Cathay Pacific Airways Limited

FOR IMMEDIATE RELEASE

9th June 2006

The boards of Air China, Cathay Pacific, China National Aviation Company (CNAC), CITIC Pacific and Swire Pacific today announced an agreement to realign their shareholding structures and create one of the world's strongest airline groupings. These far-reaching changes will also deliver significant benefits for the Chinese aviation industry and its customers, and strengthen the position of Beijing and Hong Kong as key hubs in the region.

The four most significant results of the restructuring are that: (i) Air China will make a strategic investment in Cathay Pacific; (ii) Cathay Pacific will increase its strategic investment in Air China; (iii) Hong Kong Dragon Airlines (Dragonair) will become a wholly owned subsidiary of Cathay Pacific; and (iv) Air China and Cathay Pacific will enter into an Operating Agreement that will include implementing reciprocal sales representation where Air China will be exclusively responsible for Cathay Pacific's passenger sales in Mainland China while Cathay will be exclusively responsible for Air China's passenger sales in Hong Kong, Macau and Taiwan; the extension of code share arrangements between Hong Kong and Mainland China; the implementation of joint venture routes, that will operate under profit sharing arrangements, between Hong Kong and key cities in China; cargo joint venture in Shanghai; maintaining Dragonair as a principal airline for at least six years; and the strengthening of business cooperation in a number of other areas.

To achieve these objectives, the boards of the five companies have reached agreement to undertake the following actions:

• Air China will acquire a 10.16% shareholding in Cathay Pacific from CITIC Pacific and Swire Pacific, at HK$13.50 per share, representing a total consideration of approximately HK$5.4 billion. In aggregate, Air China and its subsidiary, CNAC, will own 17.50% of Cathay Pacific.

• Cathay Pacific has agreed to subscribe in cash for 1.179 billion new Air China H-shares at HK$3.45 per share, increasing its shareholding in Air China from 10% to 20%, at a total cost of approximately HK$4.1 billion.

• Cathay Pacific will acquire the remaining 82.21% shareholding in Dragonair that it does not already own from CNAC (43.29%), CITIC Pacific (28.50%) and Swire Pacific (7.71%) and others (2.71%) for a consideration of HK$8.221 billion, making it a wholly owned subsidiary. This will be settled by a combination of the issue of 548 million new Cathay Pacific shares at HK$13.50 each and cash.

• Swire Pacific and CITIC Pacific will further reduce their shareholdings in Cathay Pacific to 40.00% and 17.50%, respectively.

Swire Pacific will remain the principal shareholder in the enlarged Cathay Pacific group. Dragonair will continue to operate under its own brand, but under Cathay Pacific management. The agreement is subject to appropriate shareholder and regulatory approvals.

The stronger shareholding ties between Air China and Cathay Pacific and the Operating Agreement will assist both companies in realising the aims originally agreed in October 2004 prior to Air China's initial public offering in Hong Kong in December 2004. The companies believe that these changes will bring significant benefits to both companies and offer opportunities for a closer operational partnership.

Air China: Chairman Li Jiaxiang said "This is an exceptional deal for Air China both in terms of valuation and strategy. Air China, Cathay Pacific and the Chinese aviation industry have much to gain, and our long term position, both in the domestic and international markets, will benefit significantly from the Operating Agreement between Cathay Pacific and Air China."

Cathay Pacific: Chief Executive Philip Chen said: "Cathay Pacific taking full control of Dragonair and strengthening its partnership with Air China will reinforce Hong Kong's role as the premier aviation hub in the Asia-Pacific region and create one of the world's strongest airline groupings, here in Hong Kong. It will improve flight connectivity and route management, mean more destinations and greater travel choices for passengers and strengthen both Hong Kong and Beijing as major aviation hubs."

CNAC: Chairman Kong Dong said: "This is a great deal for CNAC, in terms of value, and at the same time it will maximise Dragonair's potential, and ensure its future growth and success."

CITIC Pacific: Chairman Larry Yung said: "The transaction provides an attractive exit price for our shares in Dragonair. CITIC Pacific will sell shares in Cathay Pacific at above the most recent closing market price and will retain a 17.50% stake to share in the benefits of the combination of Cathay Pacific and Dragonair and operational cooperation with Air China. We intend to hold the Cathay Pacific shares as a long term investment."

Introduction

Cathay Pacific, Swire Pacific, Air China, CNAC and CITIC Pacific have reached an agreement to change the shareholder structure of Cathay Pacific, Dragonair and Air China. The new structure will offer significant benefits for airline customers and for Hong Kong and Beijing as gateways to China.

Under the agreement, which is subject to shareholder approvals, Dragonair will be wholly owned by Cathay Pacific. Air China will acquire a 17.5% stake in Cathay Pacific, and Cathay Pacific will double its shareholding in Air China to 20%.

Swire will remain the principal, long-term shareholder in Cathay Pacific. Dragonair will continue to operate under its own brand, but under Cathay Pacific management.

Cathay Pacific and Air China will continue to develop closer cooperation on many fronts, including establishing an air cargo joint venture in Shanghai.

Benefits across the board

The agreement will produce far-reaching benefits across the board for customers, shareholders, employees and the Hong Kong economy. It will:

• Enable Cathay Pacific to connect its international network with Dragonair's short-haul services to Mainland China and secondary regional destinations.
• Produce efficiencies and operational streamlining that will result in a wider network for the two airlines, more destinations, wider choice and greater convenience for customers.
• Reinforce Hong Kong's position as the premier aviation hub in the Asia Pacific region and provide a platform for the growth and expansion for Hong Kong's home carriers into the Mainland and the region.
• Further the development of Beijing Capital International Airport and Hong Kong International Airport as gateways to and hubs for Mainland China by enabling Air China and Cathay Pacific to increase business and operational cooperation, increase traffic and load factors and enhance flight connectivity between all three airlines.
• Deliver more jobs and career opportunities in the aviation sector and related industries in Hong Kong over a long-term period of growth.
• Give Cathay Pacific shareholders a stake in a larger, growth-driven company with a formidable international, regional and Mainland network.
• Create one of the world's strongest airline groupings - Cathay Pacific, Dragonair and Air China.

Background

Cathay Pacific and Dragonair are natural partners. Cathay Pacific part-owned and managed Dragonair between 1990 and 1996 before its current ownership structure came into effect. Economic and aviation circumstances have since changed dramatically, particularly in Mainland China, and so too has the world in which Cathay Pacific and Dragonair and Hong Kong must now compete.

Hong Kong's future prosperity hinges to a large extent on its development as a gateway to the Chinese Mainland and as a hub for the movement of people and goods around the globe. As Hong Kong's home carrier, Cathay Pacific has a shared interest in and commitment to the welfare of Hong Kong and its people.

Yet neither Cathay Pacific nor Dragonair separately can serve all Hong Kong's needs adequately. Dragonair lacks an international network. Cathay Pacific has a comprehensive international network hub is not yet able to offer the access consumers want to the Chinese Mainland, the world's fastest growing economy and Hong Kong's natural hinterland.

Given the urgency of competition Hong Kong faces from other regional hubs, there is not enough time for either carrier to evolve organically in order to fill these gaps. This agreement meets this pressing need.

Cathay Pacific and Dragonair are, in effect, like two separated halves of a whole: their networks and capabilities complement each other. Reunited, the whole will be greater than the sum of the parts. Hong Kong, the Hong Kong aviation hub, consumers, staff and shareholders will enjoy the benefits.

The agreement

1. Dragonair will become a wholly owned subsidiary of Cathay Pacific
2. Air China will become a substantial shareholder of Cathay Pacific and
3. Cathay Pacific will increase its shareholding in Air China to 20%

1. Dragonair will become the wholly owned subsidiary of Cathay Pacific

• Cathay Pacific has offered to acquire the remaining 82.21% shareholding in Dragonair that it does not already own for HK$8.22 billion, turning it into a wholly owned subsidiary.
• The consideration for the Dragonair shares will be a combination of the issue of new Cathay Pacific shares at HK$13.50 each and cash.

2. Air China will become a substantial shareholder of Cathay Pacific

• Air China will acquire Cathay Pacific shares from Swire Pacific and CITIC Pacific at HK$13.50 each. Air China will therefore become a shareholder of Cathay Pacific with a 10.16% equity interest for a total consideration of HK$5.39 billion. In aggregate, Air China and its subsidiary CNAC Limited will own an aggregate 17.5% of Cathay Pacific.
• Both Swire and CITIC have also undertaken to further reduce their respective shareholding in Cathay Pacific to 40% and 17.5% within 12 months of the completion of the agreement by selling Cathay Pacific shares in the open market.

3. Cathay Pacific will increase its shareholding in Air China

• Cathay Pacific has agreed to subscribe in cash for 1,179 million Air China H shares at HK$3.45 per each Air China H share, increasing its shareholding in Air China to 20% from 10% at a total cost of HK$4.1 billion.
• Reflecting its confidence in the benefits and synergies from acquiring Dragonair, Cathay Pacific has agreed to pay a special dividend of HK$0.32 per share upon completion of the transaction.

What it means for Hong Kong and the hub

The aviation industry is a major contributor to the Hong Kong economy, generating close to 10% of the SAR's GDP in 2005, according to the Aviation Policy and Research Centre of the Chinese University of Hong Kong. The Cathay Pacific Group is one of Hong Kong's largest employers, with a payroll of more than 23,000 people. This agreement means that the Hong Kong economy as a whole and the aviation industry in particular will benefit from the growth it represents.

Hub strength comes from flight frequency, connectivity and the ability of airlines to offer competitive fares. Cathay Pacific and Dragonair under single ownership and working towards a common management goal - to draw more traffic to and through Hong Kong from the Mainland and the rest of the world - would deliver on all three counts.

Close cooperation between Cathay Pacific and Dragonair has been difficult because Dragonair has not been able to offer competitive fares to our connecting passengers.

Customers flying from Sydney to Shanghai, say, have been offered more attractive prices on single-carrier services connecting in Bangkok and Singapore than Cathay Pacific has been able to offer in collaboration with Dragonair. Hong Kong is the loser as Mainland traffic flows through competing regional hubs.

Seamless operations between Cathay Pacific and Dragonair - which can only be achieved through common ownership - would lead to the coordination of services and schedules, create faster and more frequent connections and strengthen Hong Kong as a hub.

Cathay Pacific's enhanced partnership with Air China will provide access to an even wider national network within China. The national carrier's interest in the success of Cathay Pacific and Dragonair also signals a commitment to support the future growth of Hong Kong as a logistics centre.

A stronger hub creates a virtuous circle for consumers: increased traffic leads to more services, which leads to increased traffic and more choices and so on.

What it means for customers

Cathay Pacific and Dragonair's combined networks and capabilities have the potential to deliver more destinations, greater travel choice, enhanced convenience and, therefore, better value for its customers.

The acquisition will be a boost for the consumer. Hong Kong will benefit from an aviation industry better able to compete in a global marketplace. Hong Kong people will share the benefits of such growth.

Greater international traffic flows through Hong Kong unlocked by the deal will enable Dragonair to operate with greater frequency to cities it now serves and to mount new services to destinations it does not - creating more competition and choice.

Hong Kong has a population of only 7 million people. With such a small domestic market, many of the flights now available to Hong Kong people would not exist were it not for the international traffic funneled through the Hong Kong hub. About half of Cathay Pacific's passengers transit Hong Kong.

Cathay Pacific would not, for example, be able to operate daily to Bali and Colombo without the support of passenger and cargo traffic drawn from across its network. The fare on a less frequent service sustained only by Hong Kong travelers would be higher as well.

With great volumes of traffic fed from the Cathay Pacific network, infrequent and even daily services operated by Dragonair would be improved and new routes opened. Similarly, Cathay Pacific would be able to mount more services and offer greater customer value with support from Dragonair's Mainland network.

The two airlines' fleet structures will help such growth. With a fleet comprised entirely of large aircraft, Cathay Pacific cannot operate economically to smaller Mainland and regional cities. Dragonair with its fleet of small, short-range aircraft can. Yet it needs the support of international traffic from Cathay Pacific to profitably do so.

What it means for shareholders

Cathay Pacific shareholders will be owners of a much larger and stronger company, better placed to compete and maintain profitable future growth by capturing the complementary brands, network and operational attributes of Hong Kong's two largest airlines.

Cathay Pacific's ownership of Dragonair will create a company able to fully exploit the dual strengths of both airlines: Cathay Pacific as a full-service global network carrier and Dragonair as regional airline with predominantly mid-size short-haul fleet and established network focused on the Chinese Mainland and some secondary regional destinations.

The seamless integration of both airlines' operations will generate hitherto unobtainable opportunities for Cathay Pacific to increase efficiency, create new and stronger streams of revenue, expand both its network and market share and further strengthen Hong Kong's strategic position as a global aviation hub and gateway to the Chinese Mainland.

What it means for staff

Cathay Pacific, over many years, has developed an impressive and profitable passenger and cargo network throughout Asia and to Europe, North America, Australasia, the Middle East and South Africa. However, the glaring gap in this network is the company's very hinterland, Mainland China. It was intended some years ago that Dragonair would fill this gap, but for several reasons this plan has not worked in practice. The agreement now changes all this.

Common ownership will create opportunities for growth and expansion, thus creating more job and career opportunities over the longer term. The enlarged company will, of course, maintain the rigorous standards of productivity, cost management and efficiencies that have underpinned Cathay Pacific's remarkable success in the past.

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