Notes to the Accounts

1. Taxation

2. Earnings per share

Earnings per share are calculated by dividing profit attributable to shareholders for the period ended 30th June 1999 of HK$63.2 million (1998 : HK$140.4 million) by the number of 185,089,750 (1998 : 185,096,070) shares in issue during the period.

3. Comparative amounts

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

Interim Dividend

An interim dividend of HK$0.14 (1998 HK$0.22) per share has today been declared and will be paid on 27th September 1999 to shareholders registered at the close of business on 17th September 1999. The share register will be closed from 13th September 1999 to 17th September 1999, both dates inclusive.

Taxation

The taxation charge comprises Hong Kong profits tax calculated at 16% (1998: 16%) on estimated assessable profits.

Share Capital

During the period under review, no purchase, sale or redemption of the shares of the Company has been effected by the 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.

In compliance with the additional requirement of The Stock Exchange of Hong Kong Limited to its Code of Best Practice, the Company has on 1st October 1998 established an Audit Committee with written terms of reference.

Year 2000

HAECO has been working to address the Year 2000 (Y2K) or millennium date change issue since 1996 and on 30th June 1999 it achieved Y2K compliance. HAECO believes that it has taken all reasonable steps necessary to ensure that its internal systems and equipment are Y2K compliant and to identify and mitigate the material adverse effects which might result from any third parties, on which HAECO relies, failing to be Y2K compliant.

In order to achieve compliance HAECO has:

• made 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 HAECO);

• assessed and tested such equipment and systems for potential Y2K problems:

• where necessary, modified or replaced such equipment and systems to ensure that they passed HAECO's Y2K compliance test;

• audited all its critical suppliers for Y2K compliance and where critical suppliers have not passed the Y2K compliance audit, HAECO has where possible replaced those suppliers; and

• put in place appropriate business continuity plans in instances where it has not been possible to find an alternative to suppliers which are not Y2K compliant.

HAECO recognises that despite all the steps which it has taken to mitigate the material adverse effects of the millennium date change on its operations, there remains a risk that the failure of the systems or equipment or services used by third parties and on which HAECO is dependant may adversely affect its operations.

HAECO will therefore continue to monitor potential Y2K related system disruptions which may have an impact on part or all of its operations, and will adjust its business continuity plans as appropriate to reduce the potential impact of any such disruptions. In the period between 30 June 1999 and the millennium date change, HAECO will continue testing the effectiveness of its business continuity plans and ensuring that all relevant personnel are familiar with, and properly trained in the performance of, those plans. In addition, in the period leading up to the millennium date change, HAECO will continue to review and adapt its existing operational procedures to ensure that they take account of any Y2K specific issues which arise or are thought likely to arise on or before 1 January 2000.

HAECO will continue to address the millennium date change issue as a matter of priority through a dedicated Y2K project office whose activities are directed by a steering committee of executives led by a Director of the Company. The plans of HAECO's subsidiary and jointly-controlled companies are subject to review by this steering committee. A Swire Group Programme Office, sponsored by Swire Pacific's Chairman and reporting to a central steering committee, is working with external consultants to provide co-ordination and guidance to HAECO on millennium date change issues.

As at 30th June 1999, HAECO had incurred total capital expenditure of HK$1.2 million and had expensed through profit and loss a total of HK$13.0 million in relation to the millennium date change project in order to achieve compliance on that date. Of these amounts, respectively HK$0.1 million and HK$5.1 million related to expenditure in the six month period ended 30th June 1999. No further capital expenditure on the project has been committed or is anticipated. However ongoing testing and monitoring costs which will be expensed through profit and loss will continue to be incurred and are estimated at a further HK$5.0 million.

CHAIRMAN'S STATEMENT

Results

The Company's profit attributable to shareholders for the first half of 1999 was HK$63.2 million, a decrease of 55.0% from that for the same period in 1998. The number of aircraft movements handled by the Company's line maintenance operation was 26.6% lower, as increased competition following the Company's move to the Hong Kong International Airport at Chek Lap Kok contributed to a substantial decline in revenues and margins. Disruption to the scheduled services of Cathay Pacific Airways in June, a consequence of an industrial dispute within the airline, also had an adverse impact. Base maintenance revenues improved slightly, with the Company's hangar facilities being well utilised. Net finance income for the first six months of the year was below that for the first half of 1998 as cash surpluses reduced upon completion of the Company's new facilities at Chek Lap Kok and Tseung Kwan O. Results of jointly controlled companies were at a similar level, with an improved contribution from Taikoo (Xiamen) Aircraft Engineering Company Limited (TAECO) offsetting a reduced profit in Hong Kong Aero Engine Services Limited (HAESL).

Your directors have declared an interim dividend of HK$0.14 per share, a decrease of 36.4% from that declared in 1998.

Operations

The Company, either directly or through its jointly-controlled company in Xiamen, TAECO, has comprehensive maintenance contracts covering the fleets of Boeing and Airbus aircraft operated by Cathay Pacific Airways, Dragonair and Air Hong Kong. These contracts cover the provision of line maintenance and hangar-based maintenance as well as the overhaul of certain components.

In line maintenance at Hong Kong International Airport the Company maintains a strong competitive position. The volume of airframe maintenance activity at the Company's hangar facility was high. In addition to work carried out for Hong Kong based airlines, maintenance packages of varying size were completed on aircraft for Northwest Airlines, Evergreen International Airlines, American Trans Air, Air France, Polar Air Cargo, Tradewinds, Saudi Arabian Airlines, American International Airways, Air Macau and Transasia.

TAECO has continued to be busy and in April opened a second hangar capable of fully enclosing two Boeing 747 aircraft, effectively doubling the company's airframe heavy maintenance capacity. TAECO reported improved results in the period, completing significant work packages on aircraft for Cathay Pacific Airways, Air Hong Kong, Japan Air Lines, Singapore Airlines, All Nippon Airways and Air New Zealand.

HAESL reported lower profits as the volume of work from Cathay Pacific Airways reduced in consequence of the airline's decision to dispose of certain older Boeing 747 aircraft. In March HAESL announced the formation of Singapore Aero Engine Services Pte. Limited, a joint venture with Rolls-Royce plc and Singapore Airlines Engineering in which it will have a 20% stake. The joint-venture company will establish a Trent engine overhaul facility in Singapore complementing the Hong Kong capabilities of HAESL.

Prospects

The recent expansion of airframe maintenance capacity at TAECO is evidence of the Company's intention to continue to seek opportunities to further develop its network of maintenance, repair and overhaul joint ventures. However, within Hong Kong it is probable that the difficult market conditions which the Company's line maintenance business has encountered in the last twelve months will persist, and that there will be little scope for revenue or margin enhancement for some time. The balance of the year will be tough.

D M Turnbull
Chairman

Hong Kong, 10th August 1999

For further information, please contact:

Mr. Andy Herman		2840 8092
Mrs. Maisie Shu Wah		2840 8097

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