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 volume 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.

Certain Financial Information by Business Segment

Since 2006, our Company has operated in two business segments, namely the passenger business segment (including cargo carried by passenger flights) and cargo and mail transportation business segment, in view of the continued growth of our cargo and mail transportation services.

The following table sets forth our segment results for the year ended December 31, 2008:

		Passenger				Cargo and logistics				Unallocated				Total
		RMB				RMB				RMB				RMB
		(in millions)
Traffic revenues			35,528				3,316				—				38,844
Other revenues and operating income			1,477				1,092				257				2,826
Total segment revenue			37,005				4,408				257				41,670
Inter-segment revenue			(426	)			—				(171	)			(597	)
Revenues			36,579				4,408				86				41,073
Operating (loss)/profit - segment results			(15,149	)			(4	)			70				(15,083	)
Finance income			1,960				101				—				2,061
Finance costs			(2,157	)			(147	)			(25	)			(2,329	)
Share of results of associates			—				—				70				70
Share of results of jointly controlled entities			—				—				24				24
(Loss)/profit before income tax			(15,346	)			(50	)			139				(15,257	)
Income tax			10				(74	)			(10	)			(74	)
(Loss)/profit for the year			(15,336	)			(124	)			129				(15,331	)

 

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The following table sets forth our segment results for the year ended December 31, 2007:

		Passenger				Cargo and logistics				Unallocated				Total
		RMB				RMB				RMB				RMB
		(in millions)
Traffic revenues			37,550				3,113				—				40,663
Other revenues and operating income			1,209				901				208				2,318
Total segment revenue			38,759				4,014				208				42,981
Inter-segment revenue			(349	)			—				(98	)			(448	)
Revenues			38,410				4,014				110				42,534
Operating (loss)/profit - segment results			(93	)			182				39				128
Finance income			2,055				84				1				2,140
Finance costs			(1,799	)			(165	)			(14	)			(1,978	)
Share of results of associates			—				—				58				58
Share of results of jointly controlled entities			—				—				30				30
Profit before income tax			163				101				114				378
Income tax			39				(58	)			(4	)			(23	)
Profit for the year			202				43				110				355

The following table sets forth our segment results for the year ended December 31, 2006:

		Passenger				Cargo and mail				Unallocated				Total
		RMB				RMB				RMB				RMB
		(in millions)
Traffic revenues			33,413				2,843				—				36,256
Other revenues			1,212				709				140				2,061
Total segment revenue			34,625				3,552				140				38,317
Inter-segment revenue			(690	)			—				(70	)			(760	)
Revenues			33,935				3,552				70				37,557
Operating (loss)/profit - segment results			(2,566	)			(196	)			22				(2,740	)
Finance income			1,016				18				1				1,035
Finance costs			(1,654	)			(104	)			(8	)			(1,766	)
Share of results of associates			—				—				104				104
Share of results of jointly controlled entities			—				—				30				30
(Loss)/Profit before income tax			(3,204	)			(282	)			149				(3,337	)
Income tax			198				(30	)			(5	)			163
(Loss)/Profit for the year			(3,006	)			(312	)			144				(3,174	)

 

A.           Operating Results

The following tables set forth our summary income statements and balance sheet data:

		Year Ended December 31,
		2004(1)				2005(1)				2006(2)				2007(2)				2008
		RMB				RMB				RMB				RMB				RMB
		(in millions)
Summary Income Statements Data
IFRS
Revenues			21,328				27,380				37,557				42,534				41,073
Other operating income and gains			85				245				499				488				672
Operating expenses			(20,117	)			(27,562	)			(40,795	)			(42,894	)			(56,828	)
Operating profit/(loss)			1,296				63				(2,740	)			128				(15,083	)
Finance income/(costs), net			(641	)			(578	)			(731	)			162				(267	)
Profit/(loss) before income tax			650				(528	)			(3,338	)			378				(15,256	)

 

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		Year Ended December 31,
		2004(1)				2005(1)				2006(2)				2007(2)				2008
		RMB				RMB				RMB				RMB				RMB
		(in millions)
Profit/(loss) for the year attributable to equity holders of the Company			385				(418	)			(3,035	)			379				(15,269	)
Earnings/(loss) per share attributable to equity holders of the Company (2)			0.08				(0.09	)			(0.62	)			0.08				(3.14	)

 

		As of December 31,
		2004(1)				2005(1)				2006(2)				2007(2)				2008
		RMB				RMB				RMB				RMB				RMB
		(in millions)
Summary Balance Sheet Data
Cash and cash equivalents			2,114				1,864				1,987				1,655				3,451
Net current liabilities			(12,475	)			(25,548	)			(24,588	)			(26,098	)			(43,458	)
Non-current assets			35,918				52,106				51,725				57,949				62,652
Long term borrowings, including current portion			(10,736	)			(12,659	)			(14,932	)			(14,675	)			(15,628	)
Obligations under finance leases, including current portion			(8,662	)			(10,588	)			(11,949	)			(16,452	)			(20,809	)
Total share capital and reserves			5,897				5,561				2,534				2,361				(13,097	)

 

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(1)	The figures for the years ended December 31, 2004 and 2005 have been restated as a result of the changes of accounting policy.

 

(2)	The figures for the years ended December 31, 2006 and 2007 have been restated as a result of the changes of accounting policy. Please refer to Note 2(b) of the Financial Statements attached to this Annual Report on Form 20-F for more details.

(3)	The calculation of (loss)/earnings per share is based on the consolidated (loss)/profit attributable to shareholders and the weighted average number of shares of 4,866,950,000 in issue during the year.

2008 Compared to 2007

Revenues

Our revenues decreased by 3.4% from RMB42,534 million in 2007 to RMB41,073 million in 2008 (net of the applicable PRC business tax). This decrease was primarily due to a decrease in the revenues of our passenger business segment, as a result of decreased traffic volume. The decrease in our total revenue was partly offset by the increase of revenue from the cargo and logistics business segment. In 2008, we transported a total of 37.2 million passengers, representing a decrease of 4.9% from 39.2 million passengers in 2007. Our total passenger traffic (as measured in RPKs) decreased by 5.9% from 57,183 million passenger-kilometers in 2007 to 53,785 million passenger-kilometers in 2008 and our total cargo and mail traffic (as measured in RFTKs) decreased by 7.4% from 2,614 million freight tonne-kilometers in 2007 to 2,420 million freight tonne-kilometers in 2008. Our average yield for the passenger business segment remained at RMB0.62 per passenger-kilometer, whereas our average yields for the cargo and logistics business segment increased by 5.2% from RMB2.1 per tonne-kilometer in 2007 to RMB2.2 per tonne-kilometer in 2008.

This decrease was primarily due to a decline in demand for global air transportation due to the global economic crisis in 2008, as well as a series of natural disasters and unexpected incidents that occurred in China, which weakened the demand for domestic travel and transportation and reduced the incentive for foreign travellers to visit China.

Passenger business segment revenues

Our total passenger business segment revenues, including revenues generated from cargo carried by passenger flights, decreased by 4.5% from RMB38,759 million in 2007 to RMB37,005 million in 2008. Total passenger business segment revenues after elimination of inter-segment revenues, which accounted for 89.0% of our total revenues, decreased by 4.8% from RMB38,410 million in 2007 to RMB36,579 million in 2008.

For financial reporting purposes, our passenger business segment includes cargo carried by passenger flights as stated in Note 7(a) to the financial statements. In accordance with industry practice, our passenger related operating statistics, such as passenger traffic volume and passenger yield, exclude cargo carried by passenger flights. The following discussion of our passenger revenues (excluding cargo carried by passenger flights) and passenger related operating statistics conform to industry practice.

 

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Our passenger traffic revenues decreased by RMB1,692 million, or 4.8%, from RMB35,178 million in 2007 to RMB33,486 million in 2008, which accounted for 86.2% of our total traffic revenues in 2008. The decrease was due to a decline in demand for global air transportation due to the global economic crisis in 2008, as well as a series of natural disasters and unexpected incidents that occurred in China, which weakened the demand for domestic travel and transportation and reduced the incentive for foreign travellers to visit China.

Our domestic passenger traffic revenues (excluding Hong Kong passenger revenues), which accounted for 63.9% of our total passenger traffic revenues in 2008, decreased by 1.7% from RMB21,756 million in 2007 to RMB21,389 million in 2008. The decrease was mainly due to a series of catastrophic natural disasters and unexpected incidents, coupled with the increasing impact of the global financial crisis on the PRC economy, which resulted in a rapid decline in demand in the domestic air transportation market. However, because the 2008 Olympic Games and other large-scale events were held in China, the number of passengers carried did not decrease significantly and the passenger-kilometers yield on domestic routes remained the same as last year.  Compared to 2007, our domestic passenger traffic (as measured in RPKs) decreased by 0.4%, from 35,492 million tonne-kilometers in 2007 to 35,352 million tonne-kilometers in 2008. The number of passengers carried on domestic routes decreased by 2.4%, from 31.2 million in 2007 to 30.4 million in 2008. Our passenger-kilometers yield for domestic routes remained at RMB0.61 per passenger-kilometer.

International passenger traffic revenues, which accounted for 30.3% of our total passenger traffic revenues in 2008, decreased by 10.2% from RMB11,280 million in 2007 to RMB10,134 million in 2008. This decrease was primarily due to a decrease in our international passenger traffic, which resulted from the reduced number of flights on long-distance routes, as well as a decrease in revenue as a result of fluctuations of exchange rates. Our international passenger traffic (as measured in RPKs) decreased by 16.4% in 2008, from 18,386 million in 2007 to 15,375 million in 2008. The number of passengers carried on international routes decreased by 17.2%, from 5.7 million in 2007 to 4.7 million in 2008. Our passenger-kilometers yield for international routes increased from RMB0.61 per passenger-kilometer in 2007 to RMB0.66 per passenger-kilometer in 2008.

Hong Kong passenger traffic revenues, which accounted for 5.9% of our total passenger traffic revenues in 2008, decreased by 8.4% from RMB2,142 million in 2007 to RMB1,963 million in 2008. This decrease was due to intensified competition and reduced capacity, which led to a decrease of 7.5%, from 3,305 million in 2007 to 3,058 million in 2008, in our Hong Kong passenger traffic (as measured in RPKs). The number of passengers carried on Hong Kong routes decreased by 8.4%, from 2.3 million in 2007 to 2.1 million in 2008. Our passenger-kilometers yield for Hong Kong routes decreased from RMB0.65 per passenger-kilometer in 2007 to RMB0.64 per passenger-kilometer in 2008.

Cargo and logistics segment revenues

We generate cargo and mail revenues from our cargo and mail transportation services. Our total revenues from our cargo and logistics business segment, excluding revenues generated form cargo carried by passenger flights, increased by 9.8% from RMB4,014 million in 2007 to RMB4,408 million in 2008. There were no inter-segment revenues in 2008. The increase was primarily due to an increase in the average cargo yield , partly offset by a decrease in our cargo and mail traffic caused by decreases in service volume. Cargo and mail yield increased from RMB2.10 in 2007 to RMB2.21 in 2008 per cargo tonne-kilometer primarily due to increase in domestic cargo market price.

For financial reporting purposes, our cargo and logistics business segment excludes cargo carried by passenger flights as stated in Note 7(a) to the financial statements. In accordance with industry practice, our cargo and mail related operating statistics, such as cargo and mail traffic volume and cargo and mail yield, include cargo carried by passenger flights. The following discussion of our cargo and mail revenues (including cargo carried by passenger flights) and cargo and mail related operating statistics conform to industry practice.

 

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Our cargo and mail traffic revenues decreased by RMB128 million, or 2.3%, from RMB5,486 million in 2007 to RMB5,358 million in 2008, which accounted for 13.8% of our total traffic revenues in 2008. The signing of the Air Rights Agreement between China and the United States and the Trade in Services Agreement between China and six ASEAN countries in July 2007 removed the restrictions on China’s entry into foreign freight markets, which boosted the growth in revenues in the first half of the year. However, the import and export trading demand was largely inhibited due to the global financial crisis in the second half of the year, leading to a decline in traffic volume on principle routes, such as the United States and Europe routes, where the traffic volume decreased by 20% and 11%, respectively, compared to the same period in 2007.

Our domestic cargo and mail traffic revenues (excluding Hong Kong cargo and mail revenues), which accounted for 14.7% of our total cargo and mail traffic revenues in 2008, increased by 32.4% from RMB593 million in 2007 to RMB785 million in 2008. This increase was primarily due to an increase in service charges. Compared to 2007, our domestic cargo and mail traffic (as measured in RFTKs) increased by 2.2%, from 609 million in 2007 to 622 million in 2008. The weight of cargo and mail carried on domestic routes slightly decreased by 0.2%, from 464 million kilograms in 2007 to 463 million kilograms in 2008. Our freight tonne-kilometers yield for domestic routes increased from RMB0.97 per tonne-kilometer in 2007 to RMB1.26 per tonne-kilometer in 2008.

International cargo and mail traffic revenues, which accounted for 76.2% of our total cargo and mail traffic revenues in 2008, decreased by 6.4% from RMB4,364 million in 2007 to RMB4,083 million in 2008, due to a decrease of 11.6% in the weight of cargo and mail carried on international routes from 396 million kilograms in 2007 to 350 million kilograms in 2008. Our freight tonne-kilometers yield for international routes increased from RMB2.31 per tonne-kilometer to RMB2.42 per tonne-kilometer.

Hong Kong cargo and mail traffic revenues, which accounted for 9.1% of our total cargo and mail traffic revenues in 2008, decreased by 7.4% from RMB528 million in 2007 to RMB489 million in 2008. This decrease was primarily due to a decrease of 5.9%, from 118 million in 2007 to 111 million in 2008, in our Hong Kong cargo and mail traffic (as measured in RFTKs). The amount of cargo and mail carried on Hong Kong routes also decreased by 4.9%, from 80 million kilograms in 2007 to 76 million kilograms in 2008. Our freight tonne-kilometers yield for Hong Kong routes decreased from RMB4.49 per tonne-kilometer to RMB4.42 per tonne-kilometer.

Other revenues

We also generated revenues other than passenger and cargo and mail services from airport ground services and ticket handling services. Airport ground 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 Airport and Pudong International Airport of Shanghai. We are currently the principal provider of airport ground services at both Hongqiao Airport and Pudong International Airport. Our total other revenues increased by 21.9% from RMB2,318 million in 2007 to RMB2,826 million in 2008 due to the expansion of our logistics business.

Operating Expenses

Our two business segments, namely, our passenger business segment and our cargo and mail business segment, incur similar operating expenses which are subject to similar trends. As a result, we do not provide segmental analysis for our operating expenses and the following discussion is based on our business as a whole.

Our total operating expenses increased by 32.5% from RMB42,894 million in 2007 to RMB56,828 million in 2008 primarily due to a significant increase in aviation fuel expenses, aircraft maintenance expenses, depreciation of assets and losses arising from fair value movements of derivative financial instruments. Our total operating expenses as a percentage of our revenues increased from 100.8% in 2007 to 138.4% in 2008.

Aircraft fuel expenses increased by 22.3% from RMB15,117 million in 2007 to RMB18,488 million in 2008. This increase was primarily due to a substantial increase in the average price of aviation fuel. In 2008, we consumed a total of approximately 2.4 million tonnes of aviation fuel, representing a decrease of 5.5% compared to 2007. Although our weighted average fuel price per tonne in 2008 increased substantially by approximately 28% from 2007, our aircraft fuel expenses accounted for 32.5% of our total operating expenses in 2008, as compared to 35.2% in 2007. Aircraft fuel expenses accounted for 32.5% of our total operating expenses in 2008, as compared to 35.2% in 2007.

 

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Changes in fair value of financial derivatives resulted in a loss of RMB6,401 million, compared to an income of RMB84 million during the same period in 2007. The difference was mainly due to sharp fluctuations in international oil prices in 2008, which plunged rapidly after reaching a historical high in July 2008. In 2008, the fair value movements of financial derivatives charged to the income statement accounted for 11.26% of our total operating costs. As of December 31, 2008, the loss of fair value in our aviation fuel hedging contracts had contributed to the loss of our Company in the amount of approximately RMB6,256 million. See Note 3(a) to our audited consolidated financial statements for details.

Take-off and landing charges, which accounted for 9.3% of our total operating expenses in 2008, increased by 2.0% from RMB5,174 million in 2007 to RMB5,280 million in 2008 primarily due to the increase in the number of flights of aircraft with higher take-off and landing charges in 2008.  Moreover, the Civil Aviation Airport Charges Reform Implementation Plan, which was issued by the CAAC and NDRC on December 28, 2007 and which became effective on March 1, 2008, substantially increased the level of passenger service fees, which resulted in a considerable increase in the unit charges for aircraft take-off and landing.

Wages, salaries and benefits, which accounted for 8.0% of our total operating expenses in 2008, increased by 5.0% from RMB4,327 million in 2007 to RMB4,545 million in 2008, primarily due to the increase in the number of our employees from 40,477 employees as of December 31, 2007 to 44,153 employees as of December 31, 2008 as we continued to expand our core businesses.  However, we experienced a substantial decline in operating performance in 2008 and, accordingly, staff performance bonus payments were reduced compared to the same period in 2007.

Office, administration and other expenses, which were largely incurred by our passenger business segment, increased by 5.8% from RMB3,834 million in 2007 to RMB4,056 million in 2008 primarily due to the increased expenses relating to our business expansion, including the increase in overseas crew expenses, office expenses, travel expenses, value added tax and custom duties related to operating leases, maintenance expenses and handling fees charged by financial institutions.

Selling and marketing expenses, which were largely incurred by our passenger business segment, decreased by 13.4% from RMB1,805 million in 2007 to RMB1,563 million in 2008, accounting for 2.8% of our total operating expenses in 2008. The decrease was primarily due to the decrease in agency business handling fees and distribution system service fees as a result of a decrease in the number of passengers carried as well as the decrease in overseas distribution system fees resulting from the depreciation of the U.S. dollar against the Renminbi.

Aircraft operating lease expenses decreased by 4.1% from RMB2,851 million in 2007 to RMB2,735 million in 2008. The decrease was mainly due to the expiry of operating leases of certain aircraft in 2007 and the appreciation of the Renminbi against the U.S. dollar. The number of aircraft operated by us increased from 223 as of December 31, 2007 to 240 as of December 31, 2008. Depreciation and amortization expenses increased by 1.3% from RMB4,720 million in 2007 to RMB4,782 million in 2008 primarily due to the expansion of the scale of our operations and an increase in the number of our aircraft.

Aircraft maintenance expenses, which accounted for 5.8% of our total operating expenses in 2008, increased by 36.8% from RMB2,392 million in 2007 to RMB3,273 million in 2008. This was principally due to an increase in aircraft overhaul expenses, a substantial increase in the number of engines under operating leases sent for overhaul in 2008 compared to the same period in 2007, and an increase in repair and maintenance provisions relating to the surrender of aircraft under operating leases which will expire and be surrendered in 2009.

Impairment losses for assets increased from RMB227 million in 2007 to RMB2,977 million in 2008, mainly attributable to our impairment charge on property, plant and equipment, including certain aircraft models which have relatively lower operational efficiency and which management intends to retire in the near future, as well as provision for goodwill.

 

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Other Operating Income and Other Gains

Our other operating income and other gains were primarily generated from government subsidies and income from disposal of aircraft and relevant assets. The total amount of our other operating income and other gains increased from RMB488 million in 2007 to RMB672 million in 2008 primarily due to income derived from the disposal of aircraft and relevant assets of RMB267 million in 2008. The government subsidies represent subsidies granted to us by the PRC government and local government as well as other subsidies granted by various local municipalities to encourage our Company to operate certain routes to cities where these municipalities are located.

Finance Costs

Our finance costs increased by 17.7% from RMB1,979 million in 2007 to RMB2,328 million in 2008 primarily due to interest expenses of RMB1,945 million on loans from banks and other financial institutions, representing an increase of 19.4% from 2007, as well as the interest expense of RMB651 million on finance lease obligations, representing a decrease of 11.1% from 2007.

Net Profit / (Loss)

As a result of the foregoing operating results, the net loss attributable to equity holders was RMB15,269 million in 2008, as compared to a net profit of RMB379 million in 2007.

Fixed Assets

Our Company had approximately RMB52,678 million of fixed assets as of December 31, 2008, including aircraft, engines and flight equipment.

 In view of the decline in demand in the air transportation market under the current economic environment, we performed an impairment test on property, plant and equipment (“PP&E”) as of December 31, 2008, based on which an impairment provision of RMB1,442 million was made against certain aircraft models and related equipment which reflects their relatively lower operational efficiency and management’s intention to retire these aircraft in the near future. See Note 10 to our audited consolidated financial statements for details. In determining the recoverable amounts of the related assets, management has compared the value in use and the fair value less costs to sell of the related assets, primarily determined by reference to estimated market values.

2007 Compared to 2006

Revenues

Our revenues increased by 13.0% from RMB37,557 million in 2006 to RMB42,534 million in 2007 (net of the applicable PRC business tax). This increase was primarily due to an increase in the revenues of our passenger business segment and cargo and mail business segment, as a result of increased traffic volume, partly offset by the average yield. In 2007, we transported a total of 39.2 million passengers, representing an 11.8% increase from 35.0 million passengers in 2006. Our total passenger traffic (as measured in RPKs) increased by 13.8% from 50,272 million passenger-kilometers in 2006 to 57,183 million passenger-kilometers in 2007 and our total cargo and mail traffic (as measured in RFTKs) increased by 7.0% from 2,444 million freight tonne-kilometers in 2006 to 2,614 million freight tonne-kilometers in 2007. Our average yield for the passenger business segment increased to RMB0.62 per passenger-kilometer, whereas our average yields for the cargo and mail business segment decreased by 8.7% from RMB2.3 per tonne-kilometer in 2006 to RMB2.1 per tonne-kilometer in 2007.

Passenger business segment revenues

Our total passenger business segment revenues, including revenues generated from cargo carried by passenger flights, increased by 11.9% from RMB34,625 million in 2006 to RMB38,759 million in 2007. Total passenger business segment revenues after elimination of inter-segment revenues, which accounted for 90.3% of our total revenues, increased by 12.9% from RMB33,935 million in 2006 to RMB38,410 million in 2007. The increase was primarily due to the increase in traffic revenues for the passenger business segment.

 

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For financial reporting purposes, our passenger business segment includes cargo carried by passenger flights as stated in Note 7(a) to the financial statements. In accordance with industry practice, our passenger related operating statistics, such as passenger traffic volume and passenger yield, exclude cargo carried by passenger flights. The following discussion of our passenger revenues (excluding cargo carried by passenger flights) and passenger related operating statistics conform to industry practice.

Our passenger traffic revenues increased by RMB4,548 million, or 14.8%, from RMB30,630 million in 2006 to RMB35,178 million in 2007, due to the increase in traffic revenues generated from our domestic and international services, partly offset by those generated from our regional services.

Our domestic passenger traffic revenues (excluding Hong Kong passenger revenues), which accounted for 61.8% of our total passenger traffic revenues in 2007, increased by 13.7% from RMB19,137 million in 2006 to RMB21,756 million in 2007. This increase was primarily due to an increase in our domestic passenger traffic following increases in our capacity. Compared to 2006, our domestic passenger traffic (as measured in RPKs) increased by 13.5%, from 31,272 million tonne-kilometers in 2006 to 35,492 million tonne-kilometers in 2007. The number of passengers carried on domestic routes increased by 12.3%, from 27.7 million in 2006 to 31.2 million in 2007. Our passenger-kilometers yield for domestic routes remained at RMB0.61 per passenger-kilometer.

International passenger traffic revenues, which accounted for 32.1% of our total passenger traffic revenues in 2007, increased by 24.2% from RMB9,084 million in 2006 to RMB11,280 million in 2007. This increase was primarily due to an increase in our international passenger traffic, which resulted from increases in our capacity, as well as an increase in air fares. Our international passenger traffic (as measured in RPKs) increased by 18.8% in 2007, from 15,478 million in 2006 to 18,386 million in 2007. The number of passengers carried on international routes increased by 18.0%, from 4.8 million in 2006 to 5.7 million in 2007. Our passenger-kilometers yield for international routes increased from RMB0.58 per passenger-kilometer in 2006 to RMB0.61 per passenger-kilometer in 2007.

Hong Kong passenger traffic revenues, which accounted for 6.1% of our total passenger traffic revenues in 2007, decreased by 11.1% from RMB2,409 million in 2006 to RMB2,142 million in 2007. This decrease was due to a slight decrease of 6.2%, from 3,521 million in 2006 to 3,305 million in 2007, in our Hong Kong passenger traffic (as measured in RPKs), as well as a decrease in the average price of our regional airfares. The number of passengers carried on Hong Kong routes decreased 6.3%, from 2.5 million in 2006 to 2.3 million in 2007. Our passenger-kilometers yield for Hong Kong routes decreased from RMB0.71 per passenger-kilometer in 2006 to RMB0.65 per passenger-kilometer in 2007.

Cargo and mail segment revenues

We generate cargo and mail revenues from our cargo and mail transportation services. Our total revenues from our cargo and mail business segment, excluding revenues generated form cargo carried by passenger flights, increased by 13.0% from RMB3,552 million in 2006 to RMB4,014 million in 2007. There were no inter-segment revenues in 2006 and 2007. The increase was primarily due to an increase in our cargo and mail traffic caused by increases in service volume as a result of the expansion of our capacity, partly offset by the average cargo yield. Cargo and mail yield decreased from RMB2.30 in 2006 to RMB2.10 in 2007 per cargo tonne-kilometer primarily due to fare decreases resulting from intensified market competition.

For financial reporting purposes, our cargo and logistics business segment excludes cargo carried by passenger flights as stated in Note 7(a) to the financial statements. In accordance with industry practice, our cargo and mail related operating statistics, such as cargo and mail traffic volume and cargo and mail yield, include cargo carried by passenger flights. The following discussion of our cargo and mail revenues (including cargo carried by passenger flights) and cargo and mail related operating statistics conform to industry practice.

Our cargo and mail traffic revenues decreased by RMB140 million, or 2.5%, from RMB5,625 million in 2006 to RMB5,486 million in 2007, due to the decrease in traffic revenues generated from our international services and regional services.

 

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Our domestic cargo and mail traffic revenues (excluding Hong Kong cargo and mail revenues), which accounted for 10.8% of our total cargo and mail traffic revenues in 2007, increased by 17.2% from RMB506 million in 2006 to RMB593 million in 2007. This increase was primarily due to an increase in our domestic cargo and mail traffic, as well as an increase in service charges. Compared to 2006, our domestic cargo and mail traffic (as measured in RFTKs) increased by 5.9%, from 575 million in 2006 to 609 million in 2007. The weight of cargo and mail carried on domestic routes increased by 5.7%, from 439 million kilograms in 2006 to 464 million kilograms in 2007. Our freight tonne-kilometers yield for domestic routes increased from RMB0.87 per tonne-kilometer to RMB0.97 per tonne-kilometer.

International cargo and mail traffic revenues, which accounted for 79.6% of our total cargo and mail traffic revenues in 2007, decreased slightly by 0.7% from RMB4,396 million in 2006 to RMB4,364 million in 2007, due to a significant decrease in service charges despite the increase of 10.3% in the weight of cargo and mail carried on international routes from 359 million kilograms in 2006 to 396 million kilograms in 2007. Our freight tonne-kilometers yield for international routes decreased from RMB2.54 per tonne-kilometer to RMB2.31 per tonne-kilometer.

Hong Kong cargo and mail traffic revenues, which accounted for 9.6% of our total cargo and mail traffic revenues in 2007, decreased by 27.0% from RMB723 million in 2006 to RMB528 million in 2007. This decrease was primarily due to a decrease of 16.8%, from 141 million in 2006 to 118 million in 2007, in our Hong Kong cargo and mail traffic (as measured in RFTKs). The amount of cargo and mail carried on Hong Kong routes also decreased by 16.6%, from 96 million kilograms in 2006 to 80 million kilograms in 2007. Our freight tonne-kilometers yield for Hong Kong routes decreased from RMB5.24 per tonne-kilometer to RMB4.49 per tonne-kilometer.

Other revenues

We also generated revenues other than passenger and cargo and mail services from airport ground services and ticket handling services. Airport ground 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 Airport and Pudong International Airport of Shanghai. We are currently the principal provider of airport ground services at both Hongqiao Airport and Pudong International Airport. Our total other revenues increased by 12.5% from RMB2,061 million in 2006 to RMB2,318 million in 2007 due to the increase in ticketing services as a result of increases in ticket refund charges and airport ground services as a result of increased air traffic.

Operating Expenses

Our two business segments, namely, our passenger business segment and our cargo and mail business segment, incur similar operating expenses which are subject to similar trends. As a result, we do not provide segmental analysis for our operating expenses and the following discussion is based on our business as a whole.

Our total operating expenses increased by 5.1% from RMB40,795 million in 2006 to RMB42,894 million in 2007 primarily due to a significant increase in aviation fuel expenses, wages, salaries and other benefits, take off and landing charges, office, administration and other expenses and selling and marketing expenses, partly offset by the decrease in aircraft operating lease and aircraft maintenance expenses. However, our total operating expenses as a percentage of our revenues decreased from 108.6% in 2006 to 100.8% in 2007.

Aviation fuel expenses, which accounted for 35.2% of our total operating expenses in 2007, increased by 11.1% from RMB13,609 million in 2006 to RMB15,117 million in 2007. This increase was primarily due to rising fuel prices, the increase in fuel consumption due to the substantial increase in our total flying hours and mileage in 2007. In 2007, we consumed a total of 2.55 million tonnes of aviation fuel, representing an increase of 9.5% compared to 2006. We paid a weighted average fuel price of RMB5,879 per tonne in 2007, representing an increase of RMB99 per tonne, or approximately 1.7%, from RMB5,780 per tonne in 2006. Aviation fuel expenses accounted for 35.2% of our total operating expenses in 2007, as compared to 33.3% in 2006.

Take-off and landing charges, which accounted for 12.1% of our total operating expenses in 2007, increased by 3.71% from RMB4,989 million in 2006 to RMB5,174 million in 2007 primarily due to the increase in our flights from approximately 340,000 in 2006 to approximately 370,000 in 2007, while party offset by a decrease in the average take-off and landing charges.

 

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Wages, salaries and benefits, which accounted for 10.0% of our total operating expenses in 2007, increased by 22.3% from RMB3,538 million in 2006 to RMB4,327 million in 2007, primarily due to the increase in the number of our employees following the expansion of our core business operations, the improvement of basic salaries and the increase in flying hour payments resulting from the increase in the flying hours of our pilots.

Office, administration and other expenses, which was largely incurred by our passenger business segment, increased by 5.9% from RMB3,619 million in 2006 to RMB3,834 million in 2007 primarily due to our business expansion, an increase in overseas crew expenses and an increase in settlement fees due to flight delays resulting from the additional number of flights.

Selling and marketing expenses, which was largely incurred by our passenger business segment, increased by 4.0% from RMB1,735 million in 2006 to RMB1,805 million in 2007, accounting for 4.2% of our total operating expenses in 2007. The increase was primarily due to the increase in agency business handling fees and distribution system service fees as a result of an increase in the number of passengers carried as well as an increase in the price of overseas distribution systems.

Aircraft operating lease expenses decreased by 3.5% from RMB2,955 million in 2006 to RMB2,851 million in 2007. The decrease was mainly due to the expiry of operating leases of certain aircraft in 2007 and the appreciation of the Renminbi against the U.S. dollar. The number of aircraft operated by us increased from 205 as of December 31, 2006 to 223 as of December 31, 2007. Depreciation and amortization expenses increased by 5.9% from RMB4,456 million in 2006 to RMB4,720 million in 2007 primarily due to the expansion of the scale of our operations and the introduction of additional aircraft.

Aircraft maintenance expenses, which accounted for 5.6% of our total operating expenses in 2007, decreased by 9.6% from RMB2,647 million in 2006 to RMB2,392 million in 2007. This was principally due to the timing of overhauls of aircraft under operating leases.

Other Operating Income and Other Gains

Our other operating income and other gains were primarily generated from government subsidies. The net amount of our other operating income and gains increased due to an increase in government subsidies from RMB462 million in 2006 to RMB488 million in 2007. The government subsidies represent subsidies granted to us by the PRC government and local government as well as other subsidies granted by various local municipalities to encourage our Company to operate certain routes to cities where these municipalities are located.

Finance Costs

Our finance costs increased by 12.1% from RMB1,766 million in 2006 to RMB1,979 million in 2007 primarily due to interest expenses of RMB732 million on finance leases, representing an increase of 34.6% from 2006, and interest expenses of RMB1,629 million on loans from banks and other financial institutions, representing an increase of 3.1% from 2006. However, the above amounts were partly offset by the recognition of a net exchange gain of RMB2,023 million arising from the retranslation of U.S. dollar denominated liabilities.

Net Profit

As a result of the foregoing operating results, the net profit attributable to equity holders was RMB379 million in 2007, as compared to a net loss of RMB3,035 million in 2006.

Fixed Assets

Our Company had approximately RMB47,270 million of fixed assets as of December 31, 2007, including aircraft, engines and flight equipment with a value of approximately RMB42,758 million.

 

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 In December 2006, our Board of Directors passed a resolution to dispose of certain older aircraft and related flight equipment within the following 12 months. Accordingly, these aircraft together with related flight equipment and spare parts were classified as non-current assets held for sale as of December 31, 2006. Despite our Company’s continuing efforts to locate and negotiate with potential buyers, no agreement to dispose of these assets had been reached as of December 31, 2008. As of the same date, it was our management’s intention to dispose of these assets within the following 12 months and our management is continuing to take active steps to locate potential buyers. They have therefore been classified as non-current assets held for sale as of December 31, 2008. An impairment loss of RMB235 million has been recognized in the income statement in relation to these assets with reference to the estimated market values as at the balance sheet date. See Note 10(c) to our audited consolidated financial statements for details.

B.           Liquidity and Capital Resources

We typically finance our working capital requirements through a combination of funds generated from operations and short-term bank loans. As a result, our liquidity could be materially and adversely affected to the extent there is a significant decrease in demand for our services or if there is any delay in obtaining bank loans. As of December 31, 2007 and 2008, we had cash and cash equivalents of RMB1,655 million and RMB3,451 million, respectively.

As of December 31, 2008, our accumulated losses amounted to approximately RMB18.1 billion. In addition, our current liabilities exceeded our current assets by approximately RMB43.5 billion and our total liabilities exceeded total assets by approximately RMB12.6 billion.  As a consequence, our directors have taken active steps to seek additional sources of finance to improve our liquidity position. We had credit facilities of RMB13.5 billion from certain banks as of December 31, 2008, and have since then successfully obtained additional credit facilities in an aggregate amount of RMB56 billion from certain banks and financial institutions.  See the discussion below under “–Working Capital and Liabilities”.

Cash Flows from Operating Activities

In 2008, we generated a net cash inflow from operating activities of RMB2,856 million as a result of our cash generated from operations of RMB2,942 million less income tax we paid in 2008.  Our cash generated from operations was mainly due to operating profit before working capital changes of RMB112 million and changes in working capital of RMB2,831 million.  The operating profit before working capital changes of RMB112 million was a result of the loss before income tax of RMB15,256 million, mainly adjusted for (i) loss arising from fair value movements of derivative financial instruments of RMB6,401 million, (ii) depreciation of property, plant and equipment of RMB4,756 million, (iii) impairment loss of RMB2,977 million and (iv) interest expenses of RMB2,328 million, partly offset by net foreign exchange gains of RMB1,971 million.  Changes in working capital mainly consisted of the (i) decrease in flight equipment spare parts of RMB529 million, (ii) increase in other long-term liabilities of RMB432 million, (iii) decrease in amounts due from related parties of RMB223 million, and (iv) decrease in prepayments, deposits and other receivables of RMB217 million, partly offset by the (i) increase in trade payables and notes payables of RMB2,007 million, (ii) increase in other payables and accrued expenses of RMB1,902 million, and (iii) increase in trade receivables of RMB910 million.

In 2007, we generated a net cash inflow from operating activities of RMB3,080 million as a result of cash generated from operations of RMB3,143 million less income tax we paid in 2007. Our cash generated from operations of RMB3,143 million was mainly due to operating profit before working capital changes of RMB5,996 million and changes in working capital of RMB2,853 million. The operating profit before working capital changes of RMB5,996 was a result of the profit before income tax of RMB378 million, mainly adjusted for: (i) depreciation of property, plant and equipment of RMB4,695 million, and (ii) interest expenses of RMB1,978 million, partly offset by net foreign exchange gains of RMB2,023 million. Changes in working capital mainly consist of the (i) decrease in flight equipment spare parts of RMB409 million, (ii) decrease in trade receivables of RMB479 million, and (iii) decrease in prepayments, deposits and other receivables of RMB337 million, partly offset by the (i) increase in amounts due from related parties of RMB350 million, and (ii) increase in sales in advance of carriages of RMB320 million.

 

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In 2006, we generated a net cash inflow from operating activities of RMB5,118 million as a result of cash generated from operations in the amount of RMB5,140 million less income tax we paid in 2006. Our cash generated from operations amounted to RMB5,140 million was mainly due to our operating profit before working capital changes of RMB3,402 million and changes in working capital of RMB1,738 million. The operating profit before working capital changes of RMB3,402 million was a result of the loss before income tax of RMB3,337 million, mainly adjusted for (i) depreciation of property, plant and equipment of RMB4,425 million, (ii) interest expenses of RMB1,822 million, and (iii) impairment loss of RMB888 million. Changes in working capital mainly consisted of other payables and accrued expenses in the amount of RMB1,552 million, partly offset by the (i) decrease in flight equipment spare parts of RMB583 million, (ii) decrease in prepayments, deposits and other receivables in the amount of RMB563 million, and (iii) increase in trade payables and notes payables in the amount of RMB1,499 million.

Cash Flows from Investing Activities

In 2008, our net cash outflow from investing activities was RMB925 million. Our net cash outflow from investing activities mainly consisted of (i) advanced payments on acquisition of aircraft of RMB3,604 million and (ii) additions of property plant and equipment of RMB1,289 million, partly offset by (i) refunds of advanced payments upon deliveries of aircraft of RMB2,422 million and (ii) proceeds from the disposal of property, plant and equipment of RMB1,856 million.

In 2007, our net cash outflow from investing activities was RMB1,756 million. Our net cash outflow for investing activities mainly consisted of (i) advanced payments on acquisition of aircraft of RMB3,737 million and (ii) additions of property, plant and equipment of RMB1,592 million, partly offset by the refund of advanced payments upon delivery of aircraft of RMB3,065 million.

In 2006, our net cash outflow from investing activities was RMB1,679 million. Our net cash outflow for investing activities mainly consisted of (i) advanced payments on acquisition of aircraft of RMB4,561 million and (ii) additions of property, plant and equipment of RM880 million, partly offset by the refund of advanced payments upon delivery of aircraft of RMB3,745 million.

Cash Flows from Financing Activities

In 2008, our net cash outflow from financing activities was RMB92 million.  Our net cash outflow from financing activities mainly consisted of (i) repayments of short-term bank loans of RMB19,987 million, (ii) repayments of long-term bank loans of RMB3,923 million, (iii) interest paid of RMB2,742 million and (iv) principal repayments of finance lease obligations of RMB2,594 million, partly offset by (i) proceeds from draw down of short-term bank loans of RMB25,403 million and (ii) proceeds from draw down of long-term bank loans of RMB4,748 million.

In 2007, our net cash outflow from financing activities was RMB1,640 million. Our net cash outflow for financing activities mainly consisted of (i) repayments of short-term bank loans of RMB16,020 million, (ii) repayments of long-term bank loans of RMB2,985 million, (iii) principal repayments of finance lease obligations of RMB2,975 million and (iv) interest paid of RMB2,241 million, partly offset by (i) proceeds from draw down of short-term bank loans of RMB18,465 million and (ii) proceeds of draw down of long-term bank loans of RMB3,383 million.

In 2006, our net cash outflow from financing activities was RMB3,358 million. Our net cash outflow for financing activities mainly consisted of (i) proceeds from draw down of short-term bank loans of RMB14,749 million, (ii) proceeds from draw down of long-term bank loans of RMB6,910 million, partly offset by (i) repayments of short-term bank loans of RMB15,134 million, (ii) repayments of long-term bank loans of RMB4,179 million, (iii) repayment of debentures of RMB2,000 million and (iv) interest paid of RMB2,097 million.

Working Capital and Liabilities

We generally operate with a working capital deficit. As of December 31, 2008, our current liabilities exceeded our current assets by RMB43,458 million. In comparison, our current liabilities exceeded our current assets by RMB26,098 million as of December 31, 2007. The increase in our current liabilities in 2008 was primarily due to an increase in the current portion of borrowings, other payables and accrued expenses, including accrued fuel cost, accrued take-off and landing charges, accrued aircraft overhaul expenses and other accrued operating expenses, and derivative liabilities. Short-term loans outstanding totaled RMB15,189 million and RMB19,474 million as of December 31, 2007 and 2008, respectively. Long-term outstanding bank loans totaled RMB14,675 million and RMB15,628 million as of December 31, 2007 and 2008, respectively.

 

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Our consolidated interest-bearing borrowings as of December 31, 2007 and 2008 for the purpose of calculating the indebtedness of our Company, were as follows:

		As of December 31
		2007				2008
		(RMB million)
Secured bank loans			4,767				5,768
Unsecured bank loans			25,097				29,333
Total			29,864				35,101

The maturity profile of interest-bearing borrowings of our Company as of December 31, 2007 and 2008 was as follows:

		As of December 31
		2007				2008
		(RMB million)
Within one year			18,495				26,513
In the second year			5,927				4,148
In the third to fifth year inclusive			4,217				3,665
After the fifth year			1,226				775
Total			29,864				35,101

As of December 31, 2008, our interest rates relating to short-term borrowings ranged from 2.7% to 7.5%, while our fixed interest rates on our interest-bearing borrowings for long-term bank loans ranged from 4.5% to 8.4%. Our bank loans are denominated in Renminbi, U.S. dollars, Euro and Hong Kong dollars. As of December 31, 2008, our total bank loans denominated in Renminbi amounted to RMB21,956 million, our total bank loans denominated in U.S. dollars amounted to RMB13,008 million, our total bank loans denominated in Euro amounted to RMB112 million, while our bank loans denominated in Hong Kong dollar were equivalent to approximately RMB26 million. See Note 31 to the consolidated financial statements for more information on our borrowings.

We have entered into credit facility agreements to meet our future working capital needs. However, our ability to obtain financing may be affected by our financial position and leverage and credit ratings, as well as by prevailing economic conditions and the cost of financing generally. If we are unable to obtain financing 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.  On January 15, 2009, we entered into an entrusted loan agreement with CEA Holding, as the principal, and Eastern Finance, as the trustee, pursuant to which we will obtain a short-term loan of RMB5.55 billion from CEA Holding through Eastern Finance.  In addition, to further meet our future working capital needs, we obtained a two-year credit facility of RMB10 billion from the Shanghai Pudong Development Bank on January 19, 2009, a three-year credit facility of RMB15 billion from the Agricultural Bank of China on February 13, 2009, and a three-year credit facility of RMB11 billion from the Construction Bank of China on March 16, 2009. In addition, on April 28, 2009, we obtained a one-year credit facility of RMB20 billion from the Bank of China.  Based on our past experience, we believe it is likely these facilities will be rolled over in future years if required.

We have, and in the future may continue to have, substantial debts. As of December 31, 2007, our long-term debt to equity ratio was 9.8. However, our equity as of December 31, 2008 was a negative figure, therefore the long-term debt to equity ratio may not be indicative. 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.

Capital Expenditures

We expect our capital expenditures for aircraft and related equipment, including deposits, through 2015 to be in aggregate approximately RMB52,534 million, including RMB8,852 million in 2009 and RMB13,174 million in 2010, in each case subject to contractually stipulated increases or any increase relating to inflation. Construction of our facilities at the Pudong International Airport and the purchase of maintenance equipment and other property and equipment will continue to require additional capital expenditures in 2009. 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.

 

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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, 2008 to December 31, 2008 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, 2008:

 

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		Payments Due by Period
		(RMB millions)
Contractual Obligations		Total				Less Than 1 Year				1-2 Years				2-5 Years				More Than 5 Years
Long-Term Debt			15,628				7,039				4,418				3,666				775
Capital Leases			25,144				2,766				2,704				7,806				11,868
Operating Leases			16,752				2,874				2,455				4,924				6,499
Unconditional Purchase Obligations			52,534				8,852				13,174				22,353				8,155
Other Long-term Obligations (1)			1,321				—				—				—				—
Post-retirement Benefit Obligations (1)			1,516				—				—				—				—
Deferred Tax Liabilities			55				—				—				—				—
Short-term Bank Loans			18,190				18,190				—				—				—
Interest Obligations			6,350				2,121				1,056				1,906				1,267
Under Finance Lease			4,335				849				688				1,602				1,196
Under Bank Loans			2,015				1,272				368				304				71
Fixed Rate			1,382				907				250				190				35
Variable Rate (2)			633				365				118				114				36
Total			131,140				39,721				22,481				38,749				27,297

 

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

(2)

For our variable rate loans, interest rates range from 3 months LIBOR + 0.25% to 6 months LIBOR + 1%. Interest obligations relating to variable rate loans are calculated based on the relevant LIBOR rates as of December 31, 2008. A 1% increase in the interest rate would increase the interest obligations by RMB64 million in total with RMB21 million in year 1, RMB11 million in years 2, RMB19 million in years 3 to 5 and RMB13 million for subsequent years.

		Total Amounts Committed				Amount of Commitment Expiration Per Period (RMB millions)
Other Commercial Commitments		(RMB millions)				Less Than 1 Year				1-3 Years				4-5 Years				After 5 Years
Lines of Credit			28,478				1,233				27,245				—				—
Standby Letters of Credit			—				—				—				—				—
Guarantees			—				—				—				—				—
Standby Repurchase Obligations			—				—				—				—				—
Other Commercial Commitments			—				—				—				—				—
Total			28,478				1,233				27,245

Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions.

Our audited consolidated financial statements have been prepared in accordance with IFRS. Our principal accounting policies are set forth in Note 2 to our audited consolidated financial statements. IFRS requires that we adopt the accounting policies and make estimates that our Directors believe are most appropriate in the circumstances for the purposes of giving a true and fair view of our results and financial position. However, different policies, estimates and assumptions in critical areas could lead to materially different results. The critical accounting policies adopted and estimates made in the preparation of these financial statements are identified as follows:

Estimated impairment of property, plant and equipment and intangible assets

We test whether property, plant and equipment and intangible assets have been impaired in accordance with the accounting policy stated in Note 2(n) to the financial statements. The recoverable amounts of cash generating units is the higher of fair value less costs to sell and value-in-use. The calculation of value-in-use using cash flow projections based on financial budgets approved by management and the key assumptions are disclosed in Note 18(a).  Different assumptions could significantly affect the value-in-use calculation and estimated impairment of property, plant and equipment and intangible assets.

 

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Revenue recognition

We recognize passenger, cargo and mail revenues in accordance with the accounting policy stated in Note 2(f) to the financial statements. Unused tickets are recognized in traffic revenues based on current estimates. Management annually evaluates the balance in the sales in advance of carriage account (“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

We operate a frequent flyer program called “Eastern Miles” that provides 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. The deferment of revenue is estimated based on historical trends of redemptions, which is then used to project the expected utilization of these benefits. Any remaining unutilized benefits are recognized as deferred revenue.

Depreciation of components related to overhaul costs

Depreciation of components related to airframe and engine overhaul costs are based on our historical experience with similar airframe and engine models and taking into account anticipated overhauls 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 materially impact the results of operations.

Provision for costs of 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 cycles and the timeframe between each overhaul. These judgments or estimates are based on historical experience on returning similar airframe and engine models, actual costs incurred and aircraft and engines status. Different judgments or estimates could significantly affect the estimated provision for costs of return condition checks.

Retirement benefits

We operate and maintain defined retirement benefit plans which provide retirees with benefits including transportation subsidies, social activity subsidies 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 employees’ service period by utilizing various actuarial assumptions and using the projected unit credit method in accordance with the accounting policy stated in Note 2(w) to the financial statements. These assumptions include, without limitation, the selection of discount rate, annual rate of increase of per capita benefit payment and employees’ turnover rate. The discount rate is based on management’s review of local high quality corporate bonds. The annual rate of increase of benefit payments is based on the general local economic conditions. The employees’ turnover rate is based on historical trends of our Company. Additional information regarding the retirement benefit plans is disclosed in Note 36 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 2(k) to the financial statements, we consider future taxable income and ongoing prudent and feasible tax planning strategies. In the event that our 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 our ability to utilize the tax benefits of net operating loss carry forwards in the future, adjustments to the recorded amount of net deferred tax assets and taxation expense would be made.

 

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Foreign Currency Transactions

We have debts denominated in U.S. dollars, Japanese yen or Euro in addition to our debts denominated in Renminbi. We generate a significant amount of foreign currency revenues, including U.S. dollar, Japanese yen, Euro, Korean won, Hong Kong dollar, Singapore dollar, Australian dollar, and Thailand baht revenues, from ticket sales made in overseas offices. Pursuant to current foreign exchange regulations in China, we may retain our foreign currency earnings subject to the approval of SAFE. We have also designated certain personnel to manage the foreign currency risks through derivative financial products such as forward foreign exchange contracts and interest rate swaps. We use interest rate swaps to reduce risks related to changes in market interest rates. As of December 31, 2008, the notional amount of outstanding interest rate swap agreements was approximately US$471 million, compared to US$624 million as of December 31, 2007. These interest rate swap agreements will expire between 2009 and 2016. In addition, we use currency 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, 2008, the notional amount of the outstanding currency forward contracts was approximately US$121 million, compared to US$33 million as of December 31, 2007. These currency forward contracts will expire between 2009 and 2017.

Pursuant to IFRS, our monetary assets and liabilities denominated in foreign currencies are required to be translated into Renminbi at the year end at exchange rates announced by the People’s Bank of China. The net exchange gains or losses are recognized and reflected in the income statement for the relevant year. Any fluctuation of the exchange rates between Renminbi and foreign currencies may materially and adversely affect our financial condition and results of operations. Primarily due to an appreciation of Renminbi against certain foreign currencies (including the U.S. dollar and the Japanese yen) following the measures introduced by the PRC Government in July 2005 to reform the Renminbi exchange rate regime, we recorded a decrease in net exchange gains from RMB2,023 million as of December 31, 2007 to RMB1,958 million as of December 31, 2008.

Taxation

Since we changed our registered address to Pudong district in Shanghai on July 1, 2001, we have been subject to income tax at the rate of 15%. Our effective tax rate, however, may be higher than the rate of 15% because some of our subsidiaries are incorporated in jurisdictions where the applicable income tax rate is 33% rather than 15%. We had carried forward tax losses of approximately RMB5,380 million and RMB11,465 million as of December 31, 2007 and 2008, respectively, which can be used to set off against future taxable income before 2008 and 2012, respectively.

On March 16, 2007, the National People’s Congress approved the Enterprise Income Tax Law (the “EIT Law”), which took effect on January 1, 2008. The PRC enterprise income tax rate for the Company and all its subsidiaries, except those registered in Hong Kong, has been changed to a standard tax rate of 25%. The Company and certain of its subsidiaries located in Pudong District, Shanghai, are entitled to a transitional period to gradually increase the applicable corporate income tax rate to 25% in the next five years.  For the year ended December 31, 2008, the corporate income tax rate applicable to the Company and these subsidiaries was 18%. The net deferred tax position of the Company and its subsidiaries as of December 31, 2008 is insignificant and the change in tax rate has no material impact on our deferred tax position. Except for those subsidiaries that are incorporated in Hong Kong and therefore subject to a Hong Kong corporate income tax rate of 16.5%, other  subsidiaries of the Company are generally subject to the PRC standard income tax rate of 25%.

Inflation

In recent years, China has not experienced significant inflation and in 2006, inflation did not have a significant effect on our business. 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 4.8% and 5.9% in 2007 and 2008, respectively. 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.

 

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New Pronouncements

The following standards, amendments and interpretations to existing standards, which have been published and are relevant to our Company’s operations, are mandatory for accounting periods beginning on or after January 1, 2009 or later periods. We are still assessing the impact of these new/revised standards and interpretations in detail.

·

IAS 1 (Revised), ‘Presentation of financial statements’ (effective from January 1, 2009)

·

IFRS 8, ‘Operating segments’ (effective from January 1, 2009)

·

IAS 27 (Revised) “Consolidated and Separate Financial Statements” (effective from annual period beginning on or after July 1, 2009)

·

IFRS 3 (Revised) “Business Combinations” (effective for business combinations with acquisition date on or after the beginning of the first annual reporting period beginning on or after July 1, 2009)

·

IAS 36 (Amendment), ‘Impairment of assets’ (effective from January 1, 2009)

·

IAS 38 (Amendment), ‘Intangible assets’ (effective from January 1, 2009)

·

IAS 19 (Amendment), ‘Employee benefits’ (effective from January 1, 2009)

·

IFRS 7 (Amendment), ‘Financial instruments: Disclosure’ (effective from January 1, 2009)

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(1)		51		0		Chairman of the Board of Directors
Li Jun		56		0		Vice Chairman
Ma Xulun (2)		45		0		Director and President
Luo Chaogeng		59		6,600 A Shares		Director
Luo Zhuping		56		11,616 A Shares		Director and Secretary of the Board
Hu Honggao		55		0		Independent Non-executive Director
Peter Lok		72		0		Independent Non-executive Director
Wu Baiwang		66		0		Independent Non-executive Director
Zhou Ruijin		70		0		Independent Non-executive Director
Xie Rong		57		0		Independent Non-executive Director
Liu Jiangbo		59		0		Chairman of the Supervisory Committee
Xu Zhao		40		0		Supervisor
Yan Taisheng (3)		55		5,000 A Shares		Supervisor
Feng Jinxiong (4)		47		0		Supervisor
Liu Jiashun		52		3,960 A Shares		Supervisor
Zhang Jianzhong		54		0		Vice President
Li Yangmin		46		3,960 A Shares		Vice President
Fan Ru		60		3,696 A Shares		Vice President

 

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Name		Age		Shares Owned		Position
Wu Yongliang (5)		46		3,696 A Shares		Chief Financial Officer

 

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(1)	Mr. Liu Shaoyong has served as Chairman of our Company since February 3, 2009.

 

(2)	Mr. Ma Xulun has served as Director of our Company since February 3, 2009 and President of our Company since December 12, 2008.

(3)	Mr. Yan Taisheng has served as Supervisor of our Company since March 26, 2009.

(4)	Mr. Feng Jinxiong has served as Supervisor of our Company since March 26, 2009.

(5)	Mr. Wu Yongliang has served as Chief Financial Officer of our Company since April 2009.

On February 3, 2009, during the extraordinary general meeting, the shareholders of our Company approved the resignation of Mr. Li Fenghua as the Chairman and non-executive director of our Company and approved the appointment of Mr. Liu Shaoyong as director to the fifth session of the Board of our Company. The shareholders of our Company also approved the termination of office of Cao Jianxiong as the President and director of our Company, and approved the appointment of Mr. Ma Xulun as the President and the executive director of our Company.

On March 26, 2009, during the 2009 first group meetings of the 5th meetings of the 4th session employee’s representatives conference, the employee representatives of our Company approved the termination of Ms. Wang Taoying, due to her retirement, and Ms. Yang Jie, due to her relocation of appointment, as the employee representative supervisors of our Company and further elected Mr. Yan Taisheng and Mr. Feng Jinxiong as employee representative supervisors of the fifth session of the supervisory committee of our Company. On March 31, 2009, during the meeting of the fifth session of the Board, the Directors of our Company approved the resignation of Mr. Luo Weide as the Chief Financial Officer of our Company and approved the appointment of Mr. Wu Yongliang as the Chief Financial Officer of our Company.

Directors

Mr. Liu Shaoyong has served as Chairman of our Company since February 2009. He is currently a deputy party secretary and general manager of CEA Holding. Mr. Liu joined the civil aviation industry in 1978. He held the positions of Captain of the Flying Squadron of China General Aviation Corporation and was appointed as the Deputy General Manager of China General Aviation Corporation and Deputy Director of Shanxi Provincial Civil Aviation Administration. He also served as the General Manager of the Shanxi branch of the Company and as the Chief of the Flying Model Division of the Civil Aviation Administration of China. He was the General Manager of the Company from December 2000 to October 2002. From October 2002 to August 2004, he was appointed as the Vice Minister of Civil Aviation Administration of China. From August 2004 to December 2008, Mr. Liu has served as the General Manager of China Southern Air Holding Company and from November 2004 to December 2008, he has served as Chairman of directors of China Southern Airlines Company Limited. He served as Deputy Party Secretary and General Manager of CEA Holding since December 2008. Mr. Liu graduated from China Civil Aviation Flying College. He has obtained a master degree in executive business administration from Tsinghua University in 2005. He is a qualified First Class Pilot. Mr. Liu is the Director General of China Air Transport Association, a director of International Air Transport Association and a director of Association for Relations Across the Taiwan Straits.

Mr. Li Jun has served as the Vice Chairman of the Board of our Company since 2007. He also serves as a party secretary of CEA Holding. Mr. Li joined the civil aviation industry in 1972. Since 1977, Mr. Li served as officer in the Political Department and office secretary of CAAC. Mr. Li served as person-in charge of Policy Research Department in the Civil Aviation Bureau in 1984, deputy director of Policy Research Department in the Civil Aviation Bureau in 1986, deputy manager of Planning Department in CAAC in 1989, manager of Planning Department in CAAC in 1994, director of the General Office in CAAC in 1996, manager of Personnel Education Department in CAAC in 2000, and deputy head and party committee member of CAAC in 2001. Since 2006, Mr. Li has served as party secretary of CEA holding. Mr. Li graduated from the Party School of the Central Committee of the C.P.C. He holds a bachelor degree in Economic Management and is a qualified Economist.

 

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Mr. Ma Xulun has served as a Director of our Company since February 2009 and President of our Company since December 12, 2008. He is currently a deputy party secretary of CEA Holding, executive director, Deputy Party Secretary and General Manager of the Company. Mr. Ma joined the civil aviation industry in 1997. He used to serve as Deputy General Manager of China Commodities Storing and Transportation Corporation, Deputy Director General of Financial Department of CAAC, and Vice President of Air China. After the restructuring of the China civil aviation industry in 2002, he became the Vice President of the general affairs of Air China. From September 2004 to January 2007, he became the President and Deputy Party Secretary of Air China. From December 2004 to December 2008, he was a Party member of China National Aviation Holdings Company. From January 2007 to December 2008, he was Deputy General Manager of China National Aviation Holding Company. Since December 2008, he has served as Deputy Party Secretary of CEA Holding, Deputy Party Secretary and General Manager of the Company. Mr. Ma graduates from Shanxi University of Finance and Economics and Huazhong University of Science and Technology. Mr. Ma has a master degree and is a qualified accountant.

Mr. Luo Chaogeng has served as a Director of our Company since 2005. Mr. Luo joined the civil aviation industry in 1970. Mr. Luo was a flight mechanic of the instructing team of the Lanzhou Civil Aviation Administration Bureau from August 1970 to August 1972. From August 1972 to March 1989, he was the flight mechanic of the 8th Civil Aviation Flight Team. From March 1989 to August 1994, he was the deputy commissar, commissar and party secretary of the Xian Flight Team of China Northwest Airlines. From August 1994 to October 1997, he was the party secretary of the aircraft maintenance plant of China Northwest Airlines. From October 1996 to March 1997, he was the party secretary and deputy general manager of the aircraft maintenance base of China Northwest Airlines. From March 1996 to December 2000, he was the deputy director of the Civil Aviation Administration Bureau of China Northwest Airlines. From December 2000 to November 2001, Mr. Luo was the general manager of Yunnan Airlines and the director and deputy party secretary of Civil Aviation Administration Bureau of Yunnan. From November 2001 to September 2002, he was the general manager and deputy party secretary of Yunnan Airlines. From September 2002 to September 2004, he also served concurrently as the general manager of Yunnan Airlines. From September 2004 to the present, he has been the party constitution member and vice president of China Airlines Group Company, and from September 2004 to October 2006, he served as president and deputy party secretary of China Airlines Corporation Limited. From September 1998 to June 2001, Mr. Luo studied a postgraduate course for incumbent leading cadres in professional economics and management at the Central Party School of Shaanxi. Mr. Luo has obtained first class competency in flight mechanics.

Mr. Luo Zhuping has served as a Director of our Company since 2004 and the secretary of our Board of Directors since 1997. Mr. Luo joined CEA in 1988. He was deputy chief and then chief of the enterprise management department of China Eastern Airlines from 1992 to 1997. He was deputy head of the share system office from 1993 to 1996. In 1997, he became the secretary of our Board of Directors and, from 1997 to 2008, he also served as the head of the secretariat of our Board of Directors. He became a Director of our Company in June 2004. Mr. Luo graduated from the Faculty of Philosophy and the Faculty of Law of Anhui University in 1979 and 1985, respectively. In 1994, Mr. Luo received a Master’s degree from the Economics Department of Eastern China Normal University, majoring in global economics. In 1998, he participated in the training program for senior managers of large state-owned enterprises organized in the U.S.A. by the State Economic and Trade Commission and Morgan Stanley.

Mr. Hu Honggao has served as an independent non-executive Director of our Company since 1996. He is the vice-dean and professor of law at Fudan University School of Law as well as the head of the Civil and Commercial Law Research Centre of Fudan University, supervising doctoral students majoring in civil and commercial law at Fudan University. He is also a senior lawyer at the Shanghai Shen Yang Law Office. Mr. Hu is a managing director of China Commercial Law Research Society, a managing director of China Economic Law Research Society, a member of the Legislative Consultation Committee of the Shanghai Municipal Government, a member of the Legislative Profession Consultation Committee of the Shanghai Standing Committee of the People’s Congress, vice-chairman of the Shanghai Economic Law Research Society and an arbitrator of the Shanghai Arbitration Committee.

Mr. Peter Lok has served as an independent non-executive Director of our Company since 1998. Mr. Lok went to the College of Air Traffic Control in England for further studies after joining the Hong Kong Civil Aviation Department in December 1956. He studied air transport, air accident investigation and administration and management of civil aviation in England from 1968 to 1973. In 1982, he became assistant director of the Hong Kong Civil Aviation Department. From 1985, during his time in office at the air services division of the Hong Kong Civil Aviation Department, he participated in negotiations with various countries regarding air traffic rights. He became deputy director in 1988, and subsequently became director in 1990 of the Hong Kong Civil Aviation Department. Mr. Lok retired in 1996 and has served as a consultant at the Flights Standards Department of the CAAC. Mr. Lok is the first Chinese director of the Hong Kong Civil Aviation Department and was at one time an instructor of the College of Air Traffic Control of Hong Kong.

 

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Mr. Wu Baiwang has served as an independent non-executive Director of our Company since 1998. Mr. Wu joined the civil aviation industry in 1959 and was deputy fleet leader and subsequently became fleet leader of the 12th Fleet of the CAAC from 1976 to 1984. From 1984 to 1992, Mr. Wu was deputy head and subsequently became head of the CAAC Jilin Bureau. From 1992 to 1995, Mr. Wu was head and party secretary of the CAAC Northeastern Bureau. From September 1995 to 1998, he became president of China General Aviation Corporation. He was the party secretary and vice-president of Guangzhou Baiyun International Airport Group Company and the Chairman of the board of directors of Guangzhou Baiyun International Airport Company Limited from 1998 to September 2003. Mr. Wu graduated from Chinese Civil Aviation School in 1965 and holds the title of First Class Pilot.

Mr. Zhou Ruijin has served as an independent non-executive Director of our Company since 2000. Mr. Zhou was deputy editor-in-chief and the East China regional director of the People’s Daily. From 1988 to 1993, Mr. Zhou was party secretary and deputy editor-in-chief of the Liberation Daily. From April 1993 to 1996 he was deputy editor-in-chief of the People’s Daily and from 1996 to 2000 he was deputy editor-in-chief and the East China regional director of the People’s Daily. After he retired, he became vice-chairman of the China Productivity Council and Chairman of the Shanghai Productivity Council. Mr. Zhou graduated from the journalism department of Fudan University in 1962.

Mr. Xie Rong has served as an independent non-executive Director of our Company since 2003. Mr. Xie is a certified accountant in the People’s Republic of China and the deputy head of Shanghai National Accounting Institute. He taught at the faculty of accounting of Shanghai University of Finance and Economics from December 1985 to March 1997, and had been an assistant professor, a professor, a doctorate-tutor and the deputy dean of the faculty. Mr. Xie was a partner of KPMG Huazhen from December 1997 to October 2002, and has been the deputy head of Shanghai National Accounting Institute since October 2002. Mr. Xie graduated from Shanghai University of Finance and Economics and has a doctorate degree in Economics.

Supervisory Committee

As required by the PRC Company Law and our articles of association, our Company has a supervisory committee, or the Supervisory Committee, whose primary duty is the supervision of our senior management, including our Board of Directors, managers and senior officers. The Supervisory Committee consists of five supervisors.

Ms. Liu Jiangbo has served as the Chairman of the supervisory committee of our Company (the “Supervisory Committee”) since 2007, and is also a party member, vice president, and the head of disciplinary inspection group of CEA holding. Ms. Liu Jiangbo joined the civil aviation industry in 1979. Since then, Ms. Liu had been an officer in the Beijing Administrative Bureau of Civil Aviation of China and the deputy secretary of the committee of C.P.C. of the transportation business division. Ms. Liu served as secretary of the committee of the Communist Youth League of the National Civil Aviation in 1985, deputy director of the personnel department of the Traffic Control Bureau of the Aviation of China in 1987, supervisor to the Civil Aviation Administration of China appointed by the Supervisory Bureau of China in 1990, deputy director of the transportation division of CAAC in 1994, secretary of the committee of C.P.C. and vice president of Yunnan Airlines Corporation Limited in 2000, and the party member, vice president and head of the disciplinary examination committee of CEA holding in 2002. Ms. Liu graduated from the Graduate School of Chinese Academy of Social Sciences, majoring in business management of industrial economics, having the qualification of post-graduate and senior political work instructor.

Mr. Xu Zhao has served as a Supervisor of our Company since 2007, and the chief accountant of CEA holding. Mr. Xu joined the civil aviation industry in 2007. Mr. Xu served as engineer and accountant in Dongfeng Motor Group Company Limited in 1991 and 1997 respectively, Mr. Xu joined Shanghai Yanhua High Technology Limited Company as a manager in finance department in 2000, and joined Shaanxi Heavy Duty Automobile Co. Limited as a chief financial officer in 2002. Since January 2007, Mr. Xu has served as the chief accountant in CEA holding. Mr. Xu graduated from Chongxing University, majoring in moulding, and The Chinese University of Hong Kong, majoring in accounting, and holds a master degree. Mr. Xu is qualified as an engineer and an accountant, and is a certified public accountant in the PRC.

 

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Mr. Yan Taisheng is currently a Supervisor and the Vice Chairman of the Labor Union of our Company. Mr. Yan joined the civil aviation industry in 1973, and has served in the Command Centre and the General Office of Shanghai Civil Aviation Administration Bureau. From 1990 to 1993, he served as the Chief of the Secretarial Section in the General Office of China Eastern Airlines Company. He served as the Manager of Shanghai Civil Aviation Dong Da Industry Company from 1993 to 1998 and was the Deputy Director of General Office of the Labor Union of the Company from 1998 to 2002. From 2002 to 2005, he served as the Director of General Office of Labor Union of the Company. He has been the Vice Chairman of the Labor Union and the Director of the General Office of the Labor Union of the Company since 2005. Mr. Yan graduated from East China Normal University.

Mr. Feng Jinxiong is currently a Supervisor and general manager of Audit Department of our Company. Mr. Feng joined the civil aviation industry in 1982, and has served in the Planning Department of Shanghai Civil Aviation Administration Bureau as well as the Planning Department of China Eastern Airlines Company. He served as the Deputy Director of the Planning Department of China Eastern Airlines Company from 1992 to 1997, the Director of the Planning Department of our Company from 1997 to 1998, the Director of the Finance Department of China Eastern Air Holding Company from 1998 to 2000. He was the Deputy Chief Accountant of China Eastern Air Holding Company from 2000 to 2001, the Manager of the Human Resources Department of our Company from 2001 to 2003, the Party Committee Secretary and Vice President of China Eastern Air Jin Rong Company from 2003 to 2005, the Party Committee Secretary and Deputy General Manager of the Shanghai Security Department of our Company from 2005 to 2007, as well as the President and the Deputy Party Committee Secretary of the China Eastern Airlines Wuhan Co., Ltd. from 2007 to 2009. Since February 2009, he has been the General Manager of the Audit Department of our Company. Mr. Feng graduated from the Civil Aviation University of China and the Graduate School of the Chinese Academy of Sciences, holding a master’s degree.

Mr. Liu Jiashun is currently a Supervisor of our Company. From 1993 to 1999, Mr. Liu was a party secretary, deputy president and secretary of the disciplinary committee of China Aviation Fuel Hainan Company, as well as chairman of the board and president of Hainan Nanyang Air Transport Co., Ltd. From 1997 to 1999, he was also the chief director in charge of fuel supply engineering at Haikou’s Meilan Airport and served as a director of Meilan Airport Co., Ltd. and the vice chairman of the board and president of Meiya Industrial Co., Ltd. From 1999 to 2007, he was deputy party secretary, and subsequently the secretary of the disciplinary committee of China Aviation Fuel East China Company and he has been the general manager of Shanghai Puhang Oil Co., Ltd. since 2006. Mr. Liu received post-graduate education and is qualified as a senior political work instructor.

Senior Management

Mr. Zhang Jianzhong has served as a Vice President of our Company since 2004. Mr. Zhang joined the civil aviation industry in 1982. From April 1982 to December 1987, he was an assistant of the Shanghai Civil Aviation Planning Bureau. From December 1987 to April 1990, he was the deputy director of the planning department of Shanghai Hongqiao Airport. From April 1990 to January 1996, he was the director of the planning department of China Eastern Airlines. From January 1996 to April 1999, he was the manager of the sales and marketing department of our Company. From April 1999 to April 2003, he was the Assistant to the President of our Company. From September 2000 to December 2001, he served concurrently as the director of the office of strategic study of our Company. From December 2001 to May 2003, he served concurrently as the general manager of the computer information centre of our Company. From April 2003 to June 2004, he was the chief economic official of our Company. From May 2003 to June 2004, he served concurrently as the general manager of the sales and marketing department of our Company. Mr. Zhang graduated from the Faculty of Mechanical Engineering of Zhejiang University and Professional Study in Economics and Management at Fudan University, where he obtained his master’s degree.

Mr. Li Yangmin has served as a Vice President and deputy general manager of our Company since 2005. Mr. Li joined the civil aviation industry in 1985. From July 1985 to October 1996, he was the deputy head of the aircraft maintenance workshop, head of technology office and secretary of the workshop branch of Northwest Company. From October 1996 to June 2002, he was the deputy general manager of the aircraft maintenance base and the manager of air route department of Northwest Company. From June 2002 to March 2004, he was the general manager of the aircraft maintenance base of China Eastern Air Northwest Company. From March 2004 to October 2005, he was the vice president and a member of the standing committee to the party committee of China Eastern Air Northwest Company. Mr. Li graduated from China Civil Aviation Academy. He is a qualified senior engineer.

 

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Mr. Fan Ru has served as Vice President of our Company since 2006. Mr. Fan started his civil aviation career in 1966. He was a deputy fleet leader of China Eastern Airlines’ Shanghai Fleet since 1988 and was the head of aviation technology management office of China Eastern Airlines since 1995. He was appointed as the deputy chief pilot and the head of aviation technology management office of the Company in 1997. He was the chief pilot of our Company from 1999 to November 2006. Mr. Fan graduated from Advanced Aviation School for professional flying. He has received tertiary education and has obtained first class technical qualifications for pilots.

Mr. Wu Yongliang is currently the Chief Financial Officer of our Company. Mr. Wu joined the civil aviation industry in 1984. He was the deputy director of the Finance Department of China Eastern Airlines Company from 1993 to 1997, the deputy director and subsequently the director of the Finance Department of our Company from 1997 to 1998, the director of Planning and Finance Department of our Company from 1998 to 2000, the head of the Finance Department of CEA Holding from 2000 to 2001, the deputy chief accountant and the head of the Finance Department of CEA Holding from 2001 to March 2009. Mr. Wu graduated from the Economic Management Department of Civil Aviation University of China, specializing in planning and finance. He also graduated from Fudan University, specializing in business administration. Mr. Wu has the qualification of post-graduate and holds the title of Accountant.

B.           Compensation

The aggregate amount of cash compensation paid by us to our Directors, supervisors and the senior management during 2008 for services performed as Directors, supervisors and officers or employees of our Company was approximately RMB1,614,000. 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. Our Company does not have any bonus or profit sharing plan or any stock option plan.

Details of the emoluments paid to our Directors, supervisors and senior management for the year 2008 are as follows:

		2008
Name and Principal Position		Salaries and allowances				Bonus				Total
		RMB’000				RMB’000				RMB’000
Directors			—				—				—
Liu Shaoyong*			—				—				—
Ma Xulun*			—				—				—
Li Fenghua*			—				—				—
Luo Chaogeng*			—				—				—
Cao Jainxiong*			—				—				—
Li Jun*			—				—				—
Luo Zhuping			173								173
Independent non-executive Directors
Hu Honggao			120				—				120
Peter Lok			117				—				117
Wu Baiwang			120				—				120
Zhou Ruijin			120				—				120
Xie Rong			120				—				120
Supervisors
Liu Jiangbo*			—				—				—
Xu Zhao*			—								—
Yang Jie			45				—				45
Wang Taoying			162				—				162
Liu Jiashun			—				—				—
Senior Management
Zhang Jianzhong			203				—				203
Li Yangmin			188				—				188
Fan Ru			654				—				654
Luo Weide			189				—				189
Total			2,211				—				2,211

 

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*

Certain Directors of our Company received emoluments from CEA Holding, our parent company, part of which is 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 our Company and their services to CEA Holding.

During the year ended December 31, 2008, no Directors and supervisors 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 and the expiration of their current term.

Name		Held Position Since		Expiration of Term
Liu Shaoyong		February 3, 2009		June 29, 2010
Li Jun		June 29, 2007		June 29, 2010
Ma Xulun		February 3, 2009		June 29, 2010
Luo Chaogeng		June 29, 2007		June 29, 2010
Luo Zhuping		June 29, 2007		June 29, 2010
Hu Honggao		June 29, 2007		June 29, 2010
Peter Lok		June 29, 2007		June 29, 2010
Wu Baiwang		June 29, 2007		June 29, 2010
Zhou Ruijin		June 29, 2007		June 29, 2010
Xie Rong		June 29, 2007		June 29, 2010
Liu Jiangbo		June 29, 2007		June 29, 2010
Xu Zhao		June 29, 2007		June 29, 2010
Yan Taisheng		March 26, 2009		June 29, 2010
Feng Jinxiong		March 26, 2009		June 29, 2010
Liu Jiashun		June 29, 2007		June 29, 2010
Zhang Jianzhong		June 29, 2007		June 29, 2010
Li Yangmin		June 29, 2007		June 29, 2010
Fan Ru		June 29, 2007		June 29, 2010
Wu Yongliang		March 31, 2009		June 29, 2010

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.

Our Board of Directors established the audit committee in August 2000 in accordance with the listing rules of the Hong Kong Stock Exchange. On June 29, 2007, the fifth session of the Board of our Company held the first meeting for 2007 and elected Mr. Xie Rong, Mr. Hu Honggao and Mr. Zhou Ruijin as the members of the Audit Committee and appointed Mr. Xie Rong as the chairman of the Audit Committee. The audit committee is authorized to, among other things, examine our internal control system and review auditing procedures and financial reports with our auditors. Subject to the approval of the shareholders’ meeting, the audit 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 committee. The audit committee holds at least four meetings each year. The audit 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 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 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.

 

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On June 29, 2007, the fifth session of the Board of the Company held the first meeting for 2007 and appointed Mr. Zhou Ruijin, Mr. Luo Chaogeng and Mr. Wu Baiwang as the remuneration and assessment committee of the Company (the “Remuneration and Assessment Committee”), and Mr. Zhou Ruijin was elected as the chairman of the Remuneration and Assessment Committee. The remuneration and assessment committee is authorized to review the performance of our Directors, supervisors and management as well as determine their annual compensation level. The remuneration and assessment committee submits to our Board of Directors or shareholders’ meeting for approval compensation plans and oversee the implementation of approved compensation plans. The remuneration and assessment committee may consult financial, legal or other outside professional firms in carrying out its duties. The Remuneration and Assessment Committee did not hold any meeting in 2008. Under the guidance of the Remuneration and Assessment Committee, we have provided liability insurance for our Directors, supervisors and senior management in August 2008.

D.           Employees

Through arrangements with CEA Holding and others, we provide certain benefits to our employees, including housing, retirement benefits and hospital, maternity, disability and dependent medical care benefits. Our Company does not have any bonus or profit sharing plan or any stock option plan. See Notes 35 and 36 to our audited consolidated financial statements. 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, 2006, 2007 and 2008, respectively:

		As of December 31,
		2006				2007				2008
Pilots			2,696				2,873				3,048
Flight attendants			5,069				5,851				6,036
Maintenance personnel			5,595				6,043				7,425
Sales and marketing			2,863				2,483				2,922
Other			22,169				23,227				24,722
Total			38,392				40,477				44,153

E.           Share Ownership

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

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 May 29, 2009 by all persons who were known to us to be the beneficial owners of 5% or more of our capital stock:

Title of Class		Identity of Person or Group		Amount Owned				Percent of Class				Percent of Total Shares
Domestic A Shares		CEA Holding			2,904,000,000				88	%			59.67	%
H Shares		HKSCC Nominees Limited (1)			1,544,484,799				98.57	%			31.73	%

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(1)         As custodian of the Depositary for American Depositary Shares representing H Shares.

CEA Holding has held 59.67% of our issued and outstanding capital stock since its establishment in October 2002, 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.

 

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As of December 31, 2008 and May 29, 2009, there were 1,566,950,000 H Shares issued and outstanding. As of December 31, 2008 and May 29, 2009, there were, respectively, 52 and 52 registered holders of American depositary receipts evidencing 1,159,318 and 1,064,596 ADSs. 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 China State-owned Assets Supervision and Administration Commission, or 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 43 to our audited 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. Each of these arrangements is non-exclusive, although we do not currently intend to enter into any equivalent contracts with third parties.

Eastern Aviation Import and Export Corporation, or EAIEC, a 55% owned subsidiary of CEA Holding.

Our Company and EAIEC have entered into an import/export agency agreement dated May 12, 2005 to supersede our agreement dated January 7, 1997, regarding the import and export of aircraft-related accessories, machinery and equipment for a term of three years commencing from July 1, 1999. The agreement is subject to renewal. For the year ended December 31, 2008, the handling charges paid to EAIEC were approximately RMB47 million in total.

We have certain balances with EAIEC, which are unsecured, interest-free and have no fixed term of repayment. See Note 43(b) to our audited consolidated financial statements for more details.

On April 29, 2008, we entered into an agreement to renew our agreement dated May 12, 2005 regarding the import and export of aircraft-related accessories, machinery and equipment in substantially the same terms for an additional term of three years commencing from July 1, 2008.

Shanghai Eastern Aviation Advertising Service Co., Ltd., or Eastern Advertising, a 55% owned subsidiary of CEA Holding.

Our Company and Eastern Advertising have entered into an advertising service agreement dated May 12, 2005 to supersede our agreement dated December 30, 1996, regarding the provision of advertising services for a term of three years commencing from July 1, 2005. The agreement is subject to renewal. For the year ended December 31, 2008, the aggregate amount we paid to Eastern Advertising for advertising services was approximately RMB4 million .

On April 29, 2008, we entered into an agreement to renew our agreement dated May 12, 2005 regarding the provision of advertising services in substantially the same terms, for an additional term of three years commencing from July 1, 2008.

 

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China Eastern Air Catering Investment Co., Ltd., or CEA Catering, a 55% subsidiary of CEA Holding. The remaining 45% is owned by our Company.

On May 12, 2005, our Company entered into certain catering service agreements with a number of subsidiaries of CEA Catering (including Shanghai Eastern Air Catering Co., Ltd.) regarding the provision of in-flight catering services (including the supply of in-flight meals and beverages, cutlery and tableware) and related storage and complementary services required in our Company’s daily airline operations and civil aviation business. For the year ended December 31, 2008, the aggregate amount we paid to the subsidiaries of CEA Catering for the supply of in-flight meals and other services was approximately RMB372 million.

On April 29, 2008, we entered into a service agreement with CEA Catering in substantially the same terms to supersede our agreements dated May 12, 2005. The agreement, regarding the provision of in-flight catering services (including the supply of in-flight meals and beverages, cutlery and tableware) and related storage and complementary services required in our Company’s daily airline operations and civil aviation business, is for a term of three years commencing from July 1, 2008.

Eastern Air Group Finance Co., Ltd., or Eastern Finance, which is 46.3% owned and controlled by CEA Holding and other subsidiaries of CEA Holding.

Our Company and Eastern Finance have entered into a financial services agreement dated May 12, 2005 to supersede our agreement with Eastern Finance dated January 8, 1997, regarding the provision of deposit services, loan and financing services and certain other financial services such as the provision of trust loans, financial guarantees and credit facilities and credit references for a term of three years commencing from July 1, 2005. The agreement is subject to renewal. Pursuant to this agreement, we may place deposits with, and obtain loans from, Eastern Finance. As of December 31, 2008, we had short-term deposits amounting to RMB1,203 million placed with Eastern Finance, which paid interest to us at 0.4% per annum. In addition, our Company had short-term loans of RMB295 million from Eastern Finance. During the year ended December 31, 2008, the weighted average interest rate on the loan was 4.3% per annum.

Pursuant to the financial services agreement, Eastern Finance shall deposit all moneys deposited by our Company under the agreement with commercial bank(s) in China, including, for example, Industrial and Commercial Bank of China, China Construction Bank, Bank of Agriculture and Bank of Communications. Eastern Finance has also undertaken under the financial services agreement that all outstanding loans it provides to CEA Holding and its subsidiaries (other than our Company) will not at any time and from time to time exceed the aggregate amount of its equity capital, surplus reserves and deposits received from other parties.

On April 29, 2008, we entered into a financial services agreement to renew our agreement dated May 12, 2005 regarding the provision of deposit services, loan and financing services and certain other financial services such as the provision of trust loans, financial guarantees and credit facilities and credit references, in substantially the same terms, for an additional term of three years commencing from July 1, 2008.  The new financial services agreement was approved, confirmed and ratified by independent shareholders at our Annual General Meeting held on June 30, 2008.

TravelSky Technology Ltd., which is 33% owned by CEA Holding.

We pay ticket reservation service charges to TravelSky, which is 33% owned by CEA Holding, in connection with our use of its computer reservation system. For the year ended December 31, 2008, we paid ticket reservation service charges to TravelSky of approximately RMB241 million.

CEA Development Co., a non-wholly owned subsidiary of CEA Holding.

On October 28, 2008, our Company and CEA Development Co. entered into an automobile repair service agreement, pursuant to which CEA Development Co. will, from time to time, provide maintenance and repair services for our automobiles that are used in our ground services and daily operations for a term commencing from January 1, 2008 to December 31, 2010.  On April 29, 2008, we entered into a service agreement with Shanghai Eastern Aviation Equipment Manufacturing Corporation, or SEAEMC, a wholly owned subsidiary of CEA Development Co., to renew our agreement with SEAEMC dated May 12, 2005, in substantially the same terms. The agreement regarding the provision of comprehensive services in relation to maintenance, repair and overhaul of aircraft and aviation equipment, and procurement of related equipment and materials required in our daily operations extends for an additional term of three years commencing from July 1, 2008.

 

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For the year ended December 31, 2008, automobile maintenance fees paid to CEA Development Co. and SEAEMC amounted to approximately RMB24 million.

Ticket Sales

On May 12, 2005, our Company entered into certain sales agency services agreements with several subsidiaries of CEA Holding regarding the sales of our air tickets by such subsidiaries of CEA Holding as our sales agents and the provision of complementary services for a term of three years commencing from July 1, 2005. The agreement is subject to renewal. Under such agreements, the sales agents charge commissions at rates with reference to those prescribed by the CAAC and the International Aviation Transportation Association, as determined following arm’s length negotiations. Such commissions are payable monthly in arrears. The parties will perform an annual review of the then prevailing commission rate before the 31st of December in each calendar year, and agree on any required adjustments to such commission rate in respect of the next calendar year. For the year ended December 31, 2007, the aggregate amount of commissions we paid to those sales agents for the sales agency services was approximately RMB9 million.

On April 29, 2008, we entered into certain sales agency service agreements to renew our agreements dated May 12, 2005 regarding the sales of our air tickets by certain subsidiaries of CEA Holding as our sales agents and the provision of complementary services, in substantially the same terms, for an additional term of three years commencing from July 1, 2008.

Property Leases

Our Company and EA Group had entered into an office lease agreement dated January 7, 1997 in respect of office premises located at 2550 Hongqiao Road, Shanghai, China. The lease term is one year and renewable by the parties, subject to mutual agreement with respect to rental terms. The total rental payment is approximately RMB158,342 per month. In addition, our Company and EA Group had entered into a staff dormitory lease agreement dated December 31, 1996, pursuant to which EA Group had agreed to enter into lease arrangements with our employees for dormitories in Shanghai, Anhui Province, Shandong Province and Jiangxi Province. The term of the lease and the rental payments are set in accordance with Chinese regulations and the rate prescribed by the Shanghai Municipal Government. CEA Holding has assumed EA Group’s rights and liabilities under those lease agreements after its establishment.

On May 12, 2005, we entered into a property leasing agreement with CEA Holding, CEA Northwest and CEA Yunnan for a term of three years, subject to renewal of another three years. Pursuant to this property leasing agreement, we leased from CEA Holding, for our use in daily airlines and other business operations: (i) a maximum of altogether 33 land properties owned by CEA Holding through, and registered in the name of, CEA Northwest, covering an aggregate site area of approximately 692,539 square meters located primarily in Xi’an, Xianyang and Yongdeng, together with a total of 225 building properties and related construction, infrastructure and facilities occupying an aggregate floor area of approximately 269,148 square meters; and (ii) a maximum of altogether seven land properties owned by CEA Holding through, and registered in the name of, CEA Yunnan, covering an aggregate site area of approximately 420,768 square meters primarily located in Kunming, together with a total of 81 building properties and related construction, infrastructure and facilities occupying an aggregate floor area of approximately 457,722 square meters. Under the property leasing agreement, our Company shall pay annual rentals to CEA Holding. The rentals are payable half-yearly in advance, and are subject to review and adjustments provided that the adjustments shall not exceed the applicable inflation rates published by the relevant local PRC authorities. In 2007, we paid a rental of RMB55 million under this property leasing agreement.

 

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On April 29, 2008, we entered into an agreement to renew the property leasing agreement dated May 12, 2005 for an additional term of three years commencing July 1, 2008. Pursuant to the agreement, we will renew our lease on all properties covered by the previous property leasing agreement entered into on May 12, 2005, except that where we previously leased 81 building properties and related construction, infrastructure and facilities, we will instead lease 77 building properties and related construction, infrastructure and facilities covering an aggregate floor area of approximately 452,949 square meters. In addition, CEA Holding will be the only counterparty in the property leasing renewal agreement. Under the property leasing renewal agreement, our Company will pay annual rentals of approximately RMB55.14 million. The rental payments will be payable half-yearly in advance, and are subject to review and adjustments provided that the adjustments shall not exceed the applicable inflation rates published by the relevant local PRC authorities. The property leasing renewal agreement was approved, confirmed and ratified by independent shareholders at our Annual General Meeting held  June 30, 2008.

Guarantee by CEA Holding

As of December 31, 2008, certain unsecured long-term bank loans of the Group with an aggregate amount of RMB357 million were guaranteed by CEA Holding. See Note 31 to our audited consolidated financial statements.

Subscription Agreement with CEA Holding

Our Company and CEA Holding entered into a subscription agreement on November 9, 2007 for CEA Holding to subscribe in cash for 1,100,418,000 new H Shares, which would represent approximately 23% of our existing H shares, for an aggregate consideration of HK$4.2 million. The subscription agreement was part of a proposed investment by SIA and Temasek. See the section headed “Item 4. Information on the Company – History and Development of the Company”.  As of August 9, 2008, the transaction contemplated under the agreements between CEA Holding and our Company did not proceed to completion and the Subscription Agreement and CEA Holding Subscription Agreement expired because the conditions precedent were not fulfilled on or before August 9, 2008.

On December 10, 2008, CEA Holding entered into an A Share Subscription Agreement (the “Original A Share Subscription Agreement”) with our Company to subscribe for new A shares to be issued by our Company. Simultaneously with entering into the Original A Share Subscription Agreement, CES Global entered into an H Share Subscription Agreement with our Company (the “Original H Share Subscription Agreement”) to subscribe for new H shares to be issued by our Company. Subsequently, the parties made amendments to certain terms of the Original A Share Subscription Agreement and the Original H Share Subscription Agreement; and on December 29, 2008, CEA Holding entered into a revised A Share Subscription Agreement with our Company to subscribe in cash for 1,437,375,000 new A shares in our Company at the subscription price of RMB3.87 per share with a total subscription price of approximately RMB5,563 million, and CES Global entered into a revised H Share Subscription Agreement with our Company to subscribe in cash for 1,437,375,000 new H shares in our Company at the subscription price of RMB1.00 per share with a total subscription price of approximately RMB1,437 million, respectively. The Original A Share Subscription Agreement and the Original H Share Subscription Agreement were cancelled accordingly. On February 26, 2009, we convened a class meeting of A Share Shareholders, a class meeting of H Share Shareholders, and an extraordinary general meeting of shareholders, at which special resolutions were passed to approve both the non-public issuance of 1,437,375,000 new A Shares at subscription price of approximately RMB5,563 million to CEA Holding and the issuance of 1,437,375,000 new H Shares at subscription price of approximately RMB1,437 million to CES Global.

On May 22, 2009, we had received an approval issued by CSRC dated May 19, 2009 in relation to our proposed issue of 1,437,375,000 new H Shares at a price of RMB1.00 per share to CES Global. Pending the final approval to be issued by CSRC in relation to the issuance of the new A Shares, we will arrange for the new H Shares and the new A Shares to be issued.

Disposal of interests in China Eastern Air Investment Company Limited

On November 16, 2007, our Company, CEA Holding and East China Care System Co., Ltd. entered into an equity transfer agreement regarding our interests in China Eastern Air Investment Company Limited. Our Company agreed to dispose our entire interest of 98.8% in China Eastern Air Investment Company Limited for the consideration of RMB461.9 million, while East China Care System Co., Ltd. also agreed to dispose of its entire 1.2% interest in China Eastern Air Investment Company Limited for the consideration of RMB5.7 million.

 

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C.           Interests of Experts & Counsel

Not applicable.

Item 8.                 Financial Information

A.           Consolidated Statements and Other Financial Information

Financial Statements

You should 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. In 2005, the family members of certain victims in the aircraft accident (the aircraft was then owned and operated by China Eastern Air Yunnan Company), which occurred in Baotou city in the Inner Mongolia Autonomous Region on November 21, 2004, sued, among other defendants, our Company in a U.S. court for compensation, the amount of which has not been determined. As of December 31, 2006, we had filed a motion to contest the claim in the U.S. court because we expressly did not assume the legal liability of such incident in our acquisition of certain selected assets relating to the aviation business of CEA Yunnan. On July 5, 2007, pursuant to several conditions with which our Company has complied, the Superior Court of the State of California ordered the action stayed on the grounds of forum non conveniens for the purpose of permitting proceedings in the PRC. Moreover, the Superior Court scheduled and held a status conference on December 10, 2007, and intends to schedule subsequent status conferences every six months until the litigation in the PRC is resolved or until the Superior Court determines otherwise. On February 20, 2008, the plaintiff filed a motion with the Superior Court of the State of California to lift the stay. The motion was denied by the Superior Court on May 6, 2008. Subsequently, the plaintiff filed the second motion with the Superior Court to lift the stay on July 10, 2008. On August 27, 2008, the Superior Court of the State of California rejected the motion of the plaintiff again. After the case entered the procedures on appeal in the California Court of Appeal, the Court of Appeal of California issued an option on February 26, 2009, dismissing the appeal of the plaintiff and affirming the original order. On March 16, 2009, the Chinese counsel of the plaintiff sued the Company on behalf of the family members of victims in the Beijing No. 2 Intermediate People’s Court. The case is under the filing procedure and we have not received any notices or official summons from the court in Beijing as of May 31, 2009. We believe, based on professional advice, that it is unlikely that there will be any material adverse effect on our financial position.

Save for the above-mentioned, we were not involved in any other new material litigation in the period of this report.

Dividends and Dividend Policy

For the fiscal year ended December 31, 2004, our shareholder’s meeting approved the payment of a cash dividend of RMB0.02 per share. For the fiscal year ended December 31, 2005, our Board of Directors did not recommend any dividend payout. For the fiscal year ended December 31, 2006, our Board of Directors did not recommend any dividend payout due to our operating results in 2006. For the fiscal year ended December 31, 2007 and 2008, our Board of Directors also did not recommend any dividend payout due to our total accumulated losses of RMB2,814 million in the year 2007 and of RMB18,082 million in the year 2008, respectively. The balance of retained profits will be carried forward to next year. We will not convert funds from the common reserve to increase our share capital during this period. The declaration and payment of dividends for years following 2008 will depend upon our financial results, our shareholders’ interests, general business conditions and strategies, our capital requirements, contractual restrictions on the payment of dividends by us to our shareholders, and other factors our Directors may deem relevant. Holders of our H Shares will receive the equivalent amount of cash dividend as that declared in Renminbi, if any, based on the foreign exchange conversion rate published by the People’s Bank of China, or PBOC, on the date of the distribution of the cash dividend.

 

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B.           Significant Changes

Significant Post Financial Statements Events

On January 15, 2009, CEA Holding (as the principal), Eastern Air Group Finance Company Limited (the “Finance Company”) (as the trustee) and our Company (as the borrower) entered into an entrusted loan agreement, pursuant to which our Company will obtain a short-term loan of RMB5.55 billion from CEA Holding through the Finance Company. The loan will be used only as working capital, with the interest rate to be 4.374%, 10% below the bench rate published by the People’s Bank of China on the drawdown date. The loan will be provided to our Company in six tranches and the interest will be calculated from the respective drawdown dates. We will repay our loan interest in cash quarterly, mainly funding from the sales revenue of our Company. Our Company has not provided any security over our assets for the loan. We will be entitled to request an extension to the loan after having obtained the consent of CEA Holding, which request should be made in writing 15 days prior to the maturity date of the entrusted loan agreement. The Finance Company shall bear joint liabilities as a guarantor for the loan, and our Company shall pay the relevant expenses and taxes to the Finance Company.

On January 19, 2009, we obtained a two-year credit facility of RMB10 billion from Shanghai Pudong Development Bank.  On  February 13, 2009, we obtained a three-year credit facility of RMB15 billion from the Agricultural Bank of China. On February 26, 2009, we convened a class meeting of A Share Shareholders, a class meeting of H Share Shareholders, and an extraordinary general meeting of shareholders, at which special resolutions were passed to approve both the non-public issuance of 1,437,375,000 new A Shares at subscription price of approximately RMB5,563 million to CEA Holding and the issuance of 1,437,375,000 new H Shares at subscription price of approximately RMB1,437 million to CES Global. As of May 31, 2009, we have not received the subscription price from either CEA Holding or CES Global because some necessary consents, approvals or authorizations from the governmental authorities or other third parties for the subscriptions, including but not limited to the final approval from CSRC, have not been obtained. If any of the subscriptions is not approved (including but not limited to the approvals from the shareholders or CSRC), the other subscription will automatically be terminated.

On March 16, 2009, we obtained a three-year credit facility of RMB11 billion from the Construction Bank of China. In addition, on April 28, 2009, we obtained a one-year credit facility of RMB20 billion from the Bank of China.

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 100 H Shares, have been issued by The Bank of New York as the 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, 2008 and May 29, 2009, there were 1,566,950,000 H Shares issued and outstanding. As of December 31, 2008 and May 29, 2009, there were, respectively, 52 and 52 registered holders of American depositary receipts evidencing 1,159,318 and 1,064,596 ADSs. 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. The depositary for the ADSs is The Bank of New York. A total of 3,300,000,000 domestic ordinary shares were also outstanding as of May 29, 2009.

The table below sets forth certain market information relating to our H Shares and ADSs in respect of the period from 2004 to May 29, 2009.

 

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		Price Per H Share (HK$)								Price Per ADS (US$)
		High				Low				High				Low
2004			1.85				1.28				23.70				16.60
2005			1.70				0.95				22.48				12.52
2006			1.73				0.99				22.54				13.00
2007			10.50				1.68				111.58				24.02
First Quarter 2007			2.83				1.68				41.54				24.02
Second Quarter 2007			3.78				2.17				48.52				28.00
Third Quarter 2007			10.50				3.73				147.30				48.05
Fourth Quarter 2007			9.00				5.21				111.58				68.00
2008			8.11				0.65				102.99				8.47
First Quarter 2008			8.11				3.29				102.99				43.61
Second Quarter 2008			4.12				2.41				53.19				30.80
Third Quarter 2008			2.86				1.05				36.50				15.01
Fourth Quarter 2008			1.47				0.65				18.80				8.47
November 2008			1.12				0.65				14.98				8.47
December 2008			1.35				0.75				16.94				8.56
January 2009			1.28				0.95				16.45				12.30
February 2009			1.15				1.01				14.95				12.87
March 2009			1.24				0.91				15.88				12.00
April 2009			1.56				1.19				19.36				15.56
May 2009			1.75				1.32				22.67				16.91

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 26, 2009, is attached as an exhibit to this Annual Report on Form 20-F.

 

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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 were 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. We are registered with and have 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 with 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 People’s Republic of China 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 the 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 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 therefore 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. 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: (1) the provision by our Company of a loan or a guarantee of a loan to a company which is a subsidiary of our Company; (2) 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; (3) 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.

 

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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, 2008, our share capital structure was as follows: 4,866,950,000 ordinary shares, of which (a) 2,904,000,000 A shares were issued upon the establishment of the Company and all subscribed for by the promoter of the Company, which represent 59.67% of our share capital, were held by CEA Holding; (b) 1,566,950,000 H shares, which represent 32.20% of our share capital, were issued to and purchased by foreign investors in an initial public offering; and (c) 396,000,000 A shares, which represent 8.13% of our share capital, were issued to investors in China.

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:

(aa)

present name and alias and any former name or alias;

(bb)

principal address (residence);

(cc)

nationality;

(dd)

primary and all other part-time occupations and duties;

(ee)

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;

 

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(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 the 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;

(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 5 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.

 

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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 the PRC Company Law. The Articles of Association incorporate mandatory provisions in accordance with the 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 derived from the Articles of Association, the PRC 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 two dollars and fifty cents Hong Kong dollars 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);

(6)

we do not have any lien on the relevant shares.

 

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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 its issued shares under the following circumstances:

(i)

cancellation of shares for the reduction of its capital;

(ii)

merging with another company that holds shares in our Company;

(iii)

other circumstances permitted by relevant laws and administrative regulations.

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

We may, with the approval of the relevant State governing authority for repurchasing its 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;

(iii)

repurchase by an off-market agreement outside a stock exchange.

Interested Shareholders

Articles 88 and 89 of our Articles of Associations 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;

 

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(iv)

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

(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 33;

(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;

(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 the Company Law, any other relevant regulatory provisions and these Articles of Association.

 

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Recent Amendments to the Articles of Association

On June 29, 2007, our shareholders approved an amendment to Article 21 of the Articles of Association. The Articles were amended by adding the following new paragraph after the first paragraph of Article 21:

“On 18th December, 2006, the share reform plan of the Company was approved in the relevant shareholders’ meeting of the A share market. Upon the implementation of the share reform, the total share capital of the Company remained unchanged and still comprised 4,866,950,000 shares, of which 2,904,000,000 A shares, representing 59.67% of the total share capital of the Company, were held by China Eastern Air Holding Company. The 1,566,950,000 shares, representing 32.20% of the total share capital of the Company, were overseas listed H shares, and the 396,000,000 shares, representing 8.13% of the total share capital of the Company, were domestic listed A shares.”

On February 26, 2009, our shareholders approved an amendment to Article 63 and Article 145 of the Articles of Association. The first paragraph of Article 63 and the second paragraph of Article 145 were amended as follows, respectively:

“Notice of shareholders’ general meeting shall be served on the shareholders (whether or not entitled to vote at the meeting), by delivery or prepaid airmail to their addresses as shown in the register of shareholders. For the holders of Foreign-Invested Shares, such notice of meeting may be issued by way of publishing such notice on the Company’s website. For the holders of Domestic-Invested Shares, such notice of meeting may be issued by way of public notice.”

“The Company shall deliver or send the said reports to each shareholder of Overseas-Listed Foreign-Invested Shares by prepaid mail at the address registered in the register of shareholders, or publish the said reports on the website of the Company for the shareholders of Overseas-Listed Foreign-Invested Shares to review not later than twenty-one (21) days before the date of every annual general meeting of shareholders.”

We also received shareholder approval at the February 26, 2009 extraordinary general meeting for proposed amendments to the Articles of Association that are conditional upon and with effect from completion of the A Share Subscription Agreement and the H Share Subscription Agreement dated as of December 29, 2008. As the completion of both subscription agreements has not yet occurred, we have not included the related proposed amendments in our current Articles of Association as they are not currently in effect.

The CSRC has enacted a few regulations in recent years which affect the corporate governance of PRC listed companies and the PRC Company Law has also been amended in various areas. As such, the Board 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 will be conditional upon and with effect from approval of the respective resolution at our Annual General Meeting, which is scheduled to be held on June 13, 2009.

C.           Material Contracts

For a summary of any material contracts entered into by our Company or any of its 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”.

In addition, we entered into the following agreements to purchase aircraft or to issue new shares, which are filed with this Annual Report as exhibits:

 

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—

an amendment to an aircraft purchase agreement, dated as of June 26, 2006, between our Company and Airbus SAS regarding the purchase of 30 Airbus A320 aircraft (with engines);

—

an aircraft purchase agreement, dated January 30, 2008, between our Company and Boeing regarding the purchase of 30 737 NG aircraft (with engines);

—

Share Issue and Subscription Agreement, dated as of December 29, 2008, between our Company and CES Global, in relation to the placing of 1,437,375,000 new H shares to CES Global; and

—

Share Issue and Subscription Agreement, dated as of December 29, 2008, between our Company and CES Global, in relation to the placing of 1,437,375,000 new A shares to CEA Holding.

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, or FIEs, 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.

 

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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.

Taxation — Hong Kong

The following discussion summarizes the material Hong Kong tax provisions 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 Hong Kong tax is payable by the recipient in respect of dividends paid by us.

Taxation of Capital Gains

No Hong Kong tax is imposed on capital gains arising from the sale of property (such as H shares) acquired and held as investment assets. However, if a person carries on a trade, profession or business in Hong Kong (e.g., trading and dealing in securities) and derives trading gains from that trade, profession or business in or from Hong Kong, Hong Kong profits tax will be payable. Gains from sales of H shares effected on or off the Hong Kong Stock Exchange are considered to derive from or arise in Hong Kong for this purpose. Hong Kong profits tax is currently charged at the rate of 16.5% for corporations and at the rate of 15% for individuals.

No Hong Kong tax liability will arise on capital or 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

Hong Kong 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 charged at the total rate of 0.2% 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 stamp duty not paid will be assessed on the instrument of transfer (if any), and the transferee will be liable for payment of such stamp duty.

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, Hong Kong stamp duty at the rate described above for 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 lead to a Hong Kong stamp duty liability. Holders of the ADSs are not liable for the Hong Kong 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.

Taxation — China

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.

 

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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, the Chinese State Tax Bureau issued, on July 21, 1993, a Notice Concerning the Taxation of Gains on Transfer and Dividends from Shares (Equities) Received by Foreign Investment Enterprises, Foreign Enterprises and Foreign Individuals, or the Tax Notice, 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.

Amendments to the individual Income Tax Law of the PRC, or the Amendments, were promulgated on October 31, 1993 and became effective on January 1, 1994. The Amendments provide that any provisions of prior administrative regulations concerning individual income tax which contradict the Amendments are superseded by the Amendments. The Amendments and the amended Individual Income Tax Law can be interpreted to mean that foreign individuals are subject to a withholding tax on dividends received from a Chinese company at a rate of 20% unless such income is specifically exempted from individual income tax by the financial authority of the State Council. However, in a letter dated July 26, 1994 to the State Commission for Restructuring the Economic System, the State Securities Commission and the China Securities Regulatory Commission, the State Tax Bureau confirmed the temporary tax exemption set forth in the Tax Notice for dividends received from a Chinese company listed overseas. In the event this letter is withdrawn, a 20% tax may be withheld on dividends in accordance with the Provisional Regulations, the Amendments, and the Individual Income Tax law of China. Such withholding tax may be reduced pursuant to an applicable double taxation treaty.

Enterprises

Under the newly enacted PRC Enterprise Income Tax Law, or the EIT Law, and the implementation regulations to the EIT Law, effective 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.

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.

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.

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Taxation of Capital Gains by China

Individual Investors

The Tax Notice provides that gains realized upon the sale of Overseas Shares are not subject to taxes on capital gains. Although the Ministry of Finance has been empowered to collect a tax of 20% on gains derived from the sale of equity shares, a joint notice issued in February 1996 by the Ministry of Finance and the State Tax Bureau indicated that no capital gains tax would be imposed on gains from the sale of shares until the Ministry of Finance and the State Tax Bureau promulgate new rules. Therefore, holders of H Shares or ADSs have not been subject to taxation on gains realized upon the sale or disposition of such shares currently. However, holders of H Shares or ADSs could become subject to a 20% capital gains tax in the future, unless reduced or eliminated pursuant to an applicable double taxation treaty.

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).

Chinese 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.

United States Federal Income Taxation

Each potential investor is strongly urged to consult his or her own tax advisor to determine the particular United States 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 United States 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 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 who may be subject to special rules including:

—

tax-exempt entities;

—

partnerships or other entities treated as partnerships for United States federal income tax purposes;

—

banks, financial institutions, and insurance companies;

—

real estate investment trusts, regulated investment companies and grantor trusts;

—

dealers or traders in securities, commodities or currencies;

—

U.S. holders liable for alternative minimum tax;

—

U.S. holders that own, actually or constructively, 10% or more of our voting stock;

—

persons who receive the H Shares or ADSs as compensation for services;

—

U.S. holders that hold the H Shares or ADSs as part of a straddle or a hedging or conversion transaction;

—

certain U.S. expatriates; or

 

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—

U.S. holders whose functional currency is not the U.S. dollar.

Moreover, this description does not address United States federal estate, gift or alternative minimum taxes 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 United States 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 United States federal income tax purposes;

—

a corporation, or other entity treated as a corporation for United States federal income tax purposes, created or organized under the laws of the United States or any political subdivision thereof;

—

an estate the income of which is subject to United States federal income tax without regard to its source; or

—

a trust:

-

subject to the primary supervision of a United States court and the control of one or more United States persons; or

-

that has elected to be treated as a United States person under applicable United States Treasury regulations.

If a partnership (including any entity treated as a partnership for United States 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. We urge you to consult your tax advisors regarding the United States federal, state, local and non-United States tax consequences of the purchase, ownership and disposition of the H Shares or ADSs.

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 United States 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 discussions below under “-Passive Foreign Investment Company”, the gross amount of any distribution (without reduction for any PRC tax withheld) we make on the H Shares or ADSs out of our current or accumulated earnings and profits (as determined for United States 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. In this case, 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 United States corporations in respect of dividends received from United States 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.

 

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Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual, trust or estate in a taxable year prior to January 1, 2011 with respect to the H Shares or ADSs will be subject to taxation at a maximum rate of 15% 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 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 PFIC rules (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 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 2008 taxable year. In addition, based on our audited 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 2009 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”.

The U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of common stock and intermediaries through whom such stock is held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends. Because such procedures have not yet been issued, it is not clear whether we will be able to comply with them. Holders of H Shares or ADSs should consult their own tax advisers 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 received by you or by the depositary, regardless of whether you or the depositary 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 or the depositary convert the distribution into U.S. dollars will be treated as ordinary income or loss from U.S. sources.

Subject to various limitations, any PRC tax withheld from distributions in accordance with the Treaty will be deductible or creditable against your United States federal income tax liability. 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 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 “Taxation - China”), you may be able to claim a reduced 10% rate of PRC withholding tax if you are eligible for the 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-United States 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. U.S. Holders should consult their own tax advisors regarding the effect of these rules in their particular circumstance.

 

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Sale, Exchange or Other Disposition

Subject to the discussions 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 United States 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. The rules relating to the U.S. foreign tax credit are complex. U.S. Holders should consult their own tax advisors regarding the effect of these rules in their particular circumstance. Any gain or loss will generally be United States 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 that Treaty, if any PRC tax was to be imposed on any gain from the disposition of H Shares or ADSs, the gain may be treated as PRC-source income. U.S. Holders are urged to consult their tax advisors regarding the tax consequences if a foreign withholding tax is imposed on a disposition of H Shares or ADSs, including the availability of the foreign tax credit under their particular circumstances.

If you are paid in a currency other than U.S. dollars, any gain or loss resulting from currency exchange fluctuations during the period from the date of the payment resulting from sale, exchange or other disposition is made to the date you convert the payment into U.S. dollars will be treated as United States source ordinary income or loss.

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 assets consists of assets that produce, or are held for the production of, passive income.

Passive income does not include rents and royalties derived from the active conduct of a trade or business. 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.

Based on the composition of our assets and income and the current expectations regarding the price of the H Shares and ADSs, we believe that we should not be treated as a PFIC for U.S. federal income tax purposes with respect to our 2009 taxable year and we do not intend or anticipate becoming a PFIC for any future taxable year. 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 2009 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 rule” 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 United States 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.

 

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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 previously included in income 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 H Shares or ADSs may qualify as “marketable stock” because the ADSs are listed on the New York Stock Exchange.

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 you own the H Shares or ADSs during any year that we are a PFIC, you must file IRS Form 8621. The reduced tax rate for dividend income, as discussed above under “-Distributions on the H Shares or ADSs,” is not applicable to a dividend paid by us if we are a PFIC for either our taxable year in which the dividend is paid or the preceding year. We encourage you to consult your own tax advisor concerning the United States 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

—

are a corporation or fall within various other exempt categories, and, when required, demonstrate this fact; or

—

provide a correct taxpayer identification number on a properly completed IRS Form W-9 or a substitute form, certify that you are exempt from backup withholding and otherwise comply with applicable requirements of the backup withholding rules.

Any amount withheld under the backup withholding rules generally will be creditable against your United States federal income tax 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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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 U.S. Securities and Exchange Commission at the SEC’s 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 web site at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC.

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.

I.           Subsidiary Information

Not applicable.

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, 2008, the notional amount of the outstanding interest rate swap agreements was approximately US$471 million. These interest rate swap agreements will expire between 2009 and 2016. If the interest rate had been 0.25% higher with all other variables held constant, interest costs on our floating rate instruments would have increased from RMB57.7 million in 2007 to RMB77.6 million in 2008.

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, Japanese yen, Euro or 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, 2008, the notional amount of the outstanding currency forward contracts was approximately US$121 million, which will expire between 2009 and 2017.

Pursuant to IFRS, our monetary assets and liabilities denominated in foreign currencies are required to be translated into Renminbi at the year end at exchange rates announced by PBOC. 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, Renminbi has appreciated significantly against certain foreign currencies, including 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, 2008 as a consequence of a fluctuation in value of the following major foreign currencies.

 

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		Profit and Loss Account Decrease/Increase by RMB’000
U.S. dollar appreciates/ (depreciates) by 5%			1,495,352
Japanese yen appreciates/ (depreciates) by 5%			(466	)

Fuel Hedging Risk

In order to control fuel costs, we 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. In the face of continuing increases in fuel prices, we reduced the impact of the fluctuation in aviation fuel prices through various financial derivative instruments. For the years 2007 and 2008, we hedged 34.20% and 41.58% of our annual fuel consumption respectively.

The breakdown of our fuel costs for the years 2007 and 2008 are as follow:

		2007				2008
		RMB (in million)
Fuel cost			15,237				18,480
Realized hedging losses / (profits)			(120	)			8
Total fuel cost			15,117				18,488
Unrealized loss/(gains) from fair value movements of the fuel hedging derivatives			(97	)			6,256

We engaged in aviation fuel hedging for the purpose of locking in aviation fuel costs. By selecting appropriate instruments, we locked in costs within a hedged price range. However, high fluctuations in aviation fuel prices exceeding the locked-in price ranges has resulted in our Company incurring actual realized and unrealized settlement losses. If the oil price decreased or increased by 5% compared to the closing price as December 31, 2008, the fair value losses as of December 31, 2008 would increase or decrease by approximately RMB500 million.

Item 12.                 Description of Securities Other than Equity Securities

Not applicable.

PART II

Item 13.                 Defaults, Dividend Arrearages and Delinquencies

None.

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

Not applicable.

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 U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of December 31, 2008, the end of the fiscal year covered by this Annual Report. Our 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 the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and regulations.

 

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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 the Exchange Act Rules 13a-15(f) and 15d-15(f) and have designed internal control over financial reporting or caused internal control 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 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, 2008 based upon the criteria in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2008 in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

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.

The effectiveness of our internal control over financial reporting as of December 31, 2008 has been audited by PricewaterhouseCoopers, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Control over Financial Reporting

We made the following change to our internal control over financial reporting during the period covered by this Annual Report:

·

In relation to our ticket clearing process, our management improved the reconciliation between the balance of tickets settled in the ORACLE financial system and the amount of sold-but-unused tickets in the settlement system, and has analyzed and examined the differences to ensure that such differences in amounts will not materially affect our financial statements.

Item 16A.              Audit Committee Financial Expert

Our Board of Directors has determined that Mr. Xie Rong, the chairman of our audit committee, is an independent financial expert serving on our audit committee.

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. Our code of ethics can also be found on our corporate website, http://www2.ce-air.com/cea2/en_US/cea2_enUS_news_detail/0,15275,200,00.html?newsId=200. A copy of our code of ethics will be provided to any person free of charge upon written request to Zhuping Luo, Secretary Office of the Board of Directors, China Eastern Airlines Corporation Limited at 2550 Hongqiao Road, Hongqiao Airport, 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 and all other fees billed for products and services provided by our principal accountants other than the audit fees, audit-related fees and tax fees for each of the two years ended December 31, 2008:

 

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		Audit Fees				Audit-Related Fees				Tax Fees				All Other Fees
		(RMB)				(RMB)				(RMB)				(RMB)
2007			18,380,000				0				60,000				0
2008			18,000,000				0				54,000				0

Before our principal accountants were engaged by our Company or our subsidiaries to render audit or non-audit services, the engagement was approved by our audit committee.

Audit Fees

Audit fees primarily consist of fees for the audit of the consolidated financial statements as of and for the years ended December 31, 2007 and 2008 and services provided in connection with regulatory filings.

Audit-Related Fees

Audit-related fees primarily consist of fees for assurance and related services which are reasonably related to the performance of audit or review and generally include advisory services regarding specific regulatory filings and reporting procedures and other agreed-upon services related to accounting and billing records. No audit-related services were performed by PricewaterhouseCoopers for the fiscal years ended December 31, 2007 and 2008.

Tax Fees

Tax fees primarily consist of fees for tax compliance services.

All Other Fees

No other services were performed by PricewaterhouseCoopers for the fiscal years ended December 31, 2007 and 2008.

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

Not applicable.

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

Not applicable.

Item 16G.              Corporate Governance

Under the amended Corporate Governance Rules of NYSE, foreign issuers (including our Company) listed on the NYSE are required to disclose a summary of the significant differences between their domestic governance rules and NYSE corporate governance rules that would apply to a U.S. domestic issuer. We have posted a description of such differences under the section entitled “Report of Directors” of our 2008 Hong Kong Annual Report, which can be accessed through the following link on our website: http://www.ce-air.com/ceair/static/xsdh/tzzgx/dqbg/2009/200904/P020090428312050468875.pdf

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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-102.

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:

 

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Exhibit Index

Exhibits		Description
1.1		Articles of Association as amended on February 26, 2009 (English translation).
2.1		Specimen Certificate for the H Shares. (1)
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. (2)
4.1		Office Space Lease Agreement between our Company and Eastern Air Group Company (together with English translation). (1)
4.10		Amendment No. 9 to the A320 Purchase Agreement, dated as of April 21, 2005, between our Company and Airbus SAS. (3) (6)
4.11		Assets Transfer Agreement, dated as of May 12, 2005, between our Company, CEA Holding, CEA Northwest and CEA Yunnan (English translation). (3)
4.12		Aircraft Purchase Agreement, dated as of August 8, 2005, between our Company and The Boeing Company. (4) (6)
4.13		Aircraft Purchase Agreement, dated as of December 20, 2005, as amended by a supplemental agreement dated as of April 10, 2006, between our Company and The Boeing Company. (4) (6)
4.14		Amendment No. 10 to the A320 Purchase Agreement, dated as of June 26, 2006, between our Company and Airbus SAS. (4) (6)
4.15		Aircraft Purchase Agreement, dated as of January 30, 2008, between our Company and The Boeing Company. (5) (6)
4.16		Share Issue and Subscription Agreement, dated as of December 29, 2008, between our Company and CES Global Holdings (Hong Kong) Limited, in relation to the placing of 1,437,375,000 new H shares to CES Global Holdings (Hong Kong) Limited by our Company.
4.17		Share Issue and Subscription Agreement, dated as of December 29, 2008, between our Company and CES Global Holdings (Hong Kong) Limited, in relation to the placing of 1,437,375,000 new A shares to China Eastern Air Holding Company by our Company.
8.1		List of Subsidiaries (as of May 31, 2009).
11.1		Code of Ethics (English translation). (5)
12.1		Certification of President pursuant to Rule 13a-14(a).
12.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
13.1		Certification of President pursuant to Rule 13a-14(b).
13.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b).

 

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(1)	Incorporated by reference to our Registration Statement on Form F-1 (File No. 333-6260), filed with the Securities and Exchange Commission on January 9, 1997.

(2)	Incorporated by reference to our Registration Statement on Form F-6 (File No. 333-6284), filed with the Securities and Exchange Commission with respect to American Depositary Shares representing our H Shares.

(3)	Incorporated by reference to our annual report on Form 20-F (File No. 001-14550), filed with the Securities and Exchange Commission on June 24, 2005.

(4)	Incorporated by reference to our annual report on Form 20-F (File No. 001-14550), filed with the Securities and Exchange Commission on July 7, 2006.

(5)	Incorporated by reference to our annual report on Form 20-F (File No. 001-14550), filed with the Securities and Exchange Commission on June 24, 2008.

(6)	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.

 

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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: June 11, 2009

 

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CHINA EASTERN AIRLINES CORPORATION LIMITED

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED

DECEMBER 31, 2006, 2007 AND 2008

 

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

		Page
CONSOLIDATED FINANCIAL STATEMENTS OF CHINA EASTERN AIRLINES CORPORATION LIMITED
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Income Statements for each of the three years ended December 31, 2008		F-2
Consolidated Balance Sheets as of December 31, 2007 and 2008		F-3
Consolidated Statements of Cash flows for each of the three years ended December 31, 2008		F-5
Consolidated Statements of Changes in Equity for each of the three years ended December 31, 2008		F-7
Notes to the Consolidated Financial Statements		F-10

 

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of China Eastern Airlines Corporation Limited:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in equity and of cash flows (“consolidated financial statements”) present fairly, in all material respects, the financial position of China Eastern Airlines Corporation Limited (“the Company”) and its subsidiaries (collectively referred to as the “Group”) at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, 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 opinions on these financial statements and on the Company’s internal control over financial reporting based on our audits which were integrated audits in 2008 and 2007. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.

PricewaterhouseCoopers

Certified Public Accountants

Hong Kong, June 11, 2009

 

F-1

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CHINA EASTERN AIRLINES CORPORATION LIMITED

CONSOLIDATED INCOME STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

(Amounts in thousands except for per share data)

						Year ended December 31,
						2006				2007				2008
		Note				RMB’000				RMB’000				RMB’000
						Restated Note2(b)				Restated Note2(b)
Revenues			5				37,556,852				42,533,893				41,072,557
Other operating income			6				462,370				487,562				405,163
Other gains			6				36,207				-				267,084
Operating expenses
Aircraft fuel							(13,608,793	)			(15,117,147	)			(18,488,242	)
(Loss)/gain on fair value movements of financial derivatives			8				(42,344	)			83,965				(6,400,992	)
Take-off and landing charges							(4,989,382	)			(5,174,183	)			(5,279,590	)
Depreciation and amortization							(4,456,078	)			(4,719,735	)			(4,781,562	)
Wages, salaries and benefits			9				(3,538,082	)			(4,327,397	)			(4,545,312	)
Aircraft maintenance							(2,647,340	)			(2,392,039	)			(3,272,981	)
Impairment losses			10				(888,419	)			(227,456	)			(2,976,678	)
Food and beverages							(1,180,809	)			(1,230,754	)			(1,321,268	)
Aircraft operating lease rentals							(2,954,751	)			(2,850,873	)			(2,734,802	)
Other operating lease rentals							(276,715	)			(292,844	)			(369,236	)
Selling and marketing expenses							(1,734,987	)			(1,805,342	)			(1,562,945	)
Civil aviation infrastructure levies							(696,428	)			(781,613	)			(769,849	)
Ground services and other charges							(162,104	)			(224,466	)			(268,873	)
Office, administrative and other expenses							(3,619,113	)			(3,833,938	)			(4,055,679	)
Total operating expenses							(40,795,345	)			(42,893,822	)			(56,828,009	)
Operating (loss)/profit			11				(2,739,916	)			127,633				(15,083,205	)
Finance income			12				1,035,307				2,140,457				2,061,625
Finance costs			13				(1,765,981	)			(1,978,550	)			(2,328,147	)
Share of results of associates			22				103,566				58,312				69,668
Share of results of jointly controlled entities			23				29,595				30,086				24,050
(Loss)/profit before income tax							(3,337,429	)			377,938				(15,256,009	)
Income tax			14				162,932				(23,763	)			(73,916	)
(Loss)/profit for the year							(3,174,497	)			354,175				(15,329,925	)
Attributable to:
Equity holders of the Company							(3,035,157	)			378,568				(15,268,532	)
Minority interests							(139,340	)			(24,393	)			(61,393	)
							(3,174,497	)			354,175				(15,329,925	)
(Loss)/earnings per share attributable to the equity holders of the Company during the year
– basic and diluted			17			RMB(0.62		)		RMB 0.08				RMB (3.14		)

The accompanying notes are an integral part of these consolidated financial statements.

 

F-2

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CHINA EASTERN AIRLINES CORPORATION LIMITED

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2007 AND 2008

(Amounts in thousands)

 

						December 31,
						2007				2008
		Note				RMB’000				RMB’000
						Restated Note2(b)
Non-current assets
Intangible assets			18				1,244,706				164,851
Property, plant and equipment			19				47,269,754				52,678,473
Lease prepayments			20				967,497				996,521
Advanced payments on acquisition of aircraft			21				6,695,573				6,413,554
Investments in associates			22				601,119				980,319
Investments in jointly controlled entities			23				336,966				362,332
Available-for-sale financial assets							53,236				31,268
Other long-term assets			24				660,751				941,556
Deferred tax assets			34				113,211				81,947
Derivative assets			37				6,077				988
							57,948,890				62,651,809
Current assets
Flight equipment spare parts							1,124,936				871,364
Trade receivables			25				2,096,007				1,146,522
Amounts due from related companies			43				65,455				208,289
Prepayments, deposits and other receivables			26				2,555,649				4,126,219
Cash and cash equivalents			27				1,655,244				3,451,010
Derivative assets			37				89,470				123,010
Non-current assets held for sale			40				2,205,450				473,667
							9,792,211				10,400,081
Current liabilities
Sales in advance of carriage							1,211,209				1,013,878
Trade payables and notes payable			28				3,137,880				5,144,858
Amounts due to related companies			43				671,593				413,126
Other payables and accrued expenses			29				9,591,245				12,147,175
Current portion of obligations under finance leases			30				2,545,223				1,916,989
Current portion of borrowings			31				18,494,521				26,513,320
Income tax payable							90,867				39,002
Current portion of provision for aircraft overhaul expenses			32				-				213,830
Derivative liabilities			37				20,238				6,456,075
Liabilities directly associated with non-current assets held for sale			40				127,239				-
							35,890,015				53,858,253
Net current liabilities							(26,097,804	)			(43,458,172	)
Total assets less current liabilities							31,851,086				19,193,637

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3

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CHINA EASTERN AIRLINES CORPORATION LIMITED

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2007 AND 2008

(Amounts in thousands)

						December 31,
						2007				2008
		Note				RMB’000				RMB’000
						Restated Note2(b)
Non-current liabilities
Obligations under finance leases			30				13,906,987				18,891,910
Borrowings			31				11,369,307				8,588,052
Provision for aircraft overhaul expenses			32				956,910				1,320,188
Other long-term liabilities			33				1,242,697				1,320,759
Deferred tax liabilities			34				50,369				57,589
Post-retirement benefit obligations			35(b)				1,370,702				1,469,124
Derivative liabilities			37				21,558				185,524
							28,918,530				31,833,146
Net assets/(liabilities)							2,932,556				(12,639,509	)
Equity
Capital and reserves attributable to the equity holders of the Company
Share capital			38				4,866,950				4,866,950
Reserves			39				(2,506,379	)			(17,964,351	)
							2,360,571				(13,097,401	)
Minority interests							571,985				457,892
Total equity							2,932,556				(12,639,509	)

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4

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CHINA EASTERN AIRLINES CORPORATION LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

(Amounts in thousands)

						Year ended December 31,
						2006				2007				2008
		Note				RMB’000				RMB’000				RMB’000
Cash flows from operating activities
Cash generated from operations			41(a)				5,140,245				3,142,834				2,942,466
Income tax paid							(22,740	)			(62,549	)			(86,931	)
Net cash inflow from operating activities							5,117,505				3,080,285				2,855,535
Cash flows from investing activities
Additions of property, plant and equipment							(879,756	)			(1,592,310	)			(1,289,350	)
Proceeds from disposal of property, plant and equipment							328,419				70,681				1,856,358
Acquisition of land use rights							(37,158	)			-				(53,117	)
Acquisition of available-for-sale financial assets							(6,751	)			-				-
Advanced payments on acquisition of aircraft							(4,560,694	)			(3,737,079	)			(3,603,824	)
Refunds of advanced payments upon deliveries of aircraft							3,744,513				3,064,580				2,422,252
Repayment of other payables  (instalment payment for acquisition of an airline business)							(30,000	)			(30,000	)			(30,000	)
Interest received							120,161				96,849				90,635
Dividend received							8,617				22,367				29,679
Acquisitions of controlling interests in associates, net of cash outflow							(366,529	)			-				-
Capital injection in a jointly controlled entity							-				(92,416	)			-
Capital injections in associates							-				-				(384,186	)
Proceeds from disposal of interest in an associate							-				-				3,698
Proceeds on disposal of available-for-sale financial assets							-				-				32,972
Proceeds from disposal of interest in a subsidiary							-				441,002				-
Net cash outflow from investing activities							(1,679,178	)			(1,756,326	)			(924,883	)

Notes to consolidated cash flow statements is set out in Note 41 to the financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5

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CHINA EASTERN AIRLINES CORPORATION LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

(Amounts in thousands)

			Year ended December 31,
			2006				2007				2008
	Note		RMB’000				RMB’000				RMB’000
Cash flows from financing activities
Proceeds from draw down of short-term bank loans				14,748,954				18,464,695				25,403,301
Repayments of short-term bank loans				(15,133,553	)			(16,020,304	)			(19,986,723	)
Proceeds from draw down of long-term bank loans				6,909,927				3,383,349				4,748,071
Repayments of long-term bank loans				(4,179,412	)			(2,985,480	)			(3,922,593	)
Repayment of debentures				(2,000,000	)			-				-
Principal repayments of finance lease obligations				(2,539,995	)			(2,974,718	)			(2,593,656	)
Payments of restricted bank deposits				-				-				(1,365,116	)
Interest paid				(2,097,077	)			(2,240,721	)			(2,741,980	)
Refunds of deposits pledged for finance leases upon maturities				1,046,732				779,646				419,604
2004 dividend paid				(60,000	)			-				-
Dividends paid to minority shareholders of subsidiaries				(53,550	)			(46,400	)			(52,700	)
Net cash outflow from financing activities				(3,357,974	)			(1,639,933	)			(91,792	)
Net increase / (decrease) in cash and cash equivalents				80,353				(315,974	)			1,838,860
Cash and cash equivalents at January 1				1,864,001				1,987,486				1,655,244
Exchange adjustments				43,132				(16,268	)			(43,094	)
Cash and cash equivalents at December 31				1,987,486				1,655,244				3,451,010

Notes to consolidated cash flow statements is set out in Note 41 to the financial statements.

The accompanying notes are an integral part of these consolidated financial statements

 

F-6

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CHINA EASTERN AIRLINES CORPORATION LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

(Amounts in thousands)

		Attributable to equity holders of the Company
		Share capital				Other reserves				Accumulated losses				Subtotal				Minority interests				Total equity
		RMB’000				RMB’000				RMB’000				RMB’000				RMB’000				RMB’000
Balance at January 1, 2006 as previously presented			4,866,950				1,229,115				(539	)			6,095,526				822,477				6,918,003
Effect of early adoption of IFRIC 13 (Note 2(b)(i))			-				-				(292,533	)			(292,533	)			-				(292,533	)
Effect of change of accounting policy on property, plant and equipment (Note 2(b)(ii))			-				(490,688	)			(271,911	)			(762,599	)			(12,981	)			(775,580	)
Balance at January 1, 2006 as restated			4,866,950				738,427				(564,983	)			5,040,394				809,496				5,849,890
Cash flow hedges, net of tax			-				8,441				-				8,441				-				8,441
Revaluation reserve, net of tax, arising from the acquisition of a controlling interest in an associate			-				24,355				-				24.355				-				24,355
Net income recognized directly in equity			-				32,796				-				32,796				-				32,796
Loss for the year			-				-				(3,035,157	)			(3,035,157	)			(139,340	)			(3,174,497	)
Total recognized income and expense for 2006			-				32,796				(3,035,157	)			(3,002,361	)			(139,340	)			(3,141,701	)
Dividend paid to minority interest in subsidiaries			-				-				-				-				(42,892	)			(42,892	)
Additions through acquisitions of subsidiaries			-				-				-				-				21,501				21,501
Transfer to other reserve			-				20,966				(20,966	)			-				-				-
			-				20,966				(20,966	)			-				(21,391	)			(21,391	)
Balance at December 31, 2006			4,866,950				792,189				(3,621,106	)			2,038,033				648,765				2,686,798

 

F-7

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CHINA EASTERN AIRLINES CORPORATION LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

(Amounts in thousands)

		Attributable to equity holders of the Company
		Share capital				Other reserves				Accumulated losses				Subtotal				Minority interests				Total equity
		RMB’000				RMB’000				RMB’000				RMB’000				RMB’000				RMB’000
Balance at January 1, 2007 as previously presented			4,866,950				1,282,877				(3,334,930	)			2,814,897				661,746				3,476,643
Effect of early adoption of IFRIC 13 (Note 2(b)(i))			-				-				(362,606	)			(362,606	)			-				(362,606	)
Effect of change of accounting policy on property, plant and equipment (Note 2(b)(ii))			-				(490,688	)			76,430				(414,258	)			(12,981	)			(427,239	)
Balance at January 1, 2007 as restated			4,866,950				792,189				(3,621,106	)			2,038,033				648,765				2,686,798
Cash flow hedges, net of tax			-				(78,197	)			-				(78,197	)			-				(78,197	)
Fair value movements of available for sale investments held by associates (Note 22)			-				22,167				-				22,167				-				22,167
Net income recognized directly in equity			-				(56,030	)			-				(56,030	)			-				(56,030	)
Profit/(loss) for the year			-				-				378,568				378,568				(24,393	)			354,175
Total recognized income and expense for 2007			-				(56,030	)			378,568				322,538				(24,393	)			298,145
Dividend paid to minority interest in subsidiaries			-				-				-				-				(46,400	)			(46,400	)
Disposal of a subsidiary			-				-				-				-				(5,987	)			(5,987	)
Adjustment to statutory and discretionary reserves			-				(428,808	)			428,808				-				-				-
			-				(428,808	)			428,808				-				(52,387	)			(52,387	)
Balance at December 31, 2007			4,866,950				307,351				(2,813,730	)			2,360,571				571,985				2,932,556

 

F-8

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CHINA EASTERN AIRLINES CORPORATION LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

(Amounts in thousands)

		Attributable to equity holders of the Company
		Share capital				Other reserves				Accumulated losses				Subtotal				Minority interests				Total equity
		RMB’000				RMB’000				RMB’000				RMB’000				RMB’000				RMB’000
Balance at January 1, 2008 as previously presented			4,866,950				798,039				(2,637,226	)			3,027,763				584,966				3,612,729
Effect of early adoption of IFRIC 13 (Note 2(b)(i))			-				-				(345,115	)			(345,115	)			-				(345,115	)
Effect of change of accounting policy on property, plant and equipment (Note 2(b)(ii))			-				(490,688	)			168,611				(322,077	)			(12,981	)			(335,058	)
Balance at January 1, 2008 as restated			4,866,950				307,351				(2,813,730	)			2,360,571				571,985				2,932,556
Cash flow hedges, net of tax			-				(170,360	)			-				(170,360	)			-				(170,360	)
Fair value movements of available for sale investments held by associates (Note 22)			-				(19,080	)			-				(19,080	)			-				(19,080	)
Net loss recognized directly in equity			-				(189,440	)			-				(189,440	)			-				(189,440	)
Loss for the year			-				-				(15,268,532	)			(15,268,532	)			(61,393	)			(15,329,925	)
Total recognized income and expense for 2008			-				(189,440	)			(15,268,532	)			(15,457,972	)			(61,393	)			(15,519,365	)
Dividend paid to minority interest in subsidiaries			-				-				-				-				(52,700	)			(52,700	)
			-				-				-				-				(52,700	)			(52,700	)
Balance at December 31, 2008			4,866,950				117,911				(18,082,262	)			(13,097,401	)			457,892				(12,639,509	)

The accompanying notes are an integral part of these consolidated financial statements

 

F-9

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.	CORPORATE INFORMATION

China Eastern Airlines Corporation Limited (the “Company”), a joint stock company limited by shares was incorporated in the People’s Republic of China (the “PRC”) on April 14, 1995. The address of its 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, and mail delivery and other extended transportation services.

The Company is majority owned by China Eastern Air Holding Company (“CEA Holding”), a state-owned enterprise incorporated in the PRC.

The Company’s shares are traded on The Stock Exchange of Hong Kong Limited, The New York Stock Exchange and The Shanghai Stock Exchange.

These financial statements have been approved for issue by the Board of Directors on April 15, 2009.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

(a)

Basis of preparation

The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4.

In preparing the financial statements, the directors have given careful consideration to the going concern status of the Group in the context of the Group’s current working capital difficulties.

The Group’s accumulated losses were approximately RMB18.08 billion as at December 31, 2008; its current liabilities exceeded its current assets by approximately RMB43.46 billion; and total liabilities exceeded total assets by approximately RMB12.64 billion.

Against this background, the directors have taken active steps to seek additional sources of finance and improve the Group’s liquidity position. At December 31, 2008, the Group had total credit facilities of RMB13.5 billion from certain banks. Since December 31, 2008, the Company has successfully obtained additional credit facilities in an aggregate amount of RMB36 billion from certain banks and financial institutions (see Note 46 – “Post balance sheet events” for details). The directors believe that, based on experience to date, it is likely that these facilities will be rolled over in future years if required. In addition, a resolution to issue additional shares to CEA Holding, the Company’s shareholder, and CES Global Holding (Hong Kong) Limited (“CES Global”), a wholly-owned subsidiary of CEA Holding, for a total amount of RMB7 billion was approved in the extraordinary general meetings held on February 26, 2009 (see Note 46 – “Post balance sheet events” for details).

With the additional credit facilities and approved capital injection described in the preceding paragraph, and based on the Group’s history of obtaining finance and its relationships with its bankers and creditors, the Board of Directors considers that the Group will be able to obtain sufficient financing to enable it to operate and meet its liabilities as and when they fall due. Accordingly, it is appropriate that these financial statements should be prepared on a going concern basis and do not include any adjustments that would be required should the Company and the Group fail to continue as a going concern.

 

F-10

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(a)

Basis of preparation (continued)

(i)

Standards, amendment and interpretations effective in 2008

 

§

IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’, provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognized as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. This interpretation does not have any impact on the Group’s financial statements, as the Group has a pension deficit and is not subject to any minimum funding requirements.

§

IFRIC 11, ‘IFRS 2 – Group and treasury share transactions’, provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parent’s shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. This interpretation does not have an impact on the Group’s financial statements.

(ii)

Standards, amendments and interpretations to existing standards that are not yet effective and relevant for the Group’s operations

The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after January 1, 2009 or later periods, but the Group has not early adopted them:

§

IAS 1 (Revised), ‘Presentation of financial statements’ (effective from January 1, 2009). The revised standard will prohibit the presentation of items of income and expenses (that is, ‘non-owner changes in equity’) in the statement of changes in equity, requiring ‘non-owner changes in equity’ to be presented separately from owner changes in equity. All non-owner changes in equity will be required to be shown in a performance statement, but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the consolidated income statement and statement of comprehensive income). Where entities restate or reclassify comparative information, they will be required to present a restated balance sheet as at the beginning comparative period in addition to the current requirement to present balance sheets at the end of the current period and comparative period. The Group will apply IAS (Revised) from January 1, 2009. It is likely that both the consolidated income statement and statement of comprehensive income will be presented as performance statements.

§

IFRS 8, ‘Operating segments’ (effective from January 1, 2009). IFRS replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, ‘Disclosures about segments of an enterprise and related information’. The new standard requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. The Group will apply IFRS 8 from January 1, 2009. The expected impact is still being assessed in detail by management.

§

IAS 27 (Revised) “Consolidated and Separate Financial Statements” (effective from annual period beginning on or after July 1, 2009). The amendment requires non-controlling interests (i.e. minority interests) to be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent. Total comprehensive income must be attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control are accounted for within equity. When control of a subsidiary is lost, the assets and liabilities and related equity components of the former subsidiary are derecognized. Any gain or loss is recognized in profit or loss. Any investment retained in the former subsidiary is measured at its fair value at the date when control is lost. The Group will apply IAS 27 (Revised) from January 1, 2010.

 

F-11

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(a)

Basis of preparation (continued)

(ii)

Standards, amendments and interpretations to existing standards that are not yet effective and relevant for the Group’s operations (continued)

§

IFRS 3 (Revised) “Business Combinations” (effective for business combinations with acquisition date on or after the beginning of the first annual reporting period beginning on or after July 1, 2009). The amendment may bring more transactions into acquisition accounting as combinations by contract alone and combinations of mutual entities are brought into the scope of the standard and the definition of a business has been amended slightly. It now states that the elements are ‘capable of being conducted’ rather than ‘are conducted and managed’. It requires considerations (including contingent consideration), each identifiable asset and liability to be measured at its acquisition-date fair value, except leases and insurance contracts, reacquired right, indemnification assets as well as some assets and liabilities required to be measured in accordance with other IFRS. They are income taxes, employee benefits, share-based payment and non current assets held for sale and discontinued operations. Any non-controlling interest in an acquiree is measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets. All acquisition related cost should be expensed. The Group will apply IFRS 3 (Revised) prospectively to all business combinations from January 1, 2010.

§

IAS 36 (Amendment), ‘Impairment of assets’ (effective from January 1, 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. Where fair value less costs to sell is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculation should be made. The Group will apply the IAS 36 (Amendment) and provide the required disclosure where applicable for impairment tests from January 1, 2009.

§

IAS 38 (Amendment), ‘Intangible assets’ (effective from January 1, 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. A prepayment may only be recognized in the event that payment has been made in advance of obtaining right of access to goods or receipt of services. The Group will apply the IAS 38 (Amendment) from January 1, 2009, but it is not expected to have any impact on the Group’s financial statements.

§

IAS 19 (Amendment), ‘Employee benefits’ (effective from January 1, 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. The amendment clarifies that a plan amendment that results in a change in the extent to which benefit promises are affected by future salary increases is a curtailment, while an amendment that changes benefits attributable to past service gives rise to a negative past service cost if it results in a reduction in the present value of the defined benefit obligation. The definition of return on plan assets has been amended to state that plan administration costs are deducted in the calculation of return on plan assets only to the extent that such costs have been excluded from measurement of the defined benefit obligation. The distinction between short term and long term employee benefits will be based on whether benefits are due to be settled within or after 12 months of employee service being rendered. IAS 37, ‘Provisions, contingent liabilities and contingent assets’, requires contingent liabilities to be disclosed, not recognized. IAS 19 has been amended to be consistent. The Group will apply the IAS 19 (Amendment) from January 1, 2009. The expected impact is still being assessed in detail by management.

§

IFRS 7 (Amendment), ‘Financial instruments: Disclosure’ (effective from January 1, 2009). The amendment forms part of the IASB’s response to the financial crisis aims at improving transparency and enhance accounting guidance. The amendment increases the disclosure requirements about fair value measurement and reinforces existing principles for disclosure about liquidity risk. The amendment introduces a three-level hierarchy for fair value measurement disclosure and requires some specific quantitative disclosures for financial instruments in the lowest level in the hierarchy. In addition, the amendment clarifies and enhances existing requirements for the disclosure of liquidity risk primarily requiring a separate liquidity risk analysis for derivative and non-derivative financial liabilities. The Group will apply the IFRS 7 (Amendment) and provide the required disclosure, where applicable, prospectively from January 1, 2009.

 

F-12

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(b)

Changes of accounting policy

(i)

Early adoption of IFRIC 13, ‘Customer loyalty programmes’

IFRIC 13, ‘Customer loyalty programmes’ was early adopted by the Group in 2008. IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. The Company operates a frequent-flyer programme called “Eastern Miles” (the “programme”). Historically, the incremental cost of providing awards in exchange for redemption of miles earned by members was accrued as an operating cost and a liability in the balance sheet. After the adoption of IFRIC 13, revenue is allocated between the ticket sold and miles earned by members. The portion allocated to miles earned is deferred and recognized when the miles have been redeemed or have expired.

This change in accounting policy has been accounted for retrospectively, and the comparative financial statements have also been restated. The effect of the change is set out in Note 2(b)(iii).

The Group’s consolidated loss for the year ended December 31, 2008 and consolidated net liabilities at December 31, 2008 would have decreased by RMB25 million and RMB320 million respectively if the previous policies had still been applied in 2008.

(ii)

Change of accounting policy for property, plant and equipment

Under IFRS, the Company has the option to use the revaluation model or historical cost model to account for its property, plant and equipment (“PP&E”). Previously, the Company adopted the revaluation model in accordance with IAS 16 as a result of Chinese regulatory requirements to revalue PP&E in connection with its listing in 1997. Under PRC Accounting Standards, the one time revaluation for listing purposes was treated as deemed cost and the historical cost model was adopted subsequent to the initial revaluation. In 2008, the Company changed its IFRS accounting policy in respect of PP&E from the revaluation model to the historical cost model. Whilst this change was made primarily to increase the relevance of financial data to the users of the financial statements and for the reasons set out below, management also made reference to Interpretation 2 of Chinese Accounting Standards (“CAS”) issued by the Ministry of Finance in August 2008 which aims to drive the elimination of differences between IFRS and CAS. The change was made after taking into consideration the following factors:

·

the alignment of the Group’s accounting policy with industry peers – management considers that the historical cost model will improve comparability of certain financial performance data and results of operations of the Group with other airlines. Very few of the leading global airlines currently use the valuation model and valuation data is not generally used in airline industry analysis that is made available to stakeholders or internally by management.

·

increased comparability between finance and operating leased aircraft – depreciation cost of a finance leased aircraft is based on revalued amount whereas operating lease payments are based on cost and aircraft held under operating leases are not recognized as assets subject to valuation. Management therefore considers that the change to the cost model increases the level of consistency in accounting for aircraft which are not distinguished from an operational perspective.

·

the high degree of subjectivity and risk of cyclical volatility associated with external valuation and second hand aircraft fair values – the market value of second hand aircraft can be volatile and is influenced by transactions in global markets that may have little relevance to the operating environment in China. When purchasing or financing aircraft under finance leases, management intend to use these aircraft in the business for the remainder of their useful lives. Management do not believe that financial statements that reflect, often subjective, movements in second hand values provide meaningful information to investors.

 

F-13

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(b)

Changes of accounting policy (continued)

(ii)

Change of accounting policy for property, plant and equipment (continued)

This change in accounting policy has been accounted for retrospectively, and the comparative financial statements have also been restated. The effect of the change is not considered material to the financial statements but is set out in Note 2(b)(iii).

The Group’s consolidated loss for the year ended December 31, 2008 and consolidated net liabilities at December 31, 2008 would have increased by RMB216 million and decreased by RMB119 million respectively if the previous policies had still been applied in 2008.

(iii)

Impact on prior year balances

										Effect of
										change of
		2006 as				Effect of				accounting
		previously				adoption of				policy for				2006 as
		presented				IFRIC 13				PP&E				restated
		RMB’000				RMB’000				RMB’000				RMB’000
Impact on consolidated income statements
Consolidated loss for the year			(3,452,765	)			(70,073	)			348,341				(3,174,497	)
Earnings per share attributable to equity holders of the Company		RMB(0.68		)		RMB(0.01		)		RMB0.07				RMB(0.62		)
Impact on consolidated balance sheet
Consolidated net assets			3,476,643				(362,606	)			(427,239	)			2,686,798
Capital and reserves attributable to the equity holders of the Company			2,814,897				(362,606	)			(414,258	)			2,038,033
Minority interests			661,746				-				(12,981	)			648,765

										Effect of
										change of
		2007 as				Effect of				accounting
		previously				adoption of				policy for				2007 as
		presented				IFRIC 13				PP&E				restated
		RMB’000				RMB’000				RMB’000				RMB’000
Impact on consolidated income statements
Consolidated profit for the year			244,503				17,491				92,181				354,175
Earnings per share attributable to equity holders of the Company		RMB0.06				RMB0.003				RMB0.02				RMB0.08
Impact on consolidated balance sheet
Consolidated net assets			3,612,729				(345,115	)			(335,058	)			2,932,556
Capital and reserves attributable to the equity holders of the Company			3,027,763				(345,115	)			(322,077	)			2,360,571
Minority interests			584,966				-				(12,981	)			571,985

 

F-14

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(c)

Consolidation

The consolidated financial statements include the financial statements of the Company and all of its subsidiaries made up to December 31.

(i)

Subsidiaries

Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group, including those acquired from holding companies. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest.

The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.

Inter-company transactions, balances and unrealized gains on transactions between Group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

(ii)

Transactions with minority interests

The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the consolidated income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.

 

F-15

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(c)

Consolidation (continued)

(iii)

Associates

Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The Group’s investments in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition.

The Group’s share of its associates’ post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements in reserves is recognized in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate.

Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

Dilution gains and losses in associates are recognized in the consolidated income statement.

(iv)

Jointly controlled entities

A jointly controlled entity is an entity in which the Group has joint control over its economic activity established under a contractual arrangement. The Group’s investments in jointly controlled entities includes goodwill (net of any accumulated impairment loss) identified on acquisition.

The Group’s interests in jointly controlled entities are accounted for by the equity method of accounting based on the audited financial statements or management accounts of the jointly controlled entities. The Group’s share of its jointly controlled entities’ post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements is adjusted against the carrying amount of the investment. When the Group’s share of losses in a jointly controlled entity equals or exceeds its interest in that entity, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the jointly controlled entity.

The Group recognizes the portion of gains or losses on the sale of assets by the Group to the joint venture that it is attributable to the other venturers. The Group does not recognize its share of profits or losses from the joint venture that result from the Group’s purchase of assets from the joint venture until it resells the assets to an independent party. However, a loss on the transaction is recognized immediately if the loss provides evidence of a reduction in the net realizable value of current assets, or an impairment loss.

 

F-16

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(d)

Segmental reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and return that are different from those of segments operating in other economic environments.

(e)

Foreign currency translation

(i)

Functional and presentation 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 consolidated financial statements are presented in Chinese Renminbi (“RMB”), which is the Company’s functional and presentation 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 the income statement, except when deferred in equity as qualifying cash flow hedges or qualifying net investment hedges.

(f)

Revenue recognition and sales in advance of carriage

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

The Group recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. 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.

(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)

Commission income

Commission income represents amounts earned from other carriers in respect of sales made by the Group’s agents on their behalf, and is recognized in the income statement upon ticket sales.

(iii)

Other revenue

Revenues from other operating businesses, including income derived from the provision of ground services and cargo handling services, are recognized when the services are rendered.

Rental income from subleases of aircraft is recognized on a straight-line basis over the terms of the respective leases. Rental income from leasing office premises and cargo warehouses is recognized on a straight-line basis over the lease term.

 

F-17

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(g)

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.

Government grants relating to costs are deferred and recognized in the income statement over the period necessary to match them with the costs that they are intended to compensate.

Government grants relating to property, plant and equipment are included in non-current liabilities as deferred government grants and are credited to the income statement on a straight-line basis over the expected lives of the related assets.

(h)

Maintenance and overhaul costs

In respect of aircraft and engines under operating leases, the Group has the responsibility to fulfill certain return conditions under the leases. As the Group has an obligation to fulfill these return conditions, provision for 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 are capitalized as a component of property, plant and equipment and are depreciated over the appropriate maintenance cycles (Note 2(m)).

All other repairs and maintenance costs are charged to the income statement as and when incurred.

(i)

Interest income

Interest income is recognized on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognized using the original effective interest rate.

(j)

Borrowing costs

Borrowing costs incurred for the construction of any qualifying asset, including the interest attributable to loans for advance payments used to finance the acquisition of aircraft, are capitalized during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed.

(k)

Current and deferred tax

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the jurisdictions where the Company and its subsidiaries, associates and jointly controlled entities operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

 

F-18

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(k)

Current and deferred tax(continued)

Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and jointly controlled entities, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

(l)

Intangible assets

(i)

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill on acquisition of subsidiaries is included in ‘intangible assets’. Goodwill on acquisition of associates and jointly controlled entities is included in ‘investments in associates’ and ‘investments in jointly controlled entities’ and is tested for impairment as part of the overall balances. Separately recognized goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.

(ii)

Sponsorship fees

Sponsorship fees paid and payable in relation to the 2010 Shanghai Expo have been capitalized and are being amortized on a straight-line basis over the period of the sponsorship program. The cost of the intangible asset is calculated based on the expected cash payment and the fair value of the services to be provided.

(iii)

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 to 6 years. Costs associated with developing or maintaining computer software programmes are recognized as expense when incurred.

 

F-19

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(m)

Property, plant and equipment

Property, plant and equipment is recognized initially at cost which comprises purchase price, and any directly attributable costs of bringing the assets to the condition for their intended use.

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.

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 the income statement.

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

Aircraft, engines and flight equipment	10 to 20 years
Buildings	15 to 35 years
Other property, plant and equipment	5 to 20 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing the proceeds with the assets’ carrying amount and are recognized in the income statement.

Construction in progress represents buildings under construction and plant and equipment, being mainly flight simulators, pending installation. This includes the costs of construction or acquisition and interest capitalized. No depreciation is provided on construction in progress until the asset is completed and ready for use.

 

F-20

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(n)

Impairment of investments in subsidiaries, associates, jointly controlled entities and non-financial assets

Assets that have an indefinite useful life or which are not yet available for use are not subject to amortization and are tested annually for impairment. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that have suffered impairment are reviewed for possible reversal of the impairment at each balance sheet date.

(o)

Lease prepayments

Lease prepayments represent acquisition costs of land use rights less accumulated amortization. Amortization is provided over the lease period of the land use rights on a straight-line basis.

(p)

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 finance costs, and are included in non-current assets. The balance is transferred to property, plant and equipment upon delivery of the aircraft.

(q)

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 value added tax and other miscellaneous charges. Net realizable value is the estimated selling price of the flight equipment in the ordinary course of business, less applicable selling expenses.

(r)

Trade receivables

Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the assets is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited in the income statement.

(s)

Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.

 

F-21

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(t)

Borrowings

Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any differences between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

(u)

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; and 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.

(v)

Leases

(i)

A Group company is the lessee

Finance leases

The Group leases certain property, plant and equipment. Leases of property, plant and equipment 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 leased property and the present value of the minimum lease payments.

Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in other short-term and other long-term payables. The interest element of the finance cost is charged to the income statement 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, differences between sales proceeds and net book values are deferred and amortized over the minimum lease terms.

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 the income statement 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 the income statement, except to the extent that any profit or loss is compensated for by future lease payments at above or below market value.

(ii)

A Group company is the lessor

Assets leased out under operating leases are included in property, plant and equipment in the balance sheet. 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.

 

F-22

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(w)

Retirement benefits

The Group participates in defined contribution retirement schemes regarding pension and medical benefits for employees organized by the municipal governments of the relevant provinces. The contributions to the schemes are charged to the income statement as and when incurred.

In addition, the Group provides retirees with post-retirement benefits including retirement subsidies, transportation subsidies, social function activity subsidies as well as other welfare. The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged or credited to income over the employees’ expected average remaining working lives.

Past-service costs are recognized immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period.

 

(x)

Derivative financial instruments

Derivative financial instruments are initially recognized in the balance sheet at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged.

The Group documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

Derivative financial instruments that do not qualify for hedge accounting are accounted for as trading instruments and any unrealized gains or losses, being changes in fair value of the derivatives, are recognized in the income statement immediately.

Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective, are recorded in the income statement, along with any changes in the fair value of the hedged assets or liabilities that are attributable to the hedged risk.

Derivative financial instruments that qualify for hedge accounting and which are designated as a specific hedge of the variability in cash flows of a highly probable forecast transaction, are accounted for as follows:

 

(i)

the effective portion of any change in fair value of the derivative financial instrument is recognized directly in equity. Where the forecast transaction or firm commitment results in the recognition of an asset or a liability, the gains and losses previously deferred in equity are included in the initial measurement of the cost of the asset or liability. Otherwise, the cumulative gain or loss on the derivative financial instrument is removed from equity and recognized in the income statement in the same period during which the hedged forecast transaction affects net profit or loss.

 

F-23

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(x)

Derivative financial instruments (continued)

(ii)

the ineffective portion of any change in fair value is recognized in the income statement immediately.

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. Trading derivatives are classified as a current asset or liability.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized in the income statement when the committed or forecast transaction ultimately occurs. When a committed or forecast transaction is no longer expected to occur, the cumulative gain or loss that was recorded in equity is immediately transferred to the income statement.

(y)

Available-for-sale financial assets

Investments in securities other than subsidiaries, associates and jointly controlled entities, being held for non-trading purposes, are classified as available-for-sale financial assets and are initially recognized at fair value plus transaction costs. At each balance sheet date, the fair value is remeasured, with any resulting gain or loss being recognized directly in equity, except for impairment losses. When these investments are derecognized, the cumulative gain or loss previously recognized directly in equity is recognized in the income statement.

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the securities below its cost is considered an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss, measured as the difference between the acquisition cost and the current fair value less any impairment loss on that financial asset previously recognized in the income statement, is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement.

(z)

Dividend distribution

Dividend distribution to the Company’s shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved by the Company’s shareholders.

 

(aa)

Comparatives

Where necessary, prior year amounts have been reclassified to conform with changes in presentation in the current year. The major reclassifications for the 2006 and 2007 comparative figures include reclassification of certain items in the consolidated cash flow statement between “financing activities” and “operating activities”. 

 

F-24

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3.	FINANCIAL RISK MANAGEMENT

(a)

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 hedge certain risk exposures.

Risk management is carried out by a central treasury department (the “Group Treasury”) under policies approved by the Board of Directors. The Group Treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest-rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments.

(i)

Foreign currency risk

 

Since July 21, 2005, the PRC government reformed the Renminbi exchange rate system and established a floating exchange rate system in which the exchange rate would be adjusted and managed based on market supply and demand with reference to a basket of foreign currencies. The fluctuation in Renminbi exchange rate is affected by the domestic and international economy, the political situation and the currency supply and demand of the currency, and thus the Renminbi exchange rate in the future may therefore be very different from the current exchange rate.

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 (purchases and leases of aircraft) is mainly priced and settled in currencies such as US dollars. In addition, fluctuations in exchange rates will affect the Group’s costs incurred from foreign purchases such as aircraft, flight equipment and aviation fuel, and take-off and landing charges in foreign airports.

The Group also has exposure to foreign currency risk in respect of net cash inflow denominated in Japanese Yen from ticket sales in overseas branch office after payment of expenses.

The Group entered into certain foreign exchange forward option contracts to manage this foreign currency risk. Details of foreign currency forward contracts are disclosed in Note 37(b) to the financial statements.

 

 

F-25

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3.	FINANCIAL RISK MANAGEMENT (CONTINUED)

(a)

Financial risk factors (continued)

(i)

Foreign currency risk (continued)

The following table details the Group’s exposure at the balance sheet date to currency risk.

		2007							2008
		USD			Euro		JPY		USD		Euro		JPY
		RMB’000			RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
Trade and other receivables			1,019,596		54,185		420,927		981,740		42,706		56,003
Cash and cash equivalents			736,951		92,205		70,996		494,249		126,695		37,657
Trade and other payables			(317,867	)	(6,017	)	(16	)	(417,910	)	(1,476	)	(363	)
Obligation under finance leases			(15,417,522	)	-		(1,034,688	)	(19,444,259	)	-		(83,971	)
Borrowings			(17,196,836	)	(130,145	)	-		(13,007,687	)	(111,658	)	-
Currency derivatives at notional value			241,052		-		-		825,170		-		-
Net balance sheet exposure			(30,934,626	)	10,228		(542,781	)	(30,568,697	)	56,267		9,326

The following table indicates the approximate change in the Group’s profit and loss and other components of consolidated equity in response to a 5% appreciation of the RMB against the following major currencies at the balance sheet date.

		2007					2008
		Effect on profit and loss			Effect on other components of equity		Effect on profit and loss			Effect on other components of equity
		RMB’000			RMB’000		RMB’000			RMB’000
US dollars			1,555,851		1,228			1,495,352		34,364
Euro			(511	)	-			(2,813	)	-
Japanese Yen			27,139		-			(466	)	-

 

F-26

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3.	FINANCIAL RISK MANAGEMENT (CONTINUED)

(a)

Financial risk factors (continued)

(ii)

Interest rate risk

The Group’s interest-rate risk primarily arises from borrowings. Borrowings issued at variable rates expose the Group to cash flow interest-rate risk. Borrowings issued at fixed rates expose the Group to fair value interest-rate risk. During the years 2007 and 2008, the Group’s borrowings at variable rates were primarily denominated in US dollars. The interest rates and terms of repayment of borrowings made to the Group and interest rate swaps are disclosed in Notes 31 and 37(a) to the financial statements.

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 Group also entered certain interest rate swaps to swap fixed rates into variable rates.

The following table details the Group’s interest rate profile of the interest-bearing financial instruments at the balance sheet date.

		2007			2008
		RMB’000			RMB’000
Floating rate instruments
Borrowings			(9,734,862	)	(12,171,844	)
Obligations under finance leases			(14,570,519	)	(20,482,615	)
Interest rate swaps at notional amount			3,342,023		2,165,429
			(20,963,358	)	(30,489,030	)

		2007			2008
		RMB’000			RMB’000
Fixed rate instruments
Cash and cash equivalents			1,655,244		3,451,010
Borrowings			(20,128,966	)	(22,929,528	)
Obligations under finance leases			(1,881,691	)	(326,284	)
Interest rate swaps at notional amount			1,217,691		1,053,352
			(19,137,722	)	(18,751,450	)

 

F-27

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3.	FINANCIAL RISK MANAGEMENT (CONTINUED)

(a)

Financial risk factors (continued)

(ii)

Interest rate risk (continued)

The following table indicates the approximate change in the Group’s profit and loss and other components of equity if interest rate had been 0.25% higher/lower with all other variables held constant.

	2007				2008
	Effect on profit and loss		Effect on other components of equity		Effect on profit and loss			Effect on other components of equity
	RMB’000		RMB’000		RMB’000			RMB’000
Increase in interest rate	(57,681	)	27,872			(77,592	)	10,299
Decrease in interest rate	57,681		(27,872	)		77,592		(10,299	)

(iii)

Fuel price risk

The Group’s results of operations may be significantly affected by fluctuations in fuel prices which is a significant expense for the Group. Aircraft fuel accounts for 33% of the Group’s operating expenses (2007: 35%). The Group has entered into certain financial derivatives to hedge against fuel price risk. Details of fuel option contracts are disclosed in Note 37(c) to the financial statements.

For the year 2008, if fuel price had been 5% higher/lower with all other variables held constant (excluding the impact of fuel option contracts), the Group’s fuel cost would have been RMB900 million higher/lower.

For the years ended, if fuel price had been 5% higher/lower with all other variables held constant, the impact on financial derivatives is shown below.

	2007				2008
	Effect on profit and loss		Effect on other components of equity		Effect on profit and loss			Effect on other components of equity
	RMB’000		RMB’000		RMB’000			RMB’000
Net increase in fuel price	8,766		-			497,879		-
Net decrease in fuel price	(17,531	)	-			(500,690	)	-

 

F-28

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3.	FINANCIAL RISK MANAGEMENT (CONTINUED)

(a)

Financial risk factors (continued)

(iv)

Credit risk

The Group’s credit risk is primarily attributable to cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to sales agents. The Group has a credit policy in place to monitor the exposures to these credit risks on an on-going basis.

The Group has policies in place to ensure that sales of blank tickets are only made available to sales agents with an appropriate credit history. A major portion of sales are conducted through sales agents and the majority of these agents are connected to various settlement plans and/or clearing systems which impose requirements on the credit standing.

A significant portion of the Group’s air tickets are sold by 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 RMB515 million as at December 31, 2008 (2007: RMB896 million).

Except for the above, the Group has no significant concentration of credit risk, with the exposure spreading over a number of counterparties.

Further quantitative disclosures in respect of the Group’s exposure to credit risk arising from trade receivables are set out in Note 25.

The Group’s cash management policy is to deposit cash and cash equivalents mainly in state-owned banks and other banks, which are highly rated by an international credit rating company. The Group also deposits cash and cash equivalents in an associate financial institution owned by its holding company (Note 43(b)(iii)). The 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 financial institutions of high reputation. The Group has policies that limit the amount of credit exposure to any one financial institution. Management does not expect any losses from non-performance by these banks.

 

F-29

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3.	FINANCIAL RISK MANAGEMENT (CONTINUED)

(a)

Financial risk factors (continued)

(v)

Liquidity risk

The Group’s primary cash requirements have been for additions of and upgrades to aircraft, engines and flight equipment and payments on related borrowings. The Group finances its working capital requirements through a combination of funds generated from operations and both short and long term bank loans. The Group generally finances the acquisition of aircraft through long-term finance leases and bank loans.

The Group operates with a working capital deficit. As at December 31, 2008, the Group’s net current liabilities amounted to RMB43,458 million (2007: RMB26,098 million). For the year ended December 31, 2008, the Group recorded a net cash inflow from operating activities of RMB2,856 million (2007: inflow RMB3,080 million), a net cash outflow from investing activities and financing activities of RMB1,017 million (2007: outflow RMB3,396 million), and an increase in cash and cash equivalents of RMB1,796 million (2007: decrease RMB332 million).

The Directors of Company believe that cash from operations and short and long term bank borrowings will be sufficient to meet the Group’s operating cash flow. Due to the dynamic nature of the underlying businesses, the Group’s treasury policy aims at maintaining flexibility in funding by keeping credit lines available. The Directors of the Company believe that the Group has obtained sufficient general credit facilities from PRC banks for financing future capital commitments and for working capital purposes (see Notes 2(a) and 46).

Management monitors rolling forecasts of the Group’s liquidity reserves on the basis of expected cash flows:

The table below analyses the Group’s financial liabilities that will be settled into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity dates. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant.

		Less than 1 year			Between 1 and 2 years		Between 2 and 5 years			Over 5 years
		RMB’000			RMB’000		RMB’000			RMB’000
At December 31, 2007
Borrowings			18,494,521		5,927,098			4,216,517		1,225,692
Derivative financial instruments			20,238		441			5,120		15,997
Obligations under finance leases			2,545,223		1,567,253			4,205,352		8,134,382
Trade and other payables			12,075,177		-			339,064		314,884
Total			33,135,159		7,494,792			8,766,053		9,690,955
At December 31, 2008
Borrowings			27,785,310		4,515,962			3,969,413		846,074
Derivative financial instruments			6,456,075		15,448			19,416		150,660
Obligations under finance leases			2,765,969		2,704,499			7,805,669		11,868,053
Trade and other payables			16,561,603		-			320,354		410,076
Total			53,568,957		7,235,909			12,114,852		13,274,863

 

F-30

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3.	FINANCIAL RISK MANAGEMENT (CONTINUED)

(b)

Capital risk management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including borrowings and trade and other payables, as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as equity, as shown in the consolidated balance sheet, plus net debt.

The gearing ratios at December 31, 2007 and 2008 were as follows:

		2007			2008
			RMB’000		RMB’000
Total borrowings			29,863,828		35,101,372
Less: Cash and cash equivalents			(1,655,244	)	(3,451,010	)
Net debt			28,208,584		31,650,362
Total equity			2,932,556		(12,639,509	)
Total capital			31,141,140		19,010,853
Gearing ratio			0.91		1.66

 

(c)

Fair value estimation of financial assets and liabilities

The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price; the quoted market price used for financial liabilities is the current asking price.

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of interest-rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using forward exchange market rates at the balance sheet date. The fair value of fuel option contracts is determined by reference to mark-to-market values provided by counterparties and independent third parties applying appropriate option valuation models.

The fair values of other long-term receivables are based on cash flows discounted using a rate based on the borrowing rate. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments (Notes 30 and 31).

 

F-31

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4.	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.

(a)

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 2(n) to the financial statements. The recoverable amounts of cash generating units is the higher of fair value less costs to to sell and value in use. The calculations of value in use is using cash flow projections based on financial budgets approved by management and the key assumptions which are disclosed in Note 18(a). Different assumptions could significantly affect the value in use calculation and estimated impairment of property, plant and equipment and intangible assets.

(b)

Revenue recognition

The Group recognizes passenger, cargo and mail revenues in accordance with the accounting policy stated in Note 2(f) to the financial statements. Unused tickets are recognized in traffic revenues based on current estimates. Management annually evaluates the balance in the Sales in advance of carriage account (“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.

(c)

Frequent flyer programme

 

The Company operates a frequent flyer programme called “Eastern Miles” that provides travel awards to programme 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. The deferment of revenue is estimated based on historical trends of redemptions, which is then used to project the expected utilization of these benefits. Any remaining unutilized benefits are recognized as deferred revenue.

(d)

Depreciation of components related to overhaul costs

Depreciation of components related to airframe and engine overhaul costs are based on the Group’s historical experience with similar airframe and engine models and taking into account anticipated overhauls 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 materially impact the results of operations.

(e)

Provision for costs of 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 timeframe between each overhaul.  These judgments or estimates are based on historical experience on returning similar airframe and engine models, actual costs incurred and aircraft and engines status. Different judgments or estimates could significantly affect the estimated provision for costs of return condition checks.

 

F-32

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4.	CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (CONTINUED)

(f)

Retirement benefits

The Group operates and maintains defined retirement benefit plans which provide retirees with benefits including transportation subsidies, social activity subsidies 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 employees’ service period by utilizing various actuarial assumptions and using the projected unit credit method in accordance with the accounting policy stated in Note 2(w) to the financial statements. These assumptions include, without limitation, the selection of discount rate, annual rate of increase of per capita benefit payment and employees’ turnover rate. The discount rate is based on management’s review of local high quality corporate bonds. The annual rate of increase of benefit payments is based on the general local economic conditions. The employees’ turnover rate is based on historical trends of the Group. Additional information regarding the retirement benefit plans is disclosed in Note 35 to the financial statements.

(g)

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 2(k) 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 net operating loss carry forwards in the future, adjustments to the recorded amount of net deferred tax assets and taxation expense would be made.

 

F-33

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

5.

REVENUES

The Group is principally engaged in the operation of civil aviation, including the provision of passenger, cargo, mail delivery and other extended transportation services.

		Year ended December 31
		2006			2007		2008
		RMB’000			RMB’000		RMB’000
Revenues
Traffic revenues
– Passenger			31,044,438		36,077,309		34,221,555
– Cargo and mail			5,776,671		5,633,117		5,465,784
Ground service income			893,960		1,001,809		1,279,444
Cargo handling income			289,530		364,638		345,048
Commission income			125,576		156,713		187,073
Others			403,469		393,166		464,717
			38,533,644		43,626,752		41,963,621
Less: Business tax (Note)			(976,792	)	(1,092,859	)	(891,064	)
			37,556,852		42,533,893		41,072,557

Note:

Except for traffic revenues derived from inbound international and regional flights, which are not subject to the PRC business tax, the Group’s traffic revenues, commission income, ground service income, cargo handling income and other revenues are subject to the PRC business tax levied at rates ranging from 3% to 5%, pursuant to the PRC business tax rules and regulations.

6.	OTHER OPERATING INCOME AND OTHER GAINS

		Year ended December 31
		2006			2007		2008
		RMB’000			RMB’000		RMB’000
Other operating income			462,370		487,562			405,163
- Government subsidies (Note (a))
Other gains
- Gains on disposal of property, plant and equipment (Note (b))			36,207		-			267,084

Note:

 

(a) The government subsidies represent (i) subsidies granted by the Central Government and local government to the Group; and (ii) other subsidies granted by various local municipalities to encourage the Group to operate certain routes to cities where these municipalities are located.

(b) The gains on disposal of property, plant and equipment in 2008 represent the gains arising from (i) the sales of certain cargo freighters and engines which were leased back under operating lease and (ii) the disposal of certain aircraft recorded in “non-current assets held for sale” in 2007.

 

F-34

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

7.	SEGMENT INFORMATION

In accordance with the Group’s internal financial reporting, the Group has determined that business segments be presented as the primary reporting format and geographical as the secondary reporting format.

(a)

Primary reporting format by business segment

The Group has two business segments, namely passenger and cargo and logistics, which are structured and managed separately, according to the nature of their operations and the services they provide.

 

(1)

Passenger business segment includes cargo carried by passenger flights.

(2)

Inter-segment transfers or transactions are entered into under normal commercial terms and conditions that would also be available to unrelated third parties.

The segment results for the year ended December 31, 2006 are as follows:

		Passenger			Cargo and logistics		Unallocated		Total
		RMB’000			RMB’000		RMB’000		RMB’000
Traffic revenues			33,412,698		2,842,836		-		36,255,534
Other revenues and operating income			1,211,553		709,069		140,525		2,061,147
Total segment revenue			34,624,251		3,551,905		140,525		38,316,681
Inter-segment revenue			(689,331	)	-		(70,498	)	(759,829	)
Revenues			33,934,920		3,551,905		70,027		37,556,852
Operating (loss)/profit – segment results			(2,565,982	)	(195,881	)	21,947		(2,739,916	)
Finance income			1,016,217		17,639		1,451		1,035,307
Finance costs			(1,653,939	)	(104,418	)	(7,624	)	(1,765,981	)
Share of results of associates			-		-		103,566		103,566
Share of results of jointly controlled entities			-		-		29,595		29,595
(Loss)/profit before income tax			(3,203,704	)	(282,660	)	148,935		(3,337,429	)
Income tax			198,088		(30,262	)	(4,894	)	162,932
(Loss)/profit for the year			(3,005,616	)	(312,922	)	144,041		(3,174,497	)

 

F-35

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

7.	SEGMENT INFORMATION (CONTINUED)

(a)

Primary reporting format by business segment (continued)

Other segment items included in the income statement for the year ended December 31, 2006 are as follows:

		Passenger			Cargo and logistics		Unallocated			Total
		RMB’000			RMB’000		RMB’000			RMB’000
Depreciation			3,842,727		477,505			32,240		4,352,472
Amortization			103,606		-			-		103,606
Impairment loss			888,419		-			-		888,419

The segment assets and liabilities at December 31, 2006 and capital expenditure for the year then ended are as follows:

		Passenger			Cargo and logistics		Unallocated		Total
		RMB’000			RMB’000		RMB’000		RMB’000
Segment assets			54,573,594		4,962,955		463,188			59,999,737
Investments in associates			-		-		623,390			623,390
Investments in jointly controlled entities			-		-		115,540			115,540
Total assets			54,573,594		4,962,955		1,202,118			60,738,667
Segment liabilities			(53,989,636	)	(3,992,814	)	(64,352			(58,046,802	)
Capital expenditure			15,566,384		1,170,712		52,623			16,789,719

 

F-36

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

7.	SEGMENT INFORMATION (CONTINUED)

(a)

Primary reporting format by business segment (continued)

The segment results for the year ended December 31, 2007 are as follows:

		Passenger			Cargo and logistics		Unallocated		Total
		RMB’000			RMB’000		RMB’000		RMB’000
Traffic revenues			37,550,127		3,113,488		-		40,663,615
Other revenues and operating income			1,208,760		900,529		208,456		2,317,745
Total segment revenue			38,758,887		4,014,017		208,456		42,981,360
Inter-segment revenue			(348,643	)	-		(98,824	)	(447,467	)
Revenues			38,410,244		4,014,017		109,632		42,533,893
Operating (loss)/profit – segment results			(93,051	)	181,823		38,861		127,633
Finance income			2,055,187		84,481		789		2,140,457
Finance costs			(1,799,454	)	(164,685	)	(14,411	)	(1,978,550	)
Share of results of associates			-		-		58,312		58,312
Share of results of jointly controlled entities			-		-		30,086		30,086
Profit before income tax			162,682		101,619		113,637		377,938
Income tax			38,835		(58,123	)	(4,475	)	(23,763	)
Profit for the year			201,517		43,496		109,162		354,175

 

Other segment items included in the income statement for the year ended December 31, 2007 are as follows:

		Passenger			Cargo and logistics		Unallocated			Total
		RMB’000			RMB’000		RMB’000			RMB’000
Depreciation			3,899,072		646,364			42,749		4,588,185
Amortization			119,913		11,051			586		131,550
Impairment loss			227,456		-			-		227,456

 

 

F-37

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

7.	SEGMENT INFORMATION (CONTINUED)

(a)

Primary reporting format by business segment (continued)

The segment assets and liabilities at December 31, 2007 and capital expenditure for the year then ended are as follows:

		Passenger			Cargo and logistics		Unallocated		Total
		RMB’000			RMB’000		RMB’000		RMB’000
Segment assets			60,390,659		5,286,774		1,125,583		66,803,016
Investments in associates			-		-		601,119		601,119
Investments in jointly controlled entities			-		-		336,966		336,966
Total assets			60,390,659		5,286,774		2,063,668		67,741,101
Segment liabilities			(60,129,187	)	(4,196,729	)	(482,629	)	(64,808,545	)
Capital expenditure  (Note 18, 19, 20 and 21)			11,807,855		788,078		212,607		12,808,540

 

F-38

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

7.	Segment information (continued)

(a)

Primary reporting format by business segment (continued)

The segment results for the year ended December 31, 2008 are as follows:

		Passenger			Cargo and logistics		Unallocated		Total
		RMB’000			RMB’000		RMB’000		RMB’000
Traffic revenues			35,527,984		3,316,285		-		38,844,269
Other revenues and operating income			1,476,812		1,092,067		257,033		2,825,912
Total segment revenue			37,004,796		4,408,352		257,033		41,670,181
Inter-segment revenue			(426,411	)	-		(171,213	)	(597,624	)
Revenues			36,578,385		4,408,352		85,820		41,072,557
Operating (loss)/profit – segment results			(15,148,592	)	(4,392	)	69,779		(15,083,205	)
Finance income			1,960,490		100,781		354		2,061,625
Finance costs			(2,156,695	)	(146,944	)	(24,508	)	(2,328,147	)
Share of results of associates			-		-		69,668		69,668
Share of results of jointly controlled entities			-		-		24,050		24,050
(Loss)/profit before income tax			(15,344,797	)	(50,555	)	139,343		(15,256,009	)
Income tax			10,217		(73,952	)	(10,181	)	(73,916	)
(Loss)/profit for the year			(15,334,580	)	(124,507	)	129,162		(15,329,925	)

Other segment items included in the income statement for the year ended December 31, 2008 are as follows:

		Passenger			Cargo and logistics		Unallocated			Total
		RMB’000			RMB’000		RMB’000			RMB’000
Depreciation			4,052,309		427,620			60,600		4,540,529
Amortization			229,350		11,097			586		241,033
Impairment loss			2,833,565		143,113			-		2,976,678

 

F-39

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

7.	SEGMENT INFORMATION (CONTINUED)

(a)

Primary reporting format by business segment (continued)

The segment assets and liabilities at December 31, 2008 and capital expenditure for the year then ended are as follows:

		Passenger			Cargo and logistics		Unallocated		Total
		RMB’000			RMB’000		RMB’000		RMB’000
Segment assets			66,377,081		4,160,865		1,171,293		71,709,239
Investments in associates			-		-		980,319		980,319
Investments in jointly controlled entities			-		-		362,332		362,332
Total assets			66,377,081		4,160,865		2,513,944		73,051,890
Segment liabilities			(81,763,440	)	(3,415,065	)	(512,894	)	(85,691,399	)
Capital expenditure (Note 18, 19, 20 and 21)			11,332,697		177,589		20,513		11,530,799

 

F-40

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

7.	SEGMENT INFORMATION (CONTINUED)

(b)

Secondary reporting format by geographical segment

The Group’s two business segments operate in four main geographical areas, even though they are managed on a worldwide basis.

The Group’s revenues (net of business tax) by geographical segment are analyzed based on the following criteria:

 

(1)

Traffic revenue from services within the PRC (excluding the Hong Kong Special Administrative Region (“Hong Kong”)) is classified as domestic operations. Traffic revenue from inbound and outbound services between the PRC, Hong Kong or overseas markets is attributed to the segments based on the origin and destination of each flight segment.

(2)

Revenue from ticket handling services, airport ground services and other miscellaneous services are classified on the basis of where the services are performed.

		Year ended December 31,
		2006			2007		2008
		RMB’000			RMB’000		RMB’000
Domestic (the PRC, excluding Hong Kong)			20,900,798		24,133,540			24,333,387
Hong Kong			3,244,846		2,694,857			2,474,088
Japan			3,582,962		3,643,244			3,512,222
Other countries			9,828,246		12,062,252			10,752,860
Total			37,556,852		42,533,893			41,072,557

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 to geographical segments and hence segment assets and capital expenditure by geographic segment have not been presented.

8.	(LOSS)/GAIN ON FINANCIAL DERIVATIVES

		Year ended December 31,
		2006			2007		2008
		RMB’000			RMB’000		RMB’000
(Loss)/gain arising from fair value movements of financial derivatives
- Fuel option contracts (Note 37(c))			(64,849	)	96,576		(6,255,791	)
- Interest rate swaps (Note 37(a))			18,161		(8,824	)	(49,535	)
- Forward foreign exchange contracts (Note 37(b))			4,344		(3,787	)	(95,666	)
			(42,344	)	83,965		(6,400,992	)

 

F-41

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9.	WAGES, SALARIES AND BENEFITS

		Year ended December 31,
		2006			2007		2008
		RMB’000			RMB’000		RMB’000
Wages, salaries, bonus and allowances			2,603,095		3,198,734			3,259,465
Employee welfare and benefits			231,000		246,626			227,206
Defined contribution retirement schemes (Note 35(a))			298,363		373,253			452,879
Post-retirement benefits (Note 35(b))			146,968		170,670			200,603
Staff housing fund (Note 36(a))			228,000		285,000			281,776
Staff housing allowance (Note 36(b))			30,656		53,114			123,383
			3,538,082		4,327,397			4,545,312

10.	IMPAIRMENT LOSSES

		Year ended December 31,
		2006			2007		2008
		RMB’000			RMB’000		RMB’000
Goodwill impairment (Note (a))			-		-			993,143
Impairment charge on property, plant and equipment (Note (b))			-		-			1,441,904
Impairment charge on non-current assets held for sale (Note (c))			828,102		130,921			235,273
Other impairment charge			60,317		96,535			306,358
			888,419		227,456			2,976,678

Note:

(a)

For the year ended December 31, 2008, the Group recognized an impairment charge of RMB993 million against goodwill which had previously been recognized in connection with the Group’s acquisition of Yunnan Airlines, Xibei Airlines and Wuhan Airlines (Note 18).

(b)

In view of the decline in demand in the air transportation market under the current economic environment, the Group performed an impairment test on PP&E as at December 31, 2008, based on which an impairment provision of RMB1,442 million was made against certain aircraft models and related equipment which reflects their relatively lower operational efficiency and which management intend to retire in the near future. In determining the recoverable amounts of the related assets, management has compared the value in use and the fair value less costs to sell of the related PP&E, primarily determined by reference to the estimated market values (Note 19).

(c)

After assessing the fair value less costs to sell as at the balance sheet date which was primarily determined by reference to the estimated market value, an additional impairment loss of RMB235 million was made in 2008 against certain aircraft and related flight equipment which have been classified as “non-current assets held for sale” (Note 40).

 

 

F-42

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

11.	OPERATING (LOSS)/PROFIT

Operating (loss)/profits stated after charging and crediting the following items:

		Year ended December 31,
		2006			2007		2008
		RMB’000			RMB’000		RMB’000
Crediting:
Gain on disposals of property, plant and equipment			36,207		-			267,084
Charging:
Amortization of intangible assets			72,737		106,703			110,151
Depreciation of property, plant and equipment
- Leased			1,360,464		1,868,481			1,913,877
- Owned			2,992,008		2,719,704			2,626,652
Amortization of lease prepayments			30,869		24,847			25,940
Consumption of flight equipment spare parts			326,248		468,888			476,282
Provision for impairment of trade and other receivables			19,539		10,481			34,760
Auditors’ remuneration			20,120		18,439			18,000

 

12.	FINANCE INCOME

		Year ended December 31,
		2006			2007		2008
		RMB’000			RMB’000		RMB’000
Exchange gains, net (Note)			888,402		2,023,032			1,957,591
Interest income			120,161		96,849			89,275
Actual settled gains on financial instruments - forward foreign exchange contracts			26,744		20,576			14,759
			1,035,307		2,140,457			2,061,625

Note:

The exchange gain for the year ended December 31, 2008 primarily relates to the translation of the Group’s foreign currency denominated borrowings and obligations under finance leases at year-end exchange rates.

 

F-43

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

13.	FINANCE COSTS

		Year ended December 31,
		2006				2007				2008
		RMB’000				RMB’000				RMB’000
Interest relating to obligations under finance leases			543,953				731,885				651,121
Interest on loans from banks and financial institutions			1,580,536				1,629,090				1,945,212
Interest relating to notes payable			91,280				72,779				84,050
Amortization of the discount on zero coupon debentures			25,456				-				-
Interest relating to long-term payables			4,961				3,406				-
Actual settled gains on financial instruments - Interest rate swaps (Note 37(a))			(55,889	)			(59,111	)			(10,083	)
			2,190,297				2,378,049				2,670,300
Less: Amounts capitalized into advanced payments on acquisition of aircraft  (Note 21)			(424,316	)			(399,499	)			(342,153	)
			1,765,981				1,978,550				2,328,147

14.	INCOME TAX

Income tax charged / (credited) to the consolidated income statement is as follows:

		Year ended December 31,
		2006				2007				2008
		RMB’000				RMB’000				RMB’000
Provision for PRC income tax			48,072				72,918				35,432
Deferred taxation (Note 34)			(211,004	)			(49,155	)			38,484
			(162,932	)			23,763				73,916

Prior to 2008, the Company and certain of its subsidiaries (the “Pudong Subsidiaries”) located in Pudong District, Shanghai, were entitled to a reduced rate of 15% pursuant to the preferential tax policy in Pudong, Shanghai. Under the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”) which was approved by the National People’s Congress on March 16, 2007 and became effective from January 1, 2008, the Company and the Pudong Subsidiaries are entitled to enjoy a transitional period to gradually increase the applicable corporate income tax rate to 25% in coming five years. For the year ended December 31, 2008, the corporate income tax rate applicable to the Company and the Pudong Subsidiaries is 18% (2007: 15%). Other subsidiaries of the Company, except for those incorporated in Hong Kong and being subject to the Hong Kong corporate income tax rate of 16.5%, are generally subject to the PRC standard corporate tax rate of 25% under the New CIT Law.

 

F-44

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

14.	INCOME TAX (CONTINUED)

Tax on the Group’s consolidated income statement differs from the theoretical amount that would arise using the taxation rate of the home country of the Company as follows:

		Year ended December 31,
		2006				2007				2008
		RMB’000				RMB’000				RMB’000
(Loss)/profit before income tax			(3,337,429	)			377,938				(15,256,009	)
Adjusted by:
Share of result of associates and jointly controlled entities			(133,161	)			(88,398	)			(93,718	)
			(3,470,590	)			289,540				(15,349,727	)
Tax calculated at enacted tax rate of 18% (2007 and 2006: 15%)			(520,589	)			43,431				(2,762,951	)
Effect attributable to subsidiaries charged at tax rates of 16.5% or 25%			(27,969	)			(49,578	)			(67,505	)
Expenses not deductible for tax purposes			13,852				12,031				6,462
Effect of tax rate change on deferred tax			-				24,289				-
Utilization of previously unrecognized tax losses			23,130				(157,531	)			-
Written off of deferred tax asset recognized exemptions by a subsidiary in prior year			-				-				34,773
Unrecognized tax losses for the year			285,999				54,647				1,093,350
Unrecognized temporary differences for the year			16,067				96,474				1,769,787
Gain arising from intra-group property, plant and equipment disposal subject to taxation			46,578				-				-
Tax charge/(credit)			(162,932	)			23,763				73,916

The Group operates international flights to overseas destinations. There was no material overseas taxation for the years ended December 31, 2008 (2007: Nil), as there are double tax treaties between the PRC and the corresponding jurisdictions (including Hong Kong) relating to aviation businesses.

 

F-45

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

15.

DIVIDEND

No dividend was paid during both years 2007 and 2008.

The Board of Directors of the Company has not recommended any dividend in respect of the year ended December 31, 2008 (2007: Nil).

16.	(LOSS)/ PROFIT ATTRIBUTABLE TO SHAREHOLDERS

The loss attributable to equity holders of the Company is dealt with in the financial statements of the Company to the extent of RMB13,877 million (2007: profit of RMB505 million, 2006: loss of RMB 2,432 million).

17.	(LOSS)/EARNINGS PER SHARE

The calculation of basic loss per share is based on the loss attributable to equity holders of the Company of RMB15,269 million (2007: a profit of RMB379 million, 2006: a loss of RMB3,035 million ) and the weighted average number of shares of 4,866,950,000 (2007: 4,866,950,000, 2006: 4,866,950,000 ) in issue during the year.

The Company has no potentially dilutive option or other instruments relating to ordinary shares.

 

F-46

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

18.	INTANGIBLE ASSETS

		Goodwill (Note (a))				Sponsorship fee (Note (b))				Computer software				Total
		RMB’000				RMB’000				RMB’000				RMB’000
Cost
At January 1, 2007			993,143				320,000				118,573				1,431,716
Other additions			-				-				15,283				15,283
Disposals			-				-				(1,715	)			(1,715	)
At December 31, 2007			993,143				320,000				132,141				1,445,284
At January 1, 2008			993,143				320,000				132,141				1,445,284
Other additions			-				-				23,439				23,439
At December 31, 2008			993,143				320,000				155,580				1,468,723
Accumulated amortization
At January 1, 2007			-				52,870				41,292				94,162
Charge for the year			-				82,194				24,509				106,703
Disposals			-				-				(287	)			(287	)
At December 31, 2007			-				135,064				65,514				200,578
At January 1, 2008			-				135,064				65,514				200,578
Charge for the year			-				82,194				27,957				110,151
At December 31, 2008			-				217,258				93,471				310,729
Impairment
At January 1, 2008			-				-				-				-
Charge for the year			993,143				-				-				993,143
At December 31, 2008			993,143				-				-				993,143
Net book amount
At December 31, 2007			993,143				184,936				66,627				1,244,706
At December 31, 2008			-				102,742				62,109				164,851

 

 

F-47

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

18.	INTANGIBLE ASSETS (CONTINUED)

Notes:

 

(a)

Impairment tests for goodwill

The Group operates in two cash-generating units (“CGU”) which are passenger (including cargo carried by passenger flights) and cargo and logistics.

For the year ended December 31, 2008, the Group recognized an impairment charge of RMB993 million, against goodwill which had previously been recognized in connection with the acquisitions of Yunnan Airlines, Xibei Airlines and Wuhan Airlines within the passenger CGU. The impairment charge recognized represents the amount by which the CGU’s carrying amount exceeds its recoverable amount.

The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management.

Key assumptions used for cash flow projections are as follows:

- Passenger yield growth rate		0% to 4.5%
- Passenger load factor		63% to 80%
- Aircraft daily utilization (hours per day)		5.4 to 11.4
- Discount rate			10%

Management determined budgeted passenger yield growth rate, passenger load factor and aircraft daily utilization based on past performance and its expectations for market development. The discount rate used is pre-tax and reflects specific risks relating to the Group’s business.

(b)

Sponsorship fees

In March 2006, the Company entered into an agreement (the “Sponsorship Agreement”) with the Bureau of 2010 Expo Shanghai (the “Bureau”) which designated the Group as the exclusive airline passenger carrier in the PRC to sponsor the 2010 Shanghai Expo. The Company will be entitled to a number of rights, including but not limited to the use of the Expo logo in the Group’s products, priority to purchase advertising space at the Expo site etc. In return, the Company is required to pay a total sponsorship fee of RMB320 million, RMB160 million of which would be paid in cash by installments, the remaining RMB160 million would be settled by value-in-kind services (“VIK”) (in the form of goods or services) to support the 2010 Shanghai Expo. Accordingly, an intangible asset has been recognized and amortized on straight-line basis over the period from the effective date of the Sponsorship Agreement to the completion of the Expo. The outstanding sponsorship fee of RMB178 million (2007: 233 million) has been recognized as other long-term liabilities (Note 33) in the Group’s balance sheet.

 

F-48

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

19.	PROPERTY, PLANT AND EQUIPMENT

		Aircraft, engines and flight equipment
		Owned				Held under finance leases				Buildings				Other property, plant and equipment				Construction in progress				Total
		RMB’000				RMB’000				RMB’000				RMB’000				RMB’000				RMB’000
Cost
At January 1, 2007, as restated			31,922,671				21,310,056				2,752,340				3,514,463				250,112				59,749,642
Reclassification upon a purchase			4,203,030				(4,203,030	)			-				-				-				-
Transfers from construction in progress			-				-				84,402				91,269				(175,671	)			-
Transfers from advanced payments on acquisition of aircraft (Note 21)			189,402				4,920,311				-				-				-				5,109,713
Other additions			1,792,502				6,026,340				51,276				380,211				406,350				8,656,679
Disposal to a jointly controlled entity (Note 23)			-				-				(28,489	)			(2,773	)			-				(31,262	)
Other disposals			(788,727	)			(237,973	)			(33,781	)			(99,386	)			-				(1,159,867	)
Transfers to assets held for sale			(4,390,384	)			-				-				-				-				(4,390,384	)
At December 31, 2007			32,928,494				27,815,704				2,825,748				3,883,784				480,791				67,934,521
Accumulated depreciation
At January 1, 2007 as restated			12,472,726				5,393,870				582,072				1,659,800				-				20,108,468
Reclassification upon a purchase			2,203,703				(2,203,703	)			-				-				-				-
Charge for the year			2,221,399				1,868,481				103,622				394,683				-				4,588,185
Disposal to a jointly controlled entity			-				-				(5,562	)			(1,426	)			-				(6,988	)
Other disposals			(786,032	)			(237,973	)			(6,240	)			(66,305	)			-				(1,096,550	)
Transfers to assets held for sale			(2,946,295	)			-				-				-				-				(2,946,295	)
At December 31, 2007			13,165,501				4,820,675				673,892				1,986,752				-				20,646,820
Impairment
At January 1, 2007, as restated			-				-				13,094				550				4,303				17,947
Charge for the year			-				-				-				-				-				-
At December 31, 2007			-				-				13,094				550				4,303				17,947
Net book amount
At December 31, 2007			19,762,993				22,995,029				2,138,762				1,896,482				476,488				47,269,754
At January 1, 2007			19,449,945				15,916,186				2,157,174				1,854,113				245,809				39,623,227

 

 

F-49

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

19.	PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

		Aircraft, engines and flight equipment
		Owned				Held under finance leases				Buildings				Other property, plant and equipment				Construction in progress				Total
		RMB’000				RMB’000				RMB’000				RMB’000				RMB’000				RMB’000
Cost
At January 1, 2008, as restated			32,928,494				27,815,704				2,825,748				3,883,784				480,791				67,934,521
Reclassification upon a purchase			3,094,561				(3,094,561	)			-				-				-				-
Sales and finance lease back			(3,085,419	)			3,085,419				-				-				-				-
Transfers from construction in progress			-				-				233,746				19,313				(253,059	)			-
Transfers from advanced payments on acquisition of aircraft (Note 21)			411,153				3,816,843				-				-				-				4,227,996
Other additions			1,781,272				4,683,699				360,498				335,220				345,730				7,506,419
Other disposals			(719,787	)			(408,134	)			(8,047	)			(143,060	)			-				(1,279,028	)
At December 31, 2008			34,410,274				35,898,970				3,411,945				4,095,257				573,462				78,389,908
Accumulated depreciation
At January 1, 2008 as restated			13,165,501				4,820,675				673,892				1,986,752				-				20,646,820
Reclassification upon a purchase			1,580,097				(1,580,097	)			-				-				-				-
Sales and finance lease back			(1,779,979	)			1,779,979				-				-				-				-
Charge for the year			2,138,172				1,913,877				108,826				379,654				-				4,540,529
Other disposals			(520,373	)			(408,134	)			(932	)			(6,326	)			-				(935,765	)
At December 31, 2008			14,583,418				6,526,300				781,786				2,360,080				-				24,251,584
Impairment
At January 1, 2008			-				-				13,094				550				4,303				17,947
Charge for the year (Note (a))			966,191				473,393				-				-				2,320				1,441,904
At December 31, 2008			966,191				473,393				13,094				550				6,623				1,459,851
Net book amount
At December 31, 2008			18,860,665				28,899,277				2,617,065				1,734,627				566,839				52,678,473
At January 1, 2008			19,762,993				22,995,029				2,138,762				1,896,482				476,488				47,269,754

 

 

F-50

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

19.	PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

Notes:

(a)

In view of the decline in demand of the air transportation market under the current economic environment, the Group performed an impairment test on PP&E as at December 31, 2008, based on which an impairment provision of RMB1,442 million was made against certain aircraft models and related equipment which reflects their relatively lower operation efficiency and which management intend to retire in the near future (Note 10). In determining the recoverable amounts of the related assets, management has compared the value in use and the fair value less costs to sell of the related assets, primarily determined by reference to estimated market values.

(b)

As at December 31, 2008, certain aircraft and buildings owned by the Group with an aggregate net book amount of approximately RMB8,723 million (2007: RMB9,865 million) were pledged as collateral under certain loan arrangements (note 31).

20.	LEASE PREPAYMENTS

		December 31
		2007				2008
		RMB’000				RMB’000
Cost
At January 1			1,247,104				1,175,104
Other additions			-				54,964
Disposals to a jointly controlled entity (Note 23)			(70,149	)			-
Other disposals			(1,851	)			-
At December 31			1,175,104				1,230,068
Accumulated amortization
At January 1			192,742				207,607
Charge for the year			24,847				25,940
Disposals to a jointly controlled entity (Note 23)			(9,119	)			-
Other disposals			(863	)			-
At December 31			207,607				233,547
Net book amount
At December 31			967,497				996,521

Lease prepayments represent unamortized prepayments for land use rights.

The Group’s land use rights are located in the PRC and the majority of these land use rights have terms of 50 years from the date of grant. As at December 31, 2008, the majority of these land use rights had remaining terms ranging from 38 to 53 years (2007: from 39 to 54 years).

 

F-51

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

21.	ADVANCED PAYMENTS ON ACQUISITION OF AIRCRAFT

		December 31
		2007				2008
		RMB’000				RMB’000
At January 1			7,668,708				6,695,573
Additions			3,737,079				3,603,824
Interest capitalized (Note 13)			399,499				342,153
Transfers to property, plant and equipment (Note 19)			(5,109,713	)			(4,227,996	)
At December 31			6,695,573				6,413,554

Included in the Group’s balance as at December 31, 2008 is accumulated interest capitalized of RMB518 million (2007: RMB553 million), at an average interest rate of 5.43% (2007: 5.90%).

22.	INVESTMENTS IN ASSOCIATES

		December 31
		2007				2008
		RMB’000				RMB’000
Unlisted investments, at cost			425,817				808,417
Share of post acquisition results/reserves			175,302				171,902
			601,119				980,319

The movement on investments in associates is as follows:

		December 31
		2007				2008
		RMB’000				RMB’000
At January 1			623,390				601,119
Costs of additional investments			-				384,186
Disposal of an indirectly held associate			(102,750	)			(3,820	)
Share of results of associates			58,312				69,668
Share of revaluation surplus/(deficits) on available for sale investments held by associates			22,167				(19,080	)
Dividend received during the year			-				(51,754	)
At December 31			601,119				980,319

 

F-52

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

22.	INVESTMENTS IN ASSOCIATES (CONTINUED)

Particulars of the principal associates, all of which are limited liability companies established and operating in the PRC, are as follows:

Company		Place and date of establishment		Paid-up capital								Attributable Equity interest								Principal activities
				2007				2008				2007				2008
				RMB’000				RMB’000
Eastern Air Group Finance Co., Ltd. (“EAGF”)		PRC December 6, 1995			400,000				400,000				25	%			25	%		Provision of financial services to group companies of CEA Holding
China Eastern Air Catering Investment Co., Ltd.		PRC November 17, 2003			350,000				350,000				45	%			45	%		Provision of air catering services
Jiangsu Huayu General Aviation Co., Ltd.		PRC December 1, 2004			110,000				110,000				27	%			27	%		Provision of aviation support services
Eastern Aviation Import & Export Co., Ltd (“EAIEC”)		PRC June 9, 1993			80,000				80,000				45	%			45	%		Provision of aviation equipment, spare parts and tools trading
Collins Aviation Maintenance Service Shanghai Ltd.		PRC September 27, 2002			57,980				57,980				35	%			35	%		Provision of airline electronic product maintenance services
Shanghai Dongmei Aviation Travel Co., Ltd. (“SDATC”)		PRC October 17, 2004			31,000				31,000				27	%			27	%		Provision of traveling and accommodation agency services

 

 

F-53

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

22.	INVESTMENTS IN ASSOCIATES (CONTINUED)

Company		Place and date of establishment		Paid-up capital								Attributable Equity interest								Principal activities
				2007				2008				2007				2008
				RMB’000				RMB’000
Shanghai Hongpu Civil Airport Communication Co., Ltd.		PRC October 18, 2002			25,000				25,000				30	%			30	%		Provision of cable and wireless communication services
Eastern Aviation Advertising Service Co., Ltd. (“CAASC”)		PRC March 4,1986			10,320				10,320				45	%			45	%		Provision of aviation advertising agency services
Joy Air Co., Ltd (Note (a))		PRC March 28, 2008			-				600,000				-				40	%		Provision of regional airline transportation
Shanghai Pratt & Whitney Aircraft Engine Maintenance Company Limited (Note (b))		PRC March 28, 2008			-			USD	39,500				-				51	%		Provision of maintenance of aircraft, engine and other related components maintenance services

 

 

F-54

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

22.	INVESTMENTS IN ASSOCIATES (CONTINUED)

Note:

(a)

On January 24, 2008, the Company entered into an agreement with China Aviation Industry Corporation to establish Joy Air Company Limited (“Joy Air”). The Company holds a 40% interest of Joy air. As at December 31, 2008, the Company contributed RMB240 million in cash. Joy Air is still in preparation period as at the balance sheet date.

(b)

In 2008, the Company entered into an agreement (the “Agreement”) with a third party (the “Third Party”) to establish Shanghai Pratt & Whitney Aircraft Engine Maintenance Company Limited (“Shanghai P&W”). Shanghai P&W’s registered capital is USD 40 million, in which the Company holds 51% interests. As at December 31, 2008, the Company contributed USD20,145,000 in cash to Shanghai P&W. According to the Agreement, the Third Party has the power to govern the financial and operating policies of Shanghai P&W and hence the Company accounts for Shanghai P&W as an associate. At the balance sheet date, Shanghai P&W is still in preparation period.

(c)

The Group’s aggregated share of the revenues, results, assets and liabilities of its associates are as follows:

		Assets				Liabilities				Revenues				Profit
		RMB’000				RMB’000				RMB’000				RMB’000
2007			2,194,818				1,593,699				919,495				58,312
2008			4,326,145				3,345,826				913,845				69,668

23.	INVESTMENTS IN JOINTLY CONTROLLED ENTITIES

		2007				2008
		RMB’000				RMB’000
Unlisted investments, at cost			268,892				270,208
Share of post-acquisition results/reserves			68,074				92,124
			336,966				362,332

The movement on investments in jointly controlled entities is as follows:

		2007				2008
		RMB’000				RMB’000
At January 1			115,540				336,966
Other addition			209,340				-
Dividend received during the year			(18,000	)			-
Share of results			30,086				24,050
Amortization of previously unrecognized gain			-				1,316
At December 31			336,966				362,332

 

 

F-55

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

23.	INVESTMENTS IN JOINTLY CONTROLLED ENTITIES (CONTINUED)

Particulars of the principal jointly controlled entities, all of which are limited liability companies established and operating in the PRC are as follows:

Company		Place and date of establishment		Paid-up capital								Attributable Equity Interest								Principal activities
				2007				2008				2007				2008
				RMB’000				RMB’000
Shanghai Technologies Aerospace Co., Ltd. (“STA”) (Note (a))		PRC September 28, 2004			576,795				576,795				51	%			51	%		Provision of repair and maintenance services
Shanghai Eastern Union Aviation Wheels & Brakes maintenance services Overhaul Engineering Co., Ltd (“Wheels & Brakes”)		PRC December 28, 1995			17,484				17,484				40	%			40	%		Provision of spare parts repair and maintenance services
Eastern China Kaiya System Integration Co., Ltd.		PRC May 21, 1999			10,000				10,000				41	%			41	%		Provision of computer systems development

Notes:

(a)

Under a Joint Venture Agreement with the other joint venture partner of STA dated March 10, 2003, the Company has agreed to share control over the economic activities of STA. Any strategic financial and operating decisions relating to the activities of STA require the unanimous consent of the Company and the other joint venture partner.

(b)

The Group’s aggregated share of the revenues, results, assets and liabilities of its jointly controlled entities is as follows:

		Assets				Liabilities				Revenues				Profit
		RMB’000				RMB’000				RMB’000				RMB’000
2007			382,501				45,535				205,188				30,086
2008			404,888				42,556				187,997				24,050

 

 

F-56

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

24.	Other long-term assets

		December 31,
		2007				2008
		RMB’000				RMB’000
Deposits relating to aircraft under operating leases (Note (a))			508,903				509,887
Prepaid flight training fees (Note (b))			43,920				337,597
Prepaid staff benefits (Note (c))			40,567				26,888
Rental and renovation deposits			33,032				26,460
Other long-term receivables			34,329				40,724
			660,751				941,556

Notes:

(a)

The fair value of deposits relating to aircraft held under operating leases of the Group is RMB473 million (2007: RMB441 million), which is determined using the expected future payments discounted at market interest rates prevailing at the year end of 0.75%-2.79% (2007: 2.4%-3.06%).

(b)

Prepaid flight training expenses represent the training expenses prepaid for pilot undergraduates and pilots in service of the Group and are amortized over the relevant training periods for which the prepayments cover on a straight-line basis.

(c)

Prepaid staff benefits represent subsidies to certain employees as an encouragement to purchase motor vehicles. The employees are required to continue serving the Group for six years from the date of receipt of the subsidies. If the employee leaves before the end of the six-year period, a refund by the employee is required and is calculated on a pro-rata basis. These subsidies are amortized over six years on the straight-line basis.

25.	TRADE RECEIVABLES

The credit terms given to trade customers are determined on an individual basis, with the credit periods generally ranging from half a month to two months.

The aging analysis of trade receivables and notes receivable is as follows:

		2007				2008
		RMB’000				RMB’000
Within 90 days			1,761,799				1,088,951
91 to 180 days			104,991				24,282
181 to 365 days			187,355				30,451
Over 365 days			101,769				103,919
			2,155,914				1,247,603
Less: provision for impairment of receivables			(59,907	)			(101,081	)
			2,096,007				1,146,522

 

 

F-57

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

25.	TRADE RECEIVABLES (CONTINUED)

The carrying amounts of the trade receivables approximate their fair value.

Trade receivables that were neither past due or impaired relate to a large number of independent sales agents for whom there is no recent history of default.

As at December 31, 2008, trade receivables of RMB153 million (2007: RMB360 million) were past due but not impaired. These relate to a number of independent sales agents for whom there is no recent history of default. The Group holds cash deposits of RMB175 million (2007: RMB202 million) from these agents. The ageing analysis of these trade receivables is as follows:

		2007				2008
		RMB’000				RMB’000
Up to 6 months			202,238				122,407
6 to 12 months			157,850				30,451
			360,088				152,858

As at December 31, 2008, trade receivables of RMB84 million (2007: RMB44 million) were impaired and fully provided for. The remaining impaired trade receivables relate to customers that were in financial difficulties and only a portion of the receivables is expected to be recovered. The factors considered by management in determining the impairment are described in Note 2(r).

The ageing of impaired receivables is as follows:

		2007				2008
		RMB’000				RMB’000
12 to 24 months overdue			26,734				15,660
Over 24 months overdue			75,035				88,259
			101,769				103,919

Movements on the Group’s provision for impairment of trade receivables are as follows:

		2007				2008
		RMB’000				RMB’000
At January 1			90,405				59,907
Receivables written off during the year as uncollectible			(4,009	)			(1,027	)
Provision for impairment of receivables			-				42,201
Unused amounts reversed			(26,489	)			-
At December 31			59,907				101,081

 

 

F-58

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

25.	TRADE RECEIVABLES (CONTINUED)

The carrying amounts of the Group’s trade receivables are denominated in the following currencies:

		2007				2008
		RMB’000				RMB’000
Currency
Renminbi			1,800,355				899,905
US Dollars			89,944				51,075
HK Dollars			80,246				48,901
Korea Won			41,538				9,021
Euro			54,185				42,706
Japanese Yen			1,323				56,003
Other currencies			28,416				38,911
			2,096,007				1,146,522

The net impact of creation and release of provisions for impaired receivables have been included in ‘Provision for impairment of trade and other receivables’ in the income statement (Note 11). Amounts charged to the provision account are generally written off when there is no expectation of recovering additional cash.

The maximum exposure to credit risk at the reporting date is the carrying amount of receivables shown above.

 

F-59

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

26.	PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

 

		2007				2008
		RMB’000				RMB’000
Restricted bank deposits (Note (a))			-				2,159,848
Rebates receivable on aircraft acquisitions			929,652				930,665
Deposits relating to aircraft under finance leases - current portion			419,604				-
Ground service fee			337,166				310,452
Prepaid aircraft operating lease rentals			256,069				249,308
Rental deposits			130,348				88,001
Custom duties and value added tax recoverable			88,747				64,501
Prepayment for acquisition of flight equipment and other assets			60,325				36,480
Deposits with banks and a financial institution with original maturity over three months but less than a year (Note (b))			52,843				33,116
Others			280,895				253,848
			2,555,649				4,126,219

Notes:

(a)

The restricted bank deposits represent: i) a deposit of RMB1,347 million pledged against US dollar 188 million loan (2007: Nil); ii) a security deposit of US dollar 117 million (RMB796 million equivalent) for fuel option contracts (2007: Nil); iii) a deposit of RMB17 million for notes payable (2007: Nil.)

(b)

As at December 31, 2008, the effective interest rate on deposits with banks with original maturity over three months but less than a year was 0.36% (2007: 0.7%).

 

27.	CASH AND CASH EQUIVALENTS

The carrying amounts of the Group’s cash and cash equivalents are denominated in the following currencies:

		2007				2008
		RMB’000				RMB’000
Renminbi			585,797				2,623,585
US Dollars			736,951				494,249
Euro			92,205				126,695
Japanese Yen			70,996				37,657
Pounds Sterling			16,141				11,016
Australian Dollars			14,991				18,922
Canadian Dollars			25,332				12,394
Singapore Dollars			1,116				42,617
Others			111,715				83,875
			1,655,244				3,451,010

 

 

F-60

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

28.	Trade payables and notes payable

The aging analysis of trade payables and notes payable is as follows:

		2007				2008
		RMB’000				RMB’000
Within 90 days			1,465,079				3,310,710
91 to 180 days			1,126,091				1,249,400
181 to 365 days			449,391				267,785
Over 365 days			97,319				316,963
			3,137,880				5,144,858

As at December 31, 2008, notes payable totaling RMB3,840 million (2007: RMB1,616 million) were unsecured. Discount rates ranged from 2.9% to 5.9% (2007: 3.5% to 5.5%) and all notes are repayable within six months.

29.	OTHER PAYABLES AND ACCRUED EXPENSES

		December 31,
		2007				2008
		RMB’000				RMB’000
Accrued fuel cost			2,348,932				3,841,660
Accrued take-off and landing charges			1,036,423				1,879,751
Accrued aircraft overhaul expenses			1,184,529				1,256,115
Other accrued operating expenses			928,267				1,417,988
Accrued salaries, wages and benefits			1,067,245				976,551
Duties and levies payable			858,966				545,482
Staff housing allowance (Note 36(b))			363,110				386,065
Deposits received from ticket sales agents			339,064				320,254
Current portion of other long-term liabilities (Note 33)			135,859				130,460
Current portion of post-retirement benefit obligations (Note 35(b))			34,425				46,461
Others			1,294,425				1,346,388
			9,591,245				12,147,175

 

 

F-61

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

30.	Obligations under finance leases

As at December 31, 2008, the Group had 68 aircraft (2007: 55 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 fair market value and others 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 value of the minimum lease payments under finance leases are as follows:

 

		December 31,2007												December 31,2008
		Minimum lease payments				Interest				Present value of minimum lease payments				Minimum lease payments				Interest				Present value of minimum lease payments
		RMB’000				RMB’000				RMB’000				RMB’000				RMB’000				RMB’000
Within one year			3,356,665				811,442				2,545,223				2,765,969				848,980				1,916,989
In the second year			2,206,135				638,882				1,567,253				2,704,499				688,327				2,016,172
In the third to fifth year inclusive			5,714,466				1,509,114				4,205,352				7,805,669				1,602,339				6,203,330
After the fifth year			9,331,048				1,196,666				8,134,382				11,868,053				1,195,645				10,672,408
Total			20,608,314				4,156,104				16,452,210				25,144,190				4,335,291				20,808,899
Less: - amount repayable within one year			(3,356,665	)			(811,442	)			(2,545,223	)			(2,765,969	)			(848,980	)			(1,916,989	)
Long-term portion			17,251,649				3,344,662				13,906,987				22,378,221				3,486,311				18,891,910

The fair value of obligations under finance leases of the Group is RMB21,037 million (2007: RMB16,577 million), which are determined using the expected future payments discounted at market interest rates prevailing at the year end.

At December 31, 2008, the Group had bank deposits totaling nil (2007: RMB420 million) pledged as collateral under certain finance lease arrangements.

 

F-62

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

31.	BORROWINGS

		December 31,
		2007				2008
		RMB’000				RMB’000
Non-current
Long-term bank borrowings
– secured			3,994,947				3,350,114
– unsecured			7,374,360				5,237,938
			11,369,307				8,588,052
Current
Long-term bank borrowings
– secured			772,286				1,133,836
– unsecured			2,533,233				5,905,655
Short-term bank borrowings
– secured			-				1,284,236
– unsecured			15,189,002				18,189,593
			18,494,521				26,513,320
Total borrowings			29,863,828				35,101,372
The borrowings are repayable as follows:
Within one year			18,494,521				26,513,320
In the second year			5,927,098				4,147,845
In the third to fifth year inclusive			4,216,517				3,665,352
After the fifth year			1,225,692				774,855
Total borrowings			29,863,828				35,101,372

Note:

As at December 31, 2008, the secured bank borrowings of the Group for the purchases of aircraft was secured by the related aircraft with an aggregate net book amount of RMB8,723 million (2007: RMB9,865 million) (Note 19).

Certain unsecured bank borrowings of the Group totaling of RMB357 million (2007: RMB1,008 million) was guaranteed by CEA Holding (Note 43(c)).

Certain unsecured bank borrowings of the Group totaling of RMB600 million (2007: Nil) were guaranteed by a third party bank.

 

F-63

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

31.	BORROWINGS (CONTINUED)

The terms of the long-term bank borrowings are summarized as follows:

Currency		Interest rate and final maturities		2007				2008
				RMB’000				RMB’000
RMB denominated		Interest rates ranging from 4.52% to 8.36% per annum with final maturities through to 2017.			6,132,551				6,898,178
U.S. dollar denominated		Interest rates ranging from 3 month LIBOR +0.25% to 6 month LIBOR+3% per annum with final maturities through to 2019			8,418,967				8,617,707
EURO denominated		Interest rate is 6 months LIBOR +0.6% with final maturity through 2010.			123,308				111,658
Total long-term bank borrowings					14,674,826				15,627,543

Note:

(a)

The fair value of long-term borrowings of the Group is RMB15,826 million (2007: RMB14,111 million), which is determined using the expected future payments discounted at prevailing market interest rates available to the Group and  for financial instruments with substantially the same terms and characteristics at the balance sheet date.

(b)

Short-term borrowings of the Group are repayable within one year with interest charged at the prevailing market rates based on the rates quoted by the People’s Bank of China. As at December 31, 2008, the interest rates relating to such borrowings ranged from 2.7% to 7.47% per annum (2007: 4.39% to 6.72% per annum). During the year ended December 31, 2008, the weighted average interest rate on short-term bank loans was 6.36 % per annum (2007: 5.75% per annum).

(c)

The carrying amounts of the borrowings are denominated in the following currencies:

		2007				2008
		RMB’000				RMB’000
Renminbi			12,528,550				21,955,769
US Dollars			17,196,836				13,007,688
Euro			130,145				111,658
HK Dollar			8,297				26,257
			29,863,828				35,101,372

 

 

F-64

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

32.	PROVISION FOR OPERATING LEASE AIRCRAFT RETURN CONDITION CHECK

 

		2007				2008
		RMB’000				RMB’000
At January 1			510,621				956,910
Additional provisions			446,289				618,555
Utilization			-				(41,447	)
At December 31			956,910				1,534,018
Less: current portion			-				(213,830	)
Long-term portion			956,910				1,320,188

 

Provision for operating lease aircraft return condition checks represents the present value of estimated costs of major return checks for aircraft under operating leases as the Group has the responsibility to fulfill certain return conditions under relevant leases.

 

33.	OTHER LONG-TERM LIABILITIES

		December 31,
		2007				2008
		RMB’000				RMB’000
Long-term duties and levies payable			584,791				805,794
Fair value of unredeemed points awarded under the Group’s frequent flyer program			378,361				364,858
Long-term payable to the Bureau of 2010 Expo Shanghai (Note 18(b))			232,811				177,883
Long-term payable to Aviation China Civil Flight Institute (Note (a))			60,000				30,000
Deferred gains on sale and leaseback of aircraft			21,011				14,549
Other long-term payable			101,582				58,135
			1,378,556				1,451,219
Less: Current portion			(135,859	)			(130,460	)
Long-term portion			1,242,697				1,320,759

 

Note:

(a)

The balance is unsecured, interest bearing at an effective rate of 6.21% per annum and is repayable by annual instalments of RMB30 million up to year 2009.

 

F-65

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

34.	DEFERRED TAXATION

 

Deferred income tax assets and liabilities are offset when there is a legally enforceable right of offset and when the deferred income taxes relate to the same authority. The following amounts, determined after appropriate offsetting, are shown in the balance sheets:

		December 31
		2007				2008
		RMB’000				RMB’000
Deferred tax assets
– Deferred tax asset to be utilized after 12 months			111,874				79,802
– Deferred tax asset to be utilized within 12 months			1,337				2,145
			113,211				81,947
Deferred tax liabilities
– Deferred tax liability to be realized after 12 months			(50,369	)			(55,444	)
– Deferred tax liability to be realized within 12 months			-				(2,145	)
			(50,369	)			(57,589	)

Movements in the net deferred taxation asset/(liability) are as follows:

		December 31
		2007				2008
		RMB’000				RMB’000
At January 1			13,687				62,842
Credited/(charged) to income statement  (Note 14)			49,155				(38,484	)
At December 31			62,842				24,358

 

 

F-66

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

34.	DEFERRED TAXATION (CONTINUED)

 

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:

		December 31
		2007				2008
		RMB'000				RMB'000
Deferred tax assets:
Tax losses carried forward			317,392				1,846
Impairment provision for obsolete flight equipment spare parts			138,783				78,634
Impairment provision for receivables			79,195				68,553
Impairment provision for property, plant and equipment			-				170,808
Impairment provision for aircraft overhaul expenses			96,834				152,231
Provision for frequent flyer program			-				13,619
Financial derivative liabilities			10,449				313,488
Provision for post-retirement benefits			351,283				271,672
			993,936				1,070,851
Deferred tax liabilities:
Depreciation and amortization			(931,094	)			(1,024,173	)
Financial derivative assets			-				(22,320	)
			(931,094	)			(1,046,493	)

Movements of the net deferred tax assets/ (liabilities) of the Group for the year:

		At the beginning of  the year				(Charged)/ credited to income  statement				(Charged)/ credited  to equity				At the end of the  year
		RMB’000				RMB’000				RMB’000				RMB’000
For the year ended December 31, 2007
Tax losses carried forward			90,335				227,057				-				317,392
Impairment provision for obsolete flight equipment spare parts			68,574				70,209				-				138,783
Impairment provision for receivables			57,467				21,728				-				79,195
Provision for aircraft overhaul expense			77,000				19,834				-				96,834
Financial derivative liabilities			20,823				(10,374	)			-				10,449
Provision for post-retirement benefits			216,570				134,713				-				351,283
			530,769				463,167				-				993,936
Depreciation and amortization			(517,082	)			(414,012	)			-				(931,094	)
Net deferred tax assets/(liabilities)			13,687				49,155				-				62,842

 

 

F-67

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

34.	DEFERRED TAXATION (CONTINUED)

 

		At the beginning of  the year				(Charged)/ credited to income statement				(Charged)/ credited  to equity				At the end of the  year
		RMB’000				RMB’000				RMB’000				RMB’000
For the year ended December 31, 2008
Tax losses carried forward			317,392				(315,546	)			-				1,846
Impairment provision for obsolete flight equipment spare parts			138,783				(60,149	)			-				78,634
Impairment provision for receivables			79,195				(10,642	)			-				68,553
Impairment provision for property, plant and equipment			-				170,808				-				170,808
Provision for aircraft overhaul expense			96,834				55,397				-				152,231
Provision for frequent flyer program			-				13,619				-				13,619
Financial derivative liabilities			10,449				303,039				-				313,488
Provision for post-retirement benefits			351,283				(79,611	)			-				271,672
			993,936				76,915				-				1,070,851
Depreciation and amortization			(931,094	)			(93,079	)			-				(1,024,173	)
Financial derivative assets			-				(22,320	)			-				(22,320	)
Net deferred tax assets/(liabilities)			62,842				(38,484	)			-				24,358

In accordance with the PRC tax law, tax losses can be carried forward to offset against future taxable income for a period of five years. As at December 31, 2008, the Group had tax losses carried forward of approximately RMB11,465 million (2007: RMB5,380 million) which will expire between 2009 and 2013, and which is available to set off against the Group’s future taxable income. As at December 31, 2008, the Group did not recognize RMB2,864 million (2007: RMB1,035 million) of deferred tax assets arising from tax losses available as management did not consider it probable that such tax losses would be realized before they expire.

 

35.	RETIREMENT BENEFIT PLANS AND POST-RETIREMENT BENEFITS

 

(a)

Defined contribution retirement schemes

 

(i)

Pension

The Group companies participate in defined contribution retirement schemes organized by municipal governments of the various provinces in which the Group companies operate, and substantially all of the Group’s PRC employees are eligible to participate in the Group companies’ retirement schemes. The Group companies are required to make annual contributions to the schemes at rates ranging from 20% to 22% on the employees’ prior year salary and allowances. Employees are required to contribute to the schemes at rates ranging from 7% to 8% of their basic salaries. The Group has no other material obligation for the payment of retirement benefits beyond the annual contributions under these schemes. For the year ended December 31, 2008, the Group’s pension cost charged to the consolidated income statement amounted to RMB360 million (2007: RMB296 million).

 

(ii)

Medical insurance

The majority of the Group’s PRC employees participate in the medical insurance schemes organized by the municipal governments, under which the Group and its employees are required to contribute to the scheme approximately 12% and 2%, respectively, of the employee’s basic salaries. For those employees who participate in these schemes, the Group has no other obligation for the payment of medical expense beyond the annual contributions. For the year ended December 31, 2008, the Group’s medical insurance contributions charged to the income statement amounted to RMB93 million (2007: RMB77 million).

 

F-68

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

35.	RETIREMENT BENEFIT PLANS AND POST-RETIREMENT BENEFITS (CONTINUED)

 

(b)

Post-retirement benefits

In addition to the above retirement schemes, the Group provides retirees with other post-retirement benefits including transportation subsidies, social function activities subsidies and others. 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 employees’ turnover ratio.

 

The post-retirement benefit obligations recognized in the balance sheets are as follows:

		2007				2008
		RMB’000				RMB’000
Present value of unfunded post-retirement benefit obligations			2,155,393				4,481,420
Unrecognized actuarial losses			(750,266	)			(2,965,835	)
Post-retirement benefit obligations			1,405,127				1,515,585
Less: current portion (Note 29)			(34,425	)			(46,461	)
Long-term portion			1,370,702				1,469,124

Changes in post-retirement benefit obligations are as follows:

		2007				2008
		RMB’000				RMB’000
At January 1			1,323,684				1,405,127
Total expenses charged in the income statement			170,670				200,603
Payments			(89,227	)			(90,145	)
At December 31			1,405,127				1,515,585

The costs of post-retirement benefits are recognized under wages, salaries and benefits in the income statement as follows:

		2006				2007				2008
		RMB’000				RMB’000				RMB’000
Current service cost			63,957				73,416				74,478
Interest cost			72,435				83,858				102,009
Actuarial losses recognized			10,576				13,396				24,116
Total (Note 9)			146,968				170,670				200,603

The principal actuarial assumptions at the balance sheet date are as follows:

		2007				2008
Discount rate			4.75	%			3.75	%
Annual rate of increase of per capita benefit payment			2.5	%			3	%
Employee turnover rate			3.0	%			3.00	%
Mortality rate			8.43	%			8.80	%
Medical inflation rate			2.5%-5	%			5	%

 

 

F-69

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

36.	STAFF HOUSING BENEFITS

 

(a)

Staff housing fund

In accordance with the PRC housing reform regulations, the Group is required to contribute to the State-sponsored housing fund at rates ranging from 7% to 15% (2007: 7% to 15%) of the specified salary amount of its PRC 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. For the year ended December 31, 2008, the Group’s contributions to the housing funds amounted to RMB282 million (2007: RMB285 million) which has been charged to the consolidated income statement. The staff housing fund payable as at December 31, 2008 is RMB25 million (2007: RMB17 million). 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 relating to employee service in the current and prior periods.

 

(b)

Staff housing allowances

The Group also provides cash staff housing allowances to eligible employees who have not been allocated with any housing quarters, or who have not been allocated with a quarter above the minimum as set out in the Group’s staff housing allowance policy introduced in October 2003 (the “Policy”) based on the area of quarter to which they are entitled and the unit price as set out in the Policy.

The total entitlement of an eligible employee is principally vested over a period of 20 years. Upon an eligible employee’s resignation, his or her entitlement will cease and any unpaid entitlement related to past service up to the date of resignation will be paid. As at December 31, 2008, the present obligation of the provision for employee’s staff housing entitlement is RMB386 million (2007: RMB363 million).

For the year ended December 31, 2008, the staff housing benefit provided under the Staff Housing Allowance Policy amounted to RMB123 million (2007: RMB53 million) which has been charged to the consolidated income statement. 

 

F-70

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

37.	DERIVATIVE FINANCIAL INSTRUMENTS

 

		Assets								Liabilities
		2007				2008				2007				2008
		RMB’000				RMB’000				RMB’000				RMB’000
At December 31
Interest rate swaps (Note (a))			33,232				988				39,542				182,971
Forward foreign exchange contracts (Note (b))			2,847				-				1,719				138,760
Fuel option contracts (Note (c))			59,468				123,010				535				6,319,868
Total			95,547				123,998				41,796				6,641,599
Less: current portion
- Interest rate swaps			(27,155	)			-				(17,984	)			(41,668	)
- Forward foreign exchange contracts			(2,847	)			-				(1,719	)			(94,539	)
- Fuel option contracts			(59,468	)			(123,010	)			(535	)			(6,319,868	)
			(89,470	)			(123,010	)			(20,238	)			(6,456,075	)
Non-current portion			6,077				988				21,558				185,524

The maximum exposure to credit risk at the reporting date is the fair value of the derivative assets in the balance sheet.

 

Notes:

 

(a)

Interest rate swaps

The Group uses interest rate swaps to reduce the risk of changes in market interest rates (Note 3(a)(ii)). The Group’s interest rate swaps qualify for hedge accounting. The interest rate swaps entered into by the Group are generally for swapping variable rates, usually referenced to LIBOR, into fixed rates and are accounted for as cash flow hedges. Other interest rate swaps are for swapping fixed rates into variable rates and are accounted for as fair value hedges. As at December 31, 2008, the notional amount of the outstanding interest rate swap agreements was approximately US$471 million (2007: US$624 million). These agreements will expire between 2009 and 2016.

Realized and unrealized gains and losses arising from the valuation of these interest rate swaps have been dealt with in the income statements as follows:

		2006				2007				2008
		RMB’000				RMB’000				RMB’000
Realized gains/(losses) (recorded in finance costs)			55,889				59,862				10,083
Unrealized mark to market gains/(losses)
- cash flow hedges (recognized in equity)			6,325				(79,783	)			(126,138	)
- fair value hedges (recognized in the income statement)			18,161				(8,824	)			(49,535	)
			80,375				(28,745	)			(165,590	)

 

 

F-71

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

37.	DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

 

(b)

Forward foreign exchange contracts

The Group uses forward foreign exchange contracts to reduce the risk of changes in currency exchange rates in respect of ticket sales and expenses denominated in foreign currencies (Note 3(a)(i)). The Group’s forward foreign exchange contracts qualify for hedge accounting. These contracts are generally for selling Japanese Yen and purchasing U.S. dollars at fixed exchange rates and are accounted for as cash flow hedges. Other forward foreign exchange contracts are for selling Japanese Yen and purchasing U.S. dollars at variable exchange rates and are accounted for as fair value hedges. As at December 31, 2008, the notional amount of the outstanding currency forward contracts was approximately US$121 million (2007: US$33 million), which will expire between 2009 and 2017.

Realized and unrealized gains and losses arising from the valuation of these contracts have been dealt with in the income statements as follows:

		2006				2007				2008
		RMB’000				RMB’000				RMB’000
Realized gains/(losses) (recorded in finance income)			26,744				17,932				14,759
Unrealized mark to market gains/(losses)
- cash flow hedges (recognized in equity)			3,606				1,586				(44,222	)
- fair value hedges (recognized in the income statement)			4,344				(3,787	)			(95,666	)
			34,694				15,731				(125,129	)

 

(c)

Fuel option contracts

The Group enters into fuel hedging contracts to reduce the risk of changes in market oil/petroleum prices as a hedge against aircraft fuel costs. The fuel hedging contracts used by the Group are normally structured to include a combination of both put and call options which allow the Group to lock in fuel prices for specified volumes within a price range. In each hedging contract, the call options price at which the Group is effectively entitled to buy fuel will be higher than that at which the counterparty is effectively entitled to sell.

None of the fuel hedging contracts entered into by the Group in 2008 or which remained open at December 31, 2008 qualified for hedge accounting. The Group is required to account for the fair value of the difference between the spot price of fuel and the price at which the counterparties are effectively entitled to sell in future periods as unrealized mark to market losses and recognize these losses in the income statements immediately.

Realized and unrealized gains and losses arising from the valuation of these contracts have been dealt with in the income statements. 

		2006				2007				2008
		RMB’000				RMB’000				RMB’000
Realized gains/(losses) (recorded in aircraft fuel)			98,880				120,171				(8,577	)
Unrealized mark to market (losses)/gains
(recorded in (loss)/gain on fair value movements of financial derivatives)			(64,849	)			96,576				(6,255,791	)
			34,031				216,747				(6,264,368	)

The fair value of fuel option contracts is determined by reference to mark-to-market values provided by counterparties and independent third parties applying appropriate option valuation models (i.e. mean regression model using the Monte Carlo Simulation Process). Key parameters used in the valuation models include volatility, credit spread, long run mean and mean reverting ratio at date of valuation.

 

F-72

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

38.	SHARE CAPITAL

		December 31,
		2007				2008
		RMB’000				RMB’000
Registered, issued and fully paid of RMB1.00 each
Circulating shares with restricted transfer held by CEA Holding and employees			2,904,000				2,904,000
A shares listed on The Shanghai Stock Exchange			396,000				396,000
H shares listed on The Stock Exchange of Hong Kong Limited			1,566,950				1,566,950
			4,866,950				4,866,950

Pursuant to articles 49 and 50 of the Company’s Articles of Association, each of the unlisted shares, the listed A shares and the listed H shares are all registered ordinary shares and carry equal rights.

On January 4, 2007, the Company’s share reform plan was approved by the Ministry of Commerce and implemented on  January 9, 2007. In this connection, CEA Holding granted 96 million shares in total to the holders of the circulating shares and the original non-circulating shares held by CEA Holding were granted the status of listing subject to certain circulating conditions.

 

F-73

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

39.

RESERVES

		Share premium				Statutory and discretionary reserve (Note (a))				Revaluation reserve				Capital reserve (Note (b))				Hedging reserve (Note 37)				Accumulated losses				Total
		RMB’000				RMB’000				RMB’000				RMB’000				RMB’000				RMB’000				RMB’000
At January 1, 2007, as restated			1,006,455				428,808				23,816				(720,057	)			53,167				(3,621,106	)			(2,828,917	)
Unrealized loss on cash flow hedges (Note 37)			-				-				-				-				(79,783	)			-				(79,783	)
Realized gains on cash flow hedges (Note 37)			-				-				-				-				1,586				-				1,586
Fair value movements of available for sale investments held by associates			22,167				-				-				-				-				-				22,167
Profit attributable to equity holders of the Company			-				-				-				-				-				378,568				378,568
Adjustments to statutory and discretionary reserves			-				(428,808	)			-				-				-				428,808				-
At December 31, 2007			1,028,622				-				23,816				(720,057	)			(25,030	)			(2,813,730	)			(2,506,379	)
At January 1, 2008, as restated			1,028,622				-				23,816				(720,057	)			(25,030	)			(2,813,730	)			(2,506,379	)
Unrealized loss on cash flow hedges (Note 37)			-				-				-				-				(170,525	)			-				(170,525	)
Realized gains on cash flow hedges (Note 37)			-				-				-				-				165				-				165
Fair value movements of available for sale investments held by associates			(19,080	)			-				-				-				-				-				(19,080	)
Loss attributable to equity holders of the Company			-				-				-				-				-				(15,268,532	)			(15,268,532	)
At December 31, 2008			1,009,542				-				23,816				(720,057	)			(195,390	)			(18,082,262	)			(17,964,351	)

 

 

F-74

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

39.	Reserves (continued)

Notes:

 

(a)

Statutory and Discretionary Reserves

Pursuant to the PRC regulations and the Companies’ Articles of Association, each of the Group companies is required to transfer 10% of its profit for the year, as determined under the PRC Accounting Regulations, to a statutory common reserve fund until the fund balance exceeds 50% of the Group company’s registered capital. The statutory common reserve fund can be used to make good previous years’ losses, if any, and to issue new shares to shareholders in proportion to their existing shareholdings or to increase the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital.

Each of the Group companies is permitted to transfer 5% of its profit for the year as determined under the PRC Accounting Regulations, to a discretionary common reserve fund. The transfer to this reserve is subject to approval at shareholders’ meetings.

No profit appropriation by the Company to the discretionary common reserve fund was made for the year ended December 31, 2008 (2007: nil).

 

(b)

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. 

 

40.	NON-CURRENT ASSETS HELD FOR SALE

In December 2006, the Board of Directors passed a resolution to dispose of certain older aircraft and related flight equipment in the forthcoming 12-months. Accordingly, these aircraft together with related flight equipment and spare parts were classified as non-current assets held for sale as at December 31, 2006. Despite of the Company’s continuing effort to locate and negotiate with potential buyers, no agreement to dispose of these assets has been reached. It is management’s intention to dispose of these assets in the forthcoming 12-months and management is continuing to take active steps to locate potential buyers of these assets. They therefore remain classified as non-current assets held for sale as of December 31, 2008. An impairment loss of RMB235 million has been recognized in the income statement in relation to these assets with reference to the estimated market values as at the balance sheet date (Note 10(c)).

 

F-75

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

41.	NOTE TO CONSOLIDATED CASH FLOW STATEMENT

 

(a)

Cash generated from operations

		Year ended December 31,
		2006				2007				2008
		RMB’000				RMB’000				RMB’000
(Loss)/gain before income tax			(3,337,429	)			377,938				(15,256,009	)
Adjustments for:
Depreciation of property, plant and equipment			4,425,209				4,694,888				4,755,622
Gains on disposals of property, plant and equipment			(36,207	)			(674	)			(267,084	)
Share of results of associates			(103,566	)			(58,312	)			(69,668	)
Share of results of jointly controlled entities			(29,595	)			(30,086	)			(24,050	)
Amortization of lease prepayments			30,869				24,847				25,940
Net foreign exchange gains			(888,402	)			(2,023,032	)			(1,970,990	)
Amortization of deferred revenue			(13,068	)			(12,594	)			(19,965	)
Loss/(gain) arising from fair value movements of derivative financial instruments			42,344				(96,575	)			6,400,992
Consumption of flight equipment spare parts			326,248				468,888				476,282
Impairment provision for trade and other receivables			98,156				10,481				39,338
Provision for post-retirement benefits			146,968				170,670				200,603
Provision for operating lease aircraft return condition check			150,390				446,289				618,556
Impairment loss			888,419				227,456				2,976,678
Interest income			(120,161	)			(96,849	)			(89,275	)
Interest expenses			1,821,870				1,978,550				2,328,147
Gain on disposal of an associate and available-for-sale financial assets			-				-				(13,557	)
Gain on contribution to a jointly controlled entity			-				(31,620	)			-
Gain on disposal of a subsidiary			-				(54,441	)			-
Operating profit before working capital changes			3,402,045				5,995,824				111,560

 

 

F-76

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

41.	NOTE TO CONSOLIDATED CASH FLOW STATEMENT (CONTINUED)

 

(a)

Cash generated from operations (continued)

 

		Year ended December 31,
		2006				2007				2008
		RMB’000				RMB’000				RMB’000
Changes in working capital
Flight equipment spare parts			(583,027	)			(409,392	)			(529,068	)
Trade receivables			14,273				(478,550	)			909,701
Amounts due from related companies			(147,007	)			349,897				(223,112	)
Prepayments, deposits and other receivables			(563,114	)			(336,890	)			(216,706	)
Sales in advance of carriage			68,510				319,550				(197,331	)
Trade payables and notes payables			1,499,352				(1,888,884	)			2,006,978
Amounts due to related companies			125,327				29,571				(187,819	)
Other payables and accrued expenses			1,551,923				(194,694	)			1,901,892
Other long-term liabilities			23,627				(74,081	)			(431,956	)
Provision for operating lease aircraft return condition check			(67,762	)			-				(41,448	)
Staff housing allowances			(35,361	)			(76,381	)			(100,428	)
Post-retirement benefit obligations			(61,986	)			(89,227	)			(90,145	)
Operating lease deposits			(86,555	)			(3,909	)			30,348
			1,738,200				(2,852,990	)			2,830,906
Cash generated from operations			5,140,245				3,142,834				2,942,466

 

(b)

Non-cash transactions

		Year ended December 31,
		2006				2007				2008
		RMB’000				RMB’000				RMB’000
Investing activities not affecting cash:
Sale and leaseback of aircraft			7,940,164				-				-
Finance lease obligations incurred for acquisition of aircraft			2,350,978				8,395,965				7,964,792

 

F-77

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

42.	Commitments

 

(a)

Capital commitments

The Group had the following capital commitments:

		2007				2008
		RMB’000				RMB’000
Authorized and contracted for:
- Aircraft, engines and flight equipment			50,852,865				52,533,736
- Other property, plant and equipment			353,771				130,180
			51,206,636				52,663,916
Authorized but not contracted for:
- Other property, plant and equipment			11,326,338				5,235,712
			11,326,338				5,235,712
			62,532,974				57,899,628

 

Contracted expenditures for the above aircraft and flight equipment, including deposits prior to delivery, subject to future inflation increases built into the contracts and any discounts available upon delivery of the aircraft, if any, were expected to be paid as follows:

		2007				2008
		RMB’000				RMB’000
Within one year			17,127,081				8,852,380
In the second year			15,056,943				13,174,190
In the third year			13,960,033				9,051,539
In the fourth year			2,531,964				9,224,482
Over four years			2,176,844				12,231,145
			50,852,865				52,533,736

 

 

F-78

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

42.	COMMITMENTS (CONTINUED)

 

(b)

Operating lease commitments

 

As at the balance sheet date, the Group had commitments under operating leases to pay future minimum lease rentals as follows:

		2007				2008
		RMB’000				RMB’000
Aircraft, engines and flight equipment
Within one year			2,527,072				2,671,355
In the second year			2,331,741				2,330,080
In the third to fifth year inclusive			4,991,164				4,598,624
After the fifth year			5,341,362				4,100,560
			15,191,339				13,700,619
Land and buildings
Within one year			87,410				202,540
In the second year			50,683				124,643
In the third to fifth year inclusive			40,888				325,423
After the fifth year			29,846				2,398,361
			208,827				3,050,967
			15,400,166				16,751,586

 

 

F-79

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

43.	RELATED PARTY TRANSACTIONS

The Group is controlled by CEA Holding, which owns approximately 59.67% of the Company’s shares as at December 31, 2008. The aviation industry in the PRC is administrated by the CAAC. CEA Holding and the Group is ultimately controlled by the PRC government, which also controls a significant portion of the productive assets and entities in the PRC (collectively referred as the “SOEs”).

 

(a)

Related party transactions

 

The Group sells air tickets through sales agents and is therefore likely to have extensive transactions with other state-controlled enterprises, and the employees and their close family members of SOEs while such employees are on corporate business. These transactions are carried out on normal commercial terms that are consistently applied to all of the Group’s customers. Due to the large volume and the pervasiveness of these transactions, management is unable to determine the aggregate amount of the transactions for disclosure. Therefore, retail transactions with these related parties are not disclosed herein. The Directors of the Company believe that meaningful related party disclosures on these retail transactions have been adequately made.

 

F-80

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

43.	RELATED PARTY TRANSACTIONS (CONTINUED)

 

(a)

Related party transactions (continued)

The other related party transactions are:

 

				Income/ (expense or payments)
Nature of transaction		Related party		2007				2008
				RMB’000				RMB’000
With CEA Holding or companies directly or indirectly held by CEA Holding:
Interest income on deposits at an average rate of 0.36% per annum (2007: 0.72% per annum)		EAGF*			9,717				30,766
Interest expense on loans at rate of 4.87% per annum (2007: 5.42% per annum)		EAGF*			(33,590	)			,(22,267	)
Ticket reservation service charges for utilization of computer reservation system		Travel Sky Technology Limited			(241,161	)			(241,206	)
Commission expense on air tickets sold on behalf of the Group, at rates ranging from 3% to 9% of the value of tickets sold		SDATC*			(9,220	)			(610	)
		Shanghai Tourism (HK)  Co., Ltd			(6	)			(1,696	)
Handling charges of 0.1% to 2% for purchase of aircraft, flight equipment, flight equipment spare parts, other property, plant and equipment		EAIEC*			(34,643	)			(47,257	)
Repairs and maintenance expense for aircraft and engines		Wheels & Brakes			(56,764	)			(64,653	)
		STA			(100,270	)			(131,081	)
Supply of food and beverages		Shanghai Eastern Air Catering Co., Ltd			(243,895	)			(267,117	)
		Yunnan Eastern Air Catering Investment Co., Ltd.			(37,782	)			(40,836	)
		Xian Eastern Air Catering Investment Co., Ltd.			(28,780	)			(36,526	)
		Qingdao Eastern Air Catering Investment Co., Ltd			(20,101	)			(27,480	)
Disposal of a subsidiary		CEA Holding			461,916				-
Disposal of an associate		CEA Holding			-				32,972
Advertising expense		CAASC			(14,370	)			(3,595	)

 

 

F-81

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

43.	RELATED PARTY TRANSACTIONS (CONTINUED)

 

(a)

Related party transactions (continued)

				Income/ (expense or payments)
Nature of transaction		Related party		2007				2008
				RMB’000				RMB’000
Automobile maintenance fee		CEA Development Co. Ltd			(18,754	)			(23,595	)
Land and building rental		CEA Holding			(55,399	)			(55,399	)
Purchase of other fixed assets		CEA Northwest Co. Ltd			(67,305	)			-

* EAGF is a 25% owned associate of the Group; SDATC and EAIEC are both 45% owned associates of the Group.

				Income/ (expense or payments)
Nature of transaction		Related party		2007				2008
				RMB’000				RMB’000
With CAAC and its affiliates:
Civil aviation infrastructure levies paid		CAAC			(781,613	)			(769,849	)
Aircraft insurance premiums paid through CAAC which entered into the insurance policy on behalf of the Group		CAAC			(136,875	)			(134,176	)
With other SOEs:
Take-off and landing fee charges		State-controlled airports			(4,152,888	)			(4,323,382	)
Purchase of aircraft fuel		State-controlled fuel suppliers			(11,120,186	)			(14,020,301	)
Ticket reservation service charges for utilizations of computer reservation system		Travel Sky Technology Limited			(241,161	)			(241,206	)
Interest income on deposits at an average rates of 0.36% per annum (2007: 0.72% per annum)		State-controlled banks			15,411				14,778
Interest expense on loans at an average rate of 5.96%  per annum (2007: 5.47% per annum)		State-controlled banks			(1,406,812	)			(1,872,553	)

 

 

F-82

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

43.	RELATED PARTY TRANSACTIONS (CONTINUED)

 

(a)

Related party transactions (continued)

				Income/ (expense or payments)
Nature of transaction		Related party		2007				2008
				RMB’000				RMB’000
Commission expense on air tickets sold on behalf of the Group at rates ranging from 3% to 9% of the value of tickets sold		Other PRC airlines			(70,285	)			(65,832	)
Supply of food and beverages		Other state-control enterprises			(511,766	)			(567,071	)

 

(b)

Balances with related companies

 

(i)

Amounts due from related companies

 

Company		2007			2008
		RMB’000			RMB’000
SDATC			16,378		9,714
Shanghai Tourism (HK) Co., Ltd			2,914		4,020
EAIEC			26,166		181,788
Other related companies			19,997		12,767
Total			65,455		208,289

All the amounts due from related companies are trade in nature, interest free and payable within normal credit terms given to trade customers.

 

(ii)

Amounts due to related companies

Company		2007				2008
		RMB’000				RMB’000
EAIEC			(470,349	)			(241,560	)
CEA Holding			(40,214	)			(69,497	)
Shanghai Eastern Airlines Catering Co. Ltd.			(60,718	)			(46,580	)
Yunnan Eastern Air Catering Investment Co., Ltd.			(488	)			(665	)
CAASC			(2,550	)			(164	)
CEA Northwest			(64,895	)			-
Other related companies			(32,379	)			(54,660	)
Total			(671,593	)			(413,126	)

 

Except for amounts due to EAGF and CEA Holding, which are reimbursement in nature, all other amounts due to related companies are trade in nature, interest free and payable within normal credit terms given by trade creditors.

 

F-83

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

43.	RELATED PARTY TRANSACTIONS (CONTINUED)

 

(b)

Balances with related companies (continued)

 

(iii)

Short-term deposits and short-term loans with an associate

 

	Average interest rate
	2007		2008		2007		2008
					RMB’000		RMB’000
Short-term deposits (included in Prepayments, Deposits and Other Receivables)
“EAGF”	0.7	%	0.4	%	408,151			1,202,892
Short-term loans (included in Borrowings)
“EAGF”	5.3	%	4.3	%	260,351			295,181

 

(iv)

State-controlled banks and other financial institutions

 

	Average interest rate
	2007		2008		2007		2008
					RMB’000		RMB’000
Bank deposits (included in cash and cash equivalents)	0.7	%	0.4	%	845,719			1,762,245
Long-term bank borrowings	5.7	%	5.3	%	13,062,353			14,577,150

 

(c)

Guarantees by holding company

As at December 31, 2008, bank loans of the Group with an aggregate amount of RMB357 million (2007: RMB1,008 million) were guaranteed by CEA Holding (Note 31). 

 

F-84

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CHINA EASTERN AIRLINES CORPORATION LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

44.	ULTIMATE HOLDING COMPANY

The Directors regard CEA Holding, a state-owned enterprise established in the PRC, as being the ultimate holding company.

 

45.	CONTINGENT LIABILITIES

In 2005, the family members of certain victims in the aircraft accident (the aircraft was then owned and operated by China Eastern Air Yunnan Company), which occurred in Baotou on November 21, 2004, sued the Company in a U.S. court for compensation. On July 5, 2007, pursuant to several conditions with which the Company has complied, the Superior Court of the State of California ordered the action stayed on the grounds of forum non convenience for the purpose of permitting proceedings in the PRC. On February 20, 2008, the plaintiff filed a motion with the Superior Court of the State of California to lift the stay, but the motion was rejected by the court on May 6, 2008. The plaintiff filed a second motion to lift the stay on July 10, 2008. On August 27, 2008, the Superior Court of the State of California rejected the motion of the plaintiff again. After the case entered the procedures on appeal in the California Court of Appeal, the Court of Appeal of California issued an option on February 26, 2009, dismissing the appeal of the plaintiff and affirming the original order. On March 16, 2009, the Chinese counsel of the plaintiff sued the Company on behalf of the family members of victims in the Beijing No. 2 Intermediate People’s Court. The case is under the filing procedure and no official summons from the court has been received by the Company. The management of the Group believes that a negative outcome of the case will not have an adverse effect on the financial condition and results of operations of the Company. The Group intends to provide updates to the shareholders regarding the progress of the litigation. As at December 31, 2008, the Group was not involved in any other litigation, arbitration or claim of material importance.

 

46.	POST BALANCE SHEET EVENT

On January 15, 2009, CEA Holding (as the principal), Eastern Air Group Finance Company Limited (the “Finance Company”) (as the trustee) and the Company (as the borrower) entered into an entrusted loan agreement, pursuant to which, the Company will obtain a short-term loan of RMB5.55 billion from CEA Holding through the Finance Company.

 

On January 19, 2009, the Company obtained a two-year credit facility of RMB10 billion from Shanghai Pudong Development Bank.

On February 13, 2009, the Company obtained a three-year credit facility of RMB15 billion from Agricultural Bank of China.

On February 26, 2009, the Company convened an extraordinary general meeting of A and H Share Shareholders in which the special resolution in relation to the approval of the non-public issuance of 1,437,375,000 new A Shares at subscription price of approximately RMB5,563 million to China Eastern Air Holding Company and the issuance of 1,437,375,000 new H Shares at subscription price of approximately RMB1,437 million to CES Global Holdings (Hong Kong) Limited was passed. On May 13, 2009, the issuance of A Share was conditional approved by the Public Offering Review Committee of China Securities Regulatory Commission (“CSRC”). On May 19, 2009, CSRC approved the issuance of new H Shares. As of May 31, 2009, the Company has not received the subscription price from either CEA Holding or CES Global because some necessary consents, approvals or authorizations from the governmental authorities or other third parties for the subscriptions, including but not limited to the final approval from CSRC, have not been obtained. If any of the subscriptions is not approved (including but not limited to the approvals from the shareholders or CSRC), the other subscription will automatically be terminated.

On March 16, 2009, the Company obtained a three-year credit facility of RMB11 billion from Construction Bank of China.

 

On April 28, 2009, the Company obtained a one-year credit facility of RMB20 billion from Bank of China.

 

On April 30, 2009, the Company entered into sale-and-lease-back agreements of two Airbus A340 series aircraft at consideration of approximately RMB590 million.

 

 

F-85

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