Change in Chinese Civil Aircraft Market Demand Aircraft

Change in Chinese Civil Aircraft Market Demand Aircraft Selection Air China Ltd. 3 rd 11, 2008 1

Content A. Comments on Chinese Civil Aircraft Demand B. Aircraft Selection 2

A. Comments on Chinese Civil Aircraft Demand 3

Strong economic growth is the driving force of aircraft demand • China’s GDP is keeping rapid growth during the past 30 years Øcompound growth rate in 26 years： 10. 09% Øcompound growth rate in 10 years： 9. 42% Øcompound growth rate in 5 years： 10. 6% 4

Aviation market became mature with economic development. The average annual growth rate of aviation passengers is 16. 4% from 2000 to 2007 • The number of aviation passengers from 2000 -2007 Unit：million people CAGR: 16. 4% Source： CAAC 5

Aircraft numbers doubled from 2000 to 2007 with average annual growth rate 11. 4% from 2000 to 2007 • The number of transport aircraft from 2000 -2007 Unit: aircraft CAGR: 11. 6% Source： CAAC 6

Passenger and aircraft demand will maintain growth momentum in the long run • Historical data showed that passengers will keep rising – From 1986 to 2007, compound growth rate for international and domestic capacity are 16. 6% and 16. 4% respectively – The growth rate of Chinese aviation passengers is 1. 7 times of GDP – If average GDP growth rate to 2015 is supposed to reach 8 -9%, passengers will keep increasing by 13 -15% • Aircraft demand will keep strong – Chinese civil aircraft Increased from 527 in 2000 to 1134 in 2007 – Main aircraft manufacturers give a positive look on Chinese future aircraft market 7

Boeing predicted that over 29400 new aircrafts worth 3. 2 trillion US dollars will be delivered in the future 20 years to global airlines, in which Asia Pacific areas accounted for 31%. Source：Boeing website 8

Airbus predicted that 24262 new aircrafts worth 2. 8 trillion US dollars will be delivered in the future 20 years to global airlines, in which Asia Pacific areas accounted for 31%. Source：Airbus website 9

In the short term, aviation market demand witnessed a slowdown due to the effect of global economy. Airlines need to adjust fleet scale and development speed • The year of 2007 marked peak of last aviation market growth, from 2008, airline industry entered into a “winter” period Profit of global airline industry (Unit: 100 million dollar) Source: IATA Growth rate of aviation passenger (%) 10

According to the latest IATA statistic, global passenger growth rate of June 2008 reached a record low since SARS 2003. The total loss of worldwide aviation industry amounted to 9. 3 billion US dollars Source: IATA Jun 08 VS Jun 07 RPK Increase rate ASK Increase rate Load factor(%) FTK Increase rate Africa -1. 5% -0. 8% 67. 6 -1. 9% -4. 7% Asia-Pacific 3. 2% 4. 9% 75. 8 -4. 8% -0. 9% Europe 2. 1% 4. 4% 77. 9 0. 7% 3. 5% Latin. American 12. 5% 10. 1% 73. 5 -12. 7% 8. 2% Middle-East 9. 6% 9. 8% 75. 5 12. 1% 11. 8% North America 4. 4% 6. 1% 83. 7 4. 0% 6. 6% All 3. 8% 5. 5% 77. 6 -0. 8% 3. 3% 11

Most carriers suffered a sharp fall, especially British airways which located in financial center London was hit most seriously • Operation outcome of several airlines during first part of 2008 BA（profit 2 Q 2008 before tax, Unit: 100 million pounds） -87. 6% Source: airline websites AF-KLM（net income 2 Q 2008， Unit： 100 million EUROs） -59. 4% CX（Profit Jan-Jun 2008, Unit： 100 million HK dollars） -125. 6% 12

Airlines need to get prepared for passing the cold winter. Utilization of fleet improved and demand for new aircraft expended • Carriers started to reduce aircraft scale but increase utilization • Airlines is speeding up elimination of outdated aircraft and lots of second-hand aircraft emerged from the market • Airlines eyes on more efficient new aircrafts • Industry crisis led to merge opportunities but the integration process is full of difficulties 13

Entering into 2008, domestic aviation market appeared fluctuations even slowdown. But aircraft numbers keep growing which led to a reduction of utilization and incompliance with market Number of civil aircrafts and passengers in 2008 Passenger turnover Unit：million people Aircraft utilization in 2008 Number of aircrafts 9. 4 9. 2 9. 1 9 8. 8 8. 9 8. 5 1 Source : CAAC 2 3 4 5 6 7 8 9 14

From structural perspective, increase of domestic aircraft mainly focused on mainline aircrafts Structure of transport aircrafts in 2000 Structure of transport aircrafts in 2007 Regional 7% Regional 13% Mainline 87% Source : CAAC Mainline 93% 15

Fierce competition led to excessive concentration of capacity in hub airport, where slot drives rapid growth of truck route aircraft • Airport passenger turnover（million people） First 23 airports account for 80% turnover Airports have reached or exceeded designed capacity The lack of slots became more obvious Most medium and small sized airports are not fully used and suffer from operation loss. 50 of them are less than 10 million people per year Source：CAAC 16

Civil aircraft development and composition need to be better matched with market demand. • The market need for low passenger volume is high, however this kind of need is now using the narrow body aircrafts to fulfill Routes by different PDEW Totally 1012 domestic routes >800 700 -800 28%，286 routes 600 -700 500 -600 400 -500 300 -400 200 -300 100 -200 72%，726 routes 0 -100 Source：CAAC 17

As the congestion of Top 20 airports, future passenger increase will emerge in medium and small sized airports. As a result, there will be diversified need for aircraft type Distribution of China airport flow put in 2007 Share of TOP 20 airports Source：CAAC Comments • From 1996 -2007, average increase rate of China airport turnover is 12% • The share of TOP 20’s reach the peak of 80. 06% in 2002， after that decreased every year. In 2007, the share is 76. 82% • By the end of 2010, 45 new built regional airports will be put into use, the share of Top 20 will decline further • As the congestion of Top 20 airports, future passenger increase will emerge in medium and small airports 18

B. Aircraft selection 19

Fleet planning and selection have a direct effect on other decisions and will be influenced by other planning Corporate strategy Network planning Business plan Fleet planning Infrastructure Financial planning 20

Fundamental point for aircraft selection is to match aircraft type with the market and network • By the end of 2007, CA had 220 aircraft, 212 passenger and 8 cargo. Average aircraft age is 7. 3. Average seat number is 177 • By the end of 2007, CA operated 127 destinations including 79 domestic and 46 international ones. • International routes covered 28 countries, 46 cities and 2 regional cities. Domestic routes reached 79 cities. 21

CA is more prudent in capacity arrangement and fleet increase. Aircraft utilization is more important than scale Passengers carried by domestic airlines from Jul, 07 -Jun, 08 ASK increase of CA、CZ and MU (2004 -2007) 10% Source：Bombardier market division 29% 30% 22

CA total aircraft number is expected to reach 270 by 2010, most of which are narrow-body aircrafts 23

In the future, CA fleet will still be aligned in compliance with market and corporate strategy • Long haul wide-body aircraft – mainly used in international route of hub airports and newly opened destinations • Middle and long haul wide-body aircraft – mainly used in domestic and around routes • Narrow-body aircraft – accounting for main part of fleet, flying domestic and around routes – mainly using existing aircrafts, keep an eye for next generation narrow-body aircraft • Regional aircraft – watching closely the development of regional aircraft 24

Request for future aircrafts Beyond traditional fly safety, future aircraft will be • environment friendly—lower noise and emission • customer friendly---comfortable cabin • airline friendly---reduce operating cost 25

Reduction of direct operating cost is the unchanged goal in aircraft selection • Economy slowdown, soaring fuel price and fierce competition bring higher challenge to airline cost control • To reduce airline cost, aircraft and engine manufactures are beginning new round of substitution • fuel efficiency – During the past 20 years, fuel burn decreased from 8 liter per 100 RPKs to 5; future aircrafts should have better fuel efficiency • reduction of maintenance cost – Development and application of new material 26

Starting from the wide-body aircraft, new round of technology substitution begins • Technology applied in A 380、A 350、B 787 will lead the future aircraft development • Similar technology trend appears both for Airbus and Boeing – Expand application of non-metal materials – Simplifying system design – Widely use of digital data and network – Aircraft health management and monitor (Airman/AHM) • Product development of wide-body aircraft – Product line of Airbus has already showed the trend of stable and complete, A 380 and A 350 will be main products – Boeing is adjusting its products and 787 will be the future development basis 27

Narrow-body and regional jets are seeking new development • Development of next generation narrow-body aircraft – New technologies in wide-body, such as new material and engine, will widely used in narrow-body. The target is to reduce overall cost by at least 10% • CSERIES——a game changer – – – – 15% better cash operating costs-20% fuel burn advantage Total life cycle cost improvement Operational flexibility Family of Aircraft with full commonality Wide-body comfort in a single aisle aircraft Mature 99% reliability at entry into service Environmentally focused-20 EPNd. B Margin to Stage IV • Development of new regional aircraft – Reduce cost by using new technology and new materials 28

Conclusion Remarks • Beneficial from the robust development of domestic economy, China’s civil aviation passenger and aircraft demand increased tremendously. • From the long-term prospective, China’s economy still keeps growth trend, driven from that, domestic passenger needs and aircraft market will maintain expanding. • While in the short-term, facing the fluctuation of world economy and shrink of aviation market, airlines need to adjust their fleet with the change. • In addition to guarantee safety, future aircraft should also be friendly to environment and passenger, and to reduce the operation cost of airline as best as it can. • There are full of opportunities and challenges in China aircrafts market. We believe that China aircraft industry will experience high development in the near future. • Wish our own-designed big aircraft project achieve great success! 29

Thank you! 30