GOREADY

Transcription

1 (A joint stock limited company incorporated in the People s Republic of China with limited liability) Stock Code ANNUAL REPORT 2012

2 GOREADY

3 CONTENTS 2 International Airline Network 4 Financial Highlights (prepared in accordance with International Financial Reporting Standards) 5 Summary of Accounting and Business Data (prepared in accordance with PRC Accounting Standards) 6 Summary of Selected Operating Data 8 Fleet 10 Significant Events 12 Chairman s Statement 20 Review of Operations and Management s Discussion and Analysis 29 Report of Directors 59 Corporate Governance 82 Report of the Supervisory Committee 85 Social Responsibilities 88 Financial Statements prepared in accordance with International Financial Reporting Standards Independent Auditor s Report Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Company s Balance Sheet Consolidated Cash Flow Statement Consolidated Statement of Changes in Equity Notes to the Financial Statements 209 Supplementary Financial Information 213 Corporate Information 216 Company Profile 1

4 CHINA EASTERN AIRLINES CORPORATION LIMITED INTERNATIONAL AIRLINE NETWORK Hamburg Korea Seoul, Inchon, Gimpo Ch'ongju Wuan, Kwangju Cheju Pusan Taegu London Frankfurt am Main Moscow Paris Rome Dubai Kathmandu New Delhi Dhaka Mandalay Kolkata Vientiane Beijing Shanghai Okinawa Saipan Krung Thep (Bangkok) Phuket Siem Reap Phnom Penh Male Kuala Lumpur Singapore Bali Cairns Perth Adelaide Brisbane Sydney Melbourne Canberra Code-Sharing Flights 2

5 3 ANNUAL REPORT 2012 Vancouver San Francisco Hawaii Las Vegas Dallas Miami Washington New York Boston Chicago Los Angeles Fukushima Sendai Nagasaki Fukuoka Hiroshima Okayama Komatsu Sapporo Niigata Kagoshima Matsuyama Osaka Shizuoka Tokyo Nagoya Japan Auckland Wellington Christchurch

6 CHINA EASTERN AIRLINES CORPORATION LIMITED FINANCIAL HIGHLIGHTS (Prepared in accordance with International Financial Reporting Standards) Expressed in RMB millions Year ended 31 December Revenues 41,073 38,989 73,804 82,403 85,253 Other operating income 672 1, ,062 1,720 Operating expenses (56,828) (38,456) (68,765) (79,292) (82,745) Operating profit/(loss) (15,083) 1,821 5,697 4,173 4,228 Finance income/(cost), net (267) (1,549) (347) 561 (1,349) Profit/(loss) before income tax (15,256) 249 5,418 4,841 3,012 Profit/(loss) for the year attributable to the equity shareholders of the Company (15,269) 169 4,958 4,576 2,808 Earning/(loss) per share attributable to the equity shareholders of the Company (1) (RMB) (1) (3.14) At 31 December Cash and cash equivalents 3,451 1,735 3,078 3,861 2,512 Net current liabilities (43,458) (28,648) (27,184) (29,679) (35,948) Non-current assets 62,652 64,988 91, , ,144 Long term borrowings, including current portion (15,628) (16,928) (27,373) (30,321) (32,856) Obligations under finance leases, including current portion (20,809) (19,370) (19,208) (20,261) (21,858) Total share capital and reserves attributable to the equity shareholders of the Company (13,097) 1,235 15,271 20,126 22,926 (1) The calculation of earnings/(loss) per share for 2007 and 2008 are based on the consolidated profit/(loss) attributable to the equity shareholders of the Company and 4,866,950,000 shares in issue. The calculation of earnings per share for 2009 is based on the consolidated profit attributable to the equity shareholders of the Company divided by the weighted average number of shares of 6,436,828,000; the calculation of earnings per share for 2010 is based on the consolidated profit attributable to the equity shareholders of the Company divided by the weighted average number of 11,149,426,000 ordinary shares in issue. The calculation of earnings per share for 2011 and 2012 is based on the consolidated profit attributable to the equity shareholders of the Company divided by 11,276,538,860 ordinary shares in issue. (1) 4,866,950,000 6,436,828,000 11,149,426,000 11,276,538,860 REVENUES (RMB millions) OPERATING PROFIT/(LOSS) (RMB millions) 4,228 85,

7 ANNUAL REPORT 2012 SUMMARY OF ACCOUNTING AND BUSINESS DATA (Prepared in accordance with PRC Accounting Standards) PROFIT FOR THE YEAR ENDED 31 DECEMBER 2012 RMB million Net profit 3,300 Income from main operations 9,878 Income from other operations 991 Income from investments 234 Net income outside business 2,688 MAJOR ACCOUNTING DATA & FINANCIAL INDICATORS (Expressed in RMB Million) Operation revenue 83, , Net profit attributable to the equity shareholders of the Company 4, , Total assets 112, , Shareholders equity 22, , Earnings per share (RMB) Net assets per share (RMB) Notes: 1. Calculation of major financial indicators: Earnings per share = net profit weighted average number of ordinary shares outstanding Net assets per share = shareholders equity at the end of the year total number of ordinary shares at the end of the year 1. 5

8 CHINA EASTERN AIRLINES CORPORATION LIMITED SUMMARY OF SELECTED OPERATING DATA Change Capacity ATK (available tonne kilometres) (ATK) 19, , % (million) Domestic routes 10, , % International routes 8, , % Regional routes % ASK (available seat kilometres) (ASK) 136, , % (million) Domestic routes 95, , % International routes 36, , % Regional routes 5, , % AFTK (available freight tonne (AFTK) 7, , % kilometres) (million) Domestic routes 1, , % International routes 5, , % Regional routes % Hours flown (thousand) 1, , % Traffic RTK (revenue tonne kilometres) (RTK) 14, , % (million) Domestic routes 7, , % International routes 6, , % Regional routes % RPK (revenue passenger (RPK) 109, , % kilometres) (million) Domestic routes 76, , % International routes 29, , % Regional routes 3, , % RFTK (revenue freight tonne (RFTK) 4, , % kilometres) (million) Domestic routes % International routes 3, , % Regional routes % Number of passengers carried 73, , % (thousand) Domestic routes 62, , % International routes 7, , % Regional routes 2, , % Weight of freight carried (kg) (million) 1, , % Domestic routes % International routes % Regional routes % 6

9 ANNUAL REPORT 2012 SUMMARY OF SELECTED OPERATING DATA Change Load factors Overall load factor (%) (%) pts Domestic routes pts International routes pts Regional routes pts Passenger load factor (%) (%) pts Domestic routes pts International routes pts Regional routes pts Freight load factor (%) (%) pts Domestic routes pts International routes pts Regional routes pts Yields and costs Revenue tonne - kilometres yield (RMB) % Domestic routes % International routes % Regional routes % Passenger - kilometres yield (RMB) % Domestic routes % International routes % Regional routes % Freight tonne - kilometres yield (AFTK) (RMB) (AFTK) % Domestic routes % International routes % Regional routes % 7

10 CHINA EASTERN AIRLINES CORPORATION LIMITED FLEET FLEET STRUCTURE AS AT 31 DECEMBER 2012 No. Passenger aircraft Model Selfowned and under finance lease Under operating lease Sub-total Wide-body aircraft A A A A R 7 7 B Narrow-body aircraft A A A B B B B CRJ EMB 145LR Total number of passenger aircraft Freighter MD-11F 3 3 A R 3 3 B ER B F 2 2 B777F 6 6 Total number of freighters Total number of passenger aircraft and freighters No. of custody Business aircraft 12 Total number of aircraft 428 8

11 ANNUAL REPORT 2012 FLEET FUTURE AIRCRAFT PLAN Model Introduction Retirement Introduction Retirement Introduction Retirement Introduction Retirement Introduction Retirement Passenger aircraft () A320 Series (A320) A330 Series (A330) A340 Series (A340) 1 4 B737NG B B ER Regional aircraft () Freighter () A F 3 B B757F 2 MD11 2 Total Note: The abovementioned quantity and timing for the introduction and retirement of aircraft shall be subject to adjustment based on market conditions. 9

12 CHINA EASTERN AIRLINES CORPORATION LIMITED SIGNIFICANT EVENTS 27 February 2012 The Company and CAE Canada entered into an agreement for the introduction of a Gulfstream G450/550 flight simulator, which is the first flight simulator for business aircraft to be introduced in China. 2 March 2012 The Company s Xinhuanet Aircraft made its first flight. This colorful aircraft is the first in China named after a network media entity. 20 March 2012 The Company was ranked among the 2012 Top 25 Companies in China with the Best Corporate Social Responsibility by Fortune China Magazine. 5 May 2012 The Company s air-rail transportation product Air-Rail Service served the first batch of travelers, marking the official commencement of the first air-rail transportation product in China. 6 June 2012 China Cargo Airlines made an official announcement regarding its intent to join the SkyTeam Cargo Alliance at the China Aviation Logistics Exhibition. 21 June 2012 The Company entered into a loan facility agreement in the amount of RMB20 billion and strategic cooperation with Shanghai Pudong Development Bank Co., Ltd. 1 July 2012 The Company and WestJet Airlines Ltd., based in Canada, commenced code sharing cooperation on flights from Vancouver to the Company s domestic destinations. 24 August 2012 Eastern Air Overseas, a subsidiary of the Company, entered into a shareholders agreement with respect to JetStar Hong Kong with JetStar International, a whollyowned subsidiary of Qantas, to establish JetStar Hong Kong as a Hong Kong-based and Jetstar-branded low-cost carrier. 2 September 2012 The Company entered into a cooperation agreement with Niulanshan No. 1 Secondary School in Beijing regarding aviation experiment class, pursuant to which an Aviation Experiment Class would be jointly established for training talented individuals for aviation. 10

13 ANNUAL REPORT 2012 SIGNIFICANT EVENTS 30 October 2012 The Company made its first flight from Shanghai to Cairns in Australia. This is the first scheduled direct flight from China to Cairns. 16 November 2012 The Company was awarded the Golden Tripod Award at the 8th Annual Meeting of China s Securities Market. 26 November 2012 China United Airlines, a wholly-owned subsidiary of the Company, completed its joint reorganization with the former Hebei Branch of the Company and became the New China United Airlines, which is principally based at the Nanyuan Airport in Beijing. 22 November 2012 The Company was recognized as a Listed Company with the Most Valuable Brand at the 2012 Hong Kong China Securities Golden Bauhinia Award ceremony, and Mr. Liu Shaoyong, Chairman of the Company, was recognized as a Most Influential Leader December 2012 The Company was ranked 25th among the Top 50 Most Valuable Chinese Brands by WPP, a global brand communication firm. December 2012 The Company was recognized among the Top 100 Employer in China in 2012.

14 CHINA EASTERN AIRLINES CORPORATION LIMITED CHAIRMAN S STATEMENT Dear shareholders, I am pleased to present the report on the operating results of China Eastern Airlines Corporation Limited (the Company or CEA ) and its subsidiaries (collectively, the Group ) for the year ended 31 December On behalf of the entire staff of the Group, I would like to extend my sincere thanks to the shareholders of the Company (the Shareholders ). 12 Liu Shaoyong Chairman

15 ANNUAL REPORT 2012 CHAIRMAN S STATEMENT In 2012, the global economic downturn resulted in: (i) decreased demand in both international and domestic passenger traffic and freight markets; (ii) greater cost pressures brought by consistently high crude oil prices; and (iii) intensified competition in domestic routes due to preference passengers for railway over airline transportation becoming more common. Meanwhile, the Group s international routes were also affected by unforeseen international events. Facing this complex international and domestic environment, the Group has, under the premise of ensuring flight safety, maintained positive profitability by optimising route and fleet structure, enhancing sales management in both passenger transportation and freight transportation, maintaining stringent cost control, strengthening the development of information technology and improving the quality of its services. Safety management The Group maintained a stable safety system in The Group continued to strengthen its construction of the Safety Management System (SMS); promulgated and issued work plans and implementation proposals of the SMS with the relevant teams; commenced specific restoring measures regarding the risks such as lighting strike, hard landing and communication failure; established the Nantong airport training base to reinforce training on flying skills; and 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, practice and discipline and services. Such rating system not only optimised our incentive programs, but also enhanced our environment and culture to promote safe operations. The Company assessed and appointed 361 five-star captains during the first assessment at the end of (SMS)SMS

16 CHINA EASTERN AIRLINES CORPORATION LIMITED CHAIRMAN S STATEMENT Passenger traffic business Developing hub networks In 2012, for domestic routes, the Group increased the frequency of flights in certain express and sub-express routes, including Shanghai to Guangzhou, Chongqing, Zhengzhou and Changsha. The Group essentially provided full coverage over routes from Kunming to other provincial capitals in the PRC by leveraging on opportunities arising from the release of time slots at the new Kunming airport, which introduced new destinations such as Yinchuan, Jinan and Xining. The Group introduced new flights from Ningbo, Hefei and Nanchang to Northwest China via Xi an and increased the frequency of flights from Xi an to Northwest China by leveraging on opportunities arising from the release of time slots at a new terminal at the Xi an airport. For international routes, the Group introduced four weekly routes from Shanghai to Cairns, Australia, and increased the frequency of flights from Shanghai to Paris, Rome, Sydney and Hawaii during peak seasons. Given the change of relationship between China and Japan and related market factors, the Group reduced its flight capacity allocated to routes between the two countries after September 2012, and reallocated resources to Southeast Asian routes, as well as increased the frequency of flights from Shanghai to Ho Chi Minh, Kuala Lumpur, Bangkok and New Delhi. 4 The Group steadily fostered the construction of flight system for its core hub in Shanghai and regional hubs in Kunming and Xi an by introducing new flight destinations and increasing the frequency of certain flights, thereby enhancing its transfer and connection capability in these hub markets. By the end of 2012, a preliminary flight frequency of four-in-four-out was established at Shanghai Pudong International Airport, with four-in-four-out currently also being established at Kunming Airport, which increased the transfer and connection services via Kunming to Southeast Asia, South Asia and Western Asia. Xi an Airport is also in the process of establishing a three-in-three-out flight frequency. In addition, the Group actively strengthened its position in the Beijing market. Facing the relatively saturated time slots and flight resources at Beijing Capital International Airport, the Group integrated China United Airlines Co., Ltd. ( China United Airlines ), the sole operator of Beijing Nanyuan Airport and the Hebei Branch of the Company, to establish the new China United Airlines. The new China United Airlines has fully utilized time slots at Nanyuan Airport and added six B737 aircraft, which increased the frequency of flights from Beijing Nanyuan to Shenzhen, Xiamen and Changsha, and has enhanced the Group s market share in Beijing. 6 B737 In 2012, the Company implemented code-sharing programs covering 274 destinations along 429 routes with SkyTeam member airlines, as well as 130 destinations along 142 routes with non-skyteam member airlines, which has further broadened the coverage of the Group s route network

17 ANNUAL REPORT 2012 CHAIRMAN S STATEMENT Enriching the categories of marketing products In 2012, the Group took the initiative to develop marketing products based on the characteristics of different markets and routes to expand its sales channels, broaden its customer base and increase its flight revenue. The Group designed four core products of the (Eastern Series) in accordance with different levels of demand and consumption, including (Eastern Premium) which targets high-quality business travelers, providing them with concierge-style, full accompaniment services; (Eastern Privileges) which targets potential high-value travelers, providing them with upgraded experiences and door-to-door pickup services to and from the airport; (Eastern Far Reach) which targets travelers with special needs, providing them with one-stop services covering visa application before departure to ticketing reservation; and (Eastern Shuttle) which targets travelers to Yunnan, providing them with itinerary design, transit and destination value-added services. 4 In 2012, the Group cooperated with the Shanghai Railway Bureau to launch Air-Rail Pass Transportation products in 13 cities in the Yangtze River Delta including Nanjing, Hangzhou and Suzhou. The Group s domestic and international flights together with its high-speed railway products at Shanghai Hongqiao International Airport and Shanghai Pudong International Airport have formed a air-rail two-way transportation product, which has helped the Group broaden its customer base. 13 Meanwhile, in response to the low seasons, the Group launched travel products such as Journey to the Three Regions in Southern China (Yunnan, Hainan and Jiangnan) and Journey to the West (trip to Greater Western China via Xi an), which has effectively enhanced passenger load factor for flights during low seasons. Developing customer resources The Group actively explored and expanded its customer base of high-end business travelers to accelerate the development of group clients. In 2012, the Group added over 200 group clients, of which 15 are global group clients. Currently, the total number of group clients amounts to over 4,500, which has contributed to increased sales revenues ,500 The Group fully promoted the development of Eastern Miles membership business. In order to attract more members, and to provide members better experience in terms of diversity, comprehensiveness and flexibility, the Group strengthened its cooperation with retail store owners by increasing the number of co-operative stores where members may accumulate and redeem points to 74, covering various industries such as financial services, hotel, car rental and health services. The total number of exchangeable goods through this program has increased to over 850 items. By the end of 2012, the Group had over 3 million new Eastern Miles members, with a total of 18 million members. Members of Eastern Miles can participate in the frequent flyer mileage accumulation and the redemption programs of 19 SkyTeam member airlines, as well as enjoy other member benefits. Elite members also have access to our 525 VIP lounges across the world ,

18 CHINA EASTERN AIRLINES CORPORATION LIMITED CHAIRMAN S STATEMENT Freight transportation business In 2012, the Group reduced its allocation of flight capacity for freight transportation in response to weak demand in the freight transportation market. Meanwhile, the Group adjusted and optimised its freight transportation flight routes by changing the interline routes of Shanghai Pudong- Copenhagen-Paris-Shanghai Pudong to Shanghai Pudong-Copenhagen and Shanghai Pudong-Paris routes, and canceled our inbound domestic destination at Tianjin for the Shanghai Pudong-Chicago route. In terms of marketing of freight transportation, the Group promoted the construction of cabin space and freight price control system and strengthened its income management by establishing sales models at headquarters; increased sales efforts for early flight express mail products so as to boost the sales of seasonal goods; facilitated the integration of Yangtze River Delta market while planning a regional sales network in Yangtze River Delta to conduct joint sales in the region. In order to enhance the management of its freight transportation business and increase the efficiency and quality of operations, the Group established a global freight transportation command center to fully control the management of 58 freight terminals; completed the implementation of 20 domestic and 22 international station benchmarks in accordance with Cargo2000 (a quality management standard for international aviation freight transportation industry); strengthened the construction of quality management system; and revised the operation standard of general cargo and express mail, which reduced the time between receipt and delivery of goods at its Shanghai station Cargo2000 In addition, the Group s various efforts facilitated the entering of China Cargo Airlines Co., Ltd. ( China Cargo Airlines ) to the SkyTeam Cargo Alliance. On 6 June 2012, the Company formally signed a letter of intent to join the SkyTeam Cargo Alliance, with official membership to commence in Cost control The Group strictly controlled its budget and reinforced cost control by adopting a comprehensive budget management system. The Group also proactively promoted all-levels integration of its procurement resources and streamlined and optimised the procurement process, as well as implemented entireprocess control over procurement. The Group implemented approximately 700 instances of centralised procurement with respect to information technology, automobile, jet fuel and in-flight supplies in Meanwhile, the Group also strengthened DOC (Direct Operation Cost) control and management by streamlining aircraft models and optimising route structure. The Group also reduced fuel consumption by way of precise refueling based on its flight plans, which effectively reduced fuel costs by approximately RMB130 million in In addition, the Group actively explored financing channels and sought to reduce its finance costs by means of various financial instruments. In 2012, the Company issued super short-term commercial paper of RMB4 billion with a consolidated finance costs that were lower than The People s Bank of China benchmark interest rate. IT 700 DOC

19 ANNUAL REPORT 2012 CHAIRMAN S STATEMENT Information technology The Group has always attached great importance to the enhancement of information technology, and has sought to implement information technology that contributes to the continued development of the Group s business. In 2012, the Group further optimised its electronic sales service system, including its official website, call centres and mobile application E (China Eastern Mobile E), which serves to enhance customer experience while increasing the Group s direct sales. The Group upgraded its official domestic website and launched nine overseas websites. The Group fostered the transformation and upgrade of call centres and gradually expanded this system to all branches, subsidiaries and sales departments. In view of the increasing popularity of smart phones, the Group introduced the new version E (China Eastern Mobile E) in 2012, providing a streamlined customer experience with tickets booking, flight status checking and online check-in and international tickets sales services via a domestic mobile phone application. E 9 E Meanwhile, the Group took a proactive approach towards the development of self-service check-in functions and continuous improvement of an online check-in system to offer more convenient self-services for passengers. Service quality Adhering to the concept of customer satisfaction above all else and providing heart-to-heart service to our customers, the Group optimised and adjusted its fleet structure while proactively pushing the enhancement and renovation of its hardware and software service products. In 2012, the Group s newly upgraded infrastructure and facilities, including ground VIP lounges, waiting areas and check-in areas in regional hubs and key markets such as Xi an, Kunming and Beijing Nanyuan, as well as commenced operations of the Company s exclusive VIP lounges at Guangzhou and Shenzhen airports. The Group advocated a green, environmentally friendly and healthy catering concept and joined hands with world-renowned hotel groups to design innovative cuisine to be served in first class and business class cabins. The Group also promoted customized service of Inflight Meals Ordered Before Flight for first class and business class cabins and high-end customers. The content of entertainment systems in the passenger cabins has been continuously improved to ensure diversified in-flight entertainment experience of passengers. In addition, under circumstances where flights were substantially affected due to bad weather and other unexpected events, the Group increased the number of information dissemination platforms and optimised procedures to address such issues by providing timely flight status information for customers to facilitate itinerary adjustments. 17

20 CHINA EASTERN AIRLINES CORPORATION LIMITED CHAIRMAN S STATEMENT Transformation and development Working around the transformation target of transforming from an air passenger and freight carrier to an integrated aviation services and logistics services provider, the Group took a first step towards transformation by making a concerted effort to push forward the integration and allocation of internal resources in Driven by information technology, passenger transportation transformation was driven by improved network capability, product marketing and customer demand. The Group further explored customer resources and steadily promoted the construction of the Group s electronic business platform and mobile service platform. As for freight traffic transformation, the Group integrated China Cargo Airlines and (Shanghai Eastern Airlines Logistics Co., Ltd) ( Eastern Logistics ), which developed new businesses such as freight expressway, logistics solutions and aviation trading on the basis of its existing strong traditional storage and freight transportation business, which enabled the Group to build a general logistics platform for logistics services. Meanwhile, in its proactive response to the rapid development of lowcost airlines around the world, the Group entered into a shareholders agreement with Qantas Airways Limited ( Qantas ) in 2012, pursuant to which a joint venture low-cost carrier will be established in Hong Kong that will adopt the low-cost Jetstar brand owned by Qantas. As of the date of this announcement, Jetstar Hong Kong Limited ( Jetstar Hong Kong ) had obtained the certificate of incorporation issued by the Hong Kong Special Administrative Region. OUTLOOK FOR 2013 The Group cautions readers of this report. As an air transport enterprise that provides public service functions, the operations of the Group are closely linked to political and economic developments both in the PRC and abroad. As such, the Group s operations as well as that of the aviation industry are, to a significant extent, subject to risks associated with unforeseen occurrences of geopolitical events and other significant events. The 2012 annual results of the Group includes certain forward-looking statements with respect to the future plans of the Group and the outlook of international and domestic economic conditions and the general condition of the global aviation industry. Such forward-looking statements are subject to many uncertainties and risks beyond our control, and the actual results of the Group may vary materially from these forward-looking statements. You are cautioned not to place undue reliance on such forward-looking statements. In 2013, there is still uncertainty in the global economy as China s economic growth has generally slowed down but has maintained relatively steady and rapid development. Under this operation environment, the Group, with the premise of maintaining safe operations, intends to achieve its goal of strengthening its management of passenger and freight carriers and strictly controlling cost to achieve improved operational efficiency. 18

21 ANNUAL REPORT 2012 CHAIRMAN S STATEMENT For the passenger traffic business, the Group expects to allocate flight capacity and routes precisely and properly and to maintain accurate control of cabin space and refine pricing management. The Group will seek to increase the proportion of direct sales by expanding its sales and marketing platform; and step up its efforts to develop transition and tourism products by leveraging on its 72-hours visa-free stay policy in Shanghai and Beijing. The Group also seeks to further enhance its cooperation with both members and nonmembers airlines of the SkyTeam Alliance. Performance efficiency will also be enhanced through strengthened sales and marketing management measures and increased operating efficiency. 72 In terms of freight logistics, the Group will seek to adjust the structure of its freight fleet and route network, based on existing market conditions. Operating costs are expected to be reduced by controlling the allocation of flight capacity. Building on its steady freight carrier business, the Group will seek to enhance the operation management of bellyhold space to increase freight traffic revenue. Meanwhile, the Group will actively expand its presence in the freight logistics market by enhancing its ability to provide logistics solutions. The Group will continue to implement comprehensive budget management measures and strengthen the overall control in implementating this budget. Fuels cost can be decreased through reduced fuel consumption by way of continued route optimisation, continued operational management refinement and continued weight reduction on board flights. Procurement costs will also be reduced by implementing centralised procurement measures and increasing bargaining power on bulk purchase. Maintenance cost can be reduced by enhancing engine overhaul capabilities and increasing maintenance monitoring. Finance cost can be reduced by the use of various financial instruments. Through these various efforts and controls over various costs and expenses, the Group s profitability can be enhanced. While the Group will focus on traditional passenger and freight transportation operation, it will also actively promote the transformation and development of both operations. The Group will also further improve its electronic business platforms and mobile service platforms to facilitate the transformation of passenger traffic operation through optimisation of network flight capacity, expansion of aviation value chains, and enrichment of product portfolio and exploration of customer resources. For the transformation of freight logistics, the Group will benefit from economies of scale from the consolidation of its freight logistics business, which will speed up the transformation of freight transportation business and establish a platform for freight expressway to create a competitive freight expressway brand. The Group will also strengthen its truck transportation business to establish new revenue streams for freight transportation. An innovative storage approach will be adopted to expand the single storage function of cargo warehouses into a distribution centre with multiple functions such as storage, cargo management and cargo delivery. 19

22 CHINA EASTERN AIRLINES CORPORATION LIMITED REVIEW OF OPERATIONS AND MANAGEMENT S DISCUSSION AND ANALYSIS With Shanghai as its core hub and Xi an and Kunming as regional hubs, the Group has established an air transport network throughout China and extending to Asia, Europe, North America and Oceania. After joining the SkyTeam Alliance, the route network of the Group expanded to cover more than 1,000 destinations in 187 countries around the world. To date, the number of Eastern Miles members of the frequent flyer program of the Group has exceeded 18 million members. Ma Xulun Vice Chairman, President 20

23 ANNUAL REPORT 2012 REVIEW OF OPERATIONS AND MANAGEMENT S DISCUSSION AND ANALYSIS The Group currently has 10 branches and 50 overseas operation units and offices around the world, in addition to 24 wholly or partly owned subsidiaries including (Shanghai Airlines Co., Ltd.) ( Shanghai Airlines ), (China Eastern Airlines Yunnan Co., Ltd.), (Shanghai Eastern Airlines Logistics Co., Ltd) and China United Airlines. The fleet of CEA comprises over 400 large- and medium-sized aircraft with an average age of less than seven years, providing services to over 73 million travelers around the world every year ,300 In 2012, the total traffic volume of the Group was 14, million tonnekilometres, representing an increase of 7.49% from last year. Revenue of the Group was RMB85,253 million with total profit of RMB2,808 million. Net profit attributable to the equity shareholders of the Company was RMB2,954 million. 14, % In 2012, the Company accounted for 50.20% and 38.40% of the total market share at Hongqiao International Airport and Pudong International Airport, respectively, in terms of total flight take-offs and landings and accounted for 48.20% and 36.60% of the total market share at Hongqiao International Airport and Pudong International Airport, respectively, in terms of passenger throughput % 38.40% 48.20% 36.60% 21

24 CHINA EASTERN AIRLINES CORPORATION LIMITED REVIEW OF OPERATIONS AND MANAGEMENT S DISCUSSION AND ANALYSIS REVIEW OF OPERATING RESULTS The following discussion and analysis should be read together with the Group s audited financial statements and the accompanying notes prepared in accordance with International Financial Reporting Standards ( IFRS ) that are included elsewhere in this annual report. The financial data presented in this section are derived from the Group s audited financial statements prepared in accordance with IFRS. Operational revenues In 2012, the Group s revenues was RMB85,253 million, representing an increase of 3.46% from the previous year. Transportation revenue amounted to RMB79,444 million, representing an increase of 3.83% from the previous year. In 2012, the Group s total traffic volume was 14, million tonnekilometres, representing an increase of 7.49% from the previous year % %14, % In 2012, the Group s passenger revenues amounted to RMB71,419 million, representing an increase of 4.36% from the previous year, and accounted for 89.90% of the Group s traffic revenues in Passenger traffic volume was 109, million passenger-kilometres, representing a 8.14% increase from the previous year % 89.90% 109, % The Group s domestic passenger traffic volume was 76,156 million passenger-kilometres, representing an increase of 7.36% from the previous year. Compared to 2011, domestic passenger revenues increased by 2.41% to RMB50,141 million, accounting for 70.21% of the Group s passenger revenues. 76, % % 70.21% The passenger traffic volume of the Group s international routes was 29, million passenger-kilometres, representing a 11.30% increase from the previous year. Compared to 2011, international passenger revenues increased by 10.15% to RMB18,057 million, accounting for 25.28% of the Group s passenger revenues. 29, % % 25.28% The passenger traffic volume of the Group s regional routes was 3, million passenger-kilometres, representing a 1.08% increase from last year. Compared to 2011, regional passenger revenues increased by 4.65% to RMB3,221 million, accounting for 4.51% of the Group s passenger revenues. 3, % % 4.51% In 2012, the Group s cargo and mail traffic revenues decreased by 0.67% to RMB8,025 million, as compared to 2011, accounting for 10.10% of the Group s traffic revenues in Cargo and mail traffic volume was 4, million tonne-kilometres, representing a 6.34% increase from last year % 10.10% 4, % 22

25 ANNUAL REPORT 2012 REVIEW OF OPERATIONS AND MANAGEMENT S DISCUSSION AND ANALYSIS Operating expenses In 2012, the Group s total operating costs was RMB82,745 million, representing an increase of 4.35% from previous year % Analysis of the changes in other items under operating costs of the Group is set out as follows: Aviation fuel costs account for the most substantial part of the Group s operating costs. In 2012, total aviation fuel consumption was approximately 4,177,700 tonnes, representing a 7.22% increase compared to last year. In 2012, the average price of jet fuel increased by 2.14% compared to last year. Aviation fuel expenditures of the Group reached RMB29,872 million (based on value-added tax), which accounted for 36% of the Group s operating expenses, representing an increase of 2.20% from RMB29,229 million last year. The Company implemented a policy of transforming its business tax to value-added tax in If calculated in line with the business tax, aviation fuel costs for 2012 grew by 9.52% from last year, and the increase in price of jet fuel increased aviation fuel expenditures by approximately RMB671 million. The increase in aviation fuel consumption resulted in an increase in aviation fuel expenditures of approximately RMB2,111 million % 2.14% % 2.20% % Take-off and landing charges amounted to RMB9,066 million, or an increase of 8.57% from last year, and was primarily due to the increase in the number of take-off and landings, as well as an increase in average unit price of take-off and landing charges % Depreciation and amortisation amounted to RMB7,557 million, or a growth of 8.49% from last year, and was primarily due to the addition of new aircraft and engines by the Group in 2012, resulting in a greater base number for depreciation and amortisation % Wages, salaries and benefits amounted to RMB10,059 million, or an increase of 16.09% from last year, and was primarily due to an increase in the number of staff and an increase in hours flown % Food and beverage expenses were RMB2,031 million, representing an increase of 0.45% from last year % Aircraft operating lease rentals amounted to RMB4,438 million, or an increase of 7.50% from last year, and was primarily due to an increase in the number of aircraft held through an operating lease in % Other operating lease rentals amounted to RMB609 million, or an increase of 23.83% from last year, and was primarily due to an increase in the number of leases for warehouses and VIP lounges at airports % Sales and marketing expenses were RMB3,727 million, representing a decrease of 0.33% from last year % The amount of civil aviation infrastructure levies payable to Civil Aviation Administration of China ( CAAC ) amounted to RMB1,414 million, representing an increase of 7.04% compared to last year, and was primarily due to an 8% increase of miles flown by the Company in % 8% 23

26 CHINA EASTERN AIRLINES CORPORATION LIMITED REVIEW OF OPERATIONS AND MANAGEMENT S DISCUSSION AND ANALYSIS Ground services and other charges were RMB594 million, representing an increase of 4.67% from last year % Office, administration and other operating expenses amounted to RMB8,983 million, representing an increase of 1.46% from last year primarily due to an increase in the number of staff. Other operating income % In 2012, other operating income of the Group amounted to RMB1,720 million, an increase of 62.01% from the same period last year, primarily due to an increase in operations subsidy from the government. Finance income/costs % In 2012, the Group s finance income was RMB349 million, a decrease of RMB1,675 million from the same period last year, primarily due to the minimal appreciation of the Renminbi against the U.S. dollar in 2012, which had substantially appreciated in Finance costs amounted to RMB1,697 million, an increase of RMB235 million, primarily due to an increase in interest expenses arising from increased borrowings and finance leases. Profit As a result of the foregoing, the Group s profit attributable to the equity shareholders of the Company in 2012 was RMB2,954 million, representing a 35.45% decrease as compared to the Group s profit attributable to the equity shareholders of the Company of RMB4,576 million in Liquidity and Capital Structure % The Group s primary capital requirements are for its daily operations and to fund capital expenditures for the purchase of aircraft and flight equipment. Cash generated from the ordinary course of the Group s business was generally able to satisfy the cash required for the Group s daily operation and generate cash surplus. In 2011 and 2012, net cash inflow from the Group s operating activities amounted to RMB13,623 million and RMB12,617 million, respectively. Capital expenditures for the purchase of aircraft and flight equipment was partly funded by internal funds, the balance of which was mainly financed by long-term and short-term borrowings and finance leasing. In 2011 and 2012, net cash outflow from the Group s investment activities were RMB14,939 million and RMB11,789 million, respectively. Net cash inflow from the Group s financing activities in 2011 was RMB2,136 million. Net cash outflow from the Group s financing activities in 2012 was RMB2,174 million The Group generally operates with net current liabilities. As at 31 December 2012, the Group s current liabilities exceeded its current assets by RMB35,948 million. The Group has been and believes it will continue to be capable of financing its working capital by obtaining borrowings from domestic and foreign banks in China. In addition, the Group proactively explored its financing channels and continued to optimise its debt structure and lower its finance costs by issuing various kinds of bonds

27 ANNUAL REPORT 2012 REVIEW OF OPERATIONS AND MANAGEMENT S DISCUSSION AND ANALYSIS The Group monitors its capital on the basis of its debt ratio, which is calculated as total liabilities divided by total assets. As at 31 December 2012, the debt ratio of the Group was 80.17% % As at 31 December 2011 and 2012, the amount of the Group s borrowings due within one year were RMB18,171 million and RMB22,640 million, respectively. As at 31 December 2011, the Group s borrowings payable from one to two years, from three to five years, and beyond five years were RMB8,408 million, RMB9,391 million and RMB5,804 million, respectively, as compared to RMB7,273 million, RMB7,906 million and RMB7,918 million, respectively, as at 31 December The Group s obligations under finance leases as at 31 December 2011 and 2012 were RMB20,261 million and RMB21,858 million, respectively. As at 31 December 2011, the Group s lease obligations payable within two years, from three to five years and beyond five years were RMB5,017 million, RMB7,235 million and RMB8,009 million, respectively, as compared to RMB5,309 million, RMB7,925 million and RMB8,624 million, respectively, as at 31 December As at 31 December 2012, the Group s borrowings comprised USDdenominated borrowings of USD5,028 million and RMB-denominated borrowings of RMB13,827 million. Fixed-rate borrowings and floatingrate borrowings accounted for 22.91% and 77.09% of total borrowings, respectively, in As at 31 December 2011, the Group s borrowings comprised USD-denominated borrowings of USD3,967 million and RMBdenominated borrowings of RMB16,780 million. Fixed-rate borrowings and floating-rate borrowings accounted for 15.6% and 84.4% of total borrowings, respectively, in % 77.09% % 84.4% As at 31 December 2012, the Group s obligations under finance leases comprised USD-denominated obligations of USD2,983 million, Singapore dollar-denominated obligations of S$245 million, Hong Kong dollardenominated obligations of HK$1,468 million, and Japanese Yen-denominated obligations of JPY9,136 million. As at 31 December 2011, the Group s obligations under finance leases comprised USD-denominated obligations of USD2,840 million, RMB-denominated obligations of RMB1,090 million and Singapore dollar-denominated obligations of S$263 million. The Group s finance leases were floating-rate obligations in 2011 and CAPITAL EXPENDITURES According to the contracted agreements, as at 31 December 2012, we expect our capital expenditures for aircraft, engines and related equipment to be, in the aggregate, approximately RMB172,092 million, including approximately RMB26,321 million in 2013 and RMB44,435 million in 2014, in each case subject to contractually stipulated changes or any change relating to inflation. We plan to finance our capital commitments through a combination of funds generated from operation, existing bank credit facilities, bank loans, leasing arrangements and other external financing arrangement. 1,

28 CHINA EASTERN AIRLINES CORPORATION LIMITED REVIEW OF OPERATIONS AND MANAGEMENT S DISCUSSION AND ANALYSIS CRITICAL ACCOUNTING POLICIES Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. Our audited consolidated financial statements have been prepared in accordance with IFRS. Our principal accounting policies are set forth in Note 2 to our audited consolidated financial statements. IFRS requires that we adopt the accounting policies and make estimates that our directors believe are most appropriate in the circumstances for the purposes of giving a true and fair view of our results and financial position. However, different policies, estimates and assumptions in critical areas could lead to materially different results. The critical accounting policies adopted and estimates and assumptions made in the preparation of these financial statements are identified and set forth in Note 4 to our audited consolidated financial statements. RISK ANALYSIS Interest rate fluctuation risk 2 4 The Group s total interest-bearing liabilities (including long-term and shortterm borrowings, finance leases and bonds payable) as at 31 December 2011 and 2012 were RMB62,035 million and RMB67,594 million, respectively, of which short-term liabilities accounted for 33.26% and 37.35%, respectively, for those years. A portion of long-term interest-bearing liabilities were liabilities with variable interest rates, and were affected by fluctuations in current market interest rates % 37.35% The Group s interest-bearing liabilities were primarily denominated in US dollars and Renminbi. As at 31 December 2011 and 2012, the Group s liabilities denominated in US dollars accounted for 69.14% and 74.5%, respectively, of total liabilities while liabilities denominated in Renminbi accounted for 28.81% and 20.46%, respectively, of total liabilities during those periods. Fluctuations in the US dollar and Renminbi interest rates have significantly affected the Group s finance costs. Exchange rate fluctuation risk 69.14% 74.5% 28.81% 20.46% Since 21 July 2005, the Chinese government has adjusted the Renminbi exchange rate system and established a floating exchange rate system by which the exchange rate would be adjusted and managed based on market supply and demand, with reference to a basket of foreign currencies. The fluctuation in the Renminbi exchange rate is affected by domestic and international economic and political conditions and general currency supply and demand dynamics. 26

29 ANNUAL REPORT 2012 REVIEW OF OPERATIONS AND MANAGEMENT S DISCUSSION AND ANALYSIS The Group operates its business in many countries and territories and generates revenue in different currencies. As such, its foreign currency liabilities are generally much higher than its foreign currency assets at the end of the period. The Group s major liability item (purchases or leases of aircraft) is mainly priced and settled in currencies such as US dollars. In addition, fluctuations in foreign exchange rates will affect the Group s costs incurred from foreign purchases such as aircraft, flight equipment and jet fuel, and take-off and landing charges at foreign airports. As at 31 December 2012, the Group s total interest-bearing liabilities denominated in foreign currencies, converted to Renminbi, amounted to RMB53,767 million, of which US dollar liabilities accounted for 93.66% of this amount. Therefore, a significant fluctuation in foreign exchange rates will subject the Group to foreign exchange loss arising from the translation of foreign currency denominated liabilities, which will also affect the profitability and development of the Group. The Group typically uses hedging contracts for foreign currencies to reduce the foreign exchange risks for foreign currency revenue generated from ticket sales, and expenses to be paid in foreign currencies. The Group s foreign currency hedging contracts mainly involve the sales of Japanese Yen and the purchase of US dollars at fixed exchange rates. As at 31 December 2012, foreign currency hedging contracts held by the Group amounted to a notional amount of USD58 million (31 December 2011: USD46 million), and will expire between 2013 and % The Group recorded a decrease in net foreign exchange gains in As at 31 December 2011 and 2012, the Group s foreign exchange gains were RMB1,872 million and RMB148 million, respectively. Due to the significant amount of existing net foreign currency liabilities, the Group s results will be materially and adversely affected if the Renminbi depreciates against the US dollar, or if the rate of appreciation of the Renminbi against the US dollar decreases in the future. Risk associated with the fluctuation of fuel prices Jet fuel is one of the Group s major operating expenses. The fluctuation of jet fuel prices has significant impact on the Group s operating results. Foreign fuel prices are mainly affected by supply and demand dynamics in the global market. In addition, domestic jet fuel prices are supervised by governmental authorities such as the National Development and Reform Commission and CAAC of PRC. The Group generally reduces the fuel price impact on operating results arising from increasing jet fuel prices by imposing passenger fuel surcharges, reducing fuel consumption by route optimisation and enhancing cost controls. In 2012, assuming constant factors but excluding the effects of crude oil option contracts, if the average price of jet fuel had increased or decreased by 5%, jet fuel costs of the Group would have increased or decreased by approximately RMB1,494 million. 5%