Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the
period covered by the annual report.
As of December 31, 2017, 9,808,485,682 Ordinary Domestic Shares, par value RMB1.00 per share,
were issued and outstanding, and 4,659,100,000 Ordinary H Shares par value RMB1.00 per share, were issued and outstanding. H Shares are Ordinary Shares of the Company listed on The Stock Exchange of Hong Kong Limited. Each American Depositary Share
represents 50 Ordinary H Shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ☐ No ☒
If this report is an annual or
transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
. Yes ☐ No ☒
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation
S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes ☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer or an emerging growth company. See definition of large accelerated filer, accelerated filer and
emerging growth company in Rule
12b-2
of the Exchange Act.
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by
check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
The term new or revised financial accounting standard refers to any update issued by the Financial Accounting Standards Board to
its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used
to prepare the financial statements included in this filing:
If Other has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes ☐ No ☒
In this Annual Report, unless otherwise specified, the term dollars, U.S. dollars or US$ refers to United
States dollars, the lawful currency of the United States of America, or the United States or the U.S.; the term Renminbi or RMB refers to Renminbi, the lawful currency of The Peoples Republic of China, or China or the
PRC; the term Hong Kong dollars or HK$ refers to Hong Kong dollars, the lawful currency of the Hong Kong Special Administrative Region of China, or Hong Kong; the term SGD refers to Singapore dollars, the lawful
currency of the Republic of Singapore; the term JPY refers to Japan Yen, the lawful currency of Japan; the term EUR refers to EURO, the lawful currency of EMU member countries and the term KRW refers to Korea Won,
the lawful currency of the Republic of Korea. Any discrepancies in the tables included herein between the amounts listed and the totals are due to rounding.
In this Annual Report, the term we, us, our, our/the Company, or our Group refers
to China Eastern Airlines Corporation Limited, a joint stock limited company incorporated under the laws of the PRC on April 14, 1995, and our subsidiaries, or, in respect of references to any time prior to the incorporation of China Eastern
Airlines Corporation Limited, the core airline business carried on by its predecessor, China Eastern Airlines, which was assumed by China Eastern Airlines Corporation Limited pursuant to the restructuring described in this Annual Report. The term
CEA Holding refers to our parent, China Eastern Air Holding Company, which was established on October 11, 2002 as a result of the merger of our former controlling shareholder, Eastern Air Group Company, or EA Group, with China
Northwest Airlines Company and Yunnan Airlines Company.
For the purpose of this Annual Report, references to The Peoples Republic
of China, China and the PRC do not include Hong Kong, Taiwan, or the Macau Special Administrative Region of China, or Macau.
See
Item 3. Key Information Exchange Rate Information for details of exchange rates.
Certain information contained in this Annual Report may be deemed to constitute forward-looking
statements. These forward-looking statements include, without limitation, statements relating to:
The words or phrases
aim, anticipate, believe, continue, could, estimate, expect, going forward, intend, may, ought to, plan,
potential, predict, project, seek, should, will, would, and similar expressions or the negatives thereof, as they relate to our Company or its management, are
intended to identify forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933
, as amended, and Section 21E of the
Securities and Exchange Act of 1934
, as amended, or the Exchange
Act. These forward-looking statements are based on current plans and estimates, and speak only as of the date they are made. We undertake no obligation to update or revise any forward-looking statement in light of new information, future events or
otherwise. Forward-looking statements are, by their nature, subject to inherent risks and uncertainties, some of which are beyond our control, and are based on assumptions and analyses made by us in light of our experience and our perception of
historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. We caution you that a number of important factors could cause actual outcomes to differ, or to
differ materially, from those expressed in any forward-looking statement, including, without limitation:
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A.
|
Selected Financial Data
|
Pursuant to U.S. Securities and Exchange Commission
(SEC or Securities and Exchange Commission) Release
33-8879
Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial
Reporting Standards without Reconciliation to U.S. GAAP
eliminating the requirement for foreign private issuers to reconcile their financial statements to U.S. GAAP, we prepare our financial statements based on International Financial
Reporting Standards, or IFRSs, as issued by the International Accounting Standards Board, or the IASB, and no longer provide a reconciliation between IFRSs and U.S. GAAP.
Our consolidated financial statements as of December 31, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017
included in this Annual Report on Form
20-F
have been prepared in accordance with IFRSs.
We make
an explicit and unreserved statement of compliance with IFRSs with respect to our consolidated financial statements as of December 31, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017 included in this Annual Report.
Ernst & Young Hua Ming LLP, our current independent registered public accounting firm in the PRC, has issued an unqualified auditors report on our consolidated statement of financial position as of December 31, 2017 and the
related consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year ended December 31, 2017. The selected financial data from the consolidated profit or loss and other comprehensive
income for the years ended December 31, 2014, 2015 and 2016 and the selected financial data from the consolidated financial position as of December 31, 2014, 2015 and 2016 have been derived from our audited consolidated financial
statements, which have been prepared in accordance with IFRSs, and audited by Ernst & Young, an independent registered public accounting firm in Hong Kong. The selected financial data from the consolidated profit or loss and other
comprehensive income for the year ended December 31, 2013 and the selected financial data from the consolidated financial position as of December 31, 2013 have been derived from our audited consolidated financial statements, which have
been prepared in accordance with IFRSs, and audited by Ernst & Young Hua Ming LLP, an independent registered public accounting firm in the PRC.
The following tables present selected consolidated profit or loss and comprehensive income data for the years ended December 31, 2013,
2014, 2015, 2016 and 2017 and selected consolidated statements of financial position data as of December 31, 2013, 2014, 2015, 2016 and 2017 that were prepared under IFRSs. The selected financial information as of December 31, 2016 and
2017 and for the years ended December 31, 2015, 2016 and 2017 has been derived from, and should be read in conjunction with, the audited consolidated financial statements and their notes included elsewhere in this Annual Report.
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
RMB
|
|
|
2014
RMB
|
|
|
2015
RMB
|
|
|
2016
RMB
|
|
|
2017
RMB
|
|
|
|
(
in millions, except per share or per ADS data
)
|
|
Consolidated Statements of Profit or Loss and Other Comprehensive Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
88,245
|
|
|
|
90,185
|
|
|
|
93,969
|
|
|
|
98,904
|
|
|
|
102,475
|
|
(Loss)/gain on fair value changes of derivative financial instruments
|
|
|
18
|
|
|
|
11
|
|
|
|
6
|
|
|
|
2
|
|
|
|
(311
|
)
|
Other operating income and gains
|
|
|
2,725
|
|
|
|
3,685
|
|
|
|
5,269
|
|
|
|
5,469
|
|
|
|
7,481
|
|
Operating expenses
|
|
|
(89,412
|
)
|
|
|
(87,823
|
)
|
|
|
(86,619
|
)
|
|
|
(91,889
|
)
|
|
|
(100,525
|
)
|
Operating profit
|
|
|
1,576
|
|
|
|
6,058
|
|
|
|
12,625
|
|
|
|
12,486
|
|
|
|
9,431
|
|
Finance income / (costs), net
|
|
|
576
|
|
|
|
(2,072
|
)
|
|
|
(7,110
|
)
|
|
|
(6,176
|
)
|
|
|
(1,072
|
)
|
Profit before income tax
|
|
|
2,217
|
|
|
|
4,113
|
|
|
|
5,667
|
|
|
|
6,497
|
|
|
|
8,610
|
|
Profit for the year attributable to the equity holders of the Company
|
|
|
2,373
|
|
|
|
3,410
|
|
|
|
4,537
|
|
|
|
4,498
|
|
|
|
6,342
|
|
Basic and fully diluted earnings per share
(1)
|
|
|
0.20
|
|
|
|
0.27
|
|
|
|
0.35
|
|
|
|
0.33
|
|
|
|
0.44
|
|
Basic and fully diluted earnings per ADS
|
|
|
9.81
|
|
|
|
13.45
|
|
|
|
17.5
|
|
|
|
16.5
|
|
|
|
22.0
|
|
(1)
|
The calculation of earnings per share for 2013 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 12,091,881,000 ordinary shares in issue. The
calculation of earnings per share for 2014 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 12,674,269,000 ordinary shares in issue. The calculation of earnings per share for 2015
is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 12,818,509,000 ordinary shares in issue. The calculation of earnings per share for 2016 is based on the net profit attributable to
the equity holders of the Company divided by the weighted average number of 13,811,136,000 ordinary shares in issue. The calculation of earnings per share for 2017 is based on the net profit attributable to the equity holders of the Company divided
by the weighted average number of 14,467,585,682 ordinary shares in issue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
RMB
|
|
|
2014
RMB
|
|
|
2015
RMB
|
|
|
2016
RMB
|
|
|
2017
RMB
|
|
|
|
|
(in millions)
|
|
Consolidated Statements of Financial Position Data:
|
|
Cash and cash equivalents
|
|
|
1,995
|
|
|
|
1,355
|
|
|
|
9,080
|
|
|
|
1,695
|
|
|
|
4,605
|
|
Net current liabilities
|
|
|
(40,472
|
)
|
|
|
(42,887
|
)
|
|
|
(51,309
|
)
|
|
|
(52,194
|
)
|
|
|
(62,035
|
)
|
Non-current
assets
|
|
|
127,458
|
|
|
|
147,586
|
|
|
|
174,914
|
|
|
|
196,436
|
|
|
|
211,434
|
|
Long term borrowings, including current portion
|
|
|
(36,175
|
)
|
|
|
(41,210
|
)
|
|
|
(43,675
|
)
|
|
|
(29,749
|
)
|
|
|
(28,842
|
)
|
Obligations under finance leases, including current portion
|
|
|
(23,135
|
)
|
|
|
(38,695
|
)
|
|
|
(52,399
|
)
|
|
|
(61,041
|
)
|
|
|
(66,868
|
)
|
Total share capital and reserves attributable to the equity holders of the Company
|
|
|
26,902
|
|
|
|
29,974
|
|
|
|
37,411
|
|
|
|
49,450
|
|
|
|
55,360
|
|
Non-current
liabilities
|
|
|
(58,404
|
)
|
|
|
(72,928
|
)
|
|
|
(83,674
|
)
|
|
|
(91,876
|
)
|
|
|
(90,621
|
)
|
Total assets less current liabilities
|
|
|
86,986
|
|
|
|
104,699
|
|
|
|
123,605
|
|
|
|
144,242
|
|
|
|
149,399
|
|
Total assets
|
|
|
140,068
|
|
|
|
165,829
|
|
|
|
197,992
|
|
|
|
212,324
|
|
|
|
229,727
|
|
Net assets
|
|
|
28,582
|
|
|
|
31,771
|
|
|
|
39,931
|
|
|
|
52,366
|
|
|
|
58,778
|
|
5
Exchange Rate Information
We present our historical consolidated financial statements in Renminbi. For the convenience of the reader, certain pricing information is
presented in U.S. dollars and certain contractual and other amounts that are in Renminbi or Hong Kong dollars amounts include a U.S. dollar equivalent. Unless otherwise noted, all translations from RMB to U.S. dollars, from Hong Kong dollars to U.S.
dollars, from U.S. dollars to RMB and from U.S. dollars to Hong Kong dollars in this Annual Report were made at the rate of RMB6.5063 to US$1.00 and HK$7.8128 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Board of
Governors of the Federal Reserve Board on December 29, 2017. We make no representation that the Renminbi, Hong Kong dollar or U.S. dollar amounts referred to in this Annual Report could have been or could be converted into U.S. dollars, Hong
Kong dollars or Renminbi, as the case may be, at any particular rate or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through
restrictions on foreign trade.
On April 13, 2018, the exchange rates as set forth in the H.10 statistical release of the Federal
Reserve Board were RMB6.2725=US$1.00 and HK$7.8499=US$1.00. The following table sets forth information concerning exchange rates between the RMB, Hong Kong dollar and the U.S. dollar for the periods indicated. The source of these rates is the
Federal Reserve Statistical Release.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB per US$1.00
(1)
|
|
|
HK$ per US$1.00
(1)
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
October 2017
|
|
|
6.6533
|
|
|
|
6.5712
|
|
|
|
7.8106
|
|
|
|
7.7996
|
|
November 2017
|
|
|
6.6385
|
|
|
|
6.5967
|
|
|
|
7.8118
|
|
|
|
7.7955
|
|
December 2017
|
|
|
6.6210
|
|
|
|
6.5063
|
|
|
|
7.8228
|
|
|
|
7.8050
|
|
January 2018
|
|
|
6.5263
|
|
|
|
6.2841
|
|
|
|
7.8230
|
|
|
|
7.8161
|
|
February 2018
|
|
|
6.3471
|
|
|
|
6.2649
|
|
|
|
7.8267
|
|
|
|
7.8183
|
|
March 2018
|
|
|
6.3565
|
|
|
|
6.2685
|
|
|
|
7.8486
|
|
|
|
7.8275
|
|
April 2018 (up to April 13, 2018)
|
|
|
6.3045
|
|
|
|
6.2655
|
|
|
|
7.8499
|
|
|
|
7.8482
|
|
The following table sets forth the average rates between Renminbi and U.S. dollars and between Hong Kong
dollars and U.S. dollars for each of the periods indicated. The exchange rate refers to the exchange rate as set forth in the G. 5A statistical release of the Federal Reserve Board.
|
|
|
|
|
|
|
|
|
|
|
RMB per
US$1.00
(1)
|
|
|
HK$ per
US$1.00
(1)
|
|
2013
|
|
|
6.1478
|
|
|
|
7.7565
|
|
2014
|
|
|
6.1620
|
|
|
|
7.7545
|
|
2015
|
|
|
6.2827
|
|
|
|
7.7524
|
|
2016
|
|
|
6.6400
|
|
|
|
7.7620
|
|
2017
|
|
|
6.7569
|
|
|
|
7.7926
|
|
Source: Federal Reserve Statistical Release
(1)
|
Averages are based on daily noon buying rates for cable transfers in New York City certified for customs purposes by the Federal Reserve Bank of New York.
|
Selected Operating Data
The following
table sets forth certain of our operating data for the five years ended December 31, 2017, which is not audited. All references in this Annual Report to our cargo operations, statistics or revenues include figures for cargo and mail.
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
(non-comparable
basis)
(1)
|
|
|
(comparable
basis)
(2)
|
|
|
|
|
Selected Airline Operating Data:
|
|
|
|
Capacity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATK (millions)
|
|
|
21,714.8
|
|
|
|
22,538.5
|
|
|
|
25,203.0
|
|
|
|
28,002.3
|
|
|
|
25,097.6
|
|
|
|
27,396.9
|
|
ASK (millions)
|
|
|
152,075.2
|
|
|
|
160,585.1
|
|
|
|
181,792.9
|
|
|
|
206,249.3
|
|
|
|
|
|
|
|
225,996.3
|
|
AFTK (millions)
|
|
|
8,028.0
|
|
|
|
8,085.8
|
|
|
|
8,841.7
|
|
|
|
9,439.9
|
|
|
|
6,535.2
|
|
|
|
7,057.3
|
|
Traffic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passenger-kilometers (millions)
|
|
|
120,461.1
|
|
|
|
127,749.9
|
|
|
|
146,342.43
|
|
|
|
167,529.2
|
|
|
|
|
|
|
|
183,182.0
|
|
Revenue tonne-kilometers (millions)
|
|
|
15,551.8
|
|
|
|
16,122.4
|
|
|
|
17,820.4
|
|
|
|
19,712.9
|
|
|
|
17,333.1
|
|
|
|
18,856.1
|
|
Revenue freight tonne-kilometers (millions)
|
|
|
4,857.2
|
|
|
|
4,802.4
|
|
|
|
4,865.1
|
|
|
|
4,875.2
|
|
|
|
2,495.4
|
|
|
|
2,663.0
|
|
Hours flown (thousands)
|
|
|
1,540.4
|
|
|
|
1,625.1
|
|
|
|
1,804.4
|
|
|
|
1,956.5
|
|
|
|
1,918.8
|
|
|
|
2,072.7
|
|
Number of passengers carried (thousands)
|
|
|
79,093.7
|
|
|
|
83,811.5
|
|
|
|
93,780.0
|
|
|
|
101,741.6
|
|
|
|
|
|
|
|
110,811.4
|
|
Weight of cargo carried (millions of kilograms)
|
|
|
1,410.3
|
|
|
|
1,363.3
|
|
|
|
1,399.4
|
|
|
|
1,395.0
|
|
|
|
929.3
|
|
|
|
933.3
|
|
Load Factor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall load factor (%)
|
|
|
71.6
|
|
|
|
71.5
|
|
|
|
70.7
|
|
|
|
70.4
|
|
|
|
69.1
|
|
|
|
68.8
|
|
Passenger load factor (%)
|
|
|
79.2
|
|
|
|
79.6
|
|
|
|
80.5
|
|
|
|
81.2
|
|
|
|
|
|
|
|
81.1
|
|
Yield and Cost Statistics (including fuel surcharge) (RMB):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger yield (passenger revenue/ passenger- kilometers)
|
|
|
0.61
|
|
|
|
0.61
|
|
|
|
0.56
|
|
|
|
0.52
|
|
|
|
|
|
|
|
0.52
|
|
Cargo and mail yield (cargo and mail revenue/cargo and mail tonne-kilometers)
|
|
|
1.57
|
|
|
|
1.55
|
|
|
|
1.33
|
|
|
|
1.25
|
|
|
|
1.25
|
|
|
|
1.36
|
|
Average yield (passenger and cargo revenue/ tonne- kilometers)
|
|
|
5.18
|
|
|
|
5.28
|
|
|
|
4.94
|
|
|
|
4.71
|
|
|
|
5.18
|
|
|
|
5.25
|
|
Unit cost (operating expenses/ATK)
|
|
|
4.12
|
|
|
|
3.90
|
|
|
|
3.44
|
|
|
|
3.28
|
|
|
|
3.66
|
|
|
|
3.67
|
|
7
Notes:
(1)
|
On November 29, 2016, we entered into an equity transfer agreement with Eastern Airlines Industry Investment Company Limited (Eastern Airlines Industry Investment), in relation to the transfer of 100% equity
interests in Eastern Airlines Logistics Co., Ltd. (Eastern Logistics) held by us to Eastern Airlines Industry Investment. China Cargo Airlines Co., Ltd (China Cargo Airlines), a non-wholly owned subsidiary of Eastern
Logistics, operated nine freighters then. On February 8, 2017, we completed the transfer of 100% equity interest in Eastern Logistics to Eastern Airlines Industry Investment and the nine freighters operated by China Cargo Airlines ceased to be
included in our fleet. Under non-comparable basis, our operating data in 2016 comprised of our whole cargo freight data during the period from February to December 2016.
|
(2)
|
Under comparable basis, our operating data in 2016 did not include our whole cargo freight data during the period from February to December 2016.
|
B.
|
Capitalization and Indebtedness
|
Not applicable.
C.
|
Reasons for the Offer and Use of Proceeds
|
Not applicable.
Risks Relating to our Business
We may suffer losses in the event of an accident or incident involving our aircraft or the aircraft of any other airline.
As an airline company operating a large fleet, an accident or incident involving one of our aircraft could result in delays and require repair
or replacement of a damaged aircraft, which could result in consequential temporary or permanent losses from disruption of service and/or significant liability to injured passengers and others. Unforeseeable or unpredictable events such as inclement
weather, mechanical failures, human error, aircraft defects and other force majeure events may affect flight safety, which could result in accidents and/or incidents of passenger injuries or deaths that could lead to significant injury and loss
claims. Although we believe that we currently maintain liability insurance in amounts and of the types generally consistent with industry practice, the amount of such coverage may not be adequate to cover the costs related to an accident or incident
in full, which could damage our results of operations and financial condition. In addition, any aircraft accident or incident, even if fully insured, could cause a public perception that we are not as safe or reliable as other airlines, which could
harm our competitive position and result in a decrease in our operating revenues. Moreover, a major accident or incident involving an aircraft of our competitors may cause the demand for air travel in general to decrease. In particular, certain of
our competitors in the Asia Pacific region experienced major aircraft accidents and incidents in 2014, some of which involved destinations and routes that we cover. These accidents and incidents were highly publicized in the media and may have
affected public perception of certain air travel routes. The occurrence of any of the foregoing could adversely affect our results of operations and financial condition.
Our indebtedness and other financial obligations may have a material adverse effect on our liquidity and operations.
We have a substantial amount of debt, lease and other financial obligations, and will continue to do so in the future. As of December 31,
2017, our total liabilities were approximately RMB170,949 million and our current liabilities exceeded our current assets by approximately RMB62,035 million. Our total interest-bearing liabilities (including long-term and short-term
borrowings, finance leases payable and bonds payable) as of December 31, 2016 and 2017 were approximately RMB117,773 million and RMB130,669 million, respectively, of which short-term liabilities accounted for approximately 30.0% and
37.0%, respectively. Our substantial indebtedness and other financial obligations could materially and adversely affect our business and operations, including being required to dedicate additional cash flow from operations to the payment of
principal and interest on our indebtedness, thereby reducing the funds available for operations, maintenance and service improvements and future business opportunities, increasing our vulnerability to economic recessions, reducing our flexibility in
responding to changing business and economic conditions, placing us at a disadvantage compared to competitors with lower debt, limiting our ability to arrange for additional financing for working capital, capital expenditures and other general
corporate purposes, at all or on terms that are acceptable to us.
8
Moreover, we are largely dependent upon cash flows generated from our operations and external
financing to meet our debt repayment obligations and working capital requirements, which may reduce the funds available for other business purposes. If our operating cash flow is materially and adversely affected by factors such as increased
competition, a significant decrease in demand for our services, or a significant increase in jet fuel prices, our liquidity would be materially and adversely affected. We also try to secure sufficient financing through financing arrangements with
domestic and foreign banks in China as well as from debt and equity capital markets. However, our ability to obtain financing may be affected by our financial position and leverage, our credit rating and investor perception of the aviation industry,
as well as prevailing economic conditions and the cost of financing in general. If we are unable to obtain adequate financing for our capital requirements, our liquidity and operations would be materially and adversely affected.
In addition, the airline industry overall is characterized by a high degree of operating leverage. Due to high fixed costs, including payments
made in connection with aircraft leases, and landing and infrastructure fees which are set by government authorities and not within our control, the expenses relating to flight operations do not vary proportionately with the number of passengers
carried, while revenues generated from a particular flight are directly related to the number of passengers carried and the fare structure of the flight. Accordingly, a decrease in revenues may result in a disproportionately higher decrease in
profits.
We may not be able to secure future financing at terms acceptable to us or at all.
We require significant amounts of external financing to meet our capital commitments for acquiring and upgrading aircraft and flight equipment
and for other general corporate needs. As of December 31, 2017, we had total unutilized credit facilities of approximately RMB59.47 billion from various banks. We expect to roll over these bank facilities in the near future. In addition,
we generally acquire aircraft through either long-term capital leases or operating leases. In the past, we have obtained guarantees from Chinese banks in respect of payments under our foreign loan and capital lease obligations. However, we cannot
assure you that we will be able to roll over our bank facilities or continue to obtain bank guarantees in the future. Unavailability of credit facilities or guarantees from Chinese banks or the increased cost of such guarantees may materially and
adversely affect our ability to borrow additional funds or enter into international aircraft lease financing or other additional financing on acceptable terms In addition, if we are not able to arrange financing for our aircraft on order, we may
seek to defer aircraft deliveries or use cash from operations or other sources to acquire the aircraft
.
Our ability to
obtain financing may also be impaired by our financial position, leverage and credit rating. In addition, factors beyond our control, such as recent global market and economic conditions, volatile oil prices, and the tightening of credit markets may
result in limited availability of financing and increased volatility in credit and equity markets, which may materially adversely affect our ability to secure financing at reasonable costs or at all. If we are unable to obtain financing for a
significant portion of our capital requirements, our ability to expand our operations, purchase new aircraft, pursue business opportunities we believe to be desirable, withstand any future downturn in our business, or respond to increased
competition or changing economic conditions may be impaired. We have and in the future will likely continue to have substantial debts. As a result, the interest costs associated with these debts might impair our future profitability.
We are subject to the risk of fuel price fluctuations.
Jet fuel is one of the major expenses of airlines. Significant fluctuations of international oil prices will significantly impact jet fuel
prices and our revenue from fuel surcharge and accordingly our results of operations. In 2017, our total aircraft fuel cost was approximately RMB25,131 million, representing an increase of approximately 28.1% from approximately
RMB19,626 million in 2016, which was mainly due to an increase in average price of oil as the Organization of Petroleum Exporting Countries (OPEC) and other oil suppliers efficiently squeezed excess supply of oil in the market and
the political upheaval in the Middle East increased the uncertainty of oil production, and to a lesser extent, an increase in the volume of refueling from 2016 to 2017. In 2017, our total aircraft fuel cost accounted for approximately 25.0% of our
total operating expenses, as compared to approximately 21.4% in 2016.
9
The fluctuations of international crude oil prices and adjustments on domestic jet fuel prices by
the National Development and Reform Commission (the NDRC) have a significant impact on our profitability. Our results of operation and financial condition are affected by any significant fluctuations that may occur, which are generally
due to factors beyond our control. As such, we generally alleviate the pressure from the rise in operating costs arising from the increase in aviation fuel by imposing fuel surcharges, which, however, are subject to government regulations. In order
to control fuel costs, we have also entered into fuel hedging transactions using financial derivative products linked to the price of underlying assets such as United States WTI crude oil and Singapore jet fuel during previous years.
Since 2009, the PRC government required prior governmental approval for entering into fuel hedging contracts. We may, from time to time, seek
approval from the PRC government to enter into overseas fuel hedging contracts. However, these hedging strategies may not always be effective and high fluctuations in aviation fuel prices exceeding the
locked-in
price ranges may result in losses. Significant decline in fuel prices may substantially increase the costs associated with such fuel hedging arrangements. In addition, where we may, from time to
time, seek to manage the risk of fuel price increases by using derivative contracts, we cannot assure you that, at any given point in time, such fuel hedging transactions will provide any particular level of protection against increased fuel costs.
In 2017, we did not engage in any aviation fuel hedging activities.
We are subject to the risk of exchange rate fluctuations.
We operate our business in many countries and territories. We generate revenue in different currencies, and our foreign currency
liabilities are typically much higher than our foreign currency assets. Our purchases and leases of aircraft are mainly priced and settled in foreign currencies such as U.S. dollars. Fluctuations in exchange rates will affect our costs incurred from
foreign purchases such as aircraft, flight equipment and aviation fuel, and
take-off
and landing charges in foreign airports. As of December 31, 2017, our total interest-bearing liabilities denominated in
foreign currencies, amounted to approximately RMB46,789 million, of which U.S. dollar liabilities accounted for approximately 78.7% of the total amount. Therefore, a significant fluctuation in the U.S. dollar exchange rates will subject us to
significant foreign exchange loss/gain arising from the exchange of foreign currency denominated liabilities, which would affect our profitability and business development. We typically use hedging contracts for foreign currencies to reduce the
foreign exchange risks for foreign currency revenues generated from flight ticket sales and expenses required to be paid in foreign currencies. As of December 31, 2017, the outstanding foreign currency hedging contracts held by us amounted to a
notional amount of US$829 million, which will expire in 2018, compared with US$440 million as of December 31, 2016.
We
recorded net foreign exchange gains of approximately RMB2,001 million in 2017, whereas our net foreign exchange losses were approximately RMB3,574 million for 2016. As a result of the large value of existing net foreign currency
liabilities denominated in U.S. dollars, our results would be adversely affected if the Renminbi depreciates against the U.S. dollar or the rate of appreciation of the Renminbi against the U.S. dollar decreases in the future. In 2017 and the first
quarter of 2018, we expanded our financing channels by issuing guaranteed bonds and credit enhanced bonds denominated in SGD and JPY, and proactively optimized the mix of currency denomination of our debts. As of December 31, 2017, our
proportion of U.S. dollar-denominated debts out of our total liabilities decreased to approximately 28.2%. Our foreign exchange fluctuation risks are also subject to other factors beyond our control.
We are subject to the risk of interest rate fluctuations.
Our total interest-bearing liabilities (including long-term and short-term loans and finance leases payable) as of December 31, 2016 and
2017 were approximately RMB117,773 million and RMB130,669 million, respectively, of which short-term liabilities accounted for approximately 30.0% and 37.0%, respectively, and long-term liabilities accounted for approximately 70.0% and
63.0%, respectively. Most of the long-term interest-bearing liabilities were liabilities with floating interest rates. Both the short-term liabilities and long-term interest-bearing liabilities were affected by fluctuations in current market
interest rates.
10
Our interest-bearing liabilities were primarily denominated in RMB and USD. As of December 31,
2016 and December 31, 2017, our liabilities denominated in RMB accounted for approximately 49.1% and 64.2% of our total liabilities, respectively, and liabilities denominated in USD accounted for approximately 44.9% and 28.2% of our total
liabilities, respectively. Fluctuations in interest rates of interest-bearing liabilities denominated in these two currencies have and will continue to have significant impact on our finance costs. As of December 31, 2017, the average interest
rates of our
RMB-denominated
liabilities,
USD-denominated
liabilities,
EUR-denominated
liabilities,
SGD-denominated
liabilities and
KRW-denominated
liabilities was approximately 3.9%, 2.6%, 0.3%, 2.8% and 2.3%, respectively. In the first quarter of 2018, we also issued
credit enhanced bonds denominated in JPY with total principal of JPY50.0 billion due in 2021, bearing fixed interest at the rate of 0.33% per annum and 0.64% per annum for different tranches. To cope with the risk of interest rate fluctuation,
we strategically changed our debt portfolio by replacing our
USD-denominated
liabilities with floating interest rates with
USD-denominated
liabilities with fixed
interest rates. As of December 31, 2017, our
USD-denominated
liabilities with fixed interest rate was approximately USD1,980 million and accounted for approximately 49.8% of our total long-term
USD-denominated
liabilities, increasing from approximately 16.7% as of December 31, 2015. As of December 31, 2017, our outstanding foreign currency interest rate swap contracts amounted to a notional
amount of USD1,420 million, as compared to USD1,636 million as of December 31, 2016. These contracts will expire between 2018 and 2025. We will continue to optimize our liability structure to lower relevant risks by taking
consideration of various factors including the market environment, interest rates and strategic plan. However, we cannot assure you that the relevant lending rates may not increase in the future for reasons beyond our control, which may adversely
affect our business, prospects, cash flows, financial condition and results of operations. In addition, we expect to issue bonds and notes or enter into additional loan agreements and aircraft leases in the future to fund our operations and capital
expenditures, and the cost of financing for these obligations will depend greatly on market interest rates.
Increases in
insurance costs or reductions in insurance coverage may have adverse impact our results of operations and financial condition.
We could be exposed to significant liability or loss if our property or operations were to be affected by a natural catastrophe or other event,
including aircraft accidents. We maintain insurance policies but we are not fully insured against all potential hazards and risks incident to our business. If we are unable to obtain sufficient insurance with acceptable terms or if the coverage
obtained is insufficient relative to actual liability or losses that we experience, whether due to insurance market conditions, policy limitations and exclusions or otherwise, our results of operations and financial condition could be adversely
affected.
We may experience difficulty integrating our acquisitions, which could result in a material adverse effect on our
operations and financial condition.
We may from time to time expand our business through acquisition of airlines or
airline-related businesses. We are devoting significant resources to the integration of our operations in order to achieve the anticipated synergies and benefits of the absorption and acquisitions mentioned above. See Item 4. Information on
the Company for details. However, such acquisitions involve uncertainties and a number of risks, including:
|
|
|
difficulty with integrating the assets, operations and technologies of the acquired airlines or airline-related businesses, including their employees, corporate cultures, managerial systems, processes, procedures and
management information systems and services;
|
|
|
|
complying with the laws, regulations and policies that are applicable to the acquired businesses;
|
|
|
|
failure to achieve the anticipated synergies, cost savings or revenue-enhancing opportunities resulting from the acquisition of such airlines or airline-related businesses;
|
|
|
|
managing relationships with employees, customers and business partners during the course of integration of new businesses;
|
11
|
|
|
attracting, training and motivating members of our management and workforce;
|
|
|
|
accessing our debt, equity or other capital resources to fund acquisitions, which may divert financial resources otherwise available for other purposes;
|
|
|
|
diverting significant management attention and resources from our other businesses;
|
|
|
|
strengthening our operational, financial and management controls, particularly those of our newly acquired assets and subsidiaries, to maintain the reliability of our reporting processes;
|
|
|
|
difficulty with exercising control and supervision over the newly acquired operations, including failure to implement and communicate our safety management procedures resulting in additional safety hazards and risks;
|
|
|
|
increased financial pressure resulting from the assumption of recorded and unrecorded liabilities of the acquired airlines or airline-related businesses; and
|
|
|
|
the risk that any such acquisitions may not close due to failure to obtain the required government approvals.
|
We cannot assure you that we will not have difficulties in assimilating the operations, technologies, services and products of newly acquired
companies or businesses. Moreover, the continued integration of our acquired companies into our Company depends significantly on integrating the employees of our acquired companies with our employees and on maintaining productive employee relations.
In the event that we are unable to efficiently and effectively integrate newly acquired companies or airline-related businesses into our Company, we may be unable to achieve the objectives or anticipated synergies of such acquisitions and such
acquisitions may adversely impact the operations and financial results of our existing businesses.
We may be unable to retain key
management personnel or pilots.
We are dependent on the experience and industry knowledge of our key management personnel and
pilots, and there can be no assurance that we will be able to retain them. Any inability to retain our key management employees or pilots, or attract and retain additional qualified management employees or pilots, could have a negative impact on our
operations and profitability.
Our controlling shareholder, CEA Holding, holds a majority interest in our Company, and its interests
may not be aligned with other shareholders.
Most of the major airlines in China are currently majority-owned by either the central
government or provincial or municipal governments in China. As of December 31, 2017, CEA Holding holds directly or indirectly 56.38% of our Companys equity stake on behalf of the PRC government. As a result, CEA Holding could potentially
elect the majority of the board of directors of the Company (Board of Directors or the Board) and otherwise be able to control us. CEA Holding also has sufficient voting control to effect transactions without the concurrence
of our minority shareholders. The interests of the PRC government as the ultimate controlling shareholder of our Company and most of the other major PRC airlines could conflict with the interests of our minority shareholders. Although the CAAC
currently has a policy of equal treatment of all PRC airlines, we cannot assure you that the CAAC will not favor other PRC airlines over our Company.
As our controlling shareholder, CEA Holding has the ability to exercise controlling influence over our business and affairs, including, but
not limited to, decisions with respect to:
|
|
|
mergers or other business combinations;
|
|
|
|
acquisition or disposition of assets;
|
12
|
|
|
issuance of any additional shares or other equity securities;
|
|
|
|
the timing and amount of dividend payments; and
|
|
|
|
the management of our Company.
|
We engage in related party transactions, which may
result in conflict of interests.
We have engaged in, from time to time, and may continue to engage in, in the future, a variety of
transactions with CEA Holding and its various members, from whom we receive a number of important services, including support for
in-flight
catering and assistance with importation of aircraft, flight
equipment and spare parts. Because we are controlled by CEA Holding and CEA Holding may have interests that conflict with our interests, we cannot assure you that CEA Holding will not take actions that will serve its interests over the
Companys interests.
We may not be able to accurately report our financial results or prevent fraud if we fail to maintain
effective internal controls over financial reporting, resulting in adverse investor perception, which in turn could have a material adverse effect on our reputation and the performance of our shares and ADSs.
We are required under relevant United States securities laws and regulations to disclose in the reports that we file or submit under the
Exchange Act to the SEC, including our annual report on Form
20-F,
a management report assessing the effectiveness of our internal controls over financial reporting at the end of the fiscal year. Our
registered public accounting firm is also required to provide an attestation report on the effectiveness of our internal controls over financial reporting. Our management concluded that our internal controls over financial reporting were effective
as of December 31, 2017. However, we may discover other deficiencies or material weaknesses in the course of our future evaluation of our internal controls over financial reporting and we may be unable to address and rectify such deficiencies
in a timely manner. Any failure to maintain effective internal controls over financial reporting could lead to diminished investor confidence in the reliability of our consolidated financial statements, thereby adversely affecting our business,
operations, and reputation, including negatively affecting our performance in the securities markets and decreasing potential opportunities to obtain financing in the capital markets.
As part of our business strategy, we have adopted various measures to develop the international side of our business and to enhance our
competitiveness in the international long-distance flight routes. Due to the differences in certain legal and market environments, we have encountered certain challenges during the course of developing our overseas business. We have already adopted
and will continue to implement measures in order to enhance the internal controls of our overseas offices and to continue the development of our overseas business.
Any failure or disruption of our computer, communications, flight equipment or other technology systems could have an adverse impact on
our business operations, profitability, reputation and customer services.
We rely heavily on computer, communications, flight
equipment and other technology systems to operate our business and enhance customer service. Substantially all of our tickets are issued to passengers as electronic tickets, and we depend on our computerized reservation system to be able to issue,
track and accept these electronic tickets. In addition, we rely on other automated systems for crew scheduling, flight dispatch and other operational needs. These systems could be disrupted due to various events, including natural disasters, power
failures, terrorist attacks, equipment failures, software failures, computer viruses, cyber attacks and other events beyond our control. We cannot assure you that the measures we have taken to reduce the risk of some of these potential disruptions
are adequate to prevent disruptions to or failures of these systems. Any substantial or repeated failure of or disruption to these systems could result in the loss of important data and/or flight delays, and could have an adverse impact on our
business operations, profitability, reputation and customer services, including being liable for paying compensation to our customers.
13
We are subject to cyber security risks and may incur increasing costs in an effort to
minimize those risks.
The nature of our business involves the receipt and storage of personal information about our customers. We
have a program in place to detect and respond to data security incidents. To date, all incidents we have encountered have been insignificant.
If we commit a significant data security breach or fail to detect and appropriately respond
to a significant data security breach, we could be exposed to government enforcement actions and private litigation. In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to
stop using our services. The loss of consumer confidence from a significant data security breach could hurt our reputation and adversely affect our business, result of operations and financial condition.
Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection
technologies, train employees and engage third-party experts and consultants, costs incurred in connection with the notifications to employees, suppliers or the general public as part of our notification obligations to the various government
authorities that govern our business, or costs to dedicate significant resources to system repairs or other increase cyber security protection. We may also be required to pay fines in connection with stolen customer, employee or other confidential
information, or incur significant litigation or other costs.
Interruptions or disruptions of service at one or more airports in our
primary market could have an adverse impact on us.
Our business is heavily dependent on our operations at our core hub airports in
Shanghai, namely, Hongqiao International Airport and Pudong International Airport and our regional hub airports in Xian and Kunming. Each of these operations includes flights that connect our primary market to other major cities. Any
significant interruptions or disruptions of service at one or more of our primary market airports could adversely impact our operations.
Any adverse public health developments, including SARS, Ebola, avian flu, or influenza A (H1N1), or the occurrence of natural disasters
may, among other things, lead to travel restrictions and reduced levels of economic activity in the affected areas, which may in turn significantly reduce demand for our services and have a material adverse effect on our financial condition and
results of operations.
Adverse public health epidemics or pandemics could disrupt businesses and the national economy of China and
other countries where we do business. The outbreak of Severe Acute Respiratory Syndrome, or SARS, in early 2003 led to a significant decline in travel volumes and business activities and substantially affected businesses in Asia. Moreover, some
Asian countries, including China, have encountered incidents of the H5N1 strain of avian flu, many of which have resulted in fatalities. In addition, outbreaks of, and sporadic human infection with, influenza A (H1N1) in 2009, a highly contagious
acute respiratory disease, were reported in Mexico and an increasing number of countries around the world, some cases resulting in fatalities. In addition, in April 2013, there has been an ongoing outbreak of the H7N9 strain of avian flu, which has
largely been centered in eastern China, and has resulted in fatalities in that region, including Shanghai. Furthermore, in 2014, an outbreak of Ebola virus, a highly contagious hemorrhagic fever with a relatively high fatality rate, in certain
African countries resulted in confirmed cases in the United States and Europe. We are unable to predict the potential impact, if any, that the outbreak of influenza A (H1N1) or any other serious contagious disease or the effects of another outbreak
of SARS, any strain of avian flu or Ebola may have on our business.
Natural disasters, such as earthquakes, snowstorms, floods or
volcanic eruptions such as that of Eyjafjallajökull in Iceland in April and May of 2010 and the natural disasters in Japan in early 2011 may disrupt or seriously affect air travel activity. Any period of sustained disruption to the airline
industry may have a material adverse effect on our business, financial condition and results of operations.
14
Terrorist attacks or the fear of such attacks, even if not made directly on the airline
industry, could negatively affect the Company and the airline industry as a whole. The travel industry continues to face
on-going
security concerns and cost burdens.
The aviation industry as a whole has been beset with high-profile terrorist attacks, most notably on September 11, 2001 in the United
States. The CAAC has also implemented increased security measures in relation to the potential threat of terrorist attacks. Terrorist attacks, even if not made directly towards us or on the airline industry, or the fear of or the precautions taken
in anticipation of such attacks (including elevated threat warnings or selective cancellation or redirection of flights) could materially and adversely affect us and the entire airline industry. In addition, potential or actual terrorist attacks may
result in substantial flight disruption costs caused by grounding of fleet, significant increase of security costs and associated passenger inconvenience, increased insurance costs, substantially higher ticket refunds and significantly decreased
traffic and RPK. International terrorist attacks targeting aircraft and airport not only directly threatens our flight safety, aviation security, operational safety and the safety of overseas institutions and employees, but also brings about
on-going
adverse impact on the outbound tourism demand for places where terrorist attacks have taken place.
Risks
Relating to the Aviation Industry
Our business is subject to extensive government regulation.
The Chinese civil aviation industry is subject to a high degree of regulation by the CAAC. Regulatory policies issued or implemented by the
CAAC encompass virtually every aspect of airline operations, including, among other things:
|
|
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pricing of domestic airfares;
|
|
|
|
administration of air traffic control systems and certain airports;
|
|
|
|
air carrier certifications and air operator certification;
|
|
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|
aircraft registration and aircraft airworthiness certification; and
|
|
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|
airport expense policy.
|
Our ability to provide services on international routes is subject to
a variety of bilateral civil air transport agreements between China and other countries, international aviation conventions and local aviation laws. As a result of government regulations, we may face significant constraints on our flexibility and
ability to expand our business operations or to maximize our profitability.
The downward trend in domestic and global economy could
affect air travel.
The airline industry is highly cyclical, and the level of demand for air travel is correlated to the strength
of domestic and global economies. Robust demand for our air transportation services depends largely on favorable general economic conditions, including the strength of global and local economies, low unemployment, strong consumer confidence and
availability of consumer and business credit. In 2017, the global economy had a steady recovery. Simultaneous economic growth were shown in developed economies, major emerging economies and developing countries. Chinas economy had a steady to
good growth which was better than expected. The economic structures continued to optimize and the contributions of the service industry continued to increase. Benefited from the favorable continual recovery of the global economy, the global aviation
industry had a continuous rise in the demand of travelers. The Chinas civil aviation maintained its relatively fast growth rate. However, we cannot assure you that such recovery and growth will continue in the future. The global economy is
facing uncertainties, such as the rise of trade protectionism and the occasional occurrence of geopolitical risks. If the macroeconomic climate worsens or trading dispute and conflicts are created, our operations and financial condition may be
adversely affected.
15
We operate in a highly competitive industry.
We face intense competition in each of the domestic, regional and international markets that we serve. In our domestic market, we compete
against all airlines that have the same routes, including smaller domestic airlines that have lower operating costs. In the regional and international markets, we compete against international airlines that have significantly longer operating
history, better brand recognition, or more resources, such as large sales networks or sophisticated reservation systems. See the section headed Item 4. Information on the Company Business Overview Competition for more
details. The publics perception of safety of Chinese airlines could also materially and adversely affect our ability to compete against our international competitors. To stay competitive, we have, from time to time in the past, lowered
airfares for certain of our routes, and we may continue to do so in the future. Increased competition and pricing pressures may have a material adverse effect on our financial condition and results of operations.
We expect to face substantial competition from the rapid development of the Chinese rail network.
The PRC government is aggressively implementing the expansion of its high-speed rail network, which has provided train services at a speed of
up to 350 kilometers per hour connecting major cities such as Beijing, Shanghai, Guangzhou and Hong Kong. The expansion of rail network, improvements in railway service quality, increased passenger capacity and urban center accessibility could
enhance the competitiveness of the railway service and negatively affect our market share on some of our key routes, in particular our routes of between 500 km to 800 km. The high-speed railway routes between Shanghai and Kunming, Baoji and Lanzhou
and Xian and Chengdu commenced operations in 2017, and has affected our Xian and Chengdu route, Guiyang and Kunming route, Xian and Xining route and Xian and Lanzhou route. Increased competition and pricing pressures from the
railway service may have an adverse effect on our business, financial condition and results of operations.
Limitations on foreign
ownership of PRC airlines may affect our access to funding in the international equity capital markets or pursuing business opportunities.
The current CAAC policies limit foreign ownership of PRC airlines. Under these rules,
non-PRC,
Hong
Kong, Macau or Taiwan residents cannot hold a majority equity interest in a PRC airline. As of December 31, 2017, approximately 32.20% of our total outstanding shares were held by
non-PRC,
Hong Kong,
Macau or Taiwan residents or legal entities (excluding the qualified foreign institutional investors that are approved to invest in the A Share market of the PRC). As a result, our access to funding in the international equity capital markets may be
limited. This restriction may also limit the opportunities available to us to obtain funding or other benefits through the creation of equity-based strategic alliances with foreign carriers. We cannot assure you that the CAAC will not increase these
limits on foreign ownership of PRC airlines in the future.
Any jet fuel shortages or any increase in jet fuel prices may materially
and adversely affect our financial condition and results of operations.
The availability and prices of jet fuel have a significant
impact on our financial condition and results of operations. In the past, jet fuel shortages have occurred in China and, on limited occasions, required us to delay or cancel flights. Although jet fuel shortages have not occurred since the end of
1993, we cannot assure you that jet fuel shortages will not occur in the future. Fuel prices continue to be susceptible to, among other factors, political unrest in various parts of the world, OPEC policies, the rapid growth of the economies of
certain countries, including China and India, the inventory levels carried by industries, the amount of reserves built by governments, disruptions to production and refining facilities and weather conditions. Fuel efficiency of our aircraft
decreases as they advance in age which results in an overall increase in our aviation fuel costs. The foregoing and other factors that impact the global supply and demand for jet fuel may affect our financial performance due to its sensitivity to
fuel prices.
In 2017, fuel prices recovered from the previous decline as the OPEC and other oil suppliers efficiently squeezed excess
supply of oil in the market and the political upheaval in the Middle East increased the uncertainty of oil production. Setting aside the adjustment in factors such as fuel surcharge, if the average price of jet fuel had increased or decreased by 5%,
our jet fuel costs would have increased or decreased by approximately RMB1,257 million in 2017. In addition, the NDRC adjusts gasoline and diesel prices in China from time to time, taking into account the changes in international oil prices,
thereby affecting aviation fuel prices. In 2017, we have not conducted aviation fuel hedging activities. As such, we cannot assure you that jet fuel prices will not fluctuate further in the future. Due to the highly competitive nature of the airline
industry, we may be unable to fully or effectively pass on to our customers any future increase in jet fuel costs.
16
The airline industry is subject to increasing environmental regulations, which would
increase costs and affect profitability.
In recent years, regulatory authorities in China and other countries have issued a number
of directives and other regulations to address, among other things, aircraft noise and engine emissions, the use and handling of hazardous materials, aircraft age and environmental contamination remedial
clean-up
measures. These requirements impose high fees, taxes and substantial ongoing compliance costs on airlines, particularly as new aircraft brought into service will have to meet the environmental
requirements during their entire service life.
We have significant expenditures in respect of environmental compliance, which may affect
our operations and financial condition. For example, all of our B737NG and some of our A320 series aircraft newly introduced are equipped with a winglet or sharklet, an additional lifting surface to reduce fuel consumption and noises. We also took
measures to reduce the impact of our operations on the environment by optimizing our route network and flight schedules as well as installing energy-saving environmentally friendly engines. In addition, we continue to improve the energy efficiency
of our fleet by introducing aircraft with energy-saving technologies, such as
B737-8
Max and by retiring old aircraft. However, these measures have resulted in significant costs and expenditures. We expect to
continue to incur significant costs and expenditures on an ongoing basis to comply with environmental regulations, which could restrict our ability to modify or expand facilities or continue operations.
Our results of operations tend to be volatile and fluctuate due to seasonality.
The aviation industry is characterized by annual high and low travel seasons. Our operating revenue is substantially dependent on the passenger
and cargo traffic volume carried, which is subject to seasonal and other changes in traffic patterns, the availability of appropriate time slots for our flights and alternative routes, the degree of competition from other airlines and alternate
means of transportation, as well as other factors that may influence passenger travel demand and cargo and mail volume. As a result, our results tend to be volatile and subject to rapid and unexpected change.
Risks Relating to the PRC
Changes
in the economic policies of the PRC government may materially affect our business, financial condition and results of operations.
Since the late 1970s, the PRC government has been reforming the Chinese economic system. These reforms have resulted in significant economic
growth and social progress. These policies and measures may be modified or revised from time to time. Adverse changes in economic and social conditions in China, in the policies of the PRC government or in the laws and regulations of China, if any,
may have a material adverse effect on the overall economic growth of China and investments in and profitability of the domestic airline industry. These developments, in turn, may have a material adverse effect on our business, financial condition
and results of operations.
Changes in the foreign exchange regulations in the PRC may result in fluctuations of the Renminbi and
adversely affect our ability to pay dividends or to satisfy our foreign currency liabilities.
A significant portion of our revenue
and operating expenses are denominated in Renminbi, while a portion of our revenue, capital expenditures and debts are denominated in U.S. dollars and other foreign currencies. The Renminbi is currently freely convertible in the current account,
which includes payment of dividends, trade and service-related foreign currency transactions, but not in the capital account, which includes foreign direct investment, unless approval from or registration or filing with the relevant authorities, is
obtained. As a foreign invested enterprise approved by the PRC Ministry of Commerce (the MOFCOM), we can purchase foreign currencies without the approval of State Administration of Foreign Exchange (the SAFE) for settlement
of current account transactions, including for the purpose of dividend payment, by providing commercial documents evidencing these transactions. We can also retain foreign currencies in our current accounts, subject to a maximum amount approved by
SAFE, to satisfy foreign currency liabilities or pay dividends. The relevant PRC government authorities may limit or eliminate our ability to purchase and retain foreign currencies in the future. Foreign currency transactions in the capital account
are still subject to limitations and require approvals from SAFE. This may affect our ability to raise foreign capital through debt or equity financing, including through loans or capital contributions. We cannot assure you that we will be able to
obtain sufficient foreign currencies to pay dividends, if any, or satisfy our foreign currency liabilities.
17
Furthermore, the value of the Renminbi against the U.S. dollar and other currencies may fluctuate
significantly and is affected by, among other things, the PRC government policies, domestic and international economic and political conditions and changes in the supply and demand of the currency. On July 21, 2005, the PRC government changed
its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy resulted in
appreciation of the Renminbi against the U.S. dollar by approximately 7.0% in 2008. While there was no material appreciation of Renminbi against the U.S. dollar in 2009, the Renminbi appreciated by approximately 3.0% against the U.S. dollar in 2010
and by approximately 5.1% in 2011. In April 2012, the PBOC widened the daily trading band of the Renminbi against the U.S. dollar, and the Renminbi was allowed to appreciate or depreciate by 1.0% from the PBOC central parity rate, effective
April 16, 2012. In March 2014, the PBOC further widened the daily trading band of the Renminbi against the U.S. dollar, and the Renminbi was allowed to appreciate or depreciate by 2% against the U.S. dollar from the daily central parity rate,
effective March 17, 2014. On August 11, 2015, the PBOC executed a 2% devaluation in the Renminbi. Within the following two days, the Renminbi depreciated 3.5% against the U.S. dollar. The Renminbi depreciated 6.7% against the U.S. dollar
from January 4, 2016 to December 30, 2016. The Renminbi appreciated 6.3% against the U.S. dollar for the year ended December 31, 2017. However, it remains unclear what further fluctuations may occur or what impact this will have on
the value of the Renminbi. It is possible that the PRC government could adopt a more flexible foreign exchange policy, which could result in further and more significant revaluations of the Renminbi against the U.S. dollar or any other foreign
currency. Any resulting fluctuations in exchange rates as a result of such policy changes may have an adverse effect on our financial condition and results of operations.
Our operations may be adversely affected by rising inflation rates in the PRC.
Increase in inflation is due to many factors beyond our control, such as rising production and labor costs, high debts, changes in the PRC and
foreign governmental policy and regulations, and movements in exchange rates and interest rates. The national consumer price index, which is an indicator of the inflation, was 1.4%, 2.0% and 1.6% in 2015, 2016 and 2017, respectively. The national
consumer price index was 1.5%, 2.9% and 2.1% in January, February and March, 2018, respectively. We cannot assure you that inflation rates will not increase in the future. If inflation rates rise beyond our expectations, the costs of our business
operations may become significantly higher than anticipated, and we may be unable to pass on such higher costs to consumers in amounts that are sufficient to cover those increasing operating costs. As a result, further inflationary pressures in the
PRC may have a material adverse effect on our business, financial condition and results of operations, as well as our liquidity and profitability.
Any withdrawal of, or changes to, tax incentives in the PRC may adversely affect our results of operations and financial condition.
Prior to January 1, 2008, except for a number of preferential tax treatment schemes available to various enterprises,
industries and locations, business enterprises in China were subject to an enterprise income tax rate of 33% under the relevant PRC Enterprise Income Tax Law. On March 16, 2007, China passed a new enterprise income tax law, or the EIT Law,
which took effect on January 1, 2008 and amended on February 24, 2017. The EIT Law imposes a uniform income tax rate of 25% for domestic enterprises and foreign invested enterprises. Business enterprises enjoying preferential tax treatment that
was extended for a fixed term prior to January 1, 2008 will still be entitled to such treatment until such fixed term expires. Certain of our subsidiaries are entitled to preferential tax treatment, allowing us to enjoy a lower effective tax
rate that would not otherwise be available to us. To the extent that there are any increases in the applicable effective tax rate, withdrawals of, or changes in, our preferential tax treatment or tax exemptions, our tax liability may increase
correspondingly.
18
Uncertainties embodied in the PRC legal system may limit certain legal protection available
to investors.
The PRC legal system is a civil law system based on written statutes. Unlike common law systems, decided legal cases
have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. Legislation over the past 20 years has significantly enhanced the protection
afforded to foreign investors in China. However, the interpretation and enforcement of some of these laws and regulations involve uncertainties that may limit the legal protection available to investors. Such uncertainties pervade as the legal
system in the PRC continues to evolve. Even where adequate laws exist in the PRC, the enforcement of the existing laws or contracts may be uncertain and sporadic, and it may be difficult to obtain swift and equitable enforcement, including enforcing
a foreign judgment. In addition, the PRC legal system is based on written statutes and their interpretation; prior court decisions may be cited as reference but have limited authority as precedents. As such, any litigation in the PRC may be
protracted and result in substantial costs and diversion of our resources and management attention. We have full or majority board control over the management and operation of all of our subsidiaries established in the PRC. The control over these
PRC entities and the exercise of shareholder rights are subject to their respective articles of association and PRC laws applicable to foreign-invested enterprises in the PRC, which may be different from the laws of other developed jurisdictions.
The PRC has not developed a fully integrated legal system and certain recently enacted laws and regulations may not sufficiently cover
all aspects of economic activities in the PRC. The relative lack of experience of the PRCs judiciary in many cases also creates additional uncertainty as to the outcome of any litigation. In addition, interpretation of statutes and regulations
may be subject to government policies reflecting domestic political changes. Furthermore, in case of new laws and regulations, the interpretation, implementation and enforcement of these laws and regulations would involve uncertainties due to the
lack of established practice or published court decisions available for reference. We cannot predict the future legal development in the PRC, including promulgation of new laws, changes to existing laws or interpretation or enforcement thereof, or
inconsistencies between the local rules and regulations and the national law. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have a
retroactive effect. As a result, we may not be aware of any violations until sometime after the violation has occurred. This may also limit the remedies available to investors and to us in the event of any claims or disputes with third parties.
The auditors reports included in this annual report are prepared by relying on audit work which is not inspected by the Public
Company Accounting Oversight Board and, as such, investors may be deprived of the benefits of such inspection.
Auditors of
companies that are registered with the SEC and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the Public Company Accounting Oversight Board (United States), or the PCAOB,
and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards. Because we have substantial operations within China, our auditor
relied on its China affiliate to perform audits on our consolidated financial statements, and the PCAOB is currently unable to conduct inspections of the work done by our auditor as it relates to our operations without the approval of the Chinese
authorities, our auditors work related to our operations in China is not currently inspected by the PCAOB. This lack of PCAOB inspection of audit work performed in China prevents the PCAOB from regularly evaluating the audit work performed by
any auditor in China including our auditor. As a result, investors may be deprived of the full benefits of PCAOB inspections.
The
inability of the PCAOB to conduct inspections of audit work performed in China makes it more difficult to evaluate the effectiveness of our auditors audit procedures as compared to auditors in other jurisdictions that are subject to PCAOB
inspections for all their work. Investors may lose confidence in our reported financial information and procedures and the quality of our consolidated financial statements.
Proceedings instituted by the SEC against certain
PRC-based
accounting firms, including the
China affiliate of our independent registered public accounting firm, could result in financial statements being determined not to comply with the requirements of the Exchange Act.
19
In December 2012, the SEC brought administrative proceedings against five accounting firms in
China, including the Chinese affiliate of our then independent registered public accounting firm, alleging that they had refused to produce audit work papers and other documents related to certain other China-based companies under investigation by
the SEC. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of these firms from practicing before the SEC for a period of six months. The decision is neither final nor
legally effective unless and until reviewed and approved by the SEC. On February 12, 2014, four of these
PRC-based
accounting firms appealed to the SEC against this decision. In February 2015, each of the
four
PRC-based
accounting firms agreed to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement requires the firms to follow detailed
procedures to provide the SEC with access to the Chinese firms audit documents via the China Securities Regulatory Commission ( the CSRC ). If the firms do not follow these procedures, the SEC could impose sanctions such as
suspensions, or it could restart the administrative proceedings.
In the event that the SEC restarts the administrative proceedings,
depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being
determined not to be in compliance with the requirements of the Exchange Act, and possibly delisting of the securities. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based
U.S.-listed companies and the market price of our ADSs may be adversely affected.
If the Chinese affiliate of our independent registered
public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to find another registered public accounting firm in a timely manner to audit and issue an opinion on our financial statements, our
financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such determination could ultimately lead to our delisting from the NYSE or deregistration from the SEC, or both, which would substantially
reduce or effectively terminate the trading of our ADSs in the United States.
Item 4. Information on the Company
A. History and Development of the Company
Our registered office is located at 66 Airport Street, Pudong International Airport, Shanghai, China, 201202. Our principal executive office
and mailing address is Kong Gang San Road, Number 92, Shanghai, 200335, China. The telephone number of our principal executive office is
(86-21)
6268-6268 and the fax number for the Board Secretariats
office is
(86-21)
6268-6116. We currently do not have an agent for service of process in the United States.
Our Company, China Eastern Airlines Corporation Limited was established on April 14, 1995 under the laws of China as a company limited by
shares in connection with the restructuring of our predecessor and our initial public offering. We are commercially known in the industry as China Eastern Airlines. Our predecessor was one of the six original airlines established in 1988 as part of
the decentralization of the airline industry in China undertaken in connection with Chinas overall economic reform efforts. Prior to 1988, the CAAC was responsible for all aspects of civil aviation in China, including the regulation and
operation of Chinas airlines and airports. In connection with our initial public offering, our predecessor was restructured into two separate legal entities, our Company and EA Group. According to the restructuring arrangement, by operation of
law, our Company succeeded to substantially all of the assets and liabilities relating to the airline business of our predecessor. EA Group succeeded to our predecessors assets and liabilities that do not directly relate to the airline
operations and do not compete with our businesses. Assets transferred to EA Group included our predecessors equity interests in companies engaged in import and export, real estate, advertising,
in-flight
catering, tourism and certain other businesses. In connection with the restructuring, we entered into various agreements with EA Group and its subsidiaries for the provision of certain services to our Company. CEA Holding assumed the rights and
liabilities of EA Group under these agreements after it was formed by merging EA Group, Yunnan Airlines Company and China Northwest Airlines Company in October 2002. See Item 7. Major Shareholders and Related Party Transactions for more
details.
The following chart sets forth the organizational structure of our Company and our significant subsidiaries as of
December 31, 2017:
20
In February 1997, we completed our initial public offering of 1,566,950,000 ordinary H Shares, par value
RMB1.00 per share, and listed our ordinary H Shares on The Stock Exchange of Hong Kong Limited, or the Stock Exchange of Hong Kong Limited (the Hong Kong Stock Exchange), and American Depositary Shares, or ADSs, representing our H
Shares, on the New York Stock Exchange. In October 1997, we completed a public offering of 300,000,000 new ordinary domestic shares in the form of A Shares to public shareholders in China and listed such new shares on the Shanghai Stock Exchange. H
Shares are our ordinary shares listed on the Hong Kong Stock Exchange, and A Shares are our ordinary shares listed on the Shanghai Stock Exchange. Our H Shares and A Shares are identical in respect of all rights and preferences, except that the
listed A Shares may only be held by Chinese domestic investors and certain qualified foreign institutional investors. For information regarding our share capital structure, see Item 10.B Memorandum and Articles of Association
Description of the Shares. In addition, dividends on the A Shares are payable in Renminbi.
Since our initial public offering, we
have expanded our operations through acquisitions and joint ventures.
On June 12, 2012, the Board of Directors resolved and approved
to issue corporate bonds in the aggregate principal amount of not more than RMB8.8 billion and for a term of not more than ten years for a single or multiple issuances. We received the CSRC approval for this issuance on December 12, 2012.
On March 20, 2013, we issued the first tranche of the corporate bonds in the amount of RMB4.8 billion at 5.05% due 2023. The use of proceeds from this issuance was to repay bank loans, improve our financing structure and replenish our
short-term working capital.
On September 11, 2012, the Board of Directors resolved and approved the Proposal for the
non-public
issuance of A Shares to specific placees by China Eastern Airlines Corporation Limited and the Proposal for the
non-public
issuance of H Shares to
specific placees by China Eastern Airlines Corporation Limited, according to which, (i) CEA Holdings and CES Finance would subscribe in cash for 241,547,927 and 457,317,073 new A Shares, respectively, at the subscription price of RMB3.28
per share; and (ii) CES Global Holdings (Hong Kong) Limited, an overseas wholly-owned subsidiary of CEA Holding, (CES Global) would subscribe in cash for 698,865,000 new H Shares (nominal value of RMB1.00 each) at the subscription
price of HK$2.32 per share. On January 31, 2013, the CSRC approved our proposed issue of no more than 698,865,000 new H Shares with a nominal value of RMB1.00 each. The Public Offering Review Committee of the CSRC reviewed and conditionally
approved our application relating to the
non-public
issue of new A Shares of the Company on February 25, 2012.
21
On December 27, 2012, our wholly-owned subsidiary, Shanghai Airlines Tours entered into an
agreement with Eastern Tourism and Shanghai Dongmei to acquire 45% and 55% of the issued share capital of Xian Dongmei Aviation Travel Co. Ltd, held by them respectively for a consideration of approximately RMB3.3 million comprising
approximately RMB1.5 million payable to Eastern Tourism and approximately RMB1.8 million payable to Shanghai Dongmei.
On
December 27, 2012, our wholly-owned subsidiary, Shanghai Airlines Tours also entered into another agreement with Eastern Tourism and Shanghai Dongmei to acquire 45% and 55% of the issued share capital of Kunming Dongmei, held by them
respectively for a consideration of approximately RMB10.6 million comprising RMB4.7 million payable to Eastern Tourism and approximately RMB5.8 million payable to Shanghai Dongmei.
On January 10, 2013, our wholly-owned subsidiary, Shanghai Airlines Tours entered into an agreement with Eastern Tourism to acquire the
entire issued share capital of Eastern Travel held by Eastern Tourism Investment Group Co., Ltd for consideration of approximately RMB11.9 million.
On April 9, 2013, the Company obtained an approval from the CSRC, pursuant to which the CSRC approved the
non-public
issue by the Company for no more than 698,865,000 new A Shares. On April 16, 2013, the procedure for registration of the new A Shares with the Shanghai Branch of China Securities
Depository & Clearing Co. Ltd. was completed. The 698,865,000 new A Shares, at an issue price of RMB3.28 per share, under this issue are subject to a lock-up period of 36 months from the completion date of the issue and are expected to be
listed on April 17, 2016.
On June 21, 2013, we completed the issuance of new H Shares. A total of 698,865,000 new H Shares were
issued, at the price of HK$2.32 per share, to CES Global.
On October 29, 2013, the Board of Directors resolved and approved that the
Company inject RMB36 million into CES Media.
On July 17, 2014, Eastern Air Overseas (Hong Kong) Corporation Limited
(EAO) our wholly-owned subsidiary, and Jetstar Hong Kong Airways Limited (Jetstar Hong Kong), an associated company of the Company, entered into a loan agreement, pursuant to which EAO will provide a loan of
US$60 million to Jetstar Hong Kong at fair market interest rates. The principal of the loan was repaid on April 30, 2015.
On
August 15, 2014, Shanghai Airlines Tours, our wholly-owned subsidiary, entered into an equity transfer agreement with Eastern Tourism, pursuant to which, Shanghai Airlines Tours acquired 72.84% equity interest in Shanghai Dongmei from Eastern
Tourism with consideration of RMB32,147,700. This acquisition has been completed and Shanghai Dongmei has become our indirect holding company.
On December 22, 2014, our Company, CEA Holding and CES Finance (as shareholders of Eastern Air Finance agreed to inject a total of
RMB1,500 million into Eastern Air Finance in proportion according to their respective shareholding in Eastern Air Finance. In February 2015, we contributed a
pro-rata
amount of RMB375 million in
cash.
On March 29, 2015, China United Airlines, our wholly-owned subsidiary, fully adopted the
low-cost
carrier service model.
On May 30, 2015, we received approval from the Ministry of
Industry and Information Technology to offer
in-flight
Wi-Fi
services using
KU-band
satellite onboard 21 aircraft.
On July 9, 2015 we entered into the B737 Aircraft Purchase Agreement with Boeing Company in Shanghai to purchase fifty B737 series
aircraft from Boeing Company.
22
On July 27, 2015, we entered into a conditional subscription agreement (Subscription
Agreement) with Delta Air Lines, Inc. (
Delta Air Lines
), pursuant to which Delta Air Lines agreed to subscribe for 465,910,000 shares of the newly issued ordinary H shares of the Company in an amount of HK$3,488,895,000,
representing approximately 3.5% of the total share capital of the Company. On September 9, 2015, we completed the issue of 465,910,000 ordinary H shares to Delta Airlines, with a par value of RMB1.00 each at an issue price of HK$7.49 per share.
On August 14, 2015, the Board of Directors approved the Resolution on the Termination of the Proposed Establishment of Jetstar
Hong Kong and its Winding Up. The Board of Directors considers that the termination of the proposed establishment of Jetstar Hong Kong will have no material adverse impact on the financial conditions and production and operation of the
Company.
On August 28, 2015, we formally established the foreign airlines service center.
On September 1, 2015, Delta Air Lines and we entered into a marketing agreement and a letter of confirmation on the Subscription
Agreement. Pursuant to the marketing agreement, both parties will have greater cooperation in terms of code-share, revenue management, schedule coordination, sales cooperation, airport facilities sharing, frequent-flyer program, lounge and system
investment as well as staff exchange. Pursuant to the letter of confirmation on the Subscription Agreement, as of September 1, 2015, all conditions precedent to the Subscription Agreement had been fulfilled except for those conditions that will
be fulfilled on the completion date of share subscription. On September 9, 2015, we completed the issue of 465,910,000 ordinary H shares with a par value of RMB1.00 each at an issue price of HK$7.49 per share.
On November 6, 2015, the Civil Aviation Administration of China officially announced and granted the Safe Flight Diamond
Award, the highest award for flight safety in the PRC civil aviation industry, to the Company.
In January 2016, we received the
Approval for the
Non-Public
Issuance of A Shares by China Eastern Airlines Corporation Limited (Zheng Jian Xu Ke [2016] No. 8) issued by the CSRC, approving us to issue not more than
2,329,192,546 A Shares by way of
non-public
issuance.
On February 8, 2017, we completed the
transfer of 100% equity interest in Eastern Logistics to Eastern Airlines Industry Investment and the nine freighters operated by China Cargo Airlines ceased to be included in our fleet.
On November 16, 2017, EAO issued corporate
SGD-denominated
guaranteed bonds in an amount of
SGD500,000,000 at 2.8% due 2020, which was listed on the Hong Kong Stock Exchange on November 17, 2017. The Company guaranteed the bond issue. See Note 34 to the consolidated financial statements for more information.
On March 1, 2018, we entered into contractual operation agreement and operation cost agreement with China Cargo Airlines, pursuant to
which, China Cargo Airlines (as contractor) will operate the bellyhold space business and reimburse the contractual fee to us, and we will reimburse the operation cost of the bellyhold space business to China Cargo Airlines.
On March 9, 2018, the Company issued
JPY-denominated
credit enhanced bonds (Series 1
JPY10,000,000,000 0.33% Bonds due 2021, Series 2 JPY20,000,000,000 0.64% Bonds due 2021 and Series 3 JPY20,000,000,000 0.64% Bonds due 2021), which was listed on the professional oriented TOKYO
PRO-BOND
Market
of the Tokyo Stock Exchange on March 19, 2018. See Note 49 to the consolidated financial statements for the issuance of JPY bonds.
The material development of our indebtedness is set out in Note 34 and Note 49 to the consolidated financial statements. The capital
expenditure is set out in Item 5 in this Annual Report.
B. Business Overview
We were one of the three largest air carriers in China in terms of several indicators including number of passengers carried, ATK and ASK in
2017 and is an important domestic airline based in and serving Shanghai, which is considered to be the international financial and shipping center of China. The primary focus of our business is the operation of civil aviation, including the
provision of passenger, cargo, mail delivery, tour operations and other extended transportation services.
23
We operate most of our flights through our three hubs located in eastern, northwestern and
southwestern China, namely Shanghai, Xian and Kunming, respectively. With Shanghai as our core hub and Xian and Kunming as our regional hubs, we believe that we will benefit from the level of development and growth opportunities in
eastern, northern and western China as a whole by providing direct services between various cities in those regions and between those regions and other major cities in China. We have steadily fostered the construction of a flight system for these
core hubs by introducing new flight destinations and increasing the frequency of certain flights, thereby enhancing our transfer and connection capability in these hub markets.
Our domestic routes contributed approximately 65.7% of our total passenger revenues in 2017. Our most heavily traveled domestic routes
generally link Shanghai to the large commercial and business centers of China, such as Beijing, Guangzhou and Shenzhen. We have set up subsidiaries in 15 provinces and cities including Shanghai, Beijing, Yunnan, Shaanxi, Jiangsu, Zhejiang, Anhui,
Jiangxi, Shandong, Hubei, Shanxi, Gansu, Sichuan, Hebei and Guangdong by the end of 2017. Our flight routes include all provincial capital cities in China and specifically designated cities. In 2017, we opened new routes including routes to Cebu,
Jakarta from Shanghai Pudong and to Prague from Xian, and cancelled routes to Bangkok from Zhengzhou and Jeju from Beijing. As of December 31, 2017, we served a route network that covers 1,074 domestic and foreign destinations in 177
countries through SkyTeam, an international airlines alliance.
Our passenger traffic volume (as measured in revenue passenger-kilometers,
or RPKs) increased by 9.3% from approximately 167,529 million in 2016 to approximately 183,182 million in 2017. As we transferred 100% equity interest in Eastern Logistics to Eastern Airlines Industry Investment in February 2017, our cargo
and mail traffic volume (as measured in revenue freight tonne-kilometers, or RFTKs) decreased by 45.4% from approximately 4,875 million in 2016 to approximately 2,663 million in 2017 under the basis that our operating data in 2016 include
our whole cargo freight data during the period from February to December 2016 (under
non-comparable
basis). Our cargo and mail traffic volume (as measured in revenue freight tonne-kilometers, or
RFTK) increased by 6.7% from approximately 2,495 million in 2016 to approximately 2,663 million in 2017 under the basis that our operating data in 2016 did not include our whole cargo freight data during the period from February to
December 2016 (under comparable basis). As a result, our traffic volume (as measured in RTKs) decreased by 4.3% from approximately 19,713 million in 2016 to approximately 18,856 million in 2017 under the
non-comparable
basis and increased by 8.8% from approximately 17,333 million in 2016 to approximately 18,856 million in 2017 under the comparable basis.
Awards
We have received many awards,
recognitions and accolades through the years. Fortune Magazine recognized us as one of the Most Innovative PRC Companies in 2011, and our China Eastern Airlines brand was awarded Chinas Famous Trademark by
the State Administration for Industry and Commerce in 2011. In addition, in 2012 we received various recognitions and awards, including Golden Tripod Prize, which was the highest award awarded at the 8th Annual Meeting of Chinas
Securities Market, Golden Bauhinia Award for The Listed Company with Best Brand Value 2012 by China Securities, 2012 Best
Mid-Cap
Company and Best Managed Company in China
by Asiamoney Magazine, Top 50 Most Valuable Chinese Brands by WPP, a global brand communication and public relations firm, 2012 TOP 25 CSR (Corporate Social Responsibility) Ranking by Fortune China Magazine, 2012 China
State-owned Listed Enterprise Social Responsibility Rankings Top 20 by Southern Weekly, The Best Board of Directors of State-owned Listed Holding Companies of China Top 20 by various major financial media, including Moneyweek,
Healthy China Best Employee Health & Benefit Unit by Health Times, a major newspaper in China focusing on health and lifestyle, and Tsinghua University, Internal Audit Leading Enterprises in terms of Risk Management
and Internal Audit by China Institute of Internal Audit, Best 100 Employers by zhaopin.com, a major online recruiting website in China, and The Worlds Most Improved Airline by SKYTRAX, a United Kingdom-based
aviation research organization. In 2013, we received the National 1 May Award Certificate and were honored as one of the 2013 Top Ten Companies with the Best Corporate Social Responsibility by Fortune China Magazine, Best
Mid-cap
Company by Hong Kong Asiamoney Magazine for the second consecutive year, Top 50 Most Valuable Chinese Brands in 2013 by WPP, a global brand communication and public relations firm, the
Golden Bauhinia Award of the Best Listed Company and Listed Company with the Best Investors Relations Management by Ta Kung Pao and one of the Best 100 Employers by zhaopin.com. In 2014, our
charity campaign Love at China Eastern Airlines was awarded the Gold Award at the First Chinese Young Volunteers Services Contest. The Love at China Eastern Airlines campaign has organized activities such as visiting welfare
and nursing homes, subsidizing Hope Schools and schools for urban and rural migrant workers children and teaching school children with hearing and speaking impairment, running blood donation programs, and other activities for environmental
protection. The campaign launched 5,179 projects with 274,979 staff and members taking participation, serving a total of 233,353 people in need. Through interaction with the community, we have established a charity brand image of delivering
love and serving the community. In 2015, Love at China Eastern Airlines launched 530 projects all year round, with 26,119 staff participating, serving a total of 40,166 people.
24
In 2014, we were recognized as Top 50 Most Valuable Chinese Brands by WPP, a global
brand communication firm, as well as being awarded the China Securities Golden Bauhinia Award and ranked first as the Best Listed Company Award by Ta Kung Pao in Hong Kong for three consecutive years; and ranked among top 10
in terms of Most Competitive Asia Airline 2014 and Most Popular Asia Airline 2014 in the 5th World Airline Competitiveness Rankings.
In 2015, we were bestowed a number of awards, such as Best China Airline at the 8th TTG (Asia Media) China Travel Awards,
China Securities Golden Bauhinia Award Listed Company with the Most Valuable Brand for four consecutive years and Best Innovative Listed Company granted by Hong Kong Ta Kung Pao, as well as 2014-2015 Most
Respectable Chinese Enterprise and 2015 Chinese Best Business Model Innovation Award by the Economic Observer and 21st Century Business Herald, respectively.
In 2016, we successively won the 9th TTG China Tourism Awards Best China Airlines, and were awarded 2016 Asian Tourism Red
Coral Award Most Popular Airline Brand, Asia Pacific 2016 Excellence Aviation Award and International Carbon Gold Award Social Citizenship Award by the 2016 Asian Tourism Industry Annual Conference, the
CAPA Communication Center and the World Environmental Protection (Economy and Environment) Conference respectively.
In 2017, we were
awarded the International Carbon-Value Award Social Citizen Award by the World Economic and Environmental Conference and were rated as a Targeted Poverty Alleviation Demonstration Enterprise by the World Charity Forum.
We were granted China Securities Golden Bauhinia Award for six consecutive years, recognized as one of the Top 30 Most Valuable Chinese Brand by Wire & Plastic Products Group (WPP), the worlds largest brand
communication group. We were also awarded as one of the Worlds 500 Most Valuable Brands by the famous brand appraisal organization Brand Finance, Gold Ranking accredited by IATA, and awards such as Feike Travel
Awards, Best Employer Award in Aviation Industry, The Most Admired Company in China, Top 10 Influencing Airlines, Top 50 Chinese Brand with Overseas Social Influence and The Best Performing
Airline by various authoritative institutions.
Our Operations by Activity
The following table sets forth our traffic revenues by activity for each of the years ended December 31, 2015, 2016 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
(RMB million)
|
|
|
(RMB million)
|
|
|
(RMB million)
|
|
Traffic revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
|
78,585
|
|
|
|
83,577
|
|
|
|
91,564
|
|
Cargo and mail
|
|
|
6,491
|
|
|
|
5,977
|
|
|
|
3,623
|
|
Total traffic revenues
|
|
|
85,076
|
|
|
|
89,554
|
|
|
|
95,187
|
|
25
Passenger Operations
The following table sets forth our certain passenger operating statistics by route for each of the years ended December 31, 2015, 2016 and
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Passenger Traffic (in RPKs) (millions)
|
|
|
146,341
|
|
|
|
167,529
|
|
|
|
183,182
|
|
Domestic
|
|
|
98,304
|
|
|
|
106,361
|
|
|
|
117,033
|
|
Regional (Hong Kong, Macau and Taiwan)
|
|
|
4,189
|
|
|
|
4,347
|
|
|
|
4,758
|
|
International
|
|
|
43,848
|
|
|
|
56,821
|
|
|
|
61,391
|
|
Passenger Capacity (in ASKs) (millions)
|
|
|
181,792
|
|
|
|
206,249
|
|
|
|
225,996
|
|
Domestic
|
|
|
121,019
|
|
|
|
129,460
|
|
|
|
141,067
|
|
Regional (Hong Kong, Macau and Taiwan)
|
|
|
5,509
|
|
|
|
5,612
|
|
|
|
5,948
|
|
International
|
|
|
55,264
|
|
|
|
71,177
|
|
|
|
78,981
|
|
Passenger Yield (RMB)
|
|
|
0.56
|
|
|
|
0.52
|
|
|
|
0.52
|
|
Domestic
|
|
|
0.55
|
|
|
|
0.53
|
|
|
|
0.54
|
|
Regional (Hong Kong, Macau and Taiwan)
|
|
|
0.75
|
|
|
|
0.71
|
|
|
|
0.72
|
|
International
|
|
|
0.56
|
|
|
|
0.47
|
|
|
|
0.47
|
|
Passenger Load Factor (%)
|
|
|
80.50
|
|
|
|
81.23
|
|
|
|
81.06
|
|
Domestic
|
|
|
81.23
|
|
|
|
82.16
|
|
|
|
82.96
|
|
Regional (Hong Kong, Macau and Taiwan)
|
|
|
76.04
|
|
|
|
77.45
|
|
|
|
79.99
|
|
International
|
|
|
79.34
|
|
|
|
79.83
|
|
|
|
77.73
|
|
In 2015, we conducted significant optimization of our fleet structure, and increased our fleet to 551
aircrafts as of the end of 2015, and the variety of our aircraft models was streamlined to 13 models by the end of 2015. In respect of passenger transportation, we actively seized the opportunities brought about by international low oil prices and
robust demand for outbound tourism, and achieved impressive growth in passenger transportation by responding proactively to adverse factors such as geopolitical instability around the globe, terrorist attacks outside China, MERS cases in South Korea
and impact on short-haul routes due to formation of a high-speed railway network in 2015. Efforts have been made to foster the construction of hubs and negotiate time slots in hub and core markets in order to promote superb connectivity. In respect
of freight transportation and logistics, we tightened our cost control, optimized production structure, broadened marketing channels and strived to stabilize transportation prices in 2015. In 2015, we further strengthened our cooperation with both
member and
non-member
airlines of SkyTeam Alliance to widen the scope of cooperation and improve the quality of cooperation. In September 2015, we entered into a strategic partnership with Delta Air Lines to
deepen our cooperation in terms of code-share, cabin sharing and joint sales. By forming an industry-leading route network, both parties implemented codeshare on 123 routes, including 9 international major routes and 114 domestic routes in the PRC
and the USA. Through offering joint sales to corporate customers, the influential power of the North American corporate customers was increased. As for the European market, we and Air France have realized interline transit services for flights
departing and arriving at Shanghai, Dalian, Paris and Nice. In the Australian market, the joint operation with Qantas was officially commenced to launch codeshare on major routes such as Shanghai-Sydney and Shanghai-Melbourne routes, in order to
launch
in-depth
cooperative projects including customer base sharing.
In 2015, we put in
available seat kilometers (ASK) of approximately 181,792.90 million passenger-kilometers, representing an increase of approximately 13.2% from 2014. Number of passengers carried in 2015 was approximately 93.8 million, representing
an increase of approximately 11.9% from 2014. Passenger load factor in 2015 was approximately 80.5%, representing an increase of approximately 1.2% from 2014. Passenger revenue in 2015 amounted to approximately RMB78,585 million, representing
an increase of approximately 4.4% from 2014.
In 2015, we enhanced Shanghai core hub and Xian and Kunming regional hubs, and
established and extended our aviation transportation network in major markets with high market influence such as Beijing, Nanjing and Qingdao to cover 1,057 destinations in 179 countries. We strove for additions of air traffic rights and time slot
resources in hub markets and core markets, steadily improved the aircraft utilization rate and consolidated and expanded market share in the three largest hubs and core markets. Based on the SkyTeam Alliance platform, we enhanced our strategic
cooperation with Delta Air Lines and cooperated with Air France and Qantas to develop a highly efficient and convenient flight network which covered the whole country and connected to the whole wide world.
26
In 2016, we continued to update and optimize our fleet structure, introducing new aircrafts
continually and retiring outdated model aircrafts. As of the end of 2016, our average flight age was 5.4 years. We mainly introduce long haul B777 series aircrafts in trans-Pacific routes;
mid-to-long-haul
A330 series aircrafts in China-Europe routes, China-Australia and domestic business routes; A320 series and B737 series aircrafts in domestic and surrounding countries and regions routes,
which we believe enhances the matching level between fleet models and routes, transportation capacities and relevant markets. In 2016, we continued to deepen and expand our cooperation with external partners. Relying on the SkyTeam Alliance
platform, we continued to enhance our cooperation with member airlines in the SkyTeam Alliance. In collaboration with Delta Air Lines, based on
pre-existing
trans-Pacific routes and destinations in the PRC and
the USA, we further extended our network of cooperative routes to Canada, Mexico, Southeast Asian and South American regions, achieving a total of 252 codeshare routes. In collaboration with Air
France-KLM
Group (Air
France-KLM),
based on our jointly operated routes and code-share coverage, we increased our joint marketing efforts to corporate customers in the French market.
In 2016, we proactively promoted the establishment of transportation hubs with the opening of various international routes for long-haul
flights and an enhanced coverage of our transportation network. With Shanghai as the core hub, we added six international routes for long-haul flights to our network, connecting Shanghai and Prague, Amsterdam, Madrid, St. Petersburg, Chicago and
Brisbane, respectively. We provided more frequent flight services on routes connecting Shanghai and New York City, Los Angeles, Sydney and Melbourne. We added routes connecting Kunming and Sydney, Qingdao and San Francisco, Nanjing and Vancouver and
Hangzhou and Sydney. Last, we stabilized the allocation of our flight capacities for Japan, Korea and Southeast Asia markets. As a result of these enhanced transit connection and expanded transit routes structures, in 2016, we experienced
approximately 26.8%, 63.8% and 43.1%
year-on-year
growth in passenger flight capacity for Europe, North America and Australia markets, respectively; and our
inter-airline transit volume and revenue grew by 24.2% and 21.4%, respectively. As of the end of 2016, by connecting to the route networks of other SkyTeam member airlines, our flights had access to 1,062 destinations in 177 countries.
In 2016, we put in available seat kilometers (ASK) of approximately 206,249.27 million passenger-kilometers, representing an
increase of approximately 13.5% from 2015. Number of passengers carried in 2016 was approximately 101.74 million, representing an increase of approximately 8.5% from 2015. Passenger load factor in 2016 was approximately 81.2%, representing an
increase of approximately 0.7% from 2015. Passenger revenue in 2016 amounted to approximately RMB83,577 million, representing an increase of approximately 6.4% from 2015.
In 2016, we further strengthened our Shanghai core hub and Xian and Kunming regional hubs. The aggregated number of transits connecting
origin to destination of the three hubs reached 6,075, an increase of 13.8% as compared to 2015. In respect of the number of transits connecting origin to destination, Pudong reached 4,083, an increase of 17.9% as compared to
2015, Kunming reached 1,384, an increase of 9.1% as compared to 2015, and Xian reached 608, which was similar to 2015. The three hubs transported approximately 4.51 million passengers, an increase of 27.0% as compared to 2015. Among them,
our Shanghai hub transported approximately 2.99 million passengers, an increase of 27.2% as compared to 2015, comprising 25.6% of transit flights; our Kunming hub transported approximately 1.18 million passengers, an increase of 18.7% as
compared with 2015, comprising 16.1% of transit flights; and Xian hub transported approximately 340,000 passengers, an increase of 64.7% as compared to 2015, comprising of 6.9% transit flights.
In 2017, in view of a relatively complicated external environment and intensifying competition, we embrace challenges by seizing new
development opportunities such as the One Belt One Road initiative, free trade port in Shanghai, the construction of the new airport in Beijing and the full access to electronic devices on aircraft.
27
According to the Approval of the feasibility study report of the construction of new
airport in Beijing by the NDRC and the Notice regarding the matters of the construction of airline base project at the new airport in Beijing by CAAC, the new airport in Beijing is located along the north bank of Yongding River,
and between Yu Fa Town and Li Xian Town, Daxing District, Beijing and Guangyang District, Lang Fang, Hebei. Being the major base airline of the new airport in Beijing, we will undertake base construction according to the target of bearing 40% of the
traffic flow of the new airport in Beijing. In February 2017, we have gained the approval from the NDRC in regards of the base project at the new airport in Beijing. After the commencement of operation of the new airport in Beijing in 2019, we will
grasp the developmental opportunities derived from the coordinated development of Beijing, Tianjin and Hebei, especially the construction of Xiongan New District by the State, to actively strive for routes and time slot resources. Leveraging
on the SkyTeam Airline Alliance platform, we will construct international coverage of our route networks to provide convenient, highly efficient and quality outbound travelling services for travelers.
In 2017, we focused on the operation and development of the passenger transportation business. We continued to optimize
e-commerce
platform functions. For
e-commerce,
we expedited the construction of our
in-flight
internet connection platform. The scale
of the aircraft fleet with
Wi-Fi
installed ranked at the top nationwide and we took the lead in allowing the use of portable electronic devices on flight in the PRC. As at the end of 2017, internet access has
become available in all our 74 wide-body aircraft with the coverage of major business routes in Europe, the U.S., Australia and China. Internet Access In the Air enhanced customers
in-flight
experience. We also upgraded and improved our 11 overseas websites, and a total of 12 updates were made to our mobile application. Furthermore, we introduced new service products such as
pre-flight
ordering of
in-flight
meals via mobile application, with an aim to optimize service experiences of customers. We strengthened the shopping mall points operations by introducing diversified point redemption products such
as oversized baggage redemption and continued to increase the revenue from the sales of
non-aviation
points, where the revenue from the sales of nonaviation points increased by 149% compared to last year.
In 2017, we continued to optimized our fleet structure. We introduced a total of 73 aircraft of major models and a total of 18 aircraft
retired. With the introduction of B737-8MAX series aircraft and the gradual retirement of B767 series aircraft, our fleet structure has been made younger. In 2017, we continued to deepen and expand our cooperation with external partners. We deepened
the comprehensive partnership with Delta by further expanding the code-share coverage and jointly deepened marketing cooperation by expanding channels and markets. We also strengthened our business partnership with AFK by further expanding our
code-share coverage with it. Capitalized on the cooperation platform of SkyTeam Airline Alliance, we have newly launched code-share cooperation with Air Europa Líneas Aéreas, S.A.U. (IATA code: UX) from Spain and Czech Airlines j.s.c.
(IATA code: OK). In addition, we attached importance to and continued to strengthen the cooperation with airlines which are not members of SkyTeam Airline Alliance. In collaborating with Qantas Airways Limited (IATA code: QF), we launched enhanced
cooperation in joint operation and sales, and points earning and redeeming of frequent flyer program. We commenced to launch code-sharing cooperation with Jet Airways (India) Ltd. (IATA code: 9W) and Air Mauritius Limited (IATA code: MK), and
discussion on bilateral cooperation of frequent flyers with WestJet Airlines Ltd. (IATA code: WS).
In 2017, we strengthened the research
on the route network planning of Beijings new hub, and actively promoted the construction project of our base in the new airport in Beijing. We conducted seasonal improvements and adjustments on transportation capacity, and introduced
Beijing-Hangzhou-Sydney,
Kunming-Sydney and Wuhan-Sydney routes in accordance with the characteristics of European, American and Australian markets in recent years. In view of the changing demand for the Korean
market, we reduced transportation capacity and changed to use smaller aircraft. We also introduced routes such as Shanghai-Jakarta, Shanghai-Cebu,
Xian-Prague
and
Shenzhen-Krabi
so as to be in line with the States One Belt One Road initiative. As at the end of 2017, with the matching route networks with the SkyTeam Airline Alliance members, our route
networks reached 177 countries and 1,074 destinations.
In 2017, we put in available seat kilometers (ASK) of approximately
225,996 million passenger-kilometers, representing an increase of approximately 9.6% from 2016. Number of passengers carried in 2017 was approximately 111 million, representing an increase of approximately 8.9% from 2016. Passenger load
factor in 2017 was approximately 81.1%, representing a decrease of approximately 0.17 percentage point from 2016. Passenger revenue in 2017 amounted to approximately RMB91,564 million, representing an increase of approximately 9.6% from 2016.
28
In 2017, we further strengthened our Shanghai core hub and Xian and Kunming regional hubs.
The aggregated number of transits connecting origin to destination of the three hubs reached 6,489, an increase of 6.8% as compared to last year. In respect of the number of transits connecting origin to destination, Pudong
reached 4,225, an increase of 3.5% as compared to last year, Kunming reached 1,608, an increase of 16.2% as compared to last year, and Xian reached 656, an increase of 7.9% as compared to last year. The three hubs transported approximately
4.98 million passengers, an increase of approximately 10.5% as compared to last year. Among them, our Shanghai hub transported approximately 3.02 million passengers, an increase of approximately 1.2% as compared to last year, comprising
24.3% of transit flights; our Kunming hub transported approximately 1.45 million passengers, an increase of approximately 22.7% as compared with last year, comprising 17.7% of transit flights; and Xian hub transported approximately
0.51 million passengers, an increase of approximately 50.3% as compared to last year, comprising of 8.6% transit flights.
Cargo and Mail Operations
The following table sets forth certain of our cargo and mail operations statistics by route for each of the years ended December 31, 2015,
2016 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
(Non-comparable
basis)
(1)
|
|
|
(Comparable
basis)
(2)
|
|
|
|
|
Cargo and Mail Traffic (in RFTKs)
|
|
|
4,865
|
|
|
|
4,875
|
|
|
|
2,495
|
|
|
|
2,663
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
948
|
|
|
|
964
|
|
|
|
927
|
|
|
|
896
|
|
Regional (Hong Kong, Macau and Taiwan)
|
|
|
126
|
|
|
|
126
|
|
|
|
38
|
|
|
|
45
|
|
International
|
|
|
3,791
|
|
|
|
3,786
|
|
|
|
1,530
|
|
|
|
1723
|
|
Cargo and Mail Capacity (in AFTKs)
|
|
|
8,842
|
|
|
|
9,440
|
|
|
|
6,535
|
|
|
|
7,057
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
2,337
|
|
|
|
2,221
|
|
|
|
2,163
|
|
|
|
2,278
|
|
Regional (Hong Kong, Macau and Taiwan)
|
|
|
281
|
|
|
|
270
|
|
|
|
148
|
|
|
|
188
|
|
International
|
|
|
6,224
|
|
|
|
6,949
|
|
|
|
4,224
|
|
|
|
4,592
|
|
Cargo and Mail Yield (RMB)
|
|
|
1.33
|
|
|
|
1.25
|
|
|
|
1.25
|
|
|
|
1.36
|
|
Domestic
|
|
|
1.09
|
|
|
|
1.07
|
|
|
|
1.10
|
|
|
|
1.10
|
|
Regional (Hong Kong, Macau and Taiwan)
|
|
|
3.01
|
|
|
|
2.98
|
|
|
|
3.04
|
|
|
|
3.56
|
|
International
|
|
|
1.34
|
|
|
|
1.24
|
|
|
|
1.30
|
|
|
|
1.44
|
|
Cargo and Mail Load Factor (%)
|
|
|
55.02
|
|
|
|
51.64
|
|
|
|
38.20
|
|
|
|
37.70
|
|
Domestic
|
|
|
40.57
|
|
|
|
43.39
|
|
|
|
42.90
|
|
|
|
39.30
|
|
Regional (Hong Kong, Macau and Taiwan)
|
|
|
44.82
|
|
|
|
46.51
|
|
|
|
25.70
|
|
|
|
23.90
|
|
International
|
|
|
60.91
|
|
|
|
54.48
|
|
|
|
36.20
|
|
|
|
37.50
|
|
Notes:
(1)
|
On November 29, 2016, we entered into an equity transfer agreement with Eastern Airlines Industry Investment, in relation to the transfer of 100% equity interests in Eastern Logistics held by us to Eastern Airlines
Industry Investment. China Cargo Airlines, a non-wholly owned subsidiary of Eastern Logistics, operated nine freighters then. On February 8, 2017, we completed the transfer of 100% equity interest in Eastern Logistics to Eastern Airlines Industry
Investment and the nine freighters operated by China Cargo Airlines ceased to be included in our fleet. Under non-comparable basis, our operating data in 2016 comprised of our whole cargo freight data during the period from February to December
2016.
|
(2)
|
Under comparable basis, our operating data in 2016 did not include our whole cargo freight data during the period from February to December 2016.
|
29
On November 29, 2016, we entered into an equity transfer agreement with Eastern Airlines Industry
Investment, in relation to the transfer of 100% equity interests in Eastern Logistics held by us to Eastern Airlines Industry Investment. China Cargo Airlines, a non-wholly subsidiary of Eastern Logistics, operated a total of nine freighters then.
On February 8, 2017, we completed the transfer of 100% equity interest in Eastern Logistics to Eastern Airlines Industry Investment and the nine freighters operated by China Cargo Airlines ceased to be included in our fleet. After completion of the
disposal, we will focus on air passenger transportation business and continue to improve our operating and management ability. Also, on November 29, 2016, we and Eastern Logistics entered into the freight logistics daily connected transactions
framework agreement. See Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions - Related Business Transactions - Eastern Logistics, an indirectly owned subsidiary of CEA Holding - Freight Logistics Daily
Connected Transactions Framework Agreement with Eastern Logistics.
On January 1, 2017, to avoid the competition between the
bellyhold space business operated by us and the all-cargo aircraft freight business operated by China Cargo Airlines, we entered into the bellyhold space management agreement with China Cargo Airlines (Bellyhold Space Management
Agreement) to entrust China Cargo Airlines for the operation of the bellyhold space business for a term of three years, which commenced on January 1, 2017. On March 1, 2018, we entered into contractual operation agreement and operation cost
agreement with China Cargo Airlines, pursuant to which, China Cargo Airlines (as contractor) will operate the bellyhold space business and reimburse the contractual fee to us, and we will reimburse the operation cost of the bellyhold space business
to China Cargo Airlines. The Bellyhold Space Management Agreement has been superseded by the contractual operation agreement dated March 1, 2018 entered into between the Company and China Cargo Airlines since March 31, 2018.
Our Operations by Geographical Area
Our revenues (net of
business tax) by geographical area are analyzed based on the following criteria:
|
|
|
Traffic revenue from services within the PRC (excluding Hong Kong Special Administrative Region (Hong Kong), Macau Special Administrative Region (Macau) and Taiwan, (collectively known as
Regional ) )is classified as domestic operations. Traffic revenue from inbound and outbound services between overseas markets excluding Regional is classified as international operations.
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Revenue from ticket handling services, ground services, cargo handling service and other miscellaneous services is classified based on where the services are performed.
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The following table sets forth our revenues by geographical area for each of the three years ended December 31, 2017:
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2015
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2016
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2017
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(RMB million)
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(RMB million)
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(RMB million)
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Domestic
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61,222
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63,730
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67,923
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Regional (Hong Kong, Macau and Taiwan)
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3,569
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3,516
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3,624
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International
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29,178
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31,658
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30,928
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Total
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93,969
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98,904
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102,475
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Regulation
The PRC Civil Aviation Law provides the framework for regulation of many important aspects of civil aviation activities in China, including:
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the administration of airports and air traffic control systems;
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aircraft registration and aircraft airworthiness certification;
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operational safety standards; and
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the liabilities of carriers.
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The Chinese airline industry is also subject to a high degree of
regulation by the CAAC. Regulations issued or implemented by the CAAC encompass virtually every aspect of airline operations, including route allocation, domestic airfare, licensing of pilots, operational safety standards, aircraft acquisition,
aircraft airworthiness certification, fuel prices, standards for aircraft maintenance and air traffic control and standards for airport operations. Although the PRC airlines operate under the supervision and regulation of the CAAC, they are accorded
a significant degree of operational autonomy. These areas of operational autonomy include:
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whether to apply for any route;
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the allocation of aircraft among routes;
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the airfare pricing for the international and regional passenger routes;
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the airfare pricing within the limit provided by the CAAC for the domestic passenger routes;
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the acquisition of aircraft and spare parts;
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the training and supervision of personnel; and
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many other areas of
day-to-day
operations.
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Although we have generally been allocated adequate routes in the past to accommodate our expansion plans and other changes in our operations,
those routes are subject to allocation and
re-allocation
in response to changes in governmental policies or otherwise at the discretion of the CAAC. Consequently, we cannot assure you that our route structure
will be adequate to satisfy our expansion plans.
The CAAC has established regulatory policies intended to promote controlled growth of
the Chinese airline industry. We believe those policies will be beneficial to the development of and prospects for the Chinese airline industry as a whole. Nevertheless, those regulatory policies could limit our flexibility to respond to changes in
market conditions, competition or our cost structure. Moreover, while we generally benefits from regulatory policies that are beneficial to the airline industry in China as a whole, the implementation of specific regulatory policies may from time to
time materially and adversely affect our business operations.
Because we provide services on international routes, we are also subject to
a variety of bilateral civil air transport agreements between China and other countries. In addition, China is a contracting state as well as a permanent member of the International Civil Aviation Organization, an agency of the United Nations
established in 1947 to assist in the planning and development of the international air transportation. The International Civil Aviation Organization establishes technical standards for the international airline industry. China is also a party to a
number of other international aviation conventions. Our business operations are also subject to these international aviation conventions, as well as certain foreign country aviation regulations and local aviation laws with respect to route
allocation, landing rights and related flight operation regulation.
Domestic Route Rights
Chinese airlines must obtain from the CAAC the right to carry passengers or cargo on any domestic route. The CAACs policy on domestic
route rights is to assign routes to the airline or airlines suitable for a particular route. The CAAC will take into account whether an applicant for a route is based at the point of origin or termination of a particular route. This policy benefits
airlines, such as us, that have a hub located at each of the active air traffic centers in China. The CAAC also considers other factors that will make a particular airline suitable for an additional route, including the applicants safety
record, previous
on-time
performance and level of service and availability of aircraft and pilots. The CAAC will consider the market conditions applicable to any given route before such route is allocated to
one or more airlines. Generally, the CAAC will permit additional airlines to service a route that is already being serviced only when there is strong demand for a particular route relative to the available supply. The CAACs current general
policy is to require the passenger load factor of one or two airlines on a particular route to reach a certain level before another carrier is permitted to commence operations on such route.
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Regional Route Rights
Hong Kong routes and the corresponding landing rights were formerly derived from the Sino-British air services agreement. In February 2000,
the PRC government, acting through the CAAC, and Hong Kong signed the Air Transportation Arrangement between mainland China and Hong Kong. The Air Transportation Arrangement provides for equal opportunity for airlines based in Hong Kong and mainland
China. Competition from airlines based in Hong Kong increased after the execution of the Air Transportation Arrangement. The CAAC normally will not allocate an international route or a Hong Kong route to more than one domestic airline unless certain
criteria, including minimum load factors on existing flights, are met. There is more than one Chinese airline company on certain of our Hong Kong routes.
The CAAC and the Economic Development and Labor Bureau of Hong Kong entered into an agreement in 2007 to further expand the Air Transportation
Arrangement. This agreement increases the routes between Hong Kong and mainland China to expand coverage to most major cities in mainland China. The capacity limits for passenger and/or cargo services on most routes will also be gradually lifted.
Beginning in 2007, each side designated three airline companies to operate passenger and/or cargo flights and another airline company to operate
all-cargo
flights on the majority of the routes between Hong
Kong and mainland China.
On December 15, 2008, mainland China and Taiwan commenced direct air and sea transport and postal services,
ending a nearly
six-decade
ban on regular links between the two sides since 1949. Under a historic agreement signed by the governments of mainland China and Taiwan in early November 2008, the new air links
expanded from weekend charters to a daily service, with the two sides operating a total of 108 flights per week in 2008 and approximately 270 and 370 regular direct flights per week in 2009 and 2010, respectively. Mainland China and Taiwan agreed to
increase flight destinations for air links between the two sides in mainland China to 33 airports in various PRC cities in 2010, while flight destinations in Taiwan continue to include eight airports in various cities in Taiwan. At the end of 2012,
the two sides agreed to increase the total number of flights to 616 per week and to increase the total number of destination airports in mainland China and Taiwan to 64. The two sides also previously agreed to launch chartered cargo flights between
two terminals in mainland China, namely, Shanghai Pudong and Guangzhou airports, and two terminals in Taiwan, namely, Taoyuan and Kaohsiung airports. On August 12, 2013, the two sides agreed to increase the total number of flights to 670 per
week and add three terminals of chartered cargo flights in mainland China, namely, Tianjin, Zhengzhou and Ningbo airports. At the end of 2014, mainland China and Taiwan agreed to increase the total number of flights to 924 per week and to increase
the total number of destination airports in mainland China to 65. In April 2015, the fifth batch of Mainland pilot cities was opened for individual tour to Taiwan, including Haikou, Hohhot, Lanzhou, Yinchuan, Changzhou, Zhoushan, Huizhou, Weihai,
Longyan, Guilin and Xuzhou, and the number of Mainland cities with free line tour to Taiwan has reached 47.
International Route
Rights
International route rights, along with the corresponding landing rights, are derived from air services agreements
negotiated between the PRC government, acting through the CAAC, and the government of the relevant foreign country. Each government grants to the other the right to designate one or more domestic airlines to operate scheduled services between
certain points within each country. The CAAC awards the relevant route to an airline based on various criteria, including:
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availability of appropriate aircraft and flight personnel;
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on-time
performance; and
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Although hub location is an important criterion, an airline may be awarded a
route that does not originate from an airport where it has a hub. The route rights awarded do not have a fixed expiry date and can be terminated at the discretion of the CAAC.
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Airfare Pricing Policy
The PRC Civil Aviation Law provides that airfares for domestic routes are determined jointly by the CAAC and the agency of the State Council
responsible for price control, primarily based upon average airline operating costs and market conditions.
The CAAC and the NDRC jointly
publish pricing guidelines from time to time, which set forth the basic airfare levels and permitted ranges. Pursuant to the current pricing guidelines, the basic airfares for most domestic routes are the published airfares implemented by Chinese
airlines immediately prior to the approval of the Pricing Reform Plan. Except for certain domestic routes, the actual airfare set by each Chinese airline for its domestic routes cannot be 25% than the basic airfare. Domestic routes that are not
subject to the deviation range restrictions include short-haul routes between cities in the same province or autonomous region, or between a municipality and adjacent provinces, autonomous regions or another municipality. Certain tourist routes and
routes served by only one Chinese airline are not subject to the bottom range restriction. The CAAC and the NDRC will announce the routes that are not subject to the deviation range restrictions through the airfare information system known as
Airtis.net. Chinese airlines may apply to the CAAC and the NDRC for exemption from the bottom range restriction for a particular route. Chinese airlines are also required to file the actual airfare they set for their domestic routes within the
ranges through Airtis.net 30 days prior to its implementation.
The CAAC and the NDRC will regularly review the average operating costs of
Chinese airlines, and may adjust the basic airfares for particular domestic routes that, in their view, are not at a reasonable level. The CAAC and NDRC jointly issued a notice on April 13, 2010, effective on June 1, 2010, pursuant to
which airlines may set first-class and business-class airfares in accordance with market prices, subject to relevant PRC laws. Such pricing must be filed 30 days before effectiveness with the CAAC and NDRC. Efforts by the Chinese regulators to
promote a sale market with fair competition will also help provide a favorable environment for our business growth.
At the end of 2014,
the CAAC and the NDRC jointly promulgated The Notice on Further Improving the Problems About Civil Aviation Domestic Air Transport Price Policy, which lifted the control over the civil domestic airlines cargo freight rate and changed the prices of
specific airlines from government-oriented pricing to market-oriented pricing.
At the end of 2015, the CAAC announced the
Implementation Opinion on the Reform of Mechanism of Prices and Service Fee in Civil Aviation Transport
, which sets the goal to generally lift the control over the prices and service fee in competitive part of civil aviation transport by
2017, and to generally set up a basically optimized, scientific, standardized, transparent and market-oriented pricing regulatory system by 2020.
In October 2016, the CAAC and the NDRC jointly promulgated the
Circular on the Further Reform of Passenger Transport Price Policy in Civil
Aviation Domestic Air Transport
, which loosened the control over the civil domestic airlines passenger transportation and changed the prices from government-oriented pricing to market-oriented pricing. According to the circular, the price of
routes under 800km or routes above 800km that are in competition with high-speed rails for passenger transportation can be determined independently.
At the end of 2017, the CAAC and the NDRC jointly promulgated the
Notice on Further Improving the Problems about Passenger Transport Price
Policy in Civil Aviation Domestic Air Transport
, given greater freedom to set fares on more domestic routes.
Under the PRC Civil
Aviation Law, maximum airfares on regional and international routes are set in accordance with the terms of the air services agreements pursuant to which these routes are operated. In the absence of an air services agreement, airfares are set by the
airlines themselves or by the CAAC with reference to comparable market prices, taking into account the international airfare standards established through the coordination of the International Air Transport Association, which organizes periodic air
traffic conferences for coordinating international airfares. Discounts are permitted on regional and international routes. For the airline industry in China as a whole, the airfare per kilometer is substantially higher for regional and international
routes than that for domestic routes.
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Acquisition of Aircraft and Spare Parts
We are permitted to import aircraft, aircraft spare parts and other equipment for our own use from manufacturers through EAIEC, which is 55%
owned by CEA Holding and 45% owned by our Company. This gives us a sale market with fair competition flexibility with our inventory management by allowing us to maintain a relatively lower overall inventory level of aircraft parts and equipment than
we otherwise would have to maintain. We are still required to obtain approval from the NDRC and may be subject to appraisal of the relevant competent authorities for any import of aircraft. We generally pay a commission to EAIEC in connection with
these imports.
Domestic Fuel Supply and Pricing
The Civil Aviation Oil Supply Company, or the CAOSC, which is supervised by the State-owned Assets Supervision and Administration Commission,
or the SASAC, is currently the dominant civil aviation fuel supply company in China. We currently purchase a significant portion of our domestic fuel supply from CAOSC. The PRC government determines the fuel price at which the CAOSC acquires fuel
from domestic suppliers and the CAAC issues a guidance price. The retail price at which the CAOSC resells fuel to airline customers is set within a specified range based on this guidance price.
In 2005, the NDRC, the CAAC and the China Air Transport Association jointly launched the linkage mechanism for aviation fuel prices and
transportation prices by airline companies. The fuel surcharge standards for domestic passenger routes were adjusted according to a series of notices regarding the adjustments of passenger fuel surcharges on domestic routes issued by the NDRC and
the CAAC from 2006 to 2008. In the second half of 2008, international crude oil prices decreased significantly, leading the NDRC and the CAAC to release an announcement on January 14, 2009 to suspend fuel surcharges for domestic passenger
routes with effect from January 15, 2009. A Notice Concerning the Relevant Issues on Establishment Linkage Mechanism for Passenger Fuel Surcharges on Domestic Routes and the Price of Domestic Aviation Coal Oil Fuel by NDRC and CAAC, with effect
from November 14, 2009, provided that fuel surcharges shall be charged by the airlines, at the airlines discretion, but within certain limits as set forth in the notice. On March 31, 2010, the NDRC and CAAC issued the Notice
Regarding the Publication of Passenger Fuel Surcharges Rate on Domestic Routes, which reduced the standard fuel surcharge by 3.1% for domestic routes. In addition, on March 31, 2011, the NDRC and CAAC issued another similar notice, which
further adjusted the standard fuel surcharge downwards. From August 1, 2011, according to the
Announcement on the Linking Mechanism for Fuel Surcharges and Aviation Coal Oil Fuel,
issued by the NDRC and CAAC, the rate of domestic route
fuel surcharges will be adjusted each month if the difference in consolidated purchase costs for domestic aviation coal oil fuel exceeds RMB250 per ton.
On March 24, 2015, the CAAC and the NDRC jointly promulgated the
Notice on Adjustment of the Linking Mechanism for Fuel Surcharges and
Aviation Coal Oil Fuel in Passenger Transport of Domestic Airlines
, in which they decided to increase the base price of aviation coal oil fuel form RMB4,140 per ton to RMB5,000 per ton.
Safety
The CAAC
has made the continued improvement of air traffic safety in China a high priority. The CAAC is responsible for the establishment of operational safety, maintenance and training standards for all Chinese airlines, which have been formulated based on
international standards. Each Chinese airline is required to provide flight safety reports to the CAAC, including reports of flight incidents or accidents involving its aircraft, which occurred during the relevant reporting period and other safety
related problems. The CAAC conducts safety inspections on each airline periodically.
The CAAC oversees the training of most Chinese
airline pilots through its operation of the pilot training college. The CAAC implements a unified pilot certification process applicable to all Chinese airline pilots and is responsible for the issuance, renewal, suspension and cancellation of pilot
licenses. Each pilot is required to pass the CAAC-administered examinations before obtaining a pilot license and is subject to an annual examination in order to have such certification renewed.
All aircraft operated by Chinese airlines, other than a limited number of leased aircraft registered in foreign countries, are required to be
registered with the CAAC. All of our aircraft are registered with the CAAC. All aircraft operated by Chinese airlines must have a valid certificate of airworthiness issued and annually renewed by the CAAC. In addition, maintenance permits are issued
to a Chinese airline only after the maintenance capabilities of that Chinese airline have been examined and assessed by the CAAC. These maintenance permits are renewed annually. All aircraft operated by Chinese airlines may be maintained and
repaired only by CAAC certified maintenance facilities, whether located within or outside China. Aircraft maintenance personnel must be certified by the CAAC before assuming aircraft maintenance posts.
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In early 2013, the CAAC amended the original Civil Aviation Incidents Standards and published the
new Civil Aviation Incidents Standards which became effective as of March 1, 2013. The CAAC amended the
Management Rules on Safety Information of Civil Aviation
which became effective on April 4, 2016 and required that related
Chinese airlines should arrange a certain number of specialists that satisfied with special requirements to take charge of the management of safety information. The CAAC promulgated the new
Administrative Provisions on Emergencies of Chinas
Civil Aviation
which became effective from April 17, 2016 and formulated the duties and responsibilities of Chinese airlines on the prevention and emergency preparedness, prediction and early warning, emergency disposal, handling and other
emergency work of civil aviation. We will ensure our relevant employees implement the new standards, which will enable us to enhance our daily operations. For more information on the safety standards and measures implemented by us, see
Maintenance and Safety Safety. In 2016, the CAAC promulgated the new
Administrative Provisions on Civil Aviation Safety Information.
As a result, we formulated new internal regulations on aviation safety information to strengthen
the safety of our information system.
Security
The CAAC establishes and oversees the implementation of security standards and regulations based on the PRC laws and standards established by
international civil aviation organizations. Each airline is required to submit to the CAAC an aviation security handbook describing specific security procedures established by the airline for the
day-to-day
operations and security training for staff. Such security procedures must be formulated based on the relevant CAAC regulations. Chinese airlines that operate international routes must also adopt
security measures in accordance with the requirements of the relevant international agreements and applicable local laws. We believe that we comply with all applicable security regulations.
Environmental Regulation
We are subject to a number of environmental laws and regulations issued by regulatory authorities in China including the Environment Protection
Law of the PRC, the Prevention and Control of Noise Pollution Law of the PRC, the Environmental Protection Tax Law of the PRC, Implementing Regulations of Environmental Protection Tax Law of the PRC, Notice on Developing Carbon Reporting and
Verification and Emissions Monitoring Plan of 2016 and 2017, the Notice on Printing and Distributing the List of Quota Management Units of Shanghai Carbon Emission Trading (2017 Edition). We believe that we comply with all applicable noise and
environmental regulations in material aspects.
Chinese Airport Policy
Prior to September 2003, all civilian airports in China were operated directly by the CAAC or by provincial or municipal governments. In
September 2003, as part of the restructuring of the aviation industry in China, the CAAC transferred 93 civilian airports to provincial or municipal governments. The CAAC retained the authority to determine the
take-off
and landing charges, as well as charges on airlines for the use of airports and airport services. Prior to 2004, Chinese airlines were generally required to collect from their passengers on behalf of
the CAAC a levy for contribution to the civil aviation infrastructure fund, which was used for improving Chinas civilian airport facilities. Our revenue for the previous years is shown net of this levy. In 2003, the levy was 5% of domestic
airfares and 2% of international airfares. The levy was waived by the CAAC from May 1, 2003 to December 31, 2003. With effect from September 2004, the civil aviation infrastructure levies, now paid to the Ministry of Finance of the PRC
(MOF), have been reflected in airfares of Chinese airlines rather than collected as a separate levy.
On December 28,
2007, the CAAC and the NDRC released the Implementing Scheme for the Civil Aviation Airport Charges Reform Implementation Plan, which was implemented on March 1, 2008. This new plan divides airport charges into three parts: charges related to
airline businesses; charges related to important
non-airline
items; and other
non-airline
charges. The charges related to airline businesses and important
non-airline
items must follow the national guided prices, in which the standard prices are rarely increased, while reduced rates can be negotiated between the airport or the service provider and the users. The plan
grants us the right to negotiate with airports on the airport charges.
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The civil aviation infrastructure levy was paid to the MOF and refunded again from July 1,
2008 to June 30, 2009, according to one of the ten measures announced by the CAAC in December 2008 in response to the global economic downturn. The refunded levy for Chinas aviation industry amounted to approximately RMB4,000 million
in total. The ten measures also include measures to enhance safety, reduce taxes, invest in infrastructure and optimize the airspace and air routes.
Limitation on Foreign Ownership
The CAACs present policies limit foreign ownership in Chinese airlines. Under these limits,
non-Chinese
residents and Hong Kong, Macau or Taiwan residents cannot hold a majority of our total outstanding shares individually or together. For PRC air transportation companies, pursuant to the new Catalog
of Industries for Guiding Foreign Investment, jointly promulgated by the NDRC and MOC on July 28, 2017, Chinese investors should be the controlling shareholders of a PRC air transportation company and the total shares held by foreign investment
enterprises and its associated enterprises are not permitted to exceed 25% of the total shares of a Chinese airline.
Domestic
Investment
According to the Regulations on Domestic Investment in Civil Aviation Industry issued by the Ministry of Transport of
PRC and effected on January 19, 2018, public air transport companies that require special management for domestic investment can keep a relative state-owned holding in its equity structure. The state-owned shares ratio requirement of major
civil transport airports is loosened. Moreover, investment restrictions among various entities in the civil aviation industry are further liberalized.
Competition
Domestic
We compete against our domestic competitors primarily based on safety, quality of service and frequency of scheduled flights. With the
combination of our dominant position in Shanghai, our route network and our continued commitment to safety and service quality, we believe that we are well-positioned to compete against our domestic competitors in the growing airline industry in
China. However, domestic competition from other Chinese airlines has been increasing recently as our competitors have increased capacity and expanded operations by adding new routes or additional flights to existing routes and acquiring other
airlines. In addition, we have faced intense competition from entrants to our domestic markets as new investments into Chinas civil aviation industry have been made following the CAACs relaxation of certain private-sector investment
rules in July 2005. In December 2008, the CAAC announced ten measures to protect and encourage the domestic aviation industry, one of which provides that no new Chinese airlines will be licensed to incorporate and operate aviation businesses before
2010. In October 2010, the CAAC announced that the suspension of approvals for new Chinese airlines companies would continue for an indefinite period. However, if the restriction is lifted in the future, we expect that competition from other Chinese
airlines on our routes will further intensify.
There are currently more than 50 Chinese airlines in mainland China, and we compete with
many of them on various domestic routes. All of these airlines operate under the regulatory supervision of the CAAC. Our Company, Air China Limited, or Air China, which is based in Beijing and listed on the Hong Kong Stock Exchange and the London
Stock Exchange, and China Southern Airlines Company Limited, or China Southern, which is based in Guangzhou and listed on the Hong Kong Stock Exchange and the New York Stock Exchange, are the three leading air carriers in China.
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Each of the domestic airlines competes against other airlines operating the same routes or flying
indirect routes to the same destinations. Our principal competitors in the domestic market are China Southern and Air China, which also provide transportation services on some of our routes, principally routes originating from the major air
transportation hubs in China, such as Shanghai, Guangzhou and Beijing. Some of these routes are among our most heavily traveled routes. Since most of the major domestic airlines operate routes from their respective hubs to Shanghai, we also compete
against virtually all of the major domestic airlines on these routes. In addition, we are facing increasing competition from certain
low-cost
carriers, such as Spring Airlines, in the domestic market. Spring
Airlines competes with us, as it operates daily domestic routes to certain destinations such as Harbin, Shenyang, Guangzhou, Xiamen, Sanya, Kunming and Chongqing, which are covered in our domestic routes. The Twelfth Five-Year Plan for
civil aviation industry in China encourages
low-cost
airlines to enter into major logistics market gradually. In February 2014, CAAC issued Guidance on Facilitating
Low-cost
Aviation Development which aims at supporting the development of domestic
low-cost
airlines. This will further intensify the competition in domestic aviation
market. However, we believe we are well-positioned to compete against domestic
low-cost
carriers due to our expansive route network, competitive pricing, greater availability of flight services to these
destinations and strong brand name.
Domestic Rail
The PRC government is aggressively implementing the expansion of its domestic high-speed rail network, which has provided train services at
speeds of up to 350 km per hour connecting major cities such as Beijing, Shanghai, Guangzhou and Hong Kong. The expansion of the coverage of this network and improvements in railway service quality, increased passenger capacity and stations located
closer to urban centers than competing airports could enhance the relative competitiveness of the railway service and affect our market share on some of our key routes, in particular our routes between 500 km to 800 km. The high-speed railway routes
between Shanghai and Kunming, Baoji and Lanzhou and Xian and Chengdu commenced operations in 2017, and has affected our Xian and Chengdu route, Guiyang and Kunming route, Xian and Xining route and Xian and Lanzhou route.
With the establishment of a PRC national high-speed railway network, we will inevitably face increasing competition and pricing pressures from
this railway service. Therefore, we have been taking active measures in decreasing the number of short-haul routes that overlap with such high-speed train routes, as well as adjusting certain airfare prices on affected routes, facilitating
air-to-railway
transfers and allocating flight resources to alternative routes or
medium-to-long-haul
routes that have higher profitability, higher demand and lessened competition. In addition, in 2013, we developed ground connection services such as
Air-Rail
Service and
Air-Bus
Service and cooperated with Disney, brand hotel groups, and renowned international travel enterprises to develop travel products. In 2017, our
Air-Rail
Service and
Air-Bus
Service developed steadily with increased routes in Yangtze River Delta, Xian, Lanzhou and other cities and regions. We expect to continue
exploring cooperation opportunities with domestic railway authorities, while maintaining and strengthening our other competitive advantages, which include providing high quality services, increasing our
pre-sale
product promotions and developing our transfer services.
Regional
Our Hong Kong routes are highly competitive. We currently operate approximately 20 flight routes between various cities in mainland China and
Hong Kong. The primary competitors on our Hong Kong routes are Cathay Pacific Airways (Cathay), Hong Kong Dragon Airlines Limited (Dragonair) and HongKong Airlines. Cathay, Dragonair and HongKong Airlines compete with us on
several of these routes, particularly the Shanghai-Hong Kong route. We also face competition from Spring Airlines on our Shanghai-Hong Kong and Shanghai-Macau routes. In addition, we face competition from HK Express on our Kunming-Hong Kong route.
The Air Transportation Arrangement signed between the PRC government and the administrative government of Hong Kong in February, 2000 provides for equal opportunity for airlines based in Hong Kong and mainland China. As a result, Dragonair has
increased the frequency of its flights on several of our Hong Kong routes, resulting in intensified competition.
The
policy restraint on direct flights between Taiwan and mainland China has been further loosened in the past few years but there has been no further negotiation on the expansion of such arrangement between Taiwan and mainland China since
mid-2016.
We currently operate flights to Taipei from Shanghai, Xian, Kunming, Changzhou, Hefei, Huaian, Yinchuan, Nanchang, Lanzhou, Lijiang, Ningbo, Nanjing, Qingdao, Huangshan, Taiyuan, Wuhuan, Wuxi.
We currently compete with China Airlines and EVA Air on our Shanghai-Taipei, Nanjing-Taipei, Wuhan-Taipei,
Xian-Taipei
and Qingdao-Taipei routes. However, given the arrangement is subject to the
political relationship between Taiwan and mainland China, any deterioration in such political relationship may cause the discontinuity or disruption in the flight arrangement. As one of the several airlines offering Taiwan-mainland China direct
flight services, we cannot assure you that we will maintain or will continue to be allocated sufficient Taiwan-mainland China routes, or our results will not be aversely impacted.
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We compete with Air Macau on the Shanghai Pudong-Macau route. Air Macaus routes also
provide an alternative to our Hong Kong routes for passengers travelling between Taiwan and mainland China.
International
We compete with Air China, China Southern and many other well-established foreign carriers on our international routes. Most of
our international competitors are very well-known international carriers and are substantially larger than we are and have substantially greater financial resources than we do. Many of our international competitors also have significantly longer
operating histories and greater name recognition than we do. Some international passengers, who may perceive these airlines to be safer and provide better service than Chinese airlines in general, may prefer to travel on these airlines. In addition,
many of our international competitors have more extensive sales networks and utilize more developed reservation systems than ours, or engage in promotional activities, such as frequent flyer programs, that may be more popular than ours and
effectively enhance their ability to attract international passengers.
To improve our competitive position in international markets, we
have established additional dedicated overseas sales offices, launched our own frequent flyer program, participated in Asia Miles, a popular frequent flyer program in Asia, and entered into code-sharing arrangements with a number of
foreign airlines. We have also improved our online reservation and payment system. In addition, in June 2011, we joined SkyTeam, an international airlines alliance and frequent flyer mileage program that includes, among others, international
carriers such as Delta, China Southern, Alitalia, Air France and KLM. As a member of SkyTeam alliance, our Elite members can enjoy approximately 516 lounges worldwide. In 2013, we implemented code-sharing programs covering 242 routes with 11 SkyTeam
member airlines. See Marketing and Sales SkyTeam Alliance. In the meantime, we also started code-sharing cooperation with seven
non-SkyTeam
member airlines, covering more than 150
routes, including Japan Airlines Corporation and Qantas Airways Limited. In 2014, we proactively promoted international cooperation among members and
non-members
airlines of SkyTeam Alliance at various levels
and expanded its route network to increase its brand recognition. We implemented transit service cooperation with China Airlines, Delta Airlines and Air France between different terminals at Shanghai Pudong International Airport. We facilitate joint
sales by optimizing transit connection with Delta Airlines and enhanced
co-operations
with Air France by increasing the number of code-share flights. We also comprehensively improved cooperation on the
China-Australia route by establishing joint operation with Qantas.
In 2015, we actively responded to the industry competition, strove for
additions of air traffic rights and time slot resources in hub markets and core markets, steadily improved the aircraft utilization rate and consolidated and expanded market share in the three largest hubs and core markets. Based on the SkyTeam
Alliance platform, we enhanced our strategic cooperation with Delta Air Lines and cooperated with Air France and Qantas to develop a highly efficient and convenient flight network, which covered the whole country and connected to the whole world.
In 2016, we proactively promoted the establishment of transportation hubs with the opening of various international routes for long-haul
flights and an enhanced coverage of our transportation network. With Shanghai as the core hub, we added six international routes for long-haul flights to our network, connecting Shanghai and Prague, Amsterdam, Madrid, St. Petersburg, Chicago and
Brisbane, respectively. We provided more frequent flight services on routes connecting Shanghai and New York City, Los Angeles, Sydney and Melbourne. We added routes connecting Kunming and Sydney, Qingdao and San Francisco, Nanjing and Vancouver and
Hangzhou and Sydney. Last, we stabilized the allocation of our flight capacities for Japan, Korea and Southeast Asia markets. As a result of these enhanced transit connection and expanded transit routes structures. Meanwhile, we also continued to
strengthen our cooperation with airlines which are not members of the SkyTeam Alliance. We and Qantas Airways opened up our respective VIP lounges in the PRC and Australia to each other. Through cooperating with British Airways, Royal Brunei
Airlines and China Express Airlines in code sharing, we optimized our transit connection at London Heathrow Airport and enhanced the level of coverage of our route network in Southeast Asia.
38
In 2017, we actively responded to the competition in international market. We have strengthened
our cooperation with
Air-France
KLM and Delta to further extend our international route and improve our competitiveness and reputation in the international market. Relying on the cooperation platform of
SkyTeam Airline Alliance, we have newly launched code-share cooperation with Air Europa Líneas Aéreas, S.A.U. (IATA code: UX) from Spain and Czech Airlines j.s.c. (IATA code: OK). In addition, the agreement of Fully Opening of
the Aviation Market between China and Australia has intensified the competition in the Australian market, yet, it has caused us to strengthen our cooperation within the SkyTeam Airline Alliance, especially joining hands with Qantas Airlines, a
cooperative partner, to expand the route network and share the infrastructure and resources of the main bases of both parties. We deepened our cooperation with Qantas Airlines in terms of code sharing, joint operation and sales. We commenced to
launch code-sharing cooperation with Jet Airways (India) Ltd. (IATA code: 9W) and Air Mauritius Limited (IATA code: MK). In 2017, we also proactively adjust our capacities in international routes according to the market situation.
Maintenance and Safety
The rapid
increase in air traffic volume in China in recent years has put pressure on many components of Chinas airline industry, including air traffic control systems, the availability of qualified flight personnel and airport facilities. In recent
years, the CAAC has placed increasing emphasis on the safety of airline operations in China and has implemented a number of measures aimed at improving the safety record of the airlines. Our ability to provide safe air transportation in the future
depends on the availability of qualified and experienced pilots in China and the improvement of maintenance services, national air traffic control and navigational systems and ground control operations at Chinese airports. We have a good safety
record and regard the safety of our flights as the most important component of our operations.
Maintenance Capability
Through our cooperation with service providers and ventures with other companies, we currently perform regular repair and maintenance checks on
all of our aircraft, which include D1 checks, C checks and other maintenance services for certain aircraft and other flight equipment. We also perform certain maintenance services for other Chinese and international airlines. We have four main
maintenance bases in Shanghai, Kunming and Xian and several maintenance bases in our provincial hubs including Taiyuan, Qingdao and etc. Our primary aircraft maintenance base is at Pudong International Airport. We employed approximately 11,993
workers as maintenance and engineering personnel as of December 31, 2017. We prepared our own training plan for our employees to meet the requirements of certain regulations and the needs for future development. In order to enhance our
maintenance capabilities and to reduce our maintenance costs, we have acquired additional maintenance equipment, tools and fixtures and other assets over the past few years, such as airborne testing and aircraft data recovery and analysis equipment.
Our avionics equipment is primarily maintained and repaired at our electronic maintenance equipment center located in Shanghai.
We
entered into a joint venture with Honeywell International Inc. (Honeywell), formerly Allied Signal Inc., in Shanghai for performing maintenance and repairs on aircraft wheel assemblies and brakes. Since October 1997, we have operated a
maintenance hangar at Hongqiao International Airport, which has the capacity to house two wide-body aircraft. We and Rockwell Collins International Inc. of the United States have also
co-established
Collins
Aviation Maintenance Service Shanghai Limited, which is primarily engaged in the provision of repair and maintenance services for avionics and aircraft
in-flight
entertainment facilities in China. We and
Rockwell Collins International Inc. hold 35% and 65%, respectively, of the equity interests in the joint venture. Moreover, in November 2002, we, jointly with Aircraft Engineering Investment Limited, established Shanghai Eastern Aircraft Maintenance
Limited, in which we hold 60% of the equity interests, to provide supplemental avionics and other maintenance services to us. STA, which was established in 2004 by us and Singapore Technologies Aerospace Ltd. under a joint venture agreement dated
March 10, 2003, also provides us with aircraft maintenance, repair and overhaul services. In 2017, we entered into two agreements with Honeywell and we expect to save US$0.8 million of repairing costs.
39
On November 6, 2007, we entered into a joint venture with United Technologies Corp., or UTC,
to establish Shanghai Pratt & Whitney Aircraft Engine Maintenance Co., Ltd., or Pratt & Whitney, for performing maintenance and repairs on aircraft engines. We and UTC contributed US$20,145,000 and US$19,355,000, respectively, to
the registered capital and hold 51% and 49%, respectively, of the equity interests in the joint venture. Moreover, after our absorption of Shanghai Airlines, we took over its 15% equity interest in Boeing Shanghai Aviation Services Co., Ltd.
(Boeing Shanghai). As of December 31, 2013, Boeing (China) Investment Co., Ltd., Shanghai Airport (Group) Co., Ltd. and Boeing (Asia) Services Investment Limited hold 35.3%, 25.0% and 24.7%, respectively, of the remaining equity
interest. Boeing Shanghai was founded in 2006 with a registered capital of US$85,000,000, and operates a maintenance hangar with the capacity to provide aircraft modification and maintenance services for two wide-body aircraft and one narrow-body
aircraft and provides aircraft modification and maintenance services. In addition, we also hold 50% of Shanghai Airlines previous equity interest in Shanghai Hute Aviation Technology Co., Ltd. (Shanghai Hute). The remaining equity
interest is held by Sichuan Haite High-Tech Co., Ltd. Shanghai Hute was founded in 2003 with a registered capital of RMB30,000,000, and provides maintenance services for aviation equipment. The enhancement of our maintenance capabilities allows us
to perform various maintenance operations
in-house
and continue to maintain lower spare parts inventory levels.
Since December 2014, we have adopted an innovative asset management model and established Eastern Airlines Technology Co. Ltd. (Eastern
Technology), a wholly-owned subsidiary specializing in aircraft maintenance, to explore the transformation of supporting assets to operational assets. In 2015, Eastern Technology engaged in aircraft maintenance, raised its standards for
aircraft maintenance and construction management to facilitate our centralized control over aircraft maintenance, and focused on
high-end
premium operations, such as providing maintenance services for aircraft
for Chinese routes operated by international airlines and sharing of aviation equipment. In 2016, other airlines such as Singapore Airlines, AirAsia and Royal Brunei Airlines became customers of Eastern Technology, whose area of operation expanded
to locations including Xian, Jinan, Wuhan and Wuxi. In 2017, other airlines such as Macau Airlines, Delta, Asiana Airlines, Hong Kong Airlines and Malaysia Airlines became customers of Eastern Technology.
Safety
The
provision of safe and reliable air services for all of our customers is one of our primary operational objectives. We implement uniform safety standards and safety-related training programs in all operations. Our flight safety management division
monitors and supervises our flight safety. We have had a flight safety committee since the commencement of our business, comprised of members of our senior management, to formulate policies and implement routine safety checks at our Shanghai
headquarters and all provincial hubs. The flight safety committee meets monthly to review our overall operation safety record during the most recent quarter and to adopt measures to improve flight safety based upon these reviews. We have also
implemented an employee incentive program, using a system of monetary rewards and discipline, to encourage compliance with the CAAC safety standards and our safety procedures. We periodically evaluate the skills, experience and safety records of our
pilots in order to maintain strict control over the quality of our pilot crews. In 2011, we were awarded the Flight Safety Five-star Award by CAAC for our commitment to aviation and operations safety.
In 2013, we continued to strengthen our Safety Management System (SMS). We issued work implementation plans that provided specific
measures to address risks such as lighting strikes, hard aircraft landings and communication systems failures. In addition, we established the Nantong Airport training base to provide additional training programs for our flight crews. Furthermore,
we formulated the Assessment and Remuneration Packages of Star-rating flight Crew Members, which commenced star-rating assessment of all flight crew members in terms of flight safety, flight quality, discipline and provision of services.
The management of each of our provincial hub operations is responsible for the flight safety operations at the respective hub under the supervision of our flight safety management division. We prepare monthly safety bulletins detailing recent
developments in safety practices and procedures and distribute them to each of our flight crew, the maintenance department and the flight safety management department. The CAAC also requires us to prepare and submit semi-annual and annual flight
safety reports.
Regarding the strengthening of the SMS, we have (i) organized training for the administrators of safety management
of all operating units, deepened the understanding for the construction of SMS, laying the groundwork for SMS; (ii) followed our plans and orderly commenced the construction of the analytical network. We had a number of cooperation meetings,
discussing the master framework, which carries the system. We also introduced the concept of safety indicators for operational progress, rendering safety management more comprehensible; and (iii) continuously improved the risks database of the
relevant routes and airports, strengthening the application of the different databases on the actual process of operation.
40
In 2014, we continued to facilitate the construction and application of the SMS and strictly
implementing risk management. We also put greater efforts in safety inspection and supervision as well as fulfillment of responsibilities in relation to safety enhancement. We enhanced its flight training management and commenced specialized
training covering pilots management and transition to B777-300ER aircraft to reinforce the foundations of flight safety. Emphasizing technology applications, we established a research institute of flight safety technology application to provide
intellectual support to our ongoing safe operations.
All of our jet passenger aircraft pilots participated in the manufacturer training
and support programs sponsored by Airbus and Boeing and are required to undergo recurrent flight simulator training and to participate in a flight theory course periodically. We use flight simulators for A320, A330, A340, B737NG,
B737-300,
B777 aircraft at our own training facility, the training facility located in the CAAC training center or overseas training facilities.
We placed great emphasis on ensuring safe operation and will continue to do so. In 2015, we established an integrated management and control
model incorporating regional management, safety audit and safety supervision to further improve our safety management and control system, and pushed ahead the establishment of the Management of Risk Control System (MORCS) to enhance safety risk
prevention on an ongoing basis. We have also promoted phase 2 of the Electronic Flight Bag, focusing on technical difficulties such as operation of above plateau airports, and has been enhancing our research capability in flying technology,
providing psychological support to our pilots and improving emergency drills to implement
in-flight
safety requirements strictly.
In 2016, we further enhanced our safety management system by strengthening the enforcement of safety responsibilities, strengthening our
safety supervision and inspection, strengthening our risk control over special routes and international routes for long-haul flights, enhancing our operational risk alert abilities, boosting the quality of training for our pilots, improving our
system for developing talents with core skills, enhancing our ability in handling security-related contingencies, and strictly implementing safety requirements for our flights.
In 2017, through the formulation of safety management responsibility list, we strengthened procedure management and enforced safety management
responsibilities. We also carried out safety management system effectiveness evaluation to enhance our abilities in identifying and managing material operational risks. In addition, we improved our emergency handbooks and emergency flows to enhance
its ability in handling contingencies, as well as conducted comprehensive safety inspections and adopted specific prevention measures targeting material risk-prone areas to strengthen risk management. We made use of information technology to
disseminate safety information and risk alerts quickly and strengthened the application of technology in safety management. We developed air defense information system to promote the integration of air security and ensured the safety of air defense.
In 2017, we had 2,073,000 safe flying hours and 879,700
take-off
and landing flights, which is an increase of 8.0% and 7.0%, respectively, over the same period of year 2016.
Cyber-security
With respect to our
internal policies on cyber-security and internet safety, we have established an information safety management system and issued internal regulations on cyber-security, internal hardware and data safety systems to prevent loss of information due to
cyber-security incidents, network outages or hardware incidents. We also plan to implement measures relating to the office environment information safety management and information system emergency management, information system access control,
protection from any malicious software, management of information exchange tools and internal review and audit of information safety risks. Furthermore, we have entered into a strategic cooperation plan with the China Information Technology Security
Evaluation Center by which their trained engineers evaluate our internal data security policies and cyber-security measures. In 2012, we established and announced two internal regulations relating to cyber-security, namely, China Eastern Airlines
Information Security Management Regulation and China Eastern Airlines Information System Application and Development Safety Regulation and in 2013, we established and announced another two internal regulations relating to cyber-security, namely,
China Eastern Airlines Information Security Incident Management Regulation and China Eastern Airlines Information System Classification Measures, which we believe will strengthen our information safety management systems and overall cyber-security
defenses. During the year ended December 31, 2014, we did not experience any material cyber-security incidents or related losses.
41
In 2014, regarding the risks in relation to internet security of the aviation section, we took
the following preventive measures: (i) putting in place a monitoring system; (ii) clarifying the responsibilities relating to internet, mainframe computer, operation and maintenance, product development and management; (iii) having
internet security equipment; (iv) having manual inspection and(v) preparing for emergency response.
In June 2014, we promulgated
documents Class I to V for CEA Information Security Management System, including directions, management requirements, operation manual and recorded output documents at security level, and passed the ISO27001 (international information security
standard) certificate qualification in November 2014. Our internet security policy was synchronized with the ISO27001.
In 2015, we
established a routine inspection system and a contingency mechanism for its reporting website for external security breach. The data loss prevention (DLP) project was implemented and our information security management system passed the ISO27000
certification. In the future, we will further improve our security code review and management system; promote the construction of IPS at the internet portal and the information technology disaster backup center to elevate the overall protection
level on our information system security.
In 2016, we conducted information system emergency response training and commissioned the
construction of our Xian disaster backup facility. In addition, we implemented security code review and security protection around the boundaries of our internet and data center, optimized the multi-dimensional security protection system and
elevated the overall security protection level on our information system.
In 2017, we based on the Three Centers in Two
Places plan to promote our work on the construction of the Xian data and disaster backup facility and the construction of a globalized basic assurance and service system. We optimized the multi-dimensional security protection system on
the internet and the data center to prevent the attack of the WANNACRY ransomware effectively. We conducted information system emergency response training and relied on security code quality analysis to implement security code review and
security protection. We also commenced security review for information system and enhanced emergency response of internet security, optimized the multi-dimensional security protection system on the internet and the data center and safeguarded the
security of key information infrastructure, elevating the overall security protection standard on our information system. In 2017, our information security management system passed the ISO27001 review for certification renewal and the ISO20000
review.
We did not purchase any insurance for internet security.
Fuel Supplies
Jet fuel is one of the
major expenses of airlines. Fuel costs represented approximately 25.0% of our total operating expenses in 2017. Our aviation fuel expenditure in 2017 was RMB25,131 million, representing an increase of 28.1% from RMB19,626 million in 2016.
We currently purchase a significant portion of the aviation fuel for our domestic routes from regional branches of the CAOSC. Fuel costs in China are affected by costs at domestic refineries and limitations in the transportation infrastructure, as
well as by insufficient storage facilities for aviation fuel in certain regions of China. Fuel prices at six designated major airports in China, namely, the airports in Shanghai Pudong, Shanghai Hongqiao, Beijing, Guangzhou, Shenzhen and Tianjin,
are set and adjusted once a month by the CAAC in accordance with prevailing fuel prices on the international market. For our international routes, we purchase a portion of our aviation fuel from foreign fuel suppliers located at the destinations of
these routes, generally at international market prices. Significant fluctuations of international oil prices will significantly impact jet fuel prices and our revenue from fuel surcharge and accordingly our results of operations.
42
In 2017, our total aircraft fuel cost was approximately RMB25,131 million, representing an
increase of 28.1% from RMB19,626 million in 2016, which was mainly due to an increase in average price of fuel as the OPEC and other oil suppliers efficiently squeezed excess supply of oil in the market and the political upheaval in the Middle
East increased the uncertainty of oil production, and to a lesser extent, an increase in the volume of refueling from 2016 to 2017. We cannot assure you that fuel prices will not fluctuate in the future. Further, due to the highly competitive nature
of the airline industry and government regulation on airfare pricing, we may be unable to fully or effectively pass on to our customers any increased fuel costs we may encounter in the future. However, we intend to continue focusing on enhancing our
jet fuel procurement policies and developing additional internal cost-control measures, which include streamlining the number of aircraft models in our fleet and optimizing route structures, which we believe will enable us to control our fuel costs.
Ground Facilities and Services
The
center of our operations is Shanghai, one of Chinas principal air transportation hubs. Our Shanghai operations are based at Hongqiao International Airport and Pudong International Airport. We currently also operate from various other domestic
airports. We have hangars, aircraft parking and other airport service facilities at these airports, and provide ground services in these locations.
We have our own ground services and other operational services, such as aircraft cleaning and refueling and the handling of passengers and
cargo for our operations at Hongqiao International Airport and Pudong International Airport. We also provide ground services for many other airlines that operate to and from Hongqiao International Airport and Pudong International Airport.
In-flight
meals and other catering services for our Shanghai-originated flights are provided primarily
by Shanghai Eastern Air Catering Limited Liability Company, a joint venture company affiliated with CEA Holding. We generally contract with local catering companies for flights originating from other airports.
In 2017, we enhanced the flight management to reduce the delay in takeoff. We also improved our service in self
check-in
management by optimizing our internal management process. In addition, we deepened our cooperation with
Air-France
KLM, Delta and other members of the SkyTeam
to provide through
check-in
services in various domestic airports and international airports.
Marketing and
Sales
Passenger Operations
Our marketing strategy with respect to passenger operations is primarily aimed at increasing our market share for all categories of air
travelers. With respect to our Hong Kong and international routes, we are permitted to market our services based on price. We have limited flexibility in setting our airfares for domestic routes and adjust our domestic airfares in response to market
demand. As part of our overall marketing strategy, we emphasize our commitment to safety and service quality. We believe that emphasis on safety is a critical component of our ability to compete successfully.
We have also adopted customized strategies to market our services to particular travelers. We seek to establish long-term customer
relationships with business entities that have significant air travel requirements. In order to attract and retain business travelers, we focus on the frequency of flights between major business centers, convenient transit services and an extensive
sales network. We launched our initial frequent flyer program in 1998 and joined the Asia Miles frequent flyer program in April 2001 to attract and retain travelers. In August 2003, we upgraded and rebranded our frequent flyer program to
Eastern Miles and introduced a series of new services, including, among others, instant registration of membership and mileage, online registration of mileage, and accumulation of mileage on expenses at certain hotels, restaurants and
other service providers that are our strategic partners. As a result of our continual efforts to develop the Eastern Miles program, the number of members of the frequent flyer program reached over 22.8 million in 2014. The special
services hotline 95530 call center was established and came into operation in 2004. In light of the expansion of national high-speed railway network, we have cooperated with the Shanghai Railway Bureau to launch
Air-Rail
Pass Transportation products. Our domestic and international flights together with the high-speed railway products at Shanghai Hongqiao International Airport and Shanghai Pudong International
Airport, have formed an
air-rail
two-way
transportation product, which has helped us broaden our customer resources.
43
In terms of our customer resources, we have actively explored and expanded our customer base of
high-end
business travelers to accelerate the development of group clients. In addition, we have fully promoted the expansion of Eastern Miles membership. In order to attract more members and to provide members with
better experience in terms of diversity, comprehensiveness and flexibility, we have strengthened our cooperation with retail stores by increasing the number of
co-operative
stores, covering various industries
such as financial services, hotel, car rental and health services. As of the end of 2017, frequent flyer members of Eastern Miles reached 33.4 million, increased by 14.3% compared to 2016. We actively launched marketing campaigns
such as Members Day and 818 Big Sale, as well as increased the diversity of
non-aviation
point redemption channels and products, boosted the loyalty of our customers such that the
ratio of frequent flyer members repeating their flights raised to 31.71%, representing an increase of 1.37 percentage points. Meanwhile, we placed emphasis on and strengthened the cooperation with travel management companies (TMC),
online travel agencys (OTA) agents and major customers. Sales revenue from TMC increased by 38.92% compared to last year. Revenue from direct corporate customers increased by 25.07% compared to last year, the number of direct corporate
customers increased to 4,027, increased by 27.1% compared to 2016
Our advertising, marketing and other promotional activities include the
use of online platforms, radio, television and print advertisements. We plan to continue to use advertising and promotional campaigns to increase sales on new routes and competitive routes.
In 2016, China Eastern Airlines E-Commerce Co., Ltd. established an
e-commerce
platform by integrating
our online and offline platforms. Ticket returns, rebooking and upgrades via multiple channels, such as our official website, mobile application and member website were launched with success. In 2017, 12 major updates were made to our mobile
application.
Ticket Booking Systems
In 2002 and again in 2012, we upgraded our online ticket booking and payment system to facilitate customer purchases of tickets via the
Internet. In 2012, we also expedited the construction of nine overseas websites in a variety of languages. Currently, our global website covers North America, Australia, Europe and Asia Pacific. We continue to encourage our customers to book and
purchase tickets via the Internet by initiating various promotional campaigns, upgrading and expanding the services offered by our online sales system. In 2012, we introduced China Eastern Mobile E, a smartphone application that provides
mobile flight booking, flight status and online checking services, which we believe will provide our customers with additional convenient, value-added services. In 2013, we introduced a new version of China Eastern Mobile E and increased the
application of China Eastern Mobile E to 14 airports. In 2016, we introduced the English version of China Eastern Mobile E to our customers. In addition, we introduced M Website, a website portal that provides
mobile flight booking, flight status and online checking services and applied several third-party payment platforms to our ticket booking system. We also increased the success rate of website payment. In addition, we updated the ability for sale
activities and self-service.
In 2017, to expand direct sales channels effectively, we launched Air Tickets Market offline
while strengthened online sales channels on our official website and mobile user terminals, continued to enhance our ability in direct sales. Our revenue from direct sales increased significantly by 34.3% as compared to 2016 representing 51.2% of
revenue, which increased 11 percentage points as compared to 2016 while agency fee expenses reduced continuously. In 2017, the amount of tickets purchased from our official website and mobile application reached approximately 10.5 million and
led to the revenue of approximately RMB10.2 billion, representing approximately 16% of the total revenue of ticket sales.
We also
maintain an extensive domestic network of sales agents and representatives in order to promote
in-person
ticket sales and to assist customers. Direct sales are also promoted through the availability of our
telephone reservation and confirmation services. In addition to our domestic sales agents located in various cities in mainland China, Hong Kong, Macau and Taiwan, we maintain overseas sales or representative offices worldwide, including:
(i) North American locations such as Honolulu, Los Angeles, New York, San Francisco and Vancouver; (ii) European and Middle Eastern locations such as Frankfurt, Hamburg, London, Moscow, Paris, Rome, Madrid, Brussels and Munich;
(iii) Asia-Pacific locations such as Seoul, Tokyo, Osaka, Nagoya, Fukuoka, Hiroshima, Sapporo, Niigata, Fukushima, Okinawa, Shizuoka, Kanazawa, Toyama, Nagasaki, Kagoshima, Okayama, Matsuyama, Singapore, Bangkok, Phuket, New Delhi, Kolkata,
Kuala Lumpur, Ho Chi Minh, Bali, Dubai, Dhaka, Phnom Penh, Siem Reap, Vientiane, Yangon, Mandalay, Kathmandu and Maldives; and (iv) Australian locations such as Melbourne and Sydney.
44
As of June 1, 2008, we stopped issuing paper tickets for air travel in accordance with a
mandate from the International Air Transport Association (IATA). The IATA represents approximately 240 airlines and comprises approximately 84% of scheduled international air traffic. As a result of the mandate, we now issue electronic
itineraries and receipts as well as electronic tickets to our passengers. We believe the transition to 100% electronic ticketing will decrease administrative costs, increase flexibility and travel options for passengers, in addition to benefiting
the environment through the reduced need for paper. All of our direct passenger ticket sales are recorded on our computer systems. Most Chinese airlines, including us, are required to use the passenger reservation service system provided by the
CAACs computer information management center, which is linked with the computer systems of major Chinese commercial airlines. We have also entered into membership agreements with several international reservation systems, including ABACUS, the
largest computer reservation system in southeast Asia, TOPAS of Korea, SABRE, GALILEO and WORLDSPAN of the United States, AMADEUS of Europe, INFINI and AXESS of Japan and Sirena-Travel of Russia, which have made it easier for customers and sales
agents to make reservations and purchase tickets for our international flights. In addition, we have entered into distribution agreements with ABACUS, TOPAS, SABRE, GALILEO and AMADEUS.
SkyTeam Alliance
We officially joined SkyTeam, an international airlines alliance and frequent flyer mileage program that includes international carriers such
as, among others, Delta, China Southern, Alitalia, Air France and KLM, on June 21, 2011.
By the end of 2015, we have entered into
frequent flyer and airport lounges agreements with 20 SkyTeam member airlines and implemented code-sharing programs covering 670 routes, as well as 336 routes with
non-SkyTeam
member airlines, which has
further broadened the coverage of our route network. By the end of 2016, we implemented code-sharing programs with 12 SkyTeam member airlines and the number of code sharing routes with
non-SkyTeam
member
airlines increased by 52% as compared to 2015. We also cooperated with nine SkyTeam member airlines including Delta, Air France and KLM, China, Alitalia, Garuda Indonesia and Iberia in joint
check-ins
for 21
transit points. By the end of 2017, we implemented code-sharing programs with 14 SkyTeam member airlines. The two newly cooperated SkyTeam members are Air Europa Líneas Aéreas, S.A.U. (IATA code: UX) from Spain and Czech Airlines
j.s.c. (IATA code: OK).
By connecting to the route networks of other SkyTeam member airlines, we are able to offer our passengers
seamless transit to 25 destinations in 15 countries under a single plane ticket with direct luggage services as of December 31, 2017. Passengers may also enjoy the comfort of more than 600 VIP airport lounges of SkyTeam around the world. We
believe this will be another benefit for our passengers, as they will be afforded additional flight options and frequent flyer mileage benefits through our SkyTeam alliance partners. In addition, we will benefit from possible codeshare and
cooperative flight options, reduced costs and increased alliance-related marketing and promotion overseas.
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Tourism and Travel Services
In addition to our airline operations, we also generate commission revenues from tickets sold on behalf of other airlines. With our subsidiary,
Shanghai Airlines, we derive revenue from tourism and travel services through Shanghai Airlines Tours. Shanghai Airlines Tours provides various business and leisure travel services, including inbound, outbound and domestic travel, conference and
exhibition planning, flight chartering and plane ticket reservation, tour bus and hotel reservation and other related services. Shanghai Airlines Tours is a member of the China Association of Travel Services and Shanghai Association of Tourism
(International and Domestic Travel Services divisions), as well as a member of Shanghai Association of Quality, and has been admitted into many international travel organizations including the IATA. Shanghai Airlines Tours has won several awards as
a travel services provider, as well as awards and honors for its professional staff and vacation package offerings.
In 2017, Shanghai
Airlines Tours continued to optimized its business and leisure travel services under two brands, namely, Shanghai Airlines Travel and Shanghai Airlines Holiday, by developing new tourism products and models. Shanghai Airlines
Tours launched its online official store to expand its direct sale channels and consolidated its online and offline channels to make full use of its resources. It also successfully became the supplier of several government departments. In addition,
Shanghai Airlines Tours strengthened the cooperation with our other subsidiaries to connect its business to ours to improve the overall service quality and performance.
Patents and Trademarks
We own or have
obtained licenses to use various domestic and foreign patents, patent applications and trademarks related to our business. While patents, patent applications and trademarks are important to our competitive position, no single one is material to us
as a whole. In addition, we own various trademarks related to our business. The most important trademark is the service trademark of China Eastern Airlines Corporation Limited. All of our trademarks are registered in China.
Insurance
The CAAC purchases fleet
insurance from PICC Property and Casualty Company Limited (PICC), and China Pacific Property Insurance Company Ltd., on behalf of all Chinese airlines. PICC has reinsured a substantial portion of its aircraft insurance business through
Lloyds of London. The fleet insurance is subject to certain deductibles. The premium payable in connection with the insurance is allocated among all Chinese airlines based on the aircraft owned or leased by these airlines. Under the relevant
PRC laws, the maximum civil liability of Chinese airlines for injuries to passengers traveling on domestic flights has been increased to RMB400,000 per passenger in March 2006, for which we also purchase insurance. As of July 31, 2006, the
Convention for the Unification of Certain Rules for International Carriage by Air
of 1999, or Montreal Convention, became effective in China. Under the Montreal Convention, carriers of international flights are strictly liable for proven
damages up to 100,000 Special Drawing Rights and beyond that, carriers are only able to exclude liability if they can prove that the damage was not due to negligence or other wrongful act of the carrier (and its agents) or if the damage solely arose
from the negligence or other wrongful act of a third party. We believe that we maintain adequate insurance coverage for the civil liability that can be imposed due to injuries to passengers under Chinese law, the Montreal Convention and any other
agreement we are subject to. We also maintain hull all risk, hull war risk and aircraft legal liability insurance, including third party liability insurance, of the types and in amounts customary for Chinese airlines.
46
C. Organizational Structure
See the section headed Item 4. Information on the Company History and Development of the Company.
D. Property, Plant And Equipment
Fleet
As of December 31, 2017, we operated a fleet of 637 aircraft, including 627 passenger aircraft, most with a seating capacity of over 100
seats and 10 business aircraft held under trust. In 2017, we introduced 73 aircraft of major models. With the introduction of B737-8MAX series aircraft and the gradual retirement of B767 series aircraft, our fleet age structure has been made
younger. As we completed the transfer of 100% equity interest in Eastern Logistics to Eastern Investment on February 8, 2017, the fleet ceased to include the nine freighters operated by China Cargo Airlines.
We plan to continue to expand our scale in the future and to adjust and optimize our route network, thereby increasing our competitiveness and
ability to create more attractive products and services to meet the needs of the market.
Existing Fleet
The following table sets forth the details of our fleet as of December 31, 2017:
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Units
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No.
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|
Model
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Self-
owned
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Under
finance
lease
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Under
operating
lease
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Sub-
total
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Average
fleet age
(Years)
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1
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B777-300ER
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9
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11
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|
|
20
|
|
|
|
1.9
|
|
2
|
|
A330-300
|
|
|
1
|
|
|
|
17
|
|
|
|
7
|
|
|
|
25
|
|
|
|
6.9
|
|
3
|
|
A330-200
|
|
|
15
|
|
|
|
15
|
|
|
|
3
|
|
|
|
33
|
|
|
|
5.3
|
|
4
|
|
B767
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
19.5
|
|
Total number of wide-body aircraft
|
|
|
29
|
|
|
|
43
|
|
|
|
10
|
|
|
|
82
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
A321
|
|
|
38
|
|
|
|
39
|
|
|
|
|
|
|
|
77
|
|
|
|
4.4
|
|
6
|
|
A320
|
|
|
79
|
|
|
|
52
|
|
|
|
48
|
|
|
|
179
|
|
|
|
7.1
|
|
7
|
|
A319
|
|
|
13
|
|
|
|
20
|
|
|
|
2
|
|
|
|
35
|
|
|
|
4.7
|
|
8
|
|
B737-800
|
|
|
46
|
|
|
|
62
|
|
|
|
84
|
|
|
|
192
|
|
|
|
3.9
|
|
9
|
|
B737-700
|
|
|
42
|
|
|
|
13
|
|
|
|
1
|
|
|
|
56
|
|
|
|
8.6
|
|
10
|
|
B737-8MAX
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
0.1
|
|
Total number of narrow-body aircraft
|
|
|
218
|
|
|
|
192
|
|
|
|
135
|
|
|
|
545
|
|
|
|
5.5
|
|
Total number of aircraft
|
|
|
247
|
|
|
|
235
|
|
|
|
145
|
|
|
|
627
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of aircraft held under trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of aircraft
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth the daily average utilization rates of our jet passenger aircraft for each of the
year ended December 31, 2017:
|
|
|
|
|
|
|
2017
|
|
|
|
(in hours)
|
|
B777-300ER
|
|
|
14.1
|
|
B767
|
|
|
7.3
|
|
A330 Series
|
|
|
11.3
|
|
A320 Series
|
|
|
9.6
|
|
B737 Series
|
|
|
8.8
|
|
47
Most of our jet passenger aircraft were manufactured by either Airbus or Boeing. On July 9,
2015, we entered into a purchase agreement with Boeing Company to purchase fifty new Boeing B737 series aircraft which are expected to be delivered to us in stages from 2017 to 2019. On August 14, 2015, we also entered into a purchase agreement
with Airbus SAS to purchase fifteen new Airbus A330 series aircraft, which are expected to be delivered to us in stages from 2017 to 2018. On April 28, 2016, we entered into a purchase agreement with Boeing Company to purchase 15
B787-9
aircraft, which are expected to be delivered to us in stages from 2018 to 2021. On the same day, we also entered into a purchase agreement with Airbus SAS to purchase 20 Airbus
A350-900
series aircraft, which are expected to be delivered to us in stages from 2018 to 2022.
Future Fleet Development
Our aircraft acquisition program focuses on aircraft that will modernize and rationalize our fleet to better meet the anticipated requirements
of our route structure, taking into account aircraft size and fuel efficiency. Our aircraft acquisition program, however, is subject to the approval of the CAAC and the NDRC. Older aircraft models of high energy-consumption will be surrendered as
appropriate. Details of the expected fleet plan from 2018 to 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018E
|
|
|
2019E
|
|
|
|
Introduction
|
|
|
Retirement
|
|
|
Introduction
|
|
|
Retirement
|
|
Model
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger aircraft
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A319 Series
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A320 Series
|
|
|
16
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
A321 Series
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A330 Series
|
|
|
8
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
A350 Series
|
|
|
2
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
B787 Series
|
|
|
4
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
B777 Series
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B767 Series
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
B737 Series
|
|
|
37
|
|
|
|
1
|
|
|
|
26
|
|
|
|
|
|
Total number of passenger aircraft
|
|
|
67
|
|
|
|
15
|
|
|
|
62
|
|
|
|
|
|
The actual quantity and time of the introduction and retirement of any of these aircraft or any additional
aircraft may depend on such factors as general economic conditions, the levels of prevailing interest rates, foreign exchange rates, the level of inflation, credit conditions in the domestic and international markets, conditions in the aviation
industry in China and globally, our financial condition and results of operations, our financing requirements, and the terms of any financing arrangements, such as finance leases, and other capital requirements. We believe that our aircraft
acquisition plan will help us accomplish our expansion plans while maintaining an efficient fleet and ensuring alternative sources of supply.
Fleet Financing Arrangements
We generally acquire aircraft through internal funds, long-term capital leases or operating leases. Under the terms of most capital leases, we
generally are obligated to make lease payments that finance most of the purchase price of the aircraft over the lease term. Upon the expiration of the lease term, we must either purchase the aircraft at a specified price or pay any amount by which
such price exceeds the proceeds from the disposition of the aircraft to third parties. Alternatively, some capital leases provide for ownership of the aircraft to pass to us upon satisfaction of the final lease payment. Under capital leases,
aircraft are generally leased for approximately the whole of their estimated working life, and the leases are either
non-cancelable
or cancelable only on a payment of a major penalty by the lessee. As a
result, we bear substantially all of the economic risks and rewards of ownership of the aircraft held under capital leases. Operating leases, however, are customarily cancelable by the lessee on short notice and without major penalty. Leases in
which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.
48
Operating Facilities
As of December 31, 2017, we (including subsidiaries and branches) had operations on 660 parcels of land, occupying a total area of
approximately 3.6 million square meters. In addition, as of December 31, 2017, we (including subsidiaries and branches) owned approximately 2,204 buildings. We and our major subsidiaries have obtained the land use rights certificates and
building ownership certificates for certain parcels of land and buildings, and are currently in the process of applying for the certificates with respect to the five remaining parcels. We did not have any environmental issues that may have a
material impact on our utilization of the assets in 2017.
Item 4A. Unresolved Staff Comments
None.
Item 5.
Operating and Financial Review and Prospects
You should read the following discussion in conjunction with our audited consolidated
financial statements, together with the related notes, included elsewhere in this Annual Report. Our consolidated financial statements have been prepared in accordance with IFRSs. This discussion may include forward-looking statements based upon
current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 3. Key
information D. Risk Factors or in other parts of this Annual Report.
Overview
Our primary business is the provision of domestic, regional (which includes Hong Kong, Macau and Taiwan) and international passenger services.
Our overall capacity on an available tonne kilometer, or ATK, basis increased by approximately 9.2% from approximately
25,098 million in 2016 to approximately 27,397 million in 2017 under comparable basis and decreased by 2.2% from approximately 28,002 million in 2016 to approximately 27,397 million in 2017 under
non-comparable
basis, and our passenger capacity on an available seat kilometer, or ASK, basis increased by 9.6% from approximately 206,249 million in 2016 to approximately 225,996 million in 2017.
Total traffic on a revenue tonne kilometer, or RTK, basis increased by 8.8%, from approximately 17,333 million in 2016 to approximately 18,856 million in 2017 under comparable basis and decreased by 4.3% from approximately
19,713 million in 2016 to approximately 18,856 million in 2017 under
non-comparable
basis.
The historical results of operations discussed in this Annual Report may not be indicative of our future operating performance. Like those of
other airlines, our operations depend substantially on overall passenger and cargo traffic volumes and are subject to seasonal and other variations that may influence passenger travel demand and cargo volume and may not be under our control,
including unusual political events, changes in the domestic and global economies and other unforeseen events. Our operations will be affected by, among other things, fluctuations in aviation fuel prices, aircraft acquisition and leasing costs,
maintenance expenses,
take-off
and landing charges, wages, salaries and benefits, other operating expenses and the rates of income taxes paid.
Our financial performance is also significantly affected by factors associated with operating in a highly regulated industry, as well as a
number of other external variables, including political and economic conditions in China, competition, foreign exchange fluctuations and public perceptions of the safety of air travel with Chinese airlines. Because nearly every aspect of our airline
operations is subject to the regulation of the CAAC, our operating revenues and expenses are directly affected by the CAAC regulations with respect to, among other things, domestic airfares, level of commissions paid to sales agents, the aviation
fuel price,
take-off
and landing charges and route allocations. The nature and extent of airline competition and the ability of Chinese airlines to expand are also significantly affected by various CAAC
regulations and policies. Changes in the CAACs regulatory policies, or in the implementation of such policies, are therefore likely to have a significant impact on our future operations.
49
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with IFRSs which requires the use of certain critical accounting estimates. It
also requires management to exercise its judgment in the process of applying the accounting policies. We have established procedures and processes to facilitate the making of such judgments in the preparation of our consolidated financial
statements. Management has used the best information available but actual performance may differ from our managements estimates and future changes in key variables could change future reported amounts in our consolidated financial statements.
Revenue recognition and sales in advance of carriage
Revenue comprises the fair value of the consideration received or receivable for the provision of services and the sale of goods in the
ordinary course of the Groups activities. Revenue is stated net of business taxes or value-added taxes, returns, rebates and discounts and after eliminating sales within the Group.
Revenue is recognized when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on
the following basis:
Passenger, cargo and mail revenues are recognized as traffic revenues when
the transportation services are provided. The value of sold but unused tickets is recognized as sales in advance of carriage (SIAC).
|
(ii)
|
Ground service income and tour operation revenues
|
Revenues from the provision of ground
services, tour, travel services and other travel related services are recognized when the services are rendered.
|
(iii)
|
Cargo handling income
|
Revenues from the provision of cargo handling services are recognized
when the services are rendered.
Commission income represents amounts earned from other carriers in respect
of sales made by the Group on their behalf, and is recognized in profit or loss upon ticket sales.
Revenues from other operating businesses, including income derived from the
provision of freight forwarding, are recognized when the services are rendered.
|
(vi)
|
Frequent flyer programs
|
The Group operates frequent flyer programs that provide travel awards
to program members based on accumulated miles. A portion of passengers revenue attributable to the award of frequent flyer benefits is deferred and recognized when the miles have been redeemed or have expired.
Interest income is recognized on a time-proportion basis using the effective
interest rate method.
50
The amount of revenue is not considered to be reliably measurable until all contingencies
relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.
Intangible assets
Goodwill is initially measured at cost, being the excess of the aggregate of the
consideration transferred, the amount recognized for
non-controlling
interests and any fair value of the Groups previously held equity interests in the acquiree over the identifiable net assets acquired
and liabilities assumed. If the sum of this consideration and other items is lower than the fair value of the net assets acquired, the difference is, after reassessment, recognized in profit or loss as a gain on bargain purchase.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually or
more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill as at December 31. For the purpose of impairment testing, goodwill acquired in a
business combination is, from the acquisition date, allocated to each of the Groups cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other
assets or liabilities of the Group are assigned to those units or groups of units.
Impairment is determined by assessing the recoverable
amount of the cash-generating unit (group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is
recognized. An impairment loss recognized for goodwill is not reversed in a subsequent period.
|
(ii)
|
Computer software costs
|
Acquired computer software licenses are capitalized on the basis of
the costs incurred to acquire and bring to use the specific software. These costs are amortized using the straight-line method over their estimated useful lives of 5 years. Costs associated with developing or maintaining computer software programs
are recognized as expenses when incurred.
Others relate to the capitalized costs incurred to acquire the use right of certain
flight schedules (i.e. timeslots for flights taking off/landing) in Guangzhou Baiyun International Airport Co., Ltd. and Shanghai Pudong International Airport, respectively. These costs are amortized using the straight-line method over their
useful lives of 3 years.
Property, plant and equipment
Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses.
When an item of property, plant and equipment is classified as held for sale or when it is part of a disposal group classified as held for sale, it is not depreciated and is accounted for in accordance with IFRS 5, as further explained in the
accounting policy for
Non-current
assets and disposal groups held for sale. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of
bringing the asset to its working condition and location for its intended use.
When each major aircraft overhaul is performed, its cost
is recognized in the carrying amount of the item of property, plant and equipment and is depreciated over the appropriate maintenance cycles. Components related to airframe overhaul cost, are depreciated on a straight-line basis over 5 to 7.5 years.
Components related to engine overhaul costs, are depreciated between each overhaul period using the ratio of actual flying hours and estimated flying hours between overhauls. Upon completion of an overhaul, any remaining carrying amount of the cost
of the previous overhaul is derecognized and charged to profit or loss.
51
Except for components related to overhaul costs, the depreciation method of which has been
described in the preceding paragraph, other depreciation of property, plant and equipment is calculated using the straight-line method to write off their costs to their residual values over their estimated useful lives, as follows:
|
|
|
Owned and finance leased aircraft and engines
|
|
15 to 20 years
|
Other flight equipment, including rotables
|
|
10 years
|
Buildings
|
|
8 to 45 years
|
Other property, plant and equipment
|
|
3 to 20 years
|
Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is
allocated on a reasonable basis among the parts and each part is depreciated separately. Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at least at each financial year end.
An item of property, plant and equipment including any significant part initially recognized is derecognized upon disposal or when no future
economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognized in the statement of profit or loss in the year the asset is derecognized is the difference between the net sales proceeds and the carrying
amount of the relevant asset.
Construction in progress represents a building under construction, which is stated at cost less any
impairment losses, and is not depreciated. Cost comprises the direct costs of construction and capitalized borrowing costs on related borrowed funds during the period of construction. Construction in progress is reclassified to the appropriate
category of property, plant and equipment when completed and ready for use.
Leases
Finance leases
Leases where the Group has acquired substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are
capitalized at the leases commencement at the lower of the fair value of the assets and the present value of the minimum lease payments.
Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are
included in the current portion of obligation under finance leases and obligations under finance leases, respectively. The interest element of the finance costs is charged to profit or loss over the lease period so as to produce a constant periodic
rate of interest on the remaining balance of the liability for each period. Leased assets are depreciated using a straight-line basis over their expected useful lives to residual values.
For sale and leaseback transactions resulting in a finance lease, the sales proceeds are recorded as a borrowing and the relevant assets are
continued to be measured at their carry value.
Operating leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.
Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease.
For sale and leaseback transactions resulting in an operating lease, differences between sales proceeds and net book values are recognized
immediately in profit or loss, except to the extent that any profit or loss is compensated for by future lease payments at above or below the market value, then the profit or loss is deferred and amortized over the period for which the asset is
expected to be used.
52
Assets leased out under operating leases are included in property, plant and
equipment in the statement of financial position. They are depreciated over their expected useful lives on a basis consistent with similar property, plant and equipment. Rental income is recognized on a straight-line basis over the lease term.
Retirement benefits
|
(i)
|
Defined contribution plans
|
The Group participates in schemes regarding pension and medical
benefits for employees organized by the municipal governments of the relevant provinces. Contributions to these schemes are expensed as incurred.
The Group also implemented an additional defined contribution pension benefit scheme (annuity) for voluntary eligible employees. Contributions
are made based on a percentage of the employees total salaries and are charged to profit or loss as incurred.
|
(ii)
|
Defined benefit plan
|
The Group provides eligible retirees with certain post-retirement
benefits including retirement subsidies, transportation allowance as well as other welfare. The defined post-retirement benefits are unfunded. The cost of providing benefits under the post-retirement benefit plan is determined using the projected
unit credit actuarial valuation method.
Remeasurements arising from the post-retirement benefit plan, comprising actuarial gains and
losses, the effect of the asset ceiling (excluding net interest) and the return on plan assets (excluding net interest), are recognized immediately in the consolidated statement of financial position with a corresponding debit or credit to equity
through other comprehensive income in the period in which they occur. Remeasurements are not reclassified to profit or loss in subsequent periods.
Past service costs are recognized in profit or loss at the earlier of:
|
|
|
the date of the plan amendment or curtailment; and
|
|
|
|
the date that the Group recognizes restructuring-related costs
|
Net interest is calculated by
applying the discount rate to the net defined benefit liability or asset. The Group recognizes the following changes in the net defined benefit obligation under Wages, salaries and benefits and Finance costs in profit or
loss:
|
|
|
service costs comprising current service costs, past-service costs, gains and losses on curtailments and
non-routine
settlements
|
Available-for-sale
investments
Available-for-sale
financial investments are
non-derivative
financial assets in listed and unlisted equity investments and debt securities. Equity investments classified as available for sale are those which are neither classified as held for trading nor
designated as at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in
market conditions.
53
After initial recognition,
available-for-sale
financial investments are subsequently measured at fair value, with unrealized gains or losses recognized as other comprehensive income in the other
reserves until the investment is derecognized, at which time the cumulative gain or loss is recognized in profit or loss in other operating income, or until the investment is determined to be impaired, when the cumulative gain or loss is
reclassified from the other reserves to profit or loss in other gains or losses. Interest and dividends earned whilst holding the
available-for-sale
financial
investments are reported as finance income and dividend income, respectively and are recognized in profit or loss as other operating income in accordance with the policies set out for Revenue recognition and sales in advance of carriage
above.
When the fair value of unlisted equity investments cannot be reliably measured because (a) the variability in the range of
reasonable fair value estimates is significant for that investment or (b) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value, such investments are stated at cost less any
impairment losses.
The Group evaluates whether the ability and intention to sell its
available-for-sale
financial assets in the near term are still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets, the Group may elect to
reclassify these financial assets if management has the ability and intention to hold the assets for the foreseeable future or until maturity.
For a financial asset reclassified from the
available-for-sale
category, the fair value carrying amount at the date of reclassification becomes its new amortized cost and any previous gain or loss on that asset that has been recognized in equity is amortized to profit or loss over the remaining life of the
investment using the effective interest rate. Any difference between the new amortized cost and the maturity amount is also amortized over the remaining life of the asset using the effective interest rate. If the asset is subsequently determined to
be impaired, then the amount recorded in equity is reclassified to profit or loss.
Income tax
Income tax comprises current and deferred tax. Income tax relating to items recognized outside profit or loss is recognized outside profit or
loss, either in other comprehensive income or directly in equity.
Current tax assets and liabilities are measured at the amount expected
to be recovered from or paid to the taxation authorities, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period, taking into consideration interpretations and practices prevailing in the
countries in which the Group operates.
Deferred tax is provided, using the liability method, on all temporary differences at the end of
the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognized for all taxable temporary differences, except:
|
|
|
when the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the
accounting profit nor taxable profit or loss; and
|
|
|
|
in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable
that the temporary differences will not reverse in the foreseeable future.
|
Deferred tax assets are recognized for all
deductible temporary differences, the carryforward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary
differences, the carryforward of unused tax credits and unused tax losses can be utilized, except:
54
|
|
|
when the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the
transaction, affects neither the accounting profit nor taxable profit or loss; and
|
|
|
|
in respect of deductible temporary differences associated with investments in subsidiaries, associates and joint ventures, deferred tax assets are only recognized to the extent that it is probable that the temporary
differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.
|
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has
become probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be recovered.
Deferred
tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of
the reporting period.
Deferred tax assets and deferred tax liabilities are offset if and only if the Group has a legally enforceable
right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities
which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are
expected to be settled or recovered.
Critical Accounting Estimates and Judgments
Estimates and judgments used in preparing the financial statements are continually evaluated and are based on historical experience and other
factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the
related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Revenue recognition
The Group recognizes traffic revenues in accordance with the accounting policy stated in note 3 to the financial statements. Unused tickets are
recognized in traffic revenues upon legal expiration. Management periodically evaluates the balance in the SIAC and records any adjustments, which can be material, in the period the evaluation is completed.
These adjustments result from differences between the estimates of certain revenue transactions and the timing of recognizing revenue for any
unused air tickets and the related sales price, and are impacted by various factors, including a complex pricing structure and interline agreements throughout the industry, which affect the timing of revenue recognition.
Frequent flyer program
The Group operates frequent flyer programs that provide travel awards to program members based on accumulated miles. A portion of
passengers revenue attributable to the award credits of frequent flyer benefits is deferred and recognized when the award credits have been redeemed or have expired. The deferment of revenue is calculated based on the estimated fair values of
the unredeemed award credits and expected redemption rate. The fair values of the unredeemed award credits is estimated based on the yearly average flight ticket prices and the expected redemption rate is estimated by reference to the historical
trends of redemptions. Different judgments or estimates could significantly affect the estimated provision for frequent flyer programs and the results of operations.
55
Provision for costs of return condition checks for aircraft under operating leases
Provision for the estimated costs of return condition checks for aircraft and engines under operating leases is made based on the
estimated costs for such return condition checks and taking into account anticipated flying hours, flying cycle and time frame between each overhaul. These judgments or estimates are based on historical experience on returning similar airframe
models, actual costs incurred and aircraft status. Different judgments or estimates could significantly affect the estimated provision for costs of return condition checks.
Retirement benefits
The Group operates and maintains a defined retirement benefit plan which provides eligible retirees with benefits including retirement
subsidies, travel allowance as well as other welfare. The cost of providing the aforementioned benefits in the defined retirement benefit plan is actuarially determined and recognized over the employees service period by utilizing various
actuarial assumptions and using the projected unit credit method in accordance with the accounting policy stated in note 3 to the financial statements. These assumptions include, without limitation, the selection of discount rate, annual rate of
increase of per capita benefit payment and etc.. The discount rate is based on managements review of government bonds. The annual rate of increase of benefit payments is based on the general local economic conditions.
Additional information regarding the retirement benefit plan is disclosed in note 37 to the financial statements.
Deferred income tax
In assessing the amount of deferred tax assets that need to be recognized in accordance with the accounting policy stated in note 3 to the
financial statements, the Group considers future taxable income and ongoing prudent and feasible tax planning strategies. In the event that the Groups 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 Groups ability to utilize the tax benefits of deductible tax losses carried forward in the future, adjustments to the recorded amount of
net deferred tax assets and taxation expense would be made.
Provision for flight equipment spare parts
Provision for flight equipment spare parts is made based on the difference between the carrying amount and the net realizable value. The net
realizable value is estimated based on current market condition, historical experience and the Companys future operation plan for the aircraft and related spare parts. The net realizable value may be adjusted significantly due to the change of
market condition and the future plan for the aircraft and related spare parts.
Depreciation of property, plant and equipment
Depreciation of components related to airframe and engine overhaul costs is based on the Groups historical experience with
similar airframe and engine models and taking into account anticipated overhaul costs, timeframe between each overhaul, ratio of actual flying hours and estimated flying hours between overhauls. Different judgments or estimates could significantly
affect the estimated depreciation charge and the results of operations.
Except for components related to engine overhaul costs, other
property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives, after taking into account the estimated residual value. The useful lives are based on the Groups historical experience with similar assets
and taking into account anticipated technological changes. The Group reviews the estimated useful lives of assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The depreciation expense
for future periods is adjusted if there are significant changes from previous estimates.
Estimated impairment of property, plant
and equipment and intangible assets
The Group tests whether property, plant and equipment and intangible assets have been impaired
in accordance with the accounting policy stated in note 3 to the financial statements. The recoverable amount of the cash-generating unit has been determined based on fair value less cost to sell and
value-in-use
calculations.
Value-in-use
calculations use cash flow projections based on financial budgets approved by management
and certain key assumptions, such as passenger-kilometers yield level, load factor, aircraft utilization rate and discount rates.
56
Impairment of goodwill
The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the
cash-generating unit to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to
calculate the present value of those cash flows.
Operating Segments
In accordance with IFRS 8, segment disclosure has been presented in a manner that is consistent with the information used by the our chief
operating decision-maker (CODM). Our CODM monitors the results, assets and liabilities attributable to each reportable segment based on financial results prepared under the PRC Accounting Standards for Business Enterprises (the PRC
Accounting Standards), which differ from IFRSs in certain aspects. The amount of each material reconciling items from the Groups reportable segment revenue and profit before income tax, arising from different accounting policies are set
out in note 7(c) below.
A. Operating Result
The following tables set forth our summary consolidated statements of profit or loss and other comprehensive income and financial position data
as of and for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
RMB
|
|
|
2014
RMB
|
|
|
2015
RMB
|
|
|
2016
RMB
|
|
|
2017
RMB
|
|
|
|
(
in millions, except per share or per ADS data
)
|
|
Consolidated Statements of Profit or Loss and Other
Comprehensive Income
Data:
|
|
Revenues
|
|
|
88,245
|
|
|
|
90,185
|
|
|
|
93,969
|
|
|
|
98,904
|
|
|
|
102,475
|
|
(Loss)/gain on fair value changes of derivative financial instruments
|
|
|
18
|
|
|
|
11
|
|
|
|
6
|
|
|
|
2
|
|
|
|
(311
|
)
|
Other operating income and gains
|
|
|
2,725
|
|
|
|
3,685
|
|
|
|
5,269
|
|
|
|
5,469
|
|
|
|
7,481
|
|
Operating expenses
|
|
|
(89,412
|
)
|
|
|
(87,823
|
)
|
|
|
(86,619
|
)
|
|
|
(91,889
|
)
|
|
|
(100,525
|
)
|
Operating profit
|
|
|
1,576
|
|
|
|
6,058
|
|
|
|
12,625
|
|
|
|
12,486
|
|
|
|
9,431
|
|
Finance income / (costs), net
|
|
|
576
|
|
|
|
(2,072
|
)
|
|
|
(7,110
|
)
|
|
|
(6,176
|
)
|
|
|
(1,072
|
)
|
Profit before income tax
|
|
|
2,217
|
|
|
|
4,113
|
|
|
|
5,667
|
|
|
|
6,497
|
|
|
|
8,610
|
|
Profit for the year attributable to the equity holders of the Company
|
|
|
2,373
|
|
|
|
3,410
|
|
|
|
4,537
|
|
|
|
4,498
|
|
|
|
6,342
|
|
Basic and fully diluted earnings per share
(1)
|
|
|
0.20
|
|
|
|
0.27
|
|
|
|
0.35
|
|
|
|
0.33
|
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
RMB
|
|
|
2014
RMB
|
|
|
2015
RMB
|
|
|
2016
RMB
|
|
|
2017
RMB
|
|
|
|
(in millions)
|
|
Consolidated Statements of Financial Position Data:
|
|
Cash and cash equivalents
|
|
|
1,995
|
|
|
|
1,355
|
|
|
|
9,080
|
|
|
|
1,695
|
|
|
|
4,605
|
|
Net current liabilities
|
|
|
(40,472
|
)
|
|
|
(42,887
|
)
|
|
|
(51,309
|
)
|
|
|
(52,194
|
)
|
|
|
(62,035
|
)
|
Non-current
assets
|
|
|
127,458
|
|
|
|
147,586
|
|
|
|
174,914
|
|
|
|
196,436
|
|
|
|
211,434
|
|
Long term borrowings, including current portion
|
|
|
(36,175
|
)
|
|
|
(41,210
|
)
|
|
|
(43,675
|
)
|
|
|
(29,749
|
)
|
|
|
(28,842
|
)
|
Obligations under finance leases, including current portion
|
|
|
(23,135
|
)
|
|
|
(38,695
|
)
|
|
|
(52,399
|
)
|
|
|
(61,041
|
)
|
|
|
(66,868
|
)
|
Total share capital and reserves attributable to the equity holders of the Company
|
|
|
26,902
|
|
|
|
29,974
|
|
|
|
37,411
|
|
|
|
49,450
|
|
|
|
55,360
|
|
Non-current
liabilities
|
|
|
(58,404
|
)
|
|
|
(72,928
|
)
|
|
|
(83,674
|
)
|
|
|
(91,876
|
)
|
|
|
(90,621
|
)
|
Total assets less current liabilities
|
|
|
86,986
|
|
|
|
104,699
|
|
|
|
123,605
|
|
|
|
144,242
|
|
|
|
149,399
|
|
57
(1)
|
The calculation of earnings per share for 2013 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 12,091,881,000 ordinary shares in issue. The
calculation of earnings per share for 2014 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 12,674,269,000 ordinary shares in issue. The calculation of earnings per share for 2015
is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 12,818,509,000 ordinary shares in issue. The calculation of earnings per share for 2016 is based on the net profit attributable to
the equity holders of the Company divided by the weighted average number of 13,811,136,000 ordinary shares in issue. The calculation of earnings per share for 2017 is based on the net profit attributable to the equity holders of the Company divided
by the weighted average number of 14,467,585,682 ordinary shares in issue.
|
2017 Compared to 2016
Revenues
Our
revenues increased by approximately 3.6%, from approximately RMB98,904 million in 2016 to approximately RMB102,475 million in 2017. Revenues increased in our passenger business operations, primarily due to increased passenger demand and
increase in scheduled flights, which was partially offset by decreased revenue in our cargo and mail business operations, primarily due to disposal of Eastern Logistics in 2017.
In 2017, we transported approximately 111 million passengers, representing an increase of approximately 8.9%, from approximately
102 million passengers in 2016. Our total passenger traffic (as measured in RPKs) increased by approximately 9.3%, from approximately 167,529 million in 2016 to approximately 183,182 million in 2017.
Our total cargo and mail traffic (as measured in RFTKs) increased by approximately 6.7%, from approximately 2,495 million in 2016 to
approximately 2,663 million in 2017 under comparable basis and decreased by approximately 45.4% from approximately 4,875 million in 2016 to approximately 2,663 million in 2017 under
non-comparable
basis.
Our average yield for our passenger operations remained relatively stable
at RMB0.517 in 2016 and RMB0.521 per in 2017.
Our average yield for our cargo and mail operations increased by approximately 8.8% from
approximately RMB1.25 in 2016 to approximately RMB1.36 in 2017.
The following chart sets forth our revenue breakdown for 2016 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
2017 vs. 2016
|
|
|
|
2016
|
|
|
2017
|
|
|
Increase
(Decrease)
|
|
|
% Increase
(Decrease)
|
|
|
|
|
|
|
(in millions of RMB)
|
|
|
|
|
Traffic revenues
|
|
|
89,554
|
|
|
|
95,187
|
|
|
|
5,633
|
|
|
|
6.3
|
|
Passenger revenue
|
|
|
83,577
|
|
|
|
91,564
|
|
|
|
7,987
|
|
|
|
9.6
|
|
Cargo and mail revenue
|
|
|
5,977
|
|
|
|
3,623
|
|
|
|
(2,354
|
)
|
|
|
(39.4
|
)
|
Others
(1)
|
|
|
9,350
|
|
|
|
7,288
|
|
|
|
(2,062
|
)
|
|
|
(22.1
|
)
|
Total Operating Revenue
|
|
|
98,904
|
|
|
|
102,475
|
|
|
|
3,571
|
|
|
|
3.6
|
|
(1)
|
Includes tour operations income, ground service income, cargo handling income and processing income, commission income and others.
|
58
Passenger revenues
Our passenger traffic revenues increased by approximately RMB7,987 million, or approximately 9.6%, from approximately
RMB83,577 million in 2016 to approximately RMB91,564 million in 2017. This increase was primarily due to increased passenger demand and increase in scheduled flights, as well as robust demand for outbound tourism.
Our domestic passenger traffic revenues (excluding Hong Kong, Macau and Taiwan passenger revenues), which accounted for approximately 65.7% of
our total passenger traffic revenues in 2017, increased by approximately 11.2% from approximately RMB54,137 million in 2016 to approximately RMB60,180 million in 2017, primarily due to increased passenger demand. Compared to 2017, our
domestic passenger traffic (as measured in RPKs) increased by approximately 10.0% from approximately 106,361 million in 2016 to approximately 117,033 million in 2017. The number of passengers carried on domestic routes increased by
approximately 10.0% from approximately 84 million in 2016 to approximately 93 million in 2017. Our passenger-kilometers yield for domestic routes remained relatively stable at RMB0.53 per passenger-kilometer in 2016 and RMB0.54 in 2017.
Our regional passenger traffic revenues (representing Hong Kong, Macau and Taiwan passenger revenues) which accounted for approximately
3.7% of our total passenger traffic revenues in 2017, increased by approximately 11.1% from approximately RMB3,078 million in 2016 to approximately RMB3,420 million in 2017, primarily due to the increase of passenger volume. Our regional
passenger traffic (as measured in RPKs) increased by approximately 9.5% in 2017 from approximately 4,347 million in 2016 to approximately 4,758 million in 2017. The number of passengers carried on Hong Kong, Macau and Taiwan routes
increased by approximately 9.3% from approximately 3.2 million in 2016 to approximately 3.5 million in 2017. Our passenger-kilometers yield for regional routes remained relatively stable at RMB0.71 in 2016 and RMB0.72 in 2017.
International passenger traffic revenues, which accounted for approximately 30.6% of our total passenger traffic revenues in 2017, increased
by approximately 6.1% from approximately RMB26,362 million in 2016 to approximately RMB27,964 million in 2017. The increase was primarily due to increased international passenger demand and increase in our scheduled flights on
international routes. Our international passenger traffic (as measured in RPKs) increased by approximately 8.0% in 2017 from approximately 56,821 million in 2016 to approximately 61,391 million in 2017. The number of passengers carried on
international routes increased by approximately 2.5% from approximately 14.3 million in 2016 to approximately 14.7 million in 2017. Our passenger-kilometers yield for international routes remained relatively stable at RMB0.471 in 2016 and
RMB0.470 in 2017.
Cargo and mail revenues
Our cargo and mail traffic revenues decreased by approximately 39.4%, from approximately RMB5,977 million in 2016 to approximately
RMB3,623 million in 2017, which accounted for approximately 3.8% of our total traffic revenues in 2017. Cargo and mail yield increased by approximately 8.8% from approximately RMB1.25 in 2016 to approximately RMB1.36 in 2017.
Our domestic cargo and mail traffic revenues (excluding Hong Kong, Taiwan and Macau cargo and mail revenues), which accounted for
approximately 27.2% of our total cargo and mail traffic revenues in 2017, decreased from approximately RMB1,026 million in 2016 to approximately RMB985 million in 2017. This decrease was primarily due to the disposal of our interest in
Eastern Logistics. Our freight tonne-kilometers yield for domestic routes remained relatively stable at RMB1.07 in 2016 and RMB1.10 in 2017 under non-comparable basis. Our freight tonne-kilometers yield for domestic routes remained stable at RMB1.10
in 2016 and RMB1.10 in 2017 under comparable basis.
Our regional cargo and mail traffic revenues (representing Hong Kong, Macau and
Taiwan cargo and mail traffic revenues), which accounted for approximately 4.4% of our total cargo and mail traffic revenues in 2017, decreased by approximately 57.5%, from approximately RMB374 million in 2016 to approximately
RMB159 million in 2017, mainly due to the disposal of our interest in Eastern Logistics. Our freight tonne-kilometers yield for regional routes increased from RMB2.98 in 2016 to RMB3.56 in 2017 under non-comparable basis. Our freight
tonne-kilometers yield for regional routes increased from RMB3.04 in 2016 to RMB3.56 in 2017 under comparable basis.
59
International cargo and mail traffic revenues, which accounted for approximately 68.4% of our
total cargo and mail traffic revenues in 2017, decreased by approximately 45.8%, from approximately RMB4,576 million in 2016 to approximately RMB2,478 million in 2017, mainly due to the disposal of our interest in Eastern Logistics. Our
freight tonne-kilometers yield for international routes increased from RMB1.24 in 2016 to RMB1.44 in 2017 under non-comparable basis. Our freight tonne-kilometers yield for international routes increased from RMB1.30 in 2016 to RMB1.44 in 2017 under
comparable basis.
Other revenues
We also generated revenues from other services, including tour operations, airport ground services, cargo handling and processing services and
ticket handling services. These services include loading and unloading of cargo, aircraft cleaning and ground transportation of cargo and passenger luggage for aircraft arriving at or departing from Hongqiao International Airport and Pudong
International Airport of Shanghai. We are currently the principal provider of airport ground services at both Hongqiao International Airport and Pudong International Airport. Our total other revenues decreased by approximately 22.1% from
approximately RMB9,350 million in 2016 to approximately RMB7,288 million in 2017, primarily due to disposal of Eastern Logistics, which also handles certain airport ground services, cargo handling and processing services.
Operating Expenses
The following chart sets forth a breakdown of our operating expenses for the years ended December 31, 2016 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
|
|
Year Ended
December 31
|
|
|
(Increase)
Decrease
|
|
|
% Increase
(Decrease)
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
(in millions of RMB)
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel expenses
|
|
|
(19,626
|
)
|
|
|
(25,131
|
)
|
|
|
(5,505
|
)
|
|
|
28.0
|
|
Take-off
and landing charges
|
|
|
(12,279
|
)
|
|
|
(13,254
|
)
|
|
|
(975
|
)
|
|
|
7.9
|
|
Depreciation and amortization
|
|
|
(12,154
|
)
|
|
|
(13,969
|
)
|
|
|
(1,815
|
)
|
|
|
14.9
|
|
Wages, salaries and benefits
|
|
|
(18,145
|
)
|
|
|
(20,320
|
)
|
|
|
(2,175
|
)
|
|
|
12.0
|
|
Aircraft maintenance
|
|
|
(4,960
|
)
|
|
|
(5,346
|
)
|
|
|
(386
|
)
|
|
|
7.8
|
|
Impairment charges
|
|
|
(29
|
)
|
|
|
(491
|
)
|
|
|
(462
|
)
|
|
|
1,593.1
|
|
Food and beverages
|
|
|
(2,862
|
)
|
|
|
(3,090
|
)
|
|
|
(228
|
)
|
|
|
8.0
|
|
Aircraft operating lease rentals
|
|
|
(4,779
|
)
|
|
|
(4,318
|
)
|
|
|
461
|
|
|
|
(9.6
|
)
|
Other operating lease rentals
|
|
|
(868
|
)
|
|
|
(836
|
)
|
|
|
32
|
|
|
|
(3.7
|
)
|
Selling and marketing expenses
|
|
|
(3,133
|
)
|
|
|
(3,294
|
)
|
|
|
(161
|
)
|
|
|
5.1
|
|
Civil aviation development fund
|
|
|
(1,945
|
)
|
|
|
(2,080
|
)
|
|
|
(135
|
)
|
|
|
6.9
|
|
Ground services and other expenses
|
|
|
(5,058
|
)
|
|
|
(3,248
|
)
|
|
|
1,810
|
|
|
|
(35.8
|
)
|
(Loss)/gain on fair value changes of derivative financial instruments
|
|
|
2
|
|
|
|
(311
|
)
|
|
|
(313
|
)
|
|
|
(15,650.0
|
)
|
Indirect operating expenses
|
|
|
(6,051
|
)
|
|
|
(4,837
|
)
|
|
|
1,214
|
|
|
|
(20.0
|
)
|
Total Operating Expense
|
|
|
(91,887
|
)
|
|
|
(100,525
|
)
|
|
|
(8,638
|
)
|
|
|
9.4
|
|
Our total operating expenses increased by approximately 9.4% from approximately RMB91,887 million in 2016
to approximately RMB100,525 million in 2017 primarily due to the influence of further expansion of our operational scale and the rapid growth in the passenger traffic volume and the number of passengers carried. Our various costs such as
take-off
and landing costs, food and beverages, and depreciation and amortization increased from the previous year. Our total operating expenses accounted for approximately 98.1% of our operating revenue in 2017,
representing an increase from approximately 92.9% in 2016.
60
Aircraft fuel expenses increased by approximately 28.0% from approximately RMB19,626 million
in 2016 to approximately RMB25,131 million in 2017. The increase was primarily due to the increase in the volume of refueling by 4.5% and average fuel price by 22.5%.
Take-off
and landing charges, which accounted for 13.2% of our total operating expenses in 2017,
increased by 7.9% from approximately RMB12,279 million in 2016 to approximately RMB13,254 million in 2017, primarily due to the increase in our number of flights and the increase in our number of take-offs and landings. Meanwhile, the
domestic
take-off
and landing charges increased due to the adjustment of pricing standards of Chinas airports (CAAC 2017 Notice No. 18).
Depreciation and amortization increased by approximately 14.9% from approximately RMB12,154 million in 2016 to approximately
RMB13,969 million in 2017, primarily due to the net addition of aircraft self owned and under finance leases to our fleet in 2017. The increase in the number of aircraft and engines led to an increase in the original value of fixed assets and a
corresponding increase in depreciation.
Wages, salaries and benefits, which accounted for approximately 20.2% of our total operating
expenses in 2017, increased by approximately 12.0% from approximately RMB18,145 million in 2016 to approximately RMB20,320 million in 2017, primarily due to the combined effect of the increase in the number of flight-crew and maintenance
personnel, the increase in flight hours and the rise in the standard flight hour fees. Additional information regarding the changes in our retirement benefits is disclosed in Note 37 to the consolidated financial statements.
Aircraft maintenance expenses, which accounted for approximately 5.3% of our total operating expenses in 2017, increased by approximately 7.8%
from approximately RMB4,960 million in 2016 to approximately RMB5,346 million in 2017, primarily due to the net addition of nine wide-body aircraft and 46 narrow-body aircraft, which led to an increase in maintenance fees for aircraft and
engines.
Food and beverage expenses increased by approximately 8.0% from approximately RMB2,862 million in 2016 to approximately
RMB3,090 million in 2017, primarily due to the increase in the number of passengers carried and the rise in standards required for the provision of catering.
Aircraft operating lease rentals decreased by approximately 9.6% from approximately RMB4,779 million in 2016 to approximately
RMB4,318 million in 2017, primarily due to the decrease of seven cargo aircraft under operating leases upon the disposal of the equity interest in Eastern Logistics.
Other operating lease rentals decreased by approximately 3.7% from approximately RMB868 million in 2016 to approximately
RMB836 million in 2017, primarily due to the decrease of fees for ground assets under lease.
Selling and marketing expenses
increased by approximately 5.1% from approximately RMB3,133 million in 2016 to approximately RMB3,294 million in 2017, primarily due to the increase in the proportion of direct sales for the year.
The amount of civil aviation development fund to the CAAC increased by approximately 6.9% from approximately RMB1,945 million in 2016 to
approximately RMB2,080 million in 2017, primarily due to the increase in the length of miles flown in 2017.
Ground services and
other expenses decreased by approximately 35.8% from approximately RMB5,058 million in 2016 to approximately RMB3,248 million in 2017, primarily due to the disposal of interest in Eastern Logistics in 2017.
Indirect operating expenses decreased by approximately 20.0% from approximately RMB6,051 million in 2016 to approximately
RMB4,837 million in 2017, primarily due to the disposal of interest in Eastern Logistics in 2017.
61
Fair Value Changes of Derivative Financial Instruments
Changes in fair value of derivative financial instruments was recorded a loss of approximately RMB311 million in 2017, as compared to a
gain of approximately RMB2 million in 2016. The difference was mainly due to the fair value movement of forward foreign exchange contracts in 2017.
Other Operating Income and Gains
Our other operating income mainly consists of subsidy income from cooperative routes, the rest being income from disposal of a subsidiary and
income from government grants. The total amount of our other operating income and gains increased by approximately 36.8% from approximately RMB5,469 million in 2016 to approximately RMB7,481 million in 2017, primarily due to the disposal
of interest in Eastern Logistics.
Net Finance Costs
In 2017, our finance income was approximately RMB2,112 million, representing an increase of approximately RMB2,016 million from
approximately RMB96 million in 2016. Finance costs amounted to approximately RMB3,184 million in 2017, representing a decrease of approximately RMB3,088 million in 2016, primarily due to net exchange gains arising from the
appreciation of RMB of approximately RMB2,001 million during the year.
Profit Attributable to the Equity Holders of the
Company
As a result of the foregoing, the net profit attributable to the equity holders of the Company increased by approximately
41.0% from approximately RMB4,498 million in 2016 to approximately RMB6,342 million in 2017. The increase is mainly due to the increase in revenue and other operating income and gains.
Property, Plant and Equipment
We had approximately RMB166,856 million of property, plant and equipment as of December 31, 2017, including, among other assets,
aircraft, engines and flight equipment, representing a 8.9% increase from approximately RMB153,180 million in 2016. The increase is mainly due to an increase in the number of aircraft.
2016 Compared to 2015
Revenues
Our revenues increased by 5.3%, from RMB93,969 million in 2015 to RMB98,904 million in 2016. Revenues increased in our
passenger business operations, primarily due to increased passenger demand, aircraft utilization rates and increase in scheduled flights, which was partially offset by decreased revenue in our cargo and mail business operations, primarily due to a
general slowdown of the global economy that affected cargo demand and, consequently, our cargo volumes.
In 2016, we transported
101.74 million passengers, representing an increase of 8.5%, from 93.8 million passengers in 2015. Our total passenger traffic (as measured in RPKs) increased by 14.5%, from 146,342 million passenger-kilometers in 2015 to
167,529 million passenger-kilometers in 2016 and our total cargo and mail traffic (as measured in RFTKs) increased by 0.2%, from 4,865 million freight tonne-kilometers in 2015 to 4,875 million freight tonne- kilometers in 2016. Our
average yield for our passenger operations decreased by 7.2% from RMB0.56 per passenger-kilometer in 2015 to RMB0.52 in 2016.
Our average
yield for our cargo and mail operations decreased by 6.3%, from RMB1.33 per tonne-kilometer in 2015 to RMB1.25 per tonne-kilometer in 2016, primarily due to slumping cargo market and increasing competition from logistic companies that affected cargo
demand and shipping fees.
62
The following chart sets forth our revenue breakdown for 2015 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
2016 vs. 2015
|
|
|
|
2015
|
|
|
2016
|
|
|
Increase
(Decrease)
|
|
|
% Increase
(Decrease)
|
|
|
|
|
|
|
(in millions of RMB)
|
|
|
|
|
Traffic revenues
|
|
|
85,076
|
|
|
|
89,554
|
|
|
|
4,478
|
|
|
|
5.3
|
|
Passenger revenue
|
|
|
78,585
|
|
|
|
83,577
|
|
|
|
4,992
|
|
|
|
6.4
|
|
Cargo and mail revenue
|
|
|
6,491
|
|
|
|
5,977
|
|
|
|
(514
|
)
|
|
|
(7.9
|
)
|
Others
(1)
|
|
|
8,893
|
|
|
|
9,350
|
|
|
|
457
|
|
|
|
5.1
|
|
Total Operating Revenue
|
|
|
93,969
|
|
|
|
98,904
|
|
|
|
4,935
|
|
|
|
5.3
|
|
(2)
|
Includes tour operations income, ground service income, cargo handling income, commission income and others.
|
Passenger revenues
Our
passenger traffic revenues increased by RMB4,992 million, or 6.4%, from RMB78,585 million in 2015 to RMB83,577 million in 2016. This increase was primarily due to increased passenger demand, aircraft utilization rates and increase in
scheduled flights, as well as actively seizing the opportunities brought by the international low oil prices and robust demand for outbound tourism.
Our domestic passenger traffic revenues (excluding Hong Kong, Macau and Taiwan passenger revenues), which accounted for 64.8% of our total
passenger traffic revenues in 2016, increased by 5.1%, from RMB51,523 million in 2015 to 54,137 million in 2016, primarily due to increased passenger demand. Compared to 2015, our domestic passenger traffic (as measured in RPKs) increased
by 8.2%, from 98,304 million in 2015 to 106,361 million in 2016. The number of passengers carried on domestic routes increased by 7.4%, from 78.4 million in 2015 to 84.2 million in 2016. Our passenger-kilometers yield for
domestic routes decreased by 2.6% from RMB0.55 per passenger-kilometer in 2015 to 0.53 in 2016.
Our regional passenger traffic revenues
(representing Hong Kong, Macau and Taiwan passenger revenues) which accounted for 3.7% of our total passenger traffic revenues in 2016, decreased by 1.6%, from RMB3,129 million in 2015 to RMB3,078 million in 2016, primarily due to the
decrease in our passenger-kilometers yield for regional routes. The number of passengers carried on Hong Kong, Macau and Taiwan routes increased by 4.0%, from 3.1 million in 2015 to 3.22 million in 2016. Our passenger-kilometers yield for
regional routes decreased from RMB0.73 per passenger-kilometer in 2015 to 0.71 per passenger-kilometer in 2016.
International passenger
traffic revenues, which accounted for 31.5% of our total passenger traffic revenues in 2016, increased by 10.2%, from RMB23,933 million in 2015 to RMB26,362 million in 2016. The increase was primarily due to increased international
passenger demand, increased aircraft utilization rates and increase in our scheduled flights on international routes. Our international passenger traffic (as measured in RPKs) increased by 29.6% in 2016, from RMB43,848 million in 2015 to
RMB56,821 million in 2016. The number of passengers carried on international routes increased by 16.8%, from 12.3 million in 2015 to 14.3 million in 2016. Our passenger-kilometers yield for international routes decreased from RMB0.56
per passenger-kilometer in 2015 to RMB0.47 per passenger-kilometer in 2016.
Cargo and mail revenues
Our cargo and mail traffic revenues decreased by 7.9%, from RMB6,491 million in 2015 to RMB5,977 million in 2016, which accounted for
6.7% of our total traffic revenues in 2016. Cargo and mail yield decreased by 6.3% from RMB1.33 in 2015 to RMB1.25 in 2016 per cargo tonne-kilometer, primarily due to the increased competition from other cargo carriers, which resulted in decreased
shipping fees.
63
Our domestic cargo and mail traffic revenues (excluding Hong Kong, Taiwan and Macau cargo and
mail revenues), which accounted for 17.2% of our total cargo and mail traffic revenues in 2016, decreased from RMB1,036 million in 2015 to RMB1,026 million in 2016. This decrease was primarily due to the increased competition from private
owned logistic companies, which resulted in decreased shipping fees and cargo. Our freight tonne-kilometers yield for domestic routes decreased from RMB1.09 per tonne-kilometer in 2015 to RMB1.07 per tonne-kilometer in 2016.
Our regional cargo and mail traffic revenues (representing Hong Kong, Macau and Taiwan cargo and mail traffic revenues), which accounted for
6.3% of our total cargo and mail traffic revenues in 2016, slightly decreased by 1.6%, from RMB380 million in 2015 to RMB374 million in 2016. Our freight tonne-kilometers yield for regional routes decreased from RMB3.01 per tonne-kilometer
in 2015 to RMB2.98 per tonne-kilometer in 2016.
International cargo and mail traffic revenues, which accounted for 76.5% of our total
cargo and mail traffic revenues in 2016, decreased by 9.8%, from RMB5,075 million in 2015 to RMB4,576 million in 2016, due to increased competition from foreign cargo carriers which resulted in decreased shipping fees. Our prices for cargo
and mail transportation on international routes also decreased as our freight tonne-kilometers yield for international routes decreased from RMB1.34 per tonne-kilometer in 2015 to RMB1.24 per tonne-kilometer in 2016.
Other revenues
We also
generated revenues from other services, including tour operations, airport ground services, cargo handling services and ticket handling services. These services include loading and unloading of cargo, aircraft cleaning and ground transportation of
cargo and passenger luggage for aircraft arriving at or departing from Hongqiao International Airport and Pudong International Airport of Shanghai. We are currently the principal provider of airport ground services at both Hongqiao International
Airport and Pudong International Airport. Our total other revenues increased by 5.1%, from RMB8,893 million in 2015 to 9,350 million in 2016.
Operating Expenses
The following chart sets forth a breakdown of our operating expenses for the years ended December 31, 2015 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 vs. 2015
|
|
|
|
Year Ended
December 31
|
|
|
Increase
(Decrease)
|
|
|
% Increase
(Decrease)
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
(in millions of RMB)
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel expenses
|
|
|
(20,312
|
)
|
|
|
(19,626
|
)
|
|
|
(686
|
)
|
|
|
(3.4
|
)
|
Takeoff and landing charges
|
|
|
(10,851
|
)
|
|
|
(12,279
|
)
|
|
|
1,428
|
|
|
|
13.2
|
|
Depreciation and amortization
|
|
|
(10,471
|
)
|
|
|
(12,154
|
)
|
|
|
1,683
|
|
|
|
16.1
|
|
Wages, salaries and benefits
|
|
|
(16,459
|
)
|
|
|
(18,145
|
)
|
|
|
1,686
|
|
|
|
10.2
|
|
Aircraft maintenance
|
|
|
(4,304
|
)
|
|
|
(4,960
|
)
|
|
|
656
|
|
|
|
15.2
|
|
Impairment charges
|
|
|
(228
|
)
|
|
|
(29
|
)
|
|
|
(199
|
)
|
|
|
(87.3
|
)
|
Food and beverages
|
|
|
(2,469
|
)
|
|
|
(2,862
|
)
|
|
|
393
|
|
|
|
15.9
|
|
Aircraft operating lease rentals
|
|
|
(4,254
|
)
|
|
|
(4,779
|
)
|
|
|
525
|
|
|
|
12.3
|
|
Other operating lease rentals
|
|
|
(812
|
)
|
|
|
(868
|
)
|
|
|
56
|
|
|
|
6.9
|
|
Selling and marketing expenses
|
|
|
(3,651
|
)
|
|
|
(3,133
|
)
|
|
|
(518
|
)
|
|
|
(14.2
|
)
|
Civil aviation development fund
|
|
|
(1,826
|
)
|
|
|
(1,945
|
)
|
|
|
119
|
|
|
|
6.5
|
|
Ground services and other expenses
|
|
|
(5,479
|
)
|
|
|
(5,058
|
)
|
|
|
(421
|
)
|
|
|
7.7
|
|
Indirect operating expenses
|
|
|
(5,503
|
)
|
|
|
(6,051
|
)
|
|
|
548
|
|
|
|
10.0
|
|
Total Operating Expense
|
|
|
(86,619
|
)
|
|
|
(91,889
|
)
|
|
|
5,270
|
|
|
|
6.1
|
|
64
Our total operating expenses increased by 6.1%, from RMB86,619 million in 2015 to
RMB91,889 million in 2016 primarily due to the influence of further expansion of our operational scale and the rapid growth in the passenger traffic volume and the number of passengers carried, our various costs such as
take-off
and landing costs, food and beverages, and depreciation and amortization increased from the previous year. Our total operating expenses as a percentage of our operating revenues increased from 92.2% in 2015
to 92.9% in 2016.
Aircraft fuel expenses decreased by 3.4%, from RMB20,312 million in 2015 to RMB19,626 million in 2016. The
decrease was primarily due to the decrease in our average price of fuel by 13.62%, partially offset by an increase in ourvolume of refueling by 11.9%.
Take-off
and landing charges, which accounted for 13.4% of our total operating expenses in 2016,
increased by 13.2%, from RMB10,851 million in 2015 to RMB12,279 million in 2016, primarily due to the increase in our number of flights and the increase in our number of take-offs and landings. In particular, the numerous international
routes newly launched by us and the increase in our number of flights for the North American routes led to more frequent international takeoffs and landings of wide-body aircrafts.
Depreciation and amortization increased by 16.1%, from RMB10,471 million in 2015 to RMB12,154 million in 2016, primarily due to the
addition of 54 aircraft (self owned and under finance leases) to our fleet in 2016. The increase in the number of aircraft and engines led to an increase in the original value of fixed assets and a corresponding increase in depreciation.
Wages, salaries and benefits, which accounted for 19.7% of our total operating expenses in 2015, increased by 10.2%, from
RMB16,459 million in 2015 to RMB 18,145 million, primarily due to the combined effect of the increase in the number of flight-crew and maintenance personnel, the increase in flight hours and the rise in the standard flight hour fees.
Additional information regarding the changes in our retirement benefits is disclosed in Note 37 to the consolidated financial statements.
Aircraft maintenance expenses, which accounted for 5.4% of our total operating expenses in 2016, increased by 15.2%, from
RMB4,304 million in 2015 to RMB4,960 million in 2016, primarily due the net addition of 7 wide-body aircraft and 39 narrow-body aircraft, which led to an increase in maintenance fees for aircraft and engines. Meanwhile, we fitted our A330
aircraft with
in-flight
Wi-Fi
and retrofitted equipment such as required navigation performance (RNP) systems in 2016, resulting in an increase in maintenance fees.
Food and beverage expenses increased by 15.9% from RMB2,469 million in 2015 to RMB2,862 million in 2016, primarily due to the
increase in the number of passengers in carriage, especially the combined effect of the increase in the number of travelers on international long-haul flights and the higher standards required for the provision of international catering.
Aircraft operating lease rentals increased by 12.3%, from RMB4,254 million in 2015 to RMB4,779 million in 2016, primarily due to the
introduction of 18 new aircraft under operating leases by us and the retirement of 15 aircraft under operating leases in 2016. Owing to factors such as the market environment and the commodity price level, the introduction of the new aircraft
resulted in a significant increase in rentals compared to the retired aircraft.
Other operating lease rentals increased by 6.9%, from
RMB812 million in 2015 to RMB868 million in 2016, primarily due to the increase in leasehold properties (including properties such as counters and VIP lounges).
Selling and marketing expenses, which accounted for 3.4% of our total operating expenses in 2015, decreased by 14.2%, from
RMB3,651 million in 2015 to RMB3,133 million in 2016, primarily due to the increase in the proportion of direct sales for the year and changes in the policy on agency causing a decrease in the handling fees of the agency businesses.
The amount of civil aviation infrastructure levies payable to the CAAC increased by 6.5%, from RMB1,826 million in 2015 to
RMB1,945 million in 2016, primarily due to the increase in the length of miles flown in 2015.
65
Ground services and other expenses decreased by 7.7%, from RMB5,479 million in 2015 to
RMB5,058 million in 2016, primarily due to the decrease in the costs of subsidiaries.
Indirect operating expenses increased by
10.0%, from RMB5,503 million in 2015 to RMB6,051 million in 2016, primarily attributable to the significant increase in the costs associated with the expansion in the size of our fleet.
Fair Value Changes of Derivative Financial Instruments
Changes in fair value of derivative financial instruments decreased from a gain of RMB6 million in 2015 to a gain of RMB2 million in
2016. The difference was mainly due to the decrease in gains arising from fair value movement of interest rate swaps contracts.
Other Operating Income and Gains
Our other operating income mainly consists of income from cooperative routes, the rest being income from disposal of fixed assets and income
from government grants. The total amount of our other operating income and gains increased by 3.8% from RMB5,269 million in 2015 to RMB5,469 million in 2016, primarily due to an increase in income from
co-operation
routes, income from government grants and gains from disposal of fixed assets. Other
co-operation
income represented income from
co-operation
routes granted to us by the PRC government and local governments as well as other subsidies granted by various local municipalities and other parties to encourage us to operate certain routes to cities
where these municipalities are located.
Net Finance Costs
In 2016, our finance income was RMB96 million, representing an increase from RMB66 million in 2015, primarily due to an increase in
the interest rates for our deposits which increased our interest income. Finance costs amounted to RMB6,272 million, representing a decrease of 12.6%, primarily due to the decrease in net exchange losses recognized during the year. In 2016, our
exchange losses amounted to RMB3,543 million, representing a decrease of 29.0%.
Profit Attributable to the Equity Holders of
the Company
As a result of the foregoing, the net profit attributable to the equity holders of the Company slightly decreased to
RMB4,498 million in 2016, or 0.9%, as compared to a net profit of RMB4,537 million in 2015. The decrease is mainly due to the increase in income tax expense.
Property, Plant and Equipment
We had approximately RMB153,180 million of property, plant and equipment as of December 31, 2016, including, among other assets,
aircraft, engines and flight equipment, representing a 15.0% increase from RMB133,242 million in 2015. The increase is mainly due to an increase in the number of aircrafts.
Inflation
According to the National
Bureau of Statistics of China, Chinas overall national inflation rate, as represented by the general consumer price index, was approximately 2.6% in 2013, 2.1% in 2014, 1.4% in 2015, 2.0% in 2016 and 1.6% in 2017. Although neither inflation
nor deflation in the past had any material adverse impact on our results of operations, we cannot assure you that the deflation or inflation of the Chinese economy in the future would not materially and adversely affect our financial condition and
results of operations.
66
B. Liquidity and Capital Resources
We typically finance our working capital requirements through a combination of funds generated from operations, bank loans and the issuance of
corporate bonds. As a result, our liquidity could be materially and adversely affected if there is any delay in obtaining bank loans or a significant decrease in demand for our services.
As of December 31, 2015, 2016 and 2017, we had RMB9,080 million and RMB1,695 million and RMB4,605 million, respectively,
in cash and cash equivalents; RMB66,712 million, RMB56,732 million and RMB63,801 million, respectively, in outstanding borrowings; and RMB35 million, RMB43 million and RMB51 million, respectively, in restricted bank
deposits and short-term bank deposits. Our cash and cash equivalents primarily consists of cash on hand and deposits that are placed with banks and other financial institutions. We plan to use the remaining available cash for other capital
expenditures, including expenditures for aircraft, engines and related equipment, as well as for working capital and other
day-to-day
operating purposes.
In addition, our current liabilities exceeded our current assets by approximately RMB62,035 million as of December 31, 2017.
Therefore, the directors of the Company (Directors) have taken active steps to seek additional sources of financing to improve our liquidity position. As of December 31, 2017, we had total unutilized credit facilities of
RMB59.47 billion from various banks. See the discussion below under Working Capital and Liabilities.
We believe
that our current cash, cash equivalents, anticipated cash flow from operations, and the ability to obtain sufficient financing will enable us to operate, as well as to meet our anticipated cash needs for working capital and capital expenditure
requirements for at least the next 12 months. However, additional cash may be required due to changing business conditions or other future developments, including any investments or acquisitions that we may decide to pursue.
Cash Flows from Operating Activities
In
2017, we generated a net cash inflow from operating activities of RMB19,572 million as a result of cash generated from operations of RMB21,108 million less income tax we paid in 2017. Our cash generated from operations was mainly due to
operating profit before working capital changes of RMB22,004 million and positive changes in working capital of RMB896 million. The operating profit before working capital changes of RMB22,004 million was a result of the profit before
income tax of RMB8,610 million, mainly adjusted for: (i) depreciation of property, plant and equipment and amortization of other
non-current
assets of RMB13,769 million, (ii) net foreign
exchange gain of RMB2,378 and (iii) interest expenses of RMB3,184 million. Positive changes in working capital mainly consisted of (i) sales in advance of carriage of RMB569 million and (ii) other payables and accruals of
RMB340 million, partly offset by (i) other long-term liabilities of RMB728 million and (ii) prepayments and other receivables of RMB753 million.
In 2016, we generated a net cash inflow from operating activities of RMB24,893 million as a result of cash generated from operations of
RMB26,154 million less income tax we paid in 2016. Our cash generated from operations was mainly due to operating profit before working capital changes of RMB24,464 million and positive changes in working capital of RMB1,690 million.
The operating profit before working capital changes of RMB24,464 million was a result of the profit before income tax of RMB6,497 million, mainly adjusted for: (i) depreciation of property, plant and equipment and amortization of
other
non-
current assets of RMB12,345 million, (ii) net foreign exchange losses of RMB3,246 and (iii) interest expenses of RMB2,641 million. Positive changes in working capital mainly
consisted of (i) sales in advance of carriage of RMB1,836 million and (ii) other payables and accruals of RMB1,424 million, partly offset by (i) other long-term liabilities of RMB883 million and (ii) prepayments
and other receivables of RMB839 million.
In 2015, we generated a net cash inflow from operating activities of RMB24,325 million
as a result of cash generated from operations of RMB25,535 million less income tax we paid in 2015. Our cash generated from operations was mainly due to operating profit before working capital changes of RMB23,620 million and positive
changes in working capital of RMB1,915 million. The operating profit before working capital changes of RMB23,620 million was a result of the profit before income tax of RMB5,667 million, mainly adjusted for: (i) depreciation of
property, plant and equipment and amortization of other
non-
current assets of RMB10,710 million, (ii) net foreign exchange losses of RMB5,480, and (iii) interest expenses of
RMB2,075 million. Positive changes in working capital mainly consisted of (i) trade and bills payable of RMB1,629 million, and (ii) other long-term liabilities of RMB1,164 million, partly offset by prepayments and other
receivables of RMB2,011 million.
67
Cash Flows from Investing Activities
In 2017, our net cash outflow from investing activities was RMB21,312 million. Our net cash outflow for investing activities mainly
consisted of (i) advanced payments on acquisition of aircraft of RMB16,759 million and (ii) additions of property, plant and equipment of RMB7,796 million. These cash outflows were partly offset by proceeds from disposal of
property, plant and equipment of RMB1,043 million and proceeds from disposal of interest in a subsidiary of RMB1,897 million.
In
2016, our net cash outflow from investing activities was RMB37,180 million. Our net cash outflow for investing activities mainly consisted of (i) advanced payments on acquisition of new aircraft of RMB16,864 million and
(ii) additions of property, plant and equipment of RMB21,533 million. These cash outflows were partly offset by (i) proceeds from disposal of assets classified as held for sale of RMB518 million and (ii) proceeds from
disposal of property, plant and equipment of RMB690 million.
In 2015, our net cash outflow from investing activities was
RMB27,800 million. Our net cash outflow for investing activities mainly consisted of (i) advanced payments on acquisition of new aircraft of RMB24,772 million and (ii) additions of property, plant and equipment of
RMB8,609 million. These cash outflows were partly offset by (i) proceeds from disposal of assets classified as held for sale of RMB4,227 million and (ii) proceeds from disposal of property, plant and equipment of
RMB1,294 million.
Cash Flows from Financing Activities
In 2017, our net cash inflow from financing activities was RMB4,708 million. Our net cash inflow for financing activities mainly consisted
of (i) proceeds from draw down of short-term bank loans of RMB33,629 million, (ii) proceeds from draw down of long-term bank loans and other financing activities of RMB12,320 million, (iii) proceeds from issuance of
short-term debentures of RMB29,000 million and (iv) proceeds from issuance of long-term bonds of RMB2,451 million. These cash inflows were partly offset by (i) repayments of short-term bank loans of RMB18,383 million,
(ii) repayments of long-term bank loans of RMB3,247 million, and (iii) repayments of short-term debentures of RMB36,000 million.
In 2016, our net cash inflow from financing activities was RMB4,634 million. Our net cash inflow for financing activities mainly
consisted of (i) proceeds from draw down of short-term bank loans of RMB39,159 million, (ii) proceeds from draw down of long-term bank loans and other financing activities of RMB26,545 million, (iii) proceeds from issuance
of short-term debentures of RMB47,500 million and (iv) proceeds from issuance of long-term bonds of RMB12,526 million. These cash inflows were partly offset by (i) repayments of short-term bank loans of RMB36,728 million,
(ii) repayments of long-term bank loans of RMB28,803 million, and (iii) repayments of short-term debentures of RMB46,000 million.
In 2015, our net cash inflow from financing activities was RMB11,083 million. Our net cash inflow for financing activities mainly
consisted of (i) proceeds from draw down of short-term bank loans of RMB26,916 million, (ii) proceeds from draw down of long-term bank loans and other financing activities of RMB24,572 million, and (iii) proceeds from
issuance of short-term debentures of RMB21,500 million. These cash inflows were partly offset by (i) repayments of short-term bank loans of RMB34,767 million, (ii) repayments of long-term bank loans of RMB10,540 million, and
(iii) repayments of short-term debentures of RMB10,000 million.
Working Capital and Liabilities
We have, and in the future may continue to have, substantial debts. In addition, we generally operate with a working capital deficit. As of
December 31, 2017, our current liabilities exceeded our current assets by RMB62,035 million. In comparison, our current liabilities exceeded our current assets by RMB52,194 million as of December 31, 2016. Our current liabilities
increased by 18.0% primarily due to the increase in the current portion of borrowings. Our current assets increased by 15.1% in 2017 primarily due to the increase in cash and cash equivalents. Short-term loans outstanding totaled
RMB28,842 million and RMB39,090 as of December 31, 2016 and 2017, respectively. Long-term outstanding bank loans totaled RMB27,890 million and RMB24,711 million as of December 31, 2016 and 2017, respectively.
68
As of December 31, 2017, our debt ratio, representing total liabilities divided by total
assets, was 0.74. The interest expenses associated with these debts may impair our future profitability. We expect that cash from operations and bank borrowings will be sufficient to meet our operating cash flow requirements, although events that
materially and adversely affect our operating results can also have a negative impact on liquidity.
Our consolidated interest-bearing
borrowings as of December 31, 2016 and 2017 for the purpose of calculating the indebtedness were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
(RMB in millions)
|
|
Secured
|
|
|
17,369
|
|
|
|
19,908
|
|
Unsecured
|
|
|
39,363
|
|
|
|
43,893
|
|
Total
|
|
|
56,732
|
|
|
|
63,801
|
|
Our maturity profile of interest-bearing borrowings as of December 31, 2016 and 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
(RMB in millions)
|
|
Within one year
|
|
|
28,842
|
|
|
|
39,090
|
|
In the second year
|
|
|
4,833
|
|
|
|
6,527
|
|
In the third to fifth year inclusive
|
|
|
13,281
|
|
|
|
8,797
|
|
After the fifth year
|
|
|
9,776
|
|
|
|
9,387
|
|
Total
|
|
|
56,732
|
|
|
|
63,801
|
|
As of December 31, 2017, our interest rates relating to short-term borrowings ranged from 0.70% to 4.35%,
while our fixed interest rates on our interest-bearing borrowings for long-term bank loans ranged from 3.10% to 3.48%. Our bank loans are denominated in Renminbi, U.S. dollars and Euros. As of December 31, 2017, our total bank loans denominated
in Renminbi amounted to RMB83,880 million, our total bank loans denominated in U.S. dollars amounted to US$1,157 million and our total bank loans denominated in EUR amounted to EUR631 million.
On November 16, 2017, EAO issued corporate
SGD-denominated
bonds in an amount of SGD500,000,000
at 2.8% due 2020, which was listed on the Hong Kong Stock Exchange on November 17, 2017. The Company guaranteed the bond issue. See Note 34 to the consolidated financial statements for more information.
On March 9, 2018, the Company issued
JPY-denominated
credit enhanced bonds (Series 1 JPY10,000,000,000
0.33% Bonds due 2021, Series 2 JPY20,000,000,000 0.64% Bonds due 2021 and Series 3 JPY20,000,000,000 0.64% Bonds due 2021), which was listed on the professional oriented TOKYO
PRO-BOND
Market of the Tokyo
Stock Exchange on March 19, 2018. See Note 49 to the consolidated financial statements for the issuance of JPY bonds.
We have
entered into credit facility agreements to meet our future working capital needs. However, our ability to obtain financing may be affected by: (i) our results of operations, financial condition, cash flows and credit ratings; (ii) costs of
financing in line with prevailing economic conditions and the status of the global financial markets; and (iii) our ability to obtain PRC government approvals required to access domestic or international financing or to undertake any project
involving significant capital investment, which may include one or more approvals from the NDRC, SAFE, MOFCOM and/or the CSRC depending on the circumstances. If we are unable to obtain financing, for whatever reason, for a significant portion of our
capital requirements, our ability to acquire new aircraft and to expand our operations may be materially and adversely affected.
69
Capital Expenditures
As of December 31, 2017, according to the relevant agreements, we expect our capital expenditures for aircraft, engines and related
equipment to be in aggregate approximately RMB87,030 million, including approximately RMB28,322 million in 2018 and approximately RMB27,516 million in 2019, in each case subject to contractually stipulated increases or any increase
relating to inflation. We plan to finance our other capital commitments through a combination of funds generated from operations, existing credit facilities, bank loans, leasing arrangements and other external financing arrangements.
C. Research and Development, Patents and Licenses, etc.
None.
D. Trend Information
Other than as disclosed elsewhere in this Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events for the
period from January 1, 2017 to December 31, 2017 that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not
necessarily indicative of future operating results or financial conditions.
E.
Off-balance
Sheet Arrangements
We have not entered into any
off-balance
sheet arrangements other than our operating lease
arrangements:
|
|
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any unconsolidated entity;
|
|
|
We have not entered into any obligations under any derivative contracts that are indexed to our own shares and classified as shareholders 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.
|
70
F. Tabular Disclosure of Contractual Obligations
Contractual Obligations and Commercial Commitments
The following tables set forth selected information regarding our outstanding contractual and commercial commitments as of December 31,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Less Than
1 Year
|
|
|
1-2 Years
|
|
|
2-4 Years
|
|
|
More Than
4 Years
|
|
Long-Term Debt
(1)
|
|
|
9,055
|
|
|
|
4,131
|
|
|
|
1,020
|
|
|
|
2,317
|
|
|
|
1,587
|
|
Capital Leases
(2)
|
|
|
66,868
|
|
|
|
9,241
|
|
|
|
8,162
|
|
|
|
22,847
|
|
|
|
26,618
|
|
Operating Leases
(3)
|
|
|
20,936
|
|
|
|
3,380
|
|
|
|
2,723
|
|
|
|
7,268
|
|
|
|
7,565
|
|
Unconditional Purchase Obligations
(4)
|
|
|
87,030
|
|
|
|
28,322
|
|
|
|
27,516
|
|
|
|
27,102
|
|
|
|
4,090
|
|
Other Long-term Obligations
(5)(6)
|
|
|
3,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement Benefit Obligations
(5)
|
|
|
2,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
(5)
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Bank Loans
(7)
|
|
|
24,959
|
|
|
|
24,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under Finance Leases
|
|
|
13,282
|
|
|
|
2,410
|
|
|
|
2,246
|
|
|
|
5,048
|
|
|
|
3,578
|
|
Under Bank Loans
|
|
|
2,106
|
|
|
|
1,038
|
|
|
|
1,020
|
|
|
|
42
|
|
|
|
6
|
|
Fixed Rate
|
|
|
860
|
|
|
|
859
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Variable Rate
(8)
|
|
|
1,246
|
|
|
|
179
|
|
|
|
1,020
|
|
|
|
41
|
|
|
|
6
|
|
Note
(2)
|
Primarily comprise amounts paid/due under leases for the acquisition of aircraft.
|
(3)
|
Primarily comprise amounts paid/due under leases for the rental of aircraft, engines and flight equipment.
|
(4)
|
Primarily comprise capital expenditures.
|
(5)
|
Figures of payments due by period are not available.
|
(6)
|
Other long-term obligations include long-term duties and levies payable, and fair value of unredeemed points awarded under our frequent flyer programs.
|
(7)
|
Short-term bank loans are generally repayable within one year. As of December 31, 2017, the weighted average interest rate of our short-term bank loans was 1.53% per annum (2016: 2.55%).
|
(8)
|
For our variable rate loans, interest rates range from six month LIBOR + 55% to six months LIBOR + 285%. Interest obligations relating to variable rate loans are calculated based on the relevant LIBOR rates as of
December 31, 2017. A 25 basis points increase in the interest rate would increase interest expenses by RMB142 million.
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Amount of Commitment Expiration Per Period
|
|
Other Commercial
|
|
Amounts
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
After
|
|
Commitments/Credit Facilities
|
|
Committed
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
|
(RMB in millions)
|
|
Lines of Credit
|
|
|
59,465
|
|
|
|
52,626
|
|
|
|
6,800
|
|
|
|
|
|
|
|
39
|
|
Standby Letters of Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
59,465
|
|
|
|
52,626
|
|
|
|
6,800
|
|
|
|
|
|
|
|
39
|
|
Taxation
We had carried forward tax losses of approximately RMB167 million as of December 31, 2017, which can be used to set off against
future taxable income between 2018 and 2022.
Prior to 2008, the Company and certain of its subsidiaries located in Pudong District,
Shanghai, were entitled to a reduced rate of 15% pursuant to the preferential tax policy in Pudong District, Shanghai. Under Chinas EIT Law, which was approved by the National Peoples Congress on March 16, 2007 and became effective
from January 1, 2008, the Company and its Pudong subsidiaries are entitled to a transitional arrangement to increase the applicable corporate income tax rate gradually to 25% over the next five years from 2008. China Eastern Yunnan Airlines
Co., Ltd. (CEA Yunnan), a subsidiary of the Group, obtained approval from tax authorities and has been entitled to a reduced corporate income tax rate of 15% from January 1, 2011. The Companys Sichuan branch, Gansu branch and
Xibei branch also obtained approvals from respective tax authorities and are entitled to a reduced corporate income tax rate of 15%. The subsidiaries incorporated in Hong Kong are subject to Hong Kong profits tax rate of 16.5% (2016:16.5%).
The Company and its subsidiaries except for CEA Yunnan, Sichuan branch, Gansu branch and Xibei branch and those incorporated in Hong Kong, are
generally subject to income tax at the PRC standard corporate income tax rate of 25% (2016:16.5%).
New Pronouncements
For a detailed discussion of new accounting pronouncements, please see Note 2 to the consolidated financial statements.
G. Safe Harbor
See the section headed
Cautionary Statement With Respect To Forward-Looking Statements.
72
Item 6.
Directors, Senior Management and Employees
A. Directors and Senior Management
The
following table sets forth certain information concerning our current Directors, supervisors and senior management members. Except as disclosed below, none of our Directors, supervisors or members of our senior management was selected or chosen as a
result of any arrangement or understanding with any major shareholders, customers, suppliers or others. There is no family relationship between any Director, supervisor or senior management member and any other Director, supervisor or senior
management member of our Company.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Shares Owned
|
|
Position
|
Liu Shaoyong
|
|
59
|
|
|
|
Chairman of the Board of Directors
|
Ma Xulun
|
|
53
|
|
|
|
President and Vice Chairman
|
Li Yangmin
|
|
54
|
|
3,960 A Shares
|
|
Director and Vice President
|
Gu Jiadan
|
|
61
|
|
|
|
Director
|
Tang Bing
|
|
51
|
|
|
|
Director and Vice President
|
Tian Liuwen
|
|
58
|
|
|
|
Director and Vice President
|
Yuan Jun
|
|
58
|
|
|
|
Employee Representative Director
|
Li Ruoshan
|
|
69
|
|
|
|
Independent
Non-executive
Director
|
Ma Weihua
|
|
69
|
|
|
|
Independent
Non-executive
Director
|
Shao Ruiqing
|
|
60
|
|
|
|
Independent
Non-executive
Director
|
Cai Hongping
|
|
63
|
|
|
|
Independent
Non-executive
Director
|
Xi Sheng
|
|
55
|
|
|
|
Chairman of the Supervisory Committee
|
Ba Shengji
|
|
60
|
|
|
|
Supervisor
|
Hu Jidong
|
|
59
|
|
|
|
Supervisor
|
Feng Jinxiong
|
|
55
|
|
|
|
Supervisor
|
Jia Shaojun
|
|
50
|
|
|
|
Supervisor
|
Wu Yongliang
|
|
54
|
|
3,696 A Shares
|
|
Vice President and Chief Financial Officer
|
Feng Liang
|
|
53
|
|
|
|
Vice President
|
Feng Dehua
|
|
52
|
|
|
|
Vice President
|
Jiang Jiang
|
|
53
|
|
|
|
Vice President
|
Wang Jian
|
|
44
|
|
|
|
Board Secretary and Company Secretary
|
Directors
Mr.
Liu Shaoyong
, is currently the Chairman and party secretary of the Company and Chairman and party secretary of
CEA Holding. Mr. Liu joined the civil aviation industry in 1978 and was appointed as vice president of China General Aviation Corporation, deputy director of Shanxi Provincial Civil Aviation Administration of the PRC, general manager of the
Shanxi Branch of the Company, and director general of Flight Standard Department of CAAC. Mr. Liu served as President of the Company from December 2000 to October 2002, vice minister of the CAAC from October 2002 to August 2004, president of
China Southern Air Holding Company from August 2004 to December 2008, chairman of China Southern Airlines Co., Limited. from November 2004 to December 2008. Mr. Liu served as president and vice party secretary of CEA Holding from December 2008
to December 2016, and became the Chairman of the Company since February 2009. He served as the Chairman and party secretary of CEA Holding since December 2016 and the party secretary of the Company since December 2017. Mr. Liu is also currently
the member of the National Committee of the Chinese Peoples Political Consultative Conference, the council member of International Air Transport Association and the council member of Association for Relations Across the Taiwan Straits, and the
vice chairman of International Advisory Board of School of Management, Fudan University. Mr. Liu graduated from the China Civil Aviation Flight College and obtained a Master of Business Administration degree from Tsinghua University.
Mr. Liu holds the title of commanding pilot.
73
Mr.
Ma Xulun
, is currently the vice chairman, president and vice party
committee secretary of the Company, vice chairman, president, and vice party secretary of CEA Holding. Mr. Ma was previously vice president of China Commodities Storing and Transportation Corporation, deputy director general of the Finance
Department of the CAAC and vice president of Air China Corporation Limited. In 2002, after the restructuring of civil aviation industry he was appointed as vice president of general affairs of Air China Corporation Limited. Mr. Ma served as
president and deputy party secretary of Air China Corporation Limited from September 2004 to January 2007. Mr. Ma became a party member of China National Aviation Holding Company from December 2004 to December 2008, and deputy general manager
of China National Aviation Holding Company from January 2007 to December 2008. In December 2008, Mr. Ma was appointed as president and deputy party secretary of the Company and deputy party secretary of CEA Holding. Since February 2009,
Mr. Ma has become a Director of the Company. Mr. Ma served as vice president of the Company with effect from November 2011. He served as party secretary of CEA Holding from November 2011 to December 2016. He served as vice chairman,
president and vice party secretary of CEA Holding with effect from December 2016. Mr. Ma is also currently the deputy president of China Association for public companies, the vice president of Association of Shanghai Listed Companies and the
director of Shanghai Chinese Overseas Friendship Association. Mr. Ma graduated from Shanxi University of Finance and Economics and Huazhong University of Science and Technology. Mr. Ma holds a masters degree and is a PRC Certified
Public Accountant (CPA).
Mr.
Li Yangmin
, is currently a Director, vice party secretary and vice president of
the Company, and vice party secretary and vice president of CEA Holding. Mr. Li joined the civil aviation industry in 1985. He was previously deputy general manager of the aircraft maintenance base and the manager of air route department of
Northwest Company, general manager of the aircraft maintenance base of China Eastern Air Northwest Branch Company and vice president of China Eastern Air Northwest Branch Company. Since October 2005, he has also been a vice president of the Company.
He served as Safety Director of the Company from July 2010 to December 2012. He has become a party member of CEA Holding since May 2011. He was appointed the Director of the Company with effect from June 2011 and served as the party secretary of the
Company from June 2011 to December 2017. He served as the chairman of China Cargo Airlines Co., Limited. from February 2012 to January 2013. He served as the executive director of Eastern Logistics from December 2012 to June 2016. Since November
2014, he served as the Chairman of Eastern Air Yunnan. Since August 2016, he served as vice party secretary and vice president of CEA Holding. Since December 2017, he served as the vice party secretary of the Company. Mr. Li graduated from the
Civil Aviation University of China and Northwestern Polytechnical University with masters degrees and obtained an Executive Master of Business Administration degree from Fudan University. He is also a qualified professor-level senior engineer.
Mr.
Gu Jiadan
, is currently a Director. Mr. Gu was the assistant to president, and the general manager of
the commerce department and the party secretary of Shanghai Airlines Co., Limited From May 2005 to August 2009, he was the vice president and a party member of Shanghai Airlines. From August 2009 to January 2010, he was the acting president of
Shanghai Airlines. From January 2010 to December 2016, he was a party member and vice president of CEA Holding. From January 2010 to July 2011, he served as the party secretary of Shanghai Airlines. He was appointed as a Director of the Company with
effect from June 2012. Mr. Gu Jiadan holds a masters degree and is a senior economist.
Mr.
Tang
Bing
, is currently a Director, vice president of the Company, vice president and party member of CEA Holding. Mr. Tang joined the civil aviation industry in 1993. He served as vice executive president (general manager representing Chinese
shareholder) of MTU Maintenance Zhuhai Co., Limited., office director of China Southern Airlines Holding Company and president of Chongqing Airlines Company Limited. From December 2007 to May 2009, he served as chief engineer and general manager of
the Aircraft Engineering Department of China Southern Airlines Company Limited. From May 2009 to December 2009, he was appointed as president of the Beijing Branch of the Company and was the president of Shanghai Airlines from January 2010 to
December 2011. He served as the chairman and executive director of Shanghai Airlines from January 2012 to January 2018, and was appointed a party member of CEA Holding in May 2011 and a Director of the Company in June 2012. Since December 2016, he
served as the vice president of CEA Holding. Mr. Tang graduated from Nanjing University of Aeronautics and Astronautics majoring in electrical technology. He obtained a Master of Business Administration degree from the Administration Institute
of Sun
Yat-sen
University, an Executive Master of Business Administration degree from the School of Economics and Management of Tsinghua University and a doctoral degree in economics from the Graduate School
of Chinese Academy of Social Sciences. He is also a qualified senior engineer.
74
Mr.
Tian Liuwen
, is currently a Director, vice president of the Company
and vice president and a party member of CEA Holding. Mr. Tian joined the civil aviation industry in 1985. Mr. Tian served as manager of the Beijing Sales Department under the Marketing and Sales Division of China General Aviation
Corporation. He was also the head of the general manager office and chairman of the labor union and deputy general manager of the Shanxi Branch of the Company. From June 2002 to January 2008, he was the vice president and subsequently president of
the Hebei Branch of the Company. From April 2005 to May 2007, he was the president of the Beijing Base of the Company. He served as general manager of Eastern Air Jiangsu, from January 2008 to December 2011. Since December 2011, he has been the vice
president of the Company. From December 2011 to June 2013, he was the president of Shanghai Airlines. Since June 2014, he has been a party member of CEA Holding. Since June 2015, he has been a Director of the Company. Since December 2016, he served
as the vice president of CEA Holding. Since January 2018, he served as the chairman of Eastern Air Jiangsu. Mr. Tian obtained an Executive Master of Business Administration degree from Nanjing University and is qualified as senior economist.
Mr.
Yuan Jun
, is currently an employee representative Director and chief human resources officer of the
Company, employee representative director and head of Human Resources Department of CEA Holding and director of Eastern Airlines Industry Investment. Mr. Yuan entered civil aviation industry in 1997. From May 2007 to October 2011, Mr. Yuan
was the deputy head and head of Work Department of Party Committee of the Company. From October 2011 to May 2016, he was the general manager of Human Resources Department of the Company. From July 2014, he served as the chief human resources officer
of the Company. From June 2015 to September 2016, he concurrently served as the general manager of Ground Services Department and the deputy secretary of Party Committee of the Company. From September 2016, he served as the head of Human Resources
Department of CEA Holding. Mr. Yuan holds an executive masters degree in business administration from Fudan University and a senior political work specialist qualification.
Mr.
Li Ruoshan
, is currently an independent
non-executive
Director.
Mr. Li is currently a professor and PhD supervisor of the Accounting Department of the School of Management of Fudan University. He is also the vice president of the Shanghai Accounting Society and Shanghai Auditing Society. In 2001,
Mr. Li was awarded the The Best 10 Independent Directors in China by the Shanghai Stock Exchange. Mr. Li graduated from Xiamen University, majoring in accounting and obtained the first doctoral degree in auditing in the PRC. He
further studied abroad in the Katholieke Universiteit Leuven in Belgium and the Massachusetts Institute of Technology in the United States. Mr. Li was a deputy dean of the School of Economics and a deputy director of the Accounting Department
of the School of Economics of Xiamen University; and a deputy dean of the School of Management, director of the Accounting Department, director of the Financial department of Fudan University, a member of the Consultant Professional Committee for
Listed Companies of the Shanghai Stock Exchange and a consultant professional of the Committee for Accounting Standards of the Ministry of Finance. Mr. Li has been an independent
non-executive
Director of
the Company since June 2013. He is also the independent director of companies such as SAIC Motor Corporation Limited, Shanghai Zhangjiang
Hi-tech
Park Development Co., Ltd. and Xian Shaangu Power Co.,
Ltd, external supervisor of Industrial Bank Co., Ltd. and a director of Jiangsu Zhongnan Construction Group Co., Ltd.
Mr.
Ma Weihua
, is currently an independent
non-executive
Director.
Mr. Ma is currently the director-general of Council of National Fund for Technology Transfer and Commercialization, a member of the Standing Council of China Society for Finance and Banking. Mr. Ma served as an executive director,
president and chief executive officer of China Merchants Bank Co., Limited, the chairman of Wing Lung Bank Limited in Hong Kong, the chairman of CIGNA & CMC Life Insurance Company Limited and the chairman of China Merchants Fund Management
Co., Limited. Mr. Ma obtained a doctorate degree in economics and is an adjunct professor at several higher educational institutions including Peking University and Tsinghua University. Mr. Ma has been the independent
non-executive
Director since October 2013 to present. Mr. Ma is currently an independent director of China World Trade Center Co., Limited, Postal Savings Bank of China Co., Limited and Legend Holdings
Corporation at the same time and the Chairman of the board of supervisors of Taikang Life Insurance Co., Limited and a
non-executive
director of Roadshow Holdings Limited.
75
Mr.
Shao Ruiqing
, is currently an independent
non-executive
Director. Mr. Shao currently serves as a professor in accounting and a mentor to doctoral students at the Shanghai Lixin University of Commerce. Mr. Shao served as the deputy dean and dean of
the School of Economics and Management of Shanghai Maritime University, the deputy dean of Shanghai Lixin University of Commerce and the independent director of China Shipping Haisheng Co., Limited., and SAIC Motor Corp Limited. Mr. Shao served
as an independent
non-executive
Director of the Company from June 2010 to April 2014. Mr. Shao was awarded the special allowance by the State Council of the PRC in 1995. He is currently a consultative
committee member of the Ministry of Transport, as an expert in finance and accounting and the deputy head of China Association of Communications Accountancy. Mr. Shao graduated from Shanghai Maritime University, Shanghai University of Finance
and Economics and Tongji University with a bachelors degree in economics, and masters and doctoral degrees in management. Mr. Shao has spent two and a half years studying and being senior visiting scholar in the U.K. and Australia.
Mr. Shao is also an independent director of Tibet Urban Development And Investment Co., Ltd, Shenzhen Guangju Energy Co., Ltd., Huayu Automotive Systems Company Limited and Shanghai Carthane Co., Ltd.
Mr.
Cai Hongping
, is currently an independent
non-executive
Director.
Mr. Cai currently serves as the chairman of AGIC Capital. He worked for the Industrial and Transportation Management Committee of the Shanghai Government and Sinopec Shanghai Petrochemical Company Limited (Sinopec Shanghai) from
1987 to 1991. He participated in the entire listing process of Sinopec Shanghai in Hong Kong and the United States and is one of the founders of H shares in the PRC. From 1992 to 1996, he acted as a member of the Overseas Listing Team for Chinese
Enterprises under the Restructuring Committee of the State Council and the chairman of the Joint Committee of Board Secretaries for H Share Companies in the PRC. He served as a joint director of the investment banking division of Peregrine
Investments Holdings Limited in Asia from 1997 to 2006, chairman of the investment banking division of UBS AG in Asia from 2006 to 2010, chairman of Deutsche Bank in the Asia Pacific region from 2010 to 2015, independent
non-executive
director of China Oceanwide Holdings Limited since November 2014 and independent director and chairman of the audit committee of Minmetals Development Co., Limited from April 2015 to December 2015. He
became an external director of China Minmetals Corporation with effect from December 2015. He has been an independent
non-executive
Director of the Company since June 2016, an independent director of COSCO
SHIPPING Development Co., Ltd. since July 2016, and an independent director of Bank of Communications Co., Ltd since June 2017. Mr. Cai graduated from Shanghai Fudan University, majoring in mass communications.
Supervisory Committee
As required by the
PRC Company Law and our Articles of Association, our Company has a supervisory committee (the Supervisory Committee), whose primary duty is the supervision of our senior management, including our Board of Directors, managers and senior
officers. Supervisory Committee consists of five supervisors.
Mr.
Xi Sheng
, is currently the chairman of
Supervisory Committee of the Company, party member, vice president and chief auditor of CEA Holding. Mr. Xi served as the deputy head of the foreign affairs department II of the foreign funds utilization and application audit department and the
head of the liaison and reception office of the foreign affairs department of the National Audit Office of the PRC and the deputy head of the PRC Audit Institute. He was also the deputy head and head of the fixed assets investment audit department
of the National Audit Office of the PRC, and the party secretary and a special commissioner of the Harbin office of the National Audit Office of the PRC. He served as the head of the personnel and education department of the National Audit Office of
the PRC from January 2007 to September 2009. He was the head of the audit department of CEA Holding from September 2009 to November 2012. Mr. Xi has served as the chief auditor of CEA Holding since September 2009. Since June 2012, he has been a
supervisor of the Company. Since June 2016, he has been the chairman of Supervisory Committee of the Company. Since December 2017, he served as the head of the audit department of CEA Holding. Since January 2018, he served as the vice president and
party member of CEA Holding. Mr. Xi is also the council member of China Institute of Internal Audit, vice chairman of the 2nd session of supervisory committee of China Association for Public Companies and chairman of executive committee of
Association of Certified International Investment Analysts. Mr. Xi graduated from Jiangxi University of Finance and Economics with undergraduate education background. He is a senior auditor, a Chinese Certified Public Accountant (CPA) and an
International Certified Internal Auditor (CIA).
76
Mr.
Ba Shengji
, is currently a supervisor of the Company and the
chairman of the labor union of CEA Holding. Mr. Ba joined the civil aviation industry in 1978. He served as the section manager and deputy head of the finance department. He was the chief officer of the auditing office of the Company from March
1997 to October 1997, chief officer of the auditing office of CEA Holding from October 1997 to July 2000, head of the audit department of CEA Holding from July 2000 to January 2003, chief officer of disciplinary committee office, head of supervision
department and head of audit department of CEA Holding from January 2003 to May 2003. He served as the deputy head of party disciplinary inspection group, chief officer of disciplinary committee office, head of supervision department and head of the
audit department of CEA Holding from May 2003 to November 2006. He was the secretary of the disciplinary committee of the Company from November 2006 to November 2009 and the secretary of the disciplinary committee and chairman of the labor union of
the Company from November 2009 to November 2011. He served as the deputy secretary of the party committee and secretary of the disciplinary committee of the Company from November 2011 to August 2013. Since June 2013, he has been a supervisor of the
Company. He has served as the chairman of the labor union of CEA Holding since August 2013. Mr. Ba graduated from Shanghai Television University.
Mr.
Hu Jidong
, is currently a supervisor and chairman of the labor union of the Company and chief financial officer
and vice chairman of the labor union of CEA Holding. Mr. Hu joined the civil aviation industry in 1977. He has been the deputy head of the party promotion department of the Company, deputy head and head of the party publicity department of CEA
Holding, and head of the party publicity department of CEA Holding. He was the chairman of the labor union of the Company since December 2011, deputy party secretary of the Company from August 2013 to December 2017, secretary of the disciplinary
committee of the Company from August 2013 to August 2014, and supervisor of the Company since June 2016. Since November 2017, he served as the chief financial officer and vice chairman of the labor union of CEA Holding. Mr. Hu Jidong graduated
from Shanghai University with a major in cultural management and Fudan University with a major in administrative management.
Mr.
Feng Jinxiong
, is currently a supervisor of the Company and consultant of the audit department of CEA Holding.
Mr. Feng joined the civil aviation industry in 1982, and served as deputy head and head of the Planning Department of the Company, head of the Finance Department and deputy chief accountant of CEA Holding, manager of the Human Resources
Department of the Company, party secretary and vice president of CES Finance, and deputy general manager of the Shanghai Security Department of the Company. He also served as president of Eastern Air Wuhan from January 2007 to February 2009. He
served as general manager of the Audit Department of the Company from February 2009 to December 2017. He has been a supervisor of the Company since March 2009. He has been the head of the audit department of CEA Holding from May 2014 to December
2017. Since December 2017, he served as consultant of the audit department of CEA Holding. Mr. Feng graduated from the Civil Aviation University of China and the Graduate School of the Chinese Academy of Social Sciences, holding a masters
degree.
Mr.
Jia Shaojun
, is currently a supervisor of the Company. Mr. Jia was general manager of the
financial department and secretary of party general branch of the financial department of the Company. He served as general manager of the finance and accounting department of the Company from December 2011 to November 2012 and head of the audit
department of CEA Holding from November 2012 to May 2014. He has acted as head of the financial department of CEA Holding from May 2014 to December 2017. He has acted as supervisor of the Company since June 2016. Mr. Jia graduated from Civil
Aviation College of China and Fudan University School of Management, holding an executive MBA degree. He is qualified as a senior accountant.
Senior
Management
Mr.
Wu Yongliang
, is currently a vice president and chief financial officer of the Company, and
vice president and party member of CEA Holding. Mr. Wu joined the civil aviation industry in 1984 and served as deputy head and subsequently head of the Finance Department of the Company, head of Planning and Finance Department of the Company
and head of the Finance Department of CEA Holding. From April 2001 to March 2009, he served as deputy chief accountant and head of the Finance Department of CEA Holding. From April 2009 onwards, he has served as chief financial officer of the
Company. He has been a vice president of the Company since December 2011. He has been a vice president and party member of CEA Holding since November 2017. Mr. Wu graduated from the Faculty of Economic Management of Civil Aviation University of
China, majoring in planning and finance. He also graduated from Fudan University, majoring in business administration. Mr. Wu holds a MBA degree and is a certified accountant.
77
Mr.
Feng Liang
, is currently a vice president and the chief engineer of
the Company. Mr. Feng joined the civil aviation industry in 1986 and worked in the aircraft maintenance base routes department of the Company. From 1999 to 2006, he used to serve as the head of the aircraft maintenance base engineering
technology department, chief engineer of the base and general manager of the base. He also served as the general manager of China Eastern Air Engineering & Technique after it was established in September 2006. He has served as the chief
engineer of the Company since August 2010, the chief security officer of the Company from December 2012 to December 2014 and the vice president of the Company since August 2013. He has been an executive director of Eastern Technology since December
2014. Mr. Feng graduated from Civil Aviation University of China, majored in aircraft electrical equipment maintenance and obtained an MBA degree from Shanghai Jiao Tong University.
Mr.
Feng Dehua
, is currently a vice president of the Company and the deputy head of party disciplinary inspection
group of CEA Holding. Mr. Feng joined the civil aviation industry in 1989, and has worked in China General Aviation Corporation, the Shanxi branch of the Company and the sales and marketing system department of the Company. From May 2009 to
July 2009, Mr. Feng was the executive vice president for sales and marketing of passenger transportation department of the Company. From July 2009 to November 2011, he was the party secretary and vice president for sales and marketing of
passenger transportation department of the Company. From November 2011 to August 2014, he was the president and deputy party secretary of the Beijing branch of the Company. From August 2014 to December 2017, he was the secretary of the Disciplinary
Committee of the Company. Since September 2014, he has been a member of the Party Standing Committee of the Company. Since September 2014, he has been the deputy head of party disciplinary inspection group of CEA Holding. Since December 2017, he has
been a vice president of the Company. Mr. Feng graduated from Shanxi Finance and Economics Institute majored in commercial business management and obtained an executive masters degree in business administration from Fudan University. He
is qualified as a senior economist.
Mr.
Jiang Jiang
, is currently a vice president of the
Company. Mr. Jiang joined the civil aviation industry in 1986, and has worked in the Civil Aviation Industry Airline Corporation and China General Aviation Corporation. From June 1999 to April 2005, he served as the deputy manager and manager
of the flight division of the Shanxi Branch of the Company. From April 2005 to July 2010, he was the deputy general manager of the Shanxi Branch. From July 2010 to June 2014, he served as the general manager and the deputy secretary of the party
committee of the Shanxi Branch. From June 2014 to December 2016, he served as the deputy secretary of the party committee of Eastern Air Wuhan. He served as director and general manager of Eastern Air Wuhan from June 2014 to April 2017. From
December 2016 to February 2017, he has served as the
person-in-charge
of the safety operation management of the Company. Since February 2017, he has served as the vice
president of the Company. Mr. Jiang graduated from the Flight College of Civil Aviation Flight University of China, majored in aviation transportation and obtained an Executive Master of Business Administration degree from Fudan University. He
has the professional title of Level 1 pilot.
Mr.
Wang Jian
, is currently the Companys Board
secretary and company secretary. Mr. Wang joined the Company in 1995 and served as deputy head of the Companys office and deputy general manager of the Shanghai Business Office of the Company. From September 2006 to May 2009, he was the
deputy general manager in the Shanghai Base of China Southern Airlines Company Limited. He served as the head of the Board secretariat of the Company and a representative of the Companys Securities affairs from May 2009 to April 2012. He
served as the Board secretary and the head of the Board secretariat of the Company from April 2012 to May 2016. He ceased to serve as the head of the Board secretariat in May 2016. During his term as secretary to the Board and his relevant work, he
designed and promoted to implement several capital and strategic projects of the Company. Mr. Wang graduated from Shanghai Jiao Tong University and has an Master of Business Administration postgraduate degree from East China University of
Science and Technology and an Executive Master of Business Administration degree from Tsinghua University as well as a qualification certificate for board secretaries of listed companies issued by the Shanghai Stock Exchange.
Retired Director, Supervisor and Senior Management During the Reporting Period
Mr.
Xu Zhao
, was a Director of the Company, and the chief accountant of CEA Holding during the reporting period.
Mr. Xu served as engineer and accountant of Dongfeng Motor Group Company Limited, manager of the finance department of Shanghai Yanhua High Technology Limited Company, and chief financial officer of Shaanxi Heavy Duty Automobile Co., Limited.
Mr. Xu has served as the chief accountant of CEA Holding from November 2006 to January 2018. He was a supervisor of the Company from June 2007 to November 2011. He has served as a Director of the Company from June 2012 to February 2018.
Mr. Xu graduated from Chongqing University, majoring in moulding, and The Chinese University of Hong Kong, majoring in accounting, and holds a masters degree. Mr. Xu is qualified as an engineer and an accountant, and is a certified
public accountant in the PRC.
78
Mr.
Sun Youwen
, was a vice president of the Company during the
reporting period. Mr. Sun joined the civil aviation industry in 1980, and served as a squadron leader and the leader of the Shanghai flight division. He served as the vice president of Eastern Air Jiangsu from April 2007 to November 2009 and
the general manager of the Shanghai flight division of the Company from December 2009 to April 2012. He was appointed as the chief pilot of the Company and the general manager of the Shanghai flight division of the Company from April 2012 to March
2014 and has served as the vice president and chief pilot of the Company from March 2014 to July 2014. He has been a vice president of the Company from July 2014 to February 2017. Mr. Sun graduated from the Flight College of Civil Aviation
Flight University of China, majored in aircraft driving and obtained an Executive Master of Business Administration degree from the Institute of Management of Fudan University.
B. Compensation
The aggregate amount of
cash compensation paid by us to our Directors, supervisors and the senior management during 2017 for services performed as Directors, supervisors and officers or employees of our Company was approximately RMB8.7 million. In addition, Directors
and supervisors who are also officers or employees of our Company receive certain other
in-kind
benefits which are provided to all of our employees.
Details of the emoluments paid to our Directors, supervisors and senior management for the year 2017 are as follows:
|
|
|
|
|
|
|
Total
|
|
Name and Principal Position
|
|
RMB000
|
|
Directors
|
|
|
|
|
Liu Shaoyong*
|
|
|
|
|
Ma Xulun*
|
|
|
|
|
Xu Zhao*
|
|
|
|
|
Gu Jiadan*
|
|
|
|
|
Li Yangmin*
|
|
|
|
|
Tang Bing*
|
|
|
|
|
Tian Liuwen*
|
|
|
|
|
Independent
non-executive
Directors
|
|
|
|
|
Li Ruoshan
|
|
|
200
|
|
Shao Ruiqing
|
|
|
200
|
|
Ma Weihua
|
|
|
200
|
|
Cai Hongping
|
|
|
200
|
|
Supervisors
|
|
|
|
|
Xi Sheng*
|
|
|
|
|
Feng Jinxiong
|
|
|
584
|
|
Ba Shengji*
|
|
|
|
|
Hu Jidong
|
|
|
1,549
|
|
Jia Shaojun*
|
|
|
|
|
Senior Management
|
|
|
|
|
Wu Yongliang
|
|
|
1,549
|
|
Feng Liang
|
|
|
1,549
|
|
Feng Dehua
(1)
|
|
|
|
|
Jiang Jiang
(2)
|
|
|
921
|
|
Wang Jian
|
|
|
1,397
|
|
Sun Youwen
(3)
|
|
|
399
|
|
Total
|
|
|
8,748
|
|
79
*
|
These Directors and supervisors of our Company received emoluments from CEA Holding, our parent company, part of which were in respect of their services to our Company and our subsidiaries. No apportionment has been
made, as it is impracticable to apportion this amount between their services to us and their services to CEA Holding. Mr. Xu Zhao resigned on February 6, 2018.
|
(1)
|
The term of service of Mr. Feng Dehua as the vice president started from December 24, 2017 and he started to receive remuneration as the vice president from January 2018.
|
(2)
|
Mr. Jiang Jiang, the vice president, is a pilot whose salary includes flight service benefits. His term of service started from February 22, 2017. Therefore, the remuneration disclosure period was from March
to December 2017.
|
(3)
|
Mr. Sun Youwen is a pilot whose salary includes flight service benefits. The term of service of the vice president in 2017 was from January 1 to February 22, 2017. Therefore, the remuneration disclosure period was
from January to February 2017.
|
During the year ended December 31, 2017, no Directors or supervisors of the Company
waived their compensation.
C. Board Practices
All of our Directors and supervisors serve a term of three years or until such later date as their successors are elected or appointed.
Directors and supervisors may serve consecutive terms. Two of the supervisors are employee representatives appointed by our employees, and the rest are appointed by the shareholders. The following table sets forth the number of years our current
Directors, executive officers and supervisors have held their positions during their current term and the expiration of their current term.
|
|
|
|
|
|
|
Name
(1)
|
|
Position
|
|
Held Position Since
|
|
Expiration of Term
|
Liu Shaoyong
|
|
Chairman of the Board of Directors
|
|
June 15, 2016
|
|
June 30, 2019
|
Ma Xulun
|
|
Vice Chairman
|
|
June 15, 2016
|
|
June 30, 2019
|
|
|
President
|
|
June 15, 2016
|
|
June 30, 2019
|
Li Yangmin
|
|
Director
|
|
June 15, 2016
|
|
June 30, 2019
|
|
|
Vice President
|
|
June 15, 2016
|
|
June 30, 2019
|
Xu Zhao
|
|
Director
|
|
June 15, 2016
|
|
February 6, 2018
|
Gu Jiadan
|
|
Director
|
|
June 15, 2016
|
|
June 30, 2019
|
Tang Bing
|
|
Director
|
|
June 15, 2016
|
|
June 30, 2019
|
|
|
Vice President
|
|
June 15, 2016
|
|
June 30, 2019
|
Tian Liuwen
|
|
Director
|
|
June 15, 2016
|
|
June 30, 2019
|
|
|
Vice President
|
|
June 15, 2016
|
|
June 30, 2019
|
Yuan Jun
|
|
Director
|
|
February 8, 2018
|
|
June 30, 2019
|
Li Ruoshan
|
|
Independent
Non-executive
Director
|
|
June 15, 2016
|
|
June 30, 2019
|
Ma Weihua
|
|
Independent
Non-executive
Director
|
|
June 15, 2016
|
|
June 30, 2019
|
Shao Ruiqing
|
|
Independent
Non-executive
Director
|
|
June 15, 2016
|
|
June 30, 2019
|
Cai Hongping
|
|
Independent
Non-executive
Director
|
|
June 15, 2016
|
|
June 30, 2019
|
Xi Sheng
|
|
Chairman of the Supervisory Committee
|
|
June 15, 2016
|
|
June 30, 2019
|
Ba Shengji
|
|
Supervisor
|
|
June 15, 2016
|
|
June 30, 2019
|
Hu Jidong
|
|
Supervisor
|
|
June 15, 2016
|
|
June 30, 2019
|
Feng Jinxiong
|
|
Supervisor
|
|
June 15, 2016
|
|
June 30, 2019
|
Jia Shaojun
|
|
Supervisor
|
|
June 15, 2016
|
|
June 30, 2019
|
Wu Yongliang
|
|
Vice President
|
|
June 15, 2016
|
|
June 30, 2019
|
|
|
Chief Financial Officer
|
|
June 15, 2016
|
|
June 30, 2019
|
Feng Liang
|
|
Vice President
|
|
June 15, 2016
|
|
June 30, 2019
|
Feng Dehua
|
|
Vice President
|
|
December 25, 2017
|
|
June 30, 2019
|
Jiang Jiang
|
|
Vice President
|
|
February 22, 2017
|
|
June 30, 2019
|
Sun Youwen
|
|
Vice President
|
|
June 15, 2016
|
|
February 22, 2017
|
Wang Jian
|
|
Company Secretary
|
|
June 15, 2016
|
|
June 30, 2019
|
Note:
(1)
|
On February 22, 2017, the fourth ordinary meeting of the eighth session of the Board of Directors of the Company appointed Mr. Jiang Jiang as a vice president of the Company for a term of office in line with
the current session of the Board of Directors. On December 25, 2017, the ninth ordinary meeting of the eighth session of the Board of Directors of the Company appointed Mr. Feng Dehua as a vice president of the Company for a term of office
in line with the current session of the Board of Directors. On February 6, 2018, Mr. Xu Zhao resigned as a Director. On February 8, 2018, Mr. Yuan Jun was elected as an employee representative Director at the general meeting of
the employee representatives.
|
80
None of our Directors, supervisors or members of our senior management has entered into any
agreement or reached any understanding with us requiring our Company to pay any benefits as a result of termination of their services.
Audit and Risk
Management Committee
Our Board of Directors established the audit committee in August 2000 in accordance with the listing rules of the
Hong Kong Stock Exchange. Our Audit and Risk Management Committee comprised Mr. Li Ruoshan, Mr. Shao Ruiqing and Mr. Xu Zhao as the members of the Audit and Risk Management Committee and Mr. Li Ruoshan was appointed as the
chairman of the Audit and Risk Management Committee in 2017. Due to Mr. Xu Zhaos resignation, on March 29, 2018, Mr. Cai Hongping was appointed as the member of the Audit and Risk Management Committee. Our Audit and Risk
Management Committee comprises three members, which are all independent non-executive directors, and satisfies the requirements of Rule
10A-3
of the Exchange Act and NYSE Rule 303A.06 relating to audit
committees, including the requirements relating to independence of the audit committee members.
The Audit and Risk Management Committee
is authorized to, among other things, examine our internal control, internal audit and risk management systems, review auditing procedures and financial reports with our auditors, evaluate the overall risk management and corporate governance of our
Company and prepare relevant recommendations to our Board of Directors. Subject to the approval of the shareholders meeting, the Audit and Risk Management Committee of our Company is also directly responsible for the appointment, compensation,
retention and oversight of our external auditors, including resolving disagreements between management and the auditor regarding financial reporting. The external auditors report directly to the Audit and Risk Management Committee. The Audit and
Risk Management Committee holds at least three meetings each year. The Audit and Risk Management Committee has established procedures for the receipt, retention and treatment of complaints received by our Company regarding accounting, internal
controls or auditing matters, and procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Audit and Risk Management Committee has the authority to engage independent
counsel and other advisors, as it determines necessary, to carry out its duties. Our Company provides appropriate funding, as determined by the Audit and Risk Management Committee, for payment of compensation to the external auditors, advisors
employed by the audit committee, if any, and ordinary administrative expenses of the audit committee that are necessary or appropriate in carrying out its duties. The Audit and Risk Management Committee held eight meetings in 2017.
Nominations and Remuneration Committee
Our Nominations and Remuneration Committee comprises three members: Mr. Liu Shaoyong, the Chairman, Mr. Ma Weihua and Mr. Cai
Hongping, both of whom are independent
non-executive
directors. Since June 15, 2016, when considering and approving nomination related matters, the Nominations and Remuneration Committee will be chaired
by Mr. Liu Shaoyong; when considering and approving remuneration related matters, the Nominations and Remuneration Committee will be chaired by Mr. Ma Weihua.
81
The Nominations and Remuneration Committee is authorized to make recommendations to our Board of
Directors regarding its size and composition based on the relevant provisions of the Company Law and in the light of specific circumstances such as the characteristics of the Companys equity structure, determine standards and procedures for
the nomination of Directors and senior management of the Company, examine the remuneration policies of Directors and senior management of the Company, review the performance of our Directors and senior management as well as determine their annual
compensation level. The Nominations and Remuneration Committee submits to our Board of Directors or shareholders meeting for approval compensation plans and oversee the implementation of approved compensation plans. The Nominations and
Remuneration Committee may consult financial, legal or other outside professional firms in carrying out its duties. The Nominations and Remuneration Committee held four meetings in 2017.
We follow our home country practice in relation to the composition of our Nominations and Remuneration Committee in reliance on the exemption
provided under NYSE Corporate Governance Rule 303A.00 available to foreign private issuers. Our home country practice does not require us to establish a remuneration committee composed entirely of independent directors.
Planning and Development Committee
The
Planning and Development Committee comprises three members: Mr. Li Yangmin and Mr. Tang Bing both of whom are Directors, and Mr. Shao Ruiqin, an independent
non-executive
director. Mr. Li
Yangmin is the chairman of the committee.
The Planning and Development Committee, a specialized committee under our Board of Directors,
is responsible for studying, considering, and developing plans and making recommendations with regard to the long-term development plans and material investment decisions of the Company. The members of the committee also oversee the implementation
of such plans. The Planning and Development Committee held eight meetings in 2017.
Aviation Safety and Environment Committee
The Aviation Safety and Environment Committee comprises Mr. Ma Xulun and Mr. Li Yangmin, both of whom are Directors, and Mr. Li
Ruoshan, an independent
non-executive
director. Mr. Ma Xulun serves as the chairman of the committee.
The Aviation Safety and Environment Committee, a specialized committee under the Board of Directors, is responsible for consistent
implementation of relevant laws or regulations regarding national aviation safety and environmental protection, examining and overseeing the aviation safety management of the Company, studying, considering and making recommendations with regard to
aviation safety duty plans and significant issues resulting from related safety duties as well as implementing such safety duty plans. In addition, the Aviation Safety and Environment Committee performs studies, and makes recommendations on
significant environmental protection issues, including carbon emissions on our domestic and international aviation routes and carbon emission programs, and overseeing their implementation. The Aviation Safety and Environment Committee held two
meetings in 2017.
82
D. Employees
Our employees are members of a labor association, which represents employees with respect to labor disputes and certain other employee matters.
We believe that we maintain good relations with our employees and with their labor association.
The table below sets forth the number of
our employees as of December 31, 2015, 2016 and 2017, respectively:
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|
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|
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As of December 31,
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|
|
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2015
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|
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2016
|
|
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2017
|
|
Pilots
|
|
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6,386
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|
|
|
6,759
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|
|
|
7,332
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|
Flight attendants and other aircrew staff
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|
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13,225
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|
|
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15,494
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|
|
|
18,916
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Maintenance personnel
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|
|
10,890
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|
|
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11,621
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|
|
|
11,847
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Sales and marketing
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|
|
3,980
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|
|
|
4,739
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|
|
|
4,378
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|
Operation control
|
|
|
1,983
|
|
|
|
2,180
|
|
|
|
2,057
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|
Information technology
|
|
|
707
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|
|
|
860
|
|
|
|
920
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Management
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|
|
4,125
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|
|
|
4,001
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|
|
|
3,923
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Ground Services and others
|
|
|
29,737
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|
|
|
29,679
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|
|
|
25,904
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Total
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|
|
71,033
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|
|
|
75,333
|
|
|
|
75,277
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|
In 2017, we ensured positive results from the large-scale trainings through organizing and coordinating
resources, reasonably setting up courses and optimizing training cycles. We focused on different professional trainings, concentrated on the development of talent for the key positions and set up clear development and training plans for the targeted
personnel. Altogether 49,663 people have completed trainings, 980 people dispatched; 205 tranches or 3,620 people have completed the five required trainings in the transportation industry, which are dispatch, information, flight operations,
on-the-spot
affairs and capabilities; 3,134 flight attendant trainees have completed 107 training tasks from the beginner class for the new flight attendants. We have also
optimized the Sail Plan for Talents Development, a training program for new management trainees incorporating closed-door training with seminars, experiential and inspiring teaching. In addition, we promoted overseas study project, such
as Rolls-Royce management improvement study project and Six Sigma Black Belt project.
See Note 37 to the consolidated financial
statements for changes in our retirement benefits.
E. Share Ownership
See Item 6.A and Item 6.B above.
In 2012, we implemented an H shares appreciation rights scheme, under which H shares appreciation rights were granted to the Directors and
senior management on November 30, 2012 at an exercise price of HK$2.67. The H share appreciation rights granted under this scheme are valid for a period of five years from the date of grant. The
lock-up
period of the share appreciation rights shall be the 24 months from the date of grant, during which no share appreciation right shall be exercised. Subject to the satisfaction of performance appraisal indicators, incentive recipients may exercise
their share appreciation rights in equal instalments within three years after the expiration of the
lock-up
period.
There was no granting or exercise of rights under the H shares appreciation rights of our Company during 2013. The first tranche of H shares
appreciation rights, amounting to one third of the total H shares appreciation rights of our Company, was originally planned to be exercised on December 1, 2014. However, as our Company did not satisfy the exercising conditions in 2013, such
tranche expired automatically.
83
Item 7.
Major Shareholders and Related Party Transactions
A. Major Shareholders
The following
table sets forth certain information regarding ownership of our capital stock as of December 31, 2017 by all persons who were known to us to be the beneficial owners of 5% or more of any class of our issued share capital:
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|
|
Title of Class
|
|
Identity of Person or Group
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Amount Owned (%)
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|
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Percent of Class
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|
|
Percent of Total Shares (%)
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Domestic A Shares
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CEA Holding
(1)
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5,530,240,000
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|
|
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56.38
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|
|
|
38.23
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H Shares
|
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CES Global
(2)
|
|
|
2,626,240,000
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|
|
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56.37
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|
|
|
18.15
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H Shares
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HKSCC Nominees Limited
(3)
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|
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4,182,503,289
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|
|
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89.77
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|
|
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28.91
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H Shares
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Delta Air Lines
(4)
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|
|
465,910,000
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|
|
|
10.00
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|
|
|
3.22
|
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Notes:
Based on the
information available to the Directors (including such information as was available on the website of the Hong Kong Stock Exchange) and so far as they are aware, as of December 31, 2017:
(1)
|
Among such A shares, 5,072,922,927 A shares were held directly by CEA Holding; and 457,317,073 A shares were held directly by CES Finance, which in turn were entirely held by CEA Holding.
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(2)
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Those H shares were held by CES Global in the capacity of beneficial owner, which in turn were entirely held by CEA Holding.
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(3)
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Among the 4,182,503,289 H shares held by HKSCC Nominees Limited, 2,626,240,000 shares (representing approximately 62.79% of the Groups then total issued H shares) were held by CES Global in the capacity of
beneficial owner, which in turn were entirely held by CEA Holding.
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(4)
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Those H shares were held by Delta Air Lines, Inc. in the capacity of beneficial owner, and represented approximately 10.00% of the Groups then total issued H shares.
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As of December 31, 2017, CEA Holding directly or indirectly held 56.38% of our issued and outstanding capital stock, and neither it nor
HKSCC Nominees Limited has any voting rights different from those of other shareholders. We are not aware of any arrangement which may at a subsequent date result in a change of control of our Company.
As of December 31, 2017, there were 4,659,100,000 H Shares issued and outstanding. As of December 29, 2017 (December 30 and December 31,
2017 being a Saturday and a Sunday) and April 16, 2018, there were 43 and 42 registered holders, respectively, of American depositary receipts evidencing 1,974,935 and 1,925,427 ADSs, respectively. Since certain of the ADSs are held by nominees, the
above number may not be representative of the actual number of U.S. beneficial holders of ADSs or the number of ADSs beneficially held by U.S. persons.
Our Company is currently a majority-owned subsidiary of CEA Holding. CEA Holding itself is a wholly state-owned enterprise under the
administrative control of the SASAC. CEA Holdings shareholding in our Company is in the form of ordinary domestic shares, through which it, under the supervision of the SASAC, enjoys shareholders rights and benefits on behalf of the PRC
government.
B. Related Party Transactions
Relationship with CEA Holding and Associated Companies
We enter into transactions from time to time with CEA Holding and its subsidiaries. For a description of such transactions, see Note 47 to the
consolidated financial statements.
84
Related Business Transactions
As our Company and EA Group and its subsidiaries were a single group prior to the restructuring in 2002, certain arrangements among us have
continued after the restructuring and the establishment of CEA Holding. Although we do not currently intend to enter into any equivalent contracts with third parties, each of these arrangements is
non-exclusive.
Eastern Aviation Import and Export Corporation (EAIEC), a 55% owned subsidiary of
CEA Holding
Import and Export Services (previously known as Import and Export Agency Services)
On August 30, 2013, we entered into an agreement relating to the renewal of the existing import and export agency agreement with EAIEC on
substantially the same terms, pursuant to which EAIEC and its subsidiaries will from time to time as its agent provide the Group with agency services for the import and export of goods, including aircraft and related raw materials, accessories,
machinery and equipment, together with related insurance and financial services, required in the daily airlines operations and civil aviation business of the Group. The Import and Export Agency Renewal Agreement was effective for a term of three
years from January 1, 2014 to December 31, 2016.
On August 30, 2016, we entered into an agreement relating to the renewal
of the existing Import and Export Agency Agreement with EAIEC, pursuant to which EAIEC and its subsidiaries will from time to time provide our Group with a range of import and export services including: (i) agency services for the import and
export of goods, including aircraft and related raw materials, accessories, machinery and equipment, together with related insurance and financial services, required in the daily airlines operations and civil aviation business of the Group;
(ii) the provision of transportation services as required by our Group in the conduct of foreign trade; and (iii) provision of aircraft
on-board
supplies. The Import and Export Services Renewal
Agreement (previously known as Import and Export Agency Renewal Agreement) is effective for a term of three years, from January 1, 2017 to December 31, 2019.
For the year ended December 31, 2017, we paid handling charges of approximately RMB145 million to EAIEC. We currently have certain
balances with EAIEC, which are trade in nature, interest-free and payable within normal credit terms. See Note 47(c) to the consolidated financial statements for more details.
China Eastern Airlines Media Co. Ltd. (CEA Media) (previously known as Eastern Aviation Advertising Service Co., Ltd. (Eastern Aviation
Advertising)), a 55% owned subsidiary of CEA Holding
Advertising Service Agreement
On August 30, 2013, we entered into an agreement relating to the renewal of the existing advertising services agreement with Eastern
Aviation Advertising on substantially the same terms, pursuant to which Eastern Aviation Advertising and its subsidiaries will from time to time provide the Group with multi-media advertising services to promote its business and to organize
promotional functions and campaigns to enhance its reputation in the civil aviation industry. The Advertising Services Renewal Agreement was effective for a term of three years, from January 1, 2014 to December 31, 2016.
On August 30, 2016, we entered into an agreement relating to the renewal of the Existing Advertising Services Agreement with CEA Media on
substantially the same terms, pursuant to which CEA Media and its subsidiaries will from time to time provide our Group with multi-media advertising services to promote our Groups business and to organize promotional functions and campaigns to
enhance our Groups reputation in the civil aviation industry. The Advertising Services Renewal Agreement is effective for a term of three years, from January 1, 2017 to December 31, 2019.
For the year ended December 31, 2017, we paid to Eastern Aviation Advertising approximately RMB23 million for advertising services.
Media Resources Agreement
On September 27, 2013, we entered into an agreement with CE
A
Media, pursuant to which we and certain of our subsidiaries agreed to
transfer the exclusive rights to use certain media and advertising resources to CEA Media and certain of its subsidiaries for a period of 15 years (from January 1, 2014 to December 31, 2028). CEA Media is a subsidiary of and thus an
associate of CEA Holding, which in turn is a controlling shareholder of the Company. For the year ended December 31, 2017, Eastern Aviation Advertising paid approximately RMB15 million in media royalty fees.
85
China Eastern Air Catering Investment Co., Ltd. (CEA Catering), a 55% owned subsidiary of CEA
Holding with the remaining by our Company
Catering Service Agreements
On August 30, 2013, we entered into an agreement relating to the renewal of the existing catering services agreement with the Eastern Air
Catering Company on substantially the same terms, pursuant to which the Eastern Air Catering Company and its subsidiaries would from time to time provide the Group with
in-flight
catering services (including
the supply of
in-flight
meals and beverages, cutlery and tableware) and related storage and complementary services required in the daily airline operations and civil aviation business of the Group. The Eastern
Air Catering Entities provide their services in accordance with the specifications and schedules as from time to time specified by the relevant member(s) of the Group to accommodate its operation needs. The Catering Services Renewal Agreement was
approved at the extraordinary general meeting of the Company held on October 29, 2013 and was effective for a term of three years, from January 1, 2014 to December 31, 2016.
On August 30, 2016, we entered into an agreement relating to the renewal of the Existing Catering Services Agreement with CEA Catering,
pursuant to which CEA Catering and its subsidiaries (each an Eastern Air Catering Entity and collectively the Eastern Air Catering Entities) will from time to time provide our Group with catering services (including the
supply of meals and beverages, cutlery and tableware) and related storage and complementary services required in the
day-to-day
airline and ground operation of our
Group. The Eastern Air Catering Entities provide their services in accordance with the specifications and schedules as from time to time specified by the relevant member(s) of our Group to accommodate the operational needs of our Group.
For the year ended December 31, 2017, we paid approximately RMB1,254 million to the subsidiaries of CEA Catering for the supply of
in-flight
meals and other services.
Eastern Air Group Finance Co., Ltd., (Eastern Finance), a 53.75%
owned subsidiary of CEA Holding
On January 16, 2013, the Company entered into a supplemental agreement with Eastern Finance to
further regulate the balances of our deposits and loans with Eastern Finance and its subsidiaries on a
pre-condition
that the agreed maximum daily balance of each of the deposits and the loans under the
financial services agreement dated October 15, 2010 remained unchanged. On August 30, 2013, we entered into an agreement relating to the renewal of the existing financial services agreement with Eastern Finance and CES Finance, pursuant to
which Eastern Finance and its subsidiaries (each an Eastern Air Finance Entity and collectively the Eastern Air Finance Entities) and CES Finance and its subsidiaries (each a CES Finance Entity and collectively
the CES Finance Entities) will from time to time provide the Group with a range of financial services including: (i) deposit services by Eastern Air Finance Entities; (ii) loan and financing services by Eastern Air Finance
Entities; and (iii) other financial services such as: (a) the provision of trust loans, financial guarantees, credit references by Eastern Air Finance Entities; and (b) broker services for future products (e.g. crude oil, foreign
exchange and national debt) by CES Finance Entities (the scope of other financial services is not limited and different services may be provided to the Group as and when they are needed). The Financial Services Renewal Agreement was
approved at the extraordinary general meeting of the Company held on October 29, 2013 and was effective for a term of three years, from January 1, 2014 to December 31, 2016.
On August 30, 2016, we entered into an agreement relating to the renewal of the Existing Financial Services Agreement with Eastern
Finance and CES Finance, on substantially the same terms, pursuant to which Eastern Finance and its subsidiaries (each an Eastern Air Finance Entity and collectively the Eastern Air Finance Entities) and CES Finance and its
subsidiaries (each a CES Finance Entity and collectively the CES Finance Entities) agreed from time to time provide our Group with a range of financial services including: (i) deposit services by the Eastern Air Finance
Entities; (ii) loan and financing services by the Eastern Air Finance Entities; and (iii) other financial services, such as: (a) the provision of services such as trust loans, financial guarantees and credit references by the Eastern
Air Finance Entities; and (b) the provision of services such as broker services for future products (e.g. crude oil, foreign exchange and national debt) by the CES Finance Entities (the scope of other financial services is not
limited and different services may be provided to the Group as and when they are needed). The Financial Services Renewal Agreement is effective for a term of three years, from January 1, 2017 to December 31, 2019.
86
As of December 31, 2017, we had deposits amounting to RMB4,053 million placed with
Eastern Finance, which paid interest to us at 0.35% per annum.
CEA Development Co. (CEA Development), a wholly-owned subsidiary of CEA
Holding
On August 30, 2013, we entered into an agreement relating to the renewal of the existing maintenance and repair services
agreement with CEA Development on substantially the same terms, pursuant to which CEA Development and its subsidiaries (each a CEA Development Entity and collectively the CEA Development Entities) would from time to time
provide certain services, including: (i) maintenance and repair services to our airplanes and automobiles that are used in ground services and daily operations; (ii) comprehensive services in relation to maintenance, repair and overhaul of
aircraft, aviation equipment and ancillaries; (iii) various special vehicles and equipment for airline use, such as air stairs, freight cars, luggage trailers, garbage truck, aircraft portable water vehicle, aircraft sewage disposal vehicle,
food cars, freight containers, freight board; (iv) aircraft
on-board
supplies; and (v) warehousing management (the Maintenance and Repair Services Renewal Agreement). Maintenance and
Repair Services Renewal Agreement was effective for a term of three years, from January 1, 2014 to December 31, 2016.
On
August 30, 2016, we entered into the Complementary Services Renewal Agreement (previously known as the Existing Maintenance and Repair Services Agreement) with CEA Development, pursuant to which CEA Development and its subsidiaries (each a
CEA Development Entity and collectively the CEA Development Entities) will from time to time provide our Group with a range of services including: (i) supply of equipment and materials and provision of maintenance and
repair services to our automobiles and equipment; (ii) provision of property management services; (iii) provision of hotel accommodation services; and (iv) other complementary aviation services. The Complementary Services Renewal
Agreement is effective for a term of three years, from January 1, 2017 to December 31, 2019.
For the year ended
December 31, 2017, production and maintenance services fees paid to CEA Development Entity amounted to approximately RMB121 million.
Eastern
Logistics, an indirectly owned subsidiary of CEA Holding
Disposal of the entire equity interest in Eastern Air Logistics
On November 29, 2016, we entered into a disposal agreement with Eastern Airlines Industry Investment, pursuant to which, we have
conditionally agreed to sell, and Eastern Airlines Industry Investment has conditionally agreed to purchase, our entire equity interest in Eastern Logistics at a consideration of RMB2,432,544,211.50, determined with reference to the relevant
valuation report. Upon completion of the disposal on February 8, 2017, Eastern Logistics ceased to be our subsidiary.
Freight
Logistics Daily Connected Transactions Framework Agreement with Eastern Logistics
As Eastern Logistics ceased to be our subsidiary,
each member of the Eastern Logistics Group became a connected person of us. On November 29, 2016, we entered into the Freight Logistics Daily Connected Transactions Framework Agreement with Eastern Logistics. We will provide the following
services to the Eastern Logistics Group, required for the daily operation of its freight logistics business: (i) aircraft maintenance and its ancillary support services; (ii) information technology support services; (iii) cleaning
services; (iv) training services; and (v) other daily support services. The Eastern Logistics Group will provide us the following services required for our daily business operation: (i) apron transfer services, cargo terminal
operation services and security inspection services; and (ii) other daily support services. The Freight Logistics Daily Connected Transactions Framework Agreement will be effective for a term of three years, commencing from the date on which
the entire equity interest in Eastern Logistics was transferred from us to Eastern Airlines Industry Investment pursuant to the disposal agreement, and ending on December 31, 2019.
87
For the year ended December 31, 2017, the amount payable by Eastern Logistics to us for the
freight logistics support services amounted to approximately RMB100 million and the amount payable by us to Eastern Logistics for the cargo terminal business support services amounted to approximately RMB281 million.
Bellyhold Space Management Agreement
On January 1, 2017, to avoid the competition between the bellyhold space business operated by us and the
all-cargo
aircraft freight business operated by China Cargo Airlines, the subsidiary of Eastern Logistics, after the completion of equity transfer in Eastern Logistics, we entered into the Bellyhold Space
Management Agreement with China Cargo Airlines to entrust China Cargo Airlines for the operation of the bellyhold space business for a term of three years, which commenced on January 1, 2017. Pursuant to the Bellyhold Space Management
Agreement, in respect of the entrusted management of bellyhold space business, we will pay management fee to China Cargo Airlines according to industry practice, including handling charges for the entrusted management and incentives for achieving
specified sales targets.The Bellyhold Space Management Agreement is effective for a term of three years commencing January 1, 2017 until December 31, 2019.
For the year ended December 31, 2017, the actual amount incurred under the Bellyhold Space Management Agreement was approximately
RMB117 million. The Bellyhold Space Management Agreement has been superseded by the contractual operation agreement dated March 1, 2018 entered into between the Company and China Cargo Airlines from March 31, 2018.
Contractual Operation Agreement and Operation Cost Agreement
On March 1, 2018, we entered into contractual operation agreement and operation cost agreement with China Cargo Airlines, pursuant to
which, China Cargo Airlines (as contractor) will operate the bellyhold space business and reimburse the contractual fee to us, and we will reimburse the operation cost of the bellyhold space business to China Cargo Airlines. The term of the
contractual operation agreement is from April 1, 2018 to December 31, 2032. The term of the operation cost agreement is from the effective date to December 31, 2032.
Shanghai Eastern Airlines Investment Co., Limited (Eastern Investment), a wholly-owned subsidiary of CEA Holding
Land Use Rights Transfer Agreement and the Buildings Compensation Agreement
On September 29, 2017, we entered into the land use rights transfer agreement and the buildings compensation agreement with Eastern
Investment in Shanghai. Pursuant to the land use rights transfer agreement and the buildings compensation agreement, (i) we agreed to transfer to Eastern Investment the land use rights in respect of the target land together with the buildings
thereon at the eastern district of Terminal One of the Shanghai Hongqiao International Airport; and (ii) Eastern Investment agreed to compensate us for the transfer of the buildings, at total consideration of approximately RMB808 million.
Property Leases
On
August 30, 2013, we entered into an agreement relating to the renewal of the existing property leasing agreement with CEA Holding on substantially the same terms. Pursuant to the Property Leasing Renewal Agreement, we leased the following
properties from CEA Holding and its subsidiaries, for use in our daily airline and other business operations:
|
(i)
|
a maximum of 36 land properties owned by CEA Northwest, covering an aggregate site area of approximately 713,632 square meters together with a total of 172 building properties and related construction, infrastructure
and facilities occupying an aggregate floor area of approximately 240,601 square meters;
|
88
|
(ii)
|
a maximum of three land properties owned by CEA Yunnan, covering an aggregate site area of approximately 43,258 square meters together with a total of 24 building properties and related construction, infrastructure and
facilities occupying an aggregate floor area of approximately 77,401 square meters;
|
|
(iii)
|
building properties and related construction, infrastructure and facilities owned by CEA Holding, occupying an aggregate floor area of approximately 8,853 square meters located in Shijiazhuang;
|
|
(iv)
|
building properties and related construction, infrastructure and facilities owned by CEA Holding, occupying an aggregate floor area of approximately 63,552 square meters located in Taiyuan;
|
|
(v)
|
a total of 7 building properties and related construction, infrastructure and facilities owned by CEA Holding, occupying an aggregate floor area of approximately 13,195 square meters located in Shanghai;
|
|
(vi)
|
a total of 33 guest rooms in Eastern Hotel owned by CEA Holding, occupying an aggregate floor area of approximately 1,500 square meters located in Shanghai; and
|
|
(vii)
|
other property facilities owned by CEA Holding as may be leased to us from time to time, due to our business needs
|
In addition to and on the terms and conditions to be further agreed, we will lease some of the properties legally owned or leased by us to
subsidiaries of CEA Holding as needed by the subsidiaries of CEA Holding. The Property Leasing Renewal Agreement was effective for a term of three years, from January 1, 2014 to December 31, 2016.
On August 30, 2016, we entered into an agreement relating to the renewal of the existing property leasing agreement with CEA Holding.
Pursuant to the property leasing renewal agreement, we will lease from CEA Holding and its subsidiaries the following properties, for use in our daily airlines and other business operations:
|
(a)
|
altogether 17 land properties owned by CEA Holding in Lanzhou, Gansu, covering an aggregate site area of approximately 234,989 square meters together with a total of 81 building properties, construction, structures and
other ancillary facilities occupying an aggregate floor area of approximately 54,290 square meters;
|
|
(b)
|
altogether three land properties owned by CEA Holding in Kunming, Yunnan, covering an aggregate site area of 44,835 square meters together with a total of 24 building properties, construction, structures and other
ancillary facilities occupying an aggregate floor area of approximately 67,992 square meters;
|
|
(c)
|
one building property, construction, structures and other ancillary facilities owned by CEA Holding in Shijiazhuang, occupying an aggregate floor area of approximately 8,853 square meters;
|
|
(d)
|
a total of 67 building properties, construction, structures and other ancillary facilities owned by CEA Holding in Taiyuan, occupying an aggregate floor area of approximately 45,068 square meters;
|
|
(e)
|
a total of 7 building properties, construction, structures and other ancillary facilities owned by CEA Holding in Shanghai, occupying an aggregate floor area of approximately 13,195 square meters;
|
|
(f)
|
altogether 16 land properties owned by CEA Northwest, covering an aggregate site area of approximately 393,929 square meters together with a total of 115 building properties, construction, structures and other ancillary
facilities occupying an aggregate floor area of approximately 88,440 square meters;
|
|
(g)
|
a total of altogether 33 guest rooms in Eastern Hotel owned by CEA Holding, occupying an aggregate floor area of approximately 1,500 square meters located in Shanghai; and
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|
(h)
|
other land and property facilities owned by CEA Holding as may be leased to us from time to time due to our business and operational needs.
|
89
In addition to the above and on terms and conditions to be further agreed, we leased some of the
properties legally owned or leased by us to subsidiaries of CEA Holding as needed by the subsidiaries of CEA Holding. The property leasing renewal agreement was effective for a term of three years from January 1, 2017 to December 31, 2019.
For the year ended December 31, 2017, we paid a rental fee of RMB54 million under this property leasing renewal agreement.
Amendments to the
Non-Competition
Undertaking with CEA Holding
On December 22, 2017, we and CEA Holding entered into the supplemental agreement II to the reorganization and division agreement to amend
the
non-competition
undertaking of CEA Holding as set out in article 3 of the supplemental agreement I to the reorganization and division agreement entered into by both parties in 1996.
Pursuant to article 3 of the supplemental agreement I, CEA Holding has undertaken to us that, so long as the we are listed in the PRC, Hong
Kong or New York, if CEA Holding holds more than 35% of the issued shares of us or is deemed to be our controlling shareholder pursuant to the listing rules of relevant stock exchange(s) or relevant laws and regulations, CEA Holding shall not, in
any place within or outside the PRC or in any way (including but not limited to carrying on through sole proprietorship, forming partnerships or joint ventures with others and holding shares or interests in other companies or enterprises, except
that the shares held by CEA Holdings do not exceed 10% of our shares or enterprise as listed on a stock exchange) conduct any business or activities that is or may be in direct or indirect competition with our business.
Pursuant to the amendments, CEA Holding undertakes to us that so long as we are listed in the PRC, Hong Kong or New York, if CEA Holding holds
more than 35% of the issued shares of us or is deemed to be our controlling shareholder pursuant to the listing rules of relevant stock exchange(s) or relevant laws and regulations, CEA Holding shall not, in any place within or outside the PRC or in
any way, conduct any business or activities that is or may be in direct or indirect competition with our business, with an exception that CEA Holding will be allowed to conduct equity investment in any companies or enterprises that is or may be in
direct or indirect competition with the principal business of the Company (the Competing Enterprise(s)), provided that CEA Holding and its controlled subsidiary(ies) (other than us) will not contravene any applicable laws and regulations
as well as regulatory rules, control or be deemed to control such Competing Enterprises by the listing rules of relevant stock exchange(s) or relevant laws and regulations after the investment, and subject to certain conditions.
Guarantee by CEA Holding
As of
December 31, 2015, bonds issued by us in an aggregate amount of RMB4.8 million guaranteed by CEA Holding. As of December 31, 2016, bonds issued by us in an aggregate amount of RMB7.8 million guaranteed by CEA Holding. As of
December 31, 2017, bonds issued by us in an aggregate amount of RMB7.8 million guaranteed by CEA Holding. See Note 47(d) to the consolidated financial statements.
Guarantee by the Company
To
Certain Subsidiaries
On January 17, 2017, the Board of Directors considered and approved that we shall provide, within the period
from the effective date of the Board resolution to December 31, 2017, guarantee in the total amount of up to RMB1,000 million to China United Airlines, Shanghai Eastern Flight Training Co., Limited, Eastern Business Airlines Service Co.,
Limited, Eastern Technology, and their respective wholly-owned subsidiaries. The period of guarantee shall be the same as the period of subject obligations of the respective guaranteed parties and shall not exceed 10 years.
90
On December 22, 2017, the Board of Directors considered and approved that we shall provide,
within the period from the effective date of the Board resolution to December 31, 2018, guarantee in the total amount of up to RMB1,000 million to China United Airlines, Shanghai Eastern Flight Training Co., Limited, Eastern Business
Airlines Service Co., Limited, Eastern Technology, and their respective wholly-owned subsidiaries, and that Shanghai Airlines Tours International (Group) Co., Limited, a wholly-owned subsidiary of us, shall provide guarantee in the total amount of
up to RMB10 million to Shanghai Dongmei Air Travel Co., Ltd. The period of guarantee shall be the same as the period of subject obligations of the respective guaranteed parties and shall not exceed 10 years.
To not more than 67 Special Purpose Vehicles
On January 19, 2018, with an aim to carry out the work of changing aircraft leasing from overseas operating lease to domestic operating
lease for not more than 67 aircraft, the Board of Directors agreed us to invest and establish not more than 67 special purpose vehicles in Dongjiang Free Trade Port Zone of Tianjin with the aggregate guarantee amount not exceeding
RMB9.8 billion. The term of each guarantee will not exceed 15 years commencing from the actual date when we provide guarantee to each special purpose vehicle. The guarantee was considered and approved at the general meeting of the Company held
on February 8 2018.
Agreements in relation to Aircraft Finance Lease and Aircraft Operating Lease with CES Leasing
Master Lease Agreement
On
May 5, 2015, we entered into a master lease agreement with CES Leasing, pursuant to which CES Leasing agreed to provide finance leasing to us in relation to 23 aircraft in accordance with the terms and conditions of the master lease agreement
and the relevant implementation agreements. CES Leasing is a
non-wholly
owned subsidiary of CEA Holding, which in turn is the controlling shareholder of the Company.
2016 Aircraft Finance Lease Framework Agreement
On April 28, 2016, we entered into the 2016 Aircraft Finance Lease Framework Agreement with CES Leasing, pursuant to which CES Leasing
agreed to provide finance leasing to us in relation to the leased aircraft, as and when we consider desirable, in our interests and the interests of the Shareholders as a whole in accordance with the terms and conditions of the 2016 Aircraft Finance
Lease Framework Agreement and the relevant implementation agreements contemplated thereunder. The 2016 Aircraft Finance Lease Framework Agreement was effective for a term of one year commencing January 1, 2016.
20172019 Aircraft Finance Lease Framework Agreement
On April 28, 2016, we entered into the 20172019 Aircraft Finance Lease Framework Agreement with CES Leasing, pursuant to which CES
Leasing agreed to provide finance leasing to us in relation to the Leased Aircraft, as and when we consider desirable, in our interests and the interests of the Shareholders as a whole in accordance with the terms and conditions of the
20172019 Aircraft Finance Lease Framework Agreement and the relevant implementation agreements contemplated thereunder. The 20172019 Aircraft Finance Lease Framework Agreement is effective for a term of three years, from January 1,
2017 to December 31, 2019.
Novation Agreement and Aircraft Operating Lease Agreement
On July 9 2015, we (as the purchaser) entered into the purchase agreement with Boeing Company (as the seller) regarding the acquisition of
fifty brand new Boeing B737 series aircraft (the Purchase Agreement).
91
On August 10, 2017, we entered into a novation agreement with CES Leasing, pursuant to
which, (i) we agreed to novate, from the date of the novation agreement, our rights (including the purchase right) and obligations in and under the Purchase Agreement in respect of the five Boeing Aircraft, which are expected to be delivered by
the Boeing Company to us in 2017 pursuant to the Purchase Agreement (the Five Boeing Aircraft) at nil consideration; and (ii) CES Leasing agreed to, from the date of the novation agreement, assume all of the rights (including the
purchaser right) and obligations in and under the Purchase Agreement in respect of the Five Boeing Aircraft at nil consideration. The parties entered into the novation agreement at nil consideration.
On August 10, 2017, we entered into the aircraft operating lease agreement with CES Leasing, pursuant to which, CES Leasing agreed to
provide operating leasing to us in relation to the Five Boeing Aircraft. The aircraft operating lease agreement is effective for a term of 144 months for each aircraft from the date on which each of the Five Boeing Aircraft is delivered. Delivery
date would fall on the period between August 2017 and December 2017.
2018-2019 Aircraft and Engines Operating Lease Framework
Agreement
On December 22, 2017, we entered into the 2018-2019 aircraft and engines operating lease framework agreement with CES
Leasing, pursuant to which CES Leasing agreed to provide operating leasing to us in relation to the aircraft and aircraft engines. Upon successful bidding of the tender of the aircraft and/or aircraft engines during the period between
January 1, 2018 and December 31, 2019 by CES Leasing, the term of each of the lease agreement under the 2018-2019 aircraft and engines operating lease framework agreement shall be not more than 144 months for each leasing of the aircraft
and aircraft engines by CES Leasing to us.
For the year ended December 31, 2017, the actual amount incurred for aircraft finance
lease services was approximately RMB1,997 million and the actual amount incurred for aircraft operating lease services was approximately RMB25 million.
Continuing Connected Transactions with Air
France-KLM
On July 27 2017, a wholly-owned subsidiary of CEA Holding and Delta entered into a conditional subscription agreement with Air France-KLM,
respectively, to acquire 10% newly issued shares in the share capital of Air France-KLM after the completion of issuance of additional shares. We entered into a marketing agreement with Air France-KLM to further strengthen the business partnership
on the basis of good business relationship between the two parties.
On October 3, 2017, the trading of the fixed issuance of
additional 10% shares to CEA Holding by Air France-KLM was completed in the Euronext. CEA Holding appointed Tang Bing, our Director and vice president as the director of Air France-KLM. According to the relevant requirements of the Shanghai Stock
Exchange, the daily businesses such as joint operation and service security between us and Air France-KLM and its controlled subsidiaries constituted a continuing connected transaction of the Company under the Rules Governing the Listing of Stocks
on the Shanghai Stock Exchange.
On December 22, 2017, the Board of Directors considered and approved the relevant resolution
regarding the 2017-2019 continuing connected transactions between Air France-KLM and us, pursuant to which, we will provide aircraft aviation transportation cooperation and support services to Air France-KLM and Air France-KLM will provide aircraft
aviation transportation cooperation and support services to us. The Board of Directors also approved the 2017-2019 annual caps for the Air France-KLM aircraft aviation transportation cooperation and support services.
For the year ended December 31, 2017, the actual amount of the Air France-KLM aircraft aviation transportation cooperation and support
services received by us was approximately RMB622 million and the actual amount of the Air France-KLM aircraft aviation transportation cooperation and support services paid by us was approximately RMB399 million.
C. Interests of Experts and Counsel
Not
applicable.
92
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
Financial Statements
Please read
Item 18. Financial Statements for information regarding our audited consolidated financial statements and other financial information.
Legal Proceedings
We are involved
in routine litigation and other proceedings in the ordinary course of our business. We do not believe that any of these proceedings are likely to be material to our business operations, financial condition or results of operations.
Dividends and Dividend Policy
For
the years ended December 31, 2010, 2011, 2012 and 2013, our Board of Directors did not recommend any dividend payouts due to our total accumulated losses of RMB12,855 million, RMB8,039 million, RMB4,967 million and
RMB2,595 million, respectively. Under PRC law, we cannot convert funds from common reserves to increase our share capital during this period. Based on the audited financial statements of the Company under the
PRC Accounting Standards for
Business Enterprises
as of and for the year 2014, the retained earnings of the parent company were RMB21 million as of December 31, 2014. Based on the audited financial statements of the Company under IFRSs as of and for the year 2014,
the accumulated loss of the parent company was RMB385 million. Pursuant to the PRC Company Law and its Articles of Association, the Company must recover losses incurred in previous years with its profit for the year before any dividend
distributions are made to its shareholders. The basis of dividend distribution of the Company is the distributable profit of the parent company, which is subject to the principle of adopting the lesser of the profit after tax under the PRC
accounting standards and IFRSs. As of December 31, 2014, the Company has been recording accumulated losses under IFRSs. The Board of Directors recommended that no dividend be distributed for the year 2014 and share capital of the Company not be
increased through capitalization of its capital reserve. Based on the audited financial statements of the Company under the
PRC Accounting Standards for Business Enterprises
as of and for the year 2015, the retained profits of the parent
company were RMB1,680 million as of December 31, 2015. Based on the audited financial statements of the Company under IFRSs as of and for the year 2015, the retained profits of the parent company were RMB1,164 million.
In accordance with Rule 17 of Measures on the Administration of Securities Issuance and Underwriting by the CSRC, if listed companies with a
plan for issuance of securities have any profit distribution proposal or proposal for capital increase with capital surplus, that has not yet been submitted to general meeting for voting or has been approved by shareholders general meeting but
not yet implemented, the issuance of securities may only proceed after such proposals have been implemented. Given that the Companys application for
non-
public issuance of A shares was approved by the
CSRC in January 2016 and will expire on July 5, 2016, if the Company had implemented profit distribution in 2015, approval for the profit distribution proposal would have been needed at the 2015 general meeting and the
non-public
issuance of A shares could only be implemented after the implementation of the profit distribution proposal. This would have narrowed the time frame for the
non-public
issuance of A shares or would even have made it impossible to implement, in which case the implementation of the Companys
non-public
issuance project
and long-term development would have been severely hampered.
In consideration of factors such as shareholders interests and the
Companys development, the profit distribution proposal recommended by the Board of Directors for the year 2015 is as follows: No profit shall be distributed for the year 2015 and no share capital of the Company shall be increased with its
capital reserve. The Group profit distribution proposal for the year 2015 will be submitted to the 2015 annual general meeting for consideration. The Board of Directors also intends for, a cash dividend distribution in the interim period for the
year 2016 of not less than 40% of the net profit of the Company of the year 2015 under the PRC Accounting Standards.
93
On October 27, 2016, the interim profit distribution plan was approved at the extraordinary
general meeting of the Company. The 2016 interim distribution was approximately RMB737.8 million in cash. Based on our total share capital of 14,467,585,682 shares, the cash distribution per share was RMB0.051 (before tax) in cash.
On March 30, 2017, the Board of Directors considered and approved the 2016 annual profit distribution proposal. It was recommended by the
Board of Directors that the 2016 annual distribution be approximately RMB708.9 million in cash. Based on the total share capital of 14,467,585,682 shares of the Company, the cash distribution per share was RMB0.049 (before tax) in cash.
On September 25, 2017, the Board of Directors has not recommended any dividend for the six months ended June 30 2017.
On March 29, 2018, the Board of Directors considered and approved the 2017 annual profit distribution proposal. It was recommended by the
Board of Directors that the 2017 annual distribution be approximately RMB740.3 million in cash. Based on the total share capital of 14,467,585,682 shares of the Company, the cash distribution per share would be RMB0.051 (before tax) in cash
which will be distributed to holders of A shares of the Company in RMB and to holders of H shares of the Company in HKD.
The independent
non-executive
directors of the Company are of the view that the aforesaid annual profit distribution proposal is in line with the objective situation of the Company, in the long-term interests of the Company and its
shareholders, in compliance with relevant laws, regulations and the articles of association of the Company, and not detrimental to the interests of investors (especially minority shareholders) of the Company.
The aforesaid profit distribution proposal of the Group is subject to consideration and approval by the shareholders at the 2017 general
meeting of the Company. If the 2017 annual profit distribution proposal is approved at the general meeting, the Company expects that the cash distribution will be paid around August 1, 2018.
Our Board of Directors declares dividends, if any, in Renminbi, with respect to H Shares on a per share basis and pays such dividends in HK
dollars. Any final dividend for a fiscal year is subject to shareholders approval. The Bank of New York Mellon (the BNYM), as depositary, converts the HK dollar dividend payments and distributes them to holders of ADSs in U.S.
dollars, less conversion expenses. Under PRC Company Law and our Articles of Association, all of our shareholders have equal rights to dividends and distributions. The holders of the H Shares share proportionately on a per share basis in all
dividends and other distributions declared by our Board of Directors, if any, based on the foreign exchange conversion rate published by PBOC, on the date of the distribution of the cash dividend.
We believe that our dividend policy strikes a balance between two important goals providing our shareholders with a competitive return on
investment and assuring sufficient reinvestment of profits to enable us to achieve our strategic objectives. The declaration of dividends is subject to the discretion of our Board of Directors, which takes into account the following factors:
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contractual restrictions on the payment of dividends by us to our shareholders or by our subsidiaries to us;
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our shareholders interests;
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the effect on our creditworthiness;
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general business and economic conditions; and
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other factors our Board of Directors may deem relevant.
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94
Pursuant to PRC laws and regulations, dividends may only be distributed after allowance has been
made for: (i) recovery of losses, if any and (ii) allocations to the statutory surplus reserve. The allocation to the statutory surplus reserve is 10% of our net profit determined in accordance with PRC Generally Accepted Accounting
Principles. Our distributable profits for the current fiscal year will be equal to our net profits determined in accordance with IFRSs, less allocations to the statutory surplus reserve.
B. Significant Changes
Significant Post Financial
Statements Events
Not applicable.
Item 9. The Offer and Listing
A. Offer and Listing Details
The principal trading market for our H Shares is the Hong Kong Stock Exchange. The ADSs, each representing 50 H Shares, have been issued by
BNYM as Depositary and are listed on the New York Stock Exchange. Prior to our initial public offering and subsequent listings on the New York Stock Exchange and the Hong Kong Stock Exchange on February 4 and 5, 1997, respectively, there was no
market for our H Shares or ADSs. Our publicly traded domestic shares, or A shares, have been listed on the Shanghai Stock Exchange since November 5, 1997.
As of December 31, 2017, there were 4,659,100,000 H Shares issued and outstanding. As of December 29, 2017 (December 30 and December 31,
2017 being a Saturday and a Sunday) and April 16, 2018, there were 43 and 42 registered holders, respectively, of American depositary receipts evidencing 1,974,935 and 1,925,427 ADSs, respectively. Since nominees hold certain of the ADSs, the above
number may not be representative of the actual number of U.S. beneficial holders of ADSs or the number of ADSs beneficially held by U.S. persons. A total of 9,808,485,682 domestic ordinary shares were also outstanding as of December 31, 2017.
The table below sets forth certain market information relating to the trading prices of our H Shares and ADSs in respect of the period
from 2013 to April 16, 2018.
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Hong Kong Stock Exchange
Price Per H Share (HK$)
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New York Stock Exchange
Price Per ADS (US$)
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High
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Low
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High
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Low
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Yearly
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2013
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3.72
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2.24
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23.67
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14.76
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2014
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4.05
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2.30
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26.57
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14.85
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2015
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7.56
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2.33
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49.50
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22.13
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2016
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4.87
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3.26
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30.72
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21.20
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2017
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5.67
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3.57
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36.14
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23.11
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Quarterly
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2016
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First Quarter 2016
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4.35
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3.32
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27.34
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21.20
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Second Quarter 2016
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4.64
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3.86
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30.72
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25.31
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Third Quarter 2016
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4.58
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3.57
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29.72
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22.98
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Fourth Quarter 2016
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3.77
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3.32
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24.32
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21.43
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2017
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First Quarter 2017
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4.80
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3.57
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30.86
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23.11
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Second Quarter 2017
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4.82
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4.08
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30.60
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26.15
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Third Quarter 2017
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4.80
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3.83
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30.74
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24.44
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Fourth Quarter 2017
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5.67
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3.86
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36.14
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24.72
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Monthly
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October 2017
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4.07
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3.87
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25.97
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24.72
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November 2017
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4.94
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3.86
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31.55
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24.73
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December 2017
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5.67
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4.45
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36.14
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28.55
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First Quarter 2018
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January 2018
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7.09
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5.64
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44.92
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36.22
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February 2018
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7.14
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5.81
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45.06
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37.50
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March 2018
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6.66
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5.53
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42.49
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35.33
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April 2018 (up to April 16, 2018)
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6.11
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5.61
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38.52
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35.72
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95
B. Plan of Distribution
Not applicable.
C. Markets
Our H shares are listed for trading on the Hong Kong Stock Exchange (Code: 00670), our ADSs are listed for trading on the New York Stock
Exchange under the symbol CEA and our A shares are listed for trading on the Shanghai Stock Exchange (Code: 600115).
D. Selling
Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following is a brief summary of certain provisions of our Articles of Association, as amended. Such summary does not purport to be
complete. For further information, you and your advisors should refer to the text of our Articles of Association, as amended, and to the texts of applicable laws and regulations. A copy of the English translation of our Articles of Association, as
amended on February 8, 2018, is attached as an exhibit to this Annual Report on Form
20-F
(which is incorporated by reference).
96
Selected Summary of the Articles of Association
We are a joint stock limited company established in accordance with the
Company Law of the Peoples Republic of China
(the
Company Law), the State Councils Special Regulations Regarding the Issue of Shares Overseas and the Listing of Shares Overseas by Companies Limited by Share (the Special Regulations) and other relevant laws
and regulations of the State. We are established by way of promotion with the approval under the document Ti Gai Sheng 1994 No. 140 of the PRC State Commission for Restructuring the Economic System. We are registered with and
obtained a business license from Chinas State Administration Bureau of Industry and Commerce on April 14, 1995. Our business license number is
10001767-8.
We changed our registration to Shanghai
Administration for Industry and Commerce on October 18, 2002. The number of our Companys business license is: Qi Gu Hu Zong Zi No. 032138.
We were incorporated in the PRC for the purpose of providing the public with safe, punctual, comfortable, fast and convenient air transport
services and other ancillary services, to enhance the cost-effectiveness of these services and to protect the lawful rights and interests of shareholders.
Board of Directors
The Board of
Directors shall consist of eleven (11) directors, who are to be elected at the shareholders general meeting and will hold a term of office for three (3) years. At least
one-third
of the members
of the Board of Directors shall be independent directors. The Directors are not required to hold shares of our Company.
Directors who are
either directly or indirectly materially interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with our Company (other than his contract of service with our Company) shall declare the nature and extent
of his interests to the Board of Directors at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal is otherwise subject to the approval of the Board of Directors.
In accordance with our Articles, a director shall abstain from voting at a board meeting, the purpose of which is to approve contracts,
transactions or arrangements that such director or any of his or her associates (as defined in the relevant rules governing the listing of securities) has a material interest in. Such director shall not be counted in the quorum for the relevant
board meeting.
Unless the interested director discloses his interests in accordance with our Articles of Association and the contract,
transaction or arrangement is approved by the Board of Directors at a meeting in which the interested director is not counted in the quorum and refrains from voting, a contract, transaction or arrangement in which that director is materially
interested is voidable at the instance of our Company except as against a bona fide party thereto acting without notice of the breach of duty by the interested director. A director is also deemed to be interested in a contract, transaction or
arrangement in which an associate of the director is interested.
Our Articles provide that our Company shall not in any manner pay taxes
for or on behalf of a director or make directly or indirectly a loan to or provide any guarantee in connection with the making of a loan to a director of our Company or of our Companys holding company or any of their respective associates.
However, the following transactions are not subject to such prohibition: (i) the provision by our Company of a loan or a guarantee of a loan to a company which is a subsidiary of our Company; (ii) the provision by our Company of a loan or
a guarantee in connection with the making of a loan or any other funds to any of its directors, administrative officers to meet expenditure incurred or to be incurred by him for the purposes of our Company or for the purpose of enabling him to
perform his duties properly, in accordance with the terms of a service contract approved by the shareholders in general meeting; (iii) our Company may make a loan to or provide a guarantee in connection with the making of a loan to any of the
relevant directors or their respective associates in the ordinary course of its business on normal commercial terms, provided that the ordinary course of business of our Company includes the lending of money or the giving of guarantees.
Our Articles do not contain any requirements for (i) the directors power to vote compensation to themselves or any members of their
body, in the absence of an independent quorum or (ii) the directors to retire by a specified age.
97
Description of the Shares
As of December 31, 2016, our share capital structure was as follows: 14,467,585,682 ordinary shares of which (a) 1,327,406,822 A shares
subject to trading moratorium, which represented 9.18% of our share capital, were held by Shanghai Licheng Information Technology Consulting Co., Limited, China National Aviation Fuel Holding Company, China COSCO Shipping Corporation Limited and
Caitong Fund Management Co., Limited, respectively; (b) 8,481,078,860 A shares without trading moratorium, which represented 58.62% of our share capital, were issued to investors in China; and (c) 4,659,100,000 H shares without trading moratorium,
which represented 32.20% of our share capital.
Our ordinary shareholders shall enjoy the following rights:
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(i)
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the right to dividends and other distributions in proportion to the number of shares held;
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(ii)
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the right to attend or appoint a proxy to attend Shareholders general meetings and to vote thereat;
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(iii)
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the right of supervisory management over the Companys business operations, and the right to present proposals or enquiries;
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(iv)
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the right to transfer shares in accordance with laws, administrative regulations and provisions of these Articles of Association;
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(v)
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the right to obtain relevant information in accordance with the provisions of these Articles of Association, including:
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(1)
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the right to obtain a copy of these Articles of Association, subject to payment of the cost of such copy;
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(2)
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the right to inspect and copy, subject to payment of a reasonable charge;
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(vi)
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all parts of the register of shareholders;
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(vii)
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personal particulars of each of the Companys directors, supervisors, general manager, deputy general managers and other senior administrative officers, including:
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(1)
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present name and alias and any former name or alias;
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(2)
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principal address (residence);
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(4)
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primary and all other part-time occupations and duties;
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(5)
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identification documents and their relevant numbers;
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(viii)
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state of the Companys share capital;
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(ix)
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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;
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(x)
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minutes of Shareholders general meetings and the accountants report,
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(xi)
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in the event of the termination or liquidation of the Company, to participate in the distribution of surplus assets of the Company in accordance with the number of shares held; or
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(xii)
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other rights conferred by laws, administrative regulations and these Articles of Association.
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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:
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(i)
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where the number of Directors is less than the number of Directors required by Company Law or
two-thirds
of the number of Directors specified in these Articles of Association;
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(ii)
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where the unrecovered losses of the Company amount to
one-third
of the total amount of its share capital;
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(iii)
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where shareholder(s) holding 10 per cent or more of the Companys issued and outstanding shares carrying voting rights request(s) in writing the convening of an extraordinary general meeting; or
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|
(iv)
|
when deemed necessary by the Board of Directors or as requested by the supervisory committee.
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When we convene a shareholders general meeting, written notice of the meeting shall be given forty five (45) days before the date
of the meeting to notify all of the shareholders in the share register of the matters to be considered and the date and place of the meeting. A shareholder who intends to attend the meeting shall deliver his written reply concerning the attendance
of the meeting to us twenty (20) days before the date of the meeting. When we convene a shareholders annual general meeting, shareholders holding three per cent or more of the total voting shares of the Company shall have the right to
propose new motions in writing, and we shall place those matters in the proposed motions within the scope of functions and powers of the Shareholders general meeting on the agenda.
99
Shareholders Rights
Set forth below is certain information relating to the H Shares, including a brief summary of certain provisions of the Articles, and selected
laws and regulations applicable to us.
Sources of Shareholders Rights
The rights and obligations of holders of H Shares and other provisions relating to shareholder protection are principally provided in the
Articles of Association and Company Law. The Articles of Association incorporate mandatory provisions in accordance with Mandatory Provisions. We are further subject to management ordinances applicable to the listed companies in Hong Kong SAR and
the United States, as our H Shares are listed on the Hong Kong Stock Exchange and the New York Stock Exchange (in the form of ADSs).
In
addition, for so long as the H Shares are listed on the Hong Kong Stock Exchange, we are subject to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the HKSE Rules), the
Securities and Futures
Ordinance of Hong Kong
(the SFO) and the Hong Kong Code on Takeovers and Mergers and Share Repurchases.
Unless otherwise
specified, all rights, obligations and protections discussed below are derived from the Articles of Association, Company Law and abovementioned laws and regulations.
Significant Differences in the H Shares and A Shares
Holders of H Shares and A Shares, with minor exceptions, are entitled to the same economic and voting rights. The Articles of Association
provide that dividends or other payments payable to H Share holders shall be declared and calculated in Renminbi and paid in Renminbi, while those to A Share holders shall be declared and calculated in Renminbi and paid in the local currency at the
place where such A Shares are listed (if there is more than one place of listing, then the principal place of listing as determined by the Board of Directors). In addition, the H Shares can only be traded by investors of Taiwan, Hong Kong, Macau and
any country other than the PRC, while A Shares may be traded only by investors within the territory of the PRC.
Restrictions on Transferability and
the Share Register
H Shares may be traded only among investors who are not PRC persons, and may not be sold to PRC investors. There
are no restrictions on the ability of investors who are not PRC residents to hold H Shares.
Pursuant to the Articles of Association, we
may refuse to register a transfer of H Shares unless:
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(1)
|
a fee (for each instrument of transfer) of HK$2.50 or any higher fee as agreed by the Stock Exchange has been paid to us for registration of any transfer or any other document which is related to or will affect
ownership of or change of ownership of the shares;
|
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(2)
|
the instrument of transfer only involves H Shares;
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|
(3)
|
the stamp duty chargeable on the instrument of transfer has been paid;
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(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;
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(5)
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if it is intended to transfer the shares to joint owners, then the maximum number of joint owners shall not exceed four (4); or
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(6)
|
we do not have any lien on the relevant shares.
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100
If we refuse to register any transfer of shares, we shall within two months of the formal
application for the transfer provide the transferor and the transferee with a notice of refusal to register such transfer. No changes in the shareholders register due to the transfer of shares may be made within thirty (30) days before
the date of a Shareholders general meeting or within five (5) days before the record date established for the purpose of distributing a dividend.
Merger and Acquisitions
In the event of
the merger or division of our Company, a plan shall be presented by our Board of Directors and shall be approved in accordance with the procedures stipulated in our Articles of Association and then the relevant examining and approving formalities
shall be processed as required by law. A shareholder who objects to the plan of merger or division shall have the right to demand that we or the shareholders who consent to the plan of merger or division acquire such dissenting shareholders
shareholding at a fair price. The contents of the resolution of merger or division of our Company shall be made into special documents for shareholders inspection.
Repurchase of Shares
We may, with
approval according to the procedures provided in these Articles of Association and subject to the approval of the relevant governing authority of the State, repurchase our issued shares under the following circumstances:
|
(i)
|
cancellation of shares for the reduction of capital;
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|
(ii)
|
merging with another company that holds shares in our Company; or
|
|
(iii)
|
other circumstances permitted by relevant laws and administrative regulations.
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We shall not
repurchase our issued shares except under the circumstances stated above.
We may, with the approval of the relevant State governing
authority for repurchasing shares, conduct the repurchase in one of the following ways:
|
(i)
|
making a pro rata general offer of repurchase to all our shareholders;
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|
(ii)
|
repurchasing shares through public dealing on a stock exchange; or
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|
(iii)
|
repurchasing shares by an
off-market
agreement off of a stock exchange.
|
Interested Shareholders
Articles 88 and
89 of our Articles of Association provide the following:
Article 88: the following circumstances shall be deemed to be a variation or
abrogation of the class rights of a class:
|
(i)
|
to increase or decrease the number of shares of such class, or increase or decrease the number of shares of a class having voting or equity rights or privileges equal or superior to those of the shares of that class;
|
|
(ii)
|
to effect an exchange of all or part of the shares of such class into shares of another class or to effect an exchange or create a right of exchange of all or part of the shares of another class into the shares of such
class;
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(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;
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101
|
(v)
|
to add, remove or reduce conversion privileges, options, voting rights, transfer or
pre-emptive
rights, or rights to acquire securities of the Company attached to shares of such
class;
|
|
(vi)
|
to remove or reduce rights to receive payment payable by the Company in particular currencies attached to shares of such class;
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|
(vii)
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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;
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|
(viii)
|
to restrict the transfer or ownership of the shares of such class or add to such restrictions;
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|
(ix)
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to allot and issue rights to subscribe for, or convert into, shares in the Company of such class or another class;
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|
(x)
|
to increase the rights or privileges of shares of another class;
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|
(xi)
|
to restructure the Company where the proposed restructuring will result in different classes of shareholders bearing a disproportionate burden of such proposed restructuring;
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|
(xii)
|
to vary or abrogate the provisions of this Chapter.
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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:
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(i)
|
in the case of a repurchase of shares by offers to all shareholders or public dealing on a stock exchange under Article 30, a controlling shareholder within the meaning of Article 53;
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|
(ii)
|
in the case of a repurchase of shares by an
off-market
contract under Article 30, a holder of the shares to which the proposed contract relates; and
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|
(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.
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Ownership Threshold
There are no ownership thresholds above which shareholder ownership is required to be disclosed.
Changes in Capital
Article 78(1)
provides that any increase or reduction in share capital shall be resolved by a special resolution at a shareholders general meeting.
Changes in
Registered Capital
The Company may reduce its registered share capital. It shall do so in accordance with Company Law, any other
relevant regulatory provisions and the Articles of Association.
102
Recent Amendments to the Articles of Association
On February 2, 2010, our shareholders approved amendments to the Articles of Association, which was amended, respectively, as follows:
Article 20: As approved by the China Securities Regulatory Commission, the total amount of shares of the Company is 11,276,538,860
shares.
Article 21: The Company has issued a total of 11,276,538,860 ordinary shares, comprising a total of 7,782,213,860 A
shares, representing 69.01% of the total share capital of the Company, a total of 3,494,325,000 H shares, representing 30.99% of the total share capital of the Company.
Article 24: The Companys registered capital is Renminbi 11,276,538,860.
The CSRC has enacted regulations in recent years that affect the corporate governance of PRC listed companies and Company Law has also been
amended in various areas. As such, the Board of Directors proposed to amend certain provisions in our Articles of Association in accordance with the rules and regulations applicable to our Company. Such amendments relate to the general provisions of
the Articles of Association, reduction of capital and repurchase of shares, shareholders and register of shareholders, shareholders general meeting, board of directors, supervisory committee, financial and accounting systems and profit
distribution, merger and division and dissolution and liquidation of our Company. All such amendments were approved at our Annual General Meeting that took place on June 13, 2010.
On November 9, 2012, our shareholders approved further amendments to the Articles of Association, which was amended, respectively, as
follows:
Article 146: The financial statements of the Company shall, in addition to being prepared in accordance with PRC accounting
standards and regulations, be prepared in accordance with either international accounting standards, or that of the place outside the PRC where the Companys shares are listed. If there is any material difference between the financial
statements prepared respectively in accordance with the two accounting standards, such difference shall be stated in the financial statements. When the Company is to distribute its
after-tax
profits, the lower
of the
after-tax
profits as shown in the two financial statements shall be adopted. According to the relevant laws and regulations, profit distribution by the Company shall be based on the distributable profit
of the Company
(non-consolidated
statements).
Article 157: The Companys profit
distribution policy should pay close attention to ensuring a reasonable return of investment to investors, and such profit distribution policy should maintain continuity and stability. The Company shall reasonably distribute cash dividends according
to laws and regulations and requirements of securities regulatory authorities, as well as the Companys own operating performance and financial condition.
Article 157 (A): Profit distribution manner: The Company may distribute dividends by way of cash, shares, a combination of cash and
shares or in other reasonable manner in compliance with laws and regulations.
Article 157 (B): Procedures for decision-making
on profit distribution by the Company: After the end of each accounting year, the board of directors shall carefully study and examine the profit distribution plan and listen fully to the views of independent directors. The independent directors
shall fulfill their responsibilities and play their roles to give specific views. After consideration and approval by the board of directors, the profit distribution plan shall be proposed to the general meeting for voting. Implementation of the
profit distribution plan shall be subject to consideration and approval at the general meeting. The board of directors of the Company shall finish distributing the profit within two months after the general meeting is held.
When considering the profit distribution plan at the general meeting of the Company, the board of directors shall communicate and exchange
opinions with shareholders, especially minority shareholders, in a proactive manner, fully consider the opinions and requests from minority shareholders and respond to the issues which are of concern to them on a timely basis.
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Article 157 (C): Amendments to profit distribution policy of the Company: The board of
directors of the Company shall carefully study and examine and strictly follow the decision-making procedures in the event that the profit distribution policy needs to be adjusted by reason of any changes in PRC laws and regulations and regulatory
policies, or significant changes of external operating environment or operating condition of the Company. In the event of amendments to the profit distribution policy of the Company, the board of directors shall consider the revised plan and the
independent directors shall express their independent opinions thereon. Such amendments shall be disclosed to the public upon consideration and approval at the general meeting.
Article 157 (D): Conditions and proportion of distribution of cash dividends by the Company:
Proposal and implementation of cash dividends distribution by the Company shall be subject to the following conditions:
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(1)
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The Company records a profit for the year, and the audit institution issues an unqualified audited report on the Companys financial statements for that particular year;
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(2)
|
common reserve fund and discretionary common reserve fund) realized by the Company for the year is positive in value;
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(3)
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The Company has sufficient cash flow, and distribution of cash dividends will not affect the Companys normal operation and sustainable development.
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Provided that the Company is in good operating condition and has sufficient cash flow to meet the needs for its normal operation and
sustainable development, the Company will proactively distribute cash dividends in return to its shareholders, and the accumulated profit distribution made in cash by the Company in the latest three years shall not be less than 30% of the average
annual distributable profit in the latest three years. In the event that the said payout ratio of cash dividends cannot be met due to special reasons, the board of directors may adjust the payout ratio of dividends according to actual circumstances
and state the reasons therefor.
Provided that a reasonable scale of share capital and shareholding structure of the Company are
ensured, the Company may consider distributing profits by way of share dividends according to its profitability, cash flow position and business growth for the year.
Article 157 (F): Intervals for profit distribution by the Company: Provided that the conditions of profit distribution are met and the
Companys normal operation and sustainable development are ensured, the Company shall generally distribute profit on an annual basis. The board of directors of the Company may also propose interim profit distribution based on the profitability
and capital position of the Company.
Article 157 (G): Information disclosure if the Company fails to distribute cash
dividends: In the event that the board of directors of the Company does not propose any profit distribution plan, the board of directors of the Company shall disclose the reasons therefor and the use of such retained funds that would have been
otherwise available for distribution in its periodic report.
On June 26, 2013, our shareholders approved further amendments
to the Articles of Association to reflect the expansion of our business scope and the completion of the issue of new shares, as follows:
Article 13: The scope of business of the Company shall comply with those items approved by the companies registration authority.
The scope of business of the Company includes: domestic and approved international and regional business for air transportation of passengers,
cargo, mail, luggage and extended services; general aviation business; maintenance of aviation equipment and machinery; manufacture and maintenance of aviation equipment; agency business for domestic and overseas airlines and other business related
to air transportation; insurance
by-business
agency services;
e-commerce;
in-flight
supermarket; wholesale and retail of goods;
and other lawful businesses that can be carried on by a joint stock limited company formed under Company Law.
104
Article 20: As approved by the China Securities Regulatory Commission, the total amount of
shares of the Company is 12,674,268,860 shares.
Article 21: The Company has issued a total of 12,674,268,860 ordinary shares,
comprising a total of 8,481,078,860 A shares, representing 66.92% of the total share capital of the Company, a total of 4,193,190,000 H shares, representing 33.08% of the total share capital of the Company.
Article 24: The registered capital of the Company is RMB12,674,268,860.
According to the relevant requirements of CSRC and the Shanghai Stock Exchange, our Board of Directors approved at the 2014 second regular
meeting that amendments be made to corresponding terms in the articles of association of our Company in connection with the priority of cash dividends to share dividends in profit distributions and intervals for cash dividend distributions. Such
amendments will be submitted to the 2013 annual general meeting of our Company for approval.
The amendments to the Articles of Association
are as follows:
Article 157: The Companys profit distribution should pay close attention to ensuring a reasonable return of
investment to investors, and such profit distribution policy should maintain continuity and stability. The Company shall reasonably distribute cash dividends according to laws and regulations and requirements of securities regulatory authorities, as
well as the Companys own operating performance and financial condition.
Article 157: The Companys profit
distribution should pay close attention to ensuring a reasonable return of investment to investors, and such profit distribution policy should maintain continuity and stability. The Company shall reasonably distribute dividends according to laws and
regulations and requirements of securities regulatory authorities, as well as the Companys own operating performance and financial condition, and shall adopt cash distribution as the prioritized means of distribution to distribute
profit.
Article 157(F): Intervals for profit distribution by the Company: Provided that the conditions of profit distribution
are met and the Companys normal operation and sustainable development are ensured, the Company shall generally distribute profit on an annual basis. The board of directors of the Company may also propose interim profit distribution based on
the profitability and capital position of the Company.
Article 157(F): Intervals for profit distribution by the Company:
Provided that the conditions of profit distribution are met and the Companys normal operation and sustainable development are ensured, the Company shall generally distribute profit on an annual basis. The board of directors of the Company may
also propose interim profit distribution based on the profitability and capital position of the Company. Subject to fulfillment of the cash distribution conditions under the articles of association of the Company, the Company shall implement annual
cash distribution once a year in principle.
On June 26, 2014, our shareholders approved the above mentioned amendments.
On August 28, 2015, the Resolution on Amendments to Parts of the Terms of the Articles of Association was considered and approved at the
seventeenth ordinary meeting of the seventh session of the Board of the Company. As authorized by the general meeting of the Company, the Board agreed to make amendments to corresponding terms in the Articles of Association in connection with the
changes made to the share capital of the Company following the completion of the issue of H Shares of the Company to Delta Air Lines.
Article 20: As approved by the China Securities Regulatory Commission, the total amount of shares of the Company is 13,140,178,860
shares.
105
Article 21: The Company has issued a total of 13,140,178,860 ordinary shares, comprising a
total of 8,481,078,860 A shares, representing 64.54% of the total share capital of the Company, a total of 4,659,100,000 H shares, representing 35.46% of the total share capital of the Company.
Article 24: The registered capital of the Company is RMB13,140,178,860.
On June 16, 2016, our shareholders approved the amendments to the Articles of Association in relation to profit distribution.
The amendments to the Articles of Association are as follows:
Article 157(D): Conditions and proportion of distribution of cash dividends by the Company:
Proposal and implementation of cash dividends distribution by the Company shall be subject to the following conditions:
|
(1)
|
The Company records a profit for the year, and the audit institution issues an unqualified audited report on the Companys financial statements for that particular year;
|
|
(2)
|
The distributable profit (i.e. the
after-tax
profit of the Company after making up for losses, allocation to the statutory common reserve fund and discretionary common reserve
fund) realized by the Company for the year is positive in value;
|
|
(3)
|
The Company has sufficient cash flow, and distribution of cash dividends will not affect the Companys normal operation and sustainable development.
|
Provided that the Company is in good operating condition and has sufficient cash flow to meet the needs for its normal operation and
sustainable development, the Company will proactively distribute cash dividends in return to its shareholders, and the accumulated profit distribution made in cash by the Company in the latest three years shall not be less than 30% of the average
annual distributable profit attributable to the owners of the parent company in the consolidated statements in the latest three years. In the event that the said payout ratio of cash dividends cannot be met due to special reasons, the board of
directors may adjust the payout ratio of dividends according to actual circumstances and state the reasons therefor.
On
July 4, 2016, the Resolution on Amendments to the Articles of Association was considered and approved at the second ordinary meeting of the eighth session of the Board of Directors, to in order to reflect the changes to the registered capital
of the Company following the closing of the Share Issue.
The amendments to the Articles of Association are as follows:
Article 20: As approved by the China Securities Regulatory Commission, the total amount of shares of the Company is 14,467,585,682
shares.
Article 21: The Company has issued a total of 14,467,585,682 ordinary shares, comprising a total of 9,808,485,682 A
shares, representing 67.80% of the total share capital of the Company, a total of 4,659,100,000 H shares, representing 32.20% of the total share capital of the Company.
Article 24: The registered capital of the Company is RMB14,467,585,682.
On June 28, 2017, our shareholders approved further amendments to the Articles of Association to reflect the change of business license
and voting on shareholders general meeting:
106
Article 1: The Company is a joint stock limited company established in accordance with the
Company Law of the Peoples Republic of China (the Company Law), State Councils Special Regulations Regarding the Issue of Shares Overseas and the Listing of Shares Overseas by Companies Limited by
Share (the Special Regulations) and other relevant laws and regulations of the State.
The Company was established by way
of promotion with the approval under the document Ti Gai Sheng [1994] No.140 of the Peoples Republic of Chinas State Commission for Restructuring the Economic System. It is registered with and has obtained a business license
from Chinas State Administration for Industry and Commerce on April 14, 1995. On February 8, 2017, the Company completed the Combination of Three Licenses into One procedures for its business license, organization code
certificate and tax registration certificate. The unified social credit code of the business license of the Company after the integration is 913100007416029816.
The promotr of the Company is: China Eastern Air Holding Company.
Article 72: Each matter up for consideration at a Shareholders general meeting shall be voted upon at such Shareholders
general meeting. A shareholder (including proxy), when voting at a Shareholders general meeting, may exercise voting rights in accordance with the number of shares carrying the right to vote and each share shall have one vote.
For material issues to be decided in general meetings of the Company that would affect the interests of its small and medium sized investors,
the votes by the small and medium sized investors shall be counted separately. The result of such separate vote counting shall be disclosed publicly in a timely manner.
The Board of the Company, Independent Directors and those Shareholders who have met the relevant requirements may openly may openly collect
voting rights from the Companys shareholders. While collecting votes of the Shareholders, sufficient disclosure of information such as the specific voting preference shall be made to the Shareholders from whom voting rights are being
collected. No consideration or other form of de facto consideration shall be involved in the collection of voting rights from the Shareholders. The Company shall not impose any limitation related to minimum shareholdings on the collection of voting
rights.
On December 22, 2017, our shareholders approved further amendments to the Articles of Association to reflect the Party
organization of the Company:
Article 12: In accordance with the Constitution of the Party, the Company shall establish Party
organizations. The Party Committee at different levels of the Company shall perform functions in accordance with provisions of the Constitution of the Party. The Company shall set up the working organs of the Party, and maintain an adequate level of
staffing to handle Party affairs as well as sufficient funding necessary for the activities of the Party organizations.
Article 97:
The board of directors is responsible to the Shareholders general meeting and exercises the following powers:
|
(1)
|
to be responsible for the convening of the Shareholders general meeting and to report on its work to the Shareholders general meeting;
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|
(2)
|
to implement the resolutions of the Shareholders general meetings;
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(3)
|
to decide on the Companys business plans and investment plans;
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|
(4)
|
to formulate the Companys annual preliminary and final financial budgets;
|
|
(5)
|
to formulate the Companys profit distribution plan and plan for making up losses;
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|
(6)
|
to formulate proposals for increases or reductions in the Companys registered capital and the issue of debentures of the Company;
|
107
|
(7)
|
to draw up plans for the merger, division or dissolution of the Company;
|
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(8)
|
to decide on the establishment of the Companys internal management structure;
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|
(9)
|
to appoint or dismiss the Companys general manager, and pursuant to the general managers nominations to appoint or dismiss the deputy general manager and the financial controller of the Company and decide on
their remuneration;
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(10)
|
to establish the Companys basic management system;
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(11)
|
to formulate proposals for any amendments of the Companys articles of association;
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|
(12)
|
to exercise any other powers conferred by the Shareholders general meetings.
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Except the
board of directors resolutions in respect of the matters specified in
sub-paragraphs
(6), (7) and (11) of this Article which shall be passed by more than
two-thirds
of all the directors, the board of directors resolutions in respect of all other matters may be passed by more than one half of all the directors.
Prior to making decisions on material issues of the Company, the board of directors shall first seek advice from the Party Committee of the
Company in advance.
Article 143: The Company shall establish the Party Committee. The Party Committee shall be comprised of
one secretary and several other members. A deputy secretary of the Party Committee shall be appointed to take charge of the Party building work. Eligible members of the Party Committee are entitled to be admitted to the board of directors of the
Company, the supervisory committee, and the management through legal procedures, and eligible Party members from the board of directors, the supervisory committee, and the management are entitled to be admitted to the Party Committee in accordance
with relevant rules and procedures. Meanwhile, a discipline inspection committee shall be established in accordance with relevant regulations.
Article 144: The Party Committee of the Company shall perform its duties as required by the internal laws and regulations of the Party
such as the Constitution of the Party:
|
(1)
|
to ensure and supervise the Companys implementation of guidelines and policies of the Party and the State, implement major strategic decisions of the Central Committee of the Party and the State Council, as well
as the relevant material work arrangement of the Party Committee of the State-owned Assets Supervision and Administration Commission of the State Council and the superior Party organizations;
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|
(2)
|
to adhere to the principle of the Party exercising leadership over cadres, the selection of management with the board of directors of the Company, and the exercise of power as regards the right of cadres
appointment by the management in accordance with laws. The Party Committee shall consider and propose opinions and suggestions on the candidates nominated by the board of directors or the general manager, or recommend nominees to the board of
directors or the general manager. It shall review the proposed candidates together with the board of directors and propose opinions and suggestions thereon;
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|
(3)
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to study and discuss the material matters regarding the Companys reform and stable development as well as major issues relating to the Companys operation, management and staff s benefits, and propose
opinions and suggestions thereon;
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|
(4)
|
to assume main responsibility for enforcing the strict discipline of the Party. Take lead in the Companys ideological and political work, the united front work, building of spiritual and corporate culture, as well
as the labor union and groups such as the Communist Youth League. It shall play a leading role in the construction of the Party s working style to uphold anti-corruption and integrity and support the discipline inspection committee in
fulfilling its supervisory responsibility.
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108
On February 8, 2018, our shareholders approved further amendments to the Articles of
Association:
Article 57: The Shareholders general meeting shall have the following functions and powers:
|
(1)
|
to decide on the Companys operational policies and investment plans;
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|
(2)
|
to elect and replace directors (excluding employee representative directors) and decide on matters relating to the remuneration of directors;
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|
(3)
|
to elect and replace the supervisors who are representatives of shareholders and decide on matters relating to the remuneration of supervisors;
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(4)
|
to examine and approve reports of the board of directors;
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(5)
|
to examine and approve reports of the supervisory committee;
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(6)
|
to examine and approve the Companys proposed annual preliminary and final financial budgets;
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(7)
|
to examine and approve the Companys profit distribution plans and plans for making up losses;
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(8)
|
to decide on increases or reductions in the Company registered capital;
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(9)
|
to decide on matters such as merger, division, change in company form, dissolution and liquidation of the Company;
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(10)
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to decide on the issue of debentures by the Company;
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(11)
|
to decide on the appointment, dismissal and disengagement of the accountants of the Company;
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(12)
|
to amend these articles of association;
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(13)
|
to consider motions raised by shareholders who represent 3 per cent or more of the total shares of the Company carrying the right to vote;
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(14)
|
to decide on other matters which require resolutions of the shareholders in general meeting according to relevant laws, administrative regulations and provisions of these articles of association;
|
|
(15)
|
to decide on matters which the board of directors may be delegated or authorized to deal with by the shareholders in general meeting.
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Article 71 (A): Directors (excluding employee representative directors) will be elected at Shareholders general meetings through
cumulative voting. When directors are elected through cumulative voting at Shareholders general meetings, the number of total votes that a shareholder can exercise is the product of (i) the number of shares held by such shareholder, and
(ii) the number of directors to be elected. A shareholder can give all his or her votes to one director candidate or divide his or her votes among several director candidates. Directors are elected at the Shareholders general meetings
based on the number of votes the director candidates receive.
Article 95: The Company shall have a board of directors. The
board of directors shall consist of seven (7) to thirteen (13) directors. External directors (refer to directors who do not hold any office within the Company) shall represent more than
one-half
of
the board of directors including independent directors (refer to directors who are independent of the Shareholders and do not hold any office within the Company) not less than one third of the total number of directors and at least one of them shall
be an accounting professional; the board of directors shall have one employee representative director.
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The board of directors shall have one Chairman and one Vice-chairman.
Article 96: Directors (excluding employee representative directors) shall be elected at the Shareholders general meeting. while
employee representative directors shall be elected or removed by employee representative assembly. The term of office of the directors is three (3) years. At the expiry of a directors term, the term is renewable upon reelection.
The director (excluding employee representative director) candidates shall be nominated by the board of directors or shareholders. The notice
of nomination of directors and the notice by a director candidate of his or her willingness to be elected shall be given to and lodged with the Company on, at the earliest, the day after the dispatch of the relevant notice of Shareholders
general meeting appointed for the election and seven days before the date of the Shareholders general meeting.
The Chairman and the
Vice-chairman shall be elected and removed by more than one half of all the members of the board of directors. The term of office of each of the chairman and the Vice-chairman is three (3) years, renewable upon
re-election.
The Shareholders general meeting may by ordinary resolution remove any director
(excluding employee representative director) before the expiration of his term of office (but without prejudice to such directors right to claim damages based on any contract) on the condition that all the relevant laws and administrative
regulations are fully complied with. The Directors shall not be required to hold shares of the Company.
Article 107 (A):
Independent directors shall carry out duties faithfully, safeguard the interests of the Company and pay close attention to the protection of the legal rights and interests of the public shareholders from detriment.
Independent directors shall carry out duties independently and shall not be influenced by:
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(1)
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any substantial shareholder or actual controlling person of the Company; or
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(2)
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any interested entity or individual of the Company or any of its substantial shareholders or actual controlling persons.
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Article 107 (H): Matters requiring the involvement of employee representative directors can generally be divided into two categories:
matters requiring board resolutions; and matters requiring reporting to the board.
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(1)
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Matters requiring board resolutions: mainly include the enactment and amendment of basic management policy involving employee fundamental interests such as the Companys labor, remuneration policy, labor
protection, rest days and holidays, safety and operation, training, education and welfare etc.
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(2)
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Matters requiring reporting to the board: mainly include claims, comments and suggestions regarding employee democratic governance and democratic oversight and relevant claims and comments or the issues of tendency
involving employees interests.
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Article 132: Subject to Article 53, a director (excluding employee
representative director), supervisor, general manager, deputy general manager or other senior administrative officer of the Company may be relieved of liability for specific breaches of his duty by the informed consent of shareholders given at a
general meeting.
C. Material Contracts
For a summary of any material contracts entered into by our Company or any of our consolidated subsidiaries outside of the ordinary course of
business during the last two years, see Item 4. Information on the Company, Item 5. Operating and Financial Review and Prospects and Item 7. Major Shareholders and Related Party Transactions.
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D. Exchange Controls
The Renminbi is not currently a freely convertible currency. SAFE, under the authority of PBOC, controls the conversion of Renminbi into
foreign currency. Prior to January 1, 1994, Renminbi could be converted to foreign currency through the Bank of China or other authorized institutions at official rates fixed daily by SAFE. Renminbi could also be converted at swap centers open
to Chinese enterprises and foreign invested enterprises subject to SAFE approval of each foreign currency trade, at exchange rates negotiated by the parties for each transaction. Effective January 1, 1994, a unitary exchange rate system was
introduced in China, replacing the dual-rate system previously in effect. In connection with the creation of a unitary exchange rate, the PRC government announced the establishment of an inter-bank foreign exchange market, the China Foreign Exchange
Trading System, or CFETS, and the phasing out of the swap centers. Effective December 1, 1998, the swap centers were abolished by the PRC government.
On July 21, 2005, the PRC government changed its
decade-old
policy of pegging the value of the
Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in a significant appreciation of the
Renminbi against the U.S. dollar. While the international reaction to Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which
could result in a further and more significant appreciation of Renminbi against the U.S. dollar.
In general, under existing foreign
exchange regulations, domestic enterprises operating in China must price and sell their goods and services in China in Renminbi. Any foreign exchange received by such enterprises must be sold to authorized foreign exchange banks in China. A
significant portion of our revenue and operating expenses are denominated in Renminbi, while a portion of our revenue, capital expenditures and debts are denominated in U.S. dollars and other foreign currencies. Renminbi is currently freely
convertible under the current account, which includes dividends, trade and service-related foreign currency transactions, but not under the capital account, which includes foreign direct investment, unless the prior approval of the SAFE, is
obtained. As a foreign investment enterprise approved by the MOC, we can purchase foreign currency without the approval of SAFE for settlement of current account transactions, including payment of dividends, by providing commercial documents
evidencing these transactions. We can also retain foreign exchange in our current accounts, subject to a maximum amount approved by SAFE, to satisfy foreign currency liabilities or to pay dividends. However, the relevant PRC government authorities
may limit or eliminate our ability to purchase and retain foreign currencies in the future. Foreign currency transactions under the capital account are still subject to limitations and require approvals from SAFE. This may affect our ability to
obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions. We cannot assure you that we will be able to obtain sufficient foreign exchange to pay dividends or satisfy our foreign exchange
liabilities.
E. Taxation
The
taxation of income and capital gains of holders of H Shares or ADSs is subject to the laws and practices of China and of jurisdictions in which holders of H Shares or ADSs are resident or otherwise subject to tax. The following summary of certain
relevant taxation provisions is based on current law and practice, is subject to change and does not constitute legal or tax advice. The discussion does not deal with all possible tax consequences relating to an investment in the H Shares or ADSs.
In particular, the discussion does not address the tax consequences under state, local and other laws, such as
non-U.S.
federal laws. Accordingly, you should consult your own tax adviser regarding the tax
consequences of an investment in the H Shares and ADSs. The discussion is based upon laws and relevant interpretations in effect as of the date of this Annual Report, all of which are subject to change.
Hong Kong Taxation
The following
discussion summarizes the relevant Hong Kong tax rules relating to the ownership of H shares or ADSs purchased in connection with the global offering and held by you.
Dividends
Under
current Hong Kong Inland Revenue Department practice, no profits tax is payable by the recipient in respect of dividends paid by us.
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Taxation of Capital Gains
Gains derived from the sale of capital assets are specifically exempt from profits tax. Thus, no profits tax is imposed on capital gains
arising from the sale of property (such as H shares) acquired and held as a capital asset. However, whether or not there has been a sale of a capital asset depends upon the particular circumstances of a case. If a person carries on a business in
Hong Kong of trading and dealing in securities and derives trading gains from that business in Hong Kong, that person could be subject to profits tax on any assessable gains. Assessable gains include gains derived from the sales of H shares effected
on the Hong Kong Stock Exchange as these gains are considered to be trading gains derived from Hong Kong. Profits tax is currently charged at the rate of 16.5% for corporations and at the rate of 15% for unincorporated businesses (i.e. individuals).
No profits tax liability will arise on trading gains arising from the sale of ADSs where the purchase and sale is effected outside Hong
Kong (e.g. on the NYSE).
Hong Kong Stamp Duty
Stamp duty is payable by each of the seller and the purchaser for every sold note and every bought note created for every sale and purchase of
the H shares. Stamp duty is levied at the total rate of 0.2% (0.1% for each of sold note and bought note) of the value of the H shares transferred (the buyer and seller each paying half of such stamp duty). In addition, a fixed duty of HK$5 is
currently payable on an instrument of transfer of H shares. If one of the parties to a sale is a
non-resident
of Hong Kong and does not pay the required stamp duty, the amount of unpaid stamp duty will be
assessed on the instrument of transfer (if any), and the transferee will be liable for payment of such unpaid amount.
If the withdrawal
of H shares when ADSs are surrendered or the issuance of ADSs when H shares are deposited results in a change of beneficial ownership in the H shares under Hong Kong law, stamp duty at the rate cited above for a sale and purchase transaction will
apply. The issuance of ADSs for deposited H shares issued directly to the depositary, or for the account of the depositary, should not result in any stamp duty liability. Holders of the ADSs are not liable for the stamp duty on transfers of ADSs
outside of Hong Kong so long as the transfers do not result in a change of beneficial interest in the H shares under Hong Kong law.
Hong Kong Estate Duty
Hong Kong estate duty was abolished with respect to persons passing away on or after February 11, 2006.
China Taxation
The following is a
general summary of certain Chinese tax consequences of the acquisition, ownership and disposition of the H Shares and ADSs. This summary does not purport to address all material tax consequences of the ownership of Shares or ADSs, and does not take
into account the specific circumstances of any particular investors. This summary is based on the tax laws of China as in effect on the date of this Annual Report, as well as on the U.S.- China Treaty, all of which are subject to change (or changes
in interpretation), possibly with retroactive effect.
In general, and taking into account the earlier assumptions, for Chinese tax
purposes, holders of ADRs evidencing ADSs will be treated as the owners of the H Shares represented by those ADSs, and exchanges of H Shares for ADSs, and ADSs for H Shares, will not be subject to Chinese tax.
Taxation of Dividends by China
Individual investors
The Provisional Regulations of China Concerning Questions of Taxation on Enterprises Experimenting with the Share System,
or the
Provisional Regulations, provide that dividends from Chinese companies are ordinarily subject to a Chinese withholding tax levied at a flat rate of 20%. However on July 21, 1993, the Chinese State Tax Bureau issued a Notice Concerning the
Taxation of Gains on Transfer and Dividends from Shares (Equities) Received by Foreign Investment Enterprises, Foreign Enterprises and Foreign Individuals Numbered Guo Shui Fa [1993] No. 045, or No. 45 Document which provides that
dividends from a Chinese company on shares listed on an overseas stock exchange, or Overseas Shares, such as H Shares (including H Shares represented by ADSs), would not be subject to Chinese withholding tax. The relevant tax authority has not
collected withholding tax on dividend payments on Overseas Shares.
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Nevertheless, No.45 Document was abolished on January 4, 2011 and the Chinese State Tax
Bureau issued, on June 28, 2011, a Notice on Issues Concerning the Levy of Individual Income Tax following the Abolishment of the Document Numbered Guo Shui Fa [1993] No. 045, according to which dividends from a Chinese company are
ordinarily subject to a Chinese withholding tax levied at a flat rate of 20% unless otherwise provided in applicable tax treaties between the PRC and the jurisdiction in which the relevant
non-resident
shareholder resides. The tax rate of dividends income tax applicable to Hong Kong residents and U.S. residents is 10% of the gross amount of interest.
On October 31, 2014, CSRC, MOF and STA together promulgated
The Notice of the Relevant Tax Policy of the Pilot Program for the
Shanghai-Hong Kong Stock Connect
(Hereinafter refer to as Notice 81) which has been effective from November 17, 2014. Pursuant to Notice 81, for dividends acquired by mainland individual investors through investment in
H-shares
listed on the Hong Kong Stock Exchange via Hong Kong-Shanghai Stock Connect, the
H-share
company shall apply to China Securities Depository and Clearing Corporation
Limited (Hereinafter refer to as Chinese Clearing). Chinese Clearing shall provide the
H-share
company with the mainland individuals investor rosters. The
H-share
company withholds the individual income tax at the tax rate of 20%. For dividends acquired by mainland securities investment funds through investment in shares listed on the Hong Kong Stock Exchange via Hong Kong- Shanghai Stock Connect, the
individual income tax shall be collected according to the regulations hereinbefore.
For dividends acquired by Hong Kong investors
(including enterprises and individuals) through investment in
A-shares
listed on the Shanghai Stock Exchange, before Hong Kong Securities Clearing Limited (Hereinafter refer to as Hong Kong Clearing) meet the
conditions to provide Chinese Clearing with detailed data of investors identity certification and time of shareholding, the different tax policy according to time of shareholding will temporarily not to be implemented. The listed company shall
withhold the income tax at the tax rate of 10%, declare, and pay to the tax authorities.
Enterprises
Under the EIT Law amended in 2017 and the implementation regulations to the EIT Law, effective from January 1, 2008, PRC income tax at the
rate of 10% is applicable to dividends payable to investors that are
non-resident
enterprises, which do not have an establishment or place of business in the PRC, or which have such establishment
or place of business but the relevant income is not effectively connected with the establishment or place of business. The rate could be reduced or eliminated pursuant to an applicable double taxation treaty.
In accordance with the Notice 81, (a) dividends acquired by mainland enterprise investors through investment in shares listed on the Hong Kong
Stock Exchange via Hong Kong-Shanghai Stock Connect will be accounted into their total income and subject to enterprise income tax according to the laws. Among those, for the dividends acquired by mainland enterprise investors through continuing
holding H shares for 12 months, the enterprise income tax shall be exempted according to the laws; (b) the
H-share
company listed on the Hong Kong Stock Exchange shall apply to the Chinese Clearing to
offer them the mainland enterprise investor rosters. The
H-share
company does not withhold income tax from dividends for mainland enterprise investors. The enterprises shall declare and pay by themselves; and
(c) the mainland enterprise investors may apply for tax credits for dividends already withheld by
non-H-share
listed companies on the Hong Kong Stock Exchange when
declaring and paying the enterprise tax income.
Tax Treaties
Non-Chinese
investors resident in countries, which have entered into double-taxation treaties with
China, may be entitled to a reduction of the withholding tax imposed on the payment of dividends to
non-Chinese
investors of our Company. China currently has double-taxation treaties with a number of other
countries, including Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States.
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Notice 81 explicitly stipulated that for Hong Kong investors who are tax residents of other
countries that have signed the tax agreement with China to regulate the tax rate for dividends, that income tax to be less than 10%, the enterprise or individual may, by themselves or withholding agents, apply for the treatment of the tax agreement
to the tax authorities of listed companies. After examination and verification, the tax authorities shall reimburse the difference between the levied tax and the payable tax according to the tax agreement.
Under the U.S.-China Treaty, China may tax a dividend paid by our Company to a U.S. holder of H Shares or ADSs only up to a maximum of 10% of
the gross amount of such dividend.
Taxation of Capital Gains by China
Individual Investors
According to the Law of Individual Income Tax and its implementation regulations, holders of H Shares or ADSs who have no domiciles and do not
reside in China or who have no domiciles but have resided in China for less than one year shall be subject to individual income tax on their income gained within China, unless otherwise reduced or eliminated pursuant to an applicable double taxation
treaty.
Notice 81 requires, (a) from November 17, 2014 to November 16, 2017, the income tax from transfer price difference
will be temporarily exempted for mainland individual investors investment in shares listed on the Hong Kong Stock Exchange through Hong Kong-Shanghai Stock Connect; (b) for mainland individual investors, the business tax from transfer
price difference in the trading of shares listed on the Hong Kong Stock Exchange through Hong Kong- Shanghai Stock Connect will be temporarily exempted according to current policy; and (c) the income tax and the business tax from transfer price
difference will be temporarily exempted for Hong Kong individual investors investment in
A-shares
listed on the Shanghai Stock Exchange.
Under the U.S.-China Treaty, China may only tax gains from the sale or disposition by a U.S. holder of H Shares or ADSs representing an
interest in the company of 25% or more.
Enterprises
Under the EIT Law and the implementation regulations to the EIT Law, gains realized upon the sale of Overseas Shares by
non-resident
enterprises may be subject to PRC taxation at the rate of 10% (or lower treaty rate).
Pursuant to Notice 81, the income tax from transfer price difference will be accounted into the total income and subject to enterprise income
tax according to the laws for mainland enterprise investors investment in shares listed on the Hong Kong Stock Exchange through Hong Kong-Shanghai Stock Connect. For mainland enterprise investors, the business tax from transfer price
difference in the trading of shares listed on the Hong Kong Stock Exchange through Hong Kong-Shanghai Stock Connect shall be levied and exempted according to current policy. Income tax and the business tax from transfer price difference will be
temporarily exempted for Hong Kong enterprise investors investment in
A-shares
listed on the Shanghai Stock Exchange.
PRC Stamp Tax
Chinese stamp tax imposed on the transfer of shares of Chinese publicly traded companies under the Share System Tax Regulations should not
apply to the acquisition or disposition by
non-Chinese
investors of H Shares or ADSs outside of China by virtue of the Provisional Regulations of the Peoples Republic of China Concerning Stamp Tax, which
provides that Chinese stamp tax is imposed only on documents executed or received within China or that should be considered as having been executed or received within China.
According to Notice 81, Hong Kong investors shall pay stamp duty according to mainland current tax policy when trading, inheriting, gifting
the
A-
shares listed on the Shanghai Stock Exchange through Hong Kong-Shanghai Stock Connect.
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United States Federal Income Taxation
Each potential investor is strongly urged to consult his or her own tax advisor to determine the particular U.S. federal, state, local, treaty
and foreign tax consequences of acquiring, owning or disposing of the H Shares or ADSs.
The following is a general discussion of material
U.S. federal income tax consequences of purchasing, owning and disposing of the H Shares or ADSs if you are a U.S. Holder, as defined below, and hold the H Shares or ADSs as capital assets within the meaning of Section 1221 of the
U.S.
Internal Revenue Code of 1986
as amended (the Code). This discussion does not address all of the tax consequences relating to the purchase, ownership and disposition of the H Shares or ADSs, and does not take into account U.S.
Holders (defined below) who may be subject to special rules including:
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banks, financial institutions, and insurance companies;
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real estate investment trusts, regulated investment companies and grantor trusts;
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dealers or traders in securities, commodities or currencies;
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U.S. Holders that own, actually or constructively, 10% or more of our voting stock;
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persons who receive the H Shares or ADSs as compensation for services;
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U.S. Holders that hold the H Shares or ADSs as part of a straddle or a hedging or conversion transaction;
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persons that generally mark their securities to market for U.S. federal income tax purposes;
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U.S. citizens or tax residents who are residents of the PRC;
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U.S. citizens or tax residents who are subject to Hong Kong profits tax;
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certain U.S. expatriates;
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dual resident corporations; or
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U.S. Holders whose functional currency is not the U.S. dollar.
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Moreover, this description
does not address U.S. federal estate, gift or alternative minimum taxes, the U.S. federal unearned Medicare contribution tax, or any state or local tax consequences of the acquisition, ownership and disposition of the H Shares or ADSs.
This discussion is based on the Code, its legislative history, final, temporary and proposed U.S. Treasury regulations promulgated thereunder,
published rulings and court decisions as in effect on the date hereof, all of which are subject to change, or changes in interpretation, possibly with retroactive effect. In addition, this discussion is based in part upon representations of the
depositary and the assumption that each obligation in the deposit agreement and any related agreements will be performed according to its terms.
You are a U.S. Holder if you are a beneficial owner of H Shares or ADSs and are:
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an individual citizen or resident of the United States for U.S. federal income tax purposes;
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a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any political subdivision thereof;
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an estate the income of which is subject to U.S. federal income tax without regard to its source; or
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a trust if (i) a court within the United States is able to exercise primary supervision over its administration, and one or more U.S. persons have the authority to control all of the substantial decisions of
such trust, or (ii) such trust has a valid election in effect to be treated as a U.S. person for U.S. federal income tax purposes.
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If a partnership (including any entity treated as a partnership for U.S. federal tax purposes) is a beneficial owner of the H Shares or ADSs,
the treatment of the partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. If an investor is a partner in a partnership that holds H Shares or ADSs, such investor should consult its
tax advisor.
In general, if you hold ADRs evidencing ADSs, you will be treated as the owner of the H Shares represented by the ADSs.
Exchanges of H shares for ADRs, and ADRs for H shares, generally will not be subject to U.S. federal income tax.
INVESTORS SHOULD CONSULT THEIR TAX
ADVISORS AS TO THE PARTICULAR TAX CONSIDERATIONS APPLICABLE TO THEM RELATING TO THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE H SHARES OR ADSs, INCLUDING THE APPLICABILITY OF U.S. FEDERAL, STATE AND LOCAL TAX LAWS OR
NON-U.S.
TAX LAWS, ANY CHANGES IN APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION OR REGULATIONS.
Distributions on the H Shares or ADSs
Subject to the discussion below under Passive Foreign Investment Company, the gross amount of any distribution (without
reduction for any withheld PRC tax) we make on the H Shares or ADSs out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) will be includible in your gross income as ordinary dividend income when
the distribution is actually or constructively received by you, or by the depositary in the case of ADSs. Distributions that exceed our current and accumulated earnings and profits will be treated as a return of capital to you to the extent of your
basis in the H Shares or ADSs and thereafter as capital gain. We, however, may not calculate earnings and profits in accordance with U.S. tax principles. Accordingly, all distributions by us to U.S. Holders will generally be treated as dividends.
Any dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from U.S. corporations. The amount of any distribution of property other than cash will be the fair market
value of such property on the date of such distribution.
Subject to certain exceptions for short-term and hedged positions, the U.S.
dollar amount of dividends received by certain
non-corporate
holders will be subject to taxation at a maximum rate of 20% if the dividends are qualified dividends. Dividends paid on H Shares or
ADSs will be treated as qualified dividends if either (i) we are eligible for the benefits of a comprehensive income tax treaty with the United States that the Internal Revenue Service, or IRS, has approved for the purposes of the qualified
dividend rules, or (ii) the dividends are, with respect to ADSs, readily tradable on a U.S. securities market, provided that we were not, in each case, in the year prior to the year in which the dividend was paid, and are not, in the year in
which the dividend is paid, a passive foreign investment company, or PFIC. The Agreement Between the Government of the United States of America and the Government of the Peoples Republic of China for the Avoidance of Double Taxation and the
Prevention of Tax Evasion with Respect to Taxes on Income (the Treaty) has been approved for the purposes of the qualified dividend rules, and we expect to qualify for benefits under the Treaty. We are considered a qualified foreign
corporation with respect to the ADSs because our ADSs are listed on the New York Stock Exchange. Finally, based on our audited consolidated financial statements and relevant market data, we believe that we did not satisfy the definition for PFIC
status for U.S. federal income tax purposes with respect to our 2016 taxable year. In addition, based on our audited consolidated financial statements and our current expectations regarding the value and nature of our assets, the sources and nature
of our income, and relevant market data, we do not anticipate becoming a PFIC for our 2017 taxable year or any future year. However, our status in the current year and future years will depend on our income and assets (which for this purpose depends
in part on the market value of the H Shares or ADSs) in those years. See the discussion below under Passive Foreign Investment Company.
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Holders of H Shares or ADSs should consult their own tax advisors regarding the availability of
the reduced dividend tax rate in light of their own particular circumstances.
If we make a distribution paid in HK dollars, you will be
considered to receive the U.S. dollar value of the distribution determined at the spot HK dollar/U.S. dollar rate on the date such distribution is actually or constructively received by you, regardless of whether you convert the distribution into
U.S. dollars. Any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is includible in your income to the date you convert the distribution into U.S. dollars will be treated as ordinary
income or loss from U.S. sources. If dividends received in HK dollars are converted into U.S. dollars on the day they are received, the U.S. Holder generally will not be required to recognize foreign currency gain or loss in respect of the dividend
income.
Subject to various limitations, any PRC tax withheld from distributions in accordance with the Treaty will be deductible or
creditable against your U.S. federal income tax liability depending on the application of the section 904 foreign tax credit limitation provisions. Dividends paid by us generally will constitute income from sources outside the United States for U.S.
foreign tax credit limitation purposes and will be categorized as passive category income or, in the case of certain U.S. Holders, as general category income for U.S. foreign tax credit purposes.
In the event we are required to withhold PRC income tax on dividends paid to U.S. Holders on the H Shares or ADSs (see discussion under
China Taxation), you may be able to claim a reduced 10% rate of PRC withholding tax if you are eligible for benefits under the Treaty. You should consult your own tax advisor about the eligibility for reduction of PRC withholding
tax.
You may not be able to claim a foreign tax credit (and instead may claim a deduction) for
non-U.S.
taxes imposed on dividends paid on the H Shares or ADSs if you (i) have held the H Shares or ADSs for less than a specified minimum period during which you are not protected from risk of loss
with respect to such shares, or (ii) are obligated to make payments related to the dividends (for example, pursuant to a short sale). The rules relating to the U.S. foreign tax credit are complex and U.S. Holders may be subject to various
limitations on the amount of foreign tax credits that are available. In addition, if the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating a U.S.
Holders foreign tax credit limitation will generally be limited to the gross amount of the taxable dividend, multiplied by the reduced tax rate applicable to qualified dividend income and divided by the highest tax rate normally applicable to
dividends. U.S. Holders should consult their own tax advisors regarding the effect of these rules in their particular circumstance.
Sale, Exchange or
Other Disposition
Subject to the discussion below under Passive Foreign Investment Company, upon a sale, exchange
or other disposition of the H Shares or ADSs, you will generally recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the U.S. dollar value of the amount realized and your tax basis,
determined in U.S. dollars, in such H Shares or ADSs. Generally, gain or loss recognized upon the sale or other disposition of H Shares or ADSs, will be long-term capital gain or loss if the U.S. Holders holding period for such H Shares or
ADSs exceeds one year, and will be income or loss from sources within the United States for foreign tax credit limitation purposes. For
non-corporate
U.S. Holders, the U.S. income tax rate applicable to net
long-term capital gain currently will not exceed 20.0%. The deductibility of capital losses is subject to significant limitations.
A U.S.
Holder that receives foreign currency from a sale or disposition of H Shares or ADSs generally will realize an amount equal to the U.S. dollar value of the foreign currency determined on (i) the date of receipt of payment in the case of a cash
basis U.S. Holder and (ii) the date of disposition in the case of an accrual basis U.S. Holder. If Shares are treated as traded on an established securities market, a cash basis taxpayer or, if it so elects, an accrual basis
taxpayer, will determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale. A U.S. Holder will have a tax basis in the foreign currency received equal to
the U.S. dollar amount realized. Any currency exchange gain or loss realized on a subsequent conversion of the foreign currency into U.S. dollars for a different amount generally will be treated as ordinary income or loss from sources within the
United States. However, if such foreign currency is converted into U.S. dollars on the date received by the U.S. Holder, a cash basis or electing accrual basis U.S. Holder should not recognize any gain or loss on such conversion.
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Any gain or loss will generally be U.S. source gain or loss for foreign tax credit limitation
purposes and as a result of the U.S. foreign tax credit limitation, foreign taxes, if any, imposed upon capital gains in respect of H Shares or ADSs may not be currently creditable. Under the Treaty, however, if any PRC tax were to be imposed on any
gain from the disposition of H Shares or ADSs, the gain could be treated as
PRC-source
income. U.S. Holders are urged to consult their tax advisors regarding the interaction of the foreign tax credit and the
Treaty resourcing rule.
Passive Foreign Investment Company
In general, a foreign corporation is a PFIC for any taxable year in which, after applying relevant look-through rules with respect to the
income and assets of subsidiaries:
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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
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50% or more of the average quarterly value of its gross assets consists of assets that produce, or are held for the production of, passive income.
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Passive income for this purpose includes, for example, dividends, interest, royalties, rents and gains from commodities and
securities transactions. Passive income does not include rents and royalties derived from the active conduct of a trade or business. If the stock of a
non-U.S.
corporation is publicly traded for the taxable
year, the asset test is applied using the fair market value of the assets for purposes of measuring such corporations assets. If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC
tests, as owning our proportionate share of the other corporations assets and receiving our proportionate share of the other corporations income for purposes of the PFIC income and asset tests.
Based on the current and anticipated composition of our assets and income and the current expectations regarding the price of the H Shares and
ADSs, we believe that we were not a PFIC for U.S. federal income tax purposes with respect to our 2017 taxable year and we do not intend to become or anticipate becoming a PFIC for the current or any future taxable year. However, the determination
of PFIC status is a factual determination that must be made annually at the close of each taxable year and therefore, there can be no certainty as to our status in this regard until the close of the 2018 taxable year. Changes in the nature of our
income or assets or a decrease in the trading price of the H Shares or ADSs may cause us to be considered a PFIC in the current or any subsequent year.
If we were a PFIC in any taxable year that you held the H Shares or ADSs, you generally would be subject to special rules with respect to
excess distributions made by us on the H Shares or ADSs and with respect to gain from your disposition of the H Shares or ADSs. An excess distribution generally is defined as the excess of the distributions you receive with
respect to the H Shares or ADSs in any taxable year over 125% of the average annual distributions you have received from us during the shorter of the three preceding years, or your holding period for the H Shares or ADSs. Generally, you would be
required to allocate any excess distribution or gain from the disposition of the H Shares or ADSs ratably over your holding period for the H Shares or ADSs. The portion of the excess distribution or gain allocated to a prior taxable year, other than
a year prior to the first year in which we became a PFIC, would be taxed at the highest U.S. federal income tax rate on ordinary income in effect for such taxable year, and you would be subject to an interest charge on the resulting tax liability,
determined as if the tax liability had been due with respect to such particular taxable years. The portion of the excess distribution or gain that is not allocated to prior taxable years, together with the portion allocated to the years prior to the
first year in which we became a PFIC, would be included in your gross income for the taxable year of the excess distribution or disposition and taxed as ordinary income. If we were a PFIC in any year during a U.S. Holders holding period, we
would generally be treated as a PFIC for each subsequent year absent a purging election by the U.S. Holder.
118
These adverse tax consequences may be avoided if the U.S. Holder is eligible to and does elect to
annually
mark-to-market
the H Shares or ADSs. If a U.S. Holder makes a
mark-to-market
election, such holder will generally include as ordinary income the excess, if any, of the fair market value of the H Shares or ADSs at the end of each taxable year over their adjusted basis, and will be permitted an ordinary loss in respect of the
excess, if any, of the adjusted basis of the H Shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of income previously included as a result of the
mark-to-market
election). Any gain recognized on the sale or other disposition of the H Shares or ADSs will be treated as ordinary income. The
mark-to-market
election is available only for marketable stock, which is stock that is traded in other than de minimis quantities on at least 15 days during
each calendar quarter on a qualified exchange or other market, as defined in the applicable Treasury regulations. The ADSs should qualify as marketable stock because the ADSs are listed on the New York Stock Exchange. However, the stock
of any of our subsidiaries that were PFICs would not be eligible for the
mark-to-market
election.
A U.S. Holders adjusted tax basis in the H Shares or ADSs will be increased by the amount of any income inclusion and decreased by the
amount of any deductions under the
mark-to-market
rules. If a U.S. Holder makes a
mark-to-market
election it will be effective for the taxable year for which the election is made and all subsequent taxable years, unless the H Shares or ADSs are no
longer regularly traded on a qualified exchange or the IRS consents to the revocation of the election. U.S. Holders are urged to consult their tax advisors about the availability of the
mark-to-market
election, and whether making the election would be advisable in their particular circumstances.
Alternatively, a timely election to treat us as a qualified electing fund could be made to avoid the foregoing rules with respect to excess
distributions and dispositions. You should be aware, however, that if we become a PFIC, we do not intend to satisfy record keeping requirements that would permit you to make a qualified electing fund election.
If we were regarded as a PFIC, a U.S. Holder of H Shares or ADSs generally would be required to file an information return on IRS Form 8621
for any year in which the holder received a direct or indirect distribution with respect to the H Shares or ADSs, recognized gain on a direct or indirect disposition of the H Shares or ADSs, or made an election with respect to the H Shares or ADSs,
reporting distributions received and gains realized with respect to the H Shares or ADSs. In addition, if we were regarded as a PFIC, a U.S. Holder would be required to file an annual information return (also on IRS Form 8621) relating to the
holders ownership of the shares or ADSs. This requirement would be in addition to other reporting requirements applicable to ownership in a PFIC.
We encourage you to consult your own tax advisor concerning the U.S. federal income tax consequences of holding the H Shares or ADSs that
would arise if we were considered a PFIC.
Backup Withholding and Information Reporting
In general, information reporting requirements will apply to dividends in respect of the H Shares or ADSs or the proceeds of the sale,
exchange, or redemption of the H Shares or ADSs paid within the United States, and in some cases, outside of the United States, other than to various exempt recipients, including corporations. In addition, you may, under some circumstances, be
subject to backup withholding with respect to dividends paid on the H Shares or ADSs or the proceeds of any sale, exchange or transfer of the H Shares or ADSs, unless you:
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are a corporation or fall within various other exempt categories, and, when required, demonstrate this fact; or
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provide a correct taxpayer identification number on a properly completed IRS Form
W-9
or a substitute form, certifying that you are exempt from backup withholding and otherwise
comply with applicable requirements of the backup withholding rules; or
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provide a properly completed IRS Form
W-8BEN,
certifying your status as a
non-U.S.
Holder.
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Any amount withheld under the backup withholding rules generally will be creditable against your U.S. federal income tax liability or may be
refunded to the extent they exceed such liability provided that you furnish the required information to the IRS in a timely manner. If you do not provide a correct taxpayer identification number you may be subject to penalties imposed by the IRS.
119
Certain U.S. Holders may be required to report information with respect to such holders
interest in specified foreign financial assets (as defined in Section 6038D of the Code), including stock of a
non-U.S.
corporation that is not held in an account maintained by certain
financial institutions, if the aggregate value of all such assets exceeds certain dollar thresholds. Persons who are required to report specified foreign financial assets and fail to do so may be subject to substantial penalties. U.S. Holders are
urged to consult their own tax advisors regarding the foreign financial asset reporting obligations and their possible application to the holding of H Shares or ADSs.
F. Dividends and Paying Agents
Not
applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
You may read and copy documents referred to in this Annual Report on Form
20-F
that have been
filed with the Securities and Exchange Commission at its public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information on the public reference rooms and their copy charges. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy statements and other
information regarding registrants that file electronically with the SEC.
As a foreign private issuer, we are exempt from the rules under
the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in
Section 16 of the Exchange Act.
The SEC allows us to incorporate by reference the information we file with the SEC. This
means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this Annual Report on Form
20-F.
l. Subsidiary Information
For a listing of our significant subsidiaries, see Item 4. Information on the Company History and Development of the
Company.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our debts include both
fixed-rate and variable-rate long-term loans and other loans. As a result, we are subject to the market risk of fluctuation of interest rates which may affect the estimated fair value of our debt liabilities or result in losses in cash flow. We use
interest rate swaps to reduce risks related to changes in market interest rates. As of December 31, 2017, the notional amount of our outstanding interest rate swap agreements was approximately US$1,420 million. The net fair value of the
outstanding interest rate swap agreements gave rise to an asset of approximately RMB137 million. These interest rate swap agreements will expire between 2018 and 2025. If the interest rate had been 25 basis points higher with all other
variables held constant, interest expenses on our floating rate instruments would have increased by RMB140 million in 2016 and RMB142 million in 2017.
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Foreign Currency Exchange Rate Risk
Although we derive most of our income from China in Renminbi, our financial lease obligations as well as certain bank loans are denominated in
U.S. dollars and Renminbi. Pursuant to current foreign exchange regulations in China, we may retain our foreign currency earnings generated from ticket sales made in our overseas offices subject to the approval of SAFE. We use forward contracts to
reduce risks related to changes in currency exchange rates in respect of ticket sales and expenses denominated in foreign currencies. As of December 31, 2017, the notional amount of the outstanding currency forward contracts was approximately
US$829 million, which will expire in 2018.
Pursuant to IFRSs, our monetary assets and liabilities denominated in foreign currencies
are required to be translated into Renminbi at
year-end,
at exchange rates announced by the PBOC. Transactions in currencies other than the Renminbi during the year are converted into Renminbi at the
applicable rates of exchange prevailing at the dates of the transaction. Transaction gains and losses are recognized in our profit or loss account. In 2016 and 2017, we had foreign exchange losses of RMB3,543 million and foreign exchange gains
of RMB2,001 million, respectively. Any fluctuation of the exchange rates between Renminbi and foreign currencies may materially and adversely affect our financial condition and results of operations. Following the measures introduced by the PRC
government in July 2005 to reform the Renminbi exchange rate regime, the Renminbi has appreciated significantly against certain foreign currencies, including the U.S. dollar and Japanese yen. The following table shows the effect on our profit and
loss account as a result of the impact on our
non-Renminbi
denominated monetary assets and liabilities as of December 31, 2017 as a consequence of a fluctuation in value of the following major foreign
currencies.
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Profit and Loss Account
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(Decrease)/Increase
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U.S. dollar depreciates by 1%
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260
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Japanese yen depreciates by 1%
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1
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Euro depreciates by 1%
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36
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KRW depreciates by 1%
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7
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Fuel Price Fluctuation Risk
Our earnings are affected by changes in the price and availability of jet fuel. Our results of operations may be significantly affected by
fluctuations in fuel prices which is a significant expense for our Group. If the average price of jet fuel had increased or decreased by 5%, jet fuel costs of our Group would have increased or decreased by approximately RMB1,257 million. The
sensitivity analysis of jet fuel price risk is disclosed in Note 40(b) to the consolidated financial statements. In 2016 and 2017, we have not conducted aviation fuel hedging activities.
Item 12. Description of Securities Other than Equity Securities
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
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D. American Depositary Shares
Our ADSs, each representing 50 H shares, are traded on the New York Stock Exchange under the symbol CEA. The ADSs are evidenced by
American Depositary Receipts, or ADRs, issued by BNYM, as depositary under the Deposit Agreement, dated as of February 5, 1997, among the Company, BNYM and holders and beneficial owners of ADSs. BNYMs principle executive office is at 1
Wall Street, Manhattan, New York City, New York, U.S. ADS holders are required to pay the following service fees to BNYM:
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Service
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Fees (in U.S. dollars)
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Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
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US$5.00 (or less) per ADSs (or portion of 100 ADSs)
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Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
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Cancellation fees
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Any cash distribution to ADS registered holders
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N/A
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Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS registered holders
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A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs
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Depositary services
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N/A
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Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares
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Registration or transfer fees
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Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)
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Expenses of the depositary
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Converting foreign currency to U.S. dollars
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Foreign exchange fees
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As necessary
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Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes
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As necessary
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Any charges incurred by the depositary or its agents for servicing the deposited securities
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For the past annual period, from January 1, 2017 to December 31, 2017, the Company received from the
depositary an aggregate of US$52,217.16 for continuing stock exchange annual listing fees and reimbursement fees, and waived standard
out-of-pocket
maintenance costs for
the ADRs (consisting of administrative expenses) of US$131,191.22.
BNYM, as depositary, has agreed to reimburse the Company for expenses
incurred in the future in relation to the establishment and maintenance of the ADS program, which include standard
out-of-pocket
expenses such as postage and envelopes
for mailing annual and interim financial reports and all related administrative and documentary expenses. BNYM has agreed to reimburse the Company annually for certain investor relationship programs and promotional activities. There are limits as to
the amount of reimbursable expenses and this amount is not necessarily commensurate with the amount of fees BNYM collects from ADS investors. BNYM collects fees for delivery and surrender of ADSs directly from investors depositing shares or
surrendering ADSs for the purpose of withdrawal. BNYM collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay fees. BNYM may also collect its
annual fee by deducting cash distributions or by directly billing investors, or by charging the book-entry system accounts of participants acting for investors.
The above table lists the subsidiaries of the Company which, in the opinion of the directors,
principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.
All of the subsidiaries of the Company listed above are limited liability companies.
These financial statements have been prepared in accordance with all
applicable International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under
the historical cost convention, except for certain
available-for-sale
investments and derivative financial instruments which have been measured at fair value. Disposal
groups held for sale are stated at the lower of their carrying amounts and fair values less costs to sell as further explained in note 3. These financial statements are presented in Renminbi (RMB) and all values are rounded to the
nearest million except when otherwise indicated.
The consolidated financial statements include the financial statements of the Company and its subsidiaries. A subsidiary is an entity
(including a structured entity), directly or indirectly, controlled by the Company. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee (i.e., existing rights that give the Group the current ability to direct the relevant activities of the investee).
When the Company has, directly or indirectly, less than a majority of the voting or similar rights of an investee, the Group considers all
relevant facts and circumstances in assessing whether it has power over an investee, including:
The financial statements of the
subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. The results of subsidiaries are consolidated from the date on which the Group obtains control, and continue to be consolidated until the
date that such control ceases.
Profit or loss and each component of other comprehensive income are attributed to the equity holders of the
Company and to the
non-controlling
interests, even if this results in the
non-controlling
interests having a deficit balance. All intra-group assets and liabilities,
equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.
The
Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control described above. A change in the ownership interest of a subsidiary, without a loss of
control, is accounted for as an equity transaction.
If the Group loses control over a subsidiary, it derecognizes (i) the assets (including
goodwill) and liabilities of the subsidiary, (ii) the carrying amount of any
non-controlling
interest and (iii) the cumulative translation differences recorded in equity; and recognizes (i) the
fair value of the consideration received, (ii) the fair value of any investment retained and (iii) any resulting surplus or deficit in profit or loss. The Groups share of components previously recognized in other comprehensive income
is reclassified to profit or loss or retained profits, as appropriate, on the same basis as would be required if the Group had directly disposed of the related assets or liabilities.
As at
December 31, 2017, the Groups current liabilities exceeded its current assets by approximately RMB62.04 billion. In preparing the financial statements, the Board conducts a detailed review over the Groups going concern ability based
on the current financial situation. The Board has considered the Groups available sources of funds as follows:
The Board considers that the Group will be able to obtain sufficient financing to enable it to operate, as well as to meet its liabilities as
and when they become due, and the capital expenditure requirements for the upcoming twelve months. Accordingly, the Board believes that it is appropriate to prepare these financial statements on a going concern basis without including any
adjustments that would be required should the Company and the Group fail to continue as a going concern.
Further information
about those IFRSs that are expected to be applicable to the Group is as follows:
The IASB issued amendments to IFRS 2 in June 2016 that
address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding a certain amount
in order to meet an employees tax obligation associated with the share-based payment; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash-settled to
equity-settled. The amendments clarify that the approach used to account for vesting conditions when measuring equity-settled share-based payments also applies to cash-settled share-based payments. The amendments introduce an exception so that a
share-based payment transaction with net share settlement features for withholding a certain amount in order to meet the employees tax obligation is classified in its entirety as an equity-settled share-based payment transaction when certain
conditions are met. Furthermore, the amendments clarify that if the terms and conditions of a cash-settled share-based payment transaction are modified, with the result that it becomes an equity-settled share-based payment transaction, the
transaction is accounted for as an equity-settled transaction from the date of the modification. On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if they elect to
adopt for all three amendments and other criteria are met. The Group will adopt the amendments from 1 January 2018. The amendments are not expected to have any significant impact on the Groups financial statements.
In July 2014, the IASB issued the final version of IFRS 9, bringing together all phases of the financial instruments project to replace IAS 39
and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment and hedge accounting. The Group will adopt IFRS 9 from 1 January 2018. The Group will not restate comparative
information and will recognize any transition adjustments against the opening balance of equity at 1 January 2018. During 2017, the Group has performed a detailed assessment of the impact of the adoption of IFRS 9. The expected impacts relate
to the classification and measurement and the impairment requirements and are summarized as follows: .
The Group does not expect that the adoption of IFRS 9 will have a significant impact on the
classification and measurement of its financial assets. It expects to continue measuring at fair value all financial assets currently held at fair value. The equity shares in
non-listed
companies and part of
the quoted equity shares currently held as
available-for-sale
with gains and losses recorded in other comprehensive income will, instead, be measured at fair value
through profit or loss, which will increase volatility in recorded profit or loss. Other equity interest in a related party currently held as
available-for-sale
will be
measured at fair value through other comprehensive income as the investments are intended to be held for the foreseeable.
Loans as well as
trade receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest. The Group analyzed the contractual cash flow characteristics of those instruments and
concluded that they meet the criteria for amortized cost measurement under IFRS 9. Therefore, reclassification for these instruments is not required.
IFRS 9 requires an impairment on debt instruments recorded at amortized cost or at
fair value through other comprehensive income, lease receivables, loan commitments and financial guarantee contracts that are not accounted for at fair value through profit or loss under IFRS 9, to be recorded based on an expected credit loss model
either on a twelve-month basis or a lifetime basis. The Group will apply the simplified approach and record lifetime expected losses that are estimated based on the present values of all cash shortfalls over the remaining life of all of its trade
receivables. Furthermore, the Group will apply the general approach and record twelve-month expected credit losses that are estimated based on the possible default events on its other receivables within the next twelve months.
The Group determined that all existing hedge relationships that are currently
designated in effective hedging relationships will continue to qualify for hedge accounting under IFRS 9. As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, applying the hedging requirements of IFRS 9
will not have a significant impact on the Groups financial statements.
Amendments to IFRS 10 and IAS 28 address the conflict between
IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a
business, as defined in IFRS 3, between an investor and its associate or joint venture, is recognized in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognized only to the
extent of unrelated investors interests in the associate or joint venture. The IASB has deferred the effective date of these amendments indefinitely, but an entity that early adopts the amendments must apply them prospectively. The Group will
apply these amendments when they become effective.
IFRS 15 was issued in May 2014, and amended in April 2016, and establishes a five-step
model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a
customer. The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January
2018. The Group will adopt the standard effective January 1, 2018 using the modified retrospective approach. During 2017, the Group has assessed the impact of the adoption of IFRS 15 and is currently in the process of completing the analysis.
The expected impacts arising from the adoption of IFRS 15 on the Group are summarized as follows:
Prior to the adoption of IFRS 15, the Group uses residual method to allocate a portion of
ticket sales to the mileage points issued in connection with the flights and to allocate a portion of sales to the mileage points issued under the
co-branded
credit card arrangements as deferred revenue, which
were valued based on the estimated redemption value. Revenue is recognized when the miles have been redeemed and used or for miles that expire unused at the expiration date. IFRS 15 requires the Group to apply relative stand-alone selling price
approach to allocate a portion of sales to the mileage points issued and deferred as frequent flyer programs liabilities. The application of a relative selling price approach is expected to decrease in the frequent flyer program liabilities.
The Group charges customers to make changes to air tickets. The process of
changing the customers itinerary generally will be regarded a contract modification under IFRS 15 instead of considered as no additional goods or services transferred to the customer in the existing accounting policy. Under IFRS 15, change
fees will be recognized in passenger revenue when transportation is provided, while it is currently recognized in other revenue at the time of the ticket is changed.
Ticket breakage is defined as the tickets for which the passenger
will not use and will expire unused. Currently, the Group recognizes revenue from the ticket breakage upon expiration of the ticket. Under IFRS 15, the Group is required to estimate the tickets that will expire unused and recognize revenue in
proportion to the pattern of rights exercised by customers. Under IFRS 15, the Group will recognize the estimated breakage in proportion to revenue recognized for tickets acquired during the same period using a portfolio based approach.
Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a
change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to the
right-of-use
asset. Lessor accounting under IFRS 16 is substantially unchanged from the accounting under IAS 17. Lessors will continue to classify all leases using the same
classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases.
IFRS 16 also requires
lessees and lessors to make more extensive disclosures than under IAS 17. IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted, but not before an entity applies IFRS 15. A lessee can
choose to apply the standard using either a full retrospective or a modified retrospective approach. The standards transition provisions permit certain reliefs. The Group expects to adopt IFRS 16 from 1 January 2019. Management is still
assessing the impact on the financial performance and position of the Group resulting from the adoption of IFRS 16 for the annual period beginning on 1 January 2019. As disclosed in note 46(b) to the financial statements, at 31 December
2017, the Group had future minimum lease payments under
non-cancellable
operating leases in aggregate of approximately RMB20,936 million. Upon adoption of IFRS 16, certain amounts included therein may
need to be recognized as new
right-of-use
assets and lease liabilities. Further analysis, however, will be needed to determine the amount of new rights of use assets and
lease liabilities to be recognized, including, but not limited to, any amounts relating to leases of
low-value
assets and short term leases, other practical expedients and reliefs chosen, and new leases
entered into before the date of adoption.
Amendments to IAS 40, issued in December 2016, clarify when an entity should transfer
property, including property under construction or development, into or out of investment property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is
evidence of the change in use. A mere change in managements intentions for the use of a property does not provide evidence of a change in use. The amendments should be applied prospectively to the changes in use that occur on or after the
beginning of the annual reporting period in which the entity first applies the amendments. An entity should reassess the classification of property held at the date that it first applies the amendments and, if applicable, reclassify property to
reflect the conditions that exist at that date. Retrospective application is only permitted if it is possible without the use of hindsight. The Group expects to adopt the amendments prospectively from 1 January 2018. The amendments are not
expected to have any significant impact on the Groups financial statements.
Amendments to IAS 19, issued in February 2018, clarify
when a plan amendment, curtailment or settlement occurs for defined benefit plan, any entity must Determine current service cost for the remainder of the period after the plan amendment, curtailment or settlement using the actuarial assumptions used
to remeasure the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event. Determine net interest for the remainder of the period after the plan amendment, curtailment or settlement
using: (i) the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event; and (ii) the discount rate used to remeasure that net defined benefit liability (asset). The
amendments to IAS 19 also clarify that an entity first determines any past service cost, or a gain or loss on settlement, without considering the effect of the asset ceiling. This amount is recognized in profit or loss. An entity then determines the
effect of the asset ceiling after the plan amendment, curtailment or settlement. Any change in that effect, excluding amounts included in net interest, is recognized in other comprehensive income. The amendments to IAS 19 must be applied to plan
amendments, curtailments or settlements occurring on or after the beginning of the first annual reporting period that begins on or after 1 January 2019. Consequently, entities do not have to revisit plan amendments, curtailments and settlements
that occurred in prior periods. The amendments are not expected to have any significant impact on the Groups financial statements.
IFRIC 22 provides guidance on how to determine the date of the transaction when applying IAS 21 to the situation where an entity receives or
pays advance consideration in a foreign currency and recognizes a
non-monetary
asset or liability. The interpretation clarifies that the date of the transaction for the purpose of determining the exchange rate
to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the
non-monetary
asset (such as a prepayment) or
non-monetary
liability (such as deferred income) arising from the payment or receipt of the advance consideration. If there are multiple payments or receipts in advance of recognizing the related item, the entity
must determine the transaction date for each payment or receipt of the advance consideration. Entities may apply the interpretation on a full retrospective basis or on a prospective basis, either from the beginning of the reporting period in which
the entity first applies the interpretation or the beginning of the prior reporting period presented as comparative information in the financial statements of the reporting period in which the entity first applies the interpretation. The Group
expects to adopt the interpretation prospectively from 1 January 2018. The amendment is not expected to have any significant impact on the Groups financial statements.
IFRIC 23, issued in June 2017, addresses the accounting for income taxes (current and deferred) when tax treatments involve uncertainty that
affects the application of IAS 12 (often referred to as uncertain tax positions). The interpretation does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and
penalties associated with uncertain tax treatments. The interpretation specifically addresses (i) whether an entity considers uncertain tax treatments separately; (ii) the assumptions an entity makes about the examination of tax treatments
by taxation authorities; (iii) how an entity determines taxable profits or tax losses, tax bases, unused tax losses, unused tax credits and tax rates; and (iv) how an entity considers changes in facts and circumstances. The interpretation
is to be applied retrospectively, either fully retrospectively without the use of hindsight or retrospectively with the cumulative effect of application as an adjustment to the opening equity at the date of initial application, without the
restatement of comparative information. The Group expects to adopt the interpretation from 1 January 2019. The amendment is not expected to have any significant impact on the Groups financial statements.
An associate is an entity in which the Group has a long-term interest of generally not less than 20% of the equity voting rights and over
which it is in a position to exercise significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.
A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of
the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
The Groups investments in associates and joint ventures are stated in the consolidated statement of financial position at the
Groups share of net assets under the equity method of accounting, less any impairment losses. Adjustments are made to bring into line any dissimilar accounting policies that may exist.
The Groups share of the post-acquisition results and other comprehensive income of associates and joint ventures is included in the
consolidated statement of profit or loss and other comprehensive income. In addition, when there has been a change recognized directly in the equity of the associate or joint venture, the Group recognizes its share of any changes, when applicable,
in the consolidated statement of changes in equity. Unrealized gains and losses resulting from transactions between the Group and its associates or joint ventures are eliminated to the extent of the Groups investments in the associates or
joint ventures, except where unrealized losses provide evidence of an impairment of the asset transferred. Goodwill arising from the acquisition of associates or joint ventures is included as part of the Groups investments in associates or
joint ventures.
If an investment in an associate becomes an investment in a joint venture or vice versa, the retained interest is not
remeasured. Instead, the investment continues to be accounted for under the equity method. In all other cases, upon loss of significant influence over the associate or joint control over the joint venture, the Group measures and recognizes any
retained investment at its fair value. Any difference between the carrying amount of the associate or joint venture upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is
recognized in profit or loss.
When an investment in an associate or a joint venture is classified as held for sale, it is accounted for in
accordance with IFRS 5
Non-current
Assets Held for Sale and Discontinued Operations
.
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker
(CODM). The CODM, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the office of the General Manager that makes strategic decisions.
Items included in the financial statements of each of the Groups
entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The financial statements are presented in RMB, which is the Companys functional
currency.
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at
year-end
exchange
rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss, except when deferred in other comprehensive income as qualifying cash flow hedges or qualifying net investment hedges.
Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are
presented in profit or loss within finance income or finance costs.
Revenue comprises the fair value of the consideration received or receivable for the provision of services and the sale of goods in the
ordinary course of the Groups activities. Revenue is stated net of business taxes or value-added taxes, returns, rebates and discounts and after eliminating sales within the Group.
Revenue is recognized when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on
the following basis:
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).
Revenues from the provision of ground
services, tour, travel services and other travel related services are recognized when the services are rendered.
Revenues from the provision of cargo handling services are recognized
when the services are rendered.
Commission income represents amounts earned from other carriers in respect
of sales made by the Group on their behalf, and is recognized in profit or loss upon ticket sales.
Revenues from other operating businesses, including income derived from the
provision of freight forwarding, are recognized when the services are rendered.
The Group operates frequent flyer programs that provide travel awards
to program members based on accumulated miles. A portion of passengers revenue attributable to the award of frequent flyer benefits is deferred and recognized when the miles have been redeemed or have expired.
Interest income is recognized on a time-proportion basis using the effective
interest rate method.
The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have
been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.
Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the
Group will comply with all attached conditions. When the grant relates to an expense item, it is recognized as income on a systematic basis over the periods that the costs, which it is intended to compensate are expensed.
Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to profit or loss over the
expected useful life of the relevant asset by equal annual instalments.
In respect of aircraft and engines under operating leases, the Group has obligations to fulfil certain return conditions under the leases.
Provision for the estimated cost of these return condition checks is made on a straight-line basis over the term of the leases.
In respect
of aircraft and engines owned by the Group or held under finance leases, overhaul costs that meet specific recognition criteria are capitalized as a component of property, plant and equipment and are depreciated over the appropriate maintenance
cycles.
All other repairs and maintenance costs are charged to profit or loss as and when incurred.
Borrowing
costs directly attributable to the acquisition, construction or production of qualifying assets, i.e., assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalized as part of the cost of
those assets. The capitalization of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on
qualifying assets is deducted from the borrowing costs capitalized. All other borrowing costs are expensed in the period in which they are incurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the
borrowing of funds.
Income tax comprises current and deferred tax. Income tax relating to items recognized outside profit or loss is recognized outside profit or
loss, either in other comprehensive income or directly in equity.
Current tax assets and liabilities are measured at the amount expected
to be recovered from or paid to the taxation authorities, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period, taking into consideration interpretations and practices prevailing in the
countries in which the Group operates.
Deferred tax is provided, using the liability method, on all temporary differences at the end of
the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred
tax liabilities are recognized for all taxable temporary differences, except:
Deferred tax assets are recognized for all
deductible temporary differences, the carryforward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary
differences, the carryforward of unused tax credits and unused tax losses can be utilized, except:
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has
become probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be recovered.
Deferred
tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of
the reporting period.
Deferred tax assets and deferred tax liabilities are offset if and only if the Group has a legally enforceable right
to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which
intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to
be settled or recovered.
Goodwill is initially measured at cost, being the excess of the aggregate of the
consideration transferred, the amount recognized for
non-controlling
interests and any fair value of the Groups previously held equity interests in the acquiree over the identifiable net assets acquired
and liabilities assumed. If the sum of this consideration and other items is lower than the fair value of the net assets acquired, the difference is, after reassessment, recognized in profit or loss as a gain on bargain purchase.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually or
more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill as at 31 December. For the purpose of impairment testing, goodwill acquired in a
business combination is, from the acquisition date, allocated to each of the Groups cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other
assets or liabilities of the Group are assigned to those units or groups of units.
Impairment is determined by assessing the recoverable
amount of the cash-generating unit (group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is
recognized. An impairment loss recognized for goodwill is not reversed in a subsequent period.
Acquired computer software licenses are capitalized on the basis of
the costs incurred to acquire and bring to use the specific software. These costs are amortized using the straight-line method over their estimated useful lives of 5 years. Costs associated with developing or maintaining computer software programs
are recognized as expenses when incurred.
Others relate to the capitalized costs incurred to acquire the use right of certain
flight schedules (i.e. timeslots for flights taking off/landing) in Guangzhou Baiyun International Airport Co., Ltd. and Shanghai Pudong International Airport, respectively. These costs are amortized using the straight-line method over their
useful lives of 3 years.
Deferred pilot recruitment costs represent the costs borne by the Group in connection with securing a certain minimum period of employment of
pilots and are amortized on a straight-line basis over the anticipated beneficial period of 5 years, starting from the date the pilot joins the Group.
Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses.
When an item of property, plant and equipment is classified as held for sale or when it is part of a disposal group classified as held for sale, it is not depreciated and is accounted for in accordance with IFRS 5, as further explained in the
accounting policy for
Non-current
assets and disposal groups held for sale. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of
bringing the asset to its working condition and location for its intended use.
When each major aircraft overhaul is performed, its cost is
recognized in the carrying amount of the item of property, plant and equipment and is depreciated over the appropriate maintenance cycles. Components related to airframe overhaul cost, are depreciated on a straight-line basis over 5 to 7.5 years.
Components related to engine overhaul costs, are depreciated between each overhaul period using the ratio of actual flying hours and estimated flying hours between overhauls. Upon completion of an overhaul, any remaining carrying amount of the cost
of the previous overhaul is derecognized and charged to profit or loss.
Except for components related to overhaul costs, the depreciation
method of which has been described in the preceding paragraph, other depreciation of property, plant and equipment is calculated using the straight-line method to write off their costs to their residual values over their estimated useful lives, as
follows:
Where parts of an item of property, plant and equipment have different useful lives, the cost
of that item is allocated on a reasonable basis among the parts and each part is depreciated separately. Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at least at each financial year end.
An item of property, plant and equipment including any significant part initially recognized is derecognized upon disposal or when no future
economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognized in the statement of profit or loss in the year the asset is derecognized is the difference between the net sales proceeds and the carrying
amount of the relevant asset.
Construction in progress represents a building under construction, which is stated at cost less any
impairment losses, and is not depreciated. Cost comprises the direct costs of construction and capitalized borrowing costs on related borrowed funds during the period of construction. Construction in progress is reclassified to the appropriate
category of property, plant and equipment when completed and ready for use.
Investment properties are interests in land and buildings (including the leasehold interest under an operating lease for a property which would
otherwise meet the definition of an investment property) held to earn rental income and/or for capital appreciation, rather than for use in the production or supply of goods or services or for administrative purposes; or for sale in the ordinary
course of business. Such properties are measured initially at cost, including transaction costs. After initial recognition, the Group chooses the cost model to measure all of its investment properties.
Depreciation is calculated on the straight-line basis to write off the cost to its residual value over its estimated useful life. The estimated
useful lives are as follows:
The carrying amounts of investment properties measured using the cost method are reviewed for impairment when
events or changes in circumstances indicate that the carrying amounts may not be recoverable.
Any gains or losses on the retirement or
disposal of an investment property are recognized in profit or loss in the year of the retirement or disposal.
Where an indication of impairment exists, or when annual impairment testing
for an asset is required (other than inventories, construction contract assets, financial assets, investment properties and
non-current
assets/a disposal group classified as held for sale), the assets
recoverable amount is estimated. An assets recoverable amount is the higher of the assets or cash-generating units value in use and its fair value less costs of disposal, and is determined for an individual asset, unless the asset
does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs.
An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the
estimated future cash flows are discounted to their present value using a
pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An
impairment loss is charged to profit or loss in the period in which it arises in those expense categories consistent with the function of the impaired asset.
An assessment is made at the end of each reporting period as to whether there is an indication that previously recognized impairment losses may
no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognized impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to
determine the recoverable amount of that asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortization) had no impairment loss been recognized for the asset in prior years. A
reversal of such an impairment loss is credited to profit or loss in the period in which it arises, unless the asset is carried at a revalued amount, in which case the reversal of the impairment loss is accounted for in accordance with the relevant
accounting policy for that revalued asset.
Prepayments for land use right are initially stated at cost and subsequently recognized on the straight-line basis over the
agreed terms.
Advanced payments on acquisition of aircraft represent payments to aircraft manufacturers to secure deliveries of aircraft in future years,
including attributable borrowing costs, and are included in
non-current
assets. The balance is transferred to property, plant and equipment upon delivery of the aircraft.
Flight equipment spare parts are stated at the lower of cost and net realizable value. Cost is determined using the weighted average method.
The cost of flight equipment spare parts comprises the purchase price (net of discounts), freight charges, duty and other miscellaneous charges. Net realizable value is the estimated selling price of the flight equipment spare parts in the ordinary
course of business, less applicable selling expenses.
Financial assets are classified, at initial recognition, as financial assets at fair value through profit or loss, loans and receivables and
available-for-sale
financial investments, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. When financial assets are recognized
initially, they are measured at fair value plus transaction costs that are attributable to the acquisition of the financial assets, except in the case of financial assets recorded at fair value through profit or loss.
All regular way purchases and sales of financial assets are recognized on the trade date, that is, the date that the Group commits to purchase
or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.
The subsequent measurement of financial assets depends on their classification as follows:
Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial
recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of sale in the near term. Derivatives, including separated embedded derivatives, are also classified as
held for trading unless they are designated as effective hedging instruments as defined by IAS 39.
Financial assets at fair value through profit or loss are carried in the statement of
financial position at fair value with positive net changes in fair value presented as other income and gains and negative net changes in fair value presented as finance costs in profit or loss. These net fair value changes do not include any
dividends or interest earned on these financial assets, which are recognized in accordance with the policies set out for Revenue recognition and sales in advance of carriage above.
Financial assets designated upon initial recognition as at fair value through profit or loss are designated at the date of initial recognition
and only if the criteria in IAS 39 are satisfied.
Derivatives embedded in host contracts are accounted for as separate derivatives and
recorded at fair value if their economic characteristics and risks are not closely related to those of the host contracts and the host contracts are not held for trading or designated as at fair value through profit or loss. These embedded
derivatives are measured at fair value with changes in fair value recognized in profit or loss. Reassessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be
required or a reclassification of a financial asset out of the fair value through profit or loss category.
When
the fair value of unlisted equity investments cannot be reliably measured because (a) the variability in the range of reasonable fair value estimates is significant for that investment or (b) the probabilities of the various estimates
within the range cannot be reasonably assessed and used in estimating fair value, such investments are stated at cost less any impairment losses.
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized
(i.e., removed from the Groups consolidated statement of financial position) when:
When the Group has transferred its rights to receive cash flows from an asset or has entered into a
pass-through arrangement, it evaluates if and to what extent it has retained the risk and rewards of ownership of the asset. When it has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of
the asset, the Group continues to recognize the transferred asset to the extent of the Groups continuing involvement. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are
measured on a basis that reflects the rights and obligations that the Group has retained.
Continuing involvement that takes the form of a
guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.
The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial
assets is impaired. An impairment exists if one or more events that occurred after the initial recognition of the asset have an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably
estimated. Evidence of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy
or other financial reorganization and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
For financial assets carried at amortized cost, the Group first assesses whether impairment exists individually for financial assets that are
individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not,
it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to
be, recognized are not included in a collective assessment of impairment.
The amount of any impairment loss identified is measured as the
difference between the assets carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the
financial assets original effective interest rate (i.e., the effective interest rate computed at initial recognition).
The carrying
amount of the asset is reduced through the use of an allowance account and the loss is recognized in profit or loss. Interest income continues to be accrued on the reduced carrying amount using the rate of interest used to discount the future cash
flows for the purpose of measuring the impairment loss. Loans and receivables together with any associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred
to the Group.
If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring
after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a
write-off
is later recovered, the recovery is credited to
impairment charges in profit or loss.
In the case of equity investments classified as available for sale, objective evidence would include a significant or
prolonged decline in the fair value of an investment below its cost. Significant is evaluated against the original cost of the investment and prolonged against the period in which the fair value has been below its original
cost. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognized in profit or loss is
removed from other comprehensive income and recognized in profit or loss. Impairment losses on equity instruments classified as available for sale are not reversed through profit or loss. Increases in their fair value after impairment are recognized
directly in other comprehensive income.
The determination of what is significant or prolonged requires judgement.
In making this judgement, the Group evaluates, among other factors, the duration or extent to which the fair value of an investment is less than its cost.
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and
borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.
All financial liabilities are
recognized initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs.
The
Groups financial liabilities primarily include trade and other payables, derivative financial instruments and borrowings.
The subsequent measurement of financial liabilities depends on their classification as follows:
After initial recognition, borrowings are subsequently measured at amortized cost, using the effective interest rate method unless the effect
of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the effective interest rate amortization process.
Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the
effective interest rate. The effective interest rate amortization is included in finance costs in profit or loss.
Financial liabilities at fair value through profit or loss include financial liabilities held for
trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.
Financial liabilities are
classified as held for trading if they are acquired for the purpose of repurchasing in the near term. This category includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge
relationships as defined by IAS 39. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognized in profit or loss.
The net fair value gain or loss recognized in profit or loss does not include any interest charged on these financial liabilities.
Financial liabilities designated upon initial recognition as at fair value through profit or loss are designated at the date of initial
recognition and only if the criteria in IAS 39 are satisfied.
A financial liability is derecognized when the obligation under the liability is discharged or cancelled, or expires.
When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing
liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognized in profit
or loss.
For the purpose of the consolidated statement of cash flows, cash and cash equivalents comprise cash on hand and demand deposits, and short
term highly liquid investments that are readily convertible into known amounts of cash, are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which
are repayable on demand and form an integral part of the Groups cash management.
For the purpose of the consolidated statement of
financial position, cash and cash equivalents comprise cash on hand and at banks, including assets similar in nature to cash, which are not restricted as to use.
Provisions are
recognized when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; provided that the amount can be reliably estimated.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the
class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a
pre-tax
rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.
For the contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be
received under it, the present obligation under the contract is recognized and measured as a provision.
Leases where the Group has acquired substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are
capitalized at the leases commencement at the lower of the fair value of the assets and the present value of the minimum lease payments.
Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are
included in the current portion of obligation under finance leases and obligations under finance leases, respectively. The interest element of the finance costs is charged to profit or loss over the lease period so as to produce a constant periodic
rate of interest on the remaining balance of the liability for each period. Leased assets are depreciated using a straight-line basis over their expected useful lives to residual values.
For sale and leaseback transactions resulting in a finance lease, the sales proceeds are recorded as a borrowing and the relevant assets are
continued to be measured at their carry value.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.
Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease.
For sale and leaseback transactions resulting in an operating lease, differences between
sales proceeds and net book values are recognized immediately in profit or loss, except to the extent that any profit or loss is compensated for by future lease payments at above or below the market value, then the profit or loss is deferred and
amortized over the period for which the asset is expected to be used.
Assets leased out under operating leases are included in property, plant and
equipment in the statement of financial position. They are depreciated over their expected useful lives on a basis consistent with similar property, plant and equipment. Rental income is recognized on a straight-line basis over the lease term.
The Group participates in schemes regarding pension and medical
benefits for employees organized by the municipal governments of the relevant provinces. Contributions to these schemes are expensed as incurred.
The Group also implemented an additional defined contribution pension benefit scheme (annuity) for voluntary eligible employees. Contributions
are made based on a percentage of the employees total salaries and are charged to profit or loss as incurred.
The Group provides eligible retirees with certain post-retirement
benefits including retirement subsidies, transportation allowance as well as other welfare. The defined post-retirement benefits are unfunded. The cost of providing benefits under the post-retirement benefit plan is determined using the projected
unit credit actuarial valuation method.
Remeasurements arising from the post-retirement benefit plan, comprising actuarial gains and
losses, the effect of the asset ceiling (excluding net interest) and the return on plan assets (excluding net interest), are recognized immediately in the consolidated statement of financial position with a corresponding debit or credit to equity
through other comprehensive income in the period in which they occur. Remeasurements are not reclassified to profit or loss in subsequent periods.
Net interest is calculated by
applying the discount rate to the net defined benefit liability or asset. The Group recognizes the following changes in the net defined benefit obligation under Wages, salaries and benefits and Finance costs in profit or
loss:
The Group uses derivative financial instruments, such as forward currency contracts and interest rate swaps, to hedge its foreign currency risk
and interest rate risk, respectively. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as
assets when the fair value is positive and as liabilities when the fair value is negative.
Any gains or losses arising from changes in fair value of derivatives are taken directly to
profit or loss, except for the effective portion of cash flow hedges, which is recognized in other comprehensive income and later reclassified to profit or loss when the hedged item affects profit or loss.
At the inception of a hedge relationship,
the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting, the risk management objective and its strategy for undertaking the hedge. The documentation includes identification of the
hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the Group will assess the hedging instruments effectiveness of changes in the hedging instruments fair value in offsetting the exposure to
changes in the hedged items fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine
that they actually have been highly effective throughout the financial reporting periods for which they were designated.
Hedges which meet
the strict criteria for hedge accounting are accounted for as follows:
The change in the fair value of a hedging derivative is recognized in profit or loss. The change in the fair value of the hedged item
attributable to the risk hedged is recorded as a part of the carrying amount of the hedged item and is also recognized in profit or loss.
For fair value hedges relating to items carried at amortized cost, the adjustment to carrying value is amortized through profit or loss over
the remaining term of the hedge using the effective interest rate method. Effective interest rate amortization may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for changes in its fair
value attributable to the risk being hedged. If the hedged item is derecognized, the unamortized fair value is recognized immediately in profit or loss.
When an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment
attributable to the hedged risk is recognized as an asset or liability with a corresponding gain or loss recognized in profit or loss. The changes in the fair value of the hedging instrument are also recognized in profit or loss.
The
effective portion of the gain or loss on the hedging instrument is recognized directly in other comprehensive income in the hedging reserve, while any ineffective portion is recognized immediately in profit or loss.
Amounts recognized in other comprehensive income are transferred to profit or loss when the hedged transaction affects profit or loss, such as
when hedged financial income or financial expense is recognized or when a forecast sale occurs. Where the hedged item is the cost of a
non-financial
asset or
non-financial
liability, the amounts recognized in other comprehensive income are transferred to the initial carrying amount of the
non-financial
asset or
non-financial
liability.
If the hedging instrument expires or is sold, terminated or exercised without
replacement or rollover (as part of the hedging strategy), or if its designation as a hedge is revoked, or when the hedge no longer meets the criteria for hedge accounting, the amounts previously recognized in other comprehensive income remain in
other comprehensive income until the forecast transaction occurs or the foreign currency firm commitment is met.
Dividend distribution to the Companys shareholders is recognized as a liability in the consolidated financial statements in the period in
which the dividends are approved by the Companys shareholders. Proposed final dividends are disclosed in the notes to the financial statements.
The Group measures its derivative financial instruments and listed equity investments at fair value at the end of each reporting period. Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to
sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most
advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their
economic best interest.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair
value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for
which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
For assets and liabilities that are recognized in the financial statements on a recurring basis, the Group
determines whether transfers have occurred between levels in the hierarchy by reassessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
Business combinations are accounted for using the acquisition method. The consideration transferred is measured at the acquisition date fair
value which is the sum of the acquisition date fair values of assets transferred by the Group, liabilities assumed by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the
acquiree. For each business combination, the Group elects whether to measure the
non-controlling
interests in the acquiree that are present ownership interests and entitle their holders to a proportionate
share of net assets in the event of liquidation at fair value or at the proportionate share of the acquirees identifiable net assets. All other components of
non-controlling
interests are measured at
fair value. Acquisition-related costs are expensed as incurred.
When the Group acquires a business, it assesses the financial assets and
liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host
contracts of the acquiree.
If the business combination is achieved in stages, the previously held equity interest is
remeasured at its acquisition date fair value and any resulting gain or loss is recognized in profit or loss.
Any contingent consideration
to be transferred by the acquirer is recognized at fair value at the acquisition date. Contingent consideration classified as an asset or liability is measured at fair value with changes in fair value recognized in profit or loss. Contingent
consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity.
Goodwill is
initially measured at cost, being the excess of the aggregate of the consideration transferred, the amount recognized for
non-controlling
interests and any fair value of the Groups previously held equity
interests in the acquiree over the identifiable net assets acquired and liabilities assumed. If the sum of this consideration and other items is lower than the fair value of the net assets acquired, the difference is, after reassessment, recognized
in profit or loss as a gain on bargain purchase.
After initial recognition, goodwill is measured at cost less any accumulated impairment
losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill as at 31 December. For the
purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Groups cash-generating units, or groups of cash-generating units, that are expected to benefit from the
synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units.
Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units) to which the goodwill
relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognized. An impairment loss recognized for goodwill is not reversed in a subsequent period.
Where goodwill has been allocated to a cash-generating unit (or group of cash-generating units) and part of the operation within that unit
is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on the disposal. Goodwill disposed of in these circumstances is measured based on the
relative value of the operation disposed of and the portion of the cash-generating unit retained.
Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions
concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year are discussed below.
The Group recognizes traffic revenues in accordance with the
accounting policy stated in note 3 to the financial statements. Unused tickets are recognized in traffic revenues upon legal expiration. Management periodically evaluates the balance in the SIAC and records any adjustments, which can be material, in
the period the evaluation is completed.
These adjustments result from differences between the estimates of certain revenue transactions
and the timing of recognizing revenue for any unused air tickets and the related sales price, and are impacted by various factors, including a complex pricing structure and interline agreements throughout the industry, which affect the timing of
revenue recognition.
The Group operates frequent flyer programmes that provide
travel awards to programme members based on accumulated miles. A portion of passengers revenue attributable to the award credits of frequent flyer benefits is deferred and recognized when the award credits have been redeemed or have expired.
The deferment of revenue is calculated based on the estimated fair values of the unredeemed award credits and expected redemption rate. The fair values of the unredeemed award credits is estimated based on the yearly average flight ticket prices and
the expected redemption rate is estimated by reference to the historical trends of redemptions. Different judgements or estimates could significantly affect the estimated provision for frequent flyer programmes and the results of operations.
Provision for the estimated costs of return condition checks for aircraft and engines under operating leases is made based on the estimated
costs for such return condition checks and taking into account anticipated flying hours, flying cycle and time frame between each overhaul. These judgements or estimates are based on historical experience on returning similar airframe models, actual
costs incurred and aircraft status. Different judgements or estimates could significantly affect the estimated provision for costs of return condition checks.
The Group operates and maintains a defined retirement benefit plan
which provides eligible retirees with benefits including retirement subsidies, travel allowance as well as other welfare. The cost of providing the aforementioned benefits in the defined retirement benefit plan is actuarially determined and
recognized over the employees service period by utilizing various actuarial assumptions and using the projected unit credit method in accordance with the accounting policy stated in note 3 to the financial statements. These assumptions
include, without limitation, the selection of discount rate, annual rate of increase of per capita benefit payment and etc.. The discount rate is based on managements review of government bonds. The annual rate of increase of benefit payments
is based on the general local economic conditions.
Additional information regarding the retirement benefit plan is disclosed in note 37 to
the financial statements.
In assessing the amount of deferred tax assets that need to be
recognized in accordance with the accounting policy stated in note 3 to the financial statements, the Group considers future taxable income and ongoing prudent and feasible tax planning strategies. In the event that the Groups 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 Groups ability to utilize the tax benefits of deductible
tax losses carried forward in the future, adjustments to the recorded amount of net deferred tax assets and taxation expense would be made.
Provision for flight equipment spare parts
is made based on the difference between the carrying amount and the net
realizable value. The net realizable value is estimated based on
current market condition, historical experience and the Companys future operation plan for the aircraft and related spare parts. The net realizable value may be adjusted significantly due to the change of market condition and the future plan
for the aircraft and related spare parts.
Depreciation of components related to
airframe and engine overhaul costs is based on the Groups historical experience with similar airframe and engine models and taking into account anticipated overhaul costs, timeframe between each overhaul, ratio of actual flying hours and
estimated flying hours between overhauls. Different judgements or estimates could significantly affect the estimated depreciation charge and the results of operations.
Except for components related to engine overhaul costs, other property, plant and equipment are depreciated on a straight-line basis over the
estimated useful lives, after taking into account the estimated residual value. The useful lives are based on the Groups historical experience with similar assets and taking into account anticipated technological changes. The Group reviews the
estimated useful lives of assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The depreciation expense for future periods is adjusted if there are significant changes from previous
estimates.
The Group
tests whether property, plant and equipment and intangible assets have been impaired in accordance with the accounting policy stated in note 3 to the financial statements. The recoverable amount of the cash-generating unit has been determined based
on fair value less cost to sell and
value-in-use
calculations.
Value-in-use
calculations
use cash flow projections based on financial budgets approved by management and certain key assumptions, such as passenger-kilometers yield level, load factor, aircraft utilization rate and discount rates.
The Group determines whether goodwill is impaired at least on an
annual basis. This requires an estimation of the value in use of the cash-generating unit to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the
cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.
There are no unfulfilled conditions and other
contingencies related to subsidies that were recognized for the years ended 31 December 2017, 2016 and 2015.
The Group has one reportable operating segment, reported as
airline transportation operations, which comprises the provision of passenger, cargo, mail delivery, ground service and cargo handling services.
Other services including primarily tour operations, air catering and other miscellaneous services are not included within the airline
transportation operations segment, as their internal reports are separately provided to the CODM. The results of these operations are included in the other segments column.
Inter-segment transactions are entered into under normal commercial terms and conditions that would be available to unrelated third parties.
In accordance with IFRS 8, segment disclosure has been presented in a manner that is consistent with the information used by the
Groups CODM. The Groups CODM monitors the results, assets and liabilities attributable to each reportable segment based on financial results prepared under the PRC Accounting Standards for Business Enterprises (the PRC Accounting
Standards), which differ from IFRSs in certain aspects. The amount of each material reconciling items from the Groups reportable segment revenue and profit or loss, arising from different accounting policies are set out in note 7(c)
below.
The Groups revenues by geographical area are analysed based on the following criteria:
The major revenue-earning assets of the Group are its aircraft, all of which are registered in the PRC. Since
the Groups aircraft are deployed flexibly across its route network, there is no suitable basis of allocating such assets and the related liabilities by geographic area and hence segment
non-current
assets and capital expenditure by geographic area are not presented. Except the aircraft, most
non-current
assets (except financial instruments) are registered and located in the PRC.
Majority of the Groups PRC employees participate in the medical
insurance schemes organized by municipal governments.
In accordance with the relevant PRC housing regulations, the Group is
required to contribute to the state-sponsored housing fund for its employees. At the same time, the employees are required to contribute an amount equal to the Groups contribution. The employees are entitled to claim the entire sum of the fund
contributed under certain specified withdrawal circumstances. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits.
The Group also provides staff housing allowances in cash to eligible
employees. The total entitlement of an eligible employee is principally vested over a period of 20 years. Upon an eligible employees resignation or retirement, his or her entitlement would cease and any unpaid entitlement related to past
service up to the date of resignation or retirement would be paid.
The Group implements an early retirement scheme which allows
eligible employees to early retire on a voluntary basis. The Group undertakes the obligations to pay the early retirement employees basic salaries and certain welfare in the future on a monthly basis according to the early retirement scheme,
together with social insurance and housing fund pursuant to the regulation of the local government. The benefits of the early retirement scheme are calculated based on factors including the remaining number of years of service from the date of early
retirement to the normal retirement date and the benefits the early retirement employees enjoyed. The present value of the future cash flows expected to be required to settle the obligations is recognized as a provision in other long-term
liabilities.
Directors remuneration for the year, disclosed
pursuant to the Listing Rules, section 383(1)(a), (b), (c) and (f) of the Hong Kong Companies Ordinance and Part 2 of the Companies (Disclosure of Information about Benefits of Directors) Regulation, together with the remuneration of
supervisors, is as follows:
During the years ended
December 31, 2017, 2016 and 2015, no directors and supervisors waived their emoluments.
None of the Companys directors and supervisors was among
the five highest paid individuals in the Group for the year ended December 31, 2017 (2016 and 2015: Nil). The emoluments payable to the five highest paid individuals were as follows:
The number of five highest paid individuals whose emoluments fell within the following bands is as follows:
During the year ended December 31, 2017, no emoluments were paid by the Group to the directors,
supervisors and the five highest paid individuals as an inducement to join or upon joining the Group, or as a compensation for loss of office (2016 and 2015: Nil).
Pursuant to the Notice of the Ministry of Finance, the State Administration of Taxation and the General
Administration of Customs on Issues Concerning Relevant Tax Policies for Enhancing the Implementation of Western Region Development Strategy (Cai Shui [2011] No.58), and other series of tax regulations, enterprises located in the western
regions and engaged in the industrial activities as listed in the Catalogue of Encouraged Industries in Western Regions, will be entitled to a reduced corporate income tax rate of 15% from 2011 to 2020 upon approval from tax authorities.
CEA Yunnan, a subsidiary of the Company, obtained approval from tax authorities and has been entitled to a reduced corporate income tax rate of 15% from 1 January 2011. The Companys Sichuan branch, Gansu branch and Xibei branch also
obtained approvals from respective tax authorities and are entitled to a reduced corporate income tax rate of 15%. The subsidiaries incorporated in Hong Kong are subject to Hong Kong profits tax rate of 16.5% (2016:16.5%, 2015: 16.5%).
The Company and its subsidiaries except for CEA Yunnan, Sichuan branch, Gansu branch and Xibei branch and those incorporated in Hong Kong, are
generally subject to the PRC standard corporate income tax rate of 25% (2016: 25%, 2015: 25%).
A reconciliation of the tax expense
applicable to profit before tax at the statutory rates for the countries in which the Company and the majority of its subsidiaries are domiciled to the tax expense at the effective tax rates, are as follows:
The Group operates international flights to overseas destinations. There was no material overseas taxation for
the years ended December 31, 2017, 2016 and 2015, as there are avoidance of double tax treaties between the PRC and the corresponding jurisdictions (including Hong Kong) relating to the aviation business.
The calculation of basic earnings per share was based on the profit
attributable to equity holders of the Company of RMB6,342 million (2016: RMB4,498 million, 2015: RMB4,537 million) and the weighted average number of shares of 14,467,585,682 (2016: 13,811,136,000, 2015: 12,818,509,000) in issue during the year
ended December 31, 2017. The Company had no potentially dilutive options or other instruments relating to the ordinary shares in issue during the years ended December 31, 2017, 2016 and 2015.
On 27 April 2017, the Groups Board of
Directors came to a resolution to sell the equity interests of Shanghai Airlines Hotel Investment Management Co., Ltd. (Shanghai Airlines Hotel), a wholly owned subsidiary. On 29 December 2017, the Group entered into a share
transfer agreement with China Eastern Airlines Development Co., Ltd., a wholly owned subsidiary of CEA Holding, to transfer its 100% equity interests in Shanghai Airlines Hotel for a cash consideration of RMB7,100. The transfer is expected to be
completed within a year from the reporting date. At 31 December 2017, Shanghai Airlines Hotel was classified as a disposal group held for sale. The major classes of assets and liabilities (after eliminating of inter-company payable of RMB6
million) of Shanghai Airlines Hotel classified as held for sale as at 31 December 2017 are as follows:
During the year, the Group recognised an impairment loss of approximately RMB379 million relating to
aircraft, engines and flight equipment (2016: RMB29 million, 2015: RMB48 million). The recoverable amounts of these impaired aircraft, engines and flight equipment are determined at the higher of their fair value less costs to sell and value in use.
As at 31 December 2017, certain aircraft and buildings owned by the Group with an aggregate net carrying amount of approximately
RMB11,207 million (2016: approximately RMB17,559 million) were pledged as collateral under certain borrowing arrangements (note 34).
As at 31 December 2017, the ownership certificates of buildings with a net carrying amount of RMB1,397 million (31 December
2016: RMB1,455 million) have not been obtained. The directors of the Company are of the opinion that the Group legally owns and has the rights to use the aforesaid buildings, and that there is no material adverse impact on the overall financial
position of the Group.
As at 31 December 2017, the fair value of the investment properties was approximately RMB628 million
(2016: RMB604 million) according to a valuation performed by an independent professionally qualified valuer.
The investment properties are
leased to third parties and related parties under operating leases. Rental income totalling RMB39 million (2016: RMB37 million, 2015: RMB30 million) was received by the Group during the year in respect of the leases.
As at 31 December 2017, the carrying amount of the investment properties for which the ownership certificates of buildings have not been
obtained was RMB112 million (2016: RMB119 million). The directors of the Company are of the opinion that the Group legally owns and has the rights to use the aforesaid investment properties, and that there is no material adverse impact on the
overall financial position of the Group.
The following table illustrates the fair value measurement hierarchy of the Groups investment properties:
During the year, there were no transfers of fair value measurements between Level 1 and Level 2 and
no transfers into or out of Level 3 (2016: Nil).
The fair values of the buildings with comparable market price have been estimated
using significant observable inputs and calculated by adjusted market price considering the condition and location of the buildings.
The
fair values of the buildings without comparable market price have been estimated by a discounted cash flow valuation model using significant unobservable inputs such as estimated rental value, rent growth, long term vacancy rate and discounted rate.
Prepayments for land use right represent unamortized prepayments for land use rights.
Particulars of the principal associates, which are limited liability companies, are as follows:
In 2008, the Company entered into an agreement with United Technologies International Corporation (Technologies International) to
establish Shanghai P&W, in which the Company holds a 51% interest. According to the shareholders agreement, Technologies International has the power to govern the financial and operating policies and in this respect the Company accounts
for Shanghai P&W as an associate.
Particulars of the principal joint ventures, which are limited liability companies, are as follows:
Under a joint venture agreement with a joint venture partner of Technologies Aerospace dated 10 March 2003, both parties have agreed to
share the control over the economic activities of Technologies Aerospace with the joint venture partner. Any strategic financial and operating decisions relating to the activities of Technologies Aerospace require the unanimous consent of the
Company and the joint venture partner.
The following table illustrates the aggregate financial information of the Groups joint
ventures that were not individually material:
The above investments consist of investments in equity securities which were designated as
available-for-sale
investments and have no fixed maturity dates or coupon rates.
As at
31 December 2017, certain unlisted equity investments were stated at cost less impairment because the range of reasonable fair value estimates is so significant that the directors are of the opinion that their fair value cannot be measured
reliably. The Group does not intend to dispose of them in the near future.
Movements in the Groups provision for impairment of flight equipment spare parts were as follows:
An ageing analysis of the trade and notes receivables as at the end of the reporting period, based on the
invoice/billing date, was as follows:
Trade and notes receivables that were neither overdue nor impaired relate to a large number
of independent sales agents for whom there was no recent history of default.
As at 31 December 2017, trade and notes receivables of
RMB131 million (2016: RMB267 million) were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, the directors of the Company are of the opinion that no
provision for impairment is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The ageing analysis of these trade and notes receivables was as
follows:
Movements in the Groups provision for impairment of trade and notes receivables were as follows:
Included in the above provision for impairment of trade receivables is a provision for individually impaired
trade receivables of RMB46 million (2016: RMB66 million) with a carrying amount before provision of RMB46 million (2016: RMB66 million).
The remaining provision of RMB42 million relate to impaired trade receivables with a carrying amount before provision of
RMB123 million as at 31 December 2017 which customers that were in financial difficulties or were in default in interest and/or principal payments and only a portion of the receivables is expected to be recovered.
The net impacts of recognition and reversal of provisions for impaired receivables have been included in Impairment charges in
profit or loss (note 10). Amounts charged to the allowance account are generally written off when there is no expectation of recovering.