As compared with the first half of 1999, maintenance expenses increased 17.8% to RMB710 million, of which aircraft maintenance and repair charges increased by 23.3%. The increase was primarily attributable to the continued expansion in the flight operations and air fleet.

As compared with the same period last year, aircraft and traffic servicing expenses increased 10.5% to RMB995 million, mainly due to the increase in flights.

Promotion and sales expenses increased 14.9% to RMB603 million as compared with the same period last year. The increase was mainly attributable to a rise in agency commission expense resulting from the increase in traffic revenue as well as the severe competition in the domestic passenger market.

As compared with the same period last year, depreciation and amortisation expenses slightly increased 2.0% to RMB963 million, primarily reflecting the effect of aircraft additions in 1999.

Profit on sale of fixed assets amounted to RMB184 million in the review period. Pursuant to certain sale and leaseback arrangements entered into in March 2000, the Group sold two Boeing 757-200 aircraft to an independent third party and then entered into operating leases with such party to lease back the two aircraft for a period of seven years beginning March 2000.

In the review period, the Group recognised a profit of RMB 187 million, being the excess of the sale proceeds which approximate the aircraft's fair value on the date of disposal, over the aircraft's net book value and related disposal costs.

As compared with the same period last year, interest expense decreased by 8.1% to RMB542 million in the review period, reflecting primarily the scheduled debt repayments.

Net exchange gains amounted to RMB106 million in the review period, reflecting primarily the effect of the weakened Japanese Yen, which resulted in translation gains on the Group's Japanese Yen debts. Most of these gains were unrealised as at 30 June, 2000.

As a result of the aforementioned factors, for the six months ended 30 June, 2000, the Group's net profit attributable to shareholders increased 46.1% to RMB348 million as compared with the same period last year.

Recent Economic Developments

During the period, economies in Asia have stablised. In addition, the PRC economy continued to show steady improvement, leading to an increase in demand for aviation services. The PRC Government continued to pursue its policies to ensure orderly market competition and to streamline the structure of the industry through merger and consolidation.

Recently, the CAAC made a policy pronouncement regarding consolidation of domestic airlines with the three major groups, the Southern Airlines (Group) (the "SA Group"), Air China Group, and the China Eastern Air Group, as the focus of the restructuring. The principle of the CAAC policy is to restructure on a voluntary basis based on government directives in order to take advantage of the economies of scale resulting from mergers and consolidation. Along with its prudent financial management principles, and on a voluntary basis, the Group intends to positively explore the opportunities in the upcoming mergers and restructuring of the domestic airlines.

The Group expects that implementation of the CAAC policy will take a period of time and may result in an increase of financial commitments and short term operating risks. Nevertheless, the Group believes that the implementation of the above policy will in the long term help to raise the operating efficiency of the PRC aviation industry, thereby maximizing the Group's economies of scale as well as increasing the market share of the Group.

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