China Eastern Airlines : 20170104-Announcement – Bellyhold Space Management Agreement

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(A joint stock limited company incorporated in the People's Republic of China with limited liability)

(Stock code: 00670) ANNOUNCEMENT BELLYHOLD SPACE MANAGEMENT AGREEMENT

Reference is made to the announcement dated 29 November 2016 in relation to the proposed disposal of the entire equity interest in Eastern Logistics, a wholly-owned subsidiary of the Company.

Upon completion of the Disposal, members of the Eastern Logistics Group will become subsidiaries of CEA Holding, which is the controlling shareholder of the Company. China Cargo Airlines is an 83%-owned subsidiary of Eastern Logistics. Therefore, China Cargo Airlines will become a connected person of the Company as defined under the Hong Kong Listing Rules. Accordingly, under the Hong Kong Listing Rules, the entrustment of China Cargo Airlines to manage the bellyhold space business of the Group will constitute continuing connected transactions of the Company upon completion of the Disposal.

On 1 January 2017, the Company and China Cargo Airlines entered into the Management Agreement. On the signing date of the Management Agreement and as of the date of this announcement, the transactions contemplated under the Management Agreement have constituted connected transactions of the Company under the Shanghai Listing Rules but have not constituted continuing connected transactions of the Company under the Hong Kong Listing Rules.

As the relevant applicable percentage ratios set out in the Hong Kong Listing Rules in respect of the transactions contemplated under the Management Agreement are expected to be more than 0.1% but less than 5% on an annual basis, such transactions are expected to be subject to the reporting, announcement and annual review requirements only and exempt from independent shareholders' approval under the Hong Kong Listing Rules.

1. THE BELLYHOLD SPACE MANAGEMENT AGREEMENT (THE "MANAGEMENT AGREEMENT")

   Reference is made to the announcement dated 29 November 2016 in relation to the proposed disposal of the entire equity interest in Eastern Logistics, a wholly-owned subsidiary of the Company (the "Disposal Announcement"). Unless otherwise defined, the capitalized terms used herein shall have the same meanings as set out in the Disposal Announcement.

   Upon completion of the Disposal, the bellyhold space business of the Group will be in competition with the all-cargo aircraft freight business of China Cargo Airlines. In view of this, within a certain period of time upon completion of the Disposal, entrusted management of bellyhold space will be arranged by the Company as a transitional solution to avoid competition. The Company will, at such time as appropriate, negotiate with Eastern Logistics a thorough solution to the competition problem such as the buyout of the bellyhold space business.

   Upon completion of the Disposal, members of the Eastern Logistics Group will become subsidiaries of CEA Holding, which is the controlling shareholder of the Company. China Cargo Airlines is an 83%-owned subsidiary of Eastern Logistics. Therefore, China Cargo Airlines will become a connected person of the Company as defined under the Hong Kong Listing Rules. Accordingly, under the Hong Kong Listing Rules, the entrustment of China Cargo Airlines to manage the bellyhold space business of the Group will constitute continuing connected transactions of the Company upon completion of the Disposal.

   On 1 January 2017, the Company and China Cargo Airlines entered into the Management Agreement.

   Term

   The Management Agreement will be effective for a term of three years, commencing on 1 January 2017.

   Services

   Under the Management Agreement, China Cargo Airlines is entrusted to manage the bellyhold space freight business of the Group, including the businesses of bellyhold cargo sales, settlement and relevant operational support in all of the passenger flights under the Company, its branches and subsidiaries.

   Under the Management Agreement, on behalf of the Company, China Cargo Airlines shall collect the revenue from the end customers in respect of bellyhold space transportation and pay relevant system usage fee incurred for the bellyhold space business. Within 90 days after each month-end, the Company and China Cargo Airlines shall settle the payments for transportation fees collected on behalf of the Company, handling charges for entrusted management and relevant system usage fee arising from the bellyhold space business paid on behalf of the Company in respect of that month. The amount to be collected on behalf of the Company will not be accounted for as the revenue of China Cargo Airlines, but instead be accounted for as revenue of the Company in the Company's accounts. China Cargo Airlines will arrange for remittance of the amount collected on behalf of the Company for each month to the Company's designated account within 90 days after each month-end.

   Pricing

   Pursuant to the Management Agreement, in respect of the entrusted management of bellyhold space business, the Company will pay management fee to China Cargo Airlines according to industry practice, including handling charges for the entrusted management and incentives for achieving specified sales targets. Such charges and incentives shall be benchmarked against market rates, i.e. prices charged by independent third parties for the time being in the provision of comparable services pursuant to normal transaction at the same region or its vicinity where such services are provided, taking into account the overall freight market conditions, the costs of such entrusted management incurred by China Cargo Airlines and the requirements of such entrusted management specified by the Company, and negotiated and determined by the Company and China Cargo Airlines on an arm's length basis. Fee charge for the provision by China Cargo Airlines of bellyhold space management services shall be at rates which are not higher than the fee rates applicable to the provision by China Cargo Airlines of comparable services to independent third parties.

   The Group will designate departments or officials to be primarily responsible for checking the price quoted and terms offered by independent third parties for the same or similar type of services (in general, through emails, fax or telephone consultation with at least two independent third parties for price quoted and terms offered for the provision of the same or similar management services), to ensure that the terms of the Management Agreement are fair and reasonable and no less favourable than those offered by independent third parties.

   The handling fee for entrusted management shall be payable on a monthly basis whereas the sales incentives shall be payable on a yearly basis and the amount payable shall be confirmed before 31 January of the following year.

   Historical Amounts

   As the Company's entrustment of China Cargo Airlines to operate and manage the bellyhold space freight transportation business is a new transaction as a solution to the competition problem arising after the completion of the Disposal, no historical data is available for reference as far as the determination of Proposed Annual Caps is concerned.

   Proposed Annual Caps

   In connection with the transactions contemplated under the Management Agreement, the table below sets out the Proposed Annual Caps of amounts payable by the Group to China Cargo Airlines for each of the three years ending 31 December 2017, 2018 and 2019, respectively.

   Proposed Annual Caps for the year ending 31 December 2017 2018 2019

   (in millions of RMB)

   Management fee payable to China

   Cargo Airlines by the Group 300 500 700

   The Proposed Annual Caps of amounts of management fees payable by the Group to China Cargo Airlines are mainly based on the following: (i) the level of operation and development trend in the industry for comparable markets; (ii) the actual ATK (available tonne-kilometres) for bellyhold space calculated based on the plan of introduction of passenger flights of the Company, its branches and subsidiaries; (iii) the revenue level forecast in the next year arrived at using regression analysis based on the historical level of revenue for the respective routes, and the projection of annual management benchmarks together with the amount of relevant annual caps arrived at based on the annual bellyhold space cargo transportation volume and revenue level forecast. In particular, the revenue generated from bellyhold space business of the Company amounted to RMB2,384 million, RMB2,605 million and RMB2,011 million for the two years ended 2015 and the first three quarters of 2016, respectively. With reference to the above historical operating data of the bellyhold space business, the plan of passenger flights for the three years ending 2019 and the increase of carrying capacity of the bellyhold space, as well as the trend of air cargo transportation market, the Company estimated that the annual growth rate of carrying volume of the bellyhold space will reach 8-10% and the annual growth rate of revenue of the bellyhold space business will reach 7-11% for the three years ending 2019. (Note: As affected by factors including the plan of introducing/quitting passenger flights, the fluctuation of demand for international cargo transportation market, market competition and the geopolitics, the carrying capacity and revenue of the bellyhold space business of the Company for 2017-2019 may vary significantly from the growth rate anticipated by the Company. The actual amount of the management fee for the bellyhold space services may therefore vary significantly from the Proposed Annual Caps.)

2. REASONS FOR AND BENEFITS OF THE TRANSACTIONS CONTEMPLATED UNDER THE MANAGEMENT AGREEMENT

As a long-standing operator of air freight transportation, China Cargo Airlines is highly experienced in operating air freight business. The Group's entrustment of China Cargo Airlines for the operation of its bellyhold space business is in line with the overall trend of major international airlines withdrawing from air freight transportation business. It represents a specific measure and reasonable option for the Group to cope with the poor conditions of the air freight market, cater to the Group's requirement of specialized operation of its bellyhold space business, and contribute to the steady growth of revenue from its bellyhold space business. It also avoids competition between the Group and Eastern Logistics; facilitates the Group's focus on air passenger transportation in terms of the use of relevant resources; enhances the Group's operation and management ability in its core business of passenger transportation; further builds up the brand image and competitiveness of the Group in the air passenger transportation sector, thereby creating better investment returns for shareholders.