The Agreement
On 30 January 2008, the Company has entered into the Agreement with Boeing Company regarding the purchase of the Aircraft in accordance with the terms and conditions thereof.
Based on the information provided by Boeing Company, the total asset value of the Aircraft, as determined by reference to the relevant catalogue price supplied by Boeing Company, amounts in aggregate to approximately US$1.94 billion (approximately RMB13.98 billion). The Company has not conducted any independent valuation on the Aircraft.
Consideration
The aircraft basic price of the Aircraft is in aggregate approximately US$1.94 billion (approximately RMB13.98 billion) determined by reference to the relevant price catalog in July 2005. Such aircraft basic price comprises the airframe price (which is subject to price escalation by applying a formula), optional features prices and engine price. The Agreement was negotiated and entered into in accordance with customary business and industry practice, under which Boeing Company has granted to the Company significant price concessions with regard to the Aircraft. These will take the form of credit memoranda which may be used by the Company towards the purchase of the Aircraft or spare parts, goods and services or may be used towards the final delivery invoice payment of the Aircraft. Such credit memoranda were determined after arm’s length negotiations between the parties and as a result, the actual consideration for the Aircraft is lower than the aircraft basic price of the Aircraft mentioned above. Based on such actual consideration under the Agreement, the relevant “percentage ratio” calculated under Rule 14.07 of the Listing Rules at the material time is above 25% but less than 100%, the Agreement constitutes a major transaction of the Company under the Listing Rules as applied by the Stock Exchange. In respect of the transaction, the Company understands its disclosure obligations normally required under Chapter 14 of the Listing Rules, and has therefore on separate occasions raised the issue with Boeing Company in order to seek its consent to the Company’s disclosing certain otherwise required information (including the relevant consideration involved) in the relevant announcements and circulars. Nonetheless, Boeing Company, for business reasons and from a commercial perspective, did not accede to the Company’s request in this respect, and insisted preservation of the confidentiality carried with such information to the extent possible. The Company has made an application to the Stock Exchange for a waiver from strict compliance with the relevant provisions under the Listing Rules in respect of the disclosure of the actual consideration for the Aircraft.
The Company considers that the extent of the price concessions granted to the Company under the Agreement is comparable with the price concessions that the Company had obtained under its agreement entered into in April 2006 with Boeing Company regarding the purchase of certain Boeing 737 NG series aircraft. The Company believes that there is no material impact of the price concessions obtained under the Agreement on the Company’s operating costs taken as a whole.
Payment terms and source of funding
The consideration under the Agreement is payable by cash in US$ in instalments, and is, as currently contemplated, being funded principally by way of bank loans or other financial arrangements from banking institutions.
Delivery
The Aircraft are expected to be delivered to the Company in stages from July 2011 to November 2015.
Reasons for and benefits expected to accrue to the Company
The Company expects that the Aircraft will be introduced to satisfy the increasing demand in the domestic short to middle range passenger air-routes. It is also believed that the transaction will enhance the Company’s market share and competitiveness in the market segment serving short to middle range passenger air-routes, thereby improving its aviation network coverage and profitability.
The Directors believe that the terms of the Agreement are fair and reasonable and in the interests of the Company’s shareholders as a whole. The transaction has been approved by the board of Directors and will be approved by the relevant regulatory authority(ies) in the PRC in compliance with the relevant regulatory requirements.
Financial impact of the transaction
As mentioned above, the consideration is being funded principally by way of financial arrangements with banking institutions. The transaction may therefore result in an increase in the Company’s debt-to-equity ratio, but is not expected to impact on the Company’s cash-flow position or its business operations. The transaction is not expected to result in any material impact on the earnings, assets and liabilities of the Group.
Implications under the Listing Rules
As mentioned above, the Agreement constitutes a major transaction of the Company under the Listing Rules as applied by the Stock Exchange and is subject to shareholders’ approval.
CEA Holding, which holds approximately 59.67% of the issued share capital of the Company, does not have any interest or benefit under the Agreement. No shareholder (including CEA Holding) would be required to abstain from voting at any shareholders’ general meeting, if convened, to approve the Agreement.
The Agreement has accordingly been approved in writing by CEA Holding pursuant to Rule 14.44 of the Listing Rules, and no general meeting is required to be convened.
Additional information
Your attention is also drawn to the additional information set out in the appendices to this circular.
Yours faithfully,
For and on behalf of the board of Directors of
China Eastern Airlines Corporation Limited
Li Fenghua
Chairman
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