The Board of Directors ("Directors") of China Eastern Airlines Corporation Limited (the "Company") is pleased to announce the unaudited consolidated results of the operations of the Company and its subsidiaries (the "Group") for the six months ended 30 June 1998 with comparative figures for the corresponding period in 1997 as follows:-

Financial Statements

A. Prepared in accordance with International Accounting Standards ("IAS")

Consolidated Profit and Loss Account
For the six months ended 30 June 1998
(Amounts in thousands except for per share data)

Notes:

1. Basis of preparation

The accompanying unaudited consolidated profit and loss account has been prepared in conformity with International Accounting Standards ("IAS"). This basis of accounting differs in certain material respects from that used in the preparation of the Group's statutory accounts in the People's Republic of China ("PRC"). The statutory accounts of the Group have been prepared in accordance with the accounting principles and the relevant regulations applicable to PRC joint stock limited companies ("PRC Accounting Regulations"). Appropriate restatements have been made to the Group's statutory accounts to conform with IAS. Differences between PRC Accounting Regulations and IAS on unaudited consolidated loss attributable to shareholders for the six months ended 30 June 1998 and on the unaudited consolidated net assets at 30 June 1998 are set out in Section C.

In addition, IAS differs in certain material respects from generally accepted accounting principles in the United States of America ("U.S. GAAP"). Differences between IAS and U.S. GAAP on unaudited consolidated loss attributable to shareholders for the six months ended 30 June 1998 and on the unaudited consolidated net assets at 30 June 1998 are set out in Section D.

2. Turnover

The Group is principally engaged in the provision of domestic, Hong Kong and international passenger, cargo and mail airline services. Turnover comprises revenues from airline and airline related services and is net of domestic aviation infrastructure levies and sales tax. The Group's turnover by geographical segments are analysed as follows:-

* Include Japan, U.S., Europe and other Asian countries

3. Taxation

(a) Taxation in the consolidated profit and loss account represents:-

The charge for PRC income tax is calculated at the rate of 33% (1997: 33%) on the estimated assessable profits of the period determined in accordance with the relevant PRC income tax rules and regulations. No provision for PRC income tax has been made in the accounts as the Group has no taxable profits for the period ended 30 June 1998.

(b) The Group operates international flights to certain overseas destinations. There was no material overseas taxation for the period ended 30 June 1998 as there exists double tax relieves between PRC and the corresponding jurisdictions. With respect to the Group's regional flights from Hong Kong Special Administrative Region ("Hong Kong"), the related traffic revenue is exempt from Hong Kong profits tax commencing 1 January 1998 as a double tax relief has been arranged between the State Administration of Taxation of the PRC and the Finance Bureau of Hong Kong. In respect of the previous years, no Hong Kong profits tax was provided as the Group had no taxable profits.

(c) Deferred taxation is recognised for all significant temporary differences. Temporary differences are the differences between the carrying amount of an asset and liability in the balance sheet and the amount attributed to that asset or liability for tax purposes. Deferred tax assets are recognised only to the extent that future taxable profits will be available against which the deductible temporary differences can be utilised.

4. Interim dividend

The Board of Directors of the Company does not recommend the payment of an interim dividend for the period ended 30 June 1998. (1997: Nil)

5. (Loss)/ earnings per share

The calculation of (loss)/ earnings per share is based on the unaudited consolidated loss attributable to shareholders of RMB33,236,000 (1997: profit of RMB305,995,000) and the weighted average number of 4,866,950,000 (1997: 4,252,663,388) shares in issue during the period. There is no diluted (loss)/ earnings per share since the Company has no dilutive potential ordinary shares.

6. Profit appropriation

No appropriations from retained earnings were made to the statutory reserves during the period ended 30 June 1998. Such appropriations will be made at the year end in accordance with the PRC regulations and the Company's Articles of Association.

7. Convenient translation

The unaudited consolidated profit and loss account and net assets have been prepared in Renminbi ("RMB"), the national currency of the PRC. Solely for the convenience of the readers, translations of amounts from RMB into United States dollars ("US$") have been made at the rate of US$1.00 to RMB8.2798 being the average of the buying and selling rate as quoted by People's Bank of China at the close of business on 30 June 1998. No representation is made that RMB amounts could have been or could be converted into US$ at that rate or at any other rate on 30 June 1998 or any other date.

B. Prepared in accordance with PRC Accounting Regulations
(1) Consolidated Balance Sheets

(2) Consolidated Profit and Loss Account

Notes:

1. Accounting Policies

The Company and its subsidiaries originally applied the accounting policies conform with the <Accounting Regulations applicable to selected PRC Joint Stock Enterprises>. With the effect from 1 January 1998, the accounting policies have been changed to conform with the <Accounting Regulations applicable to PRC Companies Limited by Stock>. The retained profits of the company decreased by RMB114,089,000 as a result of such change in accounting policies.

2. Basis of Consolidated Statements

The Company prepares its financial statements in compliance with the regulations stipulated in <Provisional Regulations for the Consolidation of Financial Statements> issued by the Ministry of Finance, its Ref. No. Cai Kuei Zi (1995) 11. Wherever the equity investment made by the Company to the outside enterprise is over 50% of the invested enterprise's capital, upon offsetting and adjustment, consolidated financial statements should be prepared. (however, those investees have been established within a year, or have not been commenced operation, or those have total assets, operating revenue and net profit under 10% of group total are exempted from consolidation.).

The only subsidiary company consolidated is China Eastern Airlines Jiangsu Company, Limited, with a registered capital of USD47,000,000, 55% of which is held by the Company, which is principally engaged in the provision of passengers, cargo and mails airline services.

3. Principle and Basis of Accounting

The Company adopts the accrual basis, double-entry system and historical cost as basis of accounting.

4. Provision of Bad Debts Allowance

The bad debts losses on <Accounts Receivable> are recorded on a provision basis. Allowance on Bad Debts is provided at 0.3% of the year-end balance of <Accounts Receivable> and is debited in the account of <General & Administrative Expenses>. Whenever Bad debts actually occur, upon completion of necessary approval procedures, they are offset with the allowance previously provided.

5. Pricing of Inventory

The inventory of the Company covers mainly aircraft consumables, rotables, common appliances, supplies on airplanes and low-price consumables. The inventory is recorded at standard price, with adjustment made at the end of each month into actual price. The amortization of rotables is made over 4 succeeding years starting from the second year since purchase at 50%, 25%, 15% and 10% of its cost respectively. In case, upon the completion of its amortization, which can still be used after repair, rotables will be recorded at 40% of its replacement cost and will be re-amortized over next 4 succeeding years.

6. Provision for Inventory

Provision for inventory is made pursuant to the rule of the lower of cost or market value.

7. Accounting of Long-term Investment

The Company's long-term investment, according to its form and content, are classified into long-term equity investment and long-term bonds investment (including the bonds investment and leasing investment). Bonds investment and leasing investment are accounted for under equity method, while equity investment, where, the investment with the ownership of more than 20% inclusive of the investee's voting stock, or with the ownership of less than 20%, however, for which, the Company has significant influence on the investee, is accounted for under the equity method; where, the investment with the ownership of less than 20% of the investee's voting stock, or, with the ownership of more than 20% inclusive, however, for which, the Company has no significant influence on the investee, is accounted for under the cost method.

8. Fixed Assets and Depreciation

Fixed asset refers to the assets with useful lives of more than 1 year, value more than 2,000 and can be held physically to directly realise its benefits during the course of use. Fixed assets are accounted for at acquisition cost. After deducting 3% of the cost as residual value, depreciation is provided on a straight-line basis according to the useful lives as follows:

Aircraft	10-15 years
Engines	10-15 years
Buildings and Premises	15-35 years
Motor Vehicles and Electronic Device	5-6 years
Other Equipment	5-20 years

9. Construction-in-Progress

All facilities purchased and installed, self-made or subcontracted are accounted for in the account of <Construction-in-Progress>. Construction-in-Progress is recorded at acquisition cost, including cost of facilities, installation expenses and the interest capitalized during the course of construction for the purpose of financing the project. Upon the completion of the project and ready for use, the cost of construction-in-progress is to be transferred to the account of <Fixed Assets>.

10. Intangible Assets

The intangible asset is evenly amortized over its beneficial period, among which, the land use right is amortized evenly over 50 years, the use right of car-shelter on the airport, over 10 years and the use right of buildings, over 10 years.

11. Long-term Prepaid & Deferred Assets

The Company's long-term prepaid & deferred assets refer to the customs duties and value-added-taxes, in connection with the operational leasing of aircraft, and supply charges for the volume of supply increased beyond normal capacity for water-supply and additional surcharge for power-supply, among which, the customs duties and value-added-taxes in connection with the operational leasing of aircraft are evenly amortised over the related lease term, while supply charges for the volume of supply increased beyond normal capacity for water-supply and additional surcharge for power-supply are evenly amortised over 10 years.

12. Principle of Realization of Income

The Company's income from providing transportation service of passengers, cargo and mails is recognized upon delivery of the service. Air-tickets sold in advance but not executed are listed as <Current Liabilities>, which are accounted for in the account of <Domestic Sales in Advance of Carriage> and <International Sales in Advance of Carriage> and are to be cleared through China Civil Aviation Settlement Center. <Transportation Income> is recorded with the uplifted coupons as evidence.

Other business income refers to the income for ground service rendered by the Company and the commission income as agencies for other airline companies, for which, the income for ground service is to be recognized upon delivery of the service, while the commission income is to be recognized upon billing by other airline companies.

13. Taxation

1. Income Tax: The rate of income tax for the Company is 33%.

2. Circulation Tax: A Sales Tax of 3% is imposed on the Company's transportation income, ground service income and commission income as agencies.

The maintenance and repairing service incomes are imposed business tax of 6% as small-scale taxpayer

3. City construction tax and dike maintenance tax are levied at 7% and 3% based on the circulation tax respectively.

4. Premise tax, stamp tax and vehicle and ship use tax are levied according to the regulations set forth by the tax authorities.

C. Significant Differences between IAS and PRC Accounting Regulations

Differences between IAS and PRC Accounting Regulations, which have significant effects on the unaudited consolidated loss attributable to shareholders and the unaudited consolidated net assets are summarised below. The adjustments shown below have not been subject to independent audit.

D. Significant Differences between IAS and U.S. GAAP

Differences between IAS and U.S. GAAP, which have significant effects on the unaudited consolidated loss attributable to shareholders and the unaudited consolidated net assets are summarised below. The adjustments shown below have not been subject to independent audit.

Consolidated loss attributable to shareholders
For the period ended 30 June 1998

Consolidated net assets
As at 30 June 1998

Selected Airline Operating Data

Review of Operations

The Group is one of the three largest air carriers in the PRC based on traffic volume and number of passengers carried, and is the principal airline serving Shanghai, China's eastern gateway.

As of 30 June 1998, the Group operated 131 routes, including 112 domestic routes (among which, 12 routes linking mainland China to Hong Kong) and 19 international routes (2 cargo-only lines included). The Group operated over 1,300 scheduled flights per week, covering 53 domestic and international cities. The Group has a fleet of 66 aircraft, including 48 passenger jet aircraft with a capacity of over 100 seats each and one jet freighter.

During the first half of 1998, the Group's traffic volume totaled 671 million tonne-kilometers, an increase of 16.67% over the same period last year. Total revenues were RMB 3.809 billion, a decrease of 3.86% from that of the first half of 1997. The average aircraft daily utilization increased by 0.6 hours from that of the first half of 1997, to 7.4 hours.

Passenger traffic grew 13.10% to 5.058 billion passenger-kilometers. Passenger revenues were RMB 3.045 billion, a decrease of 4.40% over the same period in 1997, representing 79.95% of total revenues of the Group.

Domestic passenger traffic reached 2.362 billion passenger-kilometers, increasing by 29.57%, and revenues generated by domestic passenger traffic were RMB 1.459 billion, an increase of 12.75% compared with the same period last year, representing 47.91% of total passenger revenues of the Group. The increases in domestic passenger traffic and revenues were primarily due to the expansion of domestic passenger capacity, which increased by 34.61% over the same period last year.

The Group's passenger traffic on Hong Kong routes was 652 million passenger-kilometers, a decrease of 15.77% compared with the first half of 1997. Hong Kong passenger revenues were RMB 733 million, down 23.71%, representing 24.07% of total passenger revenues of the Group.

International passenger traffic amounted to 2.044 billion passenger-kilometers, increasing by 9.01% compared to the first half of 1997. International passenger revenues decreased by 8.28% from that of the same period last year to RMB 853 million, representing 28.02% of total passenger revenues. The increase in international passenger traffic was due to a 13.09% increase in passenger capacity allocated to the international market.

Cargo traffic was 226 million tonne-kilometers, up 25.56% from the same period last year. Cargo revenues amounted to RMB 583 million, a decrease of 4.94% compared with the first half of 1997, representing 15.30% of total revenues of the Group. The increase in cargo traffic was primarily due to an expansion of cargo capacity.

During the first half of 1998, the Group's operation was affected by the Asian financial crisis, which resulted in the depreciation of currencies in certain countries in the region and the shrinkage of demand in the Asian aviation market. In addition, adjustments in the PRC's national economic structure and a slow growth in the PRC's national economy also weakened the demand in the domestic aviation market, evidenced by the decrease in the number of passengers carried by the Chinese civil aviation industry as a whole. Excessive capacity in the domestic aviation market increased competition in the international and domestic aviation markets for the Group and as a result, the Group's overall load factor and yield decreased as compared to the same period last year.

During the first half of 1998, the Group's operating costs were RMB 3.606 billion, an increase of 14.35% from that of the first half of 1997. Such increase was primarily due to increases in depreciation charges and overhaul expenses resulting from an expansion in the Group's fleet during the second half of 1997 and the first half of 1998, rapid growth in the Group's traffic volume, and an increase in domestic fuel prices since March, 1997. However, cost control by the Group resulted in an decrease of 4.65% in unit cost (measured as operating expenses by ASK) compared to that of the same period last year.

The Group's foreign currency exchange gain was approximately RMB 85.533 million in the first half of 1998.

As a result of the above, the Group incurred a loss of RMB 33.236 million during the first half of 1998.

Outlook of the second half of 1998

The Group expects that during the second half of 1998, the Group's operations will continue to be affected by the Asian financial crisis , and demand in the international and domestic aviation markets is unlikely to improve in the near future. In view of the prevailing conditions in the aviation market, the Civil Aviation Administration of China ("CAAC") has announced policies for strengthening macro-control by reducing the industry's traffic capacity, suspending approval of new aircraft orders, delaying or considering the cancellation of delivery of contracted aircraft, where appropriate, and encouraging the sublease of aircraft among domestic air carriers. The CAAC also encourages air carriers to establish or improve coordination mechanisms with respect to overlapping routes. The Group believes that the CAAC's macro-control measures and the fuel price decrease in the domestic market in the second half of 1998 may help the Group's operating environment.

In light of the Group's current operating environment, the management of the Group intends to adopt the following measures in the second half of 1998:

1) Rationalize the capacity allocation and route structure by considering adjustment in new aircraft delivery plans, adjusting flight schedules and route network, and increasing frequency of flights on high yielding routes;

2) Activate various promotion schemes by introducing new tools such as cooperation and code sharing with more foreign air carriers, convenient ticketing counters and direct sales. In addition, the Group plans to improve its frequent flyer program which was launched in July 1998 on the Group's entire route network;

3) Further expand the group's presence in the air cargo market by establishing China Cargo Company, a joint venture with China Ocean Shipping Company, for the purpose of expanding the cargo distribution network and seizing a larger market share; and

4) Control costs by monitoring the inventory growth rate, improving the financial information management system and reducing management costs through reasonable allocation and prudent approval of such expenditures, taking advantage of interest rate changes in bank borrowings to improve the Group's financing position.

Use of Proceeds

The Group completed its public offering and listing of H Shares and A Shares in 1997. The proceeds raised by the Group pursuant to such public offerings (net of expenses) were approximately RMB2.8 billion. Of such proceeds, RMB2.6 billion has been used for advance payment for the acquisition of new aircraft and repayment of aircraft loans. The remaining RMB200 million is intended to be used for the construction of Group's base at the new international airport in the Pudong area in Shanghai. Currently, such remaining proceeds are held as short-term deposit in Bank of China.

Share Capital

1. Change in Share Capital

There was no change in the Company's share capital during the six months ended 30 June 1998.

2. Share Capital Structure

3. Substantial Shareholders

As at 30 June 1998, the following shareholders held more than 10% of the issued share capital of the Company:

4. Directors, Supervisors and Senior Management Share Holding Statement

The above shareholdings were the respective personal interests of the Directors, supervisors and senior officers of the Company. Except as disclosed above, none of the Directors, supervisors nor any member of the senior management of the Company had a beneficial interest in the issued share capital of the Group as at 30 June 1998.

Material Matters

1. Dividends

The Directors do not recommend any dividends for the six months ended 30 June 1998.

2. Influence of Recent Economic Situation

As mentioned above, the depreciation of certain Asian currencies resulting from the current Asian financial crisis has reduced the demand in the international and domestic aviation markets. Excessive capacity in the domestic market due to adjustments in the PRC's national economic structure and a slow growth of the PRC's national economy also increased competition in the aviation market. It is expected that the recent economic situation will continue to have a negative impact on the Group's operations.

3. Staff Quarters

Employees who have been employed by the Group for four years or more are eligible to apply to the Group for staff quarters. Depending on the financial position of the Group, it may construct or acquire staff quarters for its employees. Upon completion of such quarters, the group may decide to sell them to eligible employees. Such employees are prohibited from dispose of the staff quarters within a period of 5 years from the date of purchase. As at 30 June 1998, the Group has incurred approximately RMB252 million in expenditure on such staff quarters(approximately RMB132 million was incurred in the six months ended 30 June 1998). At present, the staff quarters are under construction and the Board of Directors has not made any decision to sell any of such staff quarters to the eligible employees.

According to the original policy on housing reform of the PRC and the current "Implementation Rules on Sales of Staff Quarters" issued by the Shanghai Municipal Government, the selling prices of staff quarters shall not be less than 10% of their original cost. According to a circular in respect of the strengthening of the housing reform policy and the acceleration of housing construction issued by the State Council of China in July 1998, all distribution of staff quarters to employees at discounted prices must be withdrawn from the second half of 1998. According to the circular, in principle, no staff quarters can be sold at a price lower than their cost. Specific timetable and procedures for the implementation of such policy are to be determined by the individual provincial or municipal government based on the particular situation of the relevant district. As of the date of this report, the Shanghai Municipal Government has not yet issued any detailed timetable or procedures for the implementation of the above policy. The Directors confirm that the Group will comply with the policy and guidance on pricing established by the municipal government at the time of allocation if and when the Group decides to sell staff quarters to the qualified employees. According to the Group's accounting policy, the difference between net book value and sales proceeds of the staff quarters will be amortized over a period of 5 years from the date of sale.

4. Year 2000 Problem

The term "Year 2000 problem" refers to errors and malfunctions that may occur because of the inability of any system, which includes computer systems and electronic devices that record date information based on two-digit rather than four-digit programming code, to properly recognize the change from Year 1999 to Year 2000 ("Y2K Problem").

Computer systems have been widely applied to various aspects of the Group's operations, including flights operation, ticket reservation and financial reporting. In order to identify the potential impact and solutions of the Y2K Problem, the Group has established a specialist team to conduct a survey on the current situation of the computer systems and electronic devices. Most of the Group's software systems, servers and stations were already Year 2000 compliant when installed. However, the Group will conduct further surveys on the remaining systems and hardware and resolve any Y2K Problem in conjunction with system and equipment suppliers to ensure the proper operation of the Group's systems.

The group plans to completely resolve any Y2K Problem before the new Pudong International Airport starts operation which is expected to be in October, 1999.

As at 30 June 1998, no expenditure or cost has been occurred in relation to the resolution of the Y2K Problem. Any such costs will primarily depend on the proportional share of the expenses of the International Air Transportation Association Project by all membership airlines and the resolution plan of the aircraft-borne electronic devices. Management of the Group believes that any such costs will not have a significant impact on the Group's financial condition, operation results or cash flow.

5. Purchase, Sale or Redemption of Shares

There was no purchase, sale or redemption by the Company, or any of its subsidiaries, of the Company's shares during the six-month period ended 30 June 1998.

6. Compliance with Code of Best Practice

None of the Directors is aware of information that would reasonably indicate that the Company was not in compliance with the Company's "Code of Best Practice" which incorporates items set out in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited during the six-month period ended 30 June 1998.

7. Material Litigation

The Company was not involved in any material litigation or arbitration during the six-month period ended 30 June 1998.

8. Others

1) The Group has no designated deposits as of 30 June 1998 nor has it experienced any failures to collect fixed deposits upon maturity.

2) The Group has at all times paid the full amount of income tax in accordance with the relevant tax regulations of the PRC and has never enjoyed any preferential treatment of the 18% income tax refund from the government. Therefore, neither the unification of income tax nor the cancellation of the preferential tax refund from the Chinese government has any significant impact on the Group.

Fu Yunbi
Chairman of the Board
China Eastern Airlines Corporation Limited
Shanghai, 27 August 1998

DOCUMENTATION AND ADDRESS FOR REVIEW

Documentation for review: Interim report and interim financial report with the signature of the Chairman.

Address for review: Secretary Office of the Board of Directors, China Eastern Airlines Corporation Limited, 2550 Hongqiao Road, Shanghai, the People's Republic of China.

© Copyright 1996-2008 irasia.com Ltd. All rights reserved.

DISCLAIMER: irasia.com Ltd makes no guarantee as to the accuracy or completeness of any information provided on this website. Under no circumstances shall irasia.com Ltd be liable for damages resulting from the use of the information provided on this website. TRADEMARK & COPYRIGHT: All intellectual property rights subsisting in the contents of this website belong to irasia.com Ltd or have been lawfully licensed to irasia.com Ltd for use on this website. All rights under applicable laws are hereby reserved. Reproduction of this website in whole or in part without the express written permission of irasia.com Ltd is strictly prohibited. TERMS OF USE: Please read the Terms of Use governing the use of our website.