China airline

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CONTENTS

Financial Highlights

Preface by Chairman and President

The Members of the Board

Business Operations of 2012 and Perspectives of 2013

Enhancement of Flight Operation and Maintenance

The Trend for Environmental Protection

Financial Status Contents

Financial and Operating Analysis

2012 Financial Report

China Airlines | Annual Report 2012 |

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1 www.china-airlines.com


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| Financial Highlights |


Financial Statistics Unit 2012 2011 %Change

Operating Revenue (Million TWD) 132,609 132,240 0.3%

Passenger Revenue (Million TWD) 86,621 80,825 7.2%

Cargo Revenue (Million TWD) 40,809 46,388 -12.0%

Other Revenue (Million TWD) 5,179 5,027 3.0%

Operating Expenses (Million TWD) 132,266 133,805 -1.2%

Operating Profit (Million TWD) 343 -1,565 121.9%

Income after Tax (Million TWD) 59 -1,954 103.0%

Operating Margin (%) 0.3 -1.2 1.44 ppt

Net Margin (%) 0.04 -1.5 1.52 ppt

Balance Sheet

Assets (Million TWD) 190,325 202,690 -6.1%

Liabilities (Million TWD) 138,184 155,631 -11.2%

Stockholders’ Equity (Million TWD) 52,141 47,059 10.8%

Liabilities/ Assets (%) 72.6 76.8 -4.2 ppt

Return on Assets (ROA) (%) 0.94 -0.04 0.98 ppt

Return on Equity (ROE) (%) 0.12 -4.08 4.20 ppt

Book Value per Share (TWD) 10.03 10.16 -1.3%

Employee Productivity Unit 2012 2011 %Change

Revenue per Employee (1,000TWD/Person) 12,401 12,570 -1.3%

Capacity per Employee (ATK/Person) 991,206 1,116,510 -11.2%

Traffic per Employee (RTK/Person) 728,086 811,058 -10.2%

Operating Statistics Unit 2012 2011 %Change

Passengers Carried (1,000) 12,106 11,421 6.0%

Passenger Capacity (Million ASK) 42,511 40,773 4.3%

Passenger Traffic (Million RPK) 32,864 31,798 3.4%

Passenger Load Factor (%) 77.3 78.0 -0.7 ppt

Passenger Yield (TWD/RPK) 2.64 2.54 3.9%

Cargo Carried (1,000 kg) 634,642 668,498 -5.1%

Cargo Capacity (Million FATK) 6,772 8,076 -16.1%

Cargo Traffic (Million FRTK) 4,828 5,670 -14.9%

Cargo Load Factor (%) 71.3 70.2 1.1 ppt

Cargo Yield (TWD/FRTK) 8.45 8.18 3.3%

Overall Capacity (Million ATK) 10,599 11,746 -9.8%

Overall Traffic (Million RTK) 7,785 8,532 -8.8%

Overall Yield (TWD/RTK) 17.03 15.50 9.9%

Unit Cost (TWD/ATK) 12.48 11.39 9.5%

Break Even Load Factor (%) 73.3 73.5 -0.2 ppt

RPK Revenue Passenger Kilometer Number of revenue passengers carried multiplied by distance flown

ASK Available Seat Kilometer Number of seats available for sale multiplied by distance flown

Passenger Load Factor Revenue Passenger Kilometer divided by Available Seat Kilometer

FRTK Freight Revenue Tonne Kilometer Number of revenue tonnes of freight carrier multiplied by distance flown

FATK Freight Available Tonne Kilometer Number of tonnes of capacity available to carry freight multiplied by distance flown

Cargo Load Factor Freight Revenue Tonne Kilometer divided by Freight Available Tonne Kilometer

RTK Revenue Tonne Kilometer Revenue load (passengers and freight) in tonnes multiplied by distance flown

ATK Available Tonne Kilometer Number of tonnes of capacity available to carry revenue load (passengers and freight) multiplied

by distance flown



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| Preface by Chairman and President |

In 2012, the traditional carrier industry continued to be impacted by the unstable economy worldwide, the fluctuation of international fuel prices, and the expansion of regional Low Cost Carriers (LCC). Against these challenges inherent in the environment and from our competitive rivals, China Airlines (CAL) excelled in creating unique new values through a comprehensive, multi-faceted planning and development effort.

We continued to review and update our company’s fleet modernization plan. Fourteen Airbus A350-900 purchased earlier will be delivered beginning in 2016 for use on our long-haul, medium-capacity routes. Also from 2014, CAL will gradually introduce the new Boeing 777-300ER aircraft to replace the older ones used on our long-haul routes to Europe and the Americas. These will increase the competitiveness of our flight products and reduce the impact of high fuel prices. Additionally, to accommodate the growing demand in the Asia-Pacific region, CAL will add three Boeing 737-800 and one Airbus A330-300 aircraft in 2013. We monitor closely the regional market and business climate, and will dynamically supplement the medium to short range route capacity as needed. All new aircraft in our fleet will feature designer cabins with modernized seats and entertainment systems to offer the passengers a more comfortable flight. CAL’s long-term goal is to have up to one hundred aircraft by 2020.

With the recent development of government policies, there exist new opportunities in the aviation industry. Policies such as the establishment of Taoyuan Aerotropolis, the designation of Taipei Songshan Airport as the “domestic hub and capital business airport,” Taiwan-US Visa Waiver Program, and Taiwan-Japan Open Skies Agreement, etc., are all favorable advances as are the growing popularity of direct cross-strait links and free, independent travel for mainland tourists. Taking advantage of the new Taiwan-Japan air rights and the recovery of the Japanese markets, we added new destinations in Kagoshima, Shizuoka, and Toyama, and increased frequencies to Tokyo, Osaka, Fukuoka, and Nagoya. Our new service to Gimpo, Korea rounded out CAL’s complete flight network in Northeast Asia. In terms of long haul routes, with the increasing

frequency of traveling among Taiwan, New Zealand, and Australia, we extended Auckland route for daily flights through Sydney. As for the long-cultivated US market, CAL will reinstate nonstop flights between Taipei and Hawaii in June, 2013 in anticipation of the Taiwan-US Visa Waiver Program. We will continue to code-share with other SkyTeam airlines to provide passengers with ample choices for transfer flights connecting to cities in U.S.

It is worth noted that CAL, in coordination with the SkyTeam alliance, has successfully implemented the “SkyPriority” services on all CAL routes and destinations. SkyPriority provides exclusive, priority services to premium cabin passengers and SkyTeam elite flyers,

and is consistently offered across all alliance member airlines. CAL also officially joined SkyTeam Cargo and became the f irst Taiwan-based airline to join an international freight alliance. This not only strengthens the SkyTeam’s freight operations in Asia but

also promotes Taiwan’s position as the Asian transshipment center.In the future, we can offer

customers and cargo owners better products and services through the seamless operations facilitated by

the SkyTeam alliance.

One of CAL’s operating principles is to work with business partners to create values together. In early 2013, we launched the “Greater China Connection” program with three other SkyTeam members in the region: China Eastern Airlines, China Southern Airlines, and Xiamen Airlines. This partnership provides additional benefits to our frequent flyer members, strengthens the cooperation between partner airlines, and solidifies our competitive advantages in cross-strait routes. Through a Memorandum of Understanding (MOU), we also teamed up with Chunghwa Telecom to research and to develop communication techniques applicable to the tourism and travel services market to further promote efficiency and qualities of services. Our efforts have paid off in many areas such as online ticket purchase, seat assignment, online check-in and mobile boarding passes, as well as airport kiosks. These services enable passengers to manage itineraries with ease, promote the efficiency of airport services, and reduce the amount of paper used. In the future, we will continue to work with our partners to create a green travel environment.

An enterprise of happiness that creates values and sails to the future Environmental management is a critical focus of CAL. On account of global sustainability, we strive to be a safer and a more environment-friendly new generation enterprise that provides the best transportation services. Last year, we prepared our in-flight meals using mostly local ingredients to reduce the carbon dioxide generated through the transportation process. We worked with noted f i rms to produce vegetarian meals to provide passengers with alternatives that are healthy and environmentally worthy. Some meals are also labeled with their corresponding carbon footprints to promote passengers’ eco awareness. We are an active participant of the Pacific Greenhouse Gases Measurement (PGGM) project, which collects air samples in the upper atmosphere for global academic research. Lastly, CAL signed a five-year OnPoint Fuel and Carbon Solution Agreement with General Electric (GE), with the goal of reducing 2 to 3% fuel consumption to minimize global warming.

In terms of management, we completed a corporate reorganization in May, 2012, by adjusting and rationalizing the positions within and amongst the various departments without increasing personnel counts and work load. We f irmly bel ieve that human resource is the most important asset of the company, and therefore we continuously invest in the training and mentoring of all staff. We not only task experienced managers and colleagues with important assignments but also emphasize training of the younger talents. Through inter-departmental job rotation and dispatch, the younger personnel can gain experiences for succession and advancement. CAL has outstanding employees, and we intend to offer them a stable and good working environment in our pursuit of continuously growing the business.

We are grateful to our colleagues, passengers, shareholders, and alliance partners for their support and encouragement in this past year. Looking ahead, there are still difficulties posed by economic uncertainty and high fuel prices, as well as the ever present competitors. Nevertheless, we are confident that we are ready for all challenges. We will be steady when faced with obstacles, grow and expand when opportunities arise, and perform our best to meet the expectations of our colleagues, passengers, shareholders, and alliance partners. We hope to

create a wholesome enterprise of happiness for our employees and spread that happiness to every passenger, shareholder, alliance partner, as well as everyone in the society. We believe we can outperform our rivals and achieve new highs in operations in 2013!


China Airlines | Annual Report 2012 | | The Members of the Board |

•Chang, Chia-Juch / Former Chairman Resigned : February 18, 2013 •Wei, Hsing-Hsiung / Former director Resigned : June 15, 2012 •Lee, Shen-Yi / Former director Resigned : June 15, 2012 •Lo, Ta-Hsin / Former director Resigned : June 15, 2012 •Lin, Huan / Former Corporate Supervisor Resigned : June 15, 2012 •Lin, Su-Ming / Former Corporate Supervisor Resigned : June 15, 2012

•Chung,Lo-Min / Independent Director On board : June 15, 2012 •Liu,Shao-Liang / Independent Director On board : June 15, 2012 •Luo,Hsiao-Hsien / Independent Director On board : June 15, 2012 •Lin,Su-Ming / Director On board : June 15, 2012 •Huang,Hsiu-Gu / Director On board : June 15, 2012

Chairman

Sun, Huang-Hsiang•Chairman, China Airlines Ltd.•President, China Airlines Ltd.•Managing Director, Taoyuan International

Airport Services Co., Ltd.•Director, Mandarin Airlines, Ltd.•Director, CAL-Dynasty International, Inc.•Chairman, CAL Park Co., Ltd.•Chairman, CAL Hotel Co., Ltd.•Chairman, CAL-Asia Investment Inc.•Chairman, Dynasty Properties Co., Ltd.

A Director Ting, Kwang-Hung•Standing Supervisor, Corporate Governance Committee,

China Airlines Ltd.•Chairman, Central Trading & Development Corp.•Chairman, Phu My Hung Corp.•Chairman, Hiep Phuoc Power Co., Ltd.•Chairman, Macro Technologies Inc. (Vietnam) Ltd.

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Director Lee, Cho-Ping•Member of the Financial Risk Committee, China Airlines Ltd.•Member of the Safety Committee, China Airlines Ltd.•President, China Airlines Employee Union•President, Federation of Aviation Employees, ROC•Vice President, Chinese Federation of Labor•Member of the Labor Standards Advisory Committee,

Council of Labor Affairs Executive Yuan•Member of the Labor Pension Fund Supervisory Committee,

Council of Labor Affairs Executive Yuan•President, Air Transport Workers Industrial Unions•Municipal Advisory, Taipei City Government

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Director Lin, Su-Ming•Member of the Corporate Governance Committee,

China Airlines Ltd.•Member of the Financial Risk Committee,

China Airlines Ltd.•Director, Commerce Development Research Institute•Public Director, GreTai Securities Market•Professor, Department & Graduate Institute of

Accounting National Taiwan University

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Director Ko, Tso-Liang•Member of the Corporate Governance Committee,


China Airlines Ltd.•Secretary General, China Airlines Employee

Welfare Committee•Standing Director, China Airlines Employee Union•Standing Supervisor, Federation of Aviation

Employees, ROC

I Independent Director

Chung, Lo-Min•Standing Supervisor, Audit Committee,


China Airlines Ltd.•Member of the Remuneration Committee,

China Airlines Ltd.•Chairman, China Steel Chemical Corporation•Chairman, Universal eXchange Inc.

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Director Sung, Hong-Lei•Member of the Safety Committee,

China Airlines Ltd.•Corporate Supervisor, The Grand Hotel

JDirector

Charles C.Y.Chen•Member of the Financial Risk Committee,

China Airlines Ltd.•Chairman, Eyon Holding Group•Vice Chairman, Taiwan Air Cargo Terminal Ltd.•Vice Chairman, Taian Insurance Co., Ltd.•Board Member, Epistar Corporation•Board Director, Formosa International Hotels

Corporation•Board Director, Ascendas Pte. Ltd.•President, Chen-Yung Foundation

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Director

Lai, Ching-Chyi•Standing Supervisor, Financial Risk Committee,

China Airlines Ltd.•Chairman, Taiwan Insurance Institute•Chairman, The Insurance Anti-Fraud Institute of

the ROC•Director, Taiwan Financial Services Roundtable

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Independent Director

Liu, Shao-Liang•Standing Supervisor, Remuneration Committee,

China Airlines Ltd.•Member of the Audit Committee, China Airlines Ltd.•Member of the Corporate Governance Committee,

China Airlines Ltd.•Chairman, China Venture Management Inc. •Director, Taiwan Stock Exchange Corporation•Executive Vice President, China Development

Financial Holdings •Chairman, CDIB CME Fund Ltd.

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Director Huang, Hsiu-Gu•Member of the Safety Committee, China Airlines Ltd.•President, Chunghwa Telecom Co., Ltd. Enterprise

Business Group •Director, Intelligent Transportation Society of TAIWAN •Executive Director, Taiwan Energy Service Association •Director, Taipei Computer Association

F

Independent Director

Luo, Hsiao-Hsien•Standing Supervisor, Safety Committee, China Airlines Ltd.•Member of the Audit Committee, China Airlines Ltd.•Associate Professor and Director of General Affairs,

Tamkang University, Department of Transportation Management and Institute of Transportation Science

•President, Taipei Society for Traffic Safety•Managing Director, Taipei Rapid Transit Corporation•Board Member, EasyCard Investment Holdings

Corporation and EasyCard Corporation

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F E D C B A G H I J K L 6

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| Business Operations of 2012 and Perspectives of 2013 |

Steadily Introducing Passenger Aircraft to Strengthen Competitive Advantages

As of the end of 2012, the fleet of China Airlines consisted of 72 aircraft, including 51 passenger aircraft and 21 freighters with an average age of 9.6 years fleet-wide. Notable changes include the return of one B747 freighter to our fleet in August due to expiration of the lease to Yangtzu River Express Airlines Co., Ltd. We also took delivery of three new leased A330-300 planes in January, October, and December, respectively, and returned one leased A330-300 plane in October and an-other in November at the end of their respective lease terms.

Aircraft Number

Boeing B747-400 passenger and cargo aircraft

13 / 21

Airbus A340-300 passenger aircraft 6

Airbus A330-300 passenger aircraft 22

Boeing B737-800 passenger aircraft 10

Total 72

Pursuing Excellence by Assembling an Optimal Fleet

CAL will introduce ten Boeing 777-300ER passenger aircraft beginning in 2014. We have also purchased 14 Airbus A350-900 planes, which will enter services beginning in 2016. These additions will strengthen our fleet and increase our competitiveness. Further, in response to direct cross-strait links and the expansion of Taiwan-Japan routes, CAL will introduce three B737-800 and one A330-300 planes in 2013 to supplement the operations for short and medium range routes.

To pursue excellent passenger services, CAL invested a hundred million US dollars to renovate the cabin seats and entertainment systems on nine B747-400 passenger aircraft in 2012. Among them, three have a three-class cabin with first-class turndown services, a first in Taiwan aviation industry.

Capturing New Business Opportunities and Creating a Comprehensive Route Network

Taking advantages of the opportunities created by the Taiwan-Japan Open Skies Agreement, CAL added new Taipei-Kagoshima, Taipei-Shizuoka, and Tapei-Toyama routes, increased flight frequencies to existing destinations such as Tokyo, Osaka, Fukuoka, and Nagoya, and formally offered the Kaohsiung-Osaka route as a scheduled service. CAL also launched flights from Songshan to Gimpo, Korea to round up the complete flight network in Northeast Asia. For the cross-strait routes, CAL worked with Mandarin Airlines to initiate the Songshan-Wenzhou service. This is our second cross-strait route from the Taipei Songshan Airport after the initial Songshan-Hongqiao service. As for the long haul routes, in view of increasing travel among Taiwan, New Zealand, and Australia, CAL extended the original Taipei-Sydney flight to Auckland. This daily flight between Taipei and New Zealand offers passengers convenient one-stop service. As of the end of 2012, CAL served 112 destinations in 28 countries, including cargo freight and other code-shared services.

In 2013, in connection with the introductions of new aircraft, CAL will inaugurate Taipei-Takamatsu route and increase service frequencies on Taipei-Shizuoka, Tapei-Toyama, Kaohsiung-Osaka, and Kaohsiung-Seoul routes. In addition, we will reinstate nonstop Taipei-Honolulu flight in anticipation of the potential Taiwanese tourist boom brought on by the new Taiwan-US Visa Waiver Program. We will continue to monitor closely the market demand, and develop future cross-strait routes accordingly to capture new business opportunities.

Pursuing Excellence and Maintaining Leadership of the Industry

2012 was full of challenges, but CAL steadily faced all the difficulties and kept the leadership role in

Taiwan’s aviation industry by strengthening its organizations. We further grew the Asian flight network by

adding new destinations and frequencies for the Japan, Korea, and Mainland China markets. As for the

long haul routes, CAL cooperated with Delta Airlines to boost the Taiwan-US traffic and increased the

flights to New Zealand. In 2013, CAL will follow the market trend closely to take advantage of opportunities

afforded by new measures such as the liberated amount of Mainland tourists to Taiwan and the Taiwan-

US Visa Waiver Program.

2012/03 CAL Launches Flights to Kagoshima and Shizuoka




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Leveraging Information Technologies to Strengthen Cargo Services

CAL created a smartphone app “CAL CARGO” to provide real-time freight information to cargo agents and consignors. “CAL CARGO” has five main functions: flight schedule, flight status, freight inquiry, my favorite, and contact channels. Besides tracking flight schedules and flight/freight updates, consignors can store specific flights and booking numbers through the “my favorite” menu to monitor the shipment’s real-time status including U.S. customs declaration. The app also provides the contact information of CAL’s global business stations and customers can call or send messages to CAL worldwide by a simply click.

CAL developed a new generation freight operating system called CCNet. This system has been online since July 3, 2012. Because it was developed in house, we realized significant savings in software acquisition and maintenance expenses. CCNet has an open architecture, with the ability to connect immediately according to the needs of the customers. The system is easy to operate and has raised the efficiency of our internal work flow and facilitated the training of new personnel.

Strengthened the Competitiveness of International Freight Services

CAL has one of the world’s largest cargo fleets with 21 Boeing B747-400F cargo aircraft. We flew 84 cargo flights every week, including 31 on transoceanic routes, seven on European routes, 37 on Southeastern and North Asian routes, and nine China routes. According to data from International Air Transport Association (IATA), CAL carried 5.4 billion ton-kilometers of freight in 2011 and ranked the eighth globally. In the future, CAL will continue to build up our freight network and improve the utilization of freighters, as well as cargo holds on passenger flights. We will also step up cooperation with alliance partners to strengthen the leadership role of our cargo brand and to gain more international clients.

CAL joined SkyTeam Cargo on October 3, 2012 and significantly raised our international visibility. CAL now works with alliance partners in terms of purchasing and marketing, and jointly develops a complete offering of four products: Equation, Cohesion, Variation, and Dimension.

In terms of the cargo market in Mainland China, CAL served 24 cities including Chongqing, Shanghai, Guangzhou, Nanjing, and Xiamen. To improve freight cabin utilization and enhance the quality of our services, CAL signed a “Commercial Cooperation Agreement” with China Cargo Airlines. This enables the exchange of cabin berths on the Taipei-Shanghai route and acting as the agent for each other. Further, CAL signed a “Preferred Pricing Agreements” with Air China, China Southern Airlines, China Postal Airlines, and China Eastern Airlines . With respect to the Japan cargo market, we continued to offer freight services from Osaka to both east and west coasts of US via transoceanic passenger and cargo aircraft routes. CAL also signed a “Business Cooperation Agreement” with Nippon Cargo Airlines to exchange cabin berths on the Taipei-Tokyo route and to market jointly in other global markets. Finally, since April of 2012, CAL has served as the ground agent for Tonlesap Airlines and Palau Airways’ freight services on their B737-300 and B757-200 aircraft.

CAL was responsible for transport ing many special cargoes in 2012, including penguins, ant bears (myrmecophaga tridactyla), and various precision instruments. We also flew chartered cargo flights for silicon wafers, Beaujolais, etc. In addition, CAL assisted Taiwan Tourism Bureau to deliver lanterns as a gift to the Malaysian Tourism Bureau and sponsored the delivery project of the Annual Exhibition of Shaanxi Cultural Relics.


Las Vegas

NingboNingboNanchangNanchang

三亞

YanchengYancheng

DalianDalian

QindaoQindao

ShenyangShenyang

BeijingBeijing

XianXian

ZhengzhouZhengzhou

WuxiWuxi

NanjingNanjing

FuzhouFuzhou

HangzhouHangzhouShanghaiShanghai

KaohsiungKaohsiung

TaichungTaichungXiamenXiamen

SanyaSanya

GuangzhouGuangzhouShenzhenShenzhen

(Pudong,Hongqiao)(Pudong,Hongqiao)

HaikouHaikou

(Taoyuan,SongShan)(Taoyuan,SongShan)

ChongqingChongqing

WuhanWuhan

ChangshaChangsha

ChengduChengdu

TaipeiTaipei

WenzhouWenzhou

AucklandAuckland

ShizuokaShizuokaShizuoka

ToyamaSeoul

MacauMacau

(Incheon,Gimpo)(Incheon,Gimpo)

Phoenix

SacramentoSacramento

New OrleansNew Orleans

San Diego

Las Vegas

San Diego

Las Vegas

Effective date from 2012/10



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Touching Passengers’ Heart with Thoughtfulness

CAL offers the best services with thoughtful details. For instance, during summer months, sunward window shutters are kept closed on parked aircraft to offer a comfortable cabin environment. In flight, cabin crew will share relevant touring information on destinations, as well as information on pre-ordering duty free items on the return flights. Similarly, our ground-based staff offers heart-warming services to the passengers. In 2012, approximately 18% of the accolades received from customers were attributed to the ground service group. This is a four-fold increase compared to the previous years, showcasing CAL’s commitment to prioritized customer services.

24-hour E-services and M-services world-wide

To provide services to global passengers, CAL offers website in seven different languages (Chinese, English, Japanese, German, Italian, Dutch, and Korean). We also have a mobile app for smartphones (on three different platforms of iPhone, Andriod, and Windows Phone7.5) that was first launched in December, 2010. Passengers can enjoy 24-hour services via the "Flight Schedule", "Flight Status", "Manage Travel", "Dynasty Member Services", "Promotions", and " FB Travel Channel" functions offered by the China Airlines App. New features added in 2012 include " Flight Reservation" and mobile boarding passes. Except for a few restricted routes, system-wide, nearly all passengers can check in on CAL’s website or through the smartphone app, to reduce the waiting times at the airports and make paperless eco-journey a reality.

Initiating the Use of Mobile Boarding Passes

To provide passengers with more convenient check-in service, CAL was the first Taiwanese airline to offer mobile boarding passes at Frankfurt and Hong Kong airports on March 26, 2012. This service was expanded to Taoyuan International Airport in June and later, to 12 airports globally as of the end of 2012. Using Internet, passengers can now check in online, select seats, enter passport information, print boarding passes, and download mobile boarding passes from the web or from the China Airlines App. Passengers with no checked luggage can enter the passport and security check lines with the mobile boarding pass and head directly to the gates. Mobile boarding passes on mobile phones are easily and quickly scanned at the gate, taking no more than 2 to 3 seconds. Passengers qualified to use the VIP lounge will enjoy even more convenient airport services as their lounge invitation will be shown on the mobile boarding pass as well.

SkyPriority Service for Top Customers

As a member of the SkyTeam alliance, CAL began offering SkyPriority services on all routes starting March 15, 2012. SkyPriority of SkyTeam provides a series of special services for international premium passengers. All passengers of Elite Plus, first class, and business class can enjoy the services of priority check-in, priority baggage, and advanced boarding. SkyPriority has been implemented at more than 800 airports, and will be available at over 1000 airports worldwide by early 2013.

Prioritized Customer-oriented Services for Passengers

CAL emphasizes every service detail to offer a prioritized, customer-oriented service.

From the convenience of web and mobile reservation and ticketing, to efficient boarding

with mobile boarding passes; from crew’s warm greetings to the enjoyment of Taiwanese

local cuisines on board, CAL provides prioritized services to every passenger.

2012/06 CAL Offers New Mobile Services





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Amazing Taste Experiences of Air Delicate Cuisines

CAL actively works with well-known restaurants and chefs to offer the best cuisines in air. Our selections include such local favorites as the braised pork rice of Formosa Chang, to dishes from the five-star Palais de Chine Hotel, and from the modern cuisines of the famed Shanghai Shanghai, to Taiwan’s own pride—Chef Wu, Pao-chun's bread. Our flight attendants provide detailed information of each served dish, enabling the passengers to feel the Taiwanese culture while tasting the delicious foods. CAL had recruited Michelin chefs to offer high-class dishes in 2012. We also began offering Asian vegetarian meals on all flights departing from Taipei in September, 2012. This meal is available in all cabin classes and was designed by the celebrated vegetarian restaurant, Water Drop Teahouse. In 2013, CAL plan to unveil unique Chinese set meals created exclusively by four of Taiwan’s most famous chefs, Jian-fa Shih, Zhao-lin Chen, He-jin Chang, and Hong-che Kuo.

Using Local Food Ingredients to Cherish Our Globe and Taiwan

The new menu being developed by Taiwan’s four famous chefs will unite locally produced food ingredients with expertise of China Pacific Catering Service. This showcases CAL’s support to Taiwan’s agriculture and the government’s environmental policy on energy conservation

In terms of tour products for overseas destinations, CAL introduced new packages to Shizuoka, Toyama, and Kagoshima in connection with the Taiwan-Japan Open Skies Agreement. We also initiated a partnership with JR Group’s Kyushu Railway Company to provide complete rail services in Kyushu, Japan. As for the Mainland China market, CAL added new tour destinations such as Sanya and Haikou. By the end of 2012, Dynasty Package offered tour products to 58 cities in 17 countries.

To further serve our passengers, CAL launched online hotel reservation and booking systems, in April and November, 2012, for passengers going abroad and those visiting Taiwan, respectively. These systems assist passengers in pre-trip planning via online booking. CAL also developed a companion operating system for the lodging retailers to simplify the procedures and to raise product competitiveness and sales.

Various Value-added Services for Dynasty Flyers

There are more than 2.1 million Dynasty Flyer members, who enjoy special member privileges to foster their brand loyalty. The most important benefit is the accrual of reward mileages on all CAL flights, as well as flights on partner airlines through alliance and joint ventures. In 2012, we added new partners of Saudi Arabian Airlines (SV), Middle East Airlines (ME), Aerolineas Argentinas (AR), and Xiamen Airlines (MF).

In addition, CAL introduced discounts for rentals from Hertz and Avis, mileage gift vouchers for room, meal, and spa treatment at the Taoyuan Novotel Hotel, bonus miles for stays in Regal Hotels and InterContinental Hotels Group, and bonus miles for hotel bookings made on Ctrip, the prominent online travel agent in Mainland China.

Other Dynasty Flyer benefits include first-class upgrade awards, special upgrade awards on the Hong Kong route, bonus miles on Taichung-Macau flights, accommodation in first-class cabins for Emerald and Paragon members purchasing full-price business class tickets, discounts for Gold, Emerald, and Paragon members to upgrade/renew membership, prize drawings for new members, ticket discounts and prize drawing for members who update their cell phone information online, mileage vouchers for Dynasty Packages, ticket discounts for Gold, Emerald, and Paragon, as well as SkyTeam Elite Plus members’online purchases, and discounts for onboard duty-free purchases.

Our integrated marketing partners include 18 airlines, 18 banks or credit card issuers, ten global and regional hotel chains, two online booking centers, three global car rental chains, and one telecommunication provider. Among them, CAL cooperated with HSBC Bank to offer the China Airlines Visa Infinite Card, which comes with discounts on CAL ticket purchases and bonus mileage accrual on CAL flights. Customers of HSBC’s global financial planning services also enjoy discounts from CAL’s online ticket purchase.

and carbon reduction. In addition, the VIP lounges at Taoyuan Airport offer baked sweet potatoes, made by specially grown yellow yams from Tainan’s Xinhua District. The baked sweet potatoes have been certified by SGS and the Environmental Protection Administration of their low carbon content and bear the appropriate carbon footprint labels.

Delicate Tour Products with Frequent Updates

CAL’s “Dynasty Package” welcomed more than 160,000 tourists in 2012, topping all rivals. To accommodate the increased demand of free, independent travel for mainland tourists, CAL added Nanjing, Hangzhou, Chongqing, Chengdu, Guangzhou, Fuzhou, Shenzhen, and Xian to our original three focus cities of Beijing, Shanghai, and Xiamen. Tourists from these cities can purchase customized packages to Taiwan including f l ights and lodgings. Together with our current offerings from Southeastern and Northeastern Asian destinations, Dynasty Package to Taiwan is now available from 16 cities. It is worth mentioning that our 2012 tour packages were numerous and varied than ever to serve many niche markets. For example, we had teamed with vendors to offer medical-themed packages for comprehensive physical checkups or cosmetic surgeries, as well as featured tours of Jiufen Bed & Breakfast and other farm resorts. CAL was the exclusive sponsor of the rock band Mayday’s new year’s eve concert held in Kaohsiung, leading to a frenzy of ticket-buying across Mainland China and Southeast Asia.

2012/12 CAL Press Conference showcase traditional culinary feast




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Diversified Operations to Maximize Group Efficiency

To nurture and deepen the value chain of the aviation industry, CAL Group employs diversified

operations to strengthen its competitiveness and to maximize its efficiency. The CAL Group controls

36 subsidiaries covering aviation, ground services, logistics, air cargo stations, catering services, bulk

laundry services, information network, and tourism.

Mandarin Airlines

Mandarin Airlines is a subsidiary company of CAL with a fleet of eight single-aisle, 104-seat ERJ 190-100 aircraft. It is based in Taichung, and operates international flights from Taichung, Songshan, and Kaohsiung, as well as other scheduled cross-strait routes and Taiwan domestic routes. CAL owns a 93.99% share of Mandarin and the two airlines share resources including fleet, business, and management. They cooperate with each other closely to pursue mutual interests and growth.

China Pacific Catering Service Ltd.

China Pacific Catering Service is a joint venture of CAL (51%) and John Swire & Sons (H.K.) Ltd. (49%). It was founded in 1996 and remains the most established catering service firm in Taiwan. Our goal is to grow the firm into the best catering service provider in Asia. This company employs more than 200 chefs and uses high-tech equipment to produce meals under the most scrupulous sanitation standards. It served 27 international passenger and cargo airlines in 2012.

In order to offer delicious and diverse meals, China Pacific Catering Service partners with the famous Taiwanese baker, Wu, Pao-chun, the Shanghai Shanghai, the Water Drop Teahouse vegetarian restaurant, the five-starred Palais de Chine Hotel, and the Michelin-starred China Blue restaurant in Conrad Tokyo. The company continues to update and create novel menus.

Abacus Distribution Systems Taiwan Ltd.

Abacus Distribution Systems Taiwan Ltd. is a subsidiary, with 93.93% shares held by CAL, established in October 9, 1990. It is a Taiwan-based marketing company of Abacus International Pte Ltd of Singapore. The firm’s main business is the sale of Abacus computer reservation system to domestic travel agencies, plus other services including computer software design and development, data processing, second-tier communication services, and the sale, installation, and maintenance of computer hardware.

In recent years, Abacus was also diligently involved in the research and development of other ancillary products of a reservation system. With CAL joining the SkyTeam, Abacus cooperates with SkyTeam in marketing efforts, via various social media networks. Moreover, Abacus is leveraging mobile communication and cloud technology to provide customers with multiple value-added services.





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China Pacific Laundry Services Ltd.

China Pacific Laundry Services Ltd., a joint venture of CAL (55%) and John Swire & Sons ( H.K.) Ltd. (45%), was established in September, 1997. By introducing commercial washing services and technologies from abroad, China Pacific Laundry Services Ltd. meets all international standards in operations and service qualities. Its main business is to provide bulk laundry services to airlines, hotels, and other gyms and clubs. In recent years, the firm devoted significant efforts in improving the laundry processes and will unveil new equipment in 2013. It aims to improve efficiency, conserve energy, enhance service quality, and grow the company ultimately.

Dynasty Hotel of Hawaii, Inc.

Dynasty Hotel of Hawaii, Inc. is located in Honolulu, Hawaii and was acquired by CAL in 1973. It is a 16-story building with 199 guest rooms. The hotel joined the Wyndham Worldwide group in 2009 and carries the Ramada Plaza brand. It was awarded the 2012 Certificate of Excellence Award by TripAdvisor. The hotel’s restaurant is under renovation to become a more Hawaiian-themed establishment. The renovation should improve the quality of service to customers.

Taoyuan International Airport Services Co., Ltd.

Taoyuan International Airport Services Co., Ltd. was jointly founded by the Ministry of Transportation and Communication and CAL on December 1, 1978. It started its business operation on February 26, 1979 with the opening of the original Terminal One at Taiwan Taoyuan International Airport. The firm provides professional ground services to all flights under the goals of “safety, efficiency, and services.”

Taoyuan International Airport Services Co., Ltd. passed IATA’s audit and became a certified ISAGO provider on February 11, 2012. ISAGO, the acronym for IATA Safety Audit for Ground Operation, is the highest-level audit standard for aviation industry suppliers. Taoyuan International Airport Services Co., Ltd. is the first Taiwanese ground services company to receive this certification.

Hwa Hsia Company Ltd.

Hwa Hsia Company Ltd. established in 1989, is a wholly-owned subsidiary of CAL. It was founded for the purposes of lowering the operating costs of CAL and achieving overall profits for the entire enterprise group. The work that Hwa Hsia took up in the early years only included maintenance of air cargo containers, laundry, headphone cleaning, and in-cabin cleaning. The firm has since grown extensively, providing additional services such as external aircraft cleaning, aircraft parts washing, maintenance of air cargo containers and in-cabin service carts, general cleaning of factories, office buildings, and residences, disease control, and temporary labor offerings. The number of employees increased to more than 500 from the original count of 124. In the future, Hwa Hsia will market aggressively to other partner airlines to become a qualified service depot for cargo containers, cargo pallet, cargo nets, and service carts.

Novotel Taipei Taoyuan International Airport

Novotel, another CAL’s wholly-owned subsidiary, is the first internationally-branded hotel in Taoyuan. Opened in 2009, it is Accor Group’s flagship airport hotel in Taiwan. The overall design of the hotel emphasizes the concepts of environmental protection and natural harmony. The hotel has 360 fashionable guest rooms, plus other facilities such as heated swimming pool, steam rooms, fitness center, and beauty salon. It boasts a grand ballroom with lofty five-meter high ceilings and five multifunctional conference halls to serve all business meetings and wedding parties. Novotel has been LPGA’s official hotel two years in a row. The “Wei Fang” Chinese restaurant in Novotel received award as one of the best restaurants in Taiwan due to its exemplary services and distinctive design. Novotel is truly the best international hotel in Taoyuan.

2012/2 Taoyuan International Airport Services (TIAS) Receives International Air

Transport Association (IATA) ISAGO Certification




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Human Resources as the Fuels for Growth

Motivated employees are what fuel the growth and expansion of an enterprise. Through

continuous modernization and innovations, CAL aims to stimulate the employees and raise our

competitiveness. As CAL joined SkyTeam, we have developed new products and introduced a new

fleet. CAL is stepping into a new era and we need the best talents to fuel our continued growth.

Diverse Learning to Ingrain Brand Spirit into Employees’ Heart

CAL adopts a diverse employee training regime to ingrain superior moral spirit and corporate values into employees’ heart. We expect these values to guide the employees in their conducts at the workplace, as well as in their daily lives. Our training and education regime include online learning and assessments, case studies in “CAL Employee Newsletter,” workshops and seminars, and polls for poster design. These activities aim to raise the employees’ consciousness to carry out CAL’s brand spirit and sustain our corporate culture.

Electing Model Employees to Stimulate Devotion

CAL held an election of model employees in 2012 to motivate employees in service devotion and to strengthen work ethics. Six new awards were added to the existing prizes, including “Award for Best Public Welfare Affair,” “Award for Best CAL Employee,” “Award for Best Environmental Protection Practitioner,” “Award for Best Public Relation Practitioner,” “Award for Best Safety Goalkeeper,” and “Award for Best Team Spirit.” The election was open to all employees and the winners inspired all to work harder in the future.

All New Trophies for Senior Employees

Trophies for Senior Employees mark the mutual growth of the employees and the company and symbolize the employees’ efforts and devotion. The trophy had been designed on the basis of gold plum blossoms, with a wooden pedestal, to symbolize the stable and dependable management styles. In 2012, CAL redesigned an all-new trophy for senior employees with transparent crystal along with elegant red plum blossoms to show the company’s updated, sustainable growth, as well as our resolute spirits and beliefs.

2012/12 Senior Employees were awarded in the 53rd Anniversary

2012/12 CAL Unveils Newly-designed Trophy for Senior Employee





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A Corporate Citizen for Taiwan’s Future

CAL is keenly aware of its responsibility as a corporate citizen and actively engages in public welfare

activities. We assist in promoting tourism, culture and art experiences, sporting events, environmental

protection awareness, and so on. Because we have dreams, we wish Taiwan to shine on the world

stage; because we have love, we pray for a better world tomorrow.

Being Outstanding Internationally

CAL has long been devoted to Taiwan tourism and we vigorously market Taiwan internationally in support of government policies. In 2012, CAL continued to participate in domestic and international travel fairs and sponsored many activities hosted by the Tourism Bureau and the Taiwan Visitors Association (TVA). These include the Taiwan Lantern Festival in Changhwa, Sand Sculpture Art Festival in Fulong, and the Taiwan Culinary Exhibition in Taipei. CAL also assisted the Tourism Bureau and the Centers for Disease Control in disseminating important news bulletins via onboard announcements or short films. We participated in the printing and distribution of the “Taiwan Tourism Hotel & Restaurant Guide” published by TVA. For our effort, TVA awarded CAL the “2012 Special Award for International Tourism Marketing” in the aviation category.

Repeat Winner at the U.S. Rose Parade

Rose Parade of Los Angeles, California is a major event that attracts global attentions every January. The theme for the 2012 parade was “Just Imagine.” CAL, in cooperation with the Ministry of Foreign Affairs and the Tourism Bureau, won the international first prize with a float entry named “Spirit of Prosperity and Harmony.” CAL’s floats have appeared in Rose Parade in 26 consecutive years and won the prestigious prize 21 times. This year’s theme of “Spirit of Prosperity and Harmony” was inspired by the Book of Changes. The float featured a vividly designed floral dragon, spitting smokes with animated head movements. Beautiful ambassadors, dressed in Taiwanese, Hakka, and aboriginal costumes, greeted the parade audience and attracted millions of global viewers. CAL’s float in Rose Parade showcased Chinese culture to the world, brought in the New Year of Dragon, and prayed for a prosperous world.

2012/01 "Spirit of Prosperity and Harmony" Float Wins International Trophy at the U.S. Rose Parade





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2012 was China Airlines’ first year in our sustained campaign for environmental protection. During the year, CAL Volunteer Club members conducted two beach-cleaning drives to tidy up the coastal areas of Taoyuan’s Zhuwei Fishing Harbor. CAL also held a “Bike Festival” that had thousands of participants from our employees, their family members, and staff members of various domestic and international tourism bureaus. All the bikers experienced a fun ride and, at the same time, demonstrated their resolves in energy saving, carbon reduction, and earth loving.

C u l t i v a t i o n o f Ta i w a n ’s C u l t u r e a n d Development of Branding Diplomacy

CAL act ive ly par t ic ipates in domest ic and international art and sporting events to promote national images of Taiwan and to develop international diplomacy through culture exchanges. In 2012, we sponsored activities such as “The Stunning Pop-up Books” and “The Dawn of Dinosaurs” hosted by the United Daily News Group, and the annual exhibit “Qing Dynasty and Western Court Jewelry” and “The Cultural Granderur

of the Western Zhou Dynasty” held at the National Palace Museum. CAL also sponsored other culture exchange activities held by the government, universities, foundations, and visiting international missions.

CAL is an energetic sponsor and supporter of various international games. We are particularly proud of the achievements of Taiwanese athletes. In 2012, CAL sponsored the following events: 2012 OEC Taipei Ladies Open, athletes of Chinese Taipei Sailing Association to Asian Windsurfing Championship in Thailand, 2012 Chinese Track and Field Game in the Bay Area of San Francisco, and ESPN’s “Cheers for Jeremy Lin.” For its efforts, CAL was awarded the “Best Sports Promoter” honor by the Executive Yuan in 2012.

Charter Flights that Fulfill Every Mission

CAL has abundant experiences with air charters, and the best example is our mission of charter flights in 2012 for the President and Vice President to visit friendly nations in Africa and transit in U.S. With discreet and professional services, CAL provided the safest and the most comfortable trips for the President, Vice President, and other VIPs.

The Continual Growth of Love

As the leader of the aviation industry in Taiwan, CAL has long been devoted to public welfare and humanitarian aid to fulfill its social responsibility as a corporate citizen. In particular, after the establish of the CAL Volunteer Club in 2011, CAL has participated actively in caring for the disadvantaged, watching out for our neighbors, protecting the environment, and contributing to the society in general. We truly believe in repaying the society for what we have received.

To support local families, CAL’s Volunteer Club and Taoyuan Fishermen's Association held a “Surrounding the Stove” activity for nearly 200 orphans in Taoyuan County on the Eve of Chinese New Year. In addition, CAL volunteers taught English at Zhuwei Elementary School and shared their aviation experiences with the schoolchildren. Volunteers also periodically visited the orphanages to donate goods and to arrange visiting activities for children.

Caring for the disadvantages, CAL was a sponsor in numerous activities including the “Touching the World with Love from Taiwan” held by Chou, Ta-kuan Foundation, “Cross-Strait Bike Trips” held by Xin-yin Orphanage in Yun-lin County, and “Dream-realizing Project” of R.O.C. Make-a-wish Foundation. CAL also assisted in transporting patients of rare diseases, such as spinal muscular astropy, cerebral hypoxia, and congenital lymphedema, for international rescues and medical treatments. In addition, CAL sponsored the delivery of humanitarian aids for various campaigns conducted by international volunteer organizations. Examples include Tzu Chi Foundation’s “Volunteer Doctors for Beijing Flood,” Fu Jen Catholic University's “Tanzania International Volunteers,” and Chihlee Institute of Technology’s “Burkina Faso International Volunteers.” Finally, CAL delivered guide dogs for the Taiwan Guide Dog Association, donated salvaged aircraft parts and materials, and participated in charity fund raisings, with the hope to appeal others’ support and pass on the humanitarian love.

2012/06 CAL Flight Attendants Teach Course of Aviation and English at Zhuwei Elementary School 2012/04 President Ma, Ying-jeou visits Africa on China Airlines Chartered Flight




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| Enhancement of Flight Operation and Maintenance |

Endless Efforts for Aviation Safety

Aviation safety is CAL’s utmost mission, and each and every employee is fully committed to it by

integrating safety consciousness into our operations, system design, and organization. CAL forms

its own safety culture by carefully managing and controlling the risks of aviation safety.

CAL implements a safety management system and strictly controls the risks of all operations. CAL follows safety management policies mandated by the Civil Aeronautics Administration and International Aviation Transportation Association (IATA) to train seed instructors and to carry out the required safety trainings. In addition, CAL continues to implement aviation security projects to prevent any security incidents both in the air and on the ground.

CAL’s Safety Management System (SMS), as required by IATA and the Civil Aeronautics Administration, began operation in 2009. In 2012, we continued to develop and maintain the SMS, installed the Safety Action Group, and integrated SMS into the work of all departments. By the end of June, CAL completed the setup and implementation of SMS Phase III. In December, 2012, the Civil Aeronautics Administration conducted reviews and audits of our SMS with the goal of attaining the highest safety level.

Of note is CAL’s systematic management of aviation risks in all operational areas such as flight operations, in-flight services, and ground handling. We have a safety report policy that encourages employees to quickly and honestly report all identified incidents and hazards. This

has resulted in a reduced frequency of safety incidents, as evident in the 130% more positive reports in 2012 than 2011.

CAL is the first airline in Taiwan to receive the IOSA (IATA Operational Safety Audit) certification. The IOSA program is an internationally recognized and accepted evaluation system designed to assess the operational management and control systems of an airline. All IATA members are IOSA registered and must remain registered to maintain IATA membership. CAL gained IOSA certificate for the first time in 2005. After that, CAL successfully passed the recurring audits in a 24-month cycle. In fact, audits in 2006, 2008, 2010, and 2012 had identified zero defects at CAL. Our current IOSA registry is valid until February 25, 2013 and will be extended to February 25, 2015.

The IOSA certification shows that CAL’s setup and implementation of SMS and its sub-systems are recognized and approved by IATA. CAL will continue the efforts and demand every employee of every department to take up the responsibilities for safety. We will actively identify and manage the risk of operations through SMS and prevent accidents from occurring again.

2012/12 CAL Maintenance Facility Receives ISO 14001 Certification


Implementation of Safety Management to Raise the Overall Safety



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| Enhancement of Flight Operation and Maintenance |

The corresponding training material is designed with the requisite course syllabi and fully employs audio-visual media to enrich the training contents. This has raised the efficiency of flight crew training and lowered operational risks.

CAL’ flight crew training system was approved by 2012 IOSA. Aviation Quality Services (AQS), the accredited audit organization that had conducted the audit on CAL, was very positive about CAL’s continual improvements of training system to reach the international standard.

Using LOSA to Reform the Flight Operations

Line Operations Safety Audit (LOSA), developed by the University of Texas, is a critical organizational strategy aimed at developing countermeasures to operational errors. LOSA uses highly trained observers to collect data

about flight crew behavior and crews’ strategies for managing threats, errors and undesirable states. CAL first deployed LOSA in 2004 and improved our flight operations according to the audit report. A second LOSA was conducted in 2011 and the results showed that CAL performed significantly better than the first one, as well as better than other competitors. CAL continued to improve flight operations in 2012 based on the LOSA audit, and had implemented many safety measures such as minimizing the operational pressure during flight crew’s pre-flight check, strengthening the prompts during take-off and landing phases, and integrating LOSA data into EBT database for future training. Most importantly, the audio-visual training material for flight crews’ prompts and other trainings on leadership, communications, cross-checking, management of work load, assertiveness, inquiry and advocacy, etc. are all included in the CRM training courses and will be continually implemented in 2013.

Expert Maintenance Capabilities for Flight Safety

CAL’s advanced professional aircraft maintenance center is the largest of its kind in Taiwan. CAL has aircraft maintenance licenses certified by the United States, the European Union, China, and Hong Kong. Our advanced hangars allow simultaneous work on five large planes. In addition, CAL built 120,000-pound Engine Test Cells to satisfy the needs for engine testing. CAL provides high-quality maintenance services for its passenger and cargo fleet, as well as those from more than 40 global clients. Our expert maintenance capability is evident from CAL’s higher than average dispatch reliability rate in the aviation industry.

CAL’s maintenance missions are “safety, reliability, and trustworthiness,” and we continue to improve the work flow and procedures in our daily business. In 2012, CAL completed the implementation of the Maintenance Performance Toolbox developed by the Boeing Company.

We successfully integrated the information on aircraft structure management and maintenance programs, resulting in optimum maintenance plans, increased dispatch reliability, and lowered frequencies of cancellation and delays. In 2013, CAL will introduce additional advanced material management system and facility maintenance system. These are aimed to further raise maintenance efficiency, improve the utilization of time and resources, increase service qualities and operational efficiency, and lower maintenance costs.

Excellent Flight Training for Top Aviation Safety

CAL’s flight operations department continues raising the qualities of flight crew by implementing training in a systematic and scientific manner. Our training for flight crew and instructors is based on information gathered from training, testing, initial performance, internal and external audits, and various observation reports.



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| The Trend for Environmental Protection |

The First Year of Environmental Protection -CAL’s Initiation of Green Aviation

CAL designated 2012 as the first year of environmental protection to turn our love for the globe into

actions instead of slogans. We included environmental management as an important objective of

our operations and made every effort to conserve energy and reduce carbon emissions. Every flight

should be a green flight that is friendly to our earth.

Environmental Management as an Important Focus for Operations

In response to the environmental risk brought by global climate changes, CAL established a formal corporate organizational structure to implement environmental management programs based on ISO 14001. At the highest level, there is an environmental committee headed by the president. This committee oversees all strategic planning, coordinates resource utilization, and sets up environmental management committees and action groups at various departmental levels. In addition, our environment management systems are conducted via the PDCA management cycle and are evaluated using annual management performance indexes. They cover various operational areas including aircraft maintenance, services, flight operations, administration, etc.

CAL’s environmental protection objective is guided by our six environmental policies. They are “complying with laws and fulfilling the responsibilities for environmental protection,” “establishing environmental management systems and performance indices,” “carrying out eco education and fostering employees’ consciousness for environmental protection,”

“promoting eco flights and green supply chains,” “constructing a low-carbon operational environment and raising the general eco efficiency”, and “supporting green research and activities for sustainable development.”

Continuous Monitoring and Verification of Greenhouse Gas Emissions

In accordance with ISO/CNS 14064-1, CAL examined and reported the greenhouse gas emissions generated in 2011 from our flight operations, ground services, and administrative services. As an independent check, CAL retained bsi Taiwan Branch to conduct a third-party validation and verification. We received a certificate of “Reasonable Assurance” that attests to the accuracy and credibility of CAL’s greenhouse gas emissions data.

CAL’s greenhouse gas emission in 2011 (including scopes 1 and 2) was 6,628,363 metric tons of CO2e. Of these, scope 1 had 6,603,107 tons, mainly from aircraft fuel. This is CAL’s fourth year in reporting and we will continue the effort in the future.

Nonstop Efforts for Energy Conservation and Carbon Reduction

Despite CAL’s continuing effort in fuel saving and carbon reduction, the global economic depression in 2012 resulted in reduced Revenue Tonne Kilometer (RTK) than 2011. As such, the fuel saving efficiency per RTK is lower by 0.0114 and the carbon reduction efficiency per RTK is lower by 0.0359. The details are listed as follows.

The List of Aircraft Fuel Saving and Carbon Reduction

2012 2011 Comparison

Fuel Consumption (Kg) 1,973,248,428 2,065,257,969 Down 92,009,541

Production of CO2 (Kg) 6,215,732,548 6,505,562,602 Down 289,830,054

RTK 7,785,419,370 8,532,333,689 Down 746,914,319

Fuel/RTK 0.2535 0.2421 Down 0.0114

(CO2/RTK) 0.7984 0.7625 Down 0.0359




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CAL’s Maintenance certified by ISO 14001

C A L’s m a i n t e n a n c e r e c e i v e d I S O 1 4 0 0 1 Environment Management System certification in December 2012. CAL is the first airline in Taiwan to receive this certification and it is a significant milestone for us. The occasion brought Taiwan’s airline industry in line with international practices of sustainable environmental management.

Annual Carbon Reduction Worth 86 Daan Forest Park

CAL actively implemented various environment-related projects across all operational areas including ground services, maintenance, flights, and customer services. We also set up key performance indicators (KPI) to control and monitor the projects. In 2012, there were 64 KPIs for environmental management in total, and the annual goal was to reduce carbon emission by 5%. When compared to 2011, the results for some major categories were: jet fuel decreased 20,978,870 pounds, gasoline decreased 208,676 liters, electricity reduced 2,023,868 units, water reduced 3,672 units, and paper usage decreased 1,915,014 sheets. The total amount of carbon reduction was 31,719 metric tons of CO2e, equivalent to 86 Daan Forest Park.


Carrying out Pacific Greenhouses Gases Measurement (PGGM)

CAL participated in the Pacific Greenhouse Gases Measurement (PGGM) research conducted by the National Central University and Environmental Protection Administration. CAL’s Airbus A340-300 aircraft numbered B18806 was installed with the IAGOS (In-service Aircraft for a Global Observing System) instrument and was officially launched on June 26, 2012. CAL is the first Asian airline participating in the PGGM project and the first to operate an IAGOS-equipped flight for taking atmospheric measurements on trans-Pacific routes. In the second half of 2012, CAL helped collect upper air samples on 428 flights (including 64 on the Taipei-Vancouver route).

2012/06華華華華華華華華華華華華華華華華華華華

Carrying out EU ETS Project

According to Monitoring Plans approved by EU Emissions Trading Scheme (EU ETS) and Dutch Emission Authority (NEA), CAL completed the 2011 annual report and invited BUREAU VERITAS to serve as a third party assurance agent. The results showed that CAL’s flights to the European area (including flying to and from or in the EU area) emitted approximately 840,000 metric tons of carbon dioxide.

NEA notified CAL in December, 2012 that, because ICAO will establish a global, consistent emission exchange system in September, 2013, EU currently only monitors the emission of intra-EU flights. Monitoring of emission outside of European areas is postponed for one year. CAL is closely watching the latest developments in anticipation of future reporting requirements.

86 Daan Forest Park

2012/06 CAL Launches the World's First Trans-Pacific Climate Observation Flight



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Promoting Eco Education and Awareness

CAL p romo tes env i ronmen ta l educa t i on through a variety of channels. The cultivation of employee environmental awareness helps to form an environmental consensus within the company. These channels include: using the Weekly Letter and the "Let's Eco Together" internal website to promote a different environmental issue every week; using the internal e-learning platform to support environmental education classes such as the Importance of Environmental Managemen t , D imens ions o f Env i ronmen ta l Management and Energy-saving and Carbon Reduction Measures. Our goal is to keep employees up to date on international environmental trends, inform them about environmental challenges for the aviation industry, as well as teach them about CAL's environmental governance and the ISO 14001 environmental management system.

Investments in Environmental Protection

CAL invested NT 13.87 mil l ion dollars and associated human resources to promote eco affairs and education. Our environmental efforts are varied and numerous, including purchasing eco hardware (equipment for prevention and control), purchasing green supplies, establishing ISO 14001 environmental

management system, assisting Pacific Greenhouse Gases Measurement, carrying out EU ETS project, conducting audits on greenhouse gas emission, redesigning CSR eco web pages, and so on.

Devotion to Eco Public Welfare Activities

CAL has long been devoted to eco, non-profit activities to show our love for Taiwan and the Earth. CAL volunteers conducted beach cleanups at Taoyuan Zhuwei Fishing Harbor. CAL joined “Earth Hour Taiwan” held by the Society of Wilderness on March 31, 2012 and turned off all nonessential lighting for one hour (20:30 to 21:30). We also participated in the demonstration and promotion of electric vehicles with the Industrial Technology Research Institute. Our actions demonstrated our love toward the earth and our resolve to save energy and reduce carbon footprint.

CAL received an Outstanding Achievement Award of 2012 “Energy Conservation and Carbon Reduction Action Mark” from the Environmental Protection Administration, Executive Yuan. In 2012, CAL also received the “Super Green Judges’ Award” and the first prize in the Transportation category of the “2012 Green Brand Survey” conducted by Business Next Magazine.

2012/03 Business Next Presents CAL with Top Super Green Transportation Award

Realization of Eco Trips

CAL has successfully implemented E-services such as online check in, mobile boarding passes, self-printed boarding pass, airport kiosks, and self-printed baggage tags. We are making paperless trips come true. CAL uses mostly local ingredients to prepare snacks served in the VIP lounges to reduce carbon emission. We also purchase bottled drinks of larger volume to reduce the amount of bottles or packaging, and we sort and recycle waste categorized by food residuals, papers, and plastic bottles.

Our service products and procedures also follow the principles of environmental protection to promote Eco services. For example, the headrest covers and pillowcases used in premium cabins are made of 35% coffee yarn and 65% recycled yarn made from plastic bottles; amenity kits in business class are made of non-woven fabric and contain decomposable toothbrush made from corn starch; toilet bags in economy class used innovative seals; and the elimination of the plastic bags for onboard slippers. In addition, in terms of reducing weight and fuel consumption, CAL now uses all-aluminum meal carts that are three kilograms lighter than the old one. On long haul routes, the 30 meal carts onboard can save 31 kilograms of fuel every flight. Also, utensil in the economy class is now 69 grams lighter than before.

CAL worked with the Industr ial Technology Research Institute to calculate and highlight the carbon footprint of the main dishes served on the Taipei-Frankfurt route. The business-class menu on this flight was printed with soy ink on recycled paper. Flights on this route also served the light-weight Yes mineral water with reduced plastic contents of 23% and 45%, for the bottle and the cap, respectively.

2012/12 CAL' 53rd Anniversary Celebrations - The Carbon Footprint Menu

Experience

www.china-airlines.com 35


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Financial Status Contents

36 Financial and Operating Analysis

36 Operating Profit and Net Profit

36 Operating Revenues

39 Operating Costs and Employee Productivity

40 2012 Financial Report


| Financial and Operating Analysis |

Operating Profit and Net Profit

In 2012, China Airlines’ operating profit was NT$ 343 million (operating margin 0.3%), a increase of NT$1,907 million over 2011. Net profit reached NT$ 58 million (net margin 0.04%), an increase profit of NT$ 2,012 million over 2011.

Operating Revenues

In 2012, total operating revenue reached NT$132,608 million, an increase of 0.3% over 2011. Total operating cost decreased by 1.2% to NT$132,265 million. Passenger revenue raise by 7.2% to NT$86,621 million and cargo revenue decay by 12.0% to NT$ 40,809 million, respectively. Other revenue raise by 3.0% to NT$ 5,179 million.

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Passenger Business

Passenger revenue was NT$86,621 million in 2012, an increase of NT$5,796 million or 7.2% over 2011. According to the breakdown of passenger revenue by routes, North America represented the prime market contributing 24.7%, followed by Southeast Asia, Northeast Asia and China, with the contribution of 19.2%, 18.6% and 15.6%, respectively.

Compared with those in 2011, passenger capacity (ASK) increase by 4.3%, passenger traffic (RPK) increase by 3.4%, and passenger yield increase by 3.7% to 2.64 (TWD/RPK). Passenger load factor goes down by 0.7ppt to 77.3%.

Cargo Business

Cargo revenue was NT$40,809 million in 2012, an decrease of NT$ 5,579 million or 12.0% over 2011. North America, the largest portion of cargo revenue, operated 56.4% of the cargo revenue, followed by Southeast Asia 15.5% and Europe 14.7%.

In 2012, cargo capacity (FATK) decrease by 16.1% yoy. Cargo Traffic (FRTK) decrease by 14.9% yoy, and cargo yield increase by 3.3% to 8.45(TWD/FRTK). Cargo load factor goes up by 1.1 ppt to 71.3%.

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Operating Cost and Employee Productivity

Operating expense was NT$132,266 million in 2012. The three largest cost items were fuel (46.2%), airport & ground handling charge (12.3%), and Labor cost (10.3%). In 2012, unit cost was up by 9.5% yoy to 12.48 (NT$/ATK), Without fuel cost, unit cost was up by 12.4% yoy.

As of December 31st 2012, the number of average employees for 2012 was 10,693. Employee productivity, measured by ATK per employee, RTK per employee, and revenue per employee, proved with a negative trend compared to 2011.

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and the Stockholders China Airlines, Ltd.

We have audited the accompanying balance sheets of China Airlines, Ltd. as of December 31, 2012 and 2011 and the related statements of income, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial position of China Airlines, Ltd. as of December 31, 2012 and 2011 and the results of its operations and its cash flows for the years then ended, in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law and Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the Republic of China.

We have also audited the consolidated financial statements of China Airlines, Ltd. and its subsidiaries as of and for the years ended December 31, 2012 and 2011 on which we have issued an unqualified opinion in our report dated March 29,2013.

March 29, 2013 Notice to Readers

The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China.

For the convenience of readers, the auditors’ report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors’ report and financial statements shall prevail.

| 2012 Financial Report |

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.

CHINA AIRLINES, LTD.

STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Earnings [Loss] Per Share)

2012 2011 Amount % Amount %

REVENUES (Notes 2 and 25)

Passenger $ 86,621,265 65 $ 80,825,429 61Cargo 40,808,925 31 46,388,470 35Others 5,178,641 4 5,026,570 4

Total revenues 132,608,831 100 132,240,469 100

COSTS (Notes 9, 21 and 25)

Flight operations 81,912,308 62 83,461,996 63Terminal and landing fees 19,379,015 15 18,894,391 14Passenger services 8,286,577 6 7,904,359 6Aircraft maintenance 11,001,675 8 11,882,485 9Others 2,846,879 2 2,872,199 2

Total costs 123,426,454 93 125,015,430 94

GROSS PROFIT 9,182,377 7 7,225,039 6 OPERATING EXPENSES (Notes 21 and 25)

Marketing and selling 6,251,334 5 6,178,062 5General and administrative 2,587,953 2 2,611,841 2

Total operating expenses 8,839,287 7 8,789,903 7

OPERATING INCOME (LOSS) 343,090 - (1,564,864) (1) NONOPERATING INCOME AND GAINS

Interest income 180,921 - 159,157 -Investment income recognized under the equity method (Notes 2

and 11) 652,849 1 662,566 1Dividend income (Note 2) 186,901 - 97,529 -Gain on disposal of properties, net (Notes 2 and 25) 7,388 - 41,505 -Valuation gain on financial instruments, net (Notes 2 and 5) 472,167 - 6,057 -Foreign exchange gain, net 3,556 - 189,217 -Others 612,480 1 541,251 -

Total nonoperating income and gains 2,116,262 2 1,697,282 1

NONOPERATING EXPENSES AND LOSSES

Interest expense (Note 25) 2,163,563 2 2,244,708 2Others 160,446 - 235,944 -

Total nonoperating expenses and losses 2,324,009 2 2,480,652 2

PRETAX INCOME (LOSS) 135,343 - (2,348,234) (2) INCOME TAX EXPENSE (BENEFIT) (Notes 2 and 20) 76,539 - (393,963) (1) NET INCOME (LOSS) $ 58,804 - $ (1,954,271) (1)

2012 2011 Before Tax After Tax Before Tax After Tax

EARNINGS (LOSS) PER SHARE (NEW TAIWAN DOLLARS;

Note 22) Basic and diluted $ 0.03 $ 0.01 $ (0.51) $ (0.42)

The accompanying notes are an integral part of the financial statements.


Go Top

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.


STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars)

2012 2011

CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 58,804 $ (1,954,271 )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Deferred income taxes 16,541 (458,618 )Depreciation and amortization 10,889,199 10,403,689 Provision for doubtful accounts - 72,017 Compensation cost of employee stock options - 28,123 Valuation gain on financial instruments, net (472,167 ) (6,057 )Investment income recognized under the equity method (652,849 ) (662,566 )Cash dividends received from equity-method investees 502,442 436,190 Loss on inventories, properties and idle properties 125,259 298,396 Gain on disposal of properties (7,388 ) (41,505 )Gain on disposal of idle properties, net (22,929 ) (75,159 )Amortization of deferred profit on sale-leaseback (577,178 ) (629,707 )Amortization of deferred credits (66,414 ) (66,414 )Net changes in operating assets and liabilities:

Financial assets and liabilities held for trading 2,871,376 (2,972,745 )Notes and accounts receivable 2,664,802 1,640,821 Notes and accounts receivable - related parties (102,249 ) 215,403 Other receivables 118,909 109,726 Inventories (5,030 ) (2,047,680 )Other current assets (32,798 ) (874,121 )Accounts payable (198,941 ) 228,393 Accounts payable - related parties 219,748 (104,262 )Accrued expenses (2,500,579 ) (7,949 )Advance ticket sales (1,602,882 ) 121,461 Other current liabilities 254,599 (16,565 )Accrued pension cost 34,474 139,409 Other liabilities (231,853 ) (177,667 )

Net cash provided by operating activities 11,282,896 3,598,342

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisition of investments accounted for by the equity method (30,409 ) (200,000 )Increase in other financial assets - noncurrent (679 ) - Acquisition of properties (6,437,786 ) (5,762,965 )Proceeds of the disposal of properties 206,590 218,310 Increase in computer software (61,313 ) (58,430 )Proceeds of the disposal of idle properties 27,861 93,165 Decrease in refundable deposits 324,861 764,204 Increase in deferred charges (8,870 ) (23,430 )Decrease in restricted assets 115,520 344,964

Net cash used in investing activities (5,864,225 ) (4,624,182 )

CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in short-term loans 1,600,000 (1,100,000 )Decrease in short-term bills payable - (1,249,625 )Proceeds of long-term debts 12,668,866 17,476,748 Repayments of long-term debts and capital lease obligations (19,838,897 ) (16,518,938 )Issuance of bonds payable 5,785,000 6,000,000 Repayment of bonds payable (12,200,000 ) (3,500,000 )Increase (decrease) in guarantee deposits received (13,660 ) 26,070 Decrease in deferred profits on sale-leaseback - (186,997 )Cash dividends - (1,852,649 )Issuance of common stock for cash 6,667,069 -

Net cash used in financing activities (5,331,622 ) (905,391 )

EFFECT OF EXCHANGE RATE CHANGES (23,082 ) 81,648

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 63,967 (1,849,583 )

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,947,397 10,796,980

CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,011,364 $ 8,947,397

SUPPLEMENTAL CASH FLOW INFORMATION

Interest paid $ 2,157,303 $ 2,267,516 Less: Capitalized interest 90,300 75,309Interest paid (excluding capitalized interest) $ 2,067,003 $ 2,192,207Income tax paid $ 65,345 $ 67,179

NONCASH FINANCING ACTIVITIES

Current portion of long-term loans and debts $ 16,671,452 $ 18,047,762Current portion of capital lease obligations $ 840,208 $ 1,185,639Current portion of bonds payable $ 6,130,000 $ 12,200,000

The accompanying notes are an integral part of the financial statements.


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NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In New Taiwan Dollars, Unless Stated Otherwise)

1. ORGANIZATION AND OPERATIONS

China Airlines, Ltd. (the “Company”) was founded in 1959 and its stocks are listed on the Taiwan Stock Exchange. The Company primarily provides air transport services for passengers and cargo. Its other operations include (a) mail services; (b) ground services and routine aircraft maintenance; (c) major maintenance of flight equipment; (d) communications and data processing services to other airlines; (e) sale of aircraft parts, equipment and entire aircraft; and (f) lease of aircraft.

The major stockholders of the Company are the China Aviation Development Foundation (CADF) and the National Development Fund (NDF), Executive Yuan. As of December 31, 2012 and 2011, CADF held 35.91% and 39.10% of the Company’s shares, respectively, and NDF held 9.99% and 11.22% of the Company’s shares, respectively. The Company had 10,866 and 10,578 employees as of December 31, 2012 and 2011, respectively.

2. SIGNIFICANT ACCOUNTING POLICIES

The accompanying financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, the Business Accounting Law, Guidelines Governing Business Accounting and accounting principles generally accepted in the Republic of China. Significant accounting policies are summarized as follows:

Foreign Currencies and Foreign Operations

The Company maintains its accounts and expresses its financial statements in New Taiwan dollars. Nonderivative foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange differences arising from the settlement of foreign-currency monetary assets and liabilities are recognized in profit or loss in the settlement period.

At the balance sheet date, foreign-currency monetary assets and liabilities are revalued using prevailing exchange rates and the exchange differences are recognized in profit or loss.

At the balance sheet date, foreign-currency nonmonetary assets (such as equity instruments) and liabilities which are measured at fair value, are revalued using prevailing exchange rate. For a nonmonetary financial asset with the changes in fair value recognized as an adjustment to stockholders’ equity, exchange differences are recognized as an adjustment to stockholders’ equity. For a nonmonetary financial asset at fair value through profit or loss, exchange differences are recognized in the income statement. Foreign-currency nonmonetary assets and liabilities that are carried at cost are reported using the historical exchange rate on the date of transaction.

Equity-method investments in foreign subsidiaries/affiliates are recorded in New Taiwan dollars using the rates of exchange in effect on acquisition dates. On the balance sheet date, the investments and the related equity in net income or net loss are restated at the prevailing exchange rates and weighted-average rates, respectively, and resulting differences are recorded as translation adjustments under stockholders’ equity.

Under a regulation by the Securities and Futures Bureau, the carrying amount of an aircraft acquired and the related U.S. dollar-denominated obligation incurred for the acquisition are accounted for as an investment in a foreign operating entity if the Company’s use of the aircraft results in generating revenues and incurring expenses mainly in U.S. dollars. On the balance sheet date, the carrying amount of the aircraft and the related liability are restated at balance sheet date rates. The difference is recognized in stockholders’ equity as translation adjustment.

Accounting Estimates

Under the above guidelines, law and principles, certain estimates and assumptions have been used for the allowance for doubtful accounts, allowance for loss on inventories, depreciation of properties, impairment of assets, accrued expenses - frequent flyer program, pension cost, income tax, loss on pending litigations, bonuses of employees, etc. Actual results could differ from these estimates.

Current and Noncurrent Assets and Liabilities

Current assets include cash, cash equivalents and those assets held primarily for trading purposes or to be realized, sold or consumed within one year from the balance sheet date. All other assets such as properties and intangible assets are classified as noncurrent. Current liabilities are obligations incurred for trading purposes or to be settled within one year from the balance sheet date. All other liabilities are classified as noncurrent.

Cash Equivalents

Cash equivalents, consisting of commercial paper, are highly liquid financial instruments with maturities of three months or less when acquired and with carrying amounts that approximate their fair values.

Financial Instruments at Fair Value Through Profit or Loss

Financial instruments classified as financial assets or financial liabilities at fair value through profit or loss (FVTPL) include financial assets or financial liabilities held for trading and those designated as at FVTPL on initial recognition. Financial instruments at FVTPL are initially measured at fair value. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognized immediately in profit or loss. At each balance sheet date subsequent to initial recognition, financial assets or financial liabilities at FVTPL are remeasured at fair value, with changes in fair value recognized directly in profit or loss in the year in which they arise. Cash dividends received subsequently (including those received in the year of investment) are recognized as income for the year. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis.

Derivative instruments that do not meet the criteria for hedge accounting are classified as financial assets or liabilities held for trading.

Fair values are determined as follows: (a) listed stocks - at closing prices as of the balance sheet date; (b) beneficial certificates (open-end funds) - at net asset value as of the balance sheet date; and (c) convertible bonds - at values determined using valuation techniques.

Hybrid instruments are financial assets designated as at fair value through profit or loss, and these are measured at fair value on initial recognition.

Fair value of hybrid instruments is estimated using valuation techniques incorporating estimates and assumptions that are consistent with prevailing market conditions.

Available-for-sale Financial Assets

Available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition or issuance. When fair value is remeasured, the changes in fair value are excluded from earnings and reported as a separate component of stockholders’ equity. The accumulated gains or losses are recognized as earnings when the financial asset is derecognized from the balance sheet. A regular way purchase or sale of financial assets is recognized and derecognized using transaction date accounting.

Cash dividends are recognized as investment income on ex-dividend dates but are accounted for as reductions of the original cost of investment if these dividends are declared on the investees’ earnings attributable to periods before the purchase of the investments. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income. The cost per share is recalculated on the basis of the new number of shares.

Hedge Accounting

The Company enters into some derivative transactions that aim to manage interest rates, exchange rates, fuel prices, and other factors affecting gains or losses on assets and liabilities. The hedging transactions are defined as cash flow hedge. When entering into hedging transactions, the Company has prepared official documents that describe the hedging relationship between hedging instruments and items been hedged, objective of risk management, hedging strategy, and the way to evaluate the effectiveness of the hedging instrument.

Under cash flow hedge accounting, the profit or loss on the hedging instrument is recognized as profit or loss in the same period when the profit or loss on the hedged item is affected. The profit or loss on the hedging instrument is recognized as an adjustment to stockholders’ equity and reclassified to current profit or loss when forecast transactions that are being hedged affect profit or loss. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liabilities, the associated gains or losses that were recognized directly in equity shall be reclassified to profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss. If a hedge of a forecast transaction subsequently results in the recognition of a nonfinancial asset or a nonfinancial liability, it removes the associated gains and losses that were recognized directly in equity and includes them in the initial cost or changed carrying amount of the asset or liability. However, if an entity expects that all or a portion of a loss recognized directly in equity will not be recovered in one or more future periods, it shall reclassify the amount that is not expected to be recovered into profit or loss.

If the hedging instrument expires, is sold or terminated or no longer meets the hedge accounting criteria, the cumulative profit or loss on the hedging instrument that is effective and directly recognized as an adjustment to stockholders’ equity is still recognized as an adjustment to stockholders’ equity before forecast transactions occur and then reclassified to current profit or loss when forecast transactions occur.

Financial Assets Carried at Cost

Equity investments, such as non-publicly traded stocks, with fair value that cannot be reliably measured, are carried at original cost. Cash dividends are recognized as investment income on ex-dividend dates but are accounted for as reductions of the original investment costs if these dividends are declared on the investees’ earnings attributable to periods before the purchase of the investments. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income. The cost per share is recalculated on the basis of the new number of shares. If there is objective evidence that a financial asset is impaired, a loss is recognized. However, the recording of a subsequent recovery of fair value is not allowed.

Impairment of Accounts Receivable

On January 1, 2011, the Company adopted the third time revised of Statement of Financial Accounting Standards (SFAS) No. 34 - “Financial Instruments: Recognition and Measurement.” One of the main revisions is that the impairment of receivables originated by the Company is subject to the provisions of SFAS No. 34. The Company should evaluate accounts receivable for individual and collective impairment at the end of each reporting period. When there is objective evidence of a decrease in the estimated future cash flow of accounts receivable as a result of one or more events that occurred after the initial recognition of the accounts receivable, the accounts receivable are deemed to be impaired.

The Company has a short average collection period; thus, the impairment loss recognized is the difference between the carrying amount of accounts receivable and estimated future cash flows, without considering the discounting effect. Changes in the carrying amount of the allowance account are recognized as bad - debt loss, which is recorded in operating expenses - general and administrative. When accounts receivable are considered uncollectable, the amount is written off against the allowance account.

Impairment of Assets

Statement of Financial Accounting Standards No. 35 - “Impairment of Assets” requires the Company to determine on each balance sheet date if properties, intangible assets and other assets (including a cash-generating unit) have been impaired. If there is impairment, then the Company must calculate the recoverable amount of the asset or the cash-generating unit. An impairment loss should be recognized whenever the recoverable amount of the asset or the cash-generating unit is below the carrying amount, and this impairment loss is either charged to accumulated impairment or used to reduce the carrying amount of the asset directly. If the Company revalues properties as required by law, an impairment loss on revalued properties should be charged to unrealized revaluation increment on properties, and if the capital surplus - revaluation increment on properties is not enough, the portion that exceeds the balance will be recognized as loss in the statement of income. After the recognition of an impairment loss, the depreciation (amortization) charged to the asset should be adjusted in future periods for the revised asset carrying amount (net of accumulated impairment), less its salvage value, and calculated on a systematic basis over its remaining service life. If asset impairment loss (excluding goodwill) is reversed, the increase in the carrying amount resulting from reversal is credited to current income. However, loss reversal should not be more than the carrying amount (net of depreciation) had the impairment not been recognized.

Inventories

Inventories are primarily expendable and nonexpendable parts and materials, supplies used in operations and items for in-flight sale. These parts, materials and supplies are valued at the weighted-average cost less allowance for obsolescence. Items for in-flight sale are stated at the lower of cost or net realizable value. Inventory write-downs are made by item, except where it may be appropriate to group similar or related items. The costs of inventories sold or consumed are determined using the weighted-average method.


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Investments Accounted for by the Equity Method

Investments in companies in which the Company exercises significant influence on the investees’ operating and financial policy decisions are accounted for by the equity method. Under this method, investments are stated at cost on the acquisition date and subsequently adjusted for the Company’s proportionate share or equity in the investees’ net income or net loss. Cash dividends received are accounted for as a reduction of the carrying values of the investments. On investment acquisition, the investment premiums for the cost of investment in excess of the Company’s share of the investee’s identified net assets, representing goodwill, are no longer amortized but tested annually for impairment or if there is objective evidence that the goodwill is impaired.

When the Company subscribes for its investee’s newly issued shares at a percentage different from its percentage of ownership in the investee, the Company records the change in its equity in the investee’s net assets as an adjustment to investments, with a corresponding amount credited or charged to capital surplus. When the adjustment should be debited to capital surplus, but the capital surplus arising from long-term investments is insufficient, the shortage is debited to retained earnings.

Gain or loss from transactions involving depreciable assets between the Company and its equity-method investees is deferred and recognized over the estimated useful lives of the assets.

For equity-method investments, stock dividends received are recorded only as an increase in the number of shares held and not as investment income. The cost per share is recalculated on the basis of the new number of shares.

Receipt of stock dividends from investee would not be recognized as investment income. The Company only recomputes the book value per share based on the shares with the additional shares.

Under Statement of Financial Accounting Standards No. 30 - “Accounting for Treasury Stocks,” the Company reclassified its shares held by its subsidiaries to treasury stock at the carrying value as shown in the subsidiaries’ books on January 1, 2002. Furthermore, when the Company recognized its investment income, the cash dividend income recognized by the subsidiaries from the Company’s earnings appropriation was subtracted from investment income and credited to paid-in capital.

Properties

Properties are stated at cost plus revaluation increment (if any) less accumulated depreciation and accumulated impairment. Major betterments or renewals are capitalized, while maintenance and repairs are expensed when incurred. Interests on funds used to acquire flight equipment or to construct facilities before the date the equipment is used in operations are capitalized and included in the cost of the related assets.

The amounts capitalized on flight and other equipment leased under agreements qualifying as capital leases are the lower of (a) the present value of all payments required under the lease agreements plus the bargain purchase price or (b) the fair value of the leased assets on the starting dates of the agreements. Interests implicit in lease payments are recorded as interest expense.

Amounts paid under operating lease agreements are charged to income over the term of the agreements. The imputed interest on rental deposits, calculated at the interest rate for one-year time deposits, is recorded both as rental expense and interest income.

Depreciation is calculated using the straight-line method over service lives estimated as follows (plus one year to represent estimated salvage value): buildings, 45 to 55 years; machinery and equipment, 5 to 6 years; flight equipment, 5 to 25 years; furniture, 5 years; leased assets, 6 to 25 years; and leasehold improvements, 5 years. Properties that have reached their residual value but are still in use are further depreciated over their newly estimated service lives.

Upon property sale or other disposal, the cost, revaluation increment (if any) and the related accumulated depreciation are removed from the accounts, and gain or loss is credited or charged to nonoperating gains or losses in the year of disposal.

Intangible Assets

Intangible assets acquired are initially recorded at cost and are amortized on a straight-line basis over their estimated useful lives. Computer software is amortized through its average economic useful life.

Deferred Charges

Deferred charges mainly consist of (a) expenses for training pilots in operating new types of aircraft, (b) issue costs of corporate bonds and (c) costs incurred for syndicated loans. They are all amortized using the straight-line method. The amortization periods are 10 years for training expenses and the terms of the bonds or loans.

Accrued Expenses - Frequent-flyer Program

Passengers who are members of the Dynasty Club may accumulate mileage points to reach a certain award level, which entitles them to choose from among various awards (including an upgrade to a higher class or free tickets). A liability is accrued and charged to operating expense. The amount accrued is based on the estimated incremental cost that will be incurred upon the provision of transport services.

Pension Costs

The Company has two types of pension plans: Defined benefit and defined contribution.

Pension costs under the defined benefit pension plan are recognized on the basis of actuarial calculations. Unrecognized net transition obligation is amortized over 15 years, while pension gain or loss is amortized using the straight-line method based on the average remaining service years of employees.

If additional accrued pension cost based on actuarial calculations is not in excess of the sum of the unamortized balance of prior service costs and unrecognized net transition obligation, “deferred pension cost” will be debited. Otherwise, the excess amount should be debited to “net loss not recognized as pension cost” in stockholders’ equity.

Based on the defined contribution pension plan, the Company’s required monthly contributions to the employees’ individual pension accounts are recognized as expenses throughout the employees’ service periods.

Deferred Profits on Sale-leaseback

A gain on the sale by the Company of assets that it leases back is deferred and amortized over the term of the lease agreements.

Income Tax

The Company applies the intra-period allocation method to its income tax. Deferred tax assets are recognized for the tax effects of deductible temporary differences, debit in equity, unused investment credits, and loss carryforwards, and deferred tax liabilities are recognized for the tax effects of taxable temporary differences and credit in equity. Deferred tax liabilities and assets are classified as current or noncurrent on the basis of the classification of the related asset or liability for financial reporting. A deferred tax asset or liability that cannot be related to an asset or liability for financial reporting is classified in accordance with the expected reversal or realization date of the temporary difference. Valuation allowance is recognized on deferred tax assets that are not expected to be realized.

Income tax credits for certain acquisitions of research and development expenses are recognized in the period those acquisitions or expenses are incurred.

Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

According to the Income Tax Law, an additional tax at 10% of unappropriated earnings is provided for as income tax in the year the stockholders approve the retention of earnings.

Revenue Recognition

Passenger fares and cargo revenues are recognized when transport service is provided. The value of unused passenger tickets is recognized as “advance ticket sales.”

3. EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES

Financial Instruments

On January 1, 2011, the Company adopted the newly revised Statement of Financial Accounting Standards (SFAS) No. 34 - “Financial Instruments: Recognition and Measurement.” Among the main revisions is that loans and receivables originated by the Company are now covered by SFAS No. 34. This accounting change did not have a significant effect on the Company’s financial statements as of and for the year ended December 31, 2011.

Operating Segments

On January 1, 2011, the Company adopted the newly issued SFAS No. 41 - “Operating Segments.” The statement requires that segment information disclosed should be based on the information on the components of the Company that management uses to make operating decisions. SFAS No. 41 requires the identification of operating segments based on internal reports that are regularly reviewed by the Company's chief operating decision maker in order to allocate resources to the segments and assess their performance. This statement supersedes SFAS No. 20 - “Segment Reporting.” This accounting change had no significant effect on the manner of the Company’s disclosure of segment information.

4. CASH AND CASH EQUIVALENTS December 31

2012 2011

Cash on hand $ 874,093 $ 716,536Revolving fund 111,735,746 122,679,984Checking accounts and demand deposits 4,713,159,193 4,256,564,478Time deposits 3,985,688,251 3,767,681,541Cash equivalents 199,906,451 799,754,590

$ 9,011,363,734 $ 8,947,397,129

5. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS (FVTPL)

Financial instruments held for trading are summarized as follows: December 31

2012 2011

Financial assets held for trading

Current Beneficial certificates $ 600,404,225 $ 3,004,222,113Listed stocks 653,211,167 274,516,500

$ 1,253,615,392 $ 3,278,738,613

Net gains on beneficial certificates were $472,167,000 in 2012 and $5,962,000 in 2011.

Financial instruments designated as at FVTPL were as follows: December 31, 2011

Financial assets designated as at FVTPL

Noncurrent Convertible bonds

China Life Insurance Co., Ltd. $ 374,085,000

Of the above convertible bonds, a portion with an aggregate face value of $250,000,000 was converted into 29,137,529 common shares of China Life Insurance Co., Ltd. on April 19, 2012 at the conversion price of NT$8.58 per share and reclassified to financial assets at fair value through profit or loss - current.

The transactions on financial assets designated as at FVTPL resulted in gains of $95,000 in 2011.


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6. AVAILABLE-FOR-SALE FINANCIAL ASSETS

December 31 2012 2011

% of % ofCarrying Value Ownership Carrying Value Ownership

Current

Foreign marketable equity securities France Telecom $ 62,738,292 - $ 96,131,011 -

7. NOTES AND ACCOUNTS RECEIVABLE, NET

December 31 2012 2011

Notes receivable $ 258,579,958 $ 294,225,639Accounts receivable 6,852,271,772 9,558,405,149

7,110,851,730 9,852,630,788Less: Allowance for doubtful accounts 52,033,720 129,010,305

$ 7,058,818,010 $ 9,723,620,483

8. OTHER RECEIVABLES

December 31 2012 2011

Tax refunds $ 116,337,850 $ 293,143,806Accrued revenue 272,351,871 214,741,615Others 3,302,314 3,015,606

$ 391,992,035 $ 510,901,027

9. INVENTORIES, NET

December 31 2012 2011

Aircraft spare parts $ 8,010,553,545 $ 7,955,786,647Items for in-flight sale 357,010,106 349,466,926Work in process - maintenance services 154,228,363 282,038,792

$ 8,521,792,014 $ 8,587,292,365

As of December 31, 2012 and 2011, the allowances for inventory devaluation were $80,819,000 and $83,891,000, respectively. The costs of inventories recognized as operating costs due to the reversal of write-downs of inventories was $3,072,000 in 2012 and write-downs of inventories was $17,810,000 in 2011.

10. FINANCIAL ASSETS CARRIED AT COST

December 31 2012 2011

% of % of Owner- Owner-

Carrying Value ship Carrying Value ship Unlisted common stocks

Abacus International Holdings Ltd. $ 297,946,451 13.59 $ 297,946,451 13.59 Jardine Air Terminal Services 56,022,929 15.00 56,022,929 15.00 Chung Hwa Express Co. 11,000,000 11.00 11,000,000 11.00 Regal International Advertising 5,925,000 6.58 5,925,000 6.58

370,894,380 370,894,380 Unlisted preferred stocks

Abacus International Holdings Ltd. 472,522 - 472,522 - $ 371,366,902 $ 371,366,902

11. INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD December 31

2012 2011 % of % of

Carrying Value Ownership Carrying Value OwnershipInvestees on which the Company exercises significant influence Taiwan Air Cargo Terminal $ 1,513,701,724 54.00 $ 1,613,091,139 54.00 Cal Park 1,469,920,155 100.00 1,466,188,021 100.00 Mandarin Airlines 1,226,818,604 93.99 1,150,278,944 93.99 Cal-Dynasty International 1,016,755,000 100.00 1,050,253,970 100.00 China Pacific Catering Services 688,008,930 51.00 641,880,959 51.00 Taoyuan International Airport Services 652,809,376 49.00 649,302,758 49.00 Cal-Asia Investment 430,945,000 100.00 383,610,273 100.00 Abacus Distribution Systems (Taiwan) 421,450,514 93.93 410,229,241 93.93 China Aircraft Services 381,819,505 20.00 381,186,876 20.00 Taiwan Airport Services 312,007,212 47.35 332,630,056 47.35 Kaohsiung Catering Services 242,279,047 35.78 238,320,783 35.78 Asian Compressor Technology Services 233,647,293 24.50 230,665,809 24.50 Cal Hotel 193,633,640 100.00 203,061,718 100.00 Science Park Logistics 190,874,553 28.48 177,403,739 28.48 China Pacific Laundry Services 157,875,614 55.00 150,802,938 55.00 Hwa Hsia 101,352,011 100.00 104,075,059 100.00 Dynasty Holidays 36,126,244 51.00 38,268,728 51.00 Yestrip 33,776,973 100.00 26,609,460 100.00 Global Sky Express 6,960,097 25.00 7,218,765 25.00 Freighter Princess Ltd. 35,088 100.00 35,088 100.00 Freighter Prince Ltd. 34,602 100.00 34,602 100.00 Freighter Queen Ltd. 32,895 100.00 32,895 100.00 $ 9,310,864,077 $ 9,255,181,821

Investment income (loss) recognized under the equity method was as follows: Year Ended December 31

2012 2011

Taiwan Air Cargo Terminal $ (99,389,415 ) $ (36,207,137 )Cal Park 3,732,134 8,774,261Mandarin Airlines 77,867,389 145,592,245Cal-Dynasty International 9,408,018 1,079,501China Pacific Catering Services 141,259,349 113,194,240Taoyuan International Airport Services 44,908,586 22,637,711Cal-Asia Investment 27,986,923 29,585,706Abacus Distribution Systems (Taiwan) 143,645,270 132,381,857China Aircraft Services 21,069,126 15,926,399Taiwan Airport Services 40,054,214 44,584,201Kaohsiung Catering Services 55,844,046 57,913,301Asian Compressor Technology Services 99,849,392 107,631,009Cal Hotel (9,428,078 ) (45,243,343 )Science Park Logistics 26,763,814 15,825,126China Pacific Laundry Services 23,686,893 21,884,072Hwa Hsia 29,165,206 25,354,720Dynasty Holidays 3,409,910 (5,128,274 )Yestrip 11,950,372 5,314,288Global Sky Express 1,066,332 1,466,255

$ 652,849,481 $ 662,566,138

The subsidiaries, Freighter Princess Ltd., Freighter Prince Ltd. and Freighter Queen Ltd., were established in March 2001, September 2001 and January 2002, respectively, for leasing of the Company’s aircraft. In its balance sheets, the Company recognized the fixed assets and liabilities related to the leased aircraft as a leasing transaction.

Shown below are the movements in 2012 and 2011 of (a) the difference between the investment cost and the investee’s net assets, or goodwill, and (b) a sale of depreciable assets to the Company by its subsidiary.

Goodwill

Transaction between Company and

Subsidiary

December 31, 2012

Balance, beginning of year $ 52,423,365 $ (117,777,801 )Reduction - 32,868,224

Balance, end of year $ 52,423,365 $ (84,909,577 )

December 31, 2011

Balance, beginning of year $ 52,423,365 $ (150,646,025 )Reduction - 32,868,224

Balance, end of year $ 52,423,365 $ (117,777,801 )

To meet its investees’ operating needs, the Company invested $30,409,000 in Cal-Asia Investment in May 2012 and $200,000,000 in Cal Hotel in April 2011.


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12. PROPERTIES December 31

2012 2011

Revaluation increase - cost Buildings $ 41,297,645 $ 41,297,645

Accumulated depreciation

Buildings $ 2,911,003,578 $ 2,735,167,939Machinery and equipment 3,112,684,292 3,050,569,033Flight equipment 88,057,564,718 78,780,714,029Furniture 476,109,554 413,077,707Leased flight and other equipment 6,828,800,242 6,208,371,294Leasehold improvements 901,359,053 832,767,516

$ 102,287,521,437 $ 92,020,667,518

Interests capitalized amounted to $90,300,000 in 2012 and $75,309,000 in 2011, with interests calculated at rates ranging from 1.97% to 2.26% and from 1.91% to 2.06%, respectively.

In 1976 and 1982, the Company revalued its properties in accordance with government regulations. Revaluation increments were recorded as increases in the carrying amounts of the assets and as credits to unrealized revaluation increments.

13. SHORT-TERM LOANS December 31

2012 2011

Bank loans. Interest - 1.15% to 1.23% in 2012 $ 1,600,000,000 $ -

14. BONDS PAYABLE December 31

2012 2011

Five-year secured domestic bonds - issued at par in November 2007; repayable in November 2010, November 2011 and November

2012; indicator rate plus 0.4% interest p.a., payable quarterly. $ - $ 1,200,000,000January 2010; repayable in January 2013, January 2014 and January 2015; indicator

rate plus 1.5% interest p.a., payable quarterly. 1,300,000,000 1,300,000,000February 2010; repayable in February 2013, February 2014 and February 2015;

indicator rate plus 1.5% interest p.a., payable quarterly. 2,300,000,000 2,300,000,000May 2011; repayable in May 2014, May 2015 and May 2016; 1.35% interest p.a.,

payable annually. 6,000,000,000 6,000,000,000Three-year private unsecured bonds - issued at par in

April 2009; repayable in April 2012; 3.4% interest p.a., payable semiannually. - 8,800,000,000June 2009; repayable in June 2012; 3.4% interest p.a., payable semiannually. - 2,200,000,000May 2010; repayable in May 2013; 2.8% interest p.a., payable semiannually. 5,050,000,000 5,050,000,000January 2012; repayable in January 2015; 2% interest p.a., payable semiannually. 5,785,000,000 -

Five-year private unsecured bonds - issued at par in April 2009; repayable in April 2014; 3.6% interest p.a., payable semiannually. 1,100,000,000 1,100,000,000June 2009; repayable in June 2014; 3.6% interest p.a., payable semiannually. 800,000,000 800,000,000

22,335,000,000 28,750,000,000Less: Current portion 6,130,000,000 12,200,000,000

$ 16,205,000,000 $ 16,550,000,000

The indicator rate mentioned above is the 90 days’ commercial paper rates in Taiwan’s secondary market.

In January 2012, the Company made a first issue of 2012 private unsecured bonds with aggregate face value of $5,785,000,000. The investors included these affiliates: Taoyuan International Airport Services, Mandarin Airlines and Abacus Distribution Systems (Taiwan).

In May 2010, the Company made a first issue of 2010 private unsecured bonds with aggregate face value of $5,050,000,000. The investors were these affiliates: Taoyuan International Airport Services, Mandarin Airlines, Abacus Distribution Systems (Taiwan), China Pacific Catering Services and Hwa Hsia.

15. LONG-TERM DEBTS December 31

2012 2011

Bank loans $ 65,146,978,619 $ 77,201,623,954 Commercial paper, net of unamortized discounts of $31,133,866 and $23,252,282 in

the years ended December 31, 2012 and 2011, respectively 15,273,866,134 10,231,747,718

80,420,844,753 87,433,371,672 Less: Current portion 16,671,452,387 18,047,761,512

$ 63,749,392,366 $ 69,385,610,160

Bank loans (New Taiwan dollars, U.S. dollars and Japanese yen) are repayable quarterly, semiannually or in lump sum upon maturity in February 26, 2020. Related information is summarized as follows:

Currency New Taiwan Dollars U.S. Dollars Japanese Yen Amounts Original currency

2012 $ 45,816,983,418 $ 664,951,834 $ - 2011 49,575,496,546 895,741,879 1,240,000,000

Translated in New Taiwan dollars 2012 45,816,983,418 19,329,995,201 - 2011 49,575,496,546 27,143,693,451 482,433,957

Interest rates 2012 1.287%-2.638% 0.308%-4.39% - 2011 0.7%-2.6% 0.3911%-4.77% 0.6957% Periods 2012 2002/4/11-2020/2/26 2001/7/20-2017/9/21 - 2011 2002/4/11-2020/2/26 2000/7/6-2017/9/21 2007/12/26-2012/12/26

The Company has note issuance facilities (NIFs) obtained from certain financial institutions. The NIFs, with various maturities until March 2017, were used by the Company to guarantee commercial paper it issued. The commercial paper was issued at discount rates of 1.375% to 2.125% in 2012 and 1.341% to 2.102% in 2011.

16. LONG-TERM CAPITAL LEASE OBLIGATIONS December 31

2012 2011

Capital lease obligations $ 1,088,871,938 $ 2,320,705,642Less: Current portion 840,208,297 1,185,639,137

$ 248,663,641 $ 1,135,066,505

As of December 31, 2012, the Company was in contract with certain foreign companies under capital lease agreements of aircraft and related parts expiring on various dates until February 2014.

Future minimum rental payments on flight equipment are summarized as follows:

Period Amount

2013 $ 840,208,297January to February 2014 248,663,641

17. PENSION PLAN

Based on the defined contribution pension plan under the Labor Pension Act, the rate of the Company’s required monthly contributions to the employees’ individual pension accounts under the custody of the Bureau of Labor Insurance is at 6% of salaries and wages. The Company recognized defined contribution pension costs of $121,249,000 in 2012 and $113,599,000 in 2011.

The pension plan under the Labor Standards Law is a defined benefit pension plan. Benefits are based on the service years accumulated and the average basic salaries and wages of the six months before retirement. The Company makes monthly contributions to a pension fund at 7% of salaries and wages. The fund is administered by a pension fund committee and deposited in the committee’s name in the Bank of Taiwan. The Company recognized pension cost of $630,585,000 in 2012 and $749,430,000 in 2011.

Other defined benefit pension plan is summarized as follows:

a. Net pension cost 2012 2011

Service cost $ 221,882,556 $ 251,472,577Interest cost 194,445,426 213,032,486Projected return on plan assets (25,978,704 ) (30,270,669 )Loss on plan assets (20,905,498 ) (12,740,573 )Amortization of prior service cost 59,135,597 59,135,597Amortization of pension gains or losses 202,005,328 268,800,843

$ 630,584,705 $ 749,430,261


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b. Reconciliation of the fund status of the plan and accrued pension cost:

December 31 2012 2011

Benefit obligation: Vested benefit obligation $ (6,275,326,221 ) $ (5,641,281,091 )Non-vested benefit obligation (3,325,203,393 ) (3,448,394,448 )Accumulated benefit obligation (9,600,529,614 ) (9,089,675,539 )Additional benefits based on future salaries (1,237,895,932 ) (1,268,607,961 )Projected benefit obligation (10,838,425,546 ) (10,358,283,500 )

Fair value of plan assets 2,699,797,555 2,710,958,860Funded status (8,138,627,991 ) (7,647,324,640 )Unrecognized prior service cost 59,135,592 118,271,189 Unrecognized net actuarial loss 3,975,855,946 3,459,892,285 Additional liability (2,797,095,606 ) (2,309,555,513 )

Accrued pension cost $ (6,900,732,059 ) $ (6,378,716,679 )

Vested benefits $ 10,450,897,047 $ 9,170,131,479

December 31 2012 2011

c. Actuarial assumptions

Discount rate used in determining present values 1.75% 2.00% Future salary increase rate 1.50% 1.50% Expected rate of return on plan assets 1.75% 2.00%

December 31 2012 2011

d. Contributions to the fund $ 520,714,735 $ 553,644,102

e. Payments from the fund $ 557,854,744 $ 309,753,726

18. STOCKHOLDERS’ EQUITY

Common Stock

To meet the Company’s financial demand for its operation as well as repay its debt, the board resolved in June 2011 to publicly issue 568,378,000 common shares at NT$11.73 per share, with NT$10 par value and the record date of February 10, 2012. The Company completed the registration of this capital increase on February 20, 2012.

Employee Stock Option Plans

Under the Company Law, 10% of the publicly issued common shares should be reserved for subscription by the Company’s employees. In December 2011, the board resolved the amount of shares and price for subscription by the employees. Under Statement of Financial Accounting Standards No. 39 - “Share-based Payment,” the compensation cost of employee stock options was recognized on the grant date, using the fair value method.

Information on employee stock options is as follows:

Number of Options

(In Thousands)

Weighted-average Exercise

Price

Employee stock options on a capital increase in 2012

Options granted 56,838 $ 11.73 Options exercised (33,097 ) 11.73 Options expired (23,741 ) 11.73

-

Weighted-average fair value of options granted $ 0.4948 Options granted were priced using the Black-Scholes pricing model, and the inputs to the model were as follows:

Grant-date share price $12.15Exercise price $11.73Expected volatility 39.89%Expected life 5 daysExpected dividend yield -Risk-free interest rate 0.7687%

The compensation cost of employee stock options issued for a capital increase in December 2011 was recognized at $28,123,000, which was reclassified in February 2012 to capital surplus - issuance of common shares at fair value of $16,376,000 and capital surplus - expired employee stock options of $11,747,000.

Capital Surplus

The capital surplus from shares issued in excess of par (additional paid-in capital from issuance of common shares and treasury stock transactions) and donations may be used to offset a deficit; in addition, when the Company has no deficit, such capital surplus may be distributed as cash dividends or transferred to capital (limited to a certain percentage of the Company’s paid-in capital and once a year).

The capital surplus from long-term investments, employee stock options and conversion options may not be used for any purpose.

Capital surplus is summarized as follows:

December 31 2012 2011

Arising from the issuance of common shares $ 1,391,536,015 $ 419,989,822Expired employee stock options 11,747,160 -Arising from treasury stock transactions 1,155,512 1,155,512Arising from long-term investments 955,395 955,395

$ 1,405,394,082 $ 422,100,729

Appropriation of Earnings and Dividend Policy

The Company's Articles of Incorporation provide that the following should be appropriated from annual net income (less any deficit): (a) 10% as legal reserve, and (b) special reserve equivalent to a debit balance of any stockholders’ equity account. From the remainder, the Company should also appropriate at least 3% as bonus to employees. Of the final remainder, at least 50% should be distributed to stockholders as both cash and stock dividends (cash dividend should not be less than 30% of the total dividends) or stock dividends only. In determining the amount of cash dividends to be distributed, the board of directors should take into account future cash requirements of the Company, primarily cash requirements for future aircraft acquisitions. Distribution of earnings generated in prior years should also meet the foregoing guidelines.

All earnings appropriations should be made and approved by the stockholders in, and given effect to in the financial statements of, the year following the year of earnings generation.

There were no earnings to be appropriated in 2012 and 2011; thus; no bonus to employees was estimated.

The bonus to employees was estimated on the basis of past experiences. However, there were net losses in 2012 and 2011; thus, no bonus to employees was estimated. Material differences between such estimated amounts and the amounts proposed by the Board of Directors in the following year are retroactively adjusted in the current year. If the actual amounts subsequently resolved by the stockholders differ from the proposed amounts, the differences are recorded in the year of stockholders’ resolution as a change in accounting estimate.

Based on a directive issued by the Securities and Futures Bureau, an amount equal to the net debit balance of certain stockholders’ equity accounts (including unrealized valuation gain or loss on financial instruments, cumulative translation adjustments against the unrealized gain of equity, and net loss not recognized as pension cost) should be transferred from unappropriated earnings to a special reserve. Any special reserve appropriated may be reversed to the extent of the decrease in the net debit balance.

Under the regulations of the Securities and Futures Bureau, a special reserve is appropriated from the balance of the retained earnings at an amount equal to the carrying value of the treasury stock held by subsidiaries in excess of the market value on the balance sheet date. The special reserve may be reversed when the market value recovers.

Legal reserve should be appropriated until the legal reserve equals the Company’s paid-in capital. Legal reserve may be used to offset deficit. If the Company has no deficit and the legal reserve has exceeded 25% of the Company’s paid-in capital, the excess may be transferred to capital or distributed in cash.

The appropriation of the 2010 earnings was approved in the stockholders’ meeting on June 24, 2011. The appropriations, including dividends per share, were as follows:

Appropriation of Earnings

Dividends Per Share (NT$)

Legal reserve $ 799,629,908 Special reserve 5,162,070,526 Cash dividends 1,852,648,941 $0.4

$ 7,814,349,375

The Company’s cash profit sharing in cash with its employees of $61,038,000 for 2010 was approved in the stockholders’ meeting held on June 24, 2011. The resolved amount of profit sharing to employees was consistent with that approved under a resolution passed at the Board of Directors’ meeting held on April 29, 2011, and the same amount was charged against the earnings of 2010.

The stockholders resolved to offset the accumulated deficit of 2011 in the stockholders’ meeting held on June 15, 2012. The Company offset the accumulated deficit (a net loss of $1,954,271,000) against the unappropriated earnings of $181,950,000, a special reserve of $1,288,701,000, and the legal reserve of $483,620,000. No bonus to employees was appropriated for 2011 because of a net loss in that year.

The appropriation of earnings for 2012 had been proposed by the board of directors on March 29, 2013. The appropriations were as follows:

Appreciation of Earnings

Legal reserve $ 5,880,445 Special reserve 52,924,004

$ 58,804,449

There was no earnings to be appropriated after recognized above legal reserve and special reserve. The 2012 appropriations of earnings will be resolved by the stockholders in their meeting scheduled for June 2013.

Information on bonus to employee is available on the Market Observation Post System website.


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Except for non-ROC resident stockholders, all stockholders receiving the unappropriated earnings generated on and after January 1, 1998 are allowed a tax credit equal to their proportionate share of the income tax paid by the Company.

19. TREASURY STOCK (Shares in Thousands)

Purpose of Treasury Stock

Number of Shares,

Beginning of Year

Reduction During

the Year (Note)

Number of Shares,

End of Year

Year ended December 31, 2012

Company’s shares held by its subsidiaries reclassified from investment in shares of stock

to treasury stock 2,889 - 2,889

Year ended December 31, 2011

Company’s shares held by its subsidiaries reclassified from investment in shares of stock to treasury stock 2,889 - 2,889

The Company’s shares held by its subsidiaries as of December 31, 2012 and 2011 were as follows:

Subsidiary Shares

(In Thousands) Carrying Amount Market Value December 31, 2012 Mandarin Airlines 2,075 $ 24,895,536 $ 24,895,536 Hwa Hsia 814 9,769,824 9,769,824 $ 34,665,360 $ 34,665,360 December 31, 2011 Mandarin Airlines 2,075 $ 27,385,090 $ 27,385,090 Hwa Hsia 814 10,746,806 10,746,806 $ 38,131,896 $ 38,131,896

The shares of the Company held by its subsidiaries were treated as treasury stock. The subsidiaries can exercise stockholders’ right on these treasury stocks, except the right to subscribe for the Company’s new shares and the right to vote.

20. INCOME TAX

a. The reconciliation of the income tax expense (benefit) based on income (loss) before income tax at the statutory rate of 17% and income tax expense was as follows:

2012 2011

Income tax expense (benefit) on income (loss) before income tax at statutory rate $ 23,008,317 $ (399,199,776 )Add (deduct) tax effects of:

Permanent differences (96,211,447 ) (37,004,274 )Temporary differences (28,536,938 ) (58,417,941 )Loss carryforwards 101,740,068 494,621,991

Overseas income tax expense 59,964,074 64,346,625

Income tax expense - current $ 59,964,074 $ 64,346,625

b. Income tax expense (benefit) consisted of the following: 2012 2011

Income tax expense - current $ 59,964,074 $ 64,346,625Net changes in deferred income tax expense (benefit):

Allowance for doubtful accounts (4,126,578 ) (4,701,504 )Allowance for loss on inventories (93,197,949 ) (3,027,711 )Equity in net gain or loss of foreign equity-method investees 9,243,187 775,033 Loss on disposal of properties 27,101,449 (27,101,449 )Depreciation difference between accounting and tax on properties (1,479,662 ) (1,479,662 )Allowance for loss on idle properties (7,545,164 ) (13,164,385 )Accrued expense for frequent-flyer program 5,572,417 1,786,491 Unrealized lawsuit loss 37,539,432 26,813,880Provision for pension cost (5,860,799 ) (23,699,407 )Unrealized foreign exchange gain or loss 55,662,892 96,588,942Difference between accounting and tax on interest 5,627,713 5,627,713Loss carryforwards (62,836,291 ) (548,773,588 )Investment tax credits 111,417,863 947,642,479Other valuation allowance (60,577,673 ) (915,993,563 )

Adjustment of prior years’ tax 33,680 396,689

Income tax expense (benefit) $ 76,538,591 $ (393,963,417 )

c. Deferred income tax assets (liabilities) as of December 31, 2012 and 2011 consisted of the following:

December 31 2012 2011

Current

Allowance for loss on inventories $ 107,459,495 $ 14,261,546Loss on disposal of properties - 27,101,449Accrued expenses for frequent-flyer program 10,989,409 16,561,826Unrealized lawsuit loss 37,539,432 37,539,432Allowance for doubtful accounts 8,828,082 4,701,504Investment income tax credits 165,684,028 111,417,863Deferred tax assets 330,500,446 211,583,620Less: Valuation allowance (59,440,943 ) (44,577,863 )Deferred income tax assets, net 271,059,503 167,005,757Unrealized gain on financial instruments (1,118,201 ) (11,902,268 )Unrealized foreign exchange gain (57,772,644 ) (2,109,752 )

Deferred income tax assets, net $ 212,168,658 $ 152,993,737

Noncurrent

Equity in net loss of foreign equity-method investees $ 86,986,824 $ 96,230,011Allowance for loss on idle properties 183,469,570 175,924,406Provision for pension cost 697,312,677 691,451,878Difference between accounting and tax on interest 75,956,946 81,584,659Unrealized lawsuit loss 85,804,417 123,343,849Cumulative translation adjustments 532,467,399 327,341,382Unrealized loss on financial instruments 2,222,322 3,566,915Loss carryforwards 5,272,751,661 5,209,915,370Investment income tax credits 65,233,108 230,917,136Deferred income tax assets 7,002,204,924 6,940,275,606Less: Valuation allowance (23,403,085 ) (98,843,838 )Deferred income tax assets, net 6,978,801,839 6,841,431,768Depreciation difference between accounting and tax on properties (144,529,091 ) (146,008,753 )

Deferred income tax assets, net $ 6,834,272,748 $ 6,695,423,015

d. Information on the imputation credit account (ICA) and creditable tax ratio is summarized as follows:

December 31 2012 2011

Balance of ICA $ 111,570,165 $ 24,942,084

The expected creditable tax ratio of 2012 was 20.48%. Since the Company had an accumulated deficit as of December 31, 2011, there was no expected creditable tax ratio.

e. Unused investment tax credits as of December 31, 2012 were as follows:

Laws and Statutes Tax Credit Source Total Creditable

Amount Remaining Creditable

Amount Expiry Year

Article 6 of the Statute R&D expenses, personnel $ 165,684,028 $ 165,684,028 2013 for Upgrading training expenses and 40,542,154 40,542,154 2014 Industries purchases of eligible 24,690,954 24,690,954 2015 equipment $ 230,917,136 $ 230,917,136

f. Unused tax loss carryforwards as of December 31, 2012 were as follows:

Expiry Year Unused Amount

2018 $ 8,172,477,3102019 19,338,075,4712021 2,907,162,4742012 598,470,986

$ 31,016,186,241

g. The income tax returns of the Company through 2010 have been examined by the tax authorities. On the Company’s 2009 tax returnsassessed by the tax authorities, investment tax credits were reduced to $162,397,000, which affected the usage of investment tax credits in the following years. The Company disagreed with the tax authorities’ assessment of its 2009 tax return and had applied for a reexamination.


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21. PERSONNEL, DEPRECIATION AND AMORTIZATION EXPENSES

2012 Classified as Classified as Operating Operating Costs Expenses Total

Personnel

Salaries $ 9,263,590,803 $ 2,174,834,922 $ 11,438,425,725Labor and health insurance 587,798,687 407,111,901 994,910,588Pension cost 537,119,691 214,714,372 751,834,063Others 1,752,715,430 214,952,991 1,967,668,421

Depreciation 10,355,412,608 357,433,511 10,712,846,119Amortization 2,418,506 173,934,193 176,352,699

2011 Classified as Classified as Operating Operating Costs Expenses Total

Personnel Salaries $ 9,250,252,749 $ 2,188,707,448 $ 11,438,960,197Labor and health insurance 542,117,138 431,561,104 973,678,242Pension cost 614,596,517 248,432,925 863,029,442Others 1,749,778,957 155,617,032 1,905,395,989

Depreciation 9,869,502,485 373,520,933 10,243,023,418Amortization 2,418,487 158,246,585 160,665,072

22. EARNINGS (LOSS) PER SHARE

The numerators and denominators used in calculating earnings per share (EPS) were as follows:

Amounts (Thousands) Shares Earnings (Loss) (As Numerator) (Thousands) Per Share (NT$) Pretax After Tax (As Denominator) Pretax After Tax 2012 Basic and diluted loss per share

Net income on common stock $ 135,343 $ 58,804 5,134,993 $ 0.03 $ 0.01 2011 Basic and diluted loss per share

Net loss on common stock $ (2,384,234 ) $ (1,954,271 ) 4,628,733 $ (0.51) $ (0.42)

The Accounting Research and Development Foundation issued Interpretation 2007-052, which requires companies to recognize bonuses paid to employees, directors and supervisors as compensation expenses beginning January 1, 2008. These bonuses were previously recorded as appropriations from earnings. If the Company decides to settle the bonus to employees by cash or shares, the Company should presume that the entire amount of the bonus will be settled in shares, and the resulting potential shares should be included in the weighted average number of shares outstanding used in the calculation of diluted EPS, if the shares have a dilutive effect. The number of shares is estimated by dividing the entire amount of the bonus by the closing price of the shares at the balance sheet date. This dilutive effect of the potential shares should be included in the calculation of diluted EPS until the stockholders resolve the number of shares to be distributed to employees at their meeting in the following year.

23. FINANCIAL INSTRUMENTS

a. Fair values of financial instruments

December 31 2012 2011

Carrying AmountEstimated Fair Value Carrying Amount

Estimated Fair Value

Financial assets Financial assets - with fair values

approximating carrying amounts $ 27,486,946,128 $ 27,486,946,128 $ 30,367,338,125 $ 30,367,338,125Financial assets at fair value through profit

or loss 1,253,615,392 1,253,615,392 3,652,823,613 3,652,823,613Available-for-sale financial assets 62,738,292 62,738,292 96,131,011 96,131,011Derivative financial assets for hedging 53,525,730 53,525,730 108,667,850 108,667,850Financial assets carried at cost 371,366,902 - 371,366,902 - Financial liabilities Financial liabilities - with fair values

approximating carrying amounts 14,710,377,051 14,710,377,051 17,231,288,467 17,231,288,467Derivative financial liabilities for hedging 35,131,928 35,131,928 72,400,976 72,400,976Bonds issued 22,335,000,000 22,433,709,066 28,750,000,000 29,543,925,532Loans and debts 80,420,844,753 80,628,967,040 87,433,371,672 87,461,638,881Capital lease obligations 1,088,871,938 1,088,871,937 2,320,705,642 2,320,705,642

b. Methods and assumptions used in estimating the fair values of financial instruments are as follows:

1) The carrying amounts of the following short-term financial instruments approximate their fair values because of their short maturities: Cash and cash equivalents, receivables, receivables - related parties, portion other receivables, other financial assets - noncurrent, deposit accounts, restricted assets - noncurrent, short-term loans, commercial paper, accounts payable, accounts payable to related parties, accrued expenses, portion of current other liabilities and portion of other liabilities - others.

2) Fair values of financial instruments designated as at fair value through profit or loss, available-for-sale financial assets, and derivative financial assets for hedging are based on their quoted prices in an active market. If quoted market prices are not available, fair values are estimated using valuation techniques. For those instruments which are acquired in private and could not be traded in the open market, the Company calculates their fair values by the Black-Scholes model. For those derivative financial assets for hedging and with no quoted prices, the fair values are determined using valuation techniques incorporating estimates and assumptions consistent with those generally used by other market participants to price financial instruments. The valuation techniques are applied to the derivative financial assets by financial institutions, which calculate fair values at the expiry date of each contract.

3) Financial assets carried at cost are investments in unquoted shares, which have no quoted prices in an active market and entail an unreasonably high cost to obtain verifiable fair values. Thus, no fair value is presented.

4) Fair values of bonds payable are based on their quoted market prices.

5) Some long-term debts and capital lease obligations are floating-rate financial liabilities, so their carrying values are their fair values. The fair values of long-term debts and private bonds with fixed interest rates are estimated at the present value of expected cash flows discounted at rates of 0.868% to 0.9051% in 2012 and 1.1281 % to 1.25% in 2011 prevailing in the market for long-term debts.

The total amount of fair value listed above is not equal to the total value of the Company because it is not necessary to disclose the fair value of semifinancial and nonfinancial instruments.

c. Fair values of financial assets and financial liabilities determined at quoted market prices or estimates are summarized as follows:

Quoted Market Prices Fair Value Based on Estimates December 31 December 31

2012 2011 2012 2011 Financial assets Financial assets at fair value through profit

or loss $ 1,253,615,392 $ 3,278,738,613 $ - $ 374,085,000Available-for-sale financial assets 62,738,292 96,131,011 - -Derivative financial assets for hedging - - 53,525,730 108,667,850 Financial liabilities Derivative financial liabilities for hedging - - 35,131,928 72,400,976Bonds issued 9,599,586,000 10,793,610,000 12,834,123,066 18,750,315,532Loans and debts - - 80,628,967,040 87,461,638,881

d. As of December 31, 2012 and 2011, loans, short-term bills payable, bonds payable, and capital lease obligations at fixed rate that were exposed to fair value interest rate risk, amounted to $20,737,308,000 and $24,596,691,000, respectively, and those at floating rate, which were exposed to cash flow interest rate risk, amounted to $84,707,408,000 and $93,907,387,000, respectively.

e. The adjustments of stockholders’ equity credited directly from the available-for-sale financial assets amounted to $27,716,000 for 2012 and $17,583,000 for 2011, respectively.

24. RISK MANAGEMENT AND HEDGING STRATEGIES

a. Risk management strategy

The Company has risk management and hedging strategies to respond to changes in the economic and financial environment and in the fuel market. To reduce the financial risk from changes in interest and exchange rates and in fuel prices, the Company has its operating costs stay within a specified range by using appropriate financial hedging instruments and hedging percentages in accordance with the “Processing Program of Derivative Financial Instrument Transactions” approved by Company stockholders to reduce the impact of market price changes on earnings.

In addition, the Company has a financial risk committee, which meets periodically to evaluate the performance of derivative instruments and determine the appropriate hedging percentage. This committee informs the Company of global economic and financial conditions, controls the entire financial risk resulting from changes in the financial environment and fuel prices, and develops the strategy and response to avoid financial risk with the assistance of financial risk experts to effect risk management.

The Company enters into forward contracts, currency option contracts, and foreign exchange swap contracts to hedge against the risks on changes in foreign-currency assets, liabilities and commitments and in the related exchange rates; enters into interest swap contracts to hedge against adverse risks on changes in net liability interest rates; enters into cross-currency swap contracts to hedge against adverse risks on interest rate and exchange rate changes; and enters into fuel swap contracts to hedge against adverse risks on fuel price changes. The Company uses derivative financial instruments with fair values that are highly negatively correlated to the fair values of hedged items and evaluates the hedging effectiveness of these instruments periodically.

The Company uses derivative instruments to avoid major market risks.

The following table summarizes the aggregate contractual (notional) amounts, credit risk and fair value of the derivative financial instruments of the Company as of December 31, 2012 and 2011.


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December 31 2012 2011 Contractual Contractual (Notional) (Notional)

Hedge Amount Credit Risk Fair Value Amount Credit Risk Fair Value The Company Interest rate swaps $6,080,000,000 $ 758,888 $ (14,408,011 ) $3,335,000,000 $ - $ (26,577,900 )Currency options

Call 683,139,535 38,449,431 38,449,431 696,969,697 4,602,140 4,515,794Put 683,139,535 506,083 (223,528 ) 696,969,697 794,188 (2,659,461 )

Forward exchange 1,075,581,395 46,997 (15,723,915 ) 1,090,909,091 9,674,025 8,908,414 Fuel swaps (Note)

Call 13,764,331 13,764,331 13,764,331 93,597,496 93,597,496 93,597,496Put 3,464,506 - (3,464,506 ) 41,517,468 - (41,517,468 )

Note: Based on the Taiwan Stock Exchange’s regulation for the public companies’ monthly declaration on the trading of derivativefinancial instruments, the contractual amounts are shown at the absolute values of fair values because fuel swap contracts only have nominal amounts.

The contract amount is used to calculate the amounts to be settled by the counter-parties; thus, it is neither the actual delivery amount nor the cash requirement of the Company. The derivative financial instruments held or issued by the Company are likely to be sold at reasonable market prices. The Company does not expect significant cash flow requirements upon contract maturity.

Credit risk refers to the loss the Company will incur on counter-parties’ default on contracts. However, the Company’s counter-parties are all trustworthy international and domestic financial institutions. In addition, the Company trades with several financial institutions to disperse risks. Thus, the Company does not expect to incur significant credit risks.

The fair value of each derivative contract is determined using quotes from financial institutions.

The amount of the Company’s maximum exposure to the risks on all financial instruments (excluding the fair value of collaterals) is equal to the book value of these instruments.

b. Cash flow hedge

Floating-interest long-term debts, foreign-currency firm commitments and transactions and expected demand for aviation fuel may result in future cash flow fluctuations and risks due to changes in market interest and exchange rates. To hedge against these risks, the Company uses interest rate swaps, forward exchange contracts and option contracts. The cash flow hedge information is summarized as follows: Financial Instruments Expected Profit or Loss Designated as Hedging December 31, 2012 Cash Flow Recognition

Hedged Items Instruments Nominal Amount Fair Value Period Period The Company Floating-interest long-term Interest rate swaps $ 6,080,000,000 $ (14,408,011 ) 2008 to 2017 2008 to 2017 debts Fuel cost in U.S. dollars Currency options Call 261,627,907 16,930,988 2012 to 2013 2012 to 2013 Put 261,627,907 (104,016 ) 2012 to 2013 2012 to 2013Lease cost in U.S. dollars Currency options Call 421,511,628 21,518,443 2012 to 2013 2012 to 2013 Put 421,511,628 (119,512 ) 2012 to 2013 2012 to 2013Lease cost in U.S. dollars Forward exchange 1,075,581,395 (15,723,915 ) 2012 to 2013 2012 to 2013Fuel cost in U.S. dollars Fuel swaps Call 13,764,331 13,764,331 2012 to 2013 2012 to 2013 Put 3,464,506 (3,464,506 ) 2012 to 2013 2012 to 2013 $ 18,393,802

Financial Instruments Expected Profit or Loss Designated as Hedging December 31, 2011 Cash Flow Recognition

Hedged Items Instruments Nominal Amount Fair Value Period Period The Company Floating-interest long-term Interest rate swaps $ 3,335,000,000 $ (26,577,900 ) 2007 to 2016 2007 to 2016 debts Fuel cost in U.S. dollars Currency options Call 242,424,243 1,335,266 2011 to 2012 2011 to 2012 Put 242,424,243 (223,816 ) 2011 to 2012 2011 to 2012Lease cost in U.S. dollars Currency options Call 454,545,454 3,180,528 2011 to 2012 2011 to 2012 Put 454,545,454 (2,435,645 ) 2011 to 2012 2011 to 2012Lease cost in U.S. dollars Forward exchange 1,090,909,091 8,908,414 2011 to 2012 2011 to 2012Fuel cost in U.S. dollars Fuel swaps Call 93,597,496 93,597,496 2011 to 2012 2011 to 2012 Put 41,517,468 (41,517,468 ) 2011 to 2012 2011 to 2012 $ 36,266,875

The gain or loss on cash flow hedging instruments that was recognized as adjustments to stockholders’ equity is summarized as follows:

December 31 Adjustment Items 2012 2011

Amount recognized in equity during the year $ 47,941,472 $ 118,908,800Amount removed from equity and included in profit or loss for the year (66,312,356 ) 5,162,519

25. RELATED-PARTY TRANSACTIONS

a. The Company’s related parties

Related Party Relationship with the Company

Taiwan Air Cargo Terminal Subsidiary Cal Park Subsidiary Mandarin Airlines Subsidiary Cal-Dynasty International Subsidiary China Pacific Catering Services Subsidiary Taoyuan International Airport Services Subsidiary Cal-Asia Investment Subsidiary Abacus Distribution Systems (Taiwan) Subsidiary China Aircraft Service Equity-method investee Taiwan Airport Services Subsidiary Kaohsiung Catering Services Equity-method investee Asian Compressor Technology Services Equity-method investee Cal Hotel Subsidiary Science Park Logistics Equity-method investee China Pacific Laundry Services Subsidiary Hwa Hsia Subsidiary Dynasty Holidays Subsidiary Yestrip Subsidiary Global Sky Express Subsidiary Freighter Princess Ltd. Subsidiary Freighter Prince Ltd. Subsidiary Freighter Queen Ltd. Subsidiary Yangtze River Express Airlines Subsidiary’s equity-method investee China Aviation Development Foundation Major stockholder (35.91%)

b. Significant transactions with related parties:

2012 2011 Amount % Amount % 1) Revenues

Mandarin Airlines $ 1,976,879,342 1.49 $ 1,992,992,303 1.51 Yangtze River Express Airlines 242,126,617 0.18 413,227,934 0.31 Global Sky Express 137,128,997 0.10 173,667,300 0.13 China Aviation Development Foundation 38,485,679 0.03 43,945,387 0.03 Taiwan Air Cargo Terminal 18,374,554 0.02 16,577,041 0.01 Others 64,184,072 0.05 56,740,885 0.05

$ 2,477,179,261 1.87 $ 2,697,150,850 2.04 2012 2011 Amount % Amount % 2) Costs

China Pacific Catering Services $ 1,149,899,895 0.93 $ 1,022,825,052 0.82 Taoyuan International Airport Services 974,717,296 0.79 963,217,353 0.77 Taiwan Airport Services 364,839,483 0.30 357,520,529 0.29 Mandarin Airlines 286,280,459 0.23 253,102,909 0.21 Hwa Hsia 270,234,599 0.22 250,323,655 0.20 Taiwan Air Cargo Terminal 258,818,372 0.21 273,858,674 0.22 Cal Park 213,019,195 0.17 213,019,195 0.17 China Aircraft Services 189,516,950 0.15 204,948,299 0.16 Kaohsiung Catering Services 124,485,523 0.10 116,392,074 0.09 Cal Hotel 81,118,096 0.07 79,955,286 0.06 China Pacific Laundry Services 74,135,799 0.06 78,817,192 0.06 Yangtze River Express Airlines Co., Ltd. 68,307,236 0.06 47,023,485 0.04 Dynasty Holidays 64,215,917 0.05 56,842,650 0.05 China Aviation Development Foundation 62,275,301 0.05 68,044,125 0.05 Asian Compressor Technology Services 35,548,641 0.03 48,243,448 0.04 Cal-Dynasty International 27,440,178 0.02 37,352,941 0.03 Science Park Logistics 24,966,491 0.02 27,310,453 0.02 Others 10,459,565 0.01 10,525,919 0.01 $ 4,280,278,996 3.47 $ 4,109,323,239 3.29

December 31


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2012 2011 Amount % Amount % 3) Notes and accounts receivable - related parties

Mandarin Airlines $ 338,512,733 87.91 $ 224,039,272 79.22 Yestrip 18,056,192 4.69 14,972,813 5.29 Yangtze River Express Airlines 16,250,325 4.22 29,123,374 10.30 Global Sky Express 4,363,693 1.13 7,121,113 2.52 China Aviation Development Foundation 3,339,547 0.87 3,697,160 1.31 Taiwan Air Cargo Terminal 1,910,073 0.50 1,014,467 0.36 Others 2,625,004 0.68 2,840,858 1.00 $ 385,057,567 100.00 $ 282,809,057 100.00

4) Accounts payable to related parties

China Pacific Catering Services $ 290,415,552 24.50 $ 261,782,338 27.11 Taoyuan International Airport Services 261,255,031 22.04 259,901,080 26.92 Mandarin Airlines 230,578,097 19.45 174,655,487 18.09 Cal Park 159,764,400 13.48 - - Taiwan Airport Services 62,406,266 5.26 72,934,113 7.55 Hwa Hsia 48,928,624 4.13 39,299,101 4.07 Taiwan Air Cargo Terminal 33,683,711 2.84 38,785,230 4.02 China Aircraft Services 28,928,367 2.44 35,726,255 3.70 Kaohsiung Catering Services 19,885,340 1.68 23,009,686 2.38 Yangtze River Express Airlines 18,248,433 1.54 16,079,730 1.67 China Pacific Laundry Services 12,363,578 1.04 13,943,715 1.44 Others 18,885,455 1.60 29,477,968 3.05

$ 1,185,342,854 100.00 $ 965,594,703 100.00

5) Lease of properties

In December 2008, the Company rented out planes to Mandarin Airlines under an operating leasing contract. The monthly rent received is based on this contract. The rental rate was adjusted in August 2009. As of December 31, 2012 and 2011, the monthly rentalsreceived amounted to $1,183,607,000 and $1,073,312,000, respectively.

The Company rented planes from Mandarin Airlines under an operating lease agreement. The Company paid the rental by flight hours.The Company paid hourly flight rentals of about $237,688,000 in 2012 and $185,184,000 in 2011, respectively.

Under an operating lease agreement, the Company rented flight training machines and flight simulators from China Aviation Development Foundation to train pilots. The Company paid the rental based on usage hours. As of December 31, 2012 and 2011, theCompany had paid usage rentals of about $62,275,000 and $68,044,000, respectively.

In March 2010, the Company signed with CAL Park a one-year renewable operating lease agreement to use the Operating and AviationHeadquarters building of the Taiwan Taoyuan International Airport at a fixed rental of $17,752,000 monthly. In 2012 and 2011, the Company paid rentals of $213,019,000 each.

6) Endorsements and guarantees

December 31 2012 2011

Authorized Actual Amount Authorized Actual Amount Amount Used Amount Used The Company Cal Park $ 3,400,000,000 $ 3,237,000,000 $ 3,400,000,000 $ 3,320,000,000Taiwan Air Cargo Terminal 1,080,000,000 - - -Freighter Princess Ltd. - - 29,519,987 29,519,987Freighter Prince Ltd. 300,477,541 300,477,541 334,243,354 334,243,354Freighter Queen Ltd. 244,982,212 244,982,212 297,216,378 297,216,378Cal Hotel 180,000,000 118,497,000 180,000,000 146,379,000 Cal Asia Taikoo Spirit Aerospace Systems

(Jinjiang) Composite 15,851,744 15,328,634 16,524,242 13,004,576

As of December 31, 2012 and 2011, U.S. Treasury Bills amounting to $545,460,000 and $660,980,000, respectively, had been pledged as collaterals for financing lease transactions of Freighter Princess Ltd., Freighter Prince Ltd. and Freighter Queen Ltd. and were included in restricted assets - noncurrent.

The transactions between the Company and related parties refer to the air transportation industry. The transaction price is negotiated under a regular transaction process, and the term of making collections and payments for receivables and payables is from 30 days to 2 months, which is consistent with the Company’s credit policy.

7) Bonds payable - related parties

Related parties that invested in the first issue of private unsecured bonds in 2012 and 2010 (Note 14) are summarized as follows:

December 31, 2012

Related Parties Units Aggregate

Par/Dollars

The first issue of private unsecured bonds in 2012

Taoyuan International Airport Services 100 $ 100,000,000Mandarin Airlines 280 280,000,000Abacus Distribution Systems (Taiwan) 60 60,000,000

The first issue of private unsecured bonds in 2010

Taoyuan International Airport Services 300 300,000,000Mandarin Airlines 300 300,000,000Abacus Distribution Systems (Taiwan) 60 60,000,000China Pacific Catering Services 40 40,000,000Hwa Hsia 10 10,000,000

December 31, 2011

Related Parties Units Aggregate

Par/Dollars

Taoyuan International Airport Services 300 $ 300,000,000Mandarin Airlines 300 300,000,000Abacus Distribution Systems (Taiwan) 60 60,000,000China Pacific Catering Services 40 40,000,000Hwa Hsia 10 10,000,000

As of December 31, 2012 and 2011, interest expenses were $28,463,000 and $19,826,000, respectively. The interests payable were$6,649,000 in 2012 and $2,454,000 in 2011.

8) Property transactions

To enhance asset use and improve resource sharing within its network, the Company sold the land and building located in the Taichung Port road to Mandarin Airlines for $29,320,000 in December 2012. The gain on disposal of properties was $126,000, which had been collected in full.

c. Compensation of directors, supervisors and management personnel

December 31 2012 2011

Salaries $ 34,161,116 $ 38,127,633 Incentive and special compensation 12,382,557 12,111,219

$ 46,543,673 $ 50,238,852

26. PLEDGED ASSETS

The following assets had been pledged or mortgaged as collaterals for long-term and short-term bank loans and business transactions:

December 31 2012 2011

Properties - flight equipment, net $ 94,975,848,646 $ 104,105,500,044Properties - buildings 2,245,118,771 2,298,687,338Properties - machinery and equipment 657,623,789 707,627,408Restricted assets - noncurrent (US treasury bill) 545,459,753 660,979,718

$ 98,424,050,959 $ 107,772,794,508

27. COMMITMENTS AND CONTINGENT LIABILITIES

As of December 31, 2012, the Company had commitments and contingent liabilities, as follows:

a. In 2009, the Securities and Futures Investors Protection Center (SFIPC) filed a civil lawsuit against Far East Air Transport Ltd. (FEAT) and its executives, directors and supervisors (natural persons) because of allegedly false financial statements for a period starting from the second quarter of 2005 to the third quarter of 2007; the filing was based on Article 20 and Article 20 - 1 of the Securities and Exchange Act; Article 23 of the Company Act; and Articles 28, 184 and 185 of the Civil Code. In this lawsuit, the SFIPC imposed joint and several liabilities on FEAT’S executives, directors, and supervisors for them to give a total compensation of $297,061,000 to the investors of FEAT. Later, in January 2010, SFIPC included in its lawsuit the directors and supervisors who are legal persons of FEAT (including the Company), as joint defendants. As of March 29, 2013, the date of the accompanying auditors’ report, there were 36 joint defendants in this lawsuit. Although the case is still under review by the Taipei District Court, the Company believes this case will have no material impact on its financial and sales operations.

b. The Company leased certain flight equipment, hangar, and a headquarters building under various operating lease agreements expiring on


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various dates until December 2024. Lease deposits aggregated $9,955,713,000.

Minimum rentals for future years are summarized as follows:

Year Amount

2013 $ 5,709,957,1972014 4,809,665,2162015 3,888,058,8772016 3,207,577,5492017 3,109,079,957

Rentals from 2018 and on will aggregate $10,358,235,000. The present value of these rentals, discounted at the discount interest rate 1.37% for one-year time deposits of Chunghwa Post Co., Ltd., is $9,676,950,000.

c. In January 2008, the Company entered into a contract to buy from Airbus fourteen A350-900 aircraft, with the option to buy six more A350-900 aircraft, with aggregate purchase prices of US$3,933,235,000 and US$1,802,645,000, respectively. As of December 31, 2012, the Company had paid about US$237,194,000, which was included in the “prepayments for equipment” in the properties section of the balance sheets.

d. In December 2012, the Company entered into a contract to buy six 777-300ER aircraft from the Boeing Company, with the option to buy six more 700-300ER aircraft, at aggregate purchase prices of US$2,067,261,000 and US$2,213,015,000, respectively. As of December 31, 2012, the Company had paid about US$20,673,000, which was included in the “prepayments for equipment” in the properties section of the balance sheets.

28. FINANCIAL ASSETS AND LIABILITIES IN FOREIGN CURRENCY

The material financial assets and liabilities denominated in foreign currency were as follows:

(Unit: Foreign Currencies/New Taiwan Dollars)

2012 2011 Foreign

Currencies Exchange RateNew Taiwan

Dollars Foreign

Currencies Exchange Rate New Taiwan

Dollars Financial assets Monetary items

USD $ 59,054,021 29.0698 $1,716,688,580 $ 123,586,016 30.3030 $3,745,027,050EUR 14,949,828 38.4615 574,992,810 13,462,095 40.4858 545,023,672HKD 289,354,718 3.7453 1,083,720,225 360,575,843 3.8926 1,403,577,527JPY 2,202,309,200 0.3361 740,196,122 1,517,912,341 0.3891 590,619,692RMB 1,024,262,032 4.6577 4,770,705,266 873,956,113 4.7596 4,159,681,517

Foreign operating entity USD 1,424,477,867 29.0698 41,409,286,698 1,317,164,584 30.3030 39,914,038,382

Investments accounted for using the equity method USD 49,800,880 29.0698 1,447,700,000 47,317,520 30.3030 1,433,864,243HKD 101,945,808 3.7453 381,819,505 97,926,908 3.8926 381,186,876JPY 107,479,189 0.3361 36,126,244 98,362,112 0.3891 38,268,728

Financial liabilities Monetary items

USD 883,538,220 29.0698 25,684,279,348 1,185,879,061 30.3030 35,935,693,185EUR 7,015,864 38.4615 269,840,653 9,708,706 40.4858 393,064,717HKD 63,060,777 3.7453 236,181,528 59,839,143 3.8926 232,929,849JPY 3,423,949,732 0.3361 1,150,789,505 4,872,121,446 0.3891 1,895,742,455RMB 308,515,409 4.6577 1,436,972,220 236,237,315 4.7596 1,124,395,124

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93.9

3

421,

450,

514

15

2,92

0,05

2

143,

645,

270

-

Chi

na A

ircra

ft Se

rvic

e H

ong

Kon

g In

tern

atio

nal A

irpor

tA

irpor

t ser

vice

sH

K$

58,0

00,0

00

HK

$ 58

,000

,000

28,4

00,0

0020

.00

381,

819,

505

105,

345,

626

21,0

69,1

26-

Ta

iwan

Airp

ort S

ervi

ces

Taip

ei, T

aiw

an

Airp

ort s

ervi

ces

12

,289

,100

12,2

89,1

00

20,6

26,6

4447

.35

31

2,00

7,21

2

84,5

87,7

58

40,0

54,2

14-

K

aohs

iung

Cat

erin

g Se

rvic

es

Kao

hsiu

ng, T

aiw

an

In-f

light

cat

erin

g

140,

240,

221

14

0,24

0,22

1

14,3

29,7

5735

.78

24

2,27

9,04

7

156,

077,

577

55

,844

,046

-

Asi

an C

ompr

esso

r Tec

hnol

ogy

Serv

ices

Ta

oyua

n, T

aiw

an

Rese

arch

, man

ufac

ture

and

mai

nten

ance

of e

ngin

es77

,322

,000

77,3

22,0

007,

732,

200

24.5

023

3,64

7,29

340

7,54

8,53

899

,849

,392

-

Cal

Hot

el C

o., L

td.

Taoy

uan,

Tai

wan

H

otel

bus

ines

s

465,

000,

000

46

5,00

0,00

0

46,5

00,0

0010

0.00

193,

633,

640

(9

,428

,078

)

(9,4

28,0

78 )

-

Scie

nce

Park

Log

istic

s Ta

inan

, Tai

wan

St

orag

e an

d cu

stom

s of s

ervi

ces

150,

654,

000

15

0,65

4,00

0

13,2

93,0

0028

.48

19

0,87

4,55

3

93,9

57,6

62

26,7

63,8

14-

C

hina

Pac

ific

Laun

dry

Serv

ices

Ta

oyua

n, T

aiw

an

Clea

ning

and

leas

ing

of th

e to

wel

of a

irlin

es, h

otel

s, re

staur

ants,

and

he

alth

clu

bs

13

7,50

0,00

0

137,

500,

000

13

,750

,000

55.0

0

157,

875,

614

43

,067

,077

23

,686

,893

-

H

wa

Hsi

a

Taoy

uan,

Tai

wan

Cl

eani

ng o

f airc

raft

and

mai

nten

ance

of m

achi

ne a

nd e

quip

men

t

50,0

00,0

00

50

,000

,000

50

,000

100.

00

10

1,35

2,01

1

29,1

65,2

06

29,1

65,2

06N

ote

1

Dyn

asty

Hol

iday

s To

kyo,

Japa

n Tr

avel

bus

ines

s J

PY

20,4

00,0

00

JPY

20

,400

,000

40

851

.00

36

,126

,244

6,

686,

102

3,

409,

910

-

Yes

trip

Ta

ipei

, Tai

wan

Tr

avel

bus

ines

s

26,2

64,6

43

26

,264

,643

1,

600,

000

100.

00

33

,776

,973

11

,950

,372

11

,950

,372

-

Glo

bal S

ky E

xpre

ss

Taip

ei, T

aiw

an

Forw

ardi

ng a

nd st

orag

e of

air

carg

o

2,

500,

000

2,

500,

000

25

0,00

025

.00

6,

960,

097

4,

265,

325

1,

066,

332

-

Frei

ghte

r Prin

cess

Ltd

. C

aym

an Is

land

s

Airc

raft

leas

e

US$

1,

000

US$

1,

000

1,

000

100.

00

35

,088

-

-

-

Frei

ghte

r Prin

ce L

td.

Cay

man

Isla

nds

Airc

raft

leas

e U

S$

1,00

0 U

S$

1,00

0

1,00

010

0.00

34,6

02

-

--

Fr

eigh

ter Q

ueen

Ltd

. C

aym

an Is

land

s

Airc

raft

leas

e

US$

1,

000

US$

1,

000

1,

000

100.

00

32

,895

-

-

-

C

al-A

sia In

vest

men

t X

iam

en In

tern

atio

nal A

irpor

t Air

Carg

o Te

rmin

al

Xia

men

Inte

rnat

iona

l Airp

ort

Forw

ardi

ng a

nd st

orag

e of

air

carg

o U

S$

4,11

7,84

6 U

S$

4,11

7,84

6

-14

.00

22

7,80

3,83

7

118,

068,

833

16

,529

,675

Not

e 4

X

iam

en In

tern

atio

nal A

irpor

t Air

Carg

o St

orag

e X

iam

en In

tern

atio

nal A

irpor

tFo

rwar

ding

and

stor

age

of a

ir ca

rgo

US$

1,94

7,44

1 U

S$

1,94

7,44

1-

14.0

091

,874

,709

72,5

74,7

3810

,160

,473

Not

e 4

Ea

ster

n U

nite

d In

tern

atio

nal L

ogis

tics

Hon

g K

ong

Fo

rwar

ding

and

stor

age

of a

ir ca

rgo

HK

$3,

329,

268

HK

$ 3,

329,

268

1,05

0,00

035

.00

27,0

13,7

2114

,615

,118

7,25

8,28

4-

Y

angt

ze R

iver

Exp

ress

Airl

ines

Sh

angh

ai, C

hina

Fo

rwar

ding

and

stor

age

of a

ir ca

rgo

US$

38

,796

,173

U

S$

38,7

96,1

73

-25

.00

-

(5

25,1

72,0

51 )

-

Not

es 3

and

4

Ta

iwan

Airp

ort S

ervi

ces

Taiw

an A

irpor

t Ser

vice

(Sam

oa)

Sa

moa

A

irpor

t ser

vice

s and

inve

stm

ent

US$

5,87

6,97

6 U

S$

5,87

6,97

6-

100.

0031

8,80

3,12

426

,690

,148

26,6

90,1

48N

ote

4

H

wa

Hsi

a H

wa

Shin

Bui

ldin

g Sa

fegu

ard

Taoy

uan,

Tai

wan

Bu

ildin

g se

curit

y an

d m

aint

enan

ce se

rvic

es

10

,000

,000

10,0

00,0

00

1,00

0,00

010

0.00

18,6

30,7

12

7,26

0,45

1

7,26

0,45

1-

Taiw

an A

irpor

t Ser

vice

(Sam

oa)

Xia

men

Inte

rnat

iona

l Airp

ort A

ir Ca

rgo

Term

inal

X

iam

en In

tern

atio

nal A

irpor

t Fo

rwar

ding

and

stor

age

of a

ir ca

rgo

US$

3,

950,

226

US$

3,

950,

226

-

14.0

0

227,

282,

093

11

8,06

8,83

3

16,5

29,6

75N

ote

4

X

iam

en In

tern

atio

nal A

irpor

t Air

Carg

o St

orag

e X

iam

en In

tern

atio

nal A

irpor

t Fo

rwar

ding

and

stor

age

of a

ir ca

rgo

US$

1,

926,

750

US$

1,

926,

750

-

14.0

0

91,5

20,6

98

72,5

74,7

38

10,1

60,4

73N

ote

4

Not

e 1:

A

dopt

ed th

e tre

asur

y st

ock

met

hod

in re

cogn

izin

g in

vest

men

t inc

ome

or lo

ss.

Not

e 2:

R

epre

sent

s the

con

solid

ated

fina

ncia

l inf

orm

atio

n of

the

fore

ign

hold

ing

com

pany

dis

clos

ed in

acc

orda

nce

with

loca

l reg

ulat

ions

.

Not

e 3:

Th

e C

ompa

ny d

id n

ot re

cogn

ize

an in

com

e on

this

inve

stm

ent.

Base

d on

Sta

tem

ent o

f Fin

anci

al A

ccou

ntin

g St

anda

rds N

o. 5

- “L

ong-

term

Inve

stm

ents

und

er th

e Eq

uity

Met

hod,

” th

e re

cogn

ized

boo

k va

lue

of th

e in

vest

men

t was

zer

o; th

us, t

he C

ompa

ny le

t go

of th

is in

vestm

ent.

Not

e 4:

Th

e in

veste

e w

as e

stabl

ishe

d as

a li

mite

d co

mpa

ny.


TAB

LE

2C

HIN

A A

IRLI

NE

S, L

TD

. AN

D IN

VE

STE

ES

INV

EST

ME

NT

S IN

MA

INL

AN

D C

HIN

A

YE

AR

EN

DE

D D

EC

EM

BE

R 3

1, 2

012

(In

New

Tai

wan

Dol

lars

, Unl

ess S

tate

d O

ther

wis

e)

Inve

stee

C

ompa

ny N

ame

Mai

n B

usin

esse

s and

Pr

oduc

ts

Tot

al A

mou

nt o

f Pai

d-in

C

apita

l (N

ote

8)

Inve

stm

ent

Typ

e

Acc

umul

ated

Out

flow

of

Inve

stm

ent f

rom

Tai

wan

as

of

Janu

ary

1, 2

012

(Not

e 8)

Inve

stm

ent F

low

s A

ccum

ulat

ed O

utflo

w o

f In

vest

men

t fro

m T

aiw

an

as o

f D

ecem

ber

31, 2

012

(Not

e 8)

% O

wne

rshi

p of

Dir

ect o

r In

dire

ct

Inve

stm

ent

Inve

stm

ent G

ain

(Los

s)

(Not

e 4)

(N

otes

4 a

nd 8

)

Car

ryin

g V

alue

as

of

Dec

embe

r 31

, 201

2

Acc

umul

ated

Inw

ard

Rem

ittan

ce o

f E

arni

ngs a

s of

Dec

embe

r 31

, 201

2 O

utflo

w

Inflo

w

Xia

men

Inte

rnat

iona

l Air

Car

go

Term

inal

Forw

ardi

ng a

nd st

orag

e of

ai

r car

go

$

1,04

5,55

1,93

3 (R

MB

22

4,48

0,00

0)In

dire

ct

(Not

e 1)

$

11

9,70

4,82

6 (

US$

4,

117,

846)

$

- $

-

$

119,

704,

826

(US$

4,

117,

846)

14.0

0%

$

16,5

29,6

75 (U

S$

558,

703)

$

227,

803,

837

(US$

7,

836,

452)

$

54,8

78,3

72

(US$

1,

887,

816)

(Not

e 5)

Xia

men

Inte

rnat

iona

l Airp

ort A

ir C

argo

Sto

rage

Fo

rwar

ding

and

stor

age

of

air c

argo

65,2

07,2

66 (R

MB

14

,000

,000

)In

dire

ct

(Not

e 1)

56,6

11,6

57 (

US$

1,

947,

441)

-

-

56

,611

,657

(US$

1,

947,

441)

14.0

0%

10

,160

,473

(US$

34

3,42

4)

91,8

74,7

09 (U

S$

3,16

0,48

9)

-

Taik

oo (X

iam

en) L

andi

ng G

ear

Serv

ices

La

ndin

g ge

ar m

aint

enan

ce

serv

ices

403,

779,

070

(US$

13

,890

,000

)In

dire

ct

(Not

e 1)

32,3

02,3

26 (

US$

1,

111,

200)

30

,232

,558

(US$

1,

040,

000)

-

62

,534

,884

(US$

2,

151,

200)

8.00

%

-

62

,534

,884

(US$

2,

151,

200)

-

Taik

oo S

pirit

Aer

ospa

ce S

yste

ms

(Jin

jang

) C

ompo

site

mat

eria

l

385,

102,

562

(RM

B

82,6

81,5

20)

Indi

rect

(N

ote

1)

18

,488

,372

(U

S$

636,

000)

-

-

18

,488

,372

(US$

63

6,00

0)5.

45%

-

18,4

88,3

72 (U

S$

636,

000)

-

Yan

gtze

Riv

er E

xpre

ss A

irlin

es

Forw

ardi

ng a

nd st

orag

e of

ai

r car

go

2,

328,

830,

927

(RM

B

500,

000,

000)

Indi

rect

(N

ote

1)

1,

127,

795,

727

(U

S$

38,7

96,1

73)

-

-

1,

127,

795,

727

(US$

38

,796

,173

)25

.00%

-

-

-

Shan

ghai

Eas

tern

Airc

raft

Mai

nten

ance

A

ircra

ft lin

e m

aint

enan

ce

90

,116

,279

(US$

3,

100,

000)

Indi

rect

(N

ote

2)

7,20

9,30

2(U

S$24

8,00

0)

-

-

7,20

9,30

2 (U

S$

248,

000)

8.00

%

-

7,

209,

302

(US$

248,

000)

-

Shan

ghai

Eas

tern

Uni

ted

Inte

rnat

iona

l

Forw

ardi

ng o

f air

carg

o an

d oc

ean

frei

ght

29

,069

,767

(US$

1,

000,

000)

Indi

rect

(N

ote

3)

4,

985,

465

(U

S$

171,

500)

-

-

4,

985,

465

(US$

17

1,50

0)17

.15%

-

4,98

5,46

5 (U

S$

171,

500)

-

Acc

umul

ated

Inve

stm

ent i

n M

ainl

and

Chi

na a

s of

Dec

embe

r 31

, 201

2 (N

ote

8)

Inve

stm

ent A

mou

nts A

utho

rize

d by

In

vest

men

t Com

mis

sion

, MO

EA

L

imit

on In

vest

men

t

$1

,379

,330

,232

(US$

48,0

68,1

60)

$1,4

03,9

79,8

36 (N

ote

6)

$33,

167,

723,

241

(Not

e 7)

Not

e 1:

C

hina

Airl

ines

, Ltd

. the

“C

ompa

ny”

inve

sted

in C

al-A

sia

Inve

stm

ent,

whi

ch, i

n tu

rn, i

nves

ted

in a

com

pany

loca

ted

in M

ainl

and

Chi

na.

Not

e 2:

Th

e C

ompa

ny in

vest

ed in

Chi

na A

ircra

ft Se

rvic

es, w

hich

in tu

rn, i

nves

ted

in a

com

pany

loca

ted

in M

ainl

and

Chi

na.

Not

e 3:

C

al-A

sia

Inve

stm

ent i

nves

ted

in E

aste

rn U

nite

d In

tern

atio

nal L

ogis

tics (

Hol

ding

s), w

hich

in tu

rn, i

nves

ted

in a

com

pany

loca

ted

in M

ainl

and

Chi

na.

Not

e 4:

Th

e in

vest

men

t gai

n (lo

ss) w

as b

ased

on

the

finan

cial

stat

emen

ts a

udite

d by

the

Com

pany

’s C

PAs i

n th

e R

OC

; acc

rual

acc

ount

ing

was

use

d in

the

prep

arat

ion

of th

ese

finan

cial

stat

emen

ts.

Not

e 5:

Th

e in

war

d re

mitt

ance

of e

arni

ngs i

n 20

12 a

mou

nted

to U

S$1,

887,

816.

Not

e 6:

Th

e am

ount

com

pris

ed U

S$47

,035

,573

and

NT$

36,6

66,6

67.

Not

e 7:

Th

e lim

it st

ated

in th

e In

vest

men

t Com

mis

sion

’s re

gula

tion,

“In

vest

men

t or T

echn

ical

Coo

pera

tion

in M

ainl

and

Chi

na A

djud

gmen

t Rul

e,”

is th

e la

rger

of t

he C

ompa

ny’s

net

ass

et v

alue

or 6

0% o

f the

con

solid

ated

net

ass

et v

alue

.

Not

e 8:

Th

e R

MB

and

U.S

. dol

lar a

mou

nts o

f ass

ets a

re tr

ansl

ated

at y

ear-

end

rate

s and

thos

e of

gai

ns (l

osse

s), a

t the

ave

rage

of t

he m

onth

-end

rate

s of I

ATA

(Int

erna

tiona

l Air

Tran

spor

t Ass

ocia

tion)

for t

he re

porti

ng p

erio

d.

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