As filed with the Securities and Exchange Commission on June 30, 2005
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
| | |
o | | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
OR |
x | | |
þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the fiscal year ended December 31, 2004 |
For the fiscal year ended December 31, 2007
OR
| | |
OR |
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| | |
| | Commission file number: 1-14660SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
Date of event requiring this shell company report _____________For the transition period from _________ to
Commission file number 1-14660
(Exact name of Registrant as specified in its charter)
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(Translation of Registrant’s name into English)
THE PEOPLE’S REPUBLIC OF CHINA
(Jurisdiction of incorporation or organization)
278 JI CHANG ROAD
GUANGZHOU
PEOPLE’S REPUBLIC OF CHINA, 510405
(Address of principal executive offices)
Mr. Xie Bing, 02086124462,
webmaster@csair.com and/or 02086659040
278 JI CHANG ROAD
GUANGZHOU
PEOPLE’S REPUBLIC OF CHINA, 510405
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Act. | | |
Title of each class:class | | Name of each exchange on which registered: |
| | registered |
| | |
Ordinary H Shares of par value RMB1.00 per share | | New York Stock Exchange, Inc. |
RMB1.00 per share | | |
represented by American | | |
Depositary SharesReceipts | | |
Securities registered or to be registered pursuant to Section 12(g) of the Act: Act.
(Title of Class)
(Title of Class)
| | |
SEC 1852 (05-06) | | Persons who respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number. |
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: Act.
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:report. 2,200,000,000 ordinary Domestic Shares of par value RMB1.00 per share and 1,174,178,000 ordinary H Shares of par value RMB1.00 per share and 1,000,0001,000,000,000 ordinary A Shares of par value RMB1.00 per share were issued and outstanding as of December 31, 2004.2007.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes þ No
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ
Yes oNo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer oNon-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP o | International Financial Reporting Standards þ | Other o |
| as issued by the International Accounting | |
YesxNoo | Standards Board | |
Indicate
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the Registrantregistrant has elected to follow.
o |
Item 17 Item 17o Item 18 Item 18x |
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
oYes þ No
TABLE OF CONTENTS
China Southern Airlines Company Limited
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FORWARD-LOOKING STATEMENTS | | 1 |
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INTRODUCTORY NOTE | | 1 |
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GLOSSARY OF AIRLINE INDUSTRY TERMS | | 2 |
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PART I | | |
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PageITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | | 3 |
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ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE | | 3 |
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1ITEM 3. KEY INFORMATION | | 3 |
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Selected Financial Data | | 3 |
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1Capitalization and Indebtedness | | 6 |
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Risk Factors | | 7 |
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ITEM 4. INFORMATION ON THE COMPANY | | 12 |
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History and Development of the Company | | 12 |
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33Aircraft Acquisitions | | 13 |
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Capital Expenditure | | 14 |
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Business Overview | | 14 |
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Organizational Structure | | 33 |
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Property, Plant and Equipment | | 34 |
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35ITEM 4A. UNRESOLVED STAFF COMMENTS | | 36 |
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS | | 36 |
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Critical Accounting Policies | | 36 |
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Recently Pronounced International Financial Reporting Standards | | 37 |
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36Overview | | 37 |
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Operating Results | | 39 |
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Liquidity and Capital Resources | | 44 |
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41Contractual Obligations and Commercial Commitments | | 46 |
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES. | | 46 |
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Directors, Senior Management and Employees | | 46 |
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Compensation | | 52 |
AdditionalBoard Practices | | 53 |
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Employees | | 54 |
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Share Ownership | | 56 |
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS | | 56 |
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Major Shareholders | | 56 |
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Related Party Transactions | | 56 |
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Interests of Experts and Counsel | | 62 |
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ITEM 8. FINANCIAL INFORMATION | �� | 62 |
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Consolidated Statements and Other Financial Information under U.S. GAAP | | 62 |
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Significant Changes | | 62 |
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Legal Proceedings | | 62 |
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Dividend Information | | 62 |
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ITEM 9. THE OFFER AND LISTING | | 62 |
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Offer and Listing Details | | 62 |
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Plan of Distribution | | 64 |
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Markets | | 64 |
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Selling Shareholders | | 64 |
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Dilution | | 64 |
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Expenses of the Issue | | 64 |
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ITEM 10. ADDITIONAL INFORMATION | | 64 |
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A. | | | | 48 | 64 |
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i
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B. | Memorandum and Articles of Association | | | Page64 |
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C. | Material Contracts | | | 57 | 69 |
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D. | Exchange Controls | | | 64 | 70 |
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E. | Taxation | | 71 |
| | | 65 |
F. | Dividends and Paying Agents | | 75 |
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G. | Statement by Experts | | 75 |
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H. | Documents on Display | | 75 |
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I. | Subsidiary Information | | 76 |
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ii
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | | 79 |
FORWARD-LOOKING STATEMENTS This Annual Report contains forward-looking statements. These statements appear in a number of different places in this Annual Report. A
forward lookingforward-looking statement is usually identified by the use in this Annual Report of certain terminology such as “estimates”, “projects”, “expects”, “intends”, “believes”, “plans”, “anticipates”, or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties. Forward-looking statements include statements regarding the outlook for the Company’s future operations, forecasts of future costs and expenditures, evaluation of market conditions, the outcome of legal proceedings (if any), the adequacy of reserves, or other business plans. You are cautioned that such forward-looking statements are not guarantees and involve risks, assumptions and uncertainties. The Company’s actual results may differ materially from those in the forward-looking statements due to risks facing the Company or due to actual facts differing from the assumptions underlying those forward-looking statements.
Some of these risks and assumptions, in addition to those identified under Item 3, “Key Information
–- Risk Factors,” include:
| • | · | general economic and business conditions, including changes in interest rates; |
|
| • | · | prices and other economic conditions; |
|
| • | · | actions by government authorities, including changes in government regulation;regulations; |
|
| • | · | the Company’s relationship with CSAHC; |
|
| • | · | uncertainties associated with legal proceedings; |
|
| • | · | technological development; |
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| • | · | future decisions by management in response to changing conditions; |
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| • | · | the Company’s ability to execute prospective business plans; and |
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| • | · | misjudgments in the course of preparing forward-looking statements. |
The Company advises you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to the Company, the Group and persons acting on their behalf.
INTRODUCTORY NOTE
In this Annual Report, unless the context indicates otherwise, the “Company” means China Southern Airlines Company Limited, a joint stock company incorporated in China on March 25, 1995, the “Group” means the Company and its consolidated subsidiaries, and “CSAHC” means China Southern Air Holding Company, the Company’s parent company which holds a 50.3% controlling interest in the Company.
References to “China” or the “PRC” are to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan. References to “Renminbi” or “RMB” are to the currency of China, references to “U.S. dollars”, “$” or “US$” are to the currency of the United States of America (the “U.S.” or “United States”), and reference to “HK$” is to the currency of Hong Kong. Reference to the “Chinese Government” is to the national government of China. References to “Hong Kong” or “Hong Kong SAR” are to the Hong Kong Special Administrative Region of the People’s Republic of China. References to “Macau” or “Macau SAR” are to the Macau Special Administrative Region of the People’s Republic of China.
The Company presents its consolidated financial statements in Renminbi. The consolidated financial statements of the Company
as offor the year ended December 31,
2003 and 20042007 (the “Financial Statements”) have been prepared in accordance with
all applicable International Financial Reporting Standards (“
IFRS”IFRSs”), which collective term includes all applicable individual International Financial Reporting Standards, International Accounting Standards (“IASs”)
promulgatedand interpretations issued by the International Accounting
Standards Board. IFRS includes International Accounting Standards (“IAS”) and related interpretations. IFRS differs in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”Standard Board (the “IASB”).
Information relating to the nature and effect of such differences is presented in Note 34 to the Financial Statements.Solely for the convenience of the readers, this Annual Report contains translations of certain Renminbi amounts into U.S. dollars at the rate of US$1.00 =
RMB8.2765,RMB7.3046, which is the average of the buying and selling rates as quoted by the People’s Bank of China at the close of business on December 31,
2004.2007. No representation is made that the Renminbi amounts or U.S. dollar amounts included in this Annual Report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. Any discrepancies in the tables included herein between the amounts listed and the totals are due to rounding.
1
GLOSSARY OF AIRLINE INDUSTRY TERMS
In this Annual Report, unless the context indicates otherwise, the following terms shall have the respective meanings set forth below.
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Capacity Measurements | | |
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“available seat kilometers” or “ASKs” | | the number of seats made available for sale multiplied by the kilometers flown |
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“available ton kilometers” or “ATKs” | | the number of tons of capacity available for the transportation of revenue load (passengers and cargo) multiplied by the kilometers flown |
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Traffic Measurements | | |
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“revenue passenger kilometers” or “RPKs” | | the number of revenue passengers carried multiplied by the kilometers flown |
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“cargo ton kilometers” | | the cargo load in tons multiplied by the kilometers flown |
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“revenue ton kilometers” or “RTKs” | | the load (passenger and cargo) in tons multiplied by the kilometers flown |
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Yield Measurements | | |
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“passenger yield” | | revenue from passenger operations divided by RPKs |
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“cargo yield” | | revenue from cargo operations divided by cargo ton kilometers |
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“average yield” | | revenue from airline operations (passenger and cargo) divided by RTKs
|
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“ton” | | a metric ton, equivalent to 2,204.6 pounds |
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Load Factors | | |
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“passenger load factor” | | RPKs expressed as a percentage of ASKs |
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“overall load factor” | | RTKs expressed as a percentage of ATKs |
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“breakeven load factor” | | the load factor required to equate scheduled traffic revenue with operating costs assuming that total operating surplus is attributable to scheduled traffic operations |
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Utilization | | |
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“utilization rate” | | the actual number of flight hours per aircraft per operating day
|
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Equipment | | |
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“rotables” | | aircraft parts that are ordinarily repaired and reused |
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“expendables” | | aircraft parts that are ordinarily used up and replaced with new parts |
2
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not applicable.
ITEM 3. KEY INFORMATION.
Selected Financial Data
The following tables present selected financial data of the Company as of and for each of the years in the five-year period ended December 31, 2004.2007. The selected dataconsolidated statement of consolidated statements of operations data for each of the years in the three-year period ended December 31, 20042007 and selected consolidated balance sheetssheet data as of December 31, 20032007 and 20042006, have been derived from the consolidated financial statements of the Company, including the related notes, included elsewhere in this Annual Report. The selected IFRS data of consolidated statementsstatement of operations data for the years ended December 31, 20002003 and 20012004 and IFRSselected consolidated balance sheetssheet data as of December 31, 2000, 20012005, 2004 and 20022003 are derived from the Company’s audited consolidated financial statements that are not included in this Annual Report. The
Moreover, the selected financial data should be read in conjunction with our consolidated financial statements
of the Companytogether with accompanying notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this Annual Report. Unless otherwise indicated, our consolidated financial statements are prepared and presented in accordance with
IFRS. Under IFRS, the purchase method of accounting was applied to account for the acquisition of the airline operations and certain related assets of China Northern Airlines Company (“CNA”) and Xinjiang Airlines Company (“XJA”) (“CNA/XJA Acquisitions”) (details of which are disclosed in “Item 4. Information on the Company — History and Development of the Company”) such that at December 31, 2004 only the acquired assets and liabilities are included in the consolidated financial statements. The results of the acquired operations and their related cash flows will be included in the consolidated financial statements of the Group beginning January 1, 2005. Under U.S. GAAP, such transaction is considered to be “a combination of entities under common control”. A combination of entities under common control is accounted for in a manner similar to a “pooling-of-interests”. Consequently, the assets and liabilities of CNA and XJA are reflected at their U.S. GAAP carrying values and the U.S. GAAP consolidated financial statements are restated to include the assets and liabilities of CNA and XJA, and their results of operations and cash flows for all periods presented. See Note 34 to the consolidated financial statements for the nature and effect of such differences and other significant differences related to the Group between IFRS and U.S. GAAP as of December 31, 2003 and 2004 and for each of the years in the three-year period ended December 31, 2004 and the condensed consolidated financial statements prepared and presented in accordance with U.S. GAAP for the relevant periods. The following information should be read in conjunction with, and is qualified in its entirety by, theInternational Financial
Statements of the Group. | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2000 | | | 2001 | | | 2002 | | | 2003 | | | 2004 | | | 2004 | |
| | RMB | | | RMB | | | RMB | | | RMB | | | RMB | | | US$ | |
| | (in million, except per share data) | |
Income Statement Data: | | | | | | | | | | | | | | | | | | | | | | | | |
IFRS: | | | | | | | | | | | | | | | | | | | | | | | | |
Operating revenue | | | 15,178 | | | | 16,880 | | | | 18,019 | | | | 17,470 | | | | 23,974 | | | | 2,897 | |
Operating expenses | | | 13,996 | | | | 15,479 | | | | 15,993 | | | | 17,014 | | | | 23,065 | | | | 2,787 | |
Operating income | | | 1,182 | | | | 1,401 | | | | 2,026 | | | | 456 | | | | 909 | | | | 110 | |
Equity income of affiliated companies | | | 46 | | | | 53 | | | | 37 | | | | 48 | | | | 12 | | | | 1 | |
Equity loss of jointly controlled entities | | | — | | | | (4 | ) | | | (3 | ) | | | (39 | ) | | | (5 | ) | | | (1 | ) |
Gain/(loss) on sale of property, plant and equipment | | | 373 | | | | (56 | ) | | | 171 | | | | (22 | ) | | | (1 | ) | | | — | |
Interest expense | | | (1,074 | ) | | | (934 | ) | | | (959 | ) | | | (824 | ) | | | (691 | ) | | | (84 | ) |
Exchange gain/(loss), net | | | 318 | | | | 297 | | | | (176 | ) | | | (164 | ) | | | (59 | ) | | | (7 | ) |
Other, net | | | 86 | | | | 38 | | | | 43 | | | | 34 | | | | 68 | | | | 9 | |
Income/(loss) before taxation and minority interest | | | 931 | | | | 795 | | | | 1,139 | | | | (511 | ) | | | 233 | | | | 28 | |
Taxation (expense)/credit | | | (339 | ) | | | (320 | ) | | | (398 | ) | | | 324 | | | | (78 | ) | | | (9 | ) |
Minority interests | | | (90 | ) | | | (135 | ) | | | (165 | ) | | | (171 | ) | | | (203 | ) | | | (25 | ) |
Net income/(loss) | | | 502 | | | | 340 | | | | 576 | | | | (358 | ) | | | (48 | ) | | | (6 | ) |
Basic earnings/(loss) per share | | | 0.15 | | | | 0.10 | | | | 0.17 | | | | (0.09 | ) | | | (0.01 | ) | | | (0.001 | ) |
Basic earnings/(loss) per ADS | | | 7.44 | | | | 5.04 | | | | 8.53 | | | | (4.68 | ) | | | (0.55 | ) | | | (0.07 | ) |
Cash dividends declared per share | | | — | | | | — | | | | 0.02 | | | | — | | | | — | | | | — | |
U.S. GAAP: | | | | | | | | | | | | | | | | | | | | | | | | |
Traffic revenue | | | 21,859 | | | | 23,615 | | | | 24,854 | | | | 24,897 | | | | 33,235 | | | | 4,016 | |
Other operating revenue | | | 1,083 | | | | 657 | | | | 904 | | | | 586 | | | | 930 | | | | 112 | |
Operating income | | | 1,462 | | | | 1,584 | | | | 1,948 | | | | 366 | | | | 1,877 | | | | 227 | |
Equity income of affiliated companies | | | 46 | | | | 73 | | | | 45 | | | | 53 | | | | 17 | | | | 2 | |
Equity loss of jointly controlled entities | | | — | | | | (20 | ) | | | (12 | ) | | | (37 | ) | | | (3 | ) | | | — | |
Interest expense | | | (1,970 | ) | | | (1,800 | ) | | | (1,820 | ) | | | (1,604 | ) | | | (1,184 | ) | | | (143 | ) |
Foreign currency exchange gain/(loss), net | | | 554 | | | | 532 | | | | (327 | ) | | | (381 | ) | | | (124 | ) | | | (15 | ) |
Other, net | | | 153 | | | | 106 | | | | 30 | | | | 64 | | | | 123 | | | | 15 | |
Income/(loss) before income taxes and minority interest | | | 245 | | | | 475 | | | | (136 | ) | | | (1,539 | ) | | | 706 | | | | 85 | |
Income tax (expense)/benefit | | | (309 | ) | | | (408 | ) | | | (365 | ) | | | 526 | | | | (274 | ) | | | (33 | ) |
Minority interests | | | (53 | ) | | | (97 | ) | | | (154 | ) | | | (127 | ) | | | (193 | ) | | | (23 | ) |
Net (loss)/income | | | (117 | ) | | | (30 | ) | | | (655 | ) | | | (1,140 | ) | | | 239 | | | | 29 | |
Basic (loss)/earnings per share | | | (0.034 | ) | | | (0.009 | ) | | | (0.194 | ) | | | (0.298 | ) | | | 0.055 | | | | 0.007 | |
Basic (loss)/earnings per ADS | | | (1.684 | ) | | | (0.432 | ) | | | (9.706 | ) | | | (14.876 | ) | | | 2.732 | | | | 0.331 | |
Cash dividend declared per share | | | — | | | | — | | | | 0.02 | | | | — | | | | — | | | | — | |
3
Reporting Standards, or IFRSs.
| | Year ended December 31, | |
| | 2007 US$ | | 2007 RMB | | 2006 RMB | | 2005 RMB | | 2004 RMB | | 2003 RMB | |
Consolidated Statement of Operations Data: | | (in million, except per share data) | |
| | | |
Operating revenue | | | 7,461 | | | 54,502 | | | 46,219 | | | 38,293 | | | 23,974 | | | 17,470 | |
Operating expenses | | | (7,256 | ) | | (53,013 | ) | | (45,907 | ) | | (39,598 | ) | | (23,065 | ) | | (17,014 | ) |
Operating profit/(loss) | | | 223 | | | 1,619 | | | 645 | | | (1,337 | ) | | 908 | | | 434 | |
Profit/(loss) before taxation | | | 400 | | | 2,923 | | | 357 | | | (1,853 | ) | | 220 | | | (511 | ) |
Profit/(loss) for the year | | | 283 | | | 2,065 | | | 204 | | | (1,846 | ) | | 155 | | | (187 | ) |
Profit/(loss) attributable to : | | | | | | | | | | | | | | | | | | | |
Equity shareholders of the Company | | | 256 | | | 1,871 | | | 188 | | | (1,848 | ) | | (48 | ) | | (358 | ) |
Minority interests | | | 27 | | | 194 | | | 16 | | | 2 | | | 203 | | | 171 | |
Basic and diluted earnings/(loss) per share | | | 0.06 | | | 0.43 | | | 0.04 | | | (0.42 | ) | | (0.01 | ) | | (0.09 | ) |
Basic and diluted earnings/(loss) per ADR | | | 2.93 | | | 21.39 | | | 2.15 | | | (21.12 | ) | | (0.55 | ) | | (4.68 | ) |
Cash dividends declared per share | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2000 | | | 2001 | | | 2002 | | | 2003 | | | 2004 | | | 2004 | |
| | RMB | | | RMB | | | RMB | | | RMB | | | RMB | | | US$ | |
| | (in million) | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | |
IFRS: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | 4,198 | | | | 2,818 | | | | 3,771 | | | | 2,080 | | | | 3,083 | | | | 373 | |
Other current assets | | | 1,692 | | | | 1,561 | | | | 1,835 | | | | 1,922 | | | | 4,182 | | | | 505 | |
Property, plant and equipment, net | | | 23,282 | | | | 22,352 | | | | 26,921 | | | | 28,536 | | | | 46,841 | | | | 5,660 | |
Total assets | | | 30,924 | | | | 30,653 | | | | 37,188 | | | | 39,062 | | | | 62,228 | | | | 7,519 | |
Notes payable, including current installments of long term notes payable | | | 783 | | | | 2,178 | | | | 5,241 | | | | 7,097 | | | | 11,518 | | | | 1,392 | |
Current installments of obligations under capital leases | | | 1,776 | | | | 1,452 | | | | 1,567 | | | | 1,298 | | | | 2,144 | | | | 259 | |
Notes payable, excluding current installments | | | 3,789 | | | | 3,628 | | | | 5,835 | | | | 4,522 | | | | 11,935 | | | | 1,442 | |
Obligations under capital leases, excluding current installments | | | 9,416 | | | | 7,692 | | | | 6,632 | | | | 5,543 | | | | 9,599 | | | | 1,160 | |
Shareholders’ equity | | | 8,881 | | | | 9,222 | | | | 9,613 | | | | 11,896 | | | | 11,848 | | | | 1,432 | |
U.S. GAAP: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | 5,763 | | | | 4,384 | | | | 4,772 | | | | 2,999 | | | | 3,083 | | | | 373 | |
Other current assets | | | 3,196 | | | | 3,065 | | | | 3,391 | | | | 3,034 | | | | 4,401 | | | | 532 | |
Property, plant and equipment, net | | | 35,546 | | | | 35,676 | | | | 40,277 | | | | 41,012 | | | | 46,202 | | | | 5,582 | |
Total assets | | | 48,684 | | | | 48,456 | | | | 54,860 | | | | 58,610 | | | | 65,040 | | | | 7,858 | |
Notes payable, including current portion of long term notes payable | | | 3,965 | | | | 5,359 | | | | 10,304 | | | | 8,600 | | | | 11,518 | | | | 1,392 | |
Current installments of obligations under capital leases | | | 2,752 | | | | 2,428 | | | | 2,591 | | | | 2,368 | | | | 2,106 | | | | 254 | |
Notes payable, excluding current portion | | | 9,017 | | | | 8,856 | | | | 9,179 | | | | 8,634 | | | | 11,935 | | | | 1,442 | |
Obligations under capital leases, excluding current installments | | | 15,891 | | | | 14,167 | | | | 13,333 | | | | 13,849 | | | | 11,975 | | | | 1,447 | |
Shareholders’ equity | | | 7,432 | | | | 7,315 | | | | 6,796 | | | | 13,098 | | | | 11,169 | | | | 1,349 | |
| | As of December 31, | |
| | 2007 US$ | | 2007 RMB | | 2006 RMB | | 2005 RMB | | 2004 RMB | | 2003 RMB | |
Consolidated Balance Sheet Data: | | (in million) | |
| | | | | | | | | | | |
Cash and cash equivalents | | | 524 | | | 3,824 | | | 2,264 | | | 2,901 | | | 3,083 | | | 2,080 | |
Other current assets | | | 680 | | | 4,966 | | | 4,419 | | | 4,320 | | | 4,286 | | | 1,922 | |
Property, plant and equipment, net | | | 8,001 | | | 58,441 | | | 56,335 | | | 54,254 | | | 46,841 | | | 28,536 | |
Total assets | | | 11,217 | | | 81,933 | | | 75,584 | | | 71,402 | | | 62,383 | | | 39,062 | |
Bank and other loans, including long-term bank and other loans due within one year | | | 3,415 | | | 24,948 | | | 23,822 | | | 16,223 | | | 11,518 | | | 7,097 | |
Obligations under finance leases due within one year | | | 394 | | | 2,877 | | | 3,091 | | | 3,373 | | | 2,144 | | | 1,298 | |
Bank and other loans, excluding balance due within one year | | | 1,242 | | | 9,074 | | | 10,018 | | | 12,740 | | | 11,935 | | | 4,522 | |
Obligations under finance leases, excluding balance due within one year | | | 1,760 | | | 12,858 | | | 12,307 | | | 12,459 | | | 9,599 | | | 5,543 | |
Total equity | | | 2,014 | | | 14,712 | | | 12,121 | | | 11,936 | | | 13,903 | | | 13,569 | |
The following selected operating data of the Group for the five years ended December 31,
20042007 have been derived from consolidated financial statements prepared in accordance with
IFRSIFRSs and other data provided by the Group
andwhich have not been audited.
The operating data and the profit analysis and comparison for other years below is calculated and disclosed in accordance with the statistical standards, which hashave been implemented since January 1, 2001. See “Glossary of Airline Industry Terms” at the front of this Annual Report for definitions of certain terms used herein.
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2000 | | | 2001 | | | 2002 | | | 2003 | | | 2004 | |
Capacity | | | | | | | | | | | | | | | | | | | | |
ASK (million) | | | | | | | | | | | | | | | | | | | | |
— Domestic | | | 28,345 | | | | 31,393 | | | | 33,753 | | | | 32,590 | | | | 41,330 | |
— Hong Kong regional | | | 1,744 | | | | 1,690 | | | | 1,746 | | | | 1,347 | | | | 1,896 | |
— International | | | 5,742 | | | | 6,981 | | | | 8,746 | | | | 6,930 | | | | 10,543 | |
Total | | | 35,831 | | | | 40,064 | | | | 44,245 | | | | 40,867 | | | | 53,769 | |
ATK (million) | | | | | | | | | | | | | | | | | | | | |
— Domestic | | | 3,322 | | | | 3,622 | | | | 3,924 | | | | 3,772 | | | | 4,773 | |
— Hong Kong regional | | | 198 | | | | 185 | | | | 193 | | | | 150 | | | | 211 | |
— International | | | 1,087 | | | | 1,317 | | | | 1,798 | | | | 1,999 | | | | 2,462 | |
Total | | | 4,607 | | | | 5,124 | | | | 5,915 | | | | 5,921 | | | | 7,446 | |
Kilometers flown (thousand) | | | 209,431 | | | | 234,051 | | | | 258,379 | | | | 249,068 | | | | 324,827 | |
Hours flown (thousand) | | | 326 | | | | 365 | | | | 405 | | | | 385 | | | | 501 | |
Number of landing and take-offs | | | | | | | | | | | | | | | | | | | | |
— Domestic | | | 165,726 | | | | 183,651 | | | | 194,776 | | | | 191,460 | | | | 243,410 | |
— Hong Kong regional | | | 14,255 | | | | 13,712 | | | | 13,891 | | | | 11,400 | | | | 15,380 | |
— International | | | 8,861 | | | | 10,698 | | | | 13,990 | | | | 11,330 | | | | 15,790 | |
Total | | | 188,842 | | | | 208,061 | | | | 222,657 | | | | 214,190 | | | | 274,580 | |
Traffic | | | | | | | | | | | | | | | | | | | | |
RPK (million) | | | | | | | | | | | | | | | | | | | | |
— Domestic | | | 16,974 | | | | 19,447 | | | | 22,092 | | | | 21,294 | | | | 29,121 | |
— Hong Kong regional | | | 1,074 | | | | 1,060 | | | | 1,081 | | | | 778 | | | | 1,203 | |
— International | | | 3,605 | | | | 4,550 | | | | 5,767 | | | | 4,315 | | | | 6,872 | |
Total | | | 21,653 | | | | 25,057 | | | | 28,940 | | | | 26,387 | | | | 37,196 | |
RTK (million) | | | | | | | | | | | | | | | | | | | | |
— Domestic | | | 1,941 | | | | 2,217 | | | | 2,532 | | | | 2,424 | | | | 3,206 | |
— Hong Kong regional | | | 107 | | | | 105 | | | | 108 | | | | 78 | | | | 120 | |
— International | | | 565 | | | | 712 | | | | 974 | | | | 1,059 | | | | 1,337 | |
Total | | | 2,613 | | | | 3,034 | | | | 3,614 | | | | 3,561 | | | | 4,663 | |
Passengers carried (thousand) | | | | | | | | | | | | | | | | | | | | |
— Domestic | | | 14,450 | | | | 16,499 | | | | 18,535 | | | | 18,259 | | | | 25,002 | |
— Hong Kong regional | | | 1,444 | | | | 1,409 | | | | 1,369 | | | | 1,019 | | | | 1,394 | |
— International | | | 957 | | | | 1,213 | | | | 1,589 | | | | 1,192 | | | | 1,811 | |
Total | | | 16,851 | | | | 19,121 | | | | 21,493 | | | | 20,470 | | | | 28,207 | |
Cargo and mail carried (tons) | | | 353,000 | | | | 398,000 | | | | 470,000 | | | | 464,000 | | | | 545,000 | |
Load Factors | | | | | | | | | | | | | | | | | | | | |
Passenger load factor (RPK/ASK) (%) | | | | | | | | | | | | | | | | | | | | |
— Domestic | | | 59.9 | | | | 61.9 | | | | 65.5 | | | | 65.3 | | | | 70.5 | |
— Hong Kong regional | | | 61.6 | | | | 62.7 | | | | 61.9 | | | | 57.8 | | | | 63.4 | |
— International | | | 62.8 | | | | 65.2 | | | | 65.9 | | | | 62.3 | | | | 65.2 | |
Total | | | 60.4 | | | | 62.5 | | | | 65.4 | | | | 64.6 | | | | 69.2 | |
Overall load factor (RTK/ATK) (%) | | | | | | | | | | | | | | | | | | | | |
— Domestic | | | 58.4 | | | | 61.2 | | | | 64.5 | | | | 64.2 | | | | 67.2 | |
— Hong Kong regional | | | 54.0 | | | | 56.8 | | | | 55.8 | | | | 52.2 | | | | 56.9 | |
— International | | | 52.0 | | | | 54.1 | | | | 54.2 | | | | 53.0 | | | | 54.3 | |
Total | | | 56.7 | | | | 59.2 | | | | 61.1 | | | | 60.1 | | | | 62.6 | |
Breakeven load factor (%) | | | 54.0 | | | | 55.6 | | | | 55.9 | | | | 61.6 | | | | 61.9 | |
4
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2000 | | | 2001 | | | 2002 | | | 2003 | | | 2004 | |
Yield | | | | | | | | | | | | | | | | | | | | |
Yield per RPK (RMB) | | | | | | | | | | | | | | | | | | | | |
— Domestic | | | 0.62 | | | | 0.62 | | | | 0.55 | | | | 0.57 | | | | 0.58 | |
— Hong Kong regional | | | 1.06 | | | | 1.06 | | | | 0.98 | | | | 0.96 | | | | 0.92 | |
— International | | | 0.43 | | | | 0.41 | | | | 0.42 | | | | 0.47 | | | | 0.46 | |
Total | | | 0.61 | | | | 0.60 | | | | 0.54 | | | | 0.57 | | | | 0.57 | |
Yield per cargo and mail ton kilometers (RMB) | | | 2.13 | | | | 1.76 | | | | 1.73 | | | | 1.62 | | | | 1.67 | |
Yield per RTK (RMB) | | | | | | | | | | | | | | | | | | | | |
— Domestic | | | 5.90 | | | | 5.83 | | | | 5.21 | | | | 5.40 | | | | 5.53 | |
— Hong Kong regional | | | 11.19 | | �� | | 11.26 | | | | 10.36 | | | | 10.35 | | | | 9.83 | |
— International | | | 3.63 | | | | 3.31 | | | | 3.25 | | | | 2.90 | | | | 3.31 | |
Total | | | 5.63 | | | | 5.43 | | | | 4.84 | | | | 4.76 | | | | 5.01 | |
Fleet | | | | | | | | | | | | | | | | | | | | |
— Boeing | | | 89 | | | | 91 | | | | 102 | | | | 108 | | | | 137 | |
— Airbus | | | 20 | | | | 20 | | | | 20 | | | | 24 | | | | 46 | |
— McDonnell Douglas | | | — | | | | — | | | | — | | | | — | | | | 35 | |
— Others | | | — | | | | — | | | | — | | | | — | | | | 13 | |
Total aircraft in service at period end | | | 109 | | | | 111 | | | | 122 | | | | 132 | | | | 231 | |
Overall utilization rate (hours per day) | | | 8.7 | | | | 9.1 | | | | 9.8 | | | | 8.5 | | | | 9.9 | |
Financial | | | | | | | | | | | | | | | | | | | | |
Operating cost per ASK (RMB) | | | 0.39 | | | | 0.39 | | | | 0.36 | | | | 0.42 | | | | 0.43 | |
Operating cost per ATK (RMB) | | | 3.04 | | | | 3.02 | | | | 2.70 | | | | 2.87 | | | | 3.10 | |
| | Year ended December 31, | |
Capacity | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
ASK (million) | | | 109,733 | | | 97,059 | | | 88,361 | | | 53,769 | | | 40,867 | |
ATK (million) | | | 14,208 | | | 12,656 | | | 11,509 | | | 7,446 | | | 5,921 | |
Kilometers flown (thousand) | | | 675,127 | | | 594,957 | | | 539,844 | | | 324,827 | | | 249,068 | |
Hours flown (thousand) | | | 1,075 | | | 931 | | | 846 | | | 501 | | | 385 | |
Number of landing and take-offs | | | 543,789 | | | 481,810 | | | 438,674 | | | 274,580 | | | 214,190 | |
Traffic | | | | | | | | | | | | | | | | |
RPK (million) | | | 81,727 | | | 69,582 | | | 61,923 | | | 37,196 | | | 26,387 | |
RTK (million) | | | 9,250 | | | 8,071 | | | 7,284 | | | 4,663 | | | 3,561 | |
Passengers carried (thousand) | | | 56,903 | | | 49,206 | | | 44,119 | | | 28,207 | | | 20,470 | |
Cargo and mail carried (tons) | | | 872,000 | | | 819,000 | | | 775,000 | | | 545,000 | | | 464,000 | |
Load Factors | | | | | | | | | | | | | | | | |
Passenger load factor (RPK/ASK) (%) | | | 74.5 | | | 71.7 | | | 70.1 | | | 69.2 | | | 64.6 | |
Overall load factor (RTK/ATK) (%) | | | 65.1 | | | 63.8 | | | 63.3 | | | 62.6 | | | 60.1 | |
Breakeven load factor (%) | | | 64.8 | | | 64.9 | | | 67.0 | | | 61.9 | | | 61.6 | |
Yield | | |
Yield per RPK (RMB) | | | 0.61 | | | 0.60 | | | 0.55 | | | 0.57 | | | 0.57 | |
Yield per cargo and mail ton kilometers (RMB) | | | 1.87 | | | 1.89 | | | 1.75 | | | 1.67 | | | 1.62 | |
Yield per RTK (RMB) | | | 5.76 | | | 5.59 | | | 5.14 | | | 5.01 | | | 4.76 | |
Fleet | | | | | | | | | | | | | | | | |
— Boeing | | | 177 | | | 159 | | | 140 | | | 137 | | | 108 | |
— Airbus | | | 119 | | | 103 | | | 71 | | | 46 | | | 24 | |
— McDonnell Douglas | | | 25 | | | 36 | | | 36 | | | 35 | | | — | |
— Others | | | 11 | | | 11 | | | 14 | | | 13 | | | — | |
Total aircraft in service at period end | | | 332 | | | 309 | | | 261 | | | 231 | | | 132 | |
Overall utilization rate (hours per day) | | | 9.4 | | | 9.5 | | | 9.6 | | | 9.9 | | | 8.5 | |
Financial | | | | | | | | | | | | | | | | |
Operating cost per ATK (RMB) | | | 3.73 | | | 3.63 | | | 3.44 | | | 3.10 | | | 2.87 | |
Exchange Rate Information
The following table sets forth certain information concerning exchange rates, based on the noon buying rates in New York City for cable transfers in foreign currencies, as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”), between Renminbi and U.S. dollars for the five most recent financial years.
| | | | | | | | | | | | | | | | |
| | | | | | Average(1) | | | | | | | |
Period | | Period End | | | (RMB per US$) | | | High | | | Low | |
Annual Exchange Rate | | | | | | | | | | | | | | | | |
2000 | | | 8.2781 | | | | 8.2784 | | | | 8.2799 | | | | 8.2768 | |
2001 | | | 8.2766 | | | | 8.2766 | | | | 8.2910 | | | | 8.2642 | |
2002 | | | 8.2773 | | | | 8.2773 | | | | 8.2897 | | | | 8.2152 | |
2003 | | | 8.2767 | | | | 8.2772 | | | | 8.2800 | | | | 8.2769 | |
2004 | | | 8.2765 | | | | 8.2765 | | | | 8.2889 | | | | 8.2641 | |
Period | | Period End | | Average(1) (RMB per US$) | | High | | Low | |
Annual Exchange Rate | | | | | | | | | |
2003 | | | 8.2767 | | | 8.2772 | | | 8.2800 | | | 8.2769 | |
2004 | | | 8.2765 | | | 8.2765 | | | 8.2889 | | | 8.2641 | |
2005 | | | 8.0694 | | | 8.1825 | | | 8.2767 | | | 8.0702 | |
2006 | | | 7.8041 | | | 7.9723 | | | 8.0702 | | | 7.8041 | |
2007 | | | 7.2946 | | | 7.6058 | | | 7.8127 | | | 7.2946 | |
(1) | Determined by averaging the rates on the last business day of each month during the relevant period. |
The following table sets out the range of high and low exchange rates, based on the Noon Buying Rate, between Renminbi and U.S. dollars, for the following periods.
| | | | | | | | |
Period | | High | | | Low | |
Monthly Exchange Rate | | | | | | | | |
December 2004 | | | 8.2889 | | | | 8.2641 | |
January 2005 | | | 8.2889 | | | | 8.2641 | |
February 2005 | | | 8.2889 | | | | 8.2641 | |
March 2005 | | | 8.2889 | | | | 8.2641 | |
April 2005 | | | 8.2889 | | | | 8.2641 | |
May 2005 | | | 8.2889 | | | | 8.2641 | |
June 2005 (up to June 21, 2005) | | | 8.2889 | | | | 8.2641 | |
(1) | | Determined by averaging the rates on the last business day of each month during the relevant period. |
Period | | High | | Low | |
Monthly Exchange Rate | | | | | | | |
December 2007 | | | 7.4120 | | | 7.2946 | |
January 2008 | | | 7.2946 | | | 7.1818 | |
February 2008 | | | 7.1973 | | | 7.1100 | |
March 2008 | | | 7.1110 | | | 7.0105 | |
April 2008 | | | 7.0185 | | | 6.9840 | |
May 2008 | | | 7.0000 | | | 6.9377 | |
June 2008 (up to June 19, 2008) | | | 6.9633 | | | 6.8770 | |
No interim dividends were paid during the year ended December 31, 2004.2007. The Board of Directors of the Company (“Board of Directors”) hasdid not recommended payment of a final dividend in respect of the year ended December 31, 2004.2007.
Capitalization and Indebtedness
Not applicable.
Reasons for the Offer and Use of Proceeds
Risks Relating to the Company
Government ownership and control of the Company All
Major Chinese airlines are wholly- or majority-owned either by the Chinese Government or by provincial or municipal governments in China. CSAHC, an entity wholly-owned by the Chinese Government, holds and exercises the rights of ownership of all of the Domestic Shares or 50.3% of the equity of the Company. The interests of the Chinese Government in the Company and in other Chinese airlines may conflict with the interests of the holders of the
ADSs,ADRs, H Shares and A Shares. The public policy considerations of the Chinese Government in regulating the Chinese commercial aviation industry may also conflict with its indirect ownership interest in the Company.
High operating leverage and foreign exchange exposure The airline industry is generally characterized by a high degree of operating leverage. In addition, due to high fixed costs, the expenses relating to the operation of any flight do not vary proportionately with the number of passengers carried, while revenues generated from a flight are directly related to the number of passengers carried and the fare structure of such flight. Accordingly, a decrease in revenues could result in a proportionately higher decrease in net income. Moreover, as the Group has substantial obligations denominated in foreign currencies, its results of operations are significantly affected by fluctuations in foreign exchange rates, particularly for the U.S. dollar and the Japanese
Yen.yen. The Company incurred a net exchange
lossgain of
RMB164RMB1,492 million and
RMB59RMB2,832 million for
20032006 and
2004,2007, respectively, mainly as a result of
Japanese Yen fluctuations.Reminbi appreciation. A majority of
thesethis exchange
losses weregain was unrealized in nature.
Liquidity
As of December 31, 2007, the Group had net current liabilities position of RMB33,811 million which was due to the use of short-term bank loans for the aircraft acquisitions and other capital expenditures. The Group’s short-term bank loans amounted to RMB24,948 million as at December 31, 2007. In 2008 and thereafter, the liquidity of the Group is primarily dependent on its ability to maintain adequate cash inflows from operations to meet its debt obligations as they fall due, the renewal of its short-term bank loans and on its ability to obtain adequate external financing to meet its committed future capital expenditures. The Group may not be able to meet its debt obligations as they fall due and committed future capital expenditures if certain assumptions about the operations and the availability of external financing on acceptable terms are inaccurate.
The Group has obtained firm commitments from its principal bankers to renew its short-term bank loans outstanding as of December 31, 2007 when they fall due during 2008. Subsequent to December 31, 2007 through March 31, 2008, the Group renewed short-term bank loans outstanding of RMB3,179 million. The directors of the Company believe that sufficient financing will be available to the Group, however there can be no assurance that such loan financing will be available on terms acceptable to the Group.
Potential conflicts of interest CSAHC will continue to be the controlling shareholder of the Company. CSAHC and certain of its
affiliated companiesassociates will continue to provide certain important services to the Company, including the import and export of aircraft spare parts and other flight equipment,
housingadvertising services,
provision of air catering , pilot training services, air ticket selling services, cleaning services, property management services, leasing of properties and financial services. In addition, Mr. Liu Shao Yong, the Chairman of the Board of Directors, also serves as the General Manager of CSAHC. The interests of CSAHC may conflict with those of the Company. In addition, any disruption of the provision of services by CSAHC’s
affiliated companiesassociates or a default by CSAHC of its obligations owed to the Company could affect the Company’s operations and financial conditions. In particular, as part of its cash management system, the Company periodically places significant amount of demand deposits with
China Southern Airlines Group Finance Company Limited (“SA Finance”), a PRC authorized financial institution controlled by CSAHC and an
affiliated companyassociate of the Company. As a result, the Company’s deposits with SA Finance are subject to the risks associated with the business of SA Finance over which the Company does not exercise control. As of December 31,
20032006 and
2004,2007, the Group had short-term deposits of
RMB366RMB629 million and
RMB406RMB906 million, respectively, with SA Finance.
Certain transactions between the Company and CSAHC or its
affiliatesassociates (as defined in the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Hong Kong Listing Rules”)) will constitute connected transactions of the Company under the Hong Kong Listing Rules and, unless exemptions are applicable or waivers are granted, will be subject to disclosure requirements and/or independent shareholders’ approval in a general meeting.
7
General Economic and Business conditions and natural phenomena
The US subprime crisis meltdown is an ongoing economic problem manifesting itself through liquidity issues in the global banking system owing to foreclosures which accelerated in the United States in late 2006 and has an adverse impact on global economy in 2007 and 2008. The financial crisis and other global events may reduce consumer spending or cause shifts in spending. A general reduction or shift in discretionary spending could result in decreased demand for leisure and business travel and can also impact the Company’s ability to raise fares to counteract increased fuel and labor costs.
The US subprime crisis added to the global economic slowdown which may also affect the growth of the Chinese economy. Chinese macroeconomic controls such as financing adjustments, credit adjustments, price controls and exchange rate policies will also affect the Chinese economic condition. This domestic economic condition and the increase of jet fuel prices will also affect the development of the aviation industry.
In 2008, a number of large-scale natural disasters occurred in China, such as the southern China snow storms in January and the May 12 earthquake in Sichuan province. Disasters such as these can affect the airline industry and the Company by reducing revenues and impacting travel behavior.
In summary, both international and domestic economic fluctuations and Chinese macroeconomic controls affect the demand for air travel. Additionally, increasingly strict security measures make air travel a hassle in the eyes of some consumers. These factors can have an uncertain impact on the development of the aviation industry.
Risks relating to certain real property Although systems for registration and transfer of land use rights and related real property interests in China have been implemented, such systems do not yet comprehensively account for all land and related property interests. The land in Guangzhou on which the Company’s headquarters
buildings and other facilities are located and the buildings that the Company uses at its route
basebases in Wuhan
Haikou and
ZhengzhouHaikou are leased by the Company from CSAHC. However, CSAHC lacks adequate documentation evidencing CSAHC’s rights to such land and buildings, and, as a consequence, the lease agreements between CSAHC and the Company for such land have not been registered with the relevant authorities. As a result, such lease agreements may not be enforceable. Lack of adequate documentation for land use rights and ownership of buildings subjects the Company to challenges and claims by third parties with respect to the Company’s use of such land and buildings.
The Company has been occupying all of the land and buildings described above without challenge or claim by third parties. CSAHC has received written assurance from the General Administration of Civil Aviation of China (“CAAC”) to the effect that CSAHC is entitled to continued use and occupancy of the land and certain related buildings and facilities. However, such assurance does not constitute formal evidence of CSAHC’s right to occupy such lands, buildings and facilities or the right to transfer, mortgage or lease such real property interests. The Company cannot predict the magnitude of the adverse effect on its operations if its use of any one or more of these parcels of land or buildings were successfully challenged. CSAHC has agreed to indemnify the Company and Guangzhou Aircraft Maintenance Engineering Company Limited (“GAMECO”), the Company’s jointly controlled entity, against any loss or damage caused by any challenge of, or interference with, the use by the Company and GAMECO of any of their respective land and buildings.
Risks associated with Hong Kong regionaland Macau routes The Company’s Hong Kong regional routes benefit from traffic originating in Taiwan.
The Company’s Hong Kong regional routes might be materially adversely affected ifApart from temporary lifts of the ban on direct flights between Taiwan and Mainland China
were permittedduring the Lunar Chinese New Year and the Mid-Autumn Festival, travelers between Taiwan and China have had to make use of intermediate stops in
the future.Hong Kong or elsewhere. In such event, Xiamen Airlines Company Limited (“Xiamen Airlines”), the Company’s subsidiary, might apply for route rights for direct flights between Taiwan and Mainland China, due partly to the proximity to Taiwan of Fujian province, where Xiamen Airlines is based. However, there can be no assurance that sufficient routes and flights between destinations in Taiwan and Mainland China could be obtained by Xiamen Airlines, if at all, or that adequate yields will be generated on these routes and flights.
Terrorist attacks or the fear of such attacks, even if not made directly on the airline industry, could negatively affect the Company and the airline industry. The travel industry continues to face on-going security concerns and cost burdens.
The aviation industry as a whole has been beset with high-profile terrorist attacks, most notably on September 11, 2001 in the United States. The issue could also affect China. Notably, on March 7, 2008, on a China Southern Airlines flight boarding in Urumqi, crew members discovered a suspected terrorist. Thereafter, the CAAC implemented increased security measures. Additional terrorist attacks, even if not made directly on the airline industry, or the fear of or the precautions taken in anticipation of such attacks (including elevated threat warnings or selective cancellation or redirection of flights) could materially and adversely affect the Company and the airline industry. Among possible effects that the Company could experience from terrorist attacks are substantial flight disruption costs caused by grounding of fleet, significant increase of security costs and associated passenger inconvenience, increased insurance costs, substantially higher ticket refunds and significantly decreased traffic and revenue per revenue passenger mile.
Risks associated with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 to evaluate internal controls over financial reporting
The United States Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company in the United States to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, the Company’s independent registered public accounting firm is required to report on the effectiveness of the Company’s internal control over financial reporting. Our independent registered public accounting firm may not be satisfied with our internal controls, the level at which our controls are documented, designed, operated and reviewed, or our independent registered public accounting firm may interpret the requirements, rules and regulations differently from us, then it may conclude that our internal control over financial reporting are not effective. Although our management concluded that our internal control over financial reporting as of December 31, 2007 was effective, we may discover other deficiencies in the course of our future evaluation of our internal control over our financial reporting and may be unable to remediate such deficiencies in a timely manner. If we fail to maintain the adequacy of our internal control over financial reporting, we may not be able to conclude that we have effective internal control over financial reporting on an ongoing basis, in accordance with the Sarbanes-Oxley Act. Moreover, effective internal control is necessary for us to produce reliable financial reports and is important to prevent fraud. As a result, our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading prices of our ADRs, H Shares or A Shares.
Passive Foreign Investment Company
Depending upon the value of our shares and ADRs and the nature of our assets and income over time, we could be classified as a passive foreign investment company, or PFIC, by the United States Internal Revenue Service, or IRS, for U.S. federal income tax purposes. The Company believes that it was not a PFIC for the taxable year 2007. However, there can be no assurance that the Company will not be a PFIC for the taxable year 2008 and/or later taxable years, as PFIC status is re-tested each year and depends on the facts in such year.
The Company will be classified as a PFIC in any taxable year if either: (1) the average percentage value of its gross assets during the taxable year that produce passive income or are held for the production of passive income is at least 50% of the value of its total gross assets or (2) 75% or more of its gross income for the taxable year is passive income (such as certain dividends, interest or royalties). For purposes of the first test: (1) any cash, cash equivalents, and cash invested in short-term, interest bearing, debt instruments, or bank deposits that is readily convertible into cash, will generally count as producing passive income or held for the production of passive income and (2) the average value of the Company’s gross assets is calculated based on its market capitalization.
If the Company were a PFIC, you would generally be subject to additional taxes and interest charges on certain “excess” distributions the Company makes and on any gain realized on the disposition or deemed disposition of your ADRs, regardless of whether the Company continues to be a PFIC in the year in which you receive an “excess” distribution or dispose of or are deemed to dispose of your ADRs. Distributions in respect of your ADRs during a taxable year would generally constitute “excess” distributions if, in the aggregate, they exceed 125% of the average amount of distributions in respect of your ADRs over the three preceding taxable years or, if shorter, the portion of your holding period before such taxable year. For more information on the United States federal income tax consequences to you that would result from our classification as a PFIC, please see Item 10, “Taxation — United States Federal Income Taxation — U.S. Holders — Passive Foreign Investment Company”.
Risks Relating to the Chinese Commercial Aviation Industry
The Company’s ability to implement its business strategy will continue to be affected by regulations and policies issued or implemented by the CAAC, which encompasses substantially all aspects of the Chinese commercial aviation industry, including the approval of domestic, Hong Kong regional and international route allocation, air fares, aircraft acquisition, jet fuel prices and standards for aircraft maintenance, airport operations and air traffic control. Such regulations and policies limit the flexibility of the Company to respond to market conditions, competition or changes in the Company’s cost structure. The implementation of specific CAAC policies could from time to time adversely affect the Company’s operations. The CAAC has confirmed in writing that the Company will be treated equally with other Chinese airlines with respect to certain matters regulated by the CAAC. Nevertheless, there can be no assurance that the CAAC will, in all circumstances, apply its regulations and policies in a manner that results in equal treatment of all airlines.
Jet fuel supply and costs The availability and cost of jet fuel have a significant impact on the Group’s results of operations. The Group’s jet fuel costs for 20042007 accounted for 26.2%62.98% of its operatingflight operations expenses. All of the domestic jet fuel requirements of Chinese airlines (other than at the Shenzhen, Zhuhai and Sanya airports) must be purchased from the exclusive providers, China Aviation Oil Supplies Company (“CAOSC”) and Bluesky Oil Supplies Company, companies controlled and supervised by the CAAC. Chinese airlines may also purchase their jet fuel requirements at the Shenzhen, Zhuhai and Sanya airports from joint ventures in which the CAOSC is a partner. Jet fuel obtained from the CAOSC’s regional branches is purchased at uniform prices throughout China that are determined and adjusted by the CAOSC from time to time with the approval of the CAAC and the pricing department of the State Planning Commission based on market conditions and other factors. As a result, the costs of transportation and storage of jet fuel in all regions of China are spread among all domestic airlines.
Prior to 1994, domestic jet fuel prices were generally below international jet fuel prices. Since then,From 1994 to 2006, however, CAOSC's domestic jet fuel price from CAOSC has always been higher thanprices were above international jet fuel prices, sometimes creating tension intensions over the fuel supply. In 2007, the domestic price of jet fuel from CAOSC was below international jet fuel prices. However, given the rapid increase and constant fluctuation in world oil prices, there is no way to assure that domestic prices for jet fuel do not fluctuate as well.
In addition, jet fuel shortages have occurred in China and, on
limitedsome rare occasions
beforeprior to 1993, required the Company to delay or
even cancel flights. Although such shortages have not materially affected the Company’s
results of operations since 1993, there can be no assurance that such
a shortage will not occur in the future. If such
a shortage occurs in the future and the Company is forced to delay or cancel flights due to fuel shortage, its operational reputation among passengers
and results ofas well as its operations may suffer.
8
A change in annual average price of US$1 per tonne of jet fuel affects the Group’s annual fuel costs by approximately RMB22 million, assuming no change in volume of fuel consumed. Accordingly, even if the jet fuel supply remains uninterrupted, increases in jet fuel prices will nevertheless adversely impact our financial results.
Infrastructure limitations The rapid increase in air traffic volume in China in recent years has put pressure on many components of the Chinese commercial aviation industry, including China’s air traffic control system, the availability of qualified flight personnel and airport facilities. Airlines, such as the Company, which have route networks that emphasize short- to medium-haul routes, are generally more affected by insufficient aviation infrastructure in terms of on-time performance and high operating costs due to fuel inefficiencies resulting from the relatively short segments flown, as well as the relatively high proportion of time on the ground during turnaround. All of these factors may adversely affect the perception of the service provided by an airline and, consequently, the airline’s operating results. In recent years, the CAAC has placed increasing emphasis on the safety of Chinese airline operations and has implemented measures aimed at improving the safety record of the industry. The ability of the Company to increase utilization rates and to provide safe and efficient air transportation in the future will depend in part on factors such as the improvement of national air traffic control and navigation systems and ground control operations at Chinese airports,
factors which
factors are beyond the control of the Company.
The CAAC’s extensive regulation of the Chinese commercial aviation industry has had the effect of managing competition among Chinese airlines. Nevertheless, competition has become increasingly intense in recent years due to a number of factors, including relaxation of certain regulations by the CAAC and an increase in the capacity, routes and flights of Chinese airlines. Competition in the Chinese commercial aviation industry has led to widespread price-cutting practices that do not in all respects comply with applicable regulations. Until the interpretation
if it occurs, of CAAC regulations limiting
or prohibiting such price-cutting has been finalized and strictly enforced, discounted tickets from competitors will continue to have an adverse effect on the Company’s sales.
The Company faces varying degrees of competition on its Hong Kong
and Macau regional routes from certain Chinese airlines and
Hong Kong Dragon Airlines LimitedCathay Pacific Airways, Dragonair and Air Macau, and on its international routes, primarily from non-Chinese airlines, most of which have significantly longer operating histories, substantially greater financial and technological resources and greater name recognition than the Company. In addition, the public’s perception of the safety and service records of Chinese airlines could adversely affect the Company’s ability to compete against its Hong Kong regional and international competitors. Many of the Company’s international competitors have larger sales networks and participate in reservation systems that are more comprehensive and convenient than those of the Company, or engage in promotional activities,
such as International Alliance programs, that may enhance their ability to attract international passengers.
Limitation on foreign ownership Chinese Government policies limit foreign ownership in Chinese airlines. Under these policies, the percentage ownership of the Company’s total outstanding ordinary shares held by investors in Hong Kong and any country outside China (“Foreign Investors”) may not in the aggregate exceed 49%. Currently, 26.8% of the total outstanding ordinary shares of the Company
isare held by Foreign Investors. For so long as the limitation on foreign ownership is in
forrce,force, the Company will have no meaningful access to the international equity capital markets.
Consolidation and Restructuring
In 2000, the CAAC announced a restructuring plan with respect to the PRC aviation industry. Pursuant to such restructuring plan, each domestic airline is directed to consolidate into one of the three major airline groups in China: CSAHC, China National Aviation Holding Company and China Eastern Air Holding Group. As approved by the Company’s shareholders in an extraordinary general meeting on December 31, 2004, the Company acquired the airline operations and certain related assets of CNA and XJA. These consolidation and restructuring pursuant to the CAAC restructuring plan may involve uncertainties and risks over a long period of time, including the following:
| • | | failure to achieve the anticipated synergies, cost savings or revenue enhancing opportunities resulting from the restructuring activities; |
|
| • | | diversion of management’s attention from existing business concerns and other business opportunities of the Group; |
|
| • | | difficulty in integrating the assets and business of other airlines, including its employees, corporate culture, managerial systems and processes, business information systems and services; |
|
| • | | difficulty in exercising control and supervision over various new operations within the Group; |
|
| • | | failure to retain key personnel; and |
|
| • | | increase in financial pressure due to assumption of recorded / unrecorded liabilities of the acquired businesses. |
The inability to manage additional businesses or integrate successfully the acquired businesses without substantial expense, delay or other operational or financial problems, or the occurrence of one or more of the events enumerated above, could materially adversely affect the Group’s financial condition and results of operations.
9
Risks relating to the PRC
Under current Chinese foreign exchange regulations, Renminbi is fully convertible for current account transactions, but is not a freely convertible for capital account transactions. All foreign exchange transactions involving Renminbi must take place either through the People’s Bank of China (“PBOC”) or other institutions authorized to buy and sell foreign exchange or at a swap centre.
The Group has significant exposure to foreign currency
risk as substantially all of the Group’s lease obligations and
the Company’s ability to obtain or retainbank and other loans are denominated in foreign currencies,
is subject to regulation in China. Limitations on the availability of foreign exchange could have a material adverse effect on the Company’s operations and financial condition, particularly in light of the Company’s substantial foreign currency obligations. The value of Renminbi is subject to changes in Chinese Government policies and depends to a large extent on China’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion of Renminbi toprincipally US dollars has been stable. There can be no assurance, however, that such rates will not be volatileand Japanese Yen. Depreciation or that there will be no further devaluationappreciation of the Renminbi against the foreign currencies in whichaffects the Company’s obligations are denominated, principallyGroup’s results significantly because the US dollar and the Japanese Yen. Based on the Company’sGroup’s foreign currency denominated obligations as of December 31, 2004, a 1% change in the exchange rate between the Renminbi and the US dollar, or between the Renminbi and Japanese Yen, would have resulted in an unrealized gain or loss of RMB260 million (US$31 million). As the Companypayments generally exceed its foreign currency receipts. The Group is not able to hedge its foreign currency exposure effectively against the devaluation of the Renminbi other than by retaining its foreign exchange-denominatedcurrency denominated earnings and receipts to the extent permitted by applicable law, any future devaluationthe State Administration of Foreign Exchange, or subject to certain restrictive conditions, entering into forward foreign exchange contracts with authorized banks.
The Group also has exposure to foreign currency risk in respect of net cash inflow denominated in Japanese Yen from ticket sales in overseas branch office after payment of expenses. The Group entered into certain foreign exchange forward option contracts to manage this foreign currency risk.
The exchange rate of Renminbi to US dollar was set by the
Renminbi could adversely affectPBOC and had fluctuated within a narrow band prior to 21 July 2005. Since then, a managed floating exchange rate regime based on market supply and demand with reference to a basket of foreign currencies has been used and US dollar exchange rate has gradually declined against the
Company’s results of operations and financial condition. The Company’s results of operations and financial condition may also be affected by changes in the value of currencies other than the Renminbi in which the Company’s earnings and obligations are denominated.Renminbi.
The Company is organized under the laws of China. The Chinese legal system is based on written statutes and is a system, unlike common law systems, in which decided legal cases have little precedential value.
InSince 1979,
China began to promulgatethe Chinese government has been developing a
more comprehensive system of
laws. On December 29, 1993,commercial laws and considerable progress has been made in the
Chinese National People’s Congress promulgated the Company Law, which became effective on July 1, 1994. In August 1994, pursuant to the Company Law, the PRC State Council issued the PRC Special Regulations on Overseas Offeringpromulgation of laws and
Listing of Shares by Companies Limited by Shares to regulate joint stock companies that offerregulations dealing with economic matters, such as corporate organization and
list their shares overseas.governance, foreign investments, commerce, taxation and trade. These laws, regulations and legal requirements are relatively recent, and, like other laws, regulations and legal requirements applicable in China (including with respect to the commercial aviation industry), their interpretation and enforcement involve significant uncertainties.
PRC new tax law
On 16 March 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of the PRC (“new tax law”) which has taken effect from January 1, 2008.
The Company and certain subsidiaries of the Group were entitled to preferential income tax rates in the range of 15% to 27%. According to the new tax law, the income tax rate of companies who enjoyed preferential income tax rates lower than 25% in 2007 is expected to increase to the standard rate of 25% within five-year transition period. Pursuant to the new tax law, the income tax rates of entities that previously enjoyed preferential tax rates of 15% and 18% shall be levied to 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012 respectively.
Taxation of holders of H Shares or ADSADR by China Chinese
The new tax law generally provides for the imposition of a withholding tax on dividends paid by a Chinese company to a non-Chinese shareholdernon-resident enterprise at a rate of 20%10%. In a notice and a letter issued by the State Taxation Bureau of the PRC, however, the
For individuals, Chinese tax
authorities confirmedlaw generally provides that
the imposition of this withholding tax onan individual who receives dividends
paid by joint stock companies, such asfrom the Company
had been suspended. Accordingly, for so long as this imposition is
suspended and not replaced or supplemented with similar requirements, any future dividends to be paid by the Company to holders of H Shares or ADS who are foreign individuals not resident in China or which are foreign enterprises with no permanent establishment in China will not be subject to a
20% income tax. Currently, dividend income received by any foreign individual that holds overseas shares in any Chinese
withholdingdomestic enterprise is temporarily exempt from income tax. In the event that the
suspension of the withholding taxexemption is
lifted,discontinued, such payments will be subject to
withholdingindividual income tax at the 20% rate unless the holder is entitled to a tax waiver or a lower tax rate under an applicable double-taxation treaty.
See Item 10 “Additional Information — Taxation”.10
ITEM 4. INFORMATION ON THE COMPANY.
History and Development of the Company
The Company is a joint stock company incorporated in China on March 25, 1995, and is 50.3% owned by CSAHC. The registered address of the Company is Guangzhou Economic & Technology Development Zone, People’s Republic of China (telephone no: (86)
20-8612-4738,20-8612-4462, website:
www.cs-air.com)www.csair.com).
During 2002, the Company entered into an Interest Transfer and Capital Injection Agreement with China State Post Bureau, Shanghai Municipal Post Office, Post Office of the Inner Mongolian Autonomous Region and China Philately Corporation, pursuant to which the Company contributed RMB150 million (or US$18.12 million) in cash to acquire a 49% equity interest in China Postal Airlines, Ltd. The China State Post Bureau holds the remaining 51%. In addition, the Company paid RMB136.5 million (equivalent to approximately US$16.5 million) to acquire 39% interest in Sichuan Airlines Corporation Limited to further expand its market shares in South-western China. The Group also jointly established a new 51%: 49% joint venture, namely Zhuhai Xiang Yi Aviation Technology Company Limited, the first sino-foreign joint venture company engaging in aviation training services in the PRC, with CAE. The registered capital of the joint venture company is US$29.8 million.
On March 13, 2003, the Company obtained an approval certificate from the Ministry of Commerce to change to a permanent limited company with foreign investments and on October 17, 2003 obtained a business license for its new status, as a permanent limited company with foreign investments issued by the State Administration of Industry and Commerce of the People’s Republic of China.
Pursuant to an extraordinary general meeting of shareholders held on May 21, 2002, a resolution was passed authorizing the Company to issue not more than 1,000,000,000 A Shares of par value of RMB1.00 each. The Company issued and listed its 1,000,000,000 A Shares with a par value of RMB1.00 each on the Shanghai Stock Exchange in July 2003.
On October 17, 2003, the Company’s registered address was moved to Guangzhou Economic & Technology Development Zone. In accordance with the Rules and Regulations for Implementation of Income Tax for Foreign Investment Enterprises and Foreign Enterprises of the PRC and a taxation approval document “Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que 020043”, the Company is entitled to enjoy the preferential tax policy implemented in the Guangzhou Economic & Technology Development Zone effective October 1, 2003. As a result, the Company’s income tax rate has been changed from 33% to 15% beginning from that date.
11
Instabilities in the world economy and in global politics continued to drive up the prices of aviation fuel in the international market. As a result, fuel costs rose substantially, accounting for more than 30% of the operating costs of the Group. The Group, without compromising flight safety, adopted various technical measures, including the preparation of precise flight plans and minimisation of turnaround time, so as to reduce fuel consumption. However, as an airline in China, the options available to the Group were limited in this respect. As such, the high aviation fuel price exerted immense pressure on the operating expenses of the Group.
The Group has revamped its marketing management by designating an accountability system to each of its sales managers. These measures have encouraged the operating and marketing team of the Group to be more proactive and vigilant of the difficulties faced by the Group, thereby maximising the total revenue of the Group to the greatest possible extent. In addition, the commencement of operation of the new Guangzhou Baiyun International Airport, the main hub of the Group, provides a wider platform of development for the operations of the Company. Moreover, the Group has successfully secured the exclusive right to use Terminal No. 1 of the Beijing Capital International Airport, making a substantial step in carrying out the strategy of the Group to improve its flight routes network.
Flight safety is a perennial concern to airlines. In this regard, the Group is committed to flight safety by strengthening internal safety checks, pilot training and aircraft maintenance. As a result, the Group was awarded the Golden Roc Cup, the highest award for flight safety in the Chinese civil aviation industry, for the fourth time in 2004.
The acquisition of the airline operations of CNA and XJA was approved at the general meeting of the Company held on December 31, 2004. Such acquisition provides a robust platform for the Group to consolidate its market leadership and financial results. It also brought in various benefits to the Group by expanding its flight service network, fleet size and transport capacity, as well as lowering costs and improving overall efficiency. Given the investment incentive policies such as “Go West” and “Revitalising the Old Industrial Bases in the North-eastern Region” promulgated by the Chinese government, the economy in the western and north-eastern regions of China is expected to grow at a rapid pace in the coming decades, which in turn provides substantial growth potential for the Group. Ultimately, the acquisition will strengthen the Group’s position as the largest airline in China and will create positive value to its investors. At present, the management of the Group focuses on harnessing the expanded business capacity and operation scale of the Group, and on enhancing its overall management standards through an integration of corporate culture, innovation and development, thereby realising the ultimate goal of the Group’s reorganisation.
Pursuant to “Pricing Reform of Domestic Civil Aviation” as approved by the State Council of China effective on April 20, 2004, prices on domestic routes now fluctuate freely within a predetermined range. Instead of direct supervision by setting prices of air tickets through local price bureau, the government now provides guidance on domestic flights and domestic civil aviation is controlled by the government indirectly. Market-oriented pricing policy was introduced and pricing system has been adjusted as a result of the above pricing reform.
The Group had RMB6,351 million, RMB4,707 million and RMB6,631 million capital expenditures in 2002, 2003 and 2004 respectively. Of such capital expenditures in 2004, RMB5,017 million were financed by bank borrowings while the remaining RMB1,614 million were financed by internal resources. The capital expenditures were primarily incurred on the additional investments in aircraft and flight equipment under the Group’s fleet expansion plans and Guangzhou new airport, and, to a small extent, additional investments in other facilities and building for operations.
CNA/XJA Acquisitions
Pursuant to a sale and purchase agreement dated November 12, 2004 between the Company, China Southern Airlines Holding Company, CNA and XJA which was approved by the Company’s shareholders in an extraordinary general meeting held on December 31, 2004, the Company acquired the airline operations and certain related assets of CNAChina Northern Airlines Company (“CNA”) and XJAXinjiang Airlines Company (“XJA”) with effect from December 31, 2004 (the “CNA/XJA Acquisitions”). The consideration payable for the CNA/XJA Acquisitions amounting to RMB15,522 million was determined based on the fair value of the acquired assets. Such consideration was partly satisfied by assumption of debts and liabilities of CNA and XJA totaling RMB13,563 million outstanding as of December 31, 2004 and the remaining balance of RMB1,959 million is required to be satisfiedwas fully paid in cash during 2005.
On April 30, 2006, the Company acquired certain assets of CSAHC Hainan Co., Limited (“CSAHC Hainan”), a wholly-owned subsidiary of CSAHC, at a total consideration of RMB294 million, which was partly satisfied by
December 31, 2005.assumption of debts and liabilities of CSAHC Hainan totaling RMB289 million outstanding as of that date. The CNA/XJAremaining balance of RMB5 million was settled in cash during 2006.
On June 16, 2007, the Company together with an independent third party established Chongqing Airlines Company Limited (“Chongqing Airlines”), a non-wholly owned subsidiary of the Company. The Company transferred three aircraft to Chongqing Airlines as capital contribution.
On August 14, 2007, the Company signed an agreement to acquire a 51% equity interest of Nan Lung International Freight Company Limited beneficially owned by and registered in the name of Nan Lung Travel & Express (Hong Kong) Limited which is a wholly owned subsidiary of CSAHC and a 100% equity interest in Southern Airlines (Group) Catering Co., Limited, a wholly owned subsidiary of CSAHC for a total consideration of RMB112 million.
On August 14, 2007, the Company signed an agreement to dispose of its 90% equity interest in Guangzhou Aviation Hotel Company Limited to CSAHC at a consideration of RMB75 million.
Aircraft Acquisitions have significantly expanded
Pursuant to the fleet sizeAircraft Acquisition Agreement dated July 16, 2007 between the Company and Airbus SNC, the Company will acquire20 Airbus A320 series aircraft from Airbus SNC. The catalogue price for each of the Airbus A320 series aircraft is in the range from US$66.5 to US$85.9 million. Such catalogue price includes the price for airframe and engines. The aggregate consideration for the acquisition of the A320 aircraft will be partly payable by cash of the Company, and partly by financing arrangements with banking institutions. The A320 aircraft will be delivered in stages to the Company during the period commencing from March 2009 to August 2010.
Pursuant to the Xiamen Aircraft Acquisition Agreement dated July 16, 2007 between Xiamen Airlines and Boeing, Xiamen Airlines will acquire25 Boeing B737 aircraft from Boeing. The catalogue price for each of the Boeing B737 aircraft is in the range from US$70.5 to US$79 million. Such catalogue price includes the price for airframe and engines. The aggregate consideration for the acquisition of the B737 aircraft will be partly payable by cash of Xiamen Airlines, and partly by financing arrangements with banking institutions. The B737 aircraft will be delivered in stages to Xiamen Airlines during the period commencing from July 2011 to November 2013.
Pursuant to the Aircraft Acquisition Agreement dated August 20, 2007 between the Company and Boeing, the Company will acquire 55 Boeing B737 series aircraft from Boeing, the catalogue price of a Boeing B737 series aircraft is in the range of US$57 to US$79 million. Such catalogue price includes price for airframe and engines. The aggregate consideration for the acquisition of the Boeing aircraft will be partly payable by cash of the Company, and partly by financing arrangements with banking institutions. The Boeing aircraft will be delivered in stages to the Company during the period commencing from May 2011 to October 2013.
Pursuant to the Aircraft Acquisition Agreement dated October 23, 2007 between the Company and Airbus SNC, the Company will acquire 10 Airbus A330-200 aircraft from Airbus SNC, the catalogue price of an Airbus A330-200 aircraft is in the range of US$167.7-176.7 million. Such catalogue price includes price for airframe and engines. The aggregate consideration for the acquisition will be partly payable by cash of the Company, and partly by financing arrangements with banking institutions. The Airbus aircraft will be delivered in stages to the Company during the period commencing from March 2010 to August 2012.
Pursuant to the Xiamen Aircraft Acquisition Agreement dated April 18, 2008 between Xiamen Airlines and Boeing, Xiamen Airlines will acquire 20 Boeing B737 series aircraft from Boeing. According the information provided by Boeing, the aggregate catalogue price for the 20 Boeing B737 series aircraft is around US$1,500 million. Such catalogue price includes price for airframe and engines. The aggregate consideration for the acquisition of the Boeing aircraft will be partly payable by cash of Xiamen Airlines, and partly by financing arrangements with banking institutions. The Boeing aircraft will be delivered in stages to Xiamen Airlines during the period commencing from April 2014 to October 2015.
Capital Expenditure
The Group had RMB9,832 million, RMB9,446 million and RMB13,713 million capital expenditures in 2007, 2006 and 2005, respectively. Of such capital expenditures in 2007, RMB4,330 million was financed by finance leases, RMB4,973 million was financed by bank borrowings while the remaining RMB529 million was financed by internal resources. The capital expenditures were primarily incurred on the additional investments in aircraft and flight service network as well asequipment under the market share of the Group. Presently, the Group is implementing various measuresGroup’s fleet expansion plans and, to harnessing the expanded flight capacitya small extent, additional investments in other facilities and operations and integrating the business cultures and goals of the acquired operations with those of the Group.buildings for operations.
The Group provides commercial airline services throughout China, Hong Kong and Macau regions, Southeast Asia and other parts of the world.
TheBased on the statistics from the CAAC, the Group is one of the three largest Chinese airlines and, as of year end
2004,2007, ranked first in terms of passengers carried, number of scheduled flights per week, number of hours flown and size of route network and aircraft fleet. During the three years ended December 31,
2004,2007, the Group’s RPKs increased at a compound annual rate of
13.4%17.5%, from
28,94061,923 million in
20022005 to
37,19669,582 million in
2004,2006, and to 81,727 million in 2007, while its capacity, measured in terms of ASKs, increased at a compound annual rate of
10.2%13.1%, from
44,24588,361 million in
20022005 to
53,76997,059 million in
2004.2006, and to 109,733 million in 2007. In
2004,2007, the Group carried
28.2156.9 million passengers and had passenger revenue of
RMB21,100RMB49,600 million (US$
2,5506,790 million).
Net loss for 2004 was RMB48 million (US$6 million).The Group conducts a portion of its airline operations through its airline subsidiaries namely Xiamen Airlines, Southern Airlines
Group(Group) Shantou Airlines Company Limited (“Shantou
Airlines”), Guangxi Airlines Company Limited (“Guangxi Airlines”), Zhuhai Airlines Company Limited (“Zhuhai Airlines”)
and, Guizhou Airlines Company Limited (“Guizhou Airlines”)
and Chongqing Airlines (collectively, the “Airline Subsidiaries”). In
2004,2007, the Airline Subsidiaries carried
10.513.70 million passengers and had
operatingpassenger revenue of
RMB7,436RMB14,083 million (US$
8981,928 million) and accounted for
37.3%24.1% and
31.9%28.4% of the Group’s passengers carried and
operatingpassenger revenue, respectively.
The Group also provides air cargo and mail services. The cargo and mail revenue of the Group increased by
14.8%5% to
RMB2,244RMB3,697 million (US$
271506 million) in
20042007 as compared with
2003.2006. The Group’s airline operations are fully integrated with its airline-related businesses, including aircraft and engine maintenance, flight simulation and air catering operations.
As of the year end of
2004,2007, the Group operated
542689 routes, of which
434560 were domestic,
85105 were international and
2324 were
to/from Hong Kong
regional.and Macau. The Group operates the most extensive domestic route network among all Chinese airlines.
In 2004, the Group operated an average of 5,280 landings and take-offs per week, serving 143 destinations. Its route network covers commercial
centres orcenters and rapidly developing economic regions in Mainland China.
The Group’s corporate headquarters and principal base of operations are located in Guangzhou,
which is the capital of Guangdong Province and the largest city in southern China. Located in the rapidly developing Pearl River Delta region, Guangzhou is also the transportation hub of southern China and one of China’s major gateway cities. Guangzhou’s significance has increased as the transportation infrastructure of Guangdong Province has developed through the construction and development of expressways, an extensive rail network and the port cities of
Yantian, Shekou, Chiwan, Mawan, HuangpuGuangzhou, Shenzhen, Zhanjiang, Zhuhai and
Zhuhai.Shantou.
In
December 2005, the Company established a branch company in Beijing and has added wide-body airplanes to its operation base in Beijing, with the view to expanding its Beijing aviation business and building another main hub there in addition to its
mainGuangzhou base. The establishment of Guangzhou and Beijing hubs will facilitate strategic refinement and enhancement of its route
basenetwork operations putting the Company in
Guangzhou,a better position to explore and seize the
Group also maintains eighteenopportunities in the regional
route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Shenyang, Changchun, Dalian, Harbin, Urumqi, Haikou, Zhuhai, Xiamen, Fuzhou, Guilin, Beihai, Shantou, Sanya and Guiyang. All of these regional route bases are located in provincial capitals or major commercial centers in China.aviation market expected to be brought about by the 2008 Beijing Olympic Games.
The Group’s operations primarily focus on the domestic market. In addition, the Group also operates Hong Kong regionaland Macau and international flights. As of the year end of 2004,2007, the Group had 2324 Hong Kong regionaland Macau routes and 85105 international routes. The Group’s Hong Kong regionaland Macau operations include flights between destinations in China and Hong Kong and Macau. The Group’s international operations include scheduled services to Tokyo, Osaka, Amsterdam, Sharjah, Los Angeles, Fukuoka, Seoul, Sydney, Dubai, Paristhe cities in Australia, Belgium, France, India, Iran, Japan, Kazakhstan, Korea, Kyrgyzstan, Nepal, Netherlands, Nigeria, Pakistan, Russia, Saudi Arabia, Tajikstan, UAE, USA and 1113 Southeast Asian destinations. The
After joining Skyteam Alliance, the Group
operateshas established a network reaching 841 destinations globally, connecting 162 countries of regions and covering major cities around the
most extensive Southeast Asian route network among Chinese airlines.12
world.
As of December 31,
2004,2007, the Group operated a fleet of
231332 aircraft, consisting primarily of Boeing
737-300, 737-500, 737-700, 737-800, 747-400, 757-200, 777-200,737 series, 747, 757, 777, Airbus
320-200 and 319-100,320 series, 300, 330, McDonnell Douglas 82,
and 90, Cessna 208B, ATR-72 and Embraer 145 aircraft.90. The average age of the Group’s fleet was
7.476.37 years as of the year end of
2004.13
2007.
Restructuring and Initial Public Offering
As part of China’s economic reforms in the 1980’s, the PRC State Council directed the CAAC to separate its governmental, administrative and regulatory role from the commercial airline operations that were being conducted by the CAAC and its regional administrators. As a result, CSAHC was established on January 26, 1991 for the purpose of assuming the airline and airline-related commercial operations of the Guangzhou Civil Aviation Administration, one of the six regional bureaus of the CAAC. CSAHC was one of the 55 large-scale enterprises designated by the Chinese Government to play a leading role in their respective industries.
CSAHC was restructured in 1994 and 1995 in anticipation of the initial public offering of the Company. The restructuring was effected through the establishment of the Company and the execution of the Demerger Agreement, dated as of March 25, 1995, as amended (the “Demerger Agreement”), between CSAHC and the Company. Upon the restructuring, the Company assumed substantially all of the airline and airline-related businesses, assets and liabilities of CSAHC, and CSAHC retained its
non-airline and non-airline-related businesses,
assets and liabilities, and the non-business assets and liabilities. Upon this separation, all interests, rights, duties and obligations of CSAHC, whenever created or accrued, were divided between the Company and CSAHC based on the businesses, assets and liabilities assumed by each of them under the Demerger Agreement. Under the Demerger Agreement, CSAHC agreed not to conduct or participate or hold any interest in, either directly or indirectly, any business, activity or entity in or outside China that competes or is likely to compete with the commercial interests of the Group, although CSAHC may continue to hold and control the
affiliatesassociates of CSAHC existing on the date of the Demerger Agreement and may continue to operate the businesses of such
affiliates.associates.
In July 1997, the Company completed a private placement of 32,200,000 H Shares to certain limited partnership investment funds affiliated with Goldman Sachs & Co. and an initial public offering of 1,141,978,000 H Shares, par value
RMB 1.00RMB1.00 per share, and listing of the H Shares on
theThe Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) and American Depositary
SharesReceipts (“
ADSs”ADRs”, each
ADSADR representing 50 H Shares) on the New York Stock Exchange. Prior to the private placement and the initial public offering, all of the issued and outstanding shares of capital stock of the Company, consisting of 2,200,000,000 Domestic Shares, par value
RMB 1.00RMB1.00 per share, were owned by CSAHC, which owns and exercises, on behalf of the Chinese Government and under the supervision of the CAAC, the rights of ownership of the Domestic Shares held by CSAHC. After giving effect to the private placement and the initial public offering, CSAHC’s continued ownership of the 2,200,000,000 Domestic Shares, represented approximately 65.2% of the total share capital of the Company, and will be entitled to elect all the directors of the Company and to control the management and policies of the Group. Domestic Shares and H Shares are both ordinary shares of the Company.
Pursuant to an extraordinary general meeting of shareholders held on May 21, 2002, a resolution was passed authorizing the Company to issue not more than 1,000,000,000 A Shares of par value of RMB1.00 each. The Company issued 1,000,000,000 A Shares with a par value of RMB1.00 each in July 2003 and listed these shares on the Shanghai Stock Exchange. Subsequent to the A Share issue, the shareholding of CSAHC on the Company was reduced from 65.2% to 50.3%.
14
Share Reform Plan
Pursuant to the regulations including the "Guidelines of the State Council for Promoting the Reform and Opening-up and Sustained Development of the Capital Market" promulgated by the State Council of the PRC and the "Guiding Opinions on the State Share Reform of the Listed Companies" jointly promulgated by the China Securities Regulatory Commission (“CSRC”), the State-owned Assets Supervision and Administration Commission of the State Council, the Ministry of Finance, People's Bank of China and the Ministry of Commerce, and pursuant to the operating procedures of share reform proposals, the Company announced the Share Reform Plan (“Plan”) on April 13, 2007 which was subsequently amended on April 23, 2007. Under the Plan, all the 2,200,000,000 non-tradable domestic shares held by CSAHC will be converted into tradable A shares 36 months after the commencement date of the Plan. In return, CSAHC will grant 1,400,000,000 put options to those holders of tradable A shares who are listed in the Shareholders’ register on the record date which is May 8, 2007, which will be equivalent to 1.5970 shares for every 10 A shares held by the holders of tradable A shares. The rights under the put options as referred above will be automatically exercised in a European way on the expiring date in that the exercise ratio will be 2 to 1 (i.e., the value of the exercise ratio is 0.5), the effective period will be 12 months period, the initial exercise price will be RMB7.43, and the put options will be paid in cash. The share reform plan was approved in the relevant shareholder’s meeting held on May 17, 2007. Details and schedule for the implementation of the share reform plan was approved in relevant shareholder's meeting held on June 12, 2007.
Proposed Bonus Shares Issue by Conversion of Capital Reserve
The share premium of the Company amounted to RMB5,325 million. On April 18, 2008, the Board proposed to the shareholders of the Company for their consideration and approval a bonus share issue (the “Bonus Share Issue”) by the conversion of share premium to share capital. Pursuant to the Bonus Share Issue, which is based on 4,374,178,000 shares in issue as at December 31, 2007, the number of paid up shares will be increased by 2,187,089,000 shares to 6,561,267,000 shares. The Bonus Share Issue is conditional upon (i) the passing of the special resolution to approve the Bonus Share Issue at the Annual General Meeting, the class meeting of holders of H shares and A shares of the Company; (ii) approval from the Ministry of Commerce of the PRC being obtained; and (iii) in respect of the new H Shares, the Listing Committee of the Stock Exchange granting or agreeing to grant the listing of, and permission to deal in, the new H Shares.
Proposed Issuance of Short-term Financing Bills and Medium Term Notes
On April 18, 2008, the Company's Board approved the proposed issue of short-term financing bills in the principal amount of up to RMB4 billion in the PRC and the submission of this proposal to the annual general meeting for the shareholders’ approval in accordance with the relevant procedural requirements under applicable PRC laws and regulations and the Articles of Association, and pursuant to Article 76(10) of the Articles of Association. The Board believes that the proposed issue of short-term financing bills will provide the Company with a further source of funding at an interest rate which is expected to be lower than the interest rate for loans from commercial banks. The Board considers that the issue of the short-term financing bills will lower the financing cost of borrowings for the Company and is in the interests of the Company and its shareholders as a whole. Subject to the shareholders’ approval, the Company will, if required or as otherwise considered appropriate, make further announcement when the issue of short-term financing bills takes place.
On May 28, 2008, the Board proposed the issue of medium term notes by the Company in the principal amount of up to RMB1.5 billion and the submission of such proposal to the Shareholders for their consideration and approval. The Board believes that the proposed issue of medium term notes will provide the Company with a further source of medium to long term funding at an interest rate lower than the best lending rate for loans from commercial bank. The Board considers that the issue of the medium term notes will lower the finance costs of borrowings for the Company and improve the debt structure of the Company.
The following table sets forth certain statistical information with respect to the Group’s passenger, and cargo and mail traffic for the years indicated.
| | | | | | | | | | | | | | | | | | | | | | | | |
Passenger carried | | | Cargo and Mail Carried (tons) | | | Total traffic (tons kilometers) | |
| | | | | | Increase | | | | | | | Increase | | | | | | | Increase | |
| | | | | | (decrease) | | | | | | | (decrease) | | | | | | | (decrease) | |
| | | | | | over | | | | | | | over | | | | | | | over | |
Year | | Total | | | previous year | | | Total | | | previous year | | | Total | | | previous year | |
| | (in million) | | | (%) | | | (in thousand) | | | (%) | | | (in million) | | | (%) | |
2000 | | | 16.85 | | | | 11.5 | | | | 353.0 | | | | (9.7 | ) | | | 2,613.0 | | | | 30.5 | |
2001 | | | 19.12 | | | | 13.5 | | | | 398.0 | | | | 12.7 | | | | 3,034.0 | | | | 16.1 | |
2002 | | | 21.49 | | | | 12.4 | | | | 470.0 | | | | 18.1 | | | | 3,614.0 | | | | 19.1 | |
2003 | | | 20.47 | | | | (4.7 | ) | | | 464.0 | | | | (1.3 | ) | | | 3,561.0 | | | | (1.5 | ) |
2004 | | | 28.21 | | | | 37.8 | | | | 545.0 | | | | 17.5 | | | | 4,663.0 | | | | 30.9 | |
| | Passenger carried | | Cargo and Mail Carried (tons) | | Total traffic (tons kilometers) | |
Year | | Total (in million) | | Increase (decrease) over previous year (%) | | Total (in thousand) | | Increase (decrease) over previous year (%) | | Total (in million) | | Increase (decrease) over previous year (%) | |
2003 | | | 20.47 | | | (4.7 | ) | | 464.0 | | | (1.3 | ) | | 3,561.0 | | | (1.5 | ) |
2004 | | | 28.21 | | | 37.8 | | | 545.0 | | | 17.5 | | | 4,663.0 | | | 30.9 | |
2005 | | | 44.12 | | | 56.4 | | | 775.0 | | | 42.2 | | | 7,284.0 | | | 56.2 | |
2006 | | | 49.21 | | | 11.6 | | | 819.0 | | | 5.7 | | | 8,071.0 | | | 10.8 | |
2007 | | | 56.90 | | | 15.6 | | | 872.0 | | | 6.5 | | | 9,250.0 | | | 14.6 | |
China Southern Airlines carried 49.21 million passengers in 2006. It was the ninth largest airline in the world in terms of annual passenger traffic in 2006. This ranking was officially announced by the International Air Transport Association.
China Southern Airlines Co., Ltd. ranks fourth in the global aviation industry and first in Asia, transporting 56.90 million passengers throughout the year 2007, according to the latest ranking released by the International Air Transport Association.
The Group operates the most extensive route network among the Chinese airlines. As of December 31,
2004,2007, the Group operated
542689 routes consisting of
434560 domestic routes,
2324 Hong Kong
regionaland Macau routes and
85105 international routes.
In 2004, the Group conducted an average of 5,280 landings and take-offs per week, serving 143 destinations.The Group continually evaluates its network of domestic, Hong Kong
regionaland Macau and international routes in light of its operating profitability and efficiency. The Group seeks to coordinate flight schedules with the Airline Subsidiaries on shared routes to maximize load factors and utilization rates. The acquisition of domestic, Hong Kong
regionaland Macau and international routes is subject to approval of the CAAC, and the acquisition of Hong Kong
regionaland Macau and international routes is also subject to the existence and the terms of agreements between the Chinese Government and the government of the Hong Kong SAR, the government of
the Macau
Special Administrative Region of the People’s Republic of China (“Macau SAR”)SAR and the government of the proposed foreign destination.
In order to expand the Group’s international route network, the Group has entered into code-sharing agreements with several international airlines, including Delta Airlines, Asiana Airlines, Japan Air System, Vietnam Airlines,
KLM Royal Dutch Airlines and Garuda Indonesian. Under the code sharing agreements, the participating airlines are permitted to sell tickets on certain international routes operated by the Group to passengers using the Group’s codes. Similarly, the Group is permitted to sell tickets for the other participating airlines using its “CZ” code. The code sharing agreements help increase the number of the Group’s international sales outlets.
After joining Skyteam Alliance, the Group has further established a network reaching 841 destinations globally, connecting 162 countries of regions and covering major cities around the world.
In addition to its main route
basebases in Guangzhou
and Beijing, the Group maintains
eighteencertain regional route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Shenyang, Changchun, Dalian, Harbin, Urumqi, Haikou, Zhuhai, Xiamen,
Shanghai, Xi’an, Fuzhou,
Nanning, Guilin, Shantou, Guiyang,
Chongqing, Sanya and Beihai. Most of its regional route bases are located in provincial capitals or major commercial
centrescenters in the PRC.
The Group believes that its extensive network of route bases
enablesenable it to coordinate flights and deploy its aircraft more effectively and to provide more convenient connecting flight schedules and access service and maintenance facilities for its aircraft. The Group believes that the number and location of these route bases may enhance the Group’s ability to obtain the CAAC’s approval of requests by the Group to open new routes and provide additional flights between these bases and other destinations in China. Current regulations of the CAAC generally limit airlines to operations principally conducted from their respective route bases.
The Chinese Government approved a new Guangzhou airport project, which commenced construction in 2000 and completed in August 2004. The commencement of operation of the new Guangzhou Baiyun International Airport which is the main hub of the Group, provides a wider platform of development for the operations of the Company.
Moreover, the Group has successfully secured the exclusive right to use Terminal No. 1 of the Beijing Capital International Airport, marking a substantial step in carrying out the strategy of the Group to improve its flight routes network.15
The Group’s domestic routes network serves substantially all provinces and autonomous regions in China, including Guangdong, Fujian, Hubei, Hunan, Hainan, Guangxi, Guizhou, Henan, Heilongjiang, Jilin, Liaoning and Xinjiang, and serves all four centrally-administered municipalities in China, namely, Beijing, Shanghai, Tianjin, and Chongqing. In
2004,2007, the Group’s most profitable domestic routes were
the routes betweenbetween: Guangzhou and Beijing,
Shenzhen and Shanghai, Guangzhou and Shanghai, Beijing and Guangzhou, Shenzhen and Beijing,
Shanghai and Guangzhou, Shanghai and Shenzhen, Beijing and Shenzhen, Guangzhou and
Chengdu,Shanghai, Urumqi and
amongBeijing, Shenzhen and Shanghai, Shanghai and Guangzhou,
DalianBeijing and
Harbin.Urumqi, and Sanya and Beijing.
Hong Kong and Macau
Regional Routes
The Group offers scheduled service between Hong Kong and Guangzhou,
Kunming,Luoyang, Shenyang, Harbin, Wu Yi Shan, Zhang Jia Jie, Changchun, Yinchuan, Urumqi, Xiamen, Shantou, Beijing, Guilin, Meixian, Haikou, Wuhan, Zhengzhou, Nanning, Changsha
Quanzhou and Sanya; and between Macau and Fuzhou, Hangzhou and Xiamen.
The Group’s Hong Kong regional routes also include routes between Hong Kong or Macau and other destinations in China, including Zhang Jia Jie and Wu Yi Shan, which the Group operates on a “charter” flight basis, as explained below. The Group believes that the routes on which it operates these “charter” flights are among its highest yielding routes, primarily because the Group faces limited competition on such routes and is consequently less subject to downward pricing pressures. In
2004,2007, the most profitable
Hong Kong regional routes (other than these “charter” flights) were those betweenscheduled Hong Kong and
each of Guangzhou, Beijing, Wuhan, Kunming, Haikou, and Zhengzhou. The Group’s “charter” flights are regularly scheduled flights, but permission to operate these flights is subject to monthly review by the CAAC and the Civil Aviation Department of theMacau routes were between: Hong Kong SAR. The CAAC has informally indicated that it primarily considers market demand and airline capability in granting permission for such flights. The Group has been able to maintain all of theGuangzhou, Guangzhou and Hong Kong, regional routes which it operates on a “charter” flight basisHong Kong and believes that demand on such routes will continue. Beijing, Beijing and Hong Kong, Hong Kong and Wuhan, Wuhan and Hong Kong, Guilin and Hong Kong, Hong Kong and Shantou, Shantou and Hong Kong, Hong Kong and Zhengzhou.
In
2004,2007, the Group conducted a total of
15,38015,035 flights on its Hong Kong
regionaland Macau routes, accounting for approximately
29.7%24.7% of all passengers carried by Chinese airlines on routes between Hong Kong or Macau and destinations in China.
The Group is the principal Chinese airline connecting the rapidly developing Pearl River Delta region of China to Southeast Asia, with
2728 routes serving
1113 Southeast Asian destinations, including Singapore and major cities in Indonesia, Thailand, Malaysia, the Philippines, Vietnam,
Myanmar and
Laos.Cambodia. In
2004,2007, the Group’s most profitable international routes
were those between Guangzhouwere: Guangzhou-Beijing-Amsterdam, Amsterdam-Beijing-Guangzhou, Guangzhou-Los Angeles, Shenyang-Seoul, Bejijing-Guangzhou-Pyongyang, Seoul-Shenyang, Beijing-Guangzhou-Hanoi, Guangzhou-Sydney, Guangzhou-Tokyo, and
Ho Chi Minh City, Guangzhou and Bangkok. The Group believes that, among Chinese airlines, it is well-positioned to benefit from the business opportunities arising out of increased air traffic and the growing economic relationships between China and Southeast Asian countries.Guangzhou-Osaka.
In addition to the
2728 routes serving
1113 Southeast Asian destinations, the Group operates
1777 other international routes providing scheduled services to
Amsterdam, Sharjah, Osaka, Tokyo, Fukuoka, Seoul, Los Angeles, Sydney, Melbourne, Dubaithe cities in Australia, Belgium, France, India, Iran, Japan, Kazakhstan, Korea, Kyrgyzstan, Nepal, Netherlands, Nigeria, Pakistan, Russia, Saudi Arabia, Tajikistan, UAE and
Paris.USA.
After joining Skyteam Alliance, the Group has established a network reaching 841 destinations globally, connecting 162 countries of regions and covering major cities around the world.
The Group’s fleet plan in recent years has emphasized expansion and modernization through the acquisition of new aircraft, the acquisition of existing aircraft in conjunction with our acquisition of CNA and XJA, and the retirement of less efficient, older aircraft. As of December 31,
2004,2007, the Group operated a fleet of
231332 aircraft with an average age of
7.476.37 years. Most aircraft of the Group are Boeing and Airbus aircraft. The Group has the largest fleet among Chinese airline companies. Most of the aircraft operated by the Group are leased pursuant to various types of leasing arrangements.
16
The following table sets forth certain information regarding the Group’s fleet of 231332 aircraft as of December 31, 2004.2007.
| | | | | | | | | | | | |
| | | | | | | | | | Average | |
| | Number of | | | Average age | | | Passenger | |
Model | | Aircraft | | | (years) | | | Capacity | |
Boeing 777-200 | | | 5 | | | | 8.53 | | | | 380 | |
Boeing 777-21B | | | 5 | | | | 6.20 | | | | 292 | |
Boeing 757-200 | | | 38 | | | | 11.56 | | | | 200 | |
Boeing 747F | | | 2 | | | | 2.42 | | | | n/a | |
Boeing 737-800 | | | 12 | | | | 1.86 | | | | 167 | |
Boeing 737-700 | | | 17 | | | | 2.42 | | | | 138 | |
Boeing 737-500 | | | 18 | | | | 12.09 | | | | 132 | |
Boeing 737-300 | | | 38 | | | | 10.96 | | | | 145 | |
Boeing 737-300QC | | | 2 | | | | 15.97 | | | | 128 | |
Airbus 300-600 | | | 6 | | | | 9.86 | | | | 274 | |
Airbus 319-100 | | | 8 | | | | 1.43 | | | | 128 | |
Airbus 320-200 | | | 24 | | | | 5.09 | | | | 158 | |
Airbus 321-100 | | | 8 | | | | 2.72 | | | | 185 | |
McDonnell Douglas 82 | | | 22 | | | | 13.54 | | | | 147 | |
McDonnell Douglas 90 | | | 13 | | | | 6.88 | | | | 157 | |
Embraer 145 Jet | | | 5 | | | | 0.20 | | | | 50 | |
Cessna 208B | | | 3 | | | | 2.50 | | | | 14 | |
ATR-72 | | | 5 | | | | 7.02 | | | | 72 | |
| | | | | | | | | | | |
| | | 231 | | | | | | | | | |
Model | | Number of Aircraft | | Average age (years) | | Average Passenger Capacity | |
Boeing 777-200 | | | 4 | | | 11.53 | | | 380 | |
Boeing 777-21B | | | 6 | | | 9.20 | | | 292 | |
Boeing 757-200 | | | 31 | | | 8.81 | | | 200 | |
Boeing 747F | | | 2 | | | 5.42 | | | n/a | |
Boeing 737-800 | | | 58 | | | 1.89 | | | 167 | |
Boeing 737-700 | | | 43 | | | 3.58 | | | 138 | |
Boeing 737-500 | | | 8 | | | 13.57 | | | 130 | |
Boeing 737-300 | | | 25 | | | 13.14 | | | 145 | |
Airbus 300-600 | | | 6 | | | 12.96 | | | 272 | |
Airbus 319-100 | | | 33 | | | 2.24 | | | 128 | |
Airbus 320-200 | | | 49 | | | 5.09 | | | 158 | |
Airbus 321-200 | | | 23 | | | 2.54 | | | 182 | |
Airbus 330-200 | | | 6 | | | 2.04 | | | 264 | |
Airbus 330-300 | | | 2 | | | 0.04 | | | 292 | |
McDonnell Douglas 82 | | | 12 | | | 15.04 | | | 144 | |
McDonnell Douglas 90 | | | 13 | | | 9.85 | | | 157 | |
Embraer 145 Jet | | | 6 | | | 3.23 | | | 50 | |
ATR-72 | | | 5 | | | 9.95 | | | 72 | |
Total | | | 332 | | | | | | | |
During
2004,2007, the Group continued to expand and modernize its aircraft fleet.
In 2004, theThe Group’s major aircraft transactions included:
• | | The addition of one B777-200
In 2007, the Group exercised purchase options of one Boeing 777-200, three Boeing 737-300, three McDonnell Douglas 90, eight Airbus 320-200 and two Airbus 300-600 upon expiry of the respective lease terms.
Six Airbus 319-100, three Airbus 321-200 and four Airbus 320 aircraft under operating lease; |
|
• | | The acquisition of two Boeing 757-200 aircraft, eight Boeing 737-700 and five Embraer 145 Jet financed by a combination of internal funds and long term bank loans; and |
|
• | | The acquisition of seventy eight aircraft including seventeen Boeing, eighteen Airbus, thirty five McDonnell Douglas, three Cessna 208B and five ATR72 aircraft through the acquisition of the airline operations and certain related assets of China Northern Airlines Company and Xinjiang Airlines Company which was approved by the Company’s shareholders in an extraordinary general meeting on December 31, 2004. |
In January 2005, the Company, as a lessee, entered into an agreement with an independent lessor for operating leases of nine Boeing 737-800 aircraft for a term of seven years with total futurewere acquired under operating lease, payments totalling approximately RMB1,721 million, scheduled for deliveries in 2005 and 2006.
three Boeing 757-200 and four Boeing 737-400 aircraft under operating lease were returned during 2007. In January 2005, China Aviation Supplies Import and Export Corporation, as a sole importing agent, entered into, on behalf of several PRC airlines including the Group, a general purchase agreement with the Boeing Company for the import of Boeing B7E7 aircraft. The Company, being one of the ultimate users for thirteen of the Boeing B7E7 aircraft, endorsed the general purchase agreement. The Company is currently in negotiation with the Boeing Company regarding the purchase agreements on such aircraft.
In March 2005, the Company, as a lessee, entered into another agreement with an independent lessor for operating leases of a total of twenty-five aircraft comprisingaddition, five Boeing 737-700 aircraft, fiveand fourteen Boeing 737-800 aircraft five Airbus 320-200 aircraftacquired in 2007 were financed by a combination of internal funds, long-term bank loans and ten Airbus 321-200 aircraft with scheduled deliveries in 2006 and 2007. The term offinance lease agreements.
In July 2007, the
lease ranges from ten to twelve years with total future lease payments totalling approximately RMB8,243 million. In April 2005, the CompanyGroup entered into a purchase agreement with Airbus SNC for the purchase ofto acquire five Airbus A380319, ten Airbus 320 and five Airbus 321 aircraft, scheduled for deliveries in 20072009 to 2010.
17
In July 2007, the Group entered into a purchase agreement with Boeing to acquire 25 Boeing 737-800 aircraft, scheduled for deliveries in 2011 to 2013.
In August 2007, the Group entered into a purchase agreement with Boeing to acquire 55 Boeing 737 series, scheduled for deliveries in 2011 to 2013.
In October 2007, the Group entered into a purchase agreement with Airbus to acquire ten Airbus 330-200 aircraft, scheduled for deliveries in 2010 to 2012.
In 2007, the Group disposed of 11 McDonnell Douglas 82 aircraft.
Aircraft Financing Arrangements
A significant portion of the Group’s aircraft is acquired under long-term
capitalfinance or operating leases or long-term mortgage loans with remaining terms to maturity ranging from one to
ninefifteen years. As of December 31,
2004, 472007, 69 of the Group’s
231332 aircraft were operated under
capitalfinance leases,
84130 were operated under operating leases,
5341 were financed by long-term mortgage loans, while the remaining were acquired either with cash proceeds or acquired by exercising the purchase options upon expiry of the respective
capitalfinance leases. The Group’s planned acquisition of aircraft in the foreseeable future will generally be made pursuant to operating leases or
financed by long-term mortgaged loans.finance leases. The Group’s determination as to its acquisition strategy depends on the Group’s evaluation at the time of its capacity requirements, anticipated deliveries of aircraft, the Group’s capital structure and cash flow, prevailing interest rates and other general market conditions.
The following table sets forth, as of December 31,
2004,2007, the number of aircraft operated by the Group pursuant to capital and operating leases and the remaining terms, expressed in years, of such leases.
18
| | | | | | | | | | | | | |
| | Average | | |
| | Capital | | Operating | | Remaining | | |
Model | | Lease | | Lease | | Lease Term | | | Capital Lease | | Operating Lease | | Average Remaining Lease Term | |
Boeing 777-200 and 777-21B | | 5 | | 4 | | 5.63 | | | | 4 | | | 4 | | | 2.96 | |
Boeing 757-200 | | — | | 15 | | 4.23 | | | | 0 | | | 11 | | | 2.53 | |
Boeing 737-700 | | — | | 8 | | 5.22 | | | | 9 | | | 15 | | | 6.46 | |
Boeing 737-800 | | | | 10 | | | 28 | | | 7.61 | |
Boeing 737-500 | | — | | 18 | | 1.91 | | | | 0 | | | 8 | | | 0.81 | |
Boeing 737-300 | | 4 | | 12 | | 2.23 | | | | 0 | | | 4 | | | 5.20 | |
Boeing 737-300QC | | — | | 2 | | 4.00 | | |
Airbus 300-600 | | 6 | | — | | 2.20 | | | | 1 | | | 0 | | | 0.07 | |
Airbus 319-100 | | — | | 8 | | 9.02 | | | | 6 | | | 27 | | | 7.83 | |
Airbus 320-200 | | 18 | | 6 | | 3.72 | | | | 25 | | | 16 | | | 6.24 | |
Airbus 321-100 | | 4 | | — | | 7.24 | | | | 6 | | | 13 | | | 9.55 | |
McDonnell Douglas 82 | | — | | 11 | | 3.06 | | |
Airbus 330-200 and 330-300 | | | | 4 | | | 4 | | | 9.97 | |
McDonnell Douglas 90 | | 10 | | — | | 2.69 | | | | 4 | | | 0 | | | 0.46 | |
| | | | | | |
| | 47 | | 84 | | | | |
Total | | | | 69 | | | 130 | | | | |
Capital Leases
Finance leases
As of December 31,
2004,2007, the Group’s aggregate future minimum lease payments (including future finance charges) required under its
capitalfinance leases were
RMB13,055RMB 19,499 million (US$
1,577 2,669 million). As of
the year end
2004,of 2007, a majority of the Group’s
capitalfinance leases had original terms ranging from ten to fifteen years from the date of delivery of the relevant aircraft, and the remaining terms of these leases ranged from one to
ninefifteen years. The Group’s
capitalfinance leases typically cover a significant portion of the relevant aircraft’s useful life and transfer the benefits and risks of ownership to the Group. Under its
capitalfinance leases, the Group generally has an option to purchase the aircraft at or near the end of the lease term. As
ais customary in the case of
capitalfinance leases, the Group’s obligations are secured by the related aircraft, as well as other collateral.
As of December 31,
2004,2007, the Group’s aggregate future minimum lease payments required under its operating leases were
RMB12,750RMB28,179 million (US$
1,5413,858 million). As of
the year end
2004,of 2007, the Group’s operating leases had original terms generally ranging from
eightfive to
tenfifteen years from the date of delivery of the relevant aircraft, and the remaining terms of these leases generally ranged from one to
tenthirteen years. Pursuant to the terms of the operating leases, the Group is obligated to make rental payments based on the lease term, with no termination payment obligations or purchase option, and the lessor bears the economic benefits and risks of ownership. Under its operating leases, the Group has no option to purchase the aircraft and is required to return the aircraft in the agreed condition at the end of the lease term. Although title to the aircraft remains with the lessor, the Group is responsible during the lease term for the maintenance, servicing, insurance, repair and overhaul of the aircraft.
Pursuant to
capitalfinance or operating leases, the Group is obligated to indemnify the lessors against any withholding or similar taxes that may be imposed on the lessors by taxing authorities in China with regard to payments made pursuant to such leases. In accordance with relevant PRC tax regulations, a PRC lessee is liable to pay PRC withholding tax in respect of any lease payments regularly made to an overseas lessor. Depending on the circumstances, this tax is generally imposed at a fixed rate ranging from 10% to 20% of the lease payments, or in certain cases, the interest components of such payments. Pursuant to an approval document from the State Taxation Bureau, lease arrangements executed prior to September 1, 1999 are exempt from PRC withholding tax. The PRC withholding tax payable in respect of the operating leases executed after September 1, 1999 of
RMB14RMB143 million,
RMB8RMB60 million and
RMB23RMB55 million during
2002, 20032007, 2006 and
20042005 respectively, have been included as part of the operating lease charges.
Aircraft Flight Equipment
The jet engines used in the Group’s aircraft fleet are manufactured by General Electric Corporation, Rolls-Royce plc, United Technologies International, Inc., CFM International, Inc. and International Aviation Engines Corporation.
As of year end 2004, theThe Group had
6771 and 69 spare jet engines for its
fleet.fleet as of the year end of 2007 and 2006, respectively. The Group determines its requirements for jet engines based on all relevant considerations, including manufacturers’ recommendations, the performance history of the jet engines and the planned utilization of its aircraft.
RotablesAcquisition of rotables and certain of the expendables for the Group’s aircraft are generally
purchasedhandled by Southern Airlines (Group) Import & Export Trading Corporation (“SAIETC”), a subsidiary of CSAHC acting as agent for the Group, in consideration of an agency fee. The Group arranges the ordering of aircraft, jet engines and other flight equipment for the Airline Subsidiaries and keeps an inventory of rotables and expendables for the Airline Subsidiaries.
19
A major part of the maintenance for the Group’s fleet other than overhauls of jet engines is performed by GAMECO, a jointly controlled entity established by the Company, Hutchison Whampoa (“Hutchison”) and South China International Aircraft Engineering Company Limited, consistent with the Group’s strategy to achieve fully integrated airline operations and to assure continued access to a stable source of high quality maintenance services. The remaining part of the maintenance for the Group’s fleet other than overhauls of jet engines is performed by service providers in China and overseas. GAMECO performs all types of maintenance services, ranging from maintenance inspections performed on aircraft
before, after and between flights (“line maintenance services”) to major overhaul performed at specified intervals. GAMECO was the first of three aircraft maintenance facilities in China having been certified as a repair station by both the CAAC and the FAA. In March 1998, GAMECO received an approval certificate from the United Kingdom Civil Aviation Authority for the repair and maintenance of aircraft and aircraft engines.
The Group believes that GAMECO performs major maintenance checks on the Group’s aircraft within time periods generally consistent with those of large international airline maintenance centers. GAMECO’s repair and maintenance capabilities include overhaul of more than
90%64% of the Group’s aircraft. Although rotables for the Group’s aircraft are generally imported through SAIETC, a portion of expendables and other maintenance materials are directly imported by GAMECO. GAMECO also provides line maintenance services to
9eight other Chinese airlines and
1318 international airlines. GAMECO provides heavy maintenance services to
5four other Chinese airlines and
9nine international airlines.
The Company and GAMECO had entered into an Aircraft Maintenance and Engineering Agreement for the provision of aircraft repair and maintenance services. On
May 17,
May, 1996, the Company and GAMECO entered into an agreement regarding the fee arrangement for the provision of such repair and maintenance services (the “Fee Agreement”). Pursuant to the Fee Agreement and subsequent agreements, GAMECO charged the Company for expendables at cost plus
15%16%, and labour costs at US$
30.030 per hour during
2004. For the year ended December 31, 2004, the amount2007. The amounts incurred by the Group for such repair and maintenance services
was RMB659,850,000.were RMB661 million, RMB686 million, and RMB535 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Overhauls of jet engines are performed
by MTU Maintenance Zhuhai Co., Ltd., (“MTU Zhuhai”), a jointly controlled entity of the Company and MTU Aero Engines Gmbh, and also by overseas qualified service providers in Germany, Malaysia, Canada and England.
Starting from 2003, MTU Maintenance Zhuhai Co., Ltd., (“MTU Zhuhai”) a jointly controlled entity of the Company and MTU Aero Engines Gmbh., also performed overhauls of certain jet engines for the Group. For the year ended December 31, 2004, repairRepair fees amounting to
RMB499RMB386 million, RMB497 million and RMB583 million were paid to MTU
Zhuhai.20
Zhuhai for the years ended December 31, 2007, 2006 and 2005, respectively.
The Group endeavors to maintain strict compliance with all laws and regulations applicable to flight safety. In addition, the Group has adopted measures to eliminate or minimize factors that may impair flight safety, including specialized training programs and safety manuals. The Air Safety Management Department of the Company implements safety-related training programs on an ongoing basis in all of the Group’s operations to raise the safety awareness of all employees. As a result, overall flight safety has gradually improved. There
waswere no serious incidents involving casualty or flight damage throughout the three years ended December 31,
2004.2007. For minor “incidents” which include various events and conditions prescribed by the CAAC which do not involve serious personal injury or material damage to flight equipment, the Group has kept the number consistently below the standard prescribed by the CAAC. For example, the Company’s “flight incident” ratio was
0.42, 0.130.065, 0.064 and 0.13 in
2002, 20032007, 2006 and
2004,2005, respectively. In comparison, CAAC’s published maximum acceptable flight incident ratio was
1.50.7 in
20022007, 0.7 in 2006 and
1.30.29 in
2003 and 0.9 in 2004.2005. This ratio is defined as the occurrence of one incident for every 10,000 hours of flight time.
As a result, the Group was awarded the Golden Roc Cup, the highest award for flight safety in the PRC civil aviation industry, for the fourth time in 2004.Jet fuel costs typically represent a major component of an airline’s operating expenses. The Group’s jet fuel costs
for 2004 accounted for
26.2%34.6%, 35.2% and 30.1% of the Group’s operating
expenses.expenses for the years ended December 31, 2007, 2006 and 2005, respectively. Like all Chinese airlines, the Group is generally required by the Chinese Government to purchase its jet fuel requirements from regional branches of CAOSC and Bluesky Oil Supplies Company, except at the Shenzhen, Zhuhai and Sanya airports which are supplied by Sino-foreign joint ventures in which CAOSC is a joint venture partner. CAOSC is a State-owned organization controlled and supervised by the CAAC that controls the importation and distribution of jet fuel throughout China.
Jet fuel obtained from CAOSC’s regional branches is purchased at uniform prices throughout China that are determined and adjusted by CAOSC from time to time with the approval of the CAAC and the pricing department of the National Development and Reform Commission (“NDRC”) based on market conditions and other factors. As a result, the costs of transportation and storage of jet fuel in all regions of China are spread among all domestic airlines. Jet fuel costs in China are influenced by costs at State-owned oil refineries and limitations in the transportation infrastructure, as well as by insufficient storage facilities for jet fuel in certain regions of China.
Prior to 1994, domestic jet fuel prices were generally below international jet fuel prices. The Chinese Government had gradually increased domestic jet fuel prices in order to reflect more accurately the costs of supplying jet fuel in China. As a result, domestic jet fuel prices have become higher than those in the international market since the beginning of 1994.
WithIn 2007, the
WTO entry, thedomestic price of jet fuel
price in China will probably be trimmed byfrom CAOSC was below international jet fuel prices due to the
market force to be in line with theincrease of international
market. CAOSC’s maximumjet fuel price in 2004 was RMB4,190 per ton. prices.
The average price paid by the Group in
20042007 was
RMB3,772RMB5,962 per ton, which represents a
22.7%2.1% increase from that of
2003. To address2006.
According to the
problemNDRC and the CAAC on Issues Relating to Introduction of the Fuel Surcharge for Domestic Routes, domestic airlines imposed fuel surcharges for all the domestic routes (excluding those from the mainland PRC to Hong Kong and Macau) with effect from August 1, 2005 (based on flight time). On February 16, 2006, the NDRC and CAAC released a supplementary document on Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes, stating that due to the rising jet fuel price, the period of imposition of fuel surcharge by airlines was extended. The NDRC and CAAC released separate supplementary documents on Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes on March 28, 2006 and September 1, 2006, respectively, thereby adjusting the amount of fuel surcharges in a range of RMB20 to RMB60 per passenger for distance, flown less than 800 kilometers, and in a range of RMB40 to RMB100 for distance, exceeding 800 kilometers, during the period temporarily from April 10, 2006 to October 10, 2006. On January 21, 2007, the NDRC and CAAC released additional supplementary documents on Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes, thereby adjusting the amount of fuel surcharges from RMB60 to RMB50 per passenger for distance, flown less than 800 kilometers, and from RMB100 to RMB80 for distance exceeding 800 kilometers. On November 5, 2007, the NDRC and CAAC released additional supplementary documents on Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes, thereby adjusting the amount of fuel surcharges from RMB50 to RMB60 per passenger for distance, flown less than 800 kilometers, and from RMB80 to RMB100 for distance exceeding 800 kilometers. The introduction of fuel surcharge and the extension of the duration of the same will help relieve, to a certain extent, the burden of high jet fuel
prices since 2000, CAAC has announced a policy permitting airlines to impose a fuel surchargecost, on
passengers carried by their domestic and Hong Kong regional flights for the
purpose of offsetting the effect of rising jet fuel prices. Such surcharges have been imposed by the Group since November 1, 2000 at the prescribed rates set by the CAAC.Group.
In addition to purchases of jet fuel from CAOSC, the Group is also permitted by the Chinese Government to purchase a portion of its jet fuel requirements for its international flights from foreign fuel suppliers located outside China at prevailing international market prices. Jet fuel purchased from such sources outside China accounted for approximately
26.15%12% of the Group’s total jet fuel consumption in
2004.both 2007 and 2006.
Flight operations for the Group’s flights originating in Guangzhou are managed by the Company’s flight operations and marketing divisions, which are responsible for formulating flight plans and schedules consistent with route and flight approvals received from the CAAC. The Company’s flight operations center in Guangzhou is responsible for the on-site administration of flights, including the dispatch and coordination of flights, deployment of aircraft, ground services and crew staffing. In addition, each of the Airline Subsidiaries maintains flight operations centers at all servicing airports for on-site administration of their flights. The Company’s general dispatch offices are responsible for monitoring conditions on the Group’s route network, administering the Group’s flight plans, collecting and monitoring navigation data and analyzing and monitoring airport conditions.
To enhance its management of flight operations, the Group’s computerized flight operations control system (SOC) began operation in May 1999. The system utilizes advanced computer and telecommunications technology to manage the Group’s flights on a centralized,
realtimereal-time basis. The Group believes that the system will assist it to (i) compile flight schedules more efficiently; (ii) increase the utilization of aircraft; (iii) allow real-time tracking of all of the Group’s flights; and (iv) improve coordination of the Group’s aircraft maintenance and ground servicing functions.
21
Training of Pilots and Flight Attendants
The Group believes that its pilot training program which was established in cooperation with the CAAC affiliated Beijing Aeronautics and Aviation University (the “BAAU”) has significantly improved the quality of the training received by the Group’s pilots and has helped maintain the quality of the Group’s staff of pilots at a level consistent with the expansion of operations called for by the Group’s business strategy.
In the Group’s pilot training program, trainees have two years of theoretical training at the BAAU. After successful completion of academic and physical examinations,
studentsthe trainees receive flight training for a period of approximately 20 months at China Southern West Australian Flying College Pty Ltd. (the “Australian Pilot College”), a company that is 65% owned by the Company and 35% owned by CSAHC. Each
studenttrainee at the Australian Pilot College is required to fly at least 230 hours before being awarded a flight certificate. Graduates of the BAAU and the Australian Pilot College are hired by the Group as trainee pilots after passing a CAAC-administered examination to obtain a pilot license. The total training period for the Group’s trainee pilots is approximately five years.
About 110 trainee pilots graduated fromThe Group has about 1,900 trainees as at the
Australian Pilot College each year. Priorend of April 2008, more than 400 and 500 are expected to January 2003, asgraduate in 2008 and 2009, respectively.
As part of the pilot training program,
the Group also operated a flight simulator training center in Zhuhai, Guangdong Province (the “Zhuhai Training Center”), which was equipped with simulators for all models of aircraft currently operated by the Group. Traineetrainee pilots
receivedreceive their initial training in the operation of a specific aircraft
at the Zhuhai Training Center, which also provided training to pilots from other Chinese airlines. Such flight simulation training has been shifted towith Zhuhai Xiang Yi Aviation Technology Company Limited (“Zhuhai Xiang Yi), a jointly controlled entity between the Company and CAE International Holdings Limited,
since January 2003.which also provides training to pilots from other Chinese airlines. Zhuhai Xiang Yi
is equipped with simulators for all models of aircraft currently
leases the flight simulation facilities of Zhuhai Training Center fromoperated by the Group and provides flight simulation training services to the Group.
The Group’s pilots are required to be licensed by the CAAC, which requires an annual recertification examination. The Group’s pilots attend courses in simulator training twice annually and in simulator emergency procedures annually. The Group also conducts regular advanced training courses for captains and captain candidates. Pilots advance in rank based on number of hours flown, types of aircraft flown and their performance history.
The Group used to fund the training of its recruited pilots in previous years and, as a result, incurred significant costs over the years. Recently, there has been a trend in the financing of pilot training worldwide from employer-sponsored to self-sponsored scheme. Such a change will not only cut down the Group’s training expenses significantly, but also ensures the long-term dedicated service of the pilots. Accordingly, the Group planed to recruit 150 pilots under the self-sponsored training arrangement.
The Group conducts theoretical and practical training programs for its flight attendants at its Flight Attendants Training Center in Guangzhou (the “Guangzhou Training Center”). The Guangzhou Training Center is equipped with computerized training equipment, as well as simulator cabins for all models of aircraft currently operated by the Group. At the Guangzhou Training Center, flight attendants of the Group receive comprehensive training in areas such as in-flight service, emergency evacuation and water rescue.
22
The Group makes arrangements with airport authorities, other airlines or ground services companies for substantially all ground facilities, including jet-ways, waiting areas, ticket counters and support services buildings, at each airport that it serves. The Group pays landing, parking and other fees to such airports, including
Guangzhou Baiyun
International Airport in Guangzhou.Airport. At domestic airports, such fees are generally determined by the CAAC.
At
newGuangzhou Baiyun
International Airport,
in Guangzhou, the Group operates its own passenger check-in, cargo, mail and baggage handling, aircraft maintenance and cleaning services. The Group also provides such services to other airlines that operate in
newGuangzhou Baiyun
International Airport.
Ground services at the airports in Shenzhen, Changsha,Wuhan, Zhengzhou, Haikou, Zhuhai, Xiamen, Fuzhou, Guilin, Shantou, Guiyang and Beihai are primarily operated directly by the Group.
Ground services at the airport in Beijing are primarily provided by Beijing Southern Airlines Ground Services Company Limited, a jointly controlled entity between the Company and Beijing Aviation Ground Services Co. Ltd., since April 2004. Ground services at other airports in China are provided to the Group by local airport authorities or local airlines pursuant to various service agreements. Ground services and other services at airports outside China are provided to the Group by foreign services providers pursuant to various service agreements with such parties. All such agreements of the Group are
short termshort-term and otherwise on terms that are customary in the industry.
The Company owns a
51%75% equity interest in Guangzhou Nanland Air Catering Company Limited (“Nanland”)
. as of December 31, 2007. Nanland provides in-flight meals, snacks, drinks and related services for all of the Group’s flights originating in Guangzhou and substantially all other flights departing from
newGuangzhou Baiyun
International Airport. The Group contracts with various air catering suppliers with respect to in-flight catering services for flights originating from other airports, generally on an annual basis and otherwise on terms that are customary in the industry.
23
In January 2008, the Company disposed of a 20% equity interest in Nanland to CIE EXPLOITATION DES SERVICES AUXILIAIRES AERIENS SERVAIR with a consideration of EUR5.8 million.
To facilitate the Company to optimize its assets structure, better tightening its cost control, reduce the number of connected transactions and enhance the independence of the Company’s operations in the long-run, the Company acquired 100% interest in Southern Airlines Group Air Catering Company Limited (“SAG Air Catering”) at August 31, 2007. SAG Air Catering mainly provides in-flight meals to airlines for different flights of the Company originating or stopping at the domestic airports, mainly in northern China and Xinjiang regions.
The Group also provides air cargo and mail services. A significant portion of these services
isare combined with passenger flights services. Currently, the Group
also has two Boeing 747-400 freighters
mainly servicing
threefour international cargo routes, Shenzhen to
Shanghai to Anchorage to Chicago, Shenzhen to Anchorage to Chicago, Shanghai to Anchorage to Chicago and
Belgium andShenzhen to Shanghai to Amsterdam.
Currently, the Group conducts its cargo business primarily through its cargo division in Shenzhen.
To further tap into the growing cargo market, the Group has commenced the construction of a cargo centre in the Guangzhou new airport in 2004, at a budgeted cost of Rmb254 million.
Sales, Reservations and Marketing
Passenger Ticket Sales and Reservations The Group’s ticket sales and reservations are conducted by or through independent sales agents and the Group’s own network of exclusive sales offices as well as the CAAC’s sales offices and CSAHC’s
affiliates.associates. The Group has sales offices in Guangzhou and its other route bases. In addition, the Group maintains regional sales offices in other cities in China, including Beijing and Shanghai. The Group maintains international sales offices in
Almaty, Amsterdam, Baku, Bangkok,
Manila,Bishkek, Daejeon, Delhi, Dubai, Dushanbe, Fukuoka, Hanoi,
Hiroshima, Ho Chi Minh City,
Singapore,Islamabad, Irkutsk, Jakarta, Jeddah, Khabarovsk, Kathmandu, Kita Kyushu, Kuala Lumpur,
Lagos, Los Angeles, Manila, Melbourne, Moscow, Nagoya, Nigata, Novosibirsk, Osaka, Paris, Penang,
Jakarta and Phnom Penh,
in Southeast Asia, as well as in Osaka, Fukuoka,Phuket, Pusan, Sapporo, Sendai, Seoul, Sharjah, Siemreap, Singapore, Sydney, Taegu, Tashkent, Teheran, Tokyo,
Seoul, Amsterdam, Los Angeles, Sydney, MelbourneToyama and
Sharjah. In Hong Kong, ticket sales and reservations services are provided to the Group by China National Aviation Corporation and Nanlung Travel Agency Limited (a subsidiary of CSAHC) for a commission of 3% – 9% of the ticket price. Vientiane, Vladivostok Yangon.
The Group
also has agency agreements with airlines in the
Asia-PacificAsia- Pacific region, Europe, the United States and Africa for the processing of ticket sales and reservations on a reciprocal basis. In
2004,2007, approximately
30%10.5 % of all ticket sales for the Group’s scheduled flights were made by the Group’s
and CAAC’s network of sales offices and CSAHC’s
affiliates.associates. The Group also sells tickets and accepts reservations through an extensive network of non-exclusive independent sales
agents, substantially all of whom operate in cities throughout China, with the remainder operating principally in Hong Kong and other Southeast Asian destinations served by the Group.agents. Under the agency agreements with these sales agents, the Group pays commissions based on the value of tickets sold. The Group pays independent sales agents
in China a commission of
3% of the ticket price, and pays independent sales agents outside China a commission ranging from 5% to 9%1.5%-9% of the ticket price. Sales agents are typically permitted to withhold their commission from the proceeds of ticket sales that are remitted to the Group. In
2004,2007, independent sales agents accounted for approximately
70%89.5 % of the Group’s ticket sales for its scheduled flights.
Substantially all of the Group’s sales offices and agents in China are linked electronically to the CAAC’s computerized ticketing and reservations system, which is in turn linked to all domestic airlines for flights throughout China. The Group has also entered into membership agreements with several international reservation systems, including ABACUS in Southeast Asia, SABRE and GALILEO in the United States, AMADEUS in Europe and INFINI in Japan. These systems facilitate reservations and sales of tickets for the Group’s international flights.
The Group’s cargo and mail services are promoted through its own cargo divisions and independent cargo agents both within and outside China that track available space among all airlines. In particular, the Group employs a number of cargo agents in the Pearl River
deltaDelta region. The Group generally pays such agents a commission of 4%
and- 5% of the relevant cargo freight rate for domestic and international
services, respectively.services.
Promotional and Marketing Activities The Group engages in regular promotional and marketing activities in an effort to increase its market share. The Group’s promotional and marketing activities for domestic routes emphasize safety, passenger comfort and the frequency of the Group’s flights. The Group’s promotional and marketing activities for international and Hong Kong
and Macau regional passengers emphasize the Group’s quality of service, extensive route network in China and greater frequency of flights relative to other Chinese airlines. In addition, the Group also promotes and markets its Hong Kong
and Macau regional and international routes on the basis of price.
The Group has been seeking to increase its name recognition by offering new services to passengers. For example, the Group was the first Chinese airline to provide off-airport check-in services. The Group also offers transfer and baggage “through-handling” services to passengers connecting to other airlines, including passengers connecting in Hong Kong for flights to Taiwan.
To enhance relationships with its passengers, the Group has launched two frequent flyer programs, namely the “China Southern Airlines Sky Pearl Club”, and the “Egret Mileage Plus”. By the end of
2004,2007, the Group had approximately
3,500,0005,265,500 members under these programs.
The Chinese commercial aviation industry is subject to a high degree of regulation and oversight by the CAAC. Regulations and policies issued or implemented by the CAAC encompass substantially all aspects of airline operations, including the approval of domestic, Hong Kong
regionaland Macau and international route allocation, published
airfares,air fares, aircraft acquisition, jet fuel prices and standards for aircraft maintenance, airport operations and air traffic control. The Civil Aviation Law, which became effective in March 1996, provides a framework for regulation of many of these aspects of commercial aviation activities. Although China’s airlines operate under the supervision and regulation of the CAAC, they are accorded an increasingly significant degree of operational autonomy, including with respect to the application for domestic, Hong Kong
regionaland Macau and international routes, the allocation of aircraft among routes, the purchase of flight equipment, the pricing of air fares within a certain range, the training and supervision of personnel and their day-to-day operations.
As an airline providing services on international routes, the Group is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between China and various other countries. In addition, China is a contracting state, as well as a permanent member, of the International Civil Aviation Organization (the “ICAO”), an agency of the United Nations established in 1947 to assist in the planning and development of international air transport, and is a party to many other international aviation conventions. The ICAO establishes technical standards for the international aviation industry. The Group believes that it, in all material respects, complies with all such technical standards.
Domestic Routes. The right of any Chinese airline to carry passengers or cargo on any domestic route must be obtained from the CAAC. Non-Chinese airlines are not permitted to provide domestic air service between destinations in China. The CAAC’s policy is to assign a domestic route to the Chinese airline that is best suited to serve the route based, in part, on the location of the airline’s main or regional base at the point of origin. Under current regulations, airlines are generally expected to operate mainly from their route bases, and flights within a particular region are expected to be served by airlines based in that region. The Group believes that these regulatory parameters benefit airlines, such as the Group, that have a large number of regional route bases. The CAAC also considers other factors that may make a particular airline suitable to operate a domestic route, including the applicant’s general operating authority, compliance with pricing regulations and regulations applicable to safety and service quality, market demand, the ability of the applicant in terms of its existing routes, and airport facilities and related support services. The CAAC considers market conditions for a domestic route in determining whether the route should be allocated to one or more airlines. The CAAC requires the passenger load factor on a particular route to reach 75% before additional flights may be
addedput on that route. Airlines serving the route are given priority for such additional flights, and only if such airlines cannot operate more flights will the CAAC permit another airline to commence service.
Hong Kong Regionaland Macau Routes. Hong Kong regionaland Macau routes and landing rights are derived from agreements between the Chinese Government and the government of the Hong Kong SAR, and between the Chinese Government and the government of Macau SAR. Such rights are allocated by the CAAC among the four Chinese airlines permitted to fly to Hong Kong or Macau.26
The Group understands that the criteria for determining whether a Hong Kong regionaland Macau route will be allocated to a particular airline include market demand, the ability of the airline to service the route and the appropriateness of the airline’s aircraft for such route.
A number of Hong Kong
regional routes are operated by Chinese airlines on a “charter” flight basis. Permission to operate these flights is in theory subject to monthly review by the CAAC and the Hong Kong Civil Aviation Department. The CAAC has informally indicated that it primarily considers market demand and airline capability in granting permission for such flights.
International Routes. International route rights, as well as the corresponding landing rights, are derived from air services agreements negotiated between the Chinese Government, through the CAAC, and the government of the relevant foreign country. Each government grants to the other the right to designate one or more domestic airlines to operate scheduled service between certain destinations within each of such countries. Upon entering into an air services agreement, the CAAC determines the airline to be awarded such routes based on various criteria, including the availability of appropriate aircraft, flight and management personnel, safety record, the overall size of the airline, financial condition and sufficiency of assets to bear civil liabilities in international air services. These route rights may be terminated by the CAAC under special circumstances.
The criteria for determining whether an international route will be allocated to a second airline generally include (i) the terms of the relevant bilateral civil aviation agreement; (ii) consistency with overall national plans and the national interest and the enhancement of reasonable competition; and (iii) whether the international airports to be used are sufficient for the aircraft flown and employ security measures consistent with international standards.
In addition, if the relevant bilateral civil aviation agreement permits more than one Chinese airline to operate a particular international route, the CAAC will only permit a second airline to operate on such route if the number of passengers carried annually exceeds 100,000 and if there is a minimum average load factor of 68% for routes with at least five weekly flights by Chinese airlines, or 80% for routes with four or fewer weekly flights by Chinese airlines.
Pursuant to “Pricing Reform of Domestic Civil Aviation” as approved by the State Council of the PRC effective on
April 20,
April, 2004, prices on domestic routes now fluctuate freely within a predetermined range. Instead of direct supervision by setting prices of air tickets through
a local price bureau, the government now provides guidance on domestic flights and domestic civil aviation is controlled by the government indirectly. Market-oriented pricing policy was introduced and pricing system has been adjusted as a result of the above pricing reform.
Published air fares of Chinese airlines for the Hong Kong
regionaland Macau routes are determined by the CAAC and the relevant civil aviation authorities in Hong Kong or Macau, subject to consultation between the relevant Chinese airlines and Hong Kong or Macau airlines. Airlines may offer discounts on flights on their Hong Kong regional routes.
27
Published air fares of Chinese airlines for international routes are determined through consultation between the relevant Chinese airlines and foreign airlines in accordance with the civil aviation agreements between the Chinese Government and the relevant foreign government, taking into account the international air fare standards established through the International Air Transport Association. All air fares for international routes must be approved by the CAAC. Discounting of published international air fares is permitted.
Acquisition of Aircraft and Flight Equipment The CAAC requires all Chinese airlines to acquire their aircraft through China Aviation Supplies Import and Export Corporation (“CASC”), an entity controlled by the CAAC. If a Chinese airline plans to acquire an aircraft, the airline must first seek approval from the CAAC and NDRC. The airline must, as a condition of approval, provide specific acquisition plans, which are subject to modification by the CAAC and NDRC. If the CAAC and NDRC approve an aircraft acquisition, the airline negotiates the terms of the acquisition with the manufacturer together with CASC because CASC possesses the license required to import or export aircraft, and CASC receives a commission in respect thereof. Most Chinese airlines are also required to acquire their aircraft engines, spare parts and other flight equipment through CASC. The Company and a few other Chinese airlines are permitted to import jet engines and other flight equipment for their own use without the participation of CASC. In the case of the Company, SAIETC acts as its
importerimport agent and is paid an agency fee for its services.
Jet Fuel Supply and Pricing CAOSC and Bluesky Oil Supplies Company, companies controlled and supervised by the CAAC, are the only jet fuel supply companies in China, with the exception of the joint venture jet fuel supply companies that supply the Shenzhen, Zhuhai and Sanya airports, in each of which CAOSC is a partner. Airlines are generally not permitted to buy jet fuel from other suppliers in their domestic operations, since the direct import of jet fuel for domestic purposes is prohibited. As a result, all Chinese airlines purchase their domestic jet fuel supply requirements (other than in respect of their Shenzhen, Zhuhai or Sanya operations) from the seven regional branches of CAOSC. Jet fuel obtained from such regional branches is purchased at uniform prices throughout China that are determined and adjusted by CAOSC from time to time with the approval of the CAAC and the pricing department of the NDRC based on market conditions and other factors.
The CAAC has made the improvement of air traffic safety in China a high priority and is responsible for the establishment of operational safety, maintenance and training standards for all Chinese airlines. The Chinese airlines are required to provide monthly flight safety reports to the CAAC, including reports of flight or other incidents or accidents and other safety related problems involving such airline’s aircraft occurring during the relevant reporting period. The CAAC periodically conducts safety inspections on individual airlines.
The CAAC oversees the standards of all Chinese airline pilots through its operation of the CAAC Aviation College. The CAAC Aviation College is a monitoring unit located in Tianjin which implements a uniform pilot certification process applicable to all Chinese airline pilots and is responsible for the issuance, renewal, suspension and cancellation of pilot licenses. Every pilot is required to pass CAAC-administered examinations before obtaining a pilot license and is subject to an annual recertification examination.
All aircraft operated by Chinese airlines, other than a limited number of leased aircraft registered in foreign countries, are required to be registered with the CAAC. All aircraft operated by Chinese airlines must have a valid certificate of airworthiness, which is issued annually by the CAAC. In addition, maintenance permits are issued to a Chinese airline only after its maintenance capabilities have been examined and assessed by the CAAC. Such maintenance permits are renewed annually. All aircraft operated by Chinese airlines may be maintained and repaired only by CAAC-certified maintenance facilities, whether located within or outside China. Aircraft maintenance personnel must be certified by the CAAC before assuming aircraft maintenance posts.
28
The CAAC establishes and supervises the implementation of security standards and regulations for the Chinese commercial aviation industry. Such standards and regulations are based on Chinese laws, as well as standards developed by international commercial aviation organizations. Each airline and airport in China is required to submit to the CAAC an aviation security handbook describing specific security procedures established by such airline or airport for the day-to-day operations of commercial aviation and procedures for staff training on security. Such security procedures must be based on relevant CAAC regulations and international commercial aviation treaties. Chinese airports and airlines that operate international routes must also adopt security measures in accordance with the requirements of the relevant international agreements.
Noise and Environmental Regulation All airlines in China must comply with the noise and environmental regulations of the PRC State Environmental Protection Agency. Applicable regulations of the CAAC permit Chinese airports to refuse take-off and landing rights to any aircraft that does not comply with noise regulations.
The CAAC supervises and regulates all civilian airports in China. The local government of the PRC manages the administration of most civilian airports in China, including the
newGuangzhou Baiyun
International Airport
as of 2004, with limited exceptions. Airports in China are also subject to regulation and ongoing review by the CAAC, which determines take-off and landing charges, as well as charges for the use of airports and airport services.
The CAAC’s extensive regulation of the Chinese commercial aviation industry has had the effect of managing competition among Chinese airlines. Nevertheless, competition has become increasingly intense in recent years due to a number of factors, including relaxation of certain regulations by the CAAC, an increase in the number of Chinese airlines and an increase in the capacity, routes and flights of Chinese airlines.
In the Chinese aviation industry, the three dominant airlines are the Group, Air China and China Eastern Airlines (“China Eastern”). In
2004,2007, these three airlines together controlled approximately
58.05%71.8% of the commercial aviation market in China as measured by passengers carried.
Most major Chinese airlines have in recent years significantly expanded their fleets, while at the same time passenger traffic has not increased proportionately. This has resulted in a reduction in the passenger load factors for most Chinese airlines. As a result, Chinese airlines are required to be more competitive with respect to, for example, quality of service, including ticketing and reservations, in-flight services, flight scheduling and timeliness.
The Group expects that competition in China’s commercial aviation industry will continue to be intense. The Group will also face increasing competition from alternative means of transport, such as highway and rail, as China’s transportation infrastructure improves.
Relative to other Chinese airlines, however, the Group believes that it possesses certain competitive advantages. The Group has the most extensive route network and the largest number of regional route bases among Chinese airlines, which the Group believes places it in a favorable position in the route allocation process. The Group also has the largest aircraft fleet of any Chinese airline, which, together with the Group’s planned aircraft acquisitions, will permit the Group to expand its operations and to improve the deployment of the aircraft in its fleet. The Group also believes that its dominant presence in the populous and economically developed southern and central regions of China provides it with a competitive advantage in attracting new customers and that its fully integrated flight training, aircraft and engine maintenance, and air catering operations enable it to achieve and maintain high quality service to its customers.
29
The following table sets forth the Group’s market share of passengers carried, cargo and mail carried and total traffic of Chinese airlines for the years indicated.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Total traffic | |
| | Passenger carried | | | Cargo and Mail Carried (tons) | | | (ton kilometers) | |
| | Industry | | | Group’s | | | Industry | | | Group’s | | | Industry | | | Group’s | |
Year | | Total | | | Share | | | Total | | | Share | | | Total | | | Share | |
| | (in million) | | | (% of total) | | | (in thousand) | | | (% of total) | | | (in billion) | | | (% of total) | |
1998 | | | 57.5 | | | | 26.2 | | | | 1,401 | | | | 24.9 | | | | 9.3 | | | | 20.4 | |
1999 | | | 60.9 | | | | 24.8 | | | | 1,704 | | | | 22.9 | | | | 10.6 | | | | 18.9 | |
2000 | | | 67.2 | | | | 24.9 | | | | 1,967 | | | | 22.5 | | | | 12.3 | | | | 20.0 | |
2001 | | | 75.2 | | | | 25.4 | | | | 1,709 | | | | 23.3 | | | | 14.1 | | | | 21.5 | |
2002 | | | 85.9 | | | | 25.0 | | | | 2,021 | | | | 23.3 | | | | 16.5 | | | | 21.9 | |
2003 | | | 87.6 | | | | 23.4 | | | | 2,190 | | | | 21.2 | | | | 17.1 | | | | 20.8 | |
2004 | | | 121.23 | | | | 23.27 | | | | 2,770 | | | | 19.68 | | | | 23.1 | | | | 20.19 | |
| | Passenger carried | | Cargo and Mail Carried (tons) | | Total traffic (ton kilometers) | |
Year | | Industry Total (in millions) | | Group’s Share (% of total) | | Industry Total (in thousands) | | Group’s Share (% of total) | | Industry Total (in billion) | | Group’s Share (% of total) | |
2000 | | | 67.2 | | | 24.9 | | | 1,967 | | | 22.5 | | | 12.3 | | | 20.0 | |
2001 | | | 75.2 | | | 25.4 | | | 1,709 | | | 23.3 | | | 14.1 | | | 21.5 | |
2002 | | | 85.9 | | | 25.0 | | | 2,021 | | | 23.3 | | | 16.5 | | | 21.9 | |
2003 | | | 87.6 | | | 23.4 | | | 2,190 | | | 21.2 | | | 17.1 | | | 20.8 | |
2004 | | | 121.2 | | | 23.3 | | | 2,770 | | | 19.7 | | | 23.1 | | | 20.2 | |
2005 | | | 138.3 | | | 31.8 | | | 3,067 | | | 25.3 | | | 26.1 | | | 27.9 | |
2006 | | | 159.7 | | | 30.8 | | | 3,494 | | | 23.4 | | | 30.6 | | | 26.4 | |
2007 | | | 185.8 | | | 30.6 | | | 4,018 | | | 21.7 | | | 36.5 | | | 25.3 | |
The Group competes against its domestic competitors primarily on the basis of flight schedule, route network, quality of service, safety, type and age of aircraft and, to a lesser extent and until recently, price. The Group competes against 10 other Chinese airlines in its various domestic route markets. Of these competitors, the largest are two airlines owned or controlled by the Chinese Government, and the remaining eight airlines are operated by or under the control of various Chinese provincial or municipal governments.
The following table sets forth the Group’s market share of the passengers carried, cargo and mail carried on departing flights and total departing flights at the ten busiest airports in China, based on passenger volume, in 2004.2007.
| | | | | | | | | | | | |
| | | | | | Cargo and Mail | | | | |
| | Passenger carried | | | Carried | | | Departing flight | |
Airport | | (% of total) | | | (% of total) | | | (% of total) | |
Beijing | | | 12.10 | | | | 15.13 | | | | 9.97 | |
Shanghai Pudong | | | 7.26 | | | | 6.19 | | | | 6.83 | |
Guangzhou | | | 50.57 | | | | 43.11 | | | | 49.10 | |
Shanghai Hongqiao | | | 14.16 | | | | 10.79 | | | | 13.69 | |
Shenzhen | | | 27.74 | | | | 26.31 | | | | 24.77 | |
Chengdu | | | 10.97 | | | | 14.57 | | | | 8.90 | |
Kunming | | | 20.12 | | | | 14.12 | | | | 14.57 | |
Haikou | | | 26.11 | | | | 26.40 | | | | 21.43 | |
Xian | | | 8.91 | | | | 13.32 | | | | 5.80 | |
Hangzhou | | | 27.89 | | | | 20.63 | | | | 19.58 | |
| | | | Cargo and Mail | | | |
Airport | | Passenger carried (% of total) | | Carried (% of total) | | Departing flight (% of total) | |
Beijing | | | 18.39 | % | | 12.21 | % | | 17.17 | % |
Shanghai Pudong | | | 9.32 | % | | 3.26 | % | | 10.00 | % |
Guangzhou | | | 50.46 | % | | 39.61 | % | | 50.85 | % |
Shanghai Hongqiao | | | 17.57 | % | | 22.39 | % | | 16.39 | % |
Shenzhen | | | 30.10 | % | | 23.41 | % | | 28.97 | % |
Chengdu | | | 14.26 | % | | 16.20 | % | | 12.60 | % |
Kunming | | | 17.18 | % | | 20.97 | % | | 16.09 | % |
Hangzhou | | | 38.72 | % | | 35.06 | % | | 36.64 | % |
Xi'an | | | 18.66 | % | | 21.37 | % | | 17.12 | % |
Chongqing | | | 24.91 | % | | 27.44 | % | | 22.86 | % |
The following table sets forth the Group’s market share of the passengers carried, cargo and mail carried on departing flights and total departing flights at 8eight busiest airports in southern and central China (excluding Guangzhou Shenzhen and Haikou,Shenzhen, which are included in the table above), based on passenger volume, in 2004.2007.
| | | | | | | | | | | | |
| | | | | | Cargo and Mail | | | | |
| | Passenger carried | | | Carried | | | Departing flight | |
Airport | | (% of total ) | | | (% of total) | | | (% of total) | |
Wuhan Tianhe | | | 46.62 | | | | 47.22 | | | | 39.32 | |
Changsha | | | 52.90 | | | | 49.46 | | | | 28.77 | |
Guilin | | | 39.72 | | | | 24.89 | | | | 32.84 | |
Zhengzhou | | | 68.17 | | | | 73.62 | | | | 49.83 | |
Sanya | | | 28.41 | | | | 11.06 | | | | 30.09 | |
Nanning | | | 44.90 | | | | 34.68 | | | | 33.49 | |
Zhang Jia Jie | | | 33.87 | | | | 26.35 | | | | 28.36 | |
Shantou | | | 81.85 | | | | 70.65 | | | | 65.87 | |
30
| | | | Cargo and Mail | | | |
Airport | | Passenger carried (% of total ) | | Carried (% of total) | | Departing flight (% of total) | |
Wuhan | | | 39.59 | % | | 47.65 | % | | 34.93 | % |
Changsha | | | 51.17 | % | | 69.45 | % | | 50.37 | % |
Haikou | | | 28.57 | % | | 29.6 | % | | 27.85 | % |
Sanya | | | 35.32 | % | | 33.9 | % | | 36.76 | % |
Zhengzhou | | | 58.67 | % | | 63.32 | % | | 51.78 | % |
Guilin | | | 39.02 | % | | 39.11 | % | | 37.98 | % |
Nanning | | | 43.06 | % | | 39.14 | % | | 38.61 | % |
Zhang Jia Jie | | | 39.59 | % | | 67.78 | % | | 40.31 | % |
Hong Kong Regional Routes
The Group dominates the routes operated by Chinese airlines between
Hong Kong and Macau and China. Routes
In
2004,2007, the Group
operated an averageconducted a total of
more than 15,380 “charter”15,035 flights on its Hong Kong and
other scheduled flights per weekMacau routes, accounting for approximately 24.7% of all passengers carried by Chinese airlines on routes between
China and Hong Kong or Macau
accounting for approximately 29.7% of the total number of passengers carried by all Chinese airlines on the Hong Kong regional routes.and destinations in China. The Group
believes that the routes on which it operates “charter” flights are among its highest yielding routes, primarily because the Group faces
limitedless competition on
suchregional routes
than that on domestic and
is consequently less subject to downward pricing pressures.international, and earns higher operating margin. Air China, Air Macau, Dragon Air
which is a Hong Kong-based airline, competes with the Group on many of the Group’s Hong Kong regional routes. Air Macau Group Ltd. (“Air Macau”), a Macau-based airline, started to operate routes in 1996 between Macau and China, including destinations such as Beijing, Shanghai, Xiamen and Wuhan. Air Macau also operates routes between Macau and Taiwan, including flights which allow passengers to travel between Taiwan and China through Macau. The air fares on some of Air Macau’s routes are significantly less than air fares on comparable routes of the Group. Air Macau’s routes provide an alternative to andCathay Pacific Airways compete with Group in the Group’s Hong Kong regional routes for passengers travelling between Taiwan and China.
traffic markets.
The Group competes with Air China, China Eastern and many well-established foreign airlines on its international routes. Most of these international competitors have significantly longer operating histories, substantially greater financial and technological resources and greater name recognition than the Group. In addition, the public’s perception of the safety and service records of Chinese airlines may adversely affect the Group’s ability to compete against its Hong Kong
regionaland Macau and international competitors. Many of the Group’s international competitors have larger sales networks and participate in reservation systems that are more comprehensive and convenient than those of the Group, or engage in promotional activities that may enhance their ability to attract international passengers.
Air China has the most extensive international route network among Chinese airlines. Beijing, the hub of Air China’s operations, has been the destination for most international flights to China. The Group competes against, among other airlines, Thai Airways International, Singapore Airlines, Malaysian Airlines System, Air China and China Eastern on flights to Southeast Asian destinations. In the case of its European routes, the Group’s competitors include
Air France — KLM.Cathay Pacific Airways. The Group faces competition on its international
routeroutes from Air China and China Eastern, each of which operates several routes between destinations in China and the United States, as well as international airlines that fly to Los Angeles from Hong Kong. The Group competes in the international market primarily on the basis of safety, price, timeliness and convenience of scheduling.
The Airline Subsidiaries are joint ventures established by the Company and local companies in the provinces or special economic zones where the Airline Subsidiaries are based and are engaged in providing airline and related services. The Company owns
a 60% equity interest in each of the Airline Subsidiaries.
As of December 31,
2004,2007, Xiamen Airlines operated under its own “MF” code a fleet of
2946 aircraft on
7197 domestic routes,
811 international
routeroutes and
5six Hong Kong
regionaland Macau routes. In
2004,2007, Xiamen Airlines carried a total of about
6.239.25 million passengers, or approximately
22.1%16.26% of the passengers carried by the Group in that year, and had
RMB4,448RMB7,485 million in
operatingtraffic revenue.
As of December 31,
2004,2007, Shantou Airlines operated under the Group’s “CZ” code
7nine aircraft on
1614 domestic routes,
1one international route and
1one Hong Kong
regionaland Macau route. In
2004,2007, Shantou Airlines carried a total of about
1.081.86 million passengers, or
3.8%3.26% of the passengers carried by the Group in that year. Total
operatingtraffic revenue of Shantou Airlines for the year ended December 31,
20042007 was
RMB808RMB1,289 million.
As of December 31,
2004, Guangxi2007, Chongqing Airlines operated under the
“CZ”“OQ” code
6four aircraft on
14five domestic routes
4 international routes and 3 Hong Kong regional routes.previously operated by the Company. In
2004, Guangxi2007, Chongqing Airlines carried a total of about
1.12 million217,000 passengers, or
4.0%0.38% of the total number of passengers carried by the Group in that year. Total
operatingtraffic revenue of
GuangxiChongqing Airlines for the year ended December 31,
20042007 was
RMB789RMB119 million.
31
As of December 31,
2004,2007, Zhuhai Airlines operated under the “CZ” code
5five aircraft on
1114 domestic routes. In
2004,2007, Zhuhai Airlines carried a total of about
741,000917,600 passengers, or approximately
2.6%1.61% of the total number of passengers carried by the Group in that year. Total
operatingtraffic revenue of Zhuhai Airlines for the year ended December 31,
20042007 was
RMB558RMB723 million.
As of December 31,
2004,2007, Guizhou Airlines operated under the “CZ” code
6eight aircraft on
1622 domestic routes. In
2004,2007, Guizhou Airlines carried a total of about
1.361.46 million passengers, or approximately
4.8%2.56% of the total number of passengers carried by the Group in
2004.2007. Total
operatingtraffic revenue of Guizhou Airlines was approximately
RMB833RMB1,070 million for the year ended December 31,
2004.2007.
The CAAC maintains fleet and legal liability insurance on behalf of the Group and all other Chinese airlines with the People’s Insurance Company of China (“PICC”) under the PICC master policy. The Group maintains aviation hull all risks, spares and airline liability insurance, aircraft hull all risks and spare engines deductible insurance, aviation hull war and allied perils policy of the type and in the amount customary in the Chinese aviation industry.
Under Chinese law, civil liability of Chinese airlines for injuries suffered by passengers on domestic flights is limited to
RMB 70,000RMB400,000 (approximately US$
8,455)54,760) per passenger. Under the Convention for the Unification of Certain Rules Relating to International Transportation by Air of 1929 (as amended by the protocol of 1955, the “Warsaw Convention”), unless a separate agreement has been entered into between China and a specific country, civil liability for injuries suffered by passengers on international flights is limited to US$
20,000122,000 per passenger. The Group believes that it maintains adequate insurance coverage for the maximum civil liability that can be imposed in respect of injuries to passengers under Chinese law, the Warsaw Convention or any separate agreement applicable to the Group.
The CAAC allocates insurance premiums payable in respect of the PICC master policy to each participating airline based on the value of the airline’s insured aircraft or, in the case of leased aircraft, based on the amount required by the terms of the lease. Insurance claims made by any participating airline may cause the premiums paid by the Group under the PICC master policy to increase. PICC’s practice has been to reinsure a substantial portion of its aircraft insurance business through reinsurance brokers on the London reinsurance market.
The Group’s businesses and operations, other than the businesses and operations of Xiamen
Airlines and Chongqing Airlines, are conducted under the names “China Southern” and “China Southern Airlines” in both English and Chinese. The Group uses as its logo a stylized rendition of a kapok plant. Xiamen Airlines conducts its businesses and operations under the name of “Xiamen Airlines” in English and Chinese and uses its own logo depicting a stylized rendition of an egret.
Chongqing Airlines conducts its business and operations under the name of “Chongqing Airlines” in English and Chinese and uses its own logo depicting a cross of two rivers.
The names “China Southern” and “China Southern Airlines” contain Chinese words of common usage and are therefore not eligible for registration as tradenames under current Chinese law. The kapok logo is a trademark registered in China and recorded with the International Air Transport Association (“IATA”), the rights to which are owned by CSAHC. The Company and CSAHC have entered into a trademark license agreement (the “Trademark License Agreement”), pursuant to which CSAHC has licensed to the Group the right to use the names “China Southern” and “China Southern Airlines” in both English and Chinese and granted the Company a 10-year renewable license from 1997 to use the kapok logo on a world-wide basis. CSAHC has retained the right to use the kapok logo in connection with its non-airline related businesses conducted as of the date of the Trademark License Agreement and to permit its
affiliatesassociates that do not compete, directly or indirectly, with the Group to use the kapok logo.
Unless CSAHC gives a written notice of termination three months before the expiration of the agreement, the agreement will be automatically renewed for another ten-year term. Xiamen Airlines owns all rights to its egret logo, which is a trademark registered in China, and recorded with the IATA.
Chongqing Airlines also owns all rights to its logo, which is a trademark registered in China, and recorded with the IATA.
The Company owns all rights to three trademarks, being SKY PEARL CLUB, the logo relating to Easy Cargo 5000 and “SKY PEARL CARD” which are registered in China, and recorded with Trademark Office of the State Administration for Industry and Commerce. Zhuhai Airlines Company Limited owns all rights to the airline logo which is registered with the Trademark Office of the State Administration for Industry and Commerce.
32
The following chart illustrates the corporate structure of the Group as of year end
20042007 and the aggregate effective equity interest of the Company in each of its principal subsidiaries,
affiliated companiesassociates and jointly controlled entities.
33
Note a: Including 13% ownership interest held by CSA’s subsidiaries.
The particulars of the Company’s principal subsidiaries as of December 31, 20042007 are as follows:
Name of company | | Place and date of establishment /operation | | | | | | | Proportion of ownership interest held by the Company | |
| | | | Attributable equity | |
| | Place and date of | | interest to the Company | |
| | establishment | | Direct | | | Indirect | |
Name of company | | /operation | | % | | | % | |
GuangxiSouthern Airlines (Group) Shantou Airlines Company Limited | | PRC | | | | | | | | |
| | April 28, 1994 | | | 60 | | | | — | |
Southern Airlines Group Shantou | | PRC | | | | | | | | |
Airlines Company Limited | | July 20, 1993 | | | 60 | | | | — | % |
Zhuhai Airlines Company Limited | | PRC | | | | | | | | |
| | PRC May 8, 1995 | | | 60 | | | | — | % |
Xiamen Airlines Company Limited | | PRC | | | | | | | | |
| | PRC August 11, 1984 | | | 60 | | | | — | % |
Guizhou Airlines Company Limited | | PRC | | | | | | | | |
| | PRC November 12, 1991 | | | 60 | % |
Chongqing Airlines Company Limited | | | —PRC June 16, 2007 | | | 60 | % |
Guangzhou Air Cargo Company Limited | | | PRC March 31, 2004 | | | 70 | % |
Guangzhou Nanland Air Catering | | PRC Company Limited | | | | | | | | |
Company Limited | | PRC November 21, 1989 | | | 5175 | | | | — | % |
China Southern West Australian | | Australia | | | | | | | | |
Flying College Pty Ltd. | | | Australia January 26, 1971 | | | 65 | | | | — | % |
Guangzhou Baiyun International | | PRC Logistics Company Ltd | | | | | | | | |
Logistic Company Ltd | | PRC July 23, 2002 | | | 61 | % |
Xinjiang Civil Aviation Property Management Limited | | | —PRC February 12, 2002 | | | 51.8 | % |
Southern Airlines Group Air Catering Company Limited | | | PRC December 25, 2003 | | | 100 | % |
Nanlung International Freight Company Limited | | | Hong Kong October 1, 1996 | | | 51 | % |
Affiliated Companies and Jointly Controlled Entities
The particulars of the Group’s principal affiliated companiesassociates and jointly controlled entityentities as of December 31, 20042007 are as follows:
| | | | | | | | | | |
| | | | Attributable equity | |
| | Place and date of | | interest to the Company | |
| | establishment | | Direct | | | Indirect | |
Name of company | | /operation | | % | | | % | |
Guangzhou Aircraft Maintenance | | PRC | | | | | | | | |
Engineering Company Limited | | October 28, 1989 | | | 50 | | | | — | |
Southern Airlines Group | | PRC | | | | | | | | |
Finance Company Limited | | June 28, 1995 | | | 32 | | | | 15.42 | |
Sichuan Airlines Corporation | | PRC | | | | | | | | |
Limited | | August 28, 2002 | | | 39 | | | | — | |
China Postal Airlines Limited | | PRC | | | | | | | | |
| | November 25, 1996 | | | 49 | | | | — | |
MTU Maintenance Zhuhai Co. Ltd | | PRC | | | | | | | | |
| | April 6, 2001 | | | 50 | | | | — | |
Zhuhai Xiang Yi Aviation | | PRC | | | | | | | | |
Technology Company Limited | | July 10, 2002 | | | 51 | | | | — | |
34
Name of company | | Place and date of establishment /operation | | Proportion of ownership interest held by | |
| | | | Group effective interest | | The Company | | Subsidiaries | |
Guangzhou Aircraft Maintenance Engineering Company Limited | | | PRC October 28, 1989 | | | 50 | % | | 50 | % | | — | |
China Southern Airlines Group Finance Company Limited | | | PRC June 28, 1995 | | | 34 | % | | 21.1 | % | | 12.9 | % |
Sichuan Airlines Corporation Limited | | | PRC August 28, 2002 | | | 39 | % | | 39 | % | | — | |
China Postal Airlines Limited | | | PRC November 25, 1996 | | | 49 | % | | 49 | % | | — | |
MTU Maintenance Zhuhai Co. Ltd | | | PRC April 6, 2001 | | | 50 | % | | 50 | % | | — | |
Zhuhai Xiang Yi Aviation Technology Company Limited | | | PRC July 10, 2002 | | | 51 | % | | 51 | % | | — | |
Beijing Southern Airlines Ground Service Company Limited | | | PRC April 1, 2004 | | | 50 | % | | 50 | % | | — | |
Certain of the Company’s subsidiaries, affiliated companies and jointly controlled entities are PRC joint ventures which have limited duration pursuant to PRC law.
Property, Plant and Equipment
For a discussion of the Group’s aircraft, see Item 4, “Information on the Company — History and development of the Company — Aircraft
Fleet.Acquisitions.”
The Group’s headquarters in Guangzhou occupy an area of approximately
149,000254,400 square meters of land and a total gross floor area of approximately
149,000536,652 square meters. The Group leases from CSAHC the land in Guangzhou on which the Group’s headquarters and other facilities are located. The Group also leases from CSAHC certain buildings
mainly at the
Haikou, Wuhan,
HaikouNanyang, Shenyang, Dalian, Jilin, Harbin and
Zhengzhou airports.Xinjiang.
The Company’s principal properties are located at its headquarters site and at its route bases. The following table sets forth certain information with respect to the Company’s properties at its headquarters in Guangzhou and certain route bases as of the date hereof.
| | | | | | | | | | | | | | | | |
| | Land | | | Buildings | |
| | (in square meters) | | | (in square meters) | |
| | Owned | | | Leased | | | Owned | | | Leased | |
Guangzhou | | | — | | | | 80,809 | | | | 503,957 | | | | 1,755 | |
Shenzhen | | | 208,740 | | | | — | | | | 35,174 | | | | — | |
Zhuhai | | | 170,062 | | | | — | | | | 18,791 | | | | — | |
Changsha | | | 138,949 | | | | — | | | | 47,190 | | | | — | |
Zhengzhou | | | 290,841 | | | | — | | | | 60,582 | | | | — | |
Haikou | | | 5,265 | | | | — | | | | 59,543 | | | | 19,633 | |
Wuhan | | | — | | | | 31,061 | | | | 17,335 | | | | — | |
Nanyang | | | — | | | | — | | | | 12,156 | | | | — | |
| | Land (in square meters) | | Buildings (in square meters) | |
| | Owned | | Leased | | Owned | | Leased | |
| | | | | | | | | | | | | |
Guangzhou | | | 123,962 | | | 130,438 | | | 529,375 | | | 7,277 | |
Shenzhen | | | 208,740 | | | — | | | 54,093 | | | — | |
Zhuhai | | | 170,062 | | | — | | | 18,791 | | | — | |
Changsha | | | 138,949 | | | — | | | 47,190 | | | — | |
Zhengzhou | | | 290,841 | | | — | | | 60,582 | | | — | |
Haikou | | | 5,265 | | | — | | | 63,570 | | | 19,633 | |
Wuhan | | | — | | | 31,061 | | | 17,335 | | | 22,831 | |
Nanyang | | | — | | | — | | | 12,156 | | | 60,003 | |
Sanya | | | 106,680 | | | — | | | 16,968 | | | — | |
Shenyang | | | — | | | 167,502 | | | 79,626 | | | 93,445 | |
Dalian | | | — | | | 14,403 | | | 17,250 | | | 33,597 | |
Jilin | | | — | | | 65,076 | | | 33,656 | | | 7,767 | |
Harbin | | | — | | | 286,871 | | | 36,925 | | | 3,188 | |
Xinjiang | | | — | | | 545,146 | | | 177,710 | | | 4,135 | |
Guilin | | | 72,563 | | | — | | | 73,379 | | | 139 | |
The following table sets forth certain information with respect to the properties of the Airline Subsidiaries as of the date hereof.
| | | | | | | | | | | | | | | | |
| | Land | | | Buildings | |
| | (in square meters) | | | (in square meters) | |
| | Owned | | | Leased | | | Owned | | | Leased | |
Xiamen | | | 451,121 | | | | — | | | | 355,038 | | | | 12,509 | |
Shantou | | | 36,931 | | | | 55,407 | | | | 40,624 | | | | — | |
Zhuhai | | | 68,186 | | | | — | | | | 54,398 | | | | 2,135 | |
Guilin | | | 72,563 | | | | — | | | | 73,379 | | | | 139 | |
Guizhou | | | 259,879 | | | | — | | | | 93,390 | | | | 3,533 | |
| | Land (in square meters) | | Buildings (in square meters) | |
| | Owned | | Leased | | Owned | | Leased | |
| | | | | | | | | | | | | |
Xiamen | | | 579,530 | | | — | | | 436,617 | | | 19,113 | |
Shantou | | | 36,931 | | | 55,407 | | | 42,682 | | | — | |
Zhuhai | | | 94,024 | | | — | | | 44,351 | | | 2,245 | |
Guizhou | | | 259,879 | | | — | | | 95,705 | | | 3,533 | |
Chongqing | | | — | | | — | | | — | | | 3,009 | |
As systems for registration and transfer of land use rights and related real property interests in China have been implemented relatively recently, such systems do not yet comprehensively account for all land and related property interests. The land in Guangzhou on which the Group’s headquarters and other facilities are located and the buildings that the Group uses at its route base in Wuhan
Haikou and
ZhengzhouHaikou are leased by the Company from CSAHC. However, CSAHC lacks adequate documentation evidencing CSAHC’s rights to such land and buildings, and, as a consequence, the lease agreements between CSAHC and the Company for such land may not be registered with the relevant authorities. Lack of registration may affect the validity of such lease agreements. There are certain other parcels of land and buildings owned or used by the Group that lack adequate documentation. Lack of adequate documentation for land use rights and ownership of buildings may impair the ability of the Group to dispose of or mortgage such land use rights and buildings.
The Group has been occupying all of the land and buildings described above without challenge. CSAHC has received written assurance from the CAAC to the effect that CSAHC is entitled to continued use and occupancy of the land in Guangzhou. The Group understands that the CAAC is basing its conclusion on an agreement among certain governmental authorities relating to such land. CSAHC has agreed to indemnify the Group against any loss or damage caused by any challenge of, or interference with, the use by the Group of any of their respective land and buildings.
35
ITEM 4A. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
The following discussion and analysis should be read in conjunction with the Financial Statements of the Group contained elsewhere in this Annual Report. The Group maintains its books and accounts in accordance with PRC Accounting Rules and RegulationsStandards for Business Enterprises (“PRC GAAP”) and prepares its financial statements in accordance with both PRC GAAP and IFRS.IFRSs. The Financial Statements contained elsewhere in this Annual Report have been prepared in accordance with IFRS. IFRS differs in certain significant respects from U.S. GAAP. Information relating to the nature and effect of such differences is presented in Note 34 to the Financial Statements.IFRSs.
Critical Accounting Policies The discussion and analysis of the Group’s financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with
IFRS.IFRSs. The preparation of such consolidated financial statements requires the Group to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions.
Our principal accounting policies are set forth in Note 2 to the consolidated financial statements. The Group believes that
itsthe following critical accounting policies
are limited to those described below. For a detailed discussion oninvolve the
application of thesemost significant judgments and
other accounting policies, see Note 2 to the Financial Statements. Revenue Recognition
The Group records sales of passenger, cargo and mail tickets as “Sales in advance of carriage”, a current liability, on the consolidated balance sheet. Passenger, cargo and mail revenues are recognized and the related current liability is reduced when the transportation is provided. Sales in advance of carriage therefore represents ticket sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates. The Group’s balance of sales in advance of carriage as of December 31, 2004 was RMB874 million.
36
Property, plant and equipment
The Group have approximately RMB46,841 million fixed assets as of December 31, 2004. In addition to the original cost of these assets, their recorded value is impacted by a number of policy elections, including the estimation of useful lives and residual values and when necessary, impairment charges.
There were no significant changes to the original estimated useful lives or residual values of the property, plant and equipment of the Group during 2002, 2003 and 2004. The Group records aircraft at acquisition cost. Depreciable life is determined through economic analysis, reviewing existing fleet plans, recommendations from manufacturers and comparing estimated lives to other airlines that operate similar fleets. Residual values are estimated based on our historical experience with regards to the sale of aircraft and are established in conjunction with the estimated useful lives of the aircraft. Residual values are based on current dollars when the aircraft are acquired and typically reflect asset values that have not reached the end of their physical life. Both depreciable lives and residual values are reviewed periodically to recognize changes in our fleet plan and changes in conditions.
In addition, the Group evaluates fixed assetsestimates used in operationsthe preparation of our financial statements.
Impairment for impairment. Under IFRS, iflong-lived assets
If circumstances indicate that the net book value of ana long-lived asset may not be recoverable, this asset may be considered “impaired”, and an impairment loss may be recognized in accordance with IAS 36 “Impairment of Assets”. The amountcarrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment loss is the difference betweenwhenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount of the asset and itsis reduced to recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. In determining the value in use, the Group utilizes certain assumptions, including, but not limited to: (i) estimated fair market value of the assets, and (ii) estimated futureexpected cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset will be used in the Group’s operationsare discounted to their present value, which requires significant judgment relating to level of traffic revenue and estimated residual values.amount of operating costs. The Group will useuses all readily available information in determining an amount that is a reasonable approximation of recoverable amounts,amount, including estimates based on industry trendsreasonable and referencesupportable assumptions and projections of traffic revenue and amount of operating costs.
Depreciation
Property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives, after taking into account the estimated residual value. The Group reviews the estimated useful lives of the assets regularly in order to market rates and transactions. Changesdetermine the amount of depreciation expense to the above estimates may have a material effectbe recorded during any reporting period. The useful lives are based on the Group’s Financial Statements. Ashistorical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.
Impairment of December 31, 2004, based ontrade receivables
The Group maintains an impairment loss for doubtful accounts for estimated losses resulting from the result of evaluation, the Group considered that no impairment is required. Under U.S. GAAP, property, plant, and equipmentinability of the debtors to make required payments. The Group are reviewed for impairment whenever events or changes in circumstances indicate thatbases the carrying amountestimates of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated byon the asset.ageing of the trade receivables balance, debtors’ credit-worthiness, and historical write-off experience. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amountfinancial condition of the asset exceedsdebtors were to deteriorate, actual write-offs would be higher than estimated.
Recently Pronounced International Financial Reporting Standards
Information relating to the fair valuerecently pronounced IFRSs is presented in Note 50 to the consolidated financial statements.
Overview
In 2007, the booming domestic economic development directly led to the rapid development momentum of the
asset. During 2002air transportation business. Under the precondition of ensuring flight safety, the Group continued to improve its corporate governance and
2003, the impairment losses of RMB347 million and RMB510 million respectively were recognised on certain aircraft of CNA.Overview
From the fast growing economybusiness model. However, due to fierce competition in the PRC, growthindustry and skyrocketing fuel prices, the Group was faced with comparatively significant cost pressures. The Group dealt with such pressures by optimizing the structure of flight routes and the composition of fleet, increasing its overall revenue, taking a series of fuel saving measures and utilizing financial derivatives. The Group continued to reinforce financial budget management and cost control. It also improved the performance-assessment-by-objective mechanism geared towards operating efficiency of the flight routes network. All of these helped to realize a satisfactory improvement in airline market has been carried on which was commenced in second halfoperating standards and results benchmarks of 2003. The Group’s business was benefited from the increasing traffic demand in which both the passenger volume and passenger load factor were improved. Company.
Nevertheless, the Group is facing
pressurepressures on its
operation wasoperations due to the
seasonal effects and the increase in jet fuel cost.37
The continuing political tension in the Middle East led to high fuel prices which in turn caused an increase in the Group’s jet fuel cost. The Group has implemented various measures to control the increase in operating expenses.
Pursuant to “Pricing Reform of Domestic Civil Aviation” as approved by the State Council of the PRC effective on April 20, 2004, prices on domestic routes now fluctuate freely within a predetermined range. Instead of direct supervision by setting prices of air tickets through local price bureau, the government now provides guidance on domestic flights and domestic civil aviation is controlled by the government indirectly. Market-oriented pricing policy was introduced and pricing system has been adjusted as a result of the above pricing reform.
sub-prime crisis in the US, the slowing down of the world economy, the contractionary credit policies of the People’s Bank of China, fierce competition in the aviation industry and the rise of fuel prices.
Since July 21, 2005, the PRC Government has begun to adopt a managed floating exchange rate system based on market supply and demand of currencies, which is subject to adjustments with reference to a basket of currencies. The exchange rate of Renminbi would no longer be pegged to the U.S. dollar only and a more flexible exchange rate system was established. The exchange rate of U.S. dollar and RMB was at USD1.00: RMB7.3046. Because the Group finances its aircraft acquisitions mainly through finance leases or bank loans in U.S. dollars, and there are a substantial amount of transactions and obligations denominated in U.S. dollars in relation to its global purchases of jet fuel, lease and purchase of aviation equipment as well as major repairs, in addition to the landing fees of its international flights in the airports of other countries, the Group benefited from the RMB appreciation. RMB appreciation has brought a one-off exchange gain to the Group and reduced its operating costs which are denominated in foreign currencies. However, RMB appreciation also presents the Group with a challenge in price competition in international route operations.
According to the Notice of the NDRC and the CAAC on Issues Relating to Introduction of the Fuel Surcharge for Domestic Routes, domestic airlines imposed fuel surcharges for all the domestic routes (excluding those from the mainland PRC to Hong Kong and Macau) with effect from August 1, 2005 (based on flight time). On February 16, 2006, the NDRC and CAAC released a supplementary document on Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes, stating that due to the rising jet fuel price, the period of imposition of fuel surcharge by airlines was extended. The NDRC and CAAC released separate supplementary documents on Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes on March 28, 2006 and September 1, 2006, respectively, thereby adjusting the amount of fuel surcharges in a range of RMB20 to RMB60 per passenger for distance, flown less than 800 kilometers, and in a range of RMB40 to RMB100 for distance, exceeding 800 kilometers, during the period temporarily from April 10, 2006 to October 10, 2006. On January 21, 2007, the NDRC and CAAC released additional supplementary documents on Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes, thereby adjusting the amount of fuel surcharges from RMB60 to RMB50 per passenger for distance, flown less than 800 kilometers, and from RMB100 to RMB80 for distance exceeding 800 kilometers. On November 5, 2007, the NDRC and CAAC released additional supplementary documents on Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes, thereby adjusting the amount of fuel surcharges from RMB50 to RMB60 per passenger for distance, flown less than 800 kilometers, and from RMB80 to RMB100 for distance exceeding 800 kilometers. The introduction of fuel surcharge, and the extension of the duration of the same will help relieve, to a certain extent, the burden of high jet fuel cost, on the Group.
The Group’s operating revenue is substantially dependent on the passenger and cargo traffic volume carried, which is subject to seasonal and other changes in traffic patterns, the availability of appropriate time slots for the Group’s flights and alternative routes, the degree of competition from other airlines and alternate means of transportation, as well as other factors that may influence passenger travel demand and cargo and mail volume. In particular, the Group’s airline revenue is generally higher in the second and third quarters than in the first and fourth quarters.
Like most airlines, the Group is subject to a high degree of financial and operating leverage. A significant percentage of the Group’s operating expenses
isare fixed costs that do not vary proportionally based on the Group’s yields or the load factors. These fixed costs include depreciation expense, jet fuel costs, landing and navigation fees, financing costs, operating lease payments, aircraft maintenance costs and labor for flight crew, cabin crew and ground personnel. Thus, a minor change in the Group’s yields or load factors would have a material effect on the Group’s results of operations. In addition, certain of these expenses, primarily financing costs and operating lease payments, labor costs and depreciation do not vary based on the number of flights flown. Thus, the Group’s operating results can also be substantially affected by minor changes in aircraft utilization rates. The Group is and will continue to be highly leveraged with substantial obligations denominated in foreign currencies and, accordingly, the results of its operations are significantly affected by fluctuations in foreign exchange rates, particularly for the U.S. dollar and the Japanese yen. The Group recognized a net exchange
lossgain of
RMB164RMB2,832 million and
RMB59RMB1,492 million in
20032007 and
2004,2006, respectively. These amounts represented mainly unrealized exchange differences resulting from the retranslation of the foreign currency borrowings.
A number of other external variables, including political and economic conditions in China, tend to have a major impact on the Group’s performance. The Group’s financial performance is also significantly affected by factors arising from operating in a regulated industry. As substantially all aspects of the Group’s airline operations are regulated by the PRC government, the Group’s operating revenues and expenses are directly affected by the PRC government’s policies with respect to domestic
airfares,air fares, jet fuel prices and landing and navigation fees, among others. The nature and extent of airline competition and the ability of Chinese airlines to expand are also affected by CAAC’s control over route allocations. Any changes in the PRC government’s regulatory policies or any implementation of such policies could have a significant impact on the Group’s future operations and its ability to implement its operating strategy.
38
Certain Financial Information and Operating Data by Geographic Region
The following table sets forth certain financial information and operating data by geographic region for the years ended December 31, 2002, 20032007, 2006 and 2004:2005:
Traffic | | Year ended December 31, | | 2007 vs. 2006 | | 2006 vs. 2005 | |
| | 2007 | | 2006 | | 2005 | | % increase (decrease) | | % increase (decrease) | |
RPK (million) | | | | | | | | | | | | | | | | |
Domestic | | | 68,369 | | | 58,128 | | | 51,472 | | | 17.6 | | | 12.9 | |
Hong Kong and Macau | | | 1,180 | | | 1,541 | | | 1,549 | | | (23.4 | ) | | (0.5 | ) |
International | | | 12,178 | | | 9,913 | | | 8,902 | | | 22.8 | | | 11.4 | |
Total | | | 81,727 | | | 69,582 | | | 61,923 | | | 17.5 | | | 12.4 | |
RTK (million) | | | | | | | | | | | | | | | | |
Domestic | | | 7,219 | | | 6,226 | | | 5,571 | | | 15.9 | | | 11.8 | |
Hong Kong and Macau | | | 115 | | | 156 | | | 159 | | | (26.3 | ) | | (1.9 | ) |
International | | | 1,916 | | | 1,689 | | | 1,554 | | | 13.4 | | | 8.7 | |
Total | | | 9,250 | | | 8,071 | | | 7,284 | | | 14.6 | | | 10.8 | |
Passengers carried (thousand) | | | | | | | | | | | | | | | | |
Domestic | | | 51,326 | | | 44,225 | | | 39,545 | | | 16.1 | | | 11.8 | |
Hong Kong and Macau | | | 1,339 | | | 1,545 | | | 1,556 | | | (13.3 | ) | | (0.7 | ) |
International | | | 4,238 | | | 3,436 | | | 3,018 | | | 23.3 | | | 13.9 | |
Total | | | 56,903 | | | 49,206 | | | 44,119 | | | 15.6 | | | 11.5 | |
Cargo and mail carried (thousand tons) | | | | | | | | | | | | | | | | |
Domestic | | | 733 | | | 674 | | | 639 | | | 8.8 | | | 5.5 | |
Hong Kong and Macau | | | 12 | | | 16 | | | 19 | | | (25.0 | ) | | (15.8 | ) |
International | | | 127 | | | 129 | | | 117 | | | (1.6 | ) | | 10.3 | |
Total | | | 872 | | | 819 | | | 775 | | | 6.5 | | | 5.7 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year ended | | 2003 vs. 2002 | | | 2004 vs. 2003 | |
| | December 31, | | | % increase/ | | | % increase/ | |
| | 2002 | | | 2003 | | | 2004 | | | (decrease) | | | (decrease) | |
Traffic | | | | | | | | | | | | | | | | | | | | |
RPK (million) | | | | | | | | | | | | | | | | | | | | |
Domestic | | | 22,092 | | | | 21,294 | | | | 29,121 | | | | (3.6 | ) | | | 36.8 | |
Hong Kong regional | | | 1,081 | | | | 778 | | | | 1,203 | | | | (28.0 | ) | | | 54.6 | |
International | | | 5,767 | | | | 4,315 | | | | 6,872 | | | | (25.2 | ) | | | 59.3 | |
Total | | | 28,940 | | | | 26,387 | | | | 37,196 | | | | (8.8 | ) | | | 41.0 | |
RTK (million) | | | | | | | | | | | | | | | | | | | | |
Domestic | | | 2,532 | | | | 2,424 | | | | 3,206 | | | | (4.3 | ) | | | 32.3 | |
Hong Kong regional | | | 108 | | | | 78 | | | | 120 | | | | (27.8 | ) | | | 53.8 | |
International | | | 974 | | | | 1,059 | | | | 1,337 | | | | 8.7 | | | | 26.3 | |
Total | | | 3,614 | | | | 3,561 | | | | 4,663 | | | | (1.5 | ) | | | 30.9 | |
Passengers carried (thousand) | | | | | | | | | | | | | | | | | | | | |
Domestic | | | 18,535 | | | | 18,259 | | | | 25,002 | | | | (1.5 | ) | | | 36.9 | |
Hong Kong regional | | | 1,369 | | | | 1,019 | | | | 1,394 | | | | (25.6 | ) | | | 36.8 | |
International | | | 1,589 | | | | 1,192 | | | | 1,811 | | | | (25.0 | ) | | | 51.9 | |
Total | | | 21,493 | | | | 20,470 | | | | 28,207 | | | | (4.8 | ) | | | 37.8 | |
Cargo and mail carried (thousand tons) | | | | | | | | | | | | | | | | | | | | |
Domestic | | | 404 | | | | 379 | | | | 442 | | | | (6.2 | ) | | | 16.6 | |
Hong Kong regional | | | 14 | | | | 12 | | | | 15 | | | | (14.3 | ) | | | 25.0 | |
International | | | 52 | | | | 73 | | | | 88 | | | | 40.4 | | | | 20.5 | |
Total | | | 470 | | | | 464 | | | | 545 | | | | (1.3 | ) | | | 17.5 | |
38
39
| | | | | | | | | | | | | | | | | | | | |
| | Year ended | | 2003 vs. 2002 | | | 2004 vs. 2003 | |
| | December 31, | | | % increase/ | | | % increase/ | |
| | 2002 | | | 2003 | | | 2004 | | | (decrease) | | | (decrease) | |
Capacity | | | | | | | | | | | | | | | | | | | | |
ASK (million) | | | | | | | | | | | | | | | | | | | | |
Domestic | | | 33,753 | | | | 32,590 | | | | 41,330 | | | | (3.4 | ) | | | 26.8 | |
Hong Kong regional | | | 1,746 | | | | 1,347 | | | | 1,896 | | | | (22.9 | ) | | | 40.8 | |
International | | | 8,746 | | | | 6,930 | | | | 10,543 | | | | (20.8 | ) | | | 52.1 | |
Total | | | 44,245 | | | | 40,867 | | | | 53,769 | | | | (7.6 | ) | | | 31.6 | |
ATK (million) | | | | | | | | | | | | | | | | | | | | |
Domestic | | | 3,924 | | | | 3,772 | | | | 4,773 | | | | (3.9 | ) | | | 26.5 | |
Hong Kong regional | | | 193 | | | | 150 | | | | 211 | | | | (22.3 | ) | | | 40.7 | |
International | | | 1,798 | | | | 1,999 | | | | 2,462 | | | | 11.2 | | | | 23.2 | |
Total | | | 5,915 | | | | 5,921 | | | | 7,446 | | | | 0.1 | | | | 25.8 | |
Load Factors | | | | | | | | | | | | | | | | | | | | |
Passenger load factor (RPK/ASK) (%) | | | | | | | | | | | | | | | | | | | | |
Domestic | | | 65.5 | | | | 65.3 | | | | 70.5 | | | | (0.3 | ) | | | 8.0 | |
Hong Kong regional | | | 61.9 | | | | 57.8 | | | | 63.4 | | | | (6.6 | ) | | | 9.7 | |
International | | | 65.9 | | | | 62.3 | | | | 65.2 | | | | (5.5 | ) | | | 4.7 | |
Overall | | | 65.4 | | | | 64.6 | | | | 69.2 | | | | (1.2 | ) | | | 7.1 | |
Overall load factor (RTK/ATK) (%) | | | | | | | | | | | | | | | | | | | | |
Domestic | | | 64.5 | | | | 64.2 | | | | 67.2 | | | | (0.5 | ) | | | 4.7 | |
Hong Kong regional | | | 55.8 | | | | 52.2 | | | | 56.9 | | | | (6.5 | ) | | | 9.0 | |
International | | | 54.2 | | | | 53.0 | | | | 54.3 | | | | (2.2 | ) | | | 2.5 | |
Overall | | | 61.1 | | | | 60.1 | | | | 62.6 | | | | (1.6 | ) | | | 4.2 | |
Yield | | | | | | | | | | | | | | | | | | | | |
Yield per RPK (RMB) | | | | | | | | | | | | | | | | | | | | |
Domestic | | | 0.55 | | | | 0.57 | | | | 0.58 | | | | 3.6 | | | | 1.8 | |
Hong Kong regional | | | 0.98 | | | | 0.96 | | | | 0.92 | | | | (2.0 | ) | | | (4.2 | ) |
International | | | 0.42 | | | | 0.47 | | | | 0.46 | | | | 11.9 | | | | (2.1 | ) |
Overall | | | 0.54 | | | | 0.57 | | | | 0.57 | | | | 5.6 | | | | — | |
Yield per RTK (RMB) | | | | | | | | | | | | | | | | | | | | |
Domestic | | | 5.21 | | | | 5.40 | | | | 5.53 | | | | 3.6 | | | | 2.4 | |
Hong Kong regional | | | 10.36 | | | | 10.35 | | | | 9.83 | | | | (0.1 | ) | | | (5.0 | ) |
International | | | 3.25 | | | | 2.90 | | | | 3.31 | | | | (10.8 | ) | | | 14.1 | |
Overall | | | 4.84 | | | | 4.76 | | | | 5.01 | | | | (1.7 | ) | | | 5.3 | |
Financial | | | | | | | | | | | | | | | | | | | | |
IFRS | | | | | | | | | | | | | | | | | | | | |
Passenger revenue (RMB million) | | | | | | | | | | | | | | | | | | | | |
Domestic | | | 12,234 | | | | 12,242 | | | | 16,869 | | | | 0.1 | | | | 37.8 | |
Hong Kong regional | | | 1,055 | | | | 750 | | | | 1,104 | | | | (28.9 | ) | | | 47.2 | |
International | | | 2,407 | | | | 2,018 | | | | 3,127 | | | | (16.2 | ) | | | 55.0 | |
Total | | | 15,696 | | | | 15,010 | | | | 21,100 | | | | (4.4 | ) | | | 40.6 | |
Cargo and mail revenue (RMB million) | | | 1,786 | | | | 1,955 | | | | 2,244 | | | | 9.5 | | | | 14.8 | |
U.S. GAAP | | | | | | | | | | | | | | | | | | | | |
Passenger revenue (RMB million) | | | | | | | | | | | | | | | | | | | | |
Domestic | | | 18,145 | | | | 18,679 | | | | 24,773 | | | | 2.9 | | | | 32.6 | |
Hong Kong regional | | | 1,144 | | | | 781 | | | | 1,151 | | | | (31.7 | ) | | | 47.4 | |
International | | | 3,277 | | | | 2,978 | | | | 4,519 | | | | (9.1 | ) | | | 51.7 | |
Total | | | 22,566 | | | | 22,438 | | | | 30,443 | | | | (0.6 | ) | | | 35.7 | |
Cargo and mail revenue (RMB million) | | | 2,288 | | | | 2,459 | | | | 2,792 | | | | 7.5 | | | | 13.5 | |
40
Capacity | | Year ended December 31, | | 2007 vs. 2006 % increase (decrease) | | 2006 vs. 2005 % increase (decrease) | |
| | 2007 | | 2006 | | 2005 | | | | | |
ASK (million) | | | | | | | | | | | | | | | | |
Domestic | | | 89,452 | | | 79,773 | | | 72,107 | | | 12.1 | | | 10.6 | |
Hong Kong and Macau | | | 1,881 | | | 2,459 | | | 2,656 | | | (23.5 | ) | | (7.4 | ) |
International | | | 18,400 | | | 14,827 | | | 13,598 | | | 24.1 | | | 9.0 | |
Total | | | 109,733 | | | 97,059 | | | 88,361 | | | 13.1 | | | 9.8 | |
ATK (million) Domestic | | | 10,440 | | | 9,311 | | | 8,352 | | | 12.1 | | | 11.5 | |
Hong Kong and Macau | | | 210 | | | 289 | | | 315 | | | (27.3 | ) | | (8.3 | ) |
International | | | 3,558 | | | 3,056 | | | 2,842 | | | 16.4 | | | 7.5 | |
Total | | | 14,208 | | | 12,656 | | | 11,509 | | | 12.3 | | | 10.0 | |
Load Factors | | | | | | | | | | | | | | | | |
Passenger load factor (RPK/ASK) (%) | | | | | | | | | | | | | | | | |
Domestic | | | 76.4 | | | 72.9 | | | 71.4 | | | 4.8 | | | 2.1 | |
Hong Kong and Macau | | | 62.7 | | | 62.7 | | | 58.3 | | | 0.0 | | | 7.5 | |
International | | | 66.2 | | | 66.9 | | | 65.5 | | | (1.0 | ) | | 2.1 | |
Overall | | | 74.5 | | | 71.7 | | | 70.1 | | | 3.9 | | | 2.3 | |
Overall load factor (RTK/ATK) (%) | | | | | | | | | | | | | | | | |
Domestic | | | 69.1 | | | 66.9 | | | 66.7 | | | 3.3 | | | 0.3 | |
Hong Kong and Macau | | | 55.1 | | | 54.0 | | | 50.4 | | | 2.0 | | | 7.1 | |
International | | | 53.8 | | | 55.3 | | | 54.7 | | | (2.7 | ) | | 1.1 | |
Overall | | | 65.1 | | | 63.8 | | | 63.3 | | | 2.0 | | | 0.8 | |
Yield | | | | | | | | | | | | | | | | |
Yield per RPK (RMB) | | | | | | | | | | | | | | | | |
Domestic | | | 0.60 | | | 0.59 | | | 0.55 | | | 1.7 | | | 7.3 | |
Hong Kong and Macau | | | 0.91 | | | 0.80 | | | 0.77 | | | 13.8 | | | 3.9 | |
International | | | 0.63 | | | 0.62 | | | 0.56 | | | 1.6 | | | 10.7 | |
Overall | | | 0.61 | | | 0.60 | | | 0.55 | | | 1.7 | | | 9.1 | |
Yield per RTK (RMB) | | | | | | | | | | | | | | | | |
Domestic | | | 5.89 | | | 5.74 | | | 5.30 | | | 2.6 | | | 8.3 | |
Hong Kong and Macau | | | 9.91 | | | 8.52 | | | 8.18 | | | 16.3 | | | 4.2 | |
International | | | 5.03 | | | 4.77 | | | 4.24 | | | 5.5 | | | 12.5 | |
Overall | | | 5.76 | | | 5.59 | | | 5.14 | | | 3.0 | | | 8.8 | |
Financial | | | | | | | | | | | | | | | | |
Passenger revenue (RMB million) | | | | | | | | | | | | | | | | |
Domestic | | | 40,818 | | | 34,174 | | | 28,182 | | | 19.4 | | | 21.3 | |
Hong Kong and Macau | | | 1,074 | | | 1,230 | | | 1,194 | | | (12.7 | ) | | 3.0 | |
International | | | 7,708 | | | 6,145 | | | 4,952 | | | 25.4 | | | 24.1 | |
Total | | | 49,600 | | | 41,549 | | | 34,328 | | | 19.4 | | | 21.0 | |
Cargo and mail revenue (RMB million) | | | 3,697 | | | 3,538 | | | 3,091 | | | 4.5 | | | 14.5 | |
The historical results of operations discussed below may not be indicative of the Group’s future operating performance. In addition to the factors discussed under “Overview” above, the Group’s future operations will be affected by, among other things, changes in the aviation market, the cost of jet fuel, aircraft acquisition and leasing costs, aircraft maintenance expenses, take-off and landing charges, wages, salaries and benefits and other operating expenses, foreign exchange rates and the rates of income taxes paid.
2004 Compared
2007 compared with
20032006
The
Group recordedprofit attributable to equity shareholders of the Company increased from RMB188 million in 2006 to RMB1,871 million in 2007. The scale of operations increased as a
net lossresult of
RMB48 millionsteady growth in China’s economy and strong demand for
2004, as compared to a net loss of RMB358 million for 2003.air transportation. The Group’s operating revenue increased by
RMB6,504RMB8,283 million or
37.2%17.9% from
RMB17,470RMB46,219 million in
20032006 to
RMB23,974RMB54,502 million in
2004.2007. Passenger load factor increased by
4.62.8 percentage point, from
64.6%71.7% in
20032006 to
69.2%74.5% in
2004.2007. Passenger yield (in passenger revenue per RPK)
remain steady and at RMB0.57 in both years.increased by 1.7% to RMB0.61. Average yield (in traffic revenue per RTK) increased by
5.3%3.0% from
RMB4.76RMB5.59 in
20032006 to
RMB5.01RMB5.76 in
2004.2007. Operating expenses increased by
RMB6,051RMB7,106 million or
35.6%15.5% from
RMB17,014RMB45,907 million in
20032006 to
RMB23,065RMB53,013 million in
2004.2007. As
a result of improved passenger load factor and average yield, operating
revenue increased more than operating expenses, operating profitincome was increased by
99.3%RMB974 million, from
RMB456RMB645 million in
20032006 to
RMB909RMB1,619 million in
2004.2007. The Group’s net non-operating
income was RMB1,304 million as compared to net non-operating expenses
decreased by 30.1%, from RMB967of RMB288 million in
2003 to RMB676 million2006. The improvement in
2004,non-operating result was mainly attributable to
a decreasethe net effect of increase in
unfavourable movementexchange gain of RMB1,340 million, increase in
foreign exchange differencesfuel derivatives profit of
RMB105RMB109 million, increase in share of results of associates and jointly controlled entities of RMB60 million and
a decreaseincrease in interest expense of
RMB133RMB221 million.
Overall, the Group recorded a net loss of RMB48 million in 2004, as compared to a net loss of RMB358 million in 2003.
Substantially all of the Group’s operating revenue is attributable to airline and airline related operations. Traffic revenue
in 2004 and 2003 accounted for
97.4%97.8% and
97.1% respectively97.6% of total operating
revenue.revenue in 2007 and 2006, respectively. Passenger revenue and, cargo and mail revenue accounted for
90.4%93.1% and
9.6%6.9%, respectively, of total traffic revenue in
2004.2007. The
balance of the Group’sother operating revenue is
mainly derived from commission income, income from general aviation operations, fees charged for ground services rendered to other Chinese airlines and air catering services.
Operating
The increase in operating revenue
increased by 37.2% from RMB17,470 million in 2003 to RMB23,974 million in 2004. This increase was primarily due to a
40.6%19.4% rise in passenger revenue from
RMB15,010RMB41,549 million in
20032006 to
RMB21,100RMB49,600 million in
20042007 resulting from increased traffic volume. The total number of passengers carried increased by
37.8%15.6% to
28.256.90 million passengers in
2004.2007. RPKs increased by
41.0%17.5% from
26,38769,582 million in
20032006 to
RMB37,19681,727 million in
2004,2007, primarily as a result of
anthe increase in passengers carried. Passenger yield
remained constant at RMB0.57.increased slightly by RMB0.01.
Domestic passenger revenue, which accounted for 79.9%82.3% of the total passenger revenue in 2004,2007, increased by 37.8%19.4% from RMB12,242RMB34,174 million in 20032006 to RMB16,869RMB40,818 million in 2004.2007. Domestic passenger traffic in RPKs increased by 36.8%17.6%, mainly due to an increase in passengers carried. PassengerDomestic passenger yield remained steadyincreased from RMB0.59 in 20042006 to RMB 0.60 in 2007.
Hong Kong and
at RMB0.58. Hong KongMacau passenger revenue, which accounted for 5.3%2.2% of total passenger revenue, decreased by 12.7% from RMB1,230 million in 2006 to RMB1,074 million in 2007. Owing to the keen competition in Hong Kong and Macau routes, the Group scheduled certain flight capacity to other domestic and international routes in 2007. For Hong Kong and Macau flights, passenger traffic in RPKs decreased by 23.4%, while passenger capacity in ASKs decreased by 23.5%, resulting in the passenger load factor of 62.7%, which is unchanged from 2006. Passenger yield increased from RMB0.80 in 2006 to RMB0.91 in 2007 mainly caused by the decrease of long distance routes such as Hong Kong - Beijing. Generally, long distance routes have a lower yield than short distance ones.
International passenger revenue, which accounted for 15.5% of total passenger revenue, increased by
47.2%25.4% from
RMB750RMB6,145 million in
20032006 to
RMB1,104RMB7,708 million in
2004. For Hong Kong regional flights, passenger traffic in RPKs increased by 54.6%, while passenger capacity in ASKs increased by 40.8%, resulting in a 5.6 percentage point increase in passenger load factor from 2003. Passenger yield decreased from RMB0.96 in 2003 to RMB0.92 in 2004 mainly due to intensified competition among airlines. International passenger revenue, which accounted for 14.8% of total passenger revenue, increased by 55.0% from RMB2,018 million in 2003 to RMB3,127 million in 2004.2007. For international flights, passenger traffic in RPKs increased by 59.3%22.8%, while passenger capacity in ASKs increased by 52.1%24.1%, resulting in decrease of a 2.90.7 percentage point rise in passenger load factor from 2003.2006. Passenger yield decreasedincreased by 2.1%1.6% from RMB0.47RMB0.62 in 20032006 to RMB0.46RMB0.63 in 20042007 mainly resulted from the increasescontinued growth of demand for international flights in traffic derived from long haul routes which generally had a lower yield than short haul routes.
the PRC.
Cargo and mail revenue, which accounted for
9.6%6.9% of the Group’s total traffic revenue and
9.4%6.8% of total operating revenue, increased by
14.8%4.5% from
RMB1,955RMB3,538 million in
20032006 to
RMB2,244RMB3,697 million in
2004.2007. The increase was attributable to the increasing traffic demand.
Other operating revenue increased by
24.8%6.4% from
RMB505RMB1,132 million in
20032006 to
RMB630RMB1,205 million in
2004.2007. The increase was primarily due to the general growth in income from various auxiliary operations.
41
Total operating expenses in 2007 amounted to RMB53,013 million, representing an increase of 15.5% or RMB7,106 million over 2006, primarily due to the total effect of increases in jet fuel costs, operating lease charges of aircraft, servicing expenses and maintenance expenses. Total operating expenses as a percentage of total operating revenue decreased from 99.3% in 2006 to 97.3% in 2007.
Flight operations expenses, which accounted for 54.9% of total operating expenses, increased by 16.2% from RMB25,022 million in 2006 to RMB29,082 million in 2007, primarily as a result of increases in jet fuel costs, operating lease charges of aircraft, catering expenses, and CAAC Infrastructure Development Fund Contributions. Jet fuel costs, which accounted for 63.0% of flight operations expenses, increased by 13.1% from RMB16,193 million in 2006 to RMB18,316 million in 2007 mainly as a result of increased fuel prices and fuel consumption. Operating lease charges of aircraft increased by 23.4% from RMB3,027 million in 2006 to RMB3,735 million in 2007 primarily due to the additional rental payments for new aircraft under operating leases. Catering expenses increased by 15.4% from RMB1,170 million in 2006 to RMB1,350 million in 2007 due to the increase in number of passengers carried. CAAC Infrastructure Development Fund Contributions increased by 10.9% from RMB1,127 million in 2006 to RMB1,250 million in 2007.
Maintenance expenses which accounted for 8.8% of total operating expenses, increased by 16.1% from RMB3,999 million in 2006 to RMB4,643 million in 2007. The increase was mainly due to fleet expansion in recent years.
Aircraft and traffic servicing expenses, which accounted for 15.4% of total operating expenses, increased by 15.5% from RMB7,063 million in 2006 to RMB8,160 million in 2007. The increase primarily resulted from a 12.9% rise in landing and navigation fees from RMB5,343 million in 2006 to RMB6,030 million in 2007, due to an increase in number of landing and takeoffs.
Promotional and sales expenses, which accounted for 6.6% of total operating expenses, increased by 23.7% from RMB2,811 million in 2006 to RMB3,478 million in 2007, mainly due to the increase in commission charges as a result of increase in traffic revenue by 18.2%.
Depreciation and amortization, which accounted for 10.5% of total operating expenses, increased by 11.7% from RMB4,971 million in 2006 to RMB5,554 million in 2007, mainly resulting from the additional depreciation charge on aircraft delivered in 2006 and 2007.
Other income/ (expenses), net
Net gain on disposal of property, plant and equipment decreased by 61.0% from RMB333 million in 2006 to RMB130 million in 2007. The gain in 2007 was mainly due to the disposal of 11 MD82 aircraft to certain independent third parties.
Operating income
The operating income increased, from RMB645 million in 2006 to RMB1,619 million in 2007. This was mainly because operating revenue increased by RMB8,283 million or 17.9% in 2007 while operating expenses increased by RMB7,106 million or 15.5% in the same period.
Non-operating income/(expenses)
Interest expense increased by 10.7% from RMB2,070 million in 2006 to RMB2,291 million in 2007, mainly due to the increase in loans and obligations under finance leases. Interest income increased by 78.0% from RMB41 million in 2006 to RMB73 million in 2007, mainly attributable to the increase in average bank deposits balances during 2007.
Net exchange gain increased by 89.8% from RMB1,492 million in 2006 to RMB2,832 million in 2007, mainly resulted from Renminbi appreciation during 2007. Such amount mainly represented unrealized translation gain on retranslation of foreign currency denominated liabilities at year end.
Taxation
Income tax expense increased from RMB153 million in 2006 to RMB858 million in 2007. The effective tax rate decreased from 42.9% in 2006 to 29.4% in 2007. This is mainly attributable to the tax effect of the decrease of non-deductible expenses as a percentage to profit before taxation in 2007, which is offset to a lesser extent by the increase in deferred tax expenses recognized in 2007 resulting from the changes in tax rates in accordance with the new tax law effective from January 1, 2008.
2006 Compared with 2005
The profit for 2006 attributable to equity shareholders of the Company was RMB188 million, as compared to a loss of RMB1,848 million for 2005. The scale of operations increased as a result of continued growth in China’s economy and strong demand in air transportation. The Group’s operating revenue increased by RMB7,926 million or 20.7% from RMB38,293 million in 2005 to RMB46,219 million in 2006. Passenger load factor increased by 1.6 percentage points from 70.1% in 2005 to 71.7% in 2006. Passenger yield (in passenger revenue per RPK) increased by 9.1% to RMB0.60. Average yield (in traffic revenue per RTK) increased by 8.8% from RMB5.14 in 2005 to RMB5.59 in 2006. Operating expenses increased by RMB6,309 million or 15.9% from RMB39,598 million in 2005 to RMB45,907 million in 2006. As a result of improved passenger load factor and average yield, operating profit was RMB645 million in 2006 as compared to an operating loss of RMB1,337 million in 2005. The Group’s net non-operating expense was RMB288 million in 2006 as compared to a net non-operating expense of RMB516 million in 2005. The improvement in non-operating results was mainly attributable to the increase in exchange gain of RMB272 million, an increase in share of results of associates and jointly controlled entities of RMB369 million. The decrease in net operating expenses was partly offset by the increase in interest expense of RMB454 million.
Operating revenue
Substantially all of the Group’s operating expensesrevenue is attributable to airline and airline related operations. Traffic revenue accounted for 97.6% and 97.7% of total operating revenue in 2006 and 2005, respectively. Passenger revenue and, cargo and mail revenue accounted for 92.2% and 7.8%, respectively, of total traffic revenue in 2006. The other operating revenue is mainly derived from commission income, income from general aviation operations, fees charged for ground services rendered to other Chinese airlines and air catering services.
The increase in operating revenue was primarily due to a 21.0% rise in passenger revenue from RMB34,328 million in 2005 to RMB41,549 million in 2006 resulting from increased traffic volume. The total number of passengers carried increased by 11.5 % to 49.21 million passengers in 2006.
Passenger yield increased slightly by RMB0.05. RPKs increased by 12.4% from 61,923 million in 2005 to 69,582 million in 2006, primarily as a result of the increase in passengers carried.
Domestic passenger revenue, which accounted for 82.2% of the total passenger revenue in 2006, increased by 21.3% from its airline operations. The vast majorityRMB28,182 million in 2005 to RMB34,174 million in 2006. Domestic passenger traffic in RPKs increased by 12.9%, mainly due to an increase in passengers carried. Domestic passenger yield increased from RMB0.55 in 2005 to RMB0.59 in 2006.
Hong Kong and Macau passenger revenue, which accounted for 3.0% of such expenses relate directlytotal passenger revenue, increased by 3.0% from RMB1,194 million in 2005 to flight operations, aircraftRMB1,230 million in 2006. For Hong Kong and Macau flights, passenger traffic servicing, aircraft repairin RPKs decreased slightly by 0.5%, while passenger capacity in ASKs decreased by 7.4%, resulting in a 4.4 percentage point increase in passenger load factor from 2005. Passenger yield increased from RMB0.77 in 2005 to RMB0.80 in 2006 mainly due to higher ticket price as a result of soaring jet fuel cost.
International passenger revenue, which accounted for 14.8 % of total passenger revenue, increased by 24.1% from RMB4,952 million in 2005 to RMB6,145 million in 2006. For international flights, passenger traffic in RPKs increased by 11.4%, while passenger capacity in ASKs increased by 9.0%, resulting in a 1.4percentage point rise in passenger load factor from 2005. Passenger yield increased by 10.7% from RMB0.56 in 2005 to RMB0.62 in 2006 mainly due to the continued growth of demand in international flights in the PRC.
Cargo and maintenance and to depreciation and amortisation in respect of aircraft and flight equipment. Expenses associated directly with the Group’s flight operations (collectively, “flight operations expenses”) include fuel costs, operating lease payments, catering expenses, aircraft insurance, flight personnel payroll and welfare and training expenses. Expenses associated directly with repairs and maintenance in respectmail revenue, which accounted for 7.8% of the Group’s aircraft (collectively, “repairstotal traffic revenue and maintenance expenses”) include repairs and maintenance and overhaul charges,7.7% of total operating revenue, increased by 14.5% from RMB3,091 million in 2005 to RMB3,538 million in 2006. The increase was attributable to the costs of consumables and other maintenance materials and labour costs for maintenance personnel. Expenses associated directly withincreasing traffic demand.
Other operating revenue increased by 29.5 % from RMB874 million in 2005 to RMB1,132 million in 2006. The increase was primarily due to the Group’s aircraft and traffic servicing operations (collectively “aircraft and traffic servicing expenses”) include landing and navigation fees, rental payments and chargesgeneral growth in respect of terminal and other ground facilities and labour costs for ground personnel. The balance of the Group’s operatingincome from various auxiliary operations.
Operating expenses result from promotional and marketing activities (collectively, “promotional and marketing expenses”) such as sales commissions, fees for use of the CAAC’s reservation system, ticket-printing and sales office expenses, advertising and promotional expenses, and from general and administrative expenses, such as administrative salaries and welfare and other personnel benefits and office expenses. Total operating expenses in
20042006 amounted to
RMB23,065RMB45,907 million, representing an increase of
35.6%15.9% or
RMB6,051RMB6,309 million over
2003,2005, primarily due to the
combinedtotal effect of increases in jet fuel costs, maintenance expenses and aircraft and traffic servicing expenses. Total operating expenses as a percentage of total operating revenue decreased from
97.4%103.4 % in
20032005 to
96.2%99.3% in
2004.2006.
Flight operations expenses, which accounted for
45.2%54.4% of total operating expenses, increased by
47.4%26.6% from
RMB7,070RMB19,761 million in
20032005 to
RMB10,418RMB25,022 million in
2004,2006, primarily as a result of increases in jet fuel costs, operating lease
payments, catering expenses,charges of aircraft and labour costs for flight
personnel and inclusion of CAAC Infrastructure Development Fund of RMB466 million in operating expenses which is an usage charge since 2004 but was a turnover-based levy and deducted against the traffic revenue in 2003.personnel. Jet fuel costs, which accounted for
58.1%64.7% of flight operations expenses, increased by
56.5%35.7 % from
RMB3,867RMB11,929 million in
20032005 to
RMB6,050RMB16,193 million in
20042006 mainly as a result of increased fuel prices and fuel consumption. Operating lease
paymentscharges of aircraft increased by
8.4%21.2 % from
RMB1,536RMB2,497 million in
20032005 to
RMB1,665RMB3,027 million in
2004,2006 primarily due to the additional rental payments for new aircraft under operating leases.
Catering expenses increased by 38.2% from RMB510 million in 2003 to RMB705 million in 2004, primarily due to increased passenger carried. Aircraft insurance costs decreased by 5.6% from RMB196 million in 2003 to RMB185 million in 2004, primarily because of a decrease in insurance premiums prescribed by the PRC insurance company. Labour costs for flight personnel increased by
40.9%6.1% from
RMB728RMB1,599 million in
20032005 to
RMB1,026RMB1,697 million in
2004,2006, largely due to the increase in flying
hours. Maintenance expenses which accounted for 15.0% of total operating expenses, increased by 33.6% from RMB2,589 million in 2003 to RMB3,459 million in 2004. The increase was primarily attributable to an 32.9% increase in aircraft overhaul charges from RMB2,377 million in 2003 to RMB3,158 million in 2004, as resulted from fleet expansion in recent years.
42
Aircrafthours and traffic servicing expenses, which accounted for 15.2% of total operating expenses, increased by 26.6% from RMB2,767 million in 2003 to RMB3,503 million in 2004. The increase primarily resulted from an 25.7% rise in landing and navigation fees from RMB2,563 million in 2003 to RMB3,222 million in 2004, due to an increase in number of landing and takeoffs.
Promotional and marketing expenses, which accounted for 8.4% of total operating expenses, increased by 31.1% from RMB1,480 million in 2003 to RMB1,940 million in 2004. The increase was due to 44.4% increase in labour costs from RMB225 million in 2003 to RMB325 million in 2004, as more payments of performance bonus were made because of the increased traffic volume.
General and administrative expenses, which accounted for 5.7% of the total operating expenses, increased by 25.6% from RMB1,053 million in 2003 to RMB1,323 million in 2004. This was mainly attributable to increased scale of operations.
Depreciation and amortisation, which accounted for 10.5% of total operating expenses, increased by 18.4% from RMB2,038 million in 2003 to RMB2,413 million in 2004. This increase was primarily as a result of the additions of aircraft during 2004.
Operating profit
Operating profit increased by 99.3% from RMB456 million in 2003 to RMB909 million in 2004. This was mainly because operating revenue increased by RMB6,504 million or 37.2% from 2003 and operating expenses increased by RMB6,051 million or 35.6% over the same period.
Non-operating income/(expenses)
Interest expense decreased by 16.1% from RMB824 million in 2003 to RMB691 million in 2004, mainly reflecting the combined effect of scheduled debt repayments and the replacement of certain RMB denominated bank loans of higher interest rates with US$ denominated bank loans of lower interest rates.
Interest income increased by 69.2% from RMB13 million in 2003 to RMB22 million in 2004. This was mainly attributable to an increase in average cash balances.
During 2004, the Group recorded a net exchange loss of RMB59 million (2003:RMB164 million) mainly from its Japanese yen denominated borrowings as a result of the Japanese yen appreciation. Such amount comprised mostly unrealised translational exchange loss.
43
Taxation
On October 17, 2003, the Company’s registered address was moved to Guangzhou Economic & Technology Development Zone, Guangzhou, China. In accordance with the Rules and Regulations for Implementation of Income Tax for Foreign Investment Enterprises and Foreign Enterprises of the PRC and a taxation approval document “Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que 020043”, the Company is entitled to enjoy the preferential tax policy implemented in the Guangzhou Economic & Technology Development Zone effective from October 1, 2003. As a result, the Company’s income tax rate has been changed from 33% to 15% beginning from that date.
In 2003, the Group recorded an income tax credit of RMB324 million resulting from reduction in net deferred taxation liability balance of RMB392 million. In 2004, income tax expense of RMB78 million was recorded.
Minority interests
Minority interests increased by 18.7% from RMB171 million in 2003 to RMB203 million in 2004, primarily reflecting the increased net profits earned by certain of the Group’s airline subsidiaries for the year.
2003 Compared with 2002
The Group recorded a net loss of RMB358 million for 2003, as compared to a net income of RMB576 million for 2002. The Group’s operating revenue decreased by RMB549 million or 3.0% from RMB18,019 million in 2002 to RMB17,470 million in 2003. Passenger load factor decreased by 0.8 percentage point from 65.4% in 2002 to 64.6% in 2003. Passenger yield (in passenger revenue per RPK) increased by 5.6% from RMB0.54 in 2002 to RMB0.57 in 2003. Average yield (in traffic revenue per RTK) decreased by 1.7% from RMB4.84 in 2002 to RMB4.76 in 2003. Operating expenses increased by RMB1,021 million or 6.4% from RMB15,993 million in 2002 to RMB17,014 million in 2003. As operating revenue decreased while operating expenses increased, operating profit decreased by 77.5% from RMB2,026 million in 2002 to RMB456 million in 2003. The Group’s net non-operating expenses increased by 9.1%, from RMB887 million in 2002 to RMB967 million in 2003, mainly due to a decrease in gain on disposal of fixed assets of RMB193 million, partly offset by a decrease in interest expense of RMB135 million. Overall, the Group recorded a net loss of RMB358 million in 2003, as compared to a net profit of RMB576 million in 2002.
44
Operating Revenue
Substantially all of the Group’s operating revenue is attributable to airline operations. Traffic revenue in 2003 and 2002 accounted for 97.1% and 97.0% respectively of total operating revenue. Passenger revenue and, cargo and mail revenue accounted for 88.5% and 11.5% respectively of total traffic revenue in 2003. The balance of the Group’s operating revenue is derived from commission income, income from general aviation operations, fees charged for ground services and for air catering services and net income from lease arrangements.
Operating revenue decreased by 3.0% from RMB18,019 million in 2002 to RMB17,470 million in 2003. This decrease was primarily due to a 4.4% fall in passenger revenue from RMB15,696 million in 2002 to RMB15,010 million in 2003 resulting from lower traffic volume caused by SARS. The total number of passengers carried decreased by 4.8% to 20.5 million passengers in 2003. RPKs decreased by 8.8% from 28,940 million in 2002 to 26,387 million in 2003, primarily as a result of a decrease in passengers carried. However, passenger yield increased by 5.6% from RMB0.54 in 2002 to RMB0.57 in 2003, mainly as the result of the exemption ofallowance standard. CAAC Infrastructure Development Fund and sales tax during the periodContributions increased by 15.2% from May 1, 2003 to December 31, 2003.
Domestic passenger revenue, which accounted for 81.6% of the total passenger revenue in 2003, increased slightly by 0.1% from RMB12,234RMB978 million in 20022005 to RMB12,242RMB1,127 million in 2003. Domestic passenger traffic in RPKs decreased by 3.6%, mainly due to a decrease in passengers carried. Passenger yield, however, increased from RMB0.55 in 2002 to RMB0.57 in 2003, mainly as the result of the aforesaid exemption of CAAC Infrastructure Development Fund and sales tax.
Hong Kong passenger revenue, which accounted for 5.0% of total passenger revenue, decreased by 28.9% from RMB1,055 million in 2002 to RMB750 million in 2003. For Hong Kong flights, passenger traffic in RPKs decreased by 28.0%, while passenger capacity in ASKs decreased by 22.9%, resulting in a 4.1 percentage point decrease in passenger load factor from 2002. Passenger yield decreased from RMB0.98 in 2002 to RMB0.96 in 2003 mainly due to slack in traffic volume.
International passenger revenue, which accounted for 13.4% of total passenger revenue, decreased by 16.2% from RMB2,407 million in 2002 to RMB2,018 million in 2003. For international flights, passenger traffic in RPKs decreased by 25.2%, while passenger capacity in ASKs decreased by 20.8%, resulting in a 3.6 percentage point fall in passenger load factor from 2002. Passenger yield increased by 11.9% from RMB0.42 in 2002 to RMB0.47 in 2003 mainly as the result of the aforesaid exemption of CAAC Infrastructure Development Fund and sales tax.
Cargo and mail revenue, which accounted for 11.5% of the Group’s total traffic revenue and 11.1% of total operating revenue, increased by 9.5% from RMB1,786 million in 2002 to RMB1,955 million in 2003. The increase was primarily due to the full year effect of the opening of two international cargo routes to Los Angeles of the United States of America and Leige of Belgium in late 2002.
Other operating revenue decreased by 6.0% from RMB537 million in 2002 to RMB505 million in 2003. The decrease was primarily due to a decrease in aircraft short-term lease income of RMB46 million.
Operating Expenses
Substantially all of the Group’s operating expenses result from its airline operations. The vast majority of such expenses relate directly to flight operations, aircraft and traffic servicing, aircraft repair and maintenance and to depreciation and amortisation in respect of aircraft and flight equipment. Expenses associated directly with the Group’s flight operations (collectively, “flight operations expenses”) include fuel costs, operating lease payments, catering expenses, aircraft insurance, flight personnel payroll and welfare and training expenses. Expenses associated directly with repairs and maintenance in respect of the Group’s aircraft (collectively, “repairs and maintenance expenses”) include repairs and maintenance and overhaul charges, the costs of consumables and other maintenance materials and labour costs for maintenance personnel. Expenses associated directly with the Group’s aircraft and traffic servicing operations (collectively “aircraft and traffic servicing expenses”) include landing and navigation fees, rental payments and charges in respect of terminal and other ground facilities and labour costs for ground personnel. The balance of the Group’s operating expenses result from promotional and marketing activities (collectively, “promotional and marketing expenses”) such as sales commissions, fees for use of the CAAC’s reservation system, ticket-printing and sales office expenses, advertising and promotional expenses, and from general and administrative expenses, such as administrative salaries and welfare and other personnel benefits and office expenses.
Total operating expenses in 2003 amounted to RMB17,014 million, representing an increase of 6.4% or RMB1,021 million over 2002, primarily due to the combined effect of increases in jet fuel costs, maintenance expenses and aircraft and traffic servicing expenses. Total operating expenses as a percentage of total operating revenue increased from 88.8% in 2002 to 97.4% in 2003.
45
2006.
Flight operations expenses, which accounted for 41.6% of total operating expenses, increased by 5.0% from RMB6,733 million in 2002 to RMB7,070 million in 2003, primarily as a result of increases in jet fuel costs and operating lease payments, partly offset by a decrease in catering expenses. Jet fuel costs, which accounted for 54.7% of flight operations expenses, increased by 9.9% from RMB3,519 million in 2002 to RMB3,867 million in 2003 mainly as a result of increased jet fuel prices. Operating lease payments increased by 8.4% from RMB1,417 million in 2002 to RMB1,536 million in 2003, primarily due to the full year effect of the addition of new operating leases in respect of four Boeing 757-200 aircraft in late 2002 and four Airbus 319-100 aircraft and three Boeing 737-700 aircraft during 2003. Catering expenses decreased by 18.4% from RMB625 million in 2002 to RMB510 million in 2003, primarily reflecting a tighter cost controls exercised by the Group. Aircraft insurance costs decreased by 23.4% from RMB256 million in 2002 to RMB196 million in 2003, primarily because of a reduction in the rate of aircraft insurance premiums prescribed by the PRC insurance company. Labor costs for flight personnel decreased by 6.8% from RMB781 million in 2002 to RMB728 million in 2003, largely due to a decrease in flight hours.
Maintenance
expenses which accounted for 15.2% of total operating expenses, increased by 11.0% from RMB2,333 million in 2002 to RMB2,589 million in 2003. The increase was primarily attributable to an 11.3% increase in aircraft maintenance and repair charges from RMB2,135 million in 2002 to RMB2,377 million in 2003, mainly as the result of the effect of fleet expansion in recent years. Aircraft and traffic servicing expenses, which accounted for 16.3% of total operating expenses, increased by 10.2% from RMB2,511 million in 2002 to RMB2,767 million in 2003. The increase primarily resulted from an 8.9% rise in landing and navigation fees from RMB2,354 million in 2002 to RMB2,563 million in 2003, due to an increase in the charge rate for domestic landing and navigation fees effective September 2002.
Promotional and marketing expenses which accounted for 8.7% of total operating expenses, decreased by 1.3%12.9% from RMB1,500RMB4,589 million in 20022005 to RMB1,480RMB3,999 million in 2003.2006. The decrease was due to 9.3% decrease in labor costs from RMB248 million in 2002 to RMB225 million in 2003, as fewer bonuses were given because of reduced sales volume in 2003.
General and administrative expenses, which accounted for 6.2% of the total operating expenses, decreased slightly by 0.7% from RMB1,060 million in 2002 to RMB1,053 million in 2003. This was mainly due to a decrease in scale of operationscertain major overhaul costs capitalized during SARS period.
Depreciation and amortization, which accounted for 12.0% of total operating expenses, increased by 10.8% from RMB1,840 million in 2002 to RMB2,038 million in 2003. This increase was primarily as a result of the addition of aircraft during 2003.
46
Operating Income
Operating income decreased by 77.5% from RMB2,026 million in 2002 to RMB456 million in 2003. This was mainly because operating revenue decreased by RMB549 million or 3.0% from 2002 while operating expenses increased by RMB1,021 million or 6.4% over the same period.
Non-operating Income/(Expenses)
Interest expense decreased by 14.1% from RMB959 million in 2002 to RMB824 million in 2003, mainly reflecting the combined effect of scheduled debt repayments and the replacement of certain RMB denominated bank loans with US$ denominated bank loans with lower interest rates.
Interest income decreased by 75.2% from RMB53 million in 2002 to RMB13 million in 2003. This was mainly attributable to a decrease in average cash balances.
The Group recorded a net loss on sale of fixed assets of RMB22 million in 2003, mainly resulting from retirement of two old Boeing 737- 200 aircraft.
During 2003, the Group recorded a net exchange loss of RMB164 million predominantly due to its Japanese yen denominated borrowings as a result of the Japanese yen appreciation. Such amount comprised mostly unrealized translation loss.
Taxation
On October 17, 2003, the Company’s registered address was moved to Guangzhou Economic & Technology Development Zone. In accordance with the Rules and Regulations for Implementation of Income Tax for Foreign Investment Enterprises and Foreign Enterprises of the PRC and a taxation approval document “Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que 020043”, the Company is entitled to enjoy the preferential tax policy implemented in the Guangzhou Economic & Technology Development Zone effective from October 1, 2003. As a result, the Company’s income tax rate has been changed from 33% to 15% beginning from that date.
The Group recorded an income tax credit of RMB324 million for 2003 compared to an income tax expense of RMB398 million for 2002. As a result of the reduction in income tax rate, the Company’s net deferred taxation liability balance brought forward from December 31, 2002 of RMB507 million was reduced by RMB392 million and a net deferred tax credit of RMB392 million was recognized in 2003 for such reduction in income tax rate accordingly.
Minority Interests
Minority interests increased by 3.6% from RMB165 million in 2002 to RMB171 million in 2003, primarily reflecting the net income earned by certain of the Group’s airline subsidiaries for the year.
Additional information under U.S. GAAP
2004 Compared with 2003
The Group’s operating revenue increased by RMB8,682 million or 34.1% from RMB25,483 million in 2003 to RMB34,165 million in 2004. Such growth was primarily attributable to growth in volume of passenger traffic carried by the Group as a result of the recovery of the Group’s traffic operations from SARS and flight capacity. Operating expenses increased by RMB7,171 million or 28.6% from RMB25,117 million in 2003 to RMB32,288 million in 2004. As operating revenue increased more than operating expenses, operating profit increased by 412.8% from RMB366 million in 2003 to RMB1,877 million in 2004. The Group’s net non-operating expenses decreased by 38.5%, from RMB1,905 million in 2003 to RMB1,171 million in 2004, primarily attributable to a decrease in unfavourable movement in foreign exchange differences of RMB257 million and a decrease in interest expense of RMB420 million. Overall, the Group recorded a net income of RMB239 million in 2004, as compared to a net loss of RMB1,140 million in 2003.
Operating revenue
Substantially all of the Group’s operating revenue is attributable to airline and airline related operations. Traffic revenue in 2004 and 2003 accounted for 97.3% and 97.7% respectively of total operating revenue. Passenger revenue and, cargo and mail revenue accounted for 91.6% and 8.4% respectively of total traffic revenue in 2004. The balance of the Group’s operating revenue is derived from commission income, income from general aviation operations, fees charged for ground services rendered to other Chinese airlines and air catering services.
Operating revenue increased by 34.1% from RMB25,483 million in 2003 to RMB34,165 million in 2004. This increase was primarily due to a 35.7% rise in passenger revenue from RMB22,438 million in 2003 to RMB30,443 million in 2004 resulting from increased traffic volume. The total number of passengers carried increased by 33.0% to 38.7 million passengers in 2004. RPKs increased by 34.3% from 39,626 million in 2003 to RMB53,233 million in 2004, primarily as a result of an increase in passengers carried. Passenger yield increased to RMB0.57.
Domestic passenger revenue, which accounted for 81.4% of the total passenger revenue in 2004, increased by 32.6% from RMB18,679 million in 2003 to RMB24,773 million in 2004. Domestic passenger traffic in RPKs increased by 30.6%, mainly due to an increase in passengers carried. Passenger yield increased to RMB0.57 in 2004.
Hong Kong passenger revenue, which accounted for 3.8% of total passenger revenue, increased by 47.4% from RMB781 million in 2003 to RMB1,151 million in 2004. For Hong Kong regional flights, passenger traffic in RPKs increased by 68.0%, while passenger capacity in ASKs increased by 55.8%, resulting in a 4.5 percentage point increase in passenger load factor from 2003. Passenger yield decreased from RMB1.00 in 2003 to RMB0.88 in 2004 mainly due to intensified competition among airlines.
International passenger revenue, which accounted for 14.8% of total passenger revenue, increased by 51.7% from RMB2,978 million in 2003 to RMB4,519 million in 2004. For international flights, passenger traffic in RPKs increased by 52.8%, while passenger capacity in ASKs increased by 44.1%, resulting in a 3.6 percentage point rise in passenger load factor from 2003. Passenger yield remained steady in 2004 and at RMB0.55.
Cargo and mail revenue, which accounted for 8.4% of the Group’s total traffic revenue and 8.2% of total operating revenue, increased by 13.5% from RMB2,459 million in 2003 to RMB2,792 million in 2004. The increase was attributable to the increasing traffic demand.
Other operating revenue increased by 58.7% from RMB586 million in 2003 to RMB930 million in 2004. The increase was primarily due to the general growth in income from various auxiliary operations.
Operating expenses
Substantially all of the Group’s operating expenses result from its airline operations. The vast majority of such expenses relate directly to flight operations, aircraft and traffic servicing, aircraft repair and maintenance and to depreciation and amortisation in respect of aircraft and flight equipment. Expenses associated directly with the Group’s flight operations (collectively, “flight operations expenses”) include fuel costs, operating lease payments, catering expenses, aircraft insurance, flight personnel payroll and welfare and training expenses. Expenses associated directly with repairs and maintenance in respect of the Group’s aircraft (collectively, “repairs and maintenance expenses”) include repairs and maintenance and overhaul charges, the costs of consumables and other maintenance materials and labour costs for maintenance personnel. Expenses associated directly with the Group’s aircraft and traffic servicing operations (collectively “aircraft and traffic servicing expenses”) include landing and navigation fees, rental payments and charges in respect of terminal and other ground facilities and labour costs for ground personnel. The balance of the Group’s operating expenses result from promotional and marketing activities (collectively, “promotional and marketing expenses”) such as sales commissions, fees for use of the CAAC’s reservation system, ticket-printing and sales office expenses, advertising and promotional expenses, and from general and administrative expenses, such as administrative salaries and welfare and other personnel benefits and office expenses, and from asset impairment charges.
Total operating expenses in 2004 amounted to RMB32,288 million, representing an increase of 28.6% or RMB7,171 million over 2003, primarily due to the combined effect of increases in jet fuel costs, maintenance expenses and aircraft and traffic servicing expenses. In addition, in 2003, the Group recorded an asset impairment charge of RMB510 million on certain aircraft of CNA. The Group did not incur any asset impairment charges on its aircraft in 2004. Total operating expenses as a percentage of total operating revenue decreased from 98.6% in 2003 to 94.5% in 2004.
Flight operations expenses, which accounted for 46.5% of total operating expenses, increased by 45.1% from RMB10,351 million in 2003 to RMB15,016 million in 2004, primarily as a result of increases in jet fuel costs, operating lease payments, catering expenses, labour costs for flight personnel and inclusion of CAAC Infrastructure Development Fund of RMB632 million in operating expenses which is an usage charge since 2004 but was a turnover-based levy and deducted against the traffic revenue in 2003. Jet fuel costs, which accounted for 57.0% of flight operations expenses, increased by 51.1% from RMB5,662 million in 2003 to RMB8,555 million in 2004 mainly as a result of increased fuel prices and fuel consumption. Operating lease payments increased by 16.6% from RMB1,808 million in 2003 to RMB2,109 million in 2004, primarily due to the additional rental payments for new aircraft under operating leases. Catering expenses increased by 30.9% from RMB754 million in 2003 to RMB987 million in 2004, primarily due to increase in number of passengers carried. Aircraft insurance costs decreased by 7.9% from RMB291 million in 2003 to RMB268 million in 2004, primarily because of a decrease in insurance premiums prescribed by the PRC insurance company. Labour costs for flight personnel increased by 37.2% from RMB1,126 million in 2003 to RMB1,545 million in 2004, largely due to the increase in flying hours.
Maintenance expenses which accounted for 14.2% of total operating expenses, increased by 18.1% from RMB3,878 million in 2003 to RMB4,578 million in 2004. The increase was primarily attributable to a 16.7% increase in aircraft overhaul charges from RMB2,913 million in 2003 to RMB3,399 million in 2004, which was resulted from fleet expansion in recent years.
Aircraft and traffic servicing
expenses, which accounted for 14.8% of total operating expenses, increased by 25.9% from RMB3,803 million in 2003 to RMB4,789 million in 2004. The increase was primarily resulted from an 25.7% rise in landing and navigation fees from RMB3,539 million in 2003 to RMB4,447 million in 2004, and an increase in number of landing and takeoffs. Promotional and marketing expenses, which accounted for 8.1% of total operating expenses, increased by 27.6% from RMB2,043 million in 2003 to RMB2,606 million in 2004. The increase was due to 40.0% increase in labour costs from RMB305 million in 2003 to RMB427 million in 2004, as more payments of performance bonus were made because of the increased traffic volume.
General and administrative expenses, which accounted for 5.4% of the total operating expenses, increased by 25.9% from RMB1,397 million in 2003 to RMB1,759 million in 2004. This was mainly attributable to increased scale of operations.
Depreciation and amortisation, which accounted for 11.0% of total operating expenses, increased by 15.8% from RMB3,042 million in 2003 to RMB3,523 million in 2004. This increase was primarily a result of the additions of aircraft during 2004.
Operating income
Operating income increased by 412.8% from RMB366 million in 2003 to RMB1,877 million in 2004. This was mainly because operating revenue increased by RMB8,682 million or 34.1% from 2003 and operating expenses increased by RMB7,171 million or 28.6% over the same period.
Non-operating income/(expenses)
Interest expense decreased by 26.2% from RMB1,604 million in 2003 to RMB1,184 million in 2004, mainly reflecting the combined effect of scheduled debt repayments and the replacement of certain RMB denominated bank loans of higher interest rates with US$ denominated bank loans of lower interest rates.
Interest income increased by 22.2% from RMB27 million in 2003 to RMB33 million in 2004. This was mainly attributable to an increase in average cash balances.
During 2004, the Group recorded a net exchange loss of RMB124 million (2003: RMB381 million) mainly from its Japanese yen denominated borrowings as a result of the Japanese yen appreciation. Such amount comprised mostly unrealised translational exchange loss.
Taxation
On 17 October, 2003, the Company’s registered address was moved to Guangzhou Economic & Technology Development Zone, Guangzhou, China. In accordance with the Rules and Regulations for Implementation of Income Tax for Foreign Investment Enterprises and Foreign Enterprises of the PRC and a taxation approval document “Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que 020043”, the Company is entitled to enjoy the preferential tax policy implemented in the Guangzhou Economic & Technology Development Zone effective from 1 October, 2003. As a result, the Company’s income tax rate has been changed from 33% to 15% beginning from that date. In 2003, the Group recorded an income tax credit of RMB526 million resulting from a reduction in net deferred taxation liability balance of RMB341 million.
The airline operations of CNA and XJA were subject to PRC income tax at 33% during 2003 and up to December 30, 2004. As a result of the CNA/XJA Acquisitions having been effective December 31, 2004, the airline operations of CNA and XJA have become divisions of the Company and are subject to PRC income tax at the applicable rate of 15% beginning that date. Consequently, the airline operations of CNA and XJA recorded an income tax credit of RMB99 million. Overall, net income tax expenses of the airline operations of CNA and XJA amounted to RMB274 million for 2004.
Minority interests
Minority interests increased by 52.0% from RMB127 million in 2003 to RMB193 million in 2004, primarily reflecting the increased net profits earned by certain of the Group’s airline subsidiaries for the year.
2003 Compared with 2002
The Group’s operating revenue slightly decreased by RMB275 million or 1.1% from RMB25,758 million in 2002 to RMB25,483 million in 2003. The Group’s traffic operations were badly hit by the outbreak of SARS during 2003 which reduced the traffic revenue of the Group during the affected period from April to July 2003. Operating expenses increased by RMB1,307 million or 5.5% from RMB23,810 million in 2002 to RMB25,117 million in 2003. As operating revenue decreased while operating expenses increased, operating profit decreased by 81.2% from RMB1,948 million in 2002 to RMB366 million in 2003. The Group’s net non-operating expenses decreased by 8.6%, from RMB2,084 million in 2002 to RMB1,905 million in 2003, mainly due to a decrease in interest expense of RMB 216 million, partly offset by an increase in foreign exchange loss of RMB54 million. Overall, the Group recorded a net loss of RMB1,140 million in 2003, as compared to a net loss of RMB655 million in 2002.
Operating Revenue
Substantially all of the Group’s operating revenue is attributable to airline operations. Traffic revenue in 2003 and 2002 accounted for 97.7% and 96.5% respectively of total operating revenue. Passenger revenue and, cargo and mail revenue accounted for 90.1% and 9.9% respectively of total traffic revenue in 2003. The balance of the Group’s operating revenue is derived from commission income, income from general aviation operations, fees charged for ground services and for air catering services and net income from lease arrangements.
Operating revenue decreased by 1.1% from RMB25,758 million in 2002 to RMB25,483 million in 2003. This decrease was primarily due to a 0.6% fall in passenger revenue from RMB22,566 million in 2002 to RMB22,438 million in 2003 resulting from lower traffic volume caused by SARS. The total number of passengers carried decreased by 1.4% to 20.5 million passengers in 2003. RPKs decreased by 4.8% from 41,642 million in 2002 to 39,626 million in 2003, primarily as a result of a decrease in number of passengers carried. However, passenger yield increased by 5.6% from RMB0.54 in 2002 to RMB0.57 in 2003, mainly as the result of the exemption of CAAC Infrastructure Development Fund and sales tax during the period from May 1, 2003 to December 31, 2003.
Domestic passenger revenue, which accounted for 83.2% of the total passenger revenue in 2003, increased slightly by 2.9% from RMB18,145 million in 2002 to RMB18,679 million in 2003. Domestic passenger traffic in RPKs decreased by 0.6%, mainly due to a decrease in passengers carried. Passenger yield, however, increased from RMB0.54 in 2002 to RMB0.56 in 2003, mainly as the result of the aforesaid exemption of CAAC Infrastructure Development Fund and sales tax.
Hong Kong passenger revenue, which accounted for 3.5% of total passenger revenue, decreased by 31.7% from RMB1,144 million in 2002 to RMB781 million in 2003. For Hong Kong flights, passenger traffic in RPKs decreased by 28.0%, while passenger capacity in ASKs decreased by 22.9%, resulting in a 4.1 percentage point decrease in passenger load factor from 2002. Passenger yield decreased from RMB1.06 in 2002 to RMB1.00 in 2003 mainly due to slack in traffic volume.
International passenger revenue, which accounted for 13.3% of total passenger revenue, decreased by 9.1% from RMB3,277 million in 2002 to RMB2,978 million in 2003. For international flights, passenger traffic in RPKs decreased by 22.1%, while passenger capacity in ASKs decreased by 17.8%, resulting in a 3.2 percentage point fall in passenger load factor from 2002. Passenger yield increased by 17.0% from RMB0.47 in 2002 to RMB0.55 in 2003 mainly as the result of the aforesaid exemption of CAAC Infrastructure Development Fund and sales tax.
Cargo and mail revenue, which accounted for 9.9% of the Group’s total traffic revenue and 9.6% of total operating revenue, increased by 7.4% from RMB2,289 million in 2002 to RMB2,459 million in 2003. The increase was primarily due to the full year effect of the opening of two international cargo routes to Los Angeles of the United States of America and Leige of Belgium in late 2002.
Other operating revenue decreased by 35.2% from RMB904 million in 2002 to RMB586 million in 2003. The decrease was primarily due to a decrease in aircraft short-term lease income of RMB130 million and the inclusion of the gain on the disposal of property, plant and equipment of RMB194 million in 2002.
Operating Expenses
Substantially all of the Group’s operating expenses result from its airline operations. The vast majority of such expenses relate directly to flight operations, aircraft and traffic servicing, aircraft repair and maintenance and to depreciation and amortisation in respect of aircraft and flight equipment. Expenses associated directly with the Group’s flight operations (collectively, “flight operations expenses”) include fuel costs, operating lease payments, catering expenses, aircraft insurance, flight personnel payroll and welfare and training expenses. Expenses associated directly with repairs and maintenance in respect of the Group’s aircraft (collectively, “repairs and maintenance expenses”) include repairs and maintenance and overhaul charges, the costs of consumables and other maintenance materials and labour costs for maintenance personnel. Expenses associated directly with the Group’s aircraft and traffic servicing operations (collectively “aircraft and traffic servicing expenses”) include landing and navigation fees, rental payments and charges in respect of terminal and other ground facilities and labour costs for ground personnel. The balance of the Group’s operating expenses result from promotional and marketing activities (collectively, “promotional and marketing expenses”) such as sales commissions, fees for use of the CAAC’s reservation system, ticket-printing and sales office expenses, advertising and promotional expenses, and from general and administrative expenses, such as administrative salaries and welfare and other personnel benefits and office expenses, and from assets impairment charges.
Total operating expenses in 2003 amounted to RMB25,117 million, representing an increase of 5.5% or RMB1,307 million over 2002, primarily due to the combined effect of increases in jet fuel costs, maintenance expenses and aircraft and traffic servicing expenses. Total operating expenses as a percentage of total operating revenue increased from 92.4% in 2002 to 98.6% in 2003.
Flight operations expenses, which accounted for 41.2% of total operating expenses, increased by 2.9% from RMB10,062 million in 2002 to RMB10,351 million in 2003, primarily as a result of increases in jet fuel costs and operating lease payments, partly offset by a decrease in catering expenses. Jet fuel costs, which accounted for 54.7% of flight operations expenses, increased by 8.3% from RMB5,228 million in 2002 to RMB5,662 million in 2003 mainly as a result of increased jet fuel prices. Operating lease payments increased by 8.6% from RMB1,665 million in 2002 to RMB1,808 million in 2003, primarily due to the full year effect of the addition of new operating leases in respect of four Boeing 757-200 aircraft in late 2002 and four Airbus 319-100 aircraft and three Boeing 737-700 aircraft during 2003. Catering expenses decreased by 16.7% from RMB906 million in 2002 to RMB754 million in 2003, primarily reflecting a tighter cost controls exercised by the Group. Aircraft insurance costs decreased by 19.6% from RMB362 million in 2002 to RMB291 million in 2003, primarily because of a reduction in the rate of aircraft insurance premiums prescribed by the PRC insurance company. Labor costs for flight personnel decreased by 5.8% from RMB1,195 million in 2002 to RMB1,126 million in 2003, largely due to a decrease in flight hours.
Maintenance expenses, which accounted for 15.4% of total operating expenses, increased by 9.9%8.1% from RMB3,530RMB6,534 million in 20022005 to RMB3,878RMB7,063 million in 2003.2006. The increase was primarily attributable to a 9.6% increase in aircraft maintenance and repair charges from RMB2,657 million in 2002 to RMB2,913 million in 2003, which was result of the effect of fleet expansion in recent years.
Aircraft and traffic servicing expenses, which accounted for 15.1% of total operating expenses, increased by 10.8% from RMB3,433 million in 2002 to RMB3,803 million in 2003. The increase was primarily resulted from a 9.6%7.4% rise in landing and navigation fees from RMB3,228RMB4,977 million in 20022005 to RMB3,539RMB5,343 million in 2003, and2006, due to an increase in the charge rate for domestic landingnumber of landings and navigation fees effective September 2002.
takeoffs.
Promotional and marketing expenses, which accounted for
8.1%6.1% of total operating expenses,
decreasedincreased by
0.4%1.1% from
RMB2,034RMB2,780 million in
20022005 to
RMB2,043RMB2,811 million in
2003. The decrease was due to a 5.3% decrease in labor costs from RMB322 million in 2002 to RMB305 million in 2003, as fewer bonuses were given because of reduced sales volume in 2003.2006.
General and administrative expenses, which accounted for
5.6%4.2% of the total operating expenses, increased
slightly by
1.5%47.6% from
RMB1,377RMB1,315 million in
20022005 to
RMB1,397RMB1,941 million in
2003.2006. This was mainly
dueattributable to
a decrease inincreased scale of operations
during SARS period.and a provision for early retirement benefits of RMB392 million in 2006.
Depreciation and amortization,amortisation, which accounted for 12.1%10.8% of total operating expenses, increased by 6.2%12.0% from RMB2,864RMB4,440 million in 20022005 to RMB3,042RMB4,971 million in 2003. This increase2006, mainly resulting from the additional depreciation charge on aircraft delivered in 2005 and 2006 and depreciation charge on capitalized major overhaul costs.
Other income/ (expenses), net
Net gain on disposal of property, plant and equipment was
primarily as a result of the additions of aircraft during 2003. Asset impairment charges accounted for 2.0% of total operating expenses, amounted to RMB510RMB333 million in 2003. During 2003,2006 as compared to a net loss on disposal of property, plant and equipment of RMB32 million in 2005. The gain in 2006 was mainly due to the disposal of three Boeing 757-200 aircraft to independent third parties.
Operating profit/(loss)
The Group recorded an
asset impairment chargeoperating profit of
RMB510 million on twenty-three McDonnell Douglas 82 aircraft operated by CNA. During 2002, the Group incurred an asset impairment charge of RMB347 million on four McDonnell Douglas 82 aircraft, eleven McDonnell Douglas 90 aircraft and six Airbus 300-600 aircraft operated by CNA. These asset impairment charges were recorded as a result of the carrying amount of the individual aircraft exceeding their corresponding estimated future cash flows. These asset impairment charges were recognized by the amount by which the carrying amount of the individual aircraft exceeded their corresponding fair value. Operating Income
Operating income decreased by 81.2% from RMB1,948RMB645 million in 20022006 as compared to RMB366an operating loss of RMB1,337 million in 2003. This2005. The gain was mainly becausedue to an increase in operating revenue decreased by RMB275RMB7,926 million or 1.1% from 200220.7% in 2006 while operating expenses increased by RMB1,307RMB6,309 million or 5.5% over15.9% in the same period.
Non-operating Income/(Expenses)income/(expenses)
Interest expense
decreasedincreased by
11.9%28.1% from
RMB1,820RMB1,616 million in
20022005 to
RMB1,604RMB2,070 million in
2003,2006, mainly
reflectingdue to the
combined effect of scheduled debt repaymentsincrease in loans and
the replacement of certain RMB denominated bank loans with US$ denominated bank loans with lowerlease obligations and changes in interest rates.
Interest income decreased by 67.1%25.5% from RMB82RMB55 million in 20022005 to RMB27RMB41 million in 2003. This was2006, mainly attributable to athe decrease in average cash balances.
During 2003, the Group recorded a netbank balances in 2006.
Net exchange
loss of RMB381gain increased by 22.3% from RMB1,220 million
predominantly duein 2005 to
its Japanese yen denominated borrowings as a result of the Japanese yen appreciation.RMB1,492 million in 2006, mainly resulting from Renminbi appreciation during 2006. Such amount
comprised mostlymainly represents unrealized translation
loss. Taxation
On October 17, 2003,gain on re-translation of foreign currency denominated liabilities at the Company’s registered address was movedend of fiscal year.
Taxation
Income tax expense increased to
Guangzhou Economic & Technology Development Zone. In accordance with the Rules and Regulations for Implementation of Income Tax for Foreign Investment Enterprises and Foreign Enterprises of the PRC and a taxation approval document “Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que 020043”, the Company is entitled to enjoy the preferential tax policy implemented in the Guangzhou Economic & Technology Development Zone effective from October 1, 2003. As a result, the Company’s income tax rate has been changed from 33% to 15% beginning from that date. The Group recorded an income tax credit of RMB526RMB153 million for 2003as compared to an income tax expensebenefit of RMB365RMB7 million for 2002. As a resultin 2005. This is mainly attributable to the improved financial performance of the reduction in income tax rate, the Company’s net deferred taxation liability balance brought forward from December 31, 2002 of RMB625 million was reduced by RMB341 million and a net deferred tax credit of RMB341 million was recognized in 2003 for such reduction in income tax rate accordingly.
Minority Interests
Minority interests decreased by 17.5% from RMB154 million in 2002 to RMB127 million in 2003, primarily reflecting the net income earned by certain of the Group’s airline subsidiaries for the year.
47
Group.
Liquidity and Capital Resources Prior to the initial public offering of the Company, the Group met its working capital and capital expenditure requirements through cash from its operations, the proceeds of certain long-term and short-term bank loans, capitalfinance lease financing and rebates available under certain of the Group’s aircraft leases.
In July 1997, the Company received net proceeds of RMB5,459 million from its initial public offering.
A majority part of these net proceeds was utilized to finance the Group’s working capital and capital expenditure requirements. In July 2003, the Company issued 1,000,000,000 A Shares with a par value of RMB1.00 each at issue price of RMB2.70 by way of a public offering to natural persons and institutional investors in the PRC. The proceeds received by the Company of RMB2,641 million, net of the issuance costs of RMB59,233, amounted to RMB2,641RMB59 million and have been used for the purchase of Boeing 737-800 aircraft in accordance with the disclosure in the Prospectus for Offering of the A Shares.
As of December 31,
2004,2007, the Group had banking facilities with several PRC commercial banks for providing loan finance up to an approximate amount of
RMB35,750RMB50,262 million to the Group. As of December 31,
2004,2007, an approximate amount of
RMB11,525RMB29,338 million was utilized. As of December 31,
20032007 and
2004,2006, the Group’s cash and cash equivalents totaled
RMB2,080RMB3,824 million and
RMB3,083RMB2,264 million, respectively.
Net cash inflows from operating activities in 2002, 20032007, 2006 and 20042005 were RMB3,698RMB6,869 million, RMB2,129RMB2,297 million and RMB3,596RMB3,835 million, respectively. The decrease in 2006 was mainly due to a delay of payments to suppliers at the end of 2005 which were subsequently made in 2006. The increase in 2007 was mainly due to the increased cash flow from improved operating results and sales of tickets in advance of carriage as well as the increase in accrual balances as a result of increase in operation volume and delays in billings by certain suppliers when compared with 2006.
Net cash used in investing activities in
2002, 20032007, 2006 and
20042005 was
RMB5,895RMB4,844 million,
RMB5,434RMB5,484 million and
RMB8,824RMB8,009 million, respectively. Cash capital expenditures in
2002, 20032007, 2006 and
20042005 were
RMB6,351RMB5,502 million,
RMB4,707RMB6,044 million and
RMB6,631RMB6,775 million, respectively, reflecting predominantly additional investments in aircraft and flight equipment under the Group’s fleet expansion plans and Guangzhou new airport, and, to a small extent, additional investments in other facilities and buildings
forused in operations.
Financing activities resulted in net cash
(outflows)/inflows of
RMB3,150RMB(465) million,
RMB1,615RMB2,550 million and
RMB6,231RMB3,992 million in
2002, 20032007, 2006 and
2004,2005, respectively.
Net cash inflow from new bank loans and repayments amounted to RMB2,324 million, RMB5,870 and RMB6,045 million in 2007, 2006 and 2005, respectively. The additions of bank loan were used for capital expenditures and general working capital. Repayment of finance leases in 2007, 2006 and 2005 was RMB3,021 million, RMB3,313 million and RMB2,050 million, respectively, resulting from the aircraft acquisitions under finance leases.
As of December 31,
2004,2007, the Group’s aggregate long-term
debtbank and other loans and obligations under
capitalfinance leases totaled
RMB25,271RMB28,444 million.
Based on such amount, in 2005, 2006, 2007,In 2008, 2009,
2010, 2011 and thereafter, amounts payable under such
debtloans and obligations will be
RMB3,737RMB6,512 million,
RMB4,489RMB4,575 million,
RMB6,705RMB3,296 million,
RMB3,608 million, RMB2,154RMB2,923 million and
RMB4,578 million.RMB11,138 million respectively. Such borrowings were denominated, to a larger extent, in United States dollars and, to a smaller extent, in Japanese yen
and Hong Kong dollars, with a significant portion being
fixedfloating interest rate borrowings. In the normal course of business, the Group is exposed to fluctuations in foreign currencies. The Group’s exposure to foreign currencies
was primarily
as a result ofresults from its foreign currency
debts.liabilities. Depreciation or appreciation of the Renminbi against foreign currencies affects the Group’s results significantly because the Group’s foreign currency payments generally exceed its foreign currency receipts. The Group is not able to hedge its foreign currency exposure effectively other than by retaining its foreign currency denominated earnings and receipts to the extent permitted by the State Administration of Foreign Exchange, or subject to certain restrictive conditions, entering into forward foreign exchange contracts with
authorisedauthorized PRC banks.
As of December 31,
2004,2007, the Group’s
short termshort-term bank
debt was RMB9,925 million with interest rates ranging from 1.40% to 5.31%.loans were RMB21,313 million. The Group’s weighted average interest rate on short-term bank
notes payableloans was
1.60%5.14% per annum as of December 31,
2004.2007. The primary use of the proceeds of the Group’s short-term
debtbank loans is to finance working capital needs. The Group has generally been able to arrange short-term bank loans with domestic banks in China as necessary and believes it can continue to obtain them based on its well-established relationships with various lenders.
Through April 30, 2008, the Group renewed certain short-term bank loans of RMB4,440 million. The renewed bank loans are unsecured, bear interest at floating rates ranging from 6-month LIBOR +1.40% to 2.75% per annum and the People’s bank of China benchmark interest rate-10% , these bank loans are repayable one year from their respective renewal dates. In addition, the Group entered into new short-term bank loan agreements totalling RMB8,053 million subsequent to December 31, 2007. These new short-term bank loans are unsecured and bear interest at floating rates ranging from 3-month/6-month/12-month LIBOR + 0.55% to 4% per annum, the People’s bank of China benchmark interest rate-10% and 12-month HIBOR+2.25% per annum which are repayable within one year from their respective origination dates.
As of December 31,
2004,2007, the Group had obligations under operating leases totaling
RMB12,750RMB28,179 million, predominately for aircraft. Of such amount,
RMB1,761RMB3,512 million,
RMB1,622RMB3,616 million,
RMB1,562RMB3,483 million,
RMB5,259RMB3,413 million,
RMB764RMB3,324 million and
RMB1,782RMB10,831 million, respectively,
wasis due in
2005, 2006, 2007, 2008, 2009,
2010, 2011, 2012 and thereafter.
48
As of December 31, 2004,2007, the Group had a working capital deficit of RMB18,855RMB33,811 million, as compared to a working capital deficit of RMB10,792RMB32,180 million as of December 31, 2003.2006. Historically, the Group operated in a negative working capital position, relying on cash inflow from operating activities and renewal of short-term bank debt refinancingsloans to meet its short-term liquidity and working capital needs. The increase in the Group’s working capital deficit from 20032006 to 20042007 was mainly because the Group sought increased short term debtsshort-term bank loans to finance its aircraft acquisitions. Upon deliveries of the aircraft, the Group continued to seek renewal of its short-term debtsbank loans instead of replacing such debtsloans with long-term debts,bank loans, as the interest rates for short-term debtsbank loans are lower. TheIn 2008 and thereafter, the liquidity of the Group in the future willis primarily be dependent on its ability to maintain adequate cash inflowinflows from operations to meet its debt obligations as they becomefall due, the renewal of its short-term bank loans and on its ability to obtain adequate external financing to meet its committed future capital expenditures. The Group has obtained firm commitments from its principal banker to renew its short-term bank loans outstanding atexpenditure. At December 31, 2004 when they fall due during 2005. In relation to its future capital commitments and other financing requirements,2007, the Group has already entered into loan financing agreements with several PRC banks to provide loan financefinancing up to an approximate amountRMB50,262 million, of RMB24,225which approximately RMB29,338 million was utilized. Subsequent to December 31, 2007 and up to April 30, 2008, the Group entered into additional loan financing agreements to obtain financing up to RMB1,033 million during 2005 and thereafter. 2008. The directors of the Company believe that sufficient financing will be available to the Group.
As the Group is subject to a high degree of operating leverage, a minor decrease in the Group’s yield and/or load factor could result in a significant decrease in its operating revenue and hence its operating cashflows. This could arise in such circumstances as where competition between Chinese airlines increases or where PRC aviation demand decreases. Similarly, a minor increase in the jet fuel prices, particularly
those in
the domestic market, could result in a significant increase in the Group’s operating expenses and hence a significant decrease in its operating cashflows. This could be caused by fluctuations in supply and demand in international oil market. Currently, the Group’s existing
debtloans and lease facilities do not contain any financial covenants. Nevertheless, as the Group is subject to a high degree of financial leverage, an adverse change in the Group’s operating cashflows could adversely affect its financial health and hence weaken its ability to obtain additional
debtloans and lease facilities and to renew its short-term
debtbank loans facilities as they fall due.
As of December 31, 2004,2007, the Group had capital commitments in 2005, 2006 and 2007 of approximately RMB10,167 million, RMB3,049 million and RMB84 million, respectively. Of such amounts, RMB8,748 million in 2005, RMB2,996 million in 2006 and RMB32 million in 2007 are related to the acquisition of aircraft and related flight equipment, and RMB824 million in 2005 is related to the Group’s facilities and equipment to be constructed and installed at the Guangzhou new airport. The remaining amounts of RMB595 million in 2005 and RMB105 million in 2006 are related to the Group’s otheras follows:
| | 2008 | | 2009 | | 2010 | | 2011 | | 2012 and afterwards | | Total | |
| | (RMB million) | |
Acquisition of aircraft and related equipment | | | 19,125 | | | 20,767 | | | 20,065 | | | 12,747 | | | 16,038 | | | 88,742 | |
Others | | | 1,211 | | | 694 | | | 335 | | | 196 | | | 22 | | | 2,458 | |
| | | 20,336 | | | 21,461 | | | 20,400 | | | 12,943 | | | 16,060 | | | 91,200 | |
Others mainly represent airport and office facilities and equipment, overhaul and maintenance bases and training facilities.
As of December 31,
2004,2007, the Group undertook to make a capital contribution of approximately
RMB83RMB133 million to
jointly controlled entities.a subsidiary.
As of December 31,
2004,2007, the cash and cash equivalents of the Group totaled
RMB3,083RMB3,824 million. Of such balance,
24.2%14.3% was denominated
inin.US Dollars, Hong Kong Dollars, Australian Dollars, Japanese Yen and other foreign currencies.
No interim dividend was paid during the year ended December 31, 2004. The Board of Directors does not recommend the payment of a final dividend in respect of the year ended December 31, 2004.
The Group expects that the
Group’s cash from operations and short-term and long-term bank borrowings will be sufficient to meet its cash requirements in the foreseeable future.
49
Contractual Obligations and Commercial Commitments
The following table sets forth the Group’s obligations and commitments to make future payments under contracts and under contingent commitments as of December 31, 2004.2007.
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2004 | |
| | Payment due by period | |
| | | | | | less than | | | | | | | | | | |
| | Total | | | 1 year | | | 1-3 years | | | 4-5 years | | | After 5 years | |
| | (RMB million) | |
Contractual obligations | | | | | | | | | | | | | | | | | | | | |
Short-term debt | | | 9,925 | | | | 9,925 | | | | — | | | | — | | | | — | |
Long-term debt | | | 13,528 | | | | 1,593 | | | | 5,766 | | | | 2,283 | | | | 3,886 | |
Capital lease obligations | | | 11,743 | | | | 2,144 | | | | 5,428 | | | | 3,479 | | | | 692 | |
Cash payable for CNA/XJA Acquisitions | | | 1,959 | | | | 1,959 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | |
Total contractual obligations | | | 37,155 | | | | 15,621 | | | | 11,194 | | | | 5,762 | | | | 4,578 | |
| | | | | | | | | | | | | | | |
Other commercial commitments | | | | | | | | | | | | | | | | | | | | |
Operating lease commitments | | | 12,750 | | | | 1,761 | | | | 3,184 | | | | 6,023 | | | | 1,782 | |
Aircraft purchase commitments (Note 1) | | | 11,776 | | | | 8,748 | | | | 3,028 | | | | — | | | | — | |
Capital commitments in respect of investments in the Guangzhou new airport | | | 824 | | | | 824 | | | | — | | | | — | | | | — | |
Other capital commitments | | | 700 | | | | 595 | | | | 105 | | | | — | | | | — | |
Investing commitments | | | 83 | | | | 83 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | |
Total commercial obligations | | | 26,133 | | | | 12,011 | | | | 6,317 | | | | 6,023 | | | | 1,782 | |
| | | | | | | | | | | | | | | |
Note 1 Amounts shown are net of previously paid purchase deposits. |
50
| | As of December 31, 2007 Payment due by period | | As of December 31, 2006 | |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | After 5 years | | Total | |
| | (RMB million) | |
| | | |
Contractual obligations (Note 1) | | | | | | | | | | | | | | | | | | | |
Short-term bank loans | | | 22,003 | | | 22,003 | | | | | | | | | | | | 20,536 | |
Long-term bank and other loans | | | 14,501 | | | 4,230 | | | 5,449 | | | 2,607 | | | 2,215 | | | 16,378 | |
Obligations under finance leases | | | 19,499 | | | 3,588 | | | 4,214 | | | 3,445 | | | 8,252 | | | 18,773 | |
Total contractual obligations | | | 56,003 | | | 29,821 | | | 9,663 | | | 6,052 | | | 10,467 | | | 55,687 | |
| | | | | | | | | | | | | | | | | | | |
Other commercial commitments | | | | | | | | | | | | | | | | | | | |
Operating lease commitments | | | 28,179 | | | 3,512 | | | 7,099 | | | 6,737 | | | 10,831 | | | 21,969 | |
Aircraft purchase commitments (Note 2) | | | 88,742 | | | 19,125 | | | 40,832 | | | 28,785 | | | | | | 66,881 | |
Other capital commitments | | | 2,458 | | | 1,211 | | | 1,029 | | | 218 | | | | | | 1,824 | |
Investing commitments | | | 133 | | | 133 | | | | | | | | | | | | 83 | |
Total commercial obligations | | | 119,512 | | | 23,981 | | | 48,960 | | | 35,740 | | | 10,831 | | | 90,757 | |
Note 1 Interest on variable rate loans was estimated based on the current rate in effect at December 31, 2007.
Note 2 Amounts shown are net of previously paid purchase deposits.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
Directors, and Senior Management and Employees
The following table sets forth certain information concerning directors (“Directors”), senior management (“Senior Management”) and supervisors (“Supervisors”) of the Company in 2004.2007. There were certain changes in the Company’s Directors, Senior Management and Supervisors subsequent to December 31, 2004,2007, details of which are set forth below.
Name | | Position | | Gender | | |
NameAge | | Age | | Position |
Liu Shao Yong | | | 46Chairman of the Board | | | Chairman of the Board of Directors |
Liu Ming QiMale | | | 6150 | |
Li Wen Xin | | Director | | | Vice Chairman of the Board of Directors |
Peng An FaMale | | | 5758 | | | Director |
Wang Quan Hua | | | 51Director | | | DirectorMale | | | 54 | |
Zhao Liu An | | | 57Director | | | Director |
Zhou Yong QianMale | | | 60 | | | Director |
Si Xian Min | | | 47Director, President | | | Directors; President |
Zhou Yong JinMale | | | 6251 | |
Tan Wan Geng | | Director, Executive Vice President | | | DirectorMale | | | 44 | |
Xu Jie Bo | | | 40Director, Executive Vice President, Chief Financial Officer | | | Director; Chief Financial Officer; Vice President |
Wu Rong NanMale | | | 6343 | |
Chen Zhen You | | Director | | | Director |
Simon ToMale | | | 5456 | |
Peter Lok (retired on June 28, 2007) | | Independent Non-executive Director | | | Independent Non-Executive Director |
Peter LokMale | | | 6971 | |
Wei Ming Hai (retired on June 28, 2007) | | Independent Non-executive Director | | | Independent Non-Executive Director |
Wei Ming HaiMale | | | 4143 | | | Independent Non-Executive Director |
Wang Zhi | | | 63Independent Non-executive Director | | | Independent Non-Executive DirectorMale | | | 66 | |
Sui Guang Jun | | | 44Independent Non-executive Director | | | Male | | | 47 | |
Gong Hua Zhang (appointed on June 28, 2007) | | Independent Non-ExecutiveNon-executive Director | | | Male | | | 62 | |
Lam Kwong Yu (appointed on June 28, 2007) | | Independent Non-executive Director | | | Male | | | 64 | |
Sun Xiao Yi | | | 51 | | | Chairman of the Supervisory Committee | | | Male | | | 54 | |
Yang Guang Hua | | | 52Supervisor | | | SupervisorMale | | | 55 | |
Yang Yi Hua | | | 45Supervisor | | | Supervisor |
Li Kun | | | 45 | | | Vice President |
Yuan Xin AnFemale | | | 48 | |
Liang Zhong Gao | | Vice President; Chief Engineer |
Zheng En RenSupervisor | | | 60Male | | | Vice President52 | |
Hao Jian HuaLiu Biao (resigned on January 18, 2008) | | Supervisor | | | 55Male | | | Vice President |
Ren Ji Dong42 | | | 40 | | | Vice President |
He Zong Kai | | | 53Executive Vice President | | | Vice PresidentMale | | | 57 | |
Liu Qian | | | 40Executive Vice President | | | Male | | | 42 | |
Zhang Zi Fang | | Executive Vice President | | | Male | | | 49 | |
Dong Su Guang | | Executive Vice President | | | Male | | | 54 | |
Zhang Zheng Rong | | Chief Pilotpilot | | | Male | | | 45 | |
Hu Chen Jie | | Chief Information Officer | | | Male | | | 39 | |
Tang Bing | | Chief Engineer | | | Male | | | 41 | |
Su Liang | | | 43Chief Economist | | | Male | | | 46 | |
Xie Bing | | Company Secretary | | | Male | | | 35 | |
Chen Wei Hua | | | 38Chief Legal Adviser | | | General CounselMale | | | 42 | |
On June
16, 2004, the appointment of Sun Xiao Yi, Yang Guang Hua and Yang Yi Hua as Supervisors and the resignation of Liang Hua Fu, Gan Yu Hua and Li Qi Hong as Supervisors were approved at28, 2007, the annual general meeting
offor the
shareholders of the Company. On the same date, the Supervisory Committeeyear 2006 of the Company
elected Sun Xiao Yi as the Chairman of the Supervisory Committee of the Company. On October 8, 2004, the resignation of Yan Zhi Qing as the Chairman of the Board of Directors of the Company was approved by the Board of Directors.
On October 28, 2004, the Board of Directors resolved to appoint Si Xian Min as the President of the Companyreviewed and to accept the resignation of Wang Chang Shun as the President of the Company.
On November 29, 2004, approved:
(1) | the appointment of Mr. Liu Shao Yong, Mr. Li Wen Xin, Mr. Wang Quan Hua, Mr. Zhao Liu An, Mr. Si Xian Min, Mr. Tan Wan Geng, Mr. Xu Jie Bo, and Mr. Chen Zhen You as Directors, and Mr. Wang Zhi, Mr. Sui Guang Jun, Mr. Gong Hua Zhang and Mr. Lam Kwong Yu as Independent non-executive Directors of the fifth session of the Board. |
(2) | the retirement of Mr. Wei Ming Hai and Mr. Peter Lok as the Company’s Independent non-executive Directors of the Board according to relevant regulations, due to their acting as the Company’s Independent non-executive Directors of the Board for six consecutive years. |
(3) | the appointment of Mr. Sun Xiao Yi, Mr. Yang Guang Hua, Ms. Yang Yi Hua, Mr. Liang Zhong Gao and Mr. Liu Biao as the Supervisors of the fifth session of the Supervisory Committee. |
Except that Mr. Liu Biao has officially resigned as a Supervisor in the general meeting held on January 18, 2008, since January 1, 2008 and up to the date of this Annual Report, there has been no change to the Directors and Supervisors.
BOARD OF DIRECTORS
Mr. Liu Shao Yong as a Director, andis the resignation of Yan Zhi Qing for age reason were approved at the first extraordinary general meetingchairman of the shareholders of the Company. On the same date, the Board of Directors of the Company elected Liu Shao Yong as the Chairman of the Board of Directors of the Company.51
On December 31, 2004, the appointment of Si Xian Min asBoard. He is a Director, and the resignation of Wang Chang Shun as a Director were approved at the second extraordinary general meeting of the shareholders of the Company.
On March 29, 2005, the Board of Directors resolved to appoint Ren Ji Dong and He Zong Kai as Vice Presidents of the Company, and to remove Jiang Ping as a Vice President of the Company.
Mr. Liu Shao Yongis the Chairman of the Board of Directors.qualified class one pilot. He joined the Company since November 2004. Mr. Liu graduated from China Civil Aviation Flying College and obtained an EMBA from Tsinghua University in 2005. He joined the civil aviation industry in 1978. He held the positions of Captain of the Flying Squadron of China General Aviation Corporation and was appointed as the Deputy General Manager of China General Aviation Corporation, Deputy Director of Shanxi Provincial Civil Aviation Administration, General Manager of the Shanxi branch of China Eastern Airlines Corporation Limited and the Chief of the Flying Model Division of the Civil Aviation Administration of China. He served as the General ManagerPresident of China Eastern Airlines Corporation Limited and was appointed as the Vice Minister of Civil Aviation Administration of China. Since August 2004, Mr. Liu has served as the General ManagerPresident of China Southern Air Holding Company.CSAHC. Mr. Liu obtained a post-graduate degree in International Trading from Tianjin Institutehas become the chairman of Finance and Economics in 1999. He is a qualified class one pilot.the Board since November 2004. Save as disclosed above, Mr. Liu is not connected with any Directors, senior management, substantial shareholders or Supervisors of the Company.
Mr. Liu Ming QiLi Wen Xin is the Vice Chairmancurrently a Director of the BoardCompany. Mr. Li was a graduate majoring in economic management. He is a senior expert of DirectorsPolitical Science. Mr. Li joined the civil aviation industry in 1969. He was the secretary to the disciplinary committee, deputy secretary of the party committee and vice general manager of China General Aviation Corporation successively between 1991 and 1998. He was appointed the party secretary and vice general manager of the Shanxi branch of China Eastern Airlines Corporation Limited in February 1998. He became the vice party secretary and secretary to the disciplinary committee of China Eastern Air Holding Company in June 2000. In September 2002, he was appointed the party secretary and joinedvice president of China Eastern Air Holding Company. Between June 2000 and September 2006, he was the Company since May 2003. Mr. Liu graduated from Southchairman of the supervisory committee of China Normal UniversityEastern Airlines Corporation Limited. He has been the party secretary and obtained a master’s degree in economics from Fudan University. Mr. Liu is currently the Party Secretary and theExecutive Vice President of CSAHC. Mr. Liu began his career in 1968, and has successively served as the Municipal Secretary and Mayor of Sanya city of Hainan province, the Vice Governor of Hainan province, the Vice Director of Hong Kong and Macao Affairs office of the State Council and the Vice Director of Macao Liaison Office of the Central Government.CSAHC since September 2006. Save as disclosed above, Mr. LiuLi is not connected with any Directors, senior management, substantial shareholders or Supervisors of the Company.
Mr. Peng An FaWang Quan Hua is currently a Director of the Company and the Vice President of CSAHC and became the employee of the Company since March 1995 after the establishment of the Company. Mr. Peng graduated from the pilot department of China Civil Aviation Flying College and the department of Chinese language and literature of South China Normal University. Mr. Peng began his career in civil aviation in 1969, and successively served as the Pilot Director, Vice Party Secretary and Party Secretary of the Sixth Squadron of the Civil Aviation Administration. In July 1994, Mr. Peng held office as the Party Secretary of the Flight Operations Department of China Southern Airlines. In March 1998, Mr. Peng served as the President and Vice Secretary of China Southern Airlines Shenzhen Co. From August 2001 to October 2002, Mr. Peng served as the Vice President of CSAHC. Mr. Peng is concurrently the Vice Chairman of Shenzhen Air Catering Co., Ltd and CATIC (Hong Kong). Save as disclosed above, Mr. Peng is not connected with any Directors, senior management, substantial shareholders or Supervisors of the Company.Mr. Wang Quan Huais currently a Director of the Company andExecutive Vice President of CSAHC and became the employee of the Company since March 1995 after the establishment of the Company. Mr. Wang graduated from the Economic Management Department of Central Communist Party College. Mr. Wang began his career in civil aviation in 1972, and successively served as the Director of Planning Department of Guangzhou Civil Aviation Administration, the Office Director of China Southern Airlines Shenzhen Co., the Director of the Planning and Operation Division of CSAHC, the PresidentCompany, General Manager of Strategy and Development Department of China Southern Airlinesthe Company Limited and the Executive Vice President of CSAHC. Save as disclosed above, Mr. Wang is not connected with any Directors, senior management, substantial shareholders or Supervisors of the Company.
Mr. Zhao Liu Anis a Director of the Company and the Executive Vice President of CSAHC. Mr. Zhao joined the Company since May 2003. Mr. Zhao began his career in civil aviation in 1966, and successively served as the Director of Flight Meteorology and Flight Safety Monitoring Division, Director of Science Education Division, the Director of Flying Model Division of Urumqi Civil Aviation Administration, Captain of the Ninth Squadron of the Civil Aviation Administration, the Vice President and President of Urumqi Civil Aviation Administration and Xinjiang Airlines. Save as disclosed above, Mr. Zhao is not connected with any Directors, senior management, substantial shareholders or Supervisors of the Company.Mr. Zhou Yong Qianis currently a Director of the Company and the Vice President of CSAHC and the President of China Northern Airlines. Mr. Zhou joined the Company since May 2003. Mr. Zhou graduated from Nanjing Institute of Meteorology. Mr. Zhou began his career in civil aviation in 1990, and successively served as Minister of the Organization Division of the Northeastern Civil Aviation Administration, Vice Secretary of Shenyang Taoxian International Airport, Vice Secretary of the Northeastern Civil Aviation Administration and the President of China Northern Airlines. Save as disclosed above, Mr. Zhou is not connected with any Directors, senior management, substantial shareholders or Supervisors of the Company.
52
Mr. Si Xian Minis a Director and President of the Company. Mr. Si graduated from No. 14 Aviation College as an aircraft piloting major with an associate degree. Mr. Si, a professional political tutor, he began his career in civil aviation in 1975. He held positions as Director of the political division of China Southern Airlines Henan Branch, Party Secretary and Vice President of Guizhou Airlines, Deputy Party Secretary of China Southern Airlines Company Limited,and the Secretary of the Disciplinary Department of China Southern Airlinesthe Company Limited and Party Secretary of China Northern Airlines.Airlines and has been the President of the Company since October 2004. Save as disclosed above, Mr. Si is not connected with any Directors, senior management, substantial shareholders or Supervisors of the Company.
Mr. Zhou Yong JinTan Wan Geng is a Director, Secretary of the Company.CPC Committee and Executive Vice President. Mr. Tan is an engineer graduated from Economic Geography Department in Sun Yat-sen University, with major in Regional Economy, with qualification of post graduate degree, and a master degree in economics. Mr. Tan has previously served as the Head of the Infrastructure Department and Director of Human Resources Department of the Beijing Aircraft Maintenance and Engineering Corporation from 1990 to 1996, the Deputy Director of Human Resources Division (Personnel and Education Division) in the General Administration of Civil Aviation of China from 1996 to 2000, and has been the Director General and Secretary of Chinese Communist Party Committee of Northeastern Regional Civil Aviation Administration from December 2000 to January 2006. He joined the CSAHC in January 1991 and becamehas been an employeeExecutive Vice President of the Company upon its establishment in March 1995, and has successively served as a Director of the Propaganda Department of the CSAHC, Party Secretary of the Transportation Department (Guangzhou) of the Company, and Party Secretary of the Company’s Shenzhen branch. He served as Chairman of the Labour Union of the Company.since February 2006. Save as disclosed above, Mr. ZhouTan is not connected with any of the Directors, senior management, substantial shareholders or Supervisors of the Company.
Mr. Xu Jie Bois a Director, Executive Vice President and Chief Financial Officer of the Company. Mr. Xu joined the Company in July 1998. He graduated from the Management Department of Tianjin University and was subsequently awarded with a master degree in business administration from Hong Kong Baptist University. A qualified senior accountant by profession, Mr. Xu started his career in August 1986 and worked as Supervisor of the Financial Management Office for Infrastructure Projects of Guangzhou Civil Aviation Administration.1986. In December 1992, he took up the posts of Deputy Director and Director of the Financial Department of Central and Southern China Civil Aviation Administration. In July 1998, he became General Manager of the Financial Department and Chief Financial Officer of the Company. Currently, he is a Director, and the Assistant General ManagerExecutive Vice President and Chief Financial Officer of the Company. He is also a Director of Guizhou Airlines Company Limited, Vice Chairman of Sichuan Airlines Corporation Limited and Vice Chairman of Xiamen Airlines Company Limited.Airlines. Save as disclosed above, Mr. Xu is not connected with any of the Directors, senior management, substantial shareholders or Supervisors of the Company.
Mr. Wu Rong NanChen Zhen You is a Director and Chairman of the Company. He joined CSAHC in January 1991 and became an employeeLabour Union of the Company, upon its establishmentgraduated from South China Normal University with a bachelor’s degree in March 1995.English. Mr. Wu isChen, an air traffic control engineer.economist, holds an MBA from Murdoch University in Australia. He was once employedworked as the Vice Director of Flight Operationsthe Office of theInternational Affairs of Guangzhou Civil Aviation Administration, Vice Director of the Office of Overseas Business of the Company and General Manager of the Department of Foreign Affairs of the Company. From 2001 to 2005, he was the Office Director of CSAHC and the Director of the Planning and Investment Department of CSAHC. He has been Presidenta member of Xiamen Airlinesthe Party Committee and Chairman of the Labour Union of the Company since 1986.June 2005. Save as disclosed above, Mr. WuChen is not connected with any of the Directors, senior management, substantial shareholders or Supervisors of the Company.Mr. Simon Tohas been an Independent Non-Executive Director of the Company since June 1999. Mr. To is currently the Managing Director of Hutchison Whampoa (China) Limited, and also serves as director of several companies in Hong Kong and Foreign-invested companies in China. Mr. To has managed investment projects in China since early 1980’s and is familiar with the laws and regulations of Hong Kong and China. Mr. To graduated from the Stanford University with a Master degree in Business Administration. Mr. To is not connected with any Directors, senior management, substantial shareholders or Supervisors of the Company.
Mr. Peter Lokhas been an Independent Non-Executive Director of the Company since June 2001. He is also a veteran in the civil aviation industry. Mr. Lok joined the Civil Aviation Department of Hong Kong in 1956 and became its Assistant Director in 1982, Deputy Director in 1988, and Director from 1990 to 1996. From 1997 to 2000, Mr. Lok was an advisor and president of Hong Kong Commercial Airlines Center. Mr. Lok has sat on various Committees such as the Evaluation Committees for the Design of Shanghai’s Pudong Airport, Committee for China’s Zhuhai Aviation and Spaceflight Fair, Evaluation Committees for the IATA Eagle Award. He is also independent director of several listed airline companies. Mr. Lok is not connected with any Directors, senior management, substantial shareholders or Supervisors of the Company.
Mr. Wei Ming Haihas been an Independent Non-Executive Director of the Company since June 2001. He is a Professor and Dean of the School of Management of Zhongshan University. Professor Wei has worked in Jiangxi Provincial Accounting Association, and he started working in Zhongshan University from 1991. In 1993 he became the chairman of the Accounting Department in the School of Management of Zhongshan University. In 1996 he became the Deputy Dean of the School of Management in Zhongshan University. In January 2000, he became Dean of the School of Management in Zhongshan University. Since 1998, Professor Wei has been a doctorate advisor for Accounting Information and Investment Analysis. Professor Wei is also on the board of directors of China Accountants Association, Vice Chairman of Accountants Association of Guangdong Province, Vice Chairman of Auditors Association of Guangzhou, Executive Member of the Research Institute of Financial Costs for Young and Middle-aged Accountants, member of American Accounting Association. Professor Wei holds a Ph.D degree in economics and has an MBA degree from Tulane University in the United States of America. He has published over ten academic books or textbooks, and over 60 academic papers. Mr. Wei is not connected with any Directors, senior management, substantial shareholders or Supervisors of the Company.
53
Mr. Wang Zhihas been an Independent Non-Executive Director of the Company since May 2003. Mr. Wang graduated from the Aircraft Design Department of Harbin Institute of Technology. Mr. Wang began his career in 1965, and has successively served as the Director and Senior Engineer of Aeronautics Research Institute of China, the Vice Director and Vice Secretarysecretary of the First Research Institute of Civil Aviation, the Vice Director and Director of the Planning Bureau of CAAC and the Director of the Planning Technology System Reform Department and the Planning Technology Department of CAAC. Mr. Wang is also a professor in several universities. Save as disclosed above, Mr. Wang is not connected with any Directors, senior management or substantial shareholders or Supervisors of the Company.
Mr. Sui Guang Junhas been an independentIndependent Non-Executive Director of the Company since May 2003. Mr. Sui graduated from the Economic Department of Jinan University in 1986 and obtained a master degree.degree in 1989. Mr. Sui obtained a doctor degree in the Management of Organizations of Jinan University.University in 1996. He has successively served as the Vice Director of the Research Institute of Hong Kong and MacaoMacau Economies, and the Dean of Corporate Administration Departmentcorporate administration department of Jinan University. Mr. Sui is currentlyUniversity and the Chief of the Post-doc Committee of Applied Economics and the Dean of Management College in Jinan University. Mr. Sui is currently the Deputy Vice Chancellor of Guangdong University of Foreign Studies. Save as disclosed above, Mr. Sui is not connected with any Directors, senior management or substantial shareholders or Supervisors of the Company. Supervisory
Mr. Gong Hua Zhang, an Independent Non-Executive Director of the Company, used to be the chief accountant, vice director and director of the financial bureau of China National Petroleum Corporation as well as the chief accountant of China National Petroleum Corporation. He has been serving as a director of PetroChina Company Limited since October 1999. Mr. Gong also acts as a part-time professor in Tsinghua University, Nankai University, Xiamen University and China University of Petroleum, and is a professor in National Accounting Institute (Beijing). Save as disclosed above, Mr. Gong is not connected with any Directors, senior management or substantial shareholders or Supervisors of the Company.
Mr. Lam Kwong Yu an Independent Non-Executive Director of the Company, is an expert in the field of civil aviation. Mr. Lam used to serve as the general manager of the Hong Kong Airport, the Vice Director and Director of the Civil Aviation Department of Hong Kong, a director of the Airport Authority Hong Kong and the chairman of the Aviation Advisory Board of Hong Kong. Mr. Lam is currently a member of the Selection Committee for the Hong Kong Special Administrative Region. Save as disclosed above, Mr. Lam is not connected with any Directors, senior management or substantial shareholders or Supervisors of the Company.
SUPERVISORY COMMITTEE
As required by the Company Law
of the PRC and the Articles of Association
of the Company, the Company has a supervisory committee (the “Supervisory Committee”) which is primarily responsible for the supervision of
Senior Managementsenior management of the Company, including the Board,
of Directors, executive officers and other
Senior Managementsenior management personnel, to ensure that they act in the interests of the Company, its shareholders and employees, as well as in compliance with
the applicable
laws.law. The Supervisory Committee consists of
threefour Supervisors. Two of the Supervisors are
shareholder’sshareholder representatives appointed by shareholders,
of the Company, and the
remaining Supervisor is a representativeother two Supervisors are representatives of the Company’s employees. The Supervisors serve terms of three years and may serve consecutive terms.
Mr. Sun Xiao Yi, the chairman of the Supervisory Committee of the Company, is a member of Party Committee and head of Discipline Supervision Team of CSAHC. Mr. Sun graduated from the Civil Aviation University of China Southern Air Holding Company.with a degree in Economics and Administration and is currently a postgraduate law student of Central Communist Party College. Mr. Sun is a senior expert of Political Science and Economics with an associate degree. Mr. Sun has successively served as Vice Party Secretary of the Hubei branch of the Company, Party Secretary of the Flight Operations Department of the Company, and Vice Party Secretary of China Southern Air Holding Company.CSAHC. Save as disclosed above, Mr. Sun is not connected with any Directors, senior management, substantial shareholders or Supervisors of the Company.
Mr. Yang Guang Huais the Vice Party Secretary and Discipline Supervision Secretary, a Supervisor of the Company. Mr. Yang is an engineer with university qualification. Mr. Yang has successively served as Deputy General Manager of the Hunan branch of the Company, General Manager of Southern Airlines (Group) Zhuhai Helicopters Company Limited, General Manager of the Hunan branch of the Company, and Deputy General Manager of the Company. He has been the President of Xiamen Airlines since September 2005. Save as disclosed above, Mr. Yang is not connected with any Directors, senior management, substantial shareholders or Supervisors of the Company.
Ms. Yang Yi Hua, a Supervisor of the Company, is the General Manager of the Audit Department of the Company. Ms. Yang is an internationally qualified internal auditor.a Certified Internal Auditor. She has successively served as Deputy Manager of the Clearance and Settlement Office of the Financial Division of the Guangzhou Civil Aviation Administration, Manager of the Financial Office of the Company’s Financial Division, and Deputy General Manager of the Company’s Audit Department. Save as disclosed above, Ms. Yang is not connected with any Directors, senior management, substantial shareholders or Supervisors of the Company.54
All Directors and Supervisors
Mr. Liang Zhong Gao, a Supervisor of the Company, have entered into service contracts withserves as the Company for a term of three years commencing on June 16, 2004 (except that the service contract of Mr. Liu Shao Yong and Mr. Si Xian Min which commenced from November 29, 2004 and December 31, 2004 respectively will expire at the endDirector of the term for the current session of the Board). Except for such service contracts, none of the Directors or Supervisors of the Company has entered or proposed to enter into any service contracts with the Company or its subsidiaries. None of the Directors or Supervisors has entered into any service contracts with the Company which is not determinable by the Company within one year without payment of compensation, other than statutory compensation.SENIOR ADMINISTRATIVE OFFICERS
Mr. Li Kunis a Managing Vice PresidentSupervisory Department of the Company. He graduated fromMr. Liang once served as the CAAC Management Institute specializing in Air Transport Management. Mr. Li was the General Manager of the Thailand Office, China Southern Airlines from 1993 to 1995. He became the General Manager of Transportation Department of the Company from 1998 to 2000. Mr Li has been holding the position as a Vice President of the Company since 2000.
Mr. Yuan Xin Anis a Vice PresidentParty Secretary and Chief Engineer of the Company. He graduated from the Air Engineering College. Mr. Yuan has over 25 years of experience in the Chinese aviation industry. He has been the Manager of Quality Assurance and Deputy Controller of Quality Control of Guangzhou Aircraft Maintenance Engineering Company Limited, Deputy General Manager of the Aircraft EngineeringGuangzhou Sales Office of the Company, Deputy Party Secretary and Secretary of the Disciplinary Committee of the Passenger Traffic Department of the Company, Party Secretary of the Passenger Traffic Department of the Company and Vice President of Guangzhou Aircraft Maintenance Engineering Company Limited. Mr. Yuan has become the Chief EngineerGeneral Manager of the Company since 2000, and he has been appointed as a Vice President of the Company from April 2002.
Mr. Zheng En Renis a Vice President of the Company. He graduated from the CAAC Advanced Flying College and possesses the qualification as a First Class Pilot. Mr. Zheng has over 40 years of experience in the Chinese aviation industry. He served as the Captain of the Sixth Squadron of the Civil Aviation Administration, Chairman of the Labour Union and Deputy Chief Captain. During the period from 1996 to 1999, he held the position as President of Southern Airlines (Group) Shantou Airlines Company Limited. Mr. Zheng was an Assistant to the President of the Company from 1999 to April 2002. He has been appointed as a Vice President of the Company from April 2002.
Mr. Hao Jian Huais currently the Vice President of the Company. He completed his piloting at the CAAC Advanced Flying College. Mr. Hao has held positions as Captain, then Deputy Chief Captain, and subsequently Chief Captain of the Sixth Squadron of the Civil Aviation Administration during the period from 1989 to 1994. He then became a Deputy General Manager, from 1994 to 1998, and the General Manager, from 1998 to 1999, of the Flying AviationService Quality Control Department of the Company. He has been the Vice PresidentSave as disclosed above, Mr. Liang is not connected with any Directors, senior management, substantial shareholders or Supervisors of the Company since 31 July, 2003.
Company.
SENIOR MANAGEMENT
Mr. Ren Ji DongHe Zong Kai is aan Executive Vice President of the Company who graduated from the College of Energy and Power Engineering Department of Nanjing University of Aeronautics and Astronautics with a major degree in motor design, is a senior engineer. Mr. Ren assumed various offices in the aircraft maintenance workshop of Xinjiang Airlines Company, including Head of Workshop, Deputy Director of Workshop and President of the Engineering Department. Mr. Ren served as the Deputy Director of Urumqi Civil Aviation Administration and Vice President of Xinjiang Airlines Company. He was the Vice President of Xinjiang Airlines from 2002 to 2004. Mr. Ren has assumed the offices of the Party Secretary and Vice President of the Urumqi branch of the Company since 2004.Mr. He Zong Kaiis a Vice President of the Company who graduated from BejingBeijing Foreign Language Institute with a major degree in French, and is a senior economist. Mr. He served as the Deputy Manager of the Operation Department of the Company, Manager of Passenger Transportation Department, Head of Seats Arrangement Department, Vice General Manager of the Marketing Department and General Manager of the Ground Services Department. He assumed the offices of the President and Deputy Party Secretary of Hubei branch of the Company and became an Executive Vice President of the Company since 2003.
March 2005.
Mr. Liu Qianis the Chief Pilotcurrently an Executive Vice President of the Company who graduated from China Civil Aviation Flying College with specialty in aircraft piloting. Mr. Liu served the Civil Aviation Administration of China as assistant researcher of the piloting skills supervision division of the piloting standards department, as assistant researcher of the operation supervision division of the piloting standards department, as assistant researcher of the freight transportation piloting standards division of the piloting standards department, and as the Deputy Head of the Piloting Standards Division of the Piloting Standards Department. He has assumed the offices of the Deputy Chief Pilot and Chief Pilot of the Company since November 2004.55
He has been an Executive Vice President of the Company since August 2007.
Mr. Zhang Zi Fang is an Executive Vice President of the Company. Mr. Zhang served as the Deputy Commissar and subsequently the Commissar of the Pilot Corps of China Northern Airlines Company, and later on the Party Secretary of the Jilin Branch. He served as General Manager of Dalian Branch of CSAHC Northern Division and Director of Political Works Department of CSAHC. He also served as the Vice Party Secretary and Secretary of the Disciplinary Committee of the Company. He has been an Executive Vice President of the Company since 27 December 2007.
Mr. Dong Su Guang is an Executive Vice President of the Company. Mr. Dong used to be a Deputy General Manager of Guangzhou Aircraft Maintaining and Engineering Co., Ltd, as well as Chief Engineer and the General Manager of Aircraft Engineering Department of the Company. He has been an Executive Vice President of the Company since 27 December 2007.
Mr. Zhang Zheng Rong is the chief pilot of the Company. Mr. Zhang used to serve as the Captain of the First Squadron of CAAC, the Deputy General Manager of the Flight Operations Division and the Captain of the First Squadron as well as the General Manager of the Aviation Safety Monitoring Division of the Company. He has been the General Manager and Party Secretary of the Guangzhou Flight Operations Division of the Company since May 2004. He has been the chief pilot of the Company since August 2007.
Mr. Hu Chen Jie, the Chief Information Officer of the Company. Mr. Hu used to be a software engineer in the Computer Center of CAAC, a senior software engineer in Wei Hong International Technology Company (Singapore), Deputy Director of the Computer Center of the Company, a senior project manager of SITA INC. (US) and the General Manager of CSN-ETC e-Commerce Limited. He has been the Chief Information Officer of the Company since June 2007.
Mr. Tang Bing, the Chief Engineer of the Company. Mr. Tang served as a deputy manager and vice engineering director of the Engineering Technology Division under the Aircraft Engineering Department of the Company, and as a vice director of the Business Development and Accessories Centre of Guangzhou Aircraft Maintenance Engineering Co., Ltd. He also served as Vice President of MTU Maintenance Zhuhai Co., Ltd., Office Director of CSAHC as well as the President and Vice Party Secretary of Chongqing Airlines. He has been the Chief Engineer of the Company since 27 December 2007.
Mr. Su Liangis currently holding, the position aschief economist of the Company, Secretary. He was a graduate of the Cranfield College of Aeronautics, University of Cranfield, United Kingdom specialisingwith a master degree in Air Transport Management Engineering. Mr. Su is a holder of master degree. During the period from 1998 to 1999, Mr. Su held the position as Deputy Manager of the Flight Operations Department, China Southern Airlines Shenzhen Co. and from 1999 to 2000, he was the Manager of the Planning and Administration Department of China Southern Airlines Shenzhen Co.. Mr. Su was in charge of the flight operations, planning and international cargo project of the Company. From July 2000 to November 2007, Mr. Su was the Company responsible for the planning and developmentSecretary of the Company’s North American cargo business. From 2000 to date, Mr. Su isCompany. He has been the chief economist of the Company Secretary.since December 2007.
Mr. Xie Bing, the Secretary of the Board of Directors of the Company, graduated from Nanjing University of Aeronautics and Astronautics, majoring in civil aviation management. He subsequently received a master degree of business administration and a master degree of international finance from Jinan University and the University of Birmingham, Britain respectively. Mr. Xie used to work in the Planning and Development Department and Secretariat of the Board of Directors of the Company. He has been the Company Secretary of the Company since November 2007.
Mr. Chen Wei Huais, the Chief Company CounselLegal Adviser to the Company. Mr. Chen graduated from the school of law of Peking University. He is a qualified solicitor in the PRC and a qualified corporate legal counsellor. Mr. Chen joined the Civil Aviation Administration of China in 1998.1988. He then joined the CSAHC in January 1991. From 1997 to 2003, he served as Vice Director and Director of the Legal Affairs Office of the Company. Currently, he is President of the Legal Department of the Company. Since December 2003,January 2004, Mr. Chen has been the Chief Legal Adviser to the Company. He is also a Director of Xiamen Airlines Company Limited. None of the senior administrative officers above is connected with any Directors, senior management, substantial shareholders or Supervisors of the Company.Airlines.
Compensation RMB255,000 has been paid to independent non-executive Directors for the year ended December 31, 2004.
The aggregate compensation paid by the Company to all Directors, (excluding non-executive Directors), Supervisors and senior managementSenior Management for 20042007 was RMB6.8 million.RMB12,501,000. For the year ended December 31, 2004,2007, the Company accruedpaid an aggregate of approximately RMB145,000RMB275,000 on behalf of its executive Directors, Supervisors and senior managementSenior Management pursuant to the SA Pension Scheme and the retirement plans operated by various municipal governments in which the Company participates.
Details of Directors’ and Supervisors’ emoluments for the year ended December 31, 2007 are set out below:
| | Note | | Directors’ fees RMB’000 | | Salaries, allowances and benefits in kind RMB’000 | | Discretionary bonus RMB’000 | | Retirement scheme contributions RMB’000 | | Total RMB’000 | |
Executive directors | | | | | | | | | | | | | | | | | | | |
Liu Shao Yong | | | (i) | | | | | | 737 | | | | | | 14 | | | 751 | |
Li Wen Xin | | | | | | | | | 329 | | | | | | 14 | | | 343 | |
Wang Quan Hua | | | | | | | | | 597 | | | | | | 14 | | | 611 | |
Zhao Liu An | | | (i) | | | | | | 576 | | | | | | 14 | | | 590 | |
Si Xian Min | | | | | | | | | 670 | | | | | | 13 | | | 683 | |
Tan Wan Geng | | | | | | | | | 542 | | | | | | 13 | | | 555 | |
Xu Jie Bo | | | | | | | | | 529 | | | | | | 13 | | | 542 | |
Chen Zhen You | | | | | | | | | 513 | | | | | | 16 | | | 529 | |
Supervisors | | | | | | | | | | | | | | | | | | | |
Sun Xiao Yi | | | | | | | | | 597 | | | | | | 14 | | | 611 | |
Yang Guang Hua | | | | | | | | | 565 | | | | | | 8 | | | 573 | |
Yang Yi Hua | | | | | | | | | 209 | | | | | | 16 | | | 225 | |
Liang Zhong Gao | | | (iii) | | | | | | 232 | | | | | | 12 | | | 244 | |
Liu Biao | | | (iv) | | | | | | 134 | | | | | | 2 | | | 136 | |
Independent non-executive directors | | | | | | | | | | | | | | | | | | | |
Peter Lok | | | (ii) | | | 49 | | | | | | | | | | | | 49 | |
Wei Ming Hai | | | (ii) | | | 50 | | | | | | | | | | | | 50 | |
Gong Hua Zhang | | | (iii) | | | 50 | | | | | | | | | | | | 50 | |
Wang Zhi | | | | | | 100 | | | | | | | | | | | | 100 | |
Sui Guang Jun | | | | | | 100 | | | | | | | | | | | | 100 | |
Lam Kwong Yu | | | (iii) | | | 48 | | | | | | | | | | | | 48 | |
Total | | | | | | 397 | | | 6,230 | | | | | | 163 | | | 6,790 | |
Notes:
(i) The above amounts included the salaries paid to these Directors as pilots of the Company.
(ii) Retired on June 28, 2007.
(iii) Appointed on June 28, 2007.
(iv) Appointed on June 28, 2007 and resigned on January 18, 2008.
Board Practices Directors’
Each Director’s service
contractscontract with the Company or any of its subsidiaries
provideprovides prorated monthly salary upon termination of employment in accordance with his contract. The Director is entitled to paid leave in accordance with his contract.
The term of office of a Director is three years. The term of office of the current Directors will end in 2010. A Director may serve consecutive terms upon re-election.
The audit committee is appointed by the Board of Directors and consists of fivethree independent non-executive Directors. The current members of the audit committee are Mr. Simon To, Mr. Peter Lok, Mr. Wei Ming Hai, Mr.Gong Hua Zhang, Wang Zhi and Mr. Sui Guang Jun. Gong Hua Zhang is the chairman of the audit committee. The term of office of each member is three years. The term for Messrs Wang Zhi and Sui Guang Jun will end in 2009, The term of Mr. Gong Hua Zhang will end in 2010. A member may serve consecutive terms upon re-election. At least once a year, the committee is required to meet with the Company’s external auditors without any executive members of the Board in attendance. The quorum necessary for the transaction of any business is two committee members. The committee will normally meet four times a year. Audit Committee held nine meetings in 2007, which were attended by all members.
The
external auditors orAudit Committee is required, amongst other things, to oversee the
Chief Financial Officer ofrelationship with the
Company may request a meeting of the audit committee. The audit committee selects and engages, on behalf of the Company, external auditors, to auditreview the Company’sGroup’s interim results and annual financial statements, to monitor compliance with statutory and considers questions regardinglisting requirements, to review the audit feesscope, if necessary, to engage independent legal or other advisers as it determines is necessary and the resignation or dismissal of the external auditors. The audit committee also reviews and approves the planned scope of the Company’s annual audit.to perform investigations. In addition, the audit committee reviews the annual and interim financial statements, the preliminary announcement of results and any other announcement regarding the Company’s results or other financial information to be made public, before submission to the Board of Directors. Moreover, the committee discusses problems arising from the audit and reviews the external auditors’ management letter and management’s response. Furthermore, the audit committee reviewsAudit Committee also examines the effectiveness of the system ofCompany’s internal financial controls, from information provided by the Executive Directorate and managementwhich involves regular reviews of the Companyinternal controls of various corporate structures and ensures adherencebusiness processes on a continuous basis, and takes into account their respective potential risks and severity, in order to the Company’s control policies so that the Company’s assets are safeguarded and that the financial records are complete and accurate. The audit committee meets regularly with the Company’s senior financial, internal audit and the external auditors to consider the Company’s financial reporting, the nature and scope of audit review andensure the effectiveness of the systemsCompany’s business operations and the realization of internal control.its corporate objectives and strategies. The audit committeescope of such examinations and reviews includes finance, operations, regulatory compliance and risk management. The Audit Committee also reviews any significant transactions that are not in the ordinary course of business.
56
Company’s internal audit plan, and submits relevant reports and concrete recommendations to the Board on a regular basis.
The Company has an internal audit department which reviews procedures in all major financial and operational activities. This department is led by the head of internal audit who is directly responsible to the Chairman of the Boardaudit.
Remuneration and submits regular reports to the audit committee.Assessment Committee
Remuneration Committee
The Remuneration
and Assessment Committee
comprisesis comprised of three members.
TheCurrently, the Remuneration
and Assessment Committee is chaired by independent non-executive Director Sui Guang Jun with independent non-executive Director
Wei Ming HaiGong Hua Zhang and executive Director Wang Quan Hua as members. The
term of office of each member is three years. The term of office of the current members will end in 2010. A member may serve consecutive terms upon re-election. The Remuneration
and Assessment Committee met
oncetwice in
20042007, which
waswere attended by all members.
In addition, the Remuneration Committee also meets as and when required to consider remuneration related matters.
The responsibilities of the Remuneration and Assessment Committee are to approvemake recommendations on the remuneration packages ofpolicy and structure for Directors and senior management of the Group,Company, to establish regular and transparent procedures on remuneration policy development and improvement and submit the Company’s “preliminary proposals on annual emoluments of the directors and senior management of the Group”. In particular, the Remuneration and Assessment Committee has the duty to ensure that the Directors or any of their associates shall not be involved in the determination of their own remuneration packages.
The Remuneration and Assessment Committee consulted, when appropriate, the Chairman and/or the President about its proposals relating to the remuneration of other executive Directors. The Remuneration and Assessment Committee is provided with sufficient resources to discharge its duties and professional advice is available if necessary. The Remuneration and Assessment Committee is also responsible for assessing performance of executive Directors and approving the terms of executive Directors’ service contracts. The Remuneration and Assessment Committee has performed all its responsibilities under its terms of reference in 2007.
Nomination Committee
The Nomination Committee was established on June 28, 2007. Before that, nomination of directors and other senior management was mainly undertaken by the Board. According to the Articles of Association, the Board has the authority to appoint from time to time any person as director to fill a vacancy or as additional director. In selecting candidate directors, the Board focuses on their qualifications, technical skills, experiences (in particular, the experience in the industry in which the Group operates in case of candidates of executive directors) and expected contributions to the Group.
As at December 31, 2007, the Nomination Committee consists of three members, Messers Liu Shao Yong, Wang Zhi and Gong Hua Zhang. Most of them are independent non-executive Directors of the Company (“INEDs”) and Mr. Liu Shao Yong acts as the chairman. The responsibilities of the Nomination Committee are to make recommendations to the Board in respect of the size and composition of the Board based on the operational activities, assets and shareholding structure of the Company; study the selection criteria and procedures of directors and executives and give advice to the Board; identify qualified candidates for directors and executives; investigate and propose candidates for directors and managers and other senior management members to the Board.
In accordance with relevant laws and regulations as well as the provisions of the Articles of Association of the Company, the Nomination Committee shall study and resolve on the selection criteria, procedures and terms of office for directors and managers with reference to the Company’s actual situation. Any resolution made in this regard shall be filed and proposed to the Board for approval and shall be implemented accordingly.
The Nomination Committee is provided with sufficient resources to discharge its duties and independently engage intermediate agencies to provide professional advice on its proposals if necessary.
The Nomination Committee held three meetings in 2007. which were attended by all members.
As of December 31,
2004,2007, the Group had
18,22145,474 employees, including
1,9953,931 pilots,
3,2317,159 flight attendants,
2,6795,721 maintenance personnel,
2,1945,303 sales and marketing personnel,
2,401 ground service personnel, 1,349 flight operation officers, 1,399 financial personnel and
8,1228,961 administrative
and other personnel. All of the Group’s pilots, flight attendants,
technicalmaintenance personnel,
managementadministrative personnel and sales and marketing personnel are contract employees, and most of the Group’s ancillary service workers are temporary employees. Contract employees are hired by the Group pursuant to renewable employment contracts with terms ranging from three to five years. Temporary employees generally are hired by the Group pursuant to at-will employment contracts or employment contracts with a term of one year.
The Company’s employees are members of a trade union organized under the auspices of the All-China’s Federation of Trade Unions, which is established in accordance with the Trade Union Law of China. A representative of the Company labor union currently serves on the Supervisory Committee of the Company. Each of the Company’s subsidiaries has its own trade union. The Group has not experienced any strikes, slowdowns or labor disputes that have interfered with its operations, and the Group believes that its relations with its employees are good.
All employees of the Group receive cash remuneration and certain non-cash benefits. Cash remuneration consists of salaries, bonuses and cash subsidies provided by the Group. Salaries are determined in accordance with the national basic wage standards. The total amount of wages payable by the Group to its employees is subject to a maximum limit based on the profitability of the Group and other factors. Bonuses are based on the profitability of the Group. Cash subsidies are intended as a form of cost-of-living adjustment. In addition to cash compensation, the Group’s contract employees receive certain non-cash benefits, including housing, education and health services, and the Group’s temporary employees receive limited health services, but not housing or education. CSAHC provides certain
Employee benefits
Employee benefits are all forms of considerations given and other related expenditures incurred in exchange for services rendered by employees. Except for termination benefits, employee benefits are recognised as a liability in respectthe period in which the associated services are rendered by employees, with a corresponding increase in cost of theserelevant assets or expenses in the current period.
(a) Retirement benefits
Pursuant to the
Group’s employees in consideration of certain feesrelevant laws and
other charges. Retirement And Housing Benefits
Employeesregulations of the PRC, the Group participate in severalhas joined a defined contribution retirement schemes organised separately by PRC municipal governments in regions where the major operations of the Group are located. The Group is required to contribute to these schemes at the rates ranging from 14% to 20% of salary costs including certain allowances. A member of the retirement schemes is entitled to pension benefits equal to a fixed proportion of the salary at the retirement date. The retirement benefit obligations of all existing and future retired staff of the Group are assumed by these schemes.
In addition, the Group was selected as one of the pilot enterprises to establish a supplementary defined contributionbasic retirement scheme for the benefit of employees. In this connection, employees ofarranged by local Labour and Social Security Bureaus. The Group makes contributions to the Group participate in a supplementary defined contribution retirement scheme wherebyat the Group is requiredapplicable rates based on the amounts stipulated by the government organization. The contributions are charged to make defined contributions at a rate of 4.5% of total salaries. The Group has no obligationprofit or loss on an accrual basis. When employees retire, the local Labour and Social Security Bureaus are responsible for the payment of pensionthe basic retirement benefits beyond the contributions described above. Contributions to the retired employees.
(b) Housing fund and other social insurances
Besides the retirement
schemes are charged to the income statement as and when incurred.57
Furthermore,benefits, pursuant to the comprehensive services agreement (the “Services Agreement”) dated May 22, 1997 between the Companyrelevant laws and CSAHC, CSAHC agrees to provide adequate quarters to eligible employeesregulations of the Group as and when required. In return,PRC, the Group agreeshas joined defined social security contributions for employees, such as a housing fund, basic medical insurance, unemployment insurance, injury insurance and maternity insurance. The Group makes contributions to pay a fixed annual feethe housing fund and other social insurances mentioned above at the applicable rates based on the employees’ salaries. The contributions are recognized as cost of RMB85 millionassets or charged to CSAHC for a ten-year period effective January 1, 1995.
Pursuant toprofit or loss on an additional staff housing benefit scheme effective September 2002,accrual basis.
(c) Termination benefits
When the Group
agreedterminates the employment relationship with employees before the employment contracts have expired, or provides compensation as an offer to
pay lump sum housing allowancesencourage employees to
certain employees who have not received quarters from CSAHCaccept voluntary redundancy, a provision for the termination benefits provided, is recognized in profit or
the Group according to the relevant PRC housing reform policy, for subsidising their purchases of housing. Such expenditure has been deferred and amortised on a straight line basis over a period of 10 years, which represents the vesting benefit periodloss when both of the
employees. An employee who quits prior to the end of the vesting benefit period is required to pay back a portion of the lump sum housing benefits determined on a pro-rata basis of the vesting benefit period. The Group has the right to effect a charge on the employee’s house and to enforce repayment through selling the house in the event of default in repayment. Any shortfall in repayment would be charged against income statement. As at December 31, 2004, the Group already made payments totalling RMB191 million under the scheme and recorded its remaining contractual liabilities totalling RMB69 million as accrued expenses on its balance sheet. Housing allowances are payable when applications are received from eligible employees.following conditions have been satisfied:
– | The Group has a formal plan for the termination of employment or has made an offer to employees for voluntary redundancy, which will be implemented shortly; |
– | The Group is not allowed to withdraw from termination plan or redundancy offer unilaterally. |
There is no workers’ compensation or other similar compensation scheme under the Chinese labor and employment system. As required by Chinese law, however, the Group, subject to certain conditions and limitations, pays for the medical expenses of any contract employee who sufferssuffer a work-related illness, injury or disability and continues to pay the full salary of, and provides all standard cash subsidies to, such employee during the term of such illness, injury or disability. The Group also pays for certain medical expenses of its temporary employees.
Share Ownership Except as disclosed herein, as
As of the date of this Annual Report, no Director, Senior Management or Supervisor of the Company is a beneficial owner of any shares of the Company’s capital stock. As of the date of this Annual Report, no arrangement has been put in place involving issue or grant of options or shares or securities of the Company to any of the Director, Senior Management, Supervisor or employees of the Company.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | % to the | | | % to the | | | | |
| | | | | | | | | | | | | | % to the | | | total | | | total | | | | |
| | | | | | | | | | | | | | total | | | issued | | | issued | | | | |
| | The | | | | | | | | | | | issued | | | domestic | | | share | | | | |
| | Company/ | | | | | | | Number | | | H shares | | | shares | | | capital | | | | |
| | associated | | | Types of | | Type of | | of shares | | | of the | | | of the | | | of the | | | Short | |
Name | | corporation | | | interest | | shares | | held | | | Company | | | Company | | | Company | | | position | |
Simon To | | the Company | | Interest of spouse (Note 1) | | H Shares | | | 100,0000 | | | | 0.009 | % | | | — | | | | 0.002 | % | | | — | |
| | |
Note 1: | | The spouse of Mr. Simon To is the owner of these 100,000 H Shares of the Company and accordingly, Mr. Simon To, is taken to be interested in these 100,000 H Shares by virtue of the Securities and Futures Ordinance. |
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.58
Major Shareholders
As of
DecemberMay 31,
2004,2008, the total share capital of the Company was
divided into 4,374,178,000 shares, of which approximately 50.3% (2,200,000,000 domestic shares)
iswas held by CSAHC, approximately 26.84% (1,174,178,000 H shares)
iswas held by Hong Kong and overseas shareholders and approximately 22.86% (1,000,000,000 A shares)
iswas held by domestic shareholders.
CSAHC owns 50.30% of the total share capital of the Company, therefore it is entitled to exercise all the rights of a controlling shareholder, including the election of executive Directors.
As of DecemberMay 31, 2004,2008, the following shareholders had an interest of 5% or more in the Company’s shares:
Name | | Number of Shares | | Approximate Percentage of the Total Number of Shares | |
| | | | | |
CSAHC | | | | Approximate | |
| | | | Percentage | |
| | | | of the Total | |
Name | | Number of Shares | | Number of Shares | |
CSAHC | | 2,200,000,000 domestic shares | | | 50.30 | % |
HKSCC Nominees Limited | | 1,151,953,998 | 1,162,215,598 H shares | | | 26.3426.57 | % |
The table below sets forth, as of DecemberMay 31, 2004,2008, the following entities hold 5% or more of the total number of H shares issued by the Company.
| | | | | | |
| | | | Approximate | |
| | | | Percentage of | |
| | | | the Total | |
| | | | Number of H | |
Name | | Number of H Shares | | Shares | |
HKSCC Nominees Limited | | 1,151,953,998 | | | 98.11 | % |
Name | | Number of H Shares | | Approximate Percentage of the Total Number of H Shares | |
HKSCC Nominees Limited | | | 1,162,215,598 | | | 98.98 | % |
Domestic shares and H shares have identical voting rights.
Related Party Transactions The Company enters into transactions from time to time with CSAHC and its
affiliates.associates. For a description of such transactions, see Note
2639 to the Financial Statements. In particular, the following arrangements, which the Company believes are material to its operations, have been made between the Company and CSAHC and its
affiliates.associates. The Company believes that these arrangements have been entered into by the Group in the ordinary
and usual course of
its business
on either normal commercial terms or terms no less favourable than terms available to or from independent third parties that are fair and
reasonable so far asin accordance with the
shareholders are concerned.agreements governing such transactions.
Trademark License Agreement The Company and CSAHC
have entered into
the Trademark License Agreementa ten year trademark license agreement dated May 22, 1997 pursuant to which CSAHC
has acknowledgedacknowledges that the
GroupCompany has the right to use the name “China Southern” and “China Southern Airlines” in both Chinese and English, and
has granted togrants the Company a
10-year renewable
royalty free license to use the kapok logo on a
world-wideworldwide basis in connection with
itsthe Company’s airline and airline-related businesses.
59
As CSAHC has retained the right to use the kapok logo in connection with its non-airline related businesses conducted as of the date of the Trademark License Agreement and to permit its affiliates that dodid not compete, directly or indirectly, with the Group to use the kapok logo. Unless CSAHC givesgive a written notice of termination three months before the expiration of the 10-year term of the agreement, the agreement will beis automatically extendedrenewed for another 10-yearten year term.
The Company as lessee and CSAHC as lessor have entered into the following lease agreements:
The Company and CSAHC have entered into a land lease agreement dated
(1) | On May 22, 1997, the Company and CSAHC entered into a Lease Agreement pursuant to which CSAHC leased to the Company certain land and properties at various locations in Guangzhou, Haikou and Wuhan for a term of five years, which was renewable by agreement between both parties thereto. |
On May
22, 1997, in respect of15, 2001, the
land used by the Company within Baiyun International Airport. The total rental payment is RMB2.7 million per year. The term of the lease is five years commencing April 1, 1997, and is renewable by the Company thereafter. The Company and CSAHC have separately entered into four lease agreements dated May 22, 1997, in respect of office premises located at the east wing of the Guangzhou Railway Station on Guangzhou Huanshi Dong Road, office premises at Haikou Airport, office premises in Haikou City, and office premises at Tianhe Airport in Wuhan, Hubei Province. The aggregate rental payment under the four leases is RMB12.6 million per year. The original term of each lease is one year and is renewable annually by the Company thereafter.
The Company and CSAHC have entered into an indemnification agreement dated May 22, 1997, in which CSAHC has agreed to indemnify the Company against any loss or damage caused by or arising from any challenge of, or interference with, the Company’s right to use certain land and buildings.
The Company and CSAHC entered into a lease agreement dated November 12, 2004, underpursuant to which CSAHC leasesleased to the Company certain lands by leasing theparcels of land, use rightsproperties, and buildings at various locations at Hengyang, Jingzhou (previously known as “Shashi”) and Nanyang for a term of such lands to the Company. These lands had been administratively allocated to XJA and CNA for the purposes of their civil aviation and related businesses. Subsequently, CSAHC was authorized to deal with the land use rights of such lands, including leasing, but not transferring, such land use rights. Total area of the lands leased is 1,182,297 square metres,five years, and the locationsrents were calculated on the basis of such lands are in Urumqi, Shenyang, Dalian and Harbin. The lease is for a fixed term of three years, commencing from the effective date of the lease, and isannual depreciation method. Such Lease Agreement was renewable subjectby agreement between both parties thereto.
In order to
compliancecomply with the relevant
requirementsprovisions of the Hong Kong Listing Rules
byregarding connected transactions, the
Company, by an application in writing by the Company to the lessor three months before the end of the fixed term. The rent for the land use rights of the designed lands under lease agreement is RMB22,298,033 per year, payable in arrear by cheque, in cash or by bank transfer on or before the 10th day of each calendar month, and is determined after arm’s length negotiation between the parties. The Cap for the lease agreement is set at RMB22,298,033 per year.Comprehensive Services and Employee Benefits
The Company and CSAHC have entered into a comprehensive servicesgeneral lease agreement dated May 22, 1997, pursuant to which CSAHC agrees to provide adequate quarters to eligible employeesbased on the above agreements through determination and negotiation regarding the actual situation of the Group aslands, properties and when required. In return,buildings located in above areas. This Lease Agreement takes effect retrospectively on January 1, 2006, and is valid for a term of three years. Under this Lease Agreement, the Group agrees to paytotal rent payable is RMB86,029,619.01, of which, the annual rents payable for the years 2006, 2007 and 2008 are RMB27,543,606.01, RMB28,657,966.99 and RMB29,828,046.01 respectively. However, the total rents in the original several lease agreements are RMB92,452,479.48 for the term of five years.
(2) | The Company and CSAHC entered into an indemnification agreement dated May 22, 1997 in which CSAHC has agreed to indemnify the Company against any loss or damage caused by or arising from any challenge of, or interference with, the Company’s right to use certain land and buildings. |
(3) | The Company and CSAHC entered into a lease agreement dated November 12, 2004, under which CSAHC leases to the Company certain lands by leasing the land use rights of such lands to the Company. These lands had been administratively allocated to XJA and CNA for the purposes of their civil aviation and related businesses. Subsequently, CSAHC was authorized to deal with the land use rights of such lands, including leasing, but not transferring, such land use rights. Total area of the lands leased is 1,182,297 square meters, and the locations of such lands are in Urumqi, Shenyang, Dalian and Harbin. The lease is for a fixed term of three years, commencing from the effective date of the lease, and is renewable, subject to compliance with the relevant requirements of the Hong Kong Listing Rules by the Company, by an application in writing by the Company to the lessor three months before the end of the fixed term. The rent for the land use rights of the designated lands under lease agreement is RMB22,298,000 per year, payable in arrear by cheque, in cash or by bank transfer on or before the 10th day of each calendar month, and was determined after arm’s length negotiations between the parties. The maximum aggregate annual limit (“Cap”) for the lease agreement is set at RMB22,298,000 per year. This lease agreement expired on December 31, 2007 and the Company and CSAHC had entered into a new agreement regarding the said lease. For details, please refer to item (6) below. |
(4) | The Company, CSAHC and CNA entered into a lease agreement dated November 12, 2004, under which CSAHC and CNA lease to the Company certain buildings, facilities and other infrastructure related to the civil aviation businesses of CNA situated at various locations in Shenyang, Dalian, Jilin, Harbin, Chaoyang and Russia. The lease is for a fixed term of three years, commencing from the date of the lease, and is renewable, subject to compliance with the relevant requirements of the Hong Kong Listing Rules by the Company, by an application in writing by the Company to the lessor three months before the end of the fixed term. The consideration for the lease agreement is RMB43,758,000 per year, payable in arrear by cheque, in cash or by bank transfer on or before the 10th day of each calendar month, and is determined after arm’s length negotiation between the parties. The Cap for the lease agreement is set at RMB43,758,000 per year. This lease agreement expired on December 31, 2007 and the Company and CSAHC had entered into a new agreement regarding the said lease. For details, please refer to item (6) below. |
(5) | The Company, CSAHC and XJA entered into a lease agreement dated November 12, 2004, under which CSAHC and XJA lease to the Company certain buildings, facilities and other infrastructure related to the civil aviation businesses of XJA situated in Xinjiang and Russia. The lease is for a fixed term of three years, commencing from the effective date of the lease, and is renewable, subject to compliance with the relevant requirements of the Hong Kong Listing Rules by the Company, by an application in writing by the Company to the lessor three months before the end of the fixed term. The consideration for the lease agreement is RMB5,798,000 per year, payable in arrear by cheque, in cash or by bank transfer on or before the 10th day of each calendar month, and is determined after arm’s length negotiation between the parties. The Cap for the lease agreement is set at RMB5,798,000 per year. This lease agreement expired on December 31, 2007 and the Company and CSAHC had entered into a new agreement regarding the said lease. For details, please refer to item (6) below. |
(6) | Due to the expiration on December 31, 2007 of the Land Use Rights Lease Agreement, the Property Lease Agreement between the Company and CSAHC, and CNA, as well as the Property Lease Agreement between the Company and CSAHC, and XJA as disclosed in items (3), (4) and (5) above, and in order to ensure normal operation of the Company, the Company, based on the current actual leasing conditions of both parties, consolidate the three agreements into two agreements by the type of the leased properties, namely the Land Lease Agreement and the Property Lease Agreement. Those two agreements were entered into between the Company and CSAHC on January 10, 2008 and effective for a period from January 1, 2008 to December 31, 2010. As provided for in the Land Lease Agreement and the Property Lease Agreement, the leased areas of the related lands and properties were changed to 1,104,209.69 square metres and 197,010.37 square metres respectively, and their annual rentals were adjusted to RMB21,817,145.00 and RMB48,474,632.77, or an aggregate of RMB70,291,777.77 for each of the years from 2008 to 2010. The rentals were determined by reference to the market rents of the same district and on the basis that unit rental and payment terms remained unchanged. The independent non-executive Directors of the Company have approved the above two agreements. |
Acquisition/Disposal of Assets
The Company entered into an agreement on August 14, 2007 with CSAHC for the acquisition from CSAHC of the entire equity interests in SAG Air Catering Company, the assets of Guangzhou BiHuaYuan Training Centre, certain physical assets of Nan Lung Travel & Express (Hong Kong) Limited (“Nan Lung”) and the 51% equity interest in Nan Lung International Freight Company Limited held by Nan Lung for a
fixed annual feetotal consideration of
RMB85 millionRMB270,000,000, and for the sale to CSAHC
forof a
ten-year period effective January 1, 1995.90% interest in Guangzhou Aviation Hotel at a consideration of RMB75,000,000. The resolutions relating to the above transactions were unanimously approved by the independent non-executive Directors.
Arrangements with CSAHCCSAHC’s Associates
Southern Airlines (Groups) Import and CSAHC’s AffiliatesSale and Purchase Agreement
TheExport Trading Company CSAHC, CNA,("SAIETC"), a wholly owned subsidiary of CSAHC and XJA, a wholly owned subsidiary of CSAHC, entered into a sale and purchase agreement (the “Sale and Purchase Agreement”) dated November 12, 2004, pursuant to which the Company agreed to acquire, and CSAHC, CNA and XJA agreed to sell certain airlines and airlines-related operations, assets and properties of CNA, XJA and their respective subsidiaries, which included aircraft, engines, spare parts, aviation equipment and facilities, properties, office facilities, and other fixed, current and intangible assets. In addition, the Company will also assume all indebtedness in the aggregate sum of RMB13,438,191,000 owed by XJA, CNA and their respective subsidiaries in connection with their civil aviation business. The total consideration, including the assumption of the debts under the Sale and Purchase Agreement was RMB15,397,524,000.
60
Leases
The Company, CSAHC and CNA entered into a lease agreement dated November 12, 2004, under which CSAHC and CNA lease to the Company certain buildings, facilities and other infrastructure related to the civil aviation businesses of CNA situated at various locations in Shenyang, Dalian, Jilin, Harbin, Chaoyang and Russia. The lease is for a fixed term of three years, commencing from the date of the lease, and is renewable, subject to compliance with the relevant requirements of the Hong Kong Listing Rules by the Company, by an application in writing by the Company to the lessor three months before the end of the fixed term. The consideration for lease agreement is RMB41,993,318 per year, payable in arrear by cheque, in cash or by bank transfer on or before the 10th day of each calendar month, and is determined after arm’s length negotiation between the parties. The Cap for the lease agreement is set at RMB41,993,318 per year.
The Company, CSAHC and XJA entered into a lease agreement dated November 12, 2004, under which CSAHC and XJA lease to the Company certain buildings, facilities and other infrastructure related to the civil aviation businesses of XJA situated in Xinjiang and Russia. The lease is for a fixed term of three years, commencing from the effective date of the lease, and is renewable, subject to compliance with the relevant requirements of the Hong Kong Listing Rules by the Company, by an application in writing by the Company to the lessor three months before the end of the fixed term. The consideration for lease agreement is RMB5,797,909 per year, payable in arrear by cheque, in cash or by bank transfer on or before the 10th day of each calendar month, and is determined after arm’s length negotiation between the parties. The Cap for the lease agreement is set at RMB5,797,909 per year.
Arrangements with CSAHC’s Affiliates
Southern Airlines (Group) Import and Export Trading Company (“SAIETC”), a wholly-owned subsidiary of CSAHC
The Company and SAIETC
have entered into an
agreementImport and Export Agency Framework Agreement dated
May 22, 1997,January 1, 2006 for the import and export of aircraft, flight equipment, special vehicles for airline use, communication and navigation facilities, and training
facilitiesfacilities. The Import and Export Agency Framework Agreement is valid for a term
extendingof three years, commencing from
May 22, 1997the date of agreement, subject to
May 22, 2000 which was subsequently extended to May 22, 2006compliance with the relevant provisions of the Hong Kong Listing Rules by
mutual agreement between the
parties. TheCompany. Both parties
have mutually agreed that the
agency fee for import and export shall be determined after arm’s length negotiation and shall not be higher than the market rate. The annual cap for such agreement
canshall be
extended automatically.RMB80,000,000 per annum. The independent non-executive Directors of the Company have approved the Import and Export Agency Framework Agreement.
On January 10, 2008, the Company entered into a new Import and Export Agency Framework Agreement with SAIETC, pursuant to which the parties shall cooperate on the following business domains: import and export, customs clearance, declaration and examination, tendering and agency, etc.. The Agreement is valid from January 1, 2008 to December 31, 2010, and the annual cap for the commission should not exceed RMB90,000,000. The INEDs have approved this new Import and Export Agency Framework Agreement.
For the year ended December 31, 2004,2007, the amountcommission expense incurred by the Group forin respect of the import and export of the above equipment was RMB1,117 million, inclusive of agency commission of 1.5% aboveRMB46,205,000.
Southern Airlines Culture and Media Co., Ltd. (“SACM”), which is 50% owned by the contract prices paid to SAIETC.Company and 50% owned by CSAHC
The Company and Southern Airlines Advertising Company (“SAAC”), entered into a new Advertising Agency Agreement dated January 1, 2006. SAAC and SACM entered into an acquisition agreement in 2006 whereby SACM acquired and merged with SAAC and assumed the rights, obligations and business of SAAC.
Advertising Agency Agreement is valid for a term of three years commencing from the date of the agreement. Under the agreement, SACM will produce advertisement script, graphic and music to the Company with the copyright of such products belonging to the Company, subject to compliance with the relevant provisions of the Listing Rules. The parties have determined the various rates for providing advertising services after negotiations on a fair and equitable basis, which is 45% owned byare not higher than the market rates for similar advertising services. The independent non-executive Directors of the Company have approved such Advertising Agency Agreement.
On April 12, 2007, the Company and
55% owned by CSAHC In August 2002, the Company entered into a takeover agreement with CSAHC. As a result, the Company owns 90% and CSAHC owns 10% of SAAC.
On 3 September, 2004, CSAHC increased its shareholdings from 10% to 55% by the creation of RMB3 million authorized share capital from RMB2 million. Such capital injection from CSAHC diluted the Company’s shareholdings of SAAC from 90% to 45%.
The Company and SAAC haveSACM entered into an agreement dated May 22, 1997, for the provision of advertising servicesAdvertising Agency Framework Agreement for a term extendingof three years commencing from May 22, 1997the date of the agreement. Under the agreement, SACM will produce advertisement script, graphic and music for the Company with the copyrights of such products belonging to May 22, 2000.the Company, subject to compliance with the relevant provisions of the Hong Kong Listing Rules. The parties have agreed to determine the various rates for providing advertising agency services through negotiations on arms length basis, SACM has undertaken to charge the Company on the basis of the market rates for similar advertising agency services as accepted by the Company. Pursuant to the agreement, has been extended to May 22, 2006.
the annual caps for 2007, 2008 and 2009 shall be RMB16,000,000, RMB20,500,000 and RMB25,500,000 respectively. The INEDs have approved the agreement.
For the year ended December 31,
2004, the amount incurred2007, payments made by the Group to
SAACSACM for advertising services
was RMB1.2 million.amounted to RMB8,669,000.
China Southern Airlines Group Finance Company Limited (“SA Finance”), which is 42%66% owned by CSAHC, 32%21.1% owned by the Company 26%and 12.9% owned in aggregate by five subsidiaries of the Company
The Company
has entered into a
financial agreementFinancial Services Agreement (“Financial Services Agreement”) dated May 22, 1997 with SA Finance for the provision of financial services such as deposit and loan facilities, credit facilities, financial guarantees and credit
references for a term extending from May 22, 1997 to May 22, 2000. As agreed by the parties, thereferences. The agreement
has beenwas extended
for six years to May 22, 2006. In order to comply with the new requirements under the
Hong Kong Listing Rules,
so that SA Finance can continue to provide deposit of money service and other financial services (subject to execution of separate agreements and further compliance with the Hong Kong Listing Rules), the Company and SA Finance entered into a new
financial agreementFinancial Services Agreement on
December 31, 2004. On November
12, 2004,15, 2007, the Group renewed the Financial Services Framework Agreement with SA Finance, commencing from
that dateJanuary 1, 2008 for a period of three years, and is renewable
subject to compliance with the requirements of the relevant Hong Kong Listing Rulesupon request by the Company by
an application in writing by the Companywritten notice of not less than 30 days before the end of the fixed
term.61
Under such agreement, (a) all funds that the Company deposits with SA Finance will be deposited by SA Financeterm, subject to compliance with the Commercial and Industrial Bank of China, Bank of Communications, Bank of Agriculture, China Construction Bank, or other banks of similar creditworthiness; (b) SA Finance will not at any time have outstanding loans in excessrequirements of the amount representinglisting rules applicable in the aggregateplaces of (i) deposits received from entities other than the Company, (ii) SA Finance’s shareholders’ equity and (iii) capital reserves; and (c) SA Finance will provide credit facilities, financial guarantees, credit references, and other financial services subject to the entering into of separate agreements, which will set out the cap, terms and conditions of such services, upon request by the Company during the termlisting of the financial agreement,Company.
As the Financial Services Agreement constitutes a discloseable and
non-exempt continuing connected transaction within the
Company will comply withmeaning of Rule 14A.35 of the Hong Kong Listing Rules,
when entering into such separate written agreements. The Companyit is not subject to any extra charges for depositing money with SA Finance. Forrequirements under Rule 14A.48 of the other financial services provided byHong Kong Listing Rules regarding the reporting, announcement and independent shareholders’ approval. The independent shareholders of the Company approved the Financial Services Framework Agreement at the first extraordinary general meeting of the Company held on January 18, 2008.
Under such agreement, SA Finance under the financial agreement,agrees to provide to the Company is liable to pay the following financial services:
SA Finance
shall pay interests to the
standard chargingGroup regularly at a rate not lower than the current deposit rates set by the People’s Bank of China. The
PRC commercial banks also charge similar charging rates set by the People’s Bank of China. The Company will make payment for such interest, fees and commissions in accordance with the payment terms of the separate agreements for the provision of loans or other financial services as might be entered into between the Company and SA Finance. The Cap for the provision of deposit service under the financial agreement is set at RMB1 billion per year. The Company usually receives interest on its money depositedGroup’s deposits placed with SA Finance at rates which are more favourable thanwere re-deposited in a number of banks, including the benchmark interest rates set by the People’sIndustrial and Commercial Bank of China, usually in the range between the benchmark interest rates set by the People’sChina Construction Bank, Agricultural Bank of China, and the inter-bank offer ratesBank of interest. This arrangement allows the Company to achieve a more efficient use of its current capital, since the Company can enjoy better interest rates on depositing its current capital with SA Finance than the benchmark rates of interest set by the People’sCommunications, Bank of China, China Merchants Bank and Standard Chartered Bank (China), etc.. In order to ensure the implementation of the Agreement, SA Finance has agreed that the PRC commercial banks can offerloans it provided to CSAHC and its subsidiaries other than the Company.
Subject toGroup should not exceed the entering intoaggregate of further separate agreements,share capital, reserves and total deposits of other companies (excluding the Company can borrow from SA Finance at interestGroup). The rates should be determined on arm’s length basis and based on fair market rate, and should not be higher than those set byavailable from independent third parties. The parties hereby agreed that the People’s Bankbalance of China for similar loans. In addition, the Company is not precluded under the financial agreement to borrow money from other PRC commercial banks where the terms and conditions are favourable. The Company can also enjoy the convenience of other financial services at the rates of fees and commissions set by the People’s Bank of China, which are comparable to the rates charged by PRC commercial banks for similar services.
As of December 31, 2004, the Group’s deposits placed with SA Finance amounting(including accrued interests) should not at any time exceed RMB2.6 billion, nor should the balance of loans provided to RMB406.0SA Finance at any time exceed the above-mentioned level. The annual cap of fees payable to SA Finance for the other financial services should not exceed RMB5 million. The agreement is valid for a term of three years.
As of December 31, 2007, the Group’s deposits placed with SA Finance amounted to RMB906 million. The applicable interest rates are determined in accordance with the rates published by the People’s Bank of China.
As of December 31, 2007, loans from SA Finance to the Group amounted up to RMB329 million which
earnedbore interest at
rates ranging from 5.10% to 6.16% per annum during the
rate of 0.62% — 1.62% per annum.year.
Shenzhen Air Catering Company Limited, which is 33% owned by CSAHC, and 67% owned by two independent third parties
The Company and Shenzhen Air Catering Company Limited
have entered into an agreement dated May 23, 1997 for the sale and purchase of in-flight meals for flights originating or stopping at the airport in Shenzhen. Pursuant to such agreement, Shenzhen Air Catering Company Limited
wouldwill supply in-flight meals to the Group from time to time during the term from May 23, 1997 to May 23, 1998. The parties have
mutually agreed that the agreement can be
extendedrenewed automatically.
For the year ended December 31,
2004,2007, the amount
paidpayable by the Group to Shenzhen Air Catering Company Limited for the provision of in-flight meals was approximately
RMB50.2 million.GAMECO, which is 50% owned by the Company and 50% owned by an independent third party
The Company and GAMECO have entered into an Aircraft Maintenance and Engineering Agreement for the provision of aircraft repair and maintenance services. On May 17, 1996, the Company and GAMECO entered into an agreement regarding the fee arrangement for the provision of such repair and maintenance services (the “Fee Agreement”). Pursuant to the Fee Agreement and subsequent agreements, GAMECO charged the Company for expendables at cost plus 15%, and labor costs at US$30.0 per hour during 2004.
For the year ended December 31, 2004, the amount incurred by the Company for such repair and maintenance services was RMB659.9 million.
The RMB55,857,000.
China Southern West Australian Flying College Pty Ltd (the “Australian Pilot College”), which is 65% owned by the Company and 35% owned by CSAHC.CSAHC
CSAHC and the Australian Pilot College entered into an agreement dated October 7, 1993 for the provision of pilot training in Australia to the cadet pilots of CSAHC (the “Training Agreement”). The Training Agreement will remain in force unless terminated by either party upon 90 days’ prior written notice to the other party. Pursuant to the Demerger Agreement, the Company has assumed all the interests, rights and obligations of CSAHC under the Training Agreement.
For the year ended December 31,
2004,2007, the amount
paidpayable by the Group to the Australian Pilot College for training services was
RMB79.4 million.RMB109,847,000.
Southern Airlines (Group) Economic Development Company, (“SAGEDC”), which is 61% owned by CSAHC and 39% owned by an independent third party.party
The Company and
SAGEDC haveSouthern Airlines (Group) Economic Development Company entered into an agreement dated May 22, 1997 for the provision of drinks, snacks, liquor, souvenirs and other products for a term extending from May 22, 1997 to May 22, 2007.
62
Since May 23, 2007, Southern Airlines (Group) Economic Development Company has not carried out any continuing connected transactions for the provision of drinks, snacks, liquor, souvenirs and other products to the Company.
For the year ended December 31,
2004,2007, the amount paid by the Group to Southern Airlines (Group) Economic Development Company for the provision of drinks, snacks, liquor, souvenirs and other products was
RMB65.6 million.Ticket salesRMB72,205,000.
The
CompanyGroup has entered into
ticket agency agreementsTicket Agency Agreements for the sale of the Group’s air tickets with several subsidiaries of CSAHC (the “Agents”). The Agents charge
a commission
at a rate prescribedon the basis of the rates stipulated by the CAAC and
the International Air Transport Association
for each air ticket sold in the amount of 3% of the ticket price for domestic tickets and 5% — 12% of the ticket price for Hong Kong regional/international tickets, respectively. In addition to the Agents, the Company(“IATA”). The Group has other air ticket sales agents in China who
also charge commission at the same rates. The Agents also act as air ticket sales agents for other Chinese airlines and charge the same rates of commission to such other airlines as those charged to the
Company.Group.
The Company and China Southern Airlines Group Passenger and Cargo Agent Company Limited (“PCACL”), a wholly-owned subsidiary of CSAHC, have entered into a new ticket agency framework agreement and a new airfreight forwarding agency framework dated January 1, 2006 (“Two Sales Agency Framework Agreements”).
The Two Sales Agency Framework Agreements are valid for a term of three years commencing from the date of the agreements, subject to the compliance of relevant provisions under the Hong Kong Listing Rules. The parties agreed that the agency fee shall be determined after arm’s length negotiation and shall not be higher than the market rate. The annual cap under each of the Two Sales Agency Framework Agreements is set at RMB10,000,000 per annum.
The Company and PCACL have entered into the Framework Agreement on Expanded Businesses Including the Sale of Air Tickets, the Airfreight Forwarding Services, Chartered Flight and Pallets Agency Services, Delivery Services For the Outside Storage Area and the relevant Internal Operation Services For the Inside Storage Area of China Southern Airlines Company Limited dated January 10, 2008 (“New Sales Agreement”), which is valid from January 1, 2008 to December 31, 2010. Pursuant to the agreement, the cooperative scope of both parties thereto mainly comprises extended businesses including air ticket sales agency services, airfreight forwarding sales agency services, internal operation services for the inside storage area, and delivery services for the outside storage area and chartered flight and pallets sales agency business. The annual transaction cap of the sales value shall not exceed RMB250 million.
For the year ended December 31,
2004,2007, the aggregate amount of ticket
and cargo sales of the Group conducted through the
Agentsabove sales arrangement was
RMB32.0 million.China Southern Airlines GroupRMB151,822,000.
SAG Air Catering Company Limited (the “Catering Company”), a wholly owned subsidiary of CSAHC
The Company and the SAG Air Catering Company entered into a catering agreement dated November 12, 2004 (“Catering Agreement”) under which the SAG Air Catering Company would supply (a)supply: (1) in-flight meals in accordance with the menus of in-flight meals to be agreed with the Company from time to time, and in such quantity as the Company shall advise the Catering Company in advance; and (b)(2) catering services for different flights of the Company (including normal, additional, chartered and temporary flights) originating or stopping at the domestic airports, mainly in northern China and the Xinjiang regions where theregions.
The Catering
Company provides catering services. The catering agreementAgreement is for a fixed term of three years, commencing from the date of the agreement. The parties have agreed, after arm’s length negotiation, on the price of each type of in-flight mealsmeal and the service charges for each type of aircraft. The prices of in-flight meals and the service charges are not higher than the market rate of comparable in-flight meals and service charges. The SAG Air Catering Company willwould issue an invoice listing out the quantity of in-flight meals supplied, the agreed unit price and the total price payable for each of the Company flightflights it provides service.service for. The Capcap for the Catering Agreement is set at RMB220 millionRMB220,000,000 per year.
In-flight Meals Arrangement with Northern Airlines, a wholly owned subsidiary of The Company and CSAHC
Following the announcement entered into an acquisition agreement dated August 14, 2007 to acquire 100% equity interest of the consolidation and restructuring among CSAHC, CNA and XJA on October 11, 2002 (the “Consolidation and Restructuring”), CNA has become a wholly owned subsidiary of CSAHC and a connected person of the Company under the Hong Kong Listing Rules. The following agreements have been terminated following the acquisition of the core operational assets of CNA and XJA on December 31, 2004.
Guangzhou Nanland airSAG Air Catering Company Limited (“Nanland”), which is 51% owned by the Company and 49% owned by an independent third party, has been providing and will provide in-flight meals to CNA. Pursuant to an agreement dated June 23, 2000, Nanland has been providing in-flight meals to CNA from time to time for a period of one year. The agreement will then be automatically renewed annually. Company.
For the year ended December 31, 2004,2007, the amountGroup has paid the in-flight meals charge in the sum of RMB101,338,000 pursuant to the Catering Agreement.
Guangzhou China Southern Airlines Property Management Company Limited (the “GCSAPMC”), which is 90% owned by CNA to NanlandCSAHC and 10% owned by the Company’s Union
The Company and GCSAPMC entered into a Framework Agreement for the
provisionEngagement of
in-flight means was approximately RMB5,221,000.Property Management (“Property Management Framework Agreement”) dated January 1, 2006 in respect of engaging GCSAPMC to provide property management and improvement service with a term of three years from the date of this agreement. Pursuant to the agreement, the Company has appointed GCSAPMC to provide management and maintenance services for the Company’s headquarters in Guangzhou and to provide maintenance and management services for the 110KV transformer substation to ensure the ideal working conditions of the Company’s production and office facilities and physical environment, and the normal operation of equipment. The fee charging schedule (or charge standard) shall be determined at an agreement dated October 30, 2001, CNAarm’s length between both parties, and will not be higher than the fee charging schedule of independent third parties in similar industry. The annual cap for the Property Management Framework Agreement Framework Agreement is set at RMB47,010,000 per annum. The Property Management Framework Agreement has been providing and will continue to provide in-flight meals toapproved by the Group from time to time for a periodindependent non-executive Directors of one year. The agreement will then be automatically renewed annually. the Company.
For the year ended December 31,
2004, the amount paid by the Group to CNA for the provision of in-flight meals was approximately RMB3,303,000.Ticket Sales Arrangement with Northern Airlines, a wholly owned subsidiary of CSAHC
Following the announcement of the Consolidation and Restructuring, CNA has become a wholly owned subsidiary of CSAHC and a connected person of2007, the Company underpaid the Hong Kong Listing Rules. The following agreement has been terminated following the acquisitionproperty management and maintenance fee of the core operational assets of CNA and XJA on December 31, 2004.
In accordance with the relevant requirement and industry practice, the Group has entered into ticket agency arrangement with CNA for the sale of the Group’s air tickets by CNA and for the sale of CNA air tickets by the Group. The selling party charges a commission in the amount of 3% of the ticket price for domestic tickets and 5% to 12% of the ticket price for Hong Kong regional and international tickets. These commission rates are based on the rates stipulated by the CAAC and IATA. The amount of commission paid by CNARMB31 million pursuant to the Group for the year ended December 31, 2004 was approximately RMB160,848,000. The amount of commission paid by the GroupProperty Management Framework Agreement.
Please also see note 37 to
CNA for the year ended December 31, 2004 was approximately RMB13,074,000. The amounts payable under the above aforesaid transactions are based on the rates stipulated by the CAAC and IATA.
In-flight Meals Arrangement with Xinjiang Airlines, a wholly owned subsidiary of CSAHC
Following the announcement of the Consolidation and Restructuring, XJA has become a wholly owned subsidiary of CSAHC and a connected person of the Company under the Hong Kong Listing Rules. The following agreements have been terminated following the acquisition of the core operational assets of CNA and XJA on December 31, 2004.
Pursuant to an agreement dated March 24, 2001, Nanland has been providing and will continue to provide in-flight meals to XJA from time to time for a period of one year. The agreement will then be automatically renewed annually. For the year ended December 31, 2004, the amount paid by XJA to Nanland for the provision of in-flight meals was approximately RMB2,326,000.
Pursuant to an agreement dated September 20, 1999, XJA has been providing and will provide in-flight meals to the Group for a period of one year. The agreement will then be automatically extended annually. The amount paid by the Group to XJA for the provision of in-flight meals for the year ended December 31, 2004 was approximately RMB2,298,050.
Ticket Sales Arrangement with Xinjiang Airlines, a wholly owned subsidiary of CSAHC
Following the announcement of the Consolidation and Restructuring, XJA has become a wholly owned subsidiary of CSAHC and a connected person of the Company under the Hong Kong Listing Rules. The following agreement has been terminated following the acquisition of the core operational assets of CNA and XJA on December 31, 2004.
The Group has entered into ticket agency arrangement with XJA for the sale of the Group’s air tickets by XJA and for the sale of XJA air tickets by the Group. The selling party charges a commissionour consolidated financial statements included elsewhere in the amount of 3% of the ticket price for domestic tickets and 5% to 12% of the ticket price for Hong Kong regional and international tickets. These commission sales are based on the rates stipulated by the CAAC and IATA. The amount of commission paid by XJA to the Group for the year ended December 31, 2004 was approximately RMB78,207,000. The amount of commission paid by the Group to XJA for the year ended December 31, 2004 was approximately RMB7,585,000.
The amounts payable under the above aforesaid transactions are based on the rates stipulated by the CAAC and IATA.this Form 20-F.
Interests of Experts and Counsel
ITEM 8. FINANCIAL INFORMATION.
Consolidated Statements and Other Financial Information
See “Item 18. Financial Statements” for
Our audited consolidated financial statements filed as part of this Annual Report.are set forth beginning on page F-1, which can be found after Item 19.
Significant Changes
No significant changes have occurred since the date of the financial statements provided in Item 18 below.
Legal Proceedings The Company is currently involved
From time to time, we may be subject to various claims and legal actions arising in a civil litigation (Hong Kongthe ordinary course of business. In May 2007, we received the court summons from the High People’s Court Action No. 515 of 2001) (“Litigation”). AccordingGuangdong Province with respect to the writ of summons forcontractual dispute lawsuit filed against us by Taiwan J & P International Tours Co., Ltd. and Taiwan China Southern Aviation Travel Co., Ltd. (the "Plaintiffs").
In August 2004, we entered into a cooperation agreement with the Litigation, New Link Consultants Limited, the plaintiff, claimed against the Group (as one of the defendants to the Litigation) on the basis of certain evidence proving that United Aero-Supplies System of China, Limited (“UASSC”Plaintiffs and, in September 2004, Nan Lung Travel & Express (H.K.) Ltd., our Hong Kong sales agent, entered into an air ticket sales agency agreement with the defendantsPlaintiffs. The performance of both agreements has been completed. The Plaintiffs, however, have filed a lawsuit against us for exclusive purchase of aviation equipment consigned to UASSC for sale. As the defendants failed to perform the agreement, UASSC should have the right to compensation. Since UASSC is in the course of its winding up proceedings, all the rights and benefits of UASSC in connection with the claim have been transferred to the plaintiff. The Company, as one of the defendants to the Litigation, is being claimed for unspecifiedliquidated damages for breach of the agreement.provisions on air ticket sales commissions and other payments under those two agreements. The Company has filed an objection in respectamount of the jurisdictionclaim is approximately HKD107 million. We are currently in the process of retaining legal counsel and will actively defend ourselves.
Although the proceeding is still at an early stage, we believe it will not have any material effect on the business operations and financial position of the
court, and has requested the court to transfer the case to the PRC for trial. On 3 May, 2004, the court made an award in favor of the Company for the transfer to the PRC, against which the plaintiff has filed an appeal. Based on the opinion given by the Company’s legal advisors, the directors of the Company consider that it is not probable that the Company will have an unfavorable outcome from the claim and that a provision for such claim and/or the associated legal costs is not required. Other than the above legal proceeding, the Company is not party to any material legal proceedings.
Company.
No interim dividend was paid during the year ended December 31,
2004.2007. The Board of Directors does not recommend the payment of a final dividend in respect of the year ended December 31,
2004.64
2007.
ITEM 9. THE OFFER AND LISTING.
Offer and Listing Details
The principal trading market for the Company’s H Shares is the Hong Kong Stock Exchange, and the Company’s trading code is “1055”. The
ADSs,ADRs, each representing 50 H Shares, are evidenced by ADRs issued by The Bank of New York as the Depositary for the ADRs, and are listed on the New York Stock Exchange under the symbol
“ZNH.” As of the date of this Annual Report, 2005, approximately 103,159,000 of the Company’s H Shares in the form of 2,063,180 ADSs were held in the U.S. by approximately 38 record holders in the U.S., including the Depository Trust Company.“ZNH”.
In July 2003, the Company issued and listed 1,000,000,000 A shares on the Shanghai Stock Exchange with trading code of “600029”. The 2,200,000,000 Domestic Shares held by CSAHC are not listed on any stock exchange and are essentially not
transferrabletransferable by CSAHC.
Set forth below for the periods indicated are the high and low sales prices of H Shares on the Hong Kong Stock Exchange,
ADSsADRs on the New York Stock Exchange and A Shares on the Shanghai Stock Exchange.
65
| | The Hong Kong Stock Exchange Price per H Share (HK$) | | The New York Stock Exchange Price per ADR (US$) | | The Shanghai Stock Exchange Price per A Share (RMB) | |
| | High | | Low | | High | | Low | | High | | Low | |
| | | | | | | | | | | | | |
Annual Market Prices | | | | | | | | | | | | | | | | | | | |
Fiscal Year ended December 31, 2003 | | | 3.50 | | | 1.46 | | | 22.78 | | | 9.53 | | | 5.34 | | | 3.75 | |
Fiscal Year ended December 31, 2004 | | | 4.68 | | | 2.47 | | | 29.73 | | | 15.95 | | | 6.87 | | | 3.96 | |
Fiscal Year ended December 31, 2005 | | | 3.10 | | | 1.83 | | | 19.93 | | | 11.68 | | | 5.30 | | | 2.23 | |
Fiscal Year ended December 31, 2006 | | | 3.42 | | | 1.60 | | | 22.43 | | | 10.51 | | | 4.09 | | | 2.24 | |
Fiscal Year ended December 31, 2007 | | | 13.90 | | | 3.25 | | | 94.48 | | | 20.81 | | | 28.73 | | | 4.26 | |
Quarterly Market Prices | | | | | | | | | | | | | | | | | | | |
Fiscal Year ended December 31, 2006 | | | | | | | | | | | | | | | | | | | |
First Quarter | | | 2.45 | | | 2.18 | | | 15.82 | | | 14.00 | | | 2.97 | | | 2.48 | |
Second Quarter | | | 2.30 | | | 1.66 | | | 14.96 | | | 10.82 | | | 2.92 | | | 2.24 | |
Third Quarter | | | 2.25 | | | 1.60 | | | 14.86 | | | 10.51 | | | 2.94 | | | 2.27 | |
Fourth Quarter | | | 3.42 | | | 2.29 | | | 22.43 | | | 14.06 | | | 4.09 | | | 2.95 | |
Fiscal Year ended December 31, 2007 | | | | | | | | | | | | | | | | | | | |
First Quarter | | | 4.22 | | | 3.25 | | | 26.82 | | | 20.81 | | | 7.43 | | | 4.26 | |
Second Quarter | | | 5.59 | | | 3.37 | | | 35.64 | | | 21.80 | | | 9.48 | | | 7.80 | |
Third Quarter | | | 13.90 | | | 5.01 | | | 94.48 | | | 32.37 | | | 28.73 | | | 8.42 | |
Fourth Quarter | | | 12.08 | | | 7.97 | | | 77.97 | | | 49.45 | | | 27.95 | | | 19.08 | |
Monthly Market Prices | | | | | | | | | | | | | | | | | | | |
December 2007 | | | 10.28 | | | 8.47 | | | 65.45 | | | 54.55 | | | 27.95 | | | 23.98 | |
January 2008 | | | 10.44 | | | 6.70 | | | 65.31 | | | 43.99 | | | 28.68 | | | 20.06 | |
February 2008 | | | 8.08 | | | 7.18 | | | 50.63 | | | 45.74 | | | 22.74 | | | 18.94 | |
March 2008 | | | 7.92 | | | 5.13 | | | 50.76 | | | 33.96 | | | 21.58 | | | 12.98 | |
April 2008 | | | 6.16 | | | 4.50 | | | 41.48 | | | 29.77 | | | 16.61 | | | 10.27 | |
May 2008 | | | 5.70 | | | 4.40 | | | 36.00 | | | 28.24 | | | 13.92 | | | 10.28 | |
June 2008 (up to June 19, 2008) | | | 5.02 | | | | | | 31.34 | | | 23.42 | | | 10.99 | | | 7.06 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | The Stock Exchange | | | The New York | | | The Shanghai | |
| | of Hong Kong | | | Stock Exchange | | | Stock Exchange | |
| | Price per H Share | | | Price per ADS | | | Price per A Share | |
| | (HK$) | | | (US$) | | | (RMB) | |
| | High | | | Low | | | High | | | Low | | | High | | | Low | |
Annual Market Prices | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal Year ended December 31, 1999 | | | 2.25 | | | | 0.61 | | | | 13.94 | | | | 3.88 | | | | N/A | | | | N/A | |
Fiscal Year ended December 31, 2000 | | | 2.93 | | | | 1.02 | | | | 18.38 | | | | 6.06 | | | | N/A | | | | N/A | |
Fiscal Year ended December 31, 2001 | | | 2.95 | | | | 1.35 | | | | 18.10 | | | | 8.00 | | | | N/A | | | | N/A | |
Fiscal Year ended December 31, 2002 | | | 3.60 | | | | 1.50 | | | | 22.25 | | | | 10.35 | | | | N/A | | | | N/A | |
Fiscal Year ended December 31, 2003 | | | 3.50 | | | | 1.46 | | | | 22.78 | | | | 9.53 | | | | 5.34 | | | | 3.75 | |
Fiscal Year ended December 31, 2004 | | | 4.68 | | | | 2.47 | | | | 29.73 | | | | 15.95 | | | | 6.87 | | | | 3.96 | |
Quarterly Market Prices | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal Year ended December 31, 2001 | | | | | | | | | | | | | | | | | | | | | | | | |
First Quarter | | | 2.70 | | | | 1.83 | | | | 17.38 | | | | 12.22 | | | | N/A | | | | N/A | |
Second Quarter | | | 2.95 | | | | 1.89 | | | | 18.10 | | | | 12.00 | | | | N/A | | | | N/A | |
Third Quarter | | | 2.53 | | | | 1.35 | | | | 16.50 | | | | 8.00 | | | | N/A | | | | N/A | |
Fourth Quarter | | | 2.42 | | | | 1.66 | | | | 15.25 | | | | 9.8 | | | | N/A | | | | N/A | |
Fiscal Year ended December 31, 2002 | | | | | | | | | | | | | | | | | | | | | | | | |
First Quarter | | | 2.83 | | | | 2.22 | | | | 17.63 | | | | 14.80 | | | | N/A
| | | | N/A
| |
Second Quarter | | | 3.42 | | | | 2.33 | | | | 21.74 | | | | 14.95 | | | | N/A
| | | | N/A
| |
Third Quarter | | | 3.60 | | | | 1.89 | | | | 22.25 | | | | 12.00 | | | | N/A
| | | | N/A
| |
Fourth Quarter | | | 2.42 | | | | 1.50 | | | | 15.00 | | | | 10.35 | | | | N/A
| | | | N/A
| |
Fiscal Year ended December 31, 2003 | | | | | | | | | | | | | | | | | | | | | | | | |
First Quarter | | | 2.62 | | | | 1.71 | | | | 16.50 | | | | 11.75 | | | | N/A | | | | N/A | |
Second Quarter | | | 2.40 | | | | 1.46 | | | | 14.85 | | | | 9.53 | | | | N/A | | | | N/A | |
Third Quarter | | | 2.88 | | | | 2.03 | | | | 18.59 | | | | 13.25 | | | | 4.15 | | | | 3.75 | |
Fourth Quarter | | | 3.50 | | | | 2.50 | | | | 22.78 | | | | 16.76 | | | | 5.34 | | | | 3.86 | |
Fiscal Year ended December 31, 2004 | | | | | | | | | | | | | | | | | | | | | | | | |
First Quarter | | | 4.68 | | | | 3.20 | | | | 29.73 | | | | 20.91 | | | | 6.87 | | | | 4.95 | |
Second Quarter | | | 3.90 | | | | 2.47 | | | | 24.89 | | | | 15.95 | | | | 6.24 | | | | 4.14 | |
Third Quarter | | | 3.17 | | | | 2.47 | | | | 20.17 | | | | 16.00 | | | | 5.19 | | | | 4.16 | |
Fourth Quarter | | | 3.53 | | | | 2.55 | | | | 22.74 | | | | 16.71 | | | | 5.40 | | | | 3.96 | |
Monthly Market Prices | | | | | | | | | | | | | | | | | | | | | | | | |
January 2005 | | | 3.10 | | | | 2.65 | | | | 19.93 | | | | 17.19 | | | | 5.30 | | | | 4.28 | |
February 2005 | | | 2.92 | | | | 2.75 | | | | 18.72 | | | | 17.81 | | | | 4.81 | | | | 4.30 | |
March 2005 | | | 2.90 | | | | 2.47 | | | | 18.35 | | | | 16.10 | | | | 4.62 | | | | 3.56 | |
April 2005 | | | 2.67 | | | | 2.20 | | | | 17.03 | | | | 14.72 | | | | 4.02 | | | | 3.11 | |
May 2005 | | | 2.72 | | | | 2.50 | | | | 17.33 | | | | 16.26 | | | | 3.70 | | | | 3.24 | |
June 2005 | | | 2.67 | | | | 2.50 | | | | 16.98 | | | | 16.25 | | | | 3.46 | | | | 2.95 | |
Plan of Distribution
Not applicable.
Markets
See “Offer and Listing
detailsDetails” above.
Selling Shareholders
Not applicable.
Plan of Distribution
66
Dilution
Not applicable.
Markets
Not applicable.
Selling Shareholders
Not applicable.
Dilution
Not applicable.
Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION.
Not applicable.
B.Memorandum and Articles of Association The following is a summary of certain provisions of our Articles of Association. As this is a summary, it does not contain all the information that may be important to you. You and your advisors should read the text of our Articles of Association for further information, which was filed as an exhibit to our Annual Report on Form 20-F for fiscal year 2006 filed with the Securities and Exchange Commission (File Number: 001-14660) dated on June 29, 2007.
The Company is registered with and has obtained a business license from the State Administration Bureau of Industry and Commerce of the People’s Republic of China on March 25, 1995. The Company’s business license number is 1000001001760.
On March 13, 2003, the Company obtained an approval certificate from the Ministry of Commerce to change to a permanent limited company with foreign investments and obtained the business license (Qi Gu Guo Zi Di No. 000995) on October 17, 2003 issued by the State Administration of Industry and Commerce of the People’s Republic of China.
Director
Other Senior Administrative Officers
Pursuant to the Article 1316 of the Articles of Association, the business purposesother senior administrative officers of the Company are: (i)refer to absorb domesticexecutive vice president, chief financial officer, the board secretary, chief economist, chief engineer, chief pilot, and foreign capital; (ii) to assist in developing the aviation industry of China; (iii) to promote the development of the national economy of China; (iv) to utilize corporate incentive mechanisms of privatization; (v) to draw on the advanced management expertise of other domesticchief legal adviser and foreign companies; (vi) to continuously improve the management of the Company; (vii) to enhance the market competitiveness of the Company; (viii) to generate economicchief information officer.
Objects and social benefits for the Company; and (ix) to generate steady income for the Company’s shareholders. Purpose
Pursuant to
the Article
1418 of the Articles of Association, the scope of business of the Company
shall be consistent with and subject to the scope of business approved by the relevant supervisory department of the State. The scope of business of the Company includes:
(i)(I) provision of scheduled and non-scheduled domestic, regional and international air transportation services for passengers, cargo, mail and luggage;
(ii)(II) undertaking general aviation services;
(iii)(III) provision of aircraft repair and maintenance services;
(iv)(IV) acting as agent for other domestic and international airlines;
(v)(V) provision of air catering
servicesservices; (VI) provision of hotel business; (VII) acting as sale agent for aircraft leasing and
(vi)aviation accident insurance; and (VIII) engaging in other airline or airline-related business, including advertising for such services.
Directors
Pursuant to Article
154244 of the Articles of Association, where a
directorDirector of the Company is in any way, directly or indirectly, materially interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with the Company, (other than his contract of service with the Company), he shall declare the nature and extent of his interests to the
boardBoard of
directorsDirectors at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal
therefor is otherwise subject to the approval of the
boardBoard of
directors.Directors.
Pursuant to Article
108174 of the Articles of Association, where a
directorDirector is interested in any resolution
67
proposed at a board meeting, such directorDirector shall not be present and shall not have a right to vote. Such directorDirector shall not be counted in the quorum of the relevant meeting.
Pursuant to Article
162252 of the Articles of Association, the Company shall, with the prior approval of shareholders in general meeting, enter into a contract in writing with a
directorDirector wherein his emoluments are stipulated. The aforesaid emoluments include, emoluments in respect of his service as
director, supervisorDirector, Supervisor or senior administrative officer of the Company or any subsidiary of the Company; emoluments in respect of the provision of other services in connection with the management of the affairs of the Company and any of its subsidiaries; and payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office.
Pursuant to Article
102(6)162(6) of the Articles of Association, the
boardBoard of
directorsDirectors has the power to formulate proposals for increases or reductions in the Company’s registered capital and the issue of debentures of the Company; such resolutions must be passed by more than two-thirds of all the
directors.Directors.
There is no mandatory retirement age for the
directorsDirectors of the Company. The
directorsDirectors of the Company are not required to hold shares of the Company.
Pursuant to Article 1926 of the Articles of Association,subject to the approval of the securities authority of the State Council, the Company may issue and offer shares to domestic investors or foreign investors for subscription. Foreign investors are those investors of foreign countries and regions of Hong Kong, Macau and Taiwan who subscribe for shares issued by the Company. Domestic investors are those investors within the territory of the PRC (excluding investors of the regions referred to in the preceding sentence) who subscribe for shares issued by the Company.
Pursuant to Article 2027 of the Articles of Association,Sharesshares issued by the Company to domestic investors for subscription in Renminbi shall be referred to as “Domestic-Invested Shares”. Shares issued by the Company to foreign investors for subscription in foreign currencies shall be referred to as “Foreign-Invested Shares”. Foreign-Invested Shares which are listed overseas are called “Overseas-Listed Foreign-Invested Shares”. The foreign currencies mean the legal currencies (apart from Renminbi) of other countries or districts which are recognized by the foreign exchange control authority of the Statestate and can be used to pay the Company for the share price. Pursuant to Article 2128 of the Articles of Association,Domestic-Invested Shares issued by the Company shall be called “A Shares”. Overseas-Listed Foreign-Invested Shares issued by the Company and listed in Hong Kong shall be called “H Shares”. H Shares are shares which have been admitted for listing on The Stock Exchange of Hong Kong Limited, the par value of which is denominated in Renminbi and which are subscribed for and traded in Hong Kong dollars. H Shares can also be listed on a stock exchange in the United States of America in the form of American depositary receipts.ADR.
The Company has issued a total of 4,374,178,000 ordinary shares, of which (a) 2,200,000,000
domestic shares are
Domestic Shares held by CSAHC, (b) 1,174,178,000
are H
shares areShares held by Hong Kong and overseas shareholders and (c) 1,000,000,000
are A
shares areShares held by
the PRC shareholders.
Pursuant to Article
5462 of the Articles of Association, the ordinary shareholders of the Company shall enjoy the following rights:
(1) | | the right to attend or appoint a proxy to attend shareholders’ general meetings and to vote thereat; |
|
(2) | | the right to dividends and other distributions in proportion to the number of shares held; |
|
(3) | | the right of supervisory management over the Company’s business operations, and the right to present proposals or enquiries; |
|
(4) | | the right to transfer, donate or pledge his shares in accordance with laws, administrative regulations and provisions of these articlesArticles of association;Association; |
|
(5) | | the right of knowledge and decision making power with respect to important matters of the Company in accordance with laws, administrative regulations and these articlesArticles of association;Association; |
68
(6) | | the right to obtain relevant information in accordance with the provisions of these articlesArticles of association,Association, including: |
| (i) | | the right to obtain a copy of these articlesArticles of association,Association, subject to payment of the cost of such copy; |
|
| (ii) | | the right to inspect and copy, subject to payment of a reasonable charge:charge; |
| (a) | all parts of the register of shareholders; |
|
| (b) | personal particulars of each of the Company’s directors, supervisors, president and other senior administrative officers, including: |
| (aa) | | present name and alias and any former name or alias; |
|
| (bb) | | principal address (residence); |
|
| (dd) | | primary and all other part-time occupations and duties; |
|
| (ee) | | identification documents and their relevant numbers; |
| (c) | state of the Company’s share capital; |
|
| (d) | reports showing the aggregate par value, quantity, highest and lowest price paid in respect of each class of shares repurchased by the Company since the end of last accounting year and the aggregate amount paid by the Company for this purpose; |
|
| (e) | minutes of shareholders’ general meetings; and |
|
| (f) | interim and annual reports of the Company. |
(7) | | in the event of the termination or liquidation of the Company, to participate in the distribution of surplus assets of the Company in accordance with the number of shares held; and |
|
(8) | | other rights conferred by laws, administrative regulations and these articlesArticles of association.Association. |
Pursuant to Article 55 of the Articles of Association, the ordinary shareholders of the Company shall assume the following obligations:
(1) | | to abide by these articlesArticles of association;Association; |
|
(2) | | to pay subscription monies according to the number of shares subscribed and the method of subscription; |
|
(3) | | no right to return shares to the Company unless laws and regulations provide otherwise; and |
|
(4) | | other obligations imposed by laws, administrative regulations and these articlesArticles of association.Association. |
Shareholders are not liable to make any further contribution to the share capital other than as agreed by the subscriber of the relevant shares on subscription.
Action necessary to change rights of shareholders
Pursuant to Article
92112 of the Articles of Association,
those shareholders who hold different classes of shares are shareholders of different classes.
The holders of the Domestic-Invested
sharesShares and holders of Overseas-Listed Foreign-Invested Shares shall be deemed to be shareholders of different classes.
69
Pursuant to Article
93113 of the Articles of Association, rights conferred on any class of shareholders in the capacity of shareholders (“class rights”) may not be varied or abrogated unless approved by a special resolution of shareholders in general meeting and by holders of shares of that class at a separate meeting conducted in accordance with Articles
95115 to
99.119.
Pursuant to Article 95115 of the Articles of Association,shareholders of the affected class, whether or not otherwise having the right to vote at shareholders’ general meetings, shall nevertheless have the right to vote at class meetings in respect of matters concerning sub-paragraphs (2) to (8), (11) and (12) of Article 94,114, but interested shareholder(s) shall not be entitled to vote at class meetings. “Interested shareholder(s)” is: (1) | | in the case of a repurchase of shares by offers to all shareholders or public dealing on a stock exchange under Article 31, a “controlling shareholder” within the meaning of Article 57; |
|
(2) | | in the case of a repurchase of share by an off-market contract under Article 31, a holder of the shares to which the proposed contract relates; and |
|
(3) | | in the case of a restructuring of the Company, a shareholder within a class who bears less than a proportionate obligation imposed on that class under the proposed restructuring or who has an interest in the proposed restructuring different from the interest of shareholders of that class. |
Pursuant to Article
96116 of the Articles of Association, resolutions of a class of shareholders shall be passed by votes representing more than two-thirds of the voting rights of shareholders of that class represented at the relevant meeting who, according to Article
95,115, are entitled to vote at class meetings.
Pursuant to Article
97117 of the Articles of Association, written notice of a class meeting shall be given forty-five
(45) days before the date of the class meeting to notify all of the shareholders in the share register of the class of the matters to be considered, the date and the place of the class meeting. A shareholder who intends to attend the class meeting shall deliver his written reply concerning attendance at the class meeting to the Company twenty
(20) days before the date of the class meeting.
If the number of shares carrying voting rights at the meeting represented by the shareholders who intend to attend the class meeting reaches more than one half of the voting shares at the class meeting, the Company may hold the class meeting; if not, the Company shall within five (5) days notify the shareholders again by public notice of the matters to be considered, the date and the place for the class meeting. The Company may then hold the class meeting after such publication of notice.
Pursuant to Article
98118 of the Articles of Association, notice of class meetings need only be served on shareholders entitled to vote thereat.
Meeting of any class of shareholders shall be conducted in a manner as similar as possible to that of general meetings of shareholders. The provisions of these
articlesArticles of
associationAssociation relating to the manner to conduct any shareholders’ general meeting shall apply to any meeting of a class of shareholders.
Pursuant to Article
99119 of the Articles of Association, the special procedures for voting at any meeting of a class of shareholders shall not apply to the following circumstances:
(1) | | where the Company issues, upon the approval by special resolution of its shareholders in general meeting, either separately or concurrently once every twelve months, not more than 20 per centpercent of each of its existing issued Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares; and |
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(2) | | where the Company’s plan to issue Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares at the time of its establishment is carried out within fifteen (15) months from the date of approval of the Securities Committee of the State Council. |
Shareholders’ general meetings is the organ of authority of the Company and shall exercise its functions and powers, among other things, to decide on the Company’s operational policies and investment plans, to elect and replace directors and decide on matters relating to the remuneration of directors, to examine and approve reports of the board of directors, etc.
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There are two types of shareholders’ general meetings: annual general meetings and extraordinary general meetings. Shareholders’ general meetings shall be convened by the
boardBoard of
directors.Directors. Annual general meetings are held once every year and within six
(6) months from the end of the preceding financial year.
Under any of the following circumstances, the
boardBoard of
directorsDirectors shall convene an extraordinary general meeting within two
(2) months:
(1) | | when the number of directorsDirectors is less than the number of directorsDirectors required by the Company Law or two thirds of the number of directorsDirectors specified in the Articles of Association; |
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(2) | | when the unrecovered losses of the Company amount to one third of the total amount of its share capital; |
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(3) | | when shareholder(s) holding 10 per centpercent or more of the Company’s issued and outstanding shares carrying voting rights request(s) in writing the convening of an extraordinary general meeting; |
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(4) | | when deemed necessary by the boardBoard of directorsDirectors or as requested by the supervisory committee.Supervisory Committee. |
When the Company convenes a shareholders’ general meeting, written notice of the meeting shall be given forty five
(45) days before the date of the meeting to notify all of the shareholders in the share register of the matters to be considered and the date and the place of the meeting. A shareholder who intends to attend the meeting shall deliver his written reply concerning the attendance of the meeting to the Company twenty
(20) days before the date of the meeting.
The Company shall, based on the written replies received twenty
(20) days before the date of the shareholders’ general meeting from the shareholders, calculate the number of voting shares represented by the shareholders who intend to attend the meeting. If the number of voting shares represented by the shareholders who intend to attend the meeting reaches one half or more of the Company’s total voting shares, the Company may hold the meeting; if not, then the Company shall within five
(5) days notify the shareholders again by public notice of the matters to be considered, the place and date for, the meeting. The Company may then hold the meeting after such publication of notice.
Limitation on right to own securities
The PRC Special Regulations on Overseas Offering and the Listing of Shares by Companies Limited by Share (the “Special Regulations”) and the Mandatory Provisions for Articles of Association of Companies to be Listed Overseas (the “Mandatory Provisions”) provide for different classes of shares to be subscribed for and traded by local and overseas investors respectively. Shares which can be traded by overseas investors must be in registered form and while denominated in Renminbi, they are traded in foreign currency with dividends payable in foreign currency. Local investors are prohibited from dealing in such shares.
Merger, acquisition or corporate restructuring
Pursuant to Article
193221 of the Articles of Association, in the event of the merger or division of the Company, a plan shall be presented by the Company’s
boardBoard of
directorsDirectors and shall be approved in shareholders’ general meeting and the relevant examining and approving formalities shall be processed as required by law. A shareholder who objects to the plan of merger or division shall have the right to demand the Company or the shareholders who consent to the plan of merger or division to acquire that dissenting shareholder’s shareholding at a fair price. The contents of the resolution of merger or division of the Company shall be made into special documents for shareholders’ inspection. Such special documents shall be sent by mail to holders of Overseas-Listed Foreign-Invested Shares.
The Articles of Association do not contain any provisions governing the ownership threshold above which shareholder ownership must be disclosed.
The Company has not entered into any material contracts other than in the ordinary course of business and other than those described in this Item 10, Item 7, "Related Party Transactions", Item 4, “Information on the Company” or elsewhere in this Annual Report on Form 20-F.
(a) | | A sale and purchase agreement (the “Sale and Purchase Agreement”) dated November 12, 2004 between the Company, CSAHC, CNA, a wholly owned subsidiary of CSAHC, and XJA, a wholly owned subsidiary of CSAHC, pursuant to which the Company agreed to acquire, and CSAHC, CNA and XJA agreed to sell certain airlines and airlines-related operations, assets and properties of CNA, XJA and their respective subsidiaries, which included aircraft, engines, spare parts, aviation equipment and facilities, properties, office facilities, and other fixed, current and intangible assets. In addition, the Company will also assume all indebtedness in the aggregate sum of RMB13,438,191,000 owed by XJA, CNA and their respective subsidiaries in connection with their civil aviation business. The total consideration, including the assumption of the debts under the Sale and Purchase Agreement was RMB15,397,524,000. It became effective upon approval by the shareholders of the Company on December 31, 2004. |
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(b) | | A lease agreement (the “Lease Agreement 1”) dated November 12, 2004 between the Company, CSAHC and CNA, pursuant to which CSAHC and CNA leasePursuant to the Company certain buildings, facilities and other infrastructure related to the civil aviation business of CNA situated at various locations in Shenyang, Dalian, Jilin, Harbin, Chaoyang and Russia for a period of three years. The consideration for LeaseAirbus Aircraft Acquisition Agreement 1 is RMB41,993,318.44 per year. It became effective upon approval by the shareholders of the Company on December 31, 2004. |
(c) | | A lease agreement (the “Lease Agreement 2”) dated November 12, 2004 between the Company, CSAHC and XJA, pursuant to which CSAHC and XJA lease to the Company certain buildings, facilities and other infrastructure related to the civil aviation business of XJA situated at Xinjiang and Russia for a period of three years. The consideration for Lease Agreement 2 is RMB5,797,908.61 per year. It became effective upon approval by the shareholders of the Company on December 31, 2004. |
(d) | | A lease agreement (the “Lease Agreement 3”) dated November 12, 2004July 6, 2006 between the Company and CSAHC, pursuant to which CSAHC leasesAirbus, the Company would acquire 50 Airbus A320 series aircraft from Airbus. The aggregate catalogue price for the Airbus Aircraft is approximately US$3.316 billion. The aggregate consideration for the acquisition of the Airbus Aircraft is payable by cash in installments and the Airbus Aircraft will be delivered in stages to the Company certain lands situated in Urumqi, Shenyang, Dalian and Harbin, by leasingduring the land use rights of such landsperiod commencing from 2009 to 2010. The Board has passed resolutions with regard to the Company for a periodchange in method of three years. The consideration for Lease Agreement 3 is RMB22,298,033 per year. It became effective upon approval by the shareholdersprocuring eight A320 series out of the Company on December 31, 2004.abovementioned 50 Airbus A320 series aircraft from purchase to operating lease. |
(e)(b) | | A catering agreement (the “Catering Agreement”)Pursuant to the Boeing Aircraft Acquisition Agreement dated November 12, 2004October 13, 2006 between the Company and China Southern Airlines Group Air CateringBoeing, the Company Limited (the “Catering Company”),would purchase 6 Boeing B777F freighters from Boeing. The catalogue price of a wholly owned subsidiaryBoeing B777F freighter is US$232 million. The aggregate consideration for the acquisition of CSAHC, pursuant to which the Catering Company supplies in-flight meal and catering services to the flightsB777F Freighters is partly payable by cash of the Company, originating or stopping atand partly by financing arrangements with banking institutions and the domestic airports, mainlyBoeing Aircraft will be delivered in Northern Chinastages to the Company during the period commencing from November 2008 to July 2010. |
(c) | Pursuant to the Xiamen Aircraft Acquisition Agreement dated October 13, 2006 between Xiamen Airlines and Xinjiang regions where the Catering Company provides catering servicesBoeing, Xiamen Airlines would acquire six Boeing B737 aircraft from Boeing. The catalogue price of a Boeing B737 aircraft is US$66-US$75 million. Such catalogue price includes price for a period of three years.airframe and engine. The aggregate consideration for the catering agreementacquisition of the B737 Aircraft is based on the price of each type of in-flight mealspayable by cash in installments and the service price for each type of aircraft, and is capped at RMB220 million per year. It became effective upon approval byB737 Aircraft will be delivered to Xiamen Airlines in 2010. |
(d) | Pursuant to the shareholders of the Company on December 31, 2004. |
(f) | | A financial agreement (the “Financial Agreement”)Aircraft Acquisition Agreement dated November 12, 2004,July 16, 2007 between the Company and Southern Airlines Group FinanceAirbus SNC, the Company Limited (“SA Finance”), a connected personwill acquire20 Airbus A320 series aircraft from Airbus SNC. The catalogue price for each of the Airbus A320 series aircraft is in the range from US$66.5 to US$85.9 million. Such catalogue price includes the price for airframe and engines. The aggregate consideration for the acquisition of the A320 aircraft will be partly payable by cash of the Company, which is 42% ownedand partly by CSAHC, 32% owned byfinancing arrangements with banking institutions. The A320 aircraft will be delivered in stages to the Company during the period commencing from March 2009 to August 2010. |
(e) | Pursuant to the Xiamen Aircraft Acquisition Agreement dated July 16, 2007 between Xiamen Airlines and 26% owned in aggregate by five subsidiariesBoeing, Xiamen Airlines will acquire 25 Boeing B737 aircraft from Boeing. The catalogue price for each of the Company.Boeing B737 aircraft is in the range from US$70.5 to US$79 million. Such catalogue price includes the price for airframe and engines. The Financial Agreement commenced from November 12, 2004aggregate consideration for a period of three years, and is renewable, subject to compliance with the requirementsacquisition of the relevant Hong Kong Listing RulesB737 aircraft will be partly payable by cash of Xiamen Airlines, and partly by financing arrangements with banking institutions. The B737 aircraft will be delivered in stages to Xiamen Airlines during the Company, by an application in writing by the Company not less than 30 days before the end of the fixed term. Under the Financial Agreement, SA Finance provides deposit of money service and, subjectperiod commencing from July 2011 to November 2013. |
(f) | Pursuant to the execution of further agreements with the Company, other financial services like loan facilities, credit facilities, financial guarantees and credit references to the Company. The Company is not subject to any extra charges for depositing money with SA Finance. For the other financial services provided by SA Finance under the financial agreement, the Company is liable to pay SA Finance the standard charging rates set by the People’s Bank of China. The PRC commercial banks also charge similar charging rates set by the People’s Bank of China. The Company will make payment for such interest, fees and commissions in accordance with the payment terms of the separate agreements for the provision of loans or other financial services as might be entered intoAircraft Acquisition Agreement dated August 20, 2007 between the Company and SA Finance. It became effective upon approvalBoeing, the Company will acquire 55 Boeing B737 series aircraft from Boeing, the catalogue price of a Boeing B737 series aircraft is in the range of US$57 -US$79 million. Such catalogue price includes price for airframe and engines. The aggregate consideration for the acquisition of the Boeing aircraft will be partly payable by the shareholderscash of the Company, on December 31, 2004.and partly by financing arrangements with banking institutions. The Boeing aircraft will be delivered in stages to the Company during the period commencing from May 2011 to October 2013. |
(g) | | An aircraft acquisition agreementPursuant to the Aircraft Acquisition Agreement dated April 21, 2005 pursuant to whichOctober 23, 2007 between the Company and Southern Airlines (Group) Import and Export Trading Company agreed to acquire and Airbus SNC, agreedthe Company will acquire 10 Airbus A330-200 aircraft from Airbus SNC, the catalogue price of an Airbus A330-200 aircraft is in the range of US$167.7-176.7 million. Such catalogue price includes price for airframe and engines. The aggregate consideration for the acquisition will be partly payable by cash of the Company, and partly by financing arrangements with banking institutions. The Airbus aircraft will be delivered in stages to sell five new A380 aircraft.the Company during the period commencing from March 2010 to August 2012. |
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(h) | | An aircraft acquisition agreementPursuant to the Xiamen Aircraft Acquisition Agreement dated April 29, 2005 pursuant to which the Company and18, 2008 between Xiamen Airlines Company Limited have agreed toand Boeing, Xiamen Airlines will acquire 20 Boeing B737 series aircraft from Boeing. According the information provided by Boeing, the aggregate catalogue price for the 20 Boeing B737 series aircraft is around US$1,500 million. Such catalogue price includes price for airframe and engines. The aggregate consideration for the acquisition of the Boeing aircraft will be partly payable by cash of Xiamen Airlines, and partly by financing arrangements with banking institutions. The Boeing Company has agreedaircraft will be delivered in stages to sellXiamen Airlines during the 12 new B737-700 aircraft and 33 new B737-800 aircraft.period commencing from April 2014 to October 2015. |
Under current Chinese foreign exchange regulations, Renminbi is fully convertible for current account transactions, but is not freely convertible for capital account
transactions. Current account foreign currency transactions can be undertaken without prior approval from the relevant Chinese Government agencies by producing commercial documents evidencing such transactions, provided that they are processed through Chinese banks licensed to engage in foreign currency transactions. Conversion from Renminbi into a foreign currency or vice versa for purposes of capital account transactions requires prior approvals of relevant Chinese Government agencies.
This restriction on capital account transactions could affect the ability of the Company to acquire foreign currency for capital expenditures.
The Company is generally required by law to sell all its foreign
exchangecurrency revenues to Chinese
banks at the exchange rates published by Chinese banks on each business day, which rates may deviate only within a very narrow range from the official rate published daily by the People’s Bank of China, China’s central bank.banks. The Company may purchase foreign exchangecurrency directly from Chinese banks for any current account transactions, such as trade transactions in its usual and normal course of business, including acquisition of aircraft, jet fuel and flight equipment (such acquisition requires approvals from the relevant Chinese Government agencies).
Payment of dividends by the Company to holders of the Company’s H Shares and ADSsADRs is also considered a current account transaction under Chinese law. Therefore, there is no legal restriction on the conversion of Renminbi into foreign exchangecurrency for the purpose of paying dividends to such holders of H Shares and ADSs.ADRs. In addition, the Company’s Articles of Association require the Company to pay dividends to holders of the Company’s H Shares and ADSsADRs in foreign exchange.
currency.
On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar so that the Renminbi is now permitted to fluctuate within a band against a basket of certain foreign currencies. On May 18, 2007, the People’s Bank of China announced that the floating band of Renminbi would be permitted to rise or fall by as much as 0.5%. The PRC government has stated publicly that it intends to further liberalize its currency policy, which could result in a further and more significant change in the value of the Renminbi against the U.S. dollar. Any significant revaluation of the Renminbi may have a material adverse effect on the Company's financial performance, and the value of, and any dividends payable on, the Company's H Shares and ADRs in foreign currency terms.
There are no limitations on the right of non-resident or foreign owners to hold or vote H Shares or ADSsADRs imposed by Chinese law or by the Articles of Association or other constituent documents of the Company. However, under current Chinese law, foreign ownership of the Company may not exceed 49%.
Chinese Taxation
The following is a general summary of certain Chinese tax consequences of the acquisition, ownership and disposition of H Shares and
ADSs.ADRs. This summary is based upon tax laws of China as in effect on the date of this Annual Report, including the income tax treaty between the United States and China (the “U.S.-PRC Tax Treaty”), all of which are subject to change or different interpretation.
In general, for Chinese tax purposes, holders of
ADSsADRs will be treated as the owners of the H Shares represented by those
ADSs,ADRs, and exchanges of H Shares for
ADSs,ADRs, and
ADSsADRs for H Shares, will not be subject to taxation under the laws of China.
This summary does not purport to address all material tax consequences for holders or prospective purchasers of H Shares or
ADSs,ADRs, and does not take into account the specific circumstances of such investors. Investors should consult their own tax advisors as to Chinese or other tax consequences of the acquisition, ownership and disposition of H Shares or
ADSs.ADRs.
As a result of the new tax law, the statutory income tax rate currently adopted by the Company and its subsidiaries has changed from 33% to 25% with effect from January 1, 2008. Pursuant to new tax law, the income tax rates of entities that previously enjoyed preferential tax rates of 15% and 18% have been revised to 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012 respectively.
The new tax law generally provides for the imposition of a withholding tax on dividends paid by a Chinese company to a non-Chinese shareholdernon-resident enterprise at a rate of 20%10%. However, the
For individuals, Chinese tax
authorities have temporarily suspended imposition of this withholding tax. Accordingly,law generally provides that an individual who receive dividends
paid byfrom the Company
to holders of H Shares or ADSs who are foreign individuals not resident in China or which are foreign enterprises with no permanent establishment in China will currently not beis subject to
a 20% income tax. Currently, dividend income received by any foreign individual that holds overseas shares in any Chinese
withholdingdomestic enterprise is temporarily exempt from income tax. In the event that the
suspension of the withholding taxexemption is
lifted,discontinued, such payments will be subject to
withholdingindividual income tax at the 20% rate unless the holder is entitled to a tax waiver or a lower tax rate under an applicable double-taxation treaty.
China currently has double-taxation treaties with a number of countries, including Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States. Under the U.S.-PRC Tax Treaty, China may tax a dividend paid by the Company to a U.S. holder up to a maximum of 10% of the gross amount of such
dividend.73
dividend
Capital Gains from Transfer or Disposition of Shares
The new tax law generally provides that a non-resident enterprise is subject to a 10% capital gains tax for the transfer or disposition of Shares.
For individual share holders, Chinese tax law generally provides that an individual who transfers or otherwise disposes of a company’s shares of capital stock is subject to a 20% capital gains tax. Currently, foreign enterprises and all individuals are temporarily exempt from capital gains tax on transfers of shares of capital stock of joint stock companies, such as the Company. Should such temporary exemption be discontinued, such holders may be subject to a 20% capital gains tax unless reduced by an applicable double-taxation treaty.
Under the U.S.-PRC Tax Treaty, for example, China may only impose a 20% capital gains tax from the sale or other disposition by a U.S. holder of H Shares or
ADSsADRs representing an interest in the Company of 25% or more.
Transfers of shares of capital stock of a company are not subject to Chinese stamp duty if the stock transfer doesdocuments are not take placeexecuted or received within China (excluding Hong Kong, Macau and Taiwan).
United States Federal Income Taxation
This discussion describes the material U.S. federal income tax consequences of the purchase, ownership and disposition of the Company’s ADRs. This discussion does not address any aspect of U.S. federal gift or estate tax, or the state, local or foreign tax consequences of an investment in the Company’s ADRs. This discussion applies to you only if you hold and beneficially own the Company’s ADRs as capital assets for tax purposes. This discussion does not apply to you if you are a member of a class of holders subject to special rules, such as:
· | dealers in securities or currencies; |
· | traders in securities that elect to use a mark-to-market method of accounting for securities holdings; |
· | banks or other financial institutions; |
· | tax-exempt organizations; |
· | partnerships and other entities treated as partnerships for U.S. federal income tax purposes or persons holding ADRs through any such entities; |
· | persons that hold ADRs as part of a hedge, straddle, constructive sale, conversion transaction or other integrated investment; |
· | U.S. Holders (as defined below) whose functional currency for tax purposes is not the U.S. dollar; |
· | persons liable for alternative minimum tax; or |
· | persons who actually or constructively own 10% or more of the total combined voting power of all classes of the Company’s shares (including ADRs) entitled to vote. |
This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, which is referred to in this discussion as the Code, its legislative history, existing and proposed regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. In addition, this discussion relies on the assumptions regarding the value of the Company’s shares and the nature of its business over time. Finally, this discussion is based in part upon the representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms. For U.S. federal income tax purposes, as a holder of ADRs, you are treated as the owner of the underlying ordinary shares represented by such ADRs.
You should consult your own tax advisor concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of the Company’s ADRs, as well as the consequences to you arising under the laws of any other taxing jurisdiction.
For purposes of the U.S. federal income tax discussion below, you are a “U.S. Holder” if you beneficially own ADRs and are:
· | a citizen or resident of the United States for U.S. federal income tax purposes; |
· | a corporation, or other entity taxable as a corporation, that was created or organized in or under the laws of the United States or any political subdivision thereof; |
· | an estate the income of which is subject to U.S. federal income tax regardless of its source; or |
· | a trust if (a) a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election in effect to be treated as a U.S. person. |
If you are not a U.S. person, please refer to the discussion below under “Non-U.S. Holders.”
For U.S. federal income tax purposes, income earned through a foreign or domestic partnership or other flow-through entity is attributed to its owners. Accordingly, if a partnership or other flow-through entity holds ADRs, the tax treatment of the holder will generally depend on the status of the partner or other owner and the activities of the partnership or other flow-through entity.
U.S. Holders
Dividends on ADRs
Subject to the “Passive Foreign Investment Company” discussion below, if the Company makes distributions and you are a U.S. Holder, the gross amount of any distributions you receive on your ADRs will generally be treated as dividend income if the distributions are made from the Company’s current or accumulated earnings and profits, calculated according to U.S. federal income tax principles. Dividends will generally be subject to U.S. federal income tax as ordinary income on the day you actually or constructively receive such income. However, if you are an individual and have held your ADRs for a sufficient period of time, dividend distributions on the Company’s ADRs will generally constitute qualified dividend income taxed at a preferential rate (generally 15% for dividend distributions before January 1, 2009) as long as the Company’s ADRs continue to be readily tradable on the New York Stock Exchange and certain other conditions apply. You should consult your own tax adviser as to the rate of tax that will apply to you with respect to dividend distributions, if any, you receive from us.
Distributions on the Company’s ADRs, if any, will generally be taxed to you as dividend distributions for U.S. tax purposes. Even if you are a corporation, you will not be entitled to claim a dividends-received deduction with respect to distributions you receive from the Company. Dividends generally will constitute foreign source passive income for U.S. foreign tax credit limitation purposes.
Sales and other dispositions of ADRs
Subject to the “Passive Foreign Investment Company” discussion below, when you sell or otherwise dispose of the Company’s ADRs, you will generally recognize capital gain or loss in an amount equal to the difference between the amount realized on the sale or other disposition and your adjusted tax basis in the ADRs, both as determined in U.S. dollars. Your adjusted tax basis will generally equal the amount you paid for the ADRs. Any gain or loss you recognize will be long-term capital gain or loss if your holding period in the Company’s ADRs is more than one year at the time of disposition. If you are an individual, any such long-term capital gain will be taxed at preferential rates. Your ability to deduct capital losses will be subject to various limitations.
Passive Foreign Investment Company
If the Company were a Passive Foreign Investment Company (“PFIC”) in any taxable year in which you hold the Company’s ADRs, as a U.S. Holder, you would generally be subject to adverse U.S. tax consequences, in the form of increased tax liabilities and special U.S. tax reporting requirements.
The Company will be classified as a PFIC in any taxable year if either: (1) the average percentage value of its gross assets during the taxable year that produce passive income or are held for the production of passive income is at least 50% of the value of its total gross assets; or (2) 75% or more of its gross income for the taxable year is passive income (such as certain dividends, interest or royalties). For purposes of the first test: (1) any cash, cash equivalents, and cash invested in short-term, interest bearing, debt instruments, or bank deposits that is readily convertible into cash, will generally count as producing passive income or held for the production of passive income; and (2) the average value of the Company’s gross assets is calculated based on its market capitalization.
The Company believes that it was not a PFIC for the taxable year 2007. However, there can be no assurance that the Company will not be a PFIC for the taxable year 2008 and/or later taxable years, as PFIC status is re-tested each year and depends on the facts in such year. For example, the Company would be a PFIC for the taxable year 2007 if the sum of its average market capitalization, which is its share price multiplied by the total amount of its outstanding shares, and its liabilities over that taxable year is not more than twice the value of its cash, cash equivalents, and other assets that are readily converted into cash.
If the Company were a PFIC, you would generally be subject to additional taxes and interest charges on certain “excess” distributions the Company makes and on any gain realized on the disposition or deemed disposition of your ADRs, regardless of whether the Company continues to be a PFIC in the year in which you receive an “excess” distribution or dispose of or are deemed to dispose of your ADRs. Distributions in respect of your ADRs during a taxable year would generally constitute “excess” distributions if, in the aggregate, they exceed 125% of the average amount of distributions in respect of your ADRs over the three preceding taxable years or, if shorter, the portion of your holding period before such taxable year.
To compute the tax on “excess” distributions or any gain, (1) the “excess” distribution or the gain would be allocated ratably to each day in your holding period, (2) the amount allocated to the current year and any tax year before the Company became a PFIC would be taxed as ordinary income in the current year, (3) the amount allocated to other taxable years would be taxable at the highest applicable marginal rate in effect for that year, and (4) an interest charge at the rate for underpayment of taxes for any period described under (3) above would be imposed with respect to any portion of the “excess” distribution or gain that is allocated to such period. In addition, if the Company were a PFIC, no distribution that you receive from the Company would qualify for taxation at the preferential rate discussed in the “Dividends on ADRs” section above.
If the Company were a PFIC in any year, as a U.S. Holder, you would be required to make an annual return on IRS Form 8621 regarding your ADRs. However, the Company does not intend to generate, or share with you, information that you might need to properly complete IRS Form 8621. You should consult with your own tax adviser regarding reporting requirements with regard to your ADRs.
If the Company were a PFIC in any year, you would generally be able to avoid the “excess” distribution rules described above by making a timely so-called “mark-to-market” election with respect to your ADRs provided the Company’s ADRs are “marketable”. The Company’s ADRs will be “marketable” as long as they remain regularly traded on a national securities exchange, such as the New York Stock Exchange. If you made this election in a timely fashion, you would generally recognize as ordinary income or ordinary loss the difference between the fair market value of your ADRs on the first day of any taxable year and their value on the last day of that taxable year. Any ordinary income resulting from this election would generally be taxed at ordinary income rates and would not be eligible for the reduced rate of tax applicable to qualified dividend income. Any ordinary losses would be limited to the extent of the net amount of previously included income as a result of the mark-to-market election, if any. Your basis in the ADRs would be adjusted to reflect any such income or loss. You should consult with your own tax adviser regarding potential advantages and disadvantages to you of making a “mark-to-market” election with respect to your ADRs. Separately, if the Company were a PFIC in any year, you would be able to avoid the “excess” distribution rules by making a timely election to treat us as a so-called “Qualified Electing Fund” or “QEF”. You would then generally be required to include in gross income for any taxable year (1) as ordinary income, your pro rata share of the Company’s ordinary earnings for the taxable year, and (2) as long-term capital gain, your pro rata share of the Company’s net capital gain for the taxable year. However, the Company does not intend to provide you with the information you would need to make or maintain a “QEF” election and you will, therefore, not be able to make or maintain such an election with respect to your ADRs.
Non-U.S. Holders
If you beneficially own ADRs and are not a U.S. Holder for U.S. federal income tax purposes (a “Non-U.S. Holder”), you generally will not be subject to U.S. federal income tax or withholding tax on dividends received from the Company with respect to ADRs unless that income is considered effectively connected with your conduct of a U.S. trade or business and, if an applicable income tax treaty so requires as a condition for you to be subject to U.S. federal income tax with respect to income from your ADRs, such dividends are attributable to a permanent establishment that you maintain in the United States. You generally will not be subject to U.S. federal income tax, including withholding tax, on any gain realized upon the sale or exchange of ADRs, unless:
· | that gain is effectively connected with the conduct of a U.S. trade or business and, if an applicable income tax treaty so requires as a condition for you to be subject to U.S. federal income tax with respect to income from your ADRs, such gain is attributable to a permanent establishment that you maintain in the United States; or |
· | you are a non-resident alien individual and are present in the United States for at least 183 days in the taxable year of the sale or other disposition and either (1) your gain is attributable to an office or other fixed place of business that you maintain in the United States or (2) you have a tax home in the United States. |
If you are engaged in a U.S. trade or business, unless an applicable tax treaty provides otherwise, the income from your ADRs, including dividends and the gain from the disposition of the Company’s ADRs, that is effectively connected with the conduct of that trade or business will generally be subject to the rules applicable to U.S. Holders discussed above. In addition, if you are a corporation, you may be subject to an additional branch profits tax at a rate of 30% or any lower rate under an applicable tax treaty.
U.S. information reporting and backup withholding rules
In general, dividend payments with respect to the ADRs and the proceeds received on the sale or other disposition of those ADRs may be subject to information reporting to the IRS and to backup withholding (currently imposed at a rate of 28%). Backup withholding will not apply, however, if you (1) are a corporation or come within certain other exempt categories and, when required, can demonstrate that fact or (2) provide a taxpayer identification number, certify as to no loss of exemption from backup withholding and otherwise comply with the applicable backup withholding rules. To establish your status as an exempt person, you will generally be required to provide certification on IRS Form W-9, W-8BEN or W-8ECI, as applicable. Any amounts withheld from payments to you under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability, provided that you furnish the required information to the IRS.
HOLDERS OF THE COMPANY’S ADRS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF THE ADRS, INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION AND INCLUDING ESTATE, GIFT, AND INHERITANCE LAWS.
F.Dividends and payingPaying Agents Not applicable.
Not applicable.
The Company has filed this Annual Report on Form 20-F with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Statements made in this Annual Report as to the contents of any document referred to are not necessarily complete. With respect to each such document filed as an exhibit to this Annual Report, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange Act and file reports and other information with the Securities and Exchange Commission. Reports and other information which the Company filed with the Securities and Exchange Commission, including this Annual Report on Form 20-F, may be inspected and copied at the public reference room of the Securities and Exchange Commission at 450 Fifth Street N.W. Washington D.C. 20549.
You can also obtain copies of this Annual Report on Form 20-F by mail from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the Securities and Exchange Commission’s Internet site at http://www.sec.gov. The Commission’s telephone number is 1-800-SEC-0330. Copies of this material may also be obtained for the Company's website at http:// www.csair.com.
Comparison of New York Stock Exchange Corporate Governance Rules and China Corporate Governance Rules for Listed Companies
Under the amended Corporate Governance Rules of New York Stock Exchange (NYSE), foreign issuers (including the Company) listed on the NYSE are required to disclose a summary of the significant differences between their domestic corporate governance rules and NYSE corporate governance rules that would apply to a U.S. domestic issuer. A summary of such differences is listed below:
| | |
NYSE corporate governance rules | | Corporate governance rules applicable to the domestically listed companies in China and the Company’s governance practices |
| | |
Director Independence
A listed company must have a majority of independent directors on its board of directors. No director qualifies as “independent"“independent” unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company). In addition, a director must meet certain standards to be deemed independent. For example, a director is not independent if the director is, or has been within the last three years, an employee of the listed company, or if the director has received, during any twelve-month period within the last three years, more than US$100,000 in direct compensation from the listed company. | | Director Independence Any listed company must establish an independent director system and set forth specific requirements for the qualification of independent directors. An independent director shall not hold any other position in the listed company other than being a director and shall not be influenced by the main shareholders or the controlling persons of the listed company, or by any other entities or persons with whom the listed company has a significant relationship. The Company’s governance practices The Company has complied with the relevant Chinese corporate governance rules and has implemented internal rules governing the independence and responsibilities of independent directors. The Company determines the independence of independent directors every year. |
| | |
The non-management directors of each listed company must meet at regularly scheduled executive sessions without management. | | No similar requirements. |
75
| | |
Nominating/Corporate Governance Committee | | The board of directors of a listed company may, through the resolution of the shareholders’ meeting, establish a nominating committee composed entirely of directors, of which the independent directors shall be the majority and the convener. The Company has not established a nominating committee. |
| | |
Listed companies must have a nominating/corporate governance committee composed entirely of independent directors. | | |
| | |
The nominating/corporate governance committee must have a written charter that addresses the committee’s purposes and responsibilities which, at minimum, must be to: search for eligible people for the board of directors, select and nominate directors for the next session of the shareholders’ annual meeting, study and propose corporate governance guidelines, supervise the evaluation of the board of directors and management, and evaluate the performance of the committee every year. | | Nominating/Corporate Governance Committee The independent non-executive Directorsboard of directors of a listed company may, through the resolution of the shareholders’ meeting, establish a nominating committee composed entirely of directors, of which the independent directors shall be the majority and the convener. The Company’s governance practices The Company has established a nominating committee. As at December 31, 2007, the Nomination Committee consists of three members, Messrs Liu Shao Yong, Wang Zhi and Gong Hua Zhang. Most of them are nominated byindependent directors and Mr. Liu Shao Yong acts as the chairman. The responsibilities of the Nomination Committee are to make recommendations to the Board of Directors, and their appointment must be approved by the shareholdersin respect of the Company in a general meeting.
The executive Directorssize and composition of the Company are nominated by CSAHC,Board based on the controlling shareholderoperational activities, assets and shareholding structure of the Company,Company; study the selection criteria and their appointment must be approved byprocedures of directors and executives and give advice to the shareholders ofBoard; identify qualified candidates for directors and executives; investigate and propose candidates for directors and managers and other senior management members to the Company in a general meeting.Board. |
| | |
Compensation Committee | | |
| | |
Listed companies must have a compensation committee composed entirely of independent directors. | | Compensation Committee The board of directors of a listed company can, through the resolution of shareholders’ meeting, have a compensation and evaluation committee composed entirely of directors, of whom the independent directors are the majority and act as the convener. |
| | |
| | The Company’s governance practices The Company has established a remuneration committee consisting of three members. The remuneration committee is chaired by independent non-executive Director Sui Guang Jun with independent non-executive Director Wei Ming HaiGong Hua Zhang and executive Director Wang Quan Hua as members. |
| | |
The written charter of the compensation committee must state, at least, the following purposes and responsibilities: (1) review and approve the corporate goals associated with CEO’s compensation, evaluate the performance of the CEO in fulfilling these goals, and based on such evaluation determine and approve the CEO’s compensation level; (2) make recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval; (3) produce a committee report on executive compensation as required by the SEC to be included in the annual proxy statement or annual report filed with the SEC. The charter must also include the requirement for an annual performance evaluation of the compensation committee. | | The responsibilities are similar to those stipulated by the NYSE rules, but the committee is not required to produce a report on the executive compensation or make an annual performance evaluation of the committee. The responsibilities of the remuneration committee are to approve the remuneration packages of Directors and senior management of the Group, and the Company’s “preliminary proposals on annual emoluments of the directors and senior management of the Group”. The remuneration committee is also responsible for assessing performance of executive director and approving the terms of executive directors’ service contracts. |
76
| | |
The written charter of the compensation committee must state, at least, the following purposes and responsibilities: | | The responsibilities are similar to those stipulated by the NYSE rules, but the committee is not required to produce a report on the executive compensation or make an annual performance evaluation of the committee. |
| | | | |
(1) | | review and approve the corporate goals associated with CEO’s compensation, evaluate the performance of the CEO in fulfilling these goals, and based on such evaluation determine and approve the CEO’s compensation level; | | |
| | | | |
(2) | | make recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval; | | |
| | | | |
(3) | | produce a committee report on executive compensation as required by the SEC to be included in the annual proxy statement or annual report filed with the SEC. | | |
| | | | |
The charter must also include the requirement for an annual performance evaluation of the compensation committee. | | |
| | |
Audit Committee
| | |
Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 of Exchange Act. It must have a minimum of three members, and all audit committee members must satisfy the requirements for independence set forth in Section 303A.02 of NYSE Corporate Governance Rules as well as the requirements of Rule 10A-3b (1) of the Exchange Act. | | Audit Committee The board of directors of a listed company can, through the resolution of the shareholders’ meeting, establish an audit committee composed entirely of directors, of which the independent directors are the majority and act as the convener, and, at minimum, one independent director is an accounting professional. |
| | |
The written charter of the audit committee must specify that the purpose of the audit committee is to assist the board oversight of the integrity of financial statements, the company’s compliance with legal and regulatory requirements, qualifications and independence of independent auditors and the performance of the listed company’s internal audit function and independent auditors. | | The responsibilities of the audit committee are similar to those stipulated by the NYSE rules, but according to the domestic practices, the Company is not required to make an annual performance evaluation of the audit committee,and the audit committee is not required to prepare an audit report to be included in the Company’s annual proxy statement. The Board of Directors of the Company has established an audit committee that satisfies relevant domestic requirements and the audit committee has a written charter. |
| | |
The written charter must also require the audit committee to prepare an audit committee report as required by the SEC to be included in the listed company’s annual proxy statement as well as an annual performance evaluation of the audit committee. | | The responsibilities of the audit committee are similar to those stipulated by the NYSE rules, but according to the domestic practices, the Company is not required to make an annual performance evaluation of the audit committee and the audit committee is not required to prepare an audit report to be included in the Company’s annual proxy statement. The Company’s governance practices The Board of Directors of the Company has established an audit committee that satisfies relevant domestic requirements and the audit committee has a written charter. |
| | |
Each listed company must have an internal audit department. | | China has a similar regulatory provision, and the Company has an internal audit department. |
| | |
Shareholders must be given the opportunity to vote on equity-compensation plans and material revisions thereto, except for employment incentive plans, certain awards and plans in the context of mergers and acquisitions. | | The relevant regulations of China require the board of directors to propose plans and types of director compensation for the shareholders’ meeting to approve. The compensation plan of executive officers is subject to approval by the board and announced at the shareholders’ meeting and disclosed to the public upon the approval of the board of directors. The approval of director compensation and compensation plan of executive officers of the Company satisfies relevant domestic requirements. |
| | |
Corporate governance guidelines | | |
Governance Guidelines Listed companies must adopt and disclose corporate governance guidelines, involving director qualification standards, director compensation, director continuing education, annual performance evaluation of the board of directors, etc. | | Corporate Governance Guidelines China Securities Regulatory Commission (“CSRC”) has issued the Corporate Governance Rules, with which the Company has complied. |
| | |
Code of ethicsEthics for directors, officersDirectors, Officers and employees | | |
Employees Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. | | Code of Ethics for Directors, Officers and Employees China does not have such requirement for a code for ethics. But, the directors and officers must perform their legal responsibilities in accordance with the Company Law of PRC, relative requirements of CSRC and Mandatory Provisions to the Charter of Companies Listed Overseas. |
| | |
| | The Company’s governance practices The Company does not have, in form, a code of ethics that applies to the president, chief financial officer and principal accounting officer, or collectively, the senior corporate officers. The senior executive officers, all of whom currently serve as our directors, are subject to the director service contracts that they have with the Company. Under the director service contracts, the directors, including the senior corporate officers, agree that each director owes a fiduciary and diligence obligation to the Company and that no director shall engage in any activities in competition with the Company’s business or carry any activities detrimental to the interests of the Company. Each of the directors, including the senior corporate officers, also agreed to perform their respective duties as directors and senior officers in accordance with the Company Law of the PRC, relevant rules and regulations promulgated by China Securities Regulatory Commission and the Mandatory Provisions of Articles of Association of Overseas Listed Companies. |
Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards and he or she must promptly notify the NYSE on writing of any material non-compliance with any applicable provisions of Section 303A. | | No similar requirements. |
78
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Group’s earnings are affected by changes in the price and availability of jet fuel. The Group enters into fuel option contracts to manage its price risk exposure to jet fuel. These contracts are designed to provide protection against sharp increases in the price of jet fuel. The fair value of the Group's fuel related derivatives was RMB2 million at December 31, 2007. These instruments will expire between 2008 and 2009.
The Group is subject to market risks due to fluctuations in interest rates. The majority of the Group’s
borrowingsborrowing is in the form of long-term
fixed-fixed-rate and variable-rate debts with original maturities ranging from two to fifteen years. Fluctuations in interest rates can lead to significant fluctuations in the fair value of such debt instruments. From time to time, the Group may enter into interest rate swaps designed to mitigate exposure relating to interest rate risks. No such contract was outstanding as of December 31,
2004.2007.
The Group is also exposed to foreign currency risk as a result of its aircraft and flight equipment being sourced from overseas suppliers. Specifically, the Group’s foreign currency exposure relates primarily to its foreign currency long-term
debtsbank and other loans used to finance such capital expenditures and its capital commitments. Subject to certain restrictive conditions imposed by the State Administration of Foreign Exchange, the Group may, from time to time, enter into forward foreign exchange contracts to mitigate its foreign currency exposures.
No such contract was outstanding asThe Group entered into certain foreign exchange forward option contracts to manage this foreign currency risk. Under the contracts, the Group will buy US$1 million by selling Japanese Yen at certain specified rates on each of
the 35 settlement dates until the maturity of the contracts in 2010. For the year ended December 31,
2004.2007, a net loss of approximately RMB5 million arising from changes in the fair value of these foreign currency forward option contracts has been recognised in profit or loss. At December 31, 2007, the fair value of these currency forward option contracts was financial liabilities of approximately RMB5 million.
As of December 31,
2004,2007, the Group operated a total of
131199 aircraft under operating and
capitalfinance leases at rates that are substantially fixed. Such leases expose the Group to market risks; however, in accordance with Item 305 of Regulation S-K, such leases have been excluded from the following market risk tables. Commitments under
operatingfinance leases and
capitaloperating leases are disclosed in Note
1830 and Note 44 to the Financial
Statements.Statements, respectively.
The following table provides information regarding the Group’s material interest rate sensitive financial instruments as of December 31, 20042007 and 2003:2006:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2004 | | | As of December 31, 2003 | |
| | Expected maturity date | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | Total | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | recorded | | | | | | | recorded | | | | |
| | 2005 | | | 2006 | | | 2006 | | | 2008 | | | 2009 | | | Thereafter | | | amount | | | Fair value(2) | | | amount | | | Fair value(2) | |
Debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed-rate notes payable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In US$ | | | 767 | | | | 445 | | | | 402 | | | | 251 | | | | 205 | | | | 182 | | | | 2,252 | | | | 2,464 | | | | 2,627 | | | | 2,915 | |
Average interest rate | | | 6.09 | % | | | 6.52 | % | | | 6.41 | % | | | 6.41 | % | | | 6.41 | % | | | 6.82 | % | | | 6.09 | % | | | | | | | 6.79 | % | | | — | |
Variable-rate notes payable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In US$ | | | 6,421 | | | | 905 | | | | 3,557 | | | | 777 | | | | 996 | | | | 2,671 | | | | 15,327 | | | | 15,327 | | | | 8,372 | | | | 8,372 | |
Average interest rate | | | 2.26 | % | | | 2.60 | % | | | 2.60 | % | | | 2.60 | % | | | 2.60 | % | | | 2.26 | % | | | 2.40 | % | | | | | | | 1.63 | % | | | — | |
In HKD | | | 3,327 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,327 | | | | 3,327 | | | | — | | | | — | |
Average interest rate | | | 1.42 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1.42 | % | | | | | | | — | | | | — | |
In RMB | | | 1,003 | | | | 276 | | | | 181 | | | | 27 | | | | 27 | | | | 1,033 | | | | 2,547 | | | | 2,547 | | | | 620 | | | | 620 | |
Average interest rate | | | 5.13 | % | | | 5.65 | % | | | 5.20 | % | | | 5.02 | % | | | 5.02 | % | | | 5.20 | % | | | 5.04 | % | | | | | | | 4.46 | % | | | — | |
(1) | | As of December 31, 2007 | | As of December 31, 2006 | |
| | Expected maturity date | | | | | |
| | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | Thereafter | | Total recorded amount | | Fair value(2) | | Total recorded amount | | Fair value(2) | |
Fixed-rate bank and other loans In US$ | | | 274 | | | 237 | | | 195 | | | 84 | | | 64 | | | 483 | | | 1,337 | | | 1,355 | | | 1,863 | | | 1,861 | |
Average interest rate | | | 5.83 | % | | 5.85 | % | | 5.88 | % | | 5.74 | % | | 5.74 | % | | 5.74 | % | | | | | | | | | | | | |
Variable-rate bank and other loans In US$ | | | 24,327 | | | 2,457 | | | 1,618 | | | 1,447 | | | 590 | | | 1,559 | | | 31,998 | | | 31,998 | | | 29,500 | | | 29,500 | |
Average interest rate | | | 5.12 | % | | 5.12 | % | | 5.12 | % | | 5.12 | % | | 5.11 | % | | 5.11 | % | | | | | | | | | | | | |
In HKD | | | 1 | | | | | | | | | | | | | | | | | | 1 | | | 1 | | | 1,667 | | | 1,667 | |
Average interest rate | | | 4.75 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In RMB | | | 346 | | | 46 | | | 203 | | | 44 | | | 44 | | | 3 | | | 686 | | | 686 | | | 809 | | | 809 | |
Average interest rate | | | 6.17 | % | | 6.24 | % | | 6.26 | % | | 6.24 | % | | 6.24 | % | | | | | | | | | | | | | | | |
| (1) | These interest rates are calculated based on the year end indices. |
|
(2) | | Fair value of debt instruments was estimated based on the interest rates applicable to similar debt instruments as of December 31, 20042007 and 2003.2006. |
The following table provides information regarding the Group’s material foreign currency sensitive financial instruments and capital commitments as of December 31,
20042007 and
2003:79
2006:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2004 | | | As of December 31, 2003 | |
| | Expected maturity date | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | Total | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | recorded | | | | | | | recorded | | | | |
| | 2004 | | | 2005 | | | 2006 | | | 2007 | | | 2008 | | | Thereafter | | | amount | | | Fair value(2) | | | amount | | | Fair value(2) | |
Debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed-rate notes payable In US$ | | | 767 | | | | 445 | | | | 402 | | | | 251 | | | | 205 | | | | 182 | | | | 2,252 | | | | 2,464 | | | | 2,627 | | | | 2,915 | |
Average interest rate | | | 6.09 | % | | | 6.52 | % | | | 6.41 | % | | | 6.41 | % | | | 6.41 | % | | | 6.82 | % | | | 6.09 | % | | | | | | | 6.79 | % | | | — | |
Variable-rate notes payable in US$ | | | 6,421 | | | | 905 | | | | 3,557 | | | | 777 | | | | 996 | | | | 2,671 | | | | 15,327 | | | | 15,327 | | | | 8,372 | | | | 8,372 | |
Average interest rate | | | 2.26 | % | | | 2.60 | % | | | 2.60 | % | | | 2.60 | % | | | 2.60 | % | | | 2.26 | % | | | 2.40 | % | | | | | | | 1.63 | % | | | — | |
In HKD | | | 3,327 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,327 | | | | 3,327 | | | | — | | | | — | |
Average interest rate | | | 1.42 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1.42 | % | | | | | | | — | | | | — | |
Capital commitment in US$ | | | 8,748 | | | | 2,996 | | | | 32 | | | | — | | | | — | | | | — | | | | 11,776 | | | | 11,776 | | | | 10,615 | | | | 10,615 | |
(1) | | These interest rates are calculated based on the year end indices.As of December 31, 2007 | | As of December 31, 2006 | |
| | Expected maturity date | | | | | |
(2) | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | Thereafter | | Total recorded amount | | Fair value(1) | | Total recorded amount | | Fair value(1) | |
Fixed-rate bank and other loans In US$ | | | 274 | | | 237 | | | 195 | | | 84 | | | 64 | | | 483 | | | 1,337 | | | 1,355 | | | 1,863 | | | 1,861 | |
Variable-rate bank and other loans In US$ | | | 24,327 | | | 2,457 | | | 1,618 | | | 1,447 | | | 590 | | | 1,559 | | | 31,998 | | | 31,998 | | | 29,500 | | | 29,500 | |
In HKD | | | 1 | | | | | | | | | | | | | | | | | | 1 | | | 1 | | | 1,667 | | | 1,667 | |
Capital commitment in US$ | | | 19,125 | | | 20,767 | | | 20,065 | | | 12,747 | | | 15,466 | | | 572 | | | 88,742 | | | 88,742 | | | 66,881 | | | 66,881 | |
| (1) | Fair value of debt instruments was estimated based on the floating interest rates applicable to similar debt instruments as of December 31, 20032007 and 2004.2006. |
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.
There were no material modifications affecting the rights of securities holders made during the fiscal year ended December 31, 2004.
Use of Proceeds
(1) | | Effective date of the Securities Act registration statement for which the use of proceeds information is being disclosed: |
|
| | July 23, 1997.
SEC file number assigned to such registration statement: 333-7114. |
|
(2) | | The offering commenced on July 23, 1997. |
|
(3) | | The offering was not terminated prior to the sale of any securities registered under the registration statement. |
(4) | (i) | | The offering was not terminated prior to the sale of all securities registered under the registration statement. |
|
| (ii) | | Name of the managing underwriter:
Goldman Sachs (Asia) L.L.C. (global coordinator). |
|
| (iii) | | and (iv) |
| | | | | | | | | | | | | | | | |
| | | | | | Aggregate | | | | | | | Aggregate | |
| | | | | | price of | | | | | | | offering | |
Title of each | | | | | | offering | | | | | | | price of | |
class of | | Amount | | | amount | | | Amount | | | amount | |
securities registered | | registered(1) | | | registered(2) | | | sold(3) | | | sold(4) | |
Ordinary H Shares of par value RMB 1.00 per share represented by American Depositary Shares | | 861,823,000 shares | | US$ | 528,469,864 | | | 851,501,000 shares | | US$ | 522,140,413 | |
80
Notes:
(1) The amount does not include 322,677,000 H Shares (some of which in the form of ADSs) which have not been registered with the SEC, of which 290,477,000 H Shares were sold to certain corporate investors in Hong Kong as part of the global offering of the Company in July 1997 and 32,200,000 H Shares were sold to certain limited partnership investment funds affiliated with Goldman, Sachs & Co. in a private placement in June 1997 prior to the Company’s global offering.
(2) Assumes that all H Shares were sold in the form of ADSs. The price to public for each ADS is US$30.66. Each ADS represents 50 H Shares.
(3) The amount does not include 322,677,000 H Shares referred to in note (1) above.
(4) The amount does not include US$197,865,536 which represents the proceeds from the sale of 322,677,000 H Shares referred to in note (1) above. If the latter amount is included, the aggregate amount of proceeds to the Company would be US$720,005,950. In addition, the aggregate amount is calculated on the assumption that all H Shares were sold in the form of ADSs. Based on the actual sale of H Shares and ADSs, the aggregate amount of proceeds to the Company was US$719,494,700. The issue price per H Share was HK$4.70.
(v)
A. | | | | |
Underwriting discounts and commissions | | US$ | 36,593,000 | |
Finder’s fees | | | — | |
Expenses paid to or for underwriters | | US$ | 2,958,000 | |
Other expenses | | US$ | 21,411,000 | |
Total expenses | | US$ | 60,962,000 | |
Note: | | No direct or indirect payments were made to directors, officers, general partners of the Company or their associates, or to persons owning ten percent or more of any class of equity securities of the Company, or to affiliates of the Company. All payments were made to third parties. |
(vi) Net offering proceeds to the Company after deducting the total expenses in item (4)(v) above:
US$658,532,700
Note: | | The amount is calculated on the basis of the actual aggregate amount of proceeds to the Company, and includes the proceeds from the sale of 322,677,000 H Shares referred to in note (1) of item (4)(iv) above. |
(vii) As of December 31, 2004, the net offering proceeds to the Company was used up as follows:
None.
B. | | | | |
Construction of plant, building and facilities | | US$ | 41.9 million | |
Purchase and installation of machinery and equipment | | US$ | 394.6 million | |
Purchase of real estate | | | — | |
Acquisition of other business(es) | | | — | |
Repayment of indebtedness | | US$ | 192.4 million | |
Working Capital | | US$ | 29.6 million | |
None.
Note:C. | | No direct or indirect payments were made to directors, officers, general partners of the Company or their associates, or to persons owning ten percent or more of any class of equity securities of the Company, or to affiliates of the Company. All payments were made to third parties. |
(viii) The uses of proceeds do not represent a material change in the use of proceeds described in the prospectus.
81
Not applicable.
PART III
Not applicable.
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES. (a)Disclosure controls and procedures
Our president and chief financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)), and concluded that, based on their evaluation, our disclosure controls and procedures are effective as of the end of the period covered by this Annual Report to ensure that material information required to be included in this Annual Report would be made known to them by others on a timely basis.
There
(b)Management’s annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Our management has assessed the effectiveness of internal control over financial reporting based on the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has concluded that our internal control over financial reporting was effective as of December 31, 2007.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
(c)Attestation of the Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
China Southern Airlines Company Limited:
We have audited the internal control over financial reporting of China Southern Airlines Company Limited (the “Company”) and its subsidiaries (the “Group”) as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). China Southern Airlines Company Limited’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, China Southern Airlines Company Limited and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of The Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of China Southern Airlines Company Limited and its subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, consolidated statements of changes in equity, and consolidated cash flow statements for each of the years in the three-year period ended December 31, 2007, and our report dated April 18, 2008, except for Note 46(e), which is as of 28 May, 2008, expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG
Hong Kong, China
April 18, 2008
(d)Changes in internal control over financial reporting
During the year ended December 31, 2007, there have been no significant changechanges in our internal controlscontrol over financial reporting during the period covered by this Annual Report that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. [RESERVED]RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors has determined that Mr. Wei Ming HaiGong Hua Zhang qualifies as an audit committee financial expert in accordance with the terms of Item 16. A16A of Form 20-F. Mr. Gong Hua Zhang satisfies as an “independent director” within the meaning of NYSE Manual Section 303A and meets the criteria for independence set forth in Section 10A(m)(3) of the US Securities Exchange Act of 1934, as amended, or the Exchange Act, and Rule 10A-3under the Exchange Act. See “Item 6 Directors, Senior Management and Employees — Directors and Senior Management”.
ITEM 16B. CODE OF ETHICS. As of the date of this Annual Report, the Company does not have, in form, a code of ethics that applies to the president, chief financial officer and principal accounting officer, or collectively, the senior corporate officers. The senior executive officers, all of whom currently serve as our directors,Directors, are subject to the director service contracts that they have with the Company. Under the director service contracts, the directors,Directors, including the senior corporate officers, agree that each directorDirector owes a fiduciary and diligence obligation to the Company and that no such directorDirector shall engage in any activities in competition with the Company’s business or carry out any activities detrimental to the interests of the Company. Each of the directors,Directors, including the senior corporate officers, also agreed to perform their respective duties as directors and senior officers in accordance with the Company Law of the PRC, relevant rules and regulations promulgated by China Securities Regulatory Commission and the Mandatory Provisions of Articles of Association of Overseas Listed Companies.
ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table sets forth the aggregate audit fees, audit-related fees, tax fees of the Company’s principal accountants and all other fees billed for products and services provided by the Company’s principal accountants other than the audit fees, audit-related fees and tax fees for each of the fiscal years 20032006 and 2004:2007:
| | Audit Fees | | Audit-Related Fees | | Tax Fees | | Other Fees | |
| | | | | | | | | |
2006 | | | RMB11 million | | | RMB4.0 million | | | RMB0.47 million | | | RMB3.7 million | |
| | | | | | | | | | | | | |
| | Audit Fees2007 | | | Audit-Related Fees | | | Tax Fees | | | Other Fees | |
2003 | | | RMB8.2RMB12.4 million | | | | RMB7.0RMB4.5 million | | | | RMB0.17RMB0.25 million | | | | RMB1.1RMB2.8 million | |
2004 | | | RMB8.9 million | | | | RMB6.6 million | | | | RMB0.11 million | | | | — | |
82
Audit-related fees
Services provided primarily consist
Review of the
following:a) | | Review of the Group’s 2004 interim financial report prepared under IFRS; and |
|
b) | | In connection with the Company’s acquisition of the airline operations and related assets of China Northern Airlines Company and Xinjiang Airlines Company; |
|
| | – Audit of the financial statements of China Northern Airlines Company and Xinjiang Airlines Company; |
|
| | – Issuance of comfort letter on profit forecast; |
|
| | – Issuance of comfort letter on working capital forecast; and |
|
| | – Issuance of report on statement of indebtedness. |
Group’s 2006 interim financial report prepared under IFRSs and 2007 interim financial report prepared under IFRSs.
Services provided primarily consist of tax compliance services.
Others
Services provided primarily consist
Other fees
Provision of
services to assist the Group in documenting its internal controls over financial reporting and provide observations and recommendations.Sarbanes Oxley Act of 2002 advisory services.
Before our principal accountantsaccountant were engaged by the Company or our subsidiaries to render the audit or non-auditnon audit services, the engagement hasengagements have been approved by our audit committee.
Exemptions from the Listing Standards for Audit Committee
Not applicable.
ITEM 16D.16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
The Company and its affiliated companiesassociates have not purchased any issued common shares of the Company during 20042007 and up to the date of this Annual Report.
PART IV
ITEM 17. FINANCIAL STATEMENTS.
Not applicable.
ITEM 18. FINANCIAL STATEMENTS.
Index to Financial Statements
Not applicable.
Exhibit No. | | Description of Exhibit |
1.1 | | Amended Articles of Association of China Southern Airlines Company Limited (incorporated by reference to Exhibit 1.1 to our Annual Report on Form 20-F for fiscal year 2006 filed with the Securities and Exchange Commission (File Number: 001-14660) for the year ended December 31, 2006 with the Securities and Exchange Commission on June 29, 2007) |
| | |
4.1 | | Page | Form of Director’s Service Agreement (Incorporated by reference to the Exhibit 4.1 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2005 filed with the Securities and Exchange Commission on June 30, 2006) |
CONSOLIDATED FINANCIAL STATEMENTS OF CHINA SOUTHERN AIRLINES COMPANY LIMITED
| | | |
4.2 | | Form of Non-Executive Director’s Service Agreement (Incorporated by reference to the Exhibit 4.2 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2005 filed with the Securities and Exchange Commission on June 30, 2006) |
| | |
8.1 | | Subsidiaries of China Southern Airlines Company Limited |
| | |
10.1 | | Airbus Aircraft Acquisition Agreement entered into between China Southern Airlines Company Limited and Airbus dated July 6, 2006 (Incorporated by reference to the Exhibit 99.1 to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on July 11, 2006) |
| | |
10.2 | | Boeing Aircraft Acquisition Agreement entered into between China Southern Airlines Company Limited and Boeing dated October 13, 2006 (Incorporated by reference to the Exhibit 99.1 to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on October 17, 2006) |
| | |
10.3 | | Xiamen Aircraft Acquisition Agreement entered into between Xiamen Airlines and Boeing dated October 13, 2006 (Incorporated by reference to the Exhibit 99.1 to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on October 17, 2006) |
| | |
10.4 | | Airbus Aircraft Acquisition Agreement entered into between the Company and Airbus dated on July 16, 2007 (Incorporated by reference to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on July 17, 2007) |
| | |
10.5 | | Xiamen Aircraft Acquisition Agreement entered into between Xiamen Airlines and Boeing dated on July 16, 2007 (Incorporated by reference to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on July 17, 2007) |
| | |
10.6 | | Boeing Aircraft Acquisition Agreement entered into between the Company and Boeing dated on August 20, 2007 (Incorporated by reference to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on August 21, 2007) |
| | |
10.7 | | Airbus Aircraft Acquisition Agreement entered into between the Company and Airbus dated on October 23, 2007 (Incorporated by reference to the Exhibit 99.1 to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on October 23, 2007) |
| | |
10.8 | | Boeing Aircraft Acquisition Agreement between Xiamen Airlines and Boeing dated April 18, 2008 (Incorporated by reference to the Exhibit 99.1 to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on April 22, 2008) |
| | |
12.1 | | Section 302 Certification of President |
12.2 | | Section 302 Certification of Chief Financial Officer |
| | |
13.1 | | Section 906 Certification of President |
| | |
13.2 | | Section 906 Certification of Chief Financial Officer |
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | |
Report of Independent Registered Public Accounting Firm | | | F-1 | |
Consolidated Statements of Operations for the years ended December 31, 2002, 20032007, 2006 and 2004 | 2005 | | F-2 | |
Consolidated Balance Sheets as ofat December 31, 20032007 and 2004 | | | F-3 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004 | 2006 | | F-4 | |
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2002, 20032007, 2006 and 20042005 | | F-6 |
F-5Consolidated Cash Flow Statements for the years ended December 31, 2007, 2006 and 2005 | | F-7 |
Notes to Consolidated Financial Statements | | | F-6 | F-10 |
83
ITEM 19. EXHIBITS.
| | | | |
Exhibit No. | | Description of Exhibit |
| 4.1 | | | Form of Director’s Service Agreement is incorporated by reference in Exhibit 4(c).1 of Form 20-F for the year of 2004. |
| 4.2 | | | Form of Non-Executive Director’s Service Agreement is incorporated by reference in Exhibit 4(c).2 of Form 20-F for the year of 2004. |
| 8 | | | Subsidiaries of the Company |
| 12.1 | | | Section 302 Certification of Chairman |
| 12.2 | | | Section 302 Certification of President |
| 12.3 | | | Section 302 Certification of Chief Financial Officer |
| 13.1 | | | Section 906 Certification of Chairman |
| 13.2 | | | Section 906 Certification of President |
| 13.3 | | | Section 906 Certification of Chief Financial Officer |
84
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| | | | |
| | CHINA SOUTHERN AIRLINES COMPANY
LIMITED
| |
| | |
| | /s/ Liu Shao Yong | |
| | Name: | Liu Shao Yong | |
| | Title: | Chairman of the Board of Directors | |
|
Date: June 30, 2005
85
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
China Southern Airlines Company
Limited:Limited
We have audited the accompanying consolidated balance sheets of China Southern Airlines Company Limited
(the “Company”) and its subsidiaries
(the “Group”) as of December 31,
20032006 and
2004,2007, and the related consolidated statements of operations,
cash flows andconsolidated statements of changes in
shareholders’ equity,
and consolidated cash flow statements for each of the years in the three-year period ended December 31,
2004, all expressed in Renminbi.2007. These consolidated financial statements are the responsibility of the
Company’sCompany's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Southern Airlines Company Limited and its subsidiaries as of December 31,
20032006 and
2004,2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
20042007 in conformity with International Financial Reporting Standards
promulgatedissued by the International Accounting Standards Board.
International Financial Reporting Standards vary
We have also audited, in
certain significant respects from accounting principles generally accepted inaccordance with the
United Statesstandards of
America. Information relating to the
nature and effectPublic Company Accounting Oversight Board (United States), the effectiveness of
such differences is presented in Note 34 to the
consolidatedGroup’s internal control over financial
statements. The accompanying consolidated financial statementsreporting as of and for the year ended December 31, 2004 have been translated into United States dollars solely for2007, based on criteria established in Internal Control-Integrated Framework issued by the convenienceCommittee of Sponsoring Organizations of the reader. We have audited the translation,Treadway Commission (COSO), and in our opinion, the consolidated financial statementsreport dated April 18, 2008 expressed in Renminbi have been translated into United States dollarsan unqualified opinion on the basis set forth ineffectiveness of the Group’s internal control over financial reporting.
/s/ KPMG
Hong Kong, China
April 18, 2008, except for Note
1 to the consolidated financial statements.KPMG
Hong Kong
April 25, 2005
46(e), which is as of May 28, 2008
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For
Consolidated Statements of Operations for the years ended December 31,
2002, 20032007, 2006 and
20042005
(AmountsPrepared in millions, except per share data)accordance with International Financial Reporting Standards)
| | | | | | | | | | | | | | | | | | |
| | Note | | 2002 | | | 2003 | | | 2004 | | | 2004 | |
| | | | RMB | | | RMB | | | RMB | | | U.S. dollars | |
Operating revenue: | | | | | | | | | | | | | | | | | | |
Traffic revenue | | 3 | | | 17,482 | | | | 16,965 | | | | 23,344 | | | | 2,821 | |
Other operating revenue | | 4,26 | | | 537 | | | | 505 | | | | 630 | | | | 76 | |
| | | | | | | | | | | | | | |
Total operating revenue | | | | | 18,019 | | | | 17,470 | | | | 23,974 | | | | 2,897 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | |
Flight operations | | 5, 26 | | | 6,733 | | | | 7,070 | | | | 10,418 | | | | 1,259 | |
Maintenance | | 6, 26 | | | 2,333 | | | | 2,589 | | | | 3,459 | | | | 418 | |
Aircraft and traffic servicing | | 7, 26 | | | 2,511 | | | | 2,767 | | | | 3,503 | | | | 423 | |
Promotion and sales | | 8, 26 | | | 1,500 | | | | 1,480 | | | | 1,940 | | | | 234 | |
General and administrative | | 9 | | | 1,060 | | | | 1,053 | | | | 1,323 | | | | 160 | |
Depreciation and amortization | | | | | 1,840 | | | | 2,038 | | | | 2,413 | | | | 292 | |
Other | | | | | 16 | | | | 17 | | | | 9 | | | | 1 | |
| | | | | | | | | | | | | | |
Total operating expenses | | | | | 15,993 | | | | 17,014 | | | | 23,065 | | | | 2,787 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Operating income | | | | | 2,026 | | | | 456 | | | | 909 | | | | 110 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Non-operating income/(expenses): | | | | | | | | | | | | | | | | | | |
Interest income | | 26 | | | 52 | | | | 13 | | | | 22 | | | | 3 | |
Interest expense | | 17, 26 | | | (959 | ) | | | (824 | ) | | | (691 | ) | | | (84 | ) |
Equity income of affiliated companies | | | | | 37 | | | | 48 | | | | 12 | | | | 1 | |
Equity loss of jointly controlled entities | | | | | (3 | ) | | | (39 | ) | | | (5 | ) | | | (1 | ) |
Gain/(loss) on sales of property, plant and equipment | | 14, 25 | | | 171 | | | | (22 | ) | | | (1 | ) | | | — | |
Exchange loss, net | | | | | (176 | ) | | | (164 | ) | | | (59 | ) | | | (7 | ) |
Other, net | | | | | (9 | ) | | | 21 | | | | 46 | | | | 6 | |
| | | | | | | | | | | | | | |
Total net non-operating expenses | | | | | (887 | ) | | | (967 | ) | | | (676 | ) | | | (82 | ) |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Income/(loss) before taxation and minority interests | | | | | 1,139 | | | | (511 | ) | | | 233 | | | | 28 | |
| | | | | | | | | | | | | | | | | | |
Taxation (expense)/credit | | 10 | | | (398 | ) | | | 324 | | | | (78 | ) | | | (9 | ) |
| | | | | | | | | | | | | | |
Income/(loss) before minority interests | | | | | 741 | | | | (187 | ) | | | 155 | | | | 19 | |
| | | | | | | | | | | | | | | | | | |
Minority interests | | | | | (165 | ) | | | (171 | ) | | | (203 | ) | | | (25 | ) |
| | | | | | | | | | | | | | |
Net income/(loss) | | | | | 576 | | | | (358 | ) | | | (48 | ) | | | (6 | ) |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Basic earnings/(loss) per share | | 2(ab) | | | 0.17 | | | | (0.09 | ) | | | (0.01 | ) | | | (0.001 | ) |
| | | | | | | | | | | | | | |
(Expressed in Renminbi)See accompanying notes to consolidated financial statements.
| | Note | | 2007 | | 2006 | | 2005 | |
| | | | RMB million | | RMB million | | RMB million | |
Operating revenue | | | | | | | | | |
Traffic revenue | | | 3 | | | 53,297 | | | 45,087 | | | 37,419 | |
Other operating revenue | | | 3 | | | 1,205 | | | 1,132 | | | 874 | |
Total operating revenue | | | | | | 54,502 | | | 46,219 | | | 38,293 | |
| | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | |
Flight operations | | | 4 | | | 29,082 | | | 25,022 | | | 19,761 | |
Maintenance | | | 5 | | | 4,643 | | | 3,999 | | | 4,589 | |
Aircraft and traffic servicing | | | 6 | | | 8,160 | | | 7,063 | | | 6,534 | |
Promotion and sales | | | 7 | | | 3,478 | | | 2,811 | | | 2,780 | |
General and administrative | | | 8 | | | 1,983 | | | 1,941 | | | 1,315 | |
Depreciation and amortisation | | | 9 | | | 5,554 | | | 4,971 | | | 4,440 | |
Others | | | | | | 113 | | | 100 | | | 179 | |
Total operating expenses | | | | | | 53,013 | | | 45,907 | | | 39,598 | |
Other income / (expenses), net | | | 12 | | | 130 | | | 333 | | | (32 | ) |
Operating profit / (loss) | | | | | | 1,619 | | | 645 | | | (1,337 | ) |
| | | | | | | | | | | | | |
Non-operating income / (expenses) | | | | | | | | | | | | | |
Interest income | | | | | | 73 | | | 41 | | | 55 | |
Interest expense | | | 11 | | | (2,291 | ) | | (2,070 | ) | | (1,616 | ) |
Share of associates’ results | | | 19 | | | 57 | | | 5 | | | (285 | ) |
Share of jointly controlled entities’ results | | | 20 | | | 123 | | | 115 | | | 36 | |
Gain / (loss) on derivative financial instruments, net | | | | | | 90 | | | (19 | ) | | | |
Exchange gain, net | | | | | | 2,832 | | | 1,492 | | | 1,220 | |
Gain on sale of other investments in equity securities | | | | | | 107 | | | | | | | |
Gain on disposal of a subsidiary | | | 42(c) | | | 7 | | | | | | | |
Others, net | | | | | | 306 | | | 148 | | | 74 | |
Total net non-operating income / (expenses) | | | | | | 1,304 | | | (288 | ) | | (516 | ) |
Profit / (loss) before taxation | | | | | | 2,923 | | | 357 | | | (1,853 | ) |
Income tax (expense) /benefit | | | 14 | | | (858 | ) | | (153 | ) | | 7 | |
Profit / (loss) for the year | | | | | | 2,065 | | | 204 | | | (1,846 | ) |
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
AsConsolidated Statements of December 31, 2003 and 2004
(Amounts in millions)
| | | | | | | | | | | | | | |
| | Note | | 2003 | | | 2004 | | | 2004 | |
| | | | RMB | | | RMB | | | U.S. dollars | |
ASSETS
|
CURRENT ASSETS | | | | | | | | | | | | | | |
Cash and cash equivalents | | 11 | | | 2,080 | | | | 3,083 | | | | 373 | |
Trade receivables | | 12 | | | 834 | | | | 1,203 | | | | 145 | |
Other receivables | | | | | 296 | | | | 616 | | | | 74 | |
Inventories | | | | | 544 | | | | 1,302 | | | | 157 | |
Prepaid expenses and other current assets | | | | | 248 | | | | 378 | | | | 46 | |
Short term investments | | 13 | | | — | | | | 683 | | | | 83 | |
| | | | | | | | | | | |
Total current assets | | | | | 4,002 | | | | 7,265 | | | | 878 | |
NON-CURRENT ASSETS | | | | | | | | | | | | | | |
Property, plant and equipment, net | | 14 | | | 28,536 | | | | 46,841 | | | | 5,660 | |
Construction in progress | | 15 | | | 1,630 | | | | 565 | | | | 68 | |
Lease prepayments | | | | | 349 | | | | 346 | | | | 42 | |
Investments | | 16 | | | 1,357 | | | | 1,483 | | | | 179 | |
Lease and equipment deposits | | | | | 2,933 | | | | 5,397 | | | | 652 | |
Other assets | | | | | 255 | | | | 331 | | | | 40 | |
| | | | | | | | | | | |
Total non-current assets | | | | | 35,060 | | | | 54,963 | | | | 6,641 | |
| | | | | | | | | | | |
TOTAL ASSETS | | | | | 39,062 | | | | 62,228 | | | | 7,519 | |
| | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
CURRENT LIABILITIES | | | | | | | | | | | | | | |
Notes payable, including current installments of long-term notes payable | | 17 | | | 7,097 | | | | 11,518 | | | | 1,392 | |
Current installments of obligations under capital leases | | 18 | | | 1,298 | | | | 2,144 | | | | 259 | |
Accounts payables | | | | | 928 | | | | 1,554 | | | | 188 | |
Bills payable | | | | | 438 | | | | 136 | | | | 16 | |
Sales in advance of carriage | | | | | 466 | | | | 874 | | | | 106 | |
Taxes payable | | | | | 90 | | | | 39 | | | | 5 | |
Amounts due to related companies | | 26 | | | 929 | | | | 2,330 | | | | 282 | |
Accrued expenses | | 19 | | | 2,528 | | | | 4,551 | | | | 549 | |
Other liabilities | | | | | 1,020 | | | | 2,974 | | | | 359 | |
| | | | | | | | | | | |
Total current liabilities | | | | | 14,794 | | | | 26,120 | | | | 3,156 | |
| | | | | | | | | | | |
NON-CURRENT LIABILITIES | | | | | | | | | | | | | | |
Notes payable, excluding current installments | | 17 | | | 4,522 | | | | 11,935 | | | | 1,442 | |
Obligations under capital leases, excluding current installments | | 18 | | | 5,543 | | | | 9,599 | | | | 1,160 | |
Provision for major overhauls | | 6 | | | 189 | | | | 284 | | | | 34 | |
Deferred credits | | 20 | | | 47 | | | | 100 | | | | 12 | |
Deferred tax liabilities | | 21 | | | 398 | | | | 287 | | | | 35 | |
| | | | | | | | | | | |
Total non-current liabilities | | | | | 10,699 | | | | 22,205 | | | | 2,683 | |
| | | | | | | | | | | |
TOTAL LIABILITIES | | | | | 25,493 | | | | 48,325 | | | | 5,839 | |
MINORITY INTERESTS | | | | | 1,673 | | | | 2,055 | | | | 248 | |
SHAREHOLDERS’ EQUITY | | 22,23 | | | 11,896 | | | | 11,848 | | | | 1,432 | |
| | | | | | | | | | | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | 39,062 | | | | 62,228 | | | | 7,519 | |
| | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-3
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
ForOperations for the years ended December 31, 2002, 20032007, 2006 and 2004
2005 (continued)
(AmountsPrepared in millions)accordance with International Financial Reporting Standards)
| | | | | | | | | | | | | | | | | | |
| | Note | | 2002 | | | 2003 | | | 2004 | | | 2004 | |
| | | | RMB | | | RMB | | | RMB | | | U.S. dollars | |
Cash inflows from operations | | 29(a) | | | 4,763 | | | | 3,075 | | | | 4,555 | | | | 550 | |
Interest received | | | | | 53 | | | | 13 | | | | 22 | | | | 3 | |
Interest paid | | | | | (1,051 | ) | | | (924 | ) | | | (754 | ) | | | (91 | ) |
Income tax paid | | | | | (67 | ) | | | (35 | ) | | | (227 | ) | | | (27 | ) |
| | | | | | | | | | | | | | |
Net cash inflows from operating activities | | | | | 3,698 | | | | 2,129 | | | | 3,596 | | | | 435 | |
| | | | | | | | | | | | | | |
Investing activities: | | | | | | | | | | | | | | | | | | |
Proceeds from disposal of aircraft | | | | | 778 | | | | 29 | | | | — | | | | — | |
Proceeds from disposal of other property, plant and equipment | | | | | 47 | | | | 28 | | | | 47 | | | | 6 | |
Dividends received from affiliated companies | | | | | 3 | | | | — | | | | 12 | | | | 1 | |
Dividends received from jointly controlled entities | | | | | — | | | | — | | | | 5 | | | | 1 | |
Dividends received from equity securities held for trading | | | | | — | | | | — | | | | 13 | | | | 2 | |
(Increase)/decrease in other assets | | | | | (1 | ) | | | 6 | | | | (9 | ) | | | (1 | ) |
Payment of lease and equipment deposits | | | | | (1,999 | ) | | | (1,852 | ) | | | (3,151 | ) | | | (381 | ) |
Refund of lease and equipment deposits | | | | | 2,117 | | | | 1,066 | | | | 1,253 | | | | 151 | |
Capital expenditures | | | | | (6,351 | ) | | | (4,707 | ) | | | (6,631 | ) | | | (801 | ) |
Purchase of investments in equity securities | | | | | (7 | ) | | | (1 | ) | | | (680 | ) | | | (82 | ) |
Investments in affiliated companies | | | | | (136 | ) | | | — | | | | (9 | ) | | | (1 | ) |
Investments in jointly controlled entities | | | | | (296 | ) | | | (3 | ) | | | (72 | ) | | | (9 | ) |
Governmental subsidy for safety related capital expenditures | | | | | 40 | | | | — | | | | — | | | | — | |
Effect of acquisition, net of cash and cash equivalents acquired | | 29(c) | | | (90 | ) | | | — | | | | 398 | | | | 48 | |
| | | | | | | | | | | | | | |
Net cash used in investing activities | | | | | (5,895 | ) | | | (5,434 | ) | | | (8,824 | ) | | | (1,066 | ) |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Net cash outflows before financing activities | | | | | (2,197 | ) | | | (3,305 | ) | | | (5,228 | ) | | | (631 | ) |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Financing activities: | | | | | | | | | | | | | | | | �� | | |
Proceeds from A Shares issue, net of issuance costs | | | | | — | | | | 2,641 | | | | — | | | | — | |
Proceeds from bank notes payable | | | | | 6,997 | | | | 8,914 | | | | 14,555 | | | | 1,759 | |
Repayment of bank notes payable | | | | | (2,194 | ) | | | (8,371 | ) | | | (7,108 | ) | | | (859 | ) |
Repayment of principal under capital lease obligations | | | | | (1,546 | ) | | | (1,555 | ) | | | (1,272 | ) | | | (154 | ) |
Minority shareholders’ contributions | | | | | 10 | | | | 1 | | | | 71 | | | | 9 | |
Dividends paid to shareholders | | | | | (68 | ) | | | — | | | | — | | | | — | |
Dividends paid to minority shareholders | | | | | (49 | ) | | | (15 | ) | | | (15 | ) | | | (1 | ) |
| | | | | | | | | | | | | | |
Net cash inflows from financing activities | | | | | 3,150 | | | | 1,615 | | | | 6,231 | | | | 754 | |
| | | | | | | | | | | | | | |
Increase/(decrease) in cash and cash equivalents | | | | | 953 | | | | (1,690 | ) | | | 1,003 | | | | 123 | |
Cash and cash equivalents at beginning of year | | | | | 2,817 | | | | 3,770 | | | | 2,080 | | | | 250 | |
| | | | | | | | | | | | | | |
Cash and cash equivalents at end of year | | | | | 3,770 | | | | 2,080 | | | | 3,083 | | | | 373 | |
| | | | | | | | | | | | | | |
(Expressed in Renminbi)See accompanying
| | Note | | 2007 | | 2006 | | 2005 | |
| | | | RMB million | | RMB million | | RMB million | |
Attributable to | | | | | | | | | |
Equity shareholders of the Company | | | | | | 1,871 | | | 188 | | | (1,848 | ) |
Minority interests | | | | | | 194 | | | 16 | | | 2 | |
Profit / (loss) for the year | | | | | | 2,065 | | | 204 | | | (1,846 | ) |
| | | | | | | | | | | | | |
Earnings per share | | | 16 | | | | | | | | | | |
Basic | | | | | | RMB 0.43 | | | RMB 0.04 | | | RMB (0.42 | ) |
Diluted | | | | | | RMB 0.43 | | | RMB 0.04 | | | RMB (0.42 | ) |
The notes
on pages F-10 to
F-82 form part of these consolidated financial statements.
Consolidated Balance Sheets at December 31, 2007 and 2006
(Prepared in accordance with International Financial Reporting Standards)
(Expressed in Renminbi)
| | Note | | 2007 | | 2006 | |
| | | | RMB million | | RMB million | |
Non-current assets | | | | | | | | | | |
Property, plant and equipment, net | | | 17 | | | 58,441 | | | 56,335 | |
Construction in progress | | | 18 | | | 11,385 | | | 9,587 | |
Lease prepayments | | | | | | | | | 493 | |
Interest in associates | | | 19 | | | 219 | | | 149 | |
Interest in jointly controlled entities | | | 20 | | | 873 | | | 870 | |
Other investments in equity securities | | | 21 | | | 168 | | | 261 | |
Lease deposits | | | | | | | | | 782 | |
Available-for-sale equity securities | | | 22 | | | 362 | | | 69 | |
Deferred tax assets | | | 23 | | | 11 | | | 95 | |
Other assets | | | 24 | | | 469 | | | 260 | |
| | | | | | 73,143 | | | 68,901 | |
| | | | | | | | | | |
Current assets | | | | | | | | | | |
Financial assets | | | 25 | | | 2 | | | | |
Inventories | | | 26 | | | 1,213 | | | 1,315 | |
Trade receivables | | | 27 | | | 1,966 | | | 1,512 | |
Other receivables | | | | | | 1,075 | | | 879 | |
Prepaid expenses and other current assets | | | | | | 592 | | | 585 | |
Amounts due from related companies | | | 32 | | | 118 | | | 128 | |
Cash and cash equivalents | | | 28 | | | 3,824 | | | 2,264 | |
| | | | | | 8,790 | | | 6,683 | |
| | | | | | | | | | |
Current liabilities | | | | | | | | | | |
Financial liabilities | | | 25 | | | 5 | | | 26 | |
Bank and other loans | | | 29 | | | 24,948 | | | 23,822 | |
Obligations under finance leases | | | 30 | | | 2,877 | | | 3,091 | |
Trade payables | | | 31 | | | 1,844 | | | 1,909 | |
Sales in advance of carriage | | | | | | | | | 1,436 | |
Taxes payable | | | | | | 500 | | | 126 | |
Amounts due to related companies | | | 32 | | | 194 | | | 254 | |
Accrued expenses | | | 33 | | | 7,354 | | | 5,463 | |
Other liabilities | | | 34 | | | 2,994 | | | 2,736 | |
| | | | | | 42,601 | | | 38,863 | |
Net current liabilities | | | 43(a) | | | (33,811 | ) | | (32,180 | ) |
Total assets less current liabilities | | | | | | | | | 36,721 | |
CHINA SOUTHERN AIRLINES COMPANY LIMITED
Consolidated Balance Sheets at December 31, 2007 and 2006 (continued)
(Prepared in accordance with International Financial Reporting Standards)
(Expressed in Renminbi)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS | | Note | | 2007 | | 2006 | |
| | | | RMB million | | RMB million | |
Non-current liabilities and deferred items | | | | | | | |
Bank and other loans | | | 29 | | | 9,074 | | | 10,018 | |
Obligations under finance leases | | | 30 | | | 12,858 | | | 12,307 | |
Provision for major overhauls | | | 35 | | | 683 | | | 805 | |
Provision for early retirement benefits | | | 36 | | | 230 | | | 306 | |
Deferred credits | | | | | | | | | 792 | |
Deferred tax liabilities | | | 23 | | | 748 | | | 372 | |
| | | | | | 24,620 | | | 24,600 | |
Net assets | | | | | | 14,712 | | | 12,121 | |
| | | | | | | | | | |
Capital and reserves | | | | | | | | | | |
Share capital | | | 37 | | | 4,374 | | | 4,374 | |
Reserves | | | 38 | | | 7,872 | | | 5,814 | |
Total equity attributable to equity shareholders of the Company | | | | | | 12,246 | | | 10,188 | |
Minority interests | | | | | | 2,466 | | | 1,933 | |
Total equity | | | | | | 14,712 | | | 12,121 | |
OF CHANGES IN SHAREHOLDERS’ EQUITY
For
The notes on pages F-10 to F-82 form part of these consolidated financial statements.
Consolidated Statements of Changes in Equity for the years ended December 31,
2002, 20032007, 2006 and
20042005
(AmountsPrepared in millions)accordance with International Financial Reporting Standards)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Share | | | Share | | | Other | | | Retained | | | | |
| | Note | | capital | | | premium | | | reserves | | | profits | | | Total | |
| | | | RMB | | | RMB | | | RMB | | | RMB | | | RMB | |
Shareholders’ equity at December 31, 2002 | | | | | 3,374 | | | | 3,684 | | | | 586 | | | | 1,969 | | | | 9,613 | |
| | | | | | | | | | | | | | | | | | | | | | |
Issue of A Shares | | 22 | | | 1,000 | | | | 1,641 | | | | — | | | | — | | | | 2,641 | |
Net loss | | | | | — | | | | — | | | | — | | | | (358 | ) | | | (358 | ) |
Appropriations to reserves | | | | | — | | | | — | | | | 25 | | | | (25 | ) | | | — | |
| | | | | | | | | | | | | | | | | |
Shareholders’ equity at December 31, 2003 | | | | | 4,374 | | | | 5,325 | | | | 611 | | | | 1,586 | | | | 11,896 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | — | | | | — | | | | — | | | | (48 | ) | | | (48 | ) |
Appropriations to reserves | | | | | — | | | | — | | | | 61 | | | | (61 | ) | | | — | |
| | | | | | | | | | | | | | | | | |
Shareholders’ equity at December 31, 2004 | | | | | 4,374 | | | | 5,325 | | | | 672 | | | | 1,477 | | | | 11,848 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Shareholders’ equity at December 31, 2004 in U.S. dollars | | | | | 529 | | | | 643 | | | | 81 | | | | 179 | | | | 1,432 | |
| | | | | | | | | | | | | | | | | |
(Expressed in Renminbi)See accompanying
| | Attributable to equity shareholders of the Company | | | | | |
| | | | | | | | | | Retained | | | | | | | |
| | | | | | | | | | earnings / | | | | | | | |
| | Share | | Share | | Fair value | | Other | | (accumulated | | | | Minority | | Total | |
| | capital | | premium | | reserves | | reserves | | losses) | | Total | | interests | | equity | |
| | RMB | | RMB | | RMB | | RMB | | RMB | | RMB | | RMB | | RMB | |
| | million | | million | | million | | million | | million | | million | | million | | million | |
| | | | | | | | (Note) | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
At January 1, 2005 | | | 4,374 | | | 5,325 | | | - | | | 603 | | | 1,546 | | | 11,848 | | | 2,055 | | | 13,903 | |
Loss for the year | | | - | | | - | | | - | | | - | | | (1,848 | ) | | (1,848 | ) | | 2 | | | (1,846 | ) |
Capital contribution by minority shareholders | | | - | | | - | | | - | | | - | | | - | | | - | | | 17 | | | 17 | |
Acquisition of equity interest held by minority shareholders | | | - | | | - | | | - | | | - | | | - | | | - | | | (118 | ) | | (118 | ) |
Distributions to minority shareholders | | | - | | | - | | | - | | | - | | | - | | | - | | | (20 | ) | | (20 | ) |
At December 31, 2005 | | | 4,374 | | | 5,325 | | | - | | | 603 | | | (302 | ) | | 10,000 | | | 1,936 | | | 11,936 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1, 2006 | | | 4,374 | | | 5,325 | | | - | | | 603 | | | (302 | ) | | 10,000 | | | 1,936 | | | 11,936 | |
Profit for the year | | | - | | | - | | | - | | | - | | | 188 | | | 188 | | | 16 | | | 204 | |
Acquisition of equity interest held by minority shareholders | | | - | | | - | | | - | | | - | | | - | | | - | | | (12 | ) | | (12 | ) |
Distributions to minority shareholders | | | - | | | - | | | - | | | - | | | - | | | - | | | (7 | ) | | (7 | ) |
At December 31, 2006 | | | 4,374 | | | 5,325 | | | - | | | 603 | | | (114 | ) | | 10,188 | | | 1,933 | | | 12,121 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
At January 1, 2007 | | | 4,374 | | | 5,325 | | | - | | | 603 | | | (114 | ) | | 10,188 | | | 1,933 | | | 12,121 | |
Profit for the year | | | - | | | - | | | - | | | - | | | 1,871 | | | 1,871 | | | 194 | | | 2,065 | |
Capital contribution by minority shareholders | | | - | | | - | | | - | | | - | | | - | | | - | | | 240 | | | 240 | |
Acquisition of Nan Lung Freight and Air Catering (Note 42(b)) | | | - | | | - | | | - | | | - | | | - | | | - | | | 80 | | | 80 | |
Disposal of equity interest to minority shareholders (Note 42(c)) | | | - | | | - | | | - | | | - | | | - | | | - | | | (8 | ) | | (8 | ) |
Changes in fair value of available-for-sale securities, net (Note 22) | | | - | | | - | | | 183 | | | - | | | - | | | 183 | | | 35 | | | 218 | |
Distributions to minority shareholders | | | - | | | - | | | - | | | - | | | - | | | - | | | (8 | ) | | (8 | ) |
Share of an associate’s reserves movement | | | - | | | - | | | - | | | 4 | | | - | | | 4 | | | - | | | 4 | |
At December 31, 2007 | | | 4,374 | | | 5,325 | | | 183 | | | 607 | | | 1,757 | | | 12,246 | | | 2,466 | | | 14,712 | |
Note: | Other reserves represent statutory surplus reserve, discretionary surplus reserve and others. Details are set out in Note 38. |
The notes
on pages F-10 to
F-82 form part of these consolidated financial statements.
F-5
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Cash Flow Statements for the years ended December 31, 2007, 2006 and 2005
(AmountsPrepared in millions, except share data)1. BASIS OF PRESENTATION
accordance with International Financial Reporting Standards)
(Expressed in Renminbi)
| | | | 2007 | | 2006 | | 2005 | |
| | | | RMB million | | RMB million | | RMB million | |
| | | | | | | | | |
Profit / (loss) before taxation | | | | | | 2,923 | | | 357 | | | (1,853 | ) |
Depreciation of property, plant and equipment | | | | | | 5,597 | | | 4,999 | | | 4,420 | |
Other amortisation | | | | | | 28 | | | 33 | | | 40 | |
Amortisation of deferred credits | | | | | | (71 | ) | | (61 | ) | | (78 | ) |
Impairment loss | | | | | | 109 | | | | | | | |
Share of associates’ results | | | | | | (57 | ) | | (5 | ) | | 285 | |
Share of jointly controlled entities’ results | | | | | | (123 | ) | | (115 | ) | | (36 | ) |
(Gain) / loss on sale of property, plant and equipment, net | | | | | | (130 | ) | | (333 | ) | | 32 | |
Gain on sale of other investments in equity securities | | | | | | (107 | ) | | | | | | |
Gain on sale of subsidiary | | | | | | (7 | ) | | | | | | |
Interest income | | | | | | (73 | ) | | (41 | ) | | (55 | ) |
Interest expense | | | | | | 2,291 | | | 2,070 | | | 1,616 | |
(Gain) / loss on derivative financial instruments, net | | | | | | (90 | ) | | 19 | | | | |
Net realised and unrealised gain on equity securities held for trading | | | | | | | | | | | | (6 | ) |
Dividend income from other investments in equity securities | | | | | | (12 | ) | | (7 | ) | | - | |
Unrealised exchange gain, net | | | | | | (2,832 | ) | | (1,492 | ) | | (1,164 | ) |
Decrease in inventories | | | | | | 108 | | | 95 | | | 46 | |
(Increase) / decrease in trade receivables | | | | | | (349 | ) | | 36 | | | (315 | ) |
Decrease / (increase) in other receivables | | | | | | 304 | | | 152 | | | (236 | ) |
Increase in prepaid expenses and other current assets | | | | | | (8 | ) | | (205 | ) | | (2 | ) |
(Decrease) / increase in net amounts due to related companies | | | | | | (50 | ) | | 113 | | | (493 | ) |
(Decrease) / increase in trade payables | | | | | | (95 | ) | | (2,048 | ) | | 2,239 | |
Increase in sales in advance of carriage | | | | | | 449 | | | 23 | | | 539 | |
Increase / (decrease) in accrued expenses | | | | | | 1,846 | | | 568 | | | (399 | ) |
Increase/ (decrease) in other liabilities | | | | | | 245 | | | (247 | ) | | 822 | |
(Decrease) / increase in provision for major overhauls | | | | | | (122 | ) | | 504 | | | 17 | |
(Decrease) / increase in provision for early retirement benefits | | | | | | (76 | ) | | 306 | | | | |
Cash inflows from operations | | | | | | 9,698 | | | 4,721 | | | 5,419 | |
Interest received | | | | | | 73 | | | 41 | | | 55 | |
Interest paid | | | | | | (2,814 | ) | | (2,419 | ) | | (1,616 | ) |
Income tax paid | | | | | | (88 | ) | | (46 | ) | | (23 | ) |
Net cash inflows from operating activities | | | | | | 6,869 | | | 2,297 | | | 3,835 | |
Consolidated Cash Flow Statements for the years ended December 31, 2007, 2006 and 2005 (continued)
(Prepared in accordance with International Financial Reporting Standards)
(Expressed in Renminbi)
| | | | 2007 | | 2006 | | 2005 | |
| | | | RMB million | | RMB million | | RMB million | |
Investing activities | | | | | | | | | |
Proceeds from sale of property, plant and equipment | | | | | | 288 | | | 490 | | | 238 | |
Proceeds from sale of other investments in equity securities | | | | | | 127 | | | | | | 689 | |
Net cash settlement of derivative financial instruments | | | | | | 67 | | | 7 | | | | |
Increase in deferred credits | | | | | | | | | | | | 57 | |
Dividends received from associates | | | | | | | | | 33 | | | 2 | |
Dividends received from jointly controlled entities | | | | | | 79 | | | 50 | | | 39 | |
Dividends received from other investments | | | | | | 12 | | | 7 | | | 4 | |
Decrease in other non-current assets | | | | | | | | | 16 | | | 4 | |
Payment for the CNA/XJA Acquisitions (Note 42(e)) | | | | | | | | | | | | (1,959 | ) |
Payment of acquisition of equity interest held by minority shareholders | | | | | | | | | (12 | ) | | (118 | ) |
Payment of lease deposits | | | | | | (86 | ) | | (136 | ) | | (206 | ) |
Refund of lease deposits | | | | | | 165 | | | 103 | | | 16 | |
Capital expenditures | | | | | | (5,502 | ) | | (6,044 | ) | | (6,775 | ) |
Payment for the investment in associate and other investments | | | | | | (10 | ) | | (31 | ) | | | |
Through the acquisition of CSAHC Hainan (Note 42(d)) | | | | | | | | | 33 | | | | |
Payment for acquisition of Nan Lung Freight and Air Catering (Note 42(b)) | | | | | | (58 | ) | | | | | | |
Proceeds from disposal of GZ Aviation Hotel (Note 42(c)) | | | | | | 74 | | | | | | | |
Net cash used in investing activities | | | | | | (4,844 | ) | | (5,484 | ) | | (8,009 | ) |
Net cash inflows / (outflows) before financing activities | | | | | | 2,025 | | | (3,187 | ) | | (4,174 | ) |
Consolidated Cash Flow Statements for the years ended December 31, 2007, 2006 and 2005 (continued)
(Prepared in accordance with International Financial Reporting Standards)
(Expressed in Renminbi)
| | Note | | 2007 | | 2006 | | 2005 | |
| | | | RMB million | | RMB million | | RMB million | |
Financing activities | | | | | | | | | | | | | |
Proceeds from bank and other loans | | | | | | 30,984 | | | 24,983 | | | 18,238 | |
Repayment of bank and other loans | | | | | | (28,660 | ) | | (19,113 | ) | | (12,193 | ) |
Repayment of principal under finance lease obligations | | | | | | (3,021 | ) | | (3,313 | ) | | (2,050 | ) |
Capital contribution received from minority shareholders | | | | | | 240 | | | | | | 17 | |
Dividends paid to minority shareholders | | | | | | (8 | ) | | (7 | ) | | (20 | ) |
Net cash (outflow) / inflows from financing activities | | | | | | (465 | ) | | 2,550 | | | 3,992 | |
| | | | | | | | | | | | | |
Increase / (decrease) in cash and cash equivalents | | | | | | 1,560 | | | (637 | ) | | (182 | ) |
Cash and cash equivalents at January 1 | | | | | | 2,264 | | | 2,901 | | | 3,083 | |
Cash and cash equivalents at December 31 | | | | | | 3,824 | | | 2,264 | | | 2,901 | |
The notes on pages F-10 to F-82 form part of these consolidated financial statements.
Notes to the Consolidated Financial Statements
(Prepared in accordance with International Financial Reporting Standards)
(Expressed in Renminbi)
China Southern Airlines Company Limited (the “Company”) and its subsidiaries (the “Group”) are principally engaged in the provision of domestic, Hong Kong
regionaland Macau and international passenger,
and cargo and mail airline
services, with flights operating primarily from the new Guangzhou Baiyun International Airport, which is both the main hub of the Group’s route network and the location of its corporate headquarters.services.
The Company was established in the People’s Republic of China (the “PRC”
, or “China”
or the “State”) on March 25, 1995 as a joint stock limited company as part of the
reorganizationreorganisation (the
“Reorganization”“Reorganisation”) of the Company’s holding company, China Southern Air Holding Company (“CSAHC”). CSAHC is a state-owned enterprise under the supervision of the PRC central government.
The Company’s H
shares (“H Shares”)Shares and American Depositary
SharesReceipts (“
ADS”ADR”) (each
ADSADR representing 50 H Shares) have been listed on
Thethe Stock Exchange of Hong Kong Limited and the New York Stock Exchange, respectively since July 1997. In July 2003, the Company issued 1,000,000,000 A
shares (“A Shares”)Shares which are listed on the Shanghai Stock Exchange.
Pursuant to a sale and purchase agreement dated November 12, 2004 between the Company, CSAHC, China Northern Airlines Company (“CNA”) and Xinjiang Airlines Company (“XJA”) which was approved by the Company’s shareholders in an extraordinary general meeting held on December 31, 2004, the Company acquired the airline operations and certain related assets of CNA and XJA with effect from December 31, 2004 (the “CNA/XJA Acquisitions”). The consideration payable for the CNA/XJA Acquisitions amounting to RMB15,522 was determined based on the fair value of the acquired assets. Such consideration was partly satisfied by assumption of debts and liabilities of CNA and XJA totaling RMB13,563 outstanding as of December 31, 2004 and the remaining balance of RMB1,959 is required to be satisfied in cash by December 31, 2005 (Note 26).
As the above acquisitions were completed on December 31, 2004, they have no impact on the Company’s consolidated income statement for the year ended December 31, 2004.
Further details of the CNA/XJA Acquisitions are set out in Note 29 to the consolidated financial statements.
The consolidated financial statements have been prepared in Renminbi (“RMB”), the national currency of the PRC. Solely for the convenience of readers, the 2004 financial statements have been translated into United States dollars at the rate of US$1.00 = RMB 8.2765, the rate quoted by the People’s Bank of China on December 31, 2004. No representation is made that the RMB amounts could have been, or could be, converted into United States dollars (“US$”) at that rate or at any other certain rate on December 31, 2004 or at any other certain date.
F-6
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
2. PRINCIPAL ACCOUNTING POLICIES
(a) Statement of compliance
The
2 | Principal accounting policies |
(a) | Statement of compliance |
These consolidated financial statements have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRS”IFRSs”), which collective term includes all applicable individual International Financial Reporting Standards, International Accounting Standards (“IASs”) promulgatedand interpretations issued by the International Accounting Standards Board. IFRS includes International Accounting Standards (“IAS”Board (the “IASB”).
The IASB has issued certain new and
related interpretations. Information relatingrevised IFRSs and interpretations that are first effective or available for early adoption for the current accounting period of the Group. There have been no significant changes to the nature and effectaccounting policies applied in these consolidated financial statements for the years presented as a result of these developments. A summary of the significant differences betweenprincipal accounting policies adopted by the Group is set out below.
However, as a result of the adoption of IFRS 7, Financial instruments: Disclosuresand accounting principles generally acceptedthe amendment to IAS 1, Presentation of financial statements: Capital disclosures, there have been some additional disclosures provided as follows:
| · | As a result of the adoption of IFRS 7, the consolidated financial statements include expanded disclosure about the significance of the Group’s financial instruments and the nature and extent of risks arising from those instruments, compared with the information previously required to be disclosed by IAS 32, Financial instruments: Disclosure and presentation. These disclosures are provided throughout these consolidated financial statements, in particular in note 43. |
| · | The amendment to IAS 1 introduces additional disclosure requirements to provide information about the level of capital and the Group’s objectives, policies and processes for managing capital. These new disclosures are set out in note 37. |
2 | Principal accounting policies (continued) |
(a) | Statement of compliance (continued) |
Both IFRS 7 and the amendment to IAS 1 do not have any material impact on the classification, recognition and measurement of the amounts recognised in the United Statesconsolidated financial statements.
The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period (see Note 50).
(b) | Basis of preparation of the consolidated financial statements |
At December 31, 2007, the Group’s current liabilities exceeded its current assets by RMB33,811 million, which includes bank and other loans repayable within one year of
America (‘‘U.S. GAAP’’)RMB24,948 million. In preparing the consolidated financial statements, the directors have considered the Group’s sources of liquidity and believe that adequate funding is available to fulfil the Group’s short-term obligations and capital expenditure requirements. Accordingly, the consolidated financial statements have been prepared on a basis that the Group will be able to continue as a going concern. Further details are set
forthout in Note
34.(b) Basis of preparation
43(a).
The consolidated financial statements are prepared onfor the year ended December 31, 2007 comprise the Company and its subsidiaries and the Group’s interest in associates and jointly controlled entities.
The measurement basis used in the preparation of the consolidated financial statements is the historical cost basis except that the following assets and liabilities are stated at their fair value as modified byexplained in the revaluation of certainaccounting policies set out below:
- Certain property, plant and equipment (Note 14)2(h));
- Certain assets held under finance leases (Note 2(j));
- Derivative financial instruments (Note 2(g)); and
- Available-for-sale securities (Note 2(f)). The preparation of
consolidated financial statements in conformity with
IFRSIFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognizedrecognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The accounting policies set out below
Judgements made by management in the application of IFRSs that have
been applied consistently bysignificant effect on the
Group and are consistent with those used in previous years.(c) Basis of consolidation
The consolidated financial statements includeand estimates with a significant risk of material adjustment in the financial statements of the Company and all of its subsidiaries (seenext year are discussed in Note 30 for details of the Company’s principal subsidiaries) made up to December 31, each year. A subsidiary is an entity48.
2 | Principal accounting policies (continued) |
(c) | Subsidiaries and minority interests |
Subsidiaries are entities controlled by the Company.Group. Control exists when the CompanyGroup has the power directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included
An investment in
a subsidiary is consolidated into the consolidated financial statements from the date that control
effectively commences until the date that control ceases.
The results of subsidiaries are included in the consolidated statements of operations, and the share attributable to minority shareholders is deducted from or added to the consolidated income after taxation. Losses attributable to minority shareholders of partly owned subsidiaries
F-7
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
are accounted for based on the respective equity owned by the minority shareholders up to the amount of the capital contribution and reserves attributable to the minority shareholders. Thereafter, all further losses are assumed by the Company.
Intra-group balances and transactions and any unrealizedunrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. UnrealizedUnrealised losses resulting from intra-group transactions are eliminated in the same way as unrealized income,unrealised gains but only to the extent that there is no evidence of impairment.
(d) Cash and cash equivalents
Cash and cash equivalents consist of cash in hand and balances with banks and other financial institutions with an original maturity within three months. For
Minority interests represent the
purposesportion of the
consolidated statementsnet assets of
cash flows, cashsubsidiaries attributable to interests that are not owned by the Company, whether directly or indirectly through subsidiaries, and
cash equivalents are presented net of bank overdrafts, if any.(e) Trade and other receivables
Trade and other receivables are stated at cost less allowance for doubtful accounts. Allowance for doubtful accounts are established based on evaluation of the recoverability of these accounts at the balance sheet date. In establishing such allowance, the Group considers various factors including its historical write-off experience and industry economic trend. Past due balances over a specific period and balances over a specific amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis.
(f) Inventories
Inventories, which consist primarily of expendable spare parts and supplies, are stated at cost less any applicable provision for obsolescence, and are expensed when used in operations. Cost represents the average unit cost. Inventories held for disposal are stated at the lower of cost and net realizable value. Net realizable value represents estimated resale price.
(g) Other investments
Financial instruments held for trading are classified as current assets and are stated at fair value, with any resultant gain or loss recognized in the consolidated statements of operations.
Where the Group has the positive intent and ability to hold bonds to maturity, they are stated at amortized cost less impairment losses (see accounting policy m).
Other financial instruments are stated at cost less impairment losses (see accounting policy m). Other financial instruments represent unquoted available-for-sale equity securities of companies established in the PRC. There is no quoted market price for such equity securities and accordingly a reasonable estimate of the fair value could not be made without incurring excessive costs.
F-8
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(h) Property, plant and equipment and depreciation
(i) Owned assets
An item of property, plant and equipment is initially recorded at cost less accumulated depreciation (see (iv) below) and impairment losses (see accounting policy m). The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to working condition and location for its intended use. Subsequent to the revaluation (see Note 14), which was based on depreciated replacement costs, property, plant and equipment are carried at revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses. Revaluations are performed periodically to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date.
Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the estimated net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statements of operations on the date of retirement or disposal. Any related revaluation surplus is transferred from the revaluation reserve to retained profits.
(ii) Leased assets
Leases in termsrespect of which the Group assumes substantially allhas not agreed any additional terms with the risks and rewardsholders of ownership are classified as capital leases.
Flight equipment acquired by way of capital leases is stated at an amount equal to lower of its fair value and the present value of minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses (see accounting policy m) and the corresponding liabilities, net of finance charges are recorded as obligations under capital leases. Subsequent to the revaluation (see Note 14), which was based on depreciated replacement costs, leased assets are carried at revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses. Revaluations are performed periodically to ensure that the carrying amount does not differ materially from thatthose interests which would be determined using fair value at the balance sheet date.
The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rentals are written off as an expense of the period in which they are incurred.
Gains or losses on aircraft sale and leaseback transactions which result in capital leasesthe Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. Minority interests are deferred and amortized over the terms of the related leases. Gains or losses on other aircraft sale and leaseback transactions are recognized immediately if the transactions are established at fair value. Any difference between the sales price over fair value is deferred and amortized over the period the assets are expected to be used.
F-9
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Payments made under operating leases are recognizedpresented in the consolidated statements of operations on a straight-line basis overbalance sheet within equity, separately from equity attributable to the termsequity shareholders of the leases. Lease incentives receivedCompany. Minority interests in the results of the Group are recognized inpresented on the face of the consolidated statements of operations as an integral partallocation of the total lease expense.
(iii) Subsequent costs
The Group recognizesprofit or loss for the year between minority interests and the equity shareholders of the Company.
Where losses applicable to the minority exceed the minority’s interest in the carrying amountsequity of an item of property, planta subsidiary, the excess, and equipmentany further losses applicable to the cost of replacing part of such an item when that cost is incurred if it is probableminority, are charged against the Group’s interest except to the extent that the future economic benefits embodied withminority has a binding obligation to, and is able to, make additional investment to cover the item will flow tolosses. If the subsidiary subsequently reports profits, the Group’s interest is allocated all such profits until the minority’s share of losses previously absorbed by the Group has been recovered.
Loans from holders of minority interests and
the cost of the item can be measured reliably. All other
costscontractual obligations towards these holders are
recognizedpresented as financial liabilities in the consolidated
statementsbalance sheet in accordance with Notes 2(o) or (p) depending on the nature of
operations as an expense as incurred.(iv) Depreciation
Depreciation is calculated to write off the cost or revalued amount of items of property, plant and equipment over their estimated useful lives on a straight line basis, after taking into account their residual values, as follows:liability.
(d) | | | | | | |
| | Depreciable life | | | Residual value |
Buildings | | | 15 to 40 years | | | Nil |
OwnedAssociates and leased aircraft | | | 8 to 15 years | | | 28.75% |
Other flight equipment | | | | | | |
- Jet engines | | | 8 to 15 years | | | 3% |
- Others, including rotable spares | | | 8 to 15 years | | | Nil |
Machinery and equipment | | | 5 to 10 years | | | 3% |
Vehicles | | 6 years | | 3%jointly controlled entities |
Depreciation for leased assets is provided at rates which write off the cost of the assets in equal annual amounts over the term of the relevant lease or, where it is likely the Group will obtain ownership of the asset, the life of the asset, as set out above.
(i) Construction in progress
Construction in progress represents office buildings, various infrastructure projects under construction and equipment pending installation, and is stated at cost. Cost comprises direct costs of construction as well as interest charges during the periods of construction and installation. Capitalization of these costs ceases and the construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use, notwithstanding any delays in the issue of the relevant commissioning certificates by the relevant PRC authorities.
(j)Lease prepayments
Lease prepayments represent the purchase costs of land use rights and are amortized on a straight line basis over the period of land use rights.
F-10
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(k) Affiliated company and jointly controlled entity
An affiliated companyassociate is an entity in which the Group or the Company has significant influence, but not control or joint control, over its management, including participation in the financial and operating policies. The
A jointly controlled entity is an entity which operates under a contractual arrangement between the Group or the Company and other parties, where the contractual arrangement establishes that the Group or Company and one or more of the other parties share joint control over the economic activities of the entity.
2 | Principal accounting policies (continued) |
(d) | Associates and jointly controlled entities (continued) |
An investment in an associate or a jointly controlled entity is accounted for in the consolidated financial statements includeunder the equity method and is initially recorded at cost and adjusted thereafter for the post acquisition change in the Group’s share of the total recognized gainsassociate’s or the jointly controlled entity’s net assets. The consolidated statements of operations includes the Group’s share of the post-acquisition, post-tax results of the associates and losses ofjointly controlled entities for the year, including any impairment loss on goodwill relating to the investment in associates on an equity accounted basis, fromand jointly controlled entities recognised for the date that significant influence commences until the date that significant influence ceases. year (Notes 2(e) and (l)).
When the Group’s share of losses exceeds its interest in
an affiliated company,the associate or the jointly controlled entity, the Group’s
carrying amountinterest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of
an affiliated company. Athe associate or the jointly controlled entity. For this purpose, the Group’s interest in the associate or the jointly controlled entity is an entity over whose activities the Group has joint control, established by contractual agreement. The consolidated financial statements includecarrying amount of the investment under the equity method together with the Group’s sharelong-term interests that in substance form part of the total recognized gains and losses of jointly controlled entities on an equity accounted basis, fromGroup’s net investment in the date that joint control commences untilassociate or the date that joint control ceases. When the Group’s share of losses exceeds its interest in a jointly controlled entity, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of a jointly controlled entity.
Unrealized income
Unrealised profits and losses arising from transactions with affiliated companiesbetween the Group and its associates and jointly controlled entities are eliminated to the extent of the Group’s interest in the entity. Unrealizedassociate or jointly controlled entity, except where unrealised losses provide evidence of an impairment of the asset transferred, in which case they are eliminatedrecognised immediately in profit or loss.
Goodwill represents the excess of the cost of a business combination or an investment in an associate or a jointly controlled entity over the Group’s interest in the same way as unrealized income, but onlynet fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities.
Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to
cash-generating units and is tested annually for impairment (Note 2(l)). In respect of associates or jointly controlled entities, the
extent that therecarrying amount of goodwill is
no evidenceincluded in the carrying amount of
impairment. In the consolidated balance sheets,interest in the associate or jointly controlled entity.
Any excess of the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination or an investment in an associate or a jointly controlled entity is recognised immediately in profit or loss.
On disposal of a cash-generating unit, an associate or a jointly controlled entity during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.
2 | Principal accounting policies (continued) |
(f) | Other investments in equity securities |
The Group’s policies for investments in affiliated companiesequity securities, other than investments in subsidiaries, associates and jointly controlled entities, are as follows:
Investments in equity securities are initially stated at cost, which is their transaction price unless fair value can be more reliably estimated using valuation techniques whose variables include only data from observable markets. Cost includes attributable transaction costs, except where indicated otherwise below. These investments are subsequently accounted for as follows, depending on their classification:
Available-for-sale securities are those non-derivative financial assets that are designated as available for sale. At each balance sheet date the fair value is remeasured, with any resultant gain or loss being recognised directly in equity, except foreign exchange gains and losses resulting from changes in the amortised cost of monetary items which are recognised directly in profit or loss. Dividend income from these investments is recognised in accordance with the policy set out in Note 2 (v)(iii). When these investments are derecognised or impaired (Note 2(l)), the cumulative gain or loss previously recognised directly in equity is recognised in profit or loss.
The Group’s other investments in equity securities represent unlisted equity securities of companies established in the PRC. They do not have a quoted market price in an active market and whose fair value cannot be reliably measured. Accordingly, they are recognised in the consolidated balance sheet at cost less impairment losses (Note 2(1)).
Investments are recognised / derecognised on the date the Group commits to purchase / sell the investments or they expire.
(g) | Derivative financial instruments |
Derivative financial instruments are recognised at fair value. At each balance sheet date the fair value is remeasured. The gain or loss on remeasurement to fair value is charged immediately to profit or loss.
(h) | Property, plant and equipment |
Investment properties are land and/or buildings which are owned or held under a leasehold interest (Note 2(j)) to earn rental income and/or for capital appreciation.
Investment properties are stated in the consolidated balance sheet at cost, less accumulated depreciation and impairment losses (Note 2(l)). Depreciation is calculated to write off the cost of items of investment property, less their estimated residual value, if any, using the straight line method over their estimated useful lives. Rental income from investment properties is accounted for as described in Note 2(v)(ii).
2 | Principal accounting policies (continued) |
(h) | Property, plant and equipment (continued) |
(ii) | Other property, plant and equipment |
Items of property, plant and equipment are initially stated at cost, less accumulated depreciation and impairment losses (Note 2(l)). The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to working condition and location for its intended use and the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located.
Subsequent to the revaluation of the Group’s attributable shareproperty, plant and equipment as at December 31, 1996 (Note 17(b)), which was based on depreciated replacement costs, certain of the Group’s property, plant and equipment are carried at revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation.
Revaluations are performed with sufficient regularity to ensure that the carrying amount of these assets does not differ materially from that which would be determined using fair value at the balance sheet date.
Changes arising on the revaluation of property, plant and equipment are generally dealt with in reserves. The only exceptions are as follows:
| - | When a deficit arises on revaluation, it will be charged to profit or loss to the extent that it exceeds the amount held in the reserve in respect of that same asset immediately prior to the revaluation; and |
| - | When a surplus arises on revaluation, it will be credited to profit or loss to the extent that a deficit on revaluation in respect of that same asset had previously been charged to profit or loss. |
The cost of self-constructed items of property, plant and equipment includes the cost of materials, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads and borrowing costs (Note 2(y)).
Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net
assets.(l) Deferred expenditure
Custom dutiesdisposal proceeds and other direct coststhe carrying amount of the item and are recognised in relationprofit or loss on the date of retirement or disposal. Any related revaluation surplus is transferred from the revaluation reserve to modifying, introducingretained profits.
2 | Principal accounting policies (continued) |
(h) | Property, plant and equipment (continued) |
(ii) | Other property, plant and equipment (continued) |
Depreciation is calculated to write off the cost or valuation of items of property, plant and certifying certain operatingequipment, less their estimated residual value, if any, using the straight line method over their estimated useful lives as follows:
Buildings | 30 to 35 years | |
Owned and leased aircraft | 15 to 20 years | |
Other flight equipment | | |
- Jet engines | 15 to 20 years | |
- Others, including rotable spares | 2.5 to 15 years | |
Machinery and equipment | 4 to 10 years | |
Vehicles | 6 to 8 years | |
Where parts of an item of property, plant and equipment have different useful lives, the cost or valuation of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually.
(i) | Construction in progress |
Construction in progress represents office buildings, various infrastructure projects under construction and equipment pending installation, and is stated at cost less impairment losses (Note 2(l)). Capitalisation of these costs ceases and the construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use, notwithstanding any delay in the issue of the relevant commissioning certificates by the relevant PRC authorities.
No depreciation is provided in respect of construction in progress.
2 | Principal accounting policies (continued) |
An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.
| (i) | Classification of assets leased to the Group |
Assets that are held by the Group under leases which transfer to the Group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases, except for land held for own use under an operating lease, the fair value of which cannot be measured separately from the fair value of a building situated thereon at the inception of the lease, is accounted for as being under a finance lease, unless the building is also clearly held under an operating lease. For these purposes, the inception of the lease is the time that the lease was first entered into by the Group, or taken over from the previous lessee.
| (ii) | Assets acquired under finance leases |
Where the Group acquires the use of assets under finance leases, the amounts representing the fair value of the leased asset, or, if lower, the present value of the minimum lease payments, of such assets are included in property, plant and equipment and the corresponding liabilities, net of finance charges, are recorded as obligations under finance leases. Depreciation is provided at rates which write off the cost or valuation of the assets over the term of the relevant lease or, where it is likely the Group will obtain ownership of the asset, the life of the asset, as set out in Note 2(h). Impairment losses are accounted for in accordance with the accounting policy as set out in Note 2(l). Finance charges implicit in the lease payments are charged to profit or loss over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period.
| (iii) | Operating lease charges |
Where the Group has the use of assets held under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made.
The cost of acquiring land held under operating lease is amortised on a straight-line basis over the respective periods of lease terms which ranged from 30 to 70 years.
2 | Principal accounting policies (continued) |
(j) | Leased assets (continued) |
| (iv) | Sale and leaseback transactions |
Gains or losses on sale and leaseback transactions which result in finance leases are deferred and
amortizedamortised over the terms of the related leases.
Gains or losses on other aircraft sale and leaseback transactions which result in operating leases are recognised immediately if the transactions are established at fair value. Any difference between the sales price and the fair value is deferred and amortised over the period the assets are expected to be used.
Lump sum housing benefits payable to employees of the Group are deferred and
amortizedamortised on a
straight linestraight-line basis over a period of 10 years, which represents the
benefit vesting
benefit period of the employees.
F-11
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts
Deferred expenditure is stated at cost less impairment losses (Note 2(l)).
(i) | Impairment of investments in equity securities and other receivables |
Investments in
millions, except share data)(m) Impairment loss
The carrying amountsequity securities (other than investments in subsidiaries, associates and jointly controlled entities: Notes 2(c) and 2(d)) and other current and non-current receivables that are stated at cost or amortised cost or are classified as available-for-sale equity securities are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. Objective evidence of impairment includes observable data that comes to the attention of the Group’sGroup about one or more of the following loss events:
| - | significant financial difficulty of the debtor; |
| - | a breach of contract, such as a default or delinquency in interest or principal payments; |
| - | it becoming probable that the debtor will enter bankruptcy or other financial reorganisation; |
| - | significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor; and |
| - | a significant or prolonged declined in the fair value of an investment in an equity instrument below its cost. |
2 | Principal accounting policies (continued) |
(l) | Impairment of assets (continued) |
(i) | Impairment of investments in equity securities and other receivables (continued) |
If any such evidence exists, any impairment loss is determined and recognised as follows:
| - | For unquoted equity securities carried at cost, the impairment loss is measured as the difference between the carrying amount of the financial asset and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Impairment losses for equity securities are not reversed. |
| - | For trade and other current receivables and other financial assets carried at amortised cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets), where the effect of discounting is material. This assessment is made collectively where financial assets carried at amortised cost share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group. |
If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognised in prior years.
| - | For available-for-sale securities, the cumulative loss that has been recognised directly in equity is removed from equity and is recognised in profit or loss. The amount of the cumulative loss that is recognised in profit or loss is the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that asset previously recognised in profit or loss. |
Impairment losses recognised in profit or loss in respect of available-for-sale equity securities are not reversed through profit or loss. Any subsequent increase in the fair value of such assets other than inventories (see accounting policy f),is recognised directly in equity.
Impairment losses are written off against the corresponding asset directly, except for impairment losses recognised in respect of trade and other receivables, (see accounting policy e)whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When the Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against trade and deferred tax assets (see accounting policy r)other receivables directly and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognised in profit or loss.
2 | Principal accounting policies (continued) |
(l) | Impairment of assets (continued) |
(ii) | Impairment of other assets |
Internal and external sources of information are reviewed periodicallyat each balance sheet date to identify indications that the following assets may be impaired or, except in order to assess whetherthe case of goodwill, an impairment loss previously recognised no longer exists or may have decreased:
| - | Property, plant and equipment carried at cost less accumulated depreciation; |
- Construction in progress;
- Lease deposits;
- Lease prepayments;
- Deferred expenditure;
| - | Investments in associates and jointly controlled entities; and |
If any such indication exists, the asset’s recoverable amount is estimated. For goodwill, the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount. estimated annually whether or not there is any indication of impairment.
| - | Calculation of recoverable amount |
The recoverable amount of an asset is the greater of theits net selling price and the value in use. In determining theassessing value in use, expectedthe estimated future cash flows generated by the asset are discounted to their present value. Thevalue using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).
| - | Recognition of impairment losses |
An impairment loss is recognised in profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the
reduction is recognized as an expenseother assets in the
consolidated statementsunit (or group of
operations. The Group assesses at each balance sheet date whether there is any indicationunits) on a pro-rata basis, except that an impairment loss recognized forthe carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in prior years may no longer exist. Anuse, if determinable.
2 | Principal accounting policies (continued) |
(l) | Impairment of assets (continued) |
(ii) | Impairment of other assets (continued) |
| - | Reversals of impairment losses |
In respect of assets other than goodwill, an impairment loss is reversed if there has been a favorablefavourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.
A subsequent increase in the recoverable amountreversal of an asset, when the circumstances and events that ledimpairment loss is limited to the write-down or write-off cease to exist, is recognized as income. The reversal is reduced by theasset’s carrying amount that would have been recognized as depreciationdetermined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised.
(iii) | Interim financial reporting and impairment |
Impairment losses recognised in an interim period in respect of goodwill, available-for-sale equity securities and unquoted equity securities carried at cost are not reversed in a subsequent period. This is the case even if no loss, or a smaller loss, would have been recognised had the write-downimpairment been assessed only at the end of the financial year to which the interim period relates.
Inventories, which consist primarily of expendable spare parts and supplies, are stated at cost less any applicable provision for obsolescence, and are charged to profit or
write-off not occurred.(n) Interest-bearing borrowings
loss when used in operations. Cost represents the average unit cost.
Inventories held for disposal are carried at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
(n) | Trade and other receivables |
Trade and other receivables are initially recognised at fair value and thereafter stated at amortised cost less allowance for impairment of bad and doubtful debts (Note 2(l)), except where the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less allowance for impairment of bad and doubtful debts.
(o) | Interest-bearing borrowings |
Interest-bearing borrowings are
recognizedrecognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at
amortizedamortised cost with any difference between
costthe amount initially recognised and redemption value being
recognizedrecognised in
the consolidated statements of operationsprofit or loss over the period of the borrowings,
on antogether with any interest and fees payable, using the effective interest
basis.(o) Provisions
A provision is recognizedmethod.
2 | Principal accounting policies (continued) |
(p) | Trade and other payables |
Trade and other payables are initially recognised at fair value and are subsequently stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.
(q) | Cash and cash equivalents |
Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions having been within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated balance sheetscash flow statement.
(r) | Financial guarantees issued, provisions and contingent liabilities |
(i) | Financial guarantees issued |
Financial guarantees are contracts that require the issuer (i.e. the guarantor) to make specified payments to reimburse the beneficiary of the guarantee (the “holder”) for a loss the holder incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument.
Where the Group issues a financial guarantee, the fair value of the guarantee (being the transaction price, unless the fair value can otherwise be reliably estimated) is initially recognised as deferred income within trade and other payables. Where consideration is received or receivable for the issuance of the guarantee, the consideration is recognised in accordance with the Group’s policies applicable to that category of asset. Where no such consideration is received or receivable, an immediate expense is recognised in profit or loss on initial recognition of any deferred income.
The amount of the guarantee initially recognised as deferred income is amortised in profit or loss over the term of the guarantee as income from financial guarantees issued. In addition, provisions are recognised in accordance with Note 2(r)(ii) if and when (i) it becomes probable that the holder of the guarantee will call upon the Group under the guarantee, and (ii) the amount of that claim on the Group is expected to exceed the amount currently carried in trade and other payables in respect of that guarantee i.e. the amount initially recognised, less accumulated amortisation.
2 | Principal accounting policies (continued) |
(r) | Financial guarantees issued, provisions and contingent liabilities (continued) |
(ii) | Provision and contingent liabilities |
Provisions are recognised for other liabilities of uncertain timing or amount when the Group has a
present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the
obligations. If the effect is material, provisions are determined by discounting the expected future cash flows atobligations and a
pre-tax rate that reflects current market assessments ofreliable estimate can be made. Where the time value of money
and, where appropriate,is material, provisions are stated at the
risks specificpresent value of the expenditures expected to
settle the
liability.(p) Defeasanceobligation.
Where it is not probable that an outflow of
long-termeconomic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities
unless the probability of outflow of economic benefits is remote.
(s) | Defeasance of long-term liabilities |
Where long-term liabilities have been defeased by the placement of security deposits, those liabilities and deposits (and income and charge arising therefrom) are netted off in order to reflect the overall commercial effect of the arrangements. Such netting off has been effected where a right is held by the Group to insist on net settlement of the liability and deposit including in all situations of default and where that right is assured beyond doubt.
F-12
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(q) Deferred credits
In connection with the
acquisitionacquisitions or operating
leaseleases of certain aircraft and engines, the Group receives various credits. Such credits are deferred until the aircraft and engines are delivered, at which time they are either applied as a reduction of the cost of acquiring the aircraft and engines, resulting in a reduction of future depreciation, or
amortizedamortised as a reduction of rental expense for aircraft and engines under operating leases.
(r) Deferred taxation
Deferred
Income tax for the year comprises current and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in profit or loss except to the extent that they relate to items recognised directly in equity, in which case they are recognised in equity.
Current tax is providedthe expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet liability method on alldate, and any adjustment to tax payable in respect of previous years.
Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.
2 | Principal accounting policies (continued) |
(u) | Income tax (continued) |
Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the amounts usedextent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised.
The limited exception to the recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for
taxationtax purposes,
except differences relating to the initial recognition of assets or liabilities
whichthat affect neither accounting nor taxable
income/loss.profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.
The amount of deferred tax valuerecognised is measured based on the expected manner of losses expected to be available for utilization against future taxable income is recognized asrealisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.
The carrying amount of a deferred tax asset
is reviewed at each balance sheet date and
offset against the deferred tax liability attributable to the same legal tax unit and jurisdiction. Net deferred tax assets areis reduced to the extent that it is no longer probable that
sufficient taxable profits will be available to allow the related tax benefit
to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be
realized.(s) Revenue recognition
(i) Passenger, cargoavailable.
2 | Principal accounting policies (continued) |
(u) | Income tax (continued) |
Current tax balances and mail revenuesdeferred tax balances, and movements therein, are recognized whenpresented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the transportationGroup has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:
| - | in the case of current tax assets and liabilities, the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or |
| - | in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either: |
| - | the same taxable entity; or |
| - | different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously. |
Provided it is
provided. Ticket sales for transportation not yet provided are included in current liabilities as sales in advance of carriage. Revenues from airline-related business are recognized when services are rendered. Revenue is stated net of sales tax. In addition, prior to May 1, 2003, revenue was stated net ofprobable that the
contributionseconomic benefits will flow to the
Civil Aviation Administration of China (“CAAC”) Infrastructure Development Fund.(ii) Interest income is recognized on a time proportion basis according to the outstanding principalGroup and the revenue and costs, if applicable, interest rate.
(iii) Dividend incomecan be measured reliably, revenue is recognized when the Group’s right to receive payment is established.
(iv) Operating lease income is recognized on a straight line basis over the terms of the respective leases.
(t) Traffic commissions
recognised in profit or loss as follows:
| (i) | Passenger, cargo and mail revenues are recognised when the transportation is provided. Ticket sales for transportation not yet provided are included in current liabilities as sales in advance of carriage. Revenues from airline-related business are recognised when services are rendered. Revenue is stated net of sales tax. |
| (ii) | Rental income receivable under operating leases is recognised in profit or loss in equal instalments over the periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the use of the leased asset. Lease incentives granted are recognised in profit or loss as an integral part of the aggregate net lease payments receivables. |
| (iii) | Dividend income is recognised when the shareholder’s right to receive payment is established. |
| (iv) | Government grants are recognised in the consolidated balance sheet initially when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognised as revenue in profit or loss on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are deducted in arriving at the carrying amount of the asset and consequently are recognised in profit or loss over the useful life of the asset. |
| (v) | Interest income is recognised as it accrues using the effective interest method. |
2 | Principal accounting policies (continued) |
Traffic commissions are expensed
in profit or loss when the transportation is provided and the related revenue is
recognized.recognised. Traffic commissions for transportation not yet provided are recorded on the consolidated balance
sheetssheet as a prepaid expense.
F-13
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(u) Maintenance and overhaul costs
(x) | Maintenance and overhaul costs |
Routine maintenance, and repairs and overhauls inare charged to profit or loss as and when incurred.
In respect of owned and finance leased aircraft, andcomponents within the aircraft held under capital leasessubject to replacement during major overhauls are expenseddepreciated over the average expected life between major overhauls. When each major overhaul is performed, its cost is recognised in the consolidated statementscarrying amount of operations asproperty, plant and when incurred. equipment and is depreciated over the estimated period between major overhauls. Any remaining carrying amount of cost of previous major overhaul is derecognised and charged to profit or loss.
In respect of aircraft held under operating leases,
a provision is made over the
Group has responsibility to fulfil certain return conditions under relevant lease
term for the estimated cost ofagreements. In order to fulfil these return conditions, major overhauls
are required to be
performedconducted on
a regular basis. Accordingly, estimated costs of major overhauls are accrued and charged to profit or loss over the
relatedestimated period between overhauls. After the aircraft
has completed its last overhaul cycle prior to
their returnbeing returned, expected cost of overhaul to
be incurred at the
lessors.(v) Borrowingend of the lease is estimated and accrued over the remaining period of the lease. Differences between the estimated costs
and the actual costs of overhauls are charged to profit or loss in the period when the overhaul is performed.
Borrowing costs are expensed in
profit or loss in the
consolidated statements of operations as and whenperiod in which they are incurred, except to the extent that they are
capitalizedcapitalised as being directly attributable to the acquisition or construction of an asset which necessarily takes a substantial period of time to get ready for its intended use.
The
capitalizationcapitalisation of borrowing costs as part of the cost of a qualifying asset commences when
expendituresexpenditure for the asset
areis being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use are in progress.
CapitalizationCapitalisation of borrowing costs
is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use are
interrupted or complete.
(w) Retirement benefits
Contributions
(z) | Short term employee benefits and contributions to defined contribution retirement schemes |
Salaries, annual bonuses and contributions to defined contribution retirement schemes are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and additional retirementthe effect would be material, these amounts are stated at their present values.
2 | Principal accounting policies (continued) |
Termination benefits
paidare recognised when, and only when, the Group demonstrably commits itself to
retired employees are chargedterminate employment or to
the consolidated statementsprovide benefits as a result of
operations as and when incurred (Note 25).(x) Frequent flyer award programs
voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.
(bb) | Frequent flyer award programmes |
The Group maintains two frequent flyer award
programs,programmes, namely, the China Southern Airlines Sky Pearl Club and the Egret Mileage Plus, which provide travel awards to members based on accumulated mileage. The estimated incremental cost to provide free travel is
recognizedrecognised as an expense and accrued as a current liability as members accumulate mileage. As members redeem awards or their entitlements expire, the incremental cost liability is reduced accordingly to reflect the acquittal of the outstanding obligations.
Revenue from mileage sales to third parties under the frequent flyer award
programsprogrammes is
recognizedrecognised when the related transportation services are provided.
(y)
(cc) | Translation of foreign currencies Transactions in foreign currencies
|
Foreign currencies transactions during the year are translated into Renminbi at the applicable rates of exchange quoted by the People’s Bank of China (“PBOC rates”PBOC”) prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into Renminbi at the PBOC exchange rates atprevailing on the balance sheet date. Exchange gains and losses are recognised in non-operating income/(expenses) in the consolidated statements of operations.
Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated into Renminbi at the PBOC
exchange rates prevailing on the transaction dates.
F-14
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts Non-monetary assets and liabilities denominated in millions, except share data)
(z) Related parties
foreign currencies that are stated at fair value are translated into Renminbi at the PBOC exchange rates prevailing on the dates the fair value was determined.
2 | Principal accounting policies (continued) |
For the purposes of these consolidated financial statements, parties area party is considered to be related to the Group if the Group has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where if:
| (i) | the party has the ability, directly or indirectly through one or more intermediaries, to control the Group or exercise significant influence over the Group in making financial and operating policy decisions, or has joint control over the Group; |
| (ii) | the Group and the party are subject to common control; |
| (iii) | the party is an associate of the Group or a joint venture in which the Group is a venturer; |
| (iv) | the party is a member of key management personnel of the Group or the Group’s parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals; |
| (v) | the party is a close family member of a party referred in (i) or is an entity under the control, joint control or significant influence of such individuals; or |
| (vi) | the party is a post-employment benefit plan which is for the benefit of employees of the Group or of any entity that is a related party of the Group. |
Close family members of an individual are
subject to common control or common significant influence. Related partiesthose family members who may be
individualsexpected to influence, or
entities.(aa) Segmental reporting
be influenced by, that individual in their dealings with the entity.
A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.
(ab) Basic earnings/(loss) per share
Basic earnings/(loss) per share
In accordance with the Group’s internal financial reporting system, the Group has chosen business segment information as the primary reporting format and geographical segment information as the secondary reporting format for the years ended December 31, 2002, 2003purposes of these consolidated financial statements.
Turnover comprises revenues from airline and
2004 have been computed by dividing net income/(loss) of RMB576, RMB(358),airline-related business and
RMB(48) respectively, by the weighted average number of shares in issue of 3,374,178,000 in 2002, 3,831,712,000 in 2003, and 4,374,178,000 in 2004, respectively. The amount of diluted earnings/(loss) per share is not presented as there were no dilutive potential ordinary shares in existence during the years ended December 31, 2002, 2003 and 2004.
F-15
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
3. TRAFFIC REVENUE
Traffic revenue is stated net of sales tax. In addition, traffic revenue for the year ended December 31, 2002 and four-month period ended April 30, 2003 was stated net of contributions to the CAAC Infrastructure Development Fund. An analysis of traffic revenueturnover is as follows:
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Passenger | | | 15,696 | | | | 15,010 | | | | 21,100 | |
Cargo and mail | | | 1,786 | | | | 1,955 | | | | 2,244 | |
| | | | | | | | | |
| | | 17,482 | | | | 16,965 | | | | 23,344 | |
| | | | | | | | | |
| | 2007 RMB million | | 2006 RMB million | | 2005 RMB million | |
| | | | | | | |
Traffic revenue | | | | | | | |
Passenger | | | 49,600 | | | 41,549 | | | 34,328 | |
Cargo and mail | | | 3,697 | | | 3,538 | | | 3,091 | |
| | | | | | | | | | |
| | | 53,297 | | | 45,087 | | | 37,419 | |
| | | | | | | | | | |
Other operating revenue | | | | | | | | | | |
Commission income | | | 281 | | | 238 | | | 237 | |
General aviation income | | | 108 | | | 91 | | | 77 | |
Ground services income | | | 241 | | | 184 | | | 195 | |
Air catering income | | | 81 | | | 50 | | | 25 | |
Rental income | | | 119 | | | 107 | | | 69 | |
Others | | | 375 | | | 462 | | | 271 | |
| | | | | | | | | | |
| | | 1,205 | | | 1,132 | | | 874 | |
| | | | | | | | | | |
| | | 54,502 | | | 46,219 | | | 38,293 | |
Pursuant to various PRC sales tax rules and regulations, the Group is required to pay sales tax to national and local tax authorities at the rate of approximately 3% of the traffic revenue in respect of domestic flights and outbound international/international, Hong Kong regional flights during the years ended December 31, 2002, 2003 and 2004, except for the period from May 1, 2003 to December 31, 2003 when passenger revenue was exempted from sales tax.Macau flights. Sales tax incurred by the Group forduring the yearsyear ended December 31, 2002, 2003 and 2004,2007, netted off against revenue, amounted to RMB558, RMB206,RMB1,574 million (2006: RMB1,300 million; 2005: RMB1,111 million).
4 | Flight operations expenses |
| | 2007 RMB million | | 2006 RMB million | | 2005 RMB million | |
| | | | | | | |
Jet fuel costs | | | 18,316 | | | 16,193 | | | 11,929 | |
Operating lease charges | | | | | | | | | | |
- Aircraft and flight equipment | | | 3,735 | | | 3,027 | | | 2,497 | |
- Land and buildings | | | 320 | | | 249 | | | 302 | |
Air catering expenses | | | 1,350 | | | 1,170 | | | 1,150 | |
Aircraft insurance | | | 207 | | | 274 | | | 283 | |
Flight personnel payroll and welfare | | | 2,226 | | | 1,697 | | | 1,599 | |
Training expenses | | | 517 | | | 389 | | | 373 | |
CAAC Infrastructure Development Fund contributions | | | 1,250 | | | 1,127 | | | 978 | |
Others | | | 1,161 | | | 896 | | | 650 | |
| | | | | | | | | | |
| | | 29,082 | | | 25,022 | | | 19,761 | |
| | 2007 RMB million | | 2006 RMB million | | 2005 RMB million | |
| | | | | | | |
Repairing and maintenance charges | | | 4,111 | | | 3,585 | | | 4,153 | |
Maintenance materials | | | 532 | | | 414 | | | 436 | |
| | | | | | | | | | |
| | | 4,643 | | | 3,999 | | | 4,589 | |
6 | Aircraft and traffic servicing expenses |
| | 2007 RMB million | | 2006 RMB million | | 2005 RMB million | |
| | | | | | | |
Landing and navigation fees | | | 6,030 | | | 5,343 | | | 4,977 | |
Ground service and other charges | | | 2,130 | | | 1,720 | | | 1,557 | |
| | | | | | | | | | |
| | | 8,160 | | | 7,063 | | | 6,534 | |
7 | Promotion and sales expenses |
| | 2007 RMB million | | 2006 RMB million | | 2005 RMB million | |
| | | | | | | |
Sales commissions | | | 1,789 | | | 1,489 | | | 1,503 | |
Ticket office expenses | | | 1,016 | | | 824 | | | 784 | |
Computer reservation services | | | 385 | | | 307 | | | 292 | |
Advertising and promotion | | | 108 | | | 43 | | | 32 | |
Others | | | 180 | | | 148 | | | 169 | |
| | | | | | | | | | |
| | | 3,478 | | | 2,811 | | | 2,780 | |
8 | General and administrative expenses |
| | 2007 RMB million | | 2006 RMB million | | 2005 RMB million | |
| | | | | | | |
General corporate expenses | | | 1,811 | | | 1,897 | | | 1,266 | |
Auditors’ remuneration | | | 16 | | | 15 | | | 12 | |
Impairment on aircraft (Note 17(h)) | | | 109 | | | | | | | |
Other taxes and levies | | | 47 | | | 29 | | | 37 | |
| | | | | | | | | | |
| | | 1,983 | | | 1,941 | | | 1,315 | |
9 | Depreciation and amortisation |
| | 2007 RMB million | | 2006 RMB million | | 2005 RMB million | |
Depreciation | | | | | | | |
- Owned assets | | | 4,232 | | | 3,678 | | | 3,292 | |
- Assets acquired under finance leases | | | 1,365 | | | 1,321 | | | 1,128 | |
Amortisation of deferred credits | | | (71 | ) | | (61 | ) | | (20 | ) |
Other amortisation | | | 28 | | | 33 | | | 40 | |
| | | | | | | | | | |
| | | 5,554 | | | 4,971 | | | 4,440 | |
| | 2007 RMB million | | 2006 RMB million | | 2005 RMB million | |
| | | | | | | |
Salaries, wages and welfare | | | 5,130 | | | 3,854 | | | 3,515 | |
Retirement scheme contributions | | | 614 | | | 584 | | | 472 | |
Early retirement benefits (Note 36) | | | 12 | | | 392 | | | | |
| | | | | | | | | | |
| | | 5,756 | | | 4,830 | | | 3,987 | |
Staff costs relating to flight operations, maintenance, aircraft and
RMB716 respectively.traffic servicing, promotion and sales and general and administrative expenses are also included in the respective total amounts disclosed separately in Notes 4 to 8 above.
| | 2007 RMB million | | 2006 RMB million | | 2005 RMB million | |
| | | | | | | |
Interest on bank and other loans wholly | | | | | | | |
repayable within five years | | | 1,986 | | | 1,675 | | | 995 | |
Interest on other loans | | | 105 | | | 138 | | | 93 | |
Finance charges on obligations | | | | | | | | | | |
under finance leases | | | 743 | | | 716 | | | 626 | |
Other interest expense (Note 36) | | | 15 | | | | | | | |
Less: borrowing costs capitalised | | | 558 | | | (459 | ) | | (98 | ) |
| | | | | | | | | | |
| | | 2,291 | | | 2,070 | | | 1,616 | |
The borrowing costs have been capitalised at rates ranging from 5.30% to 5.84% per annum in 2007 (2006: 5.29% to 5.61% per annum; 2005: 4.14% to 5.27% per annum).
12 | Other income / (expenses), net |
| | 2007 RMB million | | 2006 RMB million | | 2005 RMB million | |
Gain / (loss) on sale of property, plant | | | | | | | |
and equipment, net | | | | | | | |
- Aircraft and spare engines | | | 106 | | | 329 | | | | |
- Other property, plant and equipment | | | 24 | | | 4 | | | (32 | ) |
| | | | | | | | | | |
| | | 130 | | | 333 | | | (32 | ) |
In addition,2007, the Group is requiredrecognised a gain on disposal of property, plant and equipment of RMB106 million on selling of 11 MD82 aircraft, three MD82 spare engines and one Boeing 737-500 spare engine to pay contributions tocertain independent third parties, being the CAAC Infrastructure Development Fund. Prior to May 1, 2003, contributions to CAAC Infrastructure Development Fund were payable at 5% and 2% respectivelyexcess of the domesticsale proceeds over the carrying amounts of the assets and international/Hong Kong regional traffic revenue. For the period from May 1, 2003 to March 31, 2004,related disposal costs.
In 2006, the Group was exempted from paying any contributions. Effective from April 1, 2004, contributionsrecognised a gain on disposal of property, plant and equipment of RMB329 million on selling of three Boeing 757-200 aircraft to certain independent third parties, being the CAAC Infrastructure Development Fund are payable based on the traffic capacity deployed by the Group on its routes. The contributions now form partexcess of the flight operations expensessale proceeds over the carrying amounts of the assets and amounted to RMB466 millionrelated disposal costs.
13 | Emoluments of directors, supervisors and senior management |
(a) | Directors’ and supervisors’ emoluments |
Details of directors’ and supervisors’ emoluments for the year ended December 31,
2004. The contributions for the years ended December 31, 2002 and 2003 amounted to RMB798 and RMB251, respectively were netted off against traffic revenue. Pursuant to approval documents issued by the CAAC, the Group imposes a fuel surcharge on passengers carried by its domestic and Hong Kong regional flights at certain prescribed rates on ticket fares. The fuel surcharge forms part of the traffic revenue of the Group. For the years ended December 31, 2002, 2003 and 2004, the fuel surcharge revenue of the Group totaled approximately RMB554, RMB740 and RMB348, respectively.
F-16
2007 are set out below: | | | | Salaries, | | | | | | | |
| | | | allowances | | | | | | | |
| | | | and | | | | Retirement | | | |
| | Directors’ | | benefits | | Discretionary | | scheme | | | |
Name | | fees | | in kind | | bonuses | | contributions | | Total | |
| | RMB’000 | | RMB’000 | | RMB’000 | | RMB’000 | | RMB’000 | |
| | | | | | | | | | | | | | | | |
Executive directors | | | | | | | | | | | | | | | | |
Liu Shao Yong (Note (i)) | | | — | | | 737 | | | | | | 14 | | | 751 | |
Li Wen Xin | | | | | | 329 | | | | | | 14 | | | 343 | |
Wang Quan Hua | | | | | | 597 | | | | | | 14 | | | 611 | |
Zhao Liu An (Note (i)) | | | | | | 576 | | | | | | 14 | | | 590 | |
Si Xian Min | | | | | | 670 | | | | | | 13 | | | 683 | |
Tan Wan Geng | | | | | | 542 | | | | | | 13 | | | 555 | |
Xu Jie Bo | | | | | | 529 | | | | | | 13 | | | 542 | |
Chen Zhen You | | | | | | 513 | | | | | | 16 | | | 529 | |
| | | | | | | | | | | | | | | | |
Supervisors | | | | | | | | | | | | | | | | |
Sun Xiao Yi | | | | | | 597 | | | | | | 14 | | | 611 | |
Yang Guang Hua | | | | | | 565 | | | | | | 8 | | | 573 | |
Yang Yi Hua | | | | | | 209 | | | | | | 16 | | | 225 | |
Liang Zhong Gao (Note (iii)) | | | | | | 232 | | | | | | 12 | | | 244 | |
Liu Biao (Note (iv)) | | | | | | 134 | | | | | | 2 | | | 136 | |
| | | | | | | | | | | | | | | | |
Independent | | | | | | | | | | | | | | | | |
non-executive directors | | | | | | | | | | | | | | | | |
Peter Lok (Note (ii)) | | | 49 | | | | | | | | | | | | 49 | |
Wei Ming Hai (Note (ii)) | | | 50 | | | | | | | | | | | | 50 | |
Gong Hua Zhang (Note (iii)) | | | 50 | | | | | | | | | | | | 50 | |
Wang Zhi | | | 100 | | | | | | | | | | | | 100 | |
Sui Guang Jun | | | 100 | | | | | | | | | | | | 100 | |
Lam Kwong Yu, Albert (Note (iii)) | | | 48 | | | | | | | | | | | | 48 | |
| | | | | | | | | | | | | | | | |
| | | 397 | | | 6,230 | | | | | | 163 | | | 6,790 | |
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
4. OTHER OPERATING REVENUE
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Commission income | | | 138 | | | | 140 | | | | 203 | |
General aviation income | | | 68 | | | | 40 | | | | 55 | |
Ground services income | | | 79 | | | | 99 | | | | 146 | |
Air catering income | | | 38 | | | | 31 | | | | 53 | |
Net income from lease arrangements (Note 14) | | | 52 | | | | 69 | | | | — | |
Rental income | | | — | | | | 40 | | | | 45 | |
Aircraft lease income | | | 47 | | | | — | | | | 11 | |
Other | | | 115 | | | | 86 | | | | 117 | |
| | | | | | | | | |
| | | 537 | | | | 505 | | | | 630 | |
| | | | | | | | | |
5. FLIGHT OPERATIONS EXPENSES
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Fuel costs | | | 3,519 | | | | 3,867 | | | | 6,050 | |
Operating lease rentals | | | 1,417 | | | | 1,536 | | | | 1,665 | |
Air catering expenses | | | 625 | | | | 510 | | | | 705 | |
Aircraft insurance | | | 256 | | | | 196 | | | | 185 | |
Flight personnel payroll and welfare | | | 781 | | | | 728 | | | | 1,026 | |
Training expenses | | | 39 | | | | 123 | | | | 183 | |
CAAC Infrastructure Development fund | | | — | | | | — | | | | 466 | |
Other | | | 96 | | | | 110 | | | | 138 | |
| | | | | | | | | |
| | | 6,733 | | | | 7,070 | | | | 10,418 | |
| | | | | | | | | |
F-17
13 | Emoluments of directors, supervisors and senior management (continued) |
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
6. MAINTENANCE EXPENSES
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Repairing and maintenance charges | | | 1,842 | | | | 2,077 | | | | 2,734 | |
Maintenance materials | | | 292 | | | | 300 | | | | 422 | |
Labor costs | | | 130 | | | | 139 | | | | 227 | |
Other | | | 69 | | | | 73 | | | | 76 | |
| | | | | | | | | |
| | | 2,333 | | | | 2,589 | | | | 3,459 | |
| | | | | | | | | |
(a) | Directors’ and supervisors’ emoluments (continued) |
Details of
provision for major overhauls in respect of aircraft held under operating leases are as follows: | | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Balance at beginning of year | | | 187 | | | | 194 | | | | 200 | |
Additional amount provided | | | 49 | | | | 68 | | | | 89 | |
Through the CNA/XJA Acquisitions | | | — | | | | — | | | | 70 | |
Amount utilized | | | (42 | ) | | | (62 | ) | | | — | |
| | | | | | | | | |
Balance at end of year | | | 194 | | | | 200 | | | | 359 | |
| | | | | | | | | |
Balance of provision for major overhauls at December 31, 2003directors’ and 2004 consisted of:
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Current portion (included in accrued expenses) (Note 19) | | | 11 | | | | 75 | |
Non-current portion | | | 189 | | | | 284 | |
| | | | | | |
| | | 200 | | | | 359 | |
| | | | | | |
F-18
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
7. AIRCRAFT AND TRAFFIC SERVICING EXPENSES
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Landing and navigation fees | | | 2,353 | | | | 2,562 | | | | 3,222 | |
Ground service charges | | | 158 | | | | 205 | | | | 281 | |
| | | | | | | | | |
| | | 2,511 | | | | 2,767 | | | | 3,503 | |
| | | | | | | | | |
8. PROMOTION AND SALES EXPENSES
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Sales commissions | | | 750 | | | | 757 | | | | 1,062 | |
Ticket office expenses | | | 516 | | | | 504 | | | | 552 | |
Computer reservation services | | | 175 | | | | 175 | | | | 233 | |
Advertising and promotion | | | 31 | | | | 24 | | | | 36 | |
Other | | | 28 | | | | 20 | | | | 57 | |
| | | | | | | | | |
| | | 1,500 | | | | 1,480 | | | | 1,940 | |
| | | | | | | | | |
9. GENERAL AND ADMINISTRATIVE EXPENSES
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
General corporate expenses | | | 659 | | | | 680 | | | | 696 | |
Salaries and welfare | | | 380 | | | | 339 | | | | 575 | |
Provision for doubtful accounts (Note 33) | | | 1 | | | | 12 | | | | 27 | |
Other taxes and levies | | | 20 | | | | 22 | | | | 25 | |
| | | | | | | | | |
| | | 1,060 | | | | 1,053 | | | | 1,323 | |
| | | | | | | | | |
F-19
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
10. TAXATION EXPENSE/(CREDIT)
On October 17, 2003, the Company’s registered address was moved to Guangzhou Economic & Technology Development Zone. In accordance with the Rules and Regulations for Implementation of Income Tax for Foreign Investment Enterprises and Foreign Enterprises of the PRC and a taxation approval document “Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que 020043”, the Company is entitled to enjoy the preferential tax policy implemented in the Guangzhou Economic & Technology Development Zone effective October 1, 2003. As a result, the Company’s income tax rate has been changed from 33% to 15% beginning from that date.
As a result of the reduction in income tax rate, the Company’s net deferred tax liability balance at January 1, 2003 of RMB507 was reduced by RMB392. Accordingly, a net deferred tax credit of RMB392 was recognized in the consolidated statement of operationssupervisors’ emoluments for the year ended December 31, 2003.
2006 are set out below:
| | | | Salaries, | | | | | | | |
| | | | allowances | | | | | | | |
| | | | and | | | | Retirement | | | |
| | Directors’ | | benefits | | Discretionary | | scheme | | | |
Name | | fees | | in kind | | bonuses | | contributions | | Total | |
| | RMB’000 | | RMB’000 | | RMB’000 | | RMB’000 | | RMB’000 | |
Executive directors | | | | | | | | | | | | | | | | |
Liu Shao Yong (Note (i)) | | | | | | 472 | | | | | | 14 | | | 486 | |
Li Wen Xin | | | | | | 87 | | | | | | 3 | | | 90 | |
Wang Quan Hua | | | | | | 374 | | | | | | 14 | | | 388 | |
Zhao Liu An (Note (i)) | | | | | | 374 | | | | | | 14 | | | 388 | |
Si Xian Min | | | | | | 442 | | | | | | 13 | | | 455 | |
Tan Wan Geng | | | | | | 271 | | | | | | 11 | | | 282 | |
Xu Jie Bo | | | | | | 357 | | | | | | 13 | | | 370 | |
Chen Zhen You | | | | | | 253 | | | | | | 13 | | | 266 | |
Zhou Yong Qian | | | | | | 146 | | | | | | 3 | | | 149 | |
| | | | | | | | | | | | | | | | |
Supervisors | | | | | | | | | | | | | | | | |
Sun Xiao Yi | | | | | | 374 | | | | | | 14 | | | 388 | |
Yang Guang Hua | | | | | | 374 | | | 50 | | | 13 | | | 437 | |
Yang Yi Hua | | | | | | 220 | | | | | | 13 | | | 233 | |
| | | | | | | | | | | | | | | | |
Independent | | | | | | | | | | | | | | | | |
non-executive directors | | | | | | | | | | | | | | | | |
Peter Lok | | | 102 | | | | | | | | | | | | 102 | |
Wei Ming Hai | | | 100 | | | | | | | | | | | | 100 | |
Wang Zhi | | | 100 | | | | | | | | | | | | 100 | |
Sui Guang Jun | | | 100 | | | | | | | | | | | | 100 | |
| | | | | | | | | | | | | | | | |
| | | 402 | | | 3,744 | | | 50 | | | 138 | | | 4,334 | |
13 | Emoluments of directors, supervisors and senior management (continued) |
(a) | Directors’ and supervisors’ emoluments (continued) |
Details of directors’ and supervisors’ emoluments for the year ended December 31, 2005 are set out below:
| | | | Salaries, | | | | | | | |
| | | | allowances | | | | | | | |
| | | | and | | | | Retirement | | | |
| | Directors’ | | benefits | | Discretionary | | scheme | | | |
Name | | fees | | in kind | | bonuses | | contributions | | Total | |
| | RMB’000 | | RMB’000 | | RMB’000 | | RMB’000 | | RMB’000 | |
| | | | | | | | | | | |
Executive directors | | | | | | | | | | | | | | | | |
Liu Shao Yong (Note (i)) | | | | | | 299 | | | | | | 12 | | | 311 | |
Liu Ming Qi | | | | | | 242 | | | | | | 10 | | | 252 | |
Peng An Fa | | | | | | 101 | | | | | | 6 | | | 107 | |
Wang Quan Hua | | | | | | 237 | | | | | | 12 | | | 249 | |
Zhao Liu An (Note (i)) | | | | | | 237 | | | | | | 12 | | | 249 | |
Zhou Yong Qian | | | | | | 237 | | | | | | 12 | | | 249 | |
Si Xian Min | | | | | | 281 | | | | | | 12 | | | 293 | |
Zhou Yong Jin | | | | | | 127 | | | | | | 2 | | | 129 | |
Xu Jie Bo | | | | | | 226 | | | | | | 12 | | | 238 | |
Wu Rong Nan | | | | | | 368 | | | 162 | | | 7 | | | 537 | |
| | | | | | | | | | | | | | | | |
Supervisors | | | | | | | | | | | | | | | | |
Sun Xiao Yi | | | | | | 237 | | | | | | 12 | | | 249 | |
Yang Guang Hua | | | | | | 225 | | | | | | 12 | | | 237 | |
Yang Yi Hua | | | | | | 48 | | | 70 | | | 11 | | | 129 | |
| | | | | | | | | | | | | | | | |
Independent | | | | | | | | | | | | | | | | |
non-executive directors | | | | | | | | | | | | | | | | |
Simon To (Note (v)) | | | | | | | | | | | | | | | | |
Peter Lok | | | 58 | | | | | | | | | | | | 58 | |
Wei Ming Hai | | | 58 | | | | | | | | | | | | 58 | |
Wang Zhi | | | 58 | | | | | | | | | | | | 58 | |
Sui Guang Jun | | | 58 | | | | | | | | | | | | 58 | |
| | | | | | | | | | | | | | | | |
| | | 232 | | | 2,865 | | | 232 | | | 132 | | | 3,461 | |
Notes:
| (i) | The above amounts included salaries paid to these directors as pliots of the Company. |
| (ii) | Retired on June 28, 2007. |
| (iii) | Appointed on June 28, 2007. |
| (iv) | Appointed on June 28, 2007 and resigned on January 18, 2008. |
| (v) | Simon To received director’s fee of RMB1 during the year ended December 31, 2005. |
13 | Emoluments of directors, supervisors and senior management (continued) |
(b) | Individuals with highest emoluments |
In 2007 and 2006, one of the five individuals (2006: none) with the highest emoluments are directors. The aggregate of the emoluments in respect of four (2006: five) individuals during the year are as follows:
| | 2007 | | 2006 | |
| | RMB’000 | | RMB’000 | |
| | | | | |
Salaries, allowances and benefits in kind | | | 3,162 | | | 2,680 | |
Retirement scheme contributions | | | 50 | | | 58 | |
| | | | | | | |
| | | 3,212 | | | 2,738 | |
The emoluments of the four (2006: five) individuals with the highest emoluments are within the following band:
| | 2007 | | 2006 | |
| | Number | | Number | |
| | of individuals | | of individuals | |
Nil to HK$1,000,000 (RMB972,700 equivalent | | | | | | | |
(2006: RMB1,025,000 equivalent)) | | | 4 | | | 5 | |
(a) | Income tax expense in the consolidated statements of operations |
| | 2007 | | 2006 | | 2005 | |
| | RMB million | | RMB million | | RMB million | |
PRC income tax | | | | | | | | | | |
Provision for the year | | | 408 | | | 160 | | | 12 | |
Over-provision in prior year | | | (58 | ) | | (16 | ) | | | |
| | | | | | | | | | |
| | | | | | | | | 12 | |
Deferred tax (Note 23) | | | 508 | | | 9 | | | (19 | ) |
| | | | | | | | | | |
Income tax expense / (benefit) | | | 858 | | | 153 | | | (7 | ) |
In respect of the Group’s overseas airline activities, the Group has either obtained exemptions from overseas taxation pursuant to the bilateral aviation agreements between the overseas governments and the PRC government, or has sustained tax losses in these overseas jurisdictions. Accordingly, no provision for overseas tax has been made for both the years endedcurrent and prior years.
14 | Income tax expense (continued) |
(b) | Reconciliation between actual tax expense and calculated tax based on accounting profit at applicable tax rates |
| | 2007 | | 2006 | | 2005 | |
| | RMB million | | RMB million | | RMB million | |
| | | | | | | |
Profit / (loss) before taxation | | | 2,923 | | | 357 | | | (1,853 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Tax on profit before taxation, calculated | | | | | | | | | | |
at the rates applicable to profit in | | | | | | | | | | |
the tax jurisdiction concerned (Note i) | | | 482 | | | 50 | | | (271 | ) |
Adjustments for tax effect of: | | | | | | | | | | |
Non-deductible expenses | | | 250 | | | 127 | | | 82 | |
Non-taxable income | | | | | | | | | (8 | ) |
Share of results of associates | | | | | | | | | | |
and jointly controlled entities | | | (36 | ) | | (22 | ) | | 37 | |
Tax losses not recognised | | | 28 | | | 39 | | | 135 | |
Effect of change of tax rate (Note (ii)) | | | 196 | | | (21 | ) | | | |
Over-provision in prior year | | | (58 | ) | | (16 | ) | | | |
Others | | | (4 | ) | | (4 | ) | | 18 | |
| | | | | | | | | | |
Actual tax expense / (benefit) | | | 858 | | | 153 | | | (7 | ) |
Notes:
| (i) | The statutory income tax rate in the PRC is 33%. Headquarter of the Company is taxed at a preferential rate of 18% (2006: 18%; 2005: 15%), and its certain branches are taxed at rates ranging from 15% to 33%. The subsidiaries of the Group are taxed at rates ranging from 7.5% to 33% (2006: 15% to 33%; 2005: 15% to 33%). |
| (ii) | On March 16, 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of the PRC (“new tax law”) which has taken effect from January 1, 2008. As a result of the new tax law, the statutory income tax rate currently adopted by the Company and its subsidiaries has changed from 33% to 25% with effect from January 1, 2008. Pursuant to new tax law, the income tax rates of entities that previously enjoyed preferential tax rates of 15% and 18% have been revised to 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012 respectively. |
The deferred tax assets and liabilities as at December 31,
2002, 2003 and 2004. Taxation expense/(credit) consisted of:
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
PRC income tax: | | | | | | | | | | | | |
Company and subsidiaries | | | 72 | | | | 47 | | | | 176 | |
Affiliated companies | | | 9 | | | | 3 | | | | 2 | |
Jointly controlled entities | | | — | | | | 7 | | | | 11 | |
| | | | | | | | | |
| | | 81 | | | | 57 | | | | 189 | |
| | | | | | | | | | | | |
Deferred tax (Note 21) | | | | | | | | | | | | |
- current year | | | 317 | | | | 11 | | | | (111 | ) |
- adjustment for change in enacted tax rate | | | — | | | | (392 | ) | | | — | |
| | | | | | | | | |
| | | 398 | | | | (324 | ) | | | 78 | |
| | | | | | | | | |
F-20
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Actual taxation amount in the consolidated statements of operations2007 have been remeasured for the years ended December 31, 2002, 2003 and 2004 differed from the amounts computed by applying the PRC incomechange in applicable tax rate of 33%, 15% and 15%, respectively, to income/(loss) before taxation and minority interestsrates as a result of the following:new tax law.
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Expected PRC taxation expense/(credit) | | | 376 | | | | (77 | ) | | | 35 | |
Adjustments: | | | | | | | | | | | | |
Gains on sale and leaseback transactions and their amortization | | | (1 | ) | | | — | | | | — | |
Effect on change in income tax rate on deferred taxation | | | — | | | | (392 | ) | | | — | |
Rate differential on subsidiaries | | | (60 | ) | | | 5 | | | | — | |
Non-deductible expenses | | | 61 | | | | 80 | | | | 40 | |
Unrecognized tax losses | | | — | | | | 22 | | | | — | |
Expired tax losses | | | — | | | | 34 | | | | — | |
Other, net | | | 22 | | | | 4 | | | | 3 | |
| | | | | | | | | |
| | | 398 | | | | (324 | ) | | | 78 | |
| | | | | | | | | |
All but an insignificant amount
The board of
income/(loss) before taxation is from domestic sources. In accordance with relevant PRC tax regulations,directors of the Company does not recommend the payment of a PRC lessee is liable to pay PRC withholding taxdividend in respect of any lease payments regularly made to an overseas lessor. Depending on the circumstances, this tax is generally imposed at a fixed rate ranging from 10% to 20% of the lease payments, or in certain cases, the interest components of such payments. Pursuant to an approval document from the State Tax Bureau, lease arrangements executed prior to September 1, 1999 were exempted from PRC withholding tax.
The PRC withholding tax payable by the Group for the years ended December 31, 2002, 2003 and 2004 of RMB14, RMB8 and RMB23, respectively, in respect of the operating leases executed after September 1, 1999 has been included as part of the operating lease rentals.
F-21
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
11. CASH AND CASH EQUIVALENTS
As of December 31, 2003 and 2004, cash and cash equivalents comprise cash at bank and in hand and deposits with Southern Airlines Group Finance Company Limited (“SA Finance”), a PRC authorized financial institution controlled by CSAHC and an affiliated company of the Group. In accordance with the financial agreement dated May 22, 1997 between the Company and SA Finance, all the Group’s deposits accepted by SA Finance as of December 31, 2003 and 2004 were simultaneously placed with several designated major PRC banks by SA Finance. As of December 31, 2003 and 2004, the Group’s deposits with SA Finance amounted to RMB366 and RMB406, respectively (Note 26).
12. TRADE RECEIVABLES
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Trade receivables, principally traffic | | | 904 | | | | 1,295 | |
Less: Allowance for doubtful accounts (Note 33) | | | 70 | | | | 92 | |
| | | | | | |
| | | 834 | | | | 1,203 | |
| | | | | | |
13. SHORT TERM INVESTMENTS
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Equity securities held for trading | | | — | | | | 523 | |
Debt security held-to-maturity | | | — | | | | 160 | |
| | | | | | |
| | | — | | | | 683 | |
| | | | | | |
Net realized gains on equity securities held for trading during the year ended December 31, 2003 and 2004 were RMB Nil and RMB 13, respectively, and are included2007.
No dividend was paid in
consolidated statement of operations. Net unrealized gains on equity securities held for trading during the year ended December 31, 2003 and 2004 were RMB Nil and RMB 3, respectively, and are included in consolidated statement of operations.F-22
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value of debt security held-to-maturity as of December 31, 2003 and 2004 were as follows:
| | | | | | | | | | | | | | | | |
| | | | | | Gross | | | Gross | | | | |
| | | | | | unrealized | | | unrealized | | | | |
| | Amortized | | | holding | | | holding | | | | |
| | cost | | | gains | | | losses | | | Fair value | |
| | RMB | | | RMB | | | RMB | | | RMB | |
As of December 31, 2003 | | | | | | | | | | | | | | | | |
Debt security held-to-maturity | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
As of December 31, 2004 | | | | | | | | | | | | | | | | |
Debt security held-to-maturity | | | 160 | | | | — | | | | — | | | | 160 | |
| | | | | | | | | | | | |
F-23
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
14. PROPERTY, PLANT AND EQUIPMENT, NET
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Other flight | | | | | | | |
| | | | | | Aircraft | | | equipment, | | | Machinery, | | | | |
| | | | | | | | | | Held under | | | including | | | equipment | | | | |
| | | | | | | | | | finance | | | rotable | | | and | | | | |
| | Buildings | | | Owned | | | leases | | | spares | | | vehicles | | | Total | |
Cost or valuation: | | | | | | | | | | | | | | | | | | | | | | | | |
At 1 January 2004 | | | 3,288 | | | | 17,222 | | | | 10,463 | | | | 6,842 | | | | 1,930 | | | | 39,745 | |
Exchange adjustments | | | 5 | | | | — | | | | — | | | | — | | | | 12 | | | | 17 | |
Reclassification on exercise of purchase options | | | — | | | | 550 | | | | (550 | ) | | | — | | | | — | | | | — | |
Additions | | | 336 | | | | 4,156 | | | | — | | | | 525 | | | | 5 | | | | 5,022 | |
Transferred from construction in progress | | | 2,472 | | | | — | | | | — | | | | — | | | | 235 | | | | 2,707 | |
Through the CNA/XJA Acquisitions | | | 915 | | | | 5,206 | | | | 4,616 | | | | 1,753 | | | | 490 | | | | 12,980 | |
Disposals | | | (28 | ) | | | — | | | | — | | | | (76 | ) | | | (73 | ) | | | (177 | ) |
| | | | | | | | | | | | | | | | | | |
At 31 December 2004 | | | 6,988 | | | | 27,134 | | | | 14,529 | | | | 9,044 | | | | 2,599 | | | | 60,294 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Representing: | | | | | | | | | | | | | | | | | | | | | | | | |
Cost | | | 6,633 | | | | 20,905 | | | | 10,189 | | | | 6,870 | | | | 2,115 | | | | 46,712 | |
Valuation — 1996 | | | 355 | | | | 6,229 | | | | 4,340 | | | | 2,174 | | | | 484 | | | | 13,582 | |
| | | | | | | | | | | | | | | | | | |
| | | 6,988 | | | | 27,134 | | | | 14,529 | | | | 9,044 | | | | 2,599 | | | | 60,294 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated depreciation: | | | | | | | | | | | | | | | | | | | | | | | | |
At 1 January 2004 | | | 594 | | | | 3,192 | | | | 2,605 | | | | 3,644 | | | | 1,174 | | | | 11,209 | |
Exchange adjustments | | | 1 | | | | — | | | | — | | | | — | | | | 9 | | | | 10 | |
Reclassification on exercise of purchase options | | | — | | | | 183 | | | | (183 | ) | | | — | | | | — | | | | — | |
Charge for the year | | | 179 | | | | 956 | | | | 472 | | | | 544 | | | | 212 | | | | 2,363 | |
Written back on disposal | | | (17 | ) | | | — | | | | — | | | | (51 | ) | | | (61 | ) | | | (129 | ) |
| | | | | | | | | | | | | | | | | | |
At 31 December 2004 | | | 757 | | | | 4,331 | | | | 2,894 | | | | 4,137 | | | | 1,334 | | | | 13,453 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net book value: | | | | | | | | | | | | | | | | | | | | | | | | |
At 31 December 2004 | | | 6,231 | | | | 22,803 | | | | 11,635 | | | | 4,907 | | | | 1,265 | | | | 46,841 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
At 31 December 2003 | | | 2,694 | | | | 14,030 | | | | 7,858 | | | | 3,198 | | | | 756 | | | | 28,536 | |
| | | | | | | | | | | | | | | | | | |
F-24
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Substantially all of the Group’s buildings are located in the PRC. The Group was formally granted the rights to use the twenty one parcels of land in Guangzhou, Shenzhen, Zhuhai, Beihai, Changsha, Shantou, Haikou, Zhengzhou, Guiyang and Wuhan by the relevant PRC authorities for periods of 30 to 70 years, which expire between 2020 and 2068. For other land in the PRC on which the Group’s buildings are erected, the Group was formally granted the rights to use such land for periods of one to five years commencing in the second quarter of 1997 pursuant to various lease agreements between the Group and CSAHC. The leases with initial one-year term are automatically renewable for another one-year period unless the Group gives appropriate notice of termination. In this connection, rental payments totaling RMB15, RMB15 and RMB18 were paid to CSAHC for eachrespect of the years ended December 31, 2002, 20032006 and 2004 respectively2005.
The calculation of basic earnings per share for the year ended December 31, 2007 is based on the profit / (loss) attributable to equity shareholders of the Company of RMB1,871 million (2006: RMB188 million; 2005: RMB (1,848) million) and the weighted average number of shares in
respect of these leases (Note 24). The Group is obligated under various capital leases for aircraft that expire at various datesissue during the next nineyear of 4,374 million (2006: 4,374 million; 2005: 4,374 million).
The amounts of diluted earnings per share are the same as basic earnings per share as there were no dilutive potential ordinary shares in existence for both the current and prior years. The gross amount of aircraft and related accumulated amortization recorded under capital leases are as follows:
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Aircraft | | | 10,463 | | | | 14,529 | |
Less: Accumulated amortization | | | 2,605 | | | | 2,894 | |
| | | | | | |
| | | 7,858 | | | | 11,635 | |
| | | | | | |
As of December 31, 2003 and 2004, certain aircraft of the Group with an aggregate carrying amount of approximately RMB6,718 and RMB11,927, respectively, were mortgaged under certain loan agreements (Note 17).
In compliance with the PRC rules and regulations governing initial public offering of shares by PRC joint stock limited companies, the property, plant and equipment of the Group as of December 31, 1996 were revalued. This revaluation was conducted by Guangzhou Assets Appraisal Corp., a firm of independent valuers registered in the PRC, on a depreciated replacement cost basis, and approved by the China State-owned Assets Administration Bureau.
In accordance with IAS 16 “Property, Plant and Equipment”, subsequent
17 | Property, plant and equipment, net |
| | | | | | Aircraft | | Other | | | | | |
| | | | | | | | Acquired | | flight | | Machinery, | | | |
| | | | | | | | under | | equipment, | | equipment | | | |
| | Investment | | | | | | finance | | including | | and | | | |
| | properties | | Buildings | | Owned | | leases | | rotables | | vehicles | | Total | |
| | RMB | | RMB | | RMB | | RMB | | RMB | | RMB | | RMB | |
| | million | | million | | million | | million | | million | | million | | million | |
Cost or valuation: | | | | | | | | | | | | | | | | | | | | | | |
At January 1, 2006 | | | 264 | | | 7,023 | | | 28,961 | | | 22,675 | | | 10,047 | | | 2,867 | | | 71,837 | |
Additions | | | - | | | - | | | 843 | | | 4,037 | | | 769 | | | 339 | | | 5,988 | |
Transfer from construction | | | | | | | | | | | | | | | | | | | | | | |
in progress | | | - | | | 516 | | | 677 | | | 580 | | | 12 | | | 46 | | | 1,831 | |
Through the acquisition of | | | | | | | | | | | | | | | | | | | | | | |
CSAHC Hainan | | | | | | | | | | | | | | | | | | | | | | |
(Note 42(d)) | | | - | | | 34 | | | 39 | | | - | | | 41 | | | 17 | | | 131 | |
Reclassification on exercise | | | | | | | | | | | | | | | | | | | | | | |
of purchase options | | | - | | | - | | | 3,273 | | | (3,273 | ) | | - | | | - | | | - | |
Reclassification | | | - | | | (172 | ) | | - | | | - | | | - | | | 172 | | | - | |
Disposals | | | - | | | (780 | ) | | (580 | ) | | (204 | ) | | (575 | ) | | (133 | ) | | (2,272 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2006 | | | 264 | | | 6,621 | | | 33,213 | | | 23,815 | | | 10,294 | | | 3,308 | | | 77,515 | |
| | | | | | | | | | | | | | | | | | | | | | |
Representing: | | | | | | | | | | | | | | | | | | | | | | |
Cost | | | 264 | | | 6,266 | | | 27,420 | | | 19,475 | | | 8,120 | | | 2,824 | | | 64,369 | |
Valuation – 1996 (Note (b)) | | | - | | | 355 | | | 5,793 | | | 4,340 | | | 2,174 | | | 484 | | | 13,146 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | 264 | | | 6,621 | | | 33,213 | | | 23,815 | | | 10,294 | | | 3,308 | | | 77,515 | |
| | | | | | | | | | | | | | | | | | | | | | |
At January 1, 2007 | | | 264 | | | 6,621 | | | 33,213 | | | 23,815 | | | 10,294 | | | 3,308 | | | 77,515 | |
Additions | | | 2 | | | 159 | | | 1,149 | | | 4,340 | | | 698 | | | 282 | | | 6,630 | |
Transfer from construction | | | | | | | | | | | | | | | | | | | | | | |
in progress | | | - | | | 129 | | | 681 | | | 396 | | | 73 | | | 5 | | | 1,284 | |
Through the acquisition of | | | | | | | | | | | | | | | | | | | | | | |
Nan Lung Freight | | | | | | | | | | | | | | | | | | | | | | |
and Air Catering | | | | | | | | | | | | | | | | | | | | | | |
(Note 42(b)) | | | - | | | 24 | | | - | | | - | | | - | | | 53 | | | 77 | |
Reclassification on exercise | | | | | | | | | | | | | | | | | | | | | | |
of purchase options | | | - | | | - | | | 2,705 | | | (2,705 | ) | | - | | | - | | | - | |
Disposals | | | - | | | (141 | ) | | (359 | ) | | (63 | ) | | (376 | ) | | (200 | ) | | (1,139 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2007 | | | 266 | | | 6,792 | | | 37,389 | | | 25,783 | | | 10,689 | | | 3,448 | | | 84,367 | |
| | | | | | | | | | | | | | | | | | | | | | |
Representing: | | | | | | | | | | | | | | | | | | | | | | |
Cost | | | 266 | | | 6,440 | | | 32,016 | | | 21,496 | | | 8,540 | | | 3,039 | | | 71,797 | |
Valuation – 1996 (Note (b)) | | | - | | | 352 | | | 5,373 | | | 4,287 | | | 2,149 | | | 409 | | | 12,570 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | 266 | | | 6,792 | | | 37,389 | | | 25,783 | | | 10,689 | | | 3,448 | | | 84,367 | |
17 | Property, plant and equipment, net (continued) |
| | | | | | Aircraft | | Other | | | | | |
| | | | | | | | Acquired | | flight | | Machinery, | | | |
| | | | | | | | under | | equipment, | | equipment | | | |
| | Investment | | | | | | finance | | including | | and | | | |
| | properties | | Buildings | | Owned | | leases | | rotables | | vehicles | | Total | |
| | RMB | | RMB | | RMB | | RMB | | RMB | | RMB | | RMB | |
| | million | | million | | million | | million | | million | | million | | million | |
Accumulated | | | | | | | | | | | | | | | | | | | | | | |
depreciation and | | | | | | | | | | | | | | | | | | | | | | |
impairment losses: | | | | | | | | | | | | | | | | | | | | | | |
At January 1, 2006 | | | 47 | | | 858 | | | 5,877 | | | 4,002 | | | 5,113 | | | 1,686 | | | 17,583 | |
Charge for the year | | | 11 | | | 237 | | | 1,984 | | | 1,321 | | | 995 | | | 451 | | | 4,999 | |
Reclassification on exercise | | | | | | | | | | | | | | | | | | | | | | |
of purchase options | | | - | | | - | | | 1,034 | | | (1,034 | ) | | - | | | - | | | - | |
Reclassification | | | - | | | (41 | ) | | - | | | - | | | - | | | 41 | | | - | |
Disposals | | | - | | | (56 | ) | | (510 | ) | | (204 | ) | | (513 | ) | | (119 | ) | | (1,402 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2006 | | | 58 | | | 998 | | | 8,385 | | | 4,085 | | | 5,595 | | | 2,059 | | | 21,180 | |
| | | | | | | | | | | | | | | | | | | | | | |
At January 1, 2007 | | | 58 | | | 998 | | | 8,385 | | | 4,085 | | | 5,595 | | | 2,059 | | | 21,180 | |
Charge for the year | | | 11 | | | 286 | | | 2,554 | | | 1,365 | | | 1,037 | | | 344 | | | 5,597 | |
Reclassification on exercise | | | | | | | | | | | | | | | | | | | | | | |
of purchase options | | | - | | | - | | | 878 | | | (878 | ) | | - | | | - | | | - | |
Disposals | | | - | | | (27 | ) | | (359 | ) | | (63 | ) | | (343 | ) | | (168 | ) | | (960 | ) |
Impairment loss for the year | | | | | | | | | | | | | | | | | | | | | | |
(Note (h)) | | | - | | | - | | | 109 | | | - | | | - | | | - | | | 109 | |
| | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2007 | | | 69 | | | 1,257 | | | 11,567 | | | 4,509 | | | 6,289 | | | 2,235 | | | 25,926 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net book value: | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2007 | | | 197 | | | 5,535 | | | 25,822 | | | 21,274 | | | 4,400 | | | 1,213 | | | 58,441 | |
| | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2006 | | | 206 | | | 5,623 | | | 24,828 | | | 19,730 | | | 4,699 | | | 1,249 | | | 56,335 | |
(a) | Most of the Group’s buildings are located in the PRC. The Group was formally granted the rights to use the thirty parcels of land in Guangzhou, Shenzhen, Zhuhai, Beihai, Changsha, Shantou, Haikou, Zhengzhou, Guiyang and Wuhan by the relevant PRC authorities for periods of 30 to 70 years, which expire between 2020 and 2068. For other land in the PRC on which the Group’s buildings are erected, the Group was formally granted the rights to use such land for periods of one to three years pursuant to various lease agreements between the Company and CSAHC. In this connection, rental payments totalling RMB22 million were paid to CSAHC during 2007 (2006: RMB22 million; 2005: RMB24 million) in respect of these leases. |
17 | Property, plant and equipment, net (continued) |
(b) | In compliance with the PRC rules and regulations governing initial public offering of shares by PRC joint stock limited companies, the property, plant and equipment of the Group as at December 31, 1996 were revalued. This revaluation was conducted by Guangzhou Assets Appraisal Corp. (“GAAC”), a firm of independent valuers registered in the PRC, on a depreciated replacement cost basis, and approved by the China State-owned Assets Administration Bureau. |
Subsequent to the 1996 revaluation,
which was based on replacement costs, the property, plant and equipment of the Group are carried at revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated
depreciation and impairment losses.depreciation. Revaluation is performed periodically to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date.
In accordance with theBased on a revaluation performed
by the directors in respect of property, plant and equipment held by the Group as of
December 31, 2000,September 30, 2005, by Savills Valuation & Professional Services Limited, a firm of independent valuers, on a depreciated replacement cost basis, the carrying
amountsvalue of property, plant and equipment did not differ materially from their
respective fair value.
F-25
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
The effect
At December 31, 2007 and 2006, the carrying amount of
the above revaluation was to increase annual depreciation charges of the Group by approximately RMB33, RMB33 and RMB13, respectively, for 2002, 2003 and 2004. During 2002, pursuant to certain sale and leaseback arrangements, the Group sold four Boeing 757-200 aircraft, to independent third parties and then entered into operating leases with such parties to lease back the aircraft for a period of eight to nine years. The Group recognized a gain of RMB199, being the excess of the sale proceeds which approximated the aircraft’s fair value on the date of disposal over the aircraft’s net book value and related disposal costs. During 2003, the Group incurred a loss of RMB20 on early retirement of two old Boeing 737-200 aircraft. Such gain/loss was included under the sub-item “Gain/(loss) on sale ofrevalued property, plant and equipment”equipment approximated the historical carrying value of such assets had they been stated at cost less accumulated depreciation and impairment losses.
(c) | As at December 31, 2007, certain aircraft of the Group with an aggregate carrying value of approximately RMB32,976 million (2006: RMB30,075 million) were mortgaged under certain loan and lease agreements (Notes 29 and 30). |
(d) | The Group leased out investment properties and certain flight training facilities under operating leases. The leases typically run for an initial period of five to fifteen years, with an option to renew the lease after that date at which time all terms are renegotiated. None of the leases includes contingent rentals. In this connection, rental income totalling RMB49 million (2006: RMB49 million; 2005: RMB46 million) was received by the Group during the year in respect of the leases. |
All properties held under
“Non-operating income/(expenses)” inoperating leases that would otherwise meet the
consolidated statementsdefinition of
operations. In 2003, the Group entered intoinvestment property are classified as investment property.
The Group’s total future minimum lease payments under non-cancellable operating lease arrangements to lease certain flight training facilities and buildings to Zhuhai Xiang Yi Aviation Technology Company Limited (“Zhuhai Xiang Yi”), a jointly controlled entity of the Group. The leases with initial one-year term are automatically renewable for another one year unless either party gives appropriate notice of termination. In this connection, rental income totaling RMB34 was received by the Group for each of the years endedreceivable as follows:
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Within 1 year | | | 49 | | | 49 | |
After 1 year but within 5 years | | | 191 | | | 193 | |
After 5 years | | | 198 | | | 245 | |
| | | 438 | | | 487 | |
As at December 31, 2003 and 2004 in respect of the leases. As of December 31, 2004,2007, the cost and accumulated depreciation of the relevant property, plant and equipment totaled RMB787 and RMB514, respectively.flight training facilities leased out by the Group under the operating leases amounted to RMB160 million (2006: RMB160 million). Depreciation of the relevant facilities recognised during the year totalled RMB14 million (2006: RMB28 million; 2005: RMB 20 million).
17 | Property, plant and equipment, net (continued) |
(e) | The investment properties are located in the PRC, where comparable market transactions are infrequent. In the absence of the current or recent prices in an active market and alternative reliable estimates of fair value (for example discounted cash flow projection) are not available, the Group could not reliably determine the fair value of the investment properties. |
(f) | The Company entered into two separate arrangements (the “Arrangements”) with certain independent third parties during each of 2002 and 2003. Under each of the Arrangements, the Company sold an aircraft and then immediately leased back the aircraft for an agreed period. The Company has an option to purchase the aircraft at a pre-determined date. In the event that the lease agreement is early terminated by the Company, the Company is liable to pay a pre-determined penalty to the lessor. Provided that the Company complies with the lease agreements, the Company is entitled to the continued possession and operation of the aircraft. Since the Company retains substantially all risks and rewards incidental to ownership of the aircraft and enjoys substantially the same rights to their use as before the Arrangements, no adjustment has been made to the property, plant and equipment. |
(g) | As at December 31, 2007 and up to the date of approval of these consolidated financial statements, the Group is in the process of applying for the land use right certificates and property title certificates in respect of the properties located in Guangzhou Baiyun International Airport, Xiamen, Heilongjiang, Hainan, Jilin and Xinjiang, in which the Group has interests and for which such certificates have not been granted. As at December 31, 2007, carrying value of such properties of the Group amounted to RMB2,471 million (2006: RMB1,800 million). The directors of the Company are of the opinion that the use of and the conduct of operating activities at the properties referred to above are not affected by the fact that the Group has not yet obtained the relevant land use right certificates and property title certificates. |
(h) | In view of the age of the Group’s fleet of MD82 aircraft, the Group has disposed of 11 MD82 aircraft during the year and plans to dispose of its remaining fleet of MD82 aircraft. The Group has commenced its process of seeking buyers for its remaining 12 MD82 aircraft. As a result, the Group assessed the recoverable amounts of these aircraft. Based on this assessment, the carrying amount of the aircraft was written down by RMB109 million (Note 8). The estimates of recoverable amount were based on the aircraft's fair value less costs to sell, determined by reference to the recent observable market prices for MD82 aircraft. |
18 | Construction in progress |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
At 1 January | | | 9,587 | | | 6,895 | |
Additions | | | 6,004 | | | 4,563 | |
Transferred to property, | | | | | | | |
plant and equipment | | | (1,284 | ) | | (1,831 | ) |
Other decrease (Note) | | | (2,922 | ) | | (40 | ) |
| | | | | | | |
At December 31 | | | 11,385 | | | 9,587 | |
18 | Construction in progress (continued) |
The construction in progress as at December 31, 2007 mainly related to advance payments for acquisition of aircraft and flight equipment recognizedand progress payments for eachother construction projects at the Guangzhou, Hainan, Shenzhen and Fuzhou airports, Shanghai Pudong Base and Beijing Branch.
Note:
Certain software systems to be used in the Group’s operation were transferred to other assets upon completion of the development of relevant systems.
During the year,
ended December 31, 2003the Company entered into agreements with certain third parties to sell nine aircraft to third parties prior to the deliveries of these aircraft and
2004 amountedthen lease back the aircraft from the then lessors in the form of operating leases. The advance payments paid to
RMB55. As of December 31, 2004,aircraft manufacturers and the
Group’s rental receivablerelated interest costs capitalised as construction in progress in respect of the
leases due in 2005 amounted to RMB34. During 2002, the Group entered into arrangements to lease several of itsnine aircraft to independent third parties. The terms of such leases generally range from one to twelve months.
The Group entered into two separate arrangements (the “Arrangements”) with certain independent third parties during each of 2002 and 2003. Under each of the Arrangements, the Group sold an aircraft and thenaccumulated immediately leased back the aircraft for an agreed period. The lease payment obligations, with pre-determined net present value, are to be satisfied solely out of the sale proceeds and such amount has been placed irrevocably by the Group in form of deposits and debt securities in favour of the lessors. The Group has an option to purchase the aircraft at a pre-determined date and an agreed purchase price to be satisfied by the balances of the deposits and debt securities outstanding at that date. In the event that the lease agreement is early terminated by the Group, the Group is liable to pay a pre-determined penaltyprior to the lessor. Provided thatdeliveries of aircraft were transferred to calculate the Group complies with the lease agreements, the Group is entitled to the continued possessiongain or loss on sales and operation of the aircraft. Since the Group retains substantially all risks and rewards incident to ownership of the aircraft and enjoys substantially the same rights to their use as before the Arrangements, no adjustment has been made to the property, plant and equipment. As of December 31, 2003 and 2004, the net present value of the lease commitments and the corresponding defeased deposits and debt securities amounted to RMB2,409 and RMB 2,462, respectively. As a result of the Arrangements, the Group received net cash benefits of RMB52 and RMB69 in 2002 and 2003, respectively, which have been recognized as income for the respective years.
F-26
leaseback.
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
As of December 31, 2004 and up to the date of approval of these consolidated financial statements, the Group is in the process of applying for the land use right certificates and property title certificates in respect of the properties located in the Guangzhou new airport, Guangzhou Baiyun International Airport, in which the Group has interests and for which such certificates have not been granted. As of December 31, 2004, carrying value of such properties of the Group amounted to RMB2,477. The directors of the Company are of the opinion that the use of and the conduct of operating activities at the properties referred to above are not affected by the fact that the Group has not yet obtained the relevant land use right certificates and property title certificates.
15. CONSTRUCTION IN PROGRESS
As of December 31, 2003 and 2004, included in construction in progress was an amount of RMB1,446 and RMB319, respectively, in relation to the construction of facilities in the Guangzhou new airport.
16. INVESTMENTS
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Share of net assets in affiliated companies | | | 422 | | | | 429 | |
Share of net assets in jointly controlled entities | | | 731 | | | | 782 | |
Other investments, at cost | | | 204 | | | | 272 | |
| | | | | | |
| | | 1,357 | | | | 1,483 | |
| | | | | | |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Share of net assets | | | 219 | | | 149 | |
Details of the Group’s principal affiliated companies andassociates are set out in Note 52, all of which are unlisted corporate entities.
Summary of financial information on associates:
| | 100 Percent | | Group’s effective interest | |
| | 2007 | | 2006 | | 2005 | | 2007 | | 2006 | | 2005 | |
| | RMB | | RMB | | RMB | | RMB | | RMB | | RMB | |
| | million | | million | | million | | million | | million | | million | |
| | | | | | | | | | | | | |
Non-current assets | | | 7,713 | | | 6,042 | | | | | | 2,946 | | | 2,319 | | | | |
Current assets | | | 3,116 | | | 2,281 | | | | | | 633 | | | 502 | | | | |
Non-current liabilities | | | (4,597 | ) | | (3,525 | ) | | | | | (1,789 | ) | | (1,372 | ) | | | |
Current liabilities | | | (5,366 | ) | | (4,110 | ) | | | | | (1,571 | ) | | (1,300 | ) | | | |
| | | | | | | | | | | | | | | | | | | |
Net assets | | | 866 | | | 688 | | | | | | 219 | | | 149 | | | | |
| | | | | | | | | | | | | | | | | | | |
Revenue | | | 5,635 | | | 4,485 | | | 3,314 | | | 2,184 | | | 1,727 | | | 1,318 | |
Expenses | | | (5,471 | ) | | (4,487 | ) | | (3,837 | ) | | (2,127 | ) | | (1,722 | ) | | (1603 | ) |
| | | | | | | | | | | | | | | | | | | |
Profit / (loss) for the year | | | 164 | | | (2 | ) | | (523 | ) | | 57 | | | 5 | | | (285 | ) |
20 | Interest in jointly controlled entities |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Share of net assets | | | 873 | | | 870 | |
20 | Interest in jointly controlled entities (continued) |
Details of the Group’s principal jointly controlled entities are set out in Note
30.F-27
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
17. DEBT
Short-term notes payable
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Short-term notes payable | | | 6,409 | | | | 9,925 | |
| | | | | | |
As52, all of December 31, 2003 and 2004, borrowings under short-term notes payablewhich are unlisted corporate entities.
Summary of financial information on jointly controlled entities:
| | Group’s effective interest | |
| | 2007 | | 2006 | | 2005 | |
| | RMB million | | RMB million | | RMB million | |
| | | | | | | |
Non-current assets | | | 1,140 | | | 925 | | | | |
Current assets | | | 1,186 | | | 1,111 | | | | |
Non-current liabilities | | | (1,185 | ) | | (335 | ) | | | |
Current liabilities | | | (268 | ) | | (831 | ) | | | |
| | | | | | | | | | |
Net assets | | | 873 | | | 870 | | | | |
| | | | | | | | | | |
Revenue | | | 1,885 | | | 1,464 | | | 1,115 | |
Expenses | | | (1,762 | ) | | (1,349 | ) | | (1,079 | ) |
| | | | | | | | | | |
Profit for the year | | | 123 | | | 115 | | | 36 | |
21 | Other investments in equity securities |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
Unlisted equity | | | | | | | |
securities, at cost | | | 168 | | | 261 | |
Dividend income from unlisted securities of the Group totaling RMB130 and RMB411, respectively, were guaranteed by CSAHC. In addition, as ofamounted to RMB10 million during the year ended December 31, 2003, borrowings under short-term notes payable2007 (2006: RMB7 million; 2005: RMB 4 million).
22 | Available-for-sale equity securities |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
Available-for-sale securities | | | | | | | |
-Listed in the PRC | | | 362 | | | 69 | |
| | | | | | | |
| | | | | | | |
Market value of | | | | | | | |
listed securities | | | 362 | | | 69 | |
During the year, a gain on re-measurement of the fair value, net of tax, of the Group’s available-for-sale securities was recognised directly in equity amounted to RMB183 million.
Dividend income from listed securities of the Group
totaling RMB63 and RMB21 were guaranteed by Guangzhou Baiyun International Airport Company Limited and Shenzhen Yingshun Investment Development Company Limited, respectively. These notes payable were fully repaid in 2004. Borrowings under short-term notes payable are used primarilyamounted to finance working capital needs and are repayable in full onRMB2 million during the respective due dates with interest rates ranging from 1.17% to 5.31%. The Group’s weighted average interest rate on short-term notes payable was 1.76% and 1.60%, respectively, as ofyear ended December 31, 2003 and 2004.
F-28
2007 (2006: RMB1 million; 2005: RMB Nil).
CHINA SOUTHERN AIRLINES COMPANY LIMITED
23 | Deferred tax assets / (liabilities) |
Movements of net deferred tax assets / (liabilities) are as follows:
AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Long-term notes payable
| | | | | | | | |
| | December 31, | |
Interest rate and final maturity | | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Renminbi denominated notes payable: | | | | | | | | |
| | | | | | | | |
Fixed interest rates ranging from 4.80% to 6.03% per annum as of December 31, 2004, with maturities through 2009. | | | — | | | | 1,628 | |
| | | | | | | | |
Floating interest rates ranging from 4.94% to 5.76% per annum as of December 31, 2004, with maturities through 2004. | | | 76 | | | | 1,217 | |
| | | | | | | | |
Non-interest bearing loan from a municipal government authority, repayable in 2005. | | | 3 | | | | 3 | |
| | | | | | | | |
U.S. dollar denominated notes payable: | | | | | | | | |
| | | | | | | | |
Fixed interest rates ranging from 2.18% to 8.35% per annum as of December 31, 2004, with maturities through 2014. | | | 2,626 | | | | 2,676 | |
| | | | | | | | |
Floating interest rates ranging from 6 months LIBOR + 0.3% to 1.20% per annum as of December 31, 2004, with maturities through 2014. | | | 2,505 | | | | 6,578 | |
| | | | | | | | |
Floating interest rates ranging from 3 months LIBOR + 0.65% to 0.90% per annum as of December 31, 2004, with maturities through 2011. | | | — | | | | 1,426 | |
| | | | | | |
| | | 5,210 | | | | 13,528 | |
Less: current installments | | | (688 | ) | | | (1,593 | ) |
| | | | | | |
| | | 4,522 | | | | 11,935 | |
| | | | | | |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
At January 1 | | | (277 | ) | | (268 | ) |
(Charged) / credited to consolidated | | | | | | | |
statements of operations (Note 14(a)) | | | | ) | | (9 | ) |
Charged to equity | | | (64 | ) | | | |
Transfer to income tax payable | | | 112 | | | | |
| | | | | | | |
At December 31 | | | (737 | ) | | (277 | ) |
As of
The deferred tax assets / (liabilities) at December 31, 20032007 were made up of the following tax effects:
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
Deferred tax assets: | | | | | | | |
Repair charges capitalised | | | | | | 203 | |
Accrued expenses | | | 506 | | | 465 | |
Others | | | 46 | | | 38 | |
| | | | | | | |
Total deferred tax assets | | | 552 | | | 706 | |
| | | | | | | |
Deferred tax liabilities: | | | | | | | |
Accrued expenses | | | (177 | ) | | (105 | ) |
Depreciation allowances in excess of the | | | | | | | |
related depreciation | | | (1,048 | ) | | (878 | ) |
Change in fair value of available-for-sale securities | | | (64 | ) | | | |
| | | | | | | |
Total deferred tax liabilities | | | (1,289 | ) | | (983 | ) |
| | | | | | | |
| | | (737 | ) | | (277 | ) |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
Net deferred tax asset recognised on | | | | | | | |
the consolidated balance sheet | | | 11 | | | 95 | |
Net deferred tax liability recognised | | | | | | | |
on the consolidated balance sheet | | | (748 | ) | | (372 | ) |
| | | | | | | |
| | | (737 | ) | | (277 | ) |
At December 31, 2007, the Group’s gross amount of unused tax losses not expected to be utilised was RMB401 million (2006: RMB423 million).
23 | Deferred tax assets / (liabilities) (continued) |
Tax losses in the PRC are available for carry forward to set off future PRC assessable income for a maximum period of five years. Of the RMB401 million tax losses at December 31, 2007, approximately RMB309 million, and 2004, borrowings under long-term notes payableRMB92 million will expire in 2011 and 2012 respectively. In accordance with accounting policy set out in Note 2(u), the Group had not recognised deferred tax asset in respect of these unused tax losses as it was determined by management that it is not probable that future taxable profits against which the losses can be utilised will be available before they expire.
Other assets of the Group totaling RMB2,565mainly include lump sum housing benefits (Note 40), software systems used for airline operation and RMB2,172, respectively, were guaranteed by certainprepayment for exclusive use right of an airport terminal.
Movements of lump sum housing benefit, software and prepayment for exclusive use right of an airport terminal are as follows:
| | | | | | Prepayment | |
| | | | | | for exclusive | |
| | Lump sum | | | | use right of | |
| | housing | | | | an airport | |
| | benefit | | Software | | terminal | |
| | RMB million | | RMB million | | RMB million | |
| | | | | | | |
At January 1, 2006 | | | 171 | | | 92 | | | | |
Additions | | | | | | 2 | | | | |
Amortisation | | | (26 | ) | | (27 | ) | | | |
| | | | | | | | | | |
At December 31, 2006 | | | 145 | | | 67 | | | | |
At January 1, 2007 | | | 145 | | | 67 | | | | |
Additions | | | | | | 101 | | | 150 | |
Amortisation | | | (26 | ) | | (19 | ) | | | |
| | | | | | | | | | |
At December 31, 2007 | | | 119 | | | 149 | | | 150 | |
25 | Financial assets / liabilities |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Fuel option | | | 2 | | | | |
25 | Financial assets / liabilities (continued) |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Fuel option | | | | | | 26 | |
Foreign exchange forward option | | | 5 | | | | |
| | | 5 | | | 26 | |
The above financial institutionsderivative instruments are held for trading.
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Expendable spare parts and maintenance materials | | | 1,087 | | | 1,236 | |
Other supplies | | | 126 | | | 79 | |
| | | 1,213 | | | 1,315 | |
The analysis of the amount of inventories recognised as an expense is as follows:
| | 2007 | | 2006 | | 2005 | |
| | RMB million | | RMB million | | RMB million | |
| | | | | | | |
Consumption | | | 836 | | | 694 | | | 720 | |
Write-down of inventories | | | 101 | | | 161 | | | 209 | |
| | | 937 | | | 855 | | | 929 | |
Inventories had been written down as a result of fleet adjustment during the current and securedprior years.
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Trade receivables | | | 1,999 | | | 1,552 | |
Allowance for doubtful debts | | | (33 | ) | | (40 | ) |
| | | 1,966 | | | 1,512 | |
27 | Trade receivables (continued) |
Credit terms granted by the mortgages over certainGroup to sales agents and other customers generally range from one to three months. An ageing analysis of trade receivables, net of allowance for doubtful debts, is set out below:
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Within 1 month | | | 1,803 | | | 1,355 | |
More than 1 month but less than 3 months | | | 144 | | | 131 | |
More than 3 months but less than 12 months | | | 18 | | | 24 | |
More than 12 months | | | 1 | | | 2 | |
| | | 1,966 | | | 1,512 | |
All of the Group’s aircraft. In addition, astrade receivables are expected to be recovered within one year.
(b) | Impairment of trade receivables |
Impairment loss in respect of December 31, 2003 and 2004, borrowings under long-term notes payabletrade receivables is recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against trade receivables directly.
The movements in the allowance for doubtful debts during the year are as follows:
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
At January 1 | | | 40 | | | 42 | |
Impairment loss recognised | | | 2 | | | 7 | |
Uncollectible amounts written off | | | (9 | ) | | (9 | ) |
At December 31 | | | 33 | | | 40 | |
(c) | Trade receivables that are not impaired |
The ageing analysis of trade receivables that is neither individually nor collectively considered to be impaired is as follows:
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Neither past due nor impaired | | | 1,947 | | | 1,486 | |
Trade receivables that were neither past due nor impaired relate to customers for whom there was no recent history of default.
28 | Cash and cash equivalents |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Deposits with banks | | | 1,111 | | | 26 | |
Cash at bank and on hand | | | 2,713 | | | 2,238 | |
Cash and cash equivalents | | | 3,824 | | | 2,264 | |
Southern Airlines Group
totaling RMB229 and RMB2,041, respectively, were guaranteedFinance Company Limited (“SA Finance”) is a PRC authorised financial institution controlled by CSAHC and
RMB10 and RMB9, respectively, were guaranteed by SA Finance. As of December 31, 2004, the Group had banking facilities with several PRC commercial banks for providing loan finance up tois an approximate amount of RMB35,750. As of December 31, 2004, an approximate amount of RMB11,525 was utilized.
The aggregate annual maturities of long-term notes payable for eachassociate of the five years subsequent toGroup. In accordance with the financial agreement dated May 22, 1997, as revised on December 31, 2004 and thereafter are as follows:
F-29
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
| | | | |
| | RMB | |
Year ending December 31, | | | | |
2005 | | | 1,593 | |
2006 | | | 1,626 | |
2007 | | | 4,139 | |
2008 | | | 1,055 | |
2009 | | | 1,228 | |
Thereafter | | | 3,887 | |
| | | |
| | | 13,528 | |
| | | |
Interest expense, netNovember 15, 2007 between the Company and SA Finance, all of the amounts capitalized, represents:Group’s deposits accepted by SA Finance were simultaneously placed with several designated major PRC banks by SA Finance. As at December 31, 2007, the Group’s deposits with SA Finance amounted to RMB906 million (2006: RMB629 million) (Note 39(d)).
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Interest incurred | | | 1,023 | | | | 907 | | | | 725 | |
Interest capitalized | | | (64 | ) | | | (83 | ) | | | (34 | ) |
| | | | | | | | | |
Interest expense | | | 959 | | | | 824 | | | | 691 | |
| | | | | | | | | |
Interest
(a) | At December 31, 2007, bank and other loans were repayable as follows: |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Within 1 year or on demand | | | 24,948 | | | 23,822 | |
| | | | | | | |
After 1 year but within 2 years | | | 2,740 | | | 2,986 | |
After 2 years but within 5 years | | | 4,289 | | | 4,533 | |
After 5 years | | | 2,045 | | | 2,499 | |
| | | | | | | |
| | | 9,074 | | | 10,018 | |
| | | 34,022 | | | 33,840 | |
29 | Bank and other loans (continued) |
(b) | At December 31, 2007, bank and other loans are as follows: |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Short-term bank loans | | | 21,313 | | | 19,908 | |
Long-term bank and other loans due within | | | | | | | |
one year (classified as current liabilities) | | | 3,635 | | | 3,914 | |
| | | 24,948 | | | 23,822 | |
Long-term bank and other loans due after one | | | | | | | |
year (classified as non-current liabilities) | | | 9,074 | | | 10,018 | |
| | | 34,022 | | | 33,840 | |
Representing: | | | | | | | |
Bank loans | | | 34,019 | | | 33,818 | |
Other loans | | | 3 | �� | | 22 | |
| | | 34,022 | | | 33,840 | |
(c) | As at December 31, 2007, the Group’s weighted average interest rates on short-term borrowings were 5.14% per annum (2006: 5.77% per annum). |
Subsequent to December 31, 2007 through March 31, 2008, the Group renewed certain short-term bank loans of RMB3,179 million. The renewed bank loans are unsecured, bear interest at floating rates ranging from 6-month LIBOR + 0.50% to 1.80% per annum at which borrowing costs were capitalized were 5.70%, 1.62% to 5.46%, and 1.51% to 3.48% respectively, for the years ended December 31, 2002, 2003are repayable within one year from their respective renewal dates.
29 | Bank and other loans (continued) |
(d) | Details of bank and other loans with original maturity over one year are as follows: |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
Renminbi denominated loans Non-interest bearing loan from a municipal government authority | | | 3 | | | 3 | |
| | | | | | | |
Floating interest rates ranging from 5.58% to 6.72% per annum as at December 31, 2007, with maturities through 2012 | | | 383 | | | 325 | |
| | | | | | | |
United States Dollars denominated loans Fixed interest rates ranging from 4.43% to 7.48% per annum as at December 31, 2007, with maturities through 2015 | | | 1,337 | | | 1,863 | |
| | | | | | | |
Floating interest rates ranging from 3-month LIBOR + 0.50% to 0.75% per annum as at December 31, 2007, with maturities through 2010 | | | 1,527 | | | 1,727 | |
| | | | | | | |
Floating interest rates ranging from 6-month LIBOR + 0.28% to 1.20% per annum as at December 31, 2007, with maturities through 2017 | | | 9,459 | | | 9,995 | |
| | | | | | | |
Hong Kong Dollars denominated loans Non-interest bearing loan from a minority shareholder repayable within five years (Note 39(g)) | | | | | | 19 | |
| | | | | | | |
| | | 12,709 | | | 13,932 | |
Less: loans due within one year classified as current liabilities | | | (3,635 | ) | | (3,914 | ) |
| | | | | | | |
| | | 9,074 | | | 10,018 | |
29 | Bank and other loans (continued) |
(e) | The remaining contractual maturities at the balance sheet date of the Group’s bank and other loans, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates, or if floating, based on rates current at the balance sheet date) and the earliest date the Group can be required to pay, are as follows: |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Within 1 year | | | 26,233 | | | 25,248 | |
After 1 year but within 2 years | | | 3,157 | | | 3,513 | |
After 2 years but within 5 years | | | 4,899 | | | 5,348 | |
After 5 years | | | 2,215 | | | 2,779 | |
| | | 36,504 | | | 36,888 | |
(f) | As at December 31, 2007, bank and other loans of the Group totalling RMB8,583 million (2006: RMB8,726 million) were secured by mortgages over certain of the Group’s aircraft with carrying amount of RMB11,703 million (2006: RMB10,345 million). |
(g) | As at December 31, 2007, certain bank and other loans were guaranteed by the following parties: |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
Guarantors | | | | | | | |
Industrial Commercial Bank of China | | | 46 | | | 79 | |
Export-Import Bank of the United States | | | 516 | | | 828 | |
Bank of China | | | | | | 74 | |
CSAHC | | | 1,176 | | | 1,484 | |
Shenzhen Yingshun Investment | | | | | | | |
Development Company Ltd. | | | 22 | | | 22 | |
SA Finance | | | 3 | | | 5 | |
Industrial Bank Co., Ltd. | | | | | | 48 | |
Huaxia Bank Co., Ltd. | | | 657 | | | | |
| | | 2,420 | | | 2,540 | |
(h) | As at December 31, 2007, loans to the Group from SA Finance amounted to RMB329 million (2006: RMB300 million) (Note 39(d)). |
(i) | As at December 31, 2007, the Group had banking facilities with several PRC commercial banks for providing loan finance up to approximately RMB50,262 million (2006: RMB49,041 million), of which approximately RMB29,338 million (2006: RMB28,295 million) was utilised. |
29 | Bank and other loans (continued) |
(j) | The exchange rate of Renminbi to US dollar was set by the PBOC and had fluctuated within a narrow band prior to July 21, 2005. Since July 21, 2005, a managed floating exchange rate regime based on market supply and demand with reference to a basket of foreign currencies has been used and US dollar exchange rate has declined against the Renminbi since then. The Group has significant bank and other loans balances as well as obligations under finance leases (Note 30) which are denominated in US dollars. The net exchange gain of RMB2,832 million (2006: RMB1,492 million; 2005: RMB1,220 million) recorded by the Group was mainly attributable to the exchange gain arising from retranslating bank and other loans balances and finance lease obligations denominated in US dollars. The foreign currency risk is further discussed in Note 43(c). |
30 | Obligations under finance leases |
The Group have commitments under finance lease agreements in respect of aircraft and
2004.F-30
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
18. LEASE OBLIGATIONS
Capital leases
As of December 31, 2004, the Group leased 47 aircraft under capital leases.related equipment. The majority of these leases have terms of 10 to 15 years and expiry dates range from 2005 through 2013.
expiring during the years 2008 to 2022. As ofat December 31, 2004,2007, future payments under these capitalfinance leases which were 67% and 33%, respectively, denominated in U.S. dollars and Japanese yen, are as follows:
| | | | | | | | | | | | |
| | Payments | | | *Interest | | | Obligations | |
| | RMB | | | RMB | | | RMB | |
Year ending December 31, |
2005 | | | 2,580 | | | | 436 | | | | 2,144 | |
2006 | | | 3,213 | | | | 350 | | | | 2,863 | |
2007 | | | 2,844 | | | | 279 | | | | 2,565 | |
2008 | | | 2,699 | | | | 146 | | | | 2,553 | |
2009 | | | 997 | | | | 71 | | | | 926 | |
Thereafter | | | 722 | | | | 30 | | | | 692 | |
| | | | | | | | | |
| | | 13,055 | | | | 1,312 | | | | 11,743 | |
| | | | | | | | | | |
Less: current instalments of obligations under capital leases | | | (2,144 | ) |
| | | | | | | | | | | |
| | | | | | | | | | | 9,599 | |
| | | | | | | | | | | |
| | 2007 | | 2006 | |
| | Obligations | | Payments | | Interest | | Obligations | | Payments | | Interest | |
| | RMB | | RMB | | RMB | | RMB | | RMB | | RMB | |
| | million | | million | | million | | million | | million | | million | |
| | | | | | | | | | | | | |
Within 1 year | | | 2,877 | | | 3,588 | | | 711 | | | 3,091 | | | 3,769 | | | 678 | |
After 1 year but | | | | | | | | | | | | | | | | | | | |
within 2 years | | | 1,835 | | | 2,422 | | | 587 | | | 2,800 | | | 3,330 | | | 530 | |
After 2 years but | | | | | | | | | | | | | | | | | | | |
within 5 years | | | 3,906 | | | 5,237 | | | 1,331 | | | 3,873 | | | 4,926 | | | 1,053 | |
After 5 years | | | 7,117 | | | 8,252 | | | 1,135 | | | 5,634 | | | 6,378 | | | 744 | |
| | | 15,735 | | | 19,499 | | | 3,764 | | | 15,398 | | | 18,403 | | | 3,005 | |
| | | | | | | | | | | | | | | | | | | |
Less: balance due within one year classified as current liabilities | | | (2,877 | ) | | | | | | | | (3,091 | ) | | | | | | |
| | | 12,858 | | | | | | | | | 12,307 | | | | | | | |
*30 | | Interest rates ranged from 1.92% to 8.48%Obligations under finance leases (continued) |
Details of obligations under finance leases are as follows:
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
United States Dollars denominated obligations Fixed interest rates ranging from 4.24% to 7.53% per annum as at December 31, 2007 | | | 6,587 | | | 8,314 | |
| | | | | | | |
Floating interest rates ranging 6 month LIBOR + 0.03% to 0.80% per annum as at December 31, 2007 | | | 7,626 | | | 4,761 | |
| | | | | | | |
Japanese Yen denominated obligations Fixed interest rates ranging from 2.20% to 3.95% per annum as at December 31, 2007 | | | 1,522 | | | 2,323 | |
| | | 15,735 | | | 15,398 | |
Under the terms of the leases, the Group has an option to purchase, at or near the end of the lease term, certain aircraft
at fair market value and
othersrelated equipment at either fair market value or a percentage of the respective lessor’s defined
cost of the aircraft.cost.
Security, including charges over the assets concerned and relevant insurance policies, is provided to the lessors.
In addition to the assets mortgaged as security under certain loan agreements (Note 14), As at December 31, 2007, certain of the Group’s aircraft with an aggregate carrying amount of RMB7,858 and RMB11,635, respectively, as of December 31, 2003 and 2004RMB21,273 million (2006: RMB19,730 million) were mortgaged to secure facilities with financial institutions granted to lessors totaling RMB6,841 and RMB11,743, respectively, on these dates.
F-31
finance lease obligations totalling RMB15,735 million (2006: RMB15,398 million).
CHINA SOUTHERN AIRLINES COMPANY LIMITED
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Trade payables | | | 1,844 | | | 1,909 | |
The following is the ageing analysis of trade payables:
AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Operating leases
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Within 1 month | | | 1,180 | | | 1,125 | |
More than 1 month but less than 3 months | | | 347 | | | 448 | |
More than 3 months but less than 6 months | | | 317 | | | 336 | |
| | | 1,844 | | | 1,909 | |
As ofat December 31, 2004, future minimum lease payments under non-cancellable aircraft and flight equipment operating leases were as follows (principally denominated2007, the Group had an amount due to a fellow subsidiary of RMB Nil million (2006: RMB11 million) which was included in U.S. dollars):trade payables.
| | | | |
| | RMB | |
Year ending December 31, | | | | |
2005 | | | 1,761 | |
2006 | | | 1,622 | |
2007 | | | 1,562 | |
2008 | | | 5,259 | |
2009 | | | 764 | |
Thereafter | | | 1,782 | |
| | | |
Total minimum lease payments | | | 12,750 | |
| | | |
Amounts charged to rental expenses for operating leases for the years ended December 31, 2002, 2003 and 2004 totaled RMB1,348, RMB1,409 and RMB1,475, respectively.
All of the Group’s obligationstrade payables are expected to be settled within one year.
32 | Amounts due from / to related companies |
(a) | Amounts due from related companies |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
CSAHC and its affiliates | | | 6 | | | 4 | |
An associate | | | 1 | | | 2 | |
Jointly controlled entities | | | 111 | | | 122 | |
| | | 118 | | | 128 | |
The amounts due from related companies were unsecured, interest free and have no fixed terms of repayment. They are expected to be recovered within one year.
(b) | Amounts due to related companies |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
CSAHC and its affiliates | | | 76 | | | 167 | |
Jointly controlled entities | | | 118 | | | 87 | |
| | | 194 | | | 254 | |
The amounts due to related companies were unsecured, interest free and have no fixed terms of repayment.
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Jet fuel costs | | | 1,210 | | | 1,020 | |
Air catering expenses | | | 161 | | | 153 | |
Salaries and welfare | | | 1,517 | | | 868 | |
Repairs and maintenance | | | 1,642 | | | 1,281 | |
Provision for major overhauls (Note 35) | | | 450 | | | 255 | |
Provision for early retirement benefits (Note 36) | | | 77 | | | 86 | |
Landing and navigation fees | | | 1,209 | | | 1,168 | |
Computer reservation services | | | 398 | | | 66 | |
Interest expense | | | 483 | | | 448 | |
Others | | | 207 | | | 118 | |
| | | 7,354 | | | 5,463 | |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
CAAC Infrastructure Development Fund | | | 96 | | | 189 | |
Airport construction surcharge | | | 257 | | | 404 | |
Airport tax | | | 414 | | | 288 | |
Construction cost payable | | | 110 | | | 130 | |
Advance payments on chartered flights | | | 63 | | | 100 | |
Sales agent deposits | | | 239 | | | 221 | |
Other taxes payable | | | 827 | | | 494 | |
Others | | | 988 | | | 910 | |
| | | 2,994 | | | 2,736 | |
35 | Provision for major overhauls |
Details of provision for major overhauls in respect of aircraft held under
capital and operating leases are
guaranteed by financial institutions.19. ACCRUED EXPENSESas follows:
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Landing and navigation fees | | | 826 | | | | 1,331 | |
Duties and levies | | | 337 | | | | 71 | |
Fuel | | | 255 | | | | 743 | |
Interest | | | 158 | | | | 240 | |
Lease charges | | | 18 | | | | 29 | |
Accrued salaries, wages and benefits | | | 197 | | | | 349 | |
Repairs and maintenance | | | 287 | | | | 976 | |
Seat reservation | | | 55 | | | | 195 | |
Air catering | | | 114 | | | | 192 | |
Current portion of provision for major overhauls (Note 6) | | | 11 | | | | 75 | |
Lump sum housing benefits payable (Note 25) | | | 129 | | | | 69 | |
Other | | | 141 | | | | 281 | |
| | | | | | |
| | | 2,528 | | | | 4,551 | |
| | | | | | |
F-32
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
At January 1 | | | 1,060 | | | 452 | |
Provision for the year | | | 376 | | | 683 | |
Provision utilised during the year | | | (303 | ) | | (75 | ) |
At December 31 | | | 1,133 | | | 1,060 | |
Less: Current portion included in accrued | | | | | | | |
expenses (Note 33) | | | (450 | ) | | (255 | ) |
| | | 683 | | | 805 | |
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts
36 | Provision for early retirement benefits |
Details of provision for early retirement benefits in
millions, except share data)20. DEFERRED CREDITS
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Operating lease rebates | | | 7 | | | | 39 | |
Governmental subsidy for safety related capital expenditures | | | 40 | | | | 40 | |
Capital lease rebates | | | — | | | | 21 | |
| | | | | | |
| | | 47 | | | | 100 | |
| | | | | | |
| | | | | | | | |
Movements during the year are as follows: | | | | | | | | |
Balance at beginning of year | | | 48 | | | | 47 | |
Additions through the CNA/XJA Acquisitions | | | — | | | | 56 | |
Transferred to consolidated statements of operations | | | (1 | ) | | | (3 | ) |
| | | | | | |
Balance at end of year | | | 47 | | | | 100 | |
| | | | | | |
Operating lease rebates
Pursuantrespect of obligations to certain aircraft operating lease arrangements, the Group received cash rebates from the lessors. Such rebates have been deferred and amortized over the terms of the respective leases.
Governmental subsidy for safety related capital expenditures
During 2002, the Group received governmental subsidy for safety related capital expenditures amounting to RMB40 for enhancing future flight protection and safety standards. Such governmental subsidy is to be amortized over the depreciable lives of the related property, plant and equipment.
Capital lease rebates
Pursuant to certain aircraft capital lease arrangements, the Group received cash rebates upon the inception of the respective leases. The benefits are initially deferred and amortized over the terms of the respective leases to reduce the future capital lease charges.
F-33
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
21. DEFERRED TAX LIABILITIES
Movements in net deferred tax liabilitiesearly retired employees are as follows:
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Balance at beginning of year | | | (779 | ) | | | (398 | ) |
Transferred to consolidated statements of operations (Note 10) | | | | | | | | |
— current year | | | (11 | ) | | | 111 | |
— adjustment for change in income tax rate | | | 392 | | | | — | |
| | | | | | |
Balance at end of year | | | (398 | ) | | | (287 | ) |
| | | | | | |
The net deferred tax (liabilities)/assets as of December 31, 2003 and 2004 were made up of the following taxation effects:
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Deferred tax assets: | | | | | | | | |
Tax losses | | | 223 | | | | 39 | |
Repair charges capitalized | | | 261 | | | | 254 | |
Accrued expenses | | | 107 | | | | 275 | |
Other | | | 9 | | | | 21 | |
| | | | | | |
Total deferred tax assets | | | 600 | | | | 589 | |
| | | | | | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Accrued expenses | | | 81 | | | | 75 | |
Depreciation of property, plant and equipment | | | 848 | | | | 752 | |
Other | | | 69 | | | | 49 | |
| | | | | | |
Total deferred tax liabilities | | | 998 | | | | 876 | |
| | | | | | |
| | | | | | | | |
Net deferred tax liabilities | | | (398 | ) | | | (287 | ) |
| | | | | | |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
At January 1 | | | 392 | | | | |
Provision for the year (Note 10) | | | 12 | | | 392 | |
Financial cost (Note 11) | | | 15 | | | | |
Less: Payment | | | (98 | ) | | | |
Actuarial gain on | | | | | | | |
| | | (14 | ) | | | |
At December 31 | | | 307 | | | 392 | |
Less: Current portion included in accrued expenses (Note 33) | | | (77 | ) | | (86 | ) |
| | | 230 | | | 306 | |
F-34
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
As of December 31, 2004, the Group had tax losses for PRC income tax purposes totaling approximately RMB260. Such tax losses are available for carry forward to set-off against future PRC assessable income for a maximum period of five years. Of these tax losses, approximately RMB33, RMB42 and RMB185 will expire after December 31, 2007, 2008 and 2009, respectively. As of December 31, 2004, the Group recorded a deferred tax asset of RMB39 for such tax losses.
As of December 31, 2004, the Group had tax losses of approximately RMB303 available for offset against future assessable profits arising from Hong Kong profits, if any, over an indefinite period. The Group has not recognized a deferred tax asset in respectimplemented an early retirement plan for certain employees. The benefits of such tax losses as it would not be probable that future taxable profits will be available against which the taxable losses can be utilized.
22. SHARE CAPITAL
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Registered capital: | | | | | | | | |
2,200,000,000 domestic shares of RMB 1.00 each | | | 2,200 | | | | 2,200 | |
1,174,178,000 H shares of RMB 1.00 each | | | 1,174 | | | | 1,174 | |
1,000,000,000 A share of RMB1.00 each | | | 1,000 | | | | 1,000 | |
| | | | | | |
| | | 4,374 | | | | 4,374 | |
| | | | | | |
Issued and paid up capital: | | | | | | | | |
2,200,000,000 domestic shares of RMB 1.00 each | | | 2,200 | | | | 2,200 | |
1,174,178,000 H shares of RMB 1.00 each | | | 1,174 | | | | 1,174 | |
1,000,000,000 A share of RMB1.00 each | | | 1,000 | | | | 1,000 | |
| | | | | | |
| | | 4,374 | | | | 4,374 | |
| | | | | | |
In July 2003,early retirement plan are calculated based on factors including the Company issued 1,000,000,000 A shares with a parremaining number of years of services from the date of early retirement to the normal retirement date and the salary amount on the date of early retirement of the employees. The present value of RMB1.00 each at issue price of RMB2.70 by way of a public offeringthe future cash flows expected to natural persons and institutional investors inbe required to settle the PRC. The share premium received by the Company, net of the issuance costs of RMB59, amounted to RMB1,641 and was credited to share premium account.
obligations is recognised as provision for early retirement benefits.
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
Registered, issued and paid up capital: | | | | | | | |
2,200,000,000 domestic state-owned | | | | | | | |
shares of RMB 1.00 each | | | 2,200 | | | 2,200 | |
1,174,178,000 H shares of RMB 1.00 each | | | 1,174 | | | 1,174 | |
1,000,000,000 A shares of RMB 1.00 each | | | 1,000 | | | 1,000 | |
| | | 4,374 | | | 4,374 | |
All the domestic
state-owned, H and A shares rank pari passu in all material respects.
As
Capital Management
The Group’s primary objectives in managing capital are to safeguard its ability to continue as a going concern, and to generate sufficient profit to maintain growth and provide returns to its shareholders, by securing access to finance at a reasonable cost.
37 | Share capital (continued) |
Capital Management (continued)
The Group manages the amount of capital in proportion to risk and managing its debt portfolio in conjunction with projected financing requirements. The Group monitors capital on the basis of the debt to equity ratio, which is calculated on net debt as a percentage of the total equity where net debt are represented by the aggregate of bank and other loans, obligations under finance leases, trade payables, sales in advance of carriage, amounts due to related companies, accrued expenses and other liabilities less cash and cash equivalents. The Group’s debt to equity ratios over the past five years have been trending upward towards 484% at December 31, 2003 and 2004, the retained earnings2006 because of the Group included RMB112acquisitions of aircraft and RMB81, respectively, of undistributed earnings of companies which are 50% or less owned bybusinesses during 2006.
There was no change in the
Group and accounted for under the equity method.F-35
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
23. OTHER RESERVES
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Statutory surplus reserve (Note (a)) | | | | | | | | |
Balance at beginning of year | | | 337 | | | | 361 | |
Transferred from consolidated statements of operations | | | 24 | | | | 41 | |
| | | | | | |
Balance at end of year | | | 361 | | | | 402 | |
| | | | | | |
| | | | | | |
Statutory public welfare fund (Note (b)) | | | | | | | | |
Balance at beginning of year | | | 172 | | | | 173 | |
Transferred from consolidated statements of operations | | | 1 | | | | 20 | |
| | | | | | |
Balance at end of year | | | 173 | | | | 193 | |
| | | | | | |
| | | | | | |
Discretionary surplus reserve (Note (c)) | | | | | | | | |
Balance at beginning of year and at end of year | | | 77 | | | | 77 | |
| | | | | | |
Total | | | 611 | | | | 672 | |
| | | | | | |
(a) AccordingGroup’s approach to the PRC Company Law and the Articles of Association ofcapital management during 2007 compared with previous years. Neither the Company and certainnor any of its subsidiaries the Company and the relevant subsidiaries are requiredsubject to transfer 10% of their annual net incomes after taxation, as determined under relevant PRC accounting regulations,externally imposed capital requirements. The Group’s debt to a statutory surplus reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribution of a dividend to shareholders.
equity ratio stood at 409% at December 31, 2007.
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
Share premium | | | | | |
| | | | | |
At January 1 and at December 31 | | | 5,325 | | | 5,325 | |
Fair value reserve | | | | | | | |
At January 1 | | | | | | | |
Change in fair value of available-for-sale securities | | | 183 | | | | |
At December 31 | | | 183 | | | | |
Statutory surplus reserve (Note a) | | | | | | | |
| | | | | | | |
At January 1 | | | 526 | | | 349 | |
Transfer from statutory public welfare fund (Note b) | | | | | | 177 | |
At December 31 | | | 526 | | | 526 | |
Statutory public welfare fund (Note b) | | | | | | | |
| | | | | | | |
At January 1 | | | | | | 177 | |
Transfer to statutory surplus reserve | | | | | | (177 | ) |
At December 31 | | | | | | | |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
Discretionary surplus reserve (Note c) | | | | | | | |
| | | | | | | |
At January 1 at December 31 | | | 77 | | | 77 | |
| | | | | | | |
Other reserve | | | | | | | |
| | | | | | | |
At January 1 | | | | | | | |
Share of an associate’s reserves movement | | | 4 | | | | |
At December 31 | | | 4 | | | | |
| | | | | | | |
Retained earnings / (accumulated losses) | | | | | | | |
| | | | | | | |
At January 1 | | | (114 | ) | | (240 | ) |
Profit for the year | | | 1,871 | | | 126 | |
At December 31 | | | 1,757 | | | (114 | ) |
| | | | | | | |
| | | 7,872 | | | 5,814 | |
(a) | According to the PRC Company Law and the Articles of Association of the Company and certain of its subsidiaries, the Company and the relevant subsidiaries are required to transfer 10% of their annual net profits after taxation, as determined under the PRC accounting rules and regulations, to a statutory surplus reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribution of a dividend to shareholders and when there are retained earnings at the financial year end. |
Statutory surplus reserve can be used to offset prior years’ losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholding or by increasing the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital.
F-36
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(b)
(b) | According to the revised PRC Company Law effective on January 1, 2006, appropriation to the statutory public welfare fund is no longer required and the balance of statutory public welfare fund at December 31, 2005 was transferred to statutory surplus reserve. |
(c) | The appropriation to this reserve is subject to shareholders’ approval. The usage of this reserve is similar to that of statutory surplus reserve. |
(d) | Dividend distributions may be proposed at the discretion of the Company’s board of directors, after consideration of the transfers referred to above and making up cumulative prior years’ losses. Pursuant to the PRC Company Law and the Articles of Association of the Company, the net profit of the Company for the purpose of profit distribution is deemed to be the lesser of (i) the net profit determined in accordance with the PRC accounting rules and regulations, and (ii) the net profit determined in accordance with IFRSs. As at December 31, 2007, the Company did not have any distributable reserves (2006: Nil). |
39 | Material related party transactions |
(a) | Key management personnel remuneration |
Remuneration for key management personnel of the Group, including amounts paid to the Company’s directors and certain of the highest paid employees as disclosed in Note 13, is as follows:
| | 2007 | | 2006 | | 2005 | |
| | RMB’000 | | RMB’000 | | RMB’000 | |
| | | | | | | |
Short-term employees benefits | | | 12,226 | | | 6,638 | | | 5,926 | |
Post-employment benefits | | | 275 | | | 220 | | | 221 | |
| | | | | | | | | | |
| | | 12,501 | | | 6,858 | | | 6,147 | |
| | 2007 | | 2006 | | 2005 | |
| | RMB’000 | | RMB’000 | | RMB’000 | |
| | | | | | | |
Directors and supervisors (Note 13) | | | 6,790 | | | 4,334 | | | 3,461 | |
Senior management | | | 5,711 | | | 2,524 | | | 2,686 | |
| | | | | | | | | | |
| | | 12,501 | | | 6,858 | | | 6,147 | |
Total remuneration is included in “staff costs” (Note 10).
(b) | Contributions to post-employment benefit plans |
The Group participates in various defined contribution retirement plans organised by municipal and provincial governments for its subsidiaries,staff. Details of the CompanyGroup’s employee benefits plan are disclosed in Note 40.
39 | Material related party transactions (continued) |
(c) | Transactions with CSAHC and its affiliates (the “CSAHC Group”), and the associates and jointly controlled entities of the Group |
The Group obtained various operational services provided by the CSAHC Group and the relevant subsidiariesassociates and jointly controlled entities of the Group during the normal course of its business.
Details of the significant transactions carried out by the Group are required to transfer between 5% to 10% of their annual net income after taxation, as determined under PRC accounting regulations,follows:
| | | | 2007 | | 2006 | | 2005 | |
| | Note | | RMB million | | RMB million | | RMB million | |
Expenses paid to the CSAHC Group | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Handling charges | | | (i) | | | 46 | | | 29 | | | 32 | |
Air catering supplies | | | (ii) | | | 157 | | | 194 | | | 173 | |
Commission expense | | | (iii) | | | 7 | | | 43 | | | 26 | |
Sundry aviation supplies | | | (iv) | | | 72 | | | 86 | | | 88 | |
Lease charges for aircraft | | | (v) | | | | | | 3 | | | 10 | |
Lease charges for land and buildings | | | (vi) | | | 101 | | | 99 | | | 90 | |
Property management fee | | | (vii) | | | 31 | | | 26 | | | 28 | |
| | | | | | | | | | | | | |
Expenses paid to jointly controlled entities | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Ground service expenses | | | (viii) | | | 37 | | | 43 | | | 32 | |
Repairing charges | | | (ix) | | | 1,047 | | | 1,183 | | | 1,118 | |
Flight simulation service charges | | | (x) | | | 120 | | | 133 | | | 126 | |
| | | | | | | | | | | | | |
Income received from a jointly controlled entity | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Rental income | | | (x) | | | 31 | | | 35 | | | 31 | |
| | | | | | | | | | | | | |
Acquisition of CSAHC Hainan | | | (xi) | | | | | | 5 | | | | |
| | | | | | | | | | | | | |
Disposal of properties to the CSAHC Group | | | (xii) | | | | | | 23 | | | | |
| | | | | | | | | | | | | |
Acquisition of assets from CSAHC Group | | | (xiii) | | | 270 | | | | | | | |
| | | | | | | | | | | | | |
Disposal of GZ Aviation Hotel to CSAHC Group | | | (xiv) | | | 75 | | | | | | | |
39 | Material related party transactions (continued) |
(c) | Transactions with CSAHC and its affiliates (the “CSAHC Group”), and the associates and jointly controlled entities of the Group (continued) |
| (i) | The Group acquires aircraft, flight equipment and other airline-related facilities through Southern Airlines (Group) Import and Export Trading Company (“SAIETC”), a wholly-owned subsidiary of CSAHC. |
| (ii) | The Group purchases certain inflight meals and related services from Shenzhen Air Catering Company Limited and Southern Airlines Group Air Catering Company Ltd (“Air Catering”), which are an associate and a wholly-owned subsidiary of CSAHC respectively. Air Catering was acquired by the Company on August 14, 2007 (Note 39(c) (xiii)). |
| (iii) | Commission is earned by certain subsidiaries of CSAHC in connection with the air tickets sold by them on behalf of the Group. Commission is calculated based on the rates stipulated by the CAAC and International Air Transportation Association. |
| (iv) | Certain sundry aviation supplies are purchased from Southern Airlines (Group) Economic Development Company (“SAGEDC”), a subsidiary of CSAHC. |
| (v) | The Group leased an aircraft from CSAHC Hainan Co., Ltd. (“CSAHC Hainan”), a wholly-owned subsidiary of CSAHC. The lease was terminated on April 30, 2006. |
| (vi) | The Group leases certain land and buildings in the PRC from CSAHC. |
| (vii) | Guangzhou China Southern Airlines Property Management Co., Ltd., a subsidiary of CSAHC, provides property management services to the Group. |
| (viii) | Beijing Ground Service Co., Ltd., a jointly controlled entity of the Group, provides airport ground service to the Group. |
| (ix) | Guangzhou Aircraft Maintenance Engineering Company Limited and MTU Maintenance Zhuhai Co., Ltd., jointly controlled entities of the Group, provide comprehensive maintenance services to the Group. |
| (x) | Zhuhai Xiang Yi, a jointly controlled entity of the Group, provides flight simulation services to the Group. In addition, the Group entered into operating lease agreements to lease certain flight training facilities and buildings to Zhuhai Xiang Yi. |
| (xi) | On April 30, 2006, the Company acquired certain assets of CSAHC Hainan at a total consideration of RMB294 million, which was partly satisfied by assumption of debts and liabilities of CSAHC Hainan totalling RMB289 million outstanding as at that date. The remaining balance of RMB5 million had been settled in cash during the year ended December 31, 2007 (Note 42(d)). |
| (xii) | On December 28, 2006, the Company disposed of certain properties to CSAHC at a consideration of RMB23 million. |
39 | Material related party transactions (continued) |
(c) | Transactions with CSAHC and its affiliates (the “CSAHC Group”), and the associates and jointly controlled entities of the Group (continued) |
| (xiii) | On August 14, 2007, the Company signed an agreement to acquire (1) the entire equity interest in Air Catering; (2) certain assets of Guangzhou BiHuaYuan Training Centre including certain properties and office facilities; and (3) certain assets of Nan Lung Travel & Express (Hong Kong) Limited, including certain properties and office facilities and the 51% equity interest in Nan Lung International Freight Company Limited (“Nan Lung Freight”), from CSAHC for a total consideration of RMB270 million (Note 42(b)). |
| (xiv) | On August 14, 2007, the Company signed an agreement to dispose of equity interests in GZ Aviation Hotel Co., Ltd. to CSAHC at a consideration of RMB75 million (Note 42(c)). |
In addition to the statutory public welfare fund. This fund can only be utilized on capital itemsabove, certain subsidiaries of CSAHC also provided hotel and other services to the Group. The total amount involved is not material to the results of the Group for the collective benefitscurrent and prior years.
Details of amounts due from/to the CSAHC Group, and the associates and jointly controlled entities of the Company’sGroup:
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
Receivables: | | | | | | | |
The CSAHC Group | | | 6 | | | 4 | |
An associate | | | 1 | | | 2 | |
Jointly controlled entities | | | 111 | | | 122 | |
| | | | | | | |
Payables: | | | | | | | |
The CSAHC Group | | | 76 | | | 167 | |
Jointly controlled entities | | | 118 | | | 87 | |
The amounts due from/to the CSAHC Group, the associate and jointly controlled entities of the Group are unsecured, interest free and have no fixed terms of repayment.
(d) | Loans from and deposits placed with SA Finance |
At December 31, 2007, loans from SA Finance to the Group amounted to RMB329 million (2006: RMB300 million). The loans are unsecured and repayable within one year.
During the year ended December 31, 2007, interest expense paid on such loans amounted to RMB17 million (2006: RMB16 million; 2005: RMB37 million) and the relevant subsidiaries’ employees suchinterest rates ranged from 5.10% to 6.16% per annum (2006: 5.02% to 5.26% per annum; 2005: 3.30% to 5.02% per annum).
The loans are guaranteed by CSAHC (included in the amount as disclosed in (e) below).
39 | Material related party transactions (continued) |
(d) | Loans from and deposits placed with SA Finance (continued) |
(ii) | Deposits placed with SA Finance |
At December 31, 2007, the
construction of dormitories, canteen and other staff welfare facilities. This fund is non-distributable other than in liquidation.Group’s deposits with SA Finance amounted to RMB906 million (2006: RMB629 million). The
transfer to this fund must be made before distribution of a dividend to shareholders. (c) The usage of this reserve is similar to that of statutory surplus reserve.
(d) Dividend distributions may be proposed at the discretion of the Company’s Board of Directors, after consideration of the transfers referred to above and making up cumulative prior years’ losses, if any. Pursuant to Articles of Association of the Company, the net income of the Company for the purpose of dividend distribution is deemed to be the lesser of (i) net incomeapplicable interest rates are determined in accordance with the PRC accounting regulations, and (ii)rates published by the netPBOC.
During the year ended December 31, 2007, interest income determined in accordance with IFRS; or if the financial statementsreceived on such deposits amounted to RMB20 million (2006: RMB5 million; 2005 RMB3 million).
(e) | Guarantees from CSAHC and SA Finance |
Certain bank loans of the Group were guaranteed by the following related parties:
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
CSAHC | | | 1,176 | | | 1,484 | |
SA Finance | | | 3 | | | 5 | |
(f) | Transactions with other state-controlled entities |
The Company is a state-controlled entity and operates in an economic regime currently dominated by entities directly or indirectly controlled by the PRC government (“state-controlled entities”) through its government authorities, agencies, affiliations and other organisations.
Other than those transactions with the CSAHC Group, and the associates and jointly controlled entities of the Group as disclosed in Notes 39(c), (d) and (e) above, the Group conducts transactions with other state-controlled entities which include but are not preparedlimited to the following:
| - | Transportation services; |
| - | Purchase of ancillary materials and spare parts; |
| - | Ancillary and social services; and |
| - | Financial services arrangement. |
These transactions are conducted in
accordance with IFRS, the
accounting standards of oneordinary course of the
countries in which its shares are listed (Note 28).24. COMMITMENTS AND CONTINGENCIES
PursuantGroup’s business on terms comparable to the Reorganisation of CSAHC effected in 1995 (Note 1), the Company assumed the airline and airline-related businesses togetherthose with the relevant assets and liabilities from CSAHC. The Company has been advised by its PRC lawyersother entities that except for liabilities constituting or arising out of or relating to the businesses assumed by the Company in the Reorganisation, no other liabilities were assumed by the Company, and the Company is not jointly and severally liable for other debts and obligations incurred by CSAHC prior to the Reorganisation. There are not however, any definitive PRC regulations or other pronouncements confirming such conclusion.
The Group leases from CSAHC certain land in Guangzhou and certain land and buildings in Wuhan, Haikou and Zhengzhou.state-controlled. The Group has a significant investment in buildingsestablished its buying, pricing strategy and other leasehold improvements locatedapproval process for purchases and sales of products and services. Such buying, pricing strategy and approval processes do not depend on such land. However, such land in Guangzhouwhether the counterparties are state-controlled entities or not.
39 | Material related party transactions (continued) |
(f) | Transactions with other state-controlled entities (continued) |
Having considered the potential for transactions to be impacted by related party relationships, the Group’s pricing strategy, buying and
such landapproval processes, and
buildings in Wuhan, Haikou and Zhengzhou lack adequate documentation evidencing CSAHC’s rights thereto. With respect to the facilities in Guangzhou, CSAHC has received written assurance from the CAAC to the effect that CSAHC is entitled to continued use and occupancywhat information would be necessary for an understanding of the land in Guangzhou. The Group understandspotential effect of the relationship on the consolidated financial statements, the directors are of the opinion that the CAAC is basing its conclusion on an agreement among certain government authorities relating to such land. Such assurance does not constitute formal evidencefollowing transactions with other state-controlled entities require disclosure:
| (i) | The Group’s transactions with other state-controlled entities, including state-controlled banks in the PRC |
| | 2007 | | 2006 | | 2005 | |
| | RMB million | | RMB million | | RMB million | |
| | | | | | | |
Jet fuel cost | | | 14,814 | | | 13,054 | | | 9,592 | |
Interest income | | | 47 | | | 33 | | | 48 | |
Interest expense | | | 1,751 | | | 1,405 | | | 694 | |
| (ii) | The Group’s balances with other state-controlled entities, including state-controlled banks in the PRC |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Cash and deposits at bank | | | 2,624 | | | 1,434 | |
Short-term bank loans and current portion of long-term bank loans | | | 23,004 | | | 21,209 | |
Long-term bank loans, less current portion | | | 6,772 | | | 8,223 | |
| (iii) | Guarantees from other state-controlled entities, including state-controlled banks in the PRC |
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Guarantees on certain bank loans of the Group | | | 703 | | | 201 | |
(g) | Loan from minority shareholders |
A loan of
CSAHC’s right to transfer, mortgage or lease such real property interests. The Group cannot predict the magnitude of the effect on its financial condition or results of operations to the extent that their uses of one or more of these parcels of land or the related facilities were successfully challenged. CSAHC has agreed to indemnify the Group against any loss or damage caused by any challenge or interference with the Group’s use of any of its land and buildings.F-37
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
The Company is involved inRMB19 million from a civil litigation (Hong Kong High Court Action No. 515 of 2001) (“Litigation”) which commenced in 2003. According to the writ of summons for the Litigation, New Link Consultants Limited, the plaintiff claimed unspecified damages against the Group (as one of the defendants to the Litigation) for breach of the agreement on the basis of certain evidence proving that United Aero-Supplies System of China, Limited (“UASSC”) entered into an agreement with the defendants for exclusive purchase of aviation equipment consigned to UASSC for sale and, that as the defendants failed to perform the agreement, UASSC should have the right to compensation. Since UASSC is in the course of winding up proceedings, all the rights and benefits of UASSC in connection with the claim have been transferred to the plaintiff. Based on the opinion given by the Company’s legal advisors, the directors of the Company consider that it is not probable that the Company will have an unfavorable outcome from the claim and that a provision for such claim and/or the associated legal costs is not required.
As ofminority shareholder was outstanding at December 31, 2004, the Group had on order2006. The loan was unsecured, interest free and repayable within five Boeing 737-700 aircraft, six Airbus 319-100 aircraft, fifteen Airbus 320-200 aircraft, two Airbus 321-200 aircraft, four Airbus 330-200 aircraft, one Embraer ERJ-145 aircraft and certain flight equipment, scheduled for deliveries in 2005 toyears. The loan was fully repaid during 2007. Deposits of RMB4,640 have been made towards the purchase of these aircraft and related equipment. As of December 31, 2004, the approximate total future payments, including estimated amounts for price escalation through anticipated delivery dates for these aircraft and related equipment totaled approximately RMB 11,776.
As of December 31, 2004, additional capital expenditures of approximately RMB1,524 have been authorized, of which approximately RMB242 have been committed, for the Group’s principal facilities. Such expenditures comprised mainly RMB824 for facilities and equipment at the Guangzhou new airport and RMB700 for other airport and office facilities and equipment, overhaul and maintenance bases and training centers.
As of December 31, 2004, the Group was committed to make capital contributions of approximately RMB83 to its jointly controlled entities.
25. RETIREMENT AND HOUSING BENEFITS
40 | Retirement and housing benefits |
Employees of the Group participate in several defined contribution retirement schemes
organizedorganised separately by PRC municipal governments in regions where the major operations of the Group are located.
TheDuring the year ended December 31, 2007, the Group is required to contribute to these schemes at the rates ranging from
14%9% to
20% (2003: 14%24% (2006: 10% to
19%23%; 2005: 9% to 20%) of salary costs including certain allowances. A member of the retirement schemes is entitled to pension benefits
equal to a fixed proportion offrom the
salaryLocal Labour and Social Security Bureaus at the retirement date. The retirement benefit obligations of all
existing and future retired staff of the Group are assumed by these schemes.
Contributions to the retirement schemes are charged to consolidated statements of operations as and when incurred. Contributions to the retirement schemes amounted to RMB112, RMB131 and RMB143, respectively, during 2002, 2003 and 2004.F-38
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
40 | Retirement and housing benefits (continued) |
In addition, the Group was selected as one of the pilot enterprises to establishhas established a supplementary defined contribution retirement scheme for the benefit of employees.employees in accordance with relevant regulations in the PRC. In this connection, employees of the Group participate in a supplementary defined contribution retirement scheme whereby the Group is required to make defined contributions at a ratenot exceeding one-twelfth of 4.5% ofthe prior year’s total salaries.
The Group has no obligation for the payment of pension benefits beyond the contributions described above. Contributions
The Group contributes on a monthly basis to housing funds organised by municipal and provincial governments based on certain percentages of the salaries of the employees. The Group’s liability in respect of these funds is limited to the retirement schemes are charged to consolidated statements of operations as and when incurred. Contributionscontributions payable in each year.
In addition to the
retirement schemes amounted to RMB19, RMB19 and RMB25, respectively, during 2002, 2003 and 2004. Furthermore, pursuant to the comprehensive services agreement (the “Services Agreement”) dated May 22, 1997 between the Company and CSAHC, CSAHC agrees to provide adequate quarters to eligiblehousing funds, certain employees of the Group as and when required.group are eligible to one of the following housing benefit schemes:
| (i) | Pursuant to the comprehensive services agreement (the “Service Agreement”) dated May 22, 1997 between the Company and CSAHC, CSAHC provided quarters to eligible employees of the Group. In return, the Group paid a fixed annual fee of RMB85 million to CSAHC for a ten-year period from 1995 to 2004. The agreement expired by December 31, 2004. |
| (ii) | Pursuant to a staff housing benefit scheme effective September 2002, the Group agreed to pay lump sum housing allowances to certain employees who have not received quarters from CSAHC or the Group according to the relevant PRC housing reform policy, for subsidising their purchases of houses. An employee who quits prior to the end of the vesting benefit period is required to pay back a portion of the lump sum housing benefits determined on a pro-rata basis of the vesting benefit period. The Group has the right to effect a charge on the employee’s house and to enforce repayment through selling the house in the event of default in repayment. Any shortfall in repayment would be charged against income. As at December 31, 2007, the Group had made payments totalling RMB173 million (2006: RMB170 million) under the scheme and recorded its remaining contractual liabilities totalling RMB87 million (2006: RMB90 million) on the consolidated balance sheets. Housing allowances are payable when applications are received from eligible employees. |
| (iii) | The Group pays cash housing subsidies on a monthly basis to eligible employees. The monthly cash housing subsidies are charged to the consolidated statements of operations as incurred. |
The Group operates principally as a single business segment for the provision of air transportation services. The analysis of turnover and operating profit/(loss) by geographical segment is based on the following criteria:
| (i) | Traffic revenue from domestic services within the PRC (excluding Hong Kong and Macau) is attributed to the domestic operation. Traffic revenue from inbound/outbound services between the PRC and Hong Kong/Macau, and the PRC and overseas destinations is attributed to the Hong Kong and Macau operation and international operation respectively. |
41 | Segmental information (continued) |
| (ii) | Other revenue from ticket selling, general aviation services, ground services, air catering and other miscellaneous services is attributed on the basis of where the services are performed. |
| | | | Hong Kong | | | | | |
| | Domestic | | and Macau | | International* | | Total | |
| | RMB million | | RMB million | | RMB million | | RMB million | |
2007 | | | | | | | | | | | | | |
Traffic revenue | | | 42,526 | | | 1,140 | | | 9,631 | | | 53,297 | |
Other operating revenue | | | 1,188 | | | 17 | | | | | | 1,205 | |
| | | | | | | | | | | | | |
Total operating revenue | | | 43,714 | | | 1,157 | | | 9,631 | | | 54,502 | |
Operating profit / (loss) | | | 2,435 | | | 58 | | | (874 | ) | | 1,619 | |
| | | | | | | | | | | | | |
2006 | | | | | | | | | | | | | |
Traffic revenue | | | 35,707 | | | 1,329 | | | 8,051 | | | 45,087 | |
Other operating revenue | | | 1,132 | | | | | | | | | 1,132 | |
| | | | | | | | | | | | | |
Total operating revenue | | | 36,839 | | | 1,329 | | | 8,051 | | | 46,219 | |
Operating profit / (loss) | | | 1,258 | | | (4 | ) | | (617 | ) | | 645 | |
| | | | | | | | | | | | | |
2005 | | | | | | | | | | | | | |
Traffic revenue | | | 29,533 | | | 1,298 | | | 6,588 | | | 37,419 | |
Other operating revenue | | | 874 | | | | | | | | | 874 | |
| | | | | | | | | | | | | |
Total operating revenue | | | 30,407 | | | 1,298 | | | 6,588 | | | 38,293 | |
Operating loss | | | (314 | ) | | (97 | ) | | (926 | ) | | (1,337 | ) |
| * | For the year ended December 31, 2007, Asian market accounted for approximately 68% (2006: 64%; 2005: 74%) of the Group’s total international traffic revenue. The remaining portion was mainly derived from the Group’s flights to / from European, North American and Australian regions. |
The major revenue-earning assets of the Group
agrees to pay a fixed annual fee of RMB85 to CSAHC for a ten-year period effective January 1, 1995. During 2002, the Group provided additional quarters atare its own expense to certain employees whoaircraft fleet, all are not eligible for quarters pursuant to the Services Agreement. These quarters were provided to the employees in accordance with the relevant PRC housing reform policy. In 2002, the Group recognized a loss of RMB18, being the excess of the cost of these quarters over the considerations received by the Group from the employees, under the sub-item “Gain/(loss) on sale of property, plant and equipment” under “Non-operating income/(expenses)” in the consolidated statements of operations.
Subsequently, pursuant to an additional staff housing benefit scheme effective September 2002, the Group agreed to pay lump sum housing allowances to certain employees who have not received quarters from CSAHC or the Group according to the relevant PRC housing reform policy, for subsidizing their purchases of housing. Such expenditure has been deferred and amortized on a straight line basis over a period of 10 years, which represents the vesting benefit period of the employees. An employee who quits prior to the end of the vesting benefit period is required to pay back a portion of the lump sum housing benefits determined on a pro-rata basis of the vesting benefit period. The Group has the right to effect a charge on the employee’s house and to enforce repayment through selling the house in the event of default in repayment. Any shortfall in repayment would be charged against consolidated statements of operations. As of December 31, 2004, the Group already made payments totaling RMB191 under the scheme and recorded its remaining contractual liabilities totaling RMB69 as accrued expenses on its consolidated balance sheet (Note 19). Housing allowances are payable when applications are received from eligible employees.
26. RELATED PARTY TRANSACTIONS
The Group obtained various operational and financial services provided by CSAHC and its affiliates, and the Group’s affiliated companies and jointly controlled entities during the normal course of its business. In the past, CSAHC was under the direct control of the CAAC. However, such control has been shifted to the China State-owned Assets Administration Bureau since early 2003. Consequently, transactions with the CAAC and its affiliates beginning from 2003 are no longer presented as related party transactions of the Group. The principal related party transactions are described as follows:
F-39
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Allocation of routes and air fares
Both domestic and international routes on which the Group and other PRC airlines offer scheduled services are allocated by the CAAC.
International air fares are subject to bilateral agreements between the CAAC, acting on behalf of the PRC government, and other governments. Domestic air fares are regulated jointly by the CAAC and the PRC Price Administrative Bureau.
Procurement of aircraft, flight equipment and other airline-related facilities
Certain PRC airlines, including the Group, were granted permission to acquire aircraft, flight equipment and other airline-related facilities directly from manufacturers subject to the approval of their fleet expansion plans by the relevant PRC government authorities.
The Group acquires aircraft, flight equipment and other airline-related facilities through Southern Airlines (Group) Import and Export Trading Company (“SAIETC”), a wholly-owned subsidiary of CSAHC. Total purchases amounted to RMB584, RMB1,155 and RMB1,177, respectively, for 2002, 2003 and 2004. Handling fees totaling RMB36, RMB27 and RMB33, respectively, were paid to SAIETC for 2002, 2003 and 2004.
Jet fuel supplies
Jet fuel is subject to allocationregistered in the PRC. The GroupSince the Group’s aircraft fleet is requiredemployed flexibly across its route network, there is no suitable basis of allocating such assets to purchase jet fuel domestically from the China Aviation Oil Supply Company and Lan Tian Oil Supply Company, companies controlled by the CAAC, at prices set by such suppliers in conjunction with the CAAC and other PRC government authorities. During the periods presented, such prices exceeded the international market prices. The cost of jet fuel purchased by the Group in accordance with such allocation was RMB2,374 for 2002. The remaindergeographic segments. Most of the Group’s jet fuel was purchased from domestic markets and,non-aircraft assets are located in the PRC.
42 | Supplementary information to the consolidated cash flow statement |
(a) | Non cash transactions - acquisitions of aircraft |
During the year ended December 31, 2007, aircraft acquired under finance leases amounted to
a lesser extent, from international markets.Aircraft insurance
Aviation insurance covering hull, war and passenger liability risk is arranged by the CAAC on behalf of all PRC airlines with the People’s Insurance (Property) Company of China (“PICC”) under a master policy. PICC reinsures a substantial portion of its aircraft insurance business through the international reinsurance market. Insurance premiums are allocated to each individual PRC airline by the CAAC based on the value of the airline’s aircraft and after taking into account the claims history of the airline. Insurance premiums of RMB256 were incurred by the Group for 2002.
F-40
RMB4,330 million (2006: RMB3,402 million; 2005: RMB6,938 million).
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Financial arrangements
The Group’s obligations under various lease and bank loan arrangements in connection with aircraft acquisitions are secured by guarantees provided by certain PRC financial institutions which obtained back-to-back guarantees from the CAAC. Guarantee fees of RMB1 were paid to these financial institutions for 2002.
Interest income is received from deposits with SA Finance. The applicable interest rate is determined in accordance with the deposit rate published by the People’s Bank of China. Interest income totaling RMB11, RMB3 and RMB4, respectively, was earned by the Group on such deposits during 2002, 2003 and 2004 (Note 11).
During 2003, CSAHC made short-term advances to the Group. These advances were unsecured, interest free and fully repaid in 2004.
Airline-related services
(b) | Effect of the acquisition of Nan Lung Freight and Air Catering |
The Group
jointly with other PRC airlines, participates in the CAAC’s computer reservation system, under which the Group purchases computer reservation services from the CAAC at rates determined based on the utilization of the system. Service fees paid by the Group to the CAAC for 2002 totaled RMB107. The Group utilizes the passenger departure and cargo handling computer systems installed by the CAAC at certain PRC airports. Service fees are levied by the CAAC based on the utilization of these systems. Service fees of RMB62 were by the Group to the CAAC for 2002.
The Group is required to pay landing and navigation fees to various PRC airports in respect of take-off and landing slots allocated to the Group and other ancillary services provided. Fees are payable by the Group based on the scale rates published by the CAAC. Landing and navigation fees of RMB1,668 were paid to various PRC airports for 2002.
The Group purchases certain inflight meals and related services from Shenzhen Air Catering Company Limited, a cooperative joint venture established in the PRC, in respect of which CSAHC is entitled to 33% of its income after tax. Such purchases amounted to RMB29, RMB28 and RMB50, respectively, during 2002, 2003 and 2004.
Commission is earned by certain subsidiaries of CSAHC in connection with the air tickets sold by them on behalf of the Group. Commission is calculated based on a fixed rate ranging from 1.5% to 12% on the ticket value. Commission expenses incurred by the Group in respect of tickets sold by certain subsidiaries of CSAHC totaled RMB17, RMB5 and RMB2, respectively, during 2002, 2003 and 2004.
F-41
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Commission is earned by the CAAC’s sales offices and various PRC airlines in connection with the air tickets sold by them on behalf of the Group. Commission is calculated based on a fixed rate ranging from 1.5% to 12% on the ticket value. Commission expenses incurred by the Group in respect of tickets sold by the CAAC’s sales offices and various PRC airlines amounted RMB465 for 2002. Commission income received from other PRC airlines in connection with air tickets sold by the Group, calculated based on a fixed rate ranging from 3% to 9% on the ticket value, totaled RMB82 for 2002.
Ground service fees are received from other PRC airlines in respect of ground services provided by the Group and Baiyun International Airport Group at Guangzhou Baiyun International Airport. The Group was entitled to 50% of the service fees. The Group’s share of ground service fees received totaled RMB40 for 2002.
The Group has a 50% equity interest in both Guangzhou Aircraft Maintenance Engineering Company Limited (“GAMECO”) and MTU Maintenance Zhuhai Co., Ltd (“MTU Zhuhai”), which provide comprehensive maintenance services to the Group. Maintenance fees totaling RMB592, RMB693 and RMB1,159, respectively, were incurred by the Group for services provided by GAMECO and MTU Zhuhai during 2002, 2003 and 2004.
Certain sundry aviation supplies are purchased from Southern Airlines (Group) Economic Development Company (“SAGEDC”), a subsidiary of CSAHC. Supplies totaling RMB101, RMB43 and RMB66, respectively, were purchased by the Group from SAGEDC during 2002, 2003 and 2004.
The Group hasacquired a 51% equity interest in Zhuhai Xiang Yi, which provides flight simulation services to the Group. Flight simulation service charges totaling RMB101Nan Lung Freight and RMB100 were incurred bya 100% equity interest in Air Catering on August 31, 2007. Details are as follows:
| | RMB million | |
Assets acquired: | | | | |
Property, plant and equipment, net | | | 77 | |
Inventories | | | 6 | |
Trade receivables | | | 106 | |
Other receivables | | | 7 | |
Cash and cash equivalents | | | 54 | |
| | | 250 | |
| | | | |
Liabilities assumed: | | | | |
Trade payables | | | 30 | |
Accrued expenses | | | 10 | |
Other liabilities | | | 18 | |
| | | 58 | |
Minority interest | | | 80 | |
| | | | |
Net identifiable assets and liabilities | | | 112 | |
| | | | |
Satisfied by: | | | | |
Cash | | | 112 | |
| | | | |
Analysis of the net outflow of cash and cash equivalents in respect of the acquisition: | | | | |
| | | | |
Cash consideration paid | | | (112 | ) |
Cash and cash equivalents acquired | | | 54 | |
| | | | |
Net outflow of cash and cash equivalents in respect of the acquisition | | | (58 | ) |
42 | Supplementary information to the consolidated cash flow statement (continued) |
(c) | Effect of the disposal of GZ Aviation Hotel |
The Group
for services provided by Zhuhai Xiang Yi during 2003 and 2004 respectively. In addition, the Group entered into operating lease agreements to lease certain flight training facilities and buildings to Zhuhai Xiang Yi. Rental income received by the Group amounted to RMB34 each during 2003 and 2004 (Note 14).Advertising services
Advertising services are provided by Southern Airlines Advertising Company (“SA Advertising”). SA Advertising was a subsidiarydisposed of CSAHC up to July 2002. In August 2002, the Group acquiredits 90% equity interest in SA Advertising from CSAHC. Expenses totaling RMB3 were incurred byGZ Aviation Hotel to CSAHC on August 31, 2007. Details are as follows:
| | RMB million | |
Assets disposed of: | | | | |
Property, plant and equipment, net | | | 72 | |
Trade receivables | | | 1 | |
Other receivables | | | 6 | |
Cash and cash equivalents | | | 1 | |
| | | 80 | |
Liabilities disposed of: | | | | |
Other liabilities | | | 4 | |
Minority interest | | | 8 | |
| | | | |
Net identifiable assets and liabilities | | | 68 | |
Gain on disposal | | | 7 | |
| | | 75 | |
| | | | |
Satisfied by: | | | | |
Cash | | | 75 | |
| | | | |
Analysis of the net inflow of cash and cash equivalents in respect of the disposal: | | | | |
| | | | |
Cash consideration received | | | 75 | |
Cash and cash equivalents disposed of | | | (1 | ) |
| | | | |
Net inflow of cash and cash equivalents in respect of the disposal | | | 74 | |
42 | Supplementary information to the consolidated cash flow statement (continued) |
(d) | Effect of the acquisition of CSAHC Hainan |
The Group
for services provided by SA Advertising for 2002.Wet lease rentals
During 2002 and 2003, wet lease rentals totaling RMB26 and RMB36 respectively, were paid to Xinjiang Airlines Company, a subsidiaryacquired certain assets of CSAHC pursuant to a wet lease agreement in respect of a Boeing 757-200 aircraft effective October 2002. The wet lease agreement was terminated inHainan on April 2003.
F-42
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
During the period from August to October 2002, the Group received wet lease rentals totaling RMB28 from wet leasing of an Airbus 320-200 aircraft to Sichuan Airlines Corporation Limited, an affiliated company of the Group.
Refund of medical benefit payments
Prior to January 1, 2002, the Group paid a fixed annual fee to CSAHC in return for CSAHC providing medical benefit, transportation subsidies and other welfare facilities to the retirees of the Group. Such arrangement was terminated on January 1, 2002. During 2003, CSAHC refunded RMB58 to the Group which represented the difference between the aggregate fixed annual fees received from the Group and the aggregate cost of services incurred by CSAHC under the above agreement.
Acquisition of aircraft and related spare parts and vehicles
During 2002, the Group acquired five Boeing 737-300/37K aircraft and related spare parts and certain vehicles from Zhongyuan Airlines, a subsidiary of CSAHC, at a consideration of approximately RMB1,097. The consideration was satisfied by cash of approximately RMB132 together with an assumption by the Group of Zhongyuan Airlines’ debts of approximately RMB965. In addition, the Group obtained reimbursements of wet lease rentals totaling RMB150 which it paid to Zhongyuan Airlines during the period from July 1, 2001 to December 31, 2001. Such reimbursements receivable were applied to reduce the cash payable for the acquired assets.
Acquisition of subsidiaries
In August 2002, the Group acquired 90% equity interest in each of Guangzhou Aviation Hotel, Southern Airlines Advertising Company and South China International Aviation & Travel Services Company from CSAHC at an aggregate cash consideration of approximately RMB108. Such consideration is determined by reference to the valuation reports prepared by Guangzhou Zhongtian Valuation Company Limited, a firm of independent valuers registered in the PRC. These acquisitions30, 2006. Details are not considered significant in the contextas follows:
| | RMB million | |
Assets acquired: | | | | |
Property, plant and equipment, net | | | 131 | |
Lease prepayment | | | 35 | |
Inventories | | | 28 | |
Trade receivables | | | 30 | |
Other receivables | | | 32 | |
Cash and cash equivalents | | | 38 | |
| | | 294 | |
Liabilities assumed: | | | | |
Trade payables | | | 28 | |
Accrued expenses | | | 14 | |
Other liabilities | | | 247 | |
| | | 289 | |
Net identifiable assets and liabilities | | | 5 | |
| | | | |
Satisfied by: | | | | |
Cash | | | 5 | |
| | | | |
Analysis of the Group.Acquisition of airline business related assets and liabilities
As disclosed in Note 1 to the consolidated financial statements, on December 31, 2004, the net inflow of cash and cash equivalents in respect of the acquisition:
| | | | |
| | | | |
Cash consideration paid | | | (5 | ) |
Cash and cash equivalents acquired | | | 38 | |
| | | | |
Net inflow of cash and cash equivalents in respect of the acquisition | | | 33 | |
42 | Supplementary information to the consolidated cash flow statement (continued) |
(e) | Effect of the acquisitions of China Northern Airlines Company (“CNA”) and Xinjiang Airlines Company (“XJA”) |
The Group acquired the airline operations and certain related assets of CNA and XJA from its parent company, CSAHC, with effect from 31 December 2004 at a total consideration of RMB15,522, which was partly satisfied by assumption of debts and liabilities of CNA and XJA totaling RMB13,563 outstanding as of that date.RMB1,959 million. The remaining consideration payable of RMB1,959 is requiredwas settled in 2005.
Exposure to
be satisfied in cash by December 31, 2005.F-43
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Amounts due to related companies
Amounts due to related companies, which represent balance with CSAHCliquidity, interest rate, currency, jet fuel price risk and its affiliates, and the Group’s affiliated companies and jointly controlled entities, are unsecured, non-interest bearing and repayable within one year. The balance as of December 31, 2002 also included balances with the CAAC and its affiliates. Balances with other State-owned enterprises are excluded from this caption, as other State-owned enterprises are not considered related parties of the Group. The balance as of December 31, 2004 also included the above-mentioned cash consideration payable for the CNA/XJA Acquisitions of RMB1,959 (Note 1).
In addition to the above, certain business undertakings of CSAHC also provided hotel and other services to the Group during the year. The total amount involved is not material to the results of the Group for the year.
The directors of the Company are of the opinion that the above transactions with related parties were entered intocredit risks arises in the normal course of businessthe Group’s business. These risks are limited by the Group’s financial management policies and on normal commercial terms or in accordance with the agreements governing such transactions.
27. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK
Financial assets of the Group include cash and cash equivalents, trade receivables, other receivables and short-term investments. Financial liabilities of the Group include notes payables, amounts due to related companies, accounts payables, bills payable, other liabilities and taxes payable.
Liquidity risk
practices described below.
As
ofat December 31,
2003 and 2004,2007, the Group’s
net current liabilities
amounted to RMB10,792 and RMB18,855, respectively.exceeded its current assets by RMB33,811 million. For the
yearsyear ended December 31,
2002, 2003 and 2004,2007, the Group recorded a net cash inflow from operating activities of
RMB3,698, RMB2,129 and RMB3,596, respectively,RMB6,869 million, a net cash outflow from investing activities
of RMB4,844 million and
a net cash outflow from financing activities of
RMB2,745, RMB3,819RMB465 million, and
RMB2,593, respectively, and an increase/(decrease)resulted in a net increase in cash and cash equivalents of
RMB953, RMB(1,690) and RMB1,003, respectively.RMB1,560 million.
In
20052008 and thereafter, the liquidity of the Group is primarily dependent on its ability to maintain adequate cash inflow from operations to meet its debt obligations as they fall due,
the renewal of its short-term bank loans and on its ability to obtain adequate external
financefinancing to meet its committed future capital expenditures. The Group has obtained firm commitments from its principal bankers to renew its short-term bank loans outstanding at December 31,
20042007 when they fall due during
2005. In relation2008. Subsequent to
its future capital commitments and other financing requirements,December 31, 2007 through March 31, 2008, the Group
has already entered into loan financing agreements with several PRC banks to provide loan finance up to an approximate amountrenewed short-term loans outstanding of
RMB24,225 during 2005 and thereafter.RMB3,179 million (Note 29). The directors of the Company believe that
suchsufficient financing will be available to the Group.
F-44
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
The directors of the Company have carried out a detailed review of the cash flow forecast of the Group for the twelve months ending December 31,
2005.2008. Based on such forecast, the directors have determined that adequate liquidity exists to finance the working capital and capital expenditure requirements of the Group during that period. In preparing the cash flow forecast, the directors have considered historical cash requirements of the Group as well as other key factors, including the availability of the above-mentioned loan finance which may impact the operations of the Group during the next twelve-month period. The directors are of the opinion that the assumptions and sensitivities which are included in the cash flow forecast are reasonable. However, as with all assumptions in regard to future events, these are subject to inherent limitations and uncertainties and some or all of these assumptions may not be
realized.Business risk
The Group conducts its principal operationsrealised.
As at December 31, 2007, the Group’s recognised bank and other loans, finance lease obligations, trade payables and amounts due to related companies as disclosed in
Notes 29, 30, 31 and 32 respectively, are not materially different from the
PRC and accordingly is subject to special considerations and significant risks not typically associated with investments in equity securities ofamount determined based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at the
United States of America and Western European companies. These include risks associated with, among others, the political, economic and legal environment, influence of the CAAC over many aspects of its operations, and competition, in the passenger, cargo and mail airline services industry.Interest rate risk
balance sheet date).
43 | Financial instruments (continued) |
The interest rates and maturity information of the Group’s
notes payablebank and
other loans, and finance lease obligations
under capital leases of the Group are disclosed in Notes
1729 and
18,30 respectively.
Foreign currency risk
At December 31, 2007, it is estimated that a general increase of 100 basis points in interest rates, with all other variables held constant, would decrease the Group’s profit after tax by approximately RMB279 million (2006: RMB254 million).
The sensitivity analysis above has been determined assuming that the change in interest rates had occurred at the balance sheet date. The 100 basis point increase or decrease represents management’s assessment of a reasonably possible change in interest rates over the period until the next annual balance sheet date. The analysis is performed on the same basis for 2006.
The Renminbi is not freely convertible into foreign currencies. All foreign exchange transactions involving Renminbi must take place either through the PBOC or other institutions authorised to buy and sell foreign exchange or at a swap centre.
The Group has significant exposure to foreign currency
risk as substantially all of the Group’s
obligations under finance lease
obligations(Note 30) and
notes payablebank and other loans (Note 29) are denominated in foreign currencies, principally US dollars and
to a lesser extent, Japanese Yen. Depreciation or appreciation of the Renminbi against foreign currencies affects the Group’s results significantly because the Group’s foreign currency payments generally exceed its foreign currency receipts. The Group is not able to hedge its foreign currency exposure effectively other than by retaining its foreign currency denominated earnings and receipts to the extent permitted by the State Administration of Foreign Exchange,
(“SAFE”), or subject to certain restrictive conditions, entering into forward foreign exchange contracts with
authorized PRCauthorised banks.
Credit
The Group also has exposure to foreign currency risk
in respect of net cash inflow denominated in Japanese Yen from ticket sales in overseas branch office after payment of expenses. The Group entered into certain foreign exchange forward option contracts to manage this foreign currency risk. Under the contracts, the Group will buy US$1 million by selling Japanese Yen at certain specified rates on each of the 35 settlement dates until the maturity of the contracts in 2010. For the year ended December 31, 2007, a net loss of approximately RMB5 million arising from changes in the fair value of these foreign currency forward option contracts has been recognised in profit or loss. At December 31, 2007, the fair value of these currency forward option contracts was financial liabilities of approximately RMB5 million.
The exchange rate of Renminbi to US dollar was set by the PBOC and had fluctuated within a narrow band prior to July 21, 2005. Since then, a managed floating exchange rate regime based on market supply and demand with reference to a basket of foreign currencies has been used and US dollar exchange rate has gradually declined against the Renminbi.
43 | Financial instruments (continued) |
(c) | Foreign currency risk (continued) |
The following table indicates the approximate change in Group’s profit after tax in response to reasonably possible changes in the foreign exchange rates to which the Group has significant exposure at the balance sheet date.
| | 2007 | | 2006 | |
| | Increase | | Effect on profit | | Increase | | Effect on profit | |
| | in foreign | | after tax and | | in foreign | | after tax and | |
| | exchange | | retained profits | | exchange | | retained profits | |
| | rates | | RMB million | | rate | | RMB million | |
| | | | | | | | | |
United States Dollars | | | 5 | % | | 1,815 | | | 5 | % | | 1,649 | |
Japanese Yen | | | 2 | % | | 24 | | | 2 | % | | 37 | |
The sensitivity analysis has been determined assuming that the change in foreign exchange rates had occurred at the balance sheet date and had been applied to each of the Group entities’ exposure to currency risk for both derivative and non-derivative financial instruments in existence at that date, and that all other variables, in particular interest rates, remain constant.
The stated changes represent management’s assessment of reasonably possible changes in foreign exchange rates over the period until the next annual balance sheet date. The analysis is performed on the same basis for 2006.
The Group allows for the judicious use of approved derivative instruments such as swaps and options with approved counter-parties and within approved limits to manage the risk of surge of jet fuel price. In addition, counter-party credit risk is generally restricted to any gains on changes in fair value at any time, and not the principal amount of the instrument. Therefore, the possibility of material loss arising in the event of non-performance by counter-party is considered to be unlikely.
The fair values of derivative financial instruments of the Group at the balance sheet date are as follows:
| | 2007 | | 2006 | |
| | Assets | | Liabilities | | Assets | | Liabilities | |
| | RMB million | | RMB million | | RMB million | | RMB million | |
| | | | | | | | | |
Fuel option contracts | | | 2 | | | | | | | | | 26 | |
43 | Financial instruments (continued) |
(c) | Jet fuel price risk (continued) |
At December 31, 2007, the Group had outstanding fuel option contracts to buy approximately 3,300,000 barrels (2006: approximately 6,150,000 barrels) of crude oil at prices ranging from US$42 to US$64 per barrel (2006: US$55 to US$79 per barrel). However, if the prevailing market price of crude oil is above the price as stipulated in the contracts at settlement date of a fuel option, that fuel option at the particular settlement date will be invalidated. On the other hand, the Group sold fuel put options to approved counter-party and had outstanding options at December 31, 2007 of approximately 7,800,000 barrels (2006: 12,300,000 barrels) of crude oil at prices ranging from US$40 to US$54 per barrel (2006: US$43 to US$60 per barrel). All contracts will expire between 2008 and 2009.
A change in price of US$1 per tonne of jet fuel affects the Group’s annual fuel costs by RMB22 million, assuming no change in volume of fuel consumed.
Substantially all of the Group’s cash and cash equivalents are deposited with PRC financial
institutions.institutions, which management believes are of high credit quality.
A significant portion of the Group’s air tickets are sold by agents participating in the Billing and Settlement Plan (“BSP”), a clearing scheme between airlines and sales agents
organizedorganised by International Air Transportation
Association.Association which has insignificant credit risk to the Group. As
ofat December 31,
2003 and 2004,2007, the balance due from BSP
agents amounted to
RMB446RMB1,238 million (2006: RMB863 million). The credit risk exposure to BSP and
RMB411, respectively.F-45
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Self insurance risk
Thethe remaining trade receivables balance are monitored by the Group maintains a limited amounton an ongoing basis and the allowance for impairment of property insurance in respect of certain personal and real property.
Fair value
The carrying amounts and estimated fair values of significant financial assets and liabilities as of December 31, 2003 and 2004 are set out below.doubtful debts is within management’s expectations.
| | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | Carrying | | | Fair | | | Carrying | | | Fair | |
| | amount | | | value | | | amount | | | value | |
| | RMB | | | RMB | | | RMB | | | RMB | |
Cash and cash equivalents | | | 2,080 | | | | 2,080 | | | | 3,083 | | | | 3,083 | |
Trade receivables | | | 834 | | | | 834 | | | | 1,203 | | | | 1,203 | |
Other receivables | | | 296 | | | | 296 | | | | 616 | | | | 616 | |
Short term investments | | | — | | | | — | | | | 683 | | | | 683 | |
Notes payables | | | 11,619 | | | | 11,907 | | | | 23,453 | | | | 23,665 | |
Amounts due to related companies | | | 929 | | | | 929 | | | | 2,330 | | | | 2,330 | |
Accounts payables | | | 928 | | | | 928 | | | | 1,554 | | | | 1,554 | |
Bills payable | | | 438 | | | | 438 | | | | 136 | | | | 136 | |
Other liabilities | | | 1,020 | | | | 1,020 | | | | 2,974 | | | | 2,974 | |
Taxes payable | | | 90 | | | | 90 | | | | 39 | | | | 39 | |
43 | Financial instruments (continued) |
(i) | All financial instruments are carried at amounts not materially different from their fair values as at December 31, 2007 and 2006. |
The following methods and assumptions were used to estimate the fair value for each class of financial
instrument:instruments:
(i) | - | Cash and cash equivalents, trade receivables, other receivables short-term investments, amounts due to related companies, accountsand other current assets, trade payables, billstaxes payable and other liabilities and taxes payable |
The carrying values approximate
their fair
valuevalues because of the short maturities of these instruments.
F-46
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(ii) Notes payable
| - | Financial assets/ liabilities |
The fair values of fuel option contracts and foreign exchange forward option contracts are determined based on dealer price quotations and options pricing model without any deduction for transaction costs.
| - | Available-for-sale equity securities |
The fair value is determined based on quoted market prices without any deduction for transaction costs.
The fair value has been estimated by applying a discounted cash flow approach using interest rates available to the Group for similar indebtedness.
Other investments represents unquoted available-for-sale
| - | Fair value estimates are made at a specific point in time and are based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. |
(ii) | The economic characteristics of the Group’s finance leases vary from lease to lease. It is impractical to compare such leases with those prevailing in the market within the constraints of timeliness and cost for the purpose of estimating the fair value of such leases. |
(iii) | Other non-current investments represent unlisted equity securities of companies established in the PRC. There is no quoted market price for such equity securities and accordingly a reasonable estimate of the fair value could not be measured reliably. |
(iv) | Amounts due from / to related companies are unsecured, interest-free and have no fixed terms of repayment. Given these terms, it is not meaningful to disclose fair values of this balance. |
As at December 31, 2007, the Group had capital commitments as follows:
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
Commitments in respect of aircraft and flight equipment | | | | | | | |
- authorised and contracted for | | | 88,742 | | | 66,881 | |
| | | | | | | |
Other commitments | | | | | | | |
- authorised and contracted for | | | 772 | | | 420 | |
- authorised but not contracted for | | | 1,686 | | | 1,404 | |
| | | 2,458 | | | 1,824 | |
| | | 91,200 | | | 68,705 | |
As at December 31, 2007, the Group had on order 212 aircraft and certain flight equipment, scheduled for deliveries in 2008 to 2013. Deposits of RMB15,366 million have been made towards the purchase of these aircraft and related equipment. As at December 31, 2007, the approximate total future payments, including estimated amounts for price escalation through anticipated delivery dates for these aircraft and flight equipment are as follows:
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
2007 | | | | | | 12,299 | |
2008 | | | 19,125 | | | 22,572 | |
2009 | | | 20,767 | | | 17,483 | |
2010 | | | 20,065 | | | 14,232 | |
2011 | | | 12,747 | | | 295 | |
2012 and afterwards | | | 16,038 | | | | |
| | | 88,742 | | | 66,881 | |
As at December 31, 2007, the Group’s attributable share of the capital commitments of jointly controlled entities was as follows:
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
Authorised and contracted for | | | 1 | | | 11 | |
Authorised but not contracted for | | | 32 | | | 208 | |
| | | 33 | | | 219 | |
44 | Commitments (continued) |
(b) | Operating lease commitments |
As at December 31, 2007, the total future minimum lease payments under non-cancellable aircraft and flight equipment operating leases were payable as follows:
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
Payments due | | | | | | | |
Within 1 year | | | 3,512 | | | 3,077 | |
After 1 year but within 5 years | | | 13,836 | | | 10,846 | |
After 5 years | | | 10,831 | | | 8,046 | |
| | | 28,179 | | | 21,969 | |
As at December 31, 2007, the Group committed to make capital contributions in respect of:
| | 2007 | | 2006 | |
| | RMB million | | RMB million | |
| | | | | |
A jointly controlled entity | | | | | | 83 | |
A subsidiary | | | 133 | | | | |
| | | 133 | | | 83 | |
(a) | The Group leases from CSAHC certain land in Guangzhou and certain land and buildings in Wuhan, Haikou and Zhengzhou cities. The Group has a significant investment in buildings and other leasehold improvements located on such land. However, such land in Guangzhou and such land and buildings in Wuhan, Haikou and Zhengzhou lack adequate documentation evidencing CSAHC’s rights thereto. |
Pursuant to an indemnification agreement dated May 22, 1997, CSAHC has agreed to indemnify the Group against any loss or damage caused by any challenge or interference with the Group’s use of any of its land and buildings.
45 | Contingent liabilities (continued) |
(b) | A writ of summons was issued on May 30, 2007 by certain sales agents in Taiwan (the “plaintiffs”) against the Company for the alleged breach of certain terms and conditions of a cooperative agreement (the “cooperative agreement”). The plaintiffs have made a claim against the Company or a total sum of approximately HKD107 million in respect of the alleged non-payment of sales commission on air tickets sold in Taiwan, annual bonus and interest on late payment during the period from September 1, 2004 to August 31, 2006. The plaintiffs have also claimed against the Company for an unspecified compensation for early termination of the cooperative agreement. |
The directors consider that given the nature of the claims and the preliminary status of the proceedings, it is not possible to estimate the eventual outcome of the claims, with reasonable certainty at this stage. However, the directors are of the opinion that the claims are without merit and have instructed its legal advisor to defend the claims vigorously. The directors consider that the outstanding claim should have no material adverse effect on the financial position of the Group.
(c) | During the year, the Company entered into agreements with its pilot trainees and certain banks to provide guarantees to personal bank loans amounting to RMB90,858,000 to be granted to its pilot trainees to finance their respective flight training expenses. As at December 31, 2007, none of the personal bank loans were drawn down from the banks. |
46 | Non-adjusting post balance sheet events |
(a) | On April 18, 2008, Xiamen Airlines Company Limited, a subsidiary of the Company, entered into a purchase agreement with Boeing Company for the purchase of 20 Boeing B737-800 series aircraft scheduled for delivery from 2014 to 2015. According the information provided by Boeing Company, the total catalogue price for the 20 Boeing B737-800 series aircraft is around US$1,500 million. |
(b) | On April 18, 2008, the Board proposed to the shareholders of the Company for their consideration and approval a bonus share issue (the “Bonus Share Issue”) by the conversion of share premium to share capital. Pursuant to the Bonus Share Issue, which is based on 4,374,178,000 Shares in issue as at December 31, 2007, the number of paid up shares will be increased by 2,187,089,000 shares to 6,561,267,000 shares. The Bonus Share Issue is conditional upon (i) the passing of the special resolution to approve the Bonus Share Issue at the Annual General Meeting and the class meeting of holders of H shares of the Company; (ii) approval from the Ministry of Commerce of the PRC being obtained; and (iii) in respect of the new H Shares, the Listing Committee of the Stock Exchange granting or agreeing to grant the listing of, and permission to deal in, the new H Shares. |
(c) | During the year, the shareholders of the Company authorised the Board to approve guarantees on personal bank loans of its pilot trainees of no more than RMB100 million in each fiscal year (Note 45(c)). On April 18, 2008, the Board further proposed to the shareholders of the Company for their consideration and approval the increase of the amount of such guarantee to no more than RMB400 million in each of the fiscal year. |
46 | Non-adjusting post balance sheet events (continued) |
(d) | On April 18, 2008, the Board approved the proposal of issuance of short-term financing bills in the PRC in the principal amount of up to RMB4 billion and the submission of this proposal to the shareholders’ approval. The short-term financing bills are to be used to fund the operating activities of the Company. |
(e) | On May 28, 2008, the Board approved the proposal of issuance of medium term notes in the PRC in the principal amount of up to RMB1.5 billion and the submission of this proposal to the shareholders for their approval. The medium term notes are to be used as the working capital of the Company and fund the capital expenditure of the Company. |
47 | Immediate and ultimate controlling party |
As at December 31, 2007, the directors of the Company consider the immediate parent and ultimate controlling party of the Group to be CSAHC, a state-owned enterprise established in the PRC. ThereCSAHC does not produce financial statements available for public use.
48 | Accounting estimates and judgements |
The Groups’ financial position and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the consolidated financial statements. The Group bases the assumptions and estimates on historical experience and on various other assumptions that the Group believes to be reasonable and which form the basis for making judgements about matters that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.
The selection of critical accounting policies, the judgements and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in condition and assumptions are factors to be considered when reviewing the consolidated financial statements. The principal accounting policies are set forth in Note 2. The Group believes the following critical accounting policies involve the most significant judgements and estimates used in the preparation of the consolidated financial statements.
Impairment of long-lived assets
If circumstances indicate that the net book value of a long-lived asset may not be recoverable, this asset may be considered “impaired”, and an impairment loss may be recognised in accordance with IAS 36, Impairment of Assets. The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is no quoted marketreduced to recoverable amount. The recoverable amount is the greater of the net selling price for such equity securities and accordinglythe value in use. In determining the value in use, expected cash flows generated by the asset are discounted to their present value, which requires significant judgement relating to the level of traffic revenue and the amount of operating costs. The Group uses all readily available information in determining an amount that is a reasonable estimateapproximation of recoverable amount, including estimates based on a reasonable and supportable assumptions and projections of traffic revenue and amount of operating costs.
48 | Accounting estimates and judgements (continued) |
Depreciation
Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives, after taking into account the estimated residual value. The Group reviews the estimated useful lives of the
fair value could not be measured reliably. Fair value estimates are made at a specific pointassets regularly in time and based on relevant market information aboutorder to determine the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
28. FOREIGN CURRENCY EXCHANGE
The Renminbi is not freely convertible into foreign currencies. All foreign exchange transactions involving Renminbi must take place either through the People’s Bank of China or other institutions authorized to buy and sell foreign exchange or at a swap center.
The Group currently maintains bank accounts in currencies other than the Renminbi to engage in foreign exchange transactions. The amount of foreign exchange that candepreciation expense to be retained by the Group under this system is determined by the SAFErecorded during any reporting period. The useful lives are based on the Group’s expected payment obligations in foreign currencieshistorical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for lease and debt payments and for dividends. Any amountsfuture periods is adjusted if there are significant changes from previous estimates.
Impairment of foreign exchange that the Group receives in excess of such amount must be converted into Renminbi at the rate prevailing in the PRC inter-bank market. trade receivables
The Group
will have access to foreign currency throughmaintains an allowance for impairment of bad and doubtful debts for estimated losses resulting from the
inter-bank system, subject to the approvalinability of the
SAFE,debtors to
satisfy its foreign exchange requirements where these exceedmake required payments. The Group bases the
amountestimates of
foreign exchange thatfuture cash flows on the
Group has retained. The Articles of Associationageing of the Company require cash dividends be declared in Renminbitrade receivables balance, debtors’ credit-worthiness, and paid to holdershistorical write-off experience. If the financial condition of the H shares in Hong Kong dollars at the average closing exchange rate for Hong Kong dollars as announced by the People’s Bank of Chinadebtors were to deteriorate, actual write-offs would be higher than estimated.
The comparative figures represent figures for the
calendar week preceding the date of the dividend declaration. To the extent that the Company is unable to pay dividends in foreign currency out of its own resources, it will have to obtain foreign currency through the swap centers and PRC banks. Hong Kong dollar dividend payments will be converted by the depositary and distributed to holders of American Depositary Shares in United States dollars.F-47
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
29. RECONCILIATION AND SUPPLEMENTARY STATEMENTS OF CASH FLOWS INFORMATION
(a) | | The reconciliation of income/(loss) before taxation and minority interests to cash inflows from operations is as follows: |
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Income/(loss) before taxation and minority interests | | | 1,139 | | | | (511 | ) | | | 233 | |
Adjustments to reconcile income/(loss) before taxation and minority interests to cash inflows from operations: | | | | | | | | | | | | |
Depreciation and amortization of property, plant and equipment | | | 1,839 | | | | 1,998 | | | | 2,363 | |
Other amortization | | | 10 | | | | 40 | | | | 50 | |
Amortization of deferred credits | | | (7 | ) | | | (2 | ) | | | (4 | ) |
Equity income of affiliated companies | | | (37 | ) | | | (48 | ) | | | (12 | ) |
Equity loss of jointly controlled entities | | | 3 | | | | 39 | | | | 5 | |
(Gain)/loss on sale of aircraft | | | (199 | ) | | | 20 | | | | — | |
Loss on sale of other property, plant and equipment | | | 29 | | | | 2 | | | | 1 | |
Interest income | | | (53 | ) | | | (13 | ) | | | (22 | ) |
Net realised and unrealised gain on equity securities held for trading | | | — | | | | — | | | | (15 | ) |
Interest expense | | | 959 | | | | 824 | | | | 725 | |
Non-cash exchange loss, net | | | 175 | | | | 177 | | | | 42 | |
Increase in trade receivables | | | (111 | ) | | | (162 | ) | | | (218 | ) |
(Increase)/decrease in other receivables | | | (166 | ) | | | 77 | | | | (166 | ) |
Increase in deferred expenditure | | | — | | | | — | | | | (2 | ) |
(Increase)/decrease in inventories | | | (76 | ) | | | 2 | | | | (29 | ) |
Decrease/(increase) in prepaid expenses and other current assets | | | 124 | | | | (6 | ) | | | (31 | ) |
(Decrease)/increase in accounts payables | | | (62 | ) | | | 396 | | | | 344 | |
Increase/(decrease) in bills payable | | | 1,300 | | | | (862 | ) | | | (374 | ) |
Increase in sales in advance of carriage | | | 20 | | | | 76 | | | | 408 | |
(Decrease)/increase in amounts due to related companies | | | (193 | ) | | | 404 | | | | (586 | ) |
Increase in accrued expenses | | | 86 | | | | 203 | | | | 507 | |
(Decrease)/increase in other liabilities | | | (33 | ) | | | 373 | | | | 1,223 | |
Increase in provision for major overhauls | | | 16 | | | | 48 | | | | 113 | |
| | | | | | | | | |
Cash inflows from operations | | | 4,763 | | | | 3,075 | | | | 4,555 | |
| | | | | | | | | |
(b) Disclosure of non-cash investing and financing activities:
During 2002, the Group assumed from Zhongyuan Airlines debts totaling RMB965 in partial satisfaction of the consideration payable for acquisition of five Boeing 737-300/37K aircraft and other assets from Zhongyuan Airlines (Note 26).
F-48
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
During 2004, the Group acquired the airline operation and related assets of CNA and XJA at a total consideration of RMB15,522, which was partially satisfied by assumption of debts and liabilities of CNA and XJA totaling RMB13,563 outstanding as of December 31, 2004 (Note 1).
(c) Effect of acquisition:
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Net assets acquired: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Property, plant and equipment | | | 97 | | | | — | | | | 12,980 | |
Cash and cash equivalents | | | 17 | | | | — | | | | 398 | |
Trade receivables | | | 21 | | | | — | | | | 314 | |
Inventories | | | — | | | | — | | | | 729 | |
Other | | | — | | | | — | | | | 1,101 | |
| | | | | | | | | |
| | | 135 | | | | — | | | | 15,522 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Notes payable | | | — | | | | — | | | | 4,587 | |
Obligations under capital leases | | | — | | | | — | | | | 6,125 | |
Accounts payables | | | 4 | | | | — | | | | 343 | |
Accrued expenses and other liabilities | | | 11 | | | | — | | | | 1,475 | |
Other | | | — | | | | — | | | | 1,033 | |
| | | | | | | | | |
| | | 15 | | | | — | | | | 13,563 | |
| | | | | | | | | |
Net assets value | | | 120 | | | | — | | | | 1,959 | |
Minority interests’ share of net assets value | | | 12 | | | | — | | | | — | |
| | | | | | | | | |
Net assets value acquired by the Group | | | 108 | | | | — | | | | 1,959 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Consideration paid | | | 108 | | | | — | | | | — | |
Cash and cash equivalents acquired | | | 18 | | | | — | | | | 398 | |
| | | | | | | | | |
Net cash outflow/(inflow) from acquisition | | | 90 | | | | — | | | | (398 | ) |
| | | | | | | | | |
F-49
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
30. PRINCIPAL SUBSIDIARIES, AFFILIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES
Details of the Company’s principal subsidiaries, affiliated companies and jointly controlled entities as of December 31, 2004 are as follows:
| | | | | | | | | | | | |
| | | | Attributable | | |
| | Place of | | equity interest | | |
| | establishment | | Direct | | Indirect | | Principal |
Name of company | | /operation | | % | | % | | activities |
Subsidiaries | | | | | | | | | | | | |
Guangxi Airlines Company Limited | | PRC | | | 60 | | | | — | | | Airline |
Southern Airlines (Group) Shantou Airlines Company Limited | | PRC | | | 60 | | | | — | | | Airline |
Zhuhai Airlines Company Limited | | PRC | | | 60 | | | | — | | | Airline |
Guizhou Airlines Company Limited | | PRC | | | 60 | | | | — | | | Airline |
Xiamen Airlines Company Limited | | PRC | | | 60 | | | | — | | | Airline |
Guangzhou Air Cargo Company Limited | | PRC | | | 70 | | | | — | | | Cargo services |
Guangzhou Baiyun International Logistics Company Limited | | PRC | | | 61 | | | | — | | | Logistics operations |
Guangzhou Nanland Air Catering Company Limited | | PRC | | | 51 | | | | — | | | Air catering |
| | | | | | | | | | | | |
Affiliated companies | | | | | | | | | | | | |
Southern Airlines Group Finance Company Limited | | PRC | | | 32 | | | | 15.42 | | | Provision of financial services |
Sichuan Airlines Corporation Limited | | PRC | | | 39 | | | | — | | | Airline |
| | | | | | | | | | | | |
Jointly controlled entities | | | | | | | | | | | | |
Guangzhou Aircraft Maintenance Engineering Company Limited (Note) | | PRC | | | 50 | | | | — | | | Provision of aircraft repair and maintenance services |
MTU Maintenance Zhuhai Co. Ltd. | | PRC | | | 50 | | | | — | | | Provision of engine repair and maintenance services |
China Postal Airlines Limited | | PRC | | | 49 | | | | — | | | Airline |
| | | | | | | | | | | | |
Zhuhai Xiang Yi Aviation Technology Company Limited | | PRC | | | 51 | | | | — | | | Provision of flight simulation training services |
Certain of the Company’s subsidiaries, affiliated companies and jointly controlled entities are PRC joint ventures which have limited lives pursuant to PRC law.
F-50
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
31. SEGMENTAL INFORMATION
The Group operates principally as a single business segment for the provision of air transportation services. The analysis of turnover and operating income by geographical segment is based on the following criteria:
(i) Traffic revenue from domestic services within the PRC (excluding Hong Kong) is attributed to the domestic operation. Traffic revenue from inbound/outbound services between the PRC and Hong Kong, and the PRC and overseas destinations is attributed to the Hong Kong regional operation and international operation respectively.
(ii) Other revenue from ticket selling, general aviation and ground services, air catering and other miscellaneous services is attributed on the basis of where the services are performed.
| | | | | | | | | | | | | | | | |
| | | | | | Hong Kong | | | | | | | |
| | Domestic | | | regional | | | International* | | | Total | |
| | RMB | | | RMB | | | RMB | | | RMB | |
Year ended December 31, 2002 | | | | | | | | | | | | | | | | |
Traffic revenue | | | 13,198 | | | | 1,119 | | | | 3,165 | | | | 17,482 | |
Other revenue | | | 485 | | | | — | | | | 52 | | | | 537 | |
| | | | | | | | | | | | |
| | | 13,683 | | | | 1,119 | | | | 3,217 | | | | 18,019 | |
| | | | | | | | | | | | |
Operating income | | | 1,615 | | | | 193 | | | | 218 | | | | 2,026 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Year ended December 31, 2003 | | | | | | | | | | | | | | | | |
Traffic revenue | | | 13,087 | | | | 808 | | | | 3,070 | | | | 16,965 | |
Other revenue | | | 436 | | | | — | | | | 69 | | | | 505 | |
| | | | | | | | | | | | |
| | | 13,523 | | | | 808 | | | | 3,139 | | | | 17,470 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Operating income / (loss) | | | 440 | | | | (29 | ) | | | 45 | | | | 456 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Year ended December 31, 2004 | | | | | | | | | | | | | | | | |
Traffic revenue | | | 17,742 | | | | 1,180 | | | | 4,422 | | | | 23,344 | |
Other revenue | | | 630 | | | | — | | | | — | | | | 630 | |
| | | | | | | | | | | | |
| | | 18,372 | | | | 1,180 | | | | 4,422 | | | | 23,974 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Operating income | | | 650 | | | | 67 | | | | 192 | | | | 909 | |
| | | | | | | | | | | | |
* | | Asian market accounted for approximately 70%, 70% and 67%, respectively, of the Group’s total international traffic revenue for the years ended December 31, 2002, 2003 and 2004. The remaining portion was mainly derived from the Group’s flights to/from European and North American regions. |
F-51
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
The major revenue-earning assets of the Group are its aircraft fleet, most of which are registered in the PRC. Since the Group’s aircraft fleet is employed flexibly across its route network, there is no suitable basis of allocating such assets to geographic segments. Substantially all of the Group’s non-aircraft identifiable assets are located in PRC.
F-52
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
32. SUBSEQUENT EVENTS
In January 2005, the Group, as a lessee, entered into an agreement with an independent lessor for operating leases of nine Boeing 737-800 aircraft for a term of seven years with total future lease payments totalling approximately RMB1,721, scheduled for deliveries in 2005 and 2006.
In January 2005, China Aviation Supplies Import and Export Corporation, as a sole importing agent, entered into, on behalf of several PRC airlines including the Group, a general purchase agreement with the Boeing Company for the import of Boeing B7E7 aircraft. The Group, being one of the ultimate users for thirteen of the Boeing B7E7 aircraft, endorsed the general purchase agreement. The Group is currently in negotiation with the Boeing Company regarding the purchase agreements on such aircraft.
In March 2005, the Group, as a lessee, entered into another agreement with an independent lessor for operating leases of a total of twenty-five aircraft comprising five Boeing 737-700 aircraft, five Boeing 737-800 aircraft, five Airbus 320-200 aircraft and ten Airbus 321-200 aircraft with scheduled deliveries in 2006 and 2007. The term of the lease ranges from ten to twelve years with total future lease payments totalling approximately RMB8,243.
In April 2005, the Group entered into a purchase agreement with Airbus SNC for the purchase of five Airbus A380 aircraft, scheduled for deliveries in 2007 to 2010.
33. SUPPLEMENTARY INFORMATION
Movements in allowance for doubtful accounts comprise:
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Balance at beginning of year | | | 59 | | | | 60 | | | | 70 | |
Provision for doubtful accounts (Note 9) | | | 1 | | | | 12 | | | | 27 | |
Through the CNA/XJA acquisitions | | | — | | | | — | | | | 44 | |
Doubtful accounts written-off | | | — | | | | (2 | ) | | | (49 | ) |
| | | | | | | | | |
Balance at end of year (Note 12) | | | 60 | | | | 70 | | | | 92 | |
| | | | | | | | | |
F-53
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
34. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP
The Group’s accounting policies conform with IFRS which differ in certain significant respects from U.S. GAAP. Information relating to the nature and effect of such differences is set out below.
(a) CNA/XJA Acquisitions
As disclosed in Note 1 to the consolidated financial statements prepared under IFRS, the Group acquired the airline operations and certain related assets and liabilities of CNA and XJA with effect from December 31, 2004. Under IFRS, the purchase method of accounting was applied to such business combination such that at December 31, 2004 only the acquired assets and liabilities are included in the consolidated financial statements of the Group. The results of the acquired operations and their related cash flows will be included in the consolidated financial statement of the Group beginning January 1, 2005.
Under U.S. GAAP, such transaction is considered to be “a combination of entities under common control”. A combination of entities under common control is accounted for in a manner similar to a “pooling-of-interests”. Consequently, the assets and liabilities of CNA and XJA are reflected at their U.S. GAAP carrying values and the U.S. GAAP consolidated financial statements of the Group are restated to include the assets and liabilities of CNA and XJA, and their results of operations and cash flows for all the periods presented.
(b) Sale and leaseback accounting
Under IFRS, gains on sale and leaseback transactions where the subsequent lease is an operating lease are recognized as income immediately, if the transactions are established at fair value. Differences between the sale price and fair value are deferred and amortized over the period for which the assets are expected to be used. Under U.S. GAAP, such gains are deferred and amortized over the term of the lease.
(c) Lease arrangements
As disclosed in Note 14 to the consolidated financial statements, during 2002 and 2003, the Group entered into two separate arrangements with certain independent third parties under which the Group sold aircraft and then immediately leased back the aircraft for a pre-determined period.
F-54
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
As a result of the arrangements, the Group received a net cash benefit of RMB52 and RMB69 in 2002 and 2003, respectively, which were recognized as income under IFRS. Under U.S. GAAP, such benefits are deferred and amortized over the minimum lease period.
In addition, under the lease arrangements, the commitments by the Group to make long-term lease payments are defeased by the placement of security deposits. As such, under IFRS, such commitments and deposits are not recognized on the consolidated balance sheets. Under U.S. GAAP, such commitments and deposits amounting to RMB2,409 and RMB2,462 as of December 31, 2003 and 2004, respectively, would be recognized on the consolidated balance sheets, as such commitments are not deemed as extinguished by the placement of security deposits.
(d) Capitalized interest
Under IFRS, the Group capitalizes interest costs to the extent the related borrowings are directly attributable to the acquisition or construction of an asset.
Under U.S. GAAP, interest costs capitalized are determined based on specific borrowings related to the acquisition or construction of an asset, if an entity’s financing plans associate a specific new borrowing with a qualifying asset. If average accumulated expenditures for the asset exceed the amounts of specific new borrowings associated with the asset, additional interest costs capitalized are based on the weighted average interest rate applicable to other borrowings of the entity.
(e) Revaluation of property, plant and equipment
In connection with the Reorganization in 1996, the property, plant and equipment of the Group were revalued as of December 31, 1996 (see Notes 1 and 14 to the consolidated financial statements). Such revaluation resulted in an increase in shareholders’ equity with respect to the increase in carrying amount of certain property, plant and equipment above their historical cost bases, while a charge to the consolidated statement of operations was recorded with respect to the reduction in carrying amount of certain property, plant and equipment below their historical cost bases. In addition, the revalued property, plant and equipment amounts serve as the tax bases of property, plant and equipment for years beginning in 1997. Accordingly, the revaluation eliminated certain of the temporary differences which gave rise to a deferred tax asset as of December 31, 1996. Such tax asset was offset against the revaluation surplus.
Under U.S. GAAP, property, plant and equipment are stated at their historical cost unless an impairment loss has been recorded. An impairment loss on property, plant and equipment is recorded under U.S. GAAP if the carrying amount of such asset exceeds its future undiscounted cash flows, excluding finance costs. The future undiscounted cash flows, excluding finance costs, of the Group’s property, plant and equipment whose carrying amount was reduced in connection with the Reorganization, exceed their historical cost carrying amount and, therefore, impairment of such assets is not appropriate under U.S. GAAP. Accordingly, the revaluation reserve recorded directly to shareholders’ equity and the charge recorded under IFRS in 1996 and the additional depreciation charges recorded in the eight years ended December 31, 2004, as a result of2006 and 2005. Certain items in these comparative figures have been reclassified to conform with the Reorganization are reversed for U.S. GAAP purposes.
F-55
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
However, as a result of the tax deductibility of the net revaluation reserve, a deferred tax asset relatedcurrent year’s presentation to the reversal of the net revaluation reserve is created under U.S. GAAP with a corresponding increase in shareholders’ equity as of December 31, 1996. Such deferred tax asset will be reversed upon depreciation of the net revaluation surplus included in the property, plant and equipment beginning 1997.
F-56
facilitate comparison.CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(f) Investments in affiliated company and jointly controlled entity
During 2002, the Group invested in an affiliated company and a jointly controlled entity, which were PRC state-owned enterprises. Under IFRS, such investments are initially recorded on a fair value basis at the cost of purchases borne by the Group. In the consolidated statements of operations, the equity share of results of the investees are measured based on the fair value of underlying net assets determined on the dates of acquisitions.
Under U.S. GAAP, such transactions are considered
50 | Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended December 31, 2007 |
Up to
be “combinations of businesses under common control”. Consequently, such investments are initially recorded at the Group’s equity share of net assets of the investees determined on a historical cost basis. The differences between such amounts and the cost of purchases are reflected as movements in the shareholders’ equity. In the consolidated statements of operations, the equity share of results of the investees are measured based on the historical cost basis.(g) Acquisition of other subsidiaries from CSAHC
During 2002, the Group acquired 90% equity interest in certain subsidiaries from CSAHC. Under IFRS, the purchase method of accounting was applied to such business combination such that as from the date of combination, the resultsissue of the acquired subsidiaries and their assets and liabilities are included in thethese consolidated financial statements, the IASB has issued a number of the Group.
Under U.S. GAAP, such transaction is considered to be “a combination of entities under common control”. As described in Note 34(a), a combination of entities under common control is accounted for in a manner similar to a “pooling-of-interests”. The effect of this difference in accounting wasamendments, new standards and interpretations which are not material to the years presented.
(h) Provision for major overhauls
As disclosed in Notes 2(u) and 6 to the consolidated financial statements prepared under IFRS, in respect of aircraft held under operating leases, a provision is made over the lease termyet effective for the estimated cost of overhauls required to be performed on the related aircraft prior to their return to the lessors.
Under U.S. GAAP, a liability is recorded at the outset of the operating leases for the fair value of contractual obligations to perform the overhauls and a deferred asset is recorded for the corresponding amount, which is amortized over the term of the operating lease. The carrying amounts of such liability and asset amounted to approximately RMB570 and RMB370 respectively as of December 31, 2003 and RMB749 and RMB390 respectively as of December 31, 2004.
The effect of above difference on the net income/(loss) and shareholders’ equity reported under U.S. GAAP was not material to the years presented.
F-57
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(i) Financial statements presentation and disclosure
In the consolidated statements of operations presented under IFRS, (loss)/gain on sale of property, plant and equipment is classified under “Non-operating income/(expenses)”. Under U.S. GAAP, such (loss)/gain is classified under “Operating income/(expenses) — General and administrative”.
As disclosed in Note 21 to the consolidated financial statements, deferred tax assets are presented on a net basis under IFRS. Under U.S. GAAP, the gross amounts of such deferred tax assets and any applicable valuation allowances are separately disclosed. As of December 31, 2003 and 2004, the amount of the deferred tax asset valuation allowances approximated RMB741 and RMB53, respectively.
(j) New accounting pronouncements
FASB No. 123R
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. This new pronouncement replaces the existing requirements under FASB No. 123 and APB Opinion No. 25, Accounting for Stock Issued to Employees, and will be effective for financial statements on January 1, 2006. The Group currently does not offer any share-based compensation to its employees.
FASB No. 151
In December 2004, the FASB issued FASB Statement No.151, Inventory Costs. This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) which will be recognized as current-period charges. In addition, the Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement will be effective for inventory costs incurred during fiscal years beginning after January 1, 2006. The Group does not expect the initial adoption of FASB No. 151 will have a material impact on its consolidated financial statements.
FASB No. 153
In December 2004, the FASB issued FASB Statement No. 153, Exchanges of Nonmonetary Assets, which eliminates an exception in APB 29 for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. This Statement will be effective for nonmonetary asset exchanges occurring on or after January 1, 2006.
F-58
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Effect on net income/(loss) of significant differences between IFRS and U.S. GAAP is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Reference | | | Year ended December 31, | |
| | in Note | | | 2002 | | | 2003 | | | 2004 | | | 2004 | |
| | above | | | RMB | | | RMB | | | RMB | | | U.S. dollars | |
| | | | | | (restated) | | | (restated) | | | | | | | | | |
Net income/(loss) under IFRS | | | | | | | 576 | | | | (358 | ) | | | (48 | ) | | | (6 | ) |
U.S. GAAP adjustments: | | | | | | | | | | | | | | | | | | | | |
Net (loss)/income before tax attributable to airline operations of CNA and XJA | | | (a) | | | | (1,114 | ) | | | (1,042 | ) | | | 354 | | | | 43 | |
Sale and leaseback accounting | | | (b) | | | | (101 | ) | | | 115 | | | | 115 | | | | 14 | |
Lease arrangements | | | (c) | | | | (50 | ) | | | (64 | ) | | | 7 | | | | 1 | |
Capitalized interest | | | (d) | | | | (31 | ) | | | (33 | ) | | | (13 | ) | | | (2 | ) |
Reversal of additional depreciation arising from revaluation of property, plant and equipment | | | (e) | | | | 33 | | | | 33 | | | | 13 | | | | 2 | |
Investments in affiliated company and jointly controlled entity | | | (f) | | | | (1 | ) | | | 7 | | | | 7 | | | | 1 | |
Deferred tax effects | | | | | | | | | | | | | | | | | | | | |
— current year | | | | | | | 48 | | | | (8 | ) | | | (16 | ) | | | (2 | ) |
— effect on change in the Company’s income tax rate | | | | | | | — | | | | (51 | ) | | | — | | | | — | |
— tax effect of acquisitions of airline operations of CNA and XJA operations of CNA and XJA | | | | | | | (15 | ) | | | 261 | | | | (81 | ) | | | (10 | ) |
— effect on change in income tax rate applicable to airline operations of CNA and XJA | | | | | | | — | | | | — | | | | (99 | ) | | | (12 | ) |
| | | | | | | | | | | | | | | | |
Net (loss)/income under U.S. GAAP | | | | | | | (655 | ) | | | (1,140 | ) | | | 239 | | | | 29 | |
| | | | | | | | | | | | | | | | |
Basic (loss)/earnings per share under U.S. GAAP | | | | | | | (0.194 | ) | | | (0.298 | ) | | | 0.055 | | | | 0.007 | |
| | | | | | | | | | | | | | | | |
Basic (loss)/earnings per ADS under U.S. GAAP* | | | | | | | (9.706 | ) | | | (14.876 | ) | | | 2.732 | | | | 0.331 | |
| | | | | | | | | | | | | | | | |
* | | Basic (loss)/earnings per ADS is calculated on the basis that one ADS is equivalent to 50 H shares. |
F-59
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Effect on shareholders’ equity of significant differences between IFRS and U.S. GAAP is as follows:
| | | | | | | | | | | | | | | | |
| | Reference | | | December 31, | |
| | in Note | | | 2003 | | | 2004 | | | 2004 | |
| | above | | | RMB | | | RMB | | | U.S. Dollars | |
| | | | | | (restated) | | | | | | | | | |
Shareholders’ equity under IFRS | | | | | | | 11,896 | | | | 11,848 | | | | 1,432 | |
U.S. GAAP adjustments: | | | | | | | | | | | | | | | | |
Shareholders’ equity before tax effect attributable to airline operations of CNA and XJA | | | (a) | | | | 1,347 | | | | (531 | ) | | | (64 | ) |
Sale and leaseback accounting | | | (b) | | | | (472 | ) | | | (357 | ) | | | (43 | ) |
Lease arrangements | | | (c) | | | | (114 | ) | | | (107 | ) | | | (13 | ) |
Capitalized interest | | | (d) | | | | 348 | | | | 335 | | | | 40 | |
Revaluation of property, plant and equipment, net of depreciation | | | (e) | | | | (13 | ) | | | — | | | | — | |
Investments in affiliated company and jointly controlled entity | | | (f) | | | | (111 | ) | | | (104 | ) | | | (13 | ) |
Deferred tax effect on airline operations of CNA and XJA | | | | | | | 182 | | | | 66 | | | | 8 | |
Deferred tax effects | | | | | | | 35 | | | | 19 | | | | 2 | |
| | | | | | | | | | | | | |
Shareholders’ equity under U.S. GAAP | | | | | | | 13,098 | | | | 11,169 | | | | 1,349 | |
| | | | | | | | | | | | | |
F-60
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
As a result of the Group and the airline operations of CNA and XJA acquired on December 31, 2004 being under common control, the condensed financial information of the Group under U.S. GAAP for the years have been restated to reflect the combination of CNA and XJA and the Group in a manner similar to a pooling of interests. Consequently the assets and liabilities of CNA and XJA are reflected at their historical carrying values and the consolidated financial statements have been restated to include the financial statements of CNA and XJA for all periods presented.
The following are condensed consolidated balance sheets of the Group as of December 31, 2003 and 2004, and the related condensed consolidated statements of operations, cash flows and changes in total shareholders’ equity for each of the years in the three-year periodyear ended December 31, 2004, prepared on a U.S. GAAP basis.
Condensed2007 and which have not been adopted in these consolidated statements of operations
F-61
financial statements:
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
| | | | | | | | | | | | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Operating revenue: | | | | | | | | | | | | |
Traffic revenue | | | 24,854 | | | | 24,897 | | | | 33,235 | |
Other operating revenue | | | 904 | | | | 586 | | | | 930 | |
| | | | | | | | | |
Total operating revenue | | | 25,758 | | | | 25,483 | | | | 34,165 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Flight operations | | | 10,062 | | | | 10,351 | | | | 15,016 | |
Maintenance | | | 3,530 | | | | 3,878 | | | | 4,578 | |
Aircraft and traffic servicing | | | 3,433 | | | | 3,803 | | | | 4,789 | |
Promotion and sales | | | 2,034 | | | | 2,043 | | | | 2,606 | |
General and administrative | | | 1,377 | | | | 1,397 | | | | 1,759 | |
Depreciation and amortization | | | 2,864 | | | | 3,042 | | | | 3,523 | |
Asset impairment charges | | | 347 | | | | 510 | | | | — | |
Other | | | 163 | | | | 93 | | | | 17 | |
| | | | | | | | | |
Total operating expenses | | | 23,810 | | | | 25,117 | | | | 32,288 | |
| | | | | | | | | |
Operating income | | | 1,948 | | | | 366 | | | | 1,877 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Non-operating income/(expenses): | | | | | | | | | | | | |
Interest income | | | 82 | | | | 27 | | | | 33 | |
Interest expense | | | (1,820 | ) | | | (1,604 | ) | | | (1,184 | ) |
Equity income of affiliated companies | | | 45 | | | | 53 | | | | 17 | |
Equity loss of jointly controlled entities | | | (12 | ) | | | (37 | ) | | | (3 | ) |
Investment income | | | — | | | | — | | | | 5 | |
Foreign currency exchange loss, net | | | (327 | ) | | | (381 | ) | | | (124 | ) |
Other, net | | | (52 | ) | | | 37 | | | | 85 | |
| | | | | | | | | |
Total net non-operating expenses | | | (2,084 | ) | | | (1,905 | ) | | | (1,171 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
(Loss)/income before income taxes and minority interests | | | (136 | ) | | | (1,539 | ) | | | 706 | |
| | | | | | | | | | | | |
Income tax (expense)/benefit | | | (365 | ) | | | 526 | | | | (274 | ) |
| | | | | | | | | |
(Loss)/income before minority interests | | | (501 | ) | | | (1,013 | ) | | | 432 | |
Minority interests | | | (154 | ) | | | (127 | ) | | | (193 | ) |
| | | | | | | | | |
Net (loss)/income | | | (655 | ) | | | (1,140 | ) | | | 239 | |
| | | | | | | | | |
F-62
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Condensed consolidated balance sheets
| | | | | | | | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
ASSETS
|
CURRENT ASSETS | | | | | | | | |
Cash and cash equivalents | | | 2,999 | | | | 3,083 | |
Trade receivables | | | 943 | | | | 1,203 | |
Other receivables | | | 521 | | | | 616 | |
Deferred tax assets | | | 137 | | | | 271 | |
Inventories | | | 1,138 | | | | 1,250 | |
Prepaid expenses and other current assets | | | 295 | | | | 378 | |
Short term investments | | | — | | | | 683 | |
| | | | | | |
TOTAL CURRENT ASSETS | | | 6,033 | | | | 7,484 | |
PROPERTY, PLANT AND EQUIPMENT, NET | | | 41,012 | | | | 46,202 | |
CONSTRUCTION IN PROGRESS | | | 2,196 | | | | 1,049 | |
LEASE PREPAYMENTS | | | 349 | | | | 346 | |
INVESTMENTS | | | 1,314 | | | | 1,379 | |
LEASE AND EQUIPMENT DEPOSITS | | | 6,731 | | | | 7,859 | |
DEFERRED TAX ASSETS | | | 332 | | | | — | |
OTHER ASSETS | | | 643 | | | | 721 | |
| | | | | | |
TOTAL ASSETS | | | 58,610 | | | | 65,040 | |
| | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
CURRENT LIABILITIES | | | | | | | | |
Notes payable, including current installments of long-term notes payable | | | 8,600 | | | | 11,518 | |
Current installments of obligations under capital leases | | | 2,368 | | | | 2,106 | |
Accounts payable | | | 1,144 | | | | 1,554 | |
Bills payable | | | 438 | | | | 136 | |
Sales in advance of carriage | | | 663 | | | | 874 | |
Taxes payable | | | 92 | | | | 39 | |
Deferred tax liabilities | | | 91 | | | | 71 | |
Amounts due to related companies | | | 511 | | | | 2,330 | |
Accrued expenses | | | 3,890 | | | | 4,551 | |
Other liabilities | | | 1,496 | | | | 2,974 | |
| | | | | | |
TOTAL CURRENT LIABILITIES | | | 19,293 | | | | 26,153 | |
NOTES PAYABLE, EXCLUDING CURRENT INSTALLMENTS | | | 8,634 | | | | 11,935 | |
OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING CURRENT INSTALLMENTS | | | 13,849 | | | | 11,975 | |
PROVISION FOR MAJOR OVERHAULS | | | 742 | | | | 674 | |
DEFERRED CREDITS | | | 851 | | | | 693 | |
DEFERRED TAX LIABILITIES | | | 389 | | | | 402 | |
| | | | | | |
TOTAL LIABILITIES | | | 43,758 | | | | 51,832 | |
MINORITY INTERESTS | | | 1,754 | | | | 2,039 | |
SHAREHOLDERS’ EQUITY | | | 13,098 | | | | 11,169 | |
| | | | | | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | | 58,610 | | | | 65,040 | |
| | | | | | |
F-63
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Condensed consolidated statements of cash flows
The Group applies IAS 7 “Cash Flow Statements”. Its objectives and principles are similar to those set out in Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows” (“SFAS 95”) for U.S. GAAP. The principal differences between the standards relate to classification. Dividend received classified as investing activities under IAS 7 are classified as operating activities under SFAS 95. Summarized cash flows data by operating, investing and financing activities in accordance with SFAS 95 are as follows:
| | | | | | | | | | | | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Net cash inflow/(outflow) from | | | | | | | | | | | | |
Operating activities | | | 4,364 | | | | 2,965 | | | | 5,419 | |
Investing activities | | | (6,204 | ) | | | (7,558 | ) | | | (9,507 | ) |
Financing activities | | | 2,230 | | | | 2,820 | | | | 4,172 | |
| | | | | | | | | |
Increase/(decrease) in cash and cash equivalents | | | 390 | | | | (1,773 | ) | | | 84 | |
Cash and cash equivalents at beginning of year | | | 4,382 | | | | 4,772 | | | | 2,999 | |
| | | | | | | | | |
Cash and cash equivalents at end of year | | | 4,772 | | | | 2,999 | | | | 3,083 | |
| | | | | | | | | |
Condensed consolidated statements of changes in total shareholders’ equity
F-64
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
| | Effective for accounting period beginning on or after |
| | |
IFRS 8, Operating Segments | | Total | January 1, 2009 |
IFRIC 11, IFRS 2 – Group and Treasury Share Transactions | | RMB | March 1, 2007 |
Shareholders’ equity at December 31, 2001IFRIC 12, Service Concession Agreements | | January 1, 2008 |
IFRIC 13, Customer Loyalty Programmes | 7,315 | July 1, 2008 |
IFRIC 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction | | January 1, 2008 |
IAS 1 (Revised), Presentation of Financial Statement | | January 1, 2009 |
IAS 23 (Revised), Borrowing Costs | | January 1, 2009 |
Amendment to IFRS 2, Share-Based Payment – Vesting Conditions and Cancellations | | January 1, 2009 |
Amendments to IAS 32, Financial instruments: Presentation and IAS 1, Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation | | January 1, 2009 |
IFRS 3 (Revised), Business Combinations | | Applied to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after July 1, 2009 |
Amendments to IAS 27, Consolidated and Separate Financial Statements | | July 1, 2009 |
The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. So far the Group believes that the adoption of measurement of the above amendments, new standards and new interpretations is unlikely to have a significant impact on the Group’s results of operations and financial position except for IFRIC 13. IFRIC 13 is effective for the Group’s accounting period beginning on or after January 1, 2009 and may result in changes to revenue recognition in respect of mileages granted under the Group’s frequent flyer programmes.
The particulars of the Group’s principal subsidiaries as of December 31, 2007 are as follows:
Name of company | | Place of establishment / operation | | Registered capital | | Proportion of ownership interest held by the Company | | Principal activities | |
| | | | |
Net loss | | | (655 | ) |
Dividend paid | | | (67 | ) |
Distributions to CSAHC | | | (89 | ) |
Contributions from CSAHC | | | 292 | |
| | | |
Shareholders’ equity at December 31, 2002 | | | 6,796 | |
| | | | |
Issue of A sharesSouthern Airlines (Group) Shantou Airlines Company Limited (a) | | PRC | | RMB280,000,000 | | | 2,64160 | % | Airline | |
Net lossChongqing Airlines Company Limited (a) | | PRC | | RMB1,200,000,000 | | | (1,14060 | )% | Airline | |
Net liabilities assumed by CSAHC (note a)Zhuhai Airlines Company Limited (a) | | PRC | | RMB250,000,000 | | | 4,55260 | % | Airline | |
Recognition of deferred tax assets (note b)Xiamen Airlines Company Limited (a) | | PRC | | RMB700,000,000 | | | 24660 | % | Airline | |
Contributions from CSAHCGuizhou Airlines Company Limited (a) | | PRC | | RMB80,000,000 | | | 360 | % | Airline | |
Nan Lung International Freight Comapny Limited | | HK | | HKD3,270,000 | | | 51 | % | Freight services | |
Guangzhou Air Cargo Company Limited (a) | | PRC | | RMB238,000,000 | | | 70 | % | Cargo services | |
Guangzhou Baiyun International Logistics Company Limited (a) | | PRC | | RMB50,000,000 | | | 61 | % | Logistics operations | |
Southern Airlines Group Air Catering Company Limited (a) | | PRC | | RMB10,200,000 | | | 100 | % | Air catering | |
Guangzhou Nanland Air Catering Company Limited (b) | | PRC | | RMB120,000,000 | | | 75 | % | Air catering |
China Southern West Australian Flying College Pty Limited | | Australia | | AUD100,000 | | | 65 | % | Pilot training services | |
Xinjiang Civil Aviation Property Management Limited (a) | | PRC | | RMB251,332,832 | | | 51.8 | % | Property management | |
| (a) | These subsidiaries are PRC limited liability companies. |
| (b) | This subsidiary is Sino-foreign equity joint venture company established in the PRC. |
| (c) | Certain of the Group’s subsidiaries are PRC joint ventures which have limited lives pursuant to the PRC law. |
52 | Associates and jointly controlled entities |
The particulars of the Group’s principal associates and jointly controlled entities as of December 31, 2007 are as follows:
| | | | Proportion of ownership interest held by | | | |
Name of company | | Place of establishment/ operation | | Group’s effective interest | | The Company | | subsidiaries | | Principal activities | |
| | | | | | | | | | | |
Guangzhou Aircraft Maintenance Engineering Company Limited (a) | | PRC | | | 50 | % | | 50 | % | | - | | Provision of aircraft repair and maintenance services |
China Southern Airlines Group Finance Company Limited | | PRC | | | 34 | % | | 21.1 | % | | 12.9 | % | Provision of financial services | |
Sichuan Airlines Corporation Limited | | PRC | | | 39 | % | | 39 | % | | - | | Airline | |
MTU Maintenance Zhuhai Co., Limited (a) | | PRC | | | 50 | % | | 50 | % | | - | | Provision of engine repair and maintenance services | |
China Postal Cargo Airlines Limited (a) | | PRC | | | 49 | % | | 49 | % | | - | | Airline | |
Zhuhai Xiang Yi Aviation Technology Company Limited (a) | | PRC | | | 51 | % | | 51 | % | | - | | Provision of flight simulation services | |
Beijing Southern Airlines Ground Services Company Limited (a) | | PRC | | | 50 | % | | 50 | % | | - | | Provision of airport ground services | |
Guangzhou China Southern Zhongmian Dutyfee Store Co., Limited | | PRC | | | 50 | % | | 50 | % | | - | | Sales of duty free goods in flight | |
| (a) | These are jointly controlled entities. |
| (b) | Certain of the Group’s jointly controlled entities are PRC joint ventures which have limited lives pursuant to the PRC law. |
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| CHINA SOUTHERN AIRLINES COMPANY LIMITED |
| |
| /s/ Liu Shao Yong | |
| Name: Liu Shao Yong |
| Title: Chairman of the Board of Directors |
Exhibit No. | | Description of Exhibit |
1.1 | | Amended Articles of Association of China Southern Airlines Company Limited (incorporated by reference to Exhibit 1.1 to our Annual Report on Form 20-F for fiscal year 2006 filed with the Securities and Exchange Commission (File Number: 001-14660) for the year ended December 31, 2006 with the Securities and Exchange Commission on June 29, 2007) |
| | | |
Shareholders’ equity at December 31, 2003 | | | 13,098 | |
| | | | |
Net profit | | | 239 | |
Net assets distributed to CSAHC (note a) | | | (28 | ) |
Elimination of net deferred tax assets (note c) | | | (181 | ) |
Distributions to CSAHC | | | (1,959 | ) |
| | | |
Shareholders’ equity at December 31, 2004 | | | 11,169 | |
| | | |
F-65
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Notes: | | |
|
(a) | | In connection with the CNA/XJA Acquisitions, certain assets and liabilities of CNA and XJA which were not to be acquired by the Company were transferred to CSAHC, the owner of CNA and XJA during 2003 and 2004. |
|
(b) | | In connection with the CNA/XJA Acquisitions, the property, plant and equipment of CNA and XJA were revalued as of December 31, 2003 according to the relevant PRC rules and regulations. The revalued amount serves as the tax base for future years. Such revaluation are not recorded under U.S. GAAP. However, a deferred tax asset is recognized for the tax deductibility of the resulting net revaluation surpluses with a corresponding credit to the equity under U.S. GAAP. |
|
(c) | | As a result of the CNA/XJA Acquisitions, the tax losses attributable to the airline operations of CNA and XJA are no longer available for utilization against future taxable income of such operations. Accordingly, the deferred tax assets arising from such tax losses and related valuation allowance was eliminated against equity. |
F-66
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
The following additional financial statement disclosures are required under U.S. GAAP and are presented on a U.S. GAAP basis.
Operating revenue
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Traffic revenue | | | | | | | | | | | | |
Passenger | | | 22,565 | | | | 22,438 | | | | 30,443 | |
Cargo and mail | | | 2,289 | | | | 2,459 | | | | 2,792 | |
| | | | | | | | | |
| | | 24,854 | | | | 24,897 | | | | 33,235 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Other operating revenue | | | | | | | | | | | | |
Commission income | | | 167 | | | | 157 | | | | 227 | |
General aviation income | | | 68 | | | | 40 | | | | 55 | |
Ground services income | | | 95 | | | | 123 | | | | 202 | |
Air catering income | | | 38 | | | | 31 | | | | 53 | |
Rental income | | | — | | | | 40 | | | | 45 | |
Aircraft lease income | | | 166 | | | | 36 | | | | 145 | |
Gain on disposal of property, plant and equipment | | | 194 | | | | — | | | | — | |
Maintenance services income | | | 22 | | | | 30 | | | | 23 | |
Income on transfer of surplus pilot trainees | | | 10 | | | | — | | | | — | |
Utility services income | | | — | | | | 14 | | | | 28 | |
Other | | | 144 | | | | 115 | | | | 152 | |
| | | | | | | | | |
| | | 904 | | | | 586 | | | | 930 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Total operating revenue | | | 25,758 | | | | 25,483 | | | | 34,165 | |
| | | | | | | | | |
F-67
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Income tax
The Company was subject to PRC income tax at 33% for the year ended December 31, 2002 and period ended September 30, 2003. The Company is subject to PRC income tax at 15% beginning October 1, 2003. The airline operations of CNA and XJA were subject to PRC income tax at 33% during 2002, 2003 and up to December 30, 2004. As a result of the CNA/XJA Acquisitions having been effective December 31, 2004, the airline operations of CNA and XJA have become divisions of the Company and are subject to PRC income tax at the applicable rate of 15% beginning that date.
Taxation (expense)/benefit consisted of:
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
PRC income tax: | | | | | | | | | | | | |
Company and subsidiaries | | | (72 | ) | | | (47 | ) | | | (259 | ) |
Affiliated companies | | | (9 | ) | | | (3 | ) | | | (2 | ) |
Jointly controlled entities | | | — | | | | (7 | ) | | | (11 | ) |
| | | | | | | | | |
| | | (81 | ) | | | (57 | ) | | | (272 | ) |
Deferred tax | | | | | | | | | | | | |
- current year | | | (284 | ) | | | 242 | | | | 97 | |
- adjustment for change in the Company’s enacted tax rate | | | — | | | | 341 | | | | — | |
- adjustment for change in applicable tax rate for airline operations of CNA and XJA | | | — | | | | — | | | | (99 | ) |
| | | | | | | | | |
| | | (365 | ) | | | 526 | | | | (274 | ) |
| | | | | | | | | |
Additional income taxes were allocated as follows | | | | | | | | | | | | |
|
Shareholders’ equity, for deferred tax asset recognized in connection with the tax deductibility resulting from net revaluation surpluses | | | — | | | | 246 | | | | — | |
|
Shareholders’ equity, for elimination of deferred tax assets of the airline operations of CNA and XJA no longer available | | | — | | | | — | | | | (181 | ) |
| | | | | | | | | |
| | | — | | | | 246 | | | | (181 | ) |
| | | | | | | | | |
F-68
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Actual taxation amount in the consolidated statements of operations for the years ended December 31, 2002, 2003 and 2004 differed from the amounts computed by applying the PRC income tax rate of 33%, 15% and 15%, respectively, to income/(loss) before taxation and minority interests as a result of the following:
| | | | | | | | | | | | |
| | Year ended December 31, | |
| | 2002 | | | 2003 | | | 2004 | |
| | RMB | | | RMB | | | RMB | |
Expected PRC taxation (expense)/benefit | | | 45 | | | | 231 | | | | (105 | ) |
Adjustments: | | | | | | | | | | | | |
Effect of change in the Company’s income tax rate | | | — | | | | 341 | | | | — | |
Effect of change in the income tax rate applicable to the airline operations of CNA and XJA | | | — | | | | — | | | | (99 | ) |
Rate differential on subsidiaries | | | 60 | | | | (5 | ) | | | — | |
Rate differential on airline operations of CNA and XJA | | | — | | | | 196 | | | | (43 | ) |
Non-deductible expenses | | | (155 | ) | | | (90 | ) | | | (37 | ) |
Increase in deferred tax valuation allowance | | | (296 | ) | | | (110 | ) | | | (4 | ) |
Expired tax losses | | | — | | | | (34 | ) | | | — | |
Non-taxable income | | | — | | | | — | | | | 17 | |
Other, net | | | (19 | ) | | | (3 | ) | | | (3 | ) |
| | | | | | | | | |
| | | (365 | ) | | | 526 | | | | (274 | ) |
| | | | | | | | | |
All but an insignificant amount of income/(loss) before taxation is from domestic sources.
F-69
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
The net deferred tax (liabilities)/assets as of December 31, 2003 and 2004 were made up of the following taxation effects:
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Deferred tax assets: | | | | | | | | |
Tax losses | | | 1,192 | | | | 92 | |
Repair charges capitalized | | | 261 | | | | 254 | |
Accrued expenses | | | 107 | | | | 275 | |
Gains on sale and leaseback transactions | | | 88 | | | | 69 | |
Property, plant and equipment | | | 148 | | | | 89 | |
Inventories | | | 25 | | | | — | |
Other | | | 9 | | | | 21 | |
| | | | | | |
Total deferred tax assets | | | 1,830 | | | | 800 | |
Valuation allowance | | | (741 | ) | | | (53 | ) |
| | | | | | |
| | | 1,089 | | | | 747 | |
| | | | | | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Accrued expenses | | | (81 | ) | | | (75 | ) |
Property, plant and equipment | | | (945 | ) | | | (825 | ) |
Inventories | | | (5 | ) | | | — | |
Other | | | (69 | ) | | | (49 | ) |
| | | | | | |
Total deferred tax liabilities | | | (1,100 | ) | | | (949 | ) |
| | | | | | |
Net deferred tax (liabilities)/assets | | | (11 | ) | | | (202 | ) |
| | | | | | |
| | | | | | | | |
Representing: | | | | | | | | |
| | | | | | | | |
Net deferred tax assets — current portion | | | 137 | | | | 271 | |
Net deferred tax assets — non-current portion | | | 332 | | | | — | |
Net deferred tax liabilities — current portion | | | (91 | ) | | | (71 | ) |
Net deferred tax liabilities — non-current portion | | | (389 | ) | | | (402 | ) |
| | | | | | |
| | | (11 | ) | | | (202 | ) |
| | | | | | |
F-70
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable profits during the periods in which those temporary differences become deductible and tax loss utilized. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable profits in making this assessment. Based upon the projections for future taxable profits over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Group will realize the benefits of these deductible differences and tax losses. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable profits during the carry forward period are reduced.
The valuation allowance was RMB335 at January 1, 2002. During the years ended December 31, 2002, 2003 and 2004, the valuation allowance increased/(decreased) by RMB296, RMB110 and RMB(688), respectively. During 2004, the decrease in valuation allowance of RMB688 included a write-off of valuation allowance of RMB692 upon the CNA/XJA Acquisitions.
Property, plant and equipment, net
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Buildings | | | 4,120 | | | | 7,136 | |
Aircraft | | | | | | | | |
— owned | | | 23,824 | | | | 27,208 | |
— held under capital leases | | | 22,312 | | | | 21,388 | |
Other flight equipment, including rotable spares | | | 12,069 | | | | 10,301 | |
Machinery, equipment and vehicles | | | 1,327 | | | | 3,222 | |
| | | | | | |
| | | 63,652 | | | | 69,255 | |
Less: Accumulated depreciation and amortization | | | 22,640 | | | | 23,053 | |
| | | | | | |
| | | 41,012 | | | | 46,202 | |
| | | | | | |
F-71
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Capital leases
The Company is obligated under capital leases covering certain aircraft that expire at various dates during the next twenty-two years. At December 31, 2003 and 2004, the gross amount of aircraft and related accumulated amortization recorded under capital leases were as follows:
| | | | | | | | |
| | December 31, | |
| | 2003 | | | 2004 | |
| | RMB | | | RMB | |
Cost | | | 22,312 | | | | 21,388 | |
Less: Accumulated depreciation and amortization | | | 6,804 | | | | 7,136 | |
| | | | | | |
| | | 15,508 | | | | 14,252 | |
| | | | | | |
As of December 31, 2004, future payments under these capital leases, which were 73% and 27%, respectively, denominated in U.S. dollars and Japanese yen, are as follows:
| | | | | | | | | | | | |
| | Payments | | | *Interest | | | Obligations | |
| | RMB | | | RMB | | | RMB | |
Year ending December 31, | | | | | | | | | | | | |
2005 | | | 2,755 | | | | 649 | | | | 2,106 | |
2006 | | | 3,395 | | | | 537 | | | | 2,858 | |
2007 | | | 3,026 | | | | 437 | | | | 2,589 | |
2008 | | | 2,850 | | | | 295 | | | | 2,555 | |
2009 | | | 1,200 | | | | 236 | | | | 964 | |
Thereafter | | | 4,600 | | | | 1,591 | | | | 3,009 | |
| | | | | | | | | |
| | | 17,826 | | | | 3,745 | | | | 14,081 | |
| | | | | | | | | | |
Less: current instalments of obligations under capital leases | | | | | | | | | | | (2,106 | ) |
| | | | | | | | | | | |
| | | | | | | | | | | 11,975 | |
| | | | | | | | | | | |
* | | Interest rates ranged from 1.92% to 8.48% |
F-72
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Related party transactions
| | | | | | | | | | | | | | |
| | Note | | 2002 | | | 2003 | | | 2004 | |
| | | | RMB | | | RMB | | | RMB | |
Expenses | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Paid to CSAHC and its affiliates | | | | | | | | | | | | | | |
Handling charges | | (a) | | | 40 | | | | 27 | | | | 33 | |
Air-catering expenses | | | | | 29 | | | | 28 | | | | 50 | |
Sundry aviation supplies | | | | | 101 | | | | 43 | | | | 66 | |
Commission expenses | | | | | 17 | | | | 5 | | | | 2 | |
Operating lease charges for land and buildings | | (c) | | | 15 | | | | 15 | | | | 82 | |
| | | | | | | | | | | | | | |
Paid to affiliates and jointly controlled entities | | | | | | | | | | | | | | |
Maintenance fees | | (b) | | | 592 | | | | 701 | | | | 1,159 | |
Flight simulation service charges | | | | | — | | | | 104 | | | | 100 | |
| | | | | | | | | | | | | | |
Paid to CAAC and its affiliates | | | | | | | | | | | | | | |
Commission expenses | | | | | 541 | | | | — | | | | — | |
Jet fuel supplies | | | | | 3,989 | | | | — | | | | — | |
Aircraft insurance | | | | | 361 | | | | — | | | | — | |
Guarantee fee | | | | | 1 | | | | — | | | | — | |
Ticket reservation service charges | | | | | 185 | | | | — | | | | — | |
Passenger departure and cargo handling charges | | | | | 90 | | | | — | | | | — | |
Aircraft and traffic service charges | | | | | 2,377 | | | | — | | | | — | |
Advertising service charges | | | | | 3 | | | | — | | | | — | |
Interest expense | | | | | 8 | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Income | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Received from CSAHC, its affiliates and other related parties | | | | | | | | | | | | | | |
Interest income | | | | | 11 | | | | 3 | | | | 4 | |
Aircraft lease income | | (d) | | | 28 | | | | — | | | | 111 | |
| | | | | | | | | | | | | | |
Received from CAAC and its affiliates | | | | | | | | | | | | | | |
Commission income | | | | | 107 | | | | — | | | | — | |
Ground service fee income | | | | | 53 | | | | — | | | | — | |
Maintenance service income | | | | | 22 | | | | — | | | | — | |
Aircraft lease income | | | | | 62 | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Others | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Acquisition of aircraft and related spare parts and vehicles | | | | | 1,097 | | | | — | | | | — | |
Short term advances from CSAHC | | | | | — | | | | 166 | | | | — | |
Refund of medical benefit payments | | | | | — | | | | — | | | | 58 | |
| | | | | | | | | | |
F-73
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Notes:
The Group obtained various operational and financial services provided by CSAHC and its affiliates, and the Group’s affiliated companies and jointly controlled entities during the normal course of its business. In the past, CSAHC was under the direct control of the CAAC. However, such control has been shifted to the China State-owned Assets Administration Bureau since early 2003. Consequently, transactions with the CAAC and its affiliates beginning from 2003 are no longer presented as related party transactions of the Group.
(a) | | Handling charges represent fees payable to Southern Airlines (Group) Import and Export Trading Company, a wholly owned subsidiary of CSAHC, in connection with the procurement of aircraft and flight equipment on the behalf of the Group and the airline operations of CNA and XJA. Handling charges are calculated based on a fixed percentage of the purchase value and other charges. |
|
(b) | | Repairing charges represent fees incurred by the Group and the airline operations of XJA in connection with aircraft repair and maintenance services rendered by Guangzhou Aircraft Maintenance Engineering Company Limited (“GAMECO”) and MTU Maintenance Zhuhai Co., Ltd. (“MTU Zhuhai”). GAMECO and MTU Zhuhai are jointly controlled entities of the Company. |
|
(c) | | Operating lease charges were paid by the Group and the airline operations of CNA and XJA to CSAHC under lease arrangement for certain land and buildings in the PRC. The operating lease charges are determined based on prevailing market price. |
|
(d) | | Aircraft lease income represents rental receivables in respect of short term leasing of aircraft by the Group and the airline operations of CNA and XJA to certain airlines controlled by the CAAC. |
Post-retirement benefit
Employees of the Group and the airline operations of CNA and XJA participate in several defined contribution retirement schemes organized separately by PRC municipal governments in regions where the major operations of the Group and the airline operations of CNA and XJA are located. The Group and the airline operations of CNA and XJA are required to contribute to these schemes at the rates ranging from 14% to 20% of salary costs including certain allowances. A member of the retirement schemes is entitled to pension benefits equal to a fixed proportion of the salary at the retirement date. The retirement benefit obligations of all the existing and future retired staff are assumed by these schemes. Contributions to the retirement schemes are charged to consolidated statements of operations as and when incurred. Contributions to the retirement schemes amounted to RMB184, RMB231 and RMB243, respectively, during 2002, 2003 and 2004.
F-74
EXHIBIT INDEX
| | | | |
Exhibit No. | | Description of Exhibit |
| 4.1 | | | Form of Director’s Service Agreement is incorporated(Incorporated by reference into the Exhibit 4(c).1 of4.1 to our Form 20-F (File No. 001-14660) for the year of 2004.ended December 31, 2005 filed with the Securities and Exchange Commission on June 30, 2006) |
| 4.2 | |
4.2 | | Form of Non-Executive Director’s Service Agreement is incorporated(Incorporated by reference into the Exhibit 4(c).2 of4.2 to our Form 20-F (File No. 001-14660) for the year of 2004.ended December 31, 2005 filed with the Securities and Exchange Commission on June 30, 2006) |
| 8 | |
8.1 | | Subsidiaries of theChina Southern Airlines Company Limited |
| 12.1 | |
10.1 | | Airbus Aircraft Acquisition Agreement entered into between China Southern Airlines Company Limited and Airbus dated July 6, 2006 (Incorporated by reference to the Exhibit 99.1 to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on July 11, 2006) |
| | |
Section 302 Certification of Chairman10.2 | | Boeing Aircraft Acquisition Agreement entered into between China Southern Airlines Company Limited and Boeing dated October 13, 2006 (Incorporated by reference to the Exhibit 99.1 to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on October 17, 2006) |
| 12.2 | |
10.3 | | Xiamen Aircraft Acquisition Agreement entered into between Xiamen Airlines and Boeing dated October 13, 2006 (Incorporated by reference to the Exhibit 99.1 to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on October 17, 2006) |
| | |
10.4 | | Airbus Aircraft Acquisition Agreement entered into between the Company and Airbus dated on July 16, 2007 (Incorporated by reference to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on July 17, 2007) |
| | |
10.5 | | Xiamen Aircraft Acquisition Agreement entered into between Xiamen Airlines and Boeing dated on July 16, 2007 (Incorporated by reference to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on July 17, 2007) |
| | |
10.6 | | Boeing Aircraft Acquisition Agreement entered into between the Company and Boeing dated on August 20, 2007 (Incorporated by reference to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on August 21, 2007) |
| | |
10.7 | | Airbus Aircraft Acquisition Agreement entered into between the Company and Airbus dated on October 23, 2007 (Incorporated by reference to the Exhibit 99.1 to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on October 23, 2007) |
| | |
10.8 | | Boeing Aircraft Acquisition Agreement between Xiamen Airlines and Boeing dated April 18, 2008 (Incorporated by reference to the Exhibit 99.1 to our Form 6-K (File No. 001-14660) filed with the Securities and Exchange Commission on April 22, 2008) |
| | |
12.1 | | Section 302 Certification of President |
| 12.3 | 12.2 | | Section 302 Certification of Chief Financial Officer |
| 13.1 | | | Section 906 Certification of Chairman |
| 13.2 | 13.1 | | Section 906 Certification of President |
| 13.3 | |
13.2 | | Section 906 Certification of Chief Financial Officer |