As at 31 December 2016, the tax losses available for offset against future taxable profit amounted to approximately RO 664 million (2015: RO 634 million). The tax loss are available for carry forward for a period of five years from the year when it was incurred.

Deferred tax liability

Deferred tax liabilities are calculated on all temporary differences using a principal tax rate of 12% (2015: 12%). The net deferred tax (liability) / asset and deferred tax charge in the statement of profit or loss are attributable to the following items:

2016 1 January Charged to profit or loss 31 December

RO’000 RO’000 RO’000AssetCarried forward losses 250 (250) -LiabilityAccelerated tax depreciation (28,651) (349) (29,000)

(28,401) (599) (29,000)

2015AssetCarried forward losses 250 - 250LiabilityAccelerated tax depreciation (22,851) (5,800) (28,651)

(22,601) (5,800) (28,401)

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

33. Loss per share – basic and diluted 2016 2015

-Loss for the year (RO’000) (129,820) (86,333)

Weighted average number of shares outstanding during the year (‘000) 745,227 684,158

Loss per share - basic and diluted loss per share (RO) (0.174) (0.126)

The par value of each share is RO 1. The loss per share is calculated by dividing the loss for the year by the weighted average number of shares outstanding during the year.

34. Related parties

Related parties comprise the shareholders, directors, key Management personnel and business entities in which they have the ability to control or exercise significant influence in financial and operating decisions. The Government is not considered as a related party in view of the exemption from disclosure requirements set out in IFRS in relation to related party transactions and outstanding balances with a government that has control or joint control of, or significant influence over the Company and an entity that is a related party of the same government.

The Company has applied the exemptions in IAS 24:25 related to government entities and only disclosed certain information to meet the disclosure requirements of IAS 24. The Company maintains balances with these related parties which arise in the normal course of business from the commercial transactions and are entered into on terms and conditions which the directors consider to be comparable with those adopted for arms’ length transactions with third parties. Outstanding balances at the year-end are unsecured and settlement occurs in cash.

No expenses have been recognized in the year for impaired debts in respect of amounts owed by related parties. Following is the summary of significant transactions with related parties during the year:

2016 2015RO’000 RO’000

Revenue and expensesPurchase of goods / services 25,340 17,355

Sale of goods / services 45 54

Management and marketing fee 137 181

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 694 95

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

34. Related parties (continued)

The amount due from related parties included in other receivables are as below:

2016 2015RO’000 RO’000

Al Shasha Al Masia Company SAOC - 35

Government contribution to equity 39,000 -

The amount due to related parties included in trade payables are as below:

Oman Air SATS Cargo LLC 1,176 -Oman Airport Management Company SAOC 137 436Brahims Airline Catering Holding Sdn Bhd 28 -Oman Sales and Services LLC 11 -Flamingo Hotel Management - 33Oman Sail Company SAOC 1 -Al Shasha Al Masia Company SAOC 2 -

1,355 469

Key management personnel benefits

Key Management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly, including any director (whether executive or otherwise).

2016 2015RO’000 RO’000

Short term benefits 1,398 1,806Postemployment benefits 58 71Directors’ remuneration and sitting fees 67 125

1,523 2,002

35. Segment information

Information regarding the Company’s operating segments is set out below in accordance with IFRS 8 Operating segments. IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Company that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance.

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

35. Segment information (continued)

Primary reporting format - business segments

The Company is organised into three major operating divisions - airline, hotels & catering and ground and cargo handling. The airline division provides passenger and cargo services on a scheduled and charter basis.

The Hotel division operates Golden Tulip Seeb Hotel and 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:

Airline Hotels and catering

Ground and cargo handling Total

2016 2015 2016 2015 2016 2015 2016 2015RO’000 RO’000 RO’000 RO’000 RO’000 RO’000 RO’000 RO’000

RevenueTotal revenue 454,803 447,642 31,400 29,283 36,817 32,452 523,020 509,377Inter division revenue (7,433) (5,060) (25,773) (22,400) (19,454) (14,842) (52,660) (42,302)

External revenue 447,370 442,582 5,627 6,883 17,363 17,610 470,360 467,075Other income 2,083 637

472,443 467,712Segment (loss) profitincluding inter division (loss) profit (117,553) (68,135) 13,211 12,706 9,653 6,748 (94,689)

(48,681)

Common costs (25,395) (17,770)

Operating loss (120,084) (66,451)Finance cost (16,322) (13,744)Interest and investment income 603 472Profit on disposal of shareholding in Oman Air Cargo LLC 5,798 -Share of profits of an associate company 3,181 1,868Increase/(decrease) in fair value of long-term receivables 41 (945)Concession fee (2,438) (1,733)Deferred tax charge (599) (5,800)

Net loss for the year (129,820) (86,333)

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 696 97

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

35. Segment information (continued)

Segment assets and liabilities

2016 2015RO’000 RO’000

Segment assetsAirline and airport services 689,315 720,394Hotel 13,191 14,203Others 45,754 2,398

Total assets 748,260 736,995

Segment liabilitiesAirline and airport services 734,773 653,136Hotel 322 481Others 29,000 28,401

Total liabilities 764,095 682,018

For the purposes of monitoring segment performance and allocating resources between segments:

• Allassetsareallocatedtoreportablesegmentsotherthaninvestmentsinequityaccountedinvesteeand available-for-sale investments. Goodwill is allocated to Company’s hotel cash generating unit. Assets used jointly by reportable segments are allocated on the basis of the revenues earned by individual reportable segments; and

• All liabilitiesareallocatedtoreportablesegmentsotherthancurrentanddeferredtaxliabilities.Liabilities for which reportable segments are jointly liable are allocated in proportion to segment assets.

Geographical information

The Company operates 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:

Oman Overseas Total2016 2015 2016 2015 2016 2015

RO’000 RO’000 RO’000 RO’000 RO’000 RO’000

Revenue including inter division revenues 27,885 26,763 495,135 482,614 523,020 509,377

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

36. Commitments and contingencies

Capital commitments

As at 31 December 2016, the Company has commitments for previously placed aircraft orders amounting to RO 701.17 million (2015: RO 753.37 million). As at 31 December 2016 prepayments on aircraft orders have been made, amounting to RO 22.04 million (2015: RO 47.58 million).

Other commitments2016 2015

RO’000 RO’000-

Capital expenditure commitments 4,550 5,960

As at 31 December 2016, the Company has issued bank guarantees and letter of credit amounting to RO 2 million (2015: RO 4 million) in respect of aircraft operation and maintenance related costs.

Operating lease commitments

The fixed lease commitments are as follows:

Not later than one year 53,716 38,222Later than one year and not later than five years 176,854 104,279After five years 60,500 77,680

291,070 220,181

As at 31 December 2016, the Company had 30 aircraft on operating lease.

In addition to the above fixed lease commitments, there is a variable lease rental element depending on the flying hours of the leased aircraft.

The Company has issued bank guarantees and letter of credit amounting to RO 40.23 million (2015: RO 17.93 million) in respect of operating lease commitments disclosed above.

Contingent liabilities

As at 31 December 2016, there are no contingent liabilities.

37. Financial risk management

Categories of financial instruments

Financial assets consist of available for sale investments, long term receivables, trade and other receivables, term deposits and cash in hand and at bank. Financial liabilities consist of trade and other payables and borrowings.

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 698 99

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

37. Financial risk management (continued)

Financial assets

2016 2015RO’000 RO’000

Available for sale financial assets 530 514Cash and bank balances 9,480 10,549Term deposits 7,250 6,500Financial assets recorded at amortised cost: Long term receivables 19,615 20,920Trade receivables 38,629 40,079Other receivables 65,787 20,005

141,291 98,567

Financial liabilities

Liabilities measured at amortised costTrade payables 19,853 17,163Other payables and accrued expenses 105,852 86,144Borrowings 497,378 471,686Bank overdraft 11,224 -

634,307 574,993

The fair value of the financial assets and liabilities approximates their carrying value as stated in the statement of financial position.

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

37. Financial risk management (continued)

Fair value measurements recognized in the statement of financial position

31 December 2016 Level 1 Level 2 Level 3 TotalRO’000 RO’000 RO’000 RO’000

Available for sale financial assetsQuoted local equity investments 422 - - 422Unquoted local equity investments - - 108 108

422 - 108 530

31 December 2015Available for sale financial assetsQuoted local equity investments 414 - - 414Unquoted local equity investments - - 100 100

414 - 100 514

There were no transfers between Level 1, 2 and 3 during the year.

No gain or loss was included in profit or loss relating to unquoted equities held at the end of the reporting date. The management believes that there will not be any significant differences between the carrying value and the fair value of other financial instruments.

Financial risk factors

Financial instruments carried on the statement of financial position comprise cash and cash equivalents, available for sale investments, term deposits, long term receivables, trade and other receivables, trade and other payables and borrowings.

Financial assets are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows have been impacted.

The classification of financial assets depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

Overview

The Company’s activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. The Company’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance.

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 6100 101

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

37. Financial risk management (continued)

Financial risk factors (continued)

Risk management is carried out by management under policies approved by the Board of Directors.

(i) Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s receivables from customers.

Trade and other receivables The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. Owing to the nature of the Company’s operations, it undertakes transactions with a large number of customers in various countries.

The Company has established credit policies and procedures that are considered appropriate and commensurate with the nature and size of receivables.

In monitoring customer credit risk, customers are segmented according to their credit characteristics in the following categories:

• Airlines and charterers• Travel agents• Government customers• Other customers

The potential risk in respect of amounts receivable is limited to their carrying values as Management regularly reviews these balances whose recoverability is in doubt.

The Company establishes a provision for impairment that represents its estimate of potential losses in respect of trade and other receivables. The main components of this loss are specific loss component that relates to individual exposures.

The sale of passenger and cargo transportation is largely achieved through International Air Transport Association (“IATA”) approved sales agents. All IATA agents have to meet minimum financial criteria applicable to their country of operation to remain accredited. Adherence to the financial criteria is monitored on an ongoing basis by IATA through their Agency programme.

The credit risk associated with such sales agents is relatively small owing to a broad diversification.

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

37. Financial risk management (continued)

Financial risk factors (continued)

(i) Credit risk (continued)

Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure. The exposure to credit risk at the end of the reporting period was on account of:

2016 2015RO’000 RO’000

Available for sale financial assets 530 514Long term receivables 19,615 20,920Trade receivables 41,089 41,174Other receivables 65,787 20,005Term deposits 7,250 6,500Cash at bank 9,480 10,549

143,751 99,662

The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the demographics of the Company’s customer base, including the default risks of the industry and country in which customers operate, as these factors may have an influence on credit risks.

During 2016, approximately 33% (2015: 34%) of the Company’s passenger revenue was attributable to sales transactions relating to Indian subcontinent.

The exposure to credit risk for trade receivables at the end of the reporting period by type of customer was:

2016 2015RO’000 RO’000

Travel agents 25,166 26,664Airlines and charterers 5,344 4,309Others 9,131 8,263Ministries 1,448 1,938

41,089 41,174

A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 6102 103

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

37. Financial risk management (continued)

Financial risk factors (continued)

(i) Credit risk (continued)

Exposure to credit risk

The age of trade receivables and related impairment loss at the end of the reporting period was:

2016 2015Gross Impairment Gross Impairment

RO’000 RO’000 RO’000 RO’000

Not past due 24,566 - 25,458 -Past due 0 to 150 days 13,973 - 13,006 -Past due 151 to 365 days 492 - 1,335 -More than 1 year 2,058 (2,460) 1,375 (1,095)

41,089 (2,460) 41,174 (1,095)

Included in the Company’s trade receivable balance are debtors with a carrying amount of RO 14.063 million (2015: RO 14.62 million) which are past due at the end of the reporting period for which the Company has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. The Company holds collaterals in respect of certain parties in the form of cash deposits / bank guarantees to the extent of RO 5.23 million (2015: RO 4.89 million). The average collection period of these receivables is 26 days.

The movement in provision for doubtful debts has been disclosed in note 13.

The allowance account in respect of trade receivables is used to record impairment losses unless the Company is satisfied that no recovery of the amount owing is possible, at which point the amount considered irrecoverable is written off against allowance account.

(ii) Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to ensure, as far as possible that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.

Typically, the Company ensures that it has sufficient cash on demand to meet expected operational expenses including the servicing of financial obligations. This excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. The Company has access to credit facilities and government support.

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

37. Financial risk management (continued)

Financial risk factors (continued)

(ii) Liquidity risk

The maturity profile of the financial liabilities is as follows:

Carrying amount

1 year or less

1 to 2 years

2 to 5 years

Beyond 5 years

RO’000 RO’000 RO’000 RO’000 RO’00031 December 2016Trade payables 19,853 19,853 - - -Other payables and accrued expenses 105,852 105,852 - - -Borrowings 497,378 148,820 47,850 146,645 154,063Bank overdraft 11,224 11,224 - - -

634,307 285,749 47,850 146,645 154,063

31 December 2015Trade payables 17,163 17,163 - - -Other payables and accrued expenses 86,144 86,144 - - -

Borrowings 471,686 103,992 48,025 139,169 180,500

574,993 207,299 48,025 139,169 180,500

Unearned revenue is excluded from liquidity risk as it represents tickets sold but not flown as at the end of the reporting period.

(iii) Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Company’s income or the value of its holdings of financial instruments.

The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.

The Company’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates.

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Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

37. Financial risk management (continued)

Financial risk factors (continued)

(iii) Market risk

Fuel price risks

The Company is exposed to volatility in the price of fuel and closely monitors the actual cost against the forecast cost.

Aircraft lease foreign currency exchange rate risk:There are no significant exchange rate risks as all aircraft lease rental agreements, new aircraft commitments and deposits are made in US Dollars to which Rials Omani is pegged.

Interest rate risk

The Company has long term borrowings, which are interest bearing and exposed to changes in market interest rates.

At the end of the reporting period the interest rate profile of the Company’s interest bearing financial instruments was:

2016 2015RO’000 RO’000

Fixed rate instrumentsFinancial assets 7,250 6,500

Financial liabilities 508,602 471,686

(iv) Other price risks

A change of 10% on equity securities – available for sale would have increased or decreased equity by RO 42,200 (2015: RO 41,400).

Notes to the Financial Statementsfor the year ended 31 December 2016 (continued)

38. Restructuring of Company’s operations

During the year 2015, shareholders of the Company in the EGM held on 25 October 2015 approved the restructuring of the Company by transferring the assets, rights, liabilities, contracts and employees of each of the cargo handling, ground handling, hospitality, duty free sales, catering and engineering to separate entities in which the majority of shareholding is held by the Company to achieve functional efficiencies, and improve the quality of services provided.

Accordingly, during year 2016, the Company incorporated a separate entity for cargo handling division with an initial share capital of RO 500,000. The assets and liabilities of cargo handling division was subsequently transferred to the newly formed entity on 31 March 2016 and joint venture agreement was entered into with SATS Investment PTE Ltd. for 33% shareholding in the newly formed entity. At 31 December the Company’s investment in Oman Air SATS Cargo LLC, a limited liability company registered in the Sultanate of Oman is classified as joint venture (note 10).

Further a closed joint company was incorporated for ground handling operations having an initial paid up capital of RO 500,000. The Company owns 98% shares in the newly formed company remaining shares held by Ministry of Finance and Oman Airports Management Company SAOC.

Currently, no separate entity has been formed for the purpose of transferring hospitality, duty free sales, catering and engineering operations. The above events may have an impact on the financial statements of the company in 2017.

39. Comparative information

Certain corresponding figures for the previous year have been reclassified in order to confirm with the presentation for the current year. Such reclassifications did not affect previously reported profit or shareholders’ equity.

40. Approval of the financial statements

The financial statements were approved by the Board of Directors and authorized for issue on12 March 2017.

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