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.

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.~~

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~~

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 ~~RMB3,530~~RMB6,534 million in ~~2002~~2005 to ~~RMB3,878~~RMB7,063 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 ~~RMB3,228~~RMB4,977 million in ~~2002~~2005 to ~~RMB3,539~~RMB5,343 million in ~~2003, and~~2006, due to an increase in the ~~charge rate for domestic landing~~number of landings and ~~navigation fees effective September 2002.~~

takeoffs.

Comparison of New York Stock Exchange Corporate Governance Rules and China Corporate Governance Rules for Listed Companies

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.~~

~~(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)~~

ITEM ~~16D.~~16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.

~~CONSOLIDATED BALANCE SHEETS~~
AsConsolidated Statements of ~~December 31, 2003 and 2004~~

Notes to the Consolidated Financial Statements

(Prepared in accordance with International Financial Reporting Standards)

(Expressed in Renminbi)

1	Basis of presentation

China Southern Airlines Company Limited (the “Company”) and its subsidiaries (the “Group”) are principally engaged in the provision of domestic, Hong Kong ~~regional~~and 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 ~~reorganization~~reorganisation (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 ~~Shares~~Receipts (“~~ADS”~~ADR”) (each ~~ADS~~ADR representing 50 H Shares) have been listed on ~~The~~the 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”) ~~promulgated~~and 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 relating~~revised 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 effect~~accounting policies applied in these consolidated financial statements for the years presented as a result of these developments. A summary of the ~~significant differences between~~principal 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 accepted~~the 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.

F-10

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 States~~consolidated 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 ~~forth~~out in Note ~~34.~~

~~(b) Basis of preparation~~

43(a).

The consolidated financial statements ~~are prepared on~~for 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 by~~explained in the ~~revaluation of certain~~accounting 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 ~~IFRS~~IFRSs 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 ~~recognized~~recognised 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 by~~significant effect on the ~~Group and are consistent with those used in previous years.~~

~~(c) Basis of consolidation~~

~~The~~ consolidated financial statements ~~include~~and estimates with a significant risk of material adjustment in the ~~financial statements of the Company and all of its subsidiaries (see~~next 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 entity~~48.

F-11

2	Principal accounting policies (continued)

(c)

Subsidiaries and minority interests

Subsidiaries are entities controlled by the ~~Company.~~Group. Control exists when the ~~Company~~Group 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 ~~unrealized~~unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. ~~Unrealized~~Unrealised 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 ~~purposes~~portion of the ~~consolidated statements~~net assets of ~~cash flows, cash~~subsidiaries 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 terms~~respect of which the Group ~~assumes substantially all~~has not agreed any additional terms with the ~~risks and rewards~~holders 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 leases~~the 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 recognized~~presented in the consolidated ~~statements of operations on a straight-line basis over~~balance sheet within equity, separately from equity attributable to the ~~terms~~equity shareholders of the ~~leases. Lease incentives received~~Company. Minority interests in the results of the Group are ~~recognized in~~presented on the face of the consolidated statements of operations as an ~~integral part~~allocation of the total ~~lease expense.~~

~~(iii) Subsequent costs~~

~~The Group recognizes~~profit 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 amounts~~equity of ~~an item of property, plant~~a subsidiary, the excess, and ~~equipment~~any further losses applicable to the ~~cost of replacing part of such an item when that cost is incurred if it is probable~~minority, are charged against the Group’s interest except to the extent that the ~~future economic benefits embodied with~~minority has a binding obligation to, and is able to, make additional investment to cover the ~~item will flow to~~losses. 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 ~~costs~~contractual obligations towards these holders are ~~recognized~~presented as financial liabilities in the consolidated ~~statements~~balance 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~~
~~Owned~~ *Associates 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 company~~associate 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.

F-12

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 ~~include~~under 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 gains~~associate’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 of~~jointly controlled entities for the year, including any impairment loss on goodwill relating to the investment in associates ~~on an equity accounted basis, from~~and 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 amount~~interest 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 include~~carrying amount of the investment under the equity method together with the Group’s ~~share~~long-term interests that in substance form part of the ~~total recognized gains and losses of jointly controlled entities on an equity accounted basis, from~~Group’s net investment in the ~~date that joint control commences until~~associate 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 companies~~between the Group and its associates and jointly controlled entities are eliminated to the extent of the Group’s interest in the ~~entity. Unrealized~~associate or jointly controlled entity, except where unrealised losses provide evidence of an impairment of the asset transferred, in which case they are ~~eliminated~~recognised immediately in profit or loss.

(e)

Goodwill

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 only~~net 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 there~~carrying amount of goodwill is ~~no evidence~~included 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.

F-13

2	Principal accounting policies (continued)

(f)

Other investments in equity securities

The Group’s policies for investments in ~~affiliated companies~~equity 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

(i)	Investment property

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).

F-14

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 share~~property, 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 duties~~disposal proceeds and ~~other direct costs~~the carrying amount of the item and are recognised in ~~relation~~profit or loss on the date of retirement or disposal. Any related revaluation surplus is transferred from the revaluation reserve to ~~modifying, introducing~~retained profits.

F-15

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 operating~~equipment, 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.

F-16

2	Principal accounting policies (continued)

(j)

Leased assets

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.

F-17

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 ~~amortized~~amortised 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.

(k)

Deferred expenditure

Lump sum housing benefits payable to employees of the Group are deferred and ~~amortized~~amortised on a ~~straight line~~straight-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)).

(l)

Impairment of assets

(i)	Impairment of investments in equity securities and other receivables

Investments in ~~millions, except share data)~~

~~(m) Impairment loss~~

~~The carrying amounts~~equity 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’s~~Group 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.

F-18

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.

F-19

2	Principal accounting policies (continued)

(l)

Impairment of assets (continued)

(ii)	Impairment of other assets

Internal and external sources of information are reviewed ~~periodically~~at each balance sheet date to identify indications that the following assets may be impaired or, except in ~~order to assess whether~~the 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

Goodwill.

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 ~~the~~its net selling price and the value in use. In ~~determining the~~assessing value in use, ~~expected~~the estimated future cash flows ~~generated by the asset~~ are discounted to their present ~~value. The~~value 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 expense~~other assets in the ~~consolidated statements~~unit (or group of ~~operations.~~

~~The Group assesses at each balance sheet date whether there is any indication~~units) on a pro-rata basis, except that ~~an impairment loss recognized for~~the 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. An~~use, if determinable.

F-20

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 ~~favorable~~favourable 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 amount~~reversal of an ~~asset, when the circumstances and events that led~~impairment loss is limited to the ~~write-down or write-off cease to exist, is recognized as income. The reversal is reduced by the~~asset’s carrying amount that would have been ~~recognized as depreciation~~determined 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-down~~impairment been assessed only at the end of the financial year to which the interim period relates.

(m)

Inventories

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 ~~recognized~~recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at ~~amortized~~amortised cost with any difference between ~~cost~~the amount initially recognised and redemption value being ~~recognized~~recognised in ~~the consolidated statements of operations~~profit or loss over the period of the borrowings, ~~on an~~together with any interest and fees payable, using the effective interest ~~basis.~~

~~(o) Provisions~~

~~A provision is recognized~~method.

F-21

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 sheets~~cash 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.

F-22

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 at~~obligations and a ~~pre-tax rate that reflects current market assessments of~~reliable estimate can be made. Where the time value of money ~~and, where appropriate,~~is material, provisions are stated at the ~~risks specific~~present value of the expenditures expected to settle the ~~liability.~~

~~(p) Defeasance~~obligation.

Where it is not probable that an outflow of ~~long-term~~economic 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~~

(t)

Deferred credits

In connection with the ~~acquisition~~acquisitions or operating ~~lease~~leases 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 ~~amortized~~amortised as a reduction of rental expense for aircraft and engines under operating leases.

~~(r) Deferred taxation~~

~~Deferred~~

(u)

Income tax

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 ~~provided~~the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet ~~liability method on all~~date, 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.

F-23

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 used~~extent 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 ~~taxation~~tax purposes, ~~except differences relating to~~ the initial recognition of assets or liabilities ~~which~~that 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 ~~value~~recognised is measured based on the expected manner of ~~losses expected to be available for utilization against future taxable income is recognized as~~realisation 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 are~~is 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, cargo~~available.

F-24

2	Principal accounting policies (continued)

(u)

Income tax (continued)

Current tax balances and ~~mail revenues~~deferred tax balances, and movements therein, are ~~recognized when~~presented 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 ~~transportation~~Group 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.

(v)

Revenue recognition

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 ~~contributions~~economic 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 principal~~Group and the revenue and costs, if applicable, ~~interest rate.~~

~~(iii) Dividend income~~can 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.

F-25

2	Principal accounting policies (continued)

(w)

Traffic commissions

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 ~~sheets~~sheet 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, ~~and~~components within the aircraft ~~held under capital leases~~subject to replacement during major overhauls are ~~expensed~~depreciated over the average expected life between major overhauls. When each major overhaul is performed, its cost is recognised in the ~~consolidated statements~~carrying amount of ~~operations as~~property, 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 of~~agreements. In order to fulfil these return conditions, major overhauls are required to be ~~performed~~conducted on a regular basis. Accordingly, estimated costs of major overhauls are accrued and charged to profit or loss over the ~~related~~estimated period between overhauls. After the aircraft has completed its last overhaul cycle prior to ~~their return~~being returned, expected cost of overhaul to be incurred at the ~~lessors.~~

~~(v) Borrowing~~end 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.

(y)

Borrowing costs

Borrowing costs are expensed in profit or loss in the ~~consolidated statements of operations as and when~~period in which they are incurred, except to the extent that they are ~~capitalized~~capitalised 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 ~~capitalization~~capitalisation of borrowing costs as part of the cost of a qualifying asset commences when ~~expenditures~~expenditure for the asset ~~are~~is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use are in progress. ~~Capitalization~~Capitalisation 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 retirement~~the effect would be material, these amounts are stated at their present values.

F-26

2	Principal accounting policies (continued)

(aa)

Termination benefits

Termination benefits ~~paid~~are recognised when, and only when, the Group demonstrably commits itself to ~~retired employees are charged~~terminate employment or to ~~the consolidated statements~~provide 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 ~~recognized~~recognised 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 ~~programs~~programmes is ~~recognized~~recognised 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.

F-27

2	Principal accounting policies (continued)

(dd)

Related parties

For the purposes of these consolidated financial statements, ~~parties are~~a 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 parties~~those family members who may be ~~individuals~~expected to influence, or ~~entities.~~

~~(aa) Segmental reporting~~

be influenced by, that individual in their dealings with the entity.

(ee)

Segmental reporting

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, 2003~~purposes of these consolidated financial statements.

F-28

3	Turnover

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 revenue~~turnover 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 ~~for~~during the ~~years~~year 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

F-29

5	Maintenance expenses

	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

F-30

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

10	Staff costs

	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.

11	Interest expense

	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).

F-31

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 required~~recognised 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 to~~certain 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% respectively~~excess of the ~~domestic~~sale 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, contributions~~recognised 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 part~~excess of the ~~flight operations expenses~~sale proceeds over the carrying amounts of the assets and ~~amounted to RMB466 million~~related disposal costs.

F-32

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.

~~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.~~

~~The net deferred tax (liabilities)/assets as of December 31, 2003 and 2004 were made up of the following taxation effects:~~


*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 ~~Shares~~Receipts

U.S. GAAP o	International Financial Reporting Standards þ	Other o
	as issued by the International Accounting
~~Yes~~xNoo	Standards Board

		Page

FORWARD-LOOKING STATEMENTS		1

INTRODUCTORY NOTE		1

GLOSSARY OF AIRLINE INDUSTRY TERMS		2

PART I

~~Page~~ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		3

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE		3
~~Forward-Looking Statements~~
1ITEM 3. KEY INFORMATION		3

~~Introductory Note~~ Selected Financial Data		3

1Capitalization and Indebtedness		6

~~Glossary of Airline Industry Terms~~			2
~~PART I~~
~~Item 1. Identity of Directors, Senior Management and Advisers~~				3
~~Item 2. Offer Statistics and Expected Timetable~~				3
~~Item 3. Key Information~~				3
	~~Selected Financial Data~~			3
	~~Capitalization and Indebtedness~~			6
	Reasons for the Offer and Use of Proceeds			6
	~~Risk Factors~~			7
~~Item 4. Information on the Company~~				11
	~~History and Development of the Company~~			11
	~~CNA/XJA Acquisitions~~
Risk Factors	~~Business Overview~~	7

ITEM 4. INFORMATION ON THE COMPANY		12

History and Development of the Company	~~Organizational Structure~~	12

33Aircraft Acquisitions		13

Capital Expenditure		14

Business Overview		14

Organizational Structure		33

Property, Plant and Equipment		34

35ITEM 4A. UNRESOLVED STAFF COMMENTS		36

~~Item~~ITEM 5. ~~Operating and Financial Review and Prospects~~ OPERATING AND FINANCIAL REVIEW AND PROSPECTS		36

Critical Accounting Policies		36

Recently Pronounced International Financial Reporting Standards	~~Critical Accounting Policies~~	37

36Overview		37

	~~Overview~~			37
	Certain Financial Information and Operating Data by Geographic Region		38

Operating Results		39

Liquidity and Capital Resources	~~Operating Results~~	44

41Contractual Obligations and Commercial Commitments		46

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.		46

Directors, Senior Management and Employees		46

Compensation		52


B.	Memorandum and Articles of Association			~~Page~~64

	~~Board Practices~~			56
	~~Remuneration Committee~~
C.	~~Employees~~ Material Contracts			57	69
	~~Share Ownership~~			58
~~Item 7. Major Shareholders and Related Party Transactions~~				58
	~~Major Shareholders~~			59
	~~Related Party Transactions~~			59
	~~Interests of Experts and Counsel~~
~~Item 8. Financial Information~~ D.	Exchange Controls			64	70
	~~Consolidated Statements and Other Financial Information~~			64
	~~Significant Changes~~			64
	~~Legal Proceedings Dividend Information~~
~~Item 9. The Offer and Listing~~ E.	Taxation		71
			65
F.	Dividends and Paying Agents		75
	~~Offer and Listing Details~~			66
G.	Statement by Experts		75
	~~Plan of Distribution~~			66
H.	Documents on Display		75
	~~Markets~~			67
I.	Subsidiary Information		76

		~~Selling Shareholders~~			67
	~~Dilution~~			67
	~~Expenses of the Issue~~			67
~~Item 10. Additional Information~~				67
	~~Share Capital~~			67
	~~Memorandum and Articles of Association~~			67
	~~Material Contracts~~			71
	~~Exchange Controls~~			73
	~~Taxation~~			73
	~~Dividends and Paying Agents~~			74
	~~Statement by Experts~~			74
	~~Documents on Display~~			74
	~~Subsidiary Information~~			74
	Comparison of New York Stock Exchange Corporate Governance Rules and China Corporate Governance Rules for Listed Companies			75	76
~~Item 11. Quantitative and Qualitative Disclosures About Market Risk~~				79
~~Item 12. Description of Securities other than Equity Securities~~				80

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		81

PART II

~~Page~~ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		81

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		81
~~PART II~~
~~Item 13. Defaults, Dividend Arrearages and Delinquencies~~
80ITEM 15. CONTROLS AND PROCEDURES		81

~~Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds~~ ITEM 16. RESERVED		83

80ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT		83

~~Use of Proceeds~~ ITEM 16B. CODE OF ETHICS		83

ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES		83

~~PART III~~ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE		84

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS		84

~~Item 15. Controls and Procedures~~PART III
82
~~Item 16. [Reserved]~~ ITEM 17. FINANCIAL STATEMENTS			82	84
~~Item 16 A. Audit Committee Financial Expert~~				82
~~Item 16 B. Code of Ethics~~				82
~~Item 16 C. Principal Accounting Fees and Services~~				82
~~Exemptions from the Listing Standards for Audit Committee~~
~~Item 16 D. Purchases of Equity Securities By the Issuer and Affiliated Purchasers~~ITEM 18. FINANCIAL STATEMENTS		84
	83
~~PART IV~~
~~Item 17. Financial Statements~~				83
~~Item 18. Financial Statements~~				83
~~Index to Financial Statements~~				82
~~Item~~ITEM 19. ~~Exhibits~~				84
~~Signatures~~		EXHIBITS		85
~~EX-4.1 FORM OF DIRECTOR'S SERVICE AGREEMENT~~
~~EX-4.2 FORM OF NON-EXECUTIVE DIRECTOR'S SERVICE AGREEMENT~~
~~EX-8 SUBSIDIARIES OF THE COMPANY~~
~~EX-12.1 SECTION 302 CERTIFICATION OF CHAIRMAN~~
~~EX-12.2 SECTION 302 CERTIFICATION OF PRESIDENT~~
~~EX-12.3 SECTION 302 CERTIFICATION OF CFO~~
~~EX-13.1 SECTION 906 CERTIFICATION OF CHAIRMAN~~
~~EX-13.2 SECTION 906 CERTIFICATION OF PRESIDENT~~
~~EX-13.3 SECTION 906 CERTIFICATION OF CFO~~


o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR
x
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


o		~~Commission file number: 1-14660~~SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


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.

Board Practices			53

Employees			54

Share Ownership			56

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			56

Major Shareholders			56

Related Party Transactions			56

Interests of Experts and Counsel			62

ITEM 8. FINANCIAL INFORMATION		��	62

Consolidated Statements and Other Financial Information ~~under U.S. GAAP~~			62

Significant Changes			62

Legal Proceedings			62

Dividend Information			62

ITEM 9. THE OFFER AND LISTING			62

Offer and Listing Details			62

Plan of Distribution			64

Markets			64

Selling Shareholders			64

Dilution			64

Expenses of the Issue			64

ITEM 10. ADDITIONAL INFORMATION			64

A.	~~Liquidity and~~Share Capital ~~Resources~~			48	64
	~~Contractual Obligations and Commercial Commitments~~			50
~~Item 6. Directors, Senior Management and Employees~~				51
	~~Directors and Senior Management~~			51
	~~Compensation~~			56


ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			79


	•	·	actions by government authorities, including changes in government ~~regulation;~~regulations;


	•	·	future decisions by management in response to changing conditions;


	•	·	the Company’s ability to execute prospective business plans; and


	•	·	natural phenomena;


	•	·	technological development;


Capacity Measurements

“available seat kilometers” or “ASKs”		the number of seats made available for sale multiplied by the kilometers flown

“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

Traffic Measurements

“revenue passenger kilometers” or “RPKs”		the number of revenue passengers carried multiplied by the kilometers flown

“cargo ton kilometers”		the cargo load in tons multiplied by the kilometers flown

“revenue ton kilometers” or “RTKs”		the load (passenger and cargo) in tons multiplied by the kilometers flown

Yield Measurements

“passenger yield”		revenue from passenger operations divided by RPKs

“cargo yield”		revenue from cargo operations divided by cargo ton kilometers

“average yield”		revenue from airline operations (passenger and cargo) divided by RTKs

“ton”		a metric ton, equivalent to 2,204.6 pounds

Load Factors

“passenger load factor”		RPKs expressed as a percentage of ASKs

“overall load factor”		RTKs expressed as a percentage of ATKs

“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

Utilization

“utilization rate”		the actual number of flight hours per aircraft per operating day


	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			—			—			—


	•	·	misjudgments in the course of preparing forward-looking statements.

Equipment

“rotables”		aircraft parts that are ordinarily repaired and reused

“expendables”		aircraft parts that are ordinarily used up and replaced with new parts

	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

	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


			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


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

	•		~~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.~~


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


					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

•		~~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.


					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


									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


			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	%