Air China Regulatory News (AIRC)

中國國際航空公司

Air China Limited

Stock code: 00753 HongKong 601111 Shanghai AIRC London

Air China is the only national flag carrier of China and a member of Star Alliance, the world's largest airline alliance. It is also the only Chinese civil aviation enterprise listed in "The World's 500 Most Influential Brands".

Air China is headquartered in Beijing, the capital of China, with three increasingly important hubs in Chengdu, Shanghai and Shenzhen. With Star Alliance, our network covered 1,330 destinations in 192 countries as at 31 December 2017. Air China is dedicated to serving passengers with credibility, convenience, comfort and choice.

Air China is actively implementing the strategic objectives of ranking among the top in terms of global competitiveness, continuously strengthening our development potentials, providing our customers with an excellent and unique experience and realising sustainable growth to create value for all related parties.

In addition, Air China also holds direct or indirect interests in the following airlines: Air China Cargo Co., Ltd., Shenzhen Airlines Company Limited (including Kunming Airlines Company Limited), Air Macau Company Limited, Beijing Airlines Company Limited, Dalian Airlines Company Limited, Air China Inner Mongolia Co., Ltd., Cathay Pacific Airways Limited, Shandong Airlines Co., Ltd. and Tibet Airlines Company Limited.

CONTENTS

CORPORATE INFORMATION

REGISTERED CHINESE NAME:

中國國際航空股份有限公司

ENGLISH NAME:

Air China Limited

REGISTERED OFFICE:

Blue Sky Mansion

28 Tianzhu Road

Airport Industrial Zone

Shunyi District

Beijing

China

PRINCIPAL PLACE OF BUSINESS IN HONG KONG:

5th Floor

CNAC House

12 Tung Fai Road

Hong Kong International Airport

Hong Kong

WEBSITE:

www.airchina.com.cn

DIRECTOR:1

Cai Jianjiang

Song Zhiyong

John Robert Slosar

Xue Yasong

Wang Xiaokang

Liu Deheng

Stanley Hui Hon-chung

Li Dajin

SUPERVISORS:2

Wang Zhengang

He Chaofan

Xiao Yanjun

Li Guixia

LEGAL REPRESENTATIVE OF THE COMPANY:

Cai Jianjiang

JOINT COMPANY SECRETARIES:3

Zhou Feng

Tam Shuit Mui

AUTHORISED REPRESENTATIVES:

Cai Jianjiang

Tam Shuit Mui

LEGAL ADVISERS TO THE COMPANY:

DeHeng Law Offices (as to PRC Law)

DLA Piper Hong Kong (as to Hong Kong and English Law)

INTERNATIONAL AUDITOR:4

Deloitte Touche Tohmatsu

H SHARE REGISTRAR AND TRANSFER OFFICE:

Computershare Hong Kong Investor Services Limited

Rooms 1712-1716, 17th Floor, Hopewell Centre

183 Queen's Road East

Wanchai

Hong Kong

LISTING VENUES:

Hong Kong, London and Shanghai

1 On 8 May 2017, the Board received resignation letters from independent non-executive Directors Mr. Pan Xiaojiang and Mr. Simon To Chi Keung, who resigned as independent non-executive Directors with effect from 25 May 2017 as their tenures have expired. On 25 May 2017, the Company convened its 2016 Annual General Meeting, at which Mr. Wang Xiaokang and Mr. Liu Deheng were elected as independent non-executive Directors. Given the election of the new session of the Board on 27 October 2017, Mr. Cao Jianxiong, Mr. Feng Gang and Mr. lan Sai Cheung Shiu have ceased to be non-executive Directors. Mr. Xue Yasong was elected as employee representative Director by the second session of the employee representative meeting of the Company in 2018.

2 Due to work rearrangement, Mr. Zhou Feng has conveyed to the Supervisory Committee his request to resign from the position as a Supervisor on 2 August 2017. Ms. Li Guixia was elected as the employee supervisor of the fifth session of the Supervisory Committee at the employee representative meeting of the Company and Mr. Shen Zhen has ceased to be the employee supervisor with effect from 27 October 2017.

3 On 30 August 2017, the Board received a resignation letter from Ms. Rao Xinyu, the board secretary. Due to work rearrangement, Ms. Rao Xinyu resigned as board secretary and joint company secretary of the Company. On the same date, the Company convened its 48th meeting of the 4th session of the Board, at which Mr. Zhou Feng was appointed as the board secretary and joint company secretary of the Company.

4 After being considered by the 44th meeting of the 4th session of the Board and considered and approved by the 2016 Annual General Meeting, Deloitte Touche Tohmatsu was appointed as the international auditor of the Company for the year of 2017. KPMG has ceased to be the international auditor of the Company.

SUMMARY OF FINANCIAL INFORMATION

(RMB'000)

(1) EBITDA represents earnings before finance income, finance costs, income taxes, share of profits of joint ventures and associates, depreciation and amortisation as computed under the IFRSs.

(2) EBITDAR represents EBITDA before deducting operating lease expenses on aircraft and engines as well as other operating lease expenses.

(RMB'000)

SUMMARY OF OPERATING DATA

The following is the operating data summary of the Company, Air China Cargo, Shenzhen Airlines (including Kunming Airlines), Air Macau, Dalian Airlines and Air China Inner Mongolia.

CHAIRMAN'S STATEMENT

2017 is an important year when the 19th National Congress of the Communist Party of China was successfully held, and the comprehensive implementation of the 13th Five-year Plan has entered a crucial stage. Air China studied and implemented Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era and strived to guide its reform and development with new ideas, new thinking and new strategies, forge ahead and work in a down-to-earth way. The Group also spared no effort in safety management and strove to economic benefit, actively improved the service quality. We continuously pushed forward the deepening of reform, intensified the Party building, focused on the strategic target of becoming a top-tier aviation group in the world with global competitiveness, and achieved positive and stable progress in all aspects.

During the reporting period, the Group adhered to the general keynote of making progress while maintaining stability and quality and profit were improved significantly. In 2017, we recorded a profit before tax of RMB11,486 million, with a year-on-year increase of 12.47%. The net profit attributable to equity shareholders of the Company was RMB7,244 million, representing a year-on-year increase of 6.39%. We recorded 2.117 million accident-free flight hours, with a year-on-year increase of 4.2%; traffic measured by RTK reached 25,385 million tonne kilometres, with a year-on-year increase of 7.12%; 102 million passengers were carried, with a year-on-year increase of 5.15%; the passenger load factor was 81.14%, up by 0.46 percentage point year on year.

Continue to expand our route network and enhance airport hub construction. In view of the national development strategies including the Belt and Road Initiative and the coordinated development of the Beijing-Tianjin-Hebei region, 49 domestic routes such as Beijing-Maotai and 12 international and regional routes such as Beijing-Astana were newly launched in 2017. We have also made efforts to accelerate the consolidation of layout of the global route network covering six continents, which is connected by the nodes of Beijing, Chengdu, Shanghai and Shenzhen. The flight bank structure has been under continuous optimization and the number of O&D connected reached 5,918; the transfer capacity and quality continuously increased. The interlining service revenue reached RMB5.51 billion, representing a year-on-year increase of 15.3%. Luggage checking through service is now provided to all flights from Europe, North America and Australia transferring to domestic routes via Beijing and the competitiveness of our hubs were strengthened.

Steadily improve marketing capability and accelerate business model transformation. As at the end of the reporting period, the number of our frequent flyer member exceeded 50 million contributing 43.7% of our total revenue, representing a year-on-year increase of 3.8 percentage point. Due to the continuous efforts devoted to improving our mobile application platform, a turnover of RMB5.02 billion was recorded, representing a year-on-year increase of 39.4%. We conducted in-depth studies on passenger demands, and this has helped us to increase the revenue contributed by first class and business class service to RMB13.11 billion, representing a year-on-year increase of 12.7%. The revenue generated from ancillary services such as paid seat selection, prepaid luggage and boarding gate upgrade recorded a year-on year increase of 32%. Air China Cargo has achieved positive operating results through exploring new business model, optimizing the arrangement of its routes and the structure of cargo sources, as well as focusing on the development and sale of high value-added services such as cold-chain logistics.

Promote premium brand strategy and improve service quality. Focusing on the concept of "Internet plus convenient transportation", we promoted products such as self-service check-in, self-service ticket endorsement, self-print itinerary and self-service luggage check-in on all routes and established the whole-process convenient travel service mode. We continuously improved our service hardware such as infrastructure and service software such as operating codes to improve service quality. We have also made efforts to promote the application of big data and the construction of "mobile cabin" to realize the timely transmission of operation related information and connect the whole service information chain. As the exclusive official partner of air passenger transport for the Beijing 2022 Winter Olympic and Paralympic Winter Games and the International Horticultural Exhibition 2019 Beijing China, the Group took such opportunity to promote its brand in a more innovative way and to build its brand image characterized by "the leader of civil aviation industry in China" and "international network coverage".

Strive to enhance cost control and maintain cost advantage. We devoted great energy to streamline and strengthen our management, and to improve the quality and efficiency of our services. We focused on the optimization of the operation of wide-body aircraft to improve our cost management system, strengthen cost process management and improve our performance. We actively carried out the policy of "Lower Leverage, Reduce Liability and Control Risk". As a result, as at 31 December 2017, the gearing ratio of the Group decreased by 6.15 percentage points to 59.75% compared with last year, which is at a relatively superior level in the industry. We promoted special projects such as "increase direct sales and reduce distribution costs", "reduce trade receivables and inventories" and "streamline management structure". Since 2014, the percentage of the Group's passenger transport direct sales has increased from 26% to 50.9%, and the percentage of agency commission expense of the marketing revenue has decreased from 4.2% to 1.5%. Therefore, our cost competitiveness was continuously improved.

2018 marks the 40th anniversary of the Reform and Opening of China, and also the first year to implement the guiding principles of the 19th National Congress of the Communist Party of China. The Group will fully implement the guiding principles of the 19th National Congress. Guided by Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, adhering to the development principles of "Innovation, Coordination, Green, Openness and Sharing", we will focus on the reform on quality, efficiency and growth driver, carry out our work in a down-to-earth manner, prevent and mitigate risks and strengthen Party building, and will take a solid step towards the strategic goal of building a world-class aviation group by achieving further spectacular performance in safety, results, service and reform.

Cai Jianjiang

Chairman

Beijing, PRC

27 March 2018

Business Overview

In 2017, the Group's ASKs and RPKs reached 247,815 million and 201,078 million, representing a year-on-year increase of 6.26% and 6.87%, respectively. The passenger load factor was 81.14%, representing a year-on-year increase of 0.46 ppt. The Group's AFTKs and RFTKs reached 13,319 million and 7,553 million, representing a year-on-year increase of 4.57% and 7.97%, respectively. The Group's cargo and mail load factor was 56.70%, representing a year-on-year increase of 1.78 ppt.

DEVELOPMENT OF FLEET

In 2017, the Group introduced 56 aircraft, (including six B787-9 aircraft, three B777-300ER aircraft, twenty-four B737 series aircraft (including seven B737-8MAX aircraft), six A330-300 aircraft, seventeen A320 series aircraft (including two A320NEO aircraft), among which seventeen were bought with our own funds, twenty-three were acquired under finance leases and sixteen were acquired under operating leases. And the Group phased out 24 aircraft (including three B777-200 aircraft, eighteen B737 series aircraft, two A320 series aircraft and one business jet). As at the end of 2017, the Group had a total of 655 aircraft, with an average age of 6.53 years (excluding aircraft under wet leases).

Details of the fleet of the Group are set out in the table below:

Among the aircraft set out above, the Company operated a fleet of 396 aircraft in total, with an average age of 6.57 years (excluding aircraft under wet leases). The Company introduced 34 aircraft and phased out 19 aircraft among which one was leased to Dalian Airlines.

In 2017, the Company made new progress in respect of hub network, sales and marketing, products and services, external cooperation, safety management, employee self-achievement, customer service, supplier management, environmental protection and social welfare, etc.

HUB NETWORK

The Company (including Dalian Airlines and Air China Inner Mongolia) newly launched or adjusted 61 domestic and international routes. As for the Beijing Hub, the Company launched international routes from Beijing to Astana, Zurich, Brisbane, etc., and domestic routes of Beijing-Maotai, Beijing-Zhengzhou-Shaoyang, Beijing-Harbin-Jiansanjiang, etc. The Company also boosted the flight frequency on the routes of Beijing-Islamabad-Karachi, Beijing-Urumchi and other international and domestic routes. The passenger visits to transiting hotels and lounges increased by 8.8% year-on-year, with continuous enhancement of our transiting service capabilities. The transiting passengers from overseas to domestic destinations via Beijing increased by 7.2% year-on-year; the number of O&D connected reached 5,918, and the super hub value of Beijing steadily increased. The Company continuously developed the Chengdu International Hub which launched new routes such as Chengdu-Shihezi-Yining, Chengdu-Hami, Chongqing-Nanchang and Chongqing-Taipei Songshan. Shanghai international gateway launched new routes such as Shanghai Pudong-Barcelona and Shanghai Pudong-Bangkok and Shenzhen international gateway launched new routes such as Shenzhen-Los Angeles, Guangzhou-Lanzhou and Guangzhou-Yinchuan. The quadrilateral network structure has been continuously optimized and the competitiveness of the hubs has been steadily improved. In addition, route network has been further developed and the interlining flights products have been further diversified by launching new international and domestic routes such as Dalian-Chengdu, Guiyang-Haikou, Hohhot-Xiamen, Tianjin-Lianyungang-Bangkok, Hangzhou-Phuket and Yuncheng-Hong Kong. In 2018, the Company plans to launch international long-distance routes such as Beijing-Panama City, Beijing-Copenhagen, Beijing-Barcelona, Chengdu-Bangkok, Chengdu-Bali, Hangzhou-Nha Trang and domestic routes such as Chengdu-Hongyuan-Lhasa and Chongqing-Urumqi.

As at 31 December 2017, the Company (including Dalian Airlines and Air China Inner Mongolia) was operating 420 passenger routes, with 101 international routes, 16 regional routes and 303 domestic routes. The above passenger routes reached 40 countries (regions) and 185 cities, including 66 international cities, 3 regions and 116 domestic cities. With Star Alliance, our network covered 1,330 destinations in 192 countries.

SALES AND MARKETING

The Company continuously strengthened our strength in domestic key bases and routes, optimized the capacity resources distribution, dynamically adjusted our domestic and international capacity deployment structure, made full use of slot resources and increased our deployment of wide-body aircraft for domestic routes in trunk markets. We also actively carried out our price priority strategy in response to the market dynamics and adjusted the ticket prices of 64 domestic routes, resulting in an increase in revenue of approximately RMB921 million throughout the year. The successful marketing of premium class drove a year-on-year increase in revenue from premium class of 12.7%. In addition, we reconstructed the business process and model of the frequent flier credit point accumulation platform, completed 16 upgrades to the mobile platform, optimized and added more than 450 functions, significantly enhancing customer experience. The total number of"Phoenix Miles" members amounted to 50.91 million and the electronization of frequent flier services has been materialized. With the significant increase of frequent fliers' satisfaction, loyalty, and consumption stickiness, revenue contribution was up by 19.6% compared to the same period last year, accounting for 43.7% of the revenue. Moreover, the Company continuously expanded our ancillary services and products to explore new business growth points. During the reporting period, our cumulative sales revenue from ancillary products reached RMB270 million, representing a year-on-year increase of 32%. Given our brand characteristics, the Company launched an IP image "Panda (胖安達)" with an aim to enhance our brand identity and spark public emotional resonance. As the exclusive official partner of air passenger transport for the Beijing 2022 Olympic and Paralympic Winter Games, our brand strategic plans have been systematically implemented so as to continuously establish our core competitiveness and long-term development capability.

PRODUCTS AND SERVICES

Focusing on the concept of "Internet plus convenient transportation", the Company has established a whole-process convenient travel service mode to build a one-stop intelligent air travel platform. New functions such as passport reading, self-service ticket endorsement and self-print itinerary were added to self-service check-in machines. With the introduction of new process of self-service baggage check with boarding pass, the growth rate of domestic passengers boarding through self-service check-in machines has reached 13%. During the reporting period, six self-operated lounges were newly built, rebuilt or expanded, with a newly-added area of 4,600 square meters; Chongqing and Wuhan lounges were officially launched. The design of a new passenger services interface such as seats, entertainment systems, cabin interiors and scene lighting for newly introduced aircraft such as A350, A320NEO and B737-8MAX has been completed, creating brand new product experience in the new aircraft. We also managed to launch and operate the "mobile cabin", realizing the timely transmission of air-ground information and connect the whole service information chain. We continued to revise or develop such rules and codes of service as Standards for Rain and Snow Proof Services for Passengers Embarking and Disembarking at the Apron (Trial) (《雨雪天氣遠機位旅客防雨雪服務標準(試行)》) and Regulations for Management of Injury, Death and Serious Diseases of Passengers (《旅客傷亡、重病事件處置管理規程》), Standards for Irregular Flight Services (《不正常航班服務標準》) and Standards for Donated Human Organ Transshipment Services (《人體捐獻器官運輸服務標準》), so as to further improve the standardization of services and reinforce the soft power of our services. We enhanced our service quality from the perspective of passengers with problem-oriented policies, and actively expanded the access to passengers' opinions, resulting in the significant increase of passengers' response rate.

EXTERNAL COOPERATION

During 2017, the Group formally commenced its cooperation with Lufthansa Group on jointly operating China-European routes. The parties have launched a united network plan to provide passengers with more convenient traveling options; carried out the joint corporate customer scheme to provide corporate customers with more attractive products; further optimized the frequent flier scheme to reward our frequent fliers; and enhanced the standard consistency for ground service, shared lounges and improved processes for irregular flights. By adopting such measures, service of the China-European routes has been continuously improved, and our overall competitive strength in European market was obviously enhanced. Besides, we further deepened the joint operation with the Air New Zealand, and has initiated negotiation on joint operation with the Air Canada. We also engaged in code sharing arrangement with a Columbian airline, and currently cooperated with 36 airlines in code sharing and offered 14,467 code sharing flights per week. Last but not least, in 2017, the 10th year of joining the Star Alliance, the Company signed a memorandum of cooperation for the project "Move Under One Roof" with Star Alliance and Beijing Capital International Airport, with aims of facilitating development of the Beijing Capital International Airport and building it a first-class gateway airport, the achieving of which will greatly improve flight experiences in the futures. We also jointly carried out a series of programs with Star Alliance members, which includes but not limited to brand promotion under the theme of "20th anniversary of Star Alliance", fast customs clearance program and luggage hub program.

SAFETY MANAGEMENT

The Company upheld the development philosophy of "Safety First, Prevention First and Comprehensive Management". We embodied the statements and requirements in relation to new development philosophy, overall national security outlook, social governance and other aspects mentioned in the report of the 19th National Congress of the Communist Party of China into theories and guidelines of our safety work, and has maintained a stable safety record throughout the year. In 2017, the Company kept real time monitoring over those key risks and important sources of risk, proceeded safety inspections in orderly manners, and timely rectified the problems and hidden dangers identified with zero-tolerance attitude, thereby effectively preventing safety risk. In addition, we strictly controlled training quality and accelerated training progress, increased monitoring and troubleshooting efforts for common and recurrent failures, offered training and education to improved working style and service capability of our professional teams, and improved our emergency response capacity and organization and coordination ability to further consolidate our safety fundamentals. We earnestly performed our safety supervision duties, with security audit, special guidance, technical inspection and job conference in place to ensure that our investment enterprises had improved their safety management. We made sure that safety management has full coverage and good coordination between different business units, and no omission and ambiguity occurred in this respect.

EMPLOYEE SELF-ACHIEVEMENT

The Company respected and provided equality to each staff, safeguarded their legitimate rights and interests, expanded their growth channels and cared for their occupational health and personal life, wishing that all our employees could equally share our development fruits, and cohesive force of our Group and sense of belonging of our staffs could be strengthened. Specifically, we had built up a position management system, which provides unique career development channels for staffs to management, business and technical posts; we had formed a unique training system, which provides diversified training programs and training methods; we conducted comprehensive appraisal on our youth backbone and key talents at key positions through our self-developed "Assessment-oriented Method"; we continuously implemented "Happiness • Heart Program" to improve our employee's attention and knowledge on psychological health, and devoted efforts to improve their physical and psychological health; we spared no efforts to construct services sites outside Beijing to enlarge the service coverage for our staffs and facilitate their business processing; and we organized vocational skills competition, art festival and other recreational and sports activities to promote the communication between employees, hence raising their cohesion and sense of belonging.

CUSTOMER SERVICE

Adhering to its "Four Cs" service philosophy of "Credibility, Convenience, Comfort and Choice", the Company strived to continuously optimize its passenger service management system, and leveraging internet information technology, to further improve the software and hardware facilities in relation to the services of the whole process so as to improve the passengers' self-service experience. The Company took efforts to supplement and upgrade its service management system in accordance with the standards under ISO9001: 2015. The Company has further improved the flight punctuality rate by lowering the percentage of delayed flights caused by the Company, and would provide proof to passengers in respect of delay, cancellation and adjustment of flights through self-service channels including official website and mobile phone application so as to protect passengers' interest in the event of flight irregularity. Efforts have also been made to optimise the customer complaint responding mechanism and to promote on-line compensation channel so as to make it more convenient for travelers to get due compensation. The Company also paid attention to the needs of special passengers and provide preferential tickets or discounted tickets to soldiers and disabled soldiers (including police officers) through on-line channel. Information encryption technologies have been adopted for personal data transmission to prevent the leakage of and safeguard the security of such data. In 2017, no mass event has occurred for reasons of the Company and the overall satisfaction level of passengers has improved.

SUPPLIER MANAGEMENT

The Company formulated "Integrated Implementation Plan for Centralized Procurement", based on which a centralized, efficient and transparent procurement management system and a system for regular publication of supplier information data base have been established; the Company has also enhanced suppliers' annual performance assessment, created a new mechanism of performance review and optimized its performance assessment system. In 2017, the Company admitted 551 suppliers and the number of total suppliers admitted reached 3,261, of which 3,150 are domestic suppliers and 111 are foreign suppliers.

ENVIRONMENTAL PROTECTION

The Company adhered to the philosophy of "Green Operation for Sustainable Development" and continued to further implement the energy conservation and environmental protection policies of China. In accordance with the relevant requirements of the nation's environment-related laws and regulations, the Company has established systems covering the organization and mechanism of environment management. Based on the characteristics of the industry, the Company strengthened the construction of its energy management system and push forward the energy conservation and emission reduction work. Focusing on fuel saving management in its operation and the application of new technologies, the Company continuously reduced the energy consumption in fields which used to be deemed as trivial, through air route optimization, APU fuel saving and the improvement of ground facilities. The Company has paid significant attention to the development of new types of fuel, participated in relevant promotional activities and reduced emissions and pollution through implementation and research of projects such as "replace oil with electricity", solar power and low NOx transformation. The Company has also held environmental protection themed training courses and various promotional activities to elevate the environmental protection awareness of employees, passengers and the public. In 2017, the fuel efficiency of passenger aircraft was 0.2642 kilogram/tonne kilometer.

SOCIAL WELFARE

The Company has integrated the performance of social responsibility into its overall development planning for the purpose of making contribution to the community. In response to the Belt and Road Initiative, in 2017, the Company launched a number of new routes such as Beijing to Astana and Beijing to Zurich in order to promote international political, economic and cultural communication; and has successfully accomplished the transportation missions for the 19th Nation Congress of the Communist Party, the 13th National Games, "rescue operations in Sri Lanka" and "rescue operations in Jiuzhaigou". The Company contributed its efforts to precise poverty alleviation by fully utilising its own resource advantages and the characteristic resources in Sonid Right Banner, Xilingol League, the Inner Mongolia Autonomous Region and Zhaoping County, Guangxi Zhuang Autonomous Region, to help to enhance the independent development capability of the local communities and promote the rapid development of relevant industries so as to relieve the local communities from poverty sustainably. Caring for the growth of children, the Company conducted the "Star Route" teenager caring and supporting activities. In addition, the Company enhanced its communication with the community and promoted advanced culture with an aim to build a stable and harmonious social environment.

MAJOR SUBSIDIARIES AND ASSOCIATES AND THEIR OPERATING RESULTS

1. Air China Cargo

Air China Cargo was established in 2003. Headquartered in Beijing, Air China Cargo takes Shanghai as its main long-distance air freighter operation base and is primarily engaged in air cargo and mail transportation. The registered capital of Air China Cargo is RMB5,235,294,118, and Air China holds 51% of its equity interest.

As at 31 December 2017, Air China Cargo operated a fleet of 15 aircraft with an average age of 10.54 years.

In 2017, the AFTKs of Air China Cargo reached 12,176 million, representing a year-on-year increase of 3.66%. Its RFTKs reached 6,950 million, representing a year-on-year increase of 8.97%. The volume of cargo and mail carried was 1.4694 million tonnes, representing a year-on-year increase of 6.00%. The cargo and mail load factor was 57.08%, representing a year-on-year increase of 2.79 ppt.

In 2017, Air China Cargo recorded consolidated revenue of RMB11,264 million, representing an increase of 24.84%, of which cargo and mail transportation revenue amounted to RMB9,903 million, representing a year-on-year increase of 24.52%. The profit attributable to the equity shareholders was RMB1,104 million as compared to RMB11 million in the same period last year.

2. Shenzhen Airlines

Shenzhen Airlines was established in 1992, with its principal operating base located in Shenzhen. Its principal business is the operation of passenger and cargo transportation. The registered capital of Shenzhen Airlines is RMB5,360,000,000. Air China holds 51% of its equity interest.

As at 31 December 2017, Shenzhen Airlines (including Kunming Airlines) operated a fleet of 203 aircraft with an average age of 6.20 years. During the year, 19 aircraft were introduced and 4 aircraft were phased out.

In 2017, the ASKs of Shenzhen Airlines (including Kunming Airlines) reached 59,792 million, representing a year-on-year increase of 3.39%. Its RPKs reached 49,346 million, representing a year-on-year increase of 3.23%. Shenzhen Airlines (including Kunming Airlines) carried 32.7086 million passengers, representing a year-on-year increase of 3.98%. The average passenger load factor was 82.53%, representing a year-on-year decrease of 0.13 ppt.

In terms of air cargo, the AFTKs of Shenzhen Airlines reached 981 million, representing a year-on-year increase of 17.06%. Its RFTKs reached 542 million, representing a year-on-year decrease of 3.39%. The volume of cargo and mail carried by Shenzhen Airlines was 0.3271 million tonnes, representing a year-on-year decrease of 4.02%, while the cargo and mail load factor was 55.24%, representing a year-on-year decrease of 11.72 ppt.

In 2017, Shenzhen Airlines recorded consolidated revenue of RMB28,052 million, representing a year-on-year increase of 6.58%, of which, air traffic revenue amounted to RMB26,778 million, representing a year-on-year increase of 6.63%. The profit attributable to equity shareholders was RMB1,439 million, representing a year-on-year decrease of 8.54%.

3. Air Macau

Air Macau was established in 1994 and is an airline based in Macau with a registered capital of MOP442.042 million. Air China holds 66.8995% of its equity interest.

As at 31 December 2017, Air Macau operated a fleet of 17 aircraft with an average age of 7.68 years. During the year, 1 new aircraft was introduced and 1 was phased out.

In 2017, the ASKs of Air Macau reached 6,161 million, representing a year-on-year decrease of 4.34%.Its RPKs reached 4,618 million, representing a year-on-year decrease of 2.12%. It carried a total of 2.7839 million passengers during the year, representing a year-on-year decrease of 0.74%, with an average passenger load factor of 74.96%, representing a year-on-year of increase of 1.71 ppt.

In terms of air cargo, the AFTKs of Air Macau reached 98.18 million, representing a year-on-year decrease of 4.70%. Its RFTKs reached 33.44 million, representing a year-on-year increase of 13.74%. 21,220 tonnes of cargo and mail were carried, representing a year-on-year increase of 10.80%; the cargo and mail load factor was 34.06%, representing a year-on-year increase of 5.52 ppt.

In 2017, Air Macau recorded a revenue of RMB2,872 million, representing a year-on-year increase of 6.56%, of which, air traffic revenue amounted to RMB2,602 million, representing a year-on-year increase of 8.49%. Profit after taxation was RMB66 million, representing a year-on-year increase of 173.45%.

4. Beijing Airlines

Beijing Airlines was established in 2011 with a registered capital of RMB1 billion. Air China holds 51% of its equity interest.

As at 31 December 2017, Beijing Airlines operated a fleet of 5 entrusted business jets and one self-owned business jet with an average age of 5.28 years. And 1 aircraft was phased out during the year.

In 2017, Beijing Airlines completed 477 flights, representing a year-on-year increase of 11.44%. It completed 1,676 flying hours, representing a year-on-year increase of 10.26%. It carried a total of 2,980 passengers, representing a year-on-year decrease of 5.64%.

In 2017, Beijing Airlines recorded a revenue of RMB125 million, representing a year-on-year decrease of 7.92%, of which, charter service revenue amounted to RMB28 million, representing a year-on-year decrease of 36.29%. The loss for the year was RMB37 million, as compared to profit after taxation of RMB0.7 million in the same period last year.

5. Dalian Airlines

Dalian Airlines was established in 2011 with a registered capital of RMB1 billion. Air China holds 80% of its equity interest.

As at 31 December 2017, Dalian Airlines operated a fleet of 11 aircraft with an average age of 4.57 years. 2 aircraft was introduced during the year.

In 2017, the ASKs of Dalian Airlines reached 2,767 million, representing a year-on-year increase of 14.62%. Its RPKs reached 2,334 million, representing a year-on-year increase of 13.96%. It carried a total of 2.1948 million passengers during the year, representing a year-on-year increase of 8.92%, with an average passenger load factor of 84.36%, representing a year-on-year decrease of 0.47 ppt.

In terms of air cargo, the AFTKs of Dalian Airlines reached 34.9309 million, representing a year-on-year increase of 12.01%. Its RFTKs reached 15.3284 million, representing a year-on-year decrease of 0.99%.It carried a total of 13,704.87 tonnes of cargo and mail during the year, representing a year-on-year increase of 0.38%. Its cargo and mail load factor was 43.88%, representing a year-on-year decrease of 5.77 ppt.

In 2017, Dalian Airlines recorded revenue of RMB1,483 million, representing a year-on-year increase of 12.62%, of which, air traffic revenue amounted to RMB1,478 million, representing a year-on-year increase of 12.28%. Profit after taxation was RMB133 million, representing a year-on-year increase of 17.29%.

6. Air China Inner Mongolia

Air China Inner Mongolia was established in 2013 with a registered capital of RMB1 billion. Air China holds 80% of its equity interest.

As at 31 December 2017, Air China Inner Mongolia operated a fleet of 7 aircraft with an average age of 6.44 years.1 aircraft was introduced during the year.

In 2017, the ASKs of Air China Inner Mongolia reached 1,728 million, representing a year-on-year increase of 22.64%. Its RPKs reached 1,400 million, representing a year-on-year increase of 22.48%.It carried a total of 1.4243 million passengers during the year, representing a year-on-year increaseof 23.29%, with an average passenger load factor of 81.03%, representing a year-on-year decrease of 0.04 ppt.

In terms of air cargo, the AFTKs of Air China Inner Mongolia reached 28.5941 million, representing a year-on-year increase of 59.11%. Its RFTKs reached 11.4196 million, representing a year-on-year increase of 2.40%. The amount of cargo and mail carried by Air China Inner Mongolia was 10,257.53 tonnes, representing a year-on-year increase of 10.08%, with a cargo and mail load factor of 39.94%, representing a year-on-year decrease of 22.12 ppt.

In 2017, Air China Inner Mongolia recorded a revenue of RMB1,122 million, representing a year-on-year increase of 20.63%, of which, air traffic revenue amounted to RMB1,097 million, representing a year-on-year increase of 21.24%. Profit after taxation was RMB97 million, representing a year-on-year decrease of 22.15%.

7. AMECO

AMECO was established in 1989 and principally engages in maintenance services of aircraft, engine and and components. The registered capital of AMECO is US300,052,800, and Air China holds 75% of its equity interest.

In 2017, AMECO recorded a revenue of RMB7,287 million, representing a year-on-year increase of 6.75% and profit after taxation amounted to RMB165 million, representing a year-on-year increase of 79.63%.

8. CNAF

CNAF was established in 1994 and principally engaged in the provision of financial services to CNAHC Group and the Group. The registered capital of CNAF is RMB1,127,961,864, with Air China holding 51% of its equity interest.

In 2017, CNAF recorded a revenue of RMB228 million, representing a year-on-year increase of 26.75%, and profit after taxation of RMB77 million, representing a year-on-year increase of 31.83%.

9. Cathay Pacific

Cathay Pacific was established in 1946 in Hong Kong and is listed on the Hong Kong Stock Exchange. Air China holds 29.99% of its equity interest.

As at 31 December 2017, Cathay Pacific operated a fleet of 208 aircraft with an average age of 9.3 years. 12 aircraft were introduced and 6 were phased out during the year.

In 2017, the ASKs of Cathay Pacific reached 150.14 billion, representing a year-on-year increase of 2.8%. Its RPKs reached 126.66 billion, representing a year-on-year increase of 2.6%. A total of 34.820 million passengers were carried, representing a year-on-year increase of 1.4%, with an average passenger load factor of 84.4%, representing a year-on-year decrease of 0.1 ppt.

In terms of air cargo, the AFTKs of Cathay Pacific reached 17.16 billion, representing a year-on-year increase of 3.6%. Its RFTKs reached 11.63 billion, representing a year-on-year increase of 8.9%; it carried a total of 2.056 million tonnes of cargo and mail during the year, representing a year-on year increase of 10.9%; the cargo and mail load factor was 67.8%, representing a year-on year increase of 3.4 ppt.

In 2017, Cathay Pacific recorded consolidated revenue of RMB84,171 million, representing a year-on-year increase of 4.77%, of which, air traffic revenue amounted to RMB78,138 million, representing a year-on-year increase of 3.71%. The loss attributable to equity shareholders for the year was RMB1,089 million, representing a year-on-year increase of 118.72% as compared to the loss attributable to equity shareholders of RMB498 million in the same period last year.

10. Shandong Airlines

Shandong Airlines was established in 1999 with a registered capital of RMB400 million. Shandong Airlines was owned as to 22.8% and 42% by Air China and Shandong Aviation Group Corporation, while Shandong Aviation Group Corporation was owned as to 49.4% by Air China.

As at 31 December 2017, Shandong Airlines operated a fleet of 113 aircraft with an average age of 4.91 years. 15 aircraft were introduced during the year.

In 2017, the ASKs of Shandong Airlines reached 39,665 million, representing a year-on-year increase of 16.71%. Its RPKs reached 32,984 million, representing a year-on-year increase of 24.7%. It carried a total of 23.1734 million passengers during the year, representing a year-on-year increase of 24.36%, with an average passenger load factor of 83.16%, representing an increase of 5.35 ppt compared to the year of 2016.

In terms of air cargo, the AFTKs of Shandong Airlines reached 661 million, representing a year-on-year increase of 11.12%. Its RFTKs reached 270 million, representing a year-on-year increase of 10.72%. It carried a total of 0.1623 million tonnes of cargo and mail during the year, representing a year-on-year increase 7.92%. The cargo and mail load factor was 40.76%, representing a decrease of 0.15 ppt compared to the year of 2016.

In 2017, Shandong Airlines recorded a revenue of RMB16,485 million, representing a year-on-year increase of 19.96%, of which, air traffic revenue amounted to RMB15,988 million, representing a year-on-year increase of 20.19%. The profit attributable to equity shareholders was RMB490 million, representing a year-on-year decrease of 7.97%.

OUTLOOK FOR FUTURE

Further development of consumption upgrade and continuous increase of demand

With China's economy maintaining a middle-to-high speed growth and the residents' income increasing rapidly, the middle-income population and consumption capacity has been continuously expanding. Due to the rapid growth of the needs for personal travel such as tours and vacations, family visits and study abroad, the travel trend tends to be high-end, quality, convenient and customized, and it is expected more and more residents will take airplane as their prior choice of travelling means for self-funded tours and family visits. As a result, air travel will gain increasing popularity.

Due to supply-side reform, the punctuality of flights is expected to improve

The Civil Aviation Administration of China has issued "Several Policies and Measures on Controlling the Total Traffic and Adjusting Flight Structure to Improve the Punctuality Rate of Flights" which is designed to further improve flight punctuality through strictly controlling airport capacity and optimizing the allocation of flight slots resources. The Group, with an objective of constructing aviation hubs, will substantially benefit from the flight punctuality since flight punctuality is crucial for the transferring and connecting functions of these hubs. In the future, with the improvement of flight punctuality of the industry as a whole, the importance of these hubs will be further elevated.

With the implementation of pricing reform, marketisation of aviation industry will be further enhanced

The Civil Aviation Administration of China and National Development and Reform Commission have promulgated new pricing policies for civil aviation, in the light of which marketized ticket price shall be applied to routes between first-tier cities and most of other routes with huge traffic. Thus, aviation companies will be able to develop different products and services according to their respective advantages and development models, which will be beneficial for the differentiated development of various aviation companies in the industry.

Intense competition will continue in the industry, and the impacts of high-speed rail as alternative will come to a stable level

The further implementation of the coordinated development of the Beijing-Tianjin-Hebei region, the development of the Yangtze Economic Belt and the Belt and Road Initiative, together with the construction of Guangdong-Hong Kong-Macao Bay Area, has provided opportunities for aviation companies to further explore market potentials. However, as a result of the relatively low market access barrier and the rapid development of low cost airlines in China, at the present, a number of major airports have been under almost full operation and the competition for traffic rights and flight slots resources is getting even more intense. Under such background, the Group has constructed a rhombus shape network with Beijing, Chengdu, Shanghai and Shenzhen as the four vertexes and has established strong competitive advantages in major airports across China. The Group will continue to push forward the development of its four hubs/portals in order to enhance the transferring capability, expand the coverage of the airline routes and optimise the network structure for the purpose of providing passengers with quality products and services.

The development of high-speed rail in China has entered a stable stage and a relatively mature route network has been established. Although leveraging the advantages in price and punctuality rate, highspeed rail has caused obvious diversion impacts on routes within the range of 800-1,000 kilometres, aviation companies has mitigated such impacts by adjusting route network and layout. In the medium-to-long term, the diversion pressure imposed on aviation companies by the competition from high-speed rail will gradually weaken. The Group has achieved a balance between domestic and overseas routes while the average distance for domestic routes is relatively longer compared with other airlines, and through continuous route network structure adjustment,the diversion impacts of high-speed rail will be further reduced.

MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL POSITION AND OPERATING RESULTS

The following discussion and analysis are based on the Group's consolidated financial statements and the notes thereto prepared in accordance with the IFRSs and are designed to assist the readers in further understanding the information provided in this report so as to better understanding the financial conditions and results of operations of the Group as a whole.

PROFIT ANALYSIS

In 2017, the Group proactively grasped market opportunities, and further strengthened the advantages of our core air traffic business by adopting measures such as expanding the scale of production, optimising operational arrangement, stabilising the yield level and refining cost control. During the reporting period, despite of influences of unfavorable factors such as the oil price rebound, the Group still achieved satisfactory results. During the reporting period, the Group recorded a profit after tax of RMB8,641 million, representing a year-on-year increase of 11.38%.

REVENUE

In 2017, the Group's revenue was RMB124,026 million, representing an increase of RMB8,882 million or 7.71% as compared with last year. Among which, air traffic revenue was RMB115,380 million, representing an increase of RMB8,082 million or 7.53% as compared with last year; other operating revenue was RMB8,646 million, representing a year-on-year increase of RMB800 million or 10.19%.

Revenue Contribution by Geographical Segments

Air Passenger Revenue

In 2017, the Group recorded an air passenger revenue of RMB105,125 million, representing an increase of RMB6,132 million over that of 2016. Among the air passenger revenue, the increase of capacity contributed an increase of RMB6,195 million to the revenue, and the increase of passenger load factor brought an increase of RMB602 million to the revenue, while the decrease of passenger yield resulted in a decrease in revenue of RMB665 million.

The Group's capacity, passenger load factor and yield per RPK in 2017 are as follows:

Air Passenger Revenue Contributed by Geographical Segments

Air Cargo and Mail Revenue

In 2017, the Group's air cargo and mail revenue was RMB10,255 million, representing an increase of RMB1,950 million as compared with last year. Among the air cargo and mail revenue, the increase of capacity contributed an increase of RMB380 million to the revenue, while the increase of cargo and mail load factor resulted in an increase in revenue of RMB282 million, and the increase of yield of cargo and mail resulted in an increase of RMB1,288 million to the revenue.

The capacity, cargo and mail load factor and yield per RFTK in 2017 are as follows:

Air Cargo and Mail Revenue Contributed by Geographical Segments

Operating Expenses

In 2017, the Group's operating expenses were RMB112,270 million, representing an increase of 15.02% from RMB97,612 million in 2016. The breakdown of the operating expenses is set out below:

• Jet fuel costs increased by RMB6,427 million or 29.24% on a year-on-year basis, mainly due to the increase in the consumption and the prices of jet fuel.

• Take-off, landing and depot charges increased by RMB1,089 million on a year-on-year basis, primarily due to an increase in the number of take-offs and landings.

• Aircraft maintenance, repair and overhaul costs increased by RMB1,558 million on a year-on-year basis, mainly due to the expansion of fleet size.

• Employee compensation costs increased by RMB2,317 million, mainly due to the increase in number of employees and the impact of the adjustment of employee compensation level.

• Air catering charges increased by RMB192 million, mainly due to the increase in the number of passengers.

• Sales and marketing expenses increased by RMB603 million on a year-on-year basis, mainly due to the increase in agency fees and fees charged for computer reservation services.

• General and administrative expenses increased by RMB325 million on a year-on-year basis, mainly due to the increase in provision for impairment of accounts receivable.

• Other operating expenses mainly included aircraft and engines operating lease expenses, contributions to the civil aviation development fund and non-above-mentioned ordinary expenses arising from our core air traffic business. Other operating expenses increased by 12.59% as compared to the previous year, mainly due to, among others, the year-on-year increase in the operating lease expenses of aircraft, engines and premises, etc. and the increase in the contributions to the civil aviation development fund during the year.

Other Income and Gains and Finance Costs

In 2017, the Group recorded an interest income of RMB224 million, representing a year-on-year increase of RMB97 million or 76.07%; and incurred an interest expense (excluding the capitalised portion) of RMB3,055 million, representing a year-on-year decrease of RMB180 million. In 2017, the Group recorded a net exchange gain of RMB2,938 million, as compared to the net exchange loss of RMB4,234 million for the same period of 2016, which was mainly due to the depreciation in the exchange rate of US dollars against RMB during the reporting period.

Share of Results of Associates and Joint Ventures

In 2017, the Group's share of results of its associates and joint ventures was a loss of RMB376 million, as compared to the share of results of its associates and joint ventures as a profit of RMB22 million for the same period of 2016, mainly due to the decrease in the profits of Cathay Pacific (an associate of the Group) this year. The Group recorded a loss on investment of Cathay Pacific of RMB986 million during the reporting period, representing a year-on-year increase of RMB327 million.

Material Acquisitions and Disposals

In 2017, the Company did not make any material acquisitions and disposals of subsidiaries, associates or joint ventures.

Assets Structure Analysis

As at 31 December 2017, the total assets of the Group amounted to RMB235,645 million, representing a year-on-year increase of 5.17%, among which current assets accounted for RMB20,760 million or 8.81% of the total assets, while non-current assets accounted for RMB214,885 million or 91.19% of the total assets.

Among the current assets, cash and cash equivalents were RMB5,563 million, accounting for 26.80% of the current assets and representing a decrease of 18.77% from the beginning of 2017. The decrease was mainly due to the improvement of the Group in utilisation efficiency of financial funds.

Among the non-current assets, the net book value of property, plant and equipment amounted to RMB168,536 million, accounting for 78.43% of the non-current assets and representing a year-on-year increase of 6.66%, which was primarily due to the increase in the number of self-owned and financing leased aircraft during the year.

Asset Mortgage

As at 31 December 2017, the Group, pursuant to certain bank loans and finance leasing agreements, had mortgaged certain aircraft and premises with an aggregated net book value of approximately RMB81,064 million (RMB84,030 million as at 31 December 2016) and land use rights with net book value of approximately RMB34 million (RMB35 million as at 31 December 2016). In addition, as at 31 December 2017, the Group had restricted bank deposits of approximately RMB697 million (approximately RMB474 million as at 31 December 2016), which were mainly reserves deposited in the People's Bank of China.

Capital Expenditure

In 2017, the Company's capital expenditure amounted to a total of RMB19,617 million, of which the total investment in aircraft and engines was RMB18,493 million. Other capital expenditure investment amounted to RMB1,124 million, mainly including investments in aircraft modifications, flight simulators, infrastructure construction, IT system construction, ground equipment procurement and cash component of the long-term investments.

Equity Investment

As at 31 December 2017, the Group's equity investment in its associates amounted to RMB14,200 million, representing an increase of 0.13% from the beginning of 2017. Among which, the balance of the equity investment of the Group in Cathay Pacific, Shandong Aviation Group Corporation and Shandong Airlines amounted to RMB11,469 million, RMB1,301 million and RMB888 million, respectively, with such companies recording profits of RMB-768 million, RMB604 million and RMB490 million, respectively for the year of 2017.

As at 31 December 2017, the Group's equity investment in its joint ventures was RMB1,239 million, representing an increase of 9.97% from the beginning of 2017, mainly due to the impact of the recognition of investment income from the joint ventures during the year.

Debt Structure Analysis

As at 31 December 2017, the Group's total liabilities were RMB140,786 million, representing a year-on-year decrease of 4.65%. Among which, current liabilities amounted to RMB72,132 million, accounting for 51.24% of the total liabilities; and non-current liabilities amounted to RMB68,654 million, accounting for 48.76% of the total liabilities.

Among the current liabilities, interest-bearing debts (including bank loans and other borrowings and obligations under finance leases) amounted to RMB34,892 million, representing an increase of 8.78% from the beginning of 2017.

Among the non-current liabilities, interest-bearing debts (including bank loans and other borrowings, corporate bonds and obligations under finance leases) amounted to RMB59,907 million, representing a decrease of 19.19% from the beginning of 2017.

Details of interest-bearing debts of the Group categorized by currency are set out below:

Commitments and Contingent Liabilities

The Group's capital commitments, which mainly consisted of the payables in the next few years for purchasing certain aircraft and related equipment, decreased by 8.69% from RMB85,143 million as at 31 December 2016 to RMB77,742 million as at 31 December 2017. The Group's commitments under operating leases, which mainly consisted of the payments in the next few years for leasing certain aircraft, offices and related equipment, amounted to RMB51,391 million as at 31 December 2017, representing a year-on-year decrease of 1.49%. The Group's investment commitments, which was mainly used in the investment agreements entered into, amounted to RMB58 million as at 31 December 2017, representing a decrease of RMB1 million from RMB59 million as at 31 December 2016.

Details of the Group's contingent liabilities are set out in Note 43 to the financial statements of the Group for 2017.

Capital Expenditure Plan and Relevant Financing Plan for Aircraft and Related Equipment for the Coming Three Years

The Group has set the total budgeted capital expenditure for aircraft and related equipment at RMB97,973 million, of which RMB29,553 million, RMB37,143 million and RMB31,277 million have been allocated to the years of 2018, 2019 and 2020 respectively. The Group intends to satisfy the capital expenditure requirement by means such as internal funds or debt financing.

Gearing Ratio

As at 31 December 2017, the Group's gearing ratio (total liabilities divided by total assets) was 59.75%, representing a decrease of 6.15 percentage points from 65.90% as at 31 December 2016, such decrease was mainly due to the non-public issuance of A Shares during the reporting period. High gearing ratio is common among aviation enterprises, and the current gearing ratio of the Group is at a relatively reasonable level. Taking into account the Group's profitability and the market environment where it operates, its long-term insolvency risk is within controllable range.

Working Capital and its Sources

As at 31 December 2017, the Group's net current liabilities (current liabilities minus current assets) were RMB51,372 million, representing an increase of RMB7,178 million as compared to the previous year. The increase in net current liabilities was mainly due to the increase in short-term interest-bearing bank loans and other borrowings. Based on the structure of current assets and current liabilities, the current ratio (current assets divided by current liabilities) was 0.29, representing a decrease from 0.31 as at 31 December 2016.

The Group meets its working capital needs mainly through its operating activities and external financing activities. In 2017, the Group's net cash inflow from operating activities was RMB22,837 million, representing a decrease of 16.55% from RMB27,366 million in 2016, which is mainly due to the increase of jet fuel costs. Net cash outflow from investment activities was RMB14,653 million, representing a decrease of 22.93% from RMB19,013 million in 2016, mainly due to the year-on-year decrease in the cash payment of advances and remaining balances for aircraft during the reporting period. Net cash outflow from financing activities amounted to RMB9,302 million, representing an increase of 5.92% from RMB8,781 million in 2016, mainly due to the increase in debt repayment during the reporting period. The Company has obtained bank facilities of up to RMB171,567 million granted by several banks in the PRC, among which approximately RMB23,004 million has been utilised, sufficient to meet our demand on working capital and future capital commitments.

RISK FACTORS

Risks of Market Fluctuation

The demand in the air transport market is closely linked to the economic growth and the level of disposable national income. China's economy has managed to maintain its speedy growth. Accompanied by the continuously deepening of economic restructuring, the pressure of prospective economic deterioration has eased. And while, with the interlaced impact of the structural and cyclical factors, coupled with international political turmoil and such other external uncertainties, the pressure of economic slowdown and risk of market volatility still exist.

Risks of Competition

Risks of industry competition

Bilateral and multilateral non-equity joint venture arrangements among large network carriers are being constantly strengthened as competition is taking new forms. While China's top three airlines are accelerating their penetration in the global market, an increasing number of medium-size domestic airlines are actively applying for flying medium- and long-distance international routes, as a result, the international air traffic rights will become more valuable and scarce in the future. While the Company is enjoying the advantages in locations and timeslots in respect of the long-distance routes to Europe and America, it has still much to improve compared with the leading airlines in Europe and America in terms of network, products and services. Regional airlines that spring up during an industry deregulation promoted the trend of low-cost aviation operations, which will further intensify the competition in the domestic market and may result in reduced yield.

Risks of alternative competition

China has built up the world's largest high-speed railway network and is extending its reach towards the central and western China. High-speed railway transportation features high frequency, low cost, punctuality, high speed, convenience and comfort, and has become the favourite choice of travellers, which put civil aviation in an inferior position. In the short term, high-speed rail carriers will continue to snatch market shares from the airlines after they start network operation, increase the overall speed and the frequency and extend the operating schedule. However, in the long term, it will change China's geographic pattern of economy as highspeed railway transportation and civil aviation may actually cooperate and compete, and the air-rail interline operation will become a strong support to the construction of international hubs. As for the domestic routes, as medium and short distance routes account for the lowest proportion in the industry, the Company may suffer from the competition of high-speed railway transportation, but only to a limited extent.

Operating Risks

De-hubbing risks

The international reach from the airports of China's second-tier cities has been developing rapidly, with an obvious de-hubbing trend. Taking international long-distance routes above the range of 5,000 kilometres as example, in 2009, there were only three second-tier cities in China which operated international long-distance routes, and as of December 2017 the number has increased to 21. Long-distance route operations by the airports in the second-tier cities have been growing rapidly, which now covers Europe, America, Australia and Africa. With the gradual expansion of the routes, airlines with wide-body aircraft have been actively involved in the development of long-distance market in the second-tier cities. Such development will have certain impact on the Company's hubbed operations.

Risks of Oil Price Fluctuation

Jet fuel constitutes one of the major components of the Group's operating costs, for which the Group is subject to the fluctuation of jet fuel price. In the future, with uncertainties in crude oil supply, the US dollar interest rate increase cycle and geopolitics, it is expected there still exist some risks of oil price fluctuation. In 2017, with the other variables remaining unchanged, if the average price of the jet fuel rises or falls by 5%, the Group's jet fuel cost will rise or fall by about RMB1,420 million. In view of this, the Group will closely monitor the trend of oil price and actively work on appropriate measures to control the risks that might be brought by oil price fluctuation with an aim to mitigate the potential impacts of such fluctuation on the Group.

Risks of Exchange Rate Fluctuation

Currently, with the positive prospects of global economy, the US and Europe are phasing out quantitative easing and monetary policies have been tightened. In addition, as the US further pushes forward its tax reform, the economic growth of the US will gain more driving force and more dollars will flow back to its domestic market, which in turn will promote the increase of US Dollar Index and create conditions for the increase of US dollar interest rate. As of March 2018, the Federal Reserve System has announced the first-round interest rate increase in 2018 with a total of 2 to 3 times of interest rate increase to be expected for the year. At the same time, with the further deepening of supply-side reform and the implementation of the Belt and Road Initiative of China, the high-quality growth of China's economy has established the foundation for the stability of RMB exchange rate. The trend of the exchange rate of RMB against USD is still unclear in 2018.

Some of the Group's foreign currency liabilities are denominated in US dollar and some of the Group's expenses are also denominated in currencies other than RMB. Assuming that the risk variables other than the exchange rate stay unchanged, the appreciation or depreciation of RMB against US dollar by 1% due to the changes in the exchange rate will result in the increase or decrease in the Group's total profit and equity for the year of 2017 by RMB279 million. In response to this, taking into account its own income denominated in USD, the Group will flexibly adjust its debt structure on the basis of maintaining a relatively reasonable percentage of external debts, so as to minimize the exchange exposure to be brought by USD interest-bearing debts.

Details of the financial risk management objectives and policies of the Group are set out in note 45 to the financial statements of the Group for 2017.

CORPORATE GOVERNANCE REPORT

The Company has been committed to maintaining and enhancing the level of its corporate governance so as to ensure greater accountability and transparency of the Group and deliver long-term return to its shareholders. The Company has complied with all code provisions as set out in the Corporate Governance Code in Appendix 14 to the Listing Rules (the "Code") during the year ended 31 December 2017 with the exception of Code Provision A.5.1. The Company's corporate governance practices are summarised and discussed below.

GOVERNANCE STRUCTURE

As at the date of this annual report, the governance structure of the Company is set out as follows:

MEMBERS OF THE FIFTH SESSION OF THE BOARD

All of the Directors have actively participated in the activities of the Company. The attendance records of all the Directors present in person at general meetings, Board meetings and meetings of each special committee in 2017 are as follows:

Notes:

(1) For the year ended 31 December 2017, the number of Board meetings held, the convening procedures, minutes and records, rules of procedure and other relevant matters in connection with such meetings were in compliance with the relevant code provisions of the Code. It can be shown from the attendance rate that all Directors have discharged their duty of diligence and are dedicated to making contribution for the interest of the Company and its shareholders as a whole.

(2) Mr. Pan Xiaojiang and Mr. Simon To Chi Keung ceased to act as independent non-executive Directors and members of the Nomination and Remuneration Committee on 25 May 2017. On 9 August 2017, Mr. Wang Xiaokang was appointed as a member of the Nomination and Remuneration Committee. As at 31 December 2017, the Nomination and Remuneration Committee comprised two independent non-executive Directors, namely Mr. Li Dajin and Mr. Wang Xiaokang and one non-executive Director, namely Mr. Cai Jianjiang, with Mr. Li Dajin serving as the Chairman of the committee.

(3) Mr. Pan Xiaojiang ceased to act as independent non-executive Director and the Chairman of the Audit and Risk Control Committee on 25 May 2017. On 9 August 2017, Mr. Liu Deheng was elected as the Chairman of the Audit and Risk Control Committee. Mr. Cao Jianxiong ceased to be non-executive Director and a member of the Audit and Risk Control Committee with effect from 27 October 2017 and Mr. Stanley Hui Hon-chung was appointed as a member of the Audit and Risk Control Committee on the same day. As at 31 December 2017, the Audit and Risk Control Committee comprised three independent non-executive Directors, namely Mr. Liu Deheng, Mr. Stanley Hui Hon-chung and Mr. Li Dajin, with Mr. Liu Deheng serving as the Chairman of the committee.

(4) Mr. Cao Jianxiong and Mr. Feng Gang ceased to act as non-executive Directors and members of the Strategy and Investment Committee on 27 October 2017. Mr. Liu Deheng was appointed as a member of the Strategy and Investment Committee on 27 October 2017. As at 31 December 2017, the Strategy and Investment Committee comprised one non-executive Director, namely Mr. Cai Jianjiang, one executive Director, namely Mr. Song Zhiyong and one independent non-executive Director, namely Mr. Liu Deheng, with Mr. Song Zhiyong serving as the Chairman of the committee.

(5) Mr. Feng Gang ceased to act as non-executive Director and a member of the Aviation Safety Committee on 27 October 2017, and Mr. Stanley Hui Hon-chung was appointed as a member of the Aviation Safety Committee on the same day. As at 31 December 2017, the Aviation Safety Committee comprised one non-executive Director, namely Mr. Cai Jianjiang, one executive Director, namely Mr. Song Zhiyong and one independent non-executive Director, namely Mr. Stanley Hui Hon-chung, with Mr. Song Zhiyong serving as the Chairman of the committee.

(6) Mr. Xue Yasong was elected as employee representative Director in 2018 and therefore did not attend the above meetings held in 2017.

MAJOR CORPORATE GOVERNANCE PRINCIPLES AND PRACTICES OF THE COMPANY

A. Directors

Independent non-executive Directors shall comprise one third of the Board.

• As at 31 December 2017, the Board comprised 7 Directors, out of which four were independent non-executive Directors. The Directors are elected at the shareholders' general meeting for a three-year term of office, and are eligible for re-election upon expiry of the term.

• Pursuant to the Listing Rules, each of the four independent non-executive Directors, namely, Mr. Wang Xiaokang, Mr. Liu Deheng, Mr. Stanley Hui Hon-chung and Mr. Li Dajin, has confirmed their independence with the Hong Kong Stock Exchange when they were elected.

• The Company had already received from all independent non-executive Directors the annual statements concerning their independence in which each of the independent non-executive Directors re-confirmed their independence. The Company considers all independent non-executive Directors as independent within the meaning of Rule 3.13 of the Listing Rules.

The Directors shall have adequate skills and experience for the business of the Company.

• The Directors have extensive expertise and experience in the fields of aviation, finance, law and financial management and provide substantial support for the effective performance of the Board.

• The list of the Directors and their biographical details and respective roles on the Board and special committees under the Board are set out in this annual report and published on the websites of the Company and Hong Kong Stock Exchange.

• Besides the working relationships in the Company, there are no financial, business, family relationship or other material relationships among the Directors, Supervisors and senior management.

Distinguished roles of the Chairman and President

• The Chairman, concurrently a non-executive Director, is responsible for leading the Board and ensuring the Board's efficient operation and that all major and relevant issues are discussed by the Board in a prompt and constructive manner.

• The Chairman shall be elected and dismissed by a simple majority of the Directors. The term of office of the Chairman shall be three years, and the Chairman is eligible for re-election and re-appointment upon expiry of the term. Mr. Cai Jianjiang was elected as the Chairman on 21 February 2014, and was re-elected on 27 October 2017.

• The Company has a President who shall be appointed or dismissed by the Board. Mr. Song Zhiyong was appointed as the President on 28 January 2014.

• The President is authorised to oversee the Group's business and implement its strategies to attain overall commercial goals.

Non-executive Directors shall be appointed for a specific term, and all Directors appointed to fill a casual vacancy shall be subject to election by shareholders at the first shareholders' general meeting after their appointment.

• The term of office of the existing non-executive Directors is three years upon election at the shareholders' general meeting.

The Board shall assume responsibility for the leadership and supervision of the Company and be collectively responsible for promoting the success of the Company.

• The Board is accountable to the shareholders' general meeting and determines the investment proposals of the Company and disposals of the Company's fixed assets according to the authorisation of the shareholders' general meeting. The Company formulated the "Rules and Procedures for Shareholders' General Meetings", "Rules and Procedures for Board Meetings" and "Rules and Procedures for Senior Management Meetings". Pursuant to the Articles of Association, the main responsibilities of the Board include: to determine the Company's business policies and investment plans; to formulate the Company's preliminary and final annual financial budgets; to formulate the Company's profit distribution proposals and loss recovery proposals; to determine the establishment of the Company's internal management bodies; to appoint or dismiss the President of the Company, Secretary to the Board, and based on the nomination by the President, to appoint or dismiss the Vice President, the Chief Financial Officer, the Chief Pilot, the general counsel and other senior management personnel of the Company; and to exercise other functions and powers as stipulated in the Articles of Association and authorised by the shareholders' general meeting.

• The President shall be authorised by the Board to implement various strategies and oversee the day-to-day operations of the Company.

• The Board shall have independent access to the senior management personnel for enquiries in relation to the Company's management.

• The Board shall have special committees to provide support to the Board in its decision-making process.

The management shall be responsible for formulating and implementing the Company's business plans and board resolutions and shall be accountable to the Board.

• The management shall be accountable to the Board and its main responsibilities include: to formulate the strategic development plans and determine the establishment of the Company's internal bodies; to formulate and implement annual business plans, investment proposals, preliminary and final annual financial budgets; to establish general management systems regarding employment, remuneration and other fundamental internal rules and regulations; to make decisions on major issues such as operation safety and business management; to make decision on transactions relating to the Company's main business involving a value within a monetary threshold or within a specific proportion of the Company's latest audited net asset value; to implement board resolutions and exercise such other authorities as authorised by the Board.

The Board shall meet regularly to carry out its duties. The Board and its committees shall be provided with adequate information in a timely manner.

• Board meetings are held regularly throughout the year and generally include annual meeting, interim meeting and meetings for the first and third quarters. The Board shall formulate meeting plans on an annual basis, which mainly include matters such as the time and venue of the Board meeting as well as routine proposals such as review of financial reports, and shall inform all Directors of such plans in the beginning of the year. Board meetings shall be convened by the Chairman and a 14-day notice shall be served to all Directors before each meeting. The Directors may attend live meetings or through other electronic means of communication. If an extraordinary Board meeting is proposed to be convened, the Secretary to the Board shall issue a notice of the extraordinary Board meeting within 10 days from the receipt of such proposal, and the relevant documents of the meeting shall be given to all Directors, Supervisors and other persons attending the meeting at least three days in advance.

• The Secretary to the Board shall be responsible for the communications and liaison with all Directors from the time when the notice is served to the commencement of the meeting, and shall provide in a timely manner the necessary information to the Directors to facilitate their decision-making on matters set out in the agenda.

• For the purpose of considering resolutions or matters during Board meetings, the Directors may require the presence of the persons-in-charge of the relevant departments at the Board meetings to answer queries, so that the Directors can have a thorough understanding of the key issues and the general situation.

• All Directors shall have access to the Secretary to the Board. Under the leadership of the Board and the Chairman, the Secretary to the Board shall take the initiative to keep himself or herself abreast of the implementation progress of the Board resolutions, and report to and advise the Board and the Chairman in a timely manner on major issues arising in the course of implementation.

• Minutes of Board meetings shall be kept by the Secretary to the Board and made available for inspection by any Director at any time.

Each Director is required to keep abreast of his/her responsibilities as a Director and of the operating manner, business activities and developments of the Company.

• The management shall provide members of the Board and special committees under the Board with appropriate and sufficient information in a timely manner so as to update them with the latest developments of the Company and facilitate their discharge of duties.

• Newly appointed Directors shall be given introduction in relation to the Company to ensure that they have a sufficient understanding of the management, business and governance practices of the Company.

• The Company also encourages its Directors to participate in seminars and courses conducted by recognised institutions so as to ensure that they constantly improve their skills and are aware of the latest changes or developments in laws and regulations, the Listing Rules and the Code with which they are required to comply in discharging their duties.

• The Directors confirmed that they have complied with code provision A.6.5 of the Code in relation to training of Directors. All Directors have participated in continuing professional development by attending trainings and programmes or reading relevant materials to broaden their knowledge base and sharpen their skills, and have provided their training records to the Company.

Notes: a. Trainings on the responsibilities of the directors provided by the Company's legal advisers and the information about the latest laws and regulations and regulatory developments in the domestic and foreign capital markets prepared by the Company on a regular basis, for the Directors to study by themselves.

b. Special trainings provided by the regulatory authorities.

The Company shall arrange appropriate insurance in respect of potential legal actions against its Directors.

• The Company has purchased liability insurance for the Directors, Supervisors and senior management.

Compliance with the Model Code for Securities Transactions by Directors of Listed Issuers ("Model Code")

• After making specific enquiries, the Company confirmed that each Director and each Supervisor has complied with the required standards under the Model Code as set out in Appendix 10 of the Listing Rules throughout 2017.

• The Model Code contained in Appendix 10 to the Listing Rules provides that the listed issuer may adopt a code of conduct which is higher in level than the Model Code. On 5 September 2005, the Company formulated and adopted the Model Code for Securities Transactions, which was subsequently amended on 19 March 2007 and 4 December 2009, respectively, on terms no less exacting than the required standards of the Model Code. The Model Code for Securities Transactions of the Company also applies to the Supervisors and the relevant employees.

Corporate Governance Functions

• The Board shall be responsible for performing the following corporate governance duties: to develop and review the Company's policies and practices on corporate governance, and provide recommendations in this regard; to review and monitor the training and continuous professional development of the Directors and senior management; to review and monitor the Company's policies and practices on compliance with legal and regulatory requirements; to develop, review and monitor the code of conduct and compliance manual applicable to employees and Directors; and to review the Company's compliance with the Corporate Governance Code and the disclosure in the Corporate Governance Report. During the year, the Board has duly performed the above corporate governance duties. Please refer to the disclosure in this Corporate Governance Report for details of the implementation in this regard.

B. Remuneration of Directors and Senior Management

The Company shall establish a remuneration committee with certain authorities and obligations under specific written terms. A majority of the members of the remuneration committee shall be independent non-executive directors.

• The Company has established the Nomination and Remuneration Committee to advise the Board on the compensation of the Directors as well as to nominate candidates to fill vacancies on the Board of the Company. In addition, the Nomination and Remuneration Committee reviews the performance of and determines the compensation structure of the senior management of the Company.

• The "Board Diversity Policy" was adopted by the Board in September 2013, which sets out the approach of the Company towards achieving diversity of the Board.

- The Company takes into consideration a number of factors, including, but not limited to, professional experience and qualifications, cultural and educational background, skills, industry knowledge and reputation, knowledge of the laws and regulations applicable to the Company, gender, age, language skills and length of service, with a view to achieving diversity of the Board. These factors shall be taken into account by the Nomination and Remuneration Committee in reviewing the structure and composition of the Board and making recommendations to the Board on the appointment, re-appointment and re-designation of Directors.

- The above factors should be balanced as appropriate in determining the optimal composition of the Board. For appointment of Directors, the above factors shall be considered on a case-by-case basis in light of the actual circumstances of the Company and its business operations, development and strategies. Appointment by the Board should be made based on merits and the contributions that the individual is expected to bring to the Board with due regard for the benefits of diversity in the Board.

- The Nomination and Remuneration Committee shall monitor the implementation of the Board Diversity Policy on an ongoing basis, and review this policy as appropriate.

• A shareholder holding 3% or more of the shares of the Company is entitled to nominate a Director to the Nomination and Remuneration Committee. The Nomination and Remuneration Committee shall review the qualification of candidates for directorship and senior management according to the standards as set out in the Articles of Association and the Board Diversity Policy and submit a report to the Board.

• During the reporting period, the Nomination and Remuneration Committee considered the nomination of candidates for independent non-executive Directors and candidates for Directors of the fifth session of the Board; advised the Board on the appointment of senior management of the Company; recommended the remuneration of Directors of the fifth session of the Board; and re-elected the Chairman of the Nomination and Remuneration Committee of the fifth session of the Board.

• The remuneration of the independent non-executive Directors shall be determined according to the average level of the listed companies in the industry with the actual situation of the Company taken into account. The remuneration of the executive Directors and senior management shall be determined in accordance with the relevant laws and regulations of PRC and the provisions of the "Interim Measures for Remuneration Administration of Enterprise Leaders" of the Company. The Nomination and Remuneration Committee made recommendations to the Board on the remuneration packages of individual Directors and senior management based on the above-mentioned standards. The remuneration of the Directors and Supervisors of the Company shall be determined by the shareholders' meeting, and that of the senior management shall be determined by the Board of Directors after being considered by the Nomination and Remuneration Committee.

• Details of the remuneration for the Directors and senior management are disclosed in note 13 to the financial statements of this annual report. Mr. Pan Xiaojiang, a former independent non-executive Director, waived his emolument as an independent non-executive Director of the Company for personal reasons.

C. Accountability and Audit

The Board shall present a balanced, clear and comprehensive assessment of the Company's performance, position and prospects

• The Company has established the Audit and Risk Control Committee to review the financial information of the Company and the relevant disclosure, to review the risk management and internal control systems of the Company as well as to review and supervise the effectiveness of the internal audit department.

• The Company has published its annual and interim reports in accordance with the requirements of the Listing Rules and other relevant laws and regulations in a timely manner, within three months and two months, respectively, after the end of the relevant periods, and published its quarterly reports within 30 days after the end of the first and third quarter, and the information disclosed is adequate for the shareholders to evaluate the performance, financial position and prospects of the Company.

• Key operating data of the Company are published monthly in order to improve the transparency of the Company's performance and to provide the latest developments of the Company in a timely manner.

• The Company has a sound environment for implementing internal controls. The Company has set up an effective electronic information system to support business development which comprises various operation systems, settlement system and a core accounting and audit platform, i.e. the Oracle financial information system. For treasury management, the Company has implemented a global online banking management system. An effective accounting information system was also established.

The Board is responsible for assessing and determining the nature and extent of the risks that the Company is willing to take in order to achieve its strategic objectives and ensuring that the Company has established and maintained appropriate and effective risk management and internal control system. The Board shall supervise the design, implementation and monitoring of the risk management and internal control system by the management, while the management should confirm with the Board if the relevant system is effective.

• The Board bears the ultimate responsibility for the Group's risk management and internal control system and for reviewing the effectiveness of the system. The risk management and internal control system is designed to manage rather than eliminate the risk of failing to achieve business objectives and to make reasonable, but not absolute, assurances that there will be no material misstatement or loss. The Board monitors the risk level with the assistance of the Audit and Risk Control Committee and the management of the Company.

• The Company conducts at least one review of the soundness and effectiveness of the risk management and internal control system every year. The Board will publish the self-assessment report on the annual internal control after it is reviewed by the Audit and Risk Control Committee.

• In 2017, the Board reviewed the Group's risk management and internal control system for the year through the Audit and Risk Control Committee and considered that the system was adequate and effective. The review of the Audit and Risk Control Committee covered such key aspects of as financial monitoring, operational monitoring and compliance monitoring. The Audit and Risk Control Committee also reviewed the Group's resources, qualifications and experience of the responsible staff, training courses and budget in respect of the accounting, internal audit and financial reporting functions and expressed satisfaction with the adequacy of such measures. The Board also confirmed that the Company has established effective systems and procedures to ensure the control and management of the strategic risks, financial risks, operational risks, legal risks, contingent risks etc..

• The basic procedures of the Group's risk management include: (1) collection of risk information; (2) identification and assessment of risks; (3) formulation and implementation of risk reduction measures; and (4) monitoring of risk management.

• The Company has established a clear organizational structure to allocate responsibilities for formulation, implementation and monitoring as required. An information reporting mechanism has been initially formed for risk management, which covers the Company's main business units to ensure that significant risks are effectively monitored and coped with within the Group.

• The Group ranks the risks based on priority so as to pay special attention to critical risks. It sets risk indicators for critical risks, and monitors and judges the key indicators on a regular basis so that the risks are always under control. All the business units are required to compile a summary of the risks and report to the Risk Management Working Group Office on a regular basis. The Risk Management Working Group Office has initially set up a monthly reporting procedure to regularly report the risks and tracking to the management and regulatory authorities.

• According to the risk assessment in 2017, the Group is mainly facing market fluctuation risk, industry competition and alternative competition risk, oil price fluctuation and exchange rate fluctuation risk and de-hubbing risk, which will affect the profitability and development of the Company.

• The Company has established an internal audit department to assist the Audit and Risk Control Committee and to analyze and evaluate the adequacy and effectiveness of the Group's internal control and risk management system and to supervise and evaluate the risk management and internal control of the Group. The internal audit department regularly reports the annual, interim work reports and annual audit plans to the Audit and Risk Control Committee for review of risk management and internal control system. The Audit and Risk Control Committee reviews the reporting compliance, reviews and monitors the effectiveness of the internal audit department, keeps tracks of the corrective actions for the problems spotted and guides the internal audit department to operate efficiently.

• The Company has implemented a registration and filing system for the insiders and established the profiles of the insiders, who should bear the responsibility of confidentiality for the insider information they know. The Board should guarantee the truthfulness, accuracy and completeness of the insider information. The Company will conduct regular or occasional inquiries on the trading of shares and derivatives of the Company by the insiders. If insiders are found to have been involved in insider transaction or have breached the laws and regulations due to dereliction of duty, the Company will ensure that the relevant personnel are held accountable in accordance with relevant laws and regulations and the Company's policies. The Company is also aware of the Company's obligations under the SFO and the Listing Rules for the handling and disclosure of insider information, and unless the information is in the category of "Safe Harbour Provisions", the Company will disclose such insider information to the public as soon as practicable.

The Board shall establish formal and transparent arrangements in relation to the application of financial reporting, risk management and internal control principles and the maintenance of an appropriate relationship with the issuer's auditors. The Audit Committee established as per the Listing Rules must have clear Terms of Reference.

• Through the Audit and Risk Control Committee, the Board reviews and supervises the Company's financial reporting process and risk management and internal control system, and reviews and monitors the effectiveness of the internal control functions, communicates with the auditors and reviews periodic financial reports so as to make sure the financial reporting and internal control principles are formal and transparent.

• During the reporting period, the Audit and Risk Control Committee mainly performed the following duties:

reviewing the annual reports for the year of 2016 and the semi-annual reports for the year of 2017 prepared in accordance with CASs and IFRSs respectively, and the first and third quarterly reports for the year of 2017 prepared in accordance with CASs; reviewing the profit distribution plan for 2016; reviewing "Special Explanations for Non-operating Fund Utilization and Other Related Fund Transactions in 2016" and the "Statement of the Implementation of Connected Transactions for the year of 2016"; reviewing the assessment report on internal control and the audit report on internal control for the year of 2016; reviewing the performance report by the Audit and Risk Control Committee for the year of 2016; reviewing the financial plan and investment plan for the year of 2017; reviewing matters relating to the change of international and domestic auditors and internal control auditor for the year of 2017; approving the "Administrative Regulations regarding the Related/Connected Transactions of Air China Limited"; reviewing the replacement of self-raised funds by funds raised through non-public offering; reviewing the special report regarding the deposit and actual use of raised funds of A Shares for the first half of 2017; reviewing matters relating to the acquisition of properties from China National Aviation Construction and Development Company; determining the list of related parties of A share as of 31 December 2016; approving the renewal of trademark license framework agreement between the Company and CNAHC; approving the new financial services framework agreement between the Company and CNAF and the annual caps for the continuing connected transactions contemplated thereunder; approving the new financial services framework agreement between CNAF and CNAHC and the annual caps for the continuing connected transactions contemplated thereunder; and electing the Chairman of the Audit and Risk Control Committee.

In addition to the above, the Audit and Risk Control Committee also heard the following reports:

the summary report on internal audit work for the year 2016 and the internal audit plan for the year 2017; summary report on audit work for the year 2016 from KPMG; self-assessment report on internal control of the Company for the year 2017 and the audit plan on internal control of Deloitte Touche Tohmatsu CPA LLP.

• The annual results and annual report of the Company for the year 2017 had been reviewed by the Audit and Risk Control Committee.

The responsibility of the Directors in relation to the financial statements

The Company prepares and publishes annual reports, interim reports and quarterly reports each year. The responsibilities of the Directors in relation to the financial statements are set out below and shall be read together with the "Independent Auditor's Report" set out in this annual report.

• Annual reports and accounts

The Directors acknowledge that they are responsible for preparing the financial statements for each financial year so as to present a true and fair view of the financial position of the Company and the Group, and of the financial performance and cash flow of the Group.

• Accounting policies

When preparing the financial statements of the Company and the Group, the Directors have consistently applied appropriate accounting policies under the relevant accounting standards.

• Accounting records

The Directors are responsible for ensuring that the Company shall keep the accounting records, which will reflect the financial position of the Company with reasonable accuracy, enabling the Group to prepare the financial statements in accordance with the requirements of the Listing Rules, Hong Kong Companies Ordinance and the relevant accounting standards.

• Ongoing operation

After making appropriate enquiries, the Directors believe that the Group has sufficient resources for operation in the foreseeable future. Accordingly, the Group's financial statements should be prepared on a going concern basis.

The statement of reporting responsibility of the auditors is set out in the section headed "Independent Auditor's Report" set out in this annual report.

Auditors' remuneration

The international and domestic auditors of the Company are Deloitte Touche Tohmatsu and Deloitte Touche Tohmatsu Certified Public Accountants LLP respectively. Breakdown of the remuneration to the Company's external auditors for providing audit and non-audit services for the year ended 31 December 2017 is as follows:

RMB9,522,000 (including value-added tax) was charged in aggregate for the review of the Group's financial statements for the six months ended 30 June 2017 and for the audit of the Group's financial statements for the year ended 31 December 2017; an aggregate amount of RMB6,623,000 (including value-added tax) was charged for the audit of the financial statements of certain subsidiaries of the Group for the year ended 31 December 2017; RMB1,000,000 (including value-added tax) was charged for providing internal control audit services to the Group; and RMB70,000 (including value-added tax) was charged for the rendering of tax advisory related services to the Group.

D. Delegation by the Board

The Company shall formalise the functions reserved to the Board and those delegated to the management. There shall be division of responsibility between the Board committees, and each committee shall be formed with certain authorities under specific terms

• The Articles of Association has provided for the authorities and authorisations of the Board and the President, details of which are set out in the "Rules and Procedure for Board Meetings" and "Rules and Procedures for Senior Management Meetings".

• The primary duties of the Audit and Risk Control committee are: to propose the engagement or change of external auditors, conduct appropriate review and evaluation, as well as give opinion in writing to the Board, in connection with the appointment of new accounting firms or re-appointment of the existing accounting firms; to review and supervise our internal auditing system and its implementation, review the duties and responsibilities of the internal audit personnel and receive and consider the work report prepared by the responsible person of the audit department; to be responsible for the communications between the internal auditors and external auditors; to review and verify the Company's financial information and its disclosure; to review the Company's financial control, internal control and risk control system, and evaluate the effectiveness of the system; to monitor the implementation and self-assessment of the Company's internal control system, review the risk control and internal control system with the management, ensuring that they have performed their duties properly and established an effective internal control system; to study the results of the investigation on the internal control and the feedback of the management on the results; to assess the effectiveness of the control rules and the operational standards relating to risk investments, including but not limited to financial derivative instruments, and consider the strategies and proposals of the Company's risk investment; to be responsible for the control and daily management of the related/connected transactions of the Company, and to review the Company's relevant significant related/connected transactions; to receive reports from the Company relating to fraudulent acts and discovery and complaints; and to fulfil other duties authorised by the Board.

• The primary duties of the Nomination and Remuneration Committee are: to study on the criteria and procedures for selecting candidates for the Directors and senior management and make recommendations to the Board; to make recommendations to the Board on the candidates to fill casual vacancies on the Board, and make recommendations regarding the Directors' remuneration to the Board; to evaluate the performance of the senior management of the Company and determine their remuneration structure; to make recommendations to the Board on the remuneration policy and structure for the Directors and senior management and on the establishment of a set of formal and transparent procedures for formulating remuneration policy, and supervise the implementation of the remuneration policy of the Company; to assess the independence of the independent non-executive Directors; to formulate the proposal of the Company's share incentive plan, verify the compliance of relevant regulations on granting and fulfilment of exercise conditions, and make recommendations to the Board for consideration; and to fulfil other duties authorised by the Board.

• The primary duties of the Strategy and Investment Committee are: to study the Company's strategic plan for long-term development and significant investment and financing proposals, as well as important operation and production decisions, and make recommendations on other significant matters that may affect the Company's development; to make decisions on the establishment, merger and dissolution of branches of the Company; and to fulfil other duties authorised by the Board. During the reporting period, the Strategy and Investment Committee approved the investment plan of the Company for 2017 and re-elected the Chairman of the Strategy and Investment Committee of the fifth session of the Board.

• The primary duties of the Aviation Safety Committee are: to receive the safety report of the Company on a regular basis and report to the Board; to study and deal with significant problems in relation to aviation safety work of the Company; to supervise and guide the production activities of the Company and the allocation of various kinds of resources such as human resources, facilities and materials to fulfil the needs of safety operation of the Company; and to fulfil other duties authorised by the Board. During the reporting period, the Aviation Safety Committee held one meeting on which the Chairman of the Aviation Safety Committee of the fifth session of the Board was re-elected.

E. Communication with Shareholders

The Board shall endeavour to maintain an on-going dialogue with shareholders and in particular, make use of general meetings to communicate with shareholders.

• The Company has established and maintained various communication channels with its shareholders through the publication of annual reports, interim reports and quarterly reports, press releases and announcements on the websites of the Company and the stock exchanges (if applicable), results presentations, roadshows, briefings on dividend distribution, etc.

• The Company has implemented the "Measures of Investors Relation Management" to regulate and strengthen its communication with the shareholders and investors, so as to optimise its corporate governance and enhance its corporate image.

• The annual general meeting represents an effective means for the shareholders to exchange their views with the Board. The Chairman of the Board, as well as the respective Chairmen of the Audit and Risk Control Committee, Nomination and Remuneration Committee, Strategy and Investment Committee and Aviation Safety Committee will answer queries raised by shareholders at general meetings.

• Resolutions in respect of independent matters, including the election and change of the Directors (if any), shall be tabled as separate resolutions before the annual general meeting.

• Other than the annual general meeting, the Company would also hold the extraordinary general meeting (the "EGM") as required. In accordance with articles 66 and 92 of the Articles of Association, shareholder(s), individually or in the aggregate, holding more than 10% of the shares of the Company may request the Board to convene an EGM by making one or more written request(s) in the same form to the Board with a clear agenda. The Board shall respond to such written request(s) within ten days of receipt of such written request(s). If the Board agrees to convene an EGM, it shall within five days of the Board resolution resolving to hold an EGM issue a notice of EGM convening an EGM within two months of receiving such request(s) from the shareholder(s). If the Board does not accept the request(s) from shareholder(s) for a meeting or fails to respond within ten days of the receipt of such written request(s), such shareholder(s) shall request the Supervisory Committee to convene an EGM by written request(s). If the Supervisory Committee fails to issue a notice for convening a meeting within five days of the receipt of such written request(s), shareholder(s), individually or in the aggregate, holding more than 10% of the shares of the Company for a consecutive 90 days or more may convene and hold a meeting by themselves.

• For including a resolution relating to other matters in a general meeting, shareholders are requested to follow the requirements and procedures as set out in article 68 of the Articles of Association which provides that shareholder(s), individually or in the aggregate, holding more than 3% of the shares of the Company may put forward proposal(s) by providing a written request to the convener of the meeting not less than ten days before the meeting. The convener of the meeting shall, within two days of the receipt of such written request, give supplemental meeting notice to each shareholder which specifies information on such proposal(s).

• The Board values the views and input of shareholders. Shareholders, may at any time, send their enquiries and concerns to the Board by addressing them to the Company Secretary, whose contact details are as follows:

Address: Air China Headquarter, 30 Tian Zhu Road, Tianzhu Airport Economic Development Zone, Beijing, 101312

Email: ir@airchina.com

Telephone number: 86-10-61462799

Fax number: 86-10-61462805

The Company shall ensure that shareholders are familiar with the detailed procedures for conducting a poll

• The chairman of a meeting shall, at the commencement of the meeting, ensure that an explanation of the detailed procedures for conducting a poll is provided and subsequently, any questions from shareholders in relation to voting by way of a poll are answered.

F. Joint Company Secretaries

Joint company secretaries shall attend relevant professional training for no less than 15 hours

• Joint company secretaries (Mr. Zhou Feng and Ms. Tam Shuit Mui) are responsible for facilitating the rules of procedures of the Board, as well as facilitating the communications among Board members, and communications with shareholders and with the management. The biographies of the joint company secretaries are set out in the section headed "Profile of Directors, Supervisor and Senior Management" of this annual report. In 2017, each joint company secretary attended more than 15 hours of professional training to update his/her skill and knowledge.

G. Articles of Association

• In 2017, the Company made amendments to its Articles of Association, the amendments had been approved by considering at the second EGM and third EGM for 2017, respectively. The Company also made amendments to the Rules and Procedures of Shareholders' Meetings and the Rules and Procedures of Meetings of the Board in 2017, which were passed at the third EGM for 2017. The details about the above amendments set out in the circular of the Company dated 10 February 2017 and 7 September 2017.

H. Compliance with the Code Provision A.5.1 and the Requirements of the Listing Rules on Audit Committee and Remuneration Committee

Code provision A.5.1 requires that the nomination committee shall be chaired by the chairman of the Board or an independent non-executive director, and comprise a majority of independent non-executive directors. Rule 3.21 of the Listing Rules requires that the audit committee shall comprise at least three members and at least one of the independent non-executive directors must have appropriate professional qualifications or accounting or related financial management expertise as required under Rule 3.10(2) of the Listing Rules, and the chairman of the audit committee must also be an independent non-executive director. Rule 3.25 of the Listing Rules requires that the remuneration committee must comprise a majority of independent non-executive directors.

Mr. Pan Xiaojiang and Mr. Simon To Chi Keung resigned as independent non-executive Directors on 8 May 2017, and the resignation became effective from the date of the annual general meeting of the Company held on 25 May 2017, where Mr. Wang Xiaokang and Mr. Liu Deheng were elected as independent non-executive Directors. After the resignation became effective, Mr. Pan Xiaojiang was no longer the chairman of the Audit and Risk Control Committee of the Board and a member of the Nomination and Remuneration Committee of the Board, and Mr. Simon To Chi Keung was no longer a member of the nomination and remuneration committee of the Board. Therefore, the Company failed to meet the composition requirements of audit committee, remuneration committee and nomination committee under the aforesaid rules of the Listing Rules and code provision. On 9 August 2017, Mr. Wang Xiaokang was appointed as a member of the nomination and remuneration committee of the Board and Mr. Liu Deheng was elected as the chairman of the Audit and Risk Control Committee of the Board. The aforementioned requirements of the Listing Rules and code provision have been fulfilled since then.

Report of the Directors

STRATEGIC OBJECTIVES

The Group will, on the basis of enhancing security management, continue to advance the implementation of its strategies, improve global network coverage to increase the commercial value of hub network; optimise the allocation of its core resources to improve the efficiency of resource utilisation; reasonably deploy transport capacity to grasp opportunities in the market, take multiple measures to strengthen marketing competitiveness; enhance service management, promote product innovation to improve customer experience with an aim to seize market opportunities to ensure sound operation and bring better returns to its shareholders and investors.

GROUP ACTIVITIES AND RESULTS

The Group is a provider of air passenger, air cargo and airline-related services. The results of the Group for the year ended 31 December 2017 and the financial position of the Group and the Company as at the same date are set out in the audited financial statements on pages 99 to 202 of this annual report.

REVIEW OF BUSINESS

Description of the fair review of the Company's business and the analysis using the financial key performance indicators, description of the principal risks and uncertainties facing the Group, future prospects of the Company's business, environmental policy and performance and the important relations statement with employee, customer and supplier of the Group are set out in the sections headed "Business Overview" and "Management's Discussion and Analysis of Financial Position and Operating Results" of this annual report.

FIVE-YEAR FINANCIAL HIGHLIGHTS

The Group's results and financial position prepared in accordance with IFRSs for the five years ended 31 December 2017 are summarised and set out on pages 6 and 7 of this annual report.

SHARE CAPITAL STRUCTURE

As at 31 December 2017, the Company had a total share capital of RMB14,524,815,185, dividing into 14,524,815,185 shares of RMB1.00 each. The following table sets out the share capital structure of the Company as at 31 December 2017:

SIGNIFICANT INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES OF THE COMPANY

As at 31 December 2017, to the knowledge of the Directors, Supervisors and chief executive of the Company, the interests or short positions of the following persons (other than a Director, Supervisor or chief executive of the Company) in the shares and underlying shares of the Company which were required to be recorded in the register kept by the Company pursuant to Section 336 of the SFO are as follows:

1. Total long positions in the shares and underlying shares of the Company

Notes:

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

1. By virtue of CNAHC's 100% interest in CNACG, CNAHC was deemed to be interested in the 1,332,482,920 A Shares and 223,852,000 H Shares directly held by CNACG.

2. By virtue of John Swire & Sons Limited's 100% interest in John Swire & Sons (H.K.) Limited and their approximately 55.06% equity interest and 63.88% voting rights in Swire Pacific Limited, and Swire Pacific Limited's approximately 45.00% interest in Cathay Pacific as at 31 December 2017, John Swire & Sons Limited, John Swire & Sons (H.K.) Limited and Swire Pacific Limited were deemed to be interested in the 2,633,725,455 H Shares directly held by Cathay Pacific.

2. Total short positions in the shares and underlying shares of the Company

As at 31 December 2017, the Company was not aware of any substantial shareholders holding short positions in the shares or underlying shares of the Company.

Save as disclosed above, as at 31 December 2017, to the knowledge of the Directors, Supervisors and chief executive of the Company, no other person had an interest or short position in the shares or underlying shares of the Company which were required to be recorded in the register kept by the Company pursuant to Section 336 of the SFO.

INFORMATION OF SHAREHOLDERS

1. Total number of shareholders

2. Shareholdings of the top 10 shareholders and the top 10 holders of tradable shares (or shares not subject to selling restrictions) as at the end of the reporting period

Unit: Share

Unit: Share

1. HKSCC NOMINEES LIMITED is a subsidiary of The Stock Exchange of Hong Kong Limited and its principal business is acting as nominee for and on behalf of other corporate shareholders or individual shareholders. The 1,684,774,519 H shares held by it in the Company do not include the 166,852,000 H shares held by it as nominee of China National Aviation Corporation (Group) Limited.

2. According to the "Implementation Measures on Partial Transfer of State-owned Shares to the National Social Security Fund in the Domestic Securities Market" (Cai Qi [2009] No. 94) (《境內證券市場轉持部分國有股充實全國社會保障基金實施辦法》(財企[2009]94號)) and the Notice ([2009] No. 63) jointly issued by the Ministry of Finance, the State-owned Assets Supervision and Administration Commission of the State Council, China Securities Regulatory Commission and the National Council for Social Security Fund, 127,445,536 A shares and 36,454,464 A shares held by China National Aviation Holding Company, the controlling shareholder of the Company, and China National Aviation Corporation (Group) Limited respectively are frozen at present.

Unit: Share