Release Date:
Release ID: 793

Air China Announces 2006 Interim Results; Sustainable Profitability in Challenging Operating Environment

Air China Limited:

Financial Highlights:

-- Operating Revenue increased 17.7% to RMB19,931 million

-- Profit from operations declined 36.1% to RMB893 million

-- Net profit attributable to shareholders declined 22.5% to RMB458 million

-- Jet fuel costs rose 39.5% to RMB7,064 million

-- Basic earnings per share was RMB4.9 cents

Press Release

Air China Limited ("Air China" or the "Company", together with its subsidiaries, collectively the "Group" (HKEX: 0753)(LSE: AIRC)(SSE: 601111)(ADR OTC: AIRYY)), today announced its interim results for the six months ended June 30, 2006 (the "Review Period" or the "Period").

For the first six months of 2006, Air China's operating revenues grew despite the rising cost of jet fuel. Operating revenue increased by 17.7% to RMB19,931 million. However, profit from operations declined by 36.1% to RMB893 million, mainly due to the increase in the cost of jet fuel and declining profits of associated companies.

Net profit attributable to shareholders was RMB458 million, down 22.5% compared to the first half of 2005. Basic earnings per share declined from RMB6.3 cents to RMB4.9 cents in the Review Period. The Board of Directors of the Company did not recommend any interim dividend.

During the Period, total operating expenses for the Group were RMB19,038 million, up 22.5% from 2005 due to increases in the price and consumption of jet fuel. The total cost of jet fuel for the Group in the Period was RMB7,064 million. This was 37.1% of total operating expenses, up 4.5 percentage points over 2005, when jet fuel represented 32.6% of total costs. Subject to the applicable laws of the People Republic of China("PRC") , the Group hedged 39.4% of its procured jet fuel, and the net gain on jet fuel derivatives was RMB338 million. Jet fuel surcharges also further relieved pressure on operating costs.

Air China Chairman Li Jiaxiang described the first half of 2006 as a critical period for the Company: "Although the increase in international oil prices continued to present severe challenges, the Group has maintained its leading position among China's airlines. We have also made remarkable progress in strategic corporation, exploring funding channels, hub building and route network as well as internal operations. All these have laid a solid foundation for future growth and strategic development."

Robust growth in airline operations

During the Review Period, Air China achieved satisfactory results both in passenger services and cargo and mail transport. Passenger traffic was up 15.6% to 14.55 million passengers; while cargo traffic increased 12.5% to 383,500 tons.

Passenger traffic measured by revenue passenger kilometer ("RPK") was 27,663 million, an increase of 15.7% over the same period of 2005. RPK on international routes, domestic routes, Hong Kong and Macau routes was 11,313 million, 15,434 million and 915 million respectively, representing increases of 14.1%, 17.1% and 12.4%. Domestic operations experienced the fastest growth, reflecting rapidly rising demand. Passenger capacity ("ASK") increased 12.8% to 37,493 million during the Period. Passenger load factor increased 1.9 percentage points to 73.8%. Average passenger yield per RPK was RMB0.56, an increase of 2.6% compared to the first half of 2005.

Cargo traffic experienced growth of 15.3% to 1,476 million RFTK in the Review Period. Cargo capacity ("AFTK") increased 14.3% to 2,733 million. The cargo load factor was 54%, an increase of 0.5 percentage points. Average cargo yield per RFTK was RMB1.94, which was 4% lower than the same period last year.

Against a backdrop of rising oil prices, Air China implemented a number of measures to reduce jet fuel consumption and increase operational efficiency, including enhanced cost control. Currently, the Company's cost per available ton kilometers ("ATK") is RMB50 cents lower than other players in PRC.

Expansion of hub and route networks

In the first half of 2006, the Company added 8 aircraft to its Beijing hub, bringing the Beijing-based fleet to 112. This gave the Company a market share of 44% of air traffic in the nation's premier domestic and international airport. Air China completed the route network planning of its Chengdu regional hub. There was more supporting and feeder traffic to the international and regional routes originating from Chengdu. The Chengdu-based fleet is 33. The Chengdu hub has established an effective connection between cities of Northeast, Northwest China and cities in Southern China. The Company continues to increase route intensity and capacity in Shanghai, which serves as another international gateway in the company's network. The Shanghai-based fleet was comprised of 29 aircraft. Meanwhile, during the process of establishing its Southern China Base, Air China adopted measures to optimize the deployment of its fleet and to obtain more originating traffic air rights.

In the Review Period, the Company introduced 12 new routes, 6 new destinations and began services to 1 additional country. As of June 30, 2006, Air China and Air China Cargo operated a total of 331 routes, with a breakdown as follows: domestic, 242, international, 80, and regional 9. The Company continued to refine its route network so as to promote operating efficiency. In the first half of 2006, the Company added more frequencies to a number of fast growing European routes. As part of its strategy to increase competitiveness, the Company introduced aircraft with renovated first and business classes on routes to the U.S. and Germany. In its regional service, the Company increased flights between Beijing, Southwestern Chinese cities and Hong Kong. In its domestic routes, the Company introduced larger aircraft on the trunk routes, which increased the number of weekly seats available by 12.8% compared to the same period last year.

Fleet expansion and efficiency improvement

During the Period, Air China introduced 16 new aircraft. As of June 30, 2006, the company (including Air China Cargo) operated a fleet of 192 aircraft. The average age of aircraft was 8.1 years.

In order to promote service on international routes, the Company upgraded the business and first class cabins of 9 B747 aircraft and 2 A340 aircraft. The upgrading was completed on schedule by June 30, 2006 and the upgrading of cabin facilities on A340 aircraft has begun. During the Period, Air China signed purchasing agreement for 49 aircraft in total. The purchase will further expand Air China's fleet size and promote its passenger capacity and operating efficiency.

Efforts continuity in market development and business cooperation

In the first half of 2006, interline revenue for the Company increased 20.7% to RMB3,630 million. The Company sold 5.1 million electronic tickets, worth RMB3,732 million, an increase of 311.9%. Air China inaugurated a domestic call center, a North American sales website and a European call center, which will help to expand Air China's sales channels. The Company is also promoting its frequent flyer program. During the Period, 420,000 new members joined the program, which had total membership of 3.43 million as of June 30, 2006.

In its cargo business, revenue from charter flight services increased by RMB 30 million over the same period last year. The Company entered into strategic partnership with seven courier service providers in order to expand its market share in the cargo business.

On June 8, 2006, Air China signed agreements with Cathay Pacific Airways Limited ("Cathay Pacific"), China National Aviation Company Limited, Citic Pacific Limited and Swire Pacific Limited to realign shareholding structure and to explore more opportunities for business cooperation with Cathay Pacific. Under the agreements, Air China and Cathay Pacific established cross shareholding structure. The Company believes that the new relationship with Cathay Pacific will increase Air China's influence in international and domestic markets. At the same time, it will increase the competitiveness of both Beijing and Hong Kong hubs.

On May 22, 2006, Air China signed a Memorandum of Understanding with the Star Alliance, the largest airline alliance in the world. By being a member of the Star Alliance, Air China will be able to expand and improve its domestic and international route network, improve its competitive position on duplicate operating routes, and lower operating costs by taking advantage of the Alliance's joint merchandising resources.


Air China believes that for the later half of the year, passenger operations are likely to benefit from the peak season from July to October. However, high oil prices will continue to present a major challenge. Said Chairman Li Jiaxiang: "Although the high price of jet fuel creates huge pressure on costs, China economy has maintained its growth momentum, leading to the rapid expansion of air traffic. Our objective is to remain our position as China's most profitable airline by way of expanded strategic partnerships, better cost control and improved operating efficiency.


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