8 Chairman’s Statement

China Eastern Airlines Corporation Limited Chairman’s Statement 9

Ye Yigan, Chairman

Dear shareholders, Chinese government’s active fiscal policies and stable monetary policies, and I am pleased to announce the report on the further implementation of the policy the operating results of China Eastern to stimulate demand in the domestic Airlines Corporation Limited (the economy, China successfully realised a “Company”) and its subsidiaries stable transition in the first year after (collectively, the “Group”) for the year its accession to the WTO and the national ended 31 December 2002. On behalf of economy continued to maintain its high all the staff of the Group, I would like to rate of growth. extend my sincere thanks to the shareholders for their support of the Faced with the increasingly intense Group. competition in the domestic and international air transport market and, In 2002, the global economy began to in particular, the increased capacity of gradually recover. As a result of the

China Eastern Airlines Corporation Limited 10 Chairman’s Statement

response to the market Company provided venue and quality demand and attracted and transportation, conference and security ensured a more stable services for the annual meeting and won passenger traffic. In world-wide praises. addition, the Group improved its sales network, In 2002, traffic volume of the Group strengthened its marketing totalled 2,652 million tonne-kilometres, management, upgraded its an increase of 11.7% over the same period online ticket reservation in 2001, while revenues from the Group’s From left: Mr. Xia Xinghua, Director General of CAAC Eastern China Bureau, and payment system and principal business amounted to Mr. Han Zheng, Mayor of Shanghai Municipal Government, Mr. expanded e-commerce RMB12,482 million, an increase of Li Fenghua, President of our company, working together in October 2002 at Pudong International Airport for on-site review research and development. RMB804 million or 6.88% over the same of the allocation of flights to Pudong. The Group also expanded period in 2001. The average aircraft daily its cooperation with utilization was 8.6 hours, a reduction of foreign airline companies in the China foreign companies and established an 0.5 hours from the same period in 2001. market, the Group proactively adopted a equity joint venture avionics maintenance series of measures, which include actively service company with Rockwell Collins The increase in the revenues from the adjusting its capacity structure so as to Avionics of the United States in order to Group’s principal business derived mainly efficiently allocate passenger and enhance the quality of avionic product from the Group’s operations on freight capacity in response to market maintenance and reduce maintenance international routes. The increase in demand, optimising its route network, costs. The Company actively procured and passenger revenues was due to increase strengthening flight monitoring completed the restructuring of the former in passenger traffic on the Group’s capabilities and opening new passenger Wuhan Airlines Company and in August Japanese and Korean routes, and the routes. The Group opened the Beijing- 2002 established China Eastern Airlines recovery in market demand on its Delhi route, and subsequently the Wuhan Limited. In October 2002, China European and American routes from the Beijing-Tokyo and Shanghai-Kagoshima Eastern Air Holding Company (“CEA events of September 11. The significant routes, thereby increasing competitive Holding”) was formally established by increase in the Group’s cargo and mail advantage on certain international merging Eastern Air Group Company (“EA revenues was attributable to the routes. The Group also further developed Group”) with China Northwest Airlines increased volumn of importation and the transportation market and increased Company and Yunnan Airlines Company. exportation after China’s accession to the its market share in Shanghai through The establishment of CEA Holding will WTO and the positive effect on the Group’s promoting its “China Eastern Express” have a positive effect on the Group’s cargo operations by the west coast port service, and launching express transition future expansion of air transport strike in the United States in 2002. services on the Shanghai-Hong Kong- operation. As the host of the Taipei route together with Cathay Pacific 58th annual meeting of International In 2002, the Group’s total operating costs Airways. Such services were launched in Air Transportation Association, the reached RMB12,242 million, an increase

China Eastern Airlines Corporation Limited 11 Chairman’s Statement

of 8.50% over the same period in 2001. The increase in operating costs was primarily due to the increase in employee salaries, takeoff and landing charges and the deficit resulted from the revaluation of assets conducted by the Company in 2002.

As at 31 December 2002, the Group conducted a revaluation of its assets pursuant to the requirements of IFRS. As a result of the revaluation, the Group In March 2002, our company provided quality transportation services to members of the National recognised a net revaluation surplus of Committee of the Chinese People’s Political Consultative Conference (CPPCC). Front: Mr. Wang Liping, Chairman of Shanghai CPPCC. RMB136,902,000 and in the revaluation reserve and a charge to profit and loss account of RMB171,753,000. As at 31 December 2002, the Group had to its employees’ medical benefits. The approximately 15,700 employees, Group believes that the implementation In addition, the Group has a significant most of them worked in China. The of such medical benefit scheme will not percentage of Japanese Yen compensation of the Group’s employees significantly affect the Group’s operations denominated liabilities. Due to the was primarily composed of the basic and financial condition. appreciation of the Japanese Yen against salary and performance-based bonus. the Renminbi in 2002, the Group’s There were no labour disputes between Outlook for the year 2003 financial statements reflect a foreign the Group and its employees. The Group The Group would like to caution readers currency exchange loss of RMB37.52 did not experience a loss of employees that this report contains, inter alia, some million for 2002. or encounter any difficulties in recruiting forward-looking statements, such as new employees. certain forward-looking statements on In summary, the Group’s profits the Asian and Chinese economies and attributable to shareholders were In January 2001, the Group joined the aviation markets. These forward-looking RMB86.37 million for the year ended 31 staff medical benefit scheme introduced statements are subject to numerous December 2002, a decrease of 84.06% by the Shanghai Municipal Government. uncertainties and risks. from the same period in 2001. The The Group and each of its employees are decrease was mainly due to the required to contribute to such scheme The Company believes that, in general, revaluation deficit resulted from the 12% and 2%, respectively, of the basic the global economy will continue to revaluation of assets conducted by the salaries of the relevant employee. Other recover, and the domestic economic Company as at 31 December 2002. The than such contribution, the Group does climate will be positive in 2003. The air earnings per share were RMB0.018. not have other obligations with regard transportation market will continue to

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business. China, with its extensive territory, large population and rich tourist resources, holds potential for the development and growth of air transportation. The Group expects to utilize the opportunities provided by large events, traditional holidays and tourism season and to timely adjust and allocate its transportation capacity in order to increase its traffic volume on all routes, thereby increasing its transportation revenues.

Opening Ceremony for China Eastern Wuhan. As a result of the expanded reforms and strategic restructuring of China’s civil

offer numerous opportunities and Chinese government’s continued policy to aviation industry, the Group’s route challenges. stimulate domestic demand. The Group’s network will be further improved. The main base of operations, Shanghai, is Group will also increase its capabilities The economies of the United States, leading the economy growth in China and to develop the air transportation market Japan and European Union will recover rapidly developing into an international in western China and build up a solid at a slow pace due to unstable financial economic centre, trade centre, financial foundation for the Group to face markets, limited space for trade growth centre and air transportation centre. The intensified market competition. The and relatively weak consumer demand. successful bid of Shanghai to hold Expo current market demand, China’s economy The Gulf War II will also significantly 2010 will also inject vigour into its and social development, and the Chinese affect the global political and economic economic development. The increase in government’s macro-economic policies all relations. On the other hand, however, import and export, and the volume of indicate that competition in the domestic the steady growth of the Chinese business activities and culture exchanges market will become more regulated and economy has brought hopes to global will drive a further boom in the air in order as a result of the adjustments of economic recovery. The healthy macro- transportation market. As a result, the the Chinese government’s macro-control environment in China provides growth Group expect its passenger and freight policies with respect to the aviation opportunities for the civil aviation traffic volume to increase steadily. market, and the strengthening of industry. The year of 2003 is the first year regulation over that market. following the 16th National Congress of With further growth in China’s economy the Communist Party of China. and the steady improvement of Chinese The Group believes that the operation of Investment and consumer demand will people’s living standards, tourism has its domestic routes will maintain its continue to increase rapidly under the gradually become a fast-growing steady growth trend. The expansion of

China Eastern Airlines Corporation Limited 13 Chairman’s Statement

its fleet and enhanced efficiency will commence operation within this year. In arrival rate and enhance services for enable the Group to increase flight addition, the Company will pay close delayed flights. The Company will also frequency on domestic and regional attention to the development of Gulf War promote ISO9000 international standards routes and increase its market share. The II and terrorism as well as their potential certification among all its subsidiaries, Company believes that demand in the air effects on the Company’s flight safety. branches, and sales and operation offices transportation market will continue to The Company will also adopt effective in order to standardize and unify its grow in 2003, and the balance between safety measures in response to the current standards of service and build positive market demand and supply will gradually public security characteristics. image of the Company. improve. The Group will formulate a prudent aircraft purchase plan based on 2. To promote creativity in services and 3. To monitor real-time market change market development and the features of build “China Eastern” brand and appropriately adjust allocation its own fleet. advantage of capacity

In the activity “Million Passengers’ In 2003, the Company plans to purchase In response to the business environment Appraisal of Civil Aviation”, the Group and put into operation ten Airbus A320 and aviation market conditions which it ranked No. 1 for the second year in a aircraft and three Airbus A340-600 will face in 2003, the Company will duly row. With the development of the aircraft, and to acquire five Boeing carry out the following tasks to enhance aviation market and the diversification 737-700 and put into operation aircraft its competitiveness: of passenger demand, efforts will be made under operating leases. To ensure a to continually improve the Company’s proper allocation of the added capacity 1. To strengthen supervision and services. Through the promotion of in response to the development of its management and ensure flight personalised and friendly services, the route network, the Company will: safety services of the Company respond to the Year 2002 was the Company’s 9th safe most current demand of its customers. (1) in terms of capacity allocation, flight year. Again the Company received The Company will also further expand its establish a capacity control and the highest flight safety award for civil tailored “China Eastern Express” services direction centre to carry out the aviation enterprises, the Golden Roc Cup. currently provided to its customers on the overall allocation and centralized The Company will continue to strengthen Shanghai-Beijing and Shanghai-Hong management of capacity resources, safety administration, expand investment Kong routes. Passengers will be able to timely take appropriate measures in on technology, improve its training enjoy the “China Eastern Express” inter- response to market changes, and program, and raise its current safety city services on many other routes. appropriately increase the daily standards. In particular, the Company will Moreover, the Company will improve its utilization of every model of aircraft focus on improving its safety system. In network of domestic tourist routes and in order to generate maximum returns an effort to further enhance the safety will introduce its “one flight” service by utilizing limited capacity; administration and realize the real-time between cities. Furthermore, the monitoring of the entire flight, the Airline Company will appropriately adjust its (2) expand the “China Eastern Express” Operation Control (AOC) Center will flight schedule, improve its on-time services on more routes between

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Shanghai and provincial capitals, and management system, expand coverage in the eastern China timely adjust and improve market, in particular market share in its operations, and expand areas around Shanghai; increase its marketing channels in capacity on high earning routes to response to the challenges Hong Kong, Japan, Korea, Southeast presented by the market Asia and other places, and expand competition: foreign cooperation; continue to provide qualify services on routes to (1) to introduce and Europe, the United States and operate a route earning China Eastern Airlines received the “Million Passenger’s Appraisal of Civil Aviation” Award in 2002. Australia in order to increase management system as Right: Mr. Liu Shaoyong, Vice Director of CAAC; Left: Mr. Wu Jiuhong, competitive advantages on long- soon as possible in Vice President of our company. distance international routes; order to timely monitor changes in market supply and (4) to explore opportunities to enter into (3) improve flight allocation during demand, implement a flexible price business agreements with travel holidays and festivals, concentrate determination mechanism to quickly agencies, governmental agencies, capacity on high-yielding routes respond to market changes, and institutions and large enterprises in during peak seasons, arrange extra improve route return rates; order to expand a wide range of flights and charters as appropriate, cooperation and develop the “airline and explore new business for financial (2) to continue localized sales operations ticket + hotel” business; in addition, growth; and and sales on a contract basis, expand to increase investment on advertising direct sales efforts, build a sales and establish a good cooperative (4) continue to promote the development representative team, improve its relationship with the media; of the freight business, leverage on passenger and freight agent the advantages of its advanced flight management system, formulate a (5) to upgrade its frequent flyer network, appropriately arrange its reasonable sales agent bonus system information system, streamline the routes, develop the freight through- and further promote compliant and working process with respect to traffic and transit market and increase orderly sales practices; frequent flyer services in order to returns on cargo flights. satisfy the needs of program members (3) to expand, in line with market that is increasing rapidly; moreover, 4. To standardize and improve changes, its scope of cooperation to accelerate the upgrade of the operations and enhance sales and with foreign carriers by entering into frequent flyer points program into a marketing efforts code sharing agreements and special mileage bank program and improve the overall quality of services offered The Company will, through the following pro rata agreements (SPA) in order to the China Eastern Airlines Golden measures, promote the comprehensive to supplement the Company’s flight development of its computer-based sales networks; Swallow Club members; and

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(6) to actively promote the use of Company will implement the following 6. To promote the integration of electronic tickets. After an in-depth measures: business cultures and procure study and analysis of the electronic certain mergers and reorganizations

ticket business model and technology (1) to implement a comprehensive In October 2002, EA Group merged with framework, the Company will promote budget management system, approval China Northwest Airlines Company the use of electronic tickets in major and evaluation, strictly control (“Northwest Airlines”) and Yunnan cities this year; in addition, to further project investment, endeavour to Airlines Company (“Yunnan Airlines”) and improve its e-commerce system, and reduce expenditures on controllable formed CEA Holding, which substituted allow the online ticket reservation expenses, improve the efficient use EA Group and became the controlling and payment system, as a modern of funds and establish a rational shareholder of the Company holding commerce platform, play a greater financial administration model; approximately 61.64% of its issued share role in sales. capital. To the knowledge of the (2) to actively explore new financing Company’s Directors, CEA Holding is 5. To strengthen financial methods for aircraft so as to reduce currently in the process of separating the management and effectively reduce the Company’s financing costs, main assets of Northwest Airlines and costs and expenses closely monitor the fluctuations in Yunnan Airlines from their accessorial The Company believes that, in 2003, fuel prices, enhance aviation fuel risk assets and integrating certain main aviation fuel prices will fluctuate with management and formulate a aviation assets of the two companies. great uncertainties. The payments under reasonable plan to mitigate aviation leases for newly acquired aircraft and fuel price risks, implement effective After the reorganization, the scale of the accrued depreciation will also result in control of foreign exchange risk, Group is expected to expand and its increased costs and expenses. The and gradually realise comprehensive market, routes, fleet and human resources control of the Company’s are expected to be optimised to improve financial risks; and the Group’s operational environment. It will also allow the Group to establish (3) to strengthen aviation enhanced domestic and international material procurement and route networks and increase its share of storage management, expand the domestic market. cooperation with other

companies in maintenance On behalf of the Board of Directors, I operations, streamline the would like to express my gratitude to all working process with respect to of the shareholders. aviation material operations,

and reduce the proportion of Ye Yigan working capital spent on Chairman Mr. Ye Yigan, Chairman of our company, delivered a speech at the 58th Annual Meeting of IATA. aviation materials.

China Eastern Airlines Corporation Limited