HONG KONG AIRCRAFT ENGINEERING COMPANY LIMITED

Results for the six months ended 30th June 1998 - unaudited:

Interim Dividend

An interim dividend of HK$0.22 (1997: HK$0.26) per share has today been declared and will be paid on 28th September 1998 to shareholders registered at the close of business on 18th September 1998. The share register will be closed from 14th September 1998 to 18th September 1998, both dates inclusive.

Taxation

The taxation charge comprises Hong Kong profits tax calculated at 16.0% (1997: 16.5%) on estimated assessable profits.

Share Capital

During the period under review, the Company made the following purchases of its shares on the Hong Kong Stock Exchange:

Other than as stated above, no purchase, sale or redemption of the shares of the Company has been effected by the Company or its subsidiary company.

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.

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 risks-exposure through the development of comprehensive contingency plans.

HAECO is addressing the millennium date change issue as a matter of priority and has set up a Y2K project office, with dedicated resources, to address this issue. A Swire Group Programme Office, sponsored by Swire Pacific's Chairman and reporting to a central steering committee, is working with external consultants to monitor progress towards Y2K readiness and is assisting HAECO in this respect. Additionally, a separate Aviation Division subcommittee is providing co-ordination and guidance to HAECO and to other companies in Swire Pacific's Aviation Division.

HAECO 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 Year 2000 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. HAECO 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, HAECO 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.

An element of remedial expenditure has been avoided because HAECO has been able to implement the replacement of systems and equipment as part of regular and budgeted enhancements to its business systems. The move of HAECO's headquarters to the new Hong Kong International Airport during 1998 and the establishment of new HAESL facilities at Tseung Kwan O, have provided a further impetus to these enhancements. For these reasons in particular, the directors do not expect the costs of the Y2K compliance programme to be material to the accounts. The aggregate of the costs to achieve Y2K compliance has not yet been ascertained. Costs of the Y2K programme are expensed as a revenue item in the accounts as and when incurred. As at 30th June, 1998 a total of HK$6.7M had been contracted for but not provided for in the accounts and a further HK$1.0M had been authorised but not contracted for in respect of the Y2K programme.

Directors' Interests

At 30th June 1998, the register maintained under Section 29 of the Securities (Disclosure of Interests) Ordinance (SDI) showed that the following Director held beneficial interests in the shares of Hong Kong Aircraft Engineering Company Limited:-

* By virtue of the SDI, The Hon Michael Kadoorie was deemed to be interested in 3,782,886 shares in the Company.

During or prior to the period under review, no right has been granted to, or exercised by, any Director of the Company, or to or by the spouse or children under 18 years of age of any Director, to subscribe for shares, warrants or debentures of the Company.

Other than as stated above, the Directors of the Company held no interests, whether beneficial or non-beneficial, in the shares or warrants of the Company or its associated corporations (within the meaning of 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.

The register of substantial shareholders indicates that the interest disclosed by Swire Pacific Limited includes the 46,019,286 shares disclosed by its associated company, Cathay Pacific Airways Limited.

In addition, John Swire & Sons (H.K.) Limited and John Swire & Sons Limited have also disclosed a notifiable interest in the above 95,950,303 shares, by virtue of their shareholdings in Swire Pacific Limited.

CHAIRMAN'S STATEMENT

Results

The Company's profit attributable to shareholders for the first half of 1998 was HK$140.4 million, a decrease of 21.8% from that for the same period in 1997. Turnover declined as the volume of air traffic at Kai Tak reduced, and margins were under pressure as airlines sought to tighten control over operating costs. The advent of increased competition at Chek Lap Kok has also begun to impact the Company's operating margins. Net finance income for the first six months of the year was slightly below that for the first half of 1997. Contributions from associated companies improved marginally, with both Hong Kong Aero Engine Services Limited (HAESL) and Taikoo (Xiamen) Aircraft Engineering Company Limited (TAECO) recording profits.

Your directors have declared an interim dividend of HK$0.22 per share, a decrease of 15.4% from that declared in 1997.

Operations

The number of aircraft movements handled by the Company at Kai Tak decreased by 2.0% as compared to the first half of 1997, which contributed to a small decline in line maintenance revenues.

The Company's airframe maintenance facilities were well utilised during the period, with scheduled maintenance checks on the Cathay Pacific Airways fleet accounting for a significant portion of the work. Scheduled checks were also performed on the aircraft operated by Dragonair.

Comprehensive heavy maintenance work packages were undertaken for Continental Airlines, Polar Air Cargo, American Trans Air and Evergreen International Airlines. Extensive checks were performed for Federal Express, International Lease Finance Corporation, Air Atlanta Icelandic, Air Lanka, Air Macau, Sichuan Airlines, Pacific East Asia Cargo, Orient Thai and Transasia.

TAECO, the Company's associate in Xiamen, China, has continued to be busy and completed major heavy maintenance packages in the first half of 1998 for Cathay Pacific Airways, Japan Airlines, Singapore Airlines, Air Hong Kong, All Nippon Airways, Air New Zealand and Federal Express, as well as additional work for Shenzhen Airlines, Hainan Airlines, Xiamen Airlines and Shandong Airlines. TAECO contributed a profit in the first half of the year.

HAESL has commenced the second and final phase of its move from Kai Tak to a three-hectare site at Tseung Kwan O where a large fan engine test cell, module change and module repair facilites and general workshops have been constructed. The company made a positive contribution in the first half of the year but workload has been below that of 1997.

Kai Tak Refuellers Company Limited, the Company's associate which carries oil refuelling for aircraft has ceased operation with the closure of Kai Tak Aiport. Profit for the first half of 1998 was similar to that for last year but that for the second half of the year is forecast to be minimal.

Since the half-year the Company has substantially completed its relocation from Kai Tak to new facilities and has commenced a twenty-year combined line and base maintenance franchise at Hong Kong International Airport operating from a single hangar capable of fully enclosing three widebody aircraft, associated backshops and a dedicated area within the passenger terminal.

Prospects

Air traffic throughout Asia-Pacific has been badly affected by the economic turmoil of the last twelve months, and the impact has been felt by airlines around the world. The cyclical consequences of this on the aircraft maintenance industry have yet to be fully seen. The Company enters a new era at Chek Lap Kok with new facilities and free of bank borrowings, and in the longer term is well positioned. However, escalating pressure on revenues and on operating costs at the new airport will make the balance of the year extremely difficult, and it is likely that the downward trend in profitability will continue.

D M Turnbull
Chairman

Hong Kong, 4th August 1998

For further information, please contact:

Mr. Andy Herdman	2840-8092
Mrs. Maisie Shun Wah	2840-8097

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