Media Release Attachments

1998 FINAL RESULTS

Note:

1. Exceptional items

The exceptional items consist of the following:

The net profit arising from the sale of investments mainly relates to the sale of a 4.5% of a shareholding in a company operating a computerised reservation system business in Asia. The Group still maintains an 8.4% shareholding in this business.

The provision for severance payments arising from staff retrenchments in 1998 is in connection with staff redundancies undertaken or to be undertaken as a result of the decisions to remove the B747-200 and B747-300 aircraft from service.

The provision for the impairment in value of the B747-200 and B747-300 aircraft and related equipment arises from decisions to remove these aircraft from service. The carrying value of these aircraft and related equipment has been written down to net recoverable amount. Provision has also been made to write down the related aircraft spare parts to net realisable value. The net realisable value of the spare parts has been determined based on market resale price.

2. Taxation

Hong Kong profits tax is calculated at 16% (1997: 16.5%) on the estimated assessable profits for the year. Overseas taxation is calculated at rates of tax applicable in countries in which the Group is assessable for tax. Tax provisions are reviewed regularly to take into account changes in legislation, practice and status of negotiations.

Final dividend. The final dividend will be paid on 28th May 1999 to shareholders registered on 12th May 1999. The shareholders' register will be closed from 4th May 1999 to 12th May 1999, both dates inclusive.

Annual report. The 1998 annual report will be sent on 9th April 1999 to the shareholders .

The Cathay Pacific Group's attributable loss for 1998 was HK$542 million, as compared with a profit of HK$1,694 million in 1997. Turnover was HK$26,695 million, down by 12.9 percent compared to the previous year.

The results for 1998 reflect the extreme difficulties facing Cathay Pacific due to the Asian economic downturn. The regional crisis, which first became apparent in the middle of 1997, worsened significantly during 1998 and its effect began to be felt in other economies. Faltering economic growth and rising unemployment dampened demand for both tourism and business travel across the region and had an adverse impact on our revenues. At the same time, the comparatively higher costs of operating in Hong Kong due to the devaluation of regional currencies reduced our competitiveness.

From the middle of the year, there was some recovery in passenger loads, but at the expense of yields. Management has taken a number of steps to increase efficiency and productivity across all our activities. These actions, combined with external factors such as favourable fuel prices, helped to reduce unit operating costs to their lowest level in more than a decade. This will benefit Cathay Pacific when the economy turns around.

Apart from focussing on costs, we have also taken the initiative in launching a series of promotions to boost demand in various markets to and from Hong Kong. The largest was our highly successful "Hong Kong Super Offer", which ran through January and February 1998, and involved two-for-one airfares to Hong Kong and in October and November we ran our "Fly to Win" promotion with further attractive incentives.

While taking steps to ensure our short-term competitiveness, our fundamental confidence in Hong Kong's long-term prosperity remains firm. We have no doubt that Hong Kong will recover economically and that it has the potential to become Asia's premier aviation hub. Cathay Pacific, as Hong Kong's largest and longest established carrier, is proud to be an important part of Hong Kong and, despite the current economic difficulties, we have continued our extensive investment programme to prepare us for the anticipated market recovery. The past year saw several elements of that programme come to fruition.

The completion of our new headquarters and associated facilities at the new Hong Kong International Airport at Chek Lap Kok, represents an overall investment of more than HK$7,300 million. Our new headquarters, Cathay Pacific City, is now home to over 3,000 staff and the Cathay Pacific Catering Services new flight kitchen is one of the largest flight kitchens in the world.

Our other major investment at the airport, the hangar complex of Hong Kong Aircraft Engineering Company Limited, is able to accommodate three wide-body aircraft side-by-side. We have also made substantial investments to upgrade our passenger services at the new airport, including new check-in facilities and our new airport lounges known as The Wing.

The opening of the new airport was marred by a series of teething problems, a number of which cost us dearly. The difficulties involving the airport's new cargo terminal resulted in substantial lost revenue for Cathay Pacific, compounding what was already a difficult year. However, with the opening difficulties now behind us, the airport has already established a reputation as being one of the most impressive in the world. The ability to offer improved customer service and increased capacity for expansion will serve Cathay Pacific well in the years ahead.

Despite the difficult market conditions we have continued to invest in our fleet, taking delivery of ten new aircraft during the year. These included the world's first Boeing 777-300, the longest commercial aircraft in service. A further three new aircraft will be delivered in 1999. However, in view of current weak demand and reduced growth forecasts, a decision was taken to remove seven B747-200 aircraft from the fleet. In addition a further six B747-300 aircraft will be phased out in 1999. As a result, we have incorporated in the 1998 accounts a provision of HK$607 million which recognises the current market value of this fleet.

Another step we have taken to ensure our future has been to review our network in the light of changing market demand. We have reduced frequencies to some regional destinations, and increased services on key long-haul routes. We have also added two exciting new destinations, Istanbul and San Francisco. The initial response to both services has been encouraging.

In addition to investing in our product we also took a major strategic initiative during the year by becoming a founder member in a new global alliance oneworld. The alliance links five key airlines - Cathay Pacific, American Airlines, British Airways, Canadian Airlines and Qantas Airways. We are firmly of the view that the alliance route is the way of the future for the airline industry, and becoming a member of oneworld is an important step in positioning ourselves for future global competition. The alliance will enhance our presence in key global business markets and will strengthen our competitive position and that of Hong Kong's new international airport.

Consistent with our alliance plans we also unveiled a new frequent flyer programme. The new programme, known as Asia Miles, replaced our previous programme Passages, which was amicably ended by the three partner airlines involved. Asia Miles is linked with our oneworld partners and allows us to offer accrual of passenger miles in all classes and brings on board a wide range of non-aviation service partners. We are confident the new programme will grow into a highly visible and successful way of delivering greater benefits to our passengers and thereby will help to foster greater loyalty.

Following difficulties experienced by Philippine Airlines in September, we responded to an invitation from Philippines President Joseph Estrada to provide a temporary domestic charter service for the country. For ten days in October we provided air links between Manila, Cebu and Davao, adding a new chapter to our history in a market we have served continuously since we were founded in 1946. We decided, however, not to pursue the opportunity to invest in and help manage Philippine Airlines.

We realise that the Year 2000 or millennium date change is a significant business issue and we are addressing it as a matter of priority. Further details are covered later in this report.

The year ahead is shaping up to be another difficult one for Cathay Pacific. All signs suggest the operating environment will remain challenging and no significant improvement is expected in 1999. Nevertheless, the measures we have put in place during 1998 will deliver increasing benefits as the year progresses and I believe we have every reason to look to the future with some confidence.

Peter Sutch
Chairman
10th March 1999

FLEET PROFILE

* Includes aircraft which have been leased out or taken out of service.
** Includes three freighters leased to AHK Air Hong Kong.
# Options are interchangeable between A330/A340.

Operating costs

• Staff costs decreased by HK$143 million, as a result of the reduced headcounts.
• Route costs, which include costs such as meal costs, landing and parking charges, decreased primarily due to cost efficiencies and the effect of weaker foreign currencies.
• Fuel costs fell by HK$1,097 million as a result of lower fuel prices and the increased use of more fuel efficient aircraft.
• Aircraft maintenance costs reduced significantly as a result of the retirement of the B747-200 aircraft.
• Aircraft depreciation and operating lease costs increased, reflecting deliveries during the year.
• Exchange losses realised on repayment of borrowings reduced as the Japanese Yen was weaker than in 1997.
• Commissions paid to agents decreased due to lower turnover.
• The increase in other operating costs was mainly due to higher provision for doubtful debts, and the costs associated with the airport move.
• Cathay Pacific's cost per ATK fell by 12.5% to HK$2.25 reflecting successful cost management.

* Capacity is measured in available seat kilometres (ASK) for passenger services and available tonne kilometres (ATK) for cargo services.

Corporate governance

The Company has complied throughout the year with the Code of Best Practice as set out in the Listing Rules of The Stock Exchange of Hong Kong Limited.

In compliance with the additional requirement of The Stock Exchange of Hong Kong Limited to its Code of Best Practice, the Company has on 30th October 1998 established an Audit Committee with written terms of reference.

Share capital

During the year under review, the Company made the following purchases of its shares on the Hong Kong Stock Exchange. These purchases were made as a result of a fall in the price of the shares. All the shares purchased were cancelled.

Year 2000

The Year 2000 ("Y2K") or millennium date change issue has arisen because many computer systems and electronic devices which store date information based on a two-digit year sequence are unable to accurately process dates for the Year 2000 and beyond. The problem affects IT and all other systems and equipment that rely on embedded electronic chip technology. It has the potential to impact on any business that does not take adequate steps to upgrade or replace non-compliant systems, guard against third-party risk from critical suppliers or customers, and manage its risk-exposure through the development of comprehensive contingency plans.

Recognising that this is first and foremost a business problem, the Cathay Pacific Group is addressing the millennium date change issue as a matter of priority. Sponsored by the Chairman of Swire Pacific and Cathay Pacific, and reporting to a central steering committee, the Swire Group Y2K Programme Office is working with external consultants to monitor progress towards Y2K readiness on a Group-wide basis. A separate Aviation Division subcommittee is co-ordinating the progress of Y2K projects within the Cathay Pacific Group. The airline's Y2K project team began work on the modification of its systems and programmes in 1996.

Cathay Pacific's Year 2000 Programme Office has been formed as a separate department headed by a senior manager reporting directly to the Director Corporate Development, who is the executive sponsor of the programme. The Programme Office also has direct access to the Chief Executive Officer who is briefed fortnightly by the Programme Manager. The role of the Year 2000 Programme Office includes the formulation of policies on Year 2000 compliance, development of a standard approach for the assessment of critical suppliers, Business Continuity Planning development and the overall coordination as well as management of the project. The Programme Office currently has a staff of 19 people and a budget in 1999 of HK$32 million.

Cathay Pacific aims to achieve Y2K readiness for its business-critical systems by March 1999 and compliance by June 1999 with the objective that neither the performance nor function of the Group's key business assets will be materially affected by the date change.

Y2K readiness will have been achieved when an inventory of all relevant equipment and systems (that is all business critical IT systems and equipment relying on embedded chips which could be disrupted by the series of date changes associated with the Y2K issue, and therefore could have a material adverse effect on the business or operations of the Group) has been made; such equipment and systems have been assessed and tested for potential Y2K problems identified by the relevant project team and a course of action relating to any identified problems has been decided upon and the equipment or services required to implement this have been ordered or arranged. The Cathay Pacific Group of companies will have business contingency plans in place to apply in the event of disruptions caused by system or equipment failure or third party non-compliance.

Having achieved readiness, Cathay Pacific aims to achieve Y2K compliance by June 1999. By this we mean, in relation to our own relevant equipment and systems, the modification or replacement of all such equipment and systems that fail our Y2K compliance test and, in respect of suppliers of such equipment and systems, we mean that all critical suppliers will have passed our Y2K compliance audit, or have been replaced where possible by those that have.

Cathay Pacific began to address Y2K issues at a relatively early stage. As part of regular and budgeted enhancements to its business systems, the Company has worked closely with vendors on systematic upgrade programmes to deal with the Y2K problem.

Cathay Pacific's transfer in July to the new Hong Kong International Airport, has also seen the planned upgrade of a number of potentially Y2K-sensitive systems and equipment, including the introduction of a new IT infrastructure as part of its investment in its new headquarters at Chek Lap Kok. The Company has spent HK$303 million in replacing systems, with upgraded versions the vendors of which have represented as being Y2K compliant, and as a consequence has avoided expensive remedial work. The cost of these new assets has been capitalised in the accounts. The aggregate of the costs to achieve Y2K compliance has not yet been ascertained. Costs of the Y2K programme are expensed in the accounts as and when incurred. As at 31st December 1998 a total of HK$144 million has been contracted for of which HK$90 million has been provided for in the accounts for the year ended 31st December1998.

Cathay Pacific is supporting International Air Transport Association's ("IATA") initiative to monitor and assist Y2K readiness among airports and other industry suppliers. IATA has launched a global programme to audit international airports and air traffic control systems for Y2K readiness and plans to provide a report to its members by mid-1999.

Cathay Pacific believes that it has taken, or has identified and will take, all reasonable steps necessary to ensure that its internal systems and equipment will enable it to be Y2K compliant in a timely manner. In addition, Cathay Pacific believes that it has taken, or has identified and will take, all reasonable steps necessary to identify and mitigate the material adverse effects which might result from any third parties on which Cathay Pacific is or will be reliant, failing to be Y2K compliant. However, there can be no assurance that equipment or services used by third parties on which Cathay Pacific does or will rely, will be Y2K compliant in a timely manner. The failure of the systems or equipment or services used by third parties and on which Cathay Pacific does or will rely, could have a material adverse effect on its business.

Cathay Pacific is presently taking all reasonable steps to identify Y2K related system disruptions which may impact on part or all of our operations, and will have business continuity plans established to reduce the potential impact of any such disruptions.

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