Air China Regulatory News (AIRC)

http://www.rns-pdf.londonstockexchange.com/rns/4530Z_-2015-9-18.pdf 

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 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.

Air China is headquartered in Beijing, the capital of China, with two increasingly important hubs in Shanghai and Chengdu. Through Star Alliance, our network covered 1,321 destinations in 193 countries as at 30 June 2015. Air China is dedicated to provide passengers with safe, convenient, comfortable and personalised services.

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

TABLE OF CONTENTS

CORPORATE INFORMATION

SUMMARY OF FINANCIAL INFORMATION

(1) EBITDA represents earnings before finance revenue, finance costs, income taxes, share of profits less losses of associates and joint ventures, depreciation and amortisation as computed under IFRSs.

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

SUMMARY OF OPERATING DATA

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

CHAIRMAN'S STATEMENT

In the first half of 2015, the world economy as a whole was in a recovery trend while the Chinese economy edged forward steadily. The global aviation industry was generally healthy with sustained growth in demand and relatively low fuel prices. During the first half of 2015, the Group pursued our strategic goals by promoting management innovation and proactively capturing market opportunities, thereby achieving strong performance in our core businesses of passenger and cargo transport business. During the first half of 2015, the Group achieved net profit attributable to shareholders of RMB4.191 billion, an increase of 721.15% compared to the corresponding period last year.

We steadily pursued our hub network strategy. During the first half of 2015, we expanded our international routes with the view of strengthening our hubs. We launched direct service from Beijing to Melbourne, and increased the frequency of our long-haul flights from Beijing to Los Angeles, Paris and Milan. We also expanded our domestic route network coverage by adding 14 routes from our principal hub to second- and third-tier cities. We proactively kept step with the country's "One Road, One Belt" strategy and launched new routes from Beijing to Minsk and to Budapest, as well as from Chengdu to Colombo. We further added services in our routes from Beijing to Guiyang, Lanzhou, Yinchuan, Fuzhou and Zhanjiang. Our domestic and international flight networks complemented each other, thus achieving greater balance in our network structure.

As our fleet continued to expand, our first-mover advantage in fleet structure adjustment has become more prominent. During the first half of 2015, the Group took delivery of 28 new aircraft including B747-8s, B777-200Fs and B737-800s, and retired 9 old aircraft. As of 30 June 2015, the average age of our fleet was 6.11 years. As the share of wide-body jets in our fleet (the ratio of our wide-body jet seats to narrow-body jet seats was 1:2.65) increased, our fleet structure was further optimized, thus lending stronger support to our hub network strategy and contributing to further reduction in our operating and maintenance costs.

Driven by market demand, we have adjusted our capacity deployment and prudently managed our operations. In the first half of 2015, demand in the domestic market grew at a relatively faster pace. With domestic consumption moving up-market, out-bound travel remained hot, creating strong demand in the international market as well. We took advantage of the growth in domestic and international markets by deploying additional capacity in the two sectors at the most opportune time to ensure that our aircraft could match the routes and cater to the market demand. In the first half of 2015, our capacity measured in available seat kilometer reached 102,881 million and our revenue passenger kilometer reached 82,174 million, representing an increase of 10.47% and 9.49% respectively compared to the same period last year. Net revenue (excluding fuel surcharge) for the reporting period amounted to RMB47.50 billion, representing a year-on-year growth of 11.77%.

We continued to transform our sales and marketing mode and strengthened the management of our channels. In the first half of 2015, we focused on improving the operations of our e-commerce platform by launching an upgraded mobile customer service application and optimising our direct-sales channels. By enhancing the control and service capability of our end customers, our direct sales proportion has risen to 27%, an increase of 4.7 percentage points from the corresponding period last year. The e-commerce platform accounted for 16% of total sales, an increase of 6 percentage points compared to the same period last year. We continuously paid close attention to our operating performance in the international long-haul routes, new routes and key domestic markets and focused on price stability in our principal hub. We also adopted a series of effective measures in marketing and sales policy to improve our performance and raised the yield level markedly. During the first half of 2015, the Group's yield (excluding fuel surcharge) per RPK reached RMB0.50, an increase of 1.56% year-on-year.

We continued to strengthen our cost controls and maintained our cost advantage. By continuously monitoring the timing of our capacity deployment, tracking the changes in flight arrangements, and furthering the overall linkage of the fleet, we enabled our operations to better meet our market demand, thus improving our operating efficiency. By strengthening the construction of our direct sales channels, we have transformed our sales and marketing and increased the proportion of direct sales. Our agency expenses were lowered by 21.97% year-on-year. We also optimised our funding structure by increasing our controls over the amounts and frequency of borrowings. In the first half of 2015, our operating cost per available tonne kilometer was RMB3.00, representing a decline of 17.21% from the corresponding period last year. Excluding the impact of fuel cost changes, operating cost per available tonne kilometer decreased by 4.95% year-on-year.

By focusing on both innovation and management, we have steadily improved our service quality. In the first half of 2015, the Group accelerated the construction of in-flight Internet system and deployed 21 wifi-enabled aircraft on key domestic and international routes. We worked with the State Administration of Radio, Film and Television to become the first carrier to offer in-cabin satellite TV programs. We also actively pushed forward our "Quick and Easy Journey" project to promote our full-process self-service products. To add to the varieties of in-flight entertainment, we are actively developing our own entertainment programs. By strengthening the management of flight punctuality, we further reduced flight delays caused by internal factors. We also added a seat agent of service support in our operation control center, thereby enhancing our capability and efficiency in handling emergency events.

We have promoted our specialisation strategy, and deepened the strategic synergy among Group members and external cooperation. In the first half of 2015, we smoothly completed the capital injection into AMECO and increased the Company's stake in AMECO to 75%. This was a key step towards building an aircraft MRO business and achieving profit diversification for the Group. We continued to promote strategic synergy among Group members in areas such as routes, fleet, sales and MRO. We deepened our strategic cooperation with Cathay Pacific and advanced the preparation of joint venture arrangements with Lufthansa, Air Canada and Air New Zealand. When these joint venture arrangements are formally launched, our passengers will enjoy more convenience in their travels and we will be able to increase our service quality and competitiveness in the relevant markets.

Our cargo business achieved steady growth. In the first half of 2015, the Group deployed a total of 5,818 million available freight tonne kilometers, representing an increase of 22.48% over that of the corresponding period last year, and achieved 3,166 million freight revenue tonne kilometers, a year-on-year increase of 23.54%. Cargo load factor for the reporting period was 54.41%, representing a 0.47 percentage point rise from the same period last year. Air China Cargo was able to continue to optimise its route structure after completing the replacement of its fleet for US and European routes. The round-the-world route operated smoothly with a steady increase in cargo volume for the US to Europe sector. We have continued to upgrade our product range by adding competitive high value-added and transit products. By enhancing our sales management, we have made use of passenger-cargo combination operation to achieve complementary advantages. In the first half of 2015, Air China Cargo achieved profit of RMB108 million, representing a turnaround of RMB239 million.

For the second half of 2015, we maintain our optimistic view on the aviation market. We expect domestic passenger service to continue the growth trend seen in the first half of 2015, international outbound travelling to continue to grow rapidly, and fuel price to maintain at a relatively low level. Further, industry competition will further intensify while foreign exchange fluctuation will increase. In light of these opportunities and challenges, the Group will adhere to its prudent management precepts, firmly implement its strategies, and solidify and expand its competitive advantages, in order to provide our shareholders and the society with even better returns.

Cai Jianjiang

Chairman

Beijing, PRC

27 August 2015

BUSINESS OVERVIEW

In the first half of 2015, the Group's ATKs and RTKs reached 15,100 million and 10,473 million, representing an increase of 14.81% and 13.32%, respectively, from the same period last year. The Group's overall load factor was 69.35%, a decrease of 0.91 percentage point from the same period last year.

Development of Fleet

In the first half of 2015, the Group acquired 28 aircraft, including 3 B747-8s, 1 B777-200F, 6 A320s and 18 B737-800s. We phased out 9 old aircraft, comprising 1 A319, 1 A320, 1 B757-200, 2 A340s and 4 B737-800s. As of 30 June 2015, the Group operated a fleet of 559 aircraft with an average age of 6.11 years (excluding aircraft under wet leases).

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

Out of the above, the Company's fleet consisted of 343 aircraft with an average age of 6.11 years (excluding aircraft under wet leases). During the first half of 2015, the Company acquired 16 aircraft and phased out 7.

In the first half of 2015, the Company made new progress in hub network, sales and marketing, synergy and cooperation, product and services as well as cost controls.

Hub Network

We strengthened our hub construction in preparation for an enhanced global network. We expanded the network scope of Beijing routes with new services to Minsk (Budapest), Melbourne and Karamay (Yining), and increased frequency of our flights from Beijing to locations such as Los Angeles, Paris, Milan, Guiyang and Lanzhou. We further optimised our flight bank and increased the weekly OD connections to 5,333, which helped increase the number of domestic-to-international and international-to-domestic transit passengers by 14.6% and 15.1% year-on-year, respectively. The Shanghai international gateway focused its development on expanding the domestic network by launching new routes to Harbin and Fuzhou and increasing the frequency of its flights to Lanzhou and Yinchuan, which helped increase the number of transit passengers to its international services. The Chengdu regional hub launched new routes to Colombo, Taichung and Hongyuan County, and added services of its Urumqi route, thus further enhancing its western regional network. During the first half of 2015, the Company essentially deployed B777-300ER aircraft to all key European and US routes.

As of 30 June 2015, the Company operated 341 passenger routes, including 239 domestic routes, 86 international routes and 16 regional routes. They covered 164 cities in 35 countries, including 103 domestic cities, 57 international cities and 4 regional cities. Through Star Alliance, the Company's network can cover 1,321 destinations in 193 countries.

Sales and Marketing

We optimised our sales and marketing management and increased our product ranges. By expanding our direct sales channels, improving the operational management capability of our e-commerce platform, launching an updated Air China application that enabled even more service functions and service pushes for our members, we raised the proportion of direct sales by 4.7 percentage points from the same period last year. By strengthening the scientific management of our distribution channels and regulating our agents' sales activities, we have improved the efficiency of our distribution network. Further reductions in agency fees also helped reduce our cost of sales. We increased our yield level markedly by taking a proactive leadership role in pricing in our principal base market, fully utilising our OD revenue management system, strengthening our brand marketing, and adjusting our fare strategy to ensure that prices in various regional markets could match the local demand. In the face of continued popularity in outbound traveling, we continuously optimised our domestic and overseas sales proportions to stabilise the yield level of international flights. We also continued to develop and market products to generate ancillary revenue, collecting RMB21.71 million from services such as seat selection fees, prepayment for extra luggage and utilisation of excess tonnage. During the first half of 2015, revenue from premium class, e-commerce and frequent flyers recorded year-on-year growth of 8.7%, 82.4% and 11.7%, respectively.

Synergy and Cooperation

We further strengthened the strategic synergies among all member airlines. We completed the joint procurement with Shenzhen Airlines of 46 Boeing 737 series aircraft and streamlined our sales agency management process with that of Shenzhen Airlines. We smoothly merged Air Macau's frequent flyer program into ours, thus enhancing our sales and marketing synergies and strengthening our brand influence. We also launched on-line check-in and mobile check-in for Air China member airlines' code-shared flights. To allow us to share our resources, we stepped up our coordinated operations with Dalian Airlines and Inner Mongolian Airlines. The linked MRO cost shared with Air China member airlines amounted to over RMB500 million. The new AMECO has been established, and our next step will focus on continued optimisation of product structure, achieving economies of scale, exploring third-party markets, and increasing revenue and profit.

We continued to extend our external cooperation. Preparations for joint venture arrangements with Lufthansa, Air Canada and Air New Zealand have proceeded well. We have launched code-share services with Swissair and Air Serbia, and have expanded code-share services with United Airlines, TAM Airlines of Brazil and Asiana Airlines to improve our network coverage and support. To enhance the efficiency of our resources, we actively participated in the consolidation of Star Alliance's terminal resources in Tokyo, Los Angeles and San Paolo.

Product and Services

We strived to create product highlights and improve our product quality. In Beijing, we trialed full self-service baggage check-in, opened an exclusive security clearance at Terminal 3D for high-end passengers, implemented exemptions from border control procedures for passengers transiting within 24 hours, and launched an entrusted Customs clearance service of luggage for US-originated international-to-domestic transit passengers. We also accelerated the introduction of full self-service products and innovations, expanded our Internet and mobile check-in services, promoted security clearance using mobile QR codes, and expanded self-service rebooking in widespread flight delays. We proactively pushed the development of the inflight Internet industry alliance, cooperated with JD Finance to offer "Crowdfunding Spring Transport Internet Flights", jointly offered with Viva an inflight feature program on the Boao Forum for Asia, and co-hosted activities such as "Inflight Broadcast of the Two Conferences (of the National People's Congress and the Chinese People's Political Consultative Conference)" and "Expo Themed Flights" with the Xinhua News Agency. To strengthen the monitoring of the service process and control service risks effectively, we have also added a seat of service support in our operation control center. We completed the commissioning of our new lounges in Hangzhou and Tianjin, and proactively pushed forward the renovation of the existing lounges in Beijing and Shanghai and the construction of a new lounge in Chongqing. To increase the varieties of inflight entertainment, we have broadcast the "Mengwa" cartoon series extensively throughout our inflight channels and increased the international contents of our programs through the APEX (Airline Passenger Experience Association) platform. We have also completed the refurbishment and decoration of our cabins, creating a brand new cabin environment throughout our fleet.

Cost Controls

Strengthening cost control is instrumental in maintaining our cost advantage. By focusing on increased operational efficiency, adjusted sales and marketing modes and optimised capital structure, we pursued stringent cost controls to achieve higher cost effectiveness. Through various measures, such as continuously monitoring the timing of our capacity deployment, tracking the changes in flight arrangements, optimising our 330 fleet, expanding our 737 fleet, and launching the 320 fleet overall flight sharing, we enabled our operations to better match our market demand. We have conserved the use of fuel oil by promoting the use of FMC system, strengthening the optimisation of flight paths, increasing the coverage of bridge-borne equipment, and using extensively APU data monitoring. By strengthening the construction of our direct sales channel and raising the proportion of direct sales, we have substantially reduced our agency fee expenses. We also achieved outstanding results in reducing our finance costs by improving the efficiency of our use of funds, controlling the amount and frequency of borrowing, and reducing planned borrowings.

Major Subsidiaries and Associates and Their Operating Results

(1) Air China Cargo

Air China Cargo was established in 2003. In 2011, Air China completed the cargo joint venture project with Cathay Pacific based on the platform of the former Air China Cargo. The registered capital of the joint venture is RMB3,235,294,118. Air China holds 51% of its equity interest. In 2014, Air China and Cathay Pacific subscribed for an additional amount of registered capital of RMB2 billion in Air China Cargo in proportion to their respective shareholdings in Air China Cargo. Upon completion of the capital injection, the registered capital of Air China Cargo increased to RMB5,235,294,118. At present, the company registration process is still underway.

As at 30 June 2015, Air China Cargo operated a fleet of 13 aircraft with an average age of 9.29 years. During the first half of 2015, it introduced 1 aircraft.

In the first half of 2015, the AFTKs and RFTKs of Air China Cargo reached 5,442 million and 2,911 million, respectively, representing an increase of 22.99% and 25.15%, respectively, from the same period last year. The amount of cargo and mail carried increased by 10.00% to 0.6369 million tonnes, and the cargo and mail load factor increased by 0.92 percentage point to 53.49%, as compared to the same period last year.

In the first half of 2015, Air China Cargo's turnover was RMB4,392 million, representing an increase of 7.59% from the same period last year, of which cargo and mail transportation revenue was RMB3,802 million, representing an increase of 5.41% as compared to the same period last year. Profit after tax reached RMB108 million, compared with a net loss of RMB131 million for the same period last year.

(2) 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 RMB812,500,000 with Air China holding 51% of its equity interest.

As at 30 June 2015, Shenzhen Airlines (including Kunming Airlines) operated a fleet of 169 aircraft with an average age of 5.66 years. A total of 9 aircraft were introduced in the first half of 2015.

In the first half of 2015, the ASKs and RPKs of Shenzhen Airlines (including Kunming Airlines) reached 25,218 million and 20,705 million, respectively, representing an increase of 12.41% and 12.34%, respectively, from the same period last year. Shenzhen Airlines (including Kunming Airlines) carried a total of 13.8015 million passengers, representing a growth of 11.33% from the same period last year. Its average passenger load factor was 82.10%, a decrease of 0.05 percentage point from that in the same period last year.

In terms of air cargo, the AFTKs and RFTKs of Shenzhen Airlines (including Kunming Airlines) reached 319 million and 234 million, respectively, representing an increase of 15.99% and 6.64%, respectively, from the same period last year. The amount of cargo and mail carried rose by 5.65% to 0.1453 million tonnes and the cargo and mail load factor decreased by 6.42 percentage points to 73.30% as compared to the same period last year.

In the first half of 2015, Shenzhen Airlines recorded a consolidated turnover of RMB11,511 million, representing an increase of 2.57% from the same period last year, of which air traffic revenue was RMB10,944 million, up by 4.07% from the same period last year. Profit attributable to shareholders for the period was RMB549 million, representing an increase of RMB536 million from the same period last year.

(3) 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 66.9% of its equity interest.

As at 30 June 2015, Air Macau operated a fleet of 15 aircraft with an average age of 10.49 years. In the first half of 2015, it introduced 1 aircraft and retired 2.

In the first half of 2015, the ASKs and RPKs of Air Macau reached 2,748 million and 1,826 million, respectively, representing an increase of 10.13% and 7.65%, respectively, from the same period last year. A total of 1.0896 million passengers were carried, with an average load factor of 66.44%, representing an increase of 6.51% and a decline of 1.53 percentage points, respectively, as compared to the same period last year.

In terms of air cargo, the AFTKs and RFTKs of Air Macau reached 43.7737 million and 12.2470 million, respectively, representing an increase of 12.17% and 8.76%, respectively, from the same period last year. It carried 8,270.93 tonnes of cargo and mail, representing an increase of 12.12% from the same period last year, with a cargo and mail load factor of 27.98%, representing a decrease of 0.88 percentage point from the same period last year.

In the first half of 2015, Air Macau recorded a turnover of RMB1,214 million, representing a decrease of 9.35% from the same period last year, of which air traffic revenue was RMB1,160 million, representing a decrease of 11.20% from the same period last year, with a profit after tax of RMB1 million, representing a decline of 93.61% from the same period last year.

(4) 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 30 June 2015, Dalian Airlines operated a fleet of 7 aircraft, with an average age of 3.96 years.

In the first half of 2015, the ASKs and RPKs of Dalian Airlines reached 1,027 million and 849 million, respectively, representing an increase of 18.00% and 19.67%, respectively, from the same period last year. A total of 0.7931 million passengers were carried, representing an increase of 30.11% from the same period last year, with an average passenger load factor of 82.69%, representing an increase of 1.15 percentage points from the same period last year.

In terms of air cargo, the AFTKs and RFTKs of Dalian Airlines reached 11.3046 million and 7.1203 million, respectively, representing an increase of 7.90% and 32.16%, respectively, from the same period last year. The amount of cargo and mail carried by Dalian Airlines was 6,153.92 tonnes, representing an increase of 44.33% from the same period last year, with a cargo and mail load factor of 62.99%, representing an increase of 11.56 percentage points from the same period last year.

In the first half of 2015, Dalian Airlines recorded a turnover of RMB549 million, representing an increase of 31.81% from the same period last year, all of which was air traffic revenue. The net profit was RMB48 million, as compared to a net loss of RMB22 million for the same period last year.

(5) 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 30 June 2015, Beijing Airlines operated a fleet of 8 entrusted business jets and 1 self-owned business jet, with an average age of 4.13 years.

In the first half of 2015, Beijing Airlines completed 224 flights, recorded 644.9 flying hours and carried a total of 1,788 passengers, representing a decrease of 14.18%, 54.18% and 12.14%, respectively, from the same period last year.

Beijing Airlines recorded a turnover of RMB74 million in the first half of 2015, representing an increase of 13.78% from the same period last year, of which, revenue from charter flight service was RMB33 million, representing an increase of 461.57% from the same period last year, and recorded a profit after tax of RMB8.5 million, representing an increase of 194.31% from the same period last year.

(6) Inner Mongolia Airlines

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

As at 30 June 2015, Inner Mongolia Airlines operated a fleet of 3 aircraft with an average age of 7.63 years. 1 aircraft was introduced in the first half of 2015.

In the first half of 2015, the ASKs and RPKs of Inner Mongolia Airlines reached 202 million and 165 million, respectively, representing an increase of 149.35% and 126.04%, respectively, from the same period last year. A total of 0.2175 million passengers were carried, representing a rise of 62.22% from the same period last year, with an average passenger load factor of 81.45%, representing a decrease of 8.40 percentage points from the same period last year.

In terms of air cargo, the AFTKs and RFTKs of Inner Mongolia Airlines reached 1.9162 million and 1.3790 million, respectively, representing an increase of 107.01% and 182.76%, respectively, from the same period last year. The amount of cargo and mail carried by Inner Mongolia Airlines was 1,631.44 tonnes, representing an increase of 84.08% from the same period last year, with a cargo and mail load factor of 71.97%, representing an increase of 19.28 percentage points from the same period last year.

In the first half of 2015, Inner Mongolia Airlines recorded a turnover of RMB161 million, representing an increase of 83.78% from the same period last year, of which air traffic revenue was RMB160 million, representing an increase of 82.73% from the same period last year. It achieved a profit after tax of RMB4 million, as compared to a net loss of RMB8.6 million for the same period last year.

(7) Shandong Airlines

Shandong Airlines was established in 1999 with a registered capital of RMB400 million. Air China holds 22.8% of its equity interest.

As at 30 June 2015, Shandong Airlines operated a fleet of 78 aircraft (excluding 4 aircraft under wet lease to Air China) with an average age of 4.28 years. 6 aircraft were introduced and 4 aircraft were retired in the first half of 2015.

In the first half of 2015, the ASKs and RPKs of Shandong Airlines reached 12,836 million and 9,792 million, respectively, representing an increase of 18.06% and 15.23%, respectively, from the same period last year. It carried 7.4345 million passengers, representing an increase of 8.47% from the same period last year. Its average passenger load factor was 76.29%, representing a decline of 1.87 percentage points from the same period last year.

In terms of air cargo, the AFTKs and RFTKs of Shandong Airlines reached 280 million and 97 million, respectively, representing an increase of 32.20% and 6.85%, respectively, from the same period last year. The amount of cargo and mail carried by Shandong Airlines increased by 3.33% to 0.0645 million tonnes and the cargo and mail load factor decreased by 8.21 percentage points to 34.61%, as compared to that in the same period last year.

In the first half of 2015, Shandong Airlines recorded a turnover of RMB5,714 million, representing an increase of 2.69% from the same period last year, of which air traffic revenue was RMB5,592 million, representing an increase of 2.45% from the same period last year. Profit after tax amounted to RMB217 million, representing an increase of 363.96% as compared to that in the same period last year.

(8) 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 30 June 2015, Cathay Pacific operated a fleet of 202 aircraft. During the first half 2015, Cathay Pacific introduced 8 aircraft and retired 6.

In the first half of 2015, the ASKs and RPKs of Cathay Pacific reached 69,689 million and 59,835 million, respectively, representing an increase of 6.43% and 9.36%, respectively, from the same period last year. A total of 16.8003 million passengers were carried, representing an increase of 8.83% from the same period last year, with an average passenger load factor of 85.86%, representing a rise of 2.30 percentage points from the same period last year.

In terms of air cargo, the AFTKs and RFTKs of Cathay Pacific reached 7,971 million and 5,107 million, respectively, representing an increase of 8.92% and 10.48%, respectively, from the same period last year. In the first half of 2015, a total of 0.8682 million tonnes of cargo and mail were carried, representing an increase of 7.99% from that of the same period last year. The cargo and mail load factor was 64.06%, representing an increase of 0.90 percentage point from the same period last year.

In the first half of 2015, Cathay Pacific recorded a turnover of RMB39,743 million, a decrease of 1.05% from the same period last year, of which air traffic revenue was RMB37,546 million, a decrease of 1.36% from the same period last year. Profit after tax was RMB1,555 million, representing an increase of 467.40% from the same period last year.

EMPLOYEES

As at 30 June 2015, we had a total of 26,267 employees, and our subsidiaries had a total of 47,699 employees.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL position AND RESULTS OF OPERATIONS

The following discussion and analysis are based on the Group's interim financial statements and its notes prepared in accordance with IFRSs and are designed to assist the readers in understanding the information provided in this report further so as to better understand the financial position and results of operations of the Group as a whole.

Profit Analysis

For the six months ended 30 June 2015, the Group proactively seized market opportunities by adopting various measures such as optimising operational arrangement, enhancing marketing management as well as strengthening stringent cost control. We recorded an operating profit of RMB6,629 million, representing an increase of 182.84% as compared with that of the same period last year. The Group recorded profit attributable to shareholders of the Company of RMB4,191 million, representing a year-on-year increase of 721.15%.

revenue

For the six months ended 30 June 2015, the Group's revenue was RMB51,862 million, representing an increase of RMB1,930 million, or 3.86%, as compared with that of the same period last year. Among the total revenue, revenue from our air traffic operations contributed RMB49,310 million, representing an increase of RMB1,799 million, or 3.79%, over the same period last year. Our other operating revenue was RMB2,552 million, representing an increase of RMB131 million, or 5.42%, as compared with that of the same period last year.

Revenue Contribution by Geographical Segments

Air Passenger Revenue

For the six months ended 30 June 2015, the Group recorded an air passenger revenue of RMB44,989 million, representing an increase of RMB1,430 million, or 3.28%, over the same period of 2014. Among the Group's air passenger revenue, the increase in capacity contributed to an increase of RMB4,562 million, while the decrease in passenger load factor and passenger yield resulted in a decrease in revenue of RMB429 million and RMB2,703 million, respectively. The Group's capacity, load factor and passenger yield of our passenger operations for the six months ended 30 June 2015 are as follows:

Air Passenger Revenue Contributed by Geographical Segment

Air Cargo Revenue

For the six months ended 30 June 2015, the Group's air cargo and mail revenue was RMB4,321 million, representing an increase of RMB368 million, or 9.32%, from the same period in 2014. Among the Group's air cargo and mail revenue, the increase in capacity and cargo and mail load factor contributed to an increase in revenue of RMB888 million and RMB42 million respectively, while the decrease in yield of cargo and mail resulted in a decrease in revenue of RMB562 million. The capacity, load factor and yield of our cargo and mail operations for the six months ended 30 June 2015 are as follows:

Air Cargo Revenue Contributed by Geographical Segment

Operating Expenses

For the six months ended 30 June 2015, the Group's operating expenses were RMB45,233 million, representing a decrease of 4.95% as compared with RMB47,589 million recorded in the same period of 2014. The breakdown of the operating expenses is set out below:

In particular:

• Jet fuel costs decreased by RMB5,130 million, or 29.84%, from the corresponding period in the previous year, mainly due to the decrease in jet fuel prices.

• Take-off, landing and depot charges increased by RMB517 million over the same period of 2014, primarily due to an increase in the number of take-offs and landings.

• Depreciation expenses increased due to an increase in the number of self-owned and finance leased aircraft during the reporting period.

• Aircraft maintenance, repair and overhaul costs recorded an increase of RMB239 million over the same period last year, mainly due to the expansion of fleet.

• Employee compensation costs increased by RMB1,020 million, mainly due to an increase in the number of employees and the adjustment in employee compensation standard.

• Air catering charges increased by RMB107 million, mainly due to the increase in the number of passengers carried.

• Sales and marketing expenses decreased by RMB287 million as compared to the same period last year, mainly due to the Group's efforts in actively raising the proportion of direct sales and vigorously lowering agency fee expenses.

• Other operating expenses mainly included aircraft and engines operating lease expenses, contributions to the civil aviation development fund and ordinary expenses arising from our core air traffic business not included in the aforesaid items. Other operating expenses increased by 8.77% as compared to the same period last year, mainly due to a year-on-year increase in the operating lease expenses of aircraft engines and buildings and contributions to the civil aviation development fund for the reporting period.

Finance Revenue and Finance Costs

For the six months ended 30 June 2015, the Group recorded a net exchange loss of RMB123 million, representing a decrease of RMB599 million as compared to the same period in 2014, which was mainly due to the relative stable movement of the exchange rate of RMB against U.S. dollars during the reporting period. The Group incurred interest expenses (excluding the capitalised portion) of RMB1,474 million during the reporting period, representing an increase of RMB64 million from the same period of 2014, which was mainly due to the year-on-year growth in average interest-bearing liabilities of the Group during the reporting period.

Share of Profits of Associates and Joint Ventures

For the six months ended 30 June 2015, the Group's share in the profits of its associates was RMB439 million, representing an increase of RMB223 million as compared with a share in the profits of associates of RMB216 million for the same period of 2014, mainly due to the increase in the profits of Cathay Pacific, an associate of the Group, during the reporting period, among which RMB300 million gains on investment of Cathay Pacific was recognised, representing a year-on-year increase of RMB142 million.

For the six months ended 30 June 2015, the Company's share in the profits of its joint ventures was RMB210 million, as compared with a share in the profits of joint ventures of RMB29 million for the same period of 2014, representing a year-on-year increase of RMB181 million. This was mainly due to the recognition of gains on investment of RMB113 million in AMECO during the reporting period, while loss on investment of RMB27 million was recorded for the same period last year.

Analysis of Assets Structure

As at 30 June 2015, the total assets of the Group amounted to RMB216,553 million, representing an increase of 3.46% as compared with 31 December 2014, among which current assets accounted for RMB21,501 million, or 9.93%, of the total assets, while non-current assets accounted for RMB195,052 million, or 90.07%, of the total assets.

Among the current assets, cash and cash equivalents were RMB9,201 million, representing a decrease of 4.75% from 31 December 2014. Accounts receivable amounted to RMB3,667 million, representing an increase of 29.39% as compared with 31 December 2014. Among the non-current assets, the net book value of property, plant and equipment as at 30 June 2015 was RMB155,510 million, representing an increase of 4.95% from 31 December 2014.

Assets Mortgage

As at 30 June 2015, the Group, pursuant to certain bank loans and finance lease agreements, mortgaged certain aircraft and premises with an aggregate net book value of approximately RMB105,771 million (RMB98,674 million as at 31 December 2014) and land use rights with a net book value of approximately RMB36 million (RMB37 million as at 31 December 2014). At the same time, the Group had approximately RMB95 million (approximately RMB75 million as at 31 December 2014) in bank deposits pledged for certain bank loans, operating leases and other security of the Group.

Capital Expenditure

For the six months ended 30 June 2015, the Company's capital expenditure amounted to RMB6,827 million, of which the total investment in aircraft and engines was RMB5,861 million.

Other capital expenditure amounted to RMB966 million, which was mainly spent on rotables, flight simulators, infrastructure construction, IT system construction, procurement of equipment and facilities as well as the cash component of long-term investments.

Equity Investment

As at 30 June 2015, the Group's equity investment in its associates was RMB12,715 million, representing an increase of 6.91% as compared with 31 December 2014, of which the equity investment in Cathay Pacific, Shandong Aviation Group and Shandong Airlines was RMB10,607 million, RMB1,042 million and RMB643 million, respectively. Cathay Pacific, Shandong Aviation Group and Shandong Airlines recorded a profit of RMB1,555 million, RMB91 million and RMB217 million, respectively, for the six months ended 30 June 2015.

As at 30 June 2015, the Group's equity investment in its joint ventures was RMB943 million, representing a decrease of 32.26% from 31 December 2014. AMECO, originally a joint venture of the Company, became a controlled subsidiary of the Company on 31 May 2015 and its corresponding investment costs were transferred into investment costs on subsidiary.

Debt Structure Analysis

As at 30 June 2015, the total liabilities of the Group amounted to RMB152,426 million, representing an increase of 1.48% from 31 December 2014, among which current liabilities accounted for RMB60,118 million and non-current liabilities accounted for RMB92,308 million, representing 39.44% and 60.56% of the total liabilities, respectively.

Among the current liabilities, interest-bearing debts (including bank and other loans, corporate bonds, obligations under finance leases and bills payable) amounted to RMB31,927 million, representing a decrease of 6.63% from 31 December 2014. Other payables and accruals amounted to RMB28,191 million, representing an increase of 5.79% from 31 December 2014.

Among the non-current liabilities, interest-bearing debts (including bank and other loans, corporate bonds and obligations under finance leases) amounted to RMB82,308 million, representing an increase of 2.55% from 31 December 2014.

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

Commitments and Contingent Liabilities

As at 30 June 2015, capital commitments of the Group amounted to RMB100,872 million, a decrease compared with RMB104,516 million as at 31 December 2014, which was primarily used in purchasing certain aircraft, office and related equipment to be delivered in coming years. The Group had operating lease commitments of RMB31,424 million as at 30 June 2015, a decrease of 11.06% from 31 December 2014, which was primarily used in leasing certain aircraft, office premises and related equipment. Investment commitments of the Group was RMB56 million as at 30 June 2015, a decrease of RMB1,397 million from RMB1,453 million as at 31 December 2014, which was primarily used for the investment agreements signed.

Details of the Group's contingent liabilities are set out in note 24 of the unaudited interim financial report included in this interim report.

Gearing Ratio

As at 30 June 2015, the Group's gearing ratio (total liabilities divided by total assets) was 70.39%, representing a decrease of 1.37 percentage points from 71.76% as at 31 December 2014, which was mainly attributable to the sustainable profit during the period which led to an increase in the total equity as compared to the beginning of the year. Given that high gearing ratios are common among aviation enterprises, the Group continued to maintain a reasonable gearing ratio and the long-term insolvency risks are under control.

Working Capital and Its Sources

As at 30 June 2015, the Group's net current liabilities (current liabilities minus current assets) were RMB38,617 million, a decrease of RMB1,173 million from 31 December 2014. The Group's current ratio (current assets divided by current liabilities) was 0.36, a rise of 0.01 from 0.35 as at 31 December 2014. The decrease in net current liabilities was primarily due to the decrease in short-term borrowings.

The Group meets its working capital needs mainly through its operating activities and external financing activities. In the first half of 2015, the Group's net cash inflow generated from operating activities was RMB12,316 million, an increase of 84.07% from RMB6,691 million over the same period in 2014, primarily due to the increase in cash inflow from operating activities, together with a decrease in operating expenses brought by lower jet fuel costs during the reporting period. Net cash outflow from investment activities was RMB4,830 million, a decrease of 2.29% from RMB4,943 million over the same period of 2014, primarily due to a year-on-year decrease in aircraft procurement. The Group recorded a net cash outflow from financing activities of RMB7,950 million, as compared to RMB7,505 million during the same period of 2014. The change was primarily due to the strong cash flow generated from operating activities and a decrease in funding demand compared to the same period last year.

The Company obtained bank facilities with an aggregate maximum amount of RMB147,909 million from a number of banks in the PRC, of which approximately RMB37,225 million has been utilised, sufficient to meet our working capital demand.

Financial Risk Management Objectives and Policies

The Group is exposed to fluctuations in jet fuel prices, interest rates and exchange rates in its daily operation. International jet fuel prices are affected by market volatility and fluctuation in supply and demand. The Group's strategy for managing jet fuel price risk aims at managing and controlling the risk arising from the rise in fuel price. The Group has engaged in fuel hedging transactions since March 2001. The hedging instruments used were mainly derivatives of Singapore kerosene together with Brent crude oil and New York crude oil, which are closely linked to the price of jet fuel. As of 30 November 2011, all fuel derivatives of the Company had expired and no new position has been established so far. Considering the volatility of international jet fuel prices and cost sensitivity, the Company will develop its fuel hedging business in compliance with the regulatory requirements so as to respond to changes in the jet fuel market.

Certain finance lease liabilities, bank loans and other loans of the Group are principally denominated in US dollars, while certain expenses of the Group are denominated in currencies other than RMB. The Group timely remits the foreign currency income arising from the sales of tickets at the overseas office branches to China for payment of foreign currency expenses incurred in ordinary business of the Group and repayment of foreign currency debts repayable within one year. In the event of shortfall, the Group will timely use the RMB settlement for payment. However, the exchange rate of RMB against US dollars was volatile during the reporting period, which was the main reason for the exchange loss recognised by the Group during the reporting period.

As to interest rate risk management, the Company reasonably adjusts the proportion of fixed interest rates and floating interest rates of interest-bearing liabilities so as to avoid the interest rate risks.

SIGNIFICANT EVENTS

ANTITRUST INVESTIGATION

On 26 February 2007, the Eastern District Court of New York of the Federal Judiciary of the United States filed a civil summons against the Company and Air China Cargo, claiming that they, together with a number of other airlines, have violated certain anti-trust regulations in respect of their air cargo operations in the United States by acting in concert in imposing excessive surcharges to impede the offering of discounts and allocating revenue and customers so as to increase, maintain and stabilize air cargo prices. The District Court recently issued a decision certifying this lawsuit as a class action. The remaining defendant airlines, including the Company, have petitioned the Court of Appeals to review this decision. In addition, the remaining defendants have filed motions in the District Court seeking to have the Complaint dismissed. Because the litigation continues, the Directors of the Company are of the view that the ultimate outcome of this claim cannot be reliably estimated and consider that no provision for this claim is needed accordingly.

CHANGES IN INFORMATION ABOUT DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVES OF THE COMPANY

1. On 22 May 2015, the Company held the 2014 annual general meeting where Mr. Stanley Hui Hon-chung was elected as an independent non-executive director of the Company. Mr. Yang Yuzhong no longer served as an independent non-executive director of the Company.

2. On 16 June 2015, the Board received a resignation letter from Mr. Fu Yang in respect of his resignation from the position as an independent non-executive director of the Company due to work reasons. Mr. Fu Yang's resignation will result in the number of independent non-executive directors of the Company falling below one-third of the total number of the Directors in the Board. Pursuant to the Guiding Opinions on the Establishment of Independent Director Systems by Listed Companies issued by China Securities Regulatory Commission and the relevant provisions of the Company's articles of association, Mr. Fu Yang will continue to serve his current duties until a new independent non-executive director being elected by the general meeting of the Company.

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

(I) DISCLOSURE OF INTERESTS OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVES

As at 30 June 2015, the Company's Directors, Supervisors or chief executives had the following interests or short positions in the 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 shall be recorded in the register maintained by the Company pursuant to section 352 of the SFO, or which shall be notified to the Company and Hong Kong Stock Exchange pursuant to the Model Code.

Save as disclosed above, as at 30 June 2015, none of the Directors, Supervisors or chief executives of the Company had interests or short positions in the 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 shall be recorded in the register maintained by the Company pursuant to section 352 of the SFO, or which shall be 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. Mr. Ian Sai Cheung Shiu is a non-executive Director of the Company and is concurrently a non-executive director of Cathay Pacific. Cathay Pacific is a substantial shareholder of the Company, holding 2,633,725,455 H shares in the Company as at 30 June 2015, 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 Hong Kong Dragon Airlines Limited ("Dragonair"). Mr. Cai Jianjiang, the chairman and a non-executive Director of the Company, and Mr. Song Zhiyong and Mr. Fan Cheng, both executive Directors of the Company, are concurrently non-executive directors of Cathay Pacific. Cathay Pacific and Dragonair 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.

(II) SUBSTANTIAL SHAREHOLDERS' SIGNIFICANT INTERESTS IN THE COMPANY

As at 30 June 2015, to the knowledge of the Directors, Supervisors and chief executives of the Company, the interests and short positions of the following persons (other than a Director, Supervisor or chief executives of the Company) who had interests and short positions in the shares, underlying shares and debentures of the Company which shall be disclosed to the Company pursuant to the SFO are set out as follows:

Notes:

Based on the information available to the Directors, Supervisors and chief executive of the Company (including such information as was available on the website of the Hong Kong Stock Exchange) and so far as the Directors, Supervisors and chief executives are aware, as at 30 June 2015:

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 49.75% equity interest and 61.26% voting rights in Swire Pacific Limited, and Swire Pacific Limited's approximately 45.00% equity interest in Cathay Pacific as at 30 June 2015, 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 30 June 2015, to the knowledge of the Directors, Supervisors and chief executives of the Company, no other person (other than a Director, Supervisor or chief executive of the Company) had any interest or short position in the shares, underlying shares and debentures of the Company which shall be disclosed to the Company pursuant to the SFO.

CORPORATE GOVERNANCE

1. COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE

For the six months ended 30 June 2015, the Company complied with all the code provisions of the Corporate Governance Code as set out in Appendix 14 of the Listing Rules.

2. COMPLIANCE WITH THE MODEL CODE

The Company has adopted and formulated a code of conduct on terms no less exacting than the required standards of the Model Code as set out in Appendix 10 of 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 six months ended 30 June 2015.

MISCELLANEOUS

1. PURCHASE, SALE OR REDEMPTION OF SECURITIES

Neither the Company nor any of its subsidiaries had purchased, sold or redeemed any of the listed securities of the Company in the first half of 2015 (the term "securities" has the meaning ascribed to it under paragraph 1 of Appendix 16 of the Listing Rules).

2. INTERIM DIVIDEND

No interim dividend will be paid for the six months ended 30 June 2015.

3. REVIEW BY 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 2015, the Company's unaudited interim financial report and the accounting policies and practices adopted by the Group.

4. OTHER INFORMATION

According to paragraph 40 of Appendix 16 of 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 2014 Annual Report.

5. NON-PUBLIC ISSUE OF A SHARES

On 27 July 2015, the Board approved the proposed issuance of not more than 994,200,497 (inclusive) new A shares to not more than 10 (inclusive) specified investors (including CNAHC, the controlling shareholder of the Company). The gross proceeds to be raised will not be more than RMB12,000 million (inclusive). The issue price of new A shares shall be not less than 90% of the average trading price of the A shares during the 20 trading days preceding the pricing benchmark date, which is RMB12.12193 per share. Pursuant to the profit distribution proposal for the year 2014 approved at the 2014 annual general meeting of the Company, the Company distributed a cash dividend of RMB0.5223 per 10 shares (including applicable tax) on 8 July 2015 based on the total share capital of 13,084,751,004 shares to all shareholders whose names appeared on the register of members of the Company on the date of record. The issue price has been adjusted accordingly to not less than RMB12.07 per share.

Independent Auditors' Report

Review report to the Board of Directors of Air China Limited

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

Introduction

We have reviewed the interim financial report of Air China Limited (the "Company") and its subsidiaries (collectively the "Group") set out on pages 30 to 63, which comprises the consolidated statement of financial position as of 30 June 2015 and the related consolidated statement of profit or loss, consolidated statement of profit or loss and other comprehensive income and consolidated statement of changes in equity and condensed consolidated cash flow statement for the six month period then ended and explanatory notes. The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited require the preparation of an interim financial report 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 are responsible for the preparation and presentation of the interim financial report in accordance with IAS 34.

Our responsibility is to form a conclusion, based on our review, on the interim financial report 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 the interim financial report 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 interim financial report as at 30 June 2015 is not prepared, in all material respects, in accordance with IAS 34.

KPMG

Certified Public Accountants

8th Floor, Prince's Building

10 Chater Road

Central, Hong Kong

27 August 2015

Consolidated statement of profit or loss

For the six months ended 30 June 2015 - unaudited

(Prepared under International Financial Reporting Standards)

(Expressed in Renminbi)

The notes on pages 37 to 63 form part of this interim financial report. Details of dividends payable to equity shareholders of the Company are set out in note 10.

other comprehensive income

For the six months ended 30 June 2015 - unaudited

(Prepared under International Financial Reporting Standards)

(Expressed in Renminbi)

The notes on pages 37 to 63 form part of this interim financial report.

Consolidated statement of financial position

At 30 June 2015 - unaudited

(Prepared under International Financial Reporting Standards)

(Expressed in Renminbi)