Discloseable Transaction

RNS Number : 3823Y

Air China Ld

21 December 2010

 



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If you have sold or transferred all your shares of Air China Limited, you should at once hand this circular tothe purchaser or transferee or to the bank, stockbroker or other agent through whom the sale was effected fortransmission to the purchaser or the transferee.

Hong Kong Exchanges andClearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contentsof this circular, make norepresentation as to its accuracy orcompleteness and expressly disclaim any liability whatsoever for any loss however arising from or in reliance upon the whole orany part of the contents of this circular.

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

(Stock Code: 00753)

DISCLOSEABLE TRANSACTION AND

MAJOR TRANSACTION

22 December 2010

Page

Definitions .......................................................................................................................... 1

Letter from the Board

1....... Introduction ......................................................................................................... 3

2..... Discloseable Transaction............................................................................. ......... 4

(A).. Purchaseof 20 Airbus 320-series Aircraft ........................................... ......... 4

(B)... Shenzhen Airlines'Purchase of 10 Airbus 320-series Aircraft ............... ......... 6

3....... Major Transaction................................................................................................ 8

Purchase of 10 Airbus 330-series Aircraft and

10 Airbus 350-series Aircraft .................................................................           8

4....... Financialand Trading Prospects. ......................................................................... 10

5....... Working Capital ................................................................................................... 10

6....... Recommendation and Shareholder's Written Approval ............................................. 11

7....... AdditionalInformation ................................................................................. ....... 11

Appendix I        -          FinancialInformation of the Group ............................................. 12

Appendix II      -          General Information.................................................................... 16

In this circular, the followingexpressions have the following meanings, unless the context requires otherwise:

"AIE"                                               Air China Import and Export Co., a company incorporated in the People's Republic of China and a wholly-owned subsidiary of the Company

"Airbus Aircraft"                               10 Airbus 330-seriesaircraft and 10 Airbus 350-series aircraft

"Airbus Company"                            Airbus S. A. S., a company incorporated in Toulouse, France

"Board"                                            the board of directorsof the Company

"Cathay Pacific"                                Cathay Pacific Airways Limited

"CNACG"                                         China National Aviation Corporation (Group) Limited, a company incorporated under the laws of Hong Kong and a wholly-owned subsidiary of CNAHC as at the date of thiscircular

"CNAHC"                                         China National Aviation Holding Company, a company incorporated in the People's Republicof China

"Company"                                       Air China Limited, a company incorporated in the People's Republic of China whose H shares have a primary listing on TheStock Exchange of Hong Kong Limited and secondary listing on the Official List of the UK Listing Authorityand whose A shares are listed on the Shanghai Stock Exchange

"Director(s)"                                     the director(s)of the Company

"Group"                                            the Company and its subsidiaries and joint ventures

"Latest PracticableDate"                   20 December 2010, being the latest practicabledate prior to the printing of this circular for ascertaining certain information contained herein

"Listing Rules"                                  The Rules Governingthe Listing of Securities on The1 StockExchange of Hong Kong Limited

"PRC"                                              People's Republic of China excluding, for the purpose of thiscircular only, Hong Kong, Macau and Taiwan

"Previous 2010 Airbus Aircraft

Purchases"

the purchase of 20 Airbus 320-series aircraft pursuant to an aircraft purchase agreement entered into by the Company, AIE and Airbus Company on 10 February and the purchase of 10 Airbus 320-series aircraft pursuant to an aircraft purchase agreement entered into by Shenzhen Airlines, AIE and Airbus Company on 30 July 2010

"SFO"                                              the Securitiesand Futures Ordinance (Chapter 571 of the Lawsof Hong Kong), as amended, supplemented or otherwise modified from time to time

"Shareholders"                                  shareholders of the Company

"Shenzhen Airlines"                           Shenzhen AirlinesLimited, a company incorporated and validly existing under the laws of the People's Republic of China with limited liability and with 51% of its registered share capital owned by the Company as at the dateof this circular

"Stock Exchange"                             The Stock Exchange of Hong Kong Limited

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

(Stock Code: 00753)

Directors:

Non-executive Directors:

Kong Dong (Chairman)

Wang Yinxiang

Cao Jianxiong

Sun Yude

Christopher Dale Pratt

Ian Sai Cheung Shiu

Executive Directors:

Cai Jianjiang

Fan Cheng

Independent non-executive Directors:

Jia Kang

Fu Yang

Han Fangming

Li Shuang

Registered address:

9/F, Blue Sky Mansion

28 Tianzhu Road

Zone A

Tianzhu Airport IndustrialZone

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

22 December 2010

To the Shareholders

Dear Sir or Madam,

DISCLOSEABLE TRANSACTION

AND

MAJOR TRANSACTION

1.     INTRODUCTION

On 10 February 2010 the Company announcedthat the Company and AIE entered into a purchase agreement with Airbus Company, pursuant to which the Company has agreed to purchase 20 Airbus 320-series aircraft from Airbus Company. On 30 July 2010, the Company announced that Shenzhen Airlines, a subsidiary of the Company, andAIE entered into a purchase agreement with Airbus Company, pursuant to which Shenzhen Airlines has agreed to purchase 10 Airbus 320-series aircraft from Airbus Company.

Each of the above transactions constitutes a discloseable transaction of the Company underthe Listing Rules.

On 18 November 2010 the Company announced that the Company and AIE entered into a purchase agreement with Airbus Company,pursuant to which the Company has agreed to purchase 10 Airbus 330-series aircraft and 10 Airbus 350-series aircraft from Airbus Company. This purchase of 10 Airbus 330-series aircraft and 10 Airbus 350-series aircraft, aggregated withthe above transactions, constitutes a major transactionof the Company under the Listing Rules.

The purpose of this circular is to set out further details of the above transactions.

2.     DISCLOSEABLE TRANSACTION

(A)   Purchase of 20 Airbus 320-series Aircraft

Date of the transaction:

10 February 2010

Parties to the transaction:

(i)    the Company, as the purchaser, the principal business activity of which is air passenger, air cargo and airline-related services;

(ii)    AIE, as the import agent for the Company; and

(iii)   Airbus Company, as the vendor, one of whose principal business activity is aircraft manufacturing.

The Company confirms that, to the best of the Directors' knowledge, information and belief having made all reasonableenquiry, Airbus Company and each of the ultimate beneficial owner of Airbus Company are third parties independent of the Company and itsconnected persons (as defined in the Listing Rules).

Aircraft to be acquired:

20 Airbus 320-series aircraft

Consideration:

The aircraft basic price comprises theairframe price, optional features prices and engine price. The aircraft basic price of the 20 Airbus 320-series aircraft in aggregate is approximately US$1,628 million (equivalent to approximately HK$12,649.6 million) (price quoted from open market as at 2010). The aircraft price is subject to price

escalation by applying a formula. Airbus Company has granted to the Company significant price concessions with regard to the 20 Airbus 320-series aircraft. These will takethe form of credit memoranda whichmay be used by the Company towards the final price payment of the 20 Airbus 320-series aircraft or may be used for the purpose of purchasing goods and services from Airbus Company. Such credit memoranda were determined after arm's length negotiations between the parties and as a result, the actual consideration for the 20 Airbus 320-series aircraft is lower than the aircraft basic price mentioned above.

This transaction was negotiated and entered into in accordance with customary business practice. The Directors confirm that the extent of the price concessions granted tothe Company in this transaction is comparablewith the price concessionsthat the Company had obtained in the previous aircraft purchase entered into between the Company and Airbus Company as set out in the circular of the Company dated 29 July 2008. The Company believes that there is no materialimpact of the price concessions obtained in this transaction on the unit operating cost of the Company's fleet. It is normal business practice of the global airline industry to disclose the aircraft basic price, instead of the actual price, for aircraft acquisitions. Disclosure of the actual consideration will result in the loss of the significant price concessions andhence a significantnegative impact on the Company's cost for this transaction and will therefore not be in the interest ofthe Company and the Company's shareholders as a whole. The Company has applied to the Stock Exchange for a waiver from strictcompliance of Rule 14.58(4) of the Listing Rules in respect of disclosure of the actual consideration of the 20 Airbus 320-series aircraft and the Stock Exchange granted the application.

As the relevant percentage ratio under Rule 14.07 of the Listing Rules for this transaction is above 5% but less than 25%, this transaction constitutes a discloseable transactionand is therefore not subject to approval by the Company's shareholders under the Listing Rules.

Payment and delivery terms:

The aggregate consideration for the acquisition of 20 Airbus 320-series aircraft is payable by cash in instalments. The Company is expecting to take delivery of the 20 Airbus 320-series aircraft in stages from 2011 to 2014.

Source of funding:

This transaction will be funded through cash generated from the Company's business operations, commercial bank loans and other financing instruments of the Company.

Reasons for and benefitsof the transaction:

This transaction will expand the fleet capacity of the Company. Ifnot taking into account the adjustments that may be made to the fleet based on marketing condition and

the aging of the fleet, this transaction will strengthen thefleet capacity of the Company with an increase of approximately 5% based on available tonne kilometers of the Company as at 31 December 2009. In particular, this transactionwill mainly support hubs-building in Chengdu and expand the fleet capacity of the Company in southwestern Chinawhile supplementing, to an appropriate extent, the flights in eastern China. The Company expects the 20 Airbus 320-series aircraft will deliver more cost-efficient performance and provide more comfortable services to passengers.

The Directors believe that the terms of this transaction are fair and reasonable and in the interestsof the shareholders of the Company as a whole.

(B)  Shenzhen Airlines' Purchase of 10 Airbus 320-series Aircraft

Date of the transaction:

30 July 2010

Parties to the transaction:

(i)    Shenzhen Airlines, as the purchaser, the principalbusiness activity of which is airpassenger, air cargo and airline-related services;

(ii)    AIE, as the import agent for the Company; and

(iii)   Airbus Company, as the vendor, one of whose principal business activity is aircraft manufacturing.

The Company confirms that, to the best of the Directors' knowledge, information and belief having made all reasonableenquiry, Airbus Company and each of the ultimate beneficial owner of Airbus Company are third parties independent of the Company and itsconnected persons (as defined in the Listing Rules).

Aircraft to be acquired:

10 Airbus 320-series aircraft

Consideration:

The aircraft basic price comprises theairframe price, optional features prices and engine price. The aircraft basic price of the 10 Airbus 320-series aircraft in aggregate is approximately US$814 million (equivalentto approximately HK$6,324.78million) (price quoted from open market as at 2010). The aircraft price is subject to price escalation by applying a formula. Airbus Company has granted to Shenzhen Airlines significant price concessions with regard to the 10 Airbus 320-series aircraft. These will take the form of credit memoranda which may be used by Shenzhen Airlines towards the final price

payment of the 10 Airbus 320-series aircraft or may be used for the purpose of purchasing goodsand services from Airbus Company. Such credit memoranda were determined after arm's length negotiations between the parties and as a result, the actualconsideration for the 10 Airbus 320-seriesaircraft is lower than the aircraft basic price mentioned above.

This transaction was negotiated and entered into in accordance with customary business practice. The Directors confirm that the extent of the price concessions granted to Shenzhen Airlines in this transactionis comparable with the price concessions that the Company had obtained in the previous aircraft purchase entered into between the Company and Airbus Company as set out in the announcement of the Company dated 10 February 2010. The Company believes that there is no material impact of the price concessions obtained in this transaction on the unitoperating cost of the Company's fleet. It is normal business practice of the global airline industry to disclose the aircraft basic price, instead of the actual price, for aircraft acquisitions. Disclosure of the actual consideration willresult in the loss of the significant price concessions andhence a significant negative impact on the Company's cost for this transactionand will therefore notbe in the interest of the Company and the Company's shareholders as a whole. The Company has applied to the Stock Exchange for a waiver from strict complianceof Rule 14.58(4) of the ListingRules in respect of disclosureof the actual consideration of the 10 Airbus 320-series aircraft and the Stock Exchange granted the application.

As this transaction and the purchase of 20 Airbus 320-series aircraft by the Company dated10 February 2010 (the "Previous Airbus Transaction") were entered into within a 12 month period and were both with Airbus Company, pursuant to Rule 14.22 of the Listing Rules, their transaction amounts should be aggregated for the purpose of determining relevant percentage ratios under Rule 14.07 of the Listing Rules. The aggregated transaction amount is approximately US$2,442 million (HK$18,974 million).

As the relevant percentage ratio under Rule 14.07 of the Listing Rules for this transaction with aggregated transaction amount with the Previous Airbus Transactionis above 5% but less than 25%, this transaction constitutes a discloseable transaction and is therefore not subject to approval by the Company's shareholders under the Listing Rules.

Payment and delivery terms:

The aggregate consideration for the acquisition of 10 Airbus 320-series aircraft is payable by cash in instalments. Shenzhen Airlines is expecting to take delivery of the 10 Airbus 320-series aircraft in stages from 2012 to 2013.

Source of funding:

This transaction will be funded through cash generated from Shenzhen Airlines' business operations,commercial bank loans and other financing instruments of Shenzhen Airlines.

Reasons for and benefitsof the transaction:

This transaction will expand the fleet capacity of the Group. If nottaking into account the adjustmentsthat may be made to the fleet based on marketing condition and

the aging of the fleet, this transaction will strengthen the fleet capacity of the Group with an increase of approximately 2% based on available tonne kilometers of the Group as at 31 December 2009. In particular, this transaction willmainly expand the fleet capacity of Shenzhen Airlines in south China. The Group expects the 10 Airbus 320-series aircraft willdeliver more cost-efficient performance andprovide more comfortable services to passengers.

The Directors believe that the terms of this transaction are fair and reasonable and in the interestsof the shareholders of the Company as a whole.

3.      MAJOR TRANSACTION

Purchase of 10 Airbus 330-series Aircraft and 10 Airbus 350-series Aircraft

Date of the transaction:

18 November 2010

Parties to the transaction:

(i)    the Company, as the purchaser, the principal business activity of which is air passenger, air cargo and airline-related services;

(ii)    AIE, as the import agent for the Company; and

(iii)   Airbus Company, as the vendor, one of whose principal business activity is aircraft manufacturing.

The Company confirms that, to the best of the Directors' knowledge, information and belief after all reasonable enquiry, Airbus Company and each of the ultimate beneficial owners of Airbus Company are third parties independent from the Company andits connected persons (as defined in the Listing Rules).

Aircraft to be acquired:

Airbus Aircraft, i.e. 10 Airbus 330-series aircraft and 10 Airbus 350-series aircraft

Consideration:

The aircraft basic price comprises theairframe price, optional features prices and engine price. The aircraft basic price of the Airbus Aircraft in aggregate is approximately US$4,490 million (equivalent to approximately HK$34,811 million) (price quoted from open market as at January 2007 for 10 Airbus 330-series aircraft and January 2008 for 10 Airbus 350-series aircraft). The aircraft price is subject to price escalation by applying a formula. Airbus Company has granted to the Company significant price concessions with

regard to the Airbus Aircraft. These concessions will take the form of credit memoranda which may be used by the Company towards the final price payment of the Airbus Aircraft or may be used for the purpose of purchasing goods and services from Airbus Company. Such credit memoranda weredetermined after arm's length negotiations between the parties and as a result, the actual consideration for the Airbus Aircraft is lower than the aircraft basic price mentioned above.

This transaction was negotiated and entered into in accordance with customary business practice. The Directors confirm that the extent of the price concessions granted tothe Company in this transaction is comparablewith the price concessionsthat the Company had obtained in the previous aircraft purchase entered into between Shenzhen Airlines and Airbus Company as set out in the announcement of the Company dated 30 July2010. The Company believes that there is no material impact of the price concessions obtained in this transaction on the unit operating cost of the Company's fleet. It is normal business practice of the global airline industry to disclose the aircraft basic price, instead of the actual price, for aircraft acquisitions. Disclosure of the actual consideration will result in the loss of the significant price concessions andhence a significantnegative impact on the Company's cost for this transaction and will therefore not be in the interest ofthe Company and the Company's shareholders as a whole. The Company has applied to the Stock Exchange for a waiver from strictcompliance of Rule 14.58(4) of the Listing Rules in respect of disclosure of the actual consideration of the Airbus Aircraft and the StockExchange granted the application.

As the Previous 2010 Airbus Aircraft Purchases and this transaction were entered intowithin a 12 month period with Airbus Company, pursuantto Rule 14.22 of the Listing Rules, their transaction amounts should be aggregated for the purpose of determining relevant percentageratios under Rule 14.07 of theListing Rules. The aggregated transaction amount is approximately US$6,932 million (HK$53,744 million).

As each of the relevant percentage ratios under Rule 14.07 of the Listing Rules for this transaction with aggregated transaction amount with the Previous 2010 Airbus Aircraft Purchases is above 25% but less than 100%, this transaction constitutes a major transaction and is therefore subject to approval by the Company's shareholders under the Listing Rules.

Payment and delivery terms:

The aggregateconsideration for the acquisitionof Airbus Aircraft is payable by cash in instalments. The Company is expecting to take delivery of 10 Airbus 330-series aircraft in stages from 2013 to 2015 and 10 Airbus 350-series aircraft in stages from 2018 to 2020.

Source of funding:

This transaction will be funded through cash generated from the Company's business operations, commercial bank loans and other financing instruments of the Company.

Reasons for and benefitsof the transaction:

This transaction will expand the capacity of the Company's fleet. If not taking into account the adjustments that may be made to the fleet based on marketing condition and the aging of the fleet, this transactionwill increase the fleet capacity of the Group by approximately 18.6% basedon available tonne kilometers of the Group as at 31 December 2009. In particular, this transaction would optimise the fleet structure of the Company and is in line with the market requirements for the Company. The Company expects the Airbus Aircraft will deliver more cost-efficient performance andprovide more comfortable services to passengers.

The Directors believe that the terms of this transaction are fair and reasonable and in the interestsof the shareholders of the Company as a whole.

4.     FINANCIAL AND TRADING PROSPECTS

As disclosed in the 2009 annual report of the Company dated 29 April2010, for the financial year ended 31 December 2009, air traffic revenue and other operating revenue reached RMB48,092 million and RMB3,301 million, respectively, representing a decrease of 4.84% and an increase of 39.22% over 2008. Thedecrease is primarily due to the overall decreased demand from international air passenger andcargo markets caused by the global economic crisis and the increase is primarilyattributed to a revenue refund of RMB830 million from CAAC Infrastructure Development Fund in 2009. The Directors believe that rising aviation fuel prices and increasingcompetition in the airline business will present new challenges for the Group in 2010. However, the Directors view the financial and trading prospects during the current financial year of the Company ending 31 December 2010 with confidence and believe that the Group is well placed to continue to develop its business in line withits strategy. In addition, the Directors are of the view that the discloseable transaction and the major transactionare not expected to have any material impact on earnings, assets and liabilitiesof the Company.

5.     WORKING CAPITAL

Taking into account the financial resources available to the Group, the Directors are of the opinion that the Group will have sufficient working capital for the Group's requirement for the next12 months following the date of this circular.

6.     RECOMMENDATION AND SHAREHOLDER'S WRITTEN APPROVAL

This circular is despatched to Shareholders forinformation purpose only. No general meeting will be convened for approving the major transaction. As at the Latest Practicable Date, CNAHC, the controlling Shareholder, directly and indirectly (through CNACG, a wholly-owned subsidiary of CNAHC), held approximately 51.47% of the total issued share capital of the Company. Each of CNAHC and CNACG and their respectiveassociates (as defined in the Listing Rules) does not have any interest in the major transaction other than as a shareholder of the Company (where applicable). Furthermore, as no Shareholder has a material interest in the major transactionwhich is different from other Shareholders, no Shareholder wouldbe required to abstain from voting in respect of the major transaction if a general meeting were convened for approving the majortransaction. The major transaction has accordinglybeen approved in writing by CNAHC and CNACG pursuant to Rule 14.44 of the Listing Rules.

Although no general meeting will be convened,the Board considersthat each of the discloseable transactions and the major transactionwere entered into on normal commercial termsand the terms of the discloseable transaction and the major transaction are fair and reasonable and are in the best interestsof the Company and the Shareholders as a whole. Accordingly, if a general meeting were convened for approving the major transaction, the Boardwould have recommended the Shareholders to vote in favor of the major transaction.

7.     ADDITIONALINFORMATION

Your attention is drawn to the additionalinformation set out in theappendices to this circular.

By Order of the Board

Air China Limited

Chairman

Kong Dong

Beijing

I.     CONSOLIDATED FINANCIAL STATEMENTS

The Company isrequired to set out in this circular the information for the last three financial years with respect to the profits and losses, financial record and position, set out as a comparative table and the latest published audited balance sheet together with the notes on theannual accounts for the last financial year for the Group.

The audited consolidated financial statements of the Group for the year ended 31 December 2009 has been set out from page 57 in the Annual Report 2009 of the Company whichwas published on 29 April2010. The Annual Report 2009 has also been posted on the Stock Exchange's website at http://www.hkexnews.hk. Please also see below quick link to the Annual Report 2009:

http://www.hkexnews.hk/listedco/listconews/sehk/20100429/LTN201004291647.pdf

The audited consolidated financial statements of the Group for the year ended 31 December 2008 has been set out from page 57 in the Annual Report 2008 of the Company whichwas published on 23 April2009. The Annual Report 2008 has also been posted on the Stock Exchange's website at http://www.hkexnews.hk. Please also see below quick link to the Annual Report 2008:

http://www.hkexnews.hk/listedco/listconews/sehk/20090423/LTN20090423737.pdf

The audited consolidated financial statements of the Group for the year ended 31 December 2007 has been set out from page 52 in the Annual Report 2007 of the Company whichwas published on 10 April2008. The Annual Report 2007 has also been posted on the Stock Exchange's website at http://www.hkexnews.hk. Please also see below quick link to the Annual Report 2007:

http://www.hkexnews.hk/listedco/listconews/sehk/20080410/LTN20080410453.pdf

The unaudited interim financial information of the Group for the six months ended 30 June2010 has been set out from page 25 in the Interim Report 2010 of the Company whichwas published on 8 September 2010. TheInterim Report 2010 has also beenposted on the Stock Exchange's website at http://www.hkexnews.hk. Please also see below quick link to the Interim Report 2010:

http://www.hkexnews.hk/listedco/listconews/sehk/20100908/LTN20100908183.pdf

II.    INDEBTEDNESS

Borrowings

The table below sets forth the Group's total outstanding indebtedness as at 31 October 2010:

Notes

Total

RMB

(in million)

Bills payable                                                                                                          1

Bank loans, and other loans                                                 (1)                      56,844

Corporate bonds                                                                  (1)                        9,000

Finance lease obligations                                                      (2)                      17,940

Total                                                                                                            83,785

Notes:

(1)     The Group's bank loans, other loans and corporatebonds with an aggregate carrying amount of approximately RMB27,075 millionwere secured by mortgagesover certain of the Group's assets and/or guarantees. Thepledged assets included aircraft, buildingsand land use rights with an aggregate carrying amount of approximately RMB27,284 million, advance payments for aircraft of RMB2,742 million, listed shares in an associateof RMB7,181 million and bankdeposits of approximately RMB617 million as at 31 October 2010. Certain guarantees were provided by banks with back-to-back counter-guarantees provided by certain major banks in Chinawith an aggregateamount of approximately RMB1,272 million.

(2)     The Group's finance lease obligations with an aggregate carrying amount of approximately RMB17,940 million were secured by mortgages over certain of the Group's aircraft and/or guarantees. Thepledged aircraft had an aggregatenet book value of approximately RMB28,637 million as at 31 October 2010. The guarantees were provided by a commercial bank with back-to-back counter-guarantees provided by a majorbank in China of approximately RMB301 millionas at 31 October 2010.

In addition to the above, as at 31 October 2010 certain of the Group's bankdeposits with an aggregate carrying amount of approximately RMB468 million were pledged against the Group's aircraft operating leases and financial derivatives.

Contingent liabilities

As at 31 October 2010, the Group had the following significant contingent liabilities:

(i)    Pursuantto the restructuring of China National Aviation Holding Company ("CNAHC", the Company's parent and ultimate holding company) for the listing of the Company's H shares on the Hong Kong Stock Exchange ("HKSE") and the London Stock Exchange("LSE") in 2004, the Company entered

into a restructuring agreement (the "Restructuring Agreement") with CNAHC and China National Aviation Corporation (Group) Limited ("CNACG", a wholly-owned subsidiary of CNAHC) on 20 November 2004. According to theRestructuring Agreement,except for liabilities constituting or arising out of or relating to businessesundertaken by the Company after the restructuring, no liabilities would be assumed by the Company and the Company would not be liable,whether severally or jointly and severally, for debtsand obligations incurred by CNAHC andCNACG prior to the restructuring. The Company has also undertakento indemnify CNAHC and CNACGagainst any damage suffered or incurred by CNAHC and CNACG as a result of any breach by the Company of any provision of theRestructuring Agreement.

(ii)    On 15 April 2002, Flight CA129 crashed on approach to the Gimhae International Airport, South Korea. There were 129 fatalities including 121 passengers and 8 crew members aboard the crashed airplane.Investigations were conducted by both the Chinese and Korean civil aviation authorities and haveyet to be concluded at the date of this circular. Certain injured passengers and family members of the deceased passengers as well as crew members have commenced proceedings in the Korean courts seeking damages against Air China International Corporation (the predecessor of the Company). The Group cannot predict the timing of the courts' judgements or thepossible outcome of the lawsuits or any possible appeal actions. Up to 31 October 2010, the Company, Air China International Corporation and the Company's insurer had paid an aggregate amount ofapproximately RMB425 million in respect of passenger liability and other auxiliary costs. Included in the RMB425 million was an amount ofapproximately RMB415 million borne by the Company's insurer. As part of the above-mentioned restructuring, CNAHC has agreed to indemnify the Group against any liabilities relating to the crash of Flight CA129, excluding the compensation already paid up to 30 September2004 (being the date of incorporation of the Company). The Directors of the Company believe that the accident will not have any material adverse impact on the Group's financial position.

(iii)   On 26 February 2007,the Federal Judiciary of the United States filed a civil summon against the Company and Air China Cargo Co., Ltd. (a subsidiary of theCompany) claiming that they, together witha number of other airlines,have violated certain anti-trustregulations in respect of their air cargo operations. The status of theproceedings is still in thepreliminary stage and thereforethe Directors of the Company areof the view that it is not possible to estimate the eventual outcome of the claim with reasonablecertainty at this stage. Also, the Directors of the Company are of the view that there would be valid defense against this claim and consider that no provision for this claim is needed accordingly.

(iv)   On 17 November 2009, Airport City Development Co., Ltd. ("Airport City Development") commenced proceedingsinvolving approximately RMB224 million against the Company, AirChina Cargo, Air China International Corporation and a third party, for the unlawful use of land owned by Airport CityDevelopment. The status of the proceedings is still in the preliminary stageand the Directors of the Company are of the view that it is not possible to estimate the eventual outcome of the claim with reasonable certainty at this stage. Also, the Directorsof the Company are of the view that there would be valid defense against this claim and consider that no provision for this claim isneeded accordingly.

(v)    Shenzhen AirlinesCo., Ltd. ("Shenzhen Airlines"), a subsidiaryof the Group hasprovided guarantees for certain bank and other loan facilities. As at 31 October 2010, Shenzhen Airlines has outstanding guarantees in respect of bank and other loan facilities of approximately RMB659 million.

Except as disclosedabove and apart from intra-group liabilities, as at 31 October 2010,the Group did not have any debt securitiesissued and outstanding, or authorised or otherwise created but unissued, term loans, any otherborrowings or indebtedness in the nature of borrowing of the Group includingbank overdrafts and liabilities under acceptances (other than normal tradebills) or acceptance credits or hire purchase commitments, mortgages and charges, contingent liabilities or guarantee.

Save as disclosed above, the Directors have confirmed that there has been no material change in the indebtedness of the Group since 31 October 2010.

1.     RESPONSIBILITY STATEMENT

This circular, for which the Directors of the Company collectively and individually accept fullresponsibility, includes particularsgiven in compliance with the Listing Rules for the purpose of giving informationwith regard to the issuer. The Directors,having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2.     DISCLOSUREOF INTERESTS OF DIRECTORS AND SUPERVISORS

As at the Latest Practicable Date, none of the Directors and supervisors of the Company has interestsor short positions in the shares, underlying shares or debentures of the Company or its associatedcorporations (within the meaning of Part XV of the SFO) which were notified tothe Company and the Stock Exchange pursuant to Divisions7 and 8 of Part XV of the SFO (including interests or short positions which have been taken or deemed to be taken under such provisions of the SFO), or recordedin the register maintained by the Company pursuant to Section 352 of the SFO, or which were notifiedto the Company and the Stock Exchange pursuant to the Model Code for Securities Transactionby Directors of Listed Companies.

None of the Directors or supervisors of the Company has any direct or indirect interest in any assets which have been, since 31 December 2009 (the date to which the latest published audited financial statements of the Group were made up), acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of by or leased to, to any member of the Group.

None of the Directors or supervisors of the Company is materially interested in any contract or arrangementsubsisting at the date of this circular and which is significant in relationto the business of the Group.

Mr. Christopher Dale Pratt is a Non-executive Director of the Company and is concurrently the Chairman and ExecutiveDirector of Cathay Pacific. Mr. Ian Sai Cheung Shiu is a Non-executive Director of the Company and is concurrently the Non-executive Director of Cathay Pacific. Cathay Pacific is a substantialshareholder of the Company and wholly owns HongKong Dragon Airlines Limited ("Dragonair"). Mr. Kong Dong, the chairman and a Non-executive Director of the Company is concurrently the Deputy Chairman and Non- executive Director of Cathay Pacific and Mr. Cai Jianjiangand Mr. Fan Cheng, both Executive Directors of the Company, areconcurrently 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 asthey operate airline services to certain destinations, whichare also served by the Company.

Save as above, none of the Directors or supervisors of the Company and theirrespective associates (as defined in the Listing Rules) has any competing interests which would be required to be disclosed under Rule 8.10 of the Listing Rules if each of them were a controlling shareholder of the Company.

3.     MATERIALCONTRACTS

The Group has entered into the following material contracts within the two years immediately preceding the date of this circular:

(a)    the sale and purchase agreementdated 2 April 2009 between the Company and Capital Airports Holding Company ("Capital Airports") pursuant to which the Company has agreed to purchase from Capital Airports its 24% equity interest in the registered capital of Air China Cargo for a consideration of RMB718,004,045, details of which are set out in the Company's circulardated 14 April 2009;

(b)   the agreement dated 17 August 2009 between the Company and CITIC Pacific Limited ("CITIC Pacific") pursuant to which the Company hasagreed to purchase, and CITIC Pacific has agreed to sell, 491,864,724 Cathay Pacific shares owned by CITIC Pacific for a consideration of approximately HK$6,335 million. This transaction, details of which are set out in the Company's announcement dated 17 August 2009, was completed on 27 November 2009;

(c)   the aircraft purchase agreement dated 10 February 2010 between the Company, AIE andAirbus Company pursuant to which the Company has agreed to purchase 20 Airbus 320-series aircraft from Airbus Company, details of which are set out in this circular;

(d)   the framework agreement and the relevant agreements dated 25 February 2010 between the Company, Cathay Pacific and other parties pursuant to whichthey agreed to establisha jointly owned cargo airline by way of Cathay Pacific's acquisition of a 25% equity interest in Air China Cargo through its wholly owned subsidiary Cathay Pacific China Cargo Holdings Limited at a consideration of RMB851,621,140. In addition, pursuant to the framework agreement and the relevant agreements, Advent Fortune Limited ("AFL") will acquire from China National Aviation Company Limited, the entire equity of Fine Star Enterprises Corporation ("Fine Star") using a loan ofapproximately RMB817 million obtained from Cathay Pacific. In return, AFL will pledge its equity interest in Fine Star, a shareholder of Air China Cargo, to Cathay Pacific and Cathay Pacific's returns on the loan will be equal to the dividend returns on the 24% effective shareholding of Fine Star in Air China Cargo. Air China has agreed to, pursuant to the framework agreement and the relevant agreements,use the capital contributions aforesaid to purchase from Cathay Pacific and Dragonairfour Boeing 747-400BCF converted freighters at a consideration of RMB1,924 million. The details of the transactions contemplated under the framework agreement and the relevant agreements are set outin the Company's circulardated 8 April 2010;

(e)    the A sharesubscription agreementdated 11 March 2010 between the Company and CNAHCpursuant to which CNAHC will commit at least RMB1,500 million to subscribe in cash for more than 157,000,000 new A shares and the H share subscription agreement between the Company andCNACG pursuant to which CNACG will subscribe in cash for not more than 157,000,000new H shares, details of which are set out in the Company's circular dated 14 March 2010. This transaction was completed on 24 November 2010;

(f)    the capital increase agreement dated 21 March 2010 between the Company, Shenzhen International Total Logistics (Shenzhen) Co., Ltd. ("Total Logistics")and Shenzhen Huirun InvestmentCo. Ltd. ("Huirun") pursuant to which the Company andTotal Logisticshave agreed to make capital contribution to Shenzhen Airlines andHuirun's liquidatorhas waived, on behalf of Huirun, its right to subscribe for theadditional registered capital and agreed that the Company and Total Logistics shall subscribe for the entire additional registeredcapital of Shenzhen Airlines. Pursuant to thecapital increase agreement, the Company will contribute RMB682,143,750 to subscribe for an additional registered capital of Shenzhen Airlines of RMB339,375,000. Thistransaction, details of which are set out in the Company's announcement dated 21 March 2010. This transaction was completedon 19 April 2010;

(g)    the aircraft purchase agreementdated 25 June 2010 between the Company, AIE and Boeing Company pursuant to which the Company has agreed to purchase 20 Boeing 737-800 aircraft from Boeing Company, details of which are set out in the Company's circulardated 13 October 2010;

(h)    the aircraftpurchase agreement dated 30 July 2010 between Shenzhen Airlines (a subsidiary of the Company), AIE and Airbus Company pursuant to which Shenzhen Airlines has agreed to purchase 10 Airbus320-series aircraft from AirbusCompany, details of which are set out in this circular;

(i)     the aircraftsupplemental agreement dated 31 August 2010 between the Company, AIE and Boeing Company pursuant to which the Company has agreed to purchase 15 Boeing 787-9 aircraft from Boeing Company to replace the 15 Boeing 787-8 aircraft as agreed to be purchasedby the Company from Boeing Company in2005, details of which are set out in the Company's circulardated 13 October 2010;

(j)     the aircraftpurchase agreement dated 10 September 2010 between the Company, AIE and Boeing Company pursuant to which the Company has agreed to purchase 4 Boeing 777-300ER aircraft from Boeing Company, details of which are set out in the Company's circulardated 13 October 2010; and

(k)    the aircraft purchase agreementsdated 18 November 2010 between the Company, AIE and Airbus Company pursuant to which the Company has agreed to respectively purchase 10 Airbus 330-seriesaircraft and 10 Airbus 350-series aircraft from Airbus Company, details of which are set out in this circular.

Except as disclosed above, no other material contract has been entered into by the Group within the two years immediately preceding the date of this circular.

4.     LITIGATION

As at the Latest Practical Date, the litigation or claims of material importance pending or threatened against a member of the Group areas disclosed in the section titled "Contingent Liabilities" found under "II. Indebtedness" in Appendix I.

As at the Latest PracticalDate, save as disclosedabove, the audited Company was not involved in any significant litigation or arbitration. To the knowledge of the Company, there was no litigation or claim of material importance pending, to be initiated or initiated against the Company except as disclosed above, there was no litigation or claims of material importance pending or threatened against any member of the Group.

5.     SERVICE CONTRACTS

Each of the Directorswas appointed by the Company on 28 October 2010 for a term of three years. None of the Directors has any existing or proposed service contract with any member of the Group which is not expiring or terminableby the Group within one year without payment of compensation (other than statutory compensation).

6.     NO MATERIAL ADVERSE CHANGE

The Directors confirm that there has been no material adverse change in the Group's financial or trading position since 31 December 2009, being the date to which the latest published audited accounts of the Group have been made up.

7.     MISCELLANEOUS

(a)    The joint company secretariesof the Company are Huang Bin and Tam Shuit Mui, Amy. Ms. Tam is an associate member of the Hong Kong Institute of Certified Public Accountants and a member of The American Institute of Certified Public Accountants.

(b)   The registeredaddress of the Company is at 9/F., Blue Sky Mansion, 28 Tianzhu Road, Zone A, Tianzhu Airport IndustrialZone, Shunyi District, Beijing, China. The head office of the Company is at No. 30, Tianzhu Road, Tian Zhu Airport Economic Development Zone, Shunyi District, Beijing, China.

(c)   The Hong Kong branch share registrar and transfer office of the Company is Computershare Hong Kong Investor Services Limited, 17M Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong.

8.     DOCUMENTS AVAILABLE FOR INSPECTION

Copies of thefollowing documents areavailable for inspectionduring normal business hoursat the principal place of business of the Company in Hong Kong at 5th Floor, CNAC House 12 Tung Fai Road, Hong Kong International Airport, Hong Kong up to and including 5 January 2011:

(a)    the articles of associationof the Company;

(b)   the Company's 2008 and 2009 annual reports;

(c)   a copy of each material contract referred in the section headed "Material Contracts" of this circular;and

(d)   a copy of each circular issued pursuant to the requirements set out in Chapters 14 and/or 14A which has been issued since the date of the latest published audited accounts of the Company.

 

END

 

 

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