Air China Regulatory News (AIRC)

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 AIR CHINA

(a joint stock limited company incorporated in the People's Republic of China with limited liability)

(Stock Code: 00753)

REVISED ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

AND

CONTINUING CONNECTED TRANSACTIONS WITH CNACG

REVISED ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS BETWEEN THE GROUP AND THE LUFTHANSA GROUP

Reference is made to the section headed "CONTINUING CONNECTED TRANSACTIONS EXEMPT FROM THE INDEPENDENT SHAREHOLDERS' APPROVAL - 3.7 Continuing Connected Transactions between the Company and the Lufthansa Group" in the Company's circular dated 6 November 2009 in relation to various continuing connected transactions between the Group and the Lufthansa Group. The annual caps for the aggregate amount of all expenses to be paid by the Group to Lufthansa Group for the years ending on 31 December 2010, 2011 and 2012 were estimated to be RMB780 million, RMB858 million and RMB943.8 million, respectively, and the annual caps for the aggregate amount of all expenses to be paid by Lufthansa Group to the Group for the years ending on 31 December 2010, 2011 and 2012 were estimated to be RMB770 million, RMB847 million and RMB931.7 million, respectively.

The Directors have been monitoring the amounts of the Lufthansa Transactions, having regard to internal estimates of demand and operating conditions.

For the following reasons, the existing annual caps for the aggregate amount of all expenses to be paid by the Group to Lufthansa Group for the years ending on 31 December 2010, 2011 and 2012 and the annual caps for the aggregate amount of all expenses to be paid by Lufthansa Group to the Group for the years ending on 31 December 2010, 2011 and 2012 will not be sufficient to meet the requirements of the Group's operations:

• Since the second half of 2009, the cargo business of Air China Cargo, a subsidiary of the Company, has remarkably grown and, as a result, the transactions between Air China Cargo and Lufthansa Group have substantially increased. This has resulted in the increased expenses paid by Air China Cargo to Lufthansa Group. The Company currently expects that the number of cargo flights in relation to the business cooperation between the Group and the Lufthansa Group will increase no less than 10% for each of them in 2010 from the last year. In addition, Lufthansa has increased its cargo flights to Tianjin and Shanghai this year;

• the Group's passenger business has been growing in 2010. In the first half of this year, the Group recorded 47,214 million revenue passenger kilometers, carried 26.27 million passengers with a load factor of 78.89%, representing an increase of 32.13%, 34.54% and 4.55 percentage points, respectively, from the same period last year, which contributed to the increased transaction amount between the Group and Lufthansa Group. The Company currently expects that the number of its passenger flights to Germany in 2010 will increase approximately 7% from 2009; and

• in the first half of 2010, the Company made further capital contribution to Shenzhen Airlines, becoming the controlling shareholder of Shenzhen Airlines. Accordingly, the transaction amount between Shenzhen Airlines and Lufthansa Group shall be taken into account in the aggregate transaction amount of the Lufthansa Transactions between the Group and Lufthansa Group.

Accordingly, it is proposed that the annual caps for the aggregate amount of all expenses to be paid by the Group to Lufthansa Group and the annual caps for the aggregate amount of all expenses to be paid by Lufthansa Group to the Group for the years ending on 31 December 2010, 2011 and 2012 be revised as set out the table below:

In arriving at the above caps, the Directors have considered (i) the historical and estimated transaction amounts; (ii) the Company's business plan about increased flight routes to Germany; and (iii) the fleet of the Company (including Air China Cargo) is expected to grow by 7% to 9% annually from 2010 to 2012 and the routes to Europe, in particular, Germany is expected to continue to increase.

As each of the relevant Percentage Ratios (other than the profits ratio) of the Lufthansa Transactions with the revised annual caps set out above, is higher than 0.1% and less than 5%, the Lufthansa Transactions therefore fall under Rule 14A.34 of the Listing Rules and are accordingly subject to the reporting, annual review and announcement requirements, but are exempt from the independent shareholders' approval requirements under Chapter 14A of the Listing Rules.

CONTINUING CONNECTED TRANSACTIONS WITH CNACG

Reference is made to the Company's announcement dated 26 August 2008 in respect of the Framework Agreement between the Group and CNACG Group. The Framework Agreement applies to the CNACG Transactions under the Relevant Agreements in the three years ending on 31 December 2010. Pursuant to the Framework Agreement, the Framework Agreement shall be renewed for successive periods of three years thereafter unless either party to it gives to the other a notice of termination of not less than three months expiring on any 31 December. The Company has agreed to the renewal of the Framework Agreement for the three years ending on 31 December 2013.

Description of transactions

The Framework Agreement provides a framework for the Relevant Agreements between members of the Group on the one hand and members of CNACG Group on the other hand.

The CNACG Transactions are transactions between members of the Group on the one hand and members of CNACG Group on the other hand, comprising ground handling and engineering services, management services and other services and transactions as may be agreed by parties to be undertaken under the Framework Agreement excluding those which have been contemplated by the related CNAHC Framework Agreements.

The annual caps

The annual caps for the CNACG Transactions have been determined by reference to the forecast payments in respect of the CNACG Transactions to be made by the Group to CNACG Group in the three years ending on 31 December 2013 and the Group's projections for its fleet sizes, annual aircraft utilisation and other operating parameters, and have taken into account the growth of the Company's fleet (with 32 passenger aircraft scheduled for delivery in 2011) and passenger numbers (which is expected to increase by 8%-9% in 2010 from the last year).

The Directors estimate that the amounts payable by the Group to CNACG Group, in respect of the CNACG Transactions in the years ended 31 December 2011, 2012 and 2013 will not exceed the annual caps set out below.

Reasons for, and benefits of, the CNACG Transactions

The Group has entered into a series of continuing connected transactions with CNACG Group in its ordinary and usual course of business. CNACG possesses ample management expertise and financial resources on flight catering, airport ground handling and logistics and is able to provide quality services to the Group.

Connection between the parties

CNACG, by virtue of its 11.42% shareholding in the Company, is a substantial shareholder and therefore a connected person of the Company under the Listing Rules.

Compliance with Listing Rules

As each of the relevant Percentage Ratios (other than the profits ratio) of the CNACG Transactions under the Framework Agreement with the annual caps set out above, is higher than 0.1% and less than 5%, the CNACG Transactions therefore fall under Rule 14A.34 of the Listing Rules and are accordingly subject to the reporting, annual review and announcement requirements, but are exempt from the independent shareholders' approval requirements under Chapter 14A of the Listing Rules.

The maximum aggregated annual amount to be paid by CNACG to the Group under the Framework Agreement for each of the three years ended 31 December 2011, 2012 and 2013 is expected to fall below the de minimus threshold as stipulated under Rule 14A.33(3) of the Listing Rules will accordingly be exempt from the reporting, annual review, announcement and independent shareholders' approval requirements under Chapter 14A of the Listing Rules.

The Company will comply with the continuing obligations under Rules 14A.37 to 14A.41 of the Listing Rules and will re-comply with the relevant Listing Rules if the annual caps are exceeded, when the Framework Agreement is renewed or when there is a material change to its terms.

OPINION OF THE DIRECTORS

The Board (including the independent non-executive Directors of the Company) considers that the Lufthansa Transactions and CNACG Transactions have been conducted on normal commercial terms or on terms no less favourable than those available to independent third parties and were entered into in the ordinary and usual course of business of the Group, are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and the revised annual cap for the Lufthansa Transactions for each of the three years ending on 31 December 2010, 2011 and 2012 and the annual cap for the CNACG Transactions for each of the three years ending on 31 December 2011, 2012 and 2013 are fair and reasonable.

Kong Dong and Fan Cheng, being deputy chairman of the board of directors and director of CNACG, respectively, are materially interested in the CNACG Transactions and have abstained from voting on the relevant board resolutions of the Company in respect of the CNACG Transactions.

Definitions

By order of the Board

Air China Limited

Huang Bin Tam Shuit Mui

Joint Company Secretaries

Beijing, 10 September 2010

As at the date of this announcement, the directors of the Company are Mr. Kong Dong, Ms. Wang Yinxiang, Mr. Wang Shixiang, Mr. Cao Jianxiong, Mr. Christopher Dale Pratt, Mr. Cai Jianjiang, Mr. Fan Cheng, Mr. Hu Hung Lick, Henry*, Mr. Zhang Ke*, Mr. Jia Kang* and Mr. Fu Yang*.

* Independent non-executive director of the Company