Edgar Filing: CHINA EASTERN AIRLINES CORP LTD

Form 20-F

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 20-F

☐	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-14550

中国东方航空股份有限公司

(Exact Name of Registrant as Specified in Its Charter)


China Eastern Airlines Corporation Limited		The People’s Republic of China
(Translation of Registrant’s Name Into English)		(Jurisdiction of Incorporation or Organization)

Kong Gang San Road, Number 92

Shanghai, 200335

People’s Republic of China

Tel: (8621) 6268-6268

Fax: (8621) 6268-6116

(Address and Contact Details of the Board Secretariat’s Office)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on which Registered

American Depositary Shares

Ordinary H Shares, par value RMB1.00 per share

The New York Stock Exchange

The New York Stock Exchange*

*	Not for trading, but only in connection with the registration of American Depositary Shares. The Ordinary H Shares are also listed and traded on The Stock Exchange of Hong Kong Limited.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2017, 9,808,485,682 Ordinary Domestic Shares, par value RMB1.00 per share, were issued and outstanding, and 4,659,100,000 Ordinary H Shares par value RMB1.00 per share, were issued and outstanding. H Shares are Ordinary Shares of the Company listed on The Stock Exchange of Hong Kong Limited. Each American Depositary Share represents 50 Ordinary H Shares.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 .. Yes ☐ No ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer ☒		Accelerated Filer ☐		Non-Accelerated Filer ☐		Emerging Growth Company ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ☐

International Financial Reporting Standards as issued

by the International Accounting Standards Board ☒

Other

☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ☐ Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒


		Page No.
PART I

Item 1.	Identity of Directors, Senior Management and Advisers		4

Item 2.	Offer Statistics and Expected Timetable		4

Item 3.	Key Information		4

Item 4.	Information on the Company		20

Item 4A.	Unresolved Staff Comments		49

Item 5.	Operating and Financial Review and Prospects		49

Item 6.	Directors, Senior Management and Employees		73

Item 7.	Major Shareholders and Related Party Transactions		84

Item 8.	Financial Information		93

Item 9.	The Offer and Listing		95

Item 10.	Additional Information		96

Item 11.	Quantitative and Qualitative Disclosures about Market Risk		120

Item 12.	Description of Securities Other than Equity Securities		121

PART II

Item 13.	Defaults, Dividend Arrearages and Delinquencies		122

Item 14.	Material Modifications to the Rights of Security Holders and Use Of Proceeds		123

Item 15.	Controls and Procedures		123

Item 16A.	Audit Committee Financial Expert		124

Item 16B.	Code of Ethics		124

Item 16C.	Principal Accountant Fees and Services		124

Item 16D.	Exemptions from the Listing Standards for Audit Committees		124

Item 16E.	Purchase of Equity Securities by the Issuer and Affiliated Purchasers		125

Item 16F.	Changes in Registrant’s Certifying Accountant		125

Item 16G.	Corporate Governance		126

Item 16H.	Mine Safety Disclosures		127

PART III

Item 17.	Financial Statements		128

Item 18.	Financial Statements		128

Item 19.	Exhibits		129

SUPPLEMENTAL INFORMATION AND EXCHANGE RATES

In this Annual Report, unless otherwise specified, the term “dollars”, “U.S. dollars” or “US$” refers to United States dollars, the lawful currency of the United States of America, or the United States or the U.S.; the term “Renminbi” or “RMB” refers to Renminbi, the lawful currency of The People’s Republic of China, or China or the PRC; the term “Hong Kong dollars” or “HK$” refers to Hong Kong dollars, the lawful currency of the Hong Kong Special Administrative Region of China, or Hong Kong; the term “SGD” refers to Singapore dollars, the lawful currency of the Republic of Singapore; the term “JPY” refers to Japan Yen, the lawful currency of Japan; the term “EUR” refers to EURO, the lawful currency of EMU member countries and the term “KRW” refers to Korea Won, the lawful currency of the Republic of Korea. Any discrepancies in the tables included herein between the amounts listed and the totals are due to rounding.

In this Annual Report, the term “we”, “us”, “our”, “our/the Company”, or “our Group” refers to China Eastern Airlines Corporation Limited, a joint stock limited company incorporated under the laws of the PRC on April 14, 1995, and our subsidiaries, or, in respect of references to any time prior to the incorporation of China Eastern Airlines Corporation Limited, the core airline business carried on by its predecessor, China Eastern Airlines, which was assumed by China Eastern Airlines Corporation Limited pursuant to the restructuring described in this Annual Report. The term “CEA Holding” refers to our parent, China Eastern Air Holding Company, which was established on October 11, 2002 as a result of the merger of our former controlling shareholder, Eastern Air Group Company, or EA Group, with China Northwest Airlines Company and Yunnan Airlines Company.

For the purpose of this Annual Report, references to The People’s Republic of China, China and the PRC do not include Hong Kong, Taiwan, or the Macau Special Administrative Region of China, or Macau.

See “Item 3. Key Information — Exchange Rate Information” for details of exchange rates.

CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS

Certain information contained in this Annual Report may be deemed to constitute forward-looking statements. These forward-looking statements include, without limitation, statements relating to:

•

the impact of changes in the policies of the Civil Aviation Administration of China, or the CAAC, regarding route rights;

•

the impact of the CAAC policies regarding the restructuring of the airline industry in China;

•

the impact of macroeconomic fluctuations (including the fluctuations of oil prices, and interest and exchange rates);

•

certain statements with respect to trends in prices, volumes, operations, margins, risk management, overall market trends and exchange rates;

•

our fleet development plans, including, without limitation, related financing, schedule, intended use and planned disposition;

•

our expansion plan of the cargo operations;

•

our expansion plans, including possible acquisition of other airlines;

•

our marketing plans, including the establishment of additional sales offices;

•

our plan to add new pilots; and

•

the impact of unusual events on our business and operations.

The words or phrases “aim”, “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “going forward”, “intend”, “may”, “ought to”, “plan”, “potential”, “predict”, “project”, “seek”, “should”, “will”, “would”, and similar expressions or the negatives thereof, as they relate to our Company or its management, are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are based on current plans and estimates, and speak only as of the date they are made. We undertake no obligation to update or revise any forward-looking statement in light of new information, future events or otherwise. Forward-looking statements are, by their nature, subject to inherent risks and uncertainties, some of which are beyond our control, and are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. We caution you that a number of important factors could cause actual outcomes to differ, or to differ materially, from those expressed in any forward-looking statement, including, without limitation:

•

changes in political, economic, legal and social conditions in China;

•

any changes in the regulatory policies of the CAAC;

•

the development of the high-speed rail network in the PRC;

•

fluctuations of interest rates and foreign exchange rates;

•

the availability of qualified flight personnel and airport facilities;

•

the effects of competition on the demand for and price of our services;

•

the availability and cost of aviation fuel, including but not limited to pricing trends and risks associated with fuel hedging;

•

any significant depreciation of Renminbi or Hong Kong dollars against U.S. dollars, Japanese yen or Euro, the currencies in which the majority of our borrowings are denominated;

•

our ability to obtain adequate financing, including any required external debt and acceptable bank guarantees; and

•

general economic conditions in markets where we operate.

GLOSSARY OF TECHNICAL TERMS


Capacity measurements

ATK (available tonne-kilometers)		the number of tonnes of capacity available for the carriage of revenue load (passengers and cargo) multiplied by the distance flown

ASK (available seat kilometers)		the number of seats made available for sale multiplied by the distance flown

AFTK (available freight tonne-kilometers)		the number of tonnes of capacity available for the carriage of cargo and mail multiplied by the distance flown

Traffic measurements

revenue passenger-kilometers or RPK		the number of passengers carried multiplied by the distance flown

revenue freight tonne-kilometers or RFTK		cargo and mail load in tonnes multiplied by the distance flown

revenue passenger tonne-kilometers or RPTK		passenger load in tonnes multiplied by the distance flown

revenue tonne-kilometers or RTK		load (passenger and cargo) in tonnes multiplied by the distance flown

Load factors

overall load factor		tonne-kilometers expressed as a percentage of ATK

passenger load factor		passenger-kilometers expressed as a percentage of ASK

Yield and cost measurements

passenger yield (revenue per passenger-kilometer)		revenue from passenger operations divided by passenger-kilometers

cargo and mail yield (revenue per cargo and mail tonne-kilometer)		revenue from cargo and mail operations divided by cargo and mail tonne-kilometers

average yield (revenue per total tonne-kilometer)		revenue from airline operations divided by tonne-kilometers

unit cost		operating expenses divided by ATK

Tonne		a metric ton, equivalent to 2,204.6 lbs

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A.	Selected Financial Data

Pursuant to U.S. Securities and Exchange Commission (“SEC” or “Securities and Exchange Commission”) Release 33-8879 “ Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards without Reconciliation to U.S. GAAP “ eliminating the requirement for foreign private issuers to reconcile their financial statements to U.S. GAAP, we prepare our financial statements based on International Financial Reporting Standards, or IFRSs, as issued by the International Accounting Standards Board, or the IASB, and no longer provide a reconciliation between IFRSs and U.S. GAAP.

Our consolidated financial statements as of December 31, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017 included in this Annual Report on Form 20-F have been prepared in accordance with IFRSs.

We make an explicit and unreserved statement of compliance with IFRSs with respect to our consolidated financial statements as of December 31, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017 included in this Annual Report. Ernst & Young Hua Ming LLP, our current independent registered public accounting firm in the PRC, has issued an unqualified auditor’s report on our consolidated statement of financial position as of December 31, 2017 and the related consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year ended December 31, 2017. The selected financial data from the consolidated profit or loss and other comprehensive income for the years ended December 31, 2014, 2015 and 2016 and the selected financial data from the consolidated financial position as of December 31, 2014, 2015 and 2016 have been derived from our audited consolidated financial statements, which have been prepared in accordance with IFRSs, and audited by Ernst & Young, an independent registered public accounting firm in Hong Kong. The selected financial data from the consolidated profit or loss and other comprehensive income for the year ended December 31, 2013 and the selected financial data from the consolidated financial position as of December 31, 2013 have been derived from our audited consolidated financial statements, which have been prepared in accordance with IFRSs, and audited by Ernst & Young Hua Ming LLP, an independent registered public accounting firm in the PRC.

The following tables present selected consolidated profit or loss and comprehensive income data for the years ended December 31, 2013, 2014, 2015, 2016 and 2017 and selected consolidated statements of financial position data as of December 31, 2013, 2014, 2015, 2016 and 2017 that were prepared under IFRSs. The selected financial information as of December 31, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017 has been derived from, and should be read in conjunction with, the audited consolidated financial statements and their notes included elsewhere in this Annual Report.


	Year Ended December 31,
	2013 RMB			2014 RMB			2015 RMB			2016 RMB			2017 RMB
	(*in millions, except per share or per ADS data*)
Consolidated Statements of Profit or Loss and Other Comprehensive Income Data:
Revenues		88,245			90,185			93,969			98,904			102,475
(Loss)/gain on fair value changes of derivative financial instruments		18			11			6			2			(311	)
Other operating income and gains		2,725			3,685			5,269			5,469			7,481
Operating expenses		(89,412	)		(87,823	)		(86,619	)		(91,889	)		(100,525	)
Operating profit		1,576			6,058			12,625			12,486			9,431
Finance income / (costs), net		576			(2,072	)		(7,110	)		(6,176	)		(1,072	)
Profit before income tax		2,217			4,113			5,667			6,497			8,610
Profit for the year attributable to the equity holders of the Company		2,373			3,410			4,537			4,498			6,342
Basic and fully diluted earnings per share ⁽¹⁾		0.20			0.27			0.35			0.33			0.44
Basic and fully diluted earnings per ADS		9.81			13.45			17.5			16.5			22.0

(1)

The calculation of earnings per share for 2013 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 12,091,881,000 ordinary shares in issue. The calculation of earnings per share for 2014 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 12,674,269,000 ordinary shares in issue. The calculation of earnings per share for 2015 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 12,818,509,000 ordinary shares in issue. The calculation of earnings per share for 2016 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 13,811,136,000 ordinary shares in issue. The calculation of earnings per share for 2017 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 14,467,585,682 ordinary shares in issue.


	As of December 31,
	2013 RMB			2014 RMB			2015 RMB			2016 RMB			2017 RMB
				(in millions)
Consolidated Statements of Financial Position Data:
Cash and cash equivalents		1,995			1,355			9,080			1,695			4,605
Net current liabilities		(40,472	)		(42,887	)		(51,309	)		(52,194	)		(62,035	)
Non-current assets		127,458			147,586			174,914			196,436			211,434
Long term borrowings, including current portion		(36,175	)		(41,210	)		(43,675	)		(29,749	)		(28,842	)
Obligations under finance leases, including current portion		(23,135	)		(38,695	)		(52,399	)		(61,041	)		(66,868	)
Total share capital and reserves attributable to the equity holders of the Company		26,902			29,974			37,411			49,450			55,360
Non-current liabilities		(58,404	)		(72,928	)		(83,674	)		(91,876	)		(90,621	)
Total assets less current liabilities		86,986			104,699			123,605			144,242			149,399
Total assets		140,068			165,829			197,992			212,324			229,727
Net assets		28,582			31,771			39,931			52,366			58,778

Exchange Rate Information

We present our historical consolidated financial statements in Renminbi. For the convenience of the reader, certain pricing information is presented in U.S. dollars and certain contractual and other amounts that are in Renminbi or Hong Kong dollars amounts include a U.S. dollar equivalent. Unless otherwise noted, all translations from RMB to U.S. dollars, from Hong Kong dollars to U.S. dollars, from U.S. dollars to RMB and from U.S. dollars to Hong Kong dollars in this Annual Report were made at the rate of RMB6.5063 to US$1.00 and HK$7.8128 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve Board on December 29, 2017. We make no representation that the Renminbi, Hong Kong dollar or U.S. dollar amounts referred to in this Annual Report could have been or could be converted into U.S. dollars, Hong Kong dollars or Renminbi, as the case may be, at any particular rate or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade.

On April 13, 2018, the exchange rates as set forth in the H.10 statistical release of the Federal Reserve Board were RMB6.2725=US$1.00 and HK$7.8499=US$1.00. The following table sets forth information concerning exchange rates between the RMB, Hong Kong dollar and the U.S. dollar for the periods indicated. The source of these rates is the Federal Reserve Statistical Release.


	RMB per US$1.00 ⁽¹⁾				HK$ per US$1.00 ⁽¹⁾
	High		Low		High		Low
October 2017		6.6533		6.5712		7.8106		7.7996
November 2017		6.6385		6.5967		7.8118		7.7955
December 2017		6.6210		6.5063		7.8228		7.8050
January 2018		6.5263		6.2841		7.8230		7.8161
February 2018		6.3471		6.2649		7.8267		7.8183
March 2018		6.3565		6.2685		7.8486		7.8275
April 2018 (up to April 13, 2018)		6.3045		6.2655		7.8499		7.8482

The following table sets forth the average rates between Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars for each of the periods indicated. The exchange rate refers to the exchange rate as set forth in the G. 5A statistical release of the Federal Reserve Board.


	RMB per US$1.00 ⁽¹⁾		HK$ per US$1.00 ⁽¹⁾
2013		6.1478		7.7565
2014		6.1620		7.7545
2015		6.2827		7.7524
2016		6.6400		7.7620
2017		6.7569		7.7926

Source: Federal Reserve Statistical Release

(1)	Averages are based on daily noon buying rates for cable transfers in New York City certified for customs purposes by the Federal Reserve Bank of New York.

Selected Operating Data

The following table sets forth certain of our operating data for the five years ended December 31, 2017, which is not audited. All references in this Annual Report to our cargo operations, statistics or revenues include figures for cargo and mail.


	Year Ended December 31,
	2013		2014		2015		2016		2016		2017
							(non-comparable basis)⁽¹⁾		(comparable basis)⁽²⁾
Selected Airline Operating Data:
Capacity:
ATK (millions)		21,714.8		22,538.5		25,203.0		28,002.3		25,097.6		27,396.9
ASK (millions)		152,075.2		160,585.1		181,792.9		206,249.3		—		225,996.3
AFTK (millions)		8,028.0		8,085.8		8,841.7		9,439.9		6,535.2		7,057.3
Traffic:
Revenue passenger-kilometers (millions)		120,461.1		127,749.9		146,342.43		167,529.2		—		183,182.0
Revenue tonne-kilometers (millions)		15,551.8		16,122.4		17,820.4		19,712.9		17,333.1		18,856.1
Revenue freight tonne-kilometers (millions)		4,857.2		4,802.4		4,865.1		4,875.2		2,495.4		2,663.0
Hours flown (thousands)		1,540.4		1,625.1		1,804.4		1,956.5		1,918.8		2,072.7
Number of passengers carried (thousands)		79,093.7		83,811.5		93,780.0		101,741.6		—		110,811.4
Weight of cargo carried (millions of kilograms)		1,410.3		1,363.3		1,399.4		1,395.0		929.3		933.3
Load Factor:
Overall load factor (%)		71.6		71.5		70.7		70.4		69.1		68.8
Passenger load factor (%)		79.2		79.6		80.5		81.2		—		81.1
Yield and Cost Statistics (including fuel surcharge) (RMB):
Passenger yield (passenger revenue/ passenger- kilometers)		0.61		0.61		0.56		0.52		—		0.52
Cargo and mail yield (cargo and mail revenue/cargo and mail tonne-kilometers)		1.57		1.55		1.33		1.25		1.25		1.36
Average yield (passenger and cargo revenue/ tonne- kilometers)		5.18		5.28		4.94		4.71		5.18		5.25
Unit cost (operating expenses/ATK)		4.12		3.90		3.44		3.28		3.66		3.67

Notes:

(1)

On November 29, 2016, we entered into an equity transfer agreement with Eastern Airlines Industry Investment Company Limited (“Eastern Airlines Industry Investment”), in relation to the transfer of 100% equity interests in Eastern Airlines Logistics Co., Ltd. (“Eastern Logistics”) held by us to Eastern Airlines Industry Investment. China Cargo Airlines Co., Ltd (“China Cargo Airlines”), a non-wholly owned subsidiary of Eastern Logistics, operated nine freighters then. On February 8, 2017, we completed the transfer of 100% equity interest in Eastern Logistics to Eastern Airlines Industry Investment and the nine freighters operated by China Cargo Airlines ceased to be included in our fleet. Under non-comparable basis, our operating data in 2016 comprised of our whole cargo freight data during the period from February to December 2016.

(2)	Under comparable basis, our operating data in 2016 did not include our whole cargo freight data during the period from February to December 2016.

B.	Capitalization and Indebtedness

Not applicable.

C.	Reasons for the Offer and Use of Proceeds

Not applicable.

D.	Risk Factors

Risks Relating to our Business

We may suffer losses in the event of an accident or incident involving our aircraft or the aircraft of any other airline.

As an airline company operating a large fleet, an accident or incident involving one of our aircraft could result in delays and require repair or replacement of a damaged aircraft, which could result in consequential temporary or permanent losses from disruption of service and/or significant liability to injured passengers and others. Unforeseeable or unpredictable events such as inclement weather, mechanical failures, human error, aircraft defects and other force majeure events may affect flight safety, which could result in accidents and/or incidents of passenger injuries or deaths that could lead to significant injury and loss claims. Although we believe that we currently maintain liability insurance in amounts and of the types generally consistent with industry practice, the amount of such coverage may not be adequate to cover the costs related to an accident or incident in full, which could damage our results of operations and financial condition. In addition, any aircraft accident or incident, even if fully insured, could cause a public perception that we are not as safe or reliable as other airlines, which could harm our competitive position and result in a decrease in our operating revenues. Moreover, a major accident or incident involving an aircraft of our competitors may cause the demand for air travel in general to decrease. In particular, certain of our competitors in the Asia Pacific region experienced major aircraft accidents and incidents in 2014, some of which involved destinations and routes that we cover. These accidents and incidents were highly publicized in the media and may have affected public perception of certain air travel routes. The occurrence of any of the foregoing could adversely affect our results of operations and financial condition.

Our indebtedness and other financial obligations may have a material adverse effect on our liquidity and operations.

We have a substantial amount of debt, lease and other financial obligations, and will continue to do so in the future. As of December 31, 2017, our total liabilities were approximately RMB170,949 million and our current liabilities exceeded our current assets by approximately RMB62,035 million. Our total interest-bearing liabilities (including long-term and short-term borrowings, finance leases payable and bonds payable) as of December 31, 2016 and 2017 were approximately RMB117,773 million and RMB130,669 million, respectively, of which short-term liabilities accounted for approximately 30.0% and 37.0%, respectively. Our substantial indebtedness and other financial obligations could materially and adversely affect our business and operations, including being required to dedicate additional cash flow from operations to the payment of principal and interest on our indebtedness, thereby reducing the funds available for operations, maintenance and service improvements and future business opportunities, increasing our vulnerability to economic recessions, reducing our flexibility in responding to changing business and economic conditions, placing us at a disadvantage compared to competitors with lower debt, limiting our ability to arrange for additional financing for working capital, capital expenditures and other general corporate purposes, at all or on terms that are acceptable to us.

Moreover, we are largely dependent upon cash flows generated from our operations and external financing to meet our debt repayment obligations and working capital requirements, which may reduce the funds available for other business purposes. If our operating cash flow is materially and adversely affected by factors such as increased competition, a significant decrease in demand for our services, or a significant increase in jet fuel prices, our liquidity would be materially and adversely affected. We also try to secure sufficient financing through financing arrangements with domestic and foreign banks in China as well as from debt and equity capital markets. However, our ability to obtain financing may be affected by our financial position and leverage, our credit rating and investor perception of the aviation industry, as well as prevailing economic conditions and the cost of financing in general. If we are unable to obtain adequate financing for our capital requirements, our liquidity and operations would be materially and adversely affected.

In addition, the airline industry overall is characterized by a high degree of operating leverage. Due to high fixed costs, including payments made in connection with aircraft leases, and landing and infrastructure fees which are set by government authorities and not within our control, the expenses relating to flight operations do not vary proportionately with the number of passengers carried, while revenues generated from a particular flight are directly related to the number of passengers carried and the fare structure of the flight. Accordingly, a decrease in revenues may result in a disproportionately higher decrease in profits.

We may not be able to secure future financing at terms acceptable to us or at all.

We require significant amounts of external financing to meet our capital commitments for acquiring and upgrading aircraft and flight equipment and for other general corporate needs. As of December 31, 2017, we had total unutilized credit facilities of approximately RMB59.47 billion from various banks. We expect to roll over these bank facilities in the near future. In addition, we generally acquire aircraft through either long-term capital leases or operating leases. In the past, we have obtained guarantees from Chinese banks in respect of payments under our foreign loan and capital lease obligations. However, we cannot assure you that we will be able to roll over our bank facilities or continue to obtain bank guarantees in the future. Unavailability of credit facilities or guarantees from Chinese banks or the increased cost of such guarantees may materially and adversely affect our ability to borrow additional funds or enter into international aircraft lease financing or other additional financing on acceptable terms In addition, if we are not able to arrange financing for our aircraft on order, we may seek to defer aircraft deliveries or use cash from operations or other sources to acquire the aircraft .

Our ability to obtain financing may also be impaired by our financial position, leverage and credit rating. In addition, factors beyond our control, such as recent global market and economic conditions, volatile oil prices, and the tightening of credit markets may result in limited availability of financing and increased volatility in credit and equity markets, which may materially adversely affect our ability to secure financing at reasonable costs or at all. If we are unable to obtain financing for a significant portion of our capital requirements, our ability to expand our operations, purchase new aircraft, pursue business opportunities we believe to be desirable, withstand any future downturn in our business, or respond to increased competition or changing economic conditions may be impaired. We have and in the future will likely continue to have substantial debts. As a result, the interest costs associated with these debts might impair our future profitability.

We are subject to the risk of fuel price fluctuations.

Jet fuel is one of the major expenses of airlines. Significant fluctuations of international oil prices will significantly impact jet fuel prices and our revenue from fuel surcharge and accordingly our results of operations. In 2017, our total aircraft fuel cost was approximately RMB25,131 million, representing an increase of approximately 28.1% from approximately RMB19,626 million in 2016, which was mainly due to an increase in average price of oil as the Organization of Petroleum Exporting Countries (“OPEC”) and other oil suppliers efficiently squeezed excess supply of oil in the market and the political upheaval in the Middle East increased the uncertainty of oil production, and to a lesser extent, an increase in the volume of refueling from 2016 to 2017. In 2017, our total aircraft fuel cost accounted for approximately 25.0% of our total operating expenses, as compared to approximately 21.4% in 2016.

The fluctuations of international crude oil prices and adjustments on domestic jet fuel prices by the National Development and Reform Commission (the “NDRC”) have a significant impact on our profitability. Our results of operation and financial condition are affected by any significant fluctuations that may occur, which are generally due to factors beyond our control. As such, we generally alleviate the pressure from the rise in operating costs arising from the increase in aviation fuel by imposing fuel surcharges, which, however, are subject to government regulations. In order to control fuel costs, we have also entered into fuel hedging transactions using financial derivative products linked to the price of underlying assets such as United States WTI crude oil and Singapore jet fuel during previous years.

Since 2009, the PRC government required prior governmental approval for entering into fuel hedging contracts. We may, from time to time, seek approval from the PRC government to enter into overseas fuel hedging contracts. However, these hedging strategies may not always be effective and high fluctuations in aviation fuel prices exceeding the locked-in price ranges may result in losses. Significant decline in fuel prices may substantially increase the costs associated with such fuel hedging arrangements. In addition, where we may, from time to time, seek to manage the risk of fuel price increases by using derivative contracts, we cannot assure you that, at any given point in time, such fuel hedging transactions will provide any particular level of protection against increased fuel costs. In 2017, we did not engage in any aviation fuel hedging activities.

We are subject to the risk of exchange rate fluctuations.

We operate our business in many countries and territories. We generate revenue in different currencies, and our foreign currency liabilities are typically much higher than our foreign currency assets. Our purchases and leases of aircraft are mainly priced and settled in foreign currencies such as U.S. dollars. Fluctuations in exchange rates will affect our costs incurred from foreign purchases such as aircraft, flight equipment and aviation fuel, and take-off and landing charges in foreign airports. As of December 31, 2017, our total interest-bearing liabilities denominated in foreign currencies, amounted to approximately RMB46,789 million, of which U.S. dollar liabilities accounted for approximately 78.7% of the total amount. Therefore, a significant fluctuation in the U.S. dollar exchange rates will subject us to significant foreign exchange loss/gain arising from the exchange of foreign currency denominated liabilities, which would affect our profitability and business development. We typically use hedging contracts for foreign currencies to reduce the foreign exchange risks for foreign currency revenues generated from flight ticket sales and expenses required to be paid in foreign currencies. As of December 31, 2017, the outstanding foreign currency hedging contracts held by us amounted to a notional amount of US$829 million, which will expire in 2018, compared with US$440 million as of December 31, 2016.

We recorded net foreign exchange gains of approximately RMB2,001 million in 2017, whereas our net foreign exchange losses were approximately RMB3,574 million for 2016. As a result of the large value of existing net foreign currency liabilities denominated in U.S. dollars, our results would be adversely affected if the Renminbi depreciates against the U.S. dollar or the rate of appreciation of the Renminbi against the U.S. dollar decreases in the future. In 2017 and the first quarter of 2018, we expanded our financing channels by issuing guaranteed bonds and credit enhanced bonds denominated in SGD and JPY, and proactively optimized the mix of currency denomination of our debts. As of December 31, 2017, our proportion of U.S. dollar-denominated debts out of our total liabilities decreased to approximately 28.2%. Our foreign exchange fluctuation risks are also subject to other factors beyond our control.

We are subject to the risk of interest rate fluctuations.

Our total interest-bearing liabilities (including long-term and short-term loans and finance leases payable) as of December 31, 2016 and 2017 were approximately RMB117,773 million and RMB130,669 million, respectively, of which short-term liabilities accounted for approximately 30.0% and 37.0%, respectively, and long-term liabilities accounted for approximately 70.0% and 63.0%, respectively. Most of the long-term interest-bearing liabilities were liabilities with floating interest rates. Both the short-term liabilities and long-term interest-bearing liabilities were affected by fluctuations in current market interest rates.

Our interest-bearing liabilities were primarily denominated in RMB and USD. As of December 31, 2016 and December 31, 2017, our liabilities denominated in RMB accounted for approximately 49.1% and 64.2% of our total liabilities, respectively, and liabilities denominated in USD accounted for approximately 44.9% and 28.2% of our total liabilities, respectively. Fluctuations in interest rates of interest-bearing liabilities denominated in these two currencies have and will continue to have significant impact on our finance costs. As of December 31, 2017, the average interest rates of our RMB-denominated liabilities, USD-denominated liabilities, EUR-denominated liabilities, SGD-denominated liabilities and KRW-denominated liabilities was approximately 3.9%, 2.6%, 0.3%, 2.8% and 2.3%, respectively. In the first quarter of 2018, we also issued credit enhanced bonds denominated in JPY with total principal of JPY50.0 billion due in 2021, bearing fixed interest at the rate of 0.33% per annum and 0.64% per annum for different tranches. To cope with the risk of interest rate fluctuation, we strategically changed our debt portfolio by replacing our USD-denominated liabilities with floating interest rates with USD-denominated liabilities with fixed interest rates. As of December 31, 2017, our USD-denominated liabilities with fixed interest rate was approximately USD1,980 million and accounted for approximately 49.8% of our total long-term USD-denominated liabilities, increasing from approximately 16.7% as of December 31, 2015. As of December 31, 2017, our outstanding foreign currency interest rate swap contracts amounted to a notional amount of USD1,420 million, as compared to USD1,636 million as of December 31, 2016. These contracts will expire between 2018 and 2025. We will continue to optimize our liability structure to lower relevant risks by taking consideration of various factors including the market environment, interest rates and strategic plan. However, we cannot assure you that the relevant lending rates may not increase in the future for reasons beyond our control, which may adversely affect our business, prospects, cash flows, financial condition and results of operations. In addition, we expect to issue bonds and notes or enter into additional loan agreements and aircraft leases in the future to fund our operations and capital expenditures, and the cost of financing for these obligations will depend greatly on market interest rates.

Increases in insurance costs or reductions in insurance coverage may have adverse impact our results of operations and financial condition.

We could be exposed to significant liability or loss if our property or operations were to be affected by a natural catastrophe or other event, including aircraft accidents. We maintain insurance policies but we are not fully insured against all potential hazards and risks incident to our business. If we are unable to obtain sufficient insurance with acceptable terms or if the coverage obtained is insufficient relative to actual liability or losses that we experience, whether due to insurance market conditions, policy limitations and exclusions or otherwise, our results of operations and financial condition could be adversely affected.

We may experience difficulty integrating our acquisitions, which could result in a material adverse effect on our operations and financial condition.

We may from time to time expand our business through acquisition of airlines or airline-related businesses. We are devoting significant resources to the integration of our operations in order to achieve the anticipated synergies and benefits of the absorption and acquisitions mentioned above. See “Item 4. Information on the Company” for details. However, such acquisitions involve uncertainties and a number of risks, including:

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difficulty with integrating the assets, operations and technologies of the acquired airlines or airline-related businesses, including their employees, corporate cultures, managerial systems, processes, procedures and management information systems and services;

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complying with the laws, regulations and policies that are applicable to the acquired businesses;

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failure to achieve the anticipated synergies, cost savings or revenue-enhancing opportunities resulting from the acquisition of such airlines or airline-related businesses;

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managing relationships with employees, customers and business partners during the course of integration of new businesses;

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attracting, training and motivating members of our management and workforce;

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accessing our debt, equity or other capital resources to fund acquisitions, which may divert financial resources otherwise available for other purposes;

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diverting significant management attention and resources from our other businesses;

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strengthening our operational, financial and management controls, particularly those of our newly acquired assets and subsidiaries, to maintain the reliability of our reporting processes;

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difficulty with exercising control and supervision over the newly acquired operations, including failure to implement and communicate our safety management procedures resulting in additional safety hazards and risks;

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increased financial pressure resulting from the assumption of recorded and unrecorded liabilities of the acquired airlines or airline-related businesses; and

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the risk that any such acquisitions may not close due to failure to obtain the required government approvals.

We cannot assure you that we will not have difficulties in assimilating the operations, technologies, services and products of newly acquired companies or businesses. Moreover, the continued integration of our acquired companies into our Company depends significantly on integrating the employees of our acquired companies with our employees and on maintaining productive employee relations. In the event that we are unable to efficiently and effectively integrate newly acquired companies or airline-related businesses into our Company, we may be unable to achieve the objectives or anticipated synergies of such acquisitions and such acquisitions may adversely impact the operations and financial results of our existing businesses.

We may be unable to retain key management personnel or pilots.

We are dependent on the experience and industry knowledge of our key management personnel and pilots, and there can be no assurance that we will be able to retain them. Any inability to retain our key management employees or pilots, or attract and retain additional qualified management employees or pilots, could have a negative impact on our operations and profitability.

Our controlling shareholder, CEA Holding, holds a majority interest in our Company, and its interests may not be aligned with other shareholders.

Most of the major airlines in China are currently majority-owned by either the central government or provincial or municipal governments in China. As of December 31, 2017, CEA Holding holds directly or indirectly 56.38% of our Company’s equity stake on behalf of the PRC government. As a result, CEA Holding could potentially elect the majority of the board of directors of the Company (“Board of Directors” or the “Board”) and otherwise be able to control us. CEA Holding also has sufficient voting control to effect transactions without the concurrence of our minority shareholders. The interests of the PRC government as the ultimate controlling shareholder of our Company and most of the other major PRC airlines could conflict with the interests of our minority shareholders. Although the CAAC currently has a policy of equal treatment of all PRC airlines, we cannot assure you that the CAAC will not favor other PRC airlines over our Company.

As our controlling shareholder, CEA Holding has the ability to exercise controlling influence over our business and affairs, including, but not limited to, decisions with respect to:

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mergers or other business combinations;

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acquisition or disposition of assets;

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issuance of any additional shares or other equity securities;

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the timing and amount of dividend payments; and

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the management of our Company.

We engage in related party transactions, which may result in conflict of interests.

We have engaged in, from time to time, and may continue to engage in, in the future, a variety of transactions with CEA Holding and its various members, from whom we receive a number of important services, including support for in-flight catering and assistance with importation of aircraft, flight equipment and spare parts. Because we are controlled by CEA Holding and CEA Holding may have interests that conflict with our interests, we cannot assure you that CEA Holding will not take actions that will serve its interests over the Company’s interests.

We may not be able to accurately report our financial results or prevent fraud if we fail to maintain effective internal controls over financial reporting, resulting in adverse investor perception, which in turn could have a material adverse effect on our reputation and the performance of our shares and ADSs.

We are required under relevant United States securities laws and regulations to disclose in the reports that we file or submit under the Exchange Act to the SEC, including our annual report on Form 20-F, a management report assessing the effectiveness of our internal controls over financial reporting at the end of the fiscal year. Our registered public accounting firm is also required to provide an attestation report on the effectiveness of our internal controls over financial reporting. Our management concluded that our internal controls over financial reporting were effective as of December 31, 2017. However, we may discover other deficiencies or material weaknesses in the course of our future evaluation of our internal controls over financial reporting and we may be unable to address and rectify such deficiencies in a timely manner. Any failure to maintain effective internal controls over financial reporting could lead to diminished investor confidence in the reliability of our consolidated financial statements, thereby adversely affecting our business, operations, and reputation, including negatively affecting our performance in the securities markets and decreasing potential opportunities to obtain financing in the capital markets.

As part of our business strategy, we have adopted various measures to develop the international side of our business and to enhance our competitiveness in the international long-distance flight routes. Due to the differences in certain legal and market environments, we have encountered certain challenges during the course of developing our overseas business. We have already adopted and will continue to implement measures in order to enhance the internal controls of our overseas offices and to continue the development of our overseas business.

Any failure or disruption of our computer, communications, flight equipment or other technology systems could have an adverse impact on our business operations, profitability, reputation and customer services.

We rely heavily on computer, communications, flight equipment and other technology systems to operate our business and enhance customer service. Substantially all of our tickets are issued to passengers as electronic tickets, and we depend on our computerized reservation system to be able to issue, track and accept these electronic tickets. In addition, we rely on other automated systems for crew scheduling, flight dispatch and other operational needs. These systems could be disrupted due to various events, including natural disasters, power failures, terrorist attacks, equipment failures, software failures, computer viruses, cyber attacks and other events beyond our control. We cannot assure you that the measures we have taken to reduce the risk of some of these potential disruptions are adequate to prevent disruptions to or failures of these systems. Any substantial or repeated failure of or disruption to these systems could result in the loss of important data and/or flight delays, and could have an adverse impact on our business operations, profitability, reputation and customer services, including being liable for paying compensation to our customers.

We are subject to cyber security risks and may incur increasing costs in an effort to minimize those risks.

The nature of our business involves the receipt and storage of personal information about our customers. We have a program in place to detect and respond to data security incidents. To date, all incidents we have encountered have been insignificant. If we commit a significant data security breach or fail to detect and appropriately respond to a significant data security breach, we could be exposed to government enforcement actions and private litigation. In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to stop using our services. The loss of consumer confidence from a significant data security breach could hurt our reputation and adversely affect our business, result of operations and financial condition.

Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants, costs incurred in connection with the notifications to employees, suppliers or the general public as part of our notification obligations to the various government authorities that govern our business, or costs to dedicate significant resources to system repairs or other increase cyber security protection. We may also be required to pay fines in connection with stolen customer, employee or other confidential information, or incur significant litigation or other costs.

Interruptions or disruptions of service at one or more airports in our primary market could have an adverse impact on us.

Our business is heavily dependent on our operations at our core hub airports in Shanghai, namely, Hongqiao International Airport and Pudong International Airport and our regional hub airports in Xi’an and Kunming. Each of these operations includes flights that connect our primary market to other major cities. Any significant interruptions or disruptions of service at one or more of our primary market airports could adversely impact our operations.

Any adverse public health developments, including SARS, Ebola, avian flu, or influenza A (H1N1), or the occurrence of natural disasters may, among other things, lead to travel restrictions and reduced levels of economic activity in the affected areas, which may in turn significantly reduce demand for our services and have a material adverse effect on our financial condition and results of operations.

Adverse public health epidemics or pandemics could disrupt businesses and the national economy of China and other countries where we do business. The outbreak of Severe Acute Respiratory Syndrome, or SARS, in early 2003 led to a significant decline in travel volumes and business activities and substantially affected businesses in Asia. Moreover, some Asian countries, including China, have encountered incidents of the H5N1 strain of avian flu, many of which have resulted in fatalities. In addition, outbreaks of, and sporadic human infection with, influenza A (H1N1) in 2009, a highly contagious acute respiratory disease, were reported in Mexico and an increasing number of countries around the world, some cases resulting in fatalities. In addition, in April 2013, there has been an ongoing outbreak of the H7N9 strain of avian flu, which has largely been centered in eastern China, and has resulted in fatalities in that region, including Shanghai. Furthermore, in 2014, an outbreak of Ebola virus, a highly contagious hemorrhagic fever with a relatively high fatality rate, in certain African countries resulted in confirmed cases in the United States and Europe. We are unable to predict the potential impact, if any, that the outbreak of influenza A (H1N1) or any other serious contagious disease or the effects of another outbreak of SARS, any strain of avian flu or Ebola may have on our business.

Natural disasters, such as earthquakes, snowstorms, floods or volcanic eruptions such as that of Eyjafjallajökull in Iceland in April and May of 2010 and the natural disasters in Japan in early 2011 may disrupt or seriously affect air travel activity. Any period of sustained disruption to the airline industry may have a material adverse effect on our business, financial condition and results of operations.

Terrorist attacks or the fear of such attacks, even if not made directly on the airline industry, could negatively affect the Company and the airline industry as a whole. The travel industry continues to face on-going security concerns and cost burdens.

The aviation industry as a whole has been beset with high-profile terrorist attacks, most notably on September 11, 2001 in the United States. The CAAC has also implemented increased security measures in relation to the potential threat of terrorist attacks. Terrorist attacks, even if not made directly towards us or on the airline industry, or the fear of or the precautions taken in anticipation of such attacks (including elevated threat warnings or selective cancellation or redirection of flights) could materially and adversely affect us and the entire airline industry. In addition, potential or actual terrorist attacks may result in substantial flight disruption costs caused by grounding of fleet, significant increase of security costs and associated passenger inconvenience, increased insurance costs, substantially higher ticket refunds and significantly decreased traffic and RPK. International terrorist attacks targeting aircraft and airport not only directly threatens our flight safety, aviation security, operational safety and the safety of overseas institutions and employees, but also brings about on-going adverse impact on the outbound tourism demand for places where terrorist attacks have taken place.

Risks Relating to the Aviation Industry

Our business is subject to extensive government regulation.

The Chinese civil aviation industry is subject to a high degree of regulation by the CAAC. Regulatory policies issued or implemented by the CAAC encompass virtually every aspect of airline operations, including, among other things:

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route allocation;

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pricing of domestic airfares;

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administration of air traffic control systems and certain airports;

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jet fuel pricing;

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air carrier certifications and air operator certification;

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aircraft registration and aircraft airworthiness certification; and

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airport expense policy.

Our ability to provide services on international routes is subject to a variety of bilateral civil air transport agreements between China and other countries, international aviation conventions and local aviation laws. As a result of government regulations, we may face significant constraints on our flexibility and ability to expand our business operations or to maximize our profitability.

The downward trend in domestic and global economy could affect air travel.

The airline industry is highly cyclical, and the level of demand for air travel is correlated to the strength of domestic and global economies. Robust demand for our air transportation services depends largely on favorable general economic conditions, including the strength of global and local economies, low unemployment, strong consumer confidence and availability of consumer and business credit. In 2017, the global economy had a steady recovery. Simultaneous economic growth were shown in developed economies, major emerging economies and developing countries. China’s economy had a steady to good growth which was better than expected. The economic structures continued to optimize and the contributions of the service industry continued to increase. Benefited from the favorable continual recovery of the global economy, the global aviation industry had a continuous rise in the demand of travelers. The China’s civil aviation maintained its relatively fast growth rate. However, we cannot assure you that such recovery and growth will continue in the future. The global economy is facing uncertainties, such as the rise of trade protectionism and the occasional occurrence of geopolitical risks. If the macroeconomic climate worsens or trading dispute and conflicts are created, our operations and financial condition may be adversely affected.

We operate in a highly competitive industry.

We face intense competition in each of the domestic, regional and international markets that we serve. In our domestic market, we compete against all airlines that have the same routes, including smaller domestic airlines that have lower operating costs. In the regional and international markets, we compete against international airlines that have significantly longer operating history, better brand recognition, or more resources, such as large sales networks or sophisticated reservation systems. See the section headed “Item 4. Information on the Company — Business Overview — Competition” for more details. The public’s perception of safety of Chinese airlines could also materially and adversely affect our ability to compete against our international competitors. To stay competitive, we have, from time to time in the past, lowered airfares for certain of our routes, and we may continue to do so in the future. Increased competition and pricing pressures may have a material adverse effect on our financial condition and results of operations.

We expect to face substantial competition from the rapid development of the Chinese rail network.

The PRC government is aggressively implementing the expansion of its high-speed rail network, which has provided train services at a speed of up to 350 kilometers per hour connecting major cities such as Beijing, Shanghai, Guangzhou and Hong Kong. The expansion of rail network, improvements in railway service quality, increased passenger capacity and urban center accessibility could enhance the competitiveness of the railway service and negatively affect our market share on some of our key routes, in particular our routes of between 500 km to 800 km. The high-speed railway routes between Shanghai and Kunming, Baoji and Lanzhou and Xi’an and Chengdu commenced operations in 2017, and has affected our Xi’an and Chengdu route, Guiyang and Kunming route, Xi’an and Xining route and Xi’an and Lanzhou route. Increased competition and pricing pressures from the railway service may have an adverse effect on our business, financial condition and results of operations.

Limitations on foreign ownership of PRC airlines may affect our access to funding in the international equity capital markets or pursuing business opportunities.

The current CAAC policies limit foreign ownership of PRC airlines. Under these rules, non-PRC, Hong Kong, Macau or Taiwan residents cannot hold a majority equity interest in a PRC airline. As of December 31, 2017, approximately 32.20% of our total outstanding shares were held by non-PRC, Hong Kong, Macau or Taiwan residents or legal entities (excluding the qualified foreign institutional investors that are approved to invest in the A Share market of the PRC). As a result, our access to funding in the international equity capital markets may be limited. This restriction may also limit the opportunities available to us to obtain funding or other benefits through the creation of equity-based strategic alliances with foreign carriers. We cannot assure you that the CAAC will not increase these limits on foreign ownership of PRC airlines in the future.

Any jet fuel shortages or any increase in jet fuel prices may materially and adversely affect our financial condition and results of operations.

The availability and prices of jet fuel have a significant impact on our financial condition and results of operations. In the past, jet fuel shortages have occurred in China and, on limited occasions, required us to delay or cancel flights. Although jet fuel shortages have not occurred since the end of 1993, we cannot assure you that jet fuel shortages will not occur in the future. Fuel prices continue to be susceptible to, among other factors, political unrest in various parts of the world, OPEC policies, the rapid growth of the economies of certain countries, including China and India, the inventory levels carried by industries, the amount of reserves built by governments, disruptions to production and refining facilities and weather conditions. Fuel efficiency of our aircraft decreases as they advance in age which results in an overall increase in our aviation fuel costs. The foregoing and other factors that impact the global supply and demand for jet fuel may affect our financial performance due to its sensitivity to fuel prices.

In 2017, fuel prices recovered from the previous decline as the OPEC and other oil suppliers efficiently squeezed excess supply of oil in the market and the political upheaval in the Middle East increased the uncertainty of oil production. Setting aside the adjustment in factors such as fuel surcharge, if the average price of jet fuel had increased or decreased by 5%, our jet fuel costs would have increased or decreased by approximately RMB1,257 million in 2017. In addition, the NDRC adjusts gasoline and diesel prices in China from time to time, taking into account the changes in international oil prices, thereby affecting aviation fuel prices. In 2017, we have not conducted aviation fuel hedging activities. As such, we cannot assure you that jet fuel prices will not fluctuate further in the future. Due to the highly competitive nature of the airline industry, we may be unable to fully or effectively pass on to our customers any future increase in jet fuel costs.

The airline industry is subject to increasing environmental regulations, which would increase costs and affect profitability.

In recent years, regulatory authorities in China and other countries have issued a number of directives and other regulations to address, among other things, aircraft noise and engine emissions, the use and handling of hazardous materials, aircraft age and environmental contamination remedial clean-up measures. These requirements impose high fees, taxes and substantial ongoing compliance costs on airlines, particularly as new aircraft brought into service will have to meet the environmental requirements during their entire service life.

We have significant expenditures in respect of environmental compliance, which may affect our operations and financial condition. For example, all of our B737NG and some of our A320 series aircraft newly introduced are equipped with a winglet or sharklet, an additional lifting surface to reduce fuel consumption and noises. We also took measures to reduce the impact of our operations on the environment by optimizing our route network and flight schedules as well as installing energy-saving environmentally friendly engines. In addition, we continue to improve the energy efficiency of our fleet by introducing aircraft with energy-saving technologies, such as B737-8 Max and by retiring old aircraft. However, these measures have resulted in significant costs and expenditures. We expect to continue to incur significant costs and expenditures on an ongoing basis to comply with environmental regulations, which could restrict our ability to modify or expand facilities or continue operations.

Our results of operations tend to be volatile and fluctuate due to seasonality.

The aviation industry is characterized by annual high and low travel seasons. Our operating revenue is substantially dependent on the passenger and cargo traffic volume carried, which is subject to seasonal and other changes in traffic patterns, the availability of appropriate time slots for our flights and alternative routes, the degree of competition from other airlines and alternate means of transportation, as well as other factors that may influence passenger travel demand and cargo and mail volume. As a result, our results tend to be volatile and subject to rapid and unexpected change.

Risks Relating to the PRC

Changes in the economic policies of the PRC government may materially affect our business, financial condition and results of operations.

Since the late 1970s, the PRC government has been reforming the Chinese economic system. These reforms have resulted in significant economic growth and social progress. These policies and measures may be modified or revised from time to time. Adverse changes in economic and social conditions in China, in the policies of the PRC government or in the laws and regulations of China, if any, may have a material adverse effect on the overall economic growth of China and investments in and profitability of the domestic airline industry. These developments, in turn, may have a material adverse effect on our business, financial condition and results of operations.

Changes in the foreign exchange regulations in the PRC may result in fluctuations of the Renminbi and adversely affect our ability to pay dividends or to satisfy our foreign currency liabilities.

A significant portion of our revenue and operating expenses are denominated in Renminbi, while a portion of our revenue, capital expenditures and debts are denominated in U.S. dollars and other foreign currencies. The Renminbi is currently freely convertible in the current account, which includes payment of dividends, trade and service-related foreign currency transactions, but not in the capital account, which includes foreign direct investment, unless approval from or registration or filing with the relevant authorities, is obtained. As a foreign invested enterprise approved by the PRC Ministry of Commerce (the “MOFCOM”), we can purchase foreign currencies without the approval of State Administration of Foreign Exchange (the “SAFE”) for settlement of current account transactions, including for the purpose of dividend payment, by providing commercial documents evidencing these transactions. We can also retain foreign currencies in our current accounts, subject to a maximum amount approved by SAFE, to satisfy foreign currency liabilities or pay dividends. The relevant PRC government authorities may limit or eliminate our ability to purchase and retain foreign currencies in the future. Foreign currency transactions in the capital account are still subject to limitations and require approvals from SAFE. This may affect our ability to raise foreign capital through debt or equity financing, including through loans or capital contributions. We cannot assure you that we will be able to obtain sufficient foreign currencies to pay dividends, if any, or satisfy our foreign currency liabilities.

Furthermore, the value of the Renminbi against the U.S. dollar and other currencies may fluctuate significantly and is affected by, among other things, the PRC government policies, domestic and international economic and political conditions and changes in the supply and demand of the currency. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy resulted in appreciation of the Renminbi against the U.S. dollar by approximately 7.0% in 2008. While there was no material appreciation of Renminbi against the U.S. dollar in 2009, the Renminbi appreciated by approximately 3.0% against the U.S. dollar in 2010 and by approximately 5.1% in 2011. In April 2012, the PBOC widened the daily trading band of the Renminbi against the U.S. dollar, and the Renminbi was allowed to appreciate or depreciate by 1.0% from the PBOC central parity rate, effective April 16, 2012. In March 2014, the PBOC further widened the daily trading band of the Renminbi against the U.S. dollar, and the Renminbi was allowed to appreciate or depreciate by 2% against the U.S. dollar from the daily central parity rate, effective March 17, 2014. On August 11, 2015, the PBOC executed a 2% devaluation in the Renminbi. Within the following two days, the Renminbi depreciated 3.5% against the U.S. dollar. The Renminbi depreciated 6.7% against the U.S. dollar from January 4, 2016 to December 30, 2016. The Renminbi appreciated 6.3% against the U.S. dollar for the year ended December 31, 2017. However, it remains unclear what further fluctuations may occur or what impact this will have on the value of the Renminbi. It is possible that the PRC government could adopt a more flexible foreign exchange policy, which could result in further and more significant revaluations of the Renminbi against the U.S. dollar or any other foreign currency. Any resulting fluctuations in exchange rates as a result of such policy changes may have an adverse effect on our financial condition and results of operations.

Our operations may be adversely affected by rising inflation rates in the PRC.

Increase in inflation is due to many factors beyond our control, such as rising production and labor costs, high debts, changes in the PRC and foreign governmental policy and regulations, and movements in exchange rates and interest rates. The national consumer price index, which is an indicator of the inflation, was 1.4%, 2.0% and 1.6% in 2015, 2016 and 2017, respectively. The national consumer price index was 1.5%, 2.9% and 2.1% in January, February and March, 2018, respectively. We cannot assure you that inflation rates will not increase in the future. If inflation rates rise beyond our expectations, the costs of our business operations may become significantly higher than anticipated, and we may be unable to pass on such higher costs to consumers in amounts that are sufficient to cover those increasing operating costs. As a result, further inflationary pressures in the PRC may have a material adverse effect on our business, financial condition and results of operations, as well as our liquidity and profitability.

Any withdrawal of, or changes to, tax incentives in the PRC may adversely affect our results of operations and financial condition.

Prior to January 1, 2008, except for a number of preferential tax treatment schemes available to various enterprises, industries and locations, business enterprises in China were subject to an enterprise income tax rate of 33% under the relevant PRC Enterprise Income Tax Law. On March 16, 2007, China passed a new enterprise income tax law, or the EIT Law, which took effect on January 1, 2008 and amended on February 24, 2017. The EIT Law imposes a uniform income tax rate of 25% for domestic enterprises and foreign invested enterprises. Business enterprises enjoying preferential tax treatment that was extended for a fixed term prior to January 1, 2008 will still be entitled to such treatment until such fixed term expires. Certain of our subsidiaries are entitled to preferential tax treatment, allowing us to enjoy a lower effective tax rate that would not otherwise be available to us. To the extent that there are any increases in the applicable effective tax rate, withdrawals of, or changes in, our preferential tax treatment or tax exemptions, our tax liability may increase correspondingly.

Uncertainties embodied in the PRC legal system may limit certain legal protection available to investors.

The PRC legal system is a civil law system based on written statutes. Unlike common law systems, decided legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. Legislation over the past 20 years has significantly enhanced the protection afforded to foreign investors in China. However, the interpretation and enforcement of some of these laws and regulations involve uncertainties that may limit the legal protection available to investors. Such uncertainties pervade as the legal system in the PRC continues to evolve. Even where adequate laws exist in the PRC, the enforcement of the existing laws or contracts may be uncertain and sporadic, and it may be difficult to obtain swift and equitable enforcement, including enforcing a foreign judgment. In addition, the PRC legal system is based on written statutes and their interpretation; prior court decisions may be cited as reference but have limited authority as precedents. As such, any litigation in the PRC may be protracted and result in substantial costs and diversion of our resources and management attention. We have full or majority board control over the management and operation of all of our subsidiaries established in the PRC. The control over these PRC entities and the exercise of shareholder rights are subject to their respective articles of association and PRC laws applicable to foreign-invested enterprises in the PRC, which may be different from the laws of other developed jurisdictions.

The PRC has not developed a fully integrated legal system and certain recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in the PRC. The relative lack of experience of the PRC’s judiciary in many cases also creates additional uncertainty as to the outcome of any litigation. In addition, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. Furthermore, in case of new laws and regulations, the interpretation, implementation and enforcement of these laws and regulations would involve uncertainties due to the lack of established practice or published court decisions available for reference. We cannot predict the future legal development in the PRC, including promulgation of new laws, changes to existing laws or interpretation or enforcement thereof, or inconsistencies between the local rules and regulations and the national law. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have a retroactive effect. As a result, we may not be aware of any violations until sometime after the violation has occurred. This may also limit the remedies available to investors and to us in the event of any claims or disputes with third parties.

The auditors’ reports included in this annual report are prepared by relying on audit work which is not inspected by the Public Company Accounting Oversight Board and, as such, investors may be deprived of the benefits of such inspection.

Auditors of companies that are registered with the SEC and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards. Because we have substantial operations within China, our auditor relied on its China affiliate to perform audits on our consolidated financial statements, and the PCAOB is currently unable to conduct inspections of the work done by our auditor as it relates to our operations without the approval of the Chinese authorities, our auditor’s work related to our operations in China is not currently inspected by the PCAOB. This lack of PCAOB inspection of audit work performed in China prevents the PCAOB from regularly evaluating the audit work performed by any auditor in China including our auditor. As a result, investors may be deprived of the full benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections of audit work performed in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures as compared to auditors in other jurisdictions that are subject to PCAOB inspections for all their work. Investors may lose confidence in our reported financial information and procedures and the quality of our consolidated financial statements.

Proceedings instituted by the SEC against certain PRC-based accounting firms, including the China affiliate of our independent registered public accounting firm, could result in financial statements being determined not to comply with the requirements of the Exchange Act.

In December 2012, the SEC brought administrative proceedings against five accounting firms in China, including the Chinese affiliate of our then independent registered public accounting firm, alleging that they had refused to produce audit work papers and other documents related to certain other China-based companies under investigation by the SEC. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of these firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective unless and until reviewed and approved by the SEC. On February 12, 2014, four of these PRC-based accounting firms appealed to the SEC against this decision. In February 2015, each of the four PRC-based accounting firms agreed to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement requires the firms to follow detailed procedures to provide the SEC with access to the Chinese firms’ audit documents via the China Securities Regulatory Commission ( the “CSRC” ). If the firms do not follow these procedures, the SEC could impose sanctions such as suspensions, or it could restart the administrative proceedings.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined not to be in compliance with the requirements of the Exchange Act, and possibly delisting of the securities. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based U.S.-listed companies and the market price of our ADSs may be adversely affected.

If the Chinese affiliate of our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to find another registered public accounting firm in a timely manner to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such determination could ultimately lead to our delisting from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

Item 4. Information on the Company

A. History and Development of the Company

Our registered office is located at 66 Airport Street, Pudong International Airport, Shanghai, China, 201202. Our principal executive office and mailing address is Kong Gang San Road, Number 92, Shanghai, 200335, China. The telephone number of our principal executive office is (86-21) 6268-6268 and the fax number for the Board Secretariat’s office is (86-21) 6268-6116. We currently do not have an agent for service of process in the United States.

Our Company, China Eastern Airlines Corporation Limited was established on April 14, 1995 under the laws of China as a company limited by shares in connection with the restructuring of our predecessor and our initial public offering. We are commercially known in the industry as China Eastern Airlines. Our predecessor was one of the six original airlines established in 1988 as part of the decentralization of the airline industry in China undertaken in connection with China’s overall economic reform efforts. Prior to 1988, the CAAC was responsible for all aspects of civil aviation in China, including the regulation and operation of China’s airlines and airports. In connection with our initial public offering, our predecessor was restructured into two separate legal entities, our Company and EA Group. According to the restructuring arrangement, by operation of law, our Company succeeded to substantially all of the assets and liabilities relating to the airline business of our predecessor. EA Group succeeded to our predecessor’s assets and liabilities that do not directly relate to the airline operations and do not compete with our businesses. Assets transferred to EA Group included our predecessor’s equity interests in companies engaged in import and export, real estate, advertising, in-flight catering, tourism and certain other businesses. In connection with the restructuring, we entered into various agreements with EA Group and its subsidiaries for the provision of certain services to our Company. CEA Holding assumed the rights and liabilities of EA Group under these agreements after it was formed by merging EA Group, Yunnan Airlines Company and China Northwest Airlines Company in October 2002. See “Item 7. Major Shareholders and Related Party Transactions” for more details.

The following chart sets forth the organizational structure of our Company and our significant subsidiaries as of December 31, 2017:

LOGO

In February 1997, we completed our initial public offering of 1,566,950,000 ordinary H Shares, par value RMB1.00 per share, and listed our ordinary H Shares on The Stock Exchange of Hong Kong Limited, or the Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”), and American Depositary Shares, or ADSs, representing our H Shares, on the New York Stock Exchange. In October 1997, we completed a public offering of 300,000,000 new ordinary domestic shares in the form of A Shares to public shareholders in China and listed such new shares on the Shanghai Stock Exchange. H Shares are our ordinary shares listed on the Hong Kong Stock Exchange, and A Shares are our ordinary shares listed on the Shanghai Stock Exchange. Our H Shares and A Shares are identical in respect of all rights and preferences, except that the listed A Shares may only be held by Chinese domestic investors and certain qualified foreign institutional investors. For information regarding our share capital structure, see “Item 10.B Memorandum and Articles of Association – Description of the Shares.” In addition, dividends on the A Shares are payable in Renminbi.

Since our initial public offering, we have expanded our operations through acquisitions and joint ventures.

On June 12, 2012, the Board of Directors resolved and approved to issue corporate bonds in the aggregate principal amount of not more than RMB8.8 billion and for a term of not more than ten years for a single or multiple issuances. We received the CSRC approval for this issuance on December 12, 2012. On March 20, 2013, we issued the first tranche of the corporate bonds in the amount of RMB4.8 billion at 5.05% due 2023. The use of proceeds from this issuance was to repay bank loans, improve our financing structure and replenish our short-term working capital.

On September 11, 2012, the Board of Directors resolved and approved the “Proposal for the non-public issuance of A Shares to specific placees by China Eastern Airlines Corporation Limited” and the “Proposal for the non-public issuance of H Shares to specific placees by China Eastern Airlines Corporation Limited,” according to which, (i) CEA Holdings and CES Finance would subscribe in cash for 241,547,927 and 457,317,073 new A Shares, respectively, at the subscription price of RMB3.28 per share; and (ii) CES Global Holdings (Hong Kong) Limited, an overseas wholly-owned subsidiary of CEA Holding, (“CES Global”) would subscribe in cash for 698,865,000 new H Shares (nominal value of RMB1.00 each) at the subscription price of HK$2.32 per share. On January 31, 2013, the CSRC approved our proposed issue of no more than 698,865,000 new H Shares with a nominal value of RMB1.00 each. The Public Offering Review Committee of the CSRC reviewed and conditionally approved our application relating to the non-public issue of new A Shares of the Company on February 25, 2012.

On December 27, 2012, our wholly-owned subsidiary, Shanghai Airlines Tours entered into an agreement with Eastern Tourism and Shanghai Dongmei to acquire 45% and 55% of the issued share capital of Xi’an Dongmei Aviation Travel Co. Ltd, held by them respectively for a consideration of approximately RMB3.3 million comprising approximately RMB1.5 million payable to Eastern Tourism and approximately RMB1.8 million payable to Shanghai Dongmei.

On December 27, 2012, our wholly-owned subsidiary, Shanghai Airlines Tours also entered into another agreement with Eastern Tourism and Shanghai Dongmei to acquire 45% and 55% of the issued share capital of Kunming Dongmei, held by them respectively for a consideration of approximately RMB10.6 million comprising RMB4.7 million payable to Eastern Tourism and approximately RMB5.8 million payable to Shanghai Dongmei.

On January 10, 2013, our wholly-owned subsidiary, Shanghai Airlines Tours entered into an agreement with Eastern Tourism to acquire the entire issued share capital of Eastern Travel held by Eastern Tourism Investment Group Co., Ltd for consideration of approximately RMB11.9 million.

On April 9, 2013, the Company obtained an approval from the CSRC, pursuant to which the CSRC approved the non-public issue by the Company for no more than 698,865,000 new A Shares. On April 16, 2013, the procedure for registration of the new A Shares with the Shanghai Branch of China Securities Depository & Clearing Co. Ltd. was completed. The 698,865,000 new A Shares, at an issue price of RMB3.28 per share, under this issue are subject to a lock-up period of 36 months from the completion date of the issue and are expected to be listed on April 17, 2016.

On June 21, 2013, we completed the issuance of new H Shares. A total of 698,865,000 new H Shares were issued, at the price of HK$2.32 per share, to CES Global.

On October 29, 2013, the Board of Directors resolved and approved that the Company inject RMB36 million into CES Media.

On July 17, 2014, Eastern Air Overseas (Hong Kong) Corporation Limited (“EAO”) our wholly-owned subsidiary, and Jetstar Hong Kong Airways Limited (“Jetstar Hong Kong”), an associated company of the Company, entered into a loan agreement, pursuant to which EAO will provide a loan of US$60 million to Jetstar Hong Kong at fair market interest rates. The principal of the loan was repaid on April 30, 2015.

On August 15, 2014, Shanghai Airlines Tours, our wholly-owned subsidiary, entered into an equity transfer agreement with Eastern Tourism, pursuant to which, Shanghai Airlines Tours acquired 72.84% equity interest in Shanghai Dongmei from Eastern Tourism with consideration of RMB32,147,700. This acquisition has been completed and Shanghai Dongmei has become our indirect holding company.

On December 22, 2014, our Company, CEA Holding and CES Finance (as shareholders of Eastern Air Finance agreed to inject a total of RMB1,500 million into Eastern Air Finance in proportion according to their respective shareholding in Eastern Air Finance. In February 2015, we contributed a pro-rata amount of RMB375 million in cash.

On March 29, 2015, China United Airlines, our wholly-owned subsidiary, fully adopted the low-cost carrier service model.

On May 30, 2015, we received approval from the Ministry of Industry and Information Technology to offer in-flight Wi-Fi services using KU-band satellite onboard 21 aircraft.

On July 9, 2015 we entered into the B737 Aircraft Purchase Agreement with Boeing Company in Shanghai to purchase fifty B737 series aircraft from Boeing Company.

On July 27, 2015, we entered into a conditional subscription agreement (“Subscription Agreement”) with Delta Air Lines, Inc. (“Delta Air Lines”), pursuant to which Delta Air Lines agreed to subscribe for 465,910,000 shares of the newly issued ordinary H shares of the Company in an amount of HK$3,488,895,000, representing approximately 3.5% of the total share capital of the Company. On September 9, 2015, we completed the issue of 465,910,000 ordinary H shares to Delta Airlines, with a par value of RMB1.00 each at an issue price of HK$7.49 per share.

On August 14, 2015, the Board of Directors approved the “Resolution on the Termination of the Proposed Establishment of Jetstar Hong Kong and its Winding Up”. The Board of Directors considers that the termination of the proposed establishment of Jetstar Hong Kong will have no material adverse impact on the financial conditions and production and operation of the Company.

On August 28, 2015, we formally established the foreign airlines service center.

On September 1, 2015, Delta Air Lines and we entered into a marketing agreement and a letter of confirmation on the Subscription Agreement. Pursuant to the marketing agreement, both parties will have greater cooperation in terms of code-share, revenue management, schedule coordination, sales cooperation, airport facilities sharing, frequent-flyer program, lounge and system investment as well as staff exchange. Pursuant to the letter of confirmation on the Subscription Agreement, as of September 1, 2015, all conditions precedent to the Subscription Agreement had been fulfilled except for those conditions that will be fulfilled on the completion date of share subscription. On September 9, 2015, we completed the issue of 465,910,000 ordinary H shares with a par value of RMB1.00 each at an issue price of HK$7.49 per share.

On November 6, 2015, the Civil Aviation Administration of China officially announced and granted the “Safe Flight Diamond Award”, the highest award for flight safety in the PRC civil aviation industry, to the Company.

In January 2016, we received the “Approval for the Non-Public Issuance of A Shares by China Eastern Airlines Corporation Limited” (Zheng Jian Xu Ke [2016] No. 8) issued by the CSRC, approving us to issue not more than 2,329,192,546 A Shares by way of non-public issuance.

On February 8, 2017, we completed the transfer of 100% equity interest in Eastern Logistics to Eastern Airlines Industry Investment and the nine freighters operated by China Cargo Airlines ceased to be included in our fleet.

On November 16, 2017, EAO issued corporate SGD-denominated guaranteed bonds in an amount of SGD500,000,000 at 2.8% due 2020, which was listed on the Hong Kong Stock Exchange on November 17, 2017. The Company guaranteed the bond issue. See Note 34 to the consolidated financial statements for more information.

On March 9, 2018, the Company issued JPY-denominated credit enhanced bonds (Series 1 JPY10,000,000,000 0.33% Bonds due 2021, Series 2 JPY20,000,000,000 0.64% Bonds due 2021 and Series 3 JPY20,000,000,000 0.64% Bonds due 2021), which was listed on the professional oriented TOKYO PRO-BOND Market of the Tokyo Stock Exchange on March 19, 2018. See Note 49 to the consolidated financial statements for the issuance of JPY bonds.

The material development of our indebtedness is set out in Note 34 and Note 49 to the consolidated financial statements. The capital expenditure is set out in Item 5 in this Annual Report.

B. Business Overview

We were one of the three largest air carriers in China in terms of several indicators including number of passengers carried, ATK and ASK in 2017 and is an important domestic airline based in and serving Shanghai, which is considered to be the international financial and shipping center of China. The primary focus of our business is the operation of civil aviation, including the provision of passenger, cargo, mail delivery, tour operations and other extended transportation services.

We operate most of our flights through our three hubs located in eastern, northwestern and southwestern China, namely Shanghai, Xi’an and Kunming, respectively. With Shanghai as our core hub and Xi’an and Kunming as our regional hubs, we believe that we will benefit from the level of development and growth opportunities in eastern, northern and western China as a whole by providing direct services between various cities in those regions and between those regions and other major cities in China. We have steadily fostered the construction of a flight system for these core hubs by introducing new flight destinations and increasing the frequency of certain flights, thereby enhancing our transfer and connection capability in these hub markets.

Our domestic routes contributed approximately 65.7% of our total passenger revenues in 2017. Our most heavily traveled domestic routes generally link Shanghai to the large commercial and business centers of China, such as Beijing, Guangzhou and Shenzhen. We have set up subsidiaries in 15 provinces and cities including Shanghai, Beijing, Yunnan, Shaanxi, Jiangsu, Zhejiang, Anhui, Jiangxi, Shandong, Hubei, Shanxi, Gansu, Sichuan, Hebei and Guangdong by the end of 2017. Our flight routes include all provincial capital cities in China and specifically designated cities. In 2017, we opened new routes including routes to Cebu, Jakarta from Shanghai Pudong and to Prague from Xi’an, and cancelled routes to Bangkok from Zhengzhou and Jeju from Beijing. As of December 31, 2017, we served a route network that covers 1,074 domestic and foreign destinations in 177 countries through SkyTeam, an international airlines alliance.

Our passenger traffic volume (as measured in revenue passenger-kilometers, or RPKs) increased by 9.3% from approximately 167,529 million in 2016 to approximately 183,182 million in 2017. As we transferred 100% equity interest in Eastern Logistics to Eastern Airlines Industry Investment in February 2017, our cargo and mail traffic volume (as measured in revenue freight tonne-kilometers, or RFTKs) decreased by 45.4% from approximately 4,875 million in 2016 to approximately 2,663 million in 2017 under the basis that our operating data in 2016 include our whole cargo freight data during the period from February to December 2016 (“under non-comparable basis”). Our cargo and mail traffic volume (as measured in revenue freight tonne-kilometers, or RFTK) increased by 6.7% from approximately 2,495 million in 2016 to approximately 2,663 million in 2017 under the basis that our operating data in 2016 did not include our whole cargo freight data during the period from February to December 2016 (“under comparable basis”). As a result, our traffic volume (as measured in RTKs) decreased by 4.3% from approximately 19,713 million in 2016 to approximately 18,856 million in 2017 under the non-comparable basis and increased by 8.8% from approximately 17,333 million in 2016 to approximately 18,856 million in 2017 under the comparable basis.

Awards

We have received many awards, recognitions and accolades through the years. Fortune Magazine recognized us as one of the “Most Innovative PRC Companies” in 2011, and our “China Eastern Airlines” brand was awarded “China’s Famous Trademark” by the State Administration for Industry and Commerce in 2011. In addition, in 2012 we received various recognitions and awards, including “Golden Tripod Prize”, which was the highest award awarded at the 8th Annual Meeting of China’s Securities Market, “Golden Bauhinia” Award for “The Listed Company with Best Brand Value 2012” by China Securities, “2012 Best Mid-Cap Company and Best Managed Company in China” by Asiamoney Magazine, “Top 50 Most Valuable Chinese Brands” by WPP, a global brand communication and public relations firm, “2012 TOP 25 CSR (Corporate Social Responsibility) Ranking” by Fortune China Magazine, “2012 China State-owned Listed Enterprise Social Responsibility Rankings Top 20” by Southern Weekly, “The Best Board of Directors of State-owned Listed Holding Companies of China Top 20” by various major financial media, including Moneyweek, “Healthy China – Best Employee Health & Benefit Unit” by Health Times, a major newspaper in China focusing on health and lifestyle, and Tsinghua University, “Internal Audit Leading Enterprises in terms of Risk Management and Internal Audit” by China Institute of Internal Audit, “Best 100 Employers” by zhaopin.com, a major online recruiting website in China, and “The World’s Most Improved Airline” by SKYTRAX, a United Kingdom-based aviation research organization. In 2013, we received the National 1 May Award Certificate and were honored as one of the “2013 Top Ten Companies with the Best Corporate Social Responsibility” by Fortune China Magazine, “Best Mid-cap Company” by Hong Kong Asiamoney Magazine for the second consecutive year, “Top 50 Most Valuable Chinese Brands in 2013” by WPP, a global brand communication and public relations firm, the “Golden Bauhinia Award” of the “Best Listed Company” and “Listed Company with the Best Investor’s Relations Management” by Ta Kung Pao and one of the “Best 100 Employers” by zhaopin.com. In 2014, our charity campaign “Love at China Eastern Airlines” was awarded the Gold Award at the First Chinese Young Volunteers Services Contest. The “Love at China Eastern Airlines” campaign has organized activities such as visiting welfare and nursing homes, subsidizing Hope Schools and schools for urban and rural migrant workers’ children and teaching school children with hearing and speaking impairment, running blood donation programs, and other activities for environmental protection. The campaign launched 5,179 projects with 274,979 staff and members taking participation, serving a total of 233,353 people in need. Through interaction with the community, we have established a charity brand image of “delivering love and serving the community”. In 2015, “Love at China Eastern Airlines” launched 530 projects all year round, with 26,119 staff participating, serving a total of 40,166 people.

In 2014, we were recognized as “Top 50 Most Valuable Chinese Brands” by WPP, a global brand communication firm, as well as being awarded the “China Securities Golden Bauhinia Award” and ranked first as the “Best Listed Company Award” by Ta Kung Pao in Hong Kong for three consecutive years; and ranked among top 10 in terms of “Most Competitive Asia Airline 2014” and “Most Popular Asia Airline 2014” in the 5th World Airline Competitiveness Rankings.

In 2015, we were bestowed a number of awards, such as “Best China Airline” at the 8th TTG (Asia Media) China Travel Awards, “China Securities Golden Bauhinia Award – Listed Company with the Most Valuable Brand” for four consecutive years and “Best Innovative Listed Company” granted by Hong Kong Ta Kung Pao, as well as “2014-2015 Most Respectable Chinese Enterprise” and “2015 Chinese Best Business Model Innovation Award” by the Economic Observer and 21st Century Business Herald, respectively.

In 2016, we successively won the 9th TTG China Tourism Awards “Best China Airlines”, and were awarded “2016 Asian Tourism Red Coral Award – Most Popular Airline Brand”, “Asia Pacific 2016 Excellence Aviation Award” and “International Carbon Gold Award – Social Citizenship Award” by the 2016 Asian Tourism Industry Annual Conference, the CAPA Communication Center and the World Environmental Protection (Economy and Environment) Conference respectively.

In 2017, we were awarded the “International Carbon-Value Award – Social Citizen Award” by the World Economic and Environmental Conference and were rated as a “Targeted Poverty Alleviation Demonstration Enterprise” by the World Charity Forum. We were granted “China Securities Golden Bauhinia Award” for six consecutive years, recognized as one of the “Top 30 Most Valuable Chinese Brand” by Wire & Plastic Products Group (WPP), the world’s largest brand communication group. We were also awarded as one of the “World’s 500 Most Valuable Brands” by the famous brand appraisal organization Brand Finance, “Gold Ranking” accredited by IATA, and awards such as “Feike Travel Awards”, “Best Employer Award in Aviation Industry”, “The Most Admired Company in China”, “Top 10 Influencing Airlines”, “Top 50 Chinese Brand with Overseas Social Influence” and “The Best Performing Airline” by various authoritative institutions.

Our Operations by Activity

The following table sets forth our traffic revenues by activity for each of the years ended December 31, 2015, 2016 and 2017:

Year Ended December 31,

2015

2016

2017

(RMB million)

Traffic revenues

Passenger

78,585

83,577

91,564

Cargo and mail

6,491

5,977

3,623

Total traffic revenues

85,076

89,554

95,187

Passenger Operations

The following table sets forth our certain passenger operating statistics by route for each of the years ended December 31, 2015, 2016 and 2017:


	Year Ended December 31,
	2015		2016		2017
Passenger Traffic (in RPKs) (millions)		146,341		167,529		183,182
Domestic		98,304		106,361		117,033
Regional (Hong Kong, Macau and Taiwan)		4,189		4,347		4,758
International		43,848		56,821		61,391
Passenger Capacity (in ASKs) (millions)		181,792		206,249		225,996
Domestic		121,019		129,460		141,067
Regional (Hong Kong, Macau and Taiwan)		5,509		5,612		5,948
International		55,264		71,177		78,981
Passenger Yield (RMB)		0.56		0.52		0.52
Domestic		0.55		0.53		0.54
Regional (Hong Kong, Macau and Taiwan)		0.75		0.71		0.72
International		0.56		0.47		0.47
Passenger Load Factor (%)		80.50		81.23		81.06
Domestic		81.23		82.16		82.96
Regional (Hong Kong, Macau and Taiwan)		76.04		77.45		79.99
International		79.34		79.83		77.73

In 2015, we conducted significant optimization of our fleet structure, and increased our fleet to 551 aircrafts as of the end of 2015, and the variety of our aircraft models was streamlined to 13 models by the end of 2015. In respect of passenger transportation, we actively seized the opportunities brought about by international low oil prices and robust demand for outbound tourism, and achieved impressive growth in passenger transportation by responding proactively to adverse factors such as geopolitical instability around the globe, terrorist attacks outside China, MERS cases in South Korea and impact on short-haul routes due to formation of a high-speed railway network in 2015. Efforts have been made to foster the construction of hubs and negotiate time slots in hub and core markets in order to promote superb connectivity. In respect of freight transportation and logistics, we tightened our cost control, optimized production structure, broadened marketing channels and strived to stabilize transportation prices in 2015. In 2015, we further strengthened our cooperation with both member and non-member airlines of SkyTeam Alliance to widen the scope of cooperation and improve the quality of cooperation. In September 2015, we entered into a strategic partnership with Delta Air Lines to deepen our cooperation in terms of code-share, cabin sharing and joint sales. By forming an industry-leading route network, both parties implemented codeshare on 123 routes, including 9 international major routes and 114 domestic routes in the PRC and the USA. Through offering joint sales to corporate customers, the influential power of the North American corporate customers was increased. As for the European market, we and Air France have realized interline transit services for flights departing and arriving at Shanghai, Dalian, Paris and Nice. In the Australian market, the joint operation with Qantas was officially commenced to launch codeshare on major routes such as Shanghai-Sydney and Shanghai-Melbourne routes, in order to launch in-depth cooperative projects including customer base sharing.

In 2015, we put in available seat – kilometers (ASK) of approximately 181,792.90 million passenger-kilometers, representing an increase of approximately 13.2% from 2014. Number of passengers carried in 2015 was approximately 93.8 million, representing an increase of approximately 11.9% from 2014. Passenger load factor in 2015 was approximately 80.5%, representing an increase of approximately 1.2% from 2014. Passenger revenue in 2015 amounted to approximately RMB78,585 million, representing an increase of approximately 4.4% from 2014.

In 2015, we enhanced Shanghai core hub and Xi’an and Kunming regional hubs, and established and extended our aviation transportation network in major markets with high market influence such as Beijing, Nanjing and Qingdao to cover 1,057 destinations in 179 countries. We strove for additions of air traffic rights and time slot resources in hub markets and core markets, steadily improved the aircraft utilization rate and consolidated and expanded market share in the three largest hubs and core markets. Based on the SkyTeam Alliance platform, we enhanced our strategic cooperation with Delta Air Lines and cooperated with Air France and Qantas to develop a highly efficient and convenient flight network which covered the whole country and connected to the whole wide world.

In 2016, we continued to update and optimize our fleet structure, introducing new aircrafts continually and retiring outdated model aircrafts. As of the end of 2016, our average flight age was 5.4 years. We mainly introduce long – haul B777 series aircrafts in trans-Pacific routes; mid-to-long-haul A330 series aircrafts in China-Europe routes, China-Australia and domestic business routes; A320 series and B737 series aircrafts in domestic and surrounding countries and regions routes, which we believe enhances the matching level between fleet models and routes, transportation capacities and relevant markets. In 2016, we continued to deepen and expand our cooperation with external partners. Relying on the SkyTeam Alliance platform, we continued to enhance our cooperation with member airlines in the SkyTeam Alliance. In collaboration with Delta Air Lines, based on pre-existing trans-Pacific routes and destinations in the PRC and the USA, we further extended our network of cooperative routes to Canada, Mexico, Southeast Asian and South American regions, achieving a total of 252 codeshare routes. In collaboration with Air France-KLM Group (“Air France-KLM”), based on our jointly operated routes and code-share coverage, we increased our joint marketing efforts to corporate customers in the French market.

In 2016, we proactively promoted the establishment of transportation hubs with the opening of various international routes for long-haul flights and an enhanced coverage of our transportation network. With Shanghai as the core hub, we added six international routes for long-haul flights to our network, connecting Shanghai and Prague, Amsterdam, Madrid, St. Petersburg, Chicago and Brisbane, respectively. We provided more frequent flight services on routes connecting Shanghai and New York City, Los Angeles, Sydney and Melbourne. We added routes connecting Kunming and Sydney, Qingdao and San Francisco, Nanjing and Vancouver and Hangzhou and Sydney. Last, we stabilized the allocation of our flight capacities for Japan, Korea and Southeast Asia markets. As a result of these enhanced transit connection and expanded transit routes structures, in 2016, we experienced approximately 26.8%, 63.8% and 43.1% year-on-year growth in passenger flight capacity for Europe, North America and Australia markets, respectively; and our inter-airline transit volume and revenue grew by 24.2% and 21.4%, respectively. As of the end of 2016, by connecting to the route networks of other SkyTeam member airlines, our flights had access to 1,062 destinations in 177 countries.

In 2016, we put in available seat – kilometers (ASK) of approximately 206,249.27 million passenger-kilometers, representing an increase of approximately 13.5% from 2015. Number of passengers carried in 2016 was approximately 101.74 million, representing an increase of approximately 8.5% from 2015. Passenger load factor in 2016 was approximately 81.2%, representing an increase of approximately 0.7% from 2015. Passenger revenue in 2016 amounted to approximately RMB83,577 million, representing an increase of approximately 6.4% from 2015.

In 2016, we further strengthened our Shanghai core hub and Xi’an and Kunming regional hubs. The aggregated number of transits connecting “origin to destination” of the three hubs reached 6,075, an increase of 13.8% as compared to 2015. In respect of the number of transits connecting “origin to destination”, Pudong reached 4,083, an increase of 17.9% as compared to 2015, Kunming reached 1,384, an increase of 9.1% as compared to 2015, and Xi’an reached 608, which was similar to 2015. The three hubs transported approximately 4.51 million passengers, an increase of 27.0% as compared to 2015. Among them, our Shanghai hub transported approximately 2.99 million passengers, an increase of 27.2% as compared to 2015, comprising 25.6% of transit flights; our Kunming hub transported approximately 1.18 million passengers, an increase of 18.7% as compared with 2015, comprising 16.1% of transit flights; and Xi’an hub transported approximately 340,000 passengers, an increase of 64.7% as compared to 2015, comprising of 6.9% transit flights.

In 2017, in view of a relatively complicated external environment and intensifying competition, we embrace challenges by seizing new development opportunities such as the “One Belt One Road” initiative, free trade port in Shanghai, the construction of the new airport in Beijing and the full access to electronic devices on aircraft.

According to the “Approval of the feasibility study report of the construction of new airport in Beijing” by the NDRC and the “Notice regarding the matters of the construction of airline base project at the new airport in Beijing” by CAAC, the new airport in Beijing is located along the north bank of Yongding River, and between Yu Fa Town and Li Xian Town, Daxing District, Beijing and Guangyang District, Lang Fang, Hebei. Being the major base airline of the new airport in Beijing, we will undertake base construction according to the target of bearing 40% of the traffic flow of the new airport in Beijing. In February 2017, we have gained the approval from the NDRC in regards of the base project at the new airport in Beijing. After the commencement of operation of the new airport in Beijing in 2019, we will grasp the developmental opportunities derived from the coordinated development of Beijing, Tianjin and Hebei, especially the construction of Xiong’an New District by the State, to actively strive for routes and time slot resources. Leveraging on the SkyTeam Airline Alliance platform, we will construct international coverage of our route networks to provide convenient, highly efficient and quality outbound travelling services for travelers.

In 2017, we focused on the operation and development of the passenger transportation business. We continued to optimize e-commerce platform functions. For e-commerce, we expedited the construction of our in-flight internet connection platform. The scale of the aircraft fleet with Wi-Fi installed ranked at the top nationwide and we took the lead in allowing the use of portable electronic devices on flight in the PRC. As at the end of 2017, internet access has become available in all our 74 wide-body aircraft with the coverage of major business routes in Europe, the U.S., Australia and China. “Internet Access In the Air” enhanced customers’ in-flight experience. We also upgraded and improved our 11 overseas websites, and a total of 12 updates were made to our mobile application. Furthermore, we introduced new service products such as pre-flight ordering of in-flight meals via mobile application, with an aim to optimize service experiences of customers. We strengthened the shopping mall points operations by introducing diversified point redemption products such as oversized baggage redemption and continued to increase the revenue from the sales of non-aviation points, where the revenue from the sales of nonaviation points increased by 149% compared to last year.

In 2017, we continued to optimized our fleet structure. We introduced a total of 73 aircraft of major models and a total of 18 aircraft retired. With the introduction of B737-8MAX series aircraft and the gradual retirement of B767 series aircraft, our fleet structure has been made younger. In 2017, we continued to deepen and expand our cooperation with external partners. We deepened the comprehensive partnership with Delta by further expanding the code-share coverage and jointly deepened marketing cooperation by expanding channels and markets. We also strengthened our business partnership with AFK by further expanding our code-share coverage with it. Capitalized on the cooperation platform of SkyTeam Airline Alliance, we have newly launched code-share cooperation with Air Europa Líneas Aéreas, S.A.U. (IATA code: UX) from Spain and Czech Airlines j.s.c. (IATA code: OK). In addition, we attached importance to and continued to strengthen the cooperation with airlines which are not members of SkyTeam Airline Alliance. In collaborating with Qantas Airways Limited (IATA code: QF), we launched enhanced cooperation in joint operation and sales, and points earning and redeeming of frequent flyer program. We commenced to launch code-sharing cooperation with Jet Airways (India) Ltd. (IATA code: 9W) and Air Mauritius Limited (IATA code: MK), and discussion on bilateral cooperation of frequent flyers with WestJet Airlines Ltd. (IATA code: WS).

In 2017, we strengthened the research on the route network planning of Beijing’s new hub, and actively promoted the construction project of our base in the new airport in Beijing. We conducted seasonal improvements and adjustments on transportation capacity, and introduced Beijing-Hangzhou-Sydney, Kunming-Sydney and Wuhan-Sydney routes in accordance with the characteristics of European, American and Australian markets in recent years. In view of the changing demand for the Korean market, we reduced transportation capacity and changed to use smaller aircraft. We also introduced routes such as Shanghai-Jakarta, Shanghai-Cebu, Xi’an-Prague and Shenzhen-Krabi so as to be in line with the State’s “One Belt One Road” initiative. As at the end of 2017, with the matching route networks with the SkyTeam Airline Alliance members, our route networks reached 177 countries and 1,074 destinations.

In 2017, we put in available seat – kilometers (ASK) of approximately 225,996 million passenger-kilometers, representing an increase of approximately 9.6% from 2016. Number of passengers carried in 2017 was approximately 111 million, representing an increase of approximately 8.9% from 2016. Passenger load factor in 2017 was approximately 81.1%, representing a decrease of approximately 0.17 percentage point from 2016. Passenger revenue in 2017 amounted to approximately RMB91,564 million, representing an increase of approximately 9.6% from 2016.

In 2017, we further strengthened our Shanghai core hub and Xi’an and Kunming regional hubs. The aggregated number of transits connecting “origin to destination” of the three hubs reached 6,489, an increase of 6.8% as compared to last year. In respect of the number of transits connecting “origin to destination”, Pudong reached 4,225, an increase of 3.5% as compared to last year, Kunming reached 1,608, an increase of 16.2% as compared to last year, and Xi’an reached 656, an increase of 7.9% as compared to last year. The three hubs transported approximately 4.98 million passengers, an increase of approximately 10.5% as compared to last year. Among them, our Shanghai hub transported approximately 3.02 million passengers, an increase of approximately 1.2% as compared to last year, comprising 24.3% of transit flights; our Kunming hub transported approximately 1.45 million passengers, an increase of approximately 22.7% as compared with last year, comprising 17.7% of transit flights; and Xi’an hub transported approximately 0.51 million passengers, an increase of approximately 50.3% as compared to last year, comprising of 8.6% transit flights.

Cargo and Mail Operations

The following table sets forth certain of our cargo and mail operations statistics by route for each of the years ended December 31, 2015, 2016 and 2017:


			Year Ended December 31,
	2015		2016		2016		2017
			(Non-comparable basis)⁽¹⁾		(Comparable basis)⁽²⁾
Cargo and Mail Traffic (in RFTKs)		4,865		4,875		2,495		2,663
(millions)
Domestic		948		964		927		896
Regional (Hong Kong, Macau and Taiwan)		126		126		38		45
International		3,791		3,786		1,530		1723
Cargo and Mail Capacity (in AFTKs)		8,842		9,440		6,535		7,057
(millions)
Domestic		2,337		2,221		2,163		2,278
Regional (Hong Kong, Macau and Taiwan)		281		270		148		188
International		6,224		6,949		4,224		4,592
Cargo and Mail Yield (RMB)		1.33		1.25		1.25		1.36
Domestic		1.09		1.07		1.10		1.10
Regional (Hong Kong, Macau and Taiwan)		3.01		2.98		3.04		3.56
International		1.34		1.24		1.30		1.44
Cargo and Mail Load Factor (%)		55.02		51.64		38.20		37.70
Domestic		40.57		43.39		42.90		39.30
Regional (Hong Kong, Macau and Taiwan)		44.82		46.51		25.70		23.90
International		60.91		54.48		36.20		37.50

Notes:

(1)

(2)	Under comparable basis, our operating data in 2016 did not include our whole cargo freight data during the period from February to December 2016.

On November 29, 2016, we entered into an equity transfer agreement with Eastern Airlines Industry Investment, in relation to the transfer of 100% equity interests in Eastern Logistics held by us to Eastern Airlines Industry Investment. China Cargo Airlines, a non-wholly subsidiary of Eastern Logistics, operated a total of nine freighters then. On February 8, 2017, we completed the transfer of 100% equity interest in Eastern Logistics to Eastern Airlines Industry Investment and the nine freighters operated by China Cargo Airlines ceased to be included in our fleet. After completion of the disposal, we will focus on air passenger transportation business and continue to improve our operating and management ability. Also, on November 29, 2016, we and Eastern Logistics entered into the freight logistics daily connected transactions framework agreement. See “ Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions - Related Business Transactions - Eastern Logistics, an indirectly owned subsidiary of CEA Holding - Freight Logistics Daily Connected Transactions Framework Agreement with Eastern Logistics”.

On January 1, 2017, to avoid the competition between the bellyhold space business operated by us and the all-cargo aircraft freight business operated by China Cargo Airlines, we entered into the bellyhold space management agreement with China Cargo Airlines (“Bellyhold Space Management Agreement”) to entrust China Cargo Airlines for the operation of the bellyhold space business for a term of three years, which commenced on January 1, 2017. On March 1, 2018, we entered into contractual operation agreement and operation cost agreement with China Cargo Airlines, pursuant to which, China Cargo Airlines (as contractor) will operate the bellyhold space business and reimburse the contractual fee to us, and we will reimburse the operation cost of the bellyhold space business to China Cargo Airlines. The Bellyhold Space Management Agreement has been superseded by the contractual operation agreement dated March 1, 2018 entered into between the Company and China Cargo Airlines since March 31, 2018.

Our Operations by Geographical Area

Our revenues (net of business tax) by geographical area are analyzed based on the following criteria:

•

Traffic revenue from services within the PRC (excluding Hong Kong Special Administrative Region (“Hong Kong”), Macau Special Administrative Region (“Macau”) and Taiwan, (collectively known as “Regional ”) )is classified as domestic operations. Traffic revenue from inbound and outbound services between overseas markets excluding Regional is classified as international operations.

•

Revenue from ticket handling services, ground services, cargo handling service and other miscellaneous services is classified based on where the services are performed.

The following table sets forth our revenues by geographical area for each of the three years ended December 31, 2017:


	2015		2016		2017
	(RMB million)		(RMB million)		(RMB million)
Domestic		61,222		63,730		67,923
Regional (Hong Kong, Macau and Taiwan)		3,569		3,516		3,624
International		29,178		31,658		30,928
Total		93,969		98,904		102,475

Regulation

The PRC Civil Aviation Law provides the framework for regulation of many important aspects of civil aviation activities in China, including:

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the administration of airports and air traffic control systems;

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aircraft registration and aircraft airworthiness certification;

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operational safety standards; and

•

the liabilities of carriers.

The Chinese airline industry is also subject to a high degree of regulation by the CAAC. Regulations issued or implemented by the CAAC encompass virtually every aspect of airline operations, including route allocation, domestic airfare, licensing of pilots, operational safety standards, aircraft acquisition, aircraft airworthiness certification, fuel prices, standards for aircraft maintenance and air traffic control and standards for airport operations. Although the PRC airlines operate under the supervision and regulation of the CAAC, they are accorded a significant degree of operational autonomy. These areas of operational autonomy include:

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whether to apply for any route;

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the allocation of aircraft among routes;

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the airfare pricing for the international and regional passenger routes;

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the airfare pricing within the limit provided by the CAAC for the domestic passenger routes;

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the acquisition of aircraft and spare parts;

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the training and supervision of personnel; and

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many other areas of day-to-day operations.

Although we have generally been allocated adequate routes in the past to accommodate our expansion plans and other changes in our operations, those routes are subject to allocation and re-allocation in response to changes in governmental policies or otherwise at the discretion of the CAAC. Consequently, we cannot assure you that our route structure will be adequate to satisfy our expansion plans.

The CAAC has established regulatory policies intended to promote controlled growth of the Chinese airline industry. We believe those policies will be beneficial to the development of and prospects for the Chinese airline industry as a whole. Nevertheless, those regulatory policies could limit our flexibility to respond to changes in market conditions, competition or our cost structure. Moreover, while we generally benefits from regulatory policies that are beneficial to the airline industry in China as a whole, the implementation of specific regulatory policies may from time to time materially and adversely affect our business operations.

Because we provide services on international routes, we are also subject to a variety of bilateral civil air transport agreements between China and other countries. In addition, China is a contracting state as well as a permanent member of the International Civil Aviation Organization, an agency of the United Nations established in 1947 to assist in the planning and development of the international air transportation. The International Civil Aviation Organization establishes technical standards for the international airline industry. China is also a party to a number of other international aviation conventions. Our business operations are also subject to these international aviation conventions, as well as certain foreign country aviation regulations and local aviation laws with respect to route allocation, landing rights and related flight operation regulation.

Domestic Route Rights

Chinese airlines must obtain from the CAAC the right to carry passengers or cargo on any domestic route. The CAAC’s policy on domestic route rights is to assign routes to the airline or airlines suitable for a particular route. The CAAC will take into account whether an applicant for a route is based at the point of origin or termination of a particular route. This policy benefits airlines, such as us, that have a hub located at each of the active air traffic centers in China. The CAAC also considers other factors that will make a particular airline suitable for an additional route, including the applicant’s safety record, previous on-time performance and level of service and availability of aircraft and pilots. The CAAC will consider the market conditions applicable to any given route before such route is allocated to one or more airlines. Generally, the CAAC will permit additional airlines to service a route that is already being serviced only when there is strong demand for a particular route relative to the available supply. The CAAC’s current general policy is to require the passenger load factor of one or two airlines on a particular route to reach a certain level before another carrier is permitted to commence operations on such route.

Regional Route Rights

Hong Kong routes and the corresponding landing rights were formerly derived from the Sino-British air services agreement. In February 2000, the PRC government, acting through the CAAC, and Hong Kong signed the Air Transportation Arrangement between mainland China and Hong Kong. The Air Transportation Arrangement provides for equal opportunity for airlines based in Hong Kong and mainland China. Competition from airlines based in Hong Kong increased after the execution of the Air Transportation Arrangement. The CAAC normally will not allocate an international route or a Hong Kong route to more than one domestic airline unless certain criteria, including minimum load factors on existing flights, are met. There is more than one Chinese airline company on certain of our Hong Kong routes.

The CAAC and the Economic Development and Labor Bureau of Hong Kong entered into an agreement in 2007 to further expand the Air Transportation Arrangement. This agreement increases the routes between Hong Kong and mainland China to expand coverage to most major cities in mainland China. The capacity limits for passenger and/or cargo services on most routes will also be gradually lifted. Beginning in 2007, each side designated three airline companies to operate passenger and/or cargo flights and another airline company to operate all-cargo flights on the majority of the routes between Hong Kong and mainland China.

On December 15, 2008, mainland China and Taiwan commenced direct air and sea transport and postal services, ending a nearly six-decade ban on regular links between the two sides since 1949. Under a historic agreement signed by the governments of mainland China and Taiwan in early November 2008, the new air links expanded from weekend charters to a daily service, with the two sides operating a total of 108 flights per week in 2008 and approximately 270 and 370 regular direct flights per week in 2009 and 2010, respectively. Mainland China and Taiwan agreed to increase flight destinations for air links between the two sides in mainland China to 33 airports in various PRC cities in 2010, while flight destinations in Taiwan continue to include eight airports in various cities in Taiwan. At the end of 2012, the two sides agreed to increase the total number of flights to 616 per week and to increase the total number of destination airports in mainland China and Taiwan to 64. The two sides also previously agreed to launch chartered cargo flights between two terminals in mainland China, namely, Shanghai Pudong and Guangzhou airports, and two terminals in Taiwan, namely, Taoyuan and Kaohsiung airports. On August 12, 2013, the two sides agreed to increase the total number of flights to 670 per week and add three terminals of chartered cargo flights in mainland China, namely, Tianjin, Zhengzhou and Ningbo airports. At the end of 2014, mainland China and Taiwan agreed to increase the total number of flights to 924 per week and to increase the total number of destination airports in mainland China to 65. In April 2015, the fifth batch of Mainland pilot cities was opened for individual tour to Taiwan, including Haikou, Hohhot, Lanzhou, Yinchuan, Changzhou, Zhoushan, Huizhou, Weihai, Longyan, Guilin and Xuzhou, and the number of Mainland cities with free line tour to Taiwan has reached 47.

International Route Rights

International route rights, along with the corresponding landing rights, are derived from air services agreements negotiated between the PRC government, acting through the CAAC, and the government of the relevant foreign country. Each government grants to the other the right to designate one or more domestic airlines to operate scheduled services between certain points within each country. The CAAC awards the relevant route to an airline based on various criteria, including:

•

availability of appropriate aircraft and flight personnel;

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safety record;

•

on-time performance; and

•

hub location.

Although hub location is an important criterion, an airline may be awarded a route that does not originate from an airport where it has a hub. The route rights awarded do not have a fixed expiry date and can be terminated at the discretion of the CAAC.

Airfare Pricing Policy

The PRC Civil Aviation Law provides that airfares for domestic routes are determined jointly by the CAAC and the agency of the State Council responsible for price control, primarily based upon average airline operating costs and market conditions.

The CAAC and the NDRC jointly publish pricing guidelines from time to time, which set forth the basic airfare levels and permitted ranges. Pursuant to the current pricing guidelines, the basic airfares for most domestic routes are the published airfares implemented by Chinese airlines immediately prior to the approval of the Pricing Reform Plan. Except for certain domestic routes, the actual airfare set by each Chinese airline for its domestic routes cannot be 25% than the basic airfare. Domestic routes that are not subject to the deviation range restrictions include short-haul routes between cities in the same province or autonomous region, or between a municipality and adjacent provinces, autonomous regions or another municipality. Certain tourist routes and routes served by only one Chinese airline are not subject to the bottom range restriction. The CAAC and the NDRC will announce the routes that are not subject to the deviation range restrictions through the airfare information system known as Airtis.net. Chinese airlines may apply to the CAAC and the NDRC for exemption from the bottom range restriction for a particular route. Chinese airlines are also required to file the actual airfare they set for their domestic routes within the ranges through Airtis.net 30 days prior to its implementation.

The CAAC and the NDRC will regularly review the average operating costs of Chinese airlines, and may adjust the basic airfares for particular domestic routes that, in their view, are not at a reasonable level. The CAAC and NDRC jointly issued a notice on April 13, 2010, effective on June 1, 2010, pursuant to which airlines may set first-class and business-class airfares in accordance with market prices, subject to relevant PRC laws. Such pricing must be filed 30 days before effectiveness with the CAAC and NDRC. Efforts by the Chinese regulators to promote a sale market with fair competition will also help provide a favorable environment for our business growth.

At the end of 2014, the CAAC and the NDRC jointly promulgated The Notice on Further Improving the Problems About Civil Aviation Domestic Air Transport Price Policy, which lifted the control over the civil domestic airlines cargo freight rate and changed the prices of specific airlines from government-oriented pricing to market-oriented pricing.

At the end of 2015, the CAAC announced the Implementation Opinion on the Reform of Mechanism of Prices and Service Fee in Civil Aviation Transport, which sets the goal to generally lift the control over the prices and service fee in competitive part of civil aviation transport by 2017, and to generally set up a basically optimized, scientific, standardized, transparent and market-oriented pricing regulatory system by 2020.

In October 2016, the CAAC and the NDRC jointly promulgated the Circular on the Further Reform of Passenger Transport Price Policy in Civil Aviation Domestic Air Transport, which loosened the control over the civil domestic airlines passenger transportation and changed the prices from government-oriented pricing to market-oriented pricing. According to the circular, the price of routes under 800km or routes above 800km that are in competition with high-speed rails for passenger transportation can be determined independently.

At the end of 2017, the CAAC and the NDRC jointly promulgated the Notice on Further Improving the Problems about Passenger Transport Price Policy in Civil Aviation Domestic Air Transport, given greater freedom to set fares on more domestic routes.

Under the PRC Civil Aviation Law, maximum airfares on regional and international routes are set in accordance with the terms of the air services agreements pursuant to which these routes are operated. In the absence of an air services agreement, airfares are set by the airlines themselves or by the CAAC with reference to comparable market prices, taking into account the international airfare standards established through the coordination of the International Air Transport Association, which organizes periodic air traffic conferences for coordinating international airfares. Discounts are permitted on regional and international routes. For the airline industry in China as a whole, the airfare per kilometer is substantially higher for regional and international routes than that for domestic routes.

Acquisition of Aircraft and Spare Parts

We are permitted to import aircraft, aircraft spare parts and other equipment for our own use from manufacturers through EAIEC, which is 55% owned by CEA Holding and 45% owned by our Company. This gives us a sale market with fair competition flexibility with our inventory management by allowing us to maintain a relatively lower overall inventory level of aircraft parts and equipment than we otherwise would have to maintain. We are still required to obtain approval from the NDRC and may be subject to appraisal of the relevant competent authorities for any import of aircraft. We generally pay a commission to EAIEC in connection with these imports.

Domestic Fuel Supply and Pricing

The Civil Aviation Oil Supply Company, or the CAOSC, which is supervised by the State-owned Assets Supervision and Administration Commission, or the SASAC, is currently the dominant civil aviation fuel supply company in China. We currently purchase a significant portion of our domestic fuel supply from CAOSC. The PRC government determines the fuel price at which the CAOSC acquires fuel from domestic suppliers and the CAAC issues a guidance price. The retail price at which the CAOSC resells fuel to airline customers is set within a specified range based on this guidance price.

In 2005, the NDRC, the CAAC and the China Air Transport Association jointly launched the linkage mechanism for aviation fuel prices and transportation prices by airline companies. The fuel surcharge standards for domestic passenger routes were adjusted according to a series of notices regarding the adjustments of passenger fuel surcharges on domestic routes issued by the NDRC and the CAAC from 2006 to 2008. In the second half of 2008, international crude oil prices decreased significantly, leading the NDRC and the CAAC to release an announcement on January 14, 2009 to suspend fuel surcharges for domestic passenger routes with effect from January 15, 2009. A Notice Concerning the Relevant Issues on Establishment Linkage Mechanism for Passenger Fuel Surcharges on Domestic Routes and the Price of Domestic Aviation Coal Oil Fuel by NDRC and CAAC, with effect from November 14, 2009, provided that fuel surcharges shall be charged by the airlines, at the airline’s discretion, but within certain limits as set forth in the notice. On March 31, 2010, the NDRC and CAAC issued the Notice Regarding the Publication of Passenger Fuel Surcharges Rate on Domestic Routes, which reduced the standard fuel surcharge by 3.1% for domestic routes. In addition, on March 31, 2011, the NDRC and CAAC issued another similar notice, which further adjusted the standard fuel surcharge downwards. From August 1, 2011, according to the Announcement on the Linking Mechanism for Fuel Surcharges and Aviation Coal Oil Fuel, issued by the NDRC and CAAC, the rate of domestic route fuel surcharges will be adjusted each month if the difference in consolidated purchase costs for domestic aviation coal oil fuel exceeds RMB250 per ton.

On March 24, 2015, the CAAC and the NDRC jointly promulgated the Notice on Adjustment of the Linking Mechanism for Fuel Surcharges and Aviation Coal Oil Fuel in Passenger Transport of Domestic Airlines, in which they decided to increase the base price of aviation coal oil fuel form RMB4,140 per ton to RMB5,000 per ton.

Safety

The CAAC has made the continued improvement of air traffic safety in China a high priority. The CAAC is responsible for the establishment of operational safety, maintenance and training standards for all Chinese airlines, which have been formulated based on international standards. Each Chinese airline is required to provide flight safety reports to the CAAC, including reports of flight incidents or accidents involving its aircraft, which occurred during the relevant reporting period and other safety related problems. The CAAC conducts safety inspections on each airline periodically.

The CAAC oversees the training of most Chinese airline pilots through its operation of the pilot training college. The CAAC implements a unified pilot certification process applicable to all Chinese airline pilots and is responsible for the issuance, renewal, suspension and cancellation of pilot licenses. Each pilot is required to pass the CAAC-administered examinations before obtaining a pilot license and is subject to an annual examination in order to have such certification renewed.

All aircraft operated by Chinese airlines, other than a limited number of leased aircraft registered in foreign countries, are required to be registered with the CAAC. All of our aircraft are registered with the CAAC. All aircraft operated by Chinese airlines must have a valid certificate of airworthiness issued and annually renewed by the CAAC. In addition, maintenance permits are issued to a Chinese airline only after the maintenance capabilities of that Chinese airline have been examined and assessed by the CAAC. These maintenance permits are renewed annually. All aircraft operated by Chinese airlines may be maintained and repaired only by CAAC certified maintenance facilities, whether located within or outside China. Aircraft maintenance personnel must be certified by the CAAC before assuming aircraft maintenance posts.

In early 2013, the CAAC amended the original Civil Aviation Incidents Standards and published the new Civil Aviation Incidents Standards which became effective as of March 1, 2013. The CAAC amended the Management Rules on Safety Information of Civil Aviation which became effective on April 4, 2016 and required that related Chinese airlines should arrange a certain number of specialists that satisfied with special requirements to take charge of the management of safety information. The CAAC promulgated the new Administrative Provisions on Emergencies of China’s Civil Aviation which became effective from April 17, 2016 and formulated the duties and responsibilities of Chinese airlines on the prevention and emergency preparedness, prediction and early warning, emergency disposal, handling and other emergency work of civil aviation. We will ensure our relevant employees implement the new standards, which will enable us to enhance our daily operations. For more information on the safety standards and measures implemented by us, see “– Maintenance and Safety – Safety.” In 2016, the CAAC promulgated the new Administrative Provisions on Civil Aviation Safety Information. As a result, we formulated new internal regulations on aviation safety information to strengthen the safety of our information system.

Security

The CAAC establishes and oversees the implementation of security standards and regulations based on the PRC laws and standards established by international civil aviation organizations. Each airline is required to submit to the CAAC an aviation security handbook describing specific security procedures established by the airline for the day-to-day operations and security training for staff. Such security procedures must be formulated based on the relevant CAAC regulations. Chinese airlines that operate international routes must also adopt security measures in accordance with the requirements of the relevant international agreements and applicable local laws. We believe that we comply with all applicable security regulations.

Environmental Regulation

We are subject to a number of environmental laws and regulations issued by regulatory authorities in China including the Environment Protection Law of the PRC, the Prevention and Control of Noise Pollution Law of the PRC, the Environmental Protection Tax Law of the PRC, Implementing Regulations of Environmental Protection Tax Law of the PRC, Notice on Developing Carbon Reporting and Verification and Emissions Monitoring Plan of 2016 and 2017, the Notice on Printing and Distributing the List of Quota Management Units of Shanghai Carbon Emission Trading (2017 Edition). We believe that we comply with all applicable noise and environmental regulations in material aspects.

Chinese Airport Policy

Prior to September 2003, all civilian airports in China were operated directly by the CAAC or by provincial or municipal governments. In September 2003, as part of the restructuring of the aviation industry in China, the CAAC transferred 93 civilian airports to provincial or municipal governments. The CAAC retained the authority to determine the take-off and landing charges, as well as charges on airlines for the use of airports and airport services. Prior to 2004, Chinese airlines were generally required to collect from their passengers on behalf of the CAAC a levy for contribution to the civil aviation infrastructure fund, which was used for improving China’s civilian airport facilities. Our revenue for the previous years is shown net of this levy. In 2003, the levy was 5% of domestic airfares and 2% of international airfares. The levy was waived by the CAAC from May 1, 2003 to December 31, 2003. With effect from September 2004, the civil aviation infrastructure levies, now paid to the Ministry of Finance of the PRC (“MOF”), have been reflected in airfares of Chinese airlines rather than collected as a separate levy.

On December 28, 2007, the CAAC and the NDRC released the Implementing Scheme for the Civil Aviation Airport Charges Reform Implementation Plan, which was implemented on March 1, 2008. This new plan divides airport charges into three parts: charges related to airline businesses; charges related to important non-airline items; and other non-airline charges. The charges related to airline businesses and important non-airline items must follow the national guided prices, in which the standard prices are rarely increased, while reduced rates can be negotiated between the airport or the service provider and the users. The plan grants us the right to negotiate with airports on the airport charges.

The civil aviation infrastructure levy was paid to the MOF and refunded again from July 1, 2008 to June 30, 2009, according to one of the ten measures announced by the CAAC in December 2008 in response to the global economic downturn. The refunded levy for China’s aviation industry amounted to approximately RMB4,000 million in total. The ten measures also include measures to enhance safety, reduce taxes, invest in infrastructure and optimize the airspace and air routes.

Limitation on Foreign Ownership

The CAAC’s present policies limit foreign ownership in Chinese airlines. Under these limits, non-Chinese residents and Hong Kong, Macau or Taiwan residents cannot hold a majority of our total outstanding shares individually or together. For PRC air transportation companies, pursuant to the new Catalog of Industries for Guiding Foreign Investment, jointly promulgated by the NDRC and MOC on July 28, 2017, Chinese investors should be the controlling shareholders of a PRC air transportation company and the total shares held by foreign investment enterprises and its associated enterprises are not permitted to exceed 25% of the total shares of a Chinese airline.

Domestic Investment

According to the Regulations on Domestic Investment in Civil Aviation Industry issued by the Ministry of Transport of PRC and effected on January 19, 2018, public air transport companies that require special management for domestic investment can keep a relative state-owned holding in its equity structure. The state-owned shares ratio requirement of major civil transport airports is loosened. Moreover, investment restrictions among various entities in the civil aviation industry are further liberalized.

Competition

Domestic

We compete against our domestic competitors primarily based on safety, quality of service and frequency of scheduled flights. With the combination of our dominant position in Shanghai, our route network and our continued commitment to safety and service quality, we believe that we are well-positioned to compete against our domestic competitors in the growing airline industry in China. However, domestic competition from other Chinese airlines has been increasing recently as our competitors have increased capacity and expanded operations by adding new routes or additional flights to existing routes and acquiring other airlines. In addition, we have faced intense competition from entrants to our domestic markets as new investments into China’s civil aviation industry have been made following the CAAC’s relaxation of certain private-sector investment rules in July 2005. In December 2008, the CAAC announced ten measures to protect and encourage the domestic aviation industry, one of which provides that no new Chinese airlines will be licensed to incorporate and operate aviation businesses before 2010. In October 2010, the CAAC announced that the suspension of approvals for new Chinese airlines companies would continue for an indefinite period. However, if the restriction is lifted in the future, we expect that competition from other Chinese airlines on our routes will further intensify.

There are currently more than 50 Chinese airlines in mainland China, and we compete with many of them on various domestic routes. All of these airlines operate under the regulatory supervision of the CAAC. Our Company, Air China Limited, or Air China, which is based in Beijing and listed on the Hong Kong Stock Exchange and the London Stock Exchange, and China Southern Airlines Company Limited, or China Southern, which is based in Guangzhou and listed on the Hong Kong Stock Exchange and the New York Stock Exchange, are the three leading air carriers in China.

Each of the domestic airlines competes against other airlines operating the same routes or flying indirect routes to the same destinations. Our principal competitors in the domestic market are China Southern and Air China, which also provide transportation services on some of our routes, principally routes originating from the major air transportation hubs in China, such as Shanghai, Guangzhou and Beijing. Some of these routes are among our most heavily traveled routes. Since most of the major domestic airlines operate routes from their respective hubs to Shanghai, we also compete against virtually all of the major domestic airlines on these routes. In addition, we are facing increasing competition from certain low-cost carriers, such as Spring Airlines, in the domestic market. Spring Airlines competes with us, as it operates daily domestic routes to certain destinations such as Harbin, Shenyang, Guangzhou, Xiamen, Sanya, Kunming and Chongqing, which are covered in our domestic routes. The “Twelfth Five-Year Plan” for civil aviation industry in China encourages low-cost airlines to enter into major logistics market gradually. In February 2014, CAAC issued Guidance on Facilitating Low-cost Aviation Development which aims at supporting the development of domestic low-cost airlines. This will further intensify the competition in domestic aviation market. However, we believe we are well-positioned to compete against domestic low-cost carriers due to our expansive route network, competitive pricing, greater availability of flight services to these destinations and strong brand name.

Domestic Rail

The PRC government is aggressively implementing the expansion of its domestic high-speed rail network, which has provided train services at speeds of up to 350 km per hour connecting major cities such as Beijing, Shanghai, Guangzhou and Hong Kong. The expansion of the coverage of this network and improvements in railway service quality, increased passenger capacity and stations located closer to urban centers than competing airports could enhance the relative competitiveness of the railway service and affect our market share on some of our key routes, in particular our routes between 500 km to 800 km. The high-speed railway routes between Shanghai and Kunming, Baoji and Lanzhou and Xi’an and Chengdu commenced operations in 2017, and has affected our Xi’an and Chengdu route, Guiyang and Kunming route, Xi’an and Xining route and Xi’an and Lanzhou route.

With the establishment of a PRC national high-speed railway network, we will inevitably face increasing competition and pricing pressures from this railway service. Therefore, we have been taking active measures in decreasing the number of short-haul routes that overlap with such high-speed train routes, as well as adjusting certain airfare prices on affected routes, facilitating “air-to-railway” transfers and allocating flight resources to alternative routes or medium-to-long-haul routes that have higher profitability, higher demand and lessened competition. In addition, in 2013, we developed ground connection services such as Air-Rail Service and Air-Bus Service and cooperated with Disney, brand hotel groups, and renowned international travel enterprises to develop travel products. In 2017, our Air-Rail Service and Air-Bus Service developed steadily with increased routes in Yangtze River Delta, Xi’an, Lanzhou and other cities and regions. We expect to continue exploring cooperation opportunities with domestic railway authorities, while maintaining and strengthening our other competitive advantages, which include providing high quality services, increasing our pre-sale product promotions and developing our transfer services.

Regional

Our Hong Kong routes are highly competitive. We currently operate approximately 20 flight routes between various cities in mainland China and Hong Kong. The primary competitors on our Hong Kong routes are Cathay Pacific Airways (“Cathay”), Hong Kong Dragon Airlines Limited (“Dragonair”) and HongKong Airlines. Cathay, Dragonair and HongKong Airlines compete with us on several of these routes, particularly the Shanghai-Hong Kong route. We also face competition from Spring Airlines on our Shanghai-Hong Kong and Shanghai-Macau routes. In addition, we face competition from HK Express on our Kunming-Hong Kong route. The Air Transportation Arrangement signed between the PRC government and the administrative government of Hong Kong in February, 2000 provides for equal opportunity for airlines based in Hong Kong and mainland China. As a result, Dragonair has increased the frequency of its flights on several of our Hong Kong routes, resulting in intensified competition.

The policy restraint on direct flights between Taiwan and mainland China has been further loosened in the past few years but there has been no further negotiation on the expansion of such arrangement between Taiwan and mainland China since mid-2016. We currently operate flights to Taipei from Shanghai, Xi’an, Kunming, Changzhou, Hefei, Huai’an, Yinchuan, Nanchang, Lanzhou, Lijiang, Ningbo, Nanjing, Qingdao, Huangshan, Taiyuan, Wuhuan, Wuxi. We currently compete with China Airlines and EVA Air on our Shanghai-Taipei, Nanjing-Taipei, Wuhan-Taipei, Xi’an-Taipei and Qingdao-Taipei routes. However, given the arrangement is subject to the political relationship between Taiwan and mainland China, any deterioration in such political relationship may cause the discontinuity or disruption in the flight arrangement. As one of the several airlines offering Taiwan-mainland China direct flight services, we cannot assure you that we will maintain or will continue to be allocated sufficient Taiwan-mainland China routes, or our results will not be aversely impacted.

We compete with Air Macau on the Shanghai Pudong-Macau route. Air Macau’s routes also provide an alternative to our Hong Kong routes for passengers travelling between Taiwan and mainland China.

International

We compete with Air China, China Southern and many other well-established foreign carriers on our international routes. Most of our international competitors are very well-known international carriers and are substantially larger than we are and have substantially greater financial resources than we do. Many of our international competitors also have significantly longer operating histories and greater name recognition than we do. Some international passengers, who may perceive these airlines to be safer and provide better service than Chinese airlines in general, may prefer to travel on these airlines. In addition, many of our international competitors have more extensive sales networks and utilize more developed reservation systems than ours, or engage in promotional activities, such as frequent flyer programs, that may be more popular than ours and effectively enhance their ability to attract international passengers.

To improve our competitive position in international markets, we have established additional dedicated overseas sales offices, launched our own frequent flyer program, participated in “Asia Miles”, a popular frequent flyer program in Asia, and entered into code-sharing arrangements with a number of foreign airlines. We have also improved our online reservation and payment system. In addition, in June 2011, we joined SkyTeam, an international airlines alliance and frequent flyer mileage program that includes, among others, international carriers such as Delta, China Southern, Alitalia, Air France and KLM. As a member of SkyTeam alliance, our Elite members can enjoy approximately 516 lounges worldwide. In 2013, we implemented code-sharing programs covering 242 routes with 11 SkyTeam member airlines. See “ – Marketing and Sales – SkyTeam Alliance.” In the meantime, we also started code-sharing cooperation with seven non-SkyTeam member airlines, covering more than 150 routes, including Japan Airlines Corporation and Qantas Airways Limited. In 2014, we proactively promoted international cooperation among members and non-members airlines of SkyTeam Alliance at various levels and expanded its route network to increase its brand recognition. We implemented transit service cooperation with China Airlines, Delta Airlines and Air France between different terminals at Shanghai Pudong International Airport. We facilitate joint sales by optimizing transit connection with Delta Airlines and enhanced co-operations with Air France by increasing the number of code-share flights. We also comprehensively improved cooperation on the China-Australia route by establishing joint operation with Qantas.

In 2015, we actively responded to the industry competition, strove for additions of air traffic rights and time slot resources in hub markets and core markets, steadily improved the aircraft utilization rate and consolidated and expanded market share in the three largest hubs and core markets. Based on the SkyTeam Alliance platform, we enhanced our strategic cooperation with Delta Air Lines and cooperated with Air France and Qantas to develop a highly efficient and convenient flight network, which covered the whole country and connected to the whole world.

In 2016, we proactively promoted the establishment of transportation hubs with the opening of various international routes for long-haul flights and an enhanced coverage of our transportation network. With Shanghai as the core hub, we added six international routes for long-haul flights to our network, connecting Shanghai and Prague, Amsterdam, Madrid, St. Petersburg, Chicago and Brisbane, respectively. We provided more frequent flight services on routes connecting Shanghai and New York City, Los Angeles, Sydney and Melbourne. We added routes connecting Kunming and Sydney, Qingdao and San Francisco, Nanjing and Vancouver and Hangzhou and Sydney. Last, we stabilized the allocation of our flight capacities for Japan, Korea and Southeast Asia markets. As a result of these enhanced transit connection and expanded transit routes structures. Meanwhile, we also continued to strengthen our cooperation with airlines which are not members of the SkyTeam Alliance. We and Qantas Airways opened up our respective VIP lounges in the PRC and Australia to each other. Through cooperating with British Airways, Royal Brunei Airlines and China Express Airlines in code sharing, we optimized our transit connection at London Heathrow Airport and enhanced the level of coverage of our route network in Southeast Asia.

In 2017, we actively responded to the competition in international market. We have strengthened our cooperation with Air-France KLM and Delta to further extend our international route and improve our competitiveness and reputation in the international market. Relying on the cooperation platform of SkyTeam Airline Alliance, we have newly launched code-share cooperation with Air Europa Líneas Aéreas, S.A.U. (IATA code: UX) from Spain and Czech Airlines j.s.c. (IATA code: OK). In addition, the agreement of “Fully Opening of the Aviation Market” between China and Australia has intensified the competition in the Australian market, yet, it has caused us to strengthen our cooperation within the SkyTeam Airline Alliance, especially joining hands with Qantas Airlines, a cooperative partner, to expand the route network and share the infrastructure and resources of the main bases of both parties. We deepened our cooperation with Qantas Airlines in terms of code sharing, joint operation and sales. We commenced to launch code-sharing cooperation with Jet Airways (India) Ltd. (IATA code: 9W) and Air Mauritius Limited (IATA code: MK). In 2017, we also proactively adjust our capacities in international routes according to the market situation.

Maintenance and Safety

The rapid increase in air traffic volume in China in recent years has put pressure on many components of China’s airline industry, including air traffic control systems, the availability of qualified flight personnel and airport facilities. In recent years, the CAAC has placed increasing emphasis on the safety of airline operations in China and has implemented a number of measures aimed at improving the safety record of the airlines. Our ability to provide safe air transportation in the future depends on the availability of qualified and experienced pilots in China and the improvement of maintenance services, national air traffic control and navigational systems and ground control operations at Chinese airports. We have a good safety record and regard the safety of our flights as the most important component of our operations.

Maintenance Capability

Through our cooperation with service providers and ventures with other companies, we currently perform regular repair and maintenance checks on all of our aircraft, which include D1 checks, C checks and other maintenance services for certain aircraft and other flight equipment. We also perform certain maintenance services for other Chinese and international airlines. We have four main maintenance bases in Shanghai, Kunming and Xi’an and several maintenance bases in our provincial hubs including Taiyuan, Qingdao and etc. Our primary aircraft maintenance base is at Pudong International Airport. We employed approximately 11,993 workers as maintenance and engineering personnel as of December 31, 2017. We prepared our own training plan for our employees to meet the requirements of certain regulations and the needs for future development. In order to enhance our maintenance capabilities and to reduce our maintenance costs, we have acquired additional maintenance equipment, tools and fixtures and other assets over the past few years, such as airborne testing and aircraft data recovery and analysis equipment. Our avionics equipment is primarily maintained and repaired at our electronic maintenance equipment center located in Shanghai.

We entered into a joint venture with Honeywell International Inc. (“Honeywell”), formerly Allied Signal Inc., in Shanghai for performing maintenance and repairs on aircraft wheel assemblies and brakes. Since October 1997, we have operated a maintenance hangar at Hongqiao International Airport, which has the capacity to house two wide-body aircraft. We and Rockwell Collins International Inc. of the United States have also co-established Collins Aviation Maintenance Service Shanghai Limited, which is primarily engaged in the provision of repair and maintenance services for avionics and aircraft in-flight entertainment facilities in China. We and Rockwell Collins International Inc. hold 35% and 65%, respectively, of the equity interests in the joint venture. Moreover, in November 2002, we, jointly with Aircraft Engineering Investment Limited, established Shanghai Eastern Aircraft Maintenance Limited, in which we hold 60% of the equity interests, to provide supplemental avionics and other maintenance services to us. STA, which was established in 2004 by us and Singapore Technologies Aerospace Ltd. under a joint venture agreement dated March 10, 2003, also provides us with aircraft maintenance, repair and overhaul services. In 2017, we entered into two agreements with Honeywell and we expect to save US$0.8 million of repairing costs.

On November 6, 2007, we entered into a joint venture with United Technologies Corp., or UTC, to establish Shanghai Pratt & Whitney Aircraft Engine Maintenance Co., Ltd., or Pratt & Whitney, for performing maintenance and repairs on aircraft engines. We and UTC contributed US$20,145,000 and US$19,355,000, respectively, to the registered capital and hold 51% and 49%, respectively, of the equity interests in the joint venture. Moreover, after our absorption of Shanghai Airlines, we took over its 15% equity interest in Boeing Shanghai Aviation Services Co., Ltd. (“Boeing Shanghai”). As of December 31, 2013, Boeing (China) Investment Co., Ltd., Shanghai Airport (Group) Co., Ltd. and Boeing (Asia) Services Investment Limited hold 35.3%, 25.0% and 24.7%, respectively, of the remaining equity interest. Boeing Shanghai was founded in 2006 with a registered capital of US$85,000,000, and operates a maintenance hangar with the capacity to provide aircraft modification and maintenance services for two wide-body aircraft and one narrow-body aircraft and provides aircraft modification and maintenance services. In addition, we also hold 50% of Shanghai Airlines’ previous equity interest in Shanghai Hute Aviation Technology Co., Ltd. (“Shanghai Hute”). The remaining equity interest is held by Sichuan Haite High-Tech Co., Ltd. Shanghai Hute was founded in 2003 with a registered capital of RMB30,000,000, and provides maintenance services for aviation equipment. The enhancement of our maintenance capabilities allows us to perform various maintenance operations in-house and continue to maintain lower spare parts inventory levels.

Since December 2014, we have adopted an innovative asset management model and established Eastern Airlines Technology Co. Ltd. (“Eastern Technology”), a wholly-owned subsidiary specializing in aircraft maintenance, to explore the transformation of supporting assets to operational assets. In 2015, Eastern Technology engaged in aircraft maintenance, raised its standards for aircraft maintenance and construction management to facilitate our centralized control over aircraft maintenance, and focused on high-end premium operations, such as providing maintenance services for aircraft for Chinese routes operated by international airlines and sharing of aviation equipment. In 2016, other airlines such as Singapore Airlines, AirAsia and Royal Brunei Airlines became customers of Eastern Technology, whose area of operation expanded to locations including Xi’an, Jinan, Wuhan and Wuxi. In 2017, other airlines such as Macau Airlines, Delta, Asiana Airlines, Hong Kong Airlines and Malaysia Airlines became customers of Eastern Technology.

Safety

The provision of safe and reliable air services for all of our customers is one of our primary operational objectives. We implement uniform safety standards and safety-related training programs in all operations. Our flight safety management division monitors and supervises our flight safety. We have had a flight safety committee since the commencement of our business, comprised of members of our senior management, to formulate policies and implement routine safety checks at our Shanghai headquarters and all provincial hubs. The flight safety committee meets monthly to review our overall operation safety record during the most recent quarter and to adopt measures to improve flight safety based upon these reviews. We have also implemented an employee incentive program, using a system of monetary rewards and discipline, to encourage compliance with the CAAC safety standards and our safety procedures. We periodically evaluate the skills, experience and safety records of our pilots in order to maintain strict control over the quality of our pilot crews. In 2011, we were awarded the “Flight Safety Five-star Award” by CAAC for our commitment to aviation and operations safety.

In 2013, we continued to strengthen our Safety Management System (“SMS”). We issued work implementation plans that provided specific measures to address risks such as lighting strikes, hard aircraft landings and communication systems failures. In addition, we established the Nantong Airport training base to provide additional training programs for our flight crews. Furthermore, we formulated the “Assessment and Remuneration Packages of Star-rating flight Crew Members”, which commenced star-rating assessment of all flight crew members in terms of flight safety, flight quality, discipline and provision of services. The management of each of our provincial hub operations is responsible for the flight safety operations at the respective hub under the supervision of our flight safety management division. We prepare monthly safety bulletins detailing recent developments in safety practices and procedures and distribute them to each of our flight crew, the maintenance department and the flight safety management department. The CAAC also requires us to prepare and submit semi-annual and annual flight safety reports.

Regarding the strengthening of the SMS, we have (i) organized training for the administrators of safety management of all operating units, deepened the understanding for the construction of SMS, laying the groundwork for SMS; (ii) followed our plans and orderly commenced the construction of the analytical network. We had a number of cooperation meetings, discussing the master framework, which carries the system. We also introduced the concept of safety indicators for operational progress, rendering safety management more comprehensible; and (iii) continuously improved the risks database of the relevant routes and airports, strengthening the application of the different databases on the actual process of operation.

In 2014, we continued to facilitate the construction and application of the SMS and strictly implementing risk management. We also put greater efforts in safety inspection and supervision as well as fulfillment of responsibilities in relation to safety enhancement. We enhanced its flight training management and commenced specialized training covering pilots management and transition to B777-300ER aircraft to reinforce the foundations of flight safety. Emphasizing technology applications, we established a research institute of flight safety technology application to provide intellectual support to our ongoing safe operations.

All of our jet passenger aircraft pilots participated in the manufacturer training and support programs sponsored by Airbus and Boeing and are required to undergo recurrent flight simulator training and to participate in a flight theory course periodically. We use flight simulators for A320, A330, A340, B737NG, B737-300, B777 aircraft at our own training facility, the training facility located in the CAAC training center or overseas training facilities.

We placed great emphasis on ensuring safe operation and will continue to do so. In 2015, we established an integrated management and control model incorporating regional management, safety audit and safety supervision to further improve our safety management and control system, and pushed ahead the establishment of the Management of Risk Control System (MORCS) to enhance safety risk prevention on an ongoing basis. We have also promoted phase 2 of the Electronic Flight Bag, focusing on technical difficulties such as operation of above plateau airports, and has been enhancing our research capability in flying technology, providing psychological support to our pilots and improving emergency drills to implement in-flight safety requirements strictly.

In 2016, we further enhanced our safety management system by strengthening the enforcement of safety responsibilities, strengthening our safety supervision and inspection, strengthening our risk control over special routes and international routes for long-haul flights, enhancing our operational risk alert abilities, boosting the quality of training for our pilots, improving our system for developing talents with core skills, enhancing our ability in handling security-related contingencies, and strictly implementing safety requirements for our flights.

In 2017, through the formulation of safety management responsibility list, we strengthened procedure management and enforced safety management responsibilities. We also carried out safety management system effectiveness evaluation to enhance our abilities in identifying and managing material operational risks. In addition, we improved our emergency handbooks and emergency flows to enhance its ability in handling contingencies, as well as conducted comprehensive safety inspections and adopted specific prevention measures targeting material risk-prone areas to strengthen risk management. We made use of information technology to disseminate safety information and risk alerts quickly and strengthened the application of technology in safety management. We developed air defense information system to promote the integration of air security and ensured the safety of air defense. In 2017, we had 2,073,000 safe flying hours and 879,700 take-off and landing flights, which is an increase of 8.0% and 7.0%, respectively, over the same period of year 2016.

Cyber-security

With respect to our internal policies on cyber-security and internet safety, we have established an information safety management system and issued internal regulations on cyber-security, internal hardware and data safety systems to prevent loss of information due to cyber-security incidents, network outages or hardware incidents. We also plan to implement measures relating to the office environment information safety management and information system emergency management, information system access control, protection from any malicious software, management of information exchange tools and internal review and audit of information safety risks. Furthermore, we have entered into a strategic cooperation plan with the China Information Technology Security Evaluation Center by which their trained engineers evaluate our internal data security policies and cyber-security measures. In 2012, we established and announced two internal regulations relating to cyber-security, namely, China Eastern Airlines Information Security Management Regulation and China Eastern Airlines Information System Application and Development Safety Regulation and in 2013, we established and announced another two internal regulations relating to cyber-security, namely, China Eastern Airlines Information Security Incident Management Regulation and China Eastern Airlines Information System Classification Measures, which we believe will strengthen our information safety management systems and overall cyber-security defenses. During the year ended December 31, 2014, we did not experience any material cyber-security incidents or related losses.

In 2014, regarding the risks in relation to internet security of the aviation section, we took the following preventive measures: (i) putting in place a monitoring system; (ii) clarifying the responsibilities relating to internet, mainframe computer, operation and maintenance, product development and management; (iii) having internet security equipment; (iv) having manual inspection and(v) preparing for emergency response.

In June 2014, we promulgated documents Class I to V for CEA Information Security Management System, including directions, management requirements, operation manual and recorded output documents at security level, and passed the ISO27001 (international information security standard) certificate qualification in November 2014. Our internet security policy was synchronized with the ISO27001.

In 2015, we established a routine inspection system and a contingency mechanism for its reporting website for external security breach. The data loss prevention (DLP) project was implemented and our information security management system passed the ISO27000 certification. In the future, we will further improve our security code review and management system; promote the construction of IPS at the internet portal and the information technology disaster backup center to elevate the overall protection level on our information system security.

In 2016, we conducted information system emergency response training and commissioned the construction of our Xi’an disaster backup facility. In addition, we implemented security code review and security protection around the boundaries of our internet and data center, optimized the multi-dimensional security protection system and elevated the overall security protection level on our information system.

In 2017, we based on the “Three Centers in Two Places” plan to promote our work on the construction of the Xi’an data and disaster backup facility and the construction of a globalized basic assurance and service system. We optimized the multi-dimensional security protection system on the internet and the data center to prevent the attack of the “WANNACRY” ransomware effectively. We conducted information system emergency response training and relied on security code quality analysis to implement security code review and security protection. We also commenced security review for information system and enhanced emergency response of internet security, optimized the multi-dimensional security protection system on the internet and the data center and safeguarded the security of key information infrastructure, elevating the overall security protection standard on our information system. In 2017, our information security management system passed the ISO27001 review for certification renewal and the ISO20000 review.

We did not purchase any insurance for internet security.

Fuel Supplies

Jet fuel is one of the major expenses of airlines. Fuel costs represented approximately 25.0% of our total operating expenses in 2017. Our aviation fuel expenditure in 2017 was RMB25,131 million, representing an increase of 28.1% from RMB19,626 million in 2016. We currently purchase a significant portion of the aviation fuel for our domestic routes from regional branches of the CAOSC. Fuel costs in China are affected by costs at domestic refineries and limitations in the transportation infrastructure, as well as by insufficient storage facilities for aviation fuel in certain regions of China. Fuel prices at six designated major airports in China, namely, the airports in Shanghai Pudong, Shanghai Hongqiao, Beijing, Guangzhou, Shenzhen and Tianjin, are set and adjusted once a month by the CAAC in accordance with prevailing fuel prices on the international market. For our international routes, we purchase a portion of our aviation fuel from foreign fuel suppliers located at the destinations of these routes, generally at international market prices. Significant fluctuations of international oil prices will significantly impact jet fuel prices and our revenue from fuel surcharge and accordingly our results of operations.

In 2017, our total aircraft fuel cost was approximately RMB25,131 million, representing an increase of 28.1% from RMB19,626 million in 2016, which was mainly due to an increase in average price of fuel as the OPEC and other oil suppliers efficiently squeezed excess supply of oil in the market and the political upheaval in the Middle East increased the uncertainty of oil production, and to a lesser extent, an increase in the volume of refueling from 2016 to 2017. We cannot assure you that fuel prices will not fluctuate in the future. Further, due to the highly competitive nature of the airline industry and government regulation on airfare pricing, we may be unable to fully or effectively pass on to our customers any increased fuel costs we may encounter in the future. However, we intend to continue focusing on enhancing our jet fuel procurement policies and developing additional internal cost-control measures, which include streamlining the number of aircraft models in our fleet and optimizing route structures, which we believe will enable us to control our fuel costs.

Ground Facilities and Services

The center of our operations is Shanghai, one of China’s principal air transportation hubs. Our Shanghai operations are based at Hongqiao International Airport and Pudong International Airport. We currently also operate from various other domestic airports. We have hangars, aircraft parking and other airport service facilities at these airports, and provide ground services in these locations.

We have our own ground services and other operational services, such as aircraft cleaning and refueling and the handling of passengers and cargo for our operations at Hongqiao International Airport and Pudong International Airport. We also provide ground services for many other airlines that operate to and from Hongqiao International Airport and Pudong International Airport.

In-flight meals and other catering services for our Shanghai-originated flights are provided primarily by Shanghai Eastern Air Catering Limited Liability Company, a joint venture company affiliated with CEA Holding. We generally contract with local catering companies for flights originating from other airports.

In 2017, we enhanced the flight management to reduce the delay in takeoff. We also improved our service in self check-in management by optimizing our internal management process. In addition, we deepened our cooperation with Air-France KLM, Delta and other members of the SkyTeam to provide through check-in services in various domestic airports and international airports.

Marketing and Sales

Passenger Operations

Our marketing strategy with respect to passenger operations is primarily aimed at increasing our market share for all categories of air travelers. With respect to our Hong Kong and international routes, we are permitted to market our services based on price. We have limited flexibility in setting our airfares for domestic routes and adjust our domestic airfares in response to market demand. As part of our overall marketing strategy, we emphasize our commitment to safety and service quality. We believe that emphasis on safety is a critical component of our ability to compete successfully.

We have also adopted customized strategies to market our services to particular travelers. We seek to establish long-term customer relationships with business entities that have significant air travel requirements. In order to attract and retain business travelers, we focus on the frequency of flights between major business centers, convenient transit services and an extensive sales network. We launched our initial frequent flyer program in 1998 and joined the “Asia Miles” frequent flyer program in April 2001 to attract and retain travelers. In August 2003, we upgraded and rebranded our frequent flyer program to “Eastern Miles” and introduced a series of new services, including, among others, instant registration of membership and mileage, online registration of mileage, and accumulation of mileage on expenses at certain hotels, restaurants and other service providers that are our strategic partners. As a result of our continual efforts to develop the “Eastern Miles” program, the number of members of the frequent flyer program reached over 22.8 million in 2014. The special services hotline “95530” call center was established and came into operation in 2004. In light of the expansion of national high-speed railway network, we have cooperated with the Shanghai Railway Bureau to launch “Air-Rail Pass Transportation” products. Our domestic and international flights together with the high-speed railway products at Shanghai Hongqiao International Airport and Shanghai Pudong International Airport, have formed an air-rail two-way transportation product, which has helped us broaden our customer resources.

In terms of our customer resources, we have actively explored and expanded our customer base of high-end business travelers to accelerate the development of group clients. In addition, we have fully promoted the expansion of Eastern Miles membership. In order to attract more members and to provide members with better experience in terms of diversity, comprehensiveness and flexibility, we have strengthened our cooperation with retail stores by increasing the number of co-operative stores, covering various industries such as financial services, hotel, car rental and health services. As of the end of 2017, frequent flyer members of “Eastern Miles” reached 33.4 million, increased by 14.3% compared to 2016. We actively launched marketing campaigns such as “Members’ Day” and “818 Big Sale”, as well as increased the diversity of non-aviation point redemption channels and products, boosted the loyalty of our customers such that the ratio of frequent flyer members repeating their flights raised to 31.71%, representing an increase of 1.37 percentage points. Meanwhile, we placed emphasis on and strengthened the cooperation with travel management companies (“TMC”), online travel agency’s (OTA) agents and major customers. Sales revenue from TMC increased by 38.92% compared to last year. Revenue from direct corporate customers increased by 25.07% compared to last year, the number of direct corporate customers increased to 4,027, increased by 27.1% compared to 2016

Our advertising, marketing and other promotional activities include the use of online platforms, radio, television and print advertisements. We plan to continue to use advertising and promotional campaigns to increase sales on new routes and competitive routes.

In 2016, China Eastern Airlines E-Commerce Co., Ltd. established an e-commerce platform by integrating our online and offline platforms. Ticket returns, rebooking and upgrades via multiple channels, such as our official website, mobile application and member website were launched with success. In 2017, 12 major updates were made to our mobile application.

Ticket Booking Systems

In 2002 and again in 2012, we upgraded our online ticket booking and payment system to facilitate customer purchases of tickets via the Internet. In 2012, we also expedited the construction of nine overseas websites in a variety of languages. Currently, our global website covers North America, Australia, Europe and Asia Pacific. We continue to encourage our customers to book and purchase tickets via the Internet by initiating various promotional campaigns, upgrading and expanding the services offered by our online sales system. In 2012, we introduced “China Eastern Mobile E”, a smartphone application that provides mobile flight booking, flight status and online checking services, which we believe will provide our customers with additional convenient, value-added services. In 2013, we introduced a new version of China Eastern Mobile E and increased the application of “China Eastern Mobile E” to 14 airports. In 2016, we introduced the English version of “China Eastern Mobile E” to our customers. In addition, we introduced “M Website”, a website portal that provides mobile flight booking, flight status and online checking services and applied several third-party payment platforms to our ticket booking system. We also increased the success rate of website payment. In addition, we updated the ability for sale activities and self-service.

In 2017, to expand direct sales channels effectively, we launched “Air Tickets Market” offline while strengthened online sales channels on our official website and mobile user terminals, continued to enhance our ability in direct sales. Our revenue from direct sales increased significantly by 34.3% as compared to 2016 representing 51.2% of revenue, which increased 11 percentage points as compared to 2016 while agency fee expenses reduced continuously. In 2017, the amount of tickets purchased from our official website and mobile application reached approximately 10.5 million and led to the revenue of approximately RMB10.2 billion, representing approximately 16% of the total revenue of ticket sales.

We also maintain an extensive domestic network of sales agents and representatives in order to promote in-person ticket sales and to assist customers. Direct sales are also promoted through the availability of our telephone reservation and confirmation services. In addition to our domestic sales agents located in various cities in mainland China, Hong Kong, Macau and Taiwan, we maintain overseas sales or representative offices worldwide, including: (i) North American locations such as Honolulu, Los Angeles, New York, San Francisco and Vancouver; (ii) European and Middle Eastern locations such as Frankfurt, Hamburg, London, Moscow, Paris, Rome, Madrid, Brussels and Munich; (iii) Asia-Pacific locations such as Seoul, Tokyo, Osaka, Nagoya, Fukuoka, Hiroshima, Sapporo, Niigata, Fukushima, Okinawa, Shizuoka, Kanazawa, Toyama, Nagasaki, Kagoshima, Okayama, Matsuyama, Singapore, Bangkok, Phuket, New Delhi, Kolkata, Kuala Lumpur, Ho Chi Minh, Bali, Dubai, Dhaka, Phnom Penh, Siem Reap, Vientiane, Yangon, Mandalay, Kathmandu and Maldives; and (iv) Australian locations such as Melbourne and Sydney.

As of June 1, 2008, we stopped issuing paper tickets for air travel in accordance with a mandate from the International Air Transport Association (“IATA”). The IATA represents approximately 240 airlines and comprises approximately 84% of scheduled international air traffic. As a result of the mandate, we now issue electronic itineraries and receipts as well as electronic tickets to our passengers. We believe the transition to 100% electronic ticketing will decrease administrative costs, increase flexibility and travel options for passengers, in addition to benefiting the environment through the reduced need for paper. All of our direct passenger ticket sales are recorded on our computer systems. Most Chinese airlines, including us, are required to use the passenger reservation service system provided by the CAAC’s computer information management center, which is linked with the computer systems of major Chinese commercial airlines. We have also entered into membership agreements with several international reservation systems, including ABACUS, the largest computer reservation system in southeast Asia, TOPAS of Korea, SABRE, GALILEO and WORLDSPAN of the United States, AMADEUS of Europe, INFINI and AXESS of Japan and Sirena-Travel of Russia, which have made it easier for customers and sales agents to make reservations and purchase tickets for our international flights. In addition, we have entered into distribution agreements with ABACUS, TOPAS, SABRE, GALILEO and AMADEUS.

SkyTeam Alliance

We officially joined SkyTeam, an international airlines alliance and frequent flyer mileage program that includes international carriers such as, among others, Delta, China Southern, Alitalia, Air France and KLM, on June 21, 2011.

By the end of 2015, we have entered into frequent flyer and airport lounges agreements with 20 SkyTeam member airlines and implemented code-sharing programs covering 670 routes, as well as 336 routes with non-SkyTeam member airlines, which has further broadened the coverage of our route network. By the end of 2016, we implemented code-sharing programs with 12 SkyTeam member airlines and the number of code sharing routes with non-SkyTeam member airlines increased by 52% as compared to 2015. We also cooperated with nine SkyTeam member airlines including Delta, Air France and KLM, China, Alitalia, Garuda Indonesia and Iberia in joint check-ins for 21 transit points. By the end of 2017, we implemented code-sharing programs with 14 SkyTeam member airlines. The two newly cooperated SkyTeam members are Air Europa Líneas Aéreas, S.A.U. (IATA code: UX) from Spain and Czech Airlines j.s.c. (IATA code: OK).

By connecting to the route networks of other SkyTeam member airlines, we are able to offer our passengers seamless transit to 25 destinations in 15 countries under a single plane ticket with direct luggage services as of December 31, 2017. Passengers may also enjoy the comfort of more than 600 VIP airport lounges of SkyTeam around the world. We believe this will be another benefit for our passengers, as they will be afforded additional flight options and frequent flyer mileage benefits through our SkyTeam alliance partners. In addition, we will benefit from possible codeshare and cooperative flight options, reduced costs and increased alliance-related marketing and promotion overseas.

Tourism and Travel Services

In addition to our airline operations, we also generate commission revenues from tickets sold on behalf of other airlines. With our subsidiary, Shanghai Airlines, we derive revenue from tourism and travel services through Shanghai Airlines Tours. Shanghai Airlines Tours provides various business and leisure travel services, including inbound, outbound and domestic travel, conference and exhibition planning, flight chartering and plane ticket reservation, tour bus and hotel reservation and other related services. Shanghai Airlines Tours is a member of the China Association of Travel Services and Shanghai Association of Tourism (International and Domestic Travel Services divisions), as well as a member of Shanghai Association of Quality, and has been admitted into many international travel organizations including the IATA. Shanghai Airlines Tours has won several awards as a travel services provider, as well as awards and honors for its professional staff and vacation package offerings.

In 2017, Shanghai Airlines Tours continued to optimized its business and leisure travel services under two brands, namely, “Shanghai Airlines Travel” and “Shanghai Airlines Holiday”, by developing new tourism products and models. Shanghai Airlines Tours launched its online official store to expand its direct sale channels and consolidated its online and offline channels to make full use of its resources. It also successfully became the supplier of several government departments. In addition, Shanghai Airlines Tours strengthened the cooperation with our other subsidiaries to connect its business to ours to improve the overall service quality and performance.

Patents and Trademarks

We own or have obtained licenses to use various domestic and foreign patents, patent applications and trademarks related to our business. While patents, patent applications and trademarks are important to our competitive position, no single one is material to us as a whole. In addition, we own various trademarks related to our business. The most important trademark is the service trademark of China Eastern Airlines Corporation Limited. All of our trademarks are registered in China.

Insurance

The CAAC purchases fleet insurance from PICC Property and Casualty Company Limited (“PICC”), and China Pacific Property Insurance Company Ltd., on behalf of all Chinese airlines. PICC has reinsured a substantial portion of its aircraft insurance business through Lloyd’s of London. The fleet insurance is subject to certain deductibles. The premium payable in connection with the insurance is allocated among all Chinese airlines based on the aircraft owned or leased by these airlines. Under the relevant PRC laws, the maximum civil liability of Chinese airlines for injuries to passengers traveling on domestic flights has been increased to RMB400,000 per passenger in March 2006, for which we also purchase insurance. As of July 31, 2006, the Convention for the Unification of Certain Rules for International Carriage by Air of 1999, or Montreal Convention, became effective in China. Under the Montreal Convention, carriers of international flights are strictly liable for proven damages up to 100,000 Special Drawing Rights and beyond that, carriers are only able to exclude liability if they can prove that the damage was not due to negligence or other wrongful act of the carrier (and its agents) or if the damage solely arose from the negligence or other wrongful act of a third party. We believe that we maintain adequate insurance coverage for the civil liability that can be imposed due to injuries to passengers under Chinese law, the Montreal Convention and any other agreement we are subject to. We also maintain hull all risk, hull war risk and aircraft legal liability insurance, including third party liability insurance, of the types and in amounts customary for Chinese airlines.

C. Organizational Structure

See the section headed “Item 4. Information on the Company — History and Development of the Company”.

D. Property, Plant And Equipment

Fleet

As of December 31, 2017, we operated a fleet of 637 aircraft, including 627 passenger aircraft, most with a seating capacity of over 100 seats and 10 business aircraft held under trust. In 2017, we introduced 73 aircraft of major models. With the introduction of B737-8MAX series aircraft and the gradual retirement of B767 series aircraft, our fleet age structure has been made younger. As we completed the transfer of 100% equity interest in Eastern Logistics to Eastern Investment on February 8, 2017, the fleet ceased to include the nine freighters operated by China Cargo Airlines.

We plan to continue to expand our scale in the future and to adjust and optimize our route network, thereby increasing our competitiveness and ability to create more attractive products and services to meet the needs of the market.

Existing Fleet

The following table sets forth the details of our fleet as of December 31, 2017:


										Units
No.	Model	Self- owned		Under finance lease		Under operating lease		Sub- total		Average fleet age (Years)
1	B777-300ER		9		11		—		20		1.9
2	A330-300		1		17		7		25		6.9
3	A330-200		15		15		3		33		5.3
4	B767		4		—		—		4		19.5
Total number of wide-body aircraft			29		43		10		82		5.6

5	A321		38		39		—		77		4.4
6	A320		79		52		48		179		7.1
7	A319		13		20		2		35		4.7
8	B737-800		46		62		84		192		3.9
9	B737-700		42		13		1		56		8.6
10	B737-8MAX		—		6		—		6		0.1
Total number of narrow-body aircraft			218		192		135		545		5.5
Total number of aircraft			247		235		145		627		5.5

Total number of aircraft held under trust									10

Total number of aircraft									637

The table below sets forth the daily average utilization rates of our jet passenger aircraft for each of the year ended December 31, 2017:


	2017
	(in hours)
B777-300ER		14.1
B767		7.3
A330 Series		11.3
A320 Series		9.6
B737 Series		8.8

Most of our jet passenger aircraft were manufactured by either Airbus or Boeing. On July 9, 2015, we entered into a purchase agreement with Boeing Company to purchase fifty new Boeing B737 series aircraft which are expected to be delivered to us in stages from 2017 to 2019. On August 14, 2015, we also entered into a purchase agreement with Airbus SAS to purchase fifteen new Airbus A330 series aircraft, which are expected to be delivered to us in stages from 2017 to 2018. On April 28, 2016, we entered into a purchase agreement with Boeing Company to purchase 15 B787-9 aircraft, which are expected to be delivered to us in stages from 2018 to 2021. On the same day, we also entered into a purchase agreement with Airbus SAS to purchase 20 Airbus A350-900 series aircraft, which are expected to be delivered to us in stages from 2018 to 2022.

Future Fleet Development

Our aircraft acquisition program focuses on aircraft that will modernize and rationalize our fleet to better meet the anticipated requirements of our route structure, taking into account aircraft size and fuel efficiency. Our aircraft acquisition program, however, is subject to the approval of the CAAC and the NDRC. Older aircraft models of high energy-consumption will be surrendered as appropriate. Details of the expected fleet plan from 2018 to 2019 are as follows:


	2018E				2019E
	Introduction		Retirement		Introduction		Retirement
Model
Passenger aircraft
A319 Series		—		—		—		—
A320 Series		16		—		25		—
A321 Series		—		—		—		—
A330 Series		8		10		—		—
A350 Series		2		—		5		—
B787 Series		4		—		6		—
B777 Series		—		—		—		—
B767 Series		—		4		—		—
B737 Series		37		1		26		—
Total number of passenger aircraft		67		15		62		—

The actual quantity and time of the introduction and retirement of any of these aircraft or any additional aircraft may depend on such factors as general economic conditions, the levels of prevailing interest rates, foreign exchange rates, the level of inflation, credit conditions in the domestic and international markets, conditions in the aviation industry in China and globally, our financial condition and results of operations, our financing requirements, and the terms of any financing arrangements, such as finance leases, and other capital requirements. We believe that our aircraft acquisition plan will help us accomplish our expansion plans while maintaining an efficient fleet and ensuring alternative sources of supply.

Fleet Financing Arrangements

We generally acquire aircraft through internal funds, long-term capital leases or operating leases. Under the terms of most capital leases, we generally are obligated to make lease payments that finance most of the purchase price of the aircraft over the lease term. Upon the expiration of the lease term, we must either purchase the aircraft at a specified price or pay any amount by which such price exceeds the proceeds from the disposition of the aircraft to third parties. Alternatively, some capital leases provide for ownership of the aircraft to pass to us upon satisfaction of the final lease payment. Under capital leases, aircraft are generally leased for approximately the whole of their estimated working life, and the leases are either non-cancelable or cancelable only on a payment of a major penalty by the lessee. As a result, we bear substantially all of the economic risks and rewards of ownership of the aircraft held under capital leases. Operating leases, however, are customarily cancelable by the lessee on short notice and without major penalty. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.

Operating Facilities

As of December 31, 2017, we (including subsidiaries and branches) had operations on 660 parcels of land, occupying a total area of approximately 3.6 million square meters. In addition, as of December 31, 2017, we (including subsidiaries and branches) owned approximately 2,204 buildings. We and our major subsidiaries have obtained the land use rights certificates and building ownership certificates for certain parcels of land and buildings, and are currently in the process of applying for the certificates with respect to the five remaining parcels. We did not have any environmental issues that may have a material impact on our utilization of the assets in 2017.

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

You should read the following discussion in conjunction with our audited consolidated financial statements, together with the related notes, included elsewhere in this Annual Report. Our consolidated financial statements have been prepared in accordance with IFRSs. This discussion may include forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key information — D. Risk Factors” or in other parts of this Annual Report.

Overview

Our primary business is the provision of domestic, regional (which includes Hong Kong, Macau and Taiwan) and international passenger services.

Our overall capacity on an available tonne kilometer, or ATK, basis increased by approximately 9.2% from approximately 25,098 million in 2016 to approximately 27,397 million in 2017 under comparable basis and decreased by 2.2% from approximately 28,002 million in 2016 to approximately 27,397 million in 2017 under non-comparable basis, and our passenger capacity on an available seat kilometer, or ASK, basis increased by 9.6% from approximately 206,249 million in 2016 to approximately 225,996 million in 2017. Total traffic on a revenue tonne kilometer, or RTK, basis increased by 8.8%, from approximately 17,333 million in 2016 to approximately 18,856 million in 2017 under comparable basis and decreased by 4.3% from approximately 19,713 million in 2016 to approximately 18,856 million in 2017 under non-comparable basis.

The historical results of operations discussed in this Annual Report may not be indicative of our future operating performance. Like those of other airlines, our operations depend substantially on overall passenger and cargo traffic volumes and are subject to seasonal and other variations that may influence passenger travel demand and cargo volume and may not be under our control, including unusual political events, changes in the domestic and global economies and other unforeseen events. Our operations will be affected by, among other things, fluctuations in aviation fuel prices, aircraft acquisition and leasing costs, maintenance expenses, take-off and landing charges, wages, salaries and benefits, other operating expenses and the rates of income taxes paid.

Our financial performance is also significantly affected by factors associated with operating in a highly regulated industry, as well as a number of other external variables, including political and economic conditions in China, competition, foreign exchange fluctuations and public perceptions of the safety of air travel with Chinese airlines. Because nearly every aspect of our airline operations is subject to the regulation of the CAAC, our operating revenues and expenses are directly affected by the CAAC regulations with respect to, among other things, domestic airfares, level of commissions paid to sales agents, the aviation fuel price, take-off and landing charges and route allocations. The nature and extent of airline competition and the ability of Chinese airlines to expand are also significantly affected by various CAAC regulations and policies. Changes in the CAAC’s regulatory policies, or in the implementation of such policies, are therefore likely to have a significant impact on our future operations.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with IFRSs which requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the accounting policies. We have established procedures and processes to facilitate the making of such judgments in the preparation of our consolidated financial statements. Management has used the best information available but actual performance may differ from our management’s estimates and future changes in key variables could change future reported amounts in our consolidated financial statements.

Revenue recognition and sales in advance of carriage

Revenue comprises the fair value of the consideration received or receivable for the provision of services and the sale of goods in the ordinary course of the Group’s activities. Revenue is stated net of business taxes or value-added taxes, returns, rebates and discounts and after eliminating sales within the Group.

Revenue is recognized when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following basis:

(i)

Traffic revenues

Passenger, cargo and mail revenues are recognized as traffic revenues when the transportation services are provided. The value of sold but unused tickets is recognized as sales in advance of carriage (“SIAC”).

(ii)

Ground service income and tour operation revenues

Revenues from the provision of ground services, tour, travel services and other travel related services are recognized when the services are rendered.

(iii)

Cargo handling income

Revenues from the provision of cargo handling services are recognized when the services are rendered.

(iv)

Commission income

Commission income represents amounts earned from other carriers in respect of sales made by the Group on their behalf, and is recognized in profit or loss upon ticket sales.

(v)

Other revenue

Revenues from other operating businesses, including income derived from the provision of freight forwarding, are recognized when the services are rendered.

(vi)

Frequent flyer programs

The Group operates frequent flyer programs that provide travel awards to program members based on accumulated miles. A portion of passengers revenue attributable to the award of frequent flyer benefits is deferred and recognized when the miles have been redeemed or have expired.

(vii)

Interest income

Interest income is recognized on a time-proportion basis using the effective interest rate method.

The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Intangible assets

(i)

Goodwill

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred, the amount recognized for non-controlling interests and any fair value of the Group’s previously held equity interests in the acquiree over the identifiable net assets acquired and liabilities assumed. If the sum of this consideration and other items is lower than the fair value of the net assets acquired, the difference is, after reassessment, recognized in profit or loss as a gain on bargain purchase.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill as at December 31. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units.

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognized. An impairment loss recognized for goodwill is not reversed in a subsequent period.

(ii)

Computer software costs

Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized using the straight-line method over their estimated useful lives of 5 years. Costs associated with developing or maintaining computer software programs are recognized as expenses when incurred.

(iii)

Others

Others relate to the capitalized costs incurred to acquire the use right of certain flight schedules (i.e. timeslots for flights’ taking off/landing) in Guangzhou Baiyun International Airport Co., Ltd. and Shanghai Pudong International Airport, respectively. These costs are amortized using the straight-line method over their useful lives of 3 years.

Property, plant and equipment

Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses. When an item of property, plant and equipment is classified as held for sale or when it is part of a disposal group classified as held for sale, it is not depreciated and is accounted for in accordance with IFRS 5, as further explained in the accounting policy for “Non-current assets and disposal groups held for sale”. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

When each major aircraft overhaul is performed, its cost is recognized in the carrying amount of the item of property, plant and equipment and is depreciated over the appropriate maintenance cycles. Components related to airframe overhaul cost, are depreciated on a straight-line basis over 5 to 7.5 years. Components related to engine overhaul costs, are depreciated between each overhaul period using the ratio of actual flying hours and estimated flying hours between overhauls. Upon completion of an overhaul, any remaining carrying amount of the cost of the previous overhaul is derecognized and charged to profit or loss.

Except for components related to overhaul costs, the depreciation method of which has been described in the preceding paragraph, other depreciation of property, plant and equipment is calculated using the straight-line method to write off their costs to their residual values over their estimated useful lives, as follows:


Owned and finance leased aircraft and engines		15 to 20 years
Other flight equipment, including rotables		10 years
Buildings		8 to 45 years
Other property, plant and equipment		3 to 20 years

Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately. Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at least at each financial year end.

An item of property, plant and equipment including any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognized in the statement of profit or loss in the year the asset is derecognized is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Construction in progress represents a building under construction, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction and capitalized borrowing costs on related borrowed funds during the period of construction. Construction in progress is reclassified to the appropriate category of property, plant and equipment when completed and ready for use.

Leases

(i)

As lessee

Finance leases

Leases where the Group has acquired substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the lease’s commencement at the lower of the fair value of the assets and the present value of the minimum lease payments.

Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included in the current portion of obligation under finance leases and obligations under finance leases, respectively. The interest element of the finance costs is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Leased assets are depreciated using a straight-line basis over their expected useful lives to residual values.

For sale and leaseback transactions resulting in a finance lease, the sales proceeds are recorded as a borrowing and the relevant assets are continued to be measured at their carry value.

Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease.

For sale and leaseback transactions resulting in an operating lease, differences between sales proceeds and net book values are recognized immediately in profit or loss, except to the extent that any profit or loss is compensated for by future lease payments at above or below the market value, then the profit or loss is deferred and amortized over the period for which the asset is expected to be used.

(ii)

As lessor

Assets leased out under operating leases are included in property, plant and equipment in the statement of financial position. They are depreciated over their expected useful lives on a basis consistent with similar property, plant and equipment. Rental income is recognized on a straight-line basis over the lease term.

Retirement benefits

(i)

Defined contribution plans

The Group participates in schemes regarding pension and medical benefits for employees organized by the municipal governments of the relevant provinces. Contributions to these schemes are expensed as incurred.

The Group also implemented an additional defined contribution pension benefit scheme (annuity) for voluntary eligible employees. Contributions are made based on a percentage of the employees’ total salaries and are charged to profit or loss as incurred.

(ii)

Defined benefit plan

The Group provides eligible retirees with certain post-retirement benefits including retirement subsidies, transportation allowance as well as other welfare. The defined post-retirement benefits are unfunded. The cost of providing benefits under the post-retirement benefit plan is determined using the projected unit credit actuarial valuation method.

Remeasurements arising from the post-retirement benefit plan, comprising actuarial gains and losses, the effect of the asset ceiling (excluding net interest) and the return on plan assets (excluding net interest), are recognized immediately in the consolidated statement of financial position with a corresponding debit or credit to equity through other comprehensive income in the period in which they occur. Remeasurements are not reclassified to profit or loss in subsequent periods.

Past service costs are recognized in profit or loss at the earlier of:

•

the date of the plan amendment or curtailment; and

•

the date that the Group recognizes restructuring-related costs

Net interest is calculated by applying the discount rate to the net defined benefit liability or asset. The Group recognizes the following changes in the net defined benefit obligation under “Wages, salaries and benefits” and “Finance costs” in profit or loss:

•

service costs comprising current service costs, past-service costs, gains and losses on curtailments and non-routine settlements

•

net interest expense

Available-for-sale investments

Available-for-sale financial investments are non-derivative financial assets in listed and unlisted equity investments and debt securities. Equity investments classified as available for sale are those which are neither classified as held for trading nor designated as at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in market conditions.

After initial recognition, available-for-sale financial investments are subsequently measured at fair value, with unrealized gains or losses recognized as other comprehensive income in the other reserves until the investment is derecognized, at which time the cumulative gain or loss is recognized in profit or loss in other operating income, or until the investment is determined to be impaired, when the cumulative gain or loss is reclassified from the other reserves to profit or loss in other gains or losses. Interest and dividends earned whilst holding the available-for-sale financial investments are reported as finance income and dividend income, respectively and are recognized in profit or loss as other operating income in accordance with the policies set out for “Revenue recognition and sales in advance of carriage” above.

When the fair value of unlisted equity investments cannot be reliably measured because (a) the variability in the range of reasonable fair value estimates is significant for that investment or (b) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value, such investments are stated at cost less any impairment losses.

The Group evaluates whether the ability and intention to sell its available-for-sale financial assets in the near term are still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets, the Group may elect to reclassify these financial assets if management has the ability and intention to hold the assets for the foreseeable future or until maturity.

For a financial asset reclassified from the available-for-sale category, the fair value carrying amount at the date of reclassification becomes its new amortized cost and any previous gain or loss on that asset that has been recognized in equity is amortized to profit or loss over the remaining life of the investment using the effective interest rate. Any difference between the new amortized cost and the maturity amount is also amortized over the remaining life of the asset using the effective interest rate. If the asset is subsequently determined to be impaired, then the amount recorded in equity is reclassified to profit or loss.

Income tax

Income tax comprises current and deferred tax. Income tax relating to items recognized outside profit or loss is recognized outside profit or loss, either in other comprehensive income or directly in equity.

Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period, taking into consideration interpretations and practices prevailing in the countries in which the Group operates.

Deferred tax is provided, using the liability method, on all temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognized for all taxable temporary differences, except:

•

when the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

•

in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, the carryforward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, the carryforward of unused tax credits and unused tax losses can be utilized, except:

•

when the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

•

in respect of deductible temporary differences associated with investments in subsidiaries, associates and joint ventures, deferred tax assets are only recognized to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has become probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax assets and deferred tax liabilities are offset if and only if the Group has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

Critical Accounting Estimates and Judgments

Estimates and judgments used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Revenue recognition

The Group recognizes traffic revenues in accordance with the accounting policy stated in note 3 to the financial statements. Unused tickets are recognized in traffic revenues upon legal expiration. Management periodically evaluates the balance in the SIAC and records any adjustments, which can be material, in the period the evaluation is completed.

These adjustments result from differences between the estimates of certain revenue transactions and the timing of recognizing revenue for any unused air tickets and the related sales price, and are impacted by various factors, including a complex pricing structure and interline agreements throughout the industry, which affect the timing of revenue recognition.

Frequent flyer program

The Group operates frequent flyer programs that provide travel awards to program members based on accumulated miles. A portion of passengers’ revenue attributable to the award credits of frequent flyer benefits is deferred and recognized when the award credits have been redeemed or have expired. The deferment of revenue is calculated based on the estimated fair values of the unredeemed award credits and expected redemption rate. The fair values of the unredeemed award credits is estimated based on the yearly average flight ticket prices and the expected redemption rate is estimated by reference to the historical trends of redemptions. Different judgments or estimates could significantly affect the estimated provision for frequent flyer programs and the results of operations.

Provision for costs of return condition checks for aircraft under operating leases

Provision for the estimated costs of return condition checks for aircraft and engines under operating leases is made based on the estimated costs for such return condition checks and taking into account anticipated flying hours, flying cycle and time frame between each overhaul. These judgments or estimates are based on historical experience on returning similar airframe models, actual costs incurred and aircraft status. Different judgments or estimates could significantly affect the estimated provision for costs of return condition checks.

Retirement benefits

The Group operates and maintains a defined retirement benefit plan which provides eligible retirees with benefits including retirement subsidies, travel allowance as well as other welfare. The cost of providing the aforementioned benefits in the defined retirement benefit plan is actuarially determined and recognized over the employee’s service period by utilizing various actuarial assumptions and using the projected unit credit method in accordance with the accounting policy stated in note 3 to the financial statements. These assumptions include, without limitation, the selection of discount rate, annual rate of increase of per capita benefit payment and etc.. The discount rate is based on management’s review of government bonds. The annual rate of increase of benefit payments is based on the general local economic conditions.

Additional information regarding the retirement benefit plan is disclosed in note 37 to the financial statements.

Deferred income tax

In assessing the amount of deferred tax assets that need to be recognized in accordance with the accounting policy stated in note 3 to the financial statements, the Group considers future taxable income and ongoing prudent and feasible tax planning strategies. In the event that the Group’s estimates of projected future taxable income and benefits from available tax strategies are changed, or changes in current tax regulations are enacted that would impact the timing or extent of the Group’s ability to utilize the tax benefits of deductible tax losses carried forward in the future, adjustments to the recorded amount of net deferred tax assets and taxation expense would be made.

Provision for flight equipment spare parts

Provision for flight equipment spare parts is made based on the difference between the carrying amount and the net realizable value. The net realizable value is estimated based on current market condition, historical experience and the Company’s future operation plan for the aircraft and related spare parts. The net realizable value may be adjusted significantly due to the change of market condition and the future plan for the aircraft and related spare parts.

Depreciation of property, plant and equipment

Depreciation of components related to airframe and engine overhaul costs is based on the Group’s historical experience with similar airframe and engine models and taking into account anticipated overhaul costs, timeframe between each overhaul, ratio of actual flying hours and estimated flying hours between overhauls. Different judgments or estimates could significantly affect the estimated depreciation charge and the results of operations.

Except for components related to engine overhaul costs, other property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives, after taking into account the estimated residual value. The useful lives are based on the Group’s historical experience with similar assets and taking into account anticipated technological changes. The Group reviews the estimated useful lives of assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

Estimated impairment of property, plant and equipment and intangible assets

The Group tests whether property, plant and equipment and intangible assets have been impaired in accordance with the accounting policy stated in note 3 to the financial statements. The recoverable amount of the cash-generating unit has been determined based on fair value less cost to sell and value-in-use calculations. Value-in-use calculations use cash flow projections based on financial budgets approved by management and certain key assumptions, such as passenger-kilometers yield level, load factor, aircraft utilization rate and discount rates.

Impairment of goodwill

The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating unit to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

Operating Segments

In accordance with IFRS 8, segment disclosure has been presented in a manner that is consistent with the information used by the our chief operating decision-maker (“CODM”). Our CODM monitors the results, assets and liabilities attributable to each reportable segment based on financial results prepared under the PRC Accounting Standards for Business Enterprises (the “PRC Accounting Standards”), which differ from IFRSs in certain aspects. The amount of each material reconciling items from the Group’s reportable segment revenue and profit before income tax, arising from different accounting policies are set out in note 7(c) below.

A. Operating Result

The following tables set forth our summary consolidated statements of profit or loss and other comprehensive income and financial position data as of and for the years indicated:


	Year Ended December 31,
	2013 RMB			2014 RMB			2015 RMB			2016 RMB			2017 RMB
	(*in millions, except per share or per ADS data*)
Consolidated Statements of Profit or Loss and Other Comprehensive Income Data:
Revenues		88,245			90,185			93,969			98,904			102,475
(Loss)/gain on fair value changes of derivative financial instruments		18			11			6			2			(311	)
Other operating income and gains		2,725			3,685			5,269			5,469			7,481
Operating expenses		(89,412	)		(87,823	)		(86,619	)		(91,889	)		(100,525	)
Operating profit		1,576			6,058			12,625			12,486			9,431
Finance income / (costs), net		576			(2,072	)		(7,110	)		(6,176	)		(1,072	)
Profit before income tax		2,217			4,113			5,667			6,497			8,610
Profit for the year attributable to the equity holders of the Company		2,373			3,410			4,537			4,498			6,342
Basic and fully diluted earnings per share ⁽¹⁾		0.20			0.27			0.35			0.33			0.44


	As of December 31,
	2013 RMB			2014 RMB			2015 RMB			2016 RMB			2017 RMB
	(in millions)
Consolidated Statements of Financial Position Data:
Cash and cash equivalents		1,995			1,355			9,080			1,695			4,605
Net current liabilities		(40,472	)		(42,887	)		(51,309	)		(52,194	)		(62,035	)
Non-current assets		127,458			147,586			174,914			196,436			211,434
Long term borrowings, including current portion		(36,175	)		(41,210	)		(43,675	)		(29,749	)		(28,842	)
Obligations under finance leases, including current portion		(23,135	)		(38,695	)		(52,399	)		(61,041	)		(66,868	)
Total share capital and reserves attributable to the equity holders of the Company		26,902			29,974			37,411			49,450			55,360
Non-current liabilities		(58,404	)		(72,928	)		(83,674	)		(91,876	)		(90,621	)
Total assets less current liabilities		86,986			104,699			123,605			144,242			149,399

(1)

2017 Compared to 2016

Revenues

Our revenues increased by approximately 3.6%, from approximately RMB98,904 million in 2016 to approximately RMB102,475 million in 2017. Revenues increased in our passenger business operations, primarily due to increased passenger demand and increase in scheduled flights, which was partially offset by decreased revenue in our cargo and mail business operations, primarily due to disposal of Eastern Logistics in 2017.

In 2017, we transported approximately 111 million passengers, representing an increase of approximately 8.9%, from approximately 102 million passengers in 2016. Our total passenger traffic (as measured in RPKs) increased by approximately 9.3%, from approximately 167,529 million in 2016 to approximately 183,182 million in 2017.

Our total cargo and mail traffic (as measured in RFTKs) increased by approximately 6.7%, from approximately 2,495 million in 2016 to approximately 2,663 million in 2017 under comparable basis and decreased by approximately 45.4% from approximately 4,875 million in 2016 to approximately 2,663 million in 2017 under non-comparable basis.

Our average yield for our passenger operations remained relatively stable at RMB0.517 in 2016 and RMB0.521 per in 2017.

Our average yield for our cargo and mail operations increased by approximately 8.8% from approximately RMB1.25 in 2016 to approximately RMB1.36 in 2017.

The following chart sets forth our revenue breakdown for 2016 and 2017:


	Year Ended December 31				2017 vs. 2016
	2016		2017		Increase (Decrease)			% Increase (Decrease)
			(in millions of RMB)
Traffic revenues		89,554		95,187		5,633			6.3
Passenger revenue		83,577		91,564		7,987			9.6
Cargo and mail revenue		5,977		3,623		(2,354	)		(39.4	)
Others ⁽¹⁾		9,350		7,288		(2,062	)		(22.1	)
Total Operating Revenue		98,904		102,475		3,571			3.6

(1)	Includes tour operations income, ground service income, cargo handling income and processing income, commission income and others.

Passenger revenues

Our passenger traffic revenues increased by approximately RMB7,987 million, or approximately 9.6%, from approximately RMB83,577 million in 2016 to approximately RMB91,564 million in 2017. This increase was primarily due to increased passenger demand and increase in scheduled flights, as well as robust demand for outbound tourism.

Our domestic passenger traffic revenues (excluding Hong Kong, Macau and Taiwan passenger revenues), which accounted for approximately 65.7% of our total passenger traffic revenues in 2017, increased by approximately 11.2% from approximately RMB54,137 million in 2016 to approximately RMB60,180 million in 2017, primarily due to increased passenger demand. Compared to 2017, our domestic passenger traffic (as measured in RPKs) increased by approximately 10.0% from approximately 106,361 million in 2016 to approximately 117,033 million in 2017. The number of passengers carried on domestic routes increased by approximately 10.0% from approximately 84 million in 2016 to approximately 93 million in 2017. Our passenger-kilometers yield for domestic routes remained relatively stable at RMB0.53 per passenger-kilometer in 2016 and RMB0.54 in 2017.

Our regional passenger traffic revenues (representing Hong Kong, Macau and Taiwan passenger revenues) which accounted for approximately 3.7% of our total passenger traffic revenues in 2017, increased by approximately 11.1% from approximately RMB3,078 million in 2016 to approximately RMB3,420 million in 2017, primarily due to the increase of passenger volume. Our regional passenger traffic (as measured in RPKs) increased by approximately 9.5% in 2017 from approximately 4,347 million in 2016 to approximately 4,758 million in 2017. The number of passengers carried on Hong Kong, Macau and Taiwan routes increased by approximately 9.3% from approximately 3.2 million in 2016 to approximately 3.5 million in 2017. Our passenger-kilometers yield for regional routes remained relatively stable at RMB0.71 in 2016 and RMB0.72 in 2017.

International passenger traffic revenues, which accounted for approximately 30.6% of our total passenger traffic revenues in 2017, increased by approximately 6.1% from approximately RMB26,362 million in 2016 to approximately RMB27,964 million in 2017. The increase was primarily due to increased international passenger demand and increase in our scheduled flights on international routes. Our international passenger traffic (as measured in RPKs) increased by approximately 8.0% in 2017 from approximately 56,821 million in 2016 to approximately 61,391 million in 2017. The number of passengers carried on international routes increased by approximately 2.5% from approximately 14.3 million in 2016 to approximately 14.7 million in 2017. Our passenger-kilometers yield for international routes remained relatively stable at RMB0.471 in 2016 and RMB0.470 in 2017.

Cargo and mail revenues

Our cargo and mail traffic revenues decreased by approximately 39.4%, from approximately RMB5,977 million in 2016 to approximately RMB3,623 million in 2017, which accounted for approximately 3.8% of our total traffic revenues in 2017. Cargo and mail yield increased by approximately 8.8% from approximately RMB1.25 in 2016 to approximately RMB1.36 in 2017.

Our domestic cargo and mail traffic revenues (excluding Hong Kong, Taiwan and Macau cargo and mail revenues), which accounted for approximately 27.2% of our total cargo and mail traffic revenues in 2017, decreased from approximately RMB1,026 million in 2016 to approximately RMB985 million in 2017. This decrease was primarily due to the disposal of our interest in Eastern Logistics. Our freight tonne-kilometers yield for domestic routes remained relatively stable at RMB1.07 in 2016 and RMB1.10 in 2017 under non-comparable basis. Our freight tonne-kilometers yield for domestic routes remained stable at RMB1.10 in 2016 and RMB1.10 in 2017 under comparable basis.

Our regional cargo and mail traffic revenues (representing Hong Kong, Macau and Taiwan cargo and mail traffic revenues), which accounted for approximately 4.4% of our total cargo and mail traffic revenues in 2017, decreased by approximately 57.5%, from approximately RMB374 million in 2016 to approximately RMB159 million in 2017, mainly due to the disposal of our interest in Eastern Logistics. Our freight tonne-kilometers yield for regional routes increased from RMB2.98 in 2016 to RMB3.56 in 2017 under non-comparable basis. Our freight tonne-kilometers yield for regional routes increased from RMB3.04 in 2016 to RMB3.56 in 2017 under comparable basis.

International cargo and mail traffic revenues, which accounted for approximately 68.4% of our total cargo and mail traffic revenues in 2017, decreased by approximately 45.8%, from approximately RMB4,576 million in 2016 to approximately RMB2,478 million in 2017, mainly due to the disposal of our interest in Eastern Logistics. Our freight tonne-kilometers yield for international routes increased from RMB1.24 in 2016 to RMB1.44 in 2017 under non-comparable basis. Our freight tonne-kilometers yield for international routes increased from RMB1.30 in 2016 to RMB1.44 in 2017 under comparable basis.

Other revenues

We also generated revenues from other services, including tour operations, airport ground services, cargo handling and processing services and ticket handling services. These services include loading and unloading of cargo, aircraft cleaning and ground transportation of cargo and passenger luggage for aircraft arriving at or departing from Hongqiao International Airport and Pudong International Airport of Shanghai. We are currently the principal provider of airport ground services at both Hongqiao International Airport and Pudong International Airport. Our total other revenues decreased by approximately 22.1% from approximately RMB9,350 million in 2016 to approximately RMB7,288 million in 2017, primarily due to disposal of Eastern Logistics, which also handles certain airport ground services, cargo handling and processing services.

Operating Expenses

The following chart sets forth a breakdown of our operating expenses for the years ended December 31, 2016 and 2017:


							2017 vs. 2016
	Year Ended December 31						(Increase) Decrease			% Increase (Decrease)
	2016			2017			(Increase) Decrease			% Increase (Decrease)
				(in millions of RMB)
Operating Expenses:
Aircraft fuel expenses		(19,626	)		(25,131	)		(5,505	)		28.0
Take-off and landing charges		(12,279	)		(13,254	)		(975	)		7.9
Depreciation and amortization		(12,154	)		(13,969	)		(1,815	)		14.9
Wages, salaries and benefits		(18,145	)		(20,320	)		(2,175	)		12.0
Aircraft maintenance		(4,960	)		(5,346	)		(386	)		7.8
Impairment charges		(29	)		(491	)		(462	)		1,593.1
Food and beverages		(2,862	)		(3,090	)		(228	)		8.0
Aircraft operating lease rentals		(4,779	)		(4,318	)		461			(9.6	)
Other operating lease rentals		(868	)		(836	)		32			(3.7	)
Selling and marketing expenses		(3,133	)		(3,294	)		(161	)		5.1
Civil aviation development fund		(1,945	)		(2,080	)		(135	)		6.9
Ground services and other expenses		(5,058	)		(3,248	)		1,810			(35.8	)
(Loss)/gain on fair value changes of derivative financial instruments		2			(311	)		(313	)		(15,650.0	)
Indirect operating expenses		(6,051	)		(4,837	)		1,214			(20.0	)
Total Operating Expense		(91,887	)		(100,525	)		(8,638	)		9.4

Our total operating expenses increased by approximately 9.4% from approximately RMB91,887 million in 2016 to approximately RMB100,525 million in 2017 primarily due to the influence of further expansion of our operational scale and the rapid growth in the passenger traffic volume and the number of passengers carried. Our various costs such as take-off and landing costs, food and beverages, and depreciation and amortization increased from the previous year. Our total operating expenses accounted for approximately 98.1% of our operating revenue in 2017, representing an increase from approximately 92.9% in 2016.

Aircraft fuel expenses increased by approximately 28.0% from approximately RMB19,626 million in 2016 to approximately RMB25,131 million in 2017. The increase was primarily due to the increase in the volume of refueling by 4.5% and average fuel price by 22.5%.

Take-off and landing charges, which accounted for 13.2% of our total operating expenses in 2017, increased by 7.9% from approximately RMB12,279 million in 2016 to approximately RMB13,254 million in 2017, primarily due to the increase in our number of flights and the increase in our number of take-offs and landings. Meanwhile, the domestic take-off and landing charges increased due to the adjustment of pricing standards of China’s airports (CAAC 2017 Notice No. 18).

Depreciation and amortization increased by approximately 14.9% from approximately RMB12,154 million in 2016 to approximately RMB13,969 million in 2017, primarily due to the net addition of aircraft self owned and under finance leases to our fleet in 2017. The increase in the number of aircraft and engines led to an increase in the original value of fixed assets and a corresponding increase in depreciation.

Wages, salaries and benefits, which accounted for approximately 20.2% of our total operating expenses in 2017, increased by approximately 12.0% from approximately RMB18,145 million in 2016 to approximately RMB20,320 million in 2017, primarily due to the combined effect of the increase in the number of flight-crew and maintenance personnel, the increase in flight hours and the rise in the standard flight hour fees. Additional information regarding the changes in our retirement benefits is disclosed in Note 37 to the consolidated financial statements.

Aircraft maintenance expenses, which accounted for approximately 5.3% of our total operating expenses in 2017, increased by approximately 7.8% from approximately RMB4,960 million in 2016 to approximately RMB5,346 million in 2017, primarily due to the net addition of nine wide-body aircraft and 46 narrow-body aircraft, which led to an increase in maintenance fees for aircraft and engines.

Food and beverage expenses increased by approximately 8.0% from approximately RMB2,862 million in 2016 to approximately RMB3,090 million in 2017, primarily due to the increase in the number of passengers carried and the rise in standards required for the provision of catering.

Aircraft operating lease rentals decreased by approximately 9.6% from approximately RMB4,779 million in 2016 to approximately RMB4,318 million in 2017, primarily due to the decrease of seven cargo aircraft under operating leases upon the disposal of the equity interest in Eastern Logistics.

Other operating lease rentals decreased by approximately 3.7% from approximately RMB868 million in 2016 to approximately RMB836 million in 2017, primarily due to the decrease of fees for ground assets under lease.

Selling and marketing expenses increased by approximately 5.1% from approximately RMB3,133 million in 2016 to approximately RMB3,294 million in 2017, primarily due to the increase in the proportion of direct sales for the year.

The amount of civil aviation development fund to the CAAC increased by approximately 6.9% from approximately RMB1,945 million in 2016 to approximately RMB2,080 million in 2017, primarily due to the increase in the length of miles flown in 2017.

Ground services and other expenses decreased by approximately 35.8% from approximately RMB5,058 million in 2016 to approximately RMB3,248 million in 2017, primarily due to the disposal of interest in Eastern Logistics in 2017.

Indirect operating expenses decreased by approximately 20.0% from approximately RMB6,051 million in 2016 to approximately RMB4,837 million in 2017, primarily due to the disposal of interest in Eastern Logistics in 2017.

Fair Value Changes of Derivative Financial Instruments

Changes in fair value of derivative financial instruments was recorded a loss of approximately RMB311 million in 2017, as compared to a gain of approximately RMB2 million in 2016. The difference was mainly due to the fair value movement of forward foreign exchange contracts in 2017.

Other Operating Income and Gains

Our other operating income mainly consists of subsidy income from cooperative routes, the rest being income from disposal of a subsidiary and income from government grants. The total amount of our other operating income and gains increased by approximately 36.8% from approximately RMB5,469 million in 2016 to approximately RMB7,481 million in 2017, primarily due to the disposal of interest in Eastern Logistics.

Net Finance Costs

In 2017, our finance income was approximately RMB2,112 million, representing an increase of approximately RMB2,016 million from approximately RMB96 million in 2016. Finance costs amounted to approximately RMB3,184 million in 2017, representing a decrease of approximately RMB3,088 million in 2016, primarily due to net exchange gains arising from the appreciation of RMB of approximately RMB2,001 million during the year.

Profit Attributable to the Equity Holders of the Company

As a result of the foregoing, the net profit attributable to the equity holders of the Company increased by approximately 41.0% from approximately RMB4,498 million in 2016 to approximately RMB6,342 million in 2017. The increase is mainly due to the increase in revenue and other operating income and gains.

Property, Plant and Equipment

We had approximately RMB166,856 million of property, plant and equipment as of December 31, 2017, including, among other assets, aircraft, engines and flight equipment, representing a 8.9% increase from approximately RMB153,180 million in 2016. The increase is mainly due to an increase in the number of aircraft.

2016 Compared to 2015

Revenues

Our revenues increased by 5.3%, from RMB93,969 million in 2015 to RMB98,904 million in 2016. Revenues increased in our passenger business operations, primarily due to increased passenger demand, aircraft utilization rates and increase in scheduled flights, which was partially offset by decreased revenue in our cargo and mail business operations, primarily due to a general slowdown of the global economy that affected cargo demand and, consequently, our cargo volumes.

In 2016, we transported 101.74 million passengers, representing an increase of 8.5%, from 93.8 million passengers in 2015. Our total passenger traffic (as measured in RPKs) increased by 14.5%, from 146,342 million passenger-kilometers in 2015 to 167,529 million passenger-kilometers in 2016 and our total cargo and mail traffic (as measured in RFTKs) increased by 0.2%, from 4,865 million freight tonne-kilometers in 2015 to 4,875 million freight tonne- kilometers in 2016. Our average yield for our passenger operations decreased by 7.2% from RMB0.56 per passenger-kilometer in 2015 to RMB0.52 in 2016.

Our average yield for our cargo and mail operations decreased by 6.3%, from RMB1.33 per tonne-kilometer in 2015 to RMB1.25 per tonne-kilometer in 2016, primarily due to slumping cargo market and increasing competition from logistic companies that affected cargo demand and shipping fees.

The following chart sets forth our revenue breakdown for 2015 and 2016:


	Year Ended December 31				2016 vs. 2015
	2015		2016		Increase (Decrease)			% Increase (Decrease)
			(in millions of RMB)
Traffic revenues		85,076		89,554		4,478			5.3
Passenger revenue		78,585		83,577		4,992			6.4
Cargo and mail revenue		6,491		5,977		(514	)		(7.9	)
Others ⁽¹⁾		8,893		9,350		457			5.1
Total Operating Revenue		93,969		98,904		4,935			5.3

(2)	Includes tour operations income, ground service income, cargo handling income, commission income and others.

Passenger revenues

Our passenger traffic revenues increased by RMB4,992 million, or 6.4%, from RMB78,585 million in 2015 to RMB83,577 million in 2016. This increase was primarily due to increased passenger demand, aircraft utilization rates and increase in scheduled flights, as well as actively seizing the opportunities brought by the international low oil prices and robust demand for outbound tourism.

Our domestic passenger traffic revenues (excluding Hong Kong, Macau and Taiwan passenger revenues), which accounted for 64.8% of our total passenger traffic revenues in 2016, increased by 5.1%, from RMB51,523 million in 2015 to 54,137 million in 2016, primarily due to increased passenger demand. Compared to 2015, our domestic passenger traffic (as measured in RPKs) increased by 8.2%, from 98,304 million in 2015 to 106,361 million in 2016. The number of passengers carried on domestic routes increased by 7.4%, from 78.4 million in 2015 to 84.2 million in 2016. Our passenger-kilometers yield for domestic routes decreased by 2.6% from RMB0.55 per passenger-kilometer in 2015 to 0.53 in 2016.

Our regional passenger traffic revenues (representing Hong Kong, Macau and Taiwan passenger revenues) which accounted for 3.7% of our total passenger traffic revenues in 2016, decreased by 1.6%, from RMB3,129 million in 2015 to RMB3,078 million in 2016, primarily due to the decrease in our passenger-kilometers yield for regional routes. The number of passengers carried on Hong Kong, Macau and Taiwan routes increased by 4.0%, from 3.1 million in 2015 to 3.22 million in 2016. Our passenger-kilometers yield for regional routes decreased from RMB0.73 per passenger-kilometer in 2015 to 0.71 per passenger-kilometer in 2016.

International passenger traffic revenues, which accounted for 31.5% of our total passenger traffic revenues in 2016, increased by 10.2%, from RMB23,933 million in 2015 to RMB26,362 million in 2016. The increase was primarily due to increased international passenger demand, increased aircraft utilization rates and increase in our scheduled flights on international routes. Our international passenger traffic (as measured in RPKs) increased by 29.6% in 2016, from RMB43,848 million in 2015 to RMB56,821 million in 2016. The number of passengers carried on international routes increased by 16.8%, from 12.3 million in 2015 to 14.3 million in 2016. Our passenger-kilometers yield for international routes decreased from RMB0.56 per passenger-kilometer in 2015 to RMB0.47 per passenger-kilometer in 2016.

Cargo and mail revenues

Our cargo and mail traffic revenues decreased by 7.9%, from RMB6,491 million in 2015 to RMB5,977 million in 2016, which accounted for 6.7% of our total traffic revenues in 2016. Cargo and mail yield decreased by 6.3% from RMB1.33 in 2015 to RMB1.25 in 2016 per cargo tonne-kilometer, primarily due to the increased competition from other cargo carriers, which resulted in decreased shipping fees.

Our domestic cargo and mail traffic revenues (excluding Hong Kong, Taiwan and Macau cargo and mail revenues), which accounted for 17.2% of our total cargo and mail traffic revenues in 2016, decreased from RMB1,036 million in 2015 to RMB1,026 million in 2016. This decrease was primarily due to the increased competition from private owned logistic companies, which resulted in decreased shipping fees and cargo. Our freight tonne-kilometers yield for domestic routes decreased from RMB1.09 per tonne-kilometer in 2015 to RMB1.07 per tonne-kilometer in 2016.

Our regional cargo and mail traffic revenues (representing Hong Kong, Macau and Taiwan cargo and mail traffic revenues), which accounted for 6.3% of our total cargo and mail traffic revenues in 2016, slightly decreased by 1.6%, from RMB380 million in 2015 to RMB374 million in 2016. Our freight tonne-kilometers yield for regional routes decreased from RMB3.01 per tonne-kilometer in 2015 to RMB2.98 per tonne-kilometer in 2016.

International cargo and mail traffic revenues, which accounted for 76.5% of our total cargo and mail traffic revenues in 2016, decreased by 9.8%, from RMB5,075 million in 2015 to RMB4,576 million in 2016, due to increased competition from foreign cargo carriers which resulted in decreased shipping fees. Our prices for cargo and mail transportation on international routes also decreased as our freight tonne-kilometers yield for international routes decreased from RMB1.34 per tonne-kilometer in 2015 to RMB1.24 per tonne-kilometer in 2016.

Other revenues

We also generated revenues from other services, including tour operations, airport ground services, cargo handling services and ticket handling services. These services include loading and unloading of cargo, aircraft cleaning and ground transportation of cargo and passenger luggage for aircraft arriving at or departing from Hongqiao International Airport and Pudong International Airport of Shanghai. We are currently the principal provider of airport ground services at both Hongqiao International Airport and Pudong International Airport. Our total other revenues increased by 5.1%, from RMB8,893 million in 2015 to 9,350 million in 2016.

Operating Expenses

The following chart sets forth a breakdown of our operating expenses for the years ended December 31, 2015 and 2016:


							2016 vs. 2015
	Year Ended December 31						Increase (Decrease)			% Increase (Decrease)
	2015			2016			Increase (Decrease)			% Increase (Decrease)
				(in millions of RMB)
Operating Expenses:
Aircraft fuel expenses		(20,312	)		(19,626	)		(686	)		(3.4	)
Takeoff and landing charges		(10,851	)		(12,279	)		1,428			13.2
Depreciation and amortization		(10,471	)		(12,154	)		1,683			16.1
Wages, salaries and benefits		(16,459	)		(18,145	)		1,686			10.2
Aircraft maintenance		(4,304	)		(4,960	)		656			15.2
Impairment charges		(228	)		(29	)		(199	)		(87.3	)
Food and beverages		(2,469	)		(2,862	)		393			15.9
Aircraft operating lease rentals		(4,254	)		(4,779	)		525			12.3
Other operating lease rentals		(812	)		(868	)		56			6.9
Selling and marketing expenses		(3,651	)		(3,133	)		(518	)		(14.2	)
Civil aviation development fund		(1,826	)		(1,945	)		119			6.5
Ground services and other expenses		(5,479	)		(5,058	)		(421	)		7.7
Indirect operating expenses		(5,503	)		(6,051	)		548			10.0
Total Operating Expense		(86,619	)		(91,889	)		5,270			6.1

Our total operating expenses increased by 6.1%, from RMB86,619 million in 2015 to RMB91,889 million in 2016 primarily due to the influence of further expansion of our operational scale and the rapid growth in the passenger traffic volume and the number of passengers carried, our various costs such as take-off and landing costs, food and beverages, and depreciation and amortization increased from the previous year. Our total operating expenses as a percentage of our operating revenues increased from 92.2% in 2015 to 92.9% in 2016.

Aircraft fuel expenses decreased by 3.4%, from RMB20,312 million in 2015 to RMB19,626 million in 2016. The decrease was primarily due to the decrease in our average price of fuel by 13.62%, partially offset by an increase in ourvolume of refueling by 11.9%.

Take-off and landing charges, which accounted for 13.4% of our total operating expenses in 2016, increased by 13.2%, from RMB10,851 million in 2015 to RMB12,279 million in 2016, primarily due to the increase in our number of flights and the increase in our number of take-offs and landings. In particular, the numerous international routes newly launched by us and the increase in our number of flights for the North American routes led to more frequent international takeoffs and landings of wide-body aircrafts.

Depreciation and amortization increased by 16.1%, from RMB10,471 million in 2015 to RMB12,154 million in 2016, primarily due to the addition of 54 aircraft (self owned and under finance leases) to our fleet in 2016. The increase in the number of aircraft and engines led to an increase in the original value of fixed assets and a corresponding increase in depreciation.

Wages, salaries and benefits, which accounted for 19.7% of our total operating expenses in 2015, increased by 10.2%, from RMB16,459 million in 2015 to RMB 18,145 million, primarily due to the combined effect of the increase in the number of flight-crew and maintenance personnel, the increase in flight hours and the rise in the standard flight hour fees. Additional information regarding the changes in our retirement benefits is disclosed in Note 37 to the consolidated financial statements.

Aircraft maintenance expenses, which accounted for 5.4% of our total operating expenses in 2016, increased by 15.2%, from RMB4,304 million in 2015 to RMB4,960 million in 2016, primarily due the net addition of 7 wide-body aircraft and 39 narrow-body aircraft, which led to an increase in maintenance fees for aircraft and engines. Meanwhile, we fitted our A330 aircraft with in-flight Wi-Fi and retrofitted equipment such as required navigation performance (RNP) systems in 2016, resulting in an increase in maintenance fees.

Food and beverage expenses increased by 15.9% from RMB2,469 million in 2015 to RMB2,862 million in 2016, primarily due to the increase in the number of passengers in carriage, especially the combined effect of the increase in the number of travelers on international long-haul flights and the higher standards required for the provision of international catering.

Aircraft operating lease rentals increased by 12.3%, from RMB4,254 million in 2015 to RMB4,779 million in 2016, primarily due to the introduction of 18 new aircraft under operating leases by us and the retirement of 15 aircraft under operating leases in 2016. Owing to factors such as the market environment and the commodity price level, the introduction of the new aircraft resulted in a significant increase in rentals compared to the retired aircraft.

Other operating lease rentals increased by 6.9%, from RMB812 million in 2015 to RMB868 million in 2016, primarily due to the increase in leasehold properties (including properties such as counters and VIP lounges).

Selling and marketing expenses, which accounted for 3.4% of our total operating expenses in 2015, decreased by 14.2%, from RMB3,651 million in 2015 to RMB3,133 million in 2016, primarily due to the increase in the proportion of direct sales for the year and changes in the policy on agency causing a decrease in the handling fees of the agency businesses.

The amount of civil aviation infrastructure levies payable to the CAAC increased by 6.5%, from RMB1,826 million in 2015 to RMB1,945 million in 2016, primarily due to the increase in the length of miles flown in 2015.

Ground services and other expenses decreased by 7.7%, from RMB5,479 million in 2015 to RMB5,058 million in 2016, primarily due to the decrease in the costs of subsidiaries.

Indirect operating expenses increased by 10.0%, from RMB5,503 million in 2015 to RMB6,051 million in 2016, primarily attributable to the significant increase in the costs associated with the expansion in the size of our fleet.

Fair Value Changes of Derivative Financial Instruments

Changes in fair value of derivative financial instruments decreased from a gain of RMB6 million in 2015 to a gain of RMB2 million in 2016. The difference was mainly due to the decrease in gains arising from fair value movement of interest rate swaps contracts.

Other Operating Income and Gains

Our other operating income mainly consists of income from cooperative routes, the rest being income from disposal of fixed assets and income from government grants. The total amount of our other operating income and gains increased by 3.8% from RMB5,269 million in 2015 to RMB5,469 million in 2016, primarily due to an increase in income from co-operation routes, income from government grants and gains from disposal of fixed assets. Other co-operation income represented income from co-operation routes granted to us by the PRC government and local governments as well as other subsidies granted by various local municipalities and other parties to encourage us to operate certain routes to cities where these municipalities are located.

Net Finance Costs

In 2016, our finance income was RMB96 million, representing an increase from RMB66 million in 2015, primarily due to an increase in the interest rates for our deposits which increased our interest income. Finance costs amounted to RMB6,272 million, representing a decrease of 12.6%, primarily due to the decrease in net exchange losses recognized during the year. In 2016, our exchange losses amounted to RMB3,543 million, representing a decrease of 29.0%.

Profit Attributable to the Equity Holders of the Company

As a result of the foregoing, the net profit attributable to the equity holders of the Company slightly decreased to RMB4,498 million in 2016, or 0.9%, as compared to a net profit of RMB4,537 million in 2015. The decrease is mainly due to the increase in income tax expense.

Property, Plant and Equipment

We had approximately RMB153,180 million of property, plant and equipment as of December 31, 2016, including, among other assets, aircraft, engines and flight equipment, representing a 15.0% increase from RMB133,242 million in 2015. The increase is mainly due to an increase in the number of aircrafts.

Inflation

According to the National Bureau of Statistics of China, China’s overall national inflation rate, as represented by the general consumer price index, was approximately 2.6% in 2013, 2.1% in 2014, 1.4% in 2015, 2.0% in 2016 and 1.6% in 2017. Although neither inflation nor deflation in the past had any material adverse impact on our results of operations, we cannot assure you that the deflation or inflation of the Chinese economy in the future would not materially and adversely affect our financial condition and results of operations.

B. Liquidity and Capital Resources

We typically finance our working capital requirements through a combination of funds generated from operations, bank loans and the issuance of corporate bonds. As a result, our liquidity could be materially and adversely affected if there is any delay in obtaining bank loans or a significant decrease in demand for our services.

As of December 31, 2015, 2016 and 2017, we had RMB9,080 million and RMB1,695 million and RMB4,605 million, respectively, in cash and cash equivalents; RMB66,712 million, RMB56,732 million and RMB63,801 million, respectively, in outstanding borrowings; and RMB35 million, RMB43 million and RMB51 million, respectively, in restricted bank deposits and short-term bank deposits. Our cash and cash equivalents primarily consists of cash on hand and deposits that are placed with banks and other financial institutions. We plan to use the remaining available cash for other capital expenditures, including expenditures for aircraft, engines and related equipment, as well as for working capital and other day-to-day operating purposes.

In addition, our current liabilities exceeded our current assets by approximately RMB62,035 million as of December 31, 2017. Therefore, the directors of the Company (“Directors”) have taken active steps to seek additional sources of financing to improve our liquidity position. As of December 31, 2017, we had total unutilized credit facilities of RMB59.47 billion from various banks. See the discussion below under “– Working Capital and Liabilities”.

We believe that our current cash, cash equivalents, anticipated cash flow from operations, and the ability to obtain sufficient financing will enable us to operate, as well as to meet our anticipated cash needs for working capital and capital expenditure requirements for at least the next 12 months. However, additional cash may be required due to changing business conditions or other future developments, including any investments or acquisitions that we may decide to pursue.

Cash Flows from Operating Activities

In 2017, we generated a net cash inflow from operating activities of RMB19,572 million as a result of cash generated from operations of RMB21,108 million less income tax we paid in 2017. Our cash generated from operations was mainly due to operating profit before working capital changes of RMB22,004 million and positive changes in working capital of RMB896 million. The operating profit before working capital changes of RMB22,004 million was a result of the profit before income tax of RMB8,610 million, mainly adjusted for: (i) depreciation of property, plant and equipment and amortization of other non-current assets of RMB13,769 million, (ii) net foreign exchange gain of RMB2,378 and (iii) interest expenses of RMB3,184 million. Positive changes in working capital mainly consisted of (i) sales in advance of carriage of RMB569 million and (ii) other payables and accruals of RMB340 million, partly offset by (i) other long-term liabilities of RMB728 million and (ii) prepayments and other receivables of RMB753 million.

In 2016, we generated a net cash inflow from operating activities of RMB24,893 million as a result of cash generated from operations of RMB26,154 million less income tax we paid in 2016. Our cash generated from operations was mainly due to operating profit before working capital changes of RMB24,464 million and positive changes in working capital of RMB1,690 million. The operating profit before working capital changes of RMB24,464 million was a result of the profit before income tax of RMB6,497 million, mainly adjusted for: (i) depreciation of property, plant and equipment and amortization of other non- current assets of RMB12,345 million, (ii) net foreign exchange losses of RMB3,246 and (iii) interest expenses of RMB2,641 million. Positive changes in working capital mainly consisted of (i) sales in advance of carriage of RMB1,836 million and (ii) other payables and accruals of RMB1,424 million, partly offset by (i) other long-term liabilities of RMB883 million and (ii) prepayments and other receivables of RMB839 million.

In 2015, we generated a net cash inflow from operating activities of RMB24,325 million as a result of cash generated from operations of RMB25,535 million less income tax we paid in 2015. Our cash generated from operations was mainly due to operating profit before working capital changes of RMB23,620 million and positive changes in working capital of RMB1,915 million. The operating profit before working capital changes of RMB23,620 million was a result of the profit before income tax of RMB5,667 million, mainly adjusted for: (i) depreciation of property, plant and equipment and amortization of other non- current assets of RMB10,710 million, (ii) net foreign exchange losses of RMB5,480, and (iii) interest expenses of RMB2,075 million. Positive changes in working capital mainly consisted of (i) trade and bills payable of RMB1,629 million, and (ii) other long-term liabilities of RMB1,164 million, partly offset by prepayments and other receivables of RMB2,011 million.

Cash Flows from Investing Activities

In 2017, our net cash outflow from investing activities was RMB21,312 million. Our net cash outflow for investing activities mainly consisted of (i) advanced payments on acquisition of aircraft of RMB16,759 million and (ii) additions of property, plant and equipment of RMB7,796 million. These cash outflows were partly offset by proceeds from disposal of property, plant and equipment of RMB1,043 million and proceeds from disposal of interest in a subsidiary of RMB1,897 million.

In 2016, our net cash outflow from investing activities was RMB37,180 million. Our net cash outflow for investing activities mainly consisted of (i) advanced payments on acquisition of new aircraft of RMB16,864 million and (ii) additions of property, plant and equipment of RMB21,533 million. These cash outflows were partly offset by (i) proceeds from disposal of assets classified as held for sale of RMB518 million and (ii) proceeds from disposal of property, plant and equipment of RMB690 million.

In 2015, our net cash outflow from investing activities was RMB27,800 million. Our net cash outflow for investing activities mainly consisted of (i) advanced payments on acquisition of new aircraft of RMB24,772 million and (ii) additions of property, plant and equipment of RMB8,609 million. These cash outflows were partly offset by (i) proceeds from disposal of assets classified as held for sale of RMB4,227 million and (ii) proceeds from disposal of property, plant and equipment of RMB1,294 million.

Cash Flows from Financing Activities

In 2017, our net cash inflow from financing activities was RMB4,708 million. Our net cash inflow for financing activities mainly consisted of (i) proceeds from draw down of short-term bank loans of RMB33,629 million, (ii) proceeds from draw down of long-term bank loans and other financing activities of RMB12,320 million, (iii) proceeds from issuance of short-term debentures of RMB29,000 million and (iv) proceeds from issuance of long-term bonds of RMB2,451 million. These cash inflows were partly offset by (i) repayments of short-term bank loans of RMB18,383 million, (ii) repayments of long-term bank loans of RMB3,247 million, and (iii) repayments of short-term debentures of RMB36,000 million.

In 2016, our net cash inflow from financing activities was RMB4,634 million. Our net cash inflow for financing activities mainly consisted of (i) proceeds from draw down of short-term bank loans of RMB39,159 million, (ii) proceeds from draw down of long-term bank loans and other financing activities of RMB26,545 million, (iii) proceeds from issuance of short-term debentures of RMB47,500 million and (iv) proceeds from issuance of long-term bonds of RMB12,526 million. These cash inflows were partly offset by (i) repayments of short-term bank loans of RMB36,728 million, (ii) repayments of long-term bank loans of RMB28,803 million, and (iii) repayments of short-term debentures of RMB46,000 million.

In 2015, our net cash inflow from financing activities was RMB11,083 million. Our net cash inflow for financing activities mainly consisted of (i) proceeds from draw down of short-term bank loans of RMB26,916 million, (ii) proceeds from draw down of long-term bank loans and other financing activities of RMB24,572 million, and (iii) proceeds from issuance of short-term debentures of RMB21,500 million. These cash inflows were partly offset by (i) repayments of short-term bank loans of RMB34,767 million, (ii) repayments of long-term bank loans of RMB10,540 million, and (iii) repayments of short-term debentures of RMB10,000 million.

Working Capital and Liabilities

We have, and in the future may continue to have, substantial debts. In addition, we generally operate with a working capital deficit. As of December 31, 2017, our current liabilities exceeded our current assets by RMB62,035 million. In comparison, our current liabilities exceeded our current assets by RMB52,194 million as of December 31, 2016. Our current liabilities increased by 18.0% primarily due to the increase in the current portion of borrowings. Our current assets increased by 15.1% in 2017 primarily due to the increase in cash and cash equivalents. Short-term loans outstanding totaled RMB28,842 million and RMB39,090 as of December 31, 2016 and 2017, respectively. Long-term outstanding bank loans totaled RMB27,890 million and RMB24,711 million as of December 31, 2016 and 2017, respectively.

As of December 31, 2017, our debt ratio, representing total liabilities divided by total assets, was 0.74. The interest expenses associated with these debts may impair our future profitability. We expect that cash from operations and bank borrowings will be sufficient to meet our operating cash flow requirements, although events that materially and adversely affect our operating results can also have a negative impact on liquidity.

Our consolidated interest-bearing borrowings as of December 31, 2016 and 2017 for the purpose of calculating the indebtedness were as follows:


	As of December 31,
	2016		2017
	(RMB in millions)
Secured		17,369		19,908
Unsecured		39,363		43,893
Total		56,732		63,801

Our maturity profile of interest-bearing borrowings as of December 31, 2016 and 2017 was as follows:


	As of December 31,
	2016		2017
	(RMB in millions)
Within one year		28,842		39,090
In the second year		4,833		6,527
In the third to fifth year inclusive		13,281		8,797
After the fifth year		9,776		9,387
Total		56,732		63,801

As of December 31, 2017, our interest rates relating to short-term borrowings ranged from 0.70% to 4.35%, while our fixed interest rates on our interest-bearing borrowings for long-term bank loans ranged from 3.10% to 3.48%. Our bank loans are denominated in Renminbi, U.S. dollars and Euros. As of December 31, 2017, our total bank loans denominated in Renminbi amounted to RMB83,880 million, our total bank loans denominated in U.S. dollars amounted to US$1,157 million and our total bank loans denominated in EUR amounted to EUR631 million.

On November 16, 2017, EAO issued corporate SGD-denominated bonds in an amount of SGD500,000,000 at 2.8% due 2020, which was listed on the Hong Kong Stock Exchange on November 17, 2017. The Company guaranteed the bond issue. See Note 34 to the consolidated financial statements for more information.

We have entered into credit facility agreements to meet our future working capital needs. However, our ability to obtain financing may be affected by: (i) our results of operations, financial condition, cash flows and credit ratings; (ii) costs of financing in line with prevailing economic conditions and the status of the global financial markets; and (iii) our ability to obtain PRC government approvals required to access domestic or international financing or to undertake any project involving significant capital investment, which may include one or more approvals from the NDRC, SAFE, MOFCOM and/or the CSRC depending on the circumstances. If we are unable to obtain financing, for whatever reason, for a significant portion of our capital requirements, our ability to acquire new aircraft and to expand our operations may be materially and adversely affected.

Capital Expenditures

As of December 31, 2017, according to the relevant agreements, we expect our capital expenditures for aircraft, engines and related equipment to be in aggregate approximately RMB87,030 million, including approximately RMB28,322 million in 2018 and approximately RMB27,516 million in 2019, in each case subject to contractually stipulated increases or any increase relating to inflation. We plan to finance our other capital commitments through a combination of funds generated from operations, existing credit facilities, bank loans, leasing arrangements and other external financing arrangements.

C. Research and Development, Patents and Licenses, etc.

None.

D. Trend Information

Other than as disclosed elsewhere in this Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2017 to December 31, 2017 that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E. Off-balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements other than our operating lease arrangements:

•

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any unconsolidated entity;

•

We have not entered into any obligations under any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements; and

•

We do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.

F. Tabular Disclosure of Contractual Obligations

Contractual Obligations and Commercial Commitments

The following tables set forth selected information regarding our outstanding contractual and commercial commitments as of December 31, 2017:


	Total		Less Than 1 Year		1-2 Years		2-4 Years		More Than 4 Years
Long-Term Debt ⁽¹⁾		9,055		4,131		1,020		2,317		1,587
Capital Leases ⁽²⁾		66,868		9,241		8,162		22,847		26,618
Operating Leases ⁽³⁾		20,936		3,380		2,723		7,268		7,565
Unconditional Purchase Obligations ⁽⁴⁾		87,030		28,322		27,516		27,102		4,090
Other Long-term Obligations ⁽⁵⁾⁽⁶⁾		3,724		—		—		—		—
Post-retirement Benefit Obligations ⁽⁵⁾		2,670		—		—		—		—
Deferred Tax Liabilities ⁽⁵⁾		18		—		—		—		—
Short-term Bank Loans ⁽⁷⁾		24,959		24,959		—		—		—
Interest Obligations
Under Finance Leases		13,282		2,410		2,246		5,048		3,578
Under Bank Loans		2,106		1,038		1,020		42		6
Fixed Rate		860		859		—		1		—
Variable Rate ⁽⁸⁾		1,246		179		1,020		41		6

Note

(1)	Excludes interest.

(2)	Primarily comprise amounts paid/due under leases for the acquisition of aircraft.

(3)	Primarily comprise amounts paid/due under leases for the rental of aircraft, engines and flight equipment.

(4)	Primarily comprise capital expenditures.

(5)	Figures of payments due by period are not available.

(6)	Other long-term obligations include long-term duties and levies payable, and fair value of unredeemed points awarded under our frequent flyer programs.

(7)	Short-term bank loans are generally repayable within one year. As of December 31, 2017, the weighted average interest rate of our short-term bank loans was 1.53% per annum (2016: 2.55%).

(8)

For our variable rate loans, interest rates range from six month LIBOR + 55% to six months LIBOR + 285%. Interest obligations relating to variable rate loans are calculated based on the relevant LIBOR rates as of December 31, 2017. A 25 basis points increase in the interest rate would increase interest expenses by RMB142 million.


	Total		Amount of Commitment Expiration Per Period
Other Commercial	Amounts		Less Than						After
Commitments/Credit Facilities	Committed		1 Year		1-3 Years		4-5 Years		5 Years
	(RMB in millions)
Lines of Credit		59,465		52,626		6,800		—		39
Standby Letters of Credit		—		—		—		—		—
Guarantees		—		—		—		—		—
Total		59,465		52,626		6,800		—		39

Taxation

We had carried forward tax losses of approximately RMB167 million as of December 31, 2017, which can be used to set off against future taxable income between 2018 and 2022.

Prior to 2008, the Company and certain of its subsidiaries located in Pudong District, Shanghai, were entitled to a reduced rate of 15% pursuant to the preferential tax policy in Pudong District, Shanghai. Under China’s EIT Law, which was approved by the National People’s Congress on March 16, 2007 and became effective from January 1, 2008, the Company and its Pudong subsidiaries are entitled to a transitional arrangement to increase the applicable corporate income tax rate gradually to 25% over the next five years from 2008. China Eastern Yunnan Airlines Co., Ltd. (“CEA Yunnan”), a subsidiary of the Group, obtained approval from tax authorities and has been entitled to a reduced corporate income tax rate of 15% from January 1, 2011. The Company’s Sichuan branch, Gansu branch and Xibei branch also obtained approvals from respective tax authorities and are entitled to a reduced corporate income tax rate of 15%. The subsidiaries incorporated in Hong Kong are subject to Hong Kong profits tax rate of 16.5% (2016:16.5%).

The Company and its subsidiaries except for CEA Yunnan, Sichuan branch, Gansu branch and Xibei branch and those incorporated in Hong Kong, are generally subject to income tax at the PRC standard corporate income tax rate of 25% (2016:16.5%).

New Pronouncements

For a detailed discussion of new accounting pronouncements, please see Note 2 to the consolidated financial statements.

G. Safe Harbor

See the section headed “Cautionary Statement With Respect To Forward-Looking Statements”.

Item 6. Directors, Senior Management and Employees

A. Directors and Senior Management

The following table sets forth certain information concerning our current Directors, supervisors and senior management members. Except as disclosed below, none of our Directors, supervisors or members of our senior management was selected or chosen as a result of any arrangement or understanding with any major shareholders, customers, suppliers or others. There is no family relationship between any Director, supervisor or senior management member and any other Director, supervisor or senior management member of our Company.


Name	Age	Shares Owned	Position
Liu Shaoyong	59	—	Chairman of the Board of Directors
Ma Xulun	53	—	President and Vice Chairman
Li Yangmin	54	3,960 A Shares	Director and Vice President
Gu Jiadan	61	—	Director
Tang Bing	51	—	Director and Vice President
Tian Liuwen	58	—	Director and Vice President
Yuan Jun	58		Employee Representative Director
Li Ruoshan	69	—	Independent Non-executive Director
Ma Weihua	69	—	Independent Non-executive Director
Shao Ruiqing	60	—	Independent Non-executive Director
Cai Hongping	63	—	Independent Non-executive Director
Xi Sheng	55	—	Chairman of the Supervisory Committee
Ba Shengji	60	—	Supervisor
Hu Jidong	59	—	Supervisor
Feng Jinxiong	55	—	Supervisor
Jia Shaojun	50	—	Supervisor
Wu Yongliang	54	3,696 A Shares	Vice President and Chief Financial Officer
Feng Liang	53	—	Vice President
Feng Dehua	52		Vice President
Jiang Jiang	53	—	Vice President
Wang Jian	44	—	Board Secretary and Company Secretary

Directors

Mr. Liu Shaoyong, is currently the Chairman and party secretary of the Company and Chairman and party secretary of CEA Holding. Mr. Liu joined the civil aviation industry in 1978 and was appointed as vice president of China General Aviation Corporation, deputy director of Shanxi Provincial Civil Aviation Administration of the PRC, general manager of the Shanxi Branch of the Company, and director general of Flight Standard Department of CAAC. Mr. Liu served as President of the Company from December 2000 to October 2002, vice minister of the CAAC from October 2002 to August 2004, president of China Southern Air Holding Company from August 2004 to December 2008, chairman of China Southern Airlines Co., Limited. from November 2004 to December 2008. Mr. Liu served as president and vice party secretary of CEA Holding from December 2008 to December 2016, and became the Chairman of the Company since February 2009. He served as the Chairman and party secretary of CEA Holding since December 2016 and the party secretary of the Company since December 2017. Mr. Liu is also currently the member of the National Committee of the Chinese People’s Political Consultative Conference, the council member of International Air Transport Association and the council member of Association for Relations Across the Taiwan Straits, and the vice chairman of International Advisory Board of School of Management, Fudan University. Mr. Liu graduated from the China Civil Aviation Flight College and obtained a Master of Business Administration degree from Tsinghua University. Mr. Liu holds the title of commanding pilot.

Mr. Ma Xulun, is currently the vice chairman, president and vice party committee secretary of the Company, vice chairman, president, and vice party secretary of CEA Holding. Mr. Ma was previously vice president of China Commodities Storing and Transportation Corporation, deputy director general of the Finance Department of the CAAC and vice president of Air China Corporation Limited. In 2002, after the restructuring of civil aviation industry he was appointed as vice president of general affairs of Air China Corporation Limited. Mr. Ma served as president and deputy party secretary of Air China Corporation Limited from September 2004 to January 2007. Mr. Ma became a party member of China National Aviation Holding Company from December 2004 to December 2008, and deputy general manager of China National Aviation Holding Company from January 2007 to December 2008. In December 2008, Mr. Ma was appointed as president and deputy party secretary of the Company and deputy party secretary of CEA Holding. Since February 2009, Mr. Ma has become a Director of the Company. Mr. Ma served as vice president of the Company with effect from November 2011. He served as party secretary of CEA Holding from November 2011 to December 2016. He served as vice chairman, president and vice party secretary of CEA Holding with effect from December 2016. Mr. Ma is also currently the deputy president of China Association for public companies, the vice president of Association of Shanghai Listed Companies and the director of Shanghai Chinese Overseas Friendship Association. Mr. Ma graduated from Shanxi University of Finance and Economics and Huazhong University of Science and Technology. Mr. Ma holds a master’s degree and is a PRC Certified Public Accountant (CPA).

Mr. Li Yangmin, is currently a Director, vice party secretary and vice president of the Company, and vice party secretary and vice president of CEA Holding. Mr. Li joined the civil aviation industry in 1985. He was previously deputy general manager of the aircraft maintenance base and the manager of air route department of Northwest Company, general manager of the aircraft maintenance base of China Eastern Air Northwest Branch Company and vice president of China Eastern Air Northwest Branch Company. Since October 2005, he has also been a vice president of the Company. He served as Safety Director of the Company from July 2010 to December 2012. He has become a party member of CEA Holding since May 2011. He was appointed the Director of the Company with effect from June 2011 and served as the party secretary of the Company from June 2011 to December 2017. He served as the chairman of China Cargo Airlines Co., Limited. from February 2012 to January 2013. He served as the executive director of Eastern Logistics from December 2012 to June 2016. Since November 2014, he served as the Chairman of Eastern Air Yunnan. Since August 2016, he served as vice party secretary and vice president of CEA Holding. Since December 2017, he served as the vice party secretary of the Company. Mr. Li graduated from the Civil Aviation University of China and Northwestern Polytechnical University with master’s degrees and obtained an Executive Master of Business Administration degree from Fudan University. He is also a qualified professor-level senior engineer.

Mr. Gu Jiadan, is currently a Director. Mr. Gu was the assistant to president, and the general manager of the commerce department and the party secretary of Shanghai Airlines Co., Limited From May 2005 to August 2009, he was the vice president and a party member of Shanghai Airlines. From August 2009 to January 2010, he was the acting president of Shanghai Airlines. From January 2010 to December 2016, he was a party member and vice president of CEA Holding. From January 2010 to July 2011, he served as the party secretary of Shanghai Airlines. He was appointed as a Director of the Company with effect from June 2012. Mr. Gu Jiadan holds a master’s degree and is a senior economist.

Mr. Tang Bing, is currently a Director, vice president of the Company, vice president and party member of CEA Holding. Mr. Tang joined the civil aviation industry in 1993. He served as vice executive president (general manager representing Chinese shareholder) of MTU Maintenance Zhuhai Co., Limited., office director of China Southern Airlines Holding Company and president of Chongqing Airlines Company Limited. From December 2007 to May 2009, he served as chief engineer and general manager of the Aircraft Engineering Department of China Southern Airlines Company Limited. From May 2009 to December 2009, he was appointed as president of the Beijing Branch of the Company and was the president of Shanghai Airlines from January 2010 to December 2011. He served as the chairman and executive director of Shanghai Airlines from January 2012 to January 2018, and was appointed a party member of CEA Holding in May 2011 and a Director of the Company in June 2012. Since December 2016, he served as the vice president of CEA Holding. Mr. Tang graduated from Nanjing University of Aeronautics and Astronautics majoring in electrical technology. He obtained a Master of Business Administration degree from the Administration Institute of Sun Yat-sen University, an Executive Master of Business Administration degree from the School of Economics and Management of Tsinghua University and a doctoral degree in economics from the Graduate School of Chinese Academy of Social Sciences. He is also a qualified senior engineer.

Mr. Tian Liuwen, is currently a Director, vice president of the Company and vice president and a party member of CEA Holding. Mr. Tian joined the civil aviation industry in 1985. Mr. Tian served as manager of the Beijing Sales Department under the Marketing and Sales Division of China General Aviation Corporation. He was also the head of the general manager office and chairman of the labor union and deputy general manager of the Shanxi Branch of the Company. From June 2002 to January 2008, he was the vice president and subsequently president of the Hebei Branch of the Company. From April 2005 to May 2007, he was the president of the Beijing Base of the Company. He served as general manager of Eastern Air Jiangsu, from January 2008 to December 2011. Since December 2011, he has been the vice president of the Company. From December 2011 to June 2013, he was the president of Shanghai Airlines. Since June 2014, he has been a party member of CEA Holding. Since June 2015, he has been a Director of the Company. Since December 2016, he served as the vice president of CEA Holding. Since January 2018, he served as the chairman of Eastern Air Jiangsu. Mr. Tian obtained an Executive Master of Business Administration degree from Nanjing University and is qualified as senior economist.

Mr. Yuan Jun, is currently an employee representative Director and chief human resources officer of the Company, employee representative director and head of Human Resources Department of CEA Holding and director of Eastern Airlines Industry Investment. Mr. Yuan entered civil aviation industry in 1997. From May 2007 to October 2011, Mr. Yuan was the deputy head and head of Work Department of Party Committee of the Company. From October 2011 to May 2016, he was the general manager of Human Resources Department of the Company. From July 2014, he served as the chief human resources officer of the Company. From June 2015 to September 2016, he concurrently served as the general manager of Ground Services Department and the deputy secretary of Party Committee of the Company. From September 2016, he served as the head of Human Resources Department of CEA Holding. Mr. Yuan holds an executive master’s degree in business administration from Fudan University and a senior political work specialist qualification.

Mr. Li Ruoshan, is currently an independent non-executive Director. Mr. Li is currently a professor and PhD supervisor of the Accounting Department of the School of Management of Fudan University. He is also the vice president of the Shanghai Accounting Society and Shanghai Auditing Society. In 2001, Mr. Li was awarded the “The Best 10 Independent Directors in China” by the Shanghai Stock Exchange. Mr. Li graduated from Xiamen University, majoring in accounting and obtained the first doctoral degree in auditing in the PRC. He further studied abroad in the Katholieke Universiteit Leuven in Belgium and the Massachusetts Institute of Technology in the United States. Mr. Li was a deputy dean of the School of Economics and a deputy director of the Accounting Department of the School of Economics of Xiamen University; and a deputy dean of the School of Management, director of the Accounting Department, director of the Financial department of Fudan University, a member of the Consultant Professional Committee for Listed Companies of the Shanghai Stock Exchange and a consultant professional of the Committee for Accounting Standards of the Ministry of Finance. Mr. Li has been an independent non-executive Director of the Company since June 2013. He is also the independent director of companies such as SAIC Motor Corporation Limited, Shanghai Zhangjiang Hi-tech Park Development Co., Ltd. and Xi’an Shaangu Power Co., Ltd, external supervisor of Industrial Bank Co., Ltd. and a director of Jiangsu Zhongnan Construction Group Co., Ltd.

Mr. Ma Weihua, is currently an independent non-executive Director. Mr. Ma is currently the director-general of Council of National Fund for Technology Transfer and Commercialization, a member of the Standing Council of China Society for Finance and Banking. Mr. Ma served as an executive director, president and chief executive officer of China Merchants Bank Co., Limited, the chairman of Wing Lung Bank Limited in Hong Kong, the chairman of CIGNA & CMC Life Insurance Company Limited and the chairman of China Merchants Fund Management Co., Limited. Mr. Ma obtained a doctorate degree in economics and is an adjunct professor at several higher educational institutions including Peking University and Tsinghua University. Mr. Ma has been the independent non-executive Director since October 2013 to present. Mr. Ma is currently an independent director of China World Trade Center Co., Limited, Postal Savings Bank of China Co., Limited and Legend Holdings Corporation at the same time and the Chairman of the board of supervisors of Taikang Life Insurance Co., Limited and a non-executive director of Roadshow Holdings Limited.

Mr. Shao Ruiqing, is currently an independent non-executive Director. Mr. Shao currently serves as a professor in accounting and a mentor to doctoral students at the Shanghai Lixin University of Commerce. Mr. Shao served as the deputy dean and dean of the School of Economics and Management of Shanghai Maritime University, the deputy dean of Shanghai Lixin University of Commerce and the independent director of China Shipping Haisheng Co., Limited., and SAIC Motor Corp Limited. Mr. Shao served as an independent non-executive Director of the Company from June 2010 to April 2014. Mr. Shao was awarded the special allowance by the State Council of the PRC in 1995. He is currently a consultative committee member of the Ministry of Transport, as an expert in finance and accounting and the deputy head of China Association of Communications Accountancy. Mr. Shao graduated from Shanghai Maritime University, Shanghai University of Finance and Economics and Tongji University with a bachelor’s degree in economics, and master’s and doctoral degrees in management. Mr. Shao has spent two and a half years studying and being senior visiting scholar in the U.K. and Australia. Mr. Shao is also an independent director of Tibet Urban Development And Investment Co., Ltd, Shenzhen Guangju Energy Co., Ltd., Huayu Automotive Systems Company Limited and Shanghai Carthane Co., Ltd.

Mr. Cai Hongping, is currently an independent non-executive Director. Mr. Cai currently serves as the chairman of AGIC Capital. He worked for the Industrial and Transportation Management Committee of the Shanghai Government and Sinopec Shanghai Petrochemical Company Limited (“Sinopec Shanghai”) from 1987 to 1991. He participated in the entire listing process of Sinopec Shanghai in Hong Kong and the United States and is one of the founders of H shares in the PRC. From 1992 to 1996, he acted as a member of the Overseas Listing Team for Chinese Enterprises under the Restructuring Committee of the State Council and the chairman of the Joint Committee of Board Secretaries for H Share Companies in the PRC. He served as a joint director of the investment banking division of Peregrine Investments Holdings Limited in Asia from 1997 to 2006, chairman of the investment banking division of UBS AG in Asia from 2006 to 2010, chairman of Deutsche Bank in the Asia Pacific region from 2010 to 2015, independent non-executive director of China Oceanwide Holdings Limited since November 2014 and independent director and chairman of the audit committee of Minmetals Development Co., Limited from April 2015 to December 2015. He became an external director of China Minmetals Corporation with effect from December 2015. He has been an independent non-executive Director of the Company since June 2016, an independent director of COSCO SHIPPING Development Co., Ltd. since July 2016, and an independent director of Bank of Communications Co., Ltd since June 2017. Mr. Cai graduated from Shanghai Fudan University, majoring in mass communications.

Supervisory Committee

As required by the PRC Company Law and our Articles of Association, our Company has a supervisory committee (the “Supervisory Committee”), whose primary duty is the supervision of our senior management, including our Board of Directors, managers and senior officers. Supervisory Committee consists of five supervisors.

Mr. Xi Sheng, is currently the chairman of Supervisory Committee of the Company, party member, vice president and chief auditor of CEA Holding. Mr. Xi served as the deputy head of the foreign affairs department II of the foreign funds utilization and application audit department and the head of the liaison and reception office of the foreign affairs department of the National Audit Office of the PRC and the deputy head of the PRC Audit Institute. He was also the deputy head and head of the fixed assets investment audit department of the National Audit Office of the PRC, and the party secretary and a special commissioner of the Harbin office of the National Audit Office of the PRC. He served as the head of the personnel and education department of the National Audit Office of the PRC from January 2007 to September 2009. He was the head of the audit department of CEA Holding from September 2009 to November 2012. Mr. Xi has served as the chief auditor of CEA Holding since September 2009. Since June 2012, he has been a supervisor of the Company. Since June 2016, he has been the chairman of Supervisory Committee of the Company. Since December 2017, he served as the head of the audit department of CEA Holding. Since January 2018, he served as the vice president and party member of CEA Holding. Mr. Xi is also the council member of China Institute of Internal Audit, vice chairman of the 2nd session of supervisory committee of China Association for Public Companies and chairman of executive committee of Association of Certified International Investment Analysts. Mr. Xi graduated from Jiangxi University of Finance and Economics with undergraduate education background. He is a senior auditor, a Chinese Certified Public Accountant (CPA) and an International Certified Internal Auditor (CIA).

Mr. Ba Shengji, is currently a supervisor of the Company and the chairman of the labor union of CEA Holding. Mr. Ba joined the civil aviation industry in 1978. He served as the section manager and deputy head of the finance department. He was the chief officer of the auditing office of the Company from March 1997 to October 1997, chief officer of the auditing office of CEA Holding from October 1997 to July 2000, head of the audit department of CEA Holding from July 2000 to January 2003, chief officer of disciplinary committee office, head of supervision department and head of audit department of CEA Holding from January 2003 to May 2003. He served as the deputy head of party disciplinary inspection group, chief officer of disciplinary committee office, head of supervision department and head of the audit department of CEA Holding from May 2003 to November 2006. He was the secretary of the disciplinary committee of the Company from November 2006 to November 2009 and the secretary of the disciplinary committee and chairman of the labor union of the Company from November 2009 to November 2011. He served as the deputy secretary of the party committee and secretary of the disciplinary committee of the Company from November 2011 to August 2013. Since June 2013, he has been a supervisor of the Company. He has served as the chairman of the labor union of CEA Holding since August 2013. Mr. Ba graduated from Shanghai Television University.

Mr. Hu Jidong, is currently a supervisor and chairman of the labor union of the Company and chief financial officer and vice chairman of the labor union of CEA Holding. Mr. Hu joined the civil aviation industry in 1977. He has been the deputy head of the party promotion department of the Company, deputy head and head of the party publicity department of CEA Holding, and head of the party publicity department of CEA Holding. He was the chairman of the labor union of the Company since December 2011, deputy party secretary of the Company from August 2013 to December 2017, secretary of the disciplinary committee of the Company from August 2013 to August 2014, and supervisor of the Company since June 2016. Since November 2017, he served as the chief financial officer and vice chairman of the labor union of CEA Holding. Mr. Hu Jidong graduated from Shanghai University with a major in cultural management and Fudan University with a major in administrative management.

Mr. Feng Jinxiong, is currently a supervisor of the Company and consultant of the audit department of CEA Holding. Mr. Feng joined the civil aviation industry in 1982, and served as deputy head and head of the Planning Department of the Company, head of the Finance Department and deputy chief accountant of CEA Holding, manager of the Human Resources Department of the Company, party secretary and vice president of CES Finance, and deputy general manager of the Shanghai Security Department of the Company. He also served as president of Eastern Air Wuhan from January 2007 to February 2009. He served as general manager of the Audit Department of the Company from February 2009 to December 2017. He has been a supervisor of the Company since March 2009. He has been the head of the audit department of CEA Holding from May 2014 to December 2017. Since December 2017, he served as consultant of the audit department of CEA Holding. Mr. Feng graduated from the Civil Aviation University of China and the Graduate School of the Chinese Academy of Social Sciences, holding a master’s degree.

Mr. Jia Shaojun, is currently a supervisor of the Company. Mr. Jia was general manager of the financial department and secretary of party general branch of the financial department of the Company. He served as general manager of the finance and accounting department of the Company from December 2011 to November 2012 and head of the audit department of CEA Holding from November 2012 to May 2014. He has acted as head of the financial department of CEA Holding from May 2014 to December 2017. He has acted as supervisor of the Company since June 2016. Mr. Jia graduated from Civil Aviation College of China and Fudan University School of Management, holding an executive MBA degree. He is qualified as a senior accountant.

Senior Management

Mr. Wu Yongliang, is currently a vice president and chief financial officer of the Company, and vice president and party member of CEA Holding. Mr. Wu joined the civil aviation industry in 1984 and served as deputy head and subsequently head of the Finance Department of the Company, head of Planning and Finance Department of the Company and head of the Finance Department of CEA Holding. From April 2001 to March 2009, he served as deputy chief accountant and head of the Finance Department of CEA Holding. From April 2009 onwards, he has served as chief financial officer of the Company. He has been a vice president of the Company since December 2011. He has been a vice president and party member of CEA Holding since November 2017. Mr. Wu graduated from the Faculty of Economic Management of Civil Aviation University of China, majoring in planning and finance. He also graduated from Fudan University, majoring in business administration. Mr. Wu holds a MBA degree and is a certified accountant.

Mr. Feng Liang, is currently a vice president and the chief engineer of the Company. Mr. Feng joined the civil aviation industry in 1986 and worked in the aircraft maintenance base routes department of the Company. From 1999 to 2006, he used to serve as the head of the aircraft maintenance base engineering technology department, chief engineer of the base and general manager of the base. He also served as the general manager of China Eastern Air Engineering & Technique after it was established in September 2006. He has served as the chief engineer of the Company since August 2010, the chief security officer of the Company from December 2012 to December 2014 and the vice president of the Company since August 2013. He has been an executive director of Eastern Technology since December 2014. Mr. Feng graduated from Civil Aviation University of China, majored in aircraft electrical equipment maintenance and obtained an MBA degree from Shanghai Jiao Tong University.

Mr. Feng Dehua, is currently a vice president of the Company and the deputy head of party disciplinary inspection group of CEA Holding. Mr. Feng joined the civil aviation industry in 1989, and has worked in China General Aviation Corporation, the Shanxi branch of the Company and the sales and marketing system department of the Company. From May 2009 to July 2009, Mr. Feng was the executive vice president for sales and marketing of passenger transportation department of the Company. From July 2009 to November 2011, he was the party secretary and vice president for sales and marketing of passenger transportation department of the Company. From November 2011 to August 2014, he was the president and deputy party secretary of the Beijing branch of the Company. From August 2014 to December 2017, he was the secretary of the Disciplinary Committee of the Company. Since September 2014, he has been a member of the Party Standing Committee of the Company. Since September 2014, he has been the deputy head of party disciplinary inspection group of CEA Holding. Since December 2017, he has been a vice president of the Company. Mr. Feng graduated from Shanxi Finance and Economics Institute majored in commercial business management and obtained an executive master’s degree in business administration from Fudan University. He is qualified as a senior economist.

Mr. Jiang Jiang, is currently a vice president of the Company. Mr. Jiang joined the civil aviation industry in 1986, and has worked in the Civil Aviation Industry Airline Corporation and China General Aviation Corporation. From June 1999 to April 2005, he served as the deputy manager and manager of the flight division of the Shanxi Branch of the Company. From April 2005 to July 2010, he was the deputy general manager of the Shanxi Branch. From July 2010 to June 2014, he served as the general manager and the deputy secretary of the party committee of the Shanxi Branch. From June 2014 to December 2016, he served as the deputy secretary of the party committee of Eastern Air Wuhan. He served as director and general manager of Eastern Air Wuhan from June 2014 to April 2017. From December 2016 to February 2017, he has served as the person-in-charge of the safety operation management of the Company. Since February 2017, he has served as the vice president of the Company. Mr. Jiang graduated from the Flight College of Civil Aviation Flight University of China, majored in aviation transportation and obtained an Executive Master of Business Administration degree from Fudan University. He has the professional title of Level 1 pilot.

Mr. Wang Jian, is currently the Company’s Board secretary and company secretary. Mr. Wang joined the Company in 1995 and served as deputy head of the Company’s office and deputy general manager of the Shanghai Business Office of the Company. From September 2006 to May 2009, he was the deputy general manager in the Shanghai Base of China Southern Airlines Company Limited. He served as the head of the Board secretariat of the Company and a representative of the Company’s Securities affairs from May 2009 to April 2012. He served as the Board secretary and the head of the Board secretariat of the Company from April 2012 to May 2016. He ceased to serve as the head of the Board secretariat in May 2016. During his term as secretary to the Board and his relevant work, he designed and promoted to implement several capital and strategic projects of the Company. Mr. Wang graduated from Shanghai Jiao Tong University and has an Master of Business Administration postgraduate degree from East China University of Science and Technology and an Executive Master of Business Administration degree from Tsinghua University as well as a qualification certificate for board secretaries of listed companies issued by the Shanghai Stock Exchange.

Retired Director, Supervisor and Senior Management During the Reporting Period

Mr. Xu Zhao, was a Director of the Company, and the chief accountant of CEA Holding during the reporting period. Mr. Xu served as engineer and accountant of Dongfeng Motor Group Company Limited, manager of the finance department of Shanghai Yanhua High Technology Limited Company, and chief financial officer of Shaanxi Heavy Duty Automobile Co., Limited. Mr. Xu has served as the chief accountant of CEA Holding from November 2006 to January 2018. He was a supervisor of the Company from June 2007 to November 2011. He has served as a Director of the Company from June 2012 to February 2018. Mr. Xu graduated from Chongqing University, majoring in moulding, and The Chinese University of Hong Kong, majoring in accounting, and holds a master’s degree. Mr. Xu is qualified as an engineer and an accountant, and is a certified public accountant in the PRC.

Mr. Sun Youwen, was a vice president of the Company during the reporting period. Mr. Sun joined the civil aviation industry in 1980, and served as a squadron leader and the leader of the Shanghai flight division. He served as the vice president of Eastern Air Jiangsu from April 2007 to November 2009 and the general manager of the Shanghai flight division of the Company from December 2009 to April 2012. He was appointed as the chief pilot of the Company and the general manager of the Shanghai flight division of the Company from April 2012 to March 2014 and has served as the vice president and chief pilot of the Company from March 2014 to July 2014. He has been a vice president of the Company from July 2014 to February 2017. Mr. Sun graduated from the Flight College of Civil Aviation Flight University of China, majored in aircraft driving and obtained an Executive Master of Business Administration degree from the Institute of Management of Fudan University.

B. Compensation

The aggregate amount of cash compensation paid by us to our Directors, supervisors and the senior management during 2017 for services performed as Directors, supervisors and officers or employees of our Company was approximately RMB8.7 million. In addition, Directors and supervisors who are also officers or employees of our Company receive certain other in-kind benefits which are provided to all of our employees.

Details of the emoluments paid to our Directors, supervisors and senior management for the year 2017 are as follows:


	Total
Name and Principal Position	RMB’000
Directors
Liu Shaoyong*		—
Ma Xulun*		—
Xu Zhao*		—
Gu Jiadan*		—
Li Yangmin*		—
Tang Bing*		—
Tian Liuwen*		—
Independent non-executive Directors
Li Ruoshan		200
Shao Ruiqing		200
Ma Weihua		200
Cai Hongping		200
Supervisors
Xi Sheng*		—
Feng Jinxiong		584
Ba Shengji*		—
Hu Jidong		1,549
Jia Shaojun*		—
Senior Management
Wu Yongliang		1,549
Feng Liang		1,549
Feng Dehua⁽¹⁾		—
Jiang Jiang⁽²⁾		921
Wang Jian		1,397
Sun Youwen⁽³⁾		399
Total		8,748

These Directors and supervisors of our Company received emoluments from CEA Holding, our parent company, part of which were in respect of their services to our Company and our subsidiaries. No apportionment has been made, as it is impracticable to apportion this amount between their services to us and their services to CEA Holding. Mr. Xu Zhao resigned on February 6, 2018.

(1)	The term of service of Mr. Feng Dehua as the vice president started from December 24, 2017 and he started to receive remuneration as the vice president from January 2018.

(2)	Mr. Jiang Jiang, the vice president, is a pilot whose salary includes flight service benefits. His term of service started from February 22, 2017. Therefore, the remuneration disclosure period was from March to December 2017.

(3)	Mr. Sun Youwen is a pilot whose salary includes flight service benefits. The term of service of the vice president in 2017 was from January 1 to February 22, 2017. Therefore, the remuneration disclosure period was from January to February 2017.

During the year ended December 31, 2017, no Directors or supervisors of the Company waived their compensation.

C. Board Practices

All of our Directors and supervisors serve a term of three years or until such later date as their successors are elected or appointed. Directors and supervisors may serve consecutive terms. Two of the supervisors are employee representatives appointed by our employees, and the rest are appointed by the shareholders. The following table sets forth the number of years our current Directors, executive officers and supervisors have held their positions during their current term and the expiration of their current term.


Name ⁽¹⁾	Position	Held Position Since	Expiration of Term
Liu Shaoyong	Chairman of the Board of Directors	June 15, 2016	June 30, 2019
Ma Xulun	Vice Chairman	June 15, 2016	June 30, 2019
	President	June 15, 2016	June 30, 2019
Li Yangmin	Director	June 15, 2016	June 30, 2019
	Vice President	June 15, 2016	June 30, 2019
Xu Zhao	Director	June 15, 2016	February 6, 2018
Gu Jiadan	Director	June 15, 2016	June 30, 2019
Tang Bing	Director	June 15, 2016	June 30, 2019
	Vice President	June 15, 2016	June 30, 2019
Tian Liuwen	Director	June 15, 2016	June 30, 2019
	Vice President	June 15, 2016	June 30, 2019
Yuan Jun	Director	February 8, 2018	June 30, 2019
Li Ruoshan	Independent Non-executive Director	June 15, 2016	June 30, 2019
Ma Weihua	Independent Non-executive Director	June 15, 2016	June 30, 2019
Shao Ruiqing	Independent Non-executive Director	June 15, 2016	June 30, 2019
Cai Hongping	Independent Non-executive Director	June 15, 2016	June 30, 2019
Xi Sheng	Chairman of the Supervisory Committee	June 15, 2016	June 30, 2019
Ba Shengji	Supervisor	June 15, 2016	June 30, 2019
Hu Jidong	Supervisor	June 15, 2016	June 30, 2019
Feng Jinxiong	Supervisor	June 15, 2016	June 30, 2019
Jia Shaojun	Supervisor	June 15, 2016	June 30, 2019
Wu Yongliang	Vice President	June 15, 2016	June 30, 2019
	Chief Financial Officer	June 15, 2016	June 30, 2019
Feng Liang	Vice President	June 15, 2016	June 30, 2019
Feng Dehua	Vice President	December 25, 2017	June 30, 2019
Jiang Jiang	Vice President	February 22, 2017	June 30, 2019
Sun Youwen	Vice President	June 15, 2016	February 22, 2017
Wang Jian	Company Secretary	June 15, 2016	June 30, 2019

Note:

(1)

On February 22, 2017, the fourth ordinary meeting of the eighth session of the Board of Directors of the Company appointed Mr. Jiang Jiang as a vice president of the Company for a term of office in line with the current session of the Board of Directors. On December 25, 2017, the ninth ordinary meeting of the eighth session of the Board of Directors of the Company appointed Mr. Feng Dehua as a vice president of the Company for a term of office in line with the current session of the Board of Directors. On February 6, 2018, Mr. Xu Zhao resigned as a Director. On February 8, 2018, Mr. Yuan Jun was elected as an employee representative Director at the general meeting of the employee representatives.

None of our Directors, supervisors or members of our senior management has entered into any agreement or reached any understanding with us requiring our Company to pay any benefits as a result of termination of their services.

Audit and Risk Management Committee

Our Board of Directors established the audit committee in August 2000 in accordance with the listing rules of the Hong Kong Stock Exchange. Our Audit and Risk Management Committee comprised Mr. Li Ruoshan, Mr. Shao Ruiqing and Mr. Xu Zhao as the members of the Audit and Risk Management Committee and Mr. Li Ruoshan was appointed as the chairman of the Audit and Risk Management Committee in 2017. Due to Mr. Xu Zhao’s resignation, on March 29, 2018, Mr. Cai Hongping was appointed as the member of the Audit and Risk Management Committee. Our Audit and Risk Management Committee comprises three members, which are all independent non-executive directors, and satisfies the requirements of Rule 10A-3 of the Exchange Act and NYSE Rule 303A.06 relating to audit committees, including the requirements relating to independence of the audit committee members.

The Audit and Risk Management Committee is authorized to, among other things, examine our internal control, internal audit and risk management systems, review auditing procedures and financial reports with our auditors, evaluate the overall risk management and corporate governance of our Company and prepare relevant recommendations to our Board of Directors. Subject to the approval of the shareholders’ meeting, the Audit and Risk Management Committee of our Company is also directly responsible for the appointment, compensation, retention and oversight of our external auditors, including resolving disagreements between management and the auditor regarding financial reporting. The external auditors report directly to the Audit and Risk Management Committee. The Audit and Risk Management Committee holds at least three meetings each year. The Audit and Risk Management Committee has established procedures for the receipt, retention and treatment of complaints received by our Company regarding accounting, internal controls or auditing matters, and procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Audit and Risk Management Committee has the authority to engage independent counsel and other advisors, as it determines necessary, to carry out its duties. Our Company provides appropriate funding, as determined by the Audit and Risk Management Committee, for payment of compensation to the external auditors, advisors employed by the audit committee, if any, and ordinary administrative expenses of the audit committee that are necessary or appropriate in carrying out its duties. The Audit and Risk Management Committee held eight meetings in 2017.

Nominations and Remuneration Committee

Our Nominations and Remuneration Committee comprises three members: Mr. Liu Shaoyong, the Chairman, Mr. Ma Weihua and Mr. Cai Hongping, both of whom are independent non-executive directors. Since June 15, 2016, when considering and approving nomination related matters, the Nominations and Remuneration Committee will be chaired by Mr. Liu Shaoyong; when considering and approving remuneration related matters, the Nominations and Remuneration Committee will be chaired by Mr. Ma Weihua.

The Nominations and Remuneration Committee is authorized to make recommendations to our Board of Directors regarding its size and composition based on the relevant provisions of the Company Law and in the light of specific circumstances such as the characteristics of the Company’s equity structure, determine standards and procedures for the nomination of Directors and senior management of the Company, examine the remuneration policies of Directors and senior management of the Company, review the performance of our Directors and senior management as well as determine their annual compensation level. The Nominations and Remuneration Committee submits to our Board of Directors or shareholders’ meeting for approval compensation plans and oversee the implementation of approved compensation plans. The Nominations and Remuneration Committee may consult financial, legal or other outside professional firms in carrying out its duties. The Nominations and Remuneration Committee held four meetings in 2017.

We follow our home country practice in relation to the composition of our Nominations and Remuneration Committee in reliance on the exemption provided under NYSE Corporate Governance Rule 303A.00 available to foreign private issuers. Our home country practice does not require us to establish a remuneration committee composed entirely of independent directors.

Planning and Development Committee

The Planning and Development Committee comprises three members: Mr. Li Yangmin and Mr. Tang Bing both of whom are Directors, and Mr. Shao Ruiqin, an independent non-executive director. Mr. Li Yangmin is the chairman of the committee.

The Planning and Development Committee, a specialized committee under our Board of Directors, is responsible for studying, considering, and developing plans and making recommendations with regard to the long-term development plans and material investment decisions of the Company. The members of the committee also oversee the implementation of such plans. The Planning and Development Committee held eight meetings in 2017.

Aviation Safety and Environment Committee

The Aviation Safety and Environment Committee comprises Mr. Ma Xulun and Mr. Li Yangmin, both of whom are Directors, and Mr. Li Ruoshan, an independent non-executive director. Mr. Ma Xulun serves as the chairman of the committee.

The Aviation Safety and Environment Committee, a specialized committee under the Board of Directors, is responsible for consistent implementation of relevant laws or regulations regarding national aviation safety and environmental protection, examining and overseeing the aviation safety management of the Company, studying, considering and making recommendations with regard to aviation safety duty plans and significant issues resulting from related safety duties as well as implementing such safety duty plans. In addition, the Aviation Safety and Environment Committee performs studies, and makes recommendations on significant environmental protection issues, including carbon emissions on our domestic and international aviation routes and carbon emission programs, and overseeing their implementation. The Aviation Safety and Environment Committee held two meetings in 2017.

D. Employees

Our employees are members of a labor association, which represents employees with respect to labor disputes and certain other employee matters. We believe that we maintain good relations with our employees and with their labor association.

The table below sets forth the number of our employees as of December 31, 2015, 2016 and 2017, respectively:


	As of December 31,
	2015		2016		2017
Pilots		6,386		6,759		7,332
Flight attendants and other aircrew staff		13,225		15,494		18,916
Maintenance personnel		10,890		11,621		11,847
Sales and marketing		3,980		4,739		4,378
Operation control		1,983		2,180		2,057
Information technology		707		860		920
Management		4,125		4,001		3,923
Ground Services and others		29,737		29,679		25,904
Total		71,033		75,333		75,277

In 2017, we ensured positive results from the large-scale trainings through organizing and coordinating resources, reasonably setting up courses and optimizing training cycles. We focused on different professional trainings, concentrated on the development of talent for the key positions and set up clear development and training plans for the targeted personnel. Altogether 49,663 people have completed trainings, 980 people dispatched; 205 tranches or 3,620 people have completed the five required trainings in the transportation industry, which are dispatch, information, flight operations, on-the-spot affairs and capabilities; 3,134 flight attendant trainees have completed 107 training tasks from the beginner class for the new flight attendants. We have also optimized the “Sail Plan for Talents Development”, a training program for new management trainees incorporating closed-door training with seminars, experiential and inspiring teaching. In addition, we promoted overseas study project, such as Rolls-Royce management improvement study project and Six Sigma Black Belt project.

See Note 37 to the consolidated financial statements for changes in our retirement benefits.

E. Share Ownership

See Item 6.A and Item 6.B above.

In 2012, we implemented an H shares appreciation rights scheme, under which H shares appreciation rights were granted to the Directors and senior management on November 30, 2012 at an exercise price of HK$2.67. The H share appreciation rights granted under this scheme are valid for a period of five years from the date of grant. The lock-up period of the share appreciation rights shall be the 24 months from the date of grant, during which no share appreciation right shall be exercised. Subject to the satisfaction of performance appraisal indicators, incentive recipients may exercise their share appreciation rights in equal instalments within three years after the expiration of the lock-up period.

There was no granting or exercise of rights under the H shares appreciation rights of our Company during 2013. The first tranche of H shares appreciation rights, amounting to one third of the total H shares appreciation rights of our Company, was originally planned to be exercised on December 1, 2014. However, as our Company did not satisfy the exercising conditions in 2013, such tranche expired automatically.

Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders

The following table sets forth certain information regarding ownership of our capital stock as of December 31, 2017 by all persons who were known to us to be the beneficial owners of 5% or more of any class of our issued share capital:


Title of Class	Identity of Person or Group	Amount Owned (%)		Percent of Class		Percent of Total Shares (%)
Domestic A Shares	CEA Holding ⁽¹⁾		5,530,240,000		56.38		38.23
H Shares	CES Global ⁽²⁾		2,626,240,000		56.37		18.15
H Shares	HKSCC Nominees Limited ⁽³⁾		4,182,503,289		89.77		28.91
H Shares	Delta Air Lines ⁽⁴⁾		465,910,000		10.00		3.22

Notes:

Based on the information available to the Directors (including such information as was available on the website of the Hong Kong Stock Exchange) and so far as they are aware, as of December 31, 2017:

(1)	Among such A shares, 5,072,922,927 A shares were held directly by CEA Holding; and 457,317,073 A shares were held directly by CES Finance, which in turn were entirely held by CEA Holding.

(2)	Those H shares were held by CES Global in the capacity of beneficial owner, which in turn were entirely held by CEA Holding.

(3)	Among the 4,182,503,289 H shares held by HKSCC Nominees Limited, 2,626,240,000 shares (representing approximately 62.79% of the Group’s then total issued H shares) were held by CES Global in the capacity of beneficial owner, which in turn were entirely held by CEA Holding.

(4)	Those H shares were held by Delta Air Lines, Inc. in the capacity of beneficial owner, and represented approximately 10.00% of the Group’s then total issued H shares.

As of December 31, 2017, CEA Holding directly or indirectly held 56.38% of our issued and outstanding capital stock, and neither it nor HKSCC Nominees Limited has any voting rights different from those of other shareholders. We are not aware of any arrangement which may at a subsequent date result in a change of control of our Company.

As of December 31, 2017, there were 4,659,100,000 H Shares issued and outstanding. As of December 29, 2017 (December 30 and December 31, 2017 being a Saturday and a Sunday) and April 16, 2018, there were 43 and 42 registered holders, respectively, of American depositary receipts evidencing 1,974,935 and 1,925,427 ADSs, respectively. Since certain of the ADSs are held by nominees, the above number may not be representative of the actual number of U.S. beneficial holders of ADSs or the number of ADSs beneficially held by U.S. persons.

Our Company is currently a majority-owned subsidiary of CEA Holding. CEA Holding itself is a wholly state-owned enterprise under the administrative control of the SASAC. CEA Holding’s shareholding in our Company is in the form of ordinary domestic shares, through which it, under the supervision of the SASAC, enjoys shareholders’ rights and benefits on behalf of the PRC government.

B. Related Party Transactions

Relationship with CEA Holding and Associated Companies

We enter into transactions from time to time with CEA Holding and its subsidiaries. For a description of such transactions, see Note 47 to the consolidated financial statements.

Related Business Transactions

As our Company and EA Group and its subsidiaries were a single group prior to the restructuring in 2002, certain arrangements among us have continued after the restructuring and the establishment of CEA Holding. Although we do not currently intend to enter into any equivalent contracts with third parties, each of these arrangements is non-exclusive.

Eastern Aviation Import and Export Corporation (“EAIEC”), a 55% owned subsidiary of CEA Holding

Import and Export Services (previously known as Import and Export Agency Services)

On August 30, 2013, we entered into an agreement relating to the renewal of the existing import and export agency agreement with EAIEC on substantially the same terms, pursuant to which EAIEC and its subsidiaries will from time to time as its agent provide the Group with agency services for the import and export of goods, including aircraft and related raw materials, accessories, machinery and equipment, together with related insurance and financial services, required in the daily airlines operations and civil aviation business of the Group. The Import and Export Agency Renewal Agreement was effective for a term of three years from January 1, 2014 to December 31, 2016.

On August 30, 2016, we entered into an agreement relating to the renewal of the existing Import and Export Agency Agreement with EAIEC, pursuant to which EAIEC and its subsidiaries will from time to time provide our Group with a range of import and export services including: (i) agency services for the import and export of goods, including aircraft and related raw materials, accessories, machinery and equipment, together with related insurance and financial services, required in the daily airlines operations and civil aviation business of the Group; (ii) the provision of transportation services as required by our Group in the conduct of foreign trade; and (iii) provision of aircraft on-board supplies. The Import and Export Services Renewal Agreement (previously known as Import and Export Agency Renewal Agreement) is effective for a term of three years, from January 1, 2017 to December 31, 2019.

For the year ended December 31, 2017, we paid handling charges of approximately RMB145 million to EAIEC. We currently have certain balances with EAIEC, which are trade in nature, interest-free and payable within normal credit terms. See Note 47(c) to the consolidated financial statements for more details.

China Eastern Airlines Media Co. Ltd. (“CEA Media”) (previously known as Eastern Aviation Advertising Service Co., Ltd. (“Eastern Aviation Advertising”)), a 55% owned subsidiary of CEA Holding

Advertising Service Agreement

On August 30, 2013, we entered into an agreement relating to the renewal of the existing advertising services agreement with Eastern Aviation Advertising on substantially the same terms, pursuant to which Eastern Aviation Advertising and its subsidiaries will from time to time provide the Group with multi-media advertising services to promote its business and to organize promotional functions and campaigns to enhance its reputation in the civil aviation industry. The Advertising Services Renewal Agreement was effective for a term of three years, from January 1, 2014 to December 31, 2016.

On August 30, 2016, we entered into an agreement relating to the renewal of the Existing Advertising Services Agreement with CEA Media on substantially the same terms, pursuant to which CEA Media and its subsidiaries will from time to time provide our Group with multi-media advertising services to promote our Group’s business and to organize promotional functions and campaigns to enhance our Group’s reputation in the civil aviation industry. The Advertising Services Renewal Agreement is effective for a term of three years, from January 1, 2017 to December 31, 2019.

For the year ended December 31, 2017, we paid to Eastern Aviation Advertising approximately RMB23 million for advertising services.

Media Resources Agreement

On September 27, 2013, we entered into an agreement with CEA Media, pursuant to which we and certain of our subsidiaries agreed to transfer the exclusive rights to use certain media and advertising resources to CEA Media and certain of its subsidiaries for a period of 15 years (from January 1, 2014 to December 31, 2028). CEA Media is a subsidiary of and thus an associate of CEA Holding, which in turn is a controlling shareholder of the Company. For the year ended December 31, 2017, Eastern Aviation Advertising paid approximately RMB15 million in media royalty fees.

China Eastern Air Catering Investment Co., Ltd. (“CEA Catering”), a 55% owned subsidiary of CEA Holding with the remaining by our Company

Catering Service Agreements

On August 30, 2013, we entered into an agreement relating to the renewal of the existing catering services agreement with the Eastern Air Catering Company on substantially the same terms, pursuant to which the Eastern Air Catering Company and its subsidiaries would from time to time provide the Group with in-flight catering services (including the supply of in-flight meals and beverages, cutlery and tableware) and related storage and complementary services required in the daily airline operations and civil aviation business of the Group. The Eastern Air Catering Entities provide their services in accordance with the specifications and schedules as from time to time specified by the relevant member(s) of the Group to accommodate its operation needs. The Catering Services Renewal Agreement was approved at the extraordinary general meeting of the Company held on October 29, 2013 and was effective for a term of three years, from January 1, 2014 to December 31, 2016.

On August 30, 2016, we entered into an agreement relating to the renewal of the Existing Catering Services Agreement with CEA Catering, pursuant to which CEA Catering and its subsidiaries (each an “Eastern Air Catering Entity” and collectively the “Eastern Air Catering Entities”) will from time to time provide our Group with catering services (including the supply of meals and beverages, cutlery and tableware) and related storage and complementary services required in the day-to-day airline and ground operation of our Group. The Eastern Air Catering Entities provide their services in accordance with the specifications and schedules as from time to time specified by the relevant member(s) of our Group to accommodate the operational needs of our Group.

For the year ended December 31, 2017, we paid approximately RMB1,254 million to the subsidiaries of CEA Catering for the supply of in-flight meals and other services.

Eastern Air Group Finance Co., Ltd., (“Eastern Finance”), a 53.75% owned subsidiary of CEA Holding

On January 16, 2013, the Company entered into a supplemental agreement with Eastern Finance to further regulate the balances of our deposits and loans with Eastern Finance and its subsidiaries on a pre-condition that the agreed maximum daily balance of each of the deposits and the loans under the financial services agreement dated October 15, 2010 remained unchanged. On August 30, 2013, we entered into an agreement relating to the renewal of the existing financial services agreement with Eastern Finance and CES Finance, pursuant to which Eastern Finance and its subsidiaries (each an “Eastern Air Finance Entity” and collectively the “Eastern Air Finance Entities”) and CES Finance and its subsidiaries (each a “CES Finance Entity” and collectively the “CES Finance Entities”) will from time to time provide the Group with a range of financial services including: (i) deposit services by Eastern Air Finance Entities; (ii) loan and financing services by Eastern Air Finance Entities; and (iii) other financial services such as: (a) the provision of trust loans, financial guarantees, credit references by Eastern Air Finance Entities; and (b) broker services for future products (e.g. crude oil, foreign exchange and national debt) by CES Finance Entities (the scope of “other financial services” is not limited and different services may be provided to the Group as and when they are needed). The Financial Services Renewal Agreement was approved at the extraordinary general meeting of the Company held on October 29, 2013 and was effective for a term of three years, from January 1, 2014 to December 31, 2016.

On August 30, 2016, we entered into an agreement relating to the renewal of the Existing Financial Services Agreement with Eastern Finance and CES Finance, on substantially the same terms, pursuant to which Eastern Finance and its subsidiaries (each an “Eastern Air Finance Entity” and collectively the “Eastern Air Finance Entities”) and CES Finance and its subsidiaries (each a “CES Finance Entity” and collectively the “CES Finance Entities”) agreed from time to time provide our Group with a range of financial services including: (i) deposit services by the Eastern Air Finance Entities; (ii) loan and financing services by the Eastern Air Finance Entities; and (iii) other financial services, such as: (a) the provision of services such as trust loans, financial guarantees and credit references by the Eastern Air Finance Entities; and (b) the provision of services such as broker services for future products (e.g. crude oil, foreign exchange and national debt) by the CES Finance Entities (the scope of “other financial services” is not limited and different services may be provided to the Group as and when they are needed). The Financial Services Renewal Agreement is effective for a term of three years, from January 1, 2017 to December 31, 2019.

As of December 31, 2017, we had deposits amounting to RMB4,053 million placed with Eastern Finance, which paid interest to us at 0.35% per annum.

CEA Development Co. (“CEA Development”), a wholly-owned subsidiary of CEA Holding

On August 30, 2013, we entered into an agreement relating to the renewal of the existing maintenance and repair services agreement with CEA Development on substantially the same terms, pursuant to which CEA Development and its subsidiaries (each a “CEA Development Entity” and collectively the “CEA Development Entities”) would from time to time provide certain services, including: (i) maintenance and repair services to our airplanes and automobiles that are used in ground services and daily operations; (ii) comprehensive services in relation to maintenance, repair and overhaul of aircraft, aviation equipment and ancillaries; (iii) various special vehicles and equipment for airline use, such as air stairs, freight cars, luggage trailers, garbage truck, aircraft portable water vehicle, aircraft sewage disposal vehicle, food cars, freight containers, freight board; (iv) aircraft on-board supplies; and (v) warehousing management (the “Maintenance and Repair Services Renewal Agreement”). Maintenance and Repair Services Renewal Agreement was effective for a term of three years, from January 1, 2014 to December 31, 2016.

On August 30, 2016, we entered into the Complementary Services Renewal Agreement (previously known as the Existing Maintenance and Repair Services Agreement) with CEA Development, pursuant to which CEA Development and its subsidiaries (each a “CEA Development Entity” and collectively the “CEA Development Entities”) will from time to time provide our Group with a range of services including: (i) supply of equipment and materials and provision of maintenance and repair services to our automobiles and equipment; (ii) provision of property management services; (iii) provision of hotel accommodation services; and (iv) other complementary aviation services. The Complementary Services Renewal Agreement is effective for a term of three years, from January 1, 2017 to December 31, 2019.

For the year ended December 31, 2017, production and maintenance services fees paid to CEA Development Entity amounted to approximately RMB121 million.

Eastern Logistics, an indirectly owned subsidiary of CEA Holding

Disposal of the entire equity interest in Eastern Air Logistics

On November 29, 2016, we entered into a disposal agreement with Eastern Airlines Industry Investment, pursuant to which, we have conditionally agreed to sell, and Eastern Airlines Industry Investment has conditionally agreed to purchase, our entire equity interest in Eastern Logistics at a consideration of RMB2,432,544,211.50, determined with reference to the relevant valuation report. Upon completion of the disposal on February 8, 2017, Eastern Logistics ceased to be our subsidiary.

Freight Logistics Daily Connected Transactions Framework Agreement with Eastern Logistics

As Eastern Logistics ceased to be our subsidiary, each member of the Eastern Logistics Group became a connected person of us. On November 29, 2016, we entered into the Freight Logistics Daily Connected Transactions Framework Agreement with Eastern Logistics. We will provide the following services to the Eastern Logistics Group, required for the daily operation of its freight logistics business: (i) aircraft maintenance and its ancillary support services; (ii) information technology support services; (iii) cleaning services; (iv) training services; and (v) other daily support services. The Eastern Logistics Group will provide us the following services required for our daily business operation: (i) apron transfer services, cargo terminal operation services and security inspection services; and (ii) other daily support services. The Freight Logistics Daily Connected Transactions Framework Agreement will be effective for a term of three years, commencing from the date on which the entire equity interest in Eastern Logistics was transferred from us to Eastern Airlines Industry Investment pursuant to the disposal agreement, and ending on December 31, 2019.

For the year ended December 31, 2017, the amount payable by Eastern Logistics to us for the freight logistics support services amounted to approximately RMB100 million and the amount payable by us to Eastern Logistics for the cargo terminal business support services amounted to approximately RMB281 million.

Bellyhold Space Management Agreement

On January 1, 2017, to avoid the competition between the bellyhold space business operated by us and the all-cargo aircraft freight business operated by China Cargo Airlines, the subsidiary of Eastern Logistics, after the completion of equity transfer in Eastern Logistics, we entered into the Bellyhold Space Management Agreement with China Cargo Airlines to entrust China Cargo Airlines for the operation of the bellyhold space business for a term of three years, which commenced on January 1, 2017. Pursuant to the Bellyhold Space Management Agreement, in respect of the entrusted management of bellyhold space business, we will pay management fee to China Cargo Airlines according to industry practice, including handling charges for the entrusted management and incentives for achieving specified sales targets.The Bellyhold Space Management Agreement is effective for a term of three years commencing January 1, 2017 until December 31, 2019.

For the year ended December 31, 2017, the actual amount incurred under the Bellyhold Space Management Agreement was approximately RMB117 million. The Bellyhold Space Management Agreement has been superseded by the contractual operation agreement dated March 1, 2018 entered into between the Company and China Cargo Airlines from March 31, 2018.

Contractual Operation Agreement and Operation Cost Agreement

On March 1, 2018, we entered into contractual operation agreement and operation cost agreement with China Cargo Airlines, pursuant to which, China Cargo Airlines (as contractor) will operate the bellyhold space business and reimburse the contractual fee to us, and we will reimburse the operation cost of the bellyhold space business to China Cargo Airlines. The term of the contractual operation agreement is from April 1, 2018 to December 31, 2032. The term of the operation cost agreement is from the effective date to December 31, 2032.

Shanghai Eastern Airlines Investment Co., Limited (“Eastern Investment”), a wholly-owned subsidiary of CEA Holding

Land Use Rights Transfer Agreement and the Buildings Compensation Agreement

On September 29, 2017, we entered into the land use rights transfer agreement and the buildings compensation agreement with Eastern Investment in Shanghai. Pursuant to the land use rights transfer agreement and the buildings compensation agreement, (i) we agreed to transfer to Eastern Investment the land use rights in respect of the target land together with the buildings thereon at the eastern district of Terminal One of the Shanghai Hongqiao International Airport; and (ii) Eastern Investment agreed to compensate us for the transfer of the buildings, at total consideration of approximately RMB808 million.

Property Leases

On August 30, 2013, we entered into an agreement relating to the renewal of the existing property leasing agreement with CEA Holding on substantially the same terms. Pursuant to the Property Leasing Renewal Agreement, we leased the following properties from CEA Holding and its subsidiaries, for use in our daily airline and other business operations:

(i)

a maximum of 36 land properties owned by CEA Northwest, covering an aggregate site area of approximately 713,632 square meters together with a total of 172 building properties and related construction, infrastructure and facilities occupying an aggregate floor area of approximately 240,601 square meters;

(ii)

a maximum of three land properties owned by CEA Yunnan, covering an aggregate site area of approximately 43,258 square meters together with a total of 24 building properties and related construction, infrastructure and facilities occupying an aggregate floor area of approximately 77,401 square meters;

(iii)

building properties and related construction, infrastructure and facilities owned by CEA Holding, occupying an aggregate floor area of approximately 8,853 square meters located in Shijiazhuang;

(iv)

building properties and related construction, infrastructure and facilities owned by CEA Holding, occupying an aggregate floor area of approximately 63,552 square meters located in Taiyuan;

(v)

a total of 7 building properties and related construction, infrastructure and facilities owned by CEA Holding, occupying an aggregate floor area of approximately 13,195 square meters located in Shanghai;

(vi)

a total of 33 guest rooms in Eastern Hotel owned by CEA Holding, occupying an aggregate floor area of approximately 1,500 square meters located in Shanghai; and

(vii)

other property facilities owned by CEA Holding as may be leased to us from time to time, due to our business needs

In addition to and on the terms and conditions to be further agreed, we will lease some of the properties legally owned or leased by us to subsidiaries of CEA Holding as needed by the subsidiaries of CEA Holding. The Property Leasing Renewal Agreement was effective for a term of three years, from January 1, 2014 to December 31, 2016.

On August 30, 2016, we entered into an agreement relating to the renewal of the existing property leasing agreement with CEA Holding. Pursuant to the property leasing renewal agreement, we will lease from CEA Holding and its subsidiaries the following properties, for use in our daily airlines and other business operations:

(a)

altogether 17 land properties owned by CEA Holding in Lanzhou, Gansu, covering an aggregate site area of approximately 234,989 square meters together with a total of 81 building properties, construction, structures and other ancillary facilities occupying an aggregate floor area of approximately 54,290 square meters;

(b)

altogether three land properties owned by CEA Holding in Kunming, Yunnan, covering an aggregate site area of 44,835 square meters together with a total of 24 building properties, construction, structures and other ancillary facilities occupying an aggregate floor area of approximately 67,992 square meters;

(c)

one building property, construction, structures and other ancillary facilities owned by CEA Holding in Shijiazhuang, occupying an aggregate floor area of approximately 8,853 square meters;

(d)

a total of 67 building properties, construction, structures and other ancillary facilities owned by CEA Holding in Taiyuan, occupying an aggregate floor area of approximately 45,068 square meters;

(e)

a total of 7 building properties, construction, structures and other ancillary facilities owned by CEA Holding in Shanghai, occupying an aggregate floor area of approximately 13,195 square meters;

(f)

altogether 16 land properties owned by CEA Northwest, covering an aggregate site area of approximately 393,929 square meters together with a total of 115 building properties, construction, structures and other ancillary facilities occupying an aggregate floor area of approximately 88,440 square meters;

(g)

a total of altogether 33 guest rooms in Eastern Hotel owned by CEA Holding, occupying an aggregate floor area of approximately 1,500 square meters located in Shanghai; and

(h)

other land and property facilities owned by CEA Holding as may be leased to us from time to time due to our business and operational needs.

In addition to the above and on terms and conditions to be further agreed, we leased some of the properties legally owned or leased by us to subsidiaries of CEA Holding as needed by the subsidiaries of CEA Holding. The property leasing renewal agreement was effective for a term of three years from January 1, 2017 to December 31, 2019.

For the year ended December 31, 2017, we paid a rental fee of RMB54 million under this property leasing renewal agreement.

Amendments to the Non-Competition Undertaking with CEA Holding

On December 22, 2017, we and CEA Holding entered into the supplemental agreement II to the reorganization and division agreement to amend the non-competition undertaking of CEA Holding as set out in article 3 of the supplemental agreement I to the reorganization and division agreement entered into by both parties in 1996.

Pursuant to article 3 of the supplemental agreement I, CEA Holding has undertaken to us that, so long as the we are listed in the PRC, Hong Kong or New York, if CEA Holding holds more than 35% of the issued shares of us or is deemed to be our controlling shareholder pursuant to the listing rules of relevant stock exchange(s) or relevant laws and regulations, CEA Holding shall not, in any place within or outside the PRC or in any way (including but not limited to carrying on through sole proprietorship, forming partnerships or joint ventures with others and holding shares or interests in other companies or enterprises, except that the shares held by CEA Holdings do not exceed 10% of our shares or enterprise as listed on a stock exchange) conduct any business or activities that is or may be in direct or indirect competition with our business.

Pursuant to the amendments, CEA Holding undertakes to us that so long as we are listed in the PRC, Hong Kong or New York, if CEA Holding holds more than 35% of the issued shares of us or is deemed to be our controlling shareholder pursuant to the listing rules of relevant stock exchange(s) or relevant laws and regulations, CEA Holding shall not, in any place within or outside the PRC or in any way, conduct any business or activities that is or may be in direct or indirect competition with our business, with an exception that CEA Holding will be allowed to conduct equity investment in any companies or enterprises that is or may be in direct or indirect competition with the principal business of the Company (the “Competing Enterprise(s)”), provided that CEA Holding and its controlled subsidiary(ies) (other than us) will not contravene any applicable laws and regulations as well as regulatory rules, control or be deemed to control such Competing Enterprises by the listing rules of relevant stock exchange(s) or relevant laws and regulations after the investment, and subject to certain conditions.

Guarantee by CEA Holding

As of December 31, 2015, bonds issued by us in an aggregate amount of RMB4.8 million guaranteed by CEA Holding. As of December 31, 2016, bonds issued by us in an aggregate amount of RMB7.8 million guaranteed by CEA Holding. As of December 31, 2017, bonds issued by us in an aggregate amount of RMB7.8 million guaranteed by CEA Holding. See Note 47(d) to the consolidated financial statements.

Guarantee by the Company

To Certain Subsidiaries

On January 17, 2017, the Board of Directors considered and approved that we shall provide, within the period from the effective date of the Board resolution to December 31, 2017, guarantee in the total amount of up to RMB1,000 million to China United Airlines, Shanghai Eastern Flight Training Co., Limited, Eastern Business Airlines Service Co., Limited, Eastern Technology, and their respective wholly-owned subsidiaries. The period of guarantee shall be the same as the period of subject obligations of the respective guaranteed parties and shall not exceed 10 years.

On December 22, 2017, the Board of Directors considered and approved that we shall provide, within the period from the effective date of the Board resolution to December 31, 2018, guarantee in the total amount of up to RMB1,000 million to China United Airlines, Shanghai Eastern Flight Training Co., Limited, Eastern Business Airlines Service Co., Limited, Eastern Technology, and their respective wholly-owned subsidiaries, and that Shanghai Airlines Tours International (Group) Co., Limited, a wholly-owned subsidiary of us, shall provide guarantee in the total amount of up to RMB10 million to Shanghai Dongmei Air Travel Co., Ltd. The period of guarantee shall be the same as the period of subject obligations of the respective guaranteed parties and shall not exceed 10 years.

To not more than 67 Special Purpose Vehicles

On January 19, 2018, with an aim to carry out the work of changing aircraft leasing from overseas operating lease to domestic operating lease for not more than 67 aircraft, the Board of Directors agreed us to invest and establish not more than 67 special purpose vehicles in Dongjiang Free Trade Port Zone of Tianjin with the aggregate guarantee amount not exceeding RMB9.8 billion. The term of each guarantee will not exceed 15 years commencing from the actual date when we provide guarantee to each special purpose vehicle. The guarantee was considered and approved at the general meeting of the Company held on February 8 2018.

Agreements in relation to Aircraft Finance Lease and Aircraft Operating Lease with CES Leasing

Master Lease Agreement

On May 5, 2015, we entered into a master lease agreement with CES Leasing, pursuant to which CES Leasing agreed to provide finance leasing to us in relation to 23 aircraft in accordance with the terms and conditions of the master lease agreement and the relevant implementation agreements. CES Leasing is a non-wholly owned subsidiary of CEA Holding, which in turn is the controlling shareholder of the Company.

2016 Aircraft Finance Lease Framework Agreement

On April 28, 2016, we entered into the 2016 Aircraft Finance Lease Framework Agreement with CES Leasing, pursuant to which CES Leasing agreed to provide finance leasing to us in relation to the leased aircraft, as and when we consider desirable, in our interests and the interests of the Shareholders as a whole in accordance with the terms and conditions of the 2016 Aircraft Finance Lease Framework Agreement and the relevant implementation agreements contemplated thereunder. The 2016 Aircraft Finance Lease Framework Agreement was effective for a term of one year commencing January 1, 2016.

2017–2019 Aircraft Finance Lease Framework Agreement

On April 28, 2016, we entered into the 2017–2019 Aircraft Finance Lease Framework Agreement with CES Leasing, pursuant to which CES Leasing agreed to provide finance leasing to us in relation to the Leased Aircraft, as and when we consider desirable, in our interests and the interests of the Shareholders as a whole in accordance with the terms and conditions of the 2017–2019 Aircraft Finance Lease Framework Agreement and the relevant implementation agreements contemplated thereunder. The 2017–2019 Aircraft Finance Lease Framework Agreement is effective for a term of three years, from January 1, 2017 to December 31, 2019.

Novation Agreement and Aircraft Operating Lease Agreement

On July 9 2015, we (as the purchaser) entered into the purchase agreement with Boeing Company (as the seller) regarding the acquisition of fifty brand new Boeing B737 series aircraft (the “Purchase Agreement”).

On August 10, 2017, we entered into a novation agreement with CES Leasing, pursuant to which, (i) we agreed to novate, from the date of the novation agreement, our rights (including the purchase right) and obligations in and under the Purchase Agreement in respect of the five Boeing Aircraft, which are expected to be delivered by the Boeing Company to us in 2017 pursuant to the Purchase Agreement (the “Five Boeing Aircraft”) at nil consideration; and (ii) CES Leasing agreed to, from the date of the novation agreement, assume all of the rights (including the purchaser right) and obligations in and under the Purchase Agreement in respect of the Five Boeing Aircraft at nil consideration. The parties entered into the novation agreement at nil consideration.

On August 10, 2017, we entered into the aircraft operating lease agreement with CES Leasing, pursuant to which, CES Leasing agreed to provide operating leasing to us in relation to the Five Boeing Aircraft. The aircraft operating lease agreement is effective for a term of 144 months for each aircraft from the date on which each of the Five Boeing Aircraft is delivered. Delivery date would fall on the period between August 2017 and December 2017.

2018-2019 Aircraft and Engines Operating Lease Framework Agreement

On December 22, 2017, we entered into the 2018-2019 aircraft and engines operating lease framework agreement with CES Leasing, pursuant to which CES Leasing agreed to provide operating leasing to us in relation to the aircraft and aircraft engines. Upon successful bidding of the tender of the aircraft and/or aircraft engines during the period between January 1, 2018 and December 31, 2019 by CES Leasing, the term of each of the lease agreement under the 2018-2019 aircraft and engines operating lease framework agreement shall be not more than 144 months for each leasing of the aircraft and aircraft engines by CES Leasing to us.

For the year ended December 31, 2017, the actual amount incurred for aircraft finance lease services was approximately RMB1,997 million and the actual amount incurred for aircraft operating lease services was approximately RMB25 million.

Continuing Connected Transactions with Air France-KLM

On July 27 2017, a wholly-owned subsidiary of CEA Holding and Delta entered into a conditional subscription agreement with Air France-KLM, respectively, to acquire 10% newly issued shares in the share capital of Air France-KLM after the completion of issuance of additional shares. We entered into a marketing agreement with Air France-KLM to further strengthen the business partnership on the basis of good business relationship between the two parties.

On October 3, 2017, the trading of the fixed issuance of additional 10% shares to CEA Holding by Air France-KLM was completed in the Euronext. CEA Holding appointed Tang Bing, our Director and vice president as the director of Air France-KLM. According to the relevant requirements of the Shanghai Stock Exchange, the daily businesses such as joint operation and service security between us and Air France-KLM and its controlled subsidiaries constituted a continuing connected transaction of the Company under the Rules Governing the Listing of Stocks on the Shanghai Stock Exchange.

On December 22, 2017, the Board of Directors considered and approved the relevant resolution regarding the 2017-2019 continuing connected transactions between Air France-KLM and us, pursuant to which, we will provide aircraft aviation transportation cooperation and support services to Air France-KLM and Air France-KLM will provide aircraft aviation transportation cooperation and support services to us. The Board of Directors also approved the 2017-2019 annual caps for the Air France-KLM aircraft aviation transportation cooperation and support services.

For the year ended December 31, 2017, the actual amount of the Air France-KLM aircraft aviation transportation cooperation and support services received by us was approximately RMB622 million and the actual amount of the Air France-KLM aircraft aviation transportation cooperation and support services paid by us was approximately RMB399 million.

C. Interests of Experts and Counsel

Not applicable.

Item 8. Financial Information

A. Consolidated Statements and Other Financial Information

Financial Statements

Please read “Item 18. Financial Statements” for information regarding our audited consolidated financial statements and other financial information.

Legal Proceedings

We are involved in routine litigation and other proceedings in the ordinary course of our business. We do not believe that any of these proceedings are likely to be material to our business operations, financial condition or results of operations.

Dividends and Dividend Policy

For the years ended December 31, 2010, 2011, 2012 and 2013, our Board of Directors did not recommend any dividend payouts due to our total accumulated losses of RMB12,855 million, RMB8,039 million, RMB4,967 million and RMB2,595 million, respectively. Under PRC law, we cannot convert funds from common reserves to increase our share capital during this period. Based on the audited financial statements of the Company under the PRC Accounting Standards for Business Enterprises as of and for the year 2014, the retained earnings of the parent company were RMB21 million as of December 31, 2014. Based on the audited financial statements of the Company under IFRSs as of and for the year 2014, the accumulated loss of the parent company was RMB385 million. Pursuant to the PRC Company Law and its Articles of Association, the Company must recover losses incurred in previous years with its profit for the year before any dividend distributions are made to its shareholders. The basis of dividend distribution of the Company is the distributable profit of the parent company, which is subject to the principle of adopting the lesser of the profit after tax under the PRC accounting standards and IFRSs. As of December 31, 2014, the Company has been recording accumulated losses under IFRSs. The Board of Directors recommended that no dividend be distributed for the year 2014 and share capital of the Company not be increased through capitalization of its capital reserve. Based on the audited financial statements of the Company under the PRC Accounting Standards for Business Enterprises as of and for the year 2015, the retained profits of the parent company were RMB1,680 million as of December 31, 2015. Based on the audited financial statements of the Company under IFRSs as of and for the year 2015, the retained profits of the parent company were RMB1,164 million.

In accordance with Rule 17 of Measures on the Administration of Securities Issuance and Underwriting by the CSRC, if listed companies with a plan for issuance of securities have any profit distribution proposal or proposal for capital increase with capital surplus, that has not yet been submitted to general meeting for voting or has been approved by shareholders’ general meeting but not yet implemented, the issuance of securities may only proceed after such proposals have been implemented. Given that the Company’s application for non- public issuance of A shares was approved by the CSRC in January 2016 and will expire on July 5, 2016, if the Company had implemented profit distribution in 2015, approval for the profit distribution proposal would have been needed at the 2015 general meeting and the non-public issuance of A shares could only be implemented after the implementation of the profit distribution proposal. This would have narrowed the time frame for the non-public issuance of A shares or would even have made it impossible to implement, in which case the implementation of the Company’s non-public issuance project and long-term development would have been severely hampered.

In consideration of factors such as shareholders’ interests and the Company’s development, the profit distribution proposal recommended by the Board of Directors for the year 2015 is as follows: No profit shall be distributed for the year 2015 and no share capital of the Company shall be increased with its capital reserve. The Group profit distribution proposal for the year 2015 will be submitted to the 2015 annual general meeting for consideration. The Board of Directors also intends for, a cash dividend distribution in the interim period for the year 2016 of not less than 40% of the net profit of the Company of the year 2015 under the PRC Accounting Standards.

On October 27, 2016, the interim profit distribution plan was approved at the extraordinary general meeting of the Company. The 2016 interim distribution was approximately RMB737.8 million in cash. Based on our total share capital of 14,467,585,682 shares, the cash distribution per share was RMB0.051 (before tax) in cash.

On March 30, 2017, the Board of Directors considered and approved the 2016 annual profit distribution proposal. It was recommended by the Board of Directors that the 2016 annual distribution be approximately RMB708.9 million in cash. Based on the total share capital of 14,467,585,682 shares of the Company, the cash distribution per share was RMB0.049 (before tax) in cash.

On September 25, 2017, the Board of Directors has not recommended any dividend for the six months ended June 30 2017.

On March 29, 2018, the Board of Directors considered and approved the 2017 annual profit distribution proposal. It was recommended by the Board of Directors that the 2017 annual distribution be approximately RMB740.3 million in cash. Based on the total share capital of 14,467,585,682 shares of the Company, the cash distribution per share would be RMB0.051 (before tax) in cash which will be distributed to holders of A shares of the Company in RMB and to holders of H shares of the Company in HKD.

The independent non-executive directors of the Company are of the view that the aforesaid annual profit distribution proposal is in line with the objective situation of the Company, in the long-term interests of the Company and its shareholders, in compliance with relevant laws, regulations and the articles of association of the Company, and not detrimental to the interests of investors (especially minority shareholders) of the Company.

The aforesaid profit distribution proposal of the Group is subject to consideration and approval by the shareholders at the 2017 general meeting of the Company. If the 2017 annual profit distribution proposal is approved at the general meeting, the Company expects that the cash distribution will be paid around August 1, 2018.

Our Board of Directors declares dividends, if any, in Renminbi, with respect to H Shares on a per share basis and pays such dividends in HK dollars. Any final dividend for a fiscal year is subject to shareholders’ approval. The Bank of New York Mellon (the “BNYM”), as depositary, converts the HK dollar dividend payments and distributes them to holders of ADSs in U.S. dollars, less conversion expenses. Under PRC Company Law and our Articles of Association, all of our shareholders have equal rights to dividends and distributions. The holders of the H Shares share proportionately on a per share basis in all dividends and other distributions declared by our Board of Directors, if any, based on the foreign exchange conversion rate published by PBOC, on the date of the distribution of the cash dividend.

We believe that our dividend policy strikes a balance between two important goals providing our shareholders with a competitive return on investment and assuring sufficient reinvestment of profits to enable us to achieve our strategic objectives. The declaration of dividends is subject to the discretion of our Board of Directors, which takes into account the following factors:

•

our financial results;

•

capital requirements;

•

contractual restrictions on the payment of dividends by us to our shareholders or by our subsidiaries to us;

•

our shareholders interests;

•

the effect on our creditworthiness;

•

general business and economic conditions; and

•

other factors our Board of Directors may deem relevant.

Pursuant to PRC laws and regulations, dividends may only be distributed after allowance has been made for: (i) recovery of losses, if any and (ii) allocations to the statutory surplus reserve. The allocation to the statutory surplus reserve is 10% of our net profit determined in accordance with PRC Generally Accepted Accounting Principles. Our distributable profits for the current fiscal year will be equal to our net profits determined in accordance with IFRSs, less allocations to the statutory surplus reserve.

B. Significant Changes

Significant Post Financial Statements Events

Not applicable.

Item 9. The Offer and Listing

A. Offer and Listing Details

The principal trading market for our H Shares is the Hong Kong Stock Exchange. The ADSs, each representing 50 H Shares, have been issued by BNYM as Depositary and are listed on the New York Stock Exchange. Prior to our initial public offering and subsequent listings on the New York Stock Exchange and the Hong Kong Stock Exchange on February 4 and 5, 1997, respectively, there was no market for our H Shares or ADSs. Our publicly traded domestic shares, or A shares, have been listed on the Shanghai Stock Exchange since November 5, 1997.

As of December 31, 2017, there were 4,659,100,000 H Shares issued and outstanding. As of December 29, 2017 (December 30 and December 31, 2017 being a Saturday and a Sunday) and April 16, 2018, there were 43 and 42 registered holders, respectively, of American depositary receipts evidencing 1,974,935 and 1,925,427 ADSs, respectively. Since nominees hold certain of the ADSs, the above number may not be representative of the actual number of U.S. beneficial holders of ADSs or the number of ADSs beneficially held by U.S. persons. A total of 9,808,485,682 domestic ordinary shares were also outstanding as of December 31, 2017.

The table below sets forth certain market information relating to the trading prices of our H Shares and ADSs in respect of the period from 2013 to April 16, 2018.


	Hong Kong Stock Exchange Price Per H Share (HK$)				New York Stock Exchange Price Per ADS (US$)
	High		Low		High		Low
Yearly
2013		3.72		2.24		23.67		14.76
2014		4.05		2.30		26.57		14.85
2015		7.56		2.33		49.50		22.13
2016		4.87		3.26		30.72		21.20
2017		5.67		3.57		36.14		23.11
Quarterly
2016
First Quarter 2016		4.35		3.32		27.34		21.20
Second Quarter 2016		4.64		3.86		30.72		25.31
Third Quarter 2016		4.58		3.57		29.72		22.98
Fourth Quarter 2016		3.77		3.32		24.32		21.43
2017
First Quarter 2017		4.80		3.57		30.86		23.11
Second Quarter 2017		4.82		4.08		30.60		26.15
Third Quarter 2017		4.80		3.83		30.74		24.44
Fourth Quarter 2017		5.67		3.86		36.14		24.72
Monthly
October 2017		4.07		3.87		25.97		24.72
November 2017		4.94		3.86		31.55		24.73
December 2017		5.67		4.45		36.14		28.55
First Quarter 2018
January 2018		7.09		5.64		44.92		36.22
February 2018		7.14		5.81		45.06		37.50
March 2018		6.66		5.53		42.49		35.33
April 2018 (up to April 16, 2018)		6.11		5.61		38.52		35.72

B. Plan of Distribution

Not applicable.

C. Markets

Our H shares are listed for trading on the Hong Kong Stock Exchange (Code: 00670), our ADSs are listed for trading on the New York Stock Exchange under the symbol “CEA” and our A shares are listed for trading on the Shanghai Stock Exchange (Code: 600115).

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

Item 10. Additional Information

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

The following is a brief summary of certain provisions of our Articles of Association, as amended. Such summary does not purport to be complete. For further information, you and your advisors should refer to the text of our Articles of Association, as amended, and to the texts of applicable laws and regulations. A copy of the English translation of our Articles of Association, as amended on February 8, 2018, is attached as an exhibit to this Annual Report on Form 20-F (which is incorporated by reference).

Selected Summary of the Articles of Association

We are a joint stock limited company established in accordance with the Company Law of the People’s Republic of China (the “Company Law”), the “State Council’s Special Regulations Regarding the Issue of Shares Overseas and the Listing of Shares Overseas by Companies Limited by Share” (the “Special Regulations”) and other relevant laws and regulations of the State. We are established by way of promotion with the approval under the document “Ti Gai Sheng” 1994 No. 140 of the PRC State Commission for Restructuring the Economic System. We are registered with and obtained a business license from China’s State Administration Bureau of Industry and Commerce on April 14, 1995. Our business license number is 10001767-8. We changed our registration to Shanghai Administration for Industry and Commerce on October 18, 2002. The number of our Company’s business license is: Qi Gu Hu Zong Zi No. 032138.

We were incorporated in the PRC for the purpose of providing the public with safe, punctual, comfortable, fast and convenient air transport services and other ancillary services, to enhance the cost-effectiveness of these services and to protect the lawful rights and interests of shareholders.

Board of Directors

The Board of Directors shall consist of eleven (11) directors, who are to be elected at the shareholders’ general meeting and will hold a term of office for three (3) years. At least one-third of the members of the Board of Directors shall be independent directors. The Directors are not required to hold shares of our Company.

Directors who are either directly or indirectly materially interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with our Company (other than his contract of service with our Company) shall declare the nature and extent of his interests to the Board of Directors at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal is otherwise subject to the approval of the Board of Directors.

In accordance with our Articles, a director shall abstain from voting at a board meeting, the purpose of which is to approve contracts, transactions or arrangements that such director or any of his or her associates (as defined in the relevant rules governing the listing of securities) has a material interest in. Such director shall not be counted in the quorum for the relevant board meeting.

Unless the interested director discloses his interests in accordance with our Articles of Association and the contract, transaction or arrangement is approved by the Board of Directors at a meeting in which the interested director is not counted in the quorum and refrains from voting, a contract, transaction or arrangement in which that director is materially interested is voidable at the instance of our Company except as against a bona fide party thereto acting without notice of the breach of duty by the interested director. A director is also deemed to be interested in a contract, transaction or arrangement in which an associate of the director is interested.

Our Articles provide that our Company shall not in any manner pay taxes for or on behalf of a director or make directly or indirectly a loan to or provide any guarantee in connection with the making of a loan to a director of our Company or of our Company’s holding company or any of their respective associates. However, the following transactions are not subject to such prohibition: (i) the provision by our Company of a loan or a guarantee of a loan to a company which is a subsidiary of our Company; (ii) the provision by our Company of a loan or a guarantee in connection with the making of a loan or any other funds to any of its directors, administrative officers to meet expenditure incurred or to be incurred by him for the purposes of our Company or for the purpose of enabling him to perform his duties properly, in accordance with the terms of a service contract approved by the shareholders in general meeting; (iii) our Company may make a loan to or provide a guarantee in connection with the making of a loan to any of the relevant directors or their respective associates in the ordinary course of its business on normal commercial terms, provided that the ordinary course of business of our Company includes the lending of money or the giving of guarantees.

Our Articles do not contain any requirements for (i) the directors’ power to vote compensation to themselves or any members of their body, in the absence of an independent quorum or (ii) the directors to retire by a specified age.

Description of the Shares

As of December 31, 2016, our share capital structure was as follows: 14,467,585,682 ordinary shares of which (a) 1,327,406,822 A shares subject to trading moratorium, which represented 9.18% of our share capital, were held by Shanghai Licheng Information Technology Consulting Co., Limited, China National Aviation Fuel Holding Company, China COSCO Shipping Corporation Limited and Caitong Fund Management Co., Limited, respectively; (b) 8,481,078,860 A shares without trading moratorium, which represented 58.62% of our share capital, were issued to investors in China; and (c) 4,659,100,000 H shares without trading moratorium, which represented 32.20% of our share capital.

Our ordinary shareholders shall enjoy the following rights:

(i)

the right to dividends and other distributions in proportion to the number of shares held;

(ii)

the right to attend or appoint a proxy to attend Shareholders’ general meetings and to vote thereat;

(iii)

the right of supervisory management over the Company’s business operations, and the right to present proposals or enquiries;

(iv)

the right to transfer shares in accordance with laws, administrative regulations and provisions of these Articles of Association;

(v)

the right to obtain relevant information in accordance with the provisions of these Articles of Association, including:

(1)

the right to obtain a copy of these Articles of Association, subject to payment of the cost of such copy;

(2)

the right to inspect and copy, subject to payment of a reasonable charge;

(vi)

all parts of the register of shareholders;

(vii)

personal particulars of each of the Company’s directors, supervisors, general manager, deputy general managers and other senior administrative officers, including:

(1)

present name and alias and any former name or alias;

(2)

principal address (residence);

(3)

nationality;

(4)

primary and all other part-time occupations and duties;

(5)

identification documents and their relevant numbers;

(viii)

state of the Company’s share capital;

(ix)

reports showing the aggregate par value, quantity, highest and lowest price paid in respect of each class of shares repurchased by the Company since the end of the last accounting year and the aggregate amount paid by the Company for this purpose;

(x)

minutes of Shareholders’ general meetings and the accountant’s report,

(xi)

in the event of the termination or liquidation of the Company, to participate in the distribution of surplus assets of the Company in accordance with the number of shares held; or

(xii)

other rights conferred by laws, administrative regulations and these Articles of Association.

A shareholder (including a proxy), when voting at a Shareholders’ general meeting, may exercise such voting rights in accordance with the number of shares carrying the right to vote and each share shall have one vote. Resolutions of shareholders’ general meetings shall be divided into ordinary resolutions and special resolutions. To adopt an ordinary resolution, votes representing more than one half of the voting rights represented by the shareholders (including proxies) present at the meeting must be exercised in favor of the resolution in order for it to be passed. To adopt a special resolution, votes representing more than two-thirds of the voting rights represented by the shareholders (including proxies) present at the meeting must be exercised in favor of the resolution in order for it to be passed. Our ordinary shareholders are entitled to the right to dividends and other distributions in proportion to the number of shares held, and they are not liable for making any further contribution to the share capital other than as agreed by the subscriber of the relevant shares on subscription. Our Articles provide that a controlling shareholder (as defined in the Articles) shall not approve certain matters which will be prejudicial to the interests of all or some of other shareholders by exercising his/her voting rights.

The Listing Agreement between us and the Hong Kong Stock Exchange further provides that we may not permit amendments to certain sections of the Articles of Association subject to the Mandatory Provisions for the Articles of Association of Companies Listed Overseas promulgated by the State Council Securities Commission and the State Restructuring Commission on August 27, 1994 (the “Mandatory Provisions”). These sections include provisions relating to (i) varying the rights of existing classes of shares; (ii) voting rights; (iii) our power to purchase our own shares; (iv) rights of minority shareholders; and (v) procedures upon liquidation. In addition, certain amendments to the Articles of Association require the approval and assent of relevant PRC authorities.

Shareholders’ Meetings

Shareholders’ general meetings are divided into annual general meetings and extraordinary general meetings. Shareholders’ general meetings shall be convened by the Board of Directors. Annual general meetings are held once every year and within six (6) months from the end of the preceding financial year. The Board of Directors shall convene an extraordinary general meeting within two (2) months of the occurrence of any one of the following events:

(i)

where the number of Directors is less than the number of Directors required by Company Law or two-thirds of the number of Directors specified in these Articles of Association;

(ii)

where the unrecovered losses of the Company amount to one-third of the total amount of its share capital;

(iii)

where shareholder(s) holding 10 per cent or more of the Company’s issued and outstanding shares carrying voting rights request(s) in writing the convening of an extraordinary general meeting; or

(iv)

when deemed necessary by the Board of Directors or as requested by the supervisory committee.

When we convene a shareholders’ general meeting, written notice of the meeting shall be given forty five (45) days before the date of the meeting to notify all of the shareholders in the share register of the matters to be considered and the date and place of the meeting. A shareholder who intends to attend the meeting shall deliver his written reply concerning the attendance of the meeting to us twenty (20) days before the date of the meeting. When we convene a shareholders’ annual general meeting, shareholders holding three per cent or more of the total voting shares of the Company shall have the right to propose new motions in writing, and we shall place those matters in the proposed motions within the scope of functions and powers of the Shareholders’ general meeting on the agenda.

Shareholders’ Rights

Set forth below is certain information relating to the H Shares, including a brief summary of certain provisions of the Articles, and selected laws and regulations applicable to us.

Sources of Shareholders’ Rights

The rights and obligations of holders of H Shares and other provisions relating to shareholder protection are principally provided in the Articles of Association and Company Law. The Articles of Association incorporate mandatory provisions in accordance with Mandatory Provisions. We are further subject to management ordinances applicable to the listed companies in Hong Kong SAR and the United States, as our H Shares are listed on the Hong Kong Stock Exchange and the New York Stock Exchange (in the form of ADSs).

In addition, for so long as the H Shares are listed on the Hong Kong Stock Exchange, we are subject to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “HKSE Rules”), the Securities and Futures Ordinance of Hong Kong (the “SFO”) and the Hong Kong Code on Takeovers and Mergers and Share Repurchases.

Unless otherwise specified, all rights, obligations and protections discussed below are derived from the Articles of Association, Company Law and abovementioned laws and regulations.

Significant Differences in the H Shares and A Shares

Holders of H Shares and A Shares, with minor exceptions, are entitled to the same economic and voting rights. The Articles of Association provide that dividends or other payments payable to H Share holders shall be declared and calculated in Renminbi and paid in Renminbi, while those to A Share holders shall be declared and calculated in Renminbi and paid in the local currency at the place where such A Shares are listed (if there is more than one place of listing, then the principal place of listing as determined by the Board of Directors). In addition, the H Shares can only be traded by investors of Taiwan, Hong Kong, Macau and any country other than the PRC, while A Shares may be traded only by investors within the territory of the PRC.

Restrictions on Transferability and the Share Register

H Shares may be traded only among investors who are not PRC persons, and may not be sold to PRC investors. There are no restrictions on the ability of investors who are not PRC residents to hold H Shares.

Pursuant to the Articles of Association, we may refuse to register a transfer of H Shares unless:

(1)

a fee (for each instrument of transfer) of HK$2.50 or any higher fee as agreed by the Stock Exchange has been paid to us for registration of any transfer or any other document which is related to or will affect ownership of or change of ownership of the shares;

(2)

the instrument of transfer only involves H Shares;

(3)

the stamp duty chargeable on the instrument of transfer has been paid;

(4)

the relevant share certificate and upon the reasonable request of the Board of Directors any evidence in relation to the right of the transferor to transfer the shares have been submitted;

(5)

if it is intended to transfer the shares to joint owners, then the maximum number of joint owners shall not exceed four (4); or

(6)

we do not have any lien on the relevant shares.

100

If we refuse to register any transfer of shares, we shall within two months of the formal application for the transfer provide the transferor and the transferee with a notice of refusal to register such transfer. No changes in the shareholders’ register due to the transfer of shares may be made within thirty (30) days before the date of a Shareholders’ general meeting or within five (5) days before the record date established for the purpose of distributing a dividend.

Merger and Acquisitions

In the event of the merger or division of our Company, a plan shall be presented by our Board of Directors and shall be approved in accordance with the procedures stipulated in our Articles of Association and then the relevant examining and approving formalities shall be processed as required by law. A shareholder who objects to the plan of merger or division shall have the right to demand that we or the shareholders who consent to the plan of merger or division acquire such dissenting shareholders’ shareholding at a fair price. The contents of the resolution of merger or division of our Company shall be made into special documents for shareholders’ inspection.

Repurchase of Shares

We may, with approval according to the procedures provided in these Articles of Association and subject to the approval of the relevant governing authority of the State, repurchase our issued shares under the following circumstances:

(i)

cancellation of shares for the reduction of capital;

(ii)

merging with another company that holds shares in our Company; or

(iii)

other circumstances permitted by relevant laws and administrative regulations.

We shall not repurchase our issued shares except under the circumstances stated above.

We may, with the approval of the relevant State governing authority for repurchasing shares, conduct the repurchase in one of the following ways:

(i)

making a pro rata general offer of repurchase to all our shareholders;

(ii)

repurchasing shares through public dealing on a stock exchange; or

(iii)

repurchasing shares by an off-market agreement off of a stock exchange.

Interested Shareholders

Articles 88 and 89 of our Articles of Association provide the following:

Article 88: the following circumstances shall be deemed to be a variation or abrogation of the class rights of a class:

(i)

to increase or decrease the number of shares of such class, or increase or decrease the number of shares of a class having voting or equity rights or privileges equal or superior to those of the shares of that class;

(ii)

to effect an exchange of all or part of the shares of such class into shares of another class or to effect an exchange or create a right of exchange of all or part of the shares of another class into the shares of such class;

(iii)

to remove or reduce rights to accrued dividends or rights to cumulative dividends attached to shares of such class;

(iv)

to reduce or remove a dividend preference or a liquidation preference attached to shares of such class;

101

(v)

to add, remove or reduce conversion privileges, options, voting rights, transfer or pre-emptive rights, or rights to acquire securities of the Company attached to shares of such class;

(vi)

to remove or reduce rights to receive payment payable by the Company in particular currencies attached to shares of such class;

(vii)

to create a new class of shares having voting or equity rights or privileges equal or superior to those of the shares of such class;

(viii)

to restrict the transfer or ownership of the shares of such class or add to such restrictions;

(ix)

to allot and issue rights to subscribe for, or convert into, shares in the Company of such class or another class;

(x)

to increase the rights or privileges of shares of another class;

(xi)

to restructure the Company where the proposed restructuring will result in different classes of shareholders bearing a disproportionate burden of such proposed restructuring;

(xii)

to vary or abrogate the provisions of this Chapter.

Article 89. Shareholders of the affected class, whether or not otherwise having the right to vote at Shareholders’ general meetings, shall nevertheless have the right to vote at class meetings in respect of matters concerning sub-paragraphs (2) to (8), (11) and (12) of Article 88, but interested shareholder(s) shall not be entitled to vote at class meetings.

The meaning of “interested shareholder(s)” as mentioned in the preceding paragraph is:

(i)

in the case of a repurchase of shares by offers to all shareholders or public dealing on a stock exchange under Article 30, a “controlling shareholder” within the meaning of Article 53;

(ii)

in the case of a repurchase of shares by an off-market contract under Article 30, a holder of the shares to which the proposed contract relates; and

(iii)

in the case of a restructuring of the Company, a shareholder within a class who bears less than a proportionate obligation imposed on that class under the proposed restructuring or who has an interest in the proposed restructuring different from the interest of shareholders of that class.

Ownership Threshold

There are no ownership thresholds above which shareholder ownership is required to be disclosed.

Changes in Capital

Article 78(1) provides that any increase or reduction in share capital shall be resolved by a special resolution at a shareholders’ general meeting.

Changes in Registered Capital

The Company may reduce its registered share capital. It shall do so in accordance with Company Law, any other relevant regulatory provisions and the Articles of Association.

102

Recent Amendments to the Articles of Association

On February 2, 2010, our shareholders approved amendments to the Articles of Association, which was amended, respectively, as follows:

Article 20: “As approved by the China Securities Regulatory Commission, the total amount of shares of the Company is 11,276,538,860 shares.”

Article 21: “The Company has issued a total of 11,276,538,860 ordinary shares, comprising a total of 7,782,213,860 A shares, representing 69.01% of the total share capital of the Company, a total of 3,494,325,000 H shares, representing 30.99% of the total share capital of the Company.”

Article 24: “The Company’s registered capital is Renminbi 11,276,538,860.”

The CSRC has enacted regulations in recent years that affect the corporate governance of PRC listed companies and Company Law has also been amended in various areas. As such, the Board of Directors proposed to amend certain provisions in our Articles of Association in accordance with the rules and regulations applicable to our Company. Such amendments relate to the general provisions of the Articles of Association, reduction of capital and repurchase of shares, shareholders and register of shareholders, shareholders’ general meeting, board of directors, supervisory committee, financial and accounting systems and profit distribution, merger and division and dissolution and liquidation of our Company. All such amendments were approved at our Annual General Meeting that took place on June 13, 2010.

On November 9, 2012, our shareholders approved further amendments to the Articles of Association, which was amended, respectively, as follows:

Article 146: “The financial statements of the Company shall, in addition to being prepared in accordance with PRC accounting standards and regulations, be prepared in accordance with either international accounting standards, or that of the place outside the PRC where the Company’s shares are listed. If there is any material difference between the financial statements prepared respectively in accordance with the two accounting standards, such difference shall be stated in the financial statements. When the Company is to distribute its after-tax profits, the lower of the after-tax profits as shown in the two financial statements shall be adopted. According to the relevant laws and regulations, profit distribution by the Company shall be based on the distributable profit of the Company (non-consolidated statements). “

Article 157: “The Company’s profit distribution policy should pay close attention to ensuring a reasonable return of investment to investors, and such profit distribution policy should maintain continuity and stability. The Company shall reasonably distribute cash dividends according to laws and regulations and requirements of securities regulatory authorities, as well as the Company’s own operating performance and financial condition. “

Article 157 (A): “Profit distribution manner: The Company may distribute dividends by way of cash, shares, a combination of cash and shares or in other reasonable manner in compliance with laws and regulations. “

Article 157 (B): “Procedures for decision-making on profit distribution by the Company: After the end of each accounting year, the board of directors shall carefully study and examine the profit distribution plan and listen fully to the views of independent directors. The independent directors shall fulfill their responsibilities and play their roles to give specific views. After consideration and approval by the board of directors, the profit distribution plan shall be proposed to the general meeting for voting. Implementation of the profit distribution plan shall be subject to consideration and approval at the general meeting. The board of directors of the Company shall finish distributing the profit within two months after the general meeting is held.

When considering the profit distribution plan at the general meeting of the Company, the board of directors shall communicate and exchange opinions with shareholders, especially minority shareholders, in a proactive manner, fully consider the opinions and requests from minority shareholders and respond to the issues which are of concern to them on a timely basis.”

103

Article 157 (C): “Amendments to profit distribution policy of the Company: The board of directors of the Company shall carefully study and examine and strictly follow the decision-making procedures in the event that the profit distribution policy needs to be adjusted by reason of any changes in PRC laws and regulations and regulatory policies, or significant changes of external operating environment or operating condition of the Company. In the event of amendments to the profit distribution policy of the Company, the board of directors shall consider the revised plan and the independent directors shall express their independent opinions thereon. Such amendments shall be disclosed to the public upon consideration and approval at the general meeting. “

Article 157 (D): “Conditions and proportion of distribution of cash dividends by the Company:

Proposal and implementation of cash dividends distribution by the Company shall be subject to the following conditions:

(1)

The Company records a profit for the year, and the audit institution issues an unqualified audited report on the Company’s financial statements for that particular year;

(2)

common reserve fund and discretionary common reserve fund) realized by the Company for the year is positive in value;

(3)

The Company has sufficient cash flow, and distribution of cash dividends will not affect the Company’s normal operation and sustainable development.

Provided that the Company is in good operating condition and has sufficient cash flow to meet the needs for its normal operation and sustainable development, the Company will proactively distribute cash dividends in return to its shareholders, and the accumulated profit distribution made in cash by the Company in the latest three years shall not be less than 30% of the average annual distributable profit in the latest three years. In the event that the said payout ratio of cash dividends cannot be met due to special reasons, the board of directors may adjust the payout ratio of dividends according to actual circumstances and state the reasons therefor. “

Provided that a reasonable scale of share capital and shareholding structure of the Company are ensured, the Company may consider distributing profits by way of share dividends according to its profitability, cash flow position and business growth for the year. “

Article 157 (G): “Information disclosure if the Company fails to distribute cash dividends: In the event that the board of directors of the Company does not propose any profit distribution plan, the board of directors of the Company shall disclose the reasons therefor and the use of such retained funds that would have been otherwise available for distribution in its periodic report. “

On June 26, 2013, our shareholders approved further amendments to the Articles of Association to reflect the expansion of our business scope and the completion of the issue of new shares, as follows:

Article 13: “The scope of business of the Company shall comply with those items approved by the companies registration authority.

The scope of business of the Company includes: domestic and approved international and regional business for air transportation of passengers, cargo, mail, luggage and extended services; general aviation business; maintenance of aviation equipment and machinery; manufacture and maintenance of aviation equipment; agency business for domestic and overseas airlines and other business related to air transportation; insurance by-business agency services; e-commerce; in-flight supermarket; wholesale and retail of goods; and other lawful businesses that can be carried on by a joint stock limited company formed under Company Law.”

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Article 20: “As approved by the China Securities Regulatory Commission, the total amount of shares of the Company is 12,674,268,860 shares.”

Article 21:” The Company has issued a total of 12,674,268,860 ordinary shares, comprising a total of 8,481,078,860 A shares, representing 66.92% of the total share capital of the Company, a total of 4,193,190,000 H shares, representing 33.08% of the total share capital of the Company.”

Article 24: “The registered capital of the Company is RMB12,674,268,860.”

According to the relevant requirements of CSRC and the Shanghai Stock Exchange, our Board of Directors approved at the 2014 second regular meeting that amendments be made to corresponding terms in the articles of association of our Company in connection with the priority of cash dividends to share dividends in profit distributions and intervals for cash dividend distributions. Such amendments will be submitted to the 2013 annual general meeting of our Company for approval.

The amendments to the Articles of Association are as follows:

Article 157: “The Company’s profit distribution should pay close attention to ensuring a reasonable return of investment to investors, and such profit distribution policy should maintain continuity and stability. The Company shall reasonably distribute cash dividends according to laws and regulations and requirements of securities regulatory authorities, as well as the Company’s own operating performance and financial condition.”

Article 157: “The Company’s profit distribution should pay close attention to ensuring a reasonable return of investment to investors, and such profit distribution policy should maintain continuity and stability. The Company shall reasonably distribute dividends according to laws and regulations and requirements of securities regulatory authorities, as well as the Company’s own operating performance and financial condition, and shall adopt cash distribution as the prioritized means of distribution to distribute profit.”

Article 157(F): “Intervals for profit distribution by the Company: Provided that the conditions of profit distribution are met and the Company’s normal operation and sustainable development are ensured, the Company shall generally distribute profit on an annual basis. The board of directors of the Company may also propose interim profit distribution based on the profitability and capital position of the Company. Subject to fulfillment of the cash distribution conditions under the articles of association of the Company, the Company shall implement annual cash distribution once a year in principle.”

On June 26, 2014, our shareholders approved the above mentioned amendments.

On August 28, 2015, the Resolution on Amendments to Parts of the Terms of the Articles of Association was considered and approved at the seventeenth ordinary meeting of the seventh session of the Board of the Company. As authorized by the general meeting of the Company, the Board agreed to make amendments to corresponding terms in the Articles of Association in connection with the changes made to the share capital of the Company following the completion of the issue of H Shares of the Company to Delta Air Lines.

Article 20: “As approved by the China Securities Regulatory Commission, the total amount of shares of the Company is 13,140,178,860 shares.”

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Article 21: “The Company has issued a total of 13,140,178,860 ordinary shares, comprising a total of 8,481,078,860 A shares, representing 64.54% of the total share capital of the Company, a total of 4,659,100,000 H shares, representing 35.46% of the total share capital of the Company.”

Article 24: “The registered capital of the Company is RMB13,140,178,860.”

On June 16, 2016, our shareholders approved the amendments to the Articles of Association in relation to profit distribution.

The amendments to the Articles of Association are as follows:

Article 157(D): “Conditions and proportion of distribution of cash dividends by the Company:

Proposal and implementation of cash dividends distribution by the Company shall be subject to the following conditions:

(1)

The Company records a profit for the year, and the audit institution issues an unqualified audited report on the Company’s financial statements for that particular year;

(2)

The distributable profit (i.e. the after-tax profit of the Company after making up for losses, allocation to the statutory common reserve fund and discretionary common reserve fund) realized by the Company for the year is positive in value;

(3)

The Company has sufficient cash flow, and distribution of cash dividends will not affect the Company’s normal operation and sustainable development.

Provided that the Company is in good operating condition and has sufficient cash flow to meet the needs for its normal operation and sustainable development, the Company will proactively distribute cash dividends in return to its shareholders, and the accumulated profit distribution made in cash by the Company in the latest three years shall not be less than 30% of the average annual distributable profit attributable to the owners of the parent company in the consolidated statements in the latest three years. In the event that the said payout ratio of cash dividends cannot be met due to special reasons, the board of directors may adjust the payout ratio of dividends according to actual circumstances and state the reasons therefor.”

On July 4, 2016, the Resolution on Amendments to the Articles of Association was considered and approved at the second ordinary meeting of the eighth session of the Board of Directors, to in order to reflect the changes to the registered capital of the Company following the closing of the Share Issue.

The amendments to the Articles of Association are as follows:

Article 20: “As approved by the China Securities Regulatory Commission, the total amount of shares of the Company is 14,467,585,682 shares.”

Article 21: “The Company has issued a total of 14,467,585,682 ordinary shares, comprising a total of 9,808,485,682 A shares, representing 67.80% of the total share capital of the Company, a total of 4,659,100,000 H shares, representing 32.20% of the total share capital of the Company.”

Article 24: “The registered capital of the Company is RMB14,467,585,682.”

On June 28, 2017, our shareholders approved further amendments to the Articles of Association to reflect the change of business license and voting on shareholders’ general meeting:

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Article 1: “The Company is a joint stock limited company established in accordance with the “Company Law of the People’s Republic of China” (the “Company Law”), “State Council’s Special Regulations Regarding the Issue of Shares Overseas and the Listing of Shares Overseas by Companies Limited by Share” (the “Special Regulations”) and other relevant laws and regulations of the State.

The Company was established by way of promotion with the approval under the document “Ti Gai Sheng” [1994] No.140 of the People’s Republic of China’s State Commission for Restructuring the Economic System. It is registered with and has obtained a business license from China’s State Administration for Industry and Commerce on April 14, 1995. On February 8, 2017, the Company completed the “Combination of Three Licenses into One” procedures for its business license, organization code certificate and tax registration certificate. The unified social credit code of the business license of the Company after the integration is 913100007416029816.

The promotr of the Company is: China Eastern Air Holding Company.”

Article 72: “Each matter up for consideration at a Shareholders’ general meeting shall be voted upon at such Shareholders’ general meeting. A shareholder (including proxy), when voting at a Shareholders’ general meeting, may exercise voting rights in accordance with the number of shares carrying the right to vote and each share shall have one vote.

For material issues to be decided in general meetings of the Company that would affect the interests of its small and medium sized investors, the votes by the small and medium sized investors shall be counted separately. The result of such separate vote counting shall be disclosed publicly in a timely manner.

The Board of the Company, Independent Directors and those Shareholders who have met the relevant requirements may openly may openly collect voting rights from the Company’s shareholders. While collecting votes of the Shareholders, sufficient disclosure of information such as the specific voting preference shall be made to the Shareholders from whom voting rights are being collected. No consideration or other form of de facto consideration shall be involved in the collection of voting rights from the Shareholders. The Company shall not impose any limitation related to minimum shareholdings on the collection of voting rights.”

On December 22, 2017, our shareholders approved further amendments to the Articles of Association to reflect the Party organization of the Company:

Article 12: “In accordance with the Constitution of the Party, the Company shall establish Party organizations. The Party Committee at different levels of the Company shall perform functions in accordance with provisions of the Constitution of the Party. The Company shall set up the working organs of the Party, and maintain an adequate level of staffing to handle Party affairs as well as sufficient funding necessary for the activities of the Party organizations.”

Article 97: “The board of directors is responsible to the Shareholders’ general meeting and exercises the following powers:

(1)

to be responsible for the convening of the Shareholders’ general meeting and to report on its work to the Shareholders’ general meeting;

(2)

to implement the resolutions of the Shareholders’ general meetings;

(3)

to decide on the Company’s business plans and investment plans;

(4)

to formulate the Company’s annual preliminary and final financial budgets;

(5)

to formulate the Company’s profit distribution plan and plan for making up losses;

(6)

to formulate proposals for increases or reductions in the Company’s registered capital and the issue of debentures of the Company;

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(7)

to draw up plans for the merger, division or dissolution of the Company;

(8)

to decide on the establishment of the Company’s internal management structure;

(9)

to appoint or dismiss the Company’s general manager, and pursuant to the general manager’s nominations to appoint or dismiss the deputy general manager and the financial controller of the Company and decide on their remuneration;

(10)

to establish the Company’s basic management system;

(11)

to formulate proposals for any amendments of the Company’s articles of association;

(12)

to exercise any other powers conferred by the Shareholders’ general meetings.

Except the board of directors’ resolutions in respect of the matters specified in sub-paragraphs (6), (7) and (11) of this Article which shall be passed by more than two-thirds of all the directors, the board of directors’ resolutions in respect of all other matters may be passed by more than one half of all the directors.

Prior to making decisions on material issues of the Company, the board of directors shall first seek advice from the Party Committee of the Company in advance.”

Article 143: “The Company shall establish the Party Committee. The Party Committee shall be comprised of one secretary and several other members. A deputy secretary of the Party Committee shall be appointed to take charge of the Party building work. Eligible members of the Party Committee are entitled to be admitted to the board of directors of the Company, the supervisory committee, and the management through legal procedures, and eligible Party members from the board of directors, the supervisory committee, and the management are entitled to be admitted to the Party Committee in accordance with relevant rules and procedures. Meanwhile, a discipline inspection committee shall be established in accordance with relevant regulations.”

Article 144: “The Party Committee of the Company shall perform its duties as required by the internal laws and regulations of the Party such as the Constitution of the Party:

(1)

to ensure and supervise the Company’s implementation of guidelines and policies of the Party and the State, implement major strategic decisions of the Central Committee of the Party and the State Council, as well as the relevant material work arrangement of the Party Committee of the State-owned Assets Supervision and Administration Commission of the State Council and the superior Party organizations;

(2)

to adhere to the principle of the Party exercising leadership over cadres, the selection of management with the board of directors of the Company, and the exercise of power as regards the right of cadres’ appointment by the management in accordance with laws. The Party Committee shall consider and propose opinions and suggestions on the candidates nominated by the board of directors or the general manager, or recommend nominees to the board of directors or the general manager. It shall review the proposed candidates together with the board of directors and propose opinions and suggestions thereon;

(3)

to study and discuss the material matters regarding the Company’s reform and stable development as well as major issues relating to the Company’s operation, management and staff ’s benefits, and propose opinions and suggestions thereon;

(4)

to assume main responsibility for enforcing the strict discipline of the Party. Take lead in the Company’s ideological and political work, the united front work, building of spiritual and corporate culture, as well as the labor union and groups such as the Communist Youth League. It shall play a leading role in the construction of the Party ’s working style to uphold anti-corruption and integrity and support the discipline inspection committee in fulfilling its supervisory responsibility.

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On February 8, 2018, our shareholders approved further amendments to the Articles of Association:

Article 57: “The Shareholders’ general meeting shall have the following functions and powers:

(1)

to decide on the Company’s operational policies and investment plans;

(2)

to elect and replace directors (excluding employee representative directors) and decide on matters relating to the remuneration of directors;

(3)

to elect and replace the supervisors who are representatives of shareholders and decide on matters relating to the remuneration of supervisors;

(4)

to examine and approve reports of the board of directors;

(5)

to examine and approve reports of the supervisory committee;

(6)

to examine and approve the Company’s proposed annual preliminary and final financial budgets;

(7)

to examine and approve the Company’s profit distribution plans and plans for making up losses;

(8)

to decide on increases or reductions in the Company registered capital;

(9)

to decide on matters such as merger, division, change in company form, dissolution and liquidation of the Company;

(10)

to decide on the issue of debentures by the Company;

(11)

to decide on the appointment, dismissal and disengagement of the accountants of the Company;

(12)

to amend these articles of association;

(13)

to consider motions raised by shareholders who represent 3 per cent or more of the total shares of the Company carrying the right to vote;

(14)

to decide on other matters which require resolutions of the shareholders in general meeting according to relevant laws, administrative regulations and provisions of these articles of association;

(15)

to decide on matters which the board of directors may be delegated or authorized to deal with by the shareholders in general meeting.”

Article 71 (A): “Directors (excluding employee representative directors) will be elected at Shareholders’ general meetings through cumulative voting. When directors are elected through cumulative voting at Shareholders’ general meetings, the number of total votes that a shareholder can exercise is the product of (i) the number of shares held by such shareholder, and (ii) the number of directors to be elected. A shareholder can give all his or her votes to one director candidate or divide his or her votes among several director candidates. Directors are elected at the Shareholders’ general meetings based on the number of votes the director candidates receive.”

Article 95: “The Company shall have a board of directors. The board of directors shall consist of seven (7) to thirteen (13) directors. External directors (refer to directors who do not hold any office within the Company) shall represent more than one-half of the board of directors including independent directors (refer to directors who are independent of the Shareholders and do not hold any office within the Company) not less than one third of the total number of directors and at least one of them shall be an accounting professional; the board of directors shall have one employee representative director.

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The board of directors shall have one Chairman and one Vice-chairman.”

Article 96: “Directors (excluding employee representative directors) shall be elected at the Shareholders’ general meeting. while employee representative directors shall be elected or removed by employee representative assembly. The term of office of the directors is three (3) years. At the expiry of a director’s term, the term is renewable upon reelection.

The director (excluding employee representative director) candidates shall be nominated by the board of directors or shareholders. The notice of nomination of directors and the notice by a director candidate of his or her willingness to be elected shall be given to and lodged with the Company on, at the earliest, the day after the dispatch of the relevant notice of Shareholders’ general meeting appointed for the election and seven days before the date of the Shareholders’ general meeting.

The Chairman and the Vice-chairman shall be elected and removed by more than one half of all the members of the board of directors. The term of office of each of the chairman and the Vice-chairman is three (3) years, renewable upon re-election.

The Shareholders’ general meeting may by ordinary resolution remove any director (excluding employee representative director) before the expiration of his term of office (but without prejudice to such director’s right to claim damages based on any contract) on the condition that all the relevant laws and administrative regulations are fully complied with. The Directors shall not be required to hold shares of the Company.”

Article 107 (A): “Independent directors shall carry out duties faithfully, safeguard the interests of the Company and pay close attention to the protection of the legal rights and interests of the public shareholders from detriment.

Independent directors shall carry out duties independently and shall not be influenced by:

(1)

any substantial shareholder or actual controlling person of the Company; or

(2)

any interested entity or individual of the Company or any of its substantial shareholders or actual controlling persons.”

Article 107 (H): “Matters requiring the involvement of employee representative directors can generally be divided into two categories: matters requiring board resolutions; and matters requiring reporting to the board.

(1)

Matters requiring board resolutions: mainly include the enactment and amendment of basic management policy involving employee fundamental interests such as the Company’s labor, remuneration policy, labor protection, rest days and holidays, safety and operation, training, education and welfare etc.

(2)

Matters requiring reporting to the board: mainly include claims, comments and suggestions regarding employee democratic governance and democratic oversight and relevant claims and comments or the issues of tendency involving employees’ interests.”

Article 132: “Subject to Article 53, a director (excluding employee representative director), supervisor, general manager, deputy general manager or other senior administrative officer of the Company may be relieved of liability for specific breaches of his duty by the informed consent of shareholders given at a general meeting.”

C. Material Contracts

For a summary of any material contracts entered into by our Company or any of our consolidated subsidiaries outside of the ordinary course of business during the last two years, see “Item 4. Information on the Company”, “Item 5. Operating and Financial Review and Prospects” and “Item 7. Major Shareholders and Related Party Transactions”.

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D. Exchange Controls

The Renminbi is not currently a freely convertible currency. SAFE, under the authority of PBOC, controls the conversion of Renminbi into foreign currency. Prior to January 1, 1994, Renminbi could be converted to foreign currency through the Bank of China or other authorized institutions at official rates fixed daily by SAFE. Renminbi could also be converted at swap centers open to Chinese enterprises and foreign invested enterprises subject to SAFE approval of each foreign currency trade, at exchange rates negotiated by the parties for each transaction. Effective January 1, 1994, a unitary exchange rate system was introduced in China, replacing the dual-rate system previously in effect. In connection with the creation of a unitary exchange rate, the PRC government announced the establishment of an inter-bank foreign exchange market, the China Foreign Exchange Trading System, or CFETS, and the phasing out of the swap centers. Effective December 1, 1998, the swap centers were abolished by the PRC government.

On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in a significant appreciation of the Renminbi against the U.S. dollar. While the international reaction to Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of Renminbi against the U.S. dollar.

In general, under existing foreign exchange regulations, domestic enterprises operating in China must price and sell their goods and services in China in Renminbi. Any foreign exchange received by such enterprises must be sold to authorized foreign exchange banks in China. A significant portion of our revenue and operating expenses are denominated in Renminbi, while a portion of our revenue, capital expenditures and debts are denominated in U.S. dollars and other foreign currencies. Renminbi is currently freely convertible under the current account, which includes dividends, trade and service-related foreign currency transactions, but not under the capital account, which includes foreign direct investment, unless the prior approval of the SAFE, is obtained. As a foreign investment enterprise approved by the MOC, we can purchase foreign currency without the approval of SAFE for settlement of current account transactions, including payment of dividends, by providing commercial documents evidencing these transactions. We can also retain foreign exchange in our current accounts, subject to a maximum amount approved by SAFE, to satisfy foreign currency liabilities or to pay dividends. However, the relevant PRC government authorities may limit or eliminate our ability to purchase and retain foreign currencies in the future. Foreign currency transactions under the capital account are still subject to limitations and require approvals from SAFE. This may affect our ability to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions. We cannot assure you that we will be able to obtain sufficient foreign exchange to pay dividends or satisfy our foreign exchange liabilities.

E. Taxation

The taxation of income and capital gains of holders of H Shares or ADSs is subject to the laws and practices of China and of jurisdictions in which holders of H Shares or ADSs are resident or otherwise subject to tax. The following summary of certain relevant taxation provisions is based on current law and practice, is subject to change and does not constitute legal or tax advice. The discussion does not deal with all possible tax consequences relating to an investment in the H Shares or ADSs. In particular, the discussion does not address the tax consequences under state, local and other laws, such as non-U.S. federal laws. Accordingly, you should consult your own tax adviser regarding the tax consequences of an investment in the H Shares and ADSs. The discussion is based upon laws and relevant interpretations in effect as of the date of this Annual Report, all of which are subject to change.

Hong Kong Taxation

The following discussion summarizes the relevant Hong Kong tax rules relating to the ownership of H shares or ADSs purchased in connection with the global offering and held by you.

Dividends

Under current Hong Kong Inland Revenue Department practice, no profits tax is payable by the recipient in respect of dividends paid by us.

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Taxation of Capital Gains

Gains derived from the sale of capital assets are specifically exempt from profits tax. Thus, no profits tax is imposed on capital gains arising from the sale of property (such as H shares) acquired and held as a capital asset. However, whether or not there has been a sale of a capital asset depends upon the particular circumstances of a case. If a person carries on a business in Hong Kong of trading and dealing in securities and derives trading gains from that business in Hong Kong, that person could be subject to profits tax on any assessable gains. Assessable gains include gains derived from the sales of H shares effected on the Hong Kong Stock Exchange as these gains are considered to be trading gains derived from Hong Kong. Profits tax is currently charged at the rate of 16.5% for corporations and at the rate of 15% for unincorporated businesses (i.e. individuals).

No profits tax liability will arise on trading gains arising from the sale of ADSs where the purchase and sale is effected outside Hong Kong (e.g. on the NYSE).

Hong Kong Stamp Duty

Stamp duty is payable by each of the seller and the purchaser for every sold note and every bought note created for every sale and purchase of the H shares. Stamp duty is levied at the total rate of 0.2% (0.1% for each of sold note and bought note) of the value of the H shares transferred (the buyer and seller each paying half of such stamp duty). In addition, a fixed duty of HK$5 is currently payable on an instrument of transfer of H shares. If one of the parties to a sale is a non-resident of Hong Kong and does not pay the required stamp duty, the amount of unpaid stamp duty will be assessed on the instrument of transfer (if any), and the transferee will be liable for payment of such unpaid amount.

If the withdrawal of H shares when ADSs are surrendered or the issuance of ADSs when H shares are deposited results in a change of beneficial ownership in the H shares under Hong Kong law, stamp duty at the rate cited above for a sale and purchase transaction will apply. The issuance of ADSs for deposited H shares issued directly to the depositary, or for the account of the depositary, should not result in any stamp duty liability. Holders of the ADSs are not liable for the stamp duty on transfers of ADSs outside of Hong Kong so long as the transfers do not result in a change of beneficial interest in the H shares under Hong Kong law.

Hong Kong Estate Duty

Hong Kong estate duty was abolished with respect to persons passing away on or after February 11, 2006.

China Taxation

The following is a general summary of certain Chinese tax consequences of the acquisition, ownership and disposition of the H Shares and ADSs. This summary does not purport to address all material tax consequences of the ownership of Shares or ADSs, and does not take into account the specific circumstances of any particular investors. This summary is based on the tax laws of China as in effect on the date of this Annual Report, as well as on the U.S.- China Treaty, all of which are subject to change (or changes in interpretation), possibly with retroactive effect.

In general, and taking into account the earlier assumptions, for Chinese tax purposes, holders of ADRs evidencing ADSs will be treated as the owners of the H Shares represented by those ADSs, and exchanges of H Shares for ADSs, and ADSs for H Shares, will not be subject to Chinese tax.

Taxation of Dividends by China

Individual investors

The Provisional Regulations of China Concerning Questions of Taxation on Enterprises Experimenting with the Share System, or the Provisional Regulations, provide that dividends from Chinese companies are ordinarily subject to a Chinese withholding tax levied at a flat rate of 20%. However on July 21, 1993, the Chinese State Tax Bureau issued a Notice Concerning the Taxation of Gains on Transfer and Dividends from Shares (Equities) Received by Foreign Investment Enterprises, Foreign Enterprises and Foreign Individuals Numbered Guo Shui Fa [1993] No. 045, or No. 45 Document which provides that dividends from a Chinese company on shares listed on an overseas stock exchange, or Overseas Shares, such as H Shares (including H Shares represented by ADSs), would not be subject to Chinese withholding tax. The relevant tax authority has not collected withholding tax on dividend payments on Overseas Shares.

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Nevertheless, No.45 Document was abolished on January 4, 2011 and the Chinese State Tax Bureau issued, on June 28, 2011, a Notice on Issues Concerning the Levy of Individual Income Tax following the Abolishment of the Document Numbered Guo Shui Fa [1993] No. 045, according to which dividends from a Chinese company are ordinarily subject to a Chinese withholding tax levied at a flat rate of 20% unless otherwise provided in applicable tax treaties between the PRC and the jurisdiction in which the relevant non-resident shareholder resides. The tax rate of dividends income tax applicable to Hong Kong residents and U.S. residents is 10% of the gross amount of interest.

On October 31, 2014, CSRC, MOF and STA together promulgated The Notice of the Relevant Tax Policy of the Pilot Program for the Shanghai-Hong Kong Stock Connect (Hereinafter refer to as Notice 81) which has been effective from November 17, 2014. Pursuant to Notice 81, for dividends acquired by mainland individual investors through investment in H-shares listed on the Hong Kong Stock Exchange via Hong Kong-Shanghai Stock Connect, the H-share company shall apply to China Securities Depository and Clearing Corporation Limited (Hereinafter refer to as Chinese Clearing). Chinese Clearing shall provide the H-share company with the mainland individual’s investor rosters. The H-share company withholds the individual income tax at the tax rate of 20%. For dividends acquired by mainland securities investment funds through investment in shares listed on the Hong Kong Stock Exchange via Hong Kong- Shanghai Stock Connect, the individual income tax shall be collected according to the regulations hereinbefore.

For dividends acquired by Hong Kong investors’ (including enterprises and individuals) through investment in A-shares listed on the Shanghai Stock Exchange, before Hong Kong Securities Clearing Limited (Hereinafter refer to as Hong Kong Clearing) meet the conditions to provide Chinese Clearing with detailed data of investors’ identity certification and time of shareholding, the different tax policy according to time of shareholding will temporarily not to be implemented. The listed company shall withhold the income tax at the tax rate of 10%, declare, and pay to the tax authorities.

Enterprises

Under the EIT Law amended in 2017 and the implementation regulations to the EIT Law, effective from January 1, 2008, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises”, which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business. The rate could be reduced or eliminated pursuant to an applicable double taxation treaty.

In accordance with the Notice 81, (a) dividends acquired by mainland enterprise investors through investment in shares listed on the Hong Kong Stock Exchange via Hong Kong-Shanghai Stock Connect will be accounted into their total income and subject to enterprise income tax according to the laws. Among those, for the dividends acquired by mainland enterprise investors through continuing holding H shares for 12 months, the enterprise income tax shall be exempted according to the laws; (b) the H-share company listed on the Hong Kong Stock Exchange shall apply to the Chinese Clearing to offer them the mainland enterprise investor rosters. The H-share company does not withhold income tax from dividends for mainland enterprise investors. The enterprises shall declare and pay by themselves; and (c) the mainland enterprise investors may apply for tax credits for dividends already withheld by non-H-share listed companies on the Hong Kong Stock Exchange when declaring and paying the enterprise tax income.

Tax Treaties

Non-Chinese investors resident in countries, which have entered into double-taxation treaties with China, may be entitled to a reduction of the withholding tax imposed on the payment of dividends to non-Chinese investors of our Company. China currently has double-taxation treaties with a number of other countries, including Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States.

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Notice 81 explicitly stipulated that for Hong Kong investors who are tax residents of other countries that have signed the tax agreement with China to regulate the tax rate for dividends, that income tax to be less than 10%, the enterprise or individual may, by themselves or withholding agents, apply for the treatment of the tax agreement to the tax authorities of listed companies. After examination and verification, the tax authorities shall reimburse the difference between the levied tax and the payable tax according to the tax agreement.

Under the U.S.-China Treaty, China may tax a dividend paid by our Company to a U.S. holder of H Shares or ADSs only up to a maximum of 10% of the gross amount of such dividend.

Taxation of Capital Gains by China

Individual Investors

According to the Law of Individual Income Tax and its implementation regulations, holders of H Shares or ADSs who have no domiciles and do not reside in China or who have no domiciles but have resided in China for less than one year shall be subject to individual income tax on their income gained within China, unless otherwise reduced or eliminated pursuant to an applicable double taxation treaty.

Notice 81 requires, (a) from November 17, 2014 to November 16, 2017, the income tax from transfer price difference will be temporarily exempted for mainland individual investors’ investment in shares listed on the Hong Kong Stock Exchange through Hong Kong-Shanghai Stock Connect; (b) for mainland individual investors, the business tax from transfer price difference in the trading of shares listed on the Hong Kong Stock Exchange through Hong Kong- Shanghai Stock Connect will be temporarily exempted according to current policy; and (c) the income tax and the business tax from transfer price difference will be temporarily exempted for Hong Kong individual investors’ investment in A-shares listed on the Shanghai Stock Exchange.

Under the U.S.-China Treaty, China may only tax gains from the sale or disposition by a U.S. holder of H Shares or ADSs representing an interest in the company of 25% or more.

Enterprises

Under the EIT Law and the implementation regulations to the EIT Law, gains realized upon the sale of Overseas Shares by “non-resident enterprises” may be subject to PRC taxation at the rate of 10% (or lower treaty rate).

Pursuant to Notice 81, the income tax from transfer price difference will be accounted into the total income and subject to enterprise income tax according to the laws for mainland enterprise investors’ investment in shares listed on the Hong Kong Stock Exchange through Hong Kong-Shanghai Stock Connect. For mainland enterprise investors, the business tax from transfer price difference in the trading of shares listed on the Hong Kong Stock Exchange through Hong Kong-Shanghai Stock Connect shall be levied and exempted according to current policy. Income tax and the business tax from transfer price difference will be temporarily exempted for Hong Kong enterprise investors’ investment in A-shares listed on the Shanghai Stock Exchange.

PRC Stamp Tax

Chinese stamp tax imposed on the transfer of shares of Chinese publicly traded companies under the Share System Tax Regulations should not apply to the acquisition or disposition by non-Chinese investors of H Shares or ADSs outside of China by virtue of the Provisional Regulations of the People’s Republic of China Concerning Stamp Tax, which provides that Chinese stamp tax is imposed only on documents executed or received within China or that should be considered as having been executed or received within China.

According to Notice 81, Hong Kong investors shall pay stamp duty according to mainland current tax policy when trading, inheriting, gifting the A- shares listed on the Shanghai Stock Exchange through Hong Kong-Shanghai Stock Connect.

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United States Federal Income Taxation

Each potential investor is strongly urged to consult his or her own tax advisor to determine the particular U.S. federal, state, local, treaty and foreign tax consequences of acquiring, owning or disposing of the H Shares or ADSs.

The following is a general discussion of material U.S. federal income tax consequences of purchasing, owning and disposing of the H Shares or ADSs if you are a U.S. Holder, as defined below, and hold the H Shares or ADSs as capital assets within the meaning of Section 1221 of the U.S. Internal Revenue Code of 1986 as amended (the “Code”). This discussion does not address all of the tax consequences relating to the purchase, ownership and disposition of the H Shares or ADSs, and does not take into account U.S. Holders (defined below) who may be subject to special rules including:

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tax-exempt entities;

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banks, financial institutions, and insurance companies;

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real estate investment trusts, regulated investment companies and grantor trusts;

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dealers or traders in securities, commodities or currencies;

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U.S. Holders that own, actually or constructively, 10% or more of our voting stock;

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persons who receive the H Shares or ADSs as compensation for services;

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U.S. Holders that hold the H Shares or ADSs as part of a straddle or a hedging or conversion transaction;

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persons that generally mark their securities to market for U.S. federal income tax purposes;

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U.S. citizens or tax residents who are residents of the PRC;

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U.S. citizens or tax residents who are subject to Hong Kong profits tax;

•

certain U.S. expatriates;

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dual resident corporations; or

•

U.S. Holders whose functional currency is not the U.S. dollar.

Moreover, this description does not address U.S. federal estate, gift or alternative minimum taxes, the U.S. federal unearned Medicare contribution tax, or any state or local tax consequences of the acquisition, ownership and disposition of the H Shares or ADSs.

This discussion is based on the Code, its legislative history, final, temporary and proposed U.S. Treasury regulations promulgated thereunder, published rulings and court decisions as in effect on the date hereof, all of which are subject to change, or changes in interpretation, possibly with retroactive effect. In addition, this discussion is based in part upon representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreements will be performed according to its terms.

You are a “U.S. Holder” if you are a beneficial owner of H Shares or ADSs and are:

•

an individual citizen or resident of the United States for U.S. federal income tax purposes;

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•

a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any political subdivision thereof;

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an estate the income of which is subject to U.S. federal income tax without regard to its source; or

•

a trust if (i) a court within the United States is able to exercise primary supervision over it’s administration, and one or more U.S. persons have the authority to control all of the substantial decisions of such trust, or (ii) such trust has a valid election in effect to be treated as a U.S. person for U.S. federal income tax purposes.

If a partnership (including any entity treated as a partnership for U.S. federal tax purposes) is a beneficial owner of the H Shares or ADSs, the treatment of the partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. If an investor is a partner in a partnership that holds H Shares or ADSs, such investor should consult its tax advisor.

In general, if you hold ADRs evidencing ADSs, you will be treated as the owner of the H Shares represented by the ADSs. Exchanges of H shares for ADRs, and ADRs for H shares, generally will not be subject to U.S. federal income tax.

INVESTORS SHOULD CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSIDERATIONS APPLICABLE TO THEM RELATING TO THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE H SHARES OR ADSs, INCLUDING THE APPLICABILITY OF U.S. FEDERAL, STATE AND LOCAL TAX LAWS OR NON-U.S. TAX LAWS, ANY CHANGES IN APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION OR REGULATIONS.

Distributions on the H Shares or ADSs

Subject to the discussion below under “— Passive Foreign Investment Company”, the gross amount of any distribution (without reduction for any withheld PRC tax) we make on the H Shares or ADSs out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) will be includible in your gross income as ordinary dividend income when the distribution is actually or constructively received by you, or by the depositary in the case of ADSs. Distributions that exceed our current and accumulated earnings and profits will be treated as a return of capital to you to the extent of your basis in the H Shares or ADSs and thereafter as capital gain. We, however, may not calculate earnings and profits in accordance with U.S. tax principles. Accordingly, all distributions by us to U.S. Holders will generally be treated as dividends. Any dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from U.S. corporations. The amount of any distribution of property other than cash will be the fair market value of such property on the date of such distribution.

Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by certain non-corporate holders will be subject to taxation at a maximum rate of 20% if the dividends are “qualified dividends.” Dividends paid on H Shares or ADSs will be treated as qualified dividends if either (i) we are eligible for the benefits of a comprehensive income tax treaty with the United States that the Internal Revenue Service, or IRS, has approved for the purposes of the qualified dividend rules, or (ii) the dividends are, with respect to ADSs, readily tradable on a U.S. securities market, provided that we were not, in each case, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company, or PFIC. The Agreement Between the Government of the United States of America and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income (the “Treaty”) has been approved for the purposes of the qualified dividend rules, and we expect to qualify for benefits under the Treaty. We are considered a qualified foreign corporation with respect to the ADSs because our ADSs are listed on the New York Stock Exchange. Finally, based on our audited consolidated financial statements and relevant market data, we believe that we did not satisfy the definition for PFIC status for U.S. federal income tax purposes with respect to our 2016 taxable year. In addition, based on our audited consolidated financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market data, we do not anticipate becoming a PFIC for our 2017 taxable year or any future year. However, our status in the current year and future years will depend on our income and assets (which for this purpose depends in part on the market value of the H Shares or ADSs) in those years. See the discussion below under “— Passive Foreign Investment Company”.

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Holders of H Shares or ADSs should consult their own tax advisors regarding the availability of the reduced dividend tax rate in light of their own particular circumstances.

If we make a distribution paid in HK dollars, you will be considered to receive the U.S. dollar value of the distribution determined at the spot HK dollar/U.S. dollar rate on the date such distribution is actually or constructively received by you, regardless of whether you convert the distribution into U.S. dollars. Any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is includible in your income to the date you convert the distribution into U.S. dollars will be treated as ordinary income or loss from U.S. sources. If dividends received in HK dollars are converted into U.S. dollars on the day they are received, the U.S. Holder generally will not be required to recognize foreign currency gain or loss in respect of the dividend income.

Subject to various limitations, any PRC tax withheld from distributions in accordance with the Treaty will be deductible or creditable against your U.S. federal income tax liability depending on the application of the section 904 foreign tax credit limitation provisions. Dividends paid by us generally will constitute income from sources outside the United States for U.S. foreign tax credit limitation purposes and will be categorized as “passive category income” or, in the case of certain U.S. Holders, as “general category income” for U.S. foreign tax credit purposes.

In the event we are required to withhold PRC income tax on dividends paid to U.S. Holders on the H Shares or ADSs (see discussion under “— China Taxation”), you may be able to claim a reduced 10% rate of PRC withholding tax if you are eligible for benefits under the Treaty. You should consult your own tax advisor about the eligibility for reduction of PRC withholding tax.

You may not be able to claim a foreign tax credit (and instead may claim a deduction) for non-U.S. taxes imposed on dividends paid on the H Shares or ADSs if you (i) have held the H Shares or ADSs for less than a specified minimum period during which you are not protected from risk of loss with respect to such shares, or (ii) are obligated to make payments related to the dividends (for example, pursuant to a short sale). The rules relating to the U.S. foreign tax credit are complex and U.S. Holders may be subject to various limitations on the amount of foreign tax credits that are available. In addition, if the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating a U.S. Holder’s foreign tax credit limitation will generally be limited to the gross amount of the taxable dividend, multiplied by the reduced tax rate applicable to qualified dividend income and divided by the highest tax rate normally applicable to dividends. U.S. Holders should consult their own tax advisors regarding the effect of these rules in their particular circumstance.

Sale, Exchange or Other Disposition

Subject to the discussion below under “— Passive Foreign Investment Company”, upon a sale, exchange or other disposition of the H Shares or ADSs, you will generally recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the U.S. dollar value of the amount realized and your tax basis, determined in U.S. dollars, in such H Shares or ADSs. Generally, gain or loss recognized upon the sale or other disposition of H Shares or ADSs, will be long-term capital gain or loss if the U.S. Holder’s holding period for such H Shares or ADSs exceeds one year, and will be income or loss from sources within the United States for foreign tax credit limitation purposes. For non-corporate U.S. Holders, the U.S. income tax rate applicable to net long-term capital gain currently will not exceed 20.0%. The deductibility of capital losses is subject to significant limitations.

A U.S. Holder that receives foreign currency from a sale or disposition of H Shares or ADSs generally will realize an amount equal to the U.S. dollar value of the foreign currency determined on (i) the date of receipt of payment in the case of a cash basis U.S. Holder and (ii) the date of disposition in the case of an accrual basis U.S. Holder. If Shares are treated as traded on an “established securities market”, a cash basis taxpayer or, if it so elects, an accrual basis taxpayer, will determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale. A U.S. Holder will have a tax basis in the foreign currency received equal to the U.S. dollar amount realized. Any currency exchange gain or loss realized on a subsequent conversion of the foreign currency into U.S. dollars for a different amount generally will be treated as ordinary income or loss from sources within the United States. However, if such foreign currency is converted into U.S. dollars on the date received by the U.S. Holder, a cash basis or electing accrual basis U.S. Holder should not recognize any gain or loss on such conversion.

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Any gain or loss will generally be U.S. source gain or loss for foreign tax credit limitation purposes and as a result of the U.S. foreign tax credit limitation, foreign taxes, if any, imposed upon capital gains in respect of H Shares or ADSs may not be currently creditable. Under the Treaty, however, if any PRC tax were to be imposed on any gain from the disposition of H Shares or ADSs, the gain could be treated as PRC-source income. U.S. Holders are urged to consult their tax advisors regarding the interaction of the foreign tax credit and the Treaty “resourcing” rule.

Passive Foreign Investment Company

In general, a foreign corporation is a PFIC for any taxable year in which, after applying relevant look-through rules with respect to the income and assets of subsidiaries:

•

75% or more of its gross income consists of passive income, such as dividends, interest, rents, royalties, and gains from the sale of assets that give rise to such income; or

•

50% or more of the average quarterly value of its gross assets consists of assets that produce, or are held for the production of, passive income.

“Passive income” for this purpose includes, for example, dividends, interest, royalties, rents and gains from commodities and securities transactions. Passive income does not include rents and royalties derived from the active conduct of a trade or business. If the stock of a non-U.S. corporation is publicly traded for the taxable year, the asset test is applied using the fair market value of the assets for purposes of measuring such corporation’s assets. If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income for purposes of the PFIC income and asset tests.

Based on the current and anticipated composition of our assets and income and the current expectations regarding the price of the H Shares and ADSs, we believe that we were not a PFIC for U.S. federal income tax purposes with respect to our 2017 taxable year and we do not intend to become or anticipate becoming a PFIC for the current or any future taxable year. However, the determination of PFIC status is a factual determination that must be made annually at the close of each taxable year and therefore, there can be no certainty as to our status in this regard until the close of the 2018 taxable year. Changes in the nature of our income or assets or a decrease in the trading price of the H Shares or ADSs may cause us to be considered a PFIC in the current or any subsequent year.

If we were a PFIC in any taxable year that you held the H Shares or ADSs, you generally would be subject to special rules with respect to “excess distributions” made by us on the H Shares or ADSs and with respect to gain from your disposition of the H Shares or ADSs. An “excess distribution” generally is defined as the excess of the distributions you receive with respect to the H Shares or ADSs in any taxable year over 125% of the average annual distributions you have received from us during the shorter of the three preceding years, or your holding period for the H Shares or ADSs. Generally, you would be required to allocate any excess distribution or gain from the disposition of the H Shares or ADSs ratably over your holding period for the H Shares or ADSs. The portion of the excess distribution or gain allocated to a prior taxable year, other than a year prior to the first year in which we became a PFIC, would be taxed at the highest U.S. federal income tax rate on ordinary income in effect for such taxable year, and you would be subject to an interest charge on the resulting tax liability, determined as if the tax liability had been due with respect to such particular taxable years. The portion of the excess distribution or gain that is not allocated to prior taxable years, together with the portion allocated to the years prior to the first year in which we became a PFIC, would be included in your gross income for the taxable year of the excess distribution or disposition and taxed as ordinary income. If we were a PFIC in any year during a U.S. Holder’s holding period, we would generally be treated as a PFIC for each subsequent year absent a “purging” election by the U.S. Holder.

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These adverse tax consequences may be avoided if the U.S. Holder is eligible to and does elect to annually mark-to-market the H Shares or ADSs. If a U.S. Holder makes a mark-to-market election, such holder will generally include as ordinary income the excess, if any, of the fair market value of the H Shares or ADSs at the end of each taxable year over their adjusted basis, and will be permitted an ordinary loss in respect of the excess, if any, of the adjusted basis of the H Shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of income previously included as a result of the mark-to-market election). Any gain recognized on the sale or other disposition of the H Shares or ADSs will be treated as ordinary income. The mark-to-market election is available only for “marketable stock,” which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter on a qualified exchange or other market, as defined in the applicable Treasury regulations. The ADSs should qualify as “marketable stock” because the ADSs are listed on the New York Stock Exchange. However, the stock of any of our subsidiaries that were PFICs would not be eligible for the mark-to-market election.

A U.S. Holder’s adjusted tax basis in the H Shares or ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If a U.S. Holder makes a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years, unless the H Shares or ADSs are no longer regularly traded on a qualified exchange or the IRS consents to the revocation of the election. U.S. Holders are urged to consult their tax advisors about the availability of the mark-to-market election, and whether making the election would be advisable in their particular circumstances.

Alternatively, a timely election to treat us as a qualified electing fund could be made to avoid the foregoing rules with respect to excess distributions and dispositions. You should be aware, however, that if we become a PFIC, we do not intend to satisfy record keeping requirements that would permit you to make a qualified electing fund election.

If we were regarded as a PFIC, a U.S. Holder of H Shares or ADSs generally would be required to file an information return on IRS Form 8621 for any year in which the holder received a direct or indirect distribution with respect to the H Shares or ADSs, recognized gain on a direct or indirect disposition of the H Shares or ADSs, or made an election with respect to the H Shares or ADSs, reporting distributions received and gains realized with respect to the H Shares or ADSs. In addition, if we were regarded as a PFIC, a U.S. Holder would be required to file an annual information return (also on IRS Form 8621) relating to the holder’s ownership of the shares or ADSs. This requirement would be in addition to other reporting requirements applicable to ownership in a PFIC.

We encourage you to consult your own tax advisor concerning the U.S. federal income tax consequences of holding the H Shares or ADSs that would arise if we were considered a PFIC.

Backup Withholding and Information Reporting

In general, information reporting requirements will apply to dividends in respect of the H Shares or ADSs or the proceeds of the sale, exchange, or redemption of the H Shares or ADSs paid within the United States, and in some cases, outside of the United States, other than to various exempt recipients, including corporations. In addition, you may, under some circumstances, be subject to “backup withholding” with respect to dividends paid on the H Shares or ADSs or the proceeds of any sale, exchange or transfer of the H Shares or ADSs, unless you:

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are a corporation or fall within various other exempt categories, and, when required, demonstrate this fact; or

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provide a correct taxpayer identification number on a properly completed IRS Form W-9 or a substitute form, certifying that you are exempt from backup withholding and otherwise comply with applicable requirements of the backup withholding rules; or

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provide a properly completed IRS Form W-8BEN, certifying your status as a non-U.S. Holder.

Any amount withheld under the backup withholding rules generally will be creditable against your U.S. federal income tax liability or may be refunded to the extent they exceed such liability provided that you furnish the required information to the IRS in a timely manner. If you do not provide a correct taxpayer identification number you may be subject to penalties imposed by the IRS.

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Certain U.S. Holders may be required to report information with respect to such holder’s interest in “specified foreign financial assets” (as defined in Section 6038D of the Code), including stock of a non-U.S. corporation that is not held in an account maintained by certain financial institutions, if the aggregate value of all such assets exceeds certain dollar thresholds. Persons who are required to report specified foreign financial assets and fail to do so may be subject to substantial penalties. U.S. Holders are urged to consult their own tax advisors regarding the foreign financial asset reporting obligations and their possible application to the holding of H Shares or ADSs.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

You may read and copy documents referred to in this Annual Report on Form 20-F that have been filed with the Securities and Exchange Commission at its public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC.

As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.

The SEC allows us to “incorporate by reference” the information we file with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this Annual Report on Form 20-F.

l. Subsidiary Information

For a listing of our significant subsidiaries, see “Item 4. Information on the Company — History and Development of the Company”.

Item 11. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our debts include both fixed-rate and variable-rate long-term loans and other loans. As a result, we are subject to the market risk of fluctuation of interest rates which may affect the estimated fair value of our debt liabilities or result in losses in cash flow. We use interest rate swaps to reduce risks related to changes in market interest rates. As of December 31, 2017, the notional amount of our outstanding interest rate swap agreements was approximately US$1,420 million. The net fair value of the outstanding interest rate swap agreements gave rise to an asset of approximately RMB137 million. These interest rate swap agreements will expire between 2018 and 2025. If the interest rate had been 25 basis points higher with all other variables held constant, interest expenses on our floating rate instruments would have increased by RMB140 million in 2016 and RMB142 million in 2017.

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Foreign Currency Exchange Rate Risk

Although we derive most of our income from China in Renminbi, our financial lease obligations as well as certain bank loans are denominated in U.S. dollars and Renminbi. Pursuant to current foreign exchange regulations in China, we may retain our foreign currency earnings generated from ticket sales made in our overseas offices subject to the approval of SAFE. We use forward contracts to reduce risks related to changes in currency exchange rates in respect of ticket sales and expenses denominated in foreign currencies. As of December 31, 2017, the notional amount of the outstanding currency forward contracts was approximately US$829 million, which will expire in 2018.

Pursuant to IFRSs, our monetary assets and liabilities denominated in foreign currencies are required to be translated into Renminbi at year-end, at exchange rates announced by the PBOC. Transactions in currencies other than the Renminbi during the year are converted into Renminbi at the applicable rates of exchange prevailing at the dates of the transaction. Transaction gains and losses are recognized in our profit or loss account. In 2016 and 2017, we had foreign exchange losses of RMB3,543 million and foreign exchange gains of RMB2,001 million, respectively. Any fluctuation of the exchange rates between Renminbi and foreign currencies may materially and adversely affect our financial condition and results of operations. Following the measures introduced by the PRC government in July 2005 to reform the Renminbi exchange rate regime, the Renminbi has appreciated significantly against certain foreign currencies, including the U.S. dollar and Japanese yen. The following table shows the effect on our profit and loss account as a result of the impact on our non-Renminbi denominated monetary assets and liabilities as of December 31, 2017 as a consequence of a fluctuation in value of the following major foreign currencies.


	Profit and Loss Account
	(Decrease)/Increase
U.S. dollar depreciates by 1%		260
Japanese yen depreciates by 1%		1
Euro depreciates by 1%		36
KRW depreciates by 1%		7

Fuel Price Fluctuation Risk

Our earnings are affected by changes in the price and availability of jet fuel. Our results of operations may be significantly affected by fluctuations in fuel prices which is a significant expense for our Group. If the average price of jet fuel had increased or decreased by 5%, jet fuel costs of our Group would have increased or decreased by approximately RMB1,257 million. The sensitivity analysis of jet fuel price risk is disclosed in Note 40(b) to the consolidated financial statements. In 2016 and 2017, we have not conducted aviation fuel hedging activities.

Item 12. Description of Securities Other than Equity Securities

A. Debt Securities

Not applicable.

B. Warrants and Rights

Not applicable.

C. Other Securities

Not applicable.

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D. American Depositary Shares

Our ADSs, each representing 50 H shares, are traded on the New York Stock Exchange under the symbol “CEA.” The ADSs are evidenced by American Depositary Receipts, or ADRs, issued by BNYM, as depositary under the Deposit Agreement, dated as of February 5, 1997, among the Company, BNYM and holders and beneficial owners of ADSs. BNYM’s principle executive office is at 1 Wall Street, Manhattan, New York City, New York, U.S. ADS holders are required to pay the following service fees to BNYM:


Service		Fees (in U.S. dollars)
Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property		US$5.00 (or less) per ADSs (or portion of 100 ADSs)

Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates		Cancellation fees

Any cash distribution to ADS registered holders		N/A

Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS registered holders		A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs

Depositary services		N/A

Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares		Registration or transfer fees

Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)		Expenses of the depositary

Converting foreign currency to U.S. dollars		Foreign exchange fees

As necessary		Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes

As necessary		Any charges incurred by the depositary or its agents for servicing the deposited securities

For the past annual period, from January 1, 2017 to December 31, 2017, the Company received from the depositary an aggregate of US$52,217.16 for continuing stock exchange annual listing fees and reimbursement fees, and waived standard out-of-pocket maintenance costs for the ADRs (consisting of administrative expenses) of US$131,191.22.

BNYM, as depositary, has agreed to reimburse the Company for expenses incurred in the future in relation to the establishment and maintenance of the ADS program, which include standard out-of-pocket expenses such as postage and envelopes for mailing annual and interim financial reports and all related administrative and documentary expenses. BNYM has agreed to reimburse the Company annually for certain investor relationship programs and promotional activities. There are limits as to the amount of reimbursable expenses and this amount is not necessarily commensurate with the amount of fees BNYM collects from ADS investors. BNYM collects fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal. BNYM collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay fees. BNYM may also collect its annual fee by deducting cash distributions or by directly billing investors, or by charging the book-entry system accounts of participants acting for investors.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

None.

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Item 14. Material Modifications to the Rights of Security Holders and Use Of Proceeds

On August 10, 2010, we effected an ADS split whereby each ADS now represents 50 H shares. There was no change to the rights and preferences of the underlying H shares.

Item 15. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our President and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period covered by this Annual Report. Our management, with the participation of President and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures, have concluded that as of the end of the period covered by this Form 20-F, our disclosure controls and procedures were effective to ensure that material information required to be disclosed in the reports that we file and furnish under Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and regulations.

Disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information required to be disclosed by us in the reports that we file or submit under Exchange Act is accumulated and communicated to our management, including our President and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) and has designed internal control procedures over financial reporting or caused internal control procedures over financial reporting to be designed under our supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, as applicable. Under the supervision and with the participation of our President and our Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017 based upon the criteria in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)(the COSO criteria). Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2017 in providing reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRSs.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Attestation Report of the Registered Public Accounting Firm

The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Ernst & Young Hua Ming LLP, an independent registered public accounting firm in Shanghai, the PRC, as stated in their report which is included herein.

Changes in Internal Control over Financial Reporting

During 2017, there have been no changes in our internal control over financial reporting that occurred during the fiscal year covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Item 16A. Audit Committee Financial Expert

Our Board of Directors has determined that Mr. Li Ruoshan, the chairman of our audit committee, is an independent financial expert serving on our audit committee, given his experience in the academic aspects of accounting and notable achievements in accounting education and academic research. Mr. Li Ruoshan is independent of the Board of Directors, senior management, supervisors or substantial shareholders of our Company.

Item 16B. Code of Ethics

We have adopted a code of ethics that applies to our Directors, supervisors, President, Chief Financial Officer and other senior managers of our Company. We have filed this code of ethics as Exhibit 11.1 to this annual report (which is incorporated by reference). A copy of our code of ethics will be provided to any person free of charge upon written request to Wang Jian, Secretary Office of the Board of Directors, China Eastern Airlines Corporation Limited at Kong Gang San Road, Number 92, Shanghai 200335, the People’s Republic of China.

Item 16C. Principal Accountant Fees and Services

The following table sets forth the aggregate audit fees, audit-related fees and tax fees of our principal accountants, Ernst & Young for the year ended December 31, 2016, and Ernst & Young Hua Ming LLP for the year ended December 31, 2017, and all other fees billed for products and services provided by our principal accountants other than the audit fees and audit-related fees and tax fees:


	Audit Fees		Audit-Related Fees		Tax Fees		All Other Fees
	(RMB)		(RMB)		(RMB)		(RMB)
2016		17,790,000		460,000		101,000		—
2017		17,250,000		1,380,000		121,881		—

Before our principal accountants were engaged by our Company or our subsidiaries to render audit or non-audit services, our audit committee approved the engagements.

Audit Fees

Audit fees primarily consist of fees for the audits of the Company’s financial statements prepared under both of IFRSs & PRC Accounting Standards for Business Enterprises as of and for the years ended December 31, 2016 and 2017.

Audit-Related Fees

Audit-Related fees for the year ended December 31, 2017 primarily consist of fees for the verification services of revenue regarding the bellyhold space and diagnosis over the IFRS 16.

Audit-Related fees for the year ended December 31, 2016 primarily consist of fees for the verification services of greenhouse gas emissions for airlines in accordance with EU commission regulation 600/2012 on the verification of GHG emissions report and the accreditation of verifiers pursuant to Directive 2003/87/EC.

Item 16D. Exemptions from the Listing Standards for Audit Committees

Not applicable.

124

Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers

On November 9, 2012, we held an extraordinary general meeting to approve, among other things, the proposals for the non-public issuance of A Shares and H Shares to specific placees.

On April 9, 2013, the Company obtained an approval from the CSRC, pursuant to which the CSRC approved the non-public issue by the Company to CEA Holding and CES Finance of no more than 698,865,000 new A Shares. On April 16, 2013, the procedure for registration of the new A Shares with the Shanghai Branch of China Securities Depository & Clearing Co. Ltd. was completed. The 698,865,000 new A Shares under this issue, at an issue price of RMB3.28 per share, are subject to a lock-up period of 36 months from the completion date of the issue and are expected to be listed on April 17, 2016.

The issuance of new H Shares was completed on June 21, 2013. A total of 698,865,000 new H Shares were issued to CES Global at the price of HK$2.32 per share.

Item 16F. Changes in Registrant’s Certifying Accountant

(a) Change of Principal Accountant

On March 30, 2017, the Board of Directors resolved to appoint Ernst & Young Hua Ming LLP as our independent registered public accounting firm, and Ernst & Young was not re-appointed as our independent registered public accounting firm.

The independent audit reports of Ernst & Young on our consolidated financial statements for the two fiscal years ended December 31, 2015 and 2016 did not contain any adverse opinion or a disclaimer of opinion, nor was such report qualified or modified in any way as to any uncertainty, audit scope, or accounting principles.

During the two fiscal years ended December 31, 2015 and 2016 and up to April 27, 2017, there were no disagreements (as that term is used in Item 16F (a)(1)(iv) of Form 20-F and the related instructions to Item 16F) with Ernst & Young on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Ernst & Young, would have caused Ernst & Young to make reference to the subject matter of the disagreements in its reports on the consolidated financial statements during the end of such fiscal years.

During the two fiscal years ended December 31, 2015 and 2016 and up to April 27, 2017, there were no “reportable events” (defined below) requiring disclosure pursuant to Item 16F(a)(1)(v) of Form 20-F. As used herein, the term “reportable event” means any of the items listed in paragraphs (a)(1)(v)(A)-(D) of Item 16F of Form 20-F.

We have provided Ernst & Young with a copy of the disclosures under Item 16F(a) as included herein and have requested that Ernst & Young furnish us with a letter addressed to the SEC stating whether Ernst & Young agrees with the foregoing statements. A copy of the letter dated April 25, 2018, furnished by Ernst & Young in response to that request was filed as Exhibit 15.1 to this Form 20-F.

(b) Engagement of New Principal Accountant

On March 30, 2017, the Board of Directors resolved to appoint Ernst & Young Hua Ming LLP as our independent registered public accounting firm and decided to submit this resolution to the 2016 annual general meeting for consideration and approval. Such resolution was approved by our shareholders at the annual general meeting held on June 28, 2017.

During the fiscal years ended December 31, 2015 and 2016 and up to April 27, 2017, we did not consult, and have not authorized anyone on our behalf to consult Ernst & Young Hua Ming LLP with respect to any matter: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, and neither a written report nor oral advice was provided to us that Ernst & Young Hua Ming LLP concluded was an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a “disagreement” (as that term is used in Item 16F (a)(1)(iv) of Form 20-F and the related instructions to Item 16F) with Ernst & Young or a “reportable event” (as described in Item 16F (a)(1)(v) of Form 20-F).

125

Item 16G. Corporate Governance

The NYSE has imposed a series of corporate governance listing standards for companies listed on the NYSE in Section 303A of its listing rules. However, the NYSE provides that listed companies that are foreign private issuers, subject to certain limitations and conditions, are permitted to follow “home country” practice in lieu of the provisions of Section 303A of the NYSE Listed Company Manual. To qualify for this exemption, a listed foreign private issuer must disclose any significant differences between their corporate governance practices and the requirements of the NYSE corporate governance standards.

As a foreign private issuer, we are subject to more than one set of corporate governance requirements. In the table below, we set out material differences between our corporate governance practices and the NYSE’s corporate governance requirements as set out in Section 303A of the Listed Company Manual:


	NYSE Listed Company Manual Requirements on Corporate Governance	Company’s Practices

Majority independent requirement of the Board of Directors	Section 303A.01 of the Listed Company Manual requires that listed companies must have a majority of independent Directors.	There is no identical corporate governance requirement in the PRC. As a company listed in the PRC, the Company is subject to the requirement under the Independent Director Guidance that at least one-third of the Board of Directors be independent as determined thereunder. The standards for establishing independence set forth under the Independent Director Guidance of the PRC differ, to some extent, from those set forth in the NYSE Listed Company Manual. We currently have four independent directors out of a total of eleven Directors.

Non-management directors must meet at regularly scheduled executive sessions without management	Section 303A.03 of the Listed Company Manual requires non- management directors of each listed company to meet at regularly scheduled executive sessions without management participation.	There is no identical corporate governance requirement in the PRC.

Audit and Risk Management Committee	Sections 303A.06 and 303A.07 of the NYSE Listed Company Manual provides that listed companies must have an audit committee composed entirely of independent directors. In addition, audit committee members must satisfy the independence requirements set forth in Section 303A.02(a)(ii). The factors to be considered for independence include whether the committee member receives any consulting, advisory or other compensatory fees from the company and whether such director is affiliated with the listed company or its subsidiary.	There is no identical corporate governance requirement in the PRC. Under the PRC laws and the applicable listing rules in the PRC, a majority of the members of the audit committee must be independent directors. The Audit and Risk Management Committee of the Company is composed of three members, all of which are independent non-executive Directors.

126


Nominating/Corporate Governance Committee	Section 303A.04 of the Listed Company Manual requires that (i) listed companies must have a nominating/corporate governance committee composed entirely of independent directors and (ii) the nominating/corporate governance committee must have a written charter that addresses the committee’s purposes and responsibilities and an annual performance evaluation of the committee.	The merger of the Nomination Committee and Remuneration and Appraisal Committee into the Nominations and Remuneration Committee was agreed at the ordinary meeting of the Board of Directors held on March 19, 2010. The Nominations and Remuneration Committee currently consists of three members, two of which are independent non-executive directors of the Company. The Nominations and Remuneration Committee is a specialized committee under the Board of Directors. It is responsible for the discussion in regard to nominees, standards and procedures for selecting directors and senior management of the Company and making recommendations; responsible for studying and examining the remuneration policy and solutions of directors and senior management of the Company; responsible for studying the performance appraisal standards for directors and senior management of the Company, conducting appraisals and making recommendation.

Compensation Committee	Section 303A.05 of the Listed Company Manual requires that listed companies must (i) have a compensation committee composed entirely of independent directors and (ii) the compensation committee must have a written charter that addresses the committee’s purposes and responsibilities and an annual performance evaluation of the committee.	We have established a Nominations and Remuneration Committee. The merger of the Nomination Committee and Remuneration and Appraisal Committee into the Nominations and Remuneration Committee was agreed at the ordinary meeting of the Board of Directors held on March 19, 2010. The Nominations and Remuneration Committee currently consists of three members, two of which are independent nonexecutive directors of the Company.

Code of Business Conduct and Ethics	Section 303A.10 requires a listed company to adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers from the code for directors or executive officers.	As required under the Sarbanes-Oxley Act of 2002, the Company has adopted a code of ethics that is applicable to the Company’s Directors, Supervisors, President, Chief Financial Officer and other senior managers.

In addition, we have posted a description of such differences under the section entitled “Report of Directors” of our 2017 Hong Kong Annual Report, which can be accessed through the following link:

http://www.hkexnews.hk/listedco/listconews/SEHK/2018/0423/LTN201804231301.pdf

Item 16H. Mine Safety Disclosures

Not applicable.

127

PART III

Item 17. Financial Statements

We have elected to provide the financial statements and related information specified in Item 18 in lieu of Item 17.

Item 18. Financial Statements

Reference is made to pages F-1 to F-86.

128

Item 19. Exhibits

(a) See Item 18 for a list of the financial statements filed as part of this Annual Report.

(b) Exhibits to this Annual Report:

Exhibit Index


Exhibits		Description

1.1		Articles of Association as amended on February 8, 2018 (English translation) (Furnished to the Securities and Exchange Commission on our Form 6-K as filed on February 9, 2018).**

2.1		Specimen Certificate for the H Shares.

2.2		Form of Deposit Agreement among the Registrant, The Bank of New York, as depositary, and Owners and Beneficial Owners from time to time of American Depositary Receipts (Filed as FORM OF DEPOSIT AGREEMENT on our Form F-6 as filed on July 26, 2010).**

4.1		Aircraft Sale and Purchase Agreement relating to the disposal of eight Bombardier CRJ-200 Aircraft and ten Embraer ERJ-145 Aircraft, dated November 23, 2012, among our Company, Airbus SAS and other parties (Filed as Exhibit 4.27 to our Form 20-F as filed on April 24, 2013)./*

4.2		Amendment No. 2 to the A 320 Family Purchase Agreement dated December 30, 2010, dated November 23, 2012, between our Company and Airbus SAS (Filed as Exhibit 4.28 to our Form 20-F as filed on April 24, 2013)./*

4.3		Acquisition Agreement for Used Aircraft relating to five Airbus Model A340-642 Aircraft, dated April 27, 2012, between our Company and Boeing Aircraft Holding Company (Filed as Exhibit 4.29 to our Form 20-F as filed on April 24, 2013)./*

4.4		Purchase Agreement Number PA-03746 relating to Boeing Model 777-300ER Aircraft, dated April 27, 2012, between our Company and the Boeing Company (Filed as Exhibit 4.30 to our Form 20-F as filed on April 24, 2013)./*

4.5		Purchase Agreement Number PA-4076 relating to Boeing Model 737-8 Aircraft, dated June 13, 2014, between our Company and the Boeing Company (Filed as Exhibit 4.5 to our Form 20-F as filed on April 25, 2015)./*

4.6		Purchase Agreement Number PA-4077 relating to Boeing Model 737-800 Aircraft, dated June 13, 2014, between our Company and the Boeing Company (Filed as Exhibit 4.6 to our Form 20-F as filed on April 25, 2015)./*

4.7		Purchase Agreement relating to Airbus A320NEO Aircraft, dated February 28, 2014, between our Company and Airbus SAS (Filed as Exhibit 4.7 to our Form 20-F as filed on April 25, 2015)./*

4.8		Supplemental Agreement No.1 to Purchase Agreement Number PA-4077 relating to Boeing Model 737-800 Aircraft, dated July 9, 2015, between our Company and the Boeing Company (Filed as Exhibit 4.8 to our Form 20-F as filed on April 25, 2016)./*

8.1		List of Subsidiaries (as of December 31, 2017).

11.1		Code of Ethics (English translation) (Filed as Exhibit 11.1 to our Form 20-F as filed on June 24, 2008).**

12.1		Certification of the President pursuant to Rule 13a-14(a).

12.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).

13.1		Certification of the President pursuant to Rule 13a-14(b).

13.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(b).

15.1		Letter from Ernst & Young with respect to the disclosures under Item 16F(a).

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

129


Exhibits		Description

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

Note:

*	Portions of this document have been omitted pursuant to a confidential treatment request, and the full, unredacted document has been separately submitted to the Securities and Exchange Commission with a confidential treatment request.

**	Incorporated by reference.

130

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.

CHINA EASTERN AIRLINES CORPORATION LIMITED


By:		/s/ Liu Shaoyong
		Name: Liu Shaoyong
		Title: Chairman of the Board of Directors

Date: April 25, 2018

Audited Financial Statements

CHINA EASTERN AIRLINES CORPORATION LIMITED

(Established in the People’s Republic of China with limited liability)

December 31, 2017, 2016 and 2015

F-1

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of China Eastern Airlines Corporation Limited

Opinion on the Financial Statements

We have audited the accompanying consolidated statement of financial position of China Eastern Airlines Corporation Limited (the “Company”) as of December 31, 2017, and the related consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated April 25, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young Hua Ming LLP

We have served as the Company’s auditor since 2013.

Shanghai, the People’s Republic of China

April 25, 2018

F-2

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of China Eastern Airlines Corporation Limited

Opinion on Internal Control over Financial Reporting

We have audited China Eastern Airlines Corporation Limited’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, China Eastern Airlines Corporation Limited maintained (the “Company”), in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of financial position of the Company as of December 31, 2017, the related consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for each of the year ended December 31, 2017, and the related notes and our report dated April 25, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young Hua Ming LLP

Shanghai, the People’s Republic of China

April 25, 2018

F-3

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of China Eastern Airlines Corporation Limited

We have audited the accompanying consolidated statement of financial position of China Eastern Airlines Corporation Limited (the “Company”) as of December 31, 2016, and the related consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for each of the two years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2016, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2016, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

/s/ Ernst & Young

Hong Kong

April 27, 2017

F-4

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

For the years ended December 31, 2017, 2016 and 2015

(Amounts in millions except for per share data)


			2017			2016			2015
	Notes		*RMB million*			*RMB million*			*RMB million*
Revenues		5		102,475			98,904			93,969
Other operating income and gains		6		7,481			5,469			5,269

				109,956			104,373			99,238

Operating expenses
Aircraft fuel				(25,131	)		(19,626	)		(20,312	)
Take-off and landing charges				(13,254	)		(12,279	)		(10,851	)
Depreciation and amortization				(13,969	)		(12,154	)		(10,471	)
Wages, salaries and benefits		9		(20,320	)		(18,145	)		(16,459	)
Aircraft maintenance				(5,346	)		(4,960	)		(4,304	)
Impairment charges		10		(491	)		(29	)		(228	)
Food and beverages				(3,090	)		(2,862	)		(2,469	)
Aircraft operating lease rentals				(4,318	)		(4,779	)		(4,254	)
Other operating lease rentals				(836	)		(868	)		(812	)
Selling and marketing expenses				(3,294	)		(3,133	)		(3,651	)
Civil aviation development fund				(2,080	)		(1,945	)		(1,826	)
Ground services and other expenses				(3,248	)		(5,058	)		(5,479	)
(Loss)/gain on fair value changes of derivative financial instruments		8		(311	)		2			6
Indirect operating expenses				(4,837	)		(6,051	)		(5,503	)

Total operating expenses				(100,525	)		(91,887	)		(86,613	)

Operating profit		11		9,431			12,486			12,625
Share of results of associates		22		202			148			126
Share of results of joint ventures		23		49			39			26
Finance income		12		2,112			96			66
Finance costs		13		(3,184	)		(6,272	)		(7,176	)

Profit before income tax				8,610			6,497			5,667
Income tax expense		14		(1,800	)		(1,542	)		(624	)

Profit for the year				6,810			4,955			5,043

Other comprehensive income for the year
Other comprehensive income to be reclassified to profit or loss in subsequent periods
Cash flow hedges, net of tax		39		35			107			10
Fair value changes of available-for-sale investments, net of tax				115			40			87
Fair value changes of available-for-sale investments held by an associate, net of tax		22		10			(1	)		7

Net other comprehensive income to be reclassified to profit or loss in subsequent periods				160			146			104

Other comprehensive income not to be reclassified to profit or loss in subsequent periods
Actuarial gains/(losses) on the post-retirement benefit obligations, net of tax		37		124			(410	)		196

Net other comprehensive income not to be reclassified to profit or loss in subsequent periods				124			(410	)		196

Other comprehensive income, net of tax				284			(264	)		300

Total comprehensive income for the year				7,094			4,691			5,343

F-5

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

For the years ended December 31, 2017, 2016 and 2015

(Amounts in millions except for per share data)


			2017		2016		2015
	Note		*RMB million*		*RMB million*		*RMB million*
Profit attributable to:
Equity holders of the Company				6,342		4,498		4,537
Non-controlling interests				468		457		506

Profit for the year				6,810		4,955		5,043

Total comprehensive income attributable to:
Equity holders of the Company				6,619		4,237		4,834
Non-controlling interests				475		454		509

Total comprehensive income for the year				7,094		4,691		5,343

Earnings per share attributable to the equity holders of the Company during the year
– Basic and diluted (RMB)		15		0.44		0.33		0.35

F-6

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As of December 31, 2017 and 2016

(Amounts in millions except for per share data)


			December 31			December 31
			2017			2016
	Notes		*RMB million*			*RMB million*
Non-current assets
Intangible assets		17		11,596			11,624
Property, plant and equipment		18		166,856			153,180
Investment properties		19		302			321
Prepayments for land use right		20		1,717			2,064
Advanced payments on acquisition of aircraft		21		24,752			23,357
Investments in associates		22		1,654			1,536
Investments in joint ventures		23		557			524
Available-for-sale investments		24		800			645
Other non-current assets		25		2,927			2,969
Deferred tax assets		38		122			79
Derivative financial instruments		39		151			137

				211,434			196,436

Current assets
Flight equipment spare parts		26		2,185			2,248
Trade and notes receivables		27		2,124			2,660
Prepayments and other receivables		28		9,314			9,231
Derivative financial instruments		39		—			11
Restricted bank deposits and short-term bank deposits		29		51			43
Cash and cash equivalents		30		4,605			1,695
Assets of a disposal group classified as held for sale		16		14			—

				18,293			15,888

Current liabilities
Sales in advance of carriage				7,043			7,677
Trade and bills payables		31		3,184			3,376
Other payables and accruals		32		19,864			20,250
Current portion of obligations under finance leases		33		9,241			6,447
Current portion of borrowings		34		39,090			28,842
Income tax payable				593			304
Current portion of provision for return condition checks for aircraft under operating leases		35		981			1,175
Derivative financial instruments		39		324			11
Liabilities directly associated with the assets classified as held for sale		16		8			—

				80,328			68,082

Net current liabilities				(62,035	)		(52,194	)

Total assets less current liabilities				149,399			144,242

F-7

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As of December 31, 2017 and 2016

(Amounts in millions except for per share data)


			December 31		December 31
			2017		2016
	Notes		*RMB million*		*RMB million*
Non-current liabilities
Obligations under finance leases		33		57,627		54,594
Borrowings		34		24,711		27,890
Provision for return condition checks for aircraft under operating leases		35		2,038		2,495
Other long-term liabilities		36		3,724		3,874
Post-retirement benefit obligations		37		2,502		2,890
Deferred tax liabilities		38		18		86
Derivative financial instruments		39		1		47

				90,621		91,876

Net assets				58,778		52,366

Equity
Equity attributable to the equity holders of the Company
– Share capital		41		14,467		14,467
– Reserves		42		40,893		34,983

				55,360		49,450

Non-controlling interests				3,418		2,916

Total equity				58,778		52,366

F-8

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the years ended December 31, 2017, 2016 and 2015

(Amounts in millions except for per share data)


	Attributable to equity holders of the Company
	Share		Other			Retained						Non-controlling			Total
	capital		reserves			profits			Subtotal			interests			equity
	*RMB million*		*RMB million*			*RMB million*			*RMB million*			*RMB million*			*RMB million*
Balance at January 1 2015		12,674		16,485			815			29,974			1,797			31,771
Profit for the year		—		—			4,537			4,537			506			5,043
Other comprehensive income		—		297			—			297			3			300
Total comprehensive income for the year		—		297			4,537			4,834			509			5,343

Issue of shares		466		2,389			—			2,855			—			2,855
Acquisition of non-controlling interests		—		(252	)		—			(252	)		252			—
Dividends paid to non-controlling interests		—		—			—			—			(38	)		(38	)
Transfer from retained profits		—		184			(184	)		—			—			—

Balance at December 31 2015		13,140		19,103	*		5,168	*		37,411			2,520			39,931

Profit for the year		—		—			4,498			4,498			457			4,955
Other comprehensive income		—		(261	)		—			(261	)		(3	)		(264	)

Total comprehensive income for the year		—		(261	)		4,498			4,237			454			4,691
Issue of shares		1,327		7,213			—			8,540			—			8,540
Interim 2016 dividend		—		—			(738	)		(738	)		—			(738	)
Dividends paid to non-controlling interests		—		—			—			—			(58	)		(58	)
Transfer from retained profits		—		144			(144	)		—			—			—

Balance at December 31 2016		14,467		26,199	*		8,784	*		49,450			2,916			52,366

Profit for the year		—		—			6,342			6,342			468			6,810
Other comprehensive income		—		277			—			277			7			284

Total comprehensive income for the year		—		277			6,342			6,619			475			7,094
Final 2016 dividend		—		—			(709	)		(709	)		—			(709	)
Disposal of a subsidiary (note 43)		—		—			—			—			87			87
Dividends paid to non-controlling interests		—		—			—			—			(60	)		(60	)
Transfer from retained profits		—		212			(212	)		—			—			—

Balance at December 31 2017		14,467		26,688	*		14,205	*		55,360			3,418			58,778

*	These reserve accounts comprise the consolidated reserves of RMB40,893 million (2016: RMB34,983 million, 2015: RMB24,271 million) in the consolidated statement of financial position.

F-9

CONSOLIDATED STATEMENT OF CASH FLOWS

For the years ended December 31, 2017, 2016 and 2015

(Amounts in millions except for per share data)


			2017			2016			2015
	Notes		*RMB million*			*RMB million*			*RMB million*
Cash flows from operating activities
Cash generated from operations		45(a)		21,108			26,154			25,535
Income tax paid				(1,536	)		(1,261	)		(1,210	)

Net cash flows from operating activities				19,572			24,893			24,325

Cash flows from investing activities
Additions to property, plant and equipment				(7,796	)		(21,533	)		(8,609	)
Additions to prepayments for land use right				(8	)		(86	)		(82	)
Additions to intangible assets		17		(126	)		(232	)		(109	)
Advanced payments on acquisition of aircraft				(16,759	)		(16,864	)		(24,772	)
Advanced from disposal of prepayments for land use right				269			—			—
Proceeds from disposal of assets classified as held for sale				—			518			4,227
Proceeds from disposal of available for sale investments				5			—			35
Proceeds from disposal of property, plant and equipment				1,043			690			1,294
Proceeds from disposal of prepayments for land use right				3			56			47
Proceeds from disposal of intangible asets				1			—			—
Decrease/(increase) in restricted and short-term bank deposits				3			(1	)		3
Increase in shareholding in associates				(64	)		—			(413	)
Proceeds from disposal of an associate				12			12			—
Interest received				111			96			66
Dividends received				97			164			92
Proceeds from disposal of interest in a subsidiary				1,897			—			49
Repayment of loans from an associate				—			—			372

Net cash flows used in investing activities				(21,312	)		(37,180	)		(27,800	)

Cash flows from financing activities
Proceeds from issue of shares				—			8,540			2,855
Proceeds from draw-down of short-term bank loans				33,629			39,159			26,916
Proceeds from issuance of short-term debentures				29,000			47,500			21,500
Proceeds from issuance of long-term bonds				2,450			12,526			—
Proceeds from draw-down of long-term bank loans				—			7,518			11,643
Proceeds from draw-down of other financing activities				12,320			19,027			12,929
Repayments of short-term debentures				(36,000	)		(46,000	)		(10,000	)
Repayments of short-term bank loans				(18,383	)		(36,728	)		(34,767	)
Repayments of long-term bank loans				(3,246	)		(28,803	)		(10,540	)
Repayments of long-term bonds				—			(5,497	)		—
Principal repayments of finance lease obligations				(10,587	)		(8,606	)		(6,350	)
Interest paid				(3,706	)		(3,206	)		(3,065	)
Dividends paid				(709	)		(738	)		—
Dividends paid to non-controlling interests of subsidiaries				(60	)		(58	)		(38	)

Net cash flows from financing activities				4,708			4,634			11,083

Net increase/(decrease) in cash and cash equivalents				2,968			(7,653	)		7,608
Cash and cash equivalents at beginning of year				1,695			9,080			1,355
Effect of foreign exchange rate changes				(47	)		268			117

Cash and cash equivalents at December 31		30		4,616			1,695			9,080

F-10

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

1.	CORPORATE AND GROUP INFORMATION

China Eastern Airlines Corporation Limited (the “Company”), a joint stock company limited by shares, was established in the People’s Republic of China (the “PRC”) on 14 April 1995. The address of the Company’s registered office is 66 Airport Street, Pudong International Airport, Shanghai, the PRC. The Company and its subsidiaries (together, the “Group”) are principally engaged in the operation of civil aviation, including the provision of passenger, cargo, mail delivery, tour operations and other extended transportation services.

In the opinion of the directors, the holding company and ultimate holding company of the Company is China Eastern Air Holding Company Limited (“CEA Holding”), formerly named as China Eastern Air Holding Company, a state-owned enterprise established in the PRC.

The A shares, H shares and American Depositary Shares are listed on the Shanghai Stock Exchange, The Stock Exchange of Hong Kong Limited and The New York Stock Exchange, respectively.

These financial statements were approved and authorized for issue by the Company’s Board of Directors (the “Board”) on 25 April, 2018.

Information about subsidiaries

Particulars of the Company’s principal subsidiaries at the end of the reporting period are as follows:


Name	Place and date of incorporation/ registration and	Issued ordinary/ registered share		Percentage of equity attributable to the Company					Principal activities
	place of business	capital		Direct			Indirect
		million
China Eastern Airlines Jiangsu Co., Ltd. (“CEA Jiangsu”)	PRC/Mainland China 7 April 1993	RMB	2,000		62.56	%		—	Provision of airline services
China Eastern Airlines Wuhan Co., Ltd. (“CEA Wuhan”)	PRC/Mainland China 16 August 2002	RMB	1,750		60	%		—	Provision of airline services
Shanghai Eastern Flight Training Co., Ltd. (“Shanghai Flight Training”)	PRC/Mainland China 18 December 1995	RMB	694		100	%		—	Provision of flight training services
Shanghai Airlines Co., Ltd. (“Shanghai Airlines”)	PRC/Mainland China 16 March 2010	RMB	500		100	%		—	Provision of airline services
China Eastern Airlines Technology Co., Ltd. (“Eastern Technology”)	PRC/Mainland China 19 November 2014	RMB	4,300		100	%		—	Provision of airline maintenance services
China Eastern Business Jet Co., Ltd.	PRC/Mainland China 27 September 2008	RMB	50		100	%		—	Provision of airlines consultation services
China Eastern Airlines Yunnan Co., Ltd. (“CEA Yunnan”)	PRC/Mainland China 2 August 2011	RMB	3,662		90.36	%		—	Provision of airline services
Eastern Air Overseas (Hong Kong) Co., Ltd. (“Eastern Air Overseas”)	Hong Kong 10 June 2011	HKD	280		100	%		—	Provision of import and export, investment, leasing and consultation services
China United Airlines Co., Ltd. (“China United Airlines”)	PRC/Mainland China 21 September 1984	RMB	1,320		100	%		—	Provision of airline services
Eastern Airlines Hotel Co., Ltd.	PRC/Mainland China 18 March 1998	RMB	70		100	%		—	Provision of hotel services primarily to crew
Shanghai Airlines Tours International (Group) Co., Ltd. (“Shanghai Airlines Tours”)	PRC/Mainland China 29 August 1992	RMB	50		100	%		—	Tour operations, travel and air ticketing agency and transportation
China Eastern Airlines Application Development Center Co., Ltd. (“Application Development Center”)	PRC/Mainland China 21 November 2011	RMB	498		100	%		—	Provision of research and development of technology and products in the field of aviation
China Eastern Airlines E-Commerce Co., Ltd. (“Eastern E-Commerce”)	PRC/Mainland China 1 December 2014	RMB	50		100	%		—	E-commerce platform and ticket agent

F-11

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

1.	CORPORATE AND GROUP INFORMATION (cont’d)

Information about subsidiaries (cont’d)

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

All of the subsidiaries of the Company listed above are limited liability companies.

2.1	BASIS OF PREPARATION

These financial statements have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (“IASB”) and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention, except for certain available-for-sale investments and derivative financial instruments which have been measured at fair value. Disposal groups held for sale are stated at the lower of their carrying amounts and fair values less costs to sell as further explained in note 3. These financial statements are presented in Renminbi (“RMB”) and all values are rounded to the nearest million except when otherwise indicated.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries. A subsidiary is an entity (including a structured entity), directly or indirectly, controlled by the Company. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee (i.e., existing rights that give the Group the current ability to direct the relevant activities of the investee).

When the Company has, directly or indirectly, less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

(a)

the contractual arrangement with the other vote holders of the investee;

(b)

rights arising from other contractual arrangements; and

(c)

the Group’s voting rights and potential voting rights.

The financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. The results of subsidiaries are consolidated from the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases.

Profit or loss and each component of other comprehensive income are attributed to the equity holders of the Company and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control described above. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.

F-12

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

2.1	BASIS OF PREPARATION (cont’d)

If the Group loses control over a subsidiary, it derecognizes (i) the assets (including goodwill) and liabilities of the subsidiary, (ii) the carrying amount of any non-controlling interest and (iii) the cumulative translation differences recorded in equity; and recognizes (i) the fair value of the consideration received, (ii) the fair value of any investment retained and (iii) any resulting surplus or deficit in profit or loss. The Group’s share of components previously recognized in other comprehensive income is reclassified to profit or loss or retained profits, as appropriate, on the same basis as would be required if the Group had directly disposed of the related assets or liabilities.

Going concern

As at December 31, 2017, the Group’s current liabilities exceeded its current assets by approximately RMB62.04 billion. In preparing the financial statements, the Board conducts a detailed review over the Group’s going concern ability based on the current financial situation. The Board has considered the Group’s available sources of funds as follows:

•

The Group’s expected net cash inflows from operating activities in 2018;

•

Unutilized banking facilities of approximately RMB59.47 billion as at December 31, 2017; and

•

Other available sources of financing from banks and other financial institutions given the Group’s credit history.

The Board considers that the Group will be able to obtain sufficient financing to enable it to operate, as well as to meet its liabilities as and when they become due, and the capital expenditure requirements for the upcoming twelve months. Accordingly, the Board believes that it is appropriate to prepare these financial statements on a going concern basis without including any adjustments that would be required should the Company and the Group fail to continue as a going concern.

2.2	CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES

The Group has adopted the following new and revised IFRSs for the first time for the current year’s financial statements.

Amendments to IAS 7

Amendments to IAS 12

Amendments to IFRS 12

included in Annual

Improvements to IFRSs

2014-2016 Cycle

Disclosure Initiative

Recognition of Deferred Tax Assets for Unrealized Losses

Disclosure of Interests in Other Entities: Clarification of the
Scope of IFRS 12

The nature and the impact of the amendments are described below:

(a)

Amendments to IAS 7 require an entities to provide disclosure that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. Disclosure of the changes in liabilities arising from financing activities is provided in note 45(c) to the financial statements.

(b)

Amendments to IAS 12 clarify that an entity, when assessing whether taxable profits will be available against which it can utilize a deductible temporary difference, needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount. The amendments have had no impact on the financial position or performance of the Group as the Group has no deductible temporary differences or assets that are in the scope of the amendments.

(c)

Amendments to IFRS 12 clarify that the disclosure requirements in IFRS 12, other than those disclosure requirements in paragraphs B10 to B16 of IFRS 12, apply to an entity’s interest in a subsidiary, a joint venture or an associate, or a portion of its interest in a joint venture or an associate that is classified as held for sale or included in a disposal group classified as held for sale. The amendments have had no impact on the Group’s financial statements as the Group’s subsidiary classified as a disposal group held for sale (see note 16) as at 31 December 2017 is a wholly-owned subsidiary and so no additional information is required to be disclosed.

F-13

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

2.3	ISSUED BUT NOT YET EFFECTIVE INTERNATIONAL FINANCIAL REPORTING STANDARDS

The Group has not applied the following new and revised IFRSs, that have been issued but are not yet effective, in these financial statements.


Amendments to IFRS 2		Classification and Measurement of Share-based Payment Transactions¹
Amendments to IFRS 4		Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts¹
IFRS 9		Financial Instruments¹
Amendments to IFRS 9		Prepayment Features with Negative Compensation²
Amendments to IFRS 10 and IAS 28		Sale or Contribution of Assets between an Investor and its Associate or Joint Venture⁴
IFRS 15		Revenue from Contracts with Customers¹
Amendments to IFRS 15		Clarifications to IFRS 15 Revenue from Contracts with Customers¹
IFRS 16		Leases²
IFRS 17		Insurance Contracts³
Amendments to IAS 40		Transfers of Investment Property¹
Amendments to IAS 19		Employee Benefits²
IFRIC 22		Foreign Currency Transactions and Advance Consideration¹
IFRIC 23		Uncertainty over Income Tax Treatments²
Annual Improvements		Amendments to IFRS 1 and IAS 28¹
2014-2016 Cycle
Annual Improvements		Amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23²
2015-2017 Cycle

Effective for annual periods beginning on or after 1 January 2018

Effective for annual periods beginning on or after 1 January 2019

Effective for annual periods beginning on or after 1 January 2021

⁴

No mandatory effective date yet determined but available for adoption

Further information about those IFRSs that are expected to be applicable to the Group is as follows:

The IASB issued amendments to IFRS 2 in June 2016 that address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding a certain amount in order to meet an employee’s tax obligation associated with the share-based payment; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash-settled to equity-settled. The amendments clarify that the approach used to account for vesting conditions when measuring equity-settled share-based payments also applies to cash-settled share-based payments. The amendments introduce an exception so that a share-based payment transaction with net share settlement features for withholding a certain amount in order to meet the employee’s tax obligation is classified in its entirety as an equity-settled share-based payment transaction when certain conditions are met. Furthermore, the amendments clarify that if the terms and conditions of a cash-settled share-based payment transaction are modified, with the result that it becomes an equity-settled share-based payment transaction, the transaction is accounted for as an equity-settled transaction from the date of the modification. On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if they elect to adopt for all three amendments and other criteria are met. The Group will adopt the amendments from 1 January 2018. The amendments are not expected to have any significant impact on the Group’s financial statements.

In July 2014, the IASB issued the final version of IFRS 9, bringing together all phases of the financial instruments project to replace IAS 39 and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment and hedge accounting. The Group will adopt IFRS 9 from 1 January 2018. The Group will not restate comparative information and will recognize any transition adjustments against the opening balance of equity at 1 January 2018. During 2017, the Group has performed a detailed assessment of the impact of the adoption of IFRS 9. The expected impacts relate to the classification and measurement and the impairment requirements and are summarized as follows: .

(a)

Classification and measurement

F-14

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

2.3	ISSUED BUT NOT YET EFFECTIVE INTERNATIONAL FINANCIAL REPORTING STANDARDS (cont’d)

The Group does not expect that the adoption of IFRS 9 will have a significant impact on the classification and measurement of its financial assets. It expects to continue measuring at fair value all financial assets currently held at fair value. The equity shares in non-listed companies and part of the quoted equity shares currently held as available-for-sale with gains and losses recorded in other comprehensive income will, instead, be measured at fair value through profit or loss, which will increase volatility in recorded profit or loss. Other equity interest in a related party currently held as available-for-sale will be measured at fair value through other comprehensive income as the investments are intended to be held for the foreseeable.

Loans as well as trade receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest. The Group analyzed the contractual cash flow characteristics of those instruments and concluded that they meet the criteria for amortized cost measurement under IFRS 9. Therefore, reclassification for these instruments is not required.

(b)

Impairment

IFRS 9 requires an impairment on debt instruments recorded at amortized cost or at fair value through other comprehensive income, lease receivables, loan commitments and financial guarantee contracts that are not accounted for at fair value through profit or loss under IFRS 9, to be recorded based on an expected credit loss model either on a twelve-month basis or a lifetime basis. The Group will apply the simplified approach and record lifetime expected losses that are estimated based on the present values of all cash shortfalls over the remaining life of all of its trade receivables. Furthermore, the Group will apply the general approach and record twelve-month expected credit losses that are estimated based on the possible default events on its other receivables within the next twelve months.

(c)

Hedge accounting

The Group determined that all existing hedge relationships that are currently designated in effective hedging relationships will continue to qualify for hedge accounting under IFRS 9. As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, applying the hedging requirements of IFRS 9 will not have a significant impact on the Group’s financial statements.

Amendments to IFRS 10 and IAS 28 address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture, is recognized in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognized only to the extent of unrelated investors’ interests in the associate or joint venture. The IASB has deferred the effective date of these amendments indefinitely, but an entity that early adopts the amendments must apply them prospectively. The Group will apply these amendments when they become effective.

IFRS 15 was issued in May 2014, and amended in April 2016, and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018. The Group will adopt the standard effective January 1, 2018 using the modified retrospective approach. During 2017, the Group has assessed the impact of the adoption of IFRS 15 and is currently in the process of completing the analysis. The expected impacts arising from the adoption of IFRS 15 on the Group are summarized as follows:

(a)

Frequent flyer programs

F-15

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

2.3	ISSUED BUT NOT YET EFFECTIVE INTERNATIONAL FINANCIAL REPORTING STANDARDS (cont’d)

Prior to the adoption of IFRS 15, the Group uses residual method to allocate a portion of ticket sales to the mileage points issued in connection with the flights and to allocate a portion of sales to the mileage points issued under the co-branded credit card arrangements as deferred revenue, which were valued based on the estimated redemption value. Revenue is recognized when the miles have been redeemed and used or for miles that expire unused at the expiration date. IFRS 15 requires the Group to apply relative stand-alone selling price approach to allocate a portion of sales to the mileage points issued and deferred as frequent flyer programs liabilities. The application of a relative selling price approach is expected to decrease in the frequent flyer program liabilities.

(b)

Change fees

The Group charges customers to make changes to air tickets. The process of changing the customer’s itinerary generally will be regarded a contract modification under IFRS 15 instead of considered as no additional goods or services transferred to the customer in the existing accounting policy. Under IFRS 15, change fees will be recognized in passenger revenue when transportation is provided, while it is currently recognized in other revenue at the time of the ticket is changed.

(c)

Passenger ticket breakage

Ticket breakage is defined as the tickets for which the passenger will not use and will expire unused. Currently, the Group recognizes revenue from the ticket breakage upon expiration of the ticket. Under IFRS 15, the Group is required to estimate the tickets that will expire unused and recognize revenue in proportion to the pattern of rights exercised by customers. Under IFRS 15, the Group will recognize the estimated breakage in proportion to revenue recognized for tickets acquired during the same period using a portfolio based approach.

IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases of ‘low-value’ assets and short-term leases. At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset.

Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. Lessor accounting under IFRS 16 is substantially unchanged from the accounting under IAS 17. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases.

IFRS 16 also requires lessees and lessors to make more extensive disclosures than under IAS 17. IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs. The Group expects to adopt IFRS 16 from 1 January 2019. Management is still assessing the impact on the financial performance and position of the Group resulting from the adoption of IFRS 16 for the annual period beginning on 1 January 2019. As disclosed in note 46(b) to the financial statements, at 31 December 2017, the Group had future minimum lease payments under non-cancellable operating leases in aggregate of approximately RMB20,936 million. Upon adoption of IFRS 16, certain amounts included therein may need to be recognized as new right-of-use assets and lease liabilities. Further analysis, however, will be needed to determine the amount of new rights of use assets and lease liabilities to be recognized, including, but not limited to, any amounts relating to leases of low-value assets and short term leases, other practical expedients and reliefs chosen, and new leases entered into before the date of adoption.

F-16

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

2.3	ISSUED BUT NOT YET EFFECTIVE INTERNATIONAL FINANCIAL REPORTING STANDARDS (cont’d)

Amendments to IAS 40, issued in December 2016, clarify when an entity should transfer property, including property under construction or development, into or out of investment property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in management’s intentions for the use of a property does not provide evidence of a change in use. The amendments should be applied prospectively to the changes in use that occur on or after the beginning of the annual reporting period in which the entity first applies the amendments. An entity should reassess the classification of property held at the date that it first applies the amendments and, if applicable, reclassify property to reflect the conditions that exist at that date. Retrospective application is only permitted if it is possible without the use of hindsight. The Group expects to adopt the amendments prospectively from 1 January 2018. The amendments are not expected to have any significant impact on the Group’s financial statements.

Amendments to IAS 19, issued in February 2018, clarify when a plan amendment, curtailment or settlement occurs for defined benefit plan, any entity must Determine current service cost for the remainder of the period after the plan amendment, curtailment or settlement using the actuarial assumptions used to remeasure the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event. Determine net interest for the remainder of the period after the plan amendment, curtailment or settlement using: (i) the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event; and (ii) the discount rate used to remeasure that net defined benefit liability (asset). The amendments to IAS 19 also clarify that an entity first determines any past service cost, or a gain or loss on settlement, without considering the effect of the asset ceiling. This amount is recognized in profit or loss. An entity then determines the effect of the asset ceiling after the plan amendment, curtailment or settlement. Any change in that effect, excluding amounts included in net interest, is recognized in other comprehensive income. The amendments to IAS 19 must be applied to plan amendments, curtailments or settlements occurring on or after the beginning of the first annual reporting period that begins on or after 1 January 2019. Consequently, entities do not have to revisit plan amendments, curtailments and settlements that occurred in prior periods. The amendments are not expected to have any significant impact on the Group’s financial statements.

IFRIC 22 provides guidance on how to determine the date of the transaction when applying IAS 21 to the situation where an entity receives or pays advance consideration in a foreign currency and recognizes a non-monetary asset or liability. The interpretation clarifies that the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset (such as a prepayment) or non-monetary liability (such as deferred income) arising from the payment or receipt of the advance consideration. If there are multiple payments or receipts in advance of recognizing the related item, the entity must determine the transaction date for each payment or receipt of the advance consideration. Entities may apply the interpretation on a full retrospective basis or on a prospective basis, either from the beginning of the reporting period in which the entity first applies the interpretation or the beginning of the prior reporting period presented as comparative information in the financial statements of the reporting period in which the entity first applies the interpretation. The Group expects to adopt the interpretation prospectively from 1 January 2018. The amendment is not expected to have any significant impact on the Group’s financial statements.

IFRIC 23, issued in June 2017, addresses the accounting for income taxes (current and deferred) when tax treatments involve uncertainty that affects the application of IAS 12 (often referred to as “uncertain tax positions”). The interpretation does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The interpretation specifically addresses (i) whether an entity considers uncertain tax treatments separately; (ii) the assumptions an entity makes about the examination of tax treatments by taxation authorities; (iii) how an entity determines taxable profits or tax losses, tax bases, unused tax losses, unused tax credits and tax rates; and (iv) how an entity considers changes in facts and circumstances. The interpretation is to be applied retrospectively, either fully retrospectively without the use of hindsight or retrospectively with the cumulative effect of application as an adjustment to the opening equity at the date of initial application, without the restatement of comparative information. The Group expects to adopt the interpretation from 1 January 2019. The amendment is not expected to have any significant impact on the Group’s financial statements.

F-17

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Investments in associates and joint ventures

An associate is an entity in which the Group has a long-term interest of generally not less than 20% of the equity voting rights and over which it is in a position to exercise significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.

A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

The Group’s investments in associates and joint ventures are stated in the consolidated statement of financial position at the Group’s share of net assets under the equity method of accounting, less any impairment losses. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

The Group’s share of the post-acquisition results and other comprehensive income of associates and joint ventures is included in the consolidated statement of profit or loss and other comprehensive income. In addition, when there has been a change recognized directly in the equity of the associate or joint venture, the Group recognizes its share of any changes, when applicable, in the consolidated statement of changes in equity. Unrealized gains and losses resulting from transactions between the Group and its associates or joint ventures are eliminated to the extent of the Group’s investments in the associates or joint ventures, except where unrealized losses provide evidence of an impairment of the asset transferred. Goodwill arising from the acquisition of associates or joint ventures is included as part of the Group’s investments in associates or joint ventures.

If an investment in an associate becomes an investment in a joint venture or vice versa, the retained interest is not remeasured. Instead, the investment continues to be accounted for under the equity method. In all other cases, upon loss of significant influence over the associate or joint control over the joint venture, the Group measures and recognizes any retained investment at its fair value. Any difference between the carrying amount of the associate or joint venture upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is recognized in profit or loss.

When an investment in an associate or a joint venture is classified as held for sale, it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (“CODM”). The CODM, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the office of the General Manager that makes strategic decisions.

Foreign currencies

(i)

Functional currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The financial statements are presented in “RMB”, which is the Company’s functional currency.

(ii)

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss, except when deferred in other comprehensive income as qualifying cash flow hedges or qualifying net investment hedges.

F-18

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Foreign currencies (cont’d)

(ii)

Transactions and balances (cont’d)

Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in profit or loss within “finance income” or “finance costs”.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was measured. The gain or loss arising on translation of a non-monetary item measured at fair value is treated in line with the recognition of the gain or loss on change in fair value of the item (i.e., translation difference on the item whose fair value gain or loss is recognized in other comprehensive income or profit or loss is also recognized in other comprehensive income or profit or loss, respectively).

Revenue recognition and sales in advance of carriage

Revenue is recognized when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following basis:

(i)

Traffic revenues

(ii)

Ground service income and tour operation revenues

Revenues from the provision of ground services, tour, travel services and other travel related services are recognized when the services are rendered.

(iii)

Cargo handling income

Revenues from the provision of cargo handling services are recognized when the services are rendered.

(iv)

Commission income

Commission income represents amounts earned from other carriers in respect of sales made by the Group on their behalf, and is recognized in profit or loss upon ticket sales.

(v)

Other revenue

Revenues from other operating businesses, including income derived from the provision of freight forwarding, are recognized when the services are rendered.

(vi)

Frequent flyer programs

(vii)

Interest income

Interest income is recognized on a time-proportion basis using the effective interest rate method.

F-19

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Government grants

Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. When the grant relates to an expense item, it is recognized as income on a systematic basis over the periods that the costs, which it is intended to compensate are expensed.

Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to profit or loss over the expected useful life of the relevant asset by equal annual instalments.

Maintenance and overhaul costs

In respect of aircraft and engines under operating leases, the Group has obligations to fulfil certain return conditions under the leases. Provision for the estimated cost of these return condition checks is made on a straight-line basis over the term of the leases.

In respect of aircraft and engines owned by the Group or held under finance leases, overhaul costs that meet specific recognition criteria are capitalized as a component of property, plant and equipment and are depreciated over the appropriate maintenance cycles.

All other repairs and maintenance costs are charged to profit or loss as and when incurred.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e., assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalized as part of the cost of those assets. The capitalization of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs capitalized. All other borrowing costs are expensed in the period in which they are incurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

Income tax

Deferred tax liabilities are recognized for all taxable temporary differences, except:

•

F-20

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Income tax (cont’d)

•

Intangible assets

(i)

Goodwill

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill as at 31 December. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units.

(ii)

Computer software costs

(iii)

Others

Deferred pilot recruitment costs

Deferred pilot recruitment costs represent the costs borne by the Group in connection with securing a certain minimum period of employment of pilots and are amortized on a straight-line basis over the anticipated beneficial period of 5 years, starting from the date the pilot joins the Group.

F-21

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Related parties

A party is considered to be related to the Group if:

(a)

the party is a person or a close member of that person’s family and that person

(i)

has control or joint control over the Group;

(ii)

has significant influence over the Group;

(iii)

is a member of the key management personnel of the Group or of a parent of the Group;

(b)

the party is an entity where any of the following conditions applies:

(i)

the entity and the Group are members of the same group;

(ii)

one entity is an associate or joint venture of the other entity (or of a parent, subsidiary or fellow subsidiary of the other entity);

(iii)

the entity and the Group are joint ventures of the same third party;

(iv)

one entity is a joint venture of a third entity and the other entity is an associate of the third entity;

(v)

the entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group and the sponsoring employers of the post-employment benefit plan;

(vi)

the entity is controlled or jointly controlled by a person identified in (a);

(vii)

a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity); and

(viii)

the entity, or any member of a group of which it is a part, provides key management personnel services to the Group or to the parent of the Group.

Property, plant and equipment


Owned and finance leased aircraft and engines			15 to 20 years
Other flight equipment, including rotables			10 years
Buildings			8 to 45 years
Other property, plant and equipment			3 to 20 years

F-22

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Property, plant and equipment (cont’d)

Investment properties

Investment properties are interests in land and buildings (including the leasehold interest under an operating lease for a property which would otherwise meet the definition of an investment property) held to earn rental income and/or for capital appreciation, rather than for use in the production or supply of goods or services or for administrative purposes; or for sale in the ordinary course of business. Such properties are measured initially at cost, including transaction costs. After initial recognition, the Group chooses the cost model to measure all of its investment properties.

Depreciation is calculated on the straight-line basis to write off the cost to its residual value over its estimated useful life. The estimated useful lives are as follows:


Buildings			30 to 35 years

The carrying amounts of investment properties measured using the cost method are reviewed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable.

Any gains or losses on the retirement or disposal of an investment property are recognized in profit or loss in the year of the retirement or disposal.

Impairment of non-financial assets

Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than inventories, construction contract assets, financial assets, investment properties and non-current assets/a disposal group classified as held for sale), the asset’s recoverable amount is estimated. An asset’s recoverable amount is the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs of disposal, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to profit or loss in the period in which it arises in those expense categories consistent with the function of the impaired asset.

An assessment is made at the end of each reporting period as to whether there is an indication that previously recognized impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognized impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortization) had no impairment loss been recognized for the asset in prior years. A reversal of such an impairment loss is credited to profit or loss in the period in which it arises, unless the asset is carried at a revalued amount, in which case the reversal of the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

F-23

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Non-current assets and disposal groups held for sale

Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered principally through a sales transaction rather than through continuing use. For this to be the case, the asset or disposal group must be available for immediate sale in its present condition subject only to terms that are usual and customary for the sale of such assets or disposal groups and its sale must be highly probable. All assets and liabilities of a subsidiary classified as a disposal group are reclassified as held for sale regardless of whether the Group retains a non-controlling interest in its former subsidiary after the sale.

Non-current assets and disposal groups (other than investment properties and financial assets) classified as held for sale are measured at the lower of their carrying amounts and fair values less costs to sell. Property, plant and equipment and intangible assets classified as held for sale are not depreciated or amortized.

Prepayments for land use right

Prepayments for land use right are initially stated at cost and subsequently recognized on the straight-line basis over the agreed terms.

Advanced payments on acquisition of aircraft

Advanced payments on acquisition of aircraft represent payments to aircraft manufacturers to secure deliveries of aircraft in future years, including attributable borrowing costs, and are included in non-current assets. The balance is transferred to property, plant and equipment upon delivery of the aircraft.

Flight equipment spare parts

Flight equipment spare parts are stated at the lower of cost and net realizable value. Cost is determined using the weighted average method. The cost of flight equipment spare parts comprises the purchase price (net of discounts), freight charges, duty and other miscellaneous charges. Net realizable value is the estimated selling price of the flight equipment spare parts in the ordinary course of business, less applicable selling expenses.

Investments and other financial assets

Initial recognition and measurement

Financial assets are classified, at initial recognition, as financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial investments, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. When financial assets are recognized initially, they are measured at fair value plus transaction costs that are attributable to the acquisition of the financial assets, except in the case of financial assets recorded at fair value through profit or loss.

All regular way purchases and sales of financial assets are recognized on the trade date, that is, the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

Subsequent measurement

The subsequent measurement of financial assets depends on their classification as follows:

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of sale in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments as defined by IAS 39.

F-24

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Investments and other financial assets (cont’d)

Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with positive net changes in fair value presented as other income and gains and negative net changes in fair value presented as finance costs in profit or loss. These net fair value changes do not include any dividends or interest earned on these financial assets, which are recognized in accordance with the policies set out for “Revenue recognition and sales in advance of carriage” above.

Financial assets designated upon initial recognition as at fair value through profit or loss are designated at the date of initial recognition and only if the criteria in IAS 39 are satisfied.

Derivatives embedded in host contracts are accounted for as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contracts and the host contracts are not held for trading or designated as at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognized in profit or loss. Reassessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the fair value through profit or loss category.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such assets are subsequently measured at amortized cost using the effective interest rate method less any allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and includes fees or costs that are an integral part of the effective interest rate. The effective interest rate amortization is included in other operating income and gains in profit or loss. The loss arising from impairment is recognized in profit or loss in finance costs for loans and in impairment charges for receivables.

Available-for-sale financial investments

F-25

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from the Group’s consolidated statement of financial position) when:

•

the rights to receive cash flows from the asset have expired; or

•

the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risk and rewards of ownership of the asset. When it has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the Group continues to recognize the transferred asset to the extent of the Group’s continuing involvement. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Impairment of financial assets

The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. An impairment exists if one or more events that occurred after the initial recognition of the asset have an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial assets carried at amortized cost

For financial assets carried at amortized cost, the Group first assesses whether impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment.

The amount of any impairment loss identified is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition).

The carrying amount of the asset is reduced through the use of an allowance account and the loss is recognized in profit or loss. Interest income continues to be accrued on the reduced carrying amount using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Loans and receivables together with any associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Group.

If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to impairment charges in profit or loss.

F-26

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Impairment of financial assets (cont’d)

Available-for-sale financial investments

For available-for-sale financial investments, the Group assesses at the end of each reporting period whether there is objective evidence that an investment or a group of investments is impaired.

If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortization) and its current fair value, less any impairment loss previously recognized in profit or loss, is removed from other comprehensive income and recognized in profit or loss.

In the case of equity investments classified as available for sale, objective evidence would include a significant or prolonged decline in the fair value of an investment below its cost. “Significant” is evaluated against the original cost of the investment and “prolonged” against the period in which the fair value has been below its original cost. Where there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognized in profit or loss – is removed from other comprehensive income and recognized in profit or loss. Impairment losses on equity instruments classified as available for sale are not reversed through profit or loss. Increases in their fair value after impairment are recognized directly in other comprehensive income.

The determination of what is “significant” or “prolonged” requires judgement. In making this judgement, the Group evaluates, among other factors, the duration or extent to which the fair value of an investment is less than its cost.

Financial liabilities

Initial recognition and measurement

Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs.

The Group’s financial liabilities primarily include trade and other payables, derivative financial instruments and borrowings.

Subsequent measurement

The subsequent measurement of financial liabilities depends on their classification as follows:

Loans and borrowings

After initial recognition, borrowings are subsequently measured at amortized cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the effective interest rate amortization process.

Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate amortization is included in finance costs in profit or loss.

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.

Financial liabilities are classified as held for trading if they are acquired for the purpose of repurchasing in the near term. This category includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognized in profit or loss. The net fair value gain or loss recognized in profit or loss does not include any interest charged on these financial liabilities.

Financial liabilities designated upon initial recognition as at fair value through profit or loss are designated at the date of initial recognition and only if the criteria in IAS 39 are satisfied.

F-27

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Derecognition of financial liabilities

A financial liability is derecognized when the obligation under the liability is discharged or cancelled, or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognized in profit or loss.

Cash and cash equivalents

For the purpose of the consolidated statement of cash flows, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments that are readily convertible into known amounts of cash, are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.

For the purpose of the consolidated statement of financial position, cash and cash equivalents comprise cash on hand and at banks, including assets similar in nature to cash, which are not restricted as to use.

Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; provided that the amount can be reliably estimated.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

For the contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it, the present obligation under the contract is recognized and measured as a provision.

Leases

(i)

As lessee

Finance leases

For sale and leaseback transactions resulting in a finance lease, the sales proceeds are recorded as a borrowing and the relevant assets are continued to be measured at their carry value.

Operating leases

F-28

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Leases (cont’d)

(ii)

As lessor

Retirement benefits

(i)

Defined contribution plans

(ii)

Defined benefit plan

Past service costs are recognized in profit or loss at the earlier of:

•

the date of the plan amendment or curtailment; and

•

the date that the Group recognizes restruturing-related costs

•

service costs comprising current service costs, past-service costs, gains and losses on curtailments and non-routine settlements

•

net interest expense

Derivative financial instruments and hedge accounting

Initial recognition and subsequent measurement

The Group uses derivative financial instruments, such as forward currency contracts and interest rate swaps, to hedge its foreign currency risk and interest rate risk, respectively. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

F-29

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Derivative financial instruments and hedge accounting (cont’d)

Initial recognition and subsequent measurement (cont’d)

Any gains or losses arising from changes in fair value of derivatives are taken directly to profit or loss, except for the effective portion of cash flow hedges, which is recognized in other comprehensive income and later reclassified to profit or loss when the hedged item affects profit or loss.

For the purpose of hedge accounting, hedges are classified as:

•

fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; or

•

cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction, or a foreign currency risk in an unrecognized firm commitment; or

•

hedges of a net investment in a foreign operation.

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting, the risk management objective and its strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the Group will assess the hedging instrument’s effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

Hedges which meet the strict criteria for hedge accounting are accounted for as follows:

Fair value hedges

The change in the fair value of a hedging derivative is recognized in profit or loss. The change in the fair value of the hedged item attributable to the risk hedged is recorded as a part of the carrying amount of the hedged item and is also recognized in profit or loss.

For fair value hedges relating to items carried at amortized cost, the adjustment to carrying value is amortized through profit or loss over the remaining term of the hedge using the effective interest rate method. Effective interest rate amortization may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. If the hedged item is derecognized, the unamortized fair value is recognized immediately in profit or loss.

When an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognized as an asset or liability with a corresponding gain or loss recognized in profit or loss. The changes in the fair value of the hedging instrument are also recognized in profit or loss.

Cash flow hedges

The effective portion of the gain or loss on the hedging instrument is recognized directly in other comprehensive income in the hedging reserve, while any ineffective portion is recognized immediately in profit or loss.

Amounts recognized in other comprehensive income are transferred to profit or loss when the hedged transaction affects profit or loss, such as when hedged financial income or financial expense is recognized or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognized in other comprehensive income are transferred to the initial carrying amount of the non-financial asset or non-financial liability.

If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover (as part of the hedging strategy), or if its designation as a hedge is revoked, or when the hedge no longer meets the criteria for hedge accounting, the amounts previously recognized in other comprehensive income remain in other comprehensive income until the forecast transaction occurs or the foreign currency firm commitment is met.

F-30

NOTES TO THE FINANCIAL STATEMENTS

(Amount in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Derivative financial instruments and hedge accounting (cont’d)

Current versus non-current classification

The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged items is more than 12 months and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months.

Dividend distribution

Dividend distribution to the Company’s shareholders is recognized as a liability in the consolidated financial statements in the period in which the dividends are approved by the Company’s shareholders. Proposed final dividends are disclosed in the notes to the financial statements.

Fair value measurement

The Group measures its derivative financial instruments and listed equity investments at fair value at the end of each reporting period. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:


Level 1	–	based on quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2	–	based on valuation techniques for which the lowest level input that is significant to the fair value measurement is observable, either directly or indirectly

Level 3	–	based on valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by reassessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

Business combinations

Business combinations are accounted for using the acquisition method. The consideration transferred is measured at the acquisition date fair value which is the sum of the acquisition date fair values of assets transferred by the Group, liabilities assumed by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of net assets in the event of liquidation at fair value or at the proportionate share of the acquiree’s identifiable net assets. All other components of non-controlling interests are measured at fair value. Acquisition-related costs are expensed as incurred.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts of the acquiree.

F-31

NOTES TO THE FINANCIAL STATEMENTS

(Amount in millions except for per share data)

3	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Business combinations (cont’d)

If the business combination is achieved in stages, the previously held equity interest is remeasured at its acquisition date fair value and any resulting gain or loss is recognized in profit or loss.

Any contingent consideration to be transferred by the acquirer is recognized at fair value at the acquisition date. Contingent consideration classified as an asset or liability is measured at fair value with changes in fair value recognized in profit or loss. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill as at 31 December. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units.

Where goodwill has been allocated to a cash-generating unit (or group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on the disposal. Goodwill disposed of in these circumstances is measured based on the relative value of the operation disposed of and the portion of the cash-generating unit retained.

4.	CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Estimates and judgements used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

(a)

Revenue recognition

(b)

Frequent flyer programmes

The Group operates frequent flyer programmes that provide travel awards to programme members based on accumulated miles. A portion of passengers’ revenue attributable to the award credits of frequent flyer benefits is deferred and recognized when the award credits have been redeemed or have expired. The deferment of revenue is calculated based on the estimated fair values of the unredeemed award credits and expected redemption rate. The fair values of the unredeemed award credits is estimated based on the yearly average flight ticket prices and the expected redemption rate is estimated by reference to the historical trends of redemptions. Different judgements or estimates could significantly affect the estimated provision for frequent flyer programmes and the results of operations.

F-32

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

4.	CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (cont’d)

(c)

Provision for return condition checks for aircraft and engines under operating leases

Provision for the estimated costs of return condition checks for aircraft and engines under operating leases is made based on the estimated costs for such return condition checks and taking into account anticipated flying hours, flying cycle and time frame between each overhaul. These judgements or estimates are based on historical experience on returning similar airframe models, actual costs incurred and aircraft status. Different judgements or estimates could significantly affect the estimated provision for costs of return condition checks.

(d)

Retirement benefits

Additional information regarding the retirement benefit plan is disclosed in note 37 to the financial statements.

(e)

Deferred income tax

(f)

Provision for flight equipment spare parts

Provision for flight equipment spare parts is made based on the difference between the carrying amount and the net

realizable value. The net realizable value is estimated based on current market condition, historical experience and the Company’s future operation plan for the aircraft and related spare parts. The net realizable value may be adjusted significantly due to the change of market condition and the future plan for the aircraft and related spare parts.

(g)

Depreciation of property, plant and equipment

Depreciation of components related to airframe and engine overhaul costs is based on the Group’s historical experience with similar airframe and engine models and taking into account anticipated overhaul costs, timeframe between each overhaul, ratio of actual flying hours and estimated flying hours between overhauls. Different judgements or estimates could significantly affect the estimated depreciation charge and the results of operations.

(h)

Estimated impairment of property, plant and equipment and intangible assets

F-33

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

4.	CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (cont’d)

(i)

Impairment of goodwill

REVENUES

The Group is principally engaged in the operation of civil aviation, including the provision of passenger, cargo, mail delivery, tour operations and other extended transportation services.


	2017		2016		2015
	*RMB million*		*RMB million*		*RMB million*
Traffic revenues		95,187		89,554		85,076
- Passenger		91,564		83,577		78,585
- Cargo and mail		3,623		5,977		6,491
Tour operations income		2,322		3,113		3,491
Ground service income		1,323		2,850		2,546
Cargo handling and processing income		69		794		750
Commission income		112		92		78
Others		3,462		2,501		2,028

		102,475		98,904		93,969

6	OTHER OPERATING INCOME AND GAINS


	2017		2016		2015
	*RMB million*		*RMB million*		*RMB million*
Subsidy income (note (a))		4,941		4,531		4,131
Gain on disposal of property, plant and equipment		69		158		399
Gain on disposal of prepayments for land use right		5		3		1
Gain on disposal of available-for-sale investments		4		95		33
Dividend income from available-for-sale investments		33		28		13
Gain on disposal of an associate		12		12		—
Compensation from ticket sales agents		271		228		248
Gain on disposal of a subsidiary (note 43)		1,754		—		41
Others (note (b))		392		414		403

		7,481		5,469		5,269

Notes:

(a)

Subsidy income mainly represents (i) subsidies granted by various local governments based on certain amounts of tax paid; (ii) subsidies granted by various local governments and other parties to encourage the Group to operate certain routes to cities where these governments are located.

There are no unfulfilled conditions and other contingencies related to subsidies that were recognized for the years ended 31 December 2017, 2016 and 2015.

(b)

Others mainly represent compensation from transfer of the pilots.

F-34

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

7	SEGMENT INFORMATION

(a)

CODM, office of the General Manager, reviews the Group’s internal reporting in order to assess performance and allocate resources.

The Group has one reportable operating segment, reported as “airline transportation operations”, which comprises the provision of passenger, cargo, mail delivery, ground service and cargo handling services.

Other services including primarily tour operations, air catering and other miscellaneous services are not included within the airline transportation operations segment, as their internal reports are separately provided to the CODM. The results of these operations are included in the “other segments” column.

Inter-segment transactions are entered into under normal commercial terms and conditions that would be available to unrelated third parties.

In accordance with IFRS 8, segment disclosure has been presented in a manner that is consistent with the information used by the Group’s CODM. The Group’s CODM monitors the results, assets and liabilities attributable to each reportable segment based on financial results prepared under the PRC Accounting Standards for Business Enterprises (the “PRC Accounting Standards”), which differ from IFRSs in certain aspects. The amount of each material reconciling items from the Group’s reportable segment revenue and profit or loss, arising from different accounting policies are set out in note 7(c) below.

The segment results for the year ended December 31, 2017 were as follows:


	Airline
	transportation		Other
	operations		segments			Eliminations			Unallocated*		Total
	*RMB million*		*RMB million*			*RMB million*			*RMB million*		*RMB million*
Reportable segment revenue from external customers		97,698		4,023			—			—		101,721
Inter-segment sales		—		1,018			(1,018	)		—		—

Reportable segment revenue		97,698		5,041			(1,018	)		—		101,721

Reportable segment profit before income tax		6,517		363			—			1,740		8,620

Other segment information
Depreciation and amortization		13,769		190			—			—		13,959
Impairment charges (note 10)		489		2			—			—		491
Interest income		2,309		(96	)		(101	)		—		2112
Interest expenses		3,080		205			(101	)		—		3,184
Capital expenditure		32,149		657			—			—		32,806

The segment results for the year ended December 31, 2016 were as follows:
	Airline
	transportation		Other
	operations		segments			Eliminations			Unallocated*		Total
	*RMB million*		*RMB million*			*RMB million*			*RMB million*		*RMB million*
Reportable segment revenue from external customers		94,338		4,222			—			—		98,560
Inter-segment sales		—		782			(782	)		—		—

Reportable segment revenue		94,338		5,004			(782	)		—		98,560

Reportable segment profit before income tax		5,788		397			—			322		6,507

Other segment information
Depreciation and amortization		12,378		160			—			—		12,538
Impairment charges (note 10)		22		7			—			—		29
Interest income		100		100			(104	)		—		96
Interest expenses		2,553		280			(104	)		—		2,729
Capital expenditure^*		34,631		776			—			—		35,407

*	Capital expenditure consists of additions to property, plant and equipment, investment properties and intangible assets and long-term deferred assets.

F-35

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

7	SEGMENT INFORMATION (cont’d)

(a)

CODM, office of the General Manager, reviews the Group’s internal reporting in order to assess performance and allocate resources. (cont’d)

The segment results for the year ended December 31, 2015 were as follows:


	Airline
	transportation		Other
	operations		segments		Eliminations			Unallocated*		Total
	*RMB million*		*RMB million*		*RMB million*			*RMB million*		*RMB million*
Reportable segment revenue from external customers		89,013		4,831		—			—		93,844
Inter-segment sales		555		468		(1,023	)		—		—

Reportable segment revenue		89,568		5,299		(1,023	)		—		93,844

Reportable segment profit before income tax		5,327		238		—			106		5,671

Other segment information
Depreciation and amortization		10,727		128		—			—		10,855
Impairment charges (note 10)		93		1		—			134		228
Interest income		69		13		(16	)		—		66
Finance expenses		1,935		270		(16	)		—		2,189
Capital expenditure		37,706		591		—			—		38,297

The segment assets and liabilities as at December 31, 2017 and December 31, 2016 were as follows:
	Airline
	transportation		Other
	operations		segments		Eliminations			Unallocated*		Total
	*RMB million*		*RMB million*		*RMB million*			*RMB million*		*RMB million*
At December 31, 2017
Reportable segment assets		216,591		13,376		(5,514	)		3,011		227,464
Reportable segment liabilities		165,148		11,301		(5,514	)		11		170,946

At December 31, 2016
Reportable segment assets		205,024		11,218		(8,896	)		2,705		210,051
Reportable segment liabilities		159,437		9,373		(8,896	)		41		159,955

Unallocated assets primarily represent investments in associates and joint ventures, and available-for-sale investments. Unallocated results primarily represent the share of results of associates and joint ventures, income relating to available-for-sale investments.

(b)

The Group’s business operates in three main geographical areas, even though they are managed on a worldwide basis.

The Group’s revenues by geographical area are analysed based on the following criteria:

Traffic revenue from services within the PRC (excluding the Hong Kong Special Administrative Region (“Hong Kong”), the Macau Special Administrative Region (“Macau”) and Taiwan, (collectively known as “Regional”)) is classified as domestic operations. Traffic revenue from inbound and outbound services between overseas markets excluding Regional is classified as international operations.

Revenue from ticket handling services, ground services, cargo handling service and other miscellaneous services is classified on the basis of where the services are performed.

F-36

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

7	SEGMENT INFORMATION (cont’d)

(b)

The Group’s business operates in three main geographical areas, even though they are managed on a worldwide basis. (cont’d)


	2017		2016		2015
	*RMB million*		*RMB million*		*RMB million*
Domestic (the PRC, excluding Hong Kong,
Macau and Taiwan)		67,923		63,730		61,222
Regional (Hong Kong, Macau and Taiwan)		3,624		3,516		3,569
International		30,928		31,658		29,178

Total		102,475		98,904		93,969

The major revenue-earning assets of the Group are its aircraft, all of which are registered in the PRC. Since the Group’s aircraft are deployed flexibly across its route network, there is no suitable basis of allocating such assets and the related liabilities by geographic area and hence segment non-current assets and capital expenditure by geographic area are not presented. Except the aircraft, most non-current assets (except financial instruments) are registered and located in the PRC.

(c)

Reconciliation of reportable segment revenue, profit, assets and liabilities to the consolidated figures as reported in the consolidated financial statements:


		2017			2016			2015
	*Note*	*RMB million*			*RMB million*			*RMB million*
Revenue
Reportable segment revenue			101,721			98,560			93,844
- Reclassification of expired sales in advance of carriage	(i)		754			344			125

Consolidated revenue			102,475			98,904			93,969


		2017			2016			2015
	*Note*	*RMB million*			*RMB million*			*RMB million*
Profit before income tax
Reportable segment profit before income tax			8,620			6,507			5,671
- Differences in depreciation charges for aircraft and engines due to different depreciation lives	(ii)		(10	)		(10	)		(4	)

Consolidated profit before income tax			8,610			6,497			5,667



			2017		2016
	*Notes*		*RMB million*		*RMB million*
Assets
Reportable segment assets				227,464		210,051
- Differences in depreciation charges for aircraft and engines due to different depreciation lives		(ii)		21		31
- Difference in intangible asset arising from the acquisition of Shanghai Airlines		(iii)		2,242		2,242

Consolidated assets				229,727		212,324


			2017		2016
			*RMB million*		*RMB million*
Liabilities
Reportable segment liabilities				170,946		159,955
- Others				3		3

Consolidated liabilities				170,949		159,958

F-37

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

7	SEGMENT INFORMATION (cont’d)

Notes:

(i)

The difference represents the different classification of expired sales in advance of carriage under the PRC Accounting Standards and IFRSs.

(ii)

The difference is attributable to the differences in the useful lives and residual values of aircraft and engines adopted for depreciation purposes in prior years under the PRC Accounting Standards and IFRSs. Despite the depreciation policies of these assets have been unified under IFRSs and the PRC Accounting Standards in recent years, the changes were applied prospectively as changes in accounting estimates which result in the differences in the carrying amounts and related depreciation charges under IFRSs and the PRC Accounting Standards.

(iii)

The difference represents the different measurement of the fair value of acquisition cost of the shares from Shanghai Airlines between the PRC Accounting standards and IFRSs, which results in the different measurement of goodwill.

8	(LOSS)/GAIN ON FAIR VALUE CHANGES OF DERIVATIVE FINANCIAL INSTRUMENTS


	2017			2016		2015
	*RMB million*			*RMB million*		*RMB million*
Interest rate swap contracts (note 39(a))		—			2		6
Forward foreign exchange contracts (note 39(b))		(311	)		—		—

		(311	)		2		6

9	WAGES, SALARIES AND BENEFITS


	2017		2016		2015
	*RMB million*		*RMB million*		*RMB million*
Wages, salaries, bonus and allowances		16,474		14,370		12,917
Employee welfare and benefits		133		235		436
Pension (note 37(a))		1,987		1,769		1,479
Medical insurance (note (a))		663		606		563
Staff housing fund (note (b))		886		868		817
Staff housing allowances (note (c))		150		236		247
Early retirement benefits (note (d))		27		61		—

		20,320		18,145		16,459

Notes:

(a)

Medical insurance

Majority of the Group’s PRC employees participate in the medical insurance schemes organized by municipal governments.

(b)

Staff housing fund

In accordance with the relevant PRC housing regulations, the Group is required to contribute to the state-sponsored housing fund for its employees. At the same time, the employees are required to contribute an amount equal to the Group’s contribution. The employees are entitled to claim the entire sum of the fund contributed under certain specified withdrawal circumstances. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits.

(c)

Staff housing allowances

The Group also provides staff housing allowances in cash to eligible employees. The total entitlement of an eligible employee is principally vested over a period of 20 years. Upon an eligible employee’s resignation or retirement, his or her entitlement would cease and any unpaid entitlement related to past service up to the date of resignation or retirement would be paid.

F-38

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

9	WAGES, SALARIES AND BENEFITS (cont’d)

(d)

Early retirement benefits

The Group implements an early retirement scheme which allows eligible employees to early retire on a voluntary basis. The Group undertakes the obligations to pay the early retirement employees’ basic salaries and certain welfare in the future on a monthly basis according to the early retirement scheme, together with social insurance and housing fund pursuant to the regulation of the local government. The benefits of the early retirement scheme are calculated based on factors including the remaining number of years of service from the date of early retirement to the normal retirement date and the benefits the early retirement employees enjoyed. The present value of the future cash flows expected to be required to settle the obligations is recognized as a provision in “other long-term liabilities”.

(e)

Emoluments of directors and supervisors

Directors’ remuneration for the year, disclosed pursuant to the Listing Rules, section 383(1)(a), (b), (c) and (f) of the Hong Kong Companies Ordinance and Part 2 of the Companies (Disclosure of Information about Benefits of Directors) Regulation, together with the remuneration of supervisors, is as follows:

2017


	Salaries and
	allowances		Bonus		Total
	*RMB’000*		*RMB’000*		*RMB’000*
Executive Directors
Liu Shaoyong*		—		—		—
Ma Xulun*		—		—		—
Xu Zhao*		—		—		—
Gu Jiadan*		—		—		—
Li Yangmin*		—		—		—
Tang Bing*		—		—		—
Tian Liuwen*		—		—		—
Independent non-executive Directors
Li Ruoshan		200		—		200
Shao Ruiqing		200		—		200
Ma Weihua		200		—		200
Cai Hongping		200		—		200
Supervisors
Xi Sheng*		—		—		—
Feng Jinxiong		584		—		584
Ba Shengji*		—		—		—
Hu Jidong		1,549		—		1,549
Jia Shaojun*		—		—		—

Total		2,933		—		2,933

2016

Salaries and

allowances

Bonus

Total

RMB’000

Executive Directors

Liu Shaoyong*

—

Ma Xulun*

—

Xu Zhao*

—

Gu Jiadan*

—

Li Yangmin*

—

F-39

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

9	WAGES, SALARIES AND BENEFITS (cont’d)

(e)

Emoluments of directors and supervisors (cont’d)


	Salaries and
	allowances		Bonus		Total
	*RMB’000*		*RMB’000*		*RMB’000*
Tang Bing*		—		—		—
Tian Liuwen*		—		—		—
Independent non-executive Directors
Li Ruoshan		160		—		160
Ji Weidong***		—		—		—
Shao Ruiqing		160		—		160
Ma Weihua		160		—		160
Cai Hongping**		100		—		100
Supervisors
Yu Faming&***		—		—		—
Xi Sheng*		—		—		—
Xu Haihua*****		288		—		288
Feng Jinxiong		535		—		535
Ba Shengji*		—		—		—
Hu Jidong**		426		—		426
Jia Shaojun^&*		—		—		—

Total		1,829		—		1,829

2015


	Salaries and
	allowances		Bonus		Total
	*RMB’000*		*RMB’000*		*RMB’000*
Executive Directors
Liu Shaoyong*		—		—		—
Ma Xulun		401		—		401
Xu Zhao*		—		—		—
Gu Jiadan*		—		—		—
Li Yangmin		365		—		365
Tang Bing		358		—		358
Tian Liuwen******		419		—		419
Independent non-executive Directors
Liu Keya*******		72		—		72
Ji Weidong***		—		—		—
Shao Ruiqing******		60		—		60
Li Ruoshan		120		—		120
Ma Weihua		120		—		120
Supervisors
Yu Faming*		—		—		—
Xi Sheng*		—		—		—
Xu Haihua******		298		—		298
Feng Jinxiong		610		—		610
Ba Shengji*		—		—		—

Total		2,823		—		2,823

F-40

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

9	WAGES, SALARIES AND BENEFITS (cont’d)

(e)

Emoluments of directors and supervisors (cont’d)

These directors and supervisors of the Company received emoluments from CEA Holding, the parent company, part of which were in respect of their services to the Company and its subsidiaries. No apportionment has been made as it is impracticable to apportion this amount between their services to the Group and their services to CEA Holding. Mr. Xu Zhao resigned on 6 February 2018.

These directors and supervisors of the Company were newly appointed during the year ended December 31, 2016.

***

Mr. Ji Weidong has filed his resignation during the year ended December 31, 2015 and has fulfilled his responsibility until new director being appointed by the board in June 2016.

****

Mr. Yu Faming resigned during the year ended December 31, 2016.

*****

Mr. Xu Haihua resigned during the year ended December 31, 2016.

******

These directors and supervisors of the Company were newly appointed during the year ended December 31, 2015.

*******

Mr. Liu Keya retired during the year ended December 31, 2015.

During the years ended December 31, 2017, 2016 and 2015, no directors and supervisors waived their emoluments.

(f)

Five highest paid individuals

None of the Company’s directors and supervisors was among the five highest paid individuals in the Group for the year ended December 31, 2017 (2016 and 2015: Nil). The emoluments payable to the five highest paid individuals were as follows:

2017

2016

2015

RMB million

Wages, salaries, bonus and allowances

8,702

9,319

8,104

The number of five highest paid individuals whose emoluments fell within the following bands is as follows:


			Number of individuals
	2017		2016		2015
HK$1,500,001 to HK$2,000,000		—		—		5
HK$2,000,001 to HK$2,500,000		5		5		—

		5		5		5

During the year ended December 31, 2017, no emoluments were paid by the Group to the directors, supervisors and the five highest paid individuals as an inducement to join or upon joining the Group, or as a compensation for loss of office (2016 and 2015: Nil).

10	IMPAIRMENT CHARGES


	2017			2016			2015
	*RMB million*			*RMB million*			*RMB million*
Write-down of flight equipment spare parts to net realisable value (note 26)		112			10			88
Impairment charge on property, plant and equipment (note 18)		379			29			48
Impairment charge on assets of a disposal group classified as held for sale (note 16)		3			—			33
Impairment charge on available-for-sale investments		—			—			100
Accrual/(reversal) of impairment charge on trade receivables (note 27)		(3	)		(1	)		12
Reversal of impairment charge on other receivables		—			(9	)		(53	)

		491			29			228

F-41

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

11	OPERATING PROFIT

Operating profit is stated after charging the following items:


	2017			2016			2015
	*RMB million*			*RMB million*			*RMB million*
Amortization of intangible assets (note 17)		142			129			85
Depreciation of property, plant and equipment (note 18)
– owned		7,065			6,388			5,350
– leased (finance leases)		6,302			5,563			4,972
Depreciation of investment properties (note 19)		12			11			4
Amortization of long-term deferred assets included in other non-current assets		402			394			388
Amortization of prepayments for land use right		45			63			60
Consumption of flight equipment spare parts		1,131			1,198			974
Auditors’ remuneration		19			18			17
Subsidy income (note 6)		(4,941	)		(4,531	)		(4,131	)
Gain on disposal of a subsidiary (note 6)		(1,754	)		—			(41	)

12	FINANCE INCOME


	2017		2016		2015
	*RMB million*		*RMB million*		*RMB million*
Interest income		111		96		66
Foreign exchange difference, net (note 13(b))		2,001		—		—

		2,112		96		66

13	FINANCE COSTS


	2017			2016			2015
	*RMB million*			*RMB million*			*RMB million*
Interest on bank borrowings		1,590			1,529			1,613
Interest relating to obligations under finance leases		1,845			1,349			867
Interest relating to post-retirement benefit obligations (note37)		98			88			114
Interest on bonds and debentures		381			359			483
Interest relating to interest rate swap contracts (note 39(a))		63			122			128
Less: amount capitalized into advanced payments on acquisition of aircraft (note (a)) (note21)		(793	)		(749	)		(1,014	)
amounts capitalized into construction in progress (note (a))		—			—			(2	)


		3,184			2,698			2,189
Foreign exchange difference, net (note (b))		—			3,574			4,987

		3,184			6,272			7,176

Notes:

(a)

The average interest rate used for interest capitalization was 3.40% per annum for the year ended December 31, 2017 (2016: 3.25%, 2015: 3.09%).

(b)

The exchange income and losses were primarily related to the translation of the Group’s foreign currency denominated borrowings and obligations under finance leases.

F-42

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data

14	INCOME TAX EXPENSE

Income tax charged to profit or loss was as follows:


	2017			2016		2015
	*RMB million*			*RMB million*		*RMB million*
Income tax		1,962			1,396		737
Deferred taxation (note 38)		(162	)		146		(113	)

		1,800			1,542		624

Pursuant to the “Notice of the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs on Issues Concerning Relevant Tax Policies for Enhancing the Implementation of Western Region Development Strategy” (Cai Shui [2011] No.58), and other series of tax regulations, enterprises located in the western regions and engaged in the industrial activities as listed in the “Catalogue of Encouraged Industries in Western Regions”, will be entitled to a reduced corporate income tax rate of 15% from 2011 to 2020 upon approval from tax authorities. CEA Yunnan, a subsidiary of the Company, obtained approval from tax authorities and has been entitled to a reduced corporate income tax rate of 15% from 1 January 2011. The Company’s Sichuan branch, Gansu branch and Xibei branch also obtained approvals from respective tax authorities and are entitled to a reduced corporate income tax rate of 15%. The subsidiaries incorporated in Hong Kong are subject to Hong Kong profits tax rate of 16.5% (2016:16.5%, 2015: 16.5%).

The Company and its subsidiaries except for CEA Yunnan, Sichuan branch, Gansu branch and Xibei branch and those incorporated in Hong Kong, are generally subject to the PRC standard corporate income tax rate of 25% (2016: 25%, 2015: 25%).

A reconciliation of the tax expense applicable to profit before tax at the statutory rates for the countries in which the Company and the majority of its subsidiaries are domiciled to the tax expense at the effective tax rates, are as follows:


	2017			2016			2015
	*RMB million*			*RMB million*			*RMB million*
Profit before income tax		8,610			6,497			5,667

Tax calculated at the tax rate of 25% (2016: 25%, 2015: 25%)		2,152			1,624			1,417
Lower tax rates enacted by local authority		(87	)		(102	)		(156	)
Share of results of associates and joint ventures		(63	)		(37	)		(38	)
Income not subject to tax		(13	)		(10	)		—
Expenses not deductible for tax		38			117			104
Utilization of previously unrecognized tax losses		(253	)		(51	)		(1	)
Unrecognized tax losses for the year		48			13			20
Utilization of deductible temporary differences		(13	)		(10	)		(686	)
Unrecognized deductible temporary differences		2			6			(36	)
Research and development costs’ super deduction		(11	)		(8	)		—

Tax charge		1,800			1,542			624

Effective tax rate		20.91	%		23.73	%		11.01	%

The Group operates international flights to overseas destinations. There was no material overseas taxation for the years ended December 31, 2017, 2016 and 2015, as there are avoidance of double tax treaties between the PRC and the corresponding jurisdictions (including Hong Kong) relating to the aviation business.

F-43

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

15	EARNINGS PER SHARE

The calculation of basic earnings per share was based on the profit attributable to equity holders of the Company of RMB6,342 million (2016: RMB4,498 million, 2015: RMB4,537 million) and the weighted average number of shares of 14,467,585,682 (2016: 13,811,136,000, 2015: 12,818,509,000) in issue during the year ended December 31, 2017. The Company had no potentially dilutive options or other instruments relating to the ordinary shares in issue during the years ended December 31, 2017, 2016 and 2015.

16	HELD FOR SALE ASSETS AND LIABILITIES

On 27 April 2017, the Group’s Board of Directors came to a resolution to sell the equity interests of Shanghai Airlines Hotel Investment Management Co., Ltd. (“Shanghai Airlines Hotel”), a wholly owned subsidiary. On 29 December 2017, the Group entered into a share transfer agreement with China Eastern Airlines Development Co., Ltd., a wholly owned subsidiary of CEA Holding, to transfer its 100% equity interests in Shanghai Airlines Hotel for a cash consideration of RMB7,100. The transfer is expected to be completed within a year from the reporting date. At 31 December 2017, Shanghai Airlines Hotel was classified as a disposal group held for sale. The major classes of assets and liabilities (after eliminating of inter-company payable of RMB6 million) of Shanghai Airlines Hotel classified as held for sale as at 31 December 2017 are as follows:


	2017
	*RMB million*
*Assets*
Property, plant and equipment		2
Other non-current assets		1
Trade and notes receivables		2
Cash and cash equivalents		11
Inventory		1

		17
Provision for impairment of assets classified as held for sale		(3	)

Assets classified as held for sale		14

*Liabilities*
Trade and bills payables		(2	)
Other payables and accruals		(6	)

Liabilities directly associated with the assets classified as held for sale		(8	)

Net assets directly associated with the disposal group		6

17	INTANGIBLE ASSETS


	Goodwill		Computer			Others
	(note(a))		software			(note(b))			Total
	*RMB million*		*RMB million*			*RMB million*			*RMB million*
31 December 2017
Cost at 1 January 2017, net of accumulated amortization		11,270		288			66			11,624
Additions		—		126			—			126
Transfer from construction in process		—		3			—			3
Amortization provided during the year		—		(109	)		(33	)		(142	)
Disposal of a subsidiary (note 43)		—		(14	)		—			(14	)
Disposals		—		(1	)		—			(1	)

At 31 December 2017		11,270		293			33			11,596

F-44

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

17	INTANGIBLE ASSETS (cont’d)


	Goodwill		Computer			Others
	(note(a))		software			(note(b))			Total
	*RMB million*		*RMB million*			*RMB million*			*RMB million*
At 31 December 2017:
Cost		11,270		904			98			12,272
Accumulated amortization		—		(611	)		(65	)		(676	)
Net carrying amount		11,270		293			33			11,596

31 December 2016
Cost at 1 January 2016, net of accumulated amortization		11,270		252			—			11,522
Additions		—		124			98			222
Transfer from construction in process		—		9			—			9
Amortization provided during the year		—		(97	)		(32	)		(129	)
Disposals		—		—			—			—

At 31 December 2016		11,270		288			66			11,624

At 31 December 2016:
Cost		11,270		812			98			12,180
Accumulated amortization		—		(524	)		(32	)		(556	)
Net carrying amount		11,270		288			66			11,624

Notes:

(a)

The balance represents goodwill arising from the acquisition of Shanghai Airlines. The value of the Goodwill is attributable to strengthening the competitiveness of the Group’s airline transportation operations, attaining synergy through integration of the resources and accelerating the development of international air transportation in Shanghai. For the purpose of impairment assessment, goodwill was allocated to the cash-generating unit (“CGU”) that the Group operates and benefits from the acquisition.

The recoverable amount of the CGU has been determined based on a value-in-use calculation using cash flow projections based on a financial budget approved by senior management. The discount rate after tax applied to the cash flow projections is 11% (2016: 11%). The growth rate used to extrapolate the cash flows of the above cash-generating unit beyond the five-year period is 3% (2016: 3%), which does not exceed the long-term average growth rate for the business in which the CGU operates. No impairment for the goodwill was required based on the value-in-use calculation as at the reporting date.

(b)

The balance represents the costs incurred to acquire the use right of certain flight schedules (i.e. timeslots for flights’ taking off/landing).

18	PROPERTY, PLANT AND EQUIPMENT


	Aircraft, engines and
	flight equipment									Other
				Held under						property, plant			Construction
	Owned			finance leases			Buildings			and equipment			in progress		Total
	*RMB million*			*RMB million*			*RMB million*			*RMB million*			*RMB million*		*RMB million*
31 December 2017
At 31 December 2016 and at 1 January 2017:
Cost		99,653			97,064			8,324			8,201			2,398		215,640
Accumulated depreciation and impairment		(34,914	)		(19,890	)		(2,450	)		(5,206	)		—		(62,460	)

Net carrying amount		64,739			77,174			5,874			2,995			2,398		153,180

At 1 January 2017, net of accumulated depreciation and impairment		64,739			77,174			5,874			2,995			2,398		153,180
Additions		3,659			8,277			276			808			2,688		15,708
Disposals		(656	)		(264	)		(1	)		(103	)		—		(1,024	)

F-45

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

18	PROPERTY, PLANT AND EQUIPMENT (cont’d)


	Aircraft, engines and
	flight equipment									Other
				Held under						property, plant			Construction
	Owned			finance leases			Buildings			and equipment			in progress			Total
	*RMB million*			*RMB million*			*RMB million*			*RMB million*			*RMB million*			*RMB million*
Transfer from construction in progress		—			—			1,019			18			(1,037	)		—
Transfer from advanced payments on acquisition of aircraft (note 21)		1,701			13,378			—			—			—			15,079
Transfer from investment properties (note 19)		—			—			9			—			—			9
Transfer to investment properties (note 19)		—			—			(2	)		—			—			(2	)
Assets included in held for sale		—			—			—			(2	)		—			(2	)
Transfer to other non-current assets		—			—			—			—			(327	)		(327	)
Depreciation provided during the year		(6,154	)		(6,302	)		(298	)		(613	)		—			(13,367	)
Disposal of a subsidiary (note 43)		(199	)		(1,220	)		(375	)		(208	)		(17	)		(2,019	)
Impairment		(379	)		—			—			—			—			(379	)
Transfers		6,283			(6,283	)		(24	)		24			—			—

At 31 December 2017, net of accumulated depreciation and impairment		68,994			84,760			6,478			2,919			3,705			166,856

At 31 December 2017:
Cost		111,297			105,801			8,809			7,934			3,705			237,546
Accumulated depreciation and impairment		(42,303	)		(21,041	)		(2,331	)		(5,015	)		—			(70,690	)

Net carrying amount		68,994			84,760			6,478			2,919			3,705			166,856

During the year, the Group recognised an impairment loss of approximately RMB379 million relating to aircraft, engines and flight equipment (2016: RMB29 million, 2015: RMB48 million). The recoverable amounts of these impaired aircraft, engines and flight equipment are determined at the higher of their fair value less costs to sell and value in use.

As at 31 December 2017, certain aircraft and buildings owned by the Group with an aggregate net carrying amount of approximately RMB11,207 million (2016: approximately RMB17,559 million) were pledged as collateral under certain borrowing arrangements (note 34).

As at 31 December 2017, the ownership certificates of buildings with a net carrying amount of RMB1,397 million (31 December 2016: RMB1,455 million) have not been obtained. The directors of the Company are of the opinion that the Group legally owns and has the rights to use the aforesaid buildings, and that there is no material adverse impact on the overall financial position of the Group.


	Aircraft, engines and
	flight equipment									Other
	Owned			Held under						property, plant			Construction
				finance leases			Buildings			and equipment			in progress			Total
	*RMB million*			*RMB million*			*RMB million*			*RMB million*			*RMB million*			*RMB million*
31 December 2016
At 31 December 2015 and at 1 January 2016:
Cost		80,402			89,146			7,993			7,486			1,771			186,798
Accumulated depreciation and impairment		(28,557	)		(18,029	)		(2,266	)		(4,704	)		—			(53,556	)

Net carrying amount		51,845			71,117			5,727			2,782			1,771			133,242

At 1 January 2016, net of accumulated depreciation and impairment		51,845			71,117			5,727			2,782			1,771			133,242
Additions		9,411			4,485			5			651			1,477			16,029
Disposals		(324	)		(58	)		(21	)		(212	)		—			(615	)
Transfer from construction in progress		—			—			474			328			(802	)		—

F-46

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

18	PROPERTY, PLANT AND EQUIPMENT (cont’d)


	Aircraft, engines and
	flight equipment									Other
	Owned			Held under						property, plant			Construction
				finance leases			Buildings			and equipment			in progress			Total
	*RMB million*			*RMB million*			*RMB million*			*RMB million*			*RMB million*			*RMB million*
Transfer from advanced payments on acquisition of aircraft (note 21)		12,236			4,354			—			—			—			16,590
Transfer to investment properties (note 19)		—			—			(38	)		—			—			(38	)
Transfer to other non-current assets		—			—			—			—			(48	)		(48	)
Depreciation provided during the year		(5,561	)		(5,563	)		(273	)		(554	)		—			(11,951	)
Impairment		(29	)		—			—			—			—			(29	)
Transfers		(2,839	)		2,839			—			—			—			—

At 31 December 2016, net of accumulated depreciation and impairment		64,739			77,174			5,874			2,995			2,398			153,180

At 31 December 2016:
Cost		99,653			97,064			8,324			8,201			2,398			215,640
Accumulated depreciation and impairment		(34,914	)		(19,890	)		(2,450	)		(5,206	)		—			(62,460	)

Net carrying amount		64,739			77,174			5,874			2,995			2,398			153,180

19	INVESTMENT PROPERTIES


	2017			2016
	*RMB million*			*RMB million*
Cost
At 1 January		402			344
Transfer from property, plant and equipment (note 18)		4			58
Transfer to property, plant and equipment (note 18)		(14	)		—

At 31 December		392			402

Accumulated depreciation
At 1 January		81			50
Transfer from property, plant and equipment (note 18)		2			20
Transfer to property, plant and equipment (note 18)		(5	)		—
Charge for the year (note 11)		12			11

At 31 December		90			81

Net book amount
At 31 December		302			321

As at 31 December 2017, the fair value of the investment properties was approximately RMB628 million (2016: RMB604 million) according to a valuation performed by an independent professionally qualified valuer.

The investment properties are leased to third parties and related parties under operating leases. Rental income totalling RMB39 million (2016: RMB37 million, 2015: RMB30 million) was received by the Group during the year in respect of the leases.

As at 31 December 2017, the carrying amount of the investment properties for which the ownership certificates of buildings have not been obtained was RMB112 million (2016: RMB119 million). The directors of the Company are of the opinion that the Group legally owns and has the rights to use the aforesaid investment properties, and that there is no material adverse impact on the overall financial position of the Group.

F-47

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

19	INVESTMENT PROPERTIES (cont’d)

Fair value hierarchy

The following table illustrates the fair value measurement hierarchy of the Group’s investment properties:

Buildings

Fair value measurement using

Quoted prices

Significant

in active

observable

unobservable

markets

inputs

(Level 1)

(Level 2)

(Level 3)

Total

RMB million

Not measured at fair value but fair value is disclosed:

As at 31 December 2017

—

198

430

628

As at 31 December 2016

—

183

421

604

During the year, there were no transfers of fair value measurements between Level 1 and Level 2 and no transfers into or out of Level 3 (2016: Nil).

The fair values of the buildings with comparable market price have been estimated using significant observable inputs and calculated by adjusted market price considering the condition and location of the buildings.

The fair values of the buildings without comparable market price have been estimated by a discounted cash flow valuation model using significant unobservable inputs such as estimated rental value, rent growth, long term vacancy rate and discounted rate.

20	PREPAYMENTS FOR LAND USE RIGHT


	2017			2016
	*RMB million*			*RMB million*
Carrying amount at 1 January		2,064			2,094
Recognized during the year		(347	)		(30	)

Carrying amount at 31 December		1,717			2,064

Prepayments for land use right represent unamortized prepayments for land use rights.

21	ADVANCED PAYMENTS ON ACQUISITION OF AIRCRAFT


	2017			2016
	*RMB million*			*RMB million*
At 1 January		23,357			21,207
Additions		15,681			17,991
Interest capitalized (note 13)		793			749
Transfer to property, plant and equipment (note 18)		(15,079	)		(16,590	)

At 31 December		24,752			23,357

22	INVESTMENTS IN ASSOCIATES


	2017		2016
	*RMB million*		*RMB million*
Unlisted investments, cost		1,116		1,069
Share of net assets		538		467

		1,654		1,536

F-48

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

22	INVESTMENTS IN ASSOCIATES (cont’d)

The movements in investments in associates were as follows:


	2017			2016
	*RMB million*			*RMB million*
At 1 January		1,536			1,543
Additions		47			—
Share of results of associates		202			148
Share of revaluation on available-for-sale investments held by an associate		10			(1	)
Dividend received during the year		(141	)		(154	)

At 31 December		1,654			1,536

Particulars of the principal associates, which are limited liability companies, are as follows:


Company name	Place of establishment and operation and date of establishment	Registered capital				Attributable equity interest						Principal activities
		2017		2016		2017			2016
		*Million*		*Million*
Eastern Air Group Finance Co., Ltd. (“Eastern Air Finance Company”)	PRC/Mainland China 6 December 1995	RMB	2,000	RMB	2,000		25	%		25	%	Provision of financial services to group companies of CEA Holding
China Eastern Air Catering Investment Co., Ltd.	PRC/Mainland China 17 November 2003	RMB	350	RMB	350		45	%		45	%	Provision of air catering services
Shanghai Pratt & Whitney Aircraft Engine Maintenance Co., Ltd. (“Shanghai P&W”) (note)	PRC/Mainland China 28 March 2008	USD	40	USD	40		51	%		51	%	Provision of aircraft, engine and other related components maintenance services
New Shanghai International Tower Co., Ltd.	PRC/Mainland China 17 November 1992	RMB	167	RMB	167		20	%		20	%	Property development provision and management services
Eastern Aviation Import & Export Co., Ltd. (“Eastern Import & Export”)	PRC/Mainland China 9 June 1993	RMB	80	RMB	80		45	%		45	%	Provision of aviation equipment and spare parts purchase
Eastern Aviation Advertising Service Co., Ltd. (“Eastern Advertising”)	PRC/Mainland China 4 March 1986	RMB	200	RMB	200		45	%		45	%	Provision of aviation advertising agency services
Shanghai Collins Aviation Maintenance Service Co., Ltd. (“Collins Aviation”)	PRC/Mainland China 27 September 2002	USD	7	USD	7		35	%		35	%	Provision of airline electronic product maintenance services

Note:

In 2008, the Company entered into an agreement with United Technologies International Corporation (“Technologies International”) to establish Shanghai P&W, in which the Company holds a 51% interest. According to the shareholder’s agreement, Technologies International has the power to govern the financial and operating policies and in this respect the Company accounts for Shanghai P&W as an associate.

F-49

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

22	INVESTMENTS IN ASSOCIATES (cont’d)

The following table illustrates the aggregate financial information of the Group’s associates that were not individually material:


	2017		2016
	*RMB million*		*RMB million*
Share of the associates’ profit for the year		202		148
Share of the associates’ other comprehensive income		10		(1	)
Share of the associates’ total comprehensive income		212		147
Aggregate carrying amount of the Group’s interests in the associates		1,654		1,536

23	INVESTMENTS IN JOINT VENTURES


	2017		2016
	*RMB million*		*RMB million*
Unlisted investments, cost		369		352
Share of net assets		188		172

		557		524

The movements in investments in joint ventures were as follows:


	2017			2016
	*RMB million*			*RMB million*
At 1 January		524			518
Additions		17			—
Share of results		49			39
Dividend received during the year		(33	)		(33	)

At 31 December		557			524

Particulars of the principal joint ventures, which are limited liability companies, are as follows:


Company name	Place of establishment and operation and date of establishment	Paid-up capital				Attributable equity interest						Principal activities
		2017		2016		2017			2016
		Million		Million
Shanghai Technologies Aerospace Co., Ltd. (“Technologies Aerospace”) (note)	PRC/Mainland China 28 September 2004	USD	73	USD	73		51	%		51	%	Provision of repair and maintenance services
Shanghai Eastern Union Aviation Wheels & Brakes Maintenance Services Overhaul Engineering Co., Ltd. (“Wheels & Brakes”)	PRC/Mainland China 28 December 1995	USD	2	USD	2		40	%		40	%	Provision of spare parts repair and maintenance services
Eastern China Kaiya System Integration Co., Ltd. (“China Kaiya”)	PRC/Mainland China 21 May 1999	RMB	10	RMB	10		41	%		41	%	Provision of computer systems development and maintenance services
CAE Melbourne Flight Training Pty Ltd. (“CAE Melbourne”)	Australia 9 March 2007	AUD	11	AUD	11		50	%		50	%	Provision of flight training services

F-50

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

23	INVESTMENTS IN JOINT VENTURES (cont’d)

Company name

Place of establishment and
operation and date of
establishment

Paid-up capital

Attributable
equity interest

Principal activities

2017

2016

2017

2016

Million

Shanghai Hute Aviation Technology Co., Ltd. (“Shanghai Hute”)

PRC/Mainland China

9 April 2003

RMB

Provision of equipment maintenance services

Xi’an CEA SAFRAN Landing Systems Services Co., Ltd. (“XIESA”)

PRC/Mainland China

12 July 2017

USD

—

Provision of aircraft, engine and other related components maintenance services

Note:

Under a joint venture agreement with a joint venture partner of Technologies Aerospace dated 10 March 2003, both parties have agreed to share the control over the economic activities of Technologies Aerospace with the joint venture partner. Any strategic financial and operating decisions relating to the activities of Technologies Aerospace require the unanimous consent of the Company and the joint venture partner.

The following table illustrates the aggregate financial information of the Group’s joint ventures that were not individually material:


	2017		2016
	*RMB million*		*RMB million*
Share of the joint ventures’ profit for the year		49		39
Share of the joint ventures’ total comprehensive income		49		39
Aggregate carrying amount of the Group’s interests in the joint ventures		557		524

24	AVAILABLE-FOR-SALE INVESTMENTS


	2017		2016
	*RMB million*		*RMB million*
Listed equity investments, at fair value		693		538
Unlisted equity investments, at cost		107		107

		800		645

During the year, the gross gain in respect of the Group’s available-for-sale investments recognized in other comprehensive income amounted to RMB156 million (2016: RMB100 million).

The above investments consist of investments in equity securities which were designated as available-for-sale investments and have no fixed maturity dates or coupon rates.

As at 31 December 2017, certain unlisted equity investments were stated at cost less impairment because the range of reasonable fair value estimates is so significant that the directors are of the opinion that their fair value cannot be measured reliably. The Group does not intend to dispose of them in the near future.

F-51

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

25	OTHER NON-CURRENT ASSETS


	2017		2016
	*RMB million*		*RMB million*
Deposits relating to aircraft held under operating leases		217		285
Deferred pilot recruitment costs		1,288		1,182
Rebate receivables on aircraft acquisitions		65		83
Rental prepayment		—		426
Prepayment for acquisition of property, plant and equipment		681		299
Other long term assets		676		694

		2,927		2,969

26	FLIGHT EQUIPMENT SPARE PARTS


	2017			2016
	*RMB million*			*RMB million*
Flight equipment spare parts		2,716			2,713
Less: provision for spare parts		(531	)		(465	)

		2,185			2,248

Movements in the Group’s provision for impairment of flight equipment spare parts were as follows:


	2017			2016
	*RMB million*			*RMB million*
At 1 January		465			541
Accrual (note 10)		112			10
Amount written off in relation to disposal of spare parts		(1	)		(86	)
Disposal of a subsidiary		(45	)		—

At 31 December		531			465

27	TRADE AND NOTES RECEIVABLES

The credit terms given to trade customers are determined on an individual basis.


	2017		2016
	*RMB million*		*RMB million*
Trade receivables		2,124		2,630
Notes receivable		—		30

At 31 December		2,124		2,660

An ageing analysis of the trade and notes receivables as at the end of the reporting period, based on the invoice/billing date, was as follows:


	2017			2016
	*RMB million*			*RMB million*
Within 90 days		1,912			2,324
91 to 180 days		38			167
181 to 365 days		100			102
Over 365 days		162			182

		2,212			2,775
Provision for impairment of trade receivables		(88	)		(115	)

		2,124			2,660

F-52

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

27	TRADE AND NOTES RECEIVABLES (cont’d)

Trade and notes receivables that were neither overdue nor impaired relate to a large number of independent sales agents for whom there was no recent history of default.

As at 31 December 2017, trade and notes receivables of RMB131 million (2016: RMB267 million) were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, the directors of the Company are of the opinion that no provision for impairment is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The ageing analysis of these trade and notes receivables was as follows:


	2017		2016
	*RMB million*		*RMB million*
Past due:
Within 90 days		38		167
91 to 180 days		93		30
181 to 365 days		—		70

		131		267

Movements in the Group’s provision for impairment of trade and notes receivables were as follows:


	2017			2016
	*RMB million*			*RMB million*
At 1 January		115			216
Impairment losses recognized (note 10)		6			8
Amount written off during the year as uncollectible		(13	)		(100	)
Impairment losses reversed (note 10)		(9	)		(9	)
Disposal of subsidiary		(5	)		—
Provision included in held for sale		(6	)		—

At 31 December		88			115

Included in the above provision for impairment of trade receivables is a provision for individually impaired trade receivables of RMB46 million (2016: RMB66 million) with a carrying amount before provision of RMB46 million (2016: RMB66 million).

The remaining provision of RMB42 million relate to impaired trade receivables with a carrying amount before provision of RMB123 million as at 31 December 2017 which customers that were in financial difficulties or were in default in interest and/or principal payments and only a portion of the receivables is expected to be recovered.

The net impacts of recognition and reversal of provisions for impaired receivables have been included in “Impairment charges” in profit or loss (note 10). Amounts charged to the allowance account are generally written off when there is no expectation of recovering.

28	PREPAYMENTS AND OTHER RECEIVABLES


	2017		2016
	*RMB million*		*RMB million*
Value added tax recoverable		3,662		1,746
Value added tax refundable		1,387		615
Subsidy receivable		1,450		762
Prepaid corporate income tax		139		283
Advance to suppliers		218		2,327
Prepaid aircraft operating lease rentals		319		382
Dividend receivable		183		—
Rebate receivables on aircraft acquisitions		944		1,489
Rental deposits		200		233

F-53

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

28	PREPAYMENTS AND OTHER RECEIVABLES (cont’d)


	2017			2016
	*RMB million*			*RMB million*
Amounts due from related parties (note 47(c)(i))		569			616
Deposits relating to aircraft held under operating leases		76			140
Others		365			838

		9,512			9,431
Provision for impairment of other receivables		(198	)		(200	)

		9,314			9,231

29	RESTRICTED BANK DEPOSITS AND SHORT-TERM BANK DEPOSITS


	2017		2016
	*RMB million*		*RMB million*
Bank deposits with original maturity over a year		—		3
Restricted bank deposits		51		40

		51		43

30	CASH AND CASH EQUIVALENTS


	2017		2016
	*RMB million*		*RMB million*
Cash		2		3
Bank balances		4,603		1,692

		4,605		1,695

At the end of the reporting period, the cash and bank balances of the Group denominated in RMB amounted to RMB3,239 million (2016: RMB814 million). The RMB is not freely convertible into other currencies, however, under Mainland China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Group is permitted to exchange RMB for other currencies through banks authorized to conduct foreign exchange business.

Cash at banks earns interest at floating rates based on daily bank deposit rates. The bank balances are deposited with creditworthy banks and financial institutions with no recent history of default.

31	TRADE AND BILLS PAYABLES

An aged analysis of the trade and bills payables as at the end of the reporting period was as follows:


	2017		2016
	*RMB million*		*RMB million*
Within 90 days		2,791		2,994
91 to 180 days		59		57
181 to 365 days		161		83
1 to 2 years		71		77
Over 2 years		102		165

		3,184		3,376

As at 31 December 2017, trade and bills payable balances included amounts due to related parties of RMB241 million (2016: RMB232 million) (note 47(c)(ii)).

As at 31 December 2017, bills payable amounted to RMB1,173 million (2016: 1,120 million).

F-54

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

32	OTHER PAYABLES AND ACCRUALS


	2017		2016
	*RMB million*		*RMB million*
Salaries, wages and benefits		2,711		3,662
Take-off and landing charges		2,707		2,323
Fuel cost		1,369		1,774
Expenses related to aircraft overhaul conducted		1,760		1,253
Advance from customers		1,342		966
Duties and levies payable		1,483		1,507
Other accrued operating expenses		1,848		1,561
Deposits received from ticket sales agents		549		764
Current portion of other long-term liabilities (note 36)		1,038		635
Staff housing allowance		323		363
Amounts due to related parties (note 47(c)(ii))		2,111		2,534
Current portion of post-retirement benefit obligations (note 37(b))		168		173
Others		2,455		2,735

		19,864		20,250

33	OBLIGATIONS UNDER FINANCE LEASES

As at 31 December 2017, the Group had 235 aircraft (2016: 226 aircraft) under finance leases. Under the terms of the leases, the Group has the option to purchase, at or near the end of the lease terms, certain aircraft at either fair market value or a percentage of the respective lessors’ defined cost of the aircraft. The obligations under finance leases are principally denominated in US dollars.

The future minimum lease payments (including interest), and the present values of the minimum lease payments under finance leases were as follows:


				Present values						Present values
	Minimum lease			of minimum			Minimum lease			of minimum
	payments			lease payments			payments			lease payments
	2017			2017			2016			2016
	*RMB million*			*RMB million*			*RMB million*			*RMB million*
Within one year		11,651						8,123
In the second year		10,408						7,526
In the third to fifth years, inclusive		27,895						21,905
After the fifth year		30,196						33,277

Total		80,105			66,868			70,831			61,041

Less: amounts repayable within one year		(11,651	)		(9,241	)		(8,123	)		(6,447	)

Long-term portion		68,454			57,627			62,708			54,594

F-55

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

34	BORROWINGS


	2017		2016
	*RMB million*		*RMB million*
Non-current
Long-term bank borrowings
– secured (note (a))		4,816		7,169
– unsecured		108		3,435
Guaranteed bonds (note (b))		10,956		8,476
Unsecured bonds (note (b))		8,831		8,810

		24,711		27,890

Current
Current portion of long-term bank borrowings
– secured (note (a))		1,028		1,724
– unsecured		3,103		135
Short-term bank borrowings
– unsecured		24,959		9,983
Short-term debentures (note (c))		10,000		17,000

		39,090		28,842

Total borrowings		63,801		56,732

The borrowings are repayable as follows:
Within one year		39,090		28,842
In the second year		6,527		4,833
In the third to fifth years, inclusive		8,797		13,281
After the fifth year		9,387		9,776

Total borrowings		63,801		56,732

Notes:

(a)

As at 31 December 2017, the secured bank borrowings of the Group were pledged by the related aircraft and buildings with an aggregate carrying amount of RMB11,207 million (2016: RMB17,559 million) (note 18).

(b)

On 18 March 2013, the Company issued ten-year guaranteed bonds with a principal amount of RMB4.8 billion, at an issue price equal to the face value of the bonds. The bonds bear interest at the rate of 5.05% per annum, which are payable annually. The principal of the bonds will mature and be repayable on 18 March 2023. CEA Holding has unconditionally and irrevocably guaranteed the due payment and performance of the above bonds (note 47(d)).

On 15 June 2016, the Company issued three-year medium-term bonds with a principal amount of RMB3 billion, at an issue price equal to the face value of the bonds. The bonds bear interest at the rate of 3.15% per annum, which are payable annually. The principal of the bonds will mature and become repayable on 15 June 2019.

On 14 July 2016, the Company issued five-year medium-term bonds with a principal amount of RMB4 billion, at an issue price equal to the face value of the bonds. The bonds bear interest at the rate of 3.39% per annum, which are payable annually. The principal of the bonds will mature and become repayable on 14 July 2021.

On 20 July 2016, the Company issued three-year medium-term bonds with a principal amount of RMB1.5 billion, at an issue price equal to the face value of the bonds. The bonds bear interest at the rate of 3.00% per annum, which are payable annually. The principal of the bonds will mature and become repayable on 20 July 2019.

F-56

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

34	BORROWINGS (cont’d)

On 28 September 2016, the Company issued three-year guaranteed notes with a principal amount of KRW120 billion, at an issue price equal to the face value of the bonds. The bonds bear interest at the rate of 2.05% per annum, which are payable semi-annually. The principal of the bonds will mature and become repayable on 28 September 2019. Korean Development Bank has unconditionally and irrevocably guaranteed the due payment and performance of the above bonds.

On 28 September 2016, the Company issued three-year notes with a principal amount of KRW55 billion, at an issue price equal to the face value of the bonds. The bonds bear interest at the rate of 2.85% per annum, which are payable semi-annually. The principal of the bonds will mature and become repayable on 28 September 2019.

On 24 October 2016, the Company issued ten-year corporate bonds with a total principal amount of RMB3 billion, of which bonds of RMB1.5 billion bear interest at the rate of 3.03% per annum and the remaining bonds of RMB1.5 billion bear interest at the rate of 3.30% per annum. The bonds are payable annually. The principal of the bonds will mature and become repayable on 24 October 2026. CEA Holding has unconditionally and irrevocably guaranteed the due payment and performance of the above bonds (note 47(d)).

On 16 November 2017, Eastern Air Overseas issued three-year corporate bonds with a total principal amount of SGD 500 million, at an issue price equal to the face value of the bonds. The bonds bear interest at the rate of 2.80% per annum. The bonds are payable semi-annually. The principal of the bonds will mature and become repayable on 16 November 2020. The Company has unconditionally and irrevocably guaranteed the due payment and performance of the above bonds (note 47(d)).

(c)

On 21 August 2017, the Company issued short-term debentures with a principal of RMB3 billion and maturity of 270 days. The debentures bear interest at the rate of 4.16% per annum.

On 22 August 2017, the Company issued short-term debentures with a principal of RMB3 billion and maturity of 150 days. The debentures bear interest at the rate of 4.25% per annum.

On 12 September 2017, the Company issued short-term debentures with a principal of RMB2 billion and maturity of 179 days. The debentures bear interest at the rate of 4.25% per annum.

On 26 September 2017, the Company issued short-term debentures with a principal of RMB2 billion and maturity of 179 days. The debentures bear interest at the rate of 4.20% per annum.

The terms of the long-term borrowings and bonds were summarized as follows:


	Interest rate and final maturities	2017		2016
		*RMB million*		*RMB million*
Long-term bank borrowings
RMB denominated	interest rates ranging from3.10% to 3.48% with final maturities through 2021 (2016: 3.40% to 4.41%)		3,028		3,278
USD denominated	interest rates ranging from 6-month libor +0.55% to 6-month libor +2.85% with final maturities through 2025 (2016: 6-month libor +0.75% to 6-month libor +3.75%)		2,003		4,970
EUR denominated	interest rates at 3 months Euribor+0.5% with final maturities through 2026 (2016: 3 months Euribor+0.5%)		4,024		4,215

Guaranteed bonds
RMB denominated	interest rates ranging from 3.03% to 5.05% with final maturities through 2026 (2016: 3.03% to 5.05%)		7,794		7,792
SGD denominated	interest rates at 2.80% with final maturities through 2020		2,435		—
KRW denominated	interest rate at 2.05% with final maturities through 2019 (2016: 2.05%)		727		684

F-57

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

34	BORROWINGS (cont’d)


	Interest rate and final maturities	2017		2016
		*RMB million*		*RMB million*
Unsecured bonds
RMB denominated	interest rates ranging from 3.00% to 3.39% with final maturities through 2021 (2016: from 3.00% to 3.39%)		8,500		8,500
KRW denominated	interest rate at 2.85% with final maturities through 2019 (2016: 2.85%)		331		310

Total long-term borrowings and bonds			28,842		29,749

Short-term borrowings of the Group are repayable within one year. As at 31 December 2017, the interest rates relating to such borrowings ranged from 0.70% to 4.35% per annum (2016: 1.49% to 4.35% per annum).

35	PROVISION FOR RETURN CONDITION CHECKS FOR AIRCRAFT UNDER OPERATING LEASES


	2017			2016
	*RMB million*			*RMB million*
At 1 January		3,670			3,503
Accrual		1,214			1,010
Utilization		(1,865	)		(843	)

At 31 December		3,019			3,670
Less: current portion		(981	)		(1,175	)

Long-term portion		2,038			2,495

In respect of aircraft and engines under operating leases, the Group has obligations to fulfil certain return conditions under the leases. The balance as at 31 December 2017 and 2016 represented the provision for the estimated cost of these return condition checks which is made on a straight-line basis over the term of the leases.

36	OTHER LONG-TERM LIABILITIES


	2017			2016
	*RMB million*			*RMB million*
Fair value of unredeemed points awarded under the Group’s frequent flyer programmes		2,030			1,750
Long-term duties and levies payable relating to finance leases		1,411			1,608
Other long-term payables		1,321			1,151

		4,762			4,509
Less: current portion included in other payables and accruals (note 32)		(1,038	)		(635	)

Long-term portion		3,724			3,874

37	POST-RETIREMENT BENEFIT OBLIGATIONS

(a)

Pension—defined contribution

The group companies participate in defined contribution retirement schemes organized by municipal governments of various provinces in which the group companies operate. Substantially all of the Group’s PRC employees are eligible to participate in these defined contribution retirement schemes. In addition, the group companies implemented an additional defined contribution retirement pension scheme for eligible employees since 2014.

F-58

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

37	POST-RETIREMENT BENEFIT OBLIGATIONS (cont’d)

(b)

Post-retirement benefits

In addition to the above schemes, the Group provides eligible retirees with other post-retirement benefits, including retirement subsidies, transportation allowance as well as other welfare. The expected cost of providing these post-retirement benefits is actuarially determined and recognized by using the projected unit credit method, which involves a number of assumptions and estimates, including inflation rate, discount rate and etc.

The plan is exposed to interest rate risk and the risk of changes in the life expectancy for pensioners.

The most recent actuarial valuation of the post-retirement benefit obligations was carried out at 31 December 2017 with assistance from a third party consultant using the projected unit credit actuarial valuation method.

The post-retirement benefit obligations recognized in the consolidated statement of financial position are as follows:


	2017			2016
	*RMB million*			*RMB million*
Post-retirement benefit obligations		2,670			3,063
Less: current portion		(168	)		(173	)

Long-term portion		2,502			2,890

The principal actuarial assumptions utilized as at the end of the reporting period are as follows:


	2017			*2016*
Discount rates for post-retirement benefits		4.10	%		3.50	%
Mortality rate		China Insurance			China Insurance
		Life Mortality			Life Mortality
		Table (2010-2013). CL5 for			Table (2010-2013). CL5 for
		Male and CL6 for Female			Male and CL6 for Female
Annual increase rate of post-retirement medical expenses		6.50	%		6.50	%
Inflation rate of pension benefits		2.50	%		2.50	%

A quantitative sensitivity analysis for significant assumptions at the end of the reporting period is shown below:


			Increase/ (decrease) in					Increase/ (decrease) in
			post-retirement					post-retirement
	Increase		benefit			Decrease		benefit
	in rate		obligations			in rate		obligations
	%		RMB million			%		RMB million
2017
Discount rate for post-retirement benefits		0.25		(73	)		0.25		77
Annual increase rate of pension benefits		1.00		283			1.00		(240	)
Annual increase rate of medical expenses		1.00		40			1.00		(33	)
2016
Discount rate for post-retirement benefits		0.25		(95	)		0.25		100
Annual increase rate of pension benefits		1.00		325			1.00		(275	)
Annual increase rate of medical expenses		1.00		46			1.00		(38	)

The sensitivity analyses above have been determined based on a method that extrapolates the impact on net post-retirement benefit obligations as a result of reasonable changes in key assumptions occurring at the end of the reporting period.

F-59

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

37	POST-RETIREMENT BENEFIT OBLIGATIONS (cont’d)

Expected contributions to be made in the future years out of the post-retirement benefit obligations were as follows:


	2017		2016
	*RMB million*		*RMB million*
Within the next 12 months		168		173
Between 2 and 5 years		679		706
Between 5 and 10 years		851		894
Over 10 years		3,049		3,342

Total expected payments		4,747		5,115

The average duration of the post-retirement benefit obligations at the end of 2017 was 13 years (2016: 13 years and a half).

F-60

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

37	POST-RETIREMENT BENEFIT OBLIGATIONS (cont’d)

The movements in the post-retirement benefit obligations were as follows:


2017
	Pension cost charged to profit or loss								Remeasurement (gains)/losses in other comprehensive income
	1 January 2017 RMB million		Service cost RMB million		Net interest RMB million		Sub-total included in profit or loss RMB million		Actuarial changes arising from changes in financial assumptions RMB million			Actuarial changes arising from changes in demographic assumptions RMB million		Experience adjustments RMB million		Sub-total included in other comprehensive income RMB million			Benefit settled RMB million			Transferred out due to disposal of a subsidiary RMB million			31 December 2017 RMB million
Defined benefit obligations/ benefit liability		3,063		—		98		98		(220	)		—		96		(124	)		(200	)		(167	)		2,670


2016
	Pension cost charged to profit or loss								Remeasurement (gains)/losses in other comprehensive income
	1 January 2016 RMB million		Service cost RMB million		Net interest RMB million		Sub-total included in profit or loss RMB million		Actuarial changes arising from changes in financial assumptions RMB million			Actuarial changes arising from changes in demographic assumptions RMB million		Experience adjustments RMB million		Sub-total included in other comprehensive income RMB million		Benefit settled RMB million			31 December 2016 RMB million
Defined benefit obligations/ benefit liability		2,750		—		88		88		(80	)		373		117		410		(185	)		3,063

F-61

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

38	DEFERRED TAXATION

Deferred tax assets and liabilities are offset when there is a legally enforceable right of offsetting and when the deferred income taxes relate to the same authority. The following amounts, determined after appropriate offsetting, are shown in the consolidated statement of financial position:


	2017			2016
	*RMB million*			*RMB million*
Deferred tax assets		122			79
Deferred tax liabilities		(18	)		(86	)

Net deferred tax assets/(liabilities)		104			(7	)

Movements in the net deferred tax assets/(liabilities) were as follows:


	2017			2016
	*RMB million*			*RMB million*
At 1 January		(7	)		235
Credited/(charged) to profit or loss (note 14)		162			(146	)
Charged to other comprehensive income		(51	)		(96	)

At 31 December		104			(7	)

The deferred tax assets and liabilities (prior to the offsetting of balances within the same tax jurisdiction) were made up of the taxation effects of the following:


	2017			2016
	*RMB million*			*RMB million*
Deferred tax assets:
Impairment provision for obsolete flight equipment spare parts		51			22
Impairment provision for receivables		64			70
Impairment provision for property, plant and equipment		104			11
Derivative financial instruments		82			15
Impairment provision for available-for-sale investments		25			25
Other payables and accruals		29			88
Aged payables		5			7

		360			238

Deferred tax liabilities:
Depreciation and amortization		(56	)		(85	)
Available-for-sale investments		(162	)		(123	)
Derivative financial instruments		(38	)		(37	)

		(256	)		(245	)

		104			(7	)

F-62

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

38	DEFERRED TAXATION (cont’d)

Movements in the net deferred tax assets/(liabilities) of the Group for the year were as follows:


							(Charged)/
	At the			(Charged)/			credited to other			At the
	beginning of			credited to			comprehensive			end of
	the year			profit or loss			income			the year
	*RMB million*			*RMB million*			*RMB million*			*RMB million*
For the year ended 31 December 2017
Impairment provision for flight equipment spare parts		22			29			—			51
Impairment provision for receivables		70			(6	)		—			64
Impairment provision for property, plant and equipment		11			93			—			104
Derivative financial instruments		15			78			(11	)		82
Impairment provision for available-for-sale investments		25			—			—			25
Other payables and accruals		88			(59	)		—			29
Aged payables		7			(2	)		—			5

		238			133			(11	)		360

Depreciation and amortization		(85	)		29			—			(56	)
Available-for-sale investments		(123	)		—			(39	)		(162	)
Derivative financial instruments		(37	)		—			(1	)		(38	)

		(245	)		29			(40	)		(256	)

Net deferred tax assets/(liabilities)		(7	)		162			(51	)		104


							(Charged)/
	At the			(Charged)/			credited to other			At the
	beginning of			credited to			comprehensive			end of
	the year			profit or loss			income			the year
	*RMB million*			*RMB million*			*RMB million*			*RMB million*
For the year ended 31 December 2016
Impairment provision for flight equipment spare parts		43			(21	)		—			22
Impairment provision for receivables		80			(10	)		—			70
Impairment provision for property, plant and equipment		26			(15	)		—			11
Derivative financial instruments		25			—			(10	)		15
Impairment provision for available-for-sale investments		25			—			—			25
Other payables and accruals		89			(1	)		—			88
Tax losses		133			(133	)		—			—
Aged payables		—			7			—			7

		421			(173	)		(10	)		238

Depreciation and amortization		(136	)		51			—			(85	)
Available-for-sale investments		(39	)		(24	)		(60	)		(123	)
Derivative financial instruments		(11	)		—			(26	)		(37	)

		(186	)		27			(86	)		(245	)

Net deferred tax assets/(liabilities)		235			(146	)		(96	)		(7	)

F-63

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

38	DEFERRED TAXATION (cont’d)

As at the reporting date, the Group had the following balances in respect of which deferred tax assets have not been recognized:


	2017				2016
	Deferred		Temporary		Deferred		Temporary
	taxation		differences		taxation		differences
	*RMB million*		*RMB million*		*RMB million*		*RMB million*
Tax losses carried forward		42		167		409		1,637
Other deductible temporary differences		6		27		32		128

Total unrecognized deferred tax assets		48		194		441		1,765

In accordance with the PRC tax law, tax losses can be carried forward, for a period of five years, to offset against future taxable income. The Group’s tax losses carried forward will expire between 2018 and 2022.

As at 31 December 2017, management carried out an assessment to determine whether future taxable profits will be available to utilize the tax losses and deductible temporary differences. As there are still uncertainties around the Group’s future operating results, such as future fuel prices and market competition, management assessed that for certain subsidiaries there are significant uncertainties that future taxable profits will be available and the deferred tax assets arising from aforementioned tax losses and deductible temporary differences were not recognized.

39	DERIVATIVE FINANCIAL INSTRUMENTS


	Assets					Liabilities
	2017		2016			2017			2016
	*RMB million*		*RMB million*			*RMB million*			*RMB million*
At 31 December
Interest rate swaps (note (a))		151		137			14			47
Forward foreign exchange contracts (note (b))		—		11			311			11
Total		151		148			325			58

Less: current portion
– Forward foreign exchange contracts		—		(11	)		(324	)		(11	)

Non-current portion		151		137			1			47

Notes:

(a)

Interest rate swaps

The Group uses interest rate swaps to reduce the risk of changes in market interest rates (note 40). The interest rate swaps entered into by the Group for swapping floating interest rates, usually referenced to LIBOR, into fixed rates are accounted for as cash flow hedges. As at 31 December 2017, the notional amount of the outstanding interest rate swap agreements was approximately USD1,420 million (2016: USD1,636 million). These agreements will expire between 2018 and 2025.

Realized and unrealized gains and losses arising from the valuation of these interest rate swaps have been dealt with in the consolidated statement of profit or loss and other comprehensive income as follows:


	2017			2016			2015
	*RMB million*			*RMB million*			*RMB million*
Realized losses (recorded in finance costs)		(63	)		(122	)		(134	)
Unrealized mark to market gains
– cash flow hedges (recognized in other comprehensive income)		47			166			2
– fair value hedges (recognized in (loss)/gain on fair value changes of derivative financial instruments)		—			2			6

		(16	)		46			(126	)

F-64

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

39	DERIVATIVE FINANCIAL INSTRUMENTS (cont’d)

(b)

Forward foreign exchange contracts

The Group uses foreign exchange forward contracts to reduce the risk of changes in currency exchange rates in respect of ticket sales and expenses denominated in foreign currencies (note 3). The Group’s foreign exchange forward contracts for selling RMB and purchasing USD at fixed exchange rates are accounted for as fair value hedges. As at 31 December 2017, the notional amount of the outstanding currency forward contracts was approximately USD829 million (2016: USD440 million), which will expire in 2018.

Realized and unrealized gains and losses arising from the valuation of these contracts have been dealt with in the consolidated statement of profit or loss and other comprehensive income as follows:


	2017			2016			2015
	*RMB million*			*RMB million*			*RMB million*
Realized (losses)/gains (recorded in finance costs)		(177	)		5			15
Unrealized mark to market losses
– cash flow hedges (recognized in other comprehensive income)		—			(16	)		(11	)
– fair value hedges (recognized in (loss)/gain on fair value changes of derivative financial instruments)		(311	)		—			—

		(488	)		(11	)		4

(c)

Cross currency swap

The Group uses cross currency swap to reduce the risk of changes in currency exchange rates and market interest rates. The cross currency swap entered into by the Group for swapping US dollars floating interest rates (LIBOR) into Euro floating interest rates (EURIBOR), is accounted for as a cash flow hedge. As at 31 December 2017, there were no outstanding cross currency swap (2016:nil).

Realized and unrealized gain and loss arising from the valuation of the contract has been dealt with in the consolidated statement of profit or loss and other comprehensive income as follows:


	2017		2016			2015
	*RMB million*		*RMB million*			*RMB million*
Realized gains (recorded in finance costs)		—		5			—
Unrealized mark to market (losses)/gains
– cash flow hedge (recognized in other comprehensive income)		—		(7	)		7

		—		(2	)		7

40.	FINANCIAL ASSETS AND FINANCIAL LIABILITIES

(a)

Financial instruments by category



			Derivatives
	Loans and		used for		Available
	receivables		hedging		for sale		Total
	RMB million		RMB million		RMB million		RMB million
2017
Financial assets
Available-for-sale investments		—		—		800		800
Derivative financial instruments		—		151		—		151
Trade and notes receivables		2,124		—		—		2,124
Prepayments and other receivables		3,913		—		—		3,913
Restricted bank deposits and short-term bank deposits		51		—		—		51

F-65

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

40.	FINANCIAL ASSETS AND FINANCIAL LIABILITIES (cont’d)

(a)

Financial instruments by category (cont’d)



			Derivatives
	Loans and		used for		Available
	receivables		hedging		for sale		Total
	RMB million		RMB million		RMB million		RMB million
Cash and cash equivalents		4,605		—		—		4,605
Other non-current assets		293		—		—		293

Total		10,986		151		800		11,937



	Derivatives
	used for		Loans and
	hedging		borrowings		Total
	RMB million		RMB million		RMB million
2017
Financial liabilities
Borrowings		—		63,801		63,801
Obligations under finance leases		—		66,868		66,868
Derivative financial instruments		325		—		325
Trade and bills payables		—		3,184		3,184
Other payables and accruals		—		12,964		12,964

Total		325		146,817		147,142



			Derivatives
	Loans and		used for		Available
	receivables		hedging		for sale		Total
	RMB million		RMB million		RMB million		RMB million
2016
Financial assets
Available-for-sale investments		—		—		645		645
Derivative financial instruments		—		148		—		148
Trade and notes receivables		2,660		—		—		2,660
Prepayments and other receivables		2,937		—		—		2,937
Restricted bank deposits and short-term bank deposits		43		—		—		43
Cash and cash equivalents		1,695		—		—		1,695
Other non-current assets		285		—		—		285

Total		7,620		148		645		8,413



	Derivatives
	used for		Loans and
	hedging		borrowings		Total
	RMB million		RMB million		RMB million
2016
Financial liabilities
Borrowings		—		56,732		56,732
Obligations under finance leases		—		61,041		61,041
Derivative financial instruments		58		—		58
Trade and bills payables		—		3,376		3,376
Other payables and accruals		—		12,942		12,942

Total		58		134,091		134,149

F-66

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

40.	FINANCIAL ASSETS AND FINANCIAL LIABILITIES (cont’d)

(b)

Financial risk factors

The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and fuel price risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to manage risk exposures whenever management considers necessary.

Risk management is carried out by a central treasury department (the “Group Treasury”) under policies approved by the Board. The Group Treasury identifies, evaluates and hedges financial risks in close cooperation with the Group’s operating units. The overall risk management strategies, as well as written policies covering specific areas, such as foreign currency risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments were approved by the Board.

Foreign currency risk

The Group operates its business in many countries and territories. The Group generates its revenue in different currencies, and its foreign currency liabilities at the end of the period are much higher than its foreign currency assets. The Group’s major liability item (mainly resulting from purchases of aircraft) is mainly priced and settled in foreign currencies, primarily USD. The Group is exposed to currency risks from fluctuations in various foreign currency exchange rates against RMB.

The RMB is not freely convertible into other currencies, however, under Mainland China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Group is permitted to exchange RMB for other currencies through banks authorized to conduct foreign exchange business.

In addition, fluctuations in foreign currency exchange rates will affect the Group’s future costs for purchases of aircraft, flight equipment and aviation fuel, and take-off and landing charges in foreign airports.

The Group entered into certain foreign exchange forward contracts to manage part of these foreign currency risks. As at 31 December 2017, the foreign exchange forward contracts at notional value were RMB5,415 million. Details of foreign currency forward contracts are disclosed in note 39(b) to the financial statements.

The following tables detail the Group’s exposure to major currency risk at the reporting dates:


	2017
	USD			EUR			SGD			KRW
	RMB million			RMB million			RMB million			RMB million
Trade receivables		31			3			16			16
Cash and cash equivalents		961			74			28			—
Other receivables		1,065			—			1			131
Other non-current assets		206			—			—			—
Trade and other payables		(111	)		—			(6	)		—
Obligations under finance leases		(29,254	)		—			(627	)		—
Borrowings		(7,555	)		(4,921	)		(2,435	)		(1,058	)


	2016
	USD			EUR			JPY			KRW
	RMB million			RMB million			RMB million			RMB million
Trade receivables		79			99			2			27
Cash and cash equivalents		702			39			15			—
Other receivables		1,636			—			8			125
Other non-current assets		267			—			—			—
Trade and other payables		(123	)		—			(2	)		(1	)
Obligations under finance leases		(44,913	)		—			(326	)		—
Borrowings		(7,953	)		(4,215	)		—			(1,008	)

F-67

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

40.	FINANCIAL ASSETS AND FINANCIAL LIABILITIES (cont’d)

(b)

Financial risk factors (cont’d)

Foreign currency risk (cont’d)

The following tables indicate the approximate change in the Group’s consolidated statement of profit or loss and other comprehensive income in response to a 1% appreciation or depreciation of the RMB against the following major currencies at the reporting dates:

2017

2016

Effect on other

Effect on

comprehensive

Effect on

comprehensive

profit or loss

income

profit or loss

income

RMB million

If RMB (weakens)/strengthens against USD

(260)/260

41/(41

)

(377)/377

23/(23

)

If RMB (weakens)/strengthens against EUR

(36)/36

—

(31)/31

—

If RMB (weakens)/strengthens against JPY

(1)/1

—

(2)/2

—

If RMB (weakens)/strengthens against KRW

(7)/7

—

(6)/6

—

Interest rate risk

The Group’s interest rate risk primarily arises from borrowings and obligations under finance leases. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings and finance leases issued at fixed rates expose the Group to fair value interest rate risk. The Group determines the proportion of borrowings and finance leases issued at variable rates and fixed rates based on the market environment.

The Group’s finance department has been monitoring the level of interest rates. The increase in the interest rates will increase the interest costs of borrowings and finance leases issued at variable rates, which will further impact the performance of the Group. To hedge against the variability in the cash flows arising from a change in market interest rates, the Group has entered into certain interest rate swaps to swap variable rates into fixed rates. The interest rates and terms of repayment of borrowings made to the Group and interest rate swaps are disclosed in notes 34 and 39(a) to the financial statements.

The following tables detail the interest rate profiles of the Group’s interest-bearing financial instruments at the reporting dates:


	2017			2016
	*RMB million*			*RMB million*
Floating rate instruments
Cash and cash equivalents		4,605			1,695
Restricted bank deposits and short-term bank deposits		51			43
Borrowings		(13,272	)		(15,419	)
Obligations under finance leases		(66,868	)		(61,041	)
Interest rate swap at notional amount		9,280			11,352


	2017			2016
	*RMB million*			*RMB million*
Fixed rate instruments
Borrowings		(50,529	)		(41,313	)

F-68

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

40.	FINANCIAL ASSETS AND FINANCIAL LIABILITIES (cont’d)

(b)

Financial risk factors (cont’d)

Interest rate risk (cont’d)

The following table indicates the approximate change in the Group’s profit or loss and other comprehensive income, taking the interest rate swap into consideration, if interest rate had been 25 basis points higher with all other variables held constant:

2017

2016

Effect on other

Effect on

comprehensive

Effect on

comprehensive

profit or loss

income

profit or loss

income

RMB million

Floating rate instruments

(142

)

(140

)

Fuel price risk

The Group’s results of operations may be significantly affected by fluctuations in fuel prices which is a major expense component for the Group. Aircraft fuel accounted for approximately 25% of the Group’s operating expenses (2016: 21%).

As at 31 December 2017, the Group had no open crude oil option contracts.

For the year ended 31 December 2017, if fuel price had been 5% higher/lower with all other variables held constant, the Group’s fuel cost would have been RMB1,257 million higher/lower (2016: RMB981million higher/lower).

Credit risk

The Group’s credit risk is primarily attributable to cash and cash equivalents, deposits and derivative financial instruments with banks and financial institutions, as well as credit exposures to sales agents.

A significant portion of the Group’s air tickets is sold by sales agents participating in the Billing and Settlements Plan (“BSP”), a clearing system between airlines and sales agents organized by the International Air Transportation Association. The balance due from BSP agents amounted to approximately RMB717 million as at 31 December 2017 (2016: approximately RMB922 million). The credit risk exposure to BSP agents and the remaining trade and notes receivables are maintained by the Group on an on-going basis and the allowance for impairment of doubtful debts is within management’s expectations.

The Group’s cash management policy is to deposit cash and cash equivalents mainly in state-owned banks and other reputable banks and finance institutions. The Group also deposits cash and cash equivalents in an associate financial institution owned by its holding company (note 47(c)(iii)). Management does not expect any loss to arise from non-performance by these banks and the financial institution.

Transactions in relation to derivative financial instruments are only carried out with reputable banks and financial institutions. The Group has policies that limit the amount of credit exposure to any bank and financial institution. Management does not expect any losses from non-performance by these banks and financial institutions.

F-69

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

40.	FINANCIAL ASSETS AND FINANCIAL LIABILITIES (cont’d)

(b)

Financial risk factors (cont’d)

Liquidity risk

The Group’s primary cash requirements have been for day-to-day operations, additions of and upgrades to aircraft, engines and flight equipment and repayments of related borrowings. The Group finances its working capital requirements through a combination of funds generated from operations and borrowings including bank loans, debentures and bonds (both short-term and long-term). The Group generally finances the acquisition of aircraft through long-term finance leases or bank loans.

The table below analyses the Group’s financial liabilities that will be settled into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.


	Less than						Over
	1 year		1 and 2 years		2 and 5 years		5 years		Total
	RMB million		RMB million		RMB million		RMB million		RMB million
At 31 December 2017
Borrowings		41,060		7,325		10,161		10,014		68,560
Derivative financial instruments		324		—		1		—		325
Obligations under finance leases		11,651		10,408		27,895		30,196		80,150
Trade, bills and other payables		16,148		—		—		—		16,148

Total		69,183		17,733		38,057		40,210		165,183


	Less than						Over
	1 year		1 and 2 years		2 and 5 years		5 years		Total
	RMB million		RMB million		RMB million		RMB million		RMB million
At 31 December 2016
Borrowings		30,262		5,670		14,961		10,813		61,706
Derivative financial instruments		11		33		8		6		58
Obligations under finance leases		8,123		7,526		21,905		33,277		70,831
Trade, bills and other payables		16,318		—		—		—		16,318

Total		54,714		13,229		36,874		44,096		148,913

(c)

Capital risk management

The primary objectives of the Group’s capital management are to safeguard the Group’s ability to continue as a going concern and to maintain healthy capital ratios in order to support its business and maximize shareholders’ value.

The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. The Group is not subject to any externally imposed capital requirements. No changes were made in the objectives, policies or processes for managing capital during the years ended 31 December 2017 and 31 December 2016.

F-70

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

40.	FINANCIAL ASSETS AND FINANCIAL LIABILITIES (cont’d)

(c)

Capital risk management (cont’d)

The Group monitors capital on the basis of the debt ratio, which is calculated as total liabilities divided by total assets. The debt ratios at 31 December 2017 and 2016 were as follows:


	2017		2016
	*RMB million*		*RMB million*
Total liabilities		170,949		159,958
Total assets		229,727		212,324
Debt ratio		0.74		0.75

(d)

Fair value estimation of financial assets and liabilities

Financial instruments not measured at fair value

The carrying amounts and fair values of the Group’s financial instruments, other than those with carrying amounts that reasonably approximate to fair values, were as follows:


	2017				2016
	Carrying				Carrying
	amounts		Fair values		amounts		Fair values
	RMB million		RMB million		RMB million		RMB million
Financial assets
Deposits relating to aircraft held under operating leases included in other non-current assets		217		193		285		258

Financial liabilities
Long-term borrowings		24,711		23,812		27,890		28,075
Obligations under finance leases		57,627		57,352		54,594		50,408

Total		82,338		81,164		82,484		78,483

Management has assessed that the fair values of cash and cash equivalents, restricted bank deposits and short-term bank deposits, trade and notes receivables, trade and bills payables, financial assets included in prepayments and other receivables, financial liabilities included in other payables and accruals, short-term bank borrowings and short-term guaranteed bonds approximate to their carrying amounts largely due to the short term maturities of these instruments.

The fair values of the deposits relating to aircraft held under operating leases included in other non-current assets, long-term borrowings and obligations under finance leases have been measured using significant observable inputs and calculated by discounting the expected future cash flows using rates currently available for instruments with similar terms, credit risk and remaining maturities.

Financial instruments measured at fair value

The Group enters into derivative financial instruments, including forward currency contracts and interest rate swaps with various counterparties, principally financial institutions with high credit ratings.

Derivative financial instruments are measured using valuation techniques similar to forward pricing and swap models, using present value calculations. The models incorporate various market observable inputs including the foreign exchange spot and forward rates and interest rate curves. As at 31 December 2017, the marked to market value of the derivative asset position is net of a credit valuation adjustment attributable to derivative counterparty default risk. The changes in counterparty credit risk had no material effect on the hedge effectiveness assessment for derivatives designated in hedge relationship and other financial instruments recognized at fair value.

F-71

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

40.	FINANCIAL ASSETS AND FINANCIAL LIABILITIES (cont’d)

(d)

Fair value estimation of financial assets and liabilities (cont’d)

Fair value hierarchy

The following tables illustrate the fair value measurement hierarchy of the Group’s financial instruments:

Assets and liabilities measured at fair value:


As at 31 December 2017
	Fair value measurement using
	Quoted prices in active markets (Level 1) RMB million		Significant observable inputs (Level 2) RMB million		Significant unobservable inputs (Level 3) RMB million		Total RMB million
Assets
Derivative financial instruments
-Interest rate swaps (note 39(a))		—		151		—		151
Available-for-sale financial Assets (note 24)		693		—		—		693

Total		693		151		—		844

Liabilities
Derivative financial instruments
-Forward foreign exchange contracts (note 39(b))		—		311		—		311
-Interest rate swaps (note 39(a))		—		14		—		14

Total		—		325		—		325


As at 31 December 2016
	Fair value measurement using
	Quoted prices in active markets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
	RMB million		RMB million		RMB million		RMB million
Assets
Derivative financial instruments
-Forward foreign exchange contracts (note 39(b))		—		11		—		11
-Interest rate swaps (note 39(a))		—		137		—		137
Available-for-sale financial Assets (note 24)		538		—		—		538

Total		538		148		—		686

Liabilities
Derivative financial instruments
-Forward foreign exchange contracts (note 39(b))		—		11		—		11
-Interest rate swaps (note 39(a))		—		47		—		47

Total		—		58		—		58

The fair value of financial instruments traded in active markets was based on quoted market prices at the reporting dates. Available-for-sale investments are listed A share and listed H share stock investments.

The fair values of derivative financial instruments are determined by using valuation techniques. These valuation techniques use applicable models and maximize the use of observable market data where it is available and also use quoted market prices or dealer quotes for reference.

F-72

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

40.	FINANCIAL ASSETS AND FINANCIAL LIABILITIES (cont’d)

(d)

Fair value estimation of financial assets and liabilities (cont’d)

Fair value hierarchy (cont’d)

Assets and liabilities for which fair values are disclosed:


As at 31 December 2017
	Fair value measurement using
	Quoted prices in active markets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
	RMB million		RMB million		RMB million		RMB million
Assets
Deposits relating to aircraft held under operating leases included in other long-term assets		—		193		—		193

Liabilities
Long-term borrowings		2,678		21,134		—		23,812
Obligations under finance leases		—		57,352		—		57,352

Total		2,678		78,486		—		81,164


As at 31 December 2016

	Fair value measurement using
	Quoted prices in active markets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
	RMB million		RMB million		RMB million		RMB million
Assets
Deposits relating to aircraft held under operating leases included in other long-term assets		—		258		—		258

Liabilities
Long-term borrowings		—		28,075		—		28,075
Obligations under finance leases		—		50,408		—		50,408

Total		—		78,483		—		78,483

F-73

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

41	SHARE CAPITAL


		2017		2016
		*RMB million*		*RMB million*
Registered, issued and fully paid of RMB1.00 each
A shares listed on The Shanghai Stock Exchange (“A Shares”)
-	Tradable shares held by Shanghai Licheng Information
-	Technology Consulting Co., Ltd. with trading moratorium		—		466
-	Tradable shares held by China National Aviation Fuel
-	Holding Company with trading moratorium		—		466
-	Tradable shares held by China COSCO Shipping
-	Corporation Limited with trading moratorium		—		233
-	Tradable shares held by Caitong Fund Management
-	Co., Ltd. with trading moratorium		—		162
-	Tradable shares without trading moratorium		9,808		8,481

H shares listed on The Stock Exchange of Hong Kong Limited (“H Shares”)			4,659		4,659

-			14,467		14,467

Pursuant to articles 49 and 50 of the Company’s articles of association, both the listed A shares and listed H shares are registered ordinary shares and carry equal rights.

A summary of movements in the Company’s share capital is as follows:


	Number of shares in issue
At 1 January 2017		14,467
Issue of shares		—

At 31 December 2017		14,467

F-74

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

RESERVES


	Share premium		Capital reserve (note (a))			Hedging reserve			Statutory reserve (note (b))		Other reserves			Retained profits			Total
	RMB million		RMB million			RMB million			RMB million		RMB million			RMB million			RMB million
At 1 January 2016		22,327		(778	)		(51	)		184		(2,579	)		5,168			24,271
Unrealized gains on cash flow hedges (note 39)		—		—			107			—		—			—			107
Fair value movements in available-for-sale investments		—		—			—			—		36			—			36
Fair value changes of available-for-sale investments held by an associate		—		—			—			—		(1	)		—			(1	)
Actuarial gains on post-retirement benefit obligations		—		—			—			—		(403	)		—			(403	)
Transfer from retained profits		—		—			—			144		—			(144	)		—
Issue of shares		7,213		—			—			—		—			—			7,213
Profit for the year		—		—			—			—		—			4,498			4,498
Interim 2016 dividend (note 48)		—		—			—			—		—			(738	)		(738	)

At 31 December 2016		29,540		(778	)		56			328		(2,947	)		8,784			34,983

At 1 January 2017		29,540		(778	)		56			328		(2,947	)		8,784			34,983
Unrealized gains on cash flow hedges (note 39)		—		—			35			—		—			—			35
Fair value movements in available-for-sale investments		—		—			—			—		110			—			110
Fair value changes of available-for-sale investments held by an associate		—		—			—			—		10			—			10
Actuarial gains on post-retirement benefit obligations		—		—			—			—		122			—			122
Transfer from retained profits		—		—			—			212		—			(212	)		—
Issue of shares		—		—			—			—		—			—			—
Profit for the year		—		—			—			—		—			6,342			6,342
Final 2016 dividend		—		—			—			—		—			(709	)		(709	)

At 31 December 2017		29,540		(778	)		91			540		(2,705	)		14,205			40,893

Notes:

(a)

Capital reserve

Capital reserve represents the difference between the fair value of the net assets injected and the nominal amount of the Company’s share capital issued in respect of a group restructuring carried out in June 1996 for the purpose of the Company’s listing.

(b)

Reserve funds

According to the PRC Company Law, the Company is required to transfer a portion of the profits to the statutory reserve. The transfer to this reserve must be made before distribution of dividends to shareholders and when there are retained profits at the end of the financial year.

F-75

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

43	DISPOSAL OF A SUBSIDIARY

On 29 November 2016, the Company entered into Share Purchase Agreement with Eastern Airlines Industry Investment Company Limited, a wholly-owned subsidiary of CEA Holding, to transfer 100% equity interest in Eastern Logistics, a wholly-owned subsidiary of the Company (“the Transfer”). At of 8 February 2017, the Transfer has been completed.


	2017 RMB million
Net assets disposed of:
Intangible assets (note 17)		14
Property, plant and equipment (note 18)		2,019
Prepayments for land use right		305
Other non-current assets		429
Deferred tax assets		4
Flight equipment spare parts		59
Trade receivables		1,097
Prepayments and other receivables		670
Cash and cash equivalents		536
Restricted bank deposits		1
Sales in advance of carriage		(124	)
Trade payables		(1,915	)
Other payables and accruals		(1,090	)
Income tax payable		(26	)
Obligations under finance leases		(409	)
Borrowings		(262	)
Provision for return condition checks for aircraft under operating leases		(511	)
Other long-term liabilities		(47	)
Post-retirement benefit obligations		(158	)
Non-controlling interests		87


Net assets		679
Gain on disposal of a subsidiary		1,754


Satisfied by:
Cash		2,433

An analysis of the net inflow of cash and cash equivalents in respect of the disposal of a subsidiary is as follows:


	2017 RMB million
Cash consideration		2,433
Cash and bank balances disposed of		(536	)

Net inflow of cash and cash equivalents in respect of the disposal of a subsidiary		1,897

F-76

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

44	PARTLY-OWNED SUBSIDIARIES WITH MATERIAL NON-CONTROLLING INTERESTS

Details of the Group’s subsidiaries that have material non-controlling interests are set out below:


	2017			2016
Percentage of equity interest held by non-controlling interests:
CEA Jiangsu		37.44	%		37.44	%
CEA Yunnan		9.64	%		9.64	%
CEA Wuhan		40.00	%		40.00	%
China Cargo		—			17.00	%


	2017			2016
	*RMB million*			*RMB million*
Profit for the year allocated to non-controlling interests:
CEA Jiangsu		216			191
CEA Yunnan		67			75
CEA Wuhan		178			173
China Cargo		3			29

Dividends paid to non-controlling interests of CEA Jiangsu		37			56
Dividends paid to non-controlling interests of CEA Wuhan		22			—

Accumulated balances of non-controlling interests at the reporting dates:
CEA Jiangsu		1,416			1,236
CEA Yunnan		641			574
CEA Wuhan		1,393			1,249
China Cargo		—			(105	)

The following tables illustrate the summarized financial information of the above subsidiaries. The amounts disclosed are before any inter-company eliminations:


	CEA Jiangsu			CEA Yunnan			CEA Wuhan			China Cargo
	RMB million			RMB million			RMB million			RMB million
2017
Revenue		8,257			8,939			4,289			507
Total expenses		7,680			8,244			3,843			462
Profit for the year		577			695			446			45
Total comprehensive income for the year		580			695			461			45

Current assets		1,124			1,230			79			—
Non-current assets		9,313			16,171			7,047			—
Current liabilities		2,260			4,471			1,576			—
Non-current liabilities		4,395			6,282			2,067			—

Net cash flows from operating activities		1,491			1,230			846			—
Net cash flows used in investing activities		(588	)		(274	)		(156	)		—
Net cash flows used in financing activities		(894	)		(948	)		(682	)		—
Effect of foreign exchange rate changes, net		—			—			—			—

Net increase in cash and cash equivalents		9			8			8			—

F-77

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

44	PARTLY-OWNED SUBSIDIARIES WITH MATERIAL NON-CONTROLLING INTERESTS (cont’d)


	CEA Jiangsu			CEA Yunnan			CEA Wuhan			China Cargo
	RMB million			RMB million			RMB million			RMB million
2016
Revenue		7,298			9,054			3,706			3,770
Total expenses		6,787			8,280			3,273			3,598
Profit for the year		511			774			433			172
Total comprehensive income for the year		503			774			438			157

Current assets		1,260			990			79			1,595
Non-current assets		8,163			16,153			6,108			1,525
Current liabilities		1,971			3,056			1,216			2,834
Non-current liabilities		4,149			8,134			1,849			889

Net cash flows from/( used in ) operating activities		1,937			3,178			(196	)		279
Net cash flows (used in)/from investing activities		(675	)		(1,098	)		428			11
Net cash flows used in financing activities		(1,301	)		(2,096	)		(241	)		(11	)
Effect of foreign exchange rate changes, net		—			—			—			(1	)

Net (decrease)/increase in cash and cash equivalents		(39	)		(16	)		(9	)		278

F-78

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

45	NOTES TO THE STATEMENT OF CONSOLIDATED CASH FLOWS

(a)

Cash generated from operations


	2017			2016			2015
	*RMB million*			*RMB million*			*RMB million*
Profit before income tax		8,610			6,497			5,667
Adjustments for:
Depreciation of property, plant and equipment and amortization of other non-current assets		13,769			12,345			10,710
Amortization of intangible assets		143			129			85
Depreciation of investment properties		12			11			4
Amortization of prepayments for land use right		45			63			60
Gains on disposal of property, plant and equipment		(13	)		(74	)		(377	)
Gain on disposal of prepayments for land use right		(5	)		(3	)		(1	)
Gain on disposal of investment in a subsidiary		(1,754	)		—			(41	)
Gain on disposal of investment in an associate		(12	)		(12	)		—
Gain on disposal of available-for-sale investments		(4	)		(95	)		(33	)
Dividend income from available-for-sale investments		(33	)		(28	)		(13	)
Share of results of associates		(202	)		(148	)		(126	)
Share of results of joint ventures		(49	)		(39	)		(26	)
Net foreign exchange losses		(2,378	)		3,246			5,480
Gain on fair value changes of derivative financial instruments		311			(2	)		(6	)
Impairment charges		491			29			228
Interest income		(111	)		(96	)		(66	)
Interest expense		3,184			2,641			2,075

Operating profit before working capital changes		22,004			24,464			23,620

Changes in working capital
Flight equipment spare parts		(109	)		(202	)		117
Trade and notes receivables		(500	)		208			985
Prepayments and other receivables		(753	)		(839	)		(2,011	)
Restricted bank deposits and short-term bank deposits		(8	)		(8	)		—
Sales in advance of carriage		(569	)		1,836			777
Trade and bills payables		1,725			(336	)		1,629
Other payables and accruals		340			1,424			(234	)
Staff housing allowances		62			(57	)		105
Other long-term liabilities		(728	)		(883	)		1,164
Post-retirement benefit obligations		(217	)		321			(282	)
Provision for return condition checks for aircraft under operating leases		(139	)		167			(381	)
Operating lease deposits		—			59			46

Cash generated from operations		21,108			26,154			25,535

F-79

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

45	NOTES TO THE STATEMENT OF CONSOLIDATED CASH FLOWS (cont’d)

(b)

Major non-cash transactions

2017

2016

2015

RMB million

Finance lease obligations incurred for acquisition of aircraft

6,865

8,838

21,887

(c)

Changes in liabilities arising from financing activities


	Bank and other loans			Obligations under finance leases
	*RMB million*			*RMB million*
At 1 January 2017		56,732			61,041
Changes from financing cash flow		7,450			(10,587	)
Reclassified as part of the disposal group		(262	)		(409	)
Foreign exchange movement		(119	)		(2,362	)
New finance leases		—			19,185

At 31 December 2017		63,801			66,868

46	COMMITMENTS

(a)

Capital commitments

The Group had the following capital commitments:


	2017		*2016*
	*RMB million*		*RMB million*
Contracted for:
– Aircraft, engines and flight equipment (note)		87,030		123,019
– Other property, plant and equipment		7,572		9,550
– Investments		208		140

		94,810		132,709

Note:

Contracted expenditures for the above aircraft, engines and flight equipment, including deposits prior to delivery, subject to future inflation increase built into the contracts, were expected to be paid as follows:


	2017		*2016*
	*RMB million*		*RMB million*
Within one year		28,322		28,384
In the second year		27,516		32,306
In the third year		19,273		28,983
In the fourth year		7,829		18,334
Over four years		4,090		15,012

		87,030		123,019

The above capital commitments represent the future outflow of cash or other resources.

F-80

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

46	COMMITMENTS (cont’d)

(b)

Operating lease commitments

As at the reporting date, the Group had commitments to pay future minimum lease rentals under operating leases as follows:


	2017		*2016*
	*RMB million*		*RMB million*
Aircraft, engines and flight equipment
Within one year		3,048		3,814
In the second year		2,559		3,124
In the third to fifth years, inclusive		7,112		7,616
After the fifth year		7,528		7,605

		20,247		22,159

Land and buildings
Within one year		332		362
In the second year		164		225
In the third to fifth years, inclusive		156		411
After the fifth year		37		732

		689		1,730

		20,936		23,889

47	RELATED PARTY TRANSACTIONS

The Group is controlled by CEA Holding, which directly owns 35.06% of the Company’s shares as at 31 December 2017 (2016: 35.06%). In addition, through CES Global Holdings (Hong Kong) Limited and CES Finance Holding Co., Ltd., two wholly-owned subsidiaries of CEA Holding, CEA Holding indirectly owns additional shares of the Company of approximately 18.15% and 3.16% respectively as at 31 December 2017 (2016: 18.15% and 3.16% ).

The Company is a state-owned enterprise established in the PRC and is controlled by the PRC government, which also owns a significant portion of the productive assets in the PRC. In accordance with IAS 24 “Related Party Disclosures”, government-related entities and their subsidiaries, directly or indirectly controlled, jointly controlled or significantly influenced by the PRC government are defined as related parties of the Group. On that basis, related parties include CEA Holding and its subsidiaries (other than the Group), other government-related entities and their subsidiaries (“Other State-owned Enterprises”), other entities and corporations over which the Company is able to control or exercise significant influence and key management personnel of the Company as well as their close family members.

For the purpose of the related party transaction disclosures, the directors of the Company believe that meaningful information in respect of related party transactions has been adequately disclosed.

F-81

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

47	RELATED PARTY TRANSACTIONS (cont’d)

(a)

Nature of related parties that do not control or controlled by the Group:


Name of related party		Relationship with the Group
Eastern Air Finance Company		Associate of the Company
Eastern Aviation Import & Export Co., Ltd. and its subsidiaries (“Eastern Import & Export”)		Associate of the Company
Shanghai P&W		Associate of the Company
Eastern Advertising		Associate of the Company
Collins Aviation		Associate of the Company
CAE Melbourne		Joint venture of the Company
Wheels & Brakes		Joint venture of the Company
Technologies Aerospace		Joint venture of the Company
China Kaiya		Joint venture of the Company
Shanghai Hute		Joint venture of the Company
CEA Development Co., Limited and its subsidiaries (“CEA Development”)		Controlled by the same parent company
China Eastern Air Catering Investment Co., Limited and its subsidiaries (“Eastern Air Catering”)		Controlled by the same parent company
CES International Financial Leasing Corporation Limited and its subsidiaries (“CES Lease Company”)		Controlled by the same parent company
Shanghai Eastern Airlines Investment Co., Ltd. (“Eastern Investment”)		Controlled by the same parent company
Shanghai Eastern Airlines Logistics Co., Ltd. and its subsidiaries (“Eastern Logistics”) (note)		Controlled by the same parent company
Eastern Airlines Industry Investment Company Limited (“Eastern Airlines Industry Investment”)		Controlled by the same parent company
TravelSky Technology Limited (“TravelSky”)		A director and vice president of the Company is a director of Travelsky
China Aviation Supplies Holding Company and its		A director and vice president of the
subsidiaries (“CASC”)		Company is a director of CASC
Air France-KLM Group (“AFK”)		A director and vice president of the Company is a director of AFK

Note:

Eastern Logistics has become a related party of the Group as it was acquired by Eastern Airlines Industry Investment at of 8 February 2017 and ceased to be a subsidiary of the Company.

F-82

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

47	RELATED PARTY TRANSACTIONS (cont’d)

(b)

Related party transactions


				Income or receipts/
				(expense or payments)
		Pricing policy		2017			2016
Nature of transaction decision	Related party	and process		RMB million			RMB million
Interest income on deposits	Eastern Air Finance Company		(iv)		29			23
Interest expense on loans	Eastern Air Finance Company		(iv)		(2	)		(10	)
	CEA Holding		(iv)		(1	)		(1	)
Handling charges for purchase of aircraft, flight, equipment, flight equipment spare parts, other property, plant and flight equipment and repairs for aircraft and engines*	Eastern Import & Export		(ii)		(145	)		(105	)
Repairs and maintenance expense for aircraft and engines	Wheels & Brakes		(ii)		(152	)		(176	)
	Technologies Aerospace		(ii)		(276	)		(252	)
	Shanghai P&W		(ii)		(2,538	)		(2,049	)
	Shanghai Hute		(ii)		(60	)		(84	)
Supply of cabin cleaning services	Eastern Advertising		(ii)		(22	)		(21	)
Advertising expense*	Eastern Advertising		(ii)		(23	)		(36	)
Media royalty fee	Eastern Advertising		(iii)		15			17
Supply of logistics services	Eastern Import & Export		(ii)		(87	)		(72	)
Supply of system services	China Kaiya		(ii)		(44	)		(79	)
Supply of food and beverages*	Eastern Air Catering		(i)		(1,254	)		(1,054	)
	CEA Development		(i)		(72	)		(51	)
	Eastern Import & Export		(i)		(58	)		(50	)
Cargo handling income	Eastern Import & Export		(iii)		—			15
Automobile maintenance service, aircraft maintenance, providing transportation automobile and other products*	CEA Development		(ii)		(68	)		(86	)
Equipment maintenance fee	Collins Aviation		(ii)		(62	)		(30	)
	CEA Development		(ii)		(53	)		(11	)
Property management and green maintenance expenses*	CEA Development		(ii)		(75	)		(59	)
Supply of hotel accommodation service	CEA Development		(ii)		(104	)		(91	)
Land and building rental*	CEA Holding		(ii)		(54	)		(54	)
Cargo terminal business support services*	Eastern Logistics		(ii)&(vi)		(281	)		—
Bellyhold space management*	Eastern Logistics		(ii)&(vi)		(117	)		—
Transfer of the pilots	Eastern Logistics		(ii)&(vi)		(7	)		—
Freight logistics support services*	Eastern Logistics		(ii)&(vi)		100			—
Bellyhold container management	Eastern Logistics		(ii)&(vi)		(9	)		—
Payments on finance leases*	CES Lease Company		(ii)		(1,997	)		(2,721	)
Payments on operating leases*	CES Lease Company		(ii)		(25	)		—
Disposal of a subsidiary	Eastern Airlines Industry Investment		(v)		1,754			—
Civil aviation information network services**	TravelSky		(ii)		(551	)		(590	)

F-83

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

47	RELATED PARTY TRANSACTIONS (cont’d)

(b)

Related party transactions (cont’d)

Income or receipts/

(expense or payments)

Pricing policy

2017

2016

Nature of transaction decision

Related party

and process

RMB million

Flight training fee

CAE Melbourne

(ii)

(138

)

(68

)

Flight equipment spare parts maintenance**

CASC

(ii)

(98

)

—

Payments on aviation transportation cooperation and support services**

AFK

(ii)

(399

)

—

Aviation transportation cooperation and support services**

AFK

(ii)

622

—

(i)

The Group’s pricing policies on products purchased from related parties are mutually agreed between the contract parties.

(ii)

The Group’s pricing policies on services provided by related parties are mutually agreed between the contract parties.

(iii)

The Group’s pricing policies on services provided to related parties are mutually agreed between the contract parties.

(iv)

The Group’s pricing policies on related party interest rates are mutually agreed between the contract parties by reference to the benchmark interest rates.

(v)

The Group’s pricing policies on transfer of equity or disposal of investments are mutually agreed based on the valuation prices.

(vi)

The Group’s related party transactions with Eastern logistics only includes the transactions made after the disposal (note 43).

These related party transactions also constitute connected transactions or continuing connected transactions as defined in Chapter 14A of the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”).

This related party transaction constitutes a continuing connected transaction pursuant to the Rules Governing the Listing of Stocks on the Shanghai Stock Exchange.

During the years ended December 31, 2017 and 2016, the Group’s significant transactions with entities that are controlled, jointly controlled or significantly influenced by the PRC government mainly include most of its bank deposits/borrowings and the corresponding interest income/expense and part of sales and purchases of goods and services. The price and other terms of such transactions are set out in the agreements governing these transactions or as mutually agreed.

(c)

Balances with related parties

(i)

Amounts due from related parties


	2017		*2016*
	*RMB million*		*RMB million*
Trade receivables
Eastern Logistics		194		—
Eastern Air Catering		1		—

		195		—


	2017		2016
	*RMB million*		*RMB million*
Prepayments and other receivables
Eastern Import & Export		379		536
Technologies Aerospace		10		16
Eastern Air Catering		135		57
Eastern Advertising		29		—
CEA development		2		2
CEA Holding		9		—
TravelSky		5		—
Others		—		5

		569		616

All the amounts due from related parties are trade in nature, interest-free and payable within normal credit terms.

F-84

NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

47	RELATED PARTY TRANSACTIONS (cont’d)

(c)

Balances with related parties (cont’d)

(ii)

Amounts due to related parties


	2017		*2016*
	*RMB million*		*RMB million*
Trade and bills payables
Eastern Import & Export		51		85
Eastern Air Catering		31		37
Technologies Aerospace		105		45
CEA development		25		19
Collins Aviation		1		2
CEA Holding		4		3
CASC		9		18
Shanghai Hute		14		19
Others		1		4

		241		232

Other payables and accruals
Eastern Import & Export		2		240
Shanghai P&W		578		324
Eastern Air Catering		10		166
CEA Holding		302		303
Shanghai Hute		11		20
Technologies Aerospace		1		29
Wheels & Brakes		16		26
CEA Development		50		72
TravelSky		551		963
Eastern Advertising		2		18
CAE Melbourne		316		368
Eastern Investment		269		—
Others		3		5

		2,111		2,534


	2017		*2016*
	*RMB million*		*RMB million*
Obligations under finance leases
CES Lease Company		11,934		5,521

Except for the amounts due to CES Lease Company, which are related to the aircraft under finance leases, all other amounts due to related parties are interest-free and payable within normal credit terms given by trade creditors.

(iii)

Short-term deposits and borrowings with associates and CEA Holding


	Average interest rate
	2017			2016			2017		2016
							RMB million		RMB million
Short-term deposits (included in cash and cash equivalents)
Eastern Air Finance Company		0.35	%		0.35	%		4,053		1,296
Long-term borrowings (included in borrowings)
CEA Holding		3.48	%		3.48	%		28		28

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NOTES TO THE FINANCIAL STATEMENTS

(Amounts in millions except for per share data)

47	RELATED PARTY TRANSACTIONS (cont’d)

(d)

Guarantees by the holding company

As at December 31, 2017, bonds of the Group guaranteed by CEA Holding amounted to RMB7.8 billion (2016: RMB7.8 billion) (note 34(b)).

(e)

Key management compensation

The compensation paid or payable to key management for employee services mainly comprising of salaries and other short-term employee benefits was analyzed as follows:


	2017		*2016*
	*RMB million*		*RMB million*
Directors and supervisors		3		2
Senior management		6		4

		9		6

DIVIDENDS


	2017		*2016*		*2015*
	*RMB million*		*RMB million*		*RMB million*
Interim –Nil (2016: RMB5.1 cents) per ordinary share		—		738		—
Proposed final –RMB5.1 cents (2016: RMB4.9 cents) per ordinary share		740		709		—

		740		1,447		—

The proposed final dividend for the year is subject to the approval of the Company’s shareholders at the forthcoming annual general meeting.

49	EVENTS AFTER THE REPORTING PERIOD

On 29 March 2018, the Board considered and approved the 2017 annual profit distribution proposal. It was recommended by the Board that the 2017 annual distribution be approximately RMB740.3 million in cash. Based on the total share capital of 14,467,585,682 shares of the Company, the cash distribution per share would be RMB0.051 (before tax) in cash which will be distributed to holders of A shares of the Company in RMB and to holders of H shares of the Company in HKD.

On 2 February 2018, the application for the listing of bonds denominated in Japanese Yen of the Company was approved by Tokyo Stock Exchange. On 19 March 2018, the Company issued three series of JPY-denominated credit enhanced bonds with total principal of JPY50.0 billion and maturities through 2021. The first series of JPY-denominated credit enhanced bonds bears interest at the rate of 0.33% per annum and the other two series bear interest at the rate of 0.64% per annum.

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