Air China : ANNOUNCEMENT PROPOSED REVISION OF EXISTING ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTION

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

(a joint stock limited company incorporated in the People's Republic of China with limited liability)

(Stock Code: 00753)

ANNOUNCEMENT

PROPOSED REVISION OF EXISTING ANNUAL CAPS FOR

CONTINUING CONNECTED TRANSACTION

PROPOSED REVISION OF EXISTING ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTION

Reference is made to the announcement of the Company dated 30 October 2019 and the circular of the Company dated 4 November 2019 in relation to, among other things, the New ACC Framework Agreement entered into between the Company and Air China Cargo on 30 October 2019 in respect of the ACC Transactions.

On 10 December 2021, the Board has resolved to revise the annual caps applicable to contracting operation income of the Bellyhold Space Business payable by ACC Group to the Group under the New ACC Framework Agreement for the two years ending 31 December 2022. Save for the revision of the aforesaid existing annual caps for the two years ending 31 December 2021 and 2022, all other terms and conditions as well as applicable annual caps of other ACC Transactions under the New ACC Framework Agreement remain unchanged.

HONG KONG LISTING RULES IMPLICATIONS

As the highest applicable percentage ratio in respect of the Revised Annual Caps applicable to contracting operation income of the Bellyhold Space Business payable by ACC Group to the Group under the New ACC Framework Agreement is, on an annual basis, higher than 5%, such transaction is therefore subject to the announcement, annual review, circular (including advice of independent financial adviser) and the Independent Shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules.

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GENERAL

An Independent Board Committee comprising all the independent non-executive Directors has been formed to advise the Independent Shareholders on the Revised Annual Caps. BaoQiao Partners has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders on the Revised Annual Caps.

A circular containing, among other things, details of the Revised Annual Caps will be despatched to the Shareholders on or before 14 December 2021.

1. BACKGROUND
   Reference is made to the announcement of the Company dated 30 October 2019 and the circular of the Company dated 4 November 2019 in relation to, among other things, the New ACC Framework Agreement entered into between the Company and Air China Cargo on 30 October 2019 in respect of the ACC Transactions.
   On 30 October 2019, the Company, among other things, entered into the New ACC Framework Agreement with Air China Cargo in respect of the ACC transactions. The New ACC Framework Agreement and the relevant annual caps for the three years ending 31 December 2022 were approved by the Independent Shareholders at the extraordinary general meeting of the Company held on 19 December 2019.
   The ACC Transactions contemplated under the New ACC Framework Agreement include the Bellyhold Space Business contracting operation and ground support services and other services. In respect of the Bellyhold Space Business contracting operation, the Company has contracted the operation of all Bellyhold Space Business to Air China Cargo. Air China Cargo shall undertake the overall responsibilities for transporting the cargos as the contracting carrier to the consignors with respect to the cargos which are transported through the bellyhold spaces of passenger aircraft.
   Pricing policies for Bellyhold Space Business contracting operation
   As disclosed in the circular of the Company dated 4 November 2019, the consideration of any specific ACC Transactions shall be determined after arm's length negotiations between the Group and ACC Group and on normal commercial terms, and shall be determined in accordance with the pricing policies on a case-by-case basis. In respect of the Bellyhold Space Business contracting operation, the pricing policies are as follows:

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During the contracting period, Air China Cargo will regularly pay the Company the contracting operation income in respect of the Bellyhold Space Business in each year. The parties shall determine the Benchmark Income (excluding tax) of the Bellyhold Space Business contracting operation after arm's length negotiations with reference to the Company's fleet capacity, overall load factor and yield level. The specific formula is as follows:

Benchmark Income (excluding tax) = ATK (available tonne kilometres) × OLF (overall load factor) × yield level per kilometre

The ATK shall be determined based on the Company's fleet capacity for the current financial year and its plan of introduction and phase-out of passenger aircraft for the next year. The OLF and the yield level per kilometre shall be determined based on the historical data of the respective air routes of the Company.

Considering possible market fluctuations, the parties agreed to jointly appoint a qualified accounting firm to conduct a special audit on the actual income (excluding tax) of Air China Cargo for the operation of the Bellyhold Space Business of the previous financial year within three months after the end of each financial year. Where there is any difference between the Benchmark Income (excluding tax) and the actual income (excluding tax), the excess income or risk incurred shall be allocated between Air China Cargo and the Company at the proportion of 51% and 49%, respectively, and paid accordingly.

1. REVISED ANNUAL CAPS AND BASIS OF DETERMINATION
   After taking into account the actual transaction amount for the nine months ended 30 September 2021, the estimated transaction amount for the year ending 31 December 2021 as well as the expected business needs of the Group for the remaining months of 2021 and the year 2022, the Board anticipates that the Existing Annual Caps applicable to contracting operation income of the Bellyhold Space Business payable by ACC Group to the Group under the New ACC Framework Agreement may not be sufficient to meet the needs of the Group. As such, the Board has resolved to revise the annual caps applicable to contracting operation income of the Bellyhold Space Business payable by ACC Group to the Group under the New ACC Framework Agreement for the two years ending 31 December 2022. Save for the revision of the aforesaid existing annual caps for the two years ending 31 December 2021 and 2022, all other terms and conditions as well as applicable annual caps of other ACC Transactions under the New ACC Framework Agreement remain unchanged. Please refer to the announcement of the Company dated 30 October 2019 and the circular of the Company dated 4 November 2019 for details.

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Historical transaction amounts and the Existing Annual Caps
	For the	For the	For the
	year ended	year ending	year ending
	31 December 2020	31 December 2021	31 December 2022
		(in millions of RMB)
Historical transaction amounts	7,685	6,689	-
		(historical transaction
		amount for the
		nine months ended
		30 September 2021)
Annual Caps approved by the
Independent Shareholders at the
extraordinary general meeting
of the Company held on 19
December 2019 in respect of
the contracting operation
income of the Bellyhold Space
Business under the New ACC
Framework Agreement	8,000	9,600	11,600
Revised Annual Caps
		For the	For the
		year ending 31	year ending 31
		December 2021	December 2022
		(in millions of RMB)
Existing Annual Cap		9,600	11,600
Revised Annual CapNote		11,000	14,000

Note: as disclosed above, the ACC Transactions contemplated under the New ACC Framework Agreement include the Bellyhold Space Business contracting operation and ground support services and other services. The annual caps for the amounts payable by ACC Group to the Group in terms of ground support services and other services remain unchanged. The abovementioned proposed revision of the Existing Annual Caps for the two years ending 31 December 2021 and 2022 will result in the annual caps of the total amounts payable by ACC Group to the Group under the New ACC Framework Agreement for the two years ending 31 December 2021 and 2022 being revised from RMB10,600 million and RMB12,700 million to RMB12,000 million and RMB15,100 million, respectively.

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Basis for the proposed Revised Annual Caps

The Revised Annual Caps were determined based on arm's length negotiations between the Company and Air China Cargo with reference to, among others, the following factors:

1. the historical transaction amounts: for the year ended 31 December 2020 and from 1 January 2021 to 30 September 2021, the actual amounts paid by ACC Group to the Group in terms of contracting operation income of the Bellyhold Space Business were approximately RMB7,685 million and RMB6,689 million, respectively, representing approximately 96.1% and 69.7% of the existing annual cap for the year ended 31 December 2020 and ending 31 December 2021, respectively;
2. at the beginning of 2020, the pandemic struck, and the continuing extraordinary impact of the global pandemic led to a significant decline in the overall air transport capacity and reduction in the Company's investment of international passenger flights, and the transport capacity of bellyhold space of passenger aircraft in the aviation industry had been limited. The Company has contracted the operation of the Bellyhold Space Business to Air China Cargo, and Air China Cargo has adjusted the operation strategy of passenger aircraft cargo business so that the scope of the Bellyhold Space Business has been expanded to include "passenger aircraft converted for cargo operation" business, which has further increased the capacity input of unconventional passenger aircraft cargo business (mainly the "passenger aircraft converted for cargo operation"). For the years from 2021 to 2022, considering that the pandemic will continue which will lead to capacity constraints in neighboring countries, China will remain its strong export competitive advantage and substitution effect. The supply chain congestion across the shipping industry in 2021 had drove lack of capacity in the shipping industry, which is expected to lead rise in air cargo demand and the freight rate of air cargo will continue to rise significantly compared to pre-pandemic level. In addition, the transportation of medical supplies and vaccines will further increase the demand in the air cargo market. As such, Air China Cargo will actively seize the opportunities in the air cargo market and strive to improve the operating efficiency of passenger aircraft bellyhold space cargo business, which anticipates an increase in the transaction amount of the Bellyhold Space Business contracting operation contemplated under the New ACC Framework Agreement;
3. based on the actual amount paid by ACC Group to the Group in terms of the contracting operation income of the Bellyhold Space Business for the year ended 31 December 2020 and for the nine months ended 30 September 2021, the Company estimates that the transaction amount in terms of the contracting operation income of the Bellyhold Space Business for 2021 will amount to approximately RMB9,723 million after the allocation is made for the excess income. As such, by comparing the estimated transaction amount for the year 2021 with the actual amount paid by ACC Group to the Group in terms of the contracting operation income of the Bellyhold Space Business for the year 2020, a 27% growth rate has been reached. By taking into account a 10% buffer, it is expected that the

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