Air China was established and started operations on 1 July 1988. Formerly the Beijing-based international carrier division of Civil Aviation Administration of China (CAAC), it was renamed in 1988, when the government decided to split the operating divisions of CAAC into separate airlines, each with its own name. Further deregulation of the aviation business took place in 1994, enabling foreign investment in airports and facilitating the import of aircraft built outside mainland China. By 1996 the country had 108 airports with scheduled airline services and around 30 different airlines. On 28 October 2002, Air China consolidated with China National Aviation Corporation and China Southwest Airlines.

Air China's Airbus A340 taking off from Beijing Capital International Airport (Dec 2004)During 2004 as part of a consolidation of the Chinese aviation industry Air China absorbed Zhejiang Airlines (a subsidiary of CNAC). On 15 December 2004 the company listed its shares on the Hong Kong and London Stock Exchanges. Air China has shareholdings in Air China Cargo (51%), Air Macau (51%) and also holds majority shares of Shandong Airlines.

In March 2005, Air China was in talks with Swire Group, the largest shareholder of Cathay Pacific, for merger talks with Air China acquiring Cathay Pacific, and Cathay Pacific acquiring a majority stake of Dragonair. In return, the Swire Group would become the largest individual shareholder of Air China's parent company. Both airlines subsequently announced that the airlines will not merge completely in the foreseeable future, and Swire expressed its commitment in remaining as the largest shareholder of Cathay Pacific. It was also announced that Air China would cooperate with Cathay Pacific by codesharing flights in the late 2005, and would partner with Asia Miles in the second-half of 2005.

As of January 2005, Air China is owned by China National Aviation Holding Company (CNAH)(69%), public floatation (21%) and Cathay Pacific (10%). On May 22, 2006, Air China signed an agreement with Lufthansa and was officially invited to join Star Alliance, a rival airline alliance of Oneworld of which Cathay Pacific is a member. A few days later on June 9, 2006, a joint announcement revealed a new shareholding structure in which Air China will acquire a 17.5% stake in Cathay Pacific, while the latter will own 20% of the former.