Air China Regulatory News (AIRC)

Air China is the only national flag carrier of China and a member of Star Alliance, the world's largest airline alliance. It is also the only Chinese civil aviation enterprise listed in "The World's 500 Most Influential Brands".

Air China is headquartered in Beijing, the capital of China, with increasingly important hubs in Chengdu, Shanghai and Shenzhen. With Star Alliance, our network has covered 1,317 destinations in 193 countries as at the end of the Reporting Period. Air China is dedicated to serve passengers with credibility, convenience, comfort and choice.

Air China is actively implementing the strategic objectives of "ranking among the top in terms of global competitiveness, continuously strengthening our development potentials, providing our customers with a unique and excellent experience and realising sustainable growth to create value for all related parties".

In addition, Air China also holds direct or indirect interests in the following airlines: Air China Cargo Co., Ltd., Shenzhen Airlines Company Limited (including Kunming Airlines Company Limited), Air Macau Company Limited, Beijing Airlines Company Limited, Dalian Airlines Company Limited, Air China Inner Mongolia Co., Ltd., Cathay Pacific Airways Limited, Shandong Airlines Co., Ltd. and Tibet Airlines Company Limited.

TABLE OF CONTENTS

CORPORATE INFORMATION

REGISTERED CHINESE NAME:

中國國際航空股份有限公司

ENGLISH NAME:

Air China Limited

REGISTERED OFFICE:

Blue Sky Mansion

28 Tianzhu Road

Airport Industrial Zone

Shunyi District

Beijing

China

PRINCIPAL PLACE OF BUSINESS IN HONG KONG:

5th Floor, CNAC House

12 Tung Fai Road

Hong Kong International Airport

Hong Kong

WEBSITE ADDRESS:

www.airchina.com.cn

DIRECTORS1:

Cai Jianjiang

Song Zhiyong

Xue Yasong

John Robert Slosar

Wang Xiaokang

Liu Deheng

Stanley Hui Hon-chung

Li Dajin

SUPERVISORS:

Wang Zhengang

He Chaofan

Xiao Yanjun

Li Guixia

LEGAL REPRESENTATIVE OF THE COMPANY:

Cai Jianjiang

JOINT COMPANY SECRETARIES:

Zhou Feng

Tam Shuit Mui

AUTHORISED REPRESENTATIVES:

Cai Jianjiang

Tam Shuit Mui

LEGAL ADVISERS TO THE COMPANY:

DeHeng Law Offices (as to PRC Law)

DLA Piper Hong Kong (as to Hong Kong and English Law)

INTERNATIONAL AUDITOR:

Deloitte Touche Tohmatsu

H SHARE REGISTRAR AND TRANSFER OFFICE:

Computershare Hong Kong Investor Services Limited

Rooms 1712-1716, 17th Floor

Hopewell Centre

183 Queen's Road East

Wanchai

Hong Kong

LISTING VENUES:

Hong Kong, London and Shanghai

1 Mr. Xue Yasong was elected as employee representative Director by the second session of the employee representative meeting of the Company in 2018.

SUMMARY OF FINANCIAL INFORMATION

(1) EBITDA represents earnings before finance income and finance costs, exchange gains/losses, income tax expense, share of results of associates and joint ventures, depreciation and amortisation as computed under the IFRSs.

(2) EBITDAR represents EBITDA before deducting operating lease expenses on aircraft and engines as well as other operating lease expenses.

(3) In order to conform with the presentation in this period, certain comparative figures have been reclassified, including certain air traffic revenue in the comparative figure was reclassified to government grants in respect of subsidies granted by various local governments controlled parties to encourage the Group to operate certain routes to cities where these governments are located.

SUMMARY OF OPERATING DATA

The following is the operating data summary of the Company, Air China Cargo, Shenzhen Airlines (including Kunming Airlines), Air Macau, Dalian Airlines and Air China Inner Mongolia.

BUSINESS OVERVIEW

BUSINESS OVERVIEW

During the Reporting Period, the Group's ASKs and RPKs reached 133,799 million and 107,680 million, representing a year-on-year increase of 12.44% and 11.68%, respectively. The passenger load factor was 80.48%, representing a year-on-year decrease of 0.54 ppt. The Group's AFTKs and RFTKs reached 7,024 million and 3,827 million, representing a year-on-year increase of 9.61% and 8.39%, respectively. The Group's cargo and mail load factor was 54.48%, representing a year-on-year decrease of 0.61 ppt.

Development of Fleet

During the Reporting Period, the Group introduced 15 aircraft (including one B787-9 aircraft, one B777-300ER aircraft, two A330-300 aircraft, three B737-8MAX aircraft, five B737-800 aircraft, two B737-700 aircraft and one A320NEO aircraft). And the Group phased out 8 aircraft (including two B777-200 aircraft, one B737-800 aircraft, two A320 aircraft and three B737-700 aircraft). As of 30 June 2018, the Group had a total of 662 aircraft, with an average age of 6.74 years.

Among the aircraft set out above, the Company operated a fleet of 397 aircraft in total, with an average age of 6.76 years. The Company introduced 8 aircraft and phased out 7 aircraft among which one was sold to Air Macau in the first half of 2018.

Details of the fleet of the Group are set out in the table below:

Hub Network

In the first half of 2018, the Company together with Dalian Airlines and Air China Inner Mongolia newly launched or resumed 28 domestic and international routes, comprising 21 domestic and 7 international routes. As for the Beijing Hub, the Company launched international routes of Beijing-Barcelona, Beijing-Houston-Panama, Beijing-Copenhagen, Beijing-Hanoi, etc.; as at the end of the Reporting Period, the Company launched around 30 direct routes from Beijing to the countries along the Belt and Road. The capacity of Beijing as one of the key bases increased by 6.8% year-on-year by optimizing the capacity deployment structure of the Beijing Hub and increasing the deployment of wide-body aircraft for key routes departing from Beijing. We delivered through check-in baggage services on routes from 19 European cities to domestic destinations via Beijing. As at the end of June 2018, this service has covered 35 waypoints in Europe, America and Australia; the number of O&D connected by the Beijing Hub increased to 6,050 from 5,918 as at the end of 2017; the onward transit products of the Beijing Hub were promoted and the passengers transfer services were enhanced. The number of onward transit passengers via Beijing increased by 25.4% year on year. The Chengdu International Hub launched new international and domestic routes such as Chengdu-Bangkok, Chengdu-Huai'an and Chengdu-Hotan, and the capacity contributed increased by 10.3% year-on-year. Shanghai and Shenzhen international gateways have continuously improved the planning of route network and deployment of wide-body aircraft through interconnection with surrounding areas. In addition, the quadrilateral strategic layout has been continuously optimized and the route network has been further developed as the Company launched new international and domestic routes such as Hangzhou-Nha Trang, Dalian-Shijiazhuang-Yinchuan, and Hangzhou-Xi'an-Karamay.

As at the end of June 2018, the Company's passenger routes have expanded to 434 in total, across six continents of the world, comprising 308 domestic, 109 international and 17 regional routes. The Company's network covered 42 countries and regions and 189 cities, comprising 69 international, 4 regional and 116 domestic cities. Through Star Alliance, the Company's route network extended to 1,317 destinations in 193 countries.

Sales and Marketing

The Company compiled the 2018 Global Sales Yearbook (《2018年全球銷售地年鑒》) and the Global Market Opportunity Information Calendar (《全球機會市場信息日曆》), and continuously strengthened the building of sales and marketing capacity. Thanks to the diversification of domestic and international interlining products and refined revenue management, the sales revenue of domestic and international interlining services achieved a year-on-year growth of 14%. The Company seized the opportunity of domestic price reform to adjust the prices of premium cabins on 99 domestic routes and the price of economy cabin on 22 domestic routes, which resulted in a year-on-year increase in the revenue of RMB356 million. By enriching marketing activities in relation to and expanding the customer base of premium classes, the domestic and international revenue for premium cabins increased by 8% and 15%, respectively, on a year-on-year basis. The total number of "Phoenix Miles" members amounted to 54.21 million, and revenue contribution increased by 12% compared to the same period last year. The Company steadily promoted business model innovation, and enhanced e-commerce channel sales capabilities. Our APP has been upgraded nine times which added 580 new functions and realized product optimization, achieving sales revenue of RMB2.64 billion, representing an increase of 53% as compared to the same period last year. We have completed the E-service for frequent flyers business and expanded the mileage usage channels, which significantly enhanced our customers' satisfaction and loyalty. The customer experience on ancillary products has also improved. In the first half of 2018, our cumulative sales revenue from ancillary products such as paid seat selection and boarding gate cabin upgrade reached RMB92.32 million, representing a year-on-year increase of 43%.

Brand Value

With the steady development of brand building projects, the brand communication and innovation capabilities have been enhanced. We carried out comprehensive brand promotion projects in markets in China, the UK, Germany and France promoting in all directions through traditional and new media. Advertising media exposure covered 1.3 billion people and Internet media received 20.56 million clicks on its advertisements. The Company actively planned in-depth interactive activities and implemented the "Landing with Dreams" H5 interactive events, with full media coverage reaching nearly 1 billion people and online activities engaging more than 1 million people. We deepened brand public relations communication, cooperated with multiple media platforms to publicize and promote brand marketing events, and enhanced the audience's memory of the brand's core. We expanded our brand influence by registering a theme blog for our IP image "Panda (胖安達)", and planning the "Panda Celebrates Children's Day with You" theme flight activities. We also participated in the first China Independent Brand Expo to show our brand image as an international airline company. Joint marketing agreements were signed with the tourist bureau in Copenhagen and Australia, and "Munich Express" cooperation agreement was signed with Beijing Capital Airport and Munich Airport to strengthen brand synergy. The successful first flight of theme painting aircraft "Colorful World Garden (多彩世園號)" and "Flowering World(花開盛世號)" for the Beijing World Horticultural Exposition effectively enhanced our brand influence and reputation. The Company was selected as one of China's Top 500 Most Valuable Brands released by the World Brand Lab, with a brand value of RMB145.295 billion.

Products and Services

Under its "passenger first" principle, the Company has optimized the whole-process product and service system, and consistently enhanced the quality of products and services, so as to improve passenger experience. We promoted the construction of "Smart Airport" and created a new mode of "self-service-oriented, manual-assisted" check-in service. The proportion of all-channel self-service check-in reached 70.5%. We opened fully self-service baggage check-in service areas in Beijing, Chengdu, Chongqing, Shanghai, Hangzhou and other cities. We also implemented "paperless and convenient travel" project, and launched QR code electronic boarding pass inspection services in 23 domestic and 8 international and regional airports. The Company built the premium class lounges brand, and promoted the "Move Under One Roof - Beijing terminal joint operation" with Star Alliance. We also expanded the construction of our domestic first class lounge on the second floor and the floating island lounge project on the fourth floor at the T3C building of Beijing Capital Airport. The Company has built and operated 95583 global service centre, set up a global linkage mechanism for irregular flights, a pretreatment mechanism and an emergency response mechanism to boost travel security for passengers. We improved the "mobile cabin" project by adding 37 functional modules, which extended to the ground service department, and connected the passenger interface whole service information chain. We continued to revise and improve the rules and standards of service business; and further promoted the standardization of services by formulating Code for Ground Operation of Mobile Cabin (《移動客艙地面操作規範》) and A350-900 Passenger Service Interface Product Manual (《A350-900旅客服務界面產品手冊》), and revising the Regulations for Management of Injury, Death and Serious Diseases of Passengers (《旅客傷亡、重病事件處置管理規程》) and Manual for Passenger Baggage Transport Service (《旅客行李運輸服務手冊》).

External Cooperation

Through in-depth cooperation with Lufthansa under a joint operation arrangement, we have made steady progress in pushing forward with our SME customer scheme and have participated in 7 SME customer platforms operated by Lufthansa in Europe in total. We continued to integrate contracts with regional corporate customers in China and Europe to provide passengers with more flight choices while effectively enhancing the route yield level of both parties. In addition, we entered into a passenger route joint operation agreement with Air Canada, which would allow both parties to provide passengers with quality travel services through measures including optimizing flight schedules, integrating their frequent-flyer programme and corporate customer scheme, and carrying out joint sales and marketing campaigns. We also continued to enhance our cooperation with Cathay Pacific, United Airlines, Scandinavian Airlines and Air New Zealand in relation to code sharing, flight schedule coordination and service improvement. Such joint operations and cooperation have brought satisfactory results and synergy effects. We actively deepened our cooperation with Star Alliance and officially launched the project "Move Under One Roof" with Star Alliance and Beijing Capital International Airport to improve passengers' flight experience and enhance the overall competitiveness of the Company in the future by implementing various measures including airport automation and transfer processes optimisation.

Cost Controls

With its rich management experience in optimizing wide-body aircraft operation, the Company has fully commenced the work of "whole fleet operation optimisation". By focusing on key areas such as production organization and cost efficiency improvement, we strengthened our control over production process organization and resource utilization through reinforcing the role of market in guiding the formulation of production plans and resource allocation. We also conducted aircraft performance optimisation management and accelerated the process of integrated management of airline catering to improve decision-making efficiency and resource synergy, and therefore further improved our cost efficiency.

Prospects

The second half of 2018 will see both opportunities and challenges. China will continue to push forward the implementation of its new development concepts and materialize the requirement for high quality development while retaining its stable and healthy economic growth. On one hand, in light of the improving supply and demand dynamic in civil aviation industry and the progressive reform of the marketization of ticket price, the Company is confident in the realization of high quality development. On the other hand, the Company is facing challenges from adverse factors including increasingly fierce market competition in the industry, rising oil price and significant exchange rate fluctuation. The Group will continue to enhance its strategic measures, optimize the implementation mechanism of reform, comprehensively strengthen its control over corporate operation and improve its resilience against risks for the target of becoming a top-tier aviation group in the world with global competitiveness.

MAJOR SUBSIDIARIES AND ASSOCIATES AND THEIR OPERATING RESULTS

Air China Cargo

Air China Cargo was established in 2003. Headquartered in Beijing, Air China Cargo takes Shanghai as its main long-distance air freighter operation base and is primarily engaged in air cargo and mail transportation. The registered capital of Air China Cargo is RMB5,235,294,118. Air China holds 51% of its equity interest.

As at the end of the Reporting Period, Air China Cargo operated a fleet of 15 aircraft with an average age of 11.04 years.

During the Reporting Period, the AFTKs of Air China Cargo reached 6,359 million, representing a year-on-year increase of 8.86%. Its RFTKs reached 3,508 million, representing a year-on-year increase of 8.40%. The volume of cargo and mail carried was 0.7116 million tonnes, representing a year-on-year increase of 2.71%. The cargo and mail load factor was 55.17%, representing a year-on-year decrease of 0.23 ppt.

During the Reporting Period, Air China Cargo's consolidated revenue was RMB5,558 million, representing a year-on-year increase of 12.25%, of which cargo and mail transportation revenue amounted to RMB4,875 million, representing a year-on-year increase of 13.26%. The profit attributable to the equity shareholders was RMB117 million, representing a year-on-year decrease of 58.45%.

Shenzhen Airlines

Shenzhen Airlines was established in 1992, with its principal operating base located in Shenzhen. Its principal business is the operation of passenger and cargo transportation. The registered capital of Shenzhen Airlines is RMB5,360,000,000. Air China holds 51% of its equity interest.

As at the end of the Reporting Period, Shenzhen Airlines (including Kunming Airlines) operated a fleet of 207 aircraft with an average age of 6.41 years. During the Reporting Period, 6 aircraft were introduced and 2 aircraft were phased out.

During the Reporting Period, the ASKs of Shenzhen Airlines (including Kunming Airlines) reached 31,999 million, representing a year-on-year increase of 10.09%. Its RPKs reached 26,231 million, representing a year-on-year increase of 9.71%. Shenzhen Airlines (including Kunming Airlines) carried 17.3539 million passengers, representing a year-on-year increase of 9.38%. The average passenger load factor was 81.98%, representing a year-on-year decrease of 0.28 ppt.

In terms of air cargo, the AFTKs of Shenzhen Airlines (including Kunming Airlines) reached 580 million, representing a year-on-year increase of 19.10%. Its RFTKs reached 290 million, representing a year-on-year increase of 9.53%. The volume of cargo and mail carried by Shenzhen Airlines (including Kunming Airlines) was 0.1752 million tonnes, representing a year-on-year increase of 10.20%, while the cargo and mail load factor was 50.00%, representing a year-on-year decrease of 4.36 ppt.

During the Reporting Period, Shenzhen Airlines recorded a consolidated revenue of RMB15,053 million, representing a year-on-year increase of 14.07%, of which, air traffic revenue amounted to RMB14,677 million, representing a year-on-year increase of 14.49%. The profit attributable to equity shareholders was RMB527 million, representing a year-on-year decrease of 38.04%.

Air Macau

Air Macau was established in 1994 and is an airline based in Macau with a registered capital of MOP442,042,000. Air China holds 66.8995% of its equity interest.

As at the end of the Reporting Period, Air Macau operated a fleet of 18 aircraft with an average age of 7.79 years. In the first half of 2018, 1 new aircraft was introduced.

During the Reporting Period, the ASKs of Air Macau reached 3,172 million, representing a year-on-year increase of 5.16%. Its RPKs reached 2,588 million, representing a year-on-year increase of 19.23%. It carried a total of 1.5262 million passengers, representing a year-on-year increase of 17.49%, with an average passenger load factor of 81.59%, representing a year-on-year increase of 9.63 ppt.

In terms of air cargo, the AFTKs of Air Macau reached 50.4049 million, representing a year-on-year increase of 4.96%. Its RFTKs reached 15.7187 million, representing a year-on-year decrease of 1.55%. 9,708.14 tonnes of cargo and mail were carried, representing a year-on-year decrease of 3.72%; the cargo and mail load factor was 31.18%, representing a year-on-year decrease of 2.06 ppt.

During the Reporting Period, Air Macau recorded a revenue of RMB1,642 million, representing a year-on-year increase of 19.45%, of which, air traffic revenue amounted to RMB1,628 million, representing a year-on-year increase of 19.33%. The profit after taxation was RMB116 million, as compared to the net loss of RMB15 million in the same period last year.

Beijing Airlines

Beijing Airlines was established in 2011 with a registered capital of RMB1 billion. Air China holds 51% of its equity interest.

As at the end of the Reporting Period, Beijing Airlines operated a fleet of 5 entrusted business jets and one self-owned business jet with an average age of 5.78 years.

During the Reporting Period, Beijing Airlines completed 228 flights, representing a year-on-year decrease of 9.16%. It completed 780.8 flying hours, representing a year-on-year decrease of 4.42%. It carried a total of 1,247 passengers, representing a year-on-year increase of 24.70%.

During the Reporting Period, Beijing Airlines recorded a revenue of RMB55 million, representing a year-on-year decrease of 2.88%, of which, charter service revenue amounted to RMB13 million, representing a year-on-year increase of 0.37%. It recorded a net loss of RMB17 million, representing a year-on-year decrease in loss of 21.38%.

Dalian Airlines

Dalian Airlines was established in 2011 with a registered capital of RMB1 billion. Air China holds 80% of its equity interest.

As at the end of the Reporting Period, Dalian Airlines operated a fleet of 11 aircraft with an average age of 5.07 years.

During the Reporting Period, the ASKs of Dalian Airlines reached 1,557 million, representing a year-on-year increase of 16.68%. Its RPKs reached 1,315 million, representing a year-on-year increase of 17.38%. It carried a total of 1.1755 million passengers, representing a year-on-year increase of 11.61%, with an average passenger load factor of 84.45%, representing a year-on-year increase of 0.50 ppt.

In terms of air cargo, the AFTKs of Dalian Airlines reached 19.3242 million, representing a year-on-year increase of 9.22%. Its RFTKs reached 7.3806 million, representing a year-on-year decrease of 8.11%. It carried a total of 6,824.71 tonnes of cargo and mail, representing a year-on-year decrease of 1.77%. Its cargo and mail load factor was 38.19%, representing a year-on-year decrease of 7.20 ppt.

During the Reporting Period, Dalian Airlines recorded a revenue of RMB802 million, representing a year-on-year increase of 14.10%, of which, air traffic revenue amounted to RMB799 million, representing a year-on-year increase of 13.65%. Profit after taxation was RMB80 million, representing a year-on-year increase of 6.99%.

Air China Inner Mongolia

Air China Inner Mongolia was established in 2013 with a registered capital of RMB1 billion. Air China holds 80% of its equity interest.

As at the end of the Reporting Period, Air China Inner Mongolia operated a fleet of 8 aircraft with an average age of 7.37 years, out of which 3 were aircraft under wet leases. 1 aircraft was introduced during the Reporting Period.

During the Reporting Period, the ASKs of Air China Inner Mongolia reached 997 million, representing a year-on-year increase of 26.63%. Its RPKs reached 806 million, representing a year-on-year increase of 24.32%. It carried a total of 0.8251 million passengers, representing a year-on-year increase of 21.63%, with an average passenger load factor of 80.87%, representing a year-on-year decrease of 1.50 ppt.

In terms of air cargo, the AFTKs of Air China Inner Mongolia reached 15.0568 million, representing a year-on-year increase of 11.42%. Its RFTKs reached 5.4303 million, representing a year-on-year decrease of 0.50%. The amount of cargo and mail carried by Air China Inner Mongolia was 5,211.06 tonnes, representing a year-on-year increase of 7.51%, with a cargo and mail load factor of 36.07%, representing a year-on-year decrease of 4.32 ppt.

During the Reporting Period, Air China Inner Mongolia recorded a revenue of RMB611 million, representing a year-on-year increase of 13.05%, of which, air traffic revenue amounted to RMB604 million, representing a year-on-year increase of 12.81%. Profit after taxation was RMB67 million, representing a year-on-year increase of 24.10%.

AMECO

AMECO was established in 1989 and principally engaged in maintenance, repair and overhaul of aircraft, engines and components. The registered capital of AMECO is USD300,052,800, and Air China holds 75% of its equity interest.

During the Reporting Period, AMECO recorded a revenue of RMB3,519 million, representing a year-on-year increase of 21.30%. Profit after taxation amounted to RMB71 million, as compared to the net loss of RMB39 million for the corresponding period of last year.

CNAF

CNAF was established in 1994 and principally engaged in the provision of financial services to CNAHC Group and the Group. The registered capital of CNAF is RMB1,127,961,864, with Air China holding 51% of its equity interest.

During the Reporting Period, CNAF recorded a revenue of RMB93 million, representing a year-on-year decrease of 4.40%, and profit after taxation of RMB53 million, representing a year-on-year increase of 27.25%.

Cathay Pacific

Cathay Pacific was established in 1946 in Hong Kong and is listed on the Hong Kong Stock Exchange. Air China holds 29.99% of its equity interest.

As at the end of the Reporting Period, Cathay Pacific operated a fleet of 206 aircraft. 1 aircraft were introduced and 3 were phased out in the first half of the year.

During the Reporting Period, the ASKs of Cathay Pacific reached 75,770 million, representing a year-on-year increase of 3.2%. Its RPKs reached 63,810 million, representing a year-on-year increase of 2.5%. A total of 17.485 million passengers were carried, representing a year-on-year increase of 1.9%, with an average passenger load factor of 84.2%, representing a year-on-year decrease of 0.5 ppt.

In terms of air cargo, the AFTKs of Cathay Pacific reached 8,542 million, representing a year-on-year increase of 4.1%. Its RFTKs reached 5,831 million, representing a year-on-year increase of 7.3%. It carried a total of 1.038 million tonnes of cargo and mail, representing a year-on year increase of 7.5%. The cargo and mail load factor was 68.3%, representing a year-on-year increase of 2.1 ppt.

During the Reporting Period, Cathay Pacific recorded a consolidated revenue of RMB44,560 million, representing a year-on-year increase of 10.27%, of which, air traffic revenue amounted to RMB40,652 million, representing a year-on-year increase of 8.24%. The loss attributable to equity shareholders was RMB221 million, representing a year-on-year decrease in loss of 87.78%.

Shandong Airlines

Shandong Airlines was established in 1999 with a registered capital of RMB400 million. Air China and Shandong Aviation Group Corporation hold 22.8% and 42% of its equity interest, respectively, while Air China holds 49.4% of equity interest of Shandong Aviation Group Corporation.

As at the end of the Reporting Period, Shandong Airlines operated a fleet of 119 aircraft with an average age of 4.85 years. During the Reporting Period, 10 aircraft were introduced while 4 aircraft were phased out (including 2 CRJ700s).

During the Reporting Period, the ASKs of Shandong Airlines reached 21,188 million, representing a year-on-year increase of 13.21%. Its RPKs reached 17,759 million, representing a year-on-year increase of 15.36%. It carried a total of 12.1862 million passengers, representing a year-on-year increase of 13.94%, with an average passenger load factor of 83.82%, representing a year-on-year increase of 1.56 ppt.

In terms of air cargo, the AFTKs of Shandong Airlines reached 352 million, representing a year-on-year increase of 6.99%. Its RFTKs reached 141 million, representing a year-on-year increase of 9.30%. It carried a total of 0.0844 million tonnes of cargo and mail, representing a year-on-year increase of 9.33%. The cargo and mail load factor was 40.15%, representing a year-on-year increase of 1.08 ppt.

During the Reporting Period, Shandong Airlines recorded a consolidated revenue of RMB8,729 million, representing a year-on-year increase of 15.61%, of which air traffic revenue amounted to RMB8,418 million, representing a year-on-year increase of 14.92%. The profit attributable to equity shareholders was RMB204 million, representing a year-on-year increase of 126.13%.

Particulars of EMPLOYEES

As at the end of the Reporting Period, the Company had a total of 29,429 employees and its subsidiaries had a total of 59,845 employees.

The Company adheres to the principles of combining incentives with control and aligning the improvement in performance with the increase in wages, and upholds a remuneration concept of "paying salary with reference to the value of job, personal ability as well as performance appraisal" in developing and implementing the remuneration policies primarily based on the value of job. The Group has attached great importance and devoted significant efforts to the training of officers and employees. With the concept of "training as a service" and the emphasis on the development of expertise and professionalism, we have carried out various on-line and off-line training programmes of different levels and categories which will provide strong support in respect of both knowledge and talents for the sustainable development and strategy implementation of the Group.

MANAGEMENT DISCUSSION AND ANALYSIS

The following discussion and analysis are based on the Group's interim condensed consolidated financial statements and notes thereto prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as well as with the applicable disclosure requirements of Appendix 16 to the Listing Rules and are designed to assist the readers in further understanding the information provided in this report so as to better understand the financial conditions and results of operations of the Group as a whole.

Profit Analysis

During the Reporting Period, the Group recorded a profit attributable to the equity shareholders of the Company of RMB3,476 million, representing a year-on-year increase of 4.05%. During the first half of 2018, the air transport market of the PRC has a general balance between supply and demand where there was a strong need for domestic travel and a modest need for international/regional travel. However, the relatively fast-growing transport capacity has surpassed the growing demand. The Group acted in accordance with the market condition and further strengthened the advantages of economies of scale of our core air transport business by adopting measures including optimising operational arrangement, stabilising the yield level and refining cost control. For the Reporting Period, the Group has achieved satisfactory results despite the adverse impacts from factors such as oil price rebounding and currency depreciation.

Revenue

During the Reporting Period, the Group's revenue was RMB64,242 million, representing an increase of RMB6,862 million or 11.96%, on a year-on-year basis. Among the total revenue, revenue from our air traffic operations contributed RMB61,969 million, representing an increase of RMB6,477 million or 11.67%, on a year-on-year basis. Other operating revenue was RMB2,273 million, representing an increase of RMB385 million or 20.35%, on a year-on-year basis.

Revenue Contribution by Geographical Segments

Proportion of Revenue Contribution by Geographical Segments in Graph

Air Passenger Revenue

During the Reporting Period, the Group recorded an air passenger revenue of RMB56,894 million, representing an increase of RMB5,889 million or 11.55% over that of the same period of 2017. Among the air passenger revenue, the increase of capacity contributed an increase of RMB6,347 million to the revenue, and the drop of passenger load factor brought a decrease of RMB388 million to the revenue, while the decrease of passenger yield resulted in a decrease in revenue of RMB70 million. During the Reporting Period, the Group's capacity, passenger load factor and yield per RPK are as follows:

Air Passenger Revenue Contribution by Geographical Segments

Proportion of Air Passenger Revenue Contribution by Geographical Segments in Graph

Air Cargo and Mail Transportation Revenue

During the Reporting Period, the Group's air cargo and mail transportation revenue was RMB5,075 million, representing an increase of RMB589 million, or 13.12%, as compared to that of the same period of 2017. Among the Group's air cargo and mail transportation revenue, the increase in capacity of cargo and mail contributed to an increase in revenue of RMB431 million, the decrease in load factor resulted in a decrease in revenue of RMB54 million, and the increase in yield of cargo and mail contributed to an increase in revenue of RMB212 million. The capacity, load factor and yield of our air cargo and mail transportation operations for the Reporting Period are as follows:

Air Cargo and Mail Transportation Revenue Contribution by Geographical SegmentS

Proportion of Air Cargo and Mail Transportation Revenue Contribution by Geographical Segments in Graph

Operating Expenses

During the Reporting Period, the Group's operating expenses were RMB59,574 million, representing an increase of 12.53% as compared to that of RMB52,939 million in the same period of 2017. The breakdown of the operating expenses is set out below:

• Jet fuel costs increased by RMB3,953 million, or 29.00%, on a year-on-year basis, mainly due to the increase in the consumption and the prices of jet fuel.

• Take-off, landing and depot charges increased by RMB713 million on a year-on-year basis, primarily due to an increase in the number of take-offs and landings.

• Depreciation and amortisation expenses increased by RMB487 million on a year-on-year basis mainly due to the increase in the number of self-owned and finance leased aircraft during the Reporting Period.

• Aircraft maintenance, repair and overhaul costs increased by RMB304 million on a year-on-year basis, mainly due to the expansion of fleet.

• Employee compensation costs increased by RMB1,070 million on a year-on-year basis, mainly due to our business expansion and the increase in number of employees.

• Air catering charges increased by RMB168 million on a year-on-year basis, mainly due to the increase in the number of passengers.

• Aircraft operating lease expenses decreased by RMB171 million on a year-on-year basis, mainly due to the decrease of the number of aircraft under operating leases and the exchange rate changes of US dollar as compared with the corresponding period last year.

• Selling and marketing expenses decreased by RMB52 million on a year-on-year basis, mainly due to the decrease in agency fees.

• General and administrative expenses decreased by RMB53 million on a year-on-year basis, mainly due to a year-on-year decrease in tax and surcharges.

• Other operating expenses mainly included contributions to the civil aviation development fund and ordinary expenses arising from our core air traffic business not included in the aforesaid items, which increased by 4.95% on a year-on-year basis.

Exchange Gains and Losses and Finance Costs

During the Reporting Period, the Group recorded a net exchange loss of RMB518 million, as compared to the net exchange gain of RMB1,270 million for the same period of 2017, which was mainly due to the appreciation in the exchange rate of US dollars against RMB during the Reporting Period. The Group incurred interest expenses of RMB1,370 million (excluding those capitalised) during the Reporting Period, representing a year-on-year decrease of RMB222 million.

Share of Profits of Associates and Joint Ventures

During the Reporting Period, the Group's share of results of its associates was a profit of RMB77 million, as compared to a loss of RMB514 million for the same period of 2017, mainly due to the year-on-year decrease in the loss of Cathay Pacific, an associate of the Company, during the Reporting Period. The Group recorded a loss on investment of Cathay Pacific of RMB157 million during the Reporting Period, representing a year-on-year decrease in loss of RMB508 million.

During the Reporting Period, the Company's share of results of its joint ventures was a profit of RMB115 million, representing a year-on-year increase of RMB2 million. This was mainly due to the slight increase in the profits of joint ventures during the Reporting Period.

Analysis of Assets Structure

As at the end of the Reporting Period, the total assets of the Group amounted to RMB245,437 million, representing an increase of 4.16% from those as at 31 December 2017, among which current assets accounted for RMB24,367 million, or 9.93% of the total assets, while non-current assets accounted for RMB221,070 million, or 90.07% of the total assets.

Among the current assets, cash and cash equivalents were RMB8,961 million, representing an increase of 61.08% from those as at 31 December 2017, mainly because the Group owned relatively abundant cash flows in the peak season and has reserved certain internal funds to repay debts which will due in the near future.

Among the non-current assets, the net book value of property, plant and equipment as at the end of the Reporting Period was RMB169,912 million, representing an increase of 0.82% from that as at 31 December 2017.

Assets Mortgage

As at the end of the Reporting Period, the Group, pursuant to certain bank loans and finance lease agreements, mortgaged certain aircraft and premises with an aggregate net book value of approximately RMB81,413 million (RMB81,064 million as at 31 December 2017) and land use rights with a net book value of approximately RMB29 million (RMB34 million as at 31 December 2017). At the same time, the Group had approximately RMB911 million (approximately RMB697 million as at 31 December 2017) in bank deposits with title being restricted, which were mainly reserves deposited in the People's Bank of China.

Capital Expenditure

During the Reporting Period, the Group's capital expenditure amounted to RMB10,010 million, of which the total investment in aircraft and engines was RMB9,203 million. Other capital expenditure amounted to RMB807 million, mainly including investments in expensive rotatable parts, flight simulators, infrastructure construction, IT system construction, procurement of ground equipment and cash component of the long-term investments.

Equity Investment

As at the end of the Reporting Period, the Group's equity investment in its associates was RMB15,352 million, representing an increase of 8.12% from that as at 31 December 2017, of which the equity investment in Cathay Pacific, Shandong Aviation Group Corporation and Shandong Airlines was RMB12,459 million, RMB1,367 million and RMB913 million, respectively. Cathay Pacific, Shandong Aviation Group Corporation and Shandong Airlines recorded a net loss attributable to the parent of RMB221 million, a net profit attributable to the parent of RMB201 million and a net profit attributable to the parent of RMB204 million, respectively, for the Reporting Period.

As at the end of the Reporting Period, the Group's equity investment in its joint ventures was RMB1,210 million, representing a decrease of 2.36% from that as at 31 December 2017.

Debt Structure Analysis

As at the end of the Reporting Period, the total liabilities of the Group amounted to RMB146,874 million, representing an increase of 4.32% from those as at 31 December 2017, among which current liabilities were RMB77,054 million and non-current liabilities were RMB69,820 million, representing 52.46% and 47.54% of the total liabilities, respectively.

Among the current liabilities, interest-bearing debts (including bank and other loans, corporate bonds and obligations under finance leases) amounted to RMB38,497 million, representing an increase of 10.33% from those as at 31 December 2017, mainly due to the increase of working capital loans of the Group.

Among the non-current liabilities, interest-bearing debts (including bank and other loans, corporate bonds and liabilities under finance leases) amounted to RMB60,494 million, representing an increase of 0.98% from those as at 31 December 2017.

Details of interest-bearing liabilities of the Group by currency are set out below:

Proportion of Interest-bearing Liabilities by Currency in Graph

Commitments and Contingent Liabilities

The Group's capital commitments, which mainly consisted of the payables in the next few years for purchasing certain aircraft and related equipment, decreased by 7.14% from RMB77,742 million as at 31 December 2017 to RMB72,191 million as at the end of the Reporting Period. The Group's commitments under operating leases, which mainly consisted of the payments in the next few years for leasing certain aircraft, offices and related equipment, amounted to RMB49,564 million as at the end of the Reporting Period, representing a decrease of 3.55% as compared with those as at 31 December 2017. The Group's investment commitments, which were mainly used in the investment agreements entered into, amounted to RMB58 million as at the end of the Reporting Period, which was basically flat with that of 31 December 2017.

Details of the Group's contingent liabilities are set out in note 23 of the condensed consolidated financial statements included in this interim report.

Gearing Ratio

As at the end of the Reporting Period, the Group's gearing ratio (total liabilities divided by total assets) was 59.84%, representing an increase of 0.09 ppt as compared to the gearing ratio of 59.75% as at 31 December 2017. High gearing ratio is common among aviation enterprises, and the current gearing ratio of the Group is at a relatively reasonable level. Taking into account the Group's profitability and the market environment where it operates, its long-term insolvency risk is within controllable range.

Working Capital and its Sources

As at the end of the Reporting Period, the Group's net current liabilities (current liabilities minus current assets) were RMB52,687 million, representing an increase of RMB1,315 million from those as at 31 December 2017. The Group's current ratio (current assets divided by current liabilities) was 0.32, representing an increase as compared to that of 0.29 as at 31 December 2017.

The Group meets its working capital needs mainly through its operating activities and external financing activities. During the Reporting Period, the Group's net cash inflow generated from operating activities was RMB11,712 million, representing an increase of 28.89% as compared with that of RMB9,087 million in the same period of 2017, which was mainly due to the increase of transportation revenue and the decrease of operating receivables during the Reporting Period. Net cash outflow from investment activities was RMB8,451 million, representing an increase of 62.99% from that of RMB5,185 million in the same period of 2017, mainly due to the year-on-year decrease in the cash income from disposal of fixed assets and the year-on-year increase in the amount paid for purchase and construction of fixed assets and other long-term assets during the Reporting Period. The Group recorded a net cash inflow from financing activities of RMB120 million, representing a decrease of RMB326 million compared with the corresponding period in 2017.

The Company has obtained bank facilities of up to RMB147,397 million granted by several banks in the PRC, among which approximately RMB26,322 million has been utilised. The remaining amount is sufficient to meet our demands on working capital.

Financial Risk Management Objectives and Policies

The Group holds a substantial amount of financial liabilities and financial assets dominated in foreign currencies. When exchange rate fluctuates, gains and losses resulting from foreign exchanges are substantial enough to affect the Group's operating results. Exchange rate fluctuation also affects the Group's costs generated from overseas purchase of aircraft, equipment, jet fuel and expenses relating to take-off and landing in overseas airports, and it could also have an impact on the demands of Chinese citizens for overseas travel, which in turn affects the operating results of the Group to a certain degree. In addition, interest rate fluctuation could also affect the Group's finance costs, which will affect the Group's operating results.

Potential Risks

Market Fluctuation Risks

In the first half of the year, under the guiding principle of maintaining stability while seeking development, through implementing new development concept, fulfilling the requirement of high-quality development and focusing on supply-side structural reform, China's economy remained stable and made steady progress. However, recently, some changes have emerged bringing new problems and new challenges while external uncertainties have increased. Impacted by uncertainties in factors including macro-economy, the fluctuation risk of air transport market has increased.

External Risks

This year has witnessed the escalating trade friction between the US and China and the increasing risks in the international market. According to the current duty measures, the tariffs on B737NG series and B737MAX aircraft which will be imported by the Group from the US will increase to 25% which will increase our operating costs. The trade friction and increase in tariffs may impact the air passenger and freight transport demand between the US and China, which will in turn impact the revenue of the US-China routes.

In response to such situation, the Group will actively follow the nation's overall strategy and act in accordance with relevant government policies in relation to aircraft import, air passenger and freight transport. In addition, the Group will strive to further improve its assessment on the market and adjust its transport capacity resource allocation accordingly in a timely manner so as to further optimize supply and demand balance and maintain stable yield level.

Industry Competition Risks

Bilateral and multilateral joint venture arrangements among large network carriers are being constantly strengthened as competition takes new forms. While China's top three airlines are accelerating their penetration in the global market, an increasing number of medium-sized domestic airlines are actively applying for flying medium- and long-distance international routes. As a result, the international air traffic rights will become more valuable and scarce in the future. While the Company is enjoying the advantages in locations and timeslots in respect of the long-distance routes to Europe and America, it still has much to improve compared with the leading airlines in Europe and America in terms of network, products and services. Regional airlines that spring up during an industry deregulation promoted the trend of low-cost aviation operations, which will further intensify the competition in the domestic market and may impact future yield of the Group.

Alternative Competition Risks

China has built up the world's largest high-speed railway network and is extending its reach towards the central and western China. High-speed railway transportation features high frequency, low cost, punctuality, high speed, convenience and comfort, and has become the main choice of travellers for short- and medium-distance transportation, which put civil aviation in an inferior position. In the short term, high-speed rail carriers will continue to snatch market shares from the airlines after they reach network operation, increase the overall speed and the frequency and extend the operating schedule. However, in the long term, it will change China's geographic pattern of economy as high-speed railway transportation and civil aviation may actually cooperate and compete, and the air-rail interline operation will become a strong support to the construction of international hubs. As for the domestic routes, as medium and short distance routes account for the lowest proportion in the industry, the Group may suffer from the competition from high-speed railway transportation, but only to a limited extent.

De-hubbing Risks

The international reach from the airports of China's second-tier cities has been developing rapidly, with an obvious de-hubbing trend. Taking international long-distance routes above the range of 5,000 kilometres as example, in 2009, there were only three second-tier cities in China which operated international long-distance routes, and as of June 2018 the number has increased to 20. Long-distance routes flying from second-tier cities have been growing rapidly, which now covers Europe, America, Australia and Africa. With the gradual expansion of long-distance routes, airlines with wide-body aircraft have been actively involved in the development of long-distance market in second-tier cities. Such development will have certain impact on the Company's hubbed operations.

Oil Price Fluctuation Risks

For the present, oil price is still at a relatively low level. However, in the future, with uncertainties in global economy recovery, crude oil supply, US dollar interest rate increase cycle and geopolitics, risks of oil price fluctuation still exist. Jet fuel cost is one of the Group's major operating costs, the fluctuation of which is closely related with the performance of the Group. During the Reporting Period, with other variables remaining unchanged, if the average price of the jet fuel rises or falls by 5%, the Group's jet fuel cost will rise or fall by about RMB879 million.

Exchange Rate Fluctuation Risks

Since the beginning of the year, monetary policies of major economies in the world have continued the trend of diversification where the US continued to push forward "increasing interest rate" and "reducing balance sheet", while the EURO zone and Japan kept implementing QE policies. Recent strong economic data of the US have provided further support for a strong US dollar while increasing interest rate hike expectation. Impacted by US-China trade friction and unfavourable external political and economic landscape, RMB has depreciated against US dollar. However, the continuing high-quality economy growth of China established a solid foundation for the stablisation of RMB exchange rate. With the implementation of proactive fiscal policy and sound monetary policy, RMB is expected to be more resilient against US dollar and stay stable against the currency basket.

Certain financial leasing liabilities, bank and other borrowings of the Group are primarily denominated in US dollar, Euro and Yen. Some of the income and expenses of the Group's international operations are denominated in currencies other than RMB. Assuming that the risk variables other than the exchange rate stay unchanged, the appreciation or depreciation of RMB against US dollar by 1% due to the changes in the exchange rate will result in an increase or decrease in the Group's net profit and equity as at 30 June 2018 by RMB235 million, respectively; the appreciation or depreciation of RMB against Euro by 1% due to the changes in the exchange rate will result in an increase or decrease in the Group's net profit and equity as at 30 June 2018 by RMB3.167 million; and the appreciation or depreciation of RMB against Yen by 1% due to the changes in the exchange rate will result in an increase or decrease in the Group's net profit and equity by RMB9.72 million, respectively.

CHANGES IN DIRECTORS, SUPERVISORS ANDCHIEF EXECUTIVE INFORMATION

1. Mr. Xue Yasong was elected as the employee representative director of the Company by the second session of the employee representative meeting of the Company held on 29 March 2018, with a term from the date of the above resolution being passed to the expiry of the fifth session of the Board.

2. Mr. John Robert Slosar retired from his positions as the chairman and an executive director of Swire Pacific Limited, Swire Properties Limited and Hong Kong Aircraft Engineering Company Limited, with effect from 1 July 2018.

3. Mr. Liu Deheng has been appointed as an external director of Aviation Industry Corporation of China, Ltd., with effect from March 2018.

SHAREHOLDINGS OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVE AND SUBSTANTIAL SHAREHOLDERS OF THE COMPANY

DISCLOSURE OF INTERESTS OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVE

As at the end of the Reporting Period, none of the Directors, Supervisors or chief executive of the Company had interests or short positions in shares, underlying shares and/or debentures (as the case may be) of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were required to be recorded in the register kept by the Company pursuant to section 352 of the SFO, or otherwise notified to the Company and the Hong Kong Stock Exchange pursuant to the Model Code.

Mr. John Robert Slosar is a non-executive Director of the Company and is concurrently the chairman and executive director of Cathay Pacific. Cathay Pacific is a substantial shareholder of the Company, holding 2,633,725,455 H Shares of the Company as at the end of the Reporting Period, which shall be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, and it wholly owns Cathay Dragon. Mr. Cai Jianjiang, the chairman and a non-executive Director of the Company, and Mr. Song Zhiyong, the executive Director of the Company, are concurrently non-executive directors of Cathay Pacific. Cathay Pacific and Cathay Dragon compete or are likely to compete either directly or indirectly with some aspects of the business of the Company as they operate airline services to certain destinations which are also served by the Company.

Save as disclosed above, none of the Directors or Supervisors of the Company and their respective associates (as defined in the Listing Rules) has any competing interests which shall be disclosed under Rule 8.10 of the Listing Rules.

SUBSTANTIAL SHAREHOLDERS' INTERESTS IN THE COMPANY

As at the end of the Reporting Period, to the knowledge of the Directors, Supervisors and chief executive of the Company, the following persons (other than the Directors, Supervisors or chief executive of the Company) had interests or short positions in the shares or underlying shares of the Company as recorded in the register required to be kept under section 336 of the SFO:

Notes:

Based on the information available to the Directors, Supervisors and chief executive of the Company (including such information available on the website of the Hong Kong Stock Exchange) and so far as the Directors, Supervisors and chief executive are aware, as at the end of the Reporting Period:

1. By virtue of CNAHC's 100% interest in CNACG, CNAHC was deemed to be interested in the 1,332,482,920 A Shares and 223,852,000 H Shares of the Company directly held by CNACG.

2. By virtue of John Swire & Sons Limited's 100% interest in John Swire & Sons (H.K.) Limited and their approximately 55.10% equity interest and 63.97% voting rights in Swire Pacific Limited, and Swire Pacific Limited's approximately 45.00% equity interest in Cathay Pacific as at the end of the Reporting Period, John Swire & Sons Limited, John Swire & Sons (H.K.) Limited and Swire Pacific Limited were deemed to be interested in the 2,633,725,455 H Shares of the Company directly held by Cathay Pacific.

Save as disclosed above, as at the end of the Reporting Period, to the knowledge of the Directors, Supervisors and chief executive of the Company, no other person had any interest or short position in the shares or underlying shares of the Company as recorded in the register required to be kept under section 336 of the SFO.

Total number of shareholders

DEtails of Shareholders

Unit: Share

Unit: Share

1. HKSCC NOMINEES LIMITED is a subsidiary of The Stock Exchange of Hong Kong Limited and its principal business is acting as nominee for and on behalf of other corporate shareholders or individual shareholders. The 1,687,658,499 H shares held by it in the Company do not include the 166,852,000 H shares held by it as nominee of CNACG.

2. According to the "Implementation Measures on Partial Transfer of State-owned Shares to the National Social Security Fund in the Domestic Securities Market" (Cai Qi [2009] No. 94) (《境內證券市場轉持部分國有股充實全國社會保障基金實施辦法》(財企[2009]94號)) and the Notice ([2009] No. 63) jointly issued by the Ministry of Finance, the State-owned Assets Supervision and Administration Commission of the State Council, China Securities Regulatory Commission and the National Council for Social Security Fund, 127,445,536 shares and 36,454,464 shares held by CNAHC, the controlling shareholder of the Company, and CNACG respectively are frozen at present.

Unit: Share

CORPORATE GOVERNANCE

COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE

The Company has complied with the code provisions of the Corporate Governance Code as set out in Appendix 14 to the Listing Rules throughout the Reporting Period.

COMPLIANCE WITH THE MODEL CODE

The Company has adopted and formulated a code of conduct on terms no less stringent than the required standards of the Model Code as set out in Appendix 10 to the Listing Rules. After making specific enquiries, the Company confirmed that each director and each supervisor of the Company have complied with the required standards of the Model Code and the Company's code of conduct throughout the Reporting Period.

MISCELLANEOUS

PURCHASE, SALE OR REDEMPTION OF SECURITIES

During the Reporting Period, neither the Company nor any of its subsidiaries has purchased, sold or redeemed any listed securities of the Company (the term "securities" has the meaning ascribed to it under paragraph 1 of Appendix 16 to the Listing Rules).

INTERIM DIVIDEND

No interim dividend will be paid by the Company for the six months ended 30 June 2018.

REVIEW BY THE AUDIT AND RISK CONTROL COMMITTEE

The audit and risk control committee of the Company has reviewed the Company's interim report for the six months ended 30 June 2018, the Company's unaudited interim condensed consolidated financial statements and the accounting policies and practices adopted by the Group.

OTHER INFORMATION

According to paragraph 40 of Appendix 16 to the Listing Rules, save as disclosed herein, the Company confirms that the current information of the Company in relation to those matters set out in paragraph 32 of Appendix 16 has not changed materially from the information disclosed in the Company's 2017 Annual Report.

AIRCRAFT FINANCE LEASE

On 27 March 2018, the Company and CNACG entered into a 2018-2019 aircraft finance lease service framework agreement (the "Framework Agreement") with a term commencing from the date of approval by the independent shareholders of the Company to 31 December 2019. Pursuant to the Framework agreement, CNACG Group agreed to provide finance lease services to the Group in relation to the leased aircraft. The Framework Agreement, the transactions contemplated thereunder and the maximum transaction amounts for the period from 1 June 2018 to 31 December 2018 and for the year 2019 were approved at the annual general meeting of the Company held on 25 May 2018. For details, please refer to the announcements of the Company dated 27 March 2018 and 25 May 2018.

On 8 May 2018, the Company and CNAC Beijing Financial Leasing Co., Ltd. entered into an aircraft finance lease agreement, pursuant to which CNAC Beijing Financial Leasing Co., Ltd. agreed to provide finance leasing to the Company in relation to one Boeing B777-300ER aircraft. For details, please refer to the announcement of the Company dated 8 May 2018.

SUBSEQUENT EVENTS

On 30 August 2018, the Company entered into an equity transfer agreement with Capital Holding, pursuant to which, the Company has conditionally agreed to sell and Capital Holding has conditionally agreed to purchase 51% equity interests of Air China Cargo at a consideration of RMB2,438,837,520 (the "Disposal"). Upon completion of the Disposal, Air China Cargo will cease to be a subsidiary of the Company. For details, please refer to the announcement of the Company dated 30 August 2018.

In accordance with requirements of relevant regulatory authorities and the operating needs of the Company, on 30 August 2018, the Board has resolved to propose to amend the business scope and the articles of association of the Company. For details, please refer to the announcement of the Company dated 30 August 2018.

An extraordinary general meeting of the Company will be held to seek shareholders' approval in respect of the Disposal and the proposed amendments to the articles of association of the Company mentioned above.

REPORT ON REVIEW OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

TO THE BOARD OF DIRECTORS OF AIR CHINA LIMITED

(中國國際航空股份有限公司)

(Incorporated in the People's Republic of China with limited liability)

INTRODUCTION

We have reviewed the condensed consolidated financial statements of Air China Limited (the "Company") and its subsidiaries (collectively referred to as the "Group") set out on pages 34 to 91, which comprise the condensed consolidated statement of financial position as of 30 June 2018 and the related condensed consolidated statement of profit or loss, statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the six-month period then ended, and certain explanatory notes. The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited require the preparation of a report on interim financial information to be in compliance with the relevant provisions thereof and International Accounting Standard 34 "Interim Financial Reporting" ("IAS 34") issued by the International Accounting Standards Board. The directors of the Company are responsible for the preparation and presentation of these condensed consolidated financial statements in accordance with IAS 34. Our responsibility is to express a conclusion on these condensed consolidated financial statements based on our review, and to report our conclusion solely to you, as a body, in accordance with our agreed terms of engagement, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

SCOPE OF REVIEW

We conducted our review in accordance with Hong Kong Standard on Review Engagements 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Hong Kong Institute of Certified Public Accountants. A review of these condensed consolidated financial statements consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Hong Kong Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly we do not express an audit opinion.

CONCLUSION

Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34.

Deloitte Touche Tohmatsu

Certified Public Accountants

Hong Kong

30 August 2018

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS

For the six months ended 30 June 2018

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

For the six months ended 30 June 2018

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 30 June 2018