Iran Aseman Airlines - Iran Airlines

Hello and thank you for flying with us

Events in the Iranian airline industry during the past year have again proven extremely challenging. External factors such as a substantial rise in cost in combination with a governmental curb on our ability to adjust domestic ticket fares significantly affected our day-to-day operations and threatened our financial statements. In addition, U.S. sanctions continued to influence our ability to source aircrafts and parts at competitive prices.

Financial Results

In spite of this challenging environment, I am proud to announce that Aseman Airlines has managed the financial turnaround. After a devastating loss of US$ 30 millionô in 2003, we succeeded to close the year 2004 with a net profit after tax of US$ 800,000.

The reasons for this remarkable success are manifold, including:

- a substantial increase in passenger volumes and related economies of scale;

- a higher load factor;

- optimization of our routes and flight schedules;

- increased productivity and a severe cost cutting exercise.

Total passenger revenues increased by 41.6% to US$ 96.88 million, including domestic passenger revenues of US$ 51.71 million (+152%) and international passenger revenues of US$ 44.67 million (+23%). Aseman Airlines cargo business showed a moderate growth of 13.4% to reach US$ 1.51 million in revenues, while our maintenance and repair activities generated US$ 9.93 million, 72% above the corresponding figure for the previous year.

We achieved US$ 109.27 million in total sales, up by 46% from the year 2003. Our operating profit reached US$ 1.82 million, after an operating loss of US$ -19.76 in 2003.

Despite this substantial growth in our business, an inflation rate of more than 15% and substantial devaluation of the Iranian Rial against the US$ (5.6%) and Euro (14.5%), we managed to limit the annual cost increase to 13.5%, resulting in total operating cost of US$ 107.45 million.

However, our financial situation continues to be demanding. Debt and liquidity levels are ongoing concerns along with profitability. We are especially concerned that our domestic flight segment remains deeply in the red with a loss of close to US$ 45 million in 2004. Despite considerable success in cutting cost, increasing load factors and higher efficiency and volumes, the governmental curb on domestic fares continues to make domestic operations uneconomical. So far our joint lobbying efforts with other Iranian airlines have not shown the desired success. Considerable challenges and more work is still ahead.

Operating Results

Also from an operating point of view, 2004 was a remarkable year for Aseman Airlines. Thanks to the diligence, sacrifice and ingenuity of our staff and commitments from our stakeholders and partners we were able to expand our flights to 54 destinations inside Iran and 7 destinations outside the country, resulting in 1,830 city-pair connections throughout the region directly or via one or more airports.

We carried last year 1,519,730 passengers in our domestic and 698,091 in the international network, representing an increase of 48.5% and 21.5% respectively, compared to 2003. In addition, we carried more than 2,640 tons of cargo, and provided engineering and maintenance services to 4 airlines. Aseman Airlines currently operates a fleet of 30 aircraft. The number of employees as of March 20, 2005 was 1,932.

I am confident that the sustained growth of Aseman Airlines business will continue to strengthen our global competitiveness through enhanced productivity and economies of scale. In anticipation of increasing competition within our market segment, we are adjusting our operations proactively with consideration of current conditions combined with long-term foresight.

As Aseman Airlines manages through unprecedented change, the shared values and goals that have marked our 25-year history remain strong. Safety continues to be the foundation of everything we do; it is our single most important obligation to customers and employees.

Upgrading Customer Satisfaction

Our stance in the arena of aviation industry will find an opportunity for stabilization only through reliance on our clients. To this end, the management of Aseman Airlines is firmly determined to give new dimensions to its client-oriented policies.

Our clients are well aware of the problems we face based on external sanctions with regards to the renovation and development of our fleet. However, this shall not serve as an excuse. We know that we can only gain and maintain customer loyalty by offering a great product and Aseman Airlines is committed to maximizing customer satisfaction. As such, during 2004, we introduced various innovations into our lines of service to enhance and improve the experiences of customers under our wing.

I am inspired by the quality of our people at Aseman Airlines and the challenges of the industry. We are moving forward with the creation of interlocking systems, and my calls for Îout-of-the-boxÌ thinking are being heeded and implemented throughout our organization. It is not enough to be a good Iranian airline anymore; we are working on a regional level and have witnessed our industryÌs volatility caused by factors far beyond Iran. Despite these factors, I truly believe we have what it takes to become a truly regional player.

The New Financial Year: Challenge and Change

As an old Chinese proverb observes, ÏUnless we change our direction, weÌre likely to end up where weÌre headed.Ó

After thoroughly analyzing the harsh financial pressures, Aseman Airlines embarked upon an ambitious and accelerated journey to reinvent and redirect itself. Our goal is to meet the competition head-on by becoming a more efficient and simplified airline uniquely designed to improve the customer travel experience while simultaneously cutting costs.

Concurrently, by proactively recognizing market trends and needs, we will explore new routes and markets to create new revenue sources.

We have set our targets for 2005 at an ambitious US$ 120.95 million in sales, US$ 7.27 million in operating profit, and US$ 3.44 million in profit after taxation. We believe such goals will be achievable with the backing of a customer- and value-oriented management team.

Investments for the purchase of 30 new aircrafts, including 6 Fokker 100, 12 ATR 72 aircraft and 12 additional 150 or 180 seater Airbus or Boeing, which will cost US$ 440 million over the next 7 years.

We will also continue to invest substantial amounts into new infrastructure in the areas of cargo handling, catering, technical services, administration and sales. Highlights include a 90,000 m2 cargo handling site, 55,000 m2 technical services site and 8,500 m2 of office space Ò all at Imam Khomeini Airport, which will soon develop into the new home base of Aseman Airlines. Although some of these investments are in the form of joint ventures with reputable Iranian and foreign partners, we require a substantial increase in capital, which is presently under preparation.

As we prepare for the future, Aseman Airlines will pursue value management to enhance competitiveness and improve productivity. These will help position us for long-term growth and elevate our corporate value to a higher level. We are securing the foundation from which we will grow to be one of the major regional airlines.

Going Forward

Aseman Airlines is facing one of the most difficult periods in its long proud history. In the face of uncertain outcomes, but with a clear goal of achieving long-term success and viability, Aseman Airlines remains steadfastly determined to serve the best interest of its employees, customers, shareowners and other stakeholders.

I would like to take this opportunity to thank the staff of Aseman Airlines for their outstanding performance in these difficult times. Thank you for your unwavering support and encouragement.

Yours truly,

Ali Abedzadeh

Chairman and CEO