Financial and Operating Highlights

Note a: The daily weighted average was 3,384 million shares (1997:3,433 million shares).
All definitions are the same as in the 1997 annual report.

Chairman's Letter

The first six months of 1998 produced a loss for the Cathay Pacific Group of HK$175 million, a decrease of HK$1,243 million over the same period last year. Turnover was HK$12,991 million, a decrease of 16.1% over 1997.

These figures reflect the extremely difficult environment in which we are currently operating. The Asian economic downturn and the weakness of Southeast Asian currencies against the US dollar have continued to impact adversely on traffic within the region. The comparatively higher prices in Hong Kong have also discouraged in-bound tourists. These factors are reflected in the reduction in load factors over those we enjoyed during the first six months of 1997.

Prudent management has ensured that we are a financially strong company. Nevertheless, in order to maintain our financial strength we have embarked on a programme designed to reduce our unit operating costs. Both the staff retrenchment and the removal from service of seven Boeing 747 'Classic' aircraft form part of this programme. This programme will, however, ensure that neither safety nor the integrity of our product will be compromised.

In order to further conserve resources, the interim dividend has been reduced by 73.9% and an interim dividend of HK3¢ per share will be paid.

Hong Kong's new airport opened on 6th July, 1998. The move from Kai Tak to Chek Lap Kok went exceedingly well, but unfortunately this cannot be said of the start-up of operations at the new airport, particularly in respect of cargo.

HACTL experienced significant cargo handling problems, both in and outbound, which cost Cathay Pacific an estimated HK$250 million in lost revenue during the month of July. This cost will increase until the problems are rectified. Passengers in the first week were subjected to fairly lengthy flight delays and to very long waiting time for baggage retrieval. Indeed, many sadly suffered the loss of their baggage for a number of days.

This is very much regretted. However, Cathay Pacific staff, working under exceedingly difficult conditions, did a magnificent job in smoothing over the difficulties as best they could.

Five weeks after the opening, operations on the passenger side have finally settled down. It will need hard work though to overcome the disappointing start.

The phased move of Cathay Pacific staff to our new headquarters complex, Cathay Pacific City, is proceeding. Equipped with a new information technology infrastructure and modern, well planned facilities, this building will provide an efficient, comfortable and attractive working environment for the more than 3,000 staff who will be based there by the end of the year.

In May, Cathay Pacific took delivery of the world's first B777-300 aircraft. This aircraft is longer than a B747 and has already proven as versatile and reliable as its smaller relation, the B777-200.

Despite the very difficult market conditions, Cathay Pacific is committed to take delivery of all the aircraft it has on order. By planning ahead, we are positioning ourselves to benefit from the next market upswing. Our strategy of investment in our fleet has stood us in good stead in the past and we firmly believe our future profitability depends upon ensuring that our product is second to none.

Our ongoing programme to install personal televisions in every seat is continuing with more than 60% of the passenger fleet now completed. We are also making small but important adjustments to inflight services on our routes - refining them to suit passenger preferences.

While the Asian market remains soft, demand for long-haul flights to Europe and North America remains reasonably strong, although yields are under a great deal of pressure. We have adjusted our schedules to reflect this with increased services to London, Los Angeles and Sydney, all of which are now served on a double-daily basis. A new twice weekly service to Istanbul, Turkey commences on 8th August and from 1st December a daily non-stop service to San Francisco is scheduled to commence. We are continuing to evaluate the benefits of membership of a major global alliance.

Our cost management programme together with our continuing focus on "Service Straight from the Heart" will benefit the Company during the second half and into the future. However, the operating environment is expected to remain very tough and as such no significant improvement in the second half results is foreseen.

Peter Sutch
Chairman

Hong Kong, 5th August 1998

1998 Interim Review

THE NEW AIRPORT

• The new Hong Kong International Airport at Chek Lap Kok began operating on 6th July and welcomed our first polar flight from New York as the first commercial arrival.
• Features such as Cathay Pacific's dedicated check-in area and six dedicated departure gates are proving popular with our customers. Cathay Pacific is the only airline with these facilities at the new airport.
• Our First and Business Class lounges will offer an unrivalled product to First Class, Business Class and Marco Polo Club customers.

THE FLEET

• By the end of August, five Airbus Industrie A340-300s and two B777-300s will have joined the Cathay Pacific fleet. Five B747-200 'classic' aircraft will be retired by the end of August, two of which are to be leased out under a five year contract. The remaining two passenger classics' will be retired by the year end.
• In April, Cathay Pacific completed the refurbishment of its B747-300 fleet. These aircraft have been fitted with new galleys and overhead bins and personal televisions in every seat, and they now offer an improved seat pitch of 45 inches in Business Class and 32 inches in Economy Class.
• The first upgrades to the B747-400 fleet's Rolls-Royce RB211 engines were also carried out in April. These engine upgrades will continue through to the year 2002, and should result in improved fuel economy and engine performance as well as lower maintenance costs.
• On 22nd May, Cathay Pacific took delivery of its first B777-300 aircraft. The airline is the launch customer of the new stretch version of the B777. We have obtained approval from the Hong Kong Civil Aviation Department for 120 minutes "ETOPS" (Extended Twin-Engine Operations); the aircraft is performing extremely well. Another B777-300 was delivered in June and these aircraft are the first of seven that will go into operation.

FLEET PROFILE

*Includes aircraft which have been taken out of service.

** Includes three freighters leased to Air Hong Kong.

***Total value is the contracted cost in HK$ billion and is subject to variation of orders.

# Options are interchangeable between A330/A340.

THE CUSTOMERS AND THE PRODUCT

• Cathay Pacific launched Electronic Ticketing in early 1998. This facility, which enables customers to travel ticketless, is now available on flights to Manchester, Melbourne, Singapore and Sydney.
• Cathay Pacific has reached an agreement with the other owners of the Passages frequent flyer programme to wind down Passages and will launch a wholly-owned new programme on 1st February 1999. Full details will be announced in October 1998. Customers will be better served by this newly designed programme.
• During the period, Cathay Pacific won five top awards for its high quality service and product, including Best Airline Business Class from Travel Trade Gazette Asia, Best Airline on intercontinental routes from Germany's Capital Magazine and Best Passenger Service from Air Transport World.
• A new Economy Class product was launched in July, to coincide with the opening of the new Hong Kong International Airport, including new meal trays, crockery and glassware.
• In an effort to further tailor our inflight service to specific routes, we have paid particular attention to matching the language skills of our flight attendants to different sectors. For example, Paris sectors now carry at least one French speaking crew member and 60 of our cabin attendants speak French.

INFORMATION TECHNOLOGY

• Cathay Pacific is currently introducing a fully-integrated managed communications network, which will provide a range of communications services in over 80 countries. Called GALACXY, this new infrastructure tool will enhance the airline's management efficiency and customer services.

THE PEOPLE OF CATHAY PACIFIC

• The results of PULSE, a corporate staff survey conducted at the end of 1997, released in April were satisfactory and we are always encouraging the creation of more opportunities for informal two-way communication between staff and their managers.
• The second phase of recruitment for our cabin crew based in Vancouver began on 1st April. 60% of CX838/839 Hong Kong-Vancouver flights and 67% of Vancouver-New York flights are now operated by cabin crew permanently based in Vancouver.
• Recruitment and training of Hong Kong cadet pilots continues and more than 90 are now flying as First or Second Officers.
• The phased move of Cathay Pacific staff to our new headquarters at Chek Lap Kok began in June and will continue until the end of the year. Cathay Pacific City will eventually be home to more than 3,000 people.

THE COMMUNITY AND THE ENVIRONMENT

• A special B777-300 open day was held in May, to give 1,000 members of the Hong Kong community the chance to preview Cathay Pacific's new aircraft.
• Courtesy of Cathay Pacific, 50 underprivileged children joined CX907 to Manila -the first commercial flight out of Chek Lap Kok - to mark the opening of the new airport on 6th July.
• Cathay Pacific's annual Change for Good programme in conjunction with UNICEF began in July and will continue through to December.
• Cathay Pacific began an air quality assessment of its new headquarters in January, in co-operation with Hong Kong Polytechnic University. Levels of particulates, carbon dioxide and other substances will be monitored to ensure a healthy working environment at Cathay Pacific City.
• Efforts to educate staff on environmental matters continued in 1998 with ISO-14000 Environmental Management System workshops, Green Manager forums and a "Let's Fly Greener" programme.
• Cathay Pacific's Environmental Pioneer Programme began in January. More than 500 youngsters have so far participated in this educational programme.

Review of Operations

Airlines
Cathay Pacific Airways Limited

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

Passenger services

• Yields were weak on all routes with falls ranging from 13.5% to 18.5% compared with 1997. Currency weakness accounted for 4.6% of this.
• Systemwide load factor is 4.7 percentage point lower than last year with our South East Asian and Japanese routes being particularly affected. Load factors on our London and Taipei services have remained relatively strong.
• The weak Japanese travel market has caused the cancellation of one of the daily Osaka services.
• Demand in Indonesia has continued to decline and consequently we have combined one of the Jakarta services with a Singapore service. Flights to Denpasar and Surabaya are under review.
• Penang is now served daily via Kuala Lumpur.
• As from 1st July, we have double daily services to London, Los Angeles and Sydney.
• From 1st March, two of the Zurich services fly on to Manchester. From 6th July, a code sharing agreement with Swissair offers seven return services a week to Zurich.
• A new twice-weekly A340-300 service to Istanbul is to be launched in August and it is hoped this new destination will attract both holiday and business traffic from Asia.
• A daily non-stop service to San Francisco is scheduled to commence from 1st December.

Cargo services

• Cargo has shown a slight downturn, as currency rates and low yields have worked against revenue growth in the Hong Kong, Europe and North America markets. Cathay Pacific has maintained its market share in Northeast and Southeast Asia.
• In March, we made history as the first international airline to operate a commercial flight through North Korean airspace in 50 years. CX087 from Anchorage pioneered the way for subsequent overflights which afford us substantial time savings on flights to North America.

Air Hong Kong

• Exports from Hong Kong have remained buoyant in the first half of 1998 and AHK's load factors have shown an increase of 3% over the same period last year.

Dragonair

• The performance remains satisfactory as the China market has been affected to a lesser degree by the regional economic downturn. Dragonair has rolled over three of its existing fleet of A320s with new A320 aircraft powered by A5 engines, the whole roll-over plan will be completed in 1999.

Airline Services

• The interim profit attributable to shareholders of Hong Kong Aircraft Engineering Company for the first six months to June 1998 was HK$140 million. This represents a decrease from 1997, due in part to the impact of the economic downturn in South East Asia on air travel patterns.
• Other companies within this division performed satisfactorily.

Airline Catering

• Cathay Pacific Catering Services has been affected by the downturn in air traffic in Southeast Asia and the worldwide daily output of its kitchens has decreased from 75,000 meals a day in 1997 to 73,800 meals a day.
• In Hong Kong, the new 51,000 square meter facility at Chek Lap Kok has been operating successfully since July. This facility, compared with the daily capacity of 42,000 meals in Kai Tak, can produce up to 55,000 meals a day and has the capacity to expand to 80,000 meals a day.

Financial Review

Turnover

• The 16.1% decrease in turnover was mainly due to the continued difficult market situation of both passenger and cargo traffic.

Operating costs

• Route costs decreased reflecting the drop in passenger numbers.
• The decrease in fuel cost was due to lower fuel prices compared with 1997.
• Aircraft maintenance costs decreased as a result of a younger average fleet age and lower labour costs.
• Exchange losses realised on repayment of borrowings decreased because of the relatively strong Hong Kong dollar.
• The decrease in net finance charges reflects movements of exchange and interest rates, and higher interest earnings from cash deposits.

Financial position at 30th June 1998

• During the period, the Company purchased 3.6 million of its shares on the Hong Kong Stock Exchange at a total cost of HK$19 million.
• Investment at the new airport at Chek Lap Kok during the period amounted to HK$1,039 million and is analysed as:-
  
  

  Headquarters and hotel	HK$711 million
  Training facilities	HK$121 million
  Stores building	HK$29 million
  Catering facilities	HK$178 million

  
  
• Total investment at the new airport as at 30th June 1998 is HK$5,040 million by wholly owned companies with a further HK$1,532 million being our share of the expenditure of other Group companies.
• Investment in aircraft and product improvement totalled HK$3,855 million during the first six months.
• Total assets at 30th June 1998 amounted to HK$66,478 million (31st December 1997: HK$64,757 million).

Consolidated Profit and Loss Account - Unaudited
for the six months ended 30th June 1998

The US$ figures are for information only and are translated at HK$7.80.

Notes to the Accounts

1 Basis of preparation

The interim accounts have been prepared in accordance with the principal accounting policies set out in the 1997 annual report.

2 Net finance charges

Finance income and expenses relating to defeasance arrangements have been netted off in the above figures.

3 Net operating profit

4 Taxation

Hong Kong profits tax is calculated at 16% (1997: 16.5%) on the estimated assessable profits for the period. 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.

5 Interim dividend

An interim dividend of HK3¢ (1997: HK11.5¢) per share has been declared and will be paid on 5th October 1998 to shareholders registered at the close of business on 14th September 1998. The share register will be closed from 14th September 1998 to 18th September 1998, both dates inclusive.

6 Reserves

7 Comparative amounts

Certain comparative amounts have been reclassified to conform with the current period's presentation.

Information Provided in Accordance with the Listing Rules

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. Cathay Pacific recognises that this is first and foremost a business management problem. 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.

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 aims to achieve Y2K readiness for its business-critical systems by March 1999 and compliance by June 1999. This will leave a reasonable lead time for anomalies to be addressed in advance of the millennium, 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 electronic chips failure of which to operate in a manner unaffected to a material extent by the date change at Y2K would 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. Critical suppliers of such equipment and systems will have been audited for Y2K compliance and compliant alternates identified for those suppliers that are deemed unlikely to achieve Y2K compliance in time. The Cathay Pacific Group of companies aims to 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 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$226 million in replacing systems, with upgraded versions the vendors of which have represented as being Y2K compliant, and as a consequence has avoided the expense of 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 30th June 1998, a total of HK$63 million has been contracted for of which HK$22 million has been provided for in the accounts for the six months period ended 30th June 1998.

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.

Corporate governance

None of the Directors of the Company is aware of any information that would reasonably indicate that the Company is not, or was not for any part of the accounting period covered by the interim report, in compliance with the Code of & Best Practice as set out in the Listing Rules of The Stock Exchange of Hong Kong Limited.

Directors' interests

At 30th June 1998, the register maintained under Section 29 of the Securities (Disclosures of Interests) Ordinance ("SDI") showed that Directors held the following beneficial interests in the shares of Cathay Pacific Airways Limited:

Neither during nor prior to the period under review, has any right been granted to, or exercised by, any Director of Cathay Pacific Airways Limited, or to or by the spouse or minor children of any Director, to subscribe for shares, warrants or debentures of Cathay Pacific Airways Limited.

Other than as stated above, no Director of Cathay Pacific Airways held any interest, whether beneficial or non-beneficial, in the share capital or warrants of Cathay Pacific Airways Limited or any of its associated companies (within the meaning of the SDI).

Substantial shareholders

The register of substantial shareholders maintained under section 16(1) of the SDI shows that at 30th June 1998 the Company had been notified of the following interests, being 10% or more of the Company's issued share capital. These interests are in addition to those disclosed above in respect of the Directors.

Share capital

During the period under review, Cathay Pacific Airways Limited 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.

At 30th June 1998, 3,384,199,848 shares were in issue (30th June 1997: 3,429,063,848 shares).

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