CSA AR12 420x297 CS3

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2 1 Contents Company Profile 2 Corporate Information 3 Financial Highlights 5 Chairman s Statement 8 Management Discussion and Analysis 12 Report of the Directors 27 Report of the Supervisory Committee 46 Corporate Governance Report 51 Financial Statements Prepared under International Financial Reporting Standards Independent auditor s report 61 Consolidated income statement 63 Consolidated statement of comprehensive income 64 Consolidated statement of financial position 65 Statement of financial position 67 Consolidated statement of changes in equity 69 Consolidated cash flow statement Supplementary Information 180 Five Year Summary 183 The Board of Directors, Supervisory Committee and Senior Management 185 Glossary 196

3 2 China Southern Airlines Company Limited Annual Report 2012 Company Profile China Southern Airlines Company Limited (the Company ), together with its subsidiaries (collectively, the Group ), is one of the largest airlines in the People s Republic of China ( China or the PRC ). In 2012, the Group ranked first among all Chinese airlines in terms of its fleet size, flight routes network and volume of passenger traffic. The Group has a network of flight routes with Guangzhou as the core hub and Beijing as a major hub, covering China and the rest of Asia and connecting Europe, America, Australia and Africa. The Company joined the SKYTEAM in November Up to the date of this report, the Group has established a network connecting over 1,000 destinations of 187 countries and regions and covering major cities around the world. Based in Guangzhou, the Group has 15 branches, including Xinjiang, Beifang, Beijing, Shenzhen, Hainan, Heilongjiang, Jilin, Dalian, Henan, Hubei, Hunan, Guangxi, Xi an, Taiwan, Zhuhai Helicopter, and 5 major subsidiaries, including Xiamen Airlines Company Limited ( Xiamen Airlines ), Shantou Airlines Company Limited ( Shantou Airlines ), Zhuhai Airlines Company Limited ( Zhuhai Airlines ), Guizhou Airlines Company Limited ( Guizhou Airlines ) and Chongqing Airlines Company Limited ( Chongqing Airlines ). The Group has set up four bases in places including Shanghai and 22 domestic offices in cities including Chengdu, Hangzhou and Nanjing. It also maintains 60 overseas offices including Tokyo, Los Angeles, Paris, Sydney, Auckland, Singapore, Moscow and Vancouver. Apart from the above, the Company has equity interests in Sichuan Airlines Corporation Limited. As of 31 December 2012, the Group had a fleet of 491 aircraft, consisting primarily of Boeing 737 series, 747, 757, 777, Airbus 320 series, 330, 380 etc. The average age of the Group s registered aircraft was 6.32 years as at the year end of ,

4 3 Corporate Information DIRECTORS Non-Executive Directors Si Xian Min (Chairman) Wang Quan Hua Yuan Xin An Yang Li Hua (Appointed on 24 January 2013) Executive Directors Tan Wan Geng (Vice Chairman and President) Zhang Zi Fang (Executive Vice President) Xu Jie Bo (Executive Vice President and Chief Financial Officer) Li Shao Bin (Appointed on 24 January 2013) Independent Non-Executive Directors Gong Hua Zhang Wei Jin Cai Ning Xiang Dong Liu Chang Le SUPERVISORS Pan Fu (Chairman of the Supervisory Committee) Li Jia Shi Zhang Wei Yang Yi Hua Liang Zhong Gao JOINT COMPANY SECRETARIES Xie Bing Liu Wei AUTHORISED REPRESENTATIVES Xu Jie Bo Liu Wei PRINCIPAL BANKERS China Development Bank Bank of China The Export-Import Bank of China China Construction Bank The Industrial & Commercial Bank of China Agricultural Bank of China LEGAL ADVISERS TO THE COMPANY DLA Piper Hong Kong Z&T Law Firm

5 4 China Southern Airlines Company Limited Annual Report 2012 Corporate Information SHARE REGISTRAR Hong Kong Registrars Limited 17M Floor Hopewell Centre 183 Queen s Road East Wanchai, Hong Kong BNY Mellon Depositary Receipts P.O. Box Providence, RI U.S.A. China Securities Depository and Clearing Corporation Limited Shanghai Branch Floor 36, China Insurance Building 166 Lu Jia Zui East Road, Shanghai PRC CORPORATE HEADQUARTERS 278 Ji Chang Road Guangzhou PRC Website: PLACE OF BUSINESS IN HONG KONG Unit B1, 9th Floor United Centre 95 Queensway Hong Kong INTERNATIONAL AUDITORS KPMG Certified Public Accountants 8th Floor, Prince s Building 10 Chater Road Hong Kong PRC AUDITORS KPMG Huazhen (Special General Partnership) 8/F, Office Tower E2 Oriental Plaza No. 1 East Chang An Avenue Beijing PRC Postcode M BNY Mellon Depositary Receipts P.O. Box Providence, RI U.S.A B

6 5 Financial Highlights The board (the Board ) of directors (the Directors ) of the Company hereby presents below the consolidated results of the Group for the year ended 31 December 2012, prepared in accordance with International Financial Reporting Standards ( IFRSs ), together with the comparative figures for the corresponding period in The following consolidated results should be read in conjunction with the financial statements and the Independent Auditor s Report contained in this annual report (the Annual Report ). CONSOLIDATED INCOME STATEMENT vs 2011 For the year ended 31 December Increase/ (decrease) RMB million RMB million HK$ million US$ million Traffic revenue: Passenger 89,544 81, ,439 14,246 10% Cargo and mail 6,556 5,760 8,086 1,043 14% 96,100 87, ,525 15,289 10% Other operating revenue 3,414 3,143 4, % Total operating revenue 99,514 90, ,736 15,832 10% Operating expenses: Flight operations 54,690 48,344 67,452 8,701 13% Maintenance 7,971 7,531 9,831 1,268 6% Aircraft and traffic servicing 14,072 12,337 17,356 2,239 14% Promotion and sales 7,134 6,568 8,799 1,135 9% General and administrative 2,425 2,807 2, (14%) Impairment on property, plant and equipment 584 (100%) Depreciation and amortisation 8,264 7,689 10,192 1,315 7% Others 1,321 1,203 1, % Total operating expenses 95,877 87, ,250 15,254 10% Other net income 1,462 1,021 1, % Operating profit 5,099 4,353 6, %

7 6 China Southern Airlines Company Limited Annual Report 2012 Financial Highlights 2012 vs 2011 For the year ended 31 December Increase/ (decrease) RMB million RMB million HK$ million US$ million Interest income % Interest expense (1,376) (1,067) (1,697) (219) 29% Share of associates results (30%) Share of jointly controlled entities results (3%) Exchange gain, net 267 2, (90%) Other non-operating income (42%) Profit before taxation 4,738 6,930 5, (32%) Income tax (954) (840) (1,177) (152) 14% Profit for the year 3,784 6,090 4, (38%) Attributable to: Equity shareholders of the Company 2,619 5,110 3, (49%) Non-controlling interests 1, , % Profit for the year 3,784 6,090 4, (38%) Earnings per share Basic and diluted RMB0.27 RMB0.52 HK$0.33 USD0.04 (48%) Note: The above consolidated income statement has been prepared in Renminbi ( RMB ), the national currency of the PRC. Translations of amounts from RMB into Hong Kong dollars ( HK$ ) and United States dollars ( US$ ) solely for the convenience of readers have been made at the rates of HK$1.00 to RMB and US$1.00 to RMB6.2855, respectively, being the average of the buying and selling rates as quoted by the People s Bank of China at the close of business on 31 December No representation is made that the RMB amounts could have been or could be converted into HK$ or US$ at these rates on 31 December 2012 or on any other date

8 中国南方航空股份有限公司 二零一二年年度報告 財務摘要 Financial Highlights Passenger Traffic (RPK) Passenger Traffic Capacity (ASK) Yield (Yield per RPK) million million RMB 客運量 收費客公里 客載運力 可用座位公里 收益 每收費客公里收益 百萬 百萬 人民幣元 160, , , , , , , , , ,000 40, ,000 20, Total Revenue 2012 RMB million 總收入二零一二年 人民幣百萬元 ,000 40, ,000 60, ,000 80, , , Passenger Traffic Capacity Available Seat Kilometres ( ASK ) 2012 Passenger Traffic Revenue Passenger Kilometres ( RPK ) 2012 million million 客載運力 可用座位公里 二零一二年 客運量 收費客公里 二零一二年 百萬 百萬 s Domestic 131, (77.8%) s Hong Kong, Macau and Taiwan 3, (2.0%) s International 34, (20.2%) s Domestic 107, (79.1%) s Hong Kong, Macau and Taiwan 2, (1.9%) s International 25, (19.0%) s 國內 131, (77.8%) s 港澳臺地區 3, (2.0%) s 國際 34, (20.2%) s 國內 107, (79.1%) s 港澳臺地區 2, (1.9%) s 國際 25, (19.0%) s Domestic passenger revenue 73,845 (74.3%) s Hong Kong, Macau and Taiwan passenger revenue 2,133 (2.1%) s International passenger revenue 13,566 (13.6%) s Cargo and mail revenue 6,556 (6.6%) s Other operating revenue 3,414 (3.4%) s 國內客運收入 73,845 (74.3%) s 港澳臺地區客運收入 2,133 (2.1%) s 國際客運收入 13,566 (13.6%) s 貨運及郵運收入 6,556 (6.6%) s 其他經營收入 3,414 (3.4%) 7

9 8 China Southern Airlines Company Limited Annual Report 2012 Chairman s Statement Si Xian Min Chairman Looking into 2013, global economy will undergo a moderate recovery. However, there are still uncertainties prolonging the weak growth. China s economic development will remain in a period of strategic opportunities and is expected to recover moderately in

10 9 Chairman s Statement Si Xian Min Chairman In 2012, affected by several factors such as slower economic growth rate of the developed economies including the European and the US and the slowdown in economic growth of emerging economies, global economy recovered at a slow pace. Facing weak external demand, slower economic growth rate and other challenges, China promptly strengthened and improved its macroeconomic control and promoted the adjustment of economic structure, which maintained a moderate and steady economic growth in spite of the adverse internal and external environment. In 2012, international aviation markets continued to be sluggish under influence of the global economic situation. Benefitted from the steady growth of the China s economy and the growing household consumption demand, the domestic civil aviation demand maintained a growth. However, due to several factors such as rapid growth in capacity of the industry, intensified market competition, high jet fuel price and a significant decrease in exchange gain, the operation of airlines was adversely affected. Facing the serious economic environment, the Company actively responded to the challenge of the decrease in the growth of the traffic volume in global aviation market by seizing the strategic opportunity of rapid development in China s civil aviation. Through strengthening safety management, accelerating strategic transformation, actively adjusting and optimizing market structure and significantly raising its service standards, the Company maintained the best safety record among airlines in China, thereby effectively enhancing the Company s comprehensive competitiveness and achieved good operating results. During the reporting period, the Company further strengthened the idea of unceasing safety by continuously increasing safety management and committing to enhancing safe aviation quality and safety management level, thus achieved a good safety performance. In 2012, the Group completed a total of 1,680,700 safe flight hours, representing an increase of 173,400 hours as compared with the previous year and accumulating safe flight hours to over 10,000,000, and maintained 158 consecutive months of aviation safety and 222 consecutive months of aviation security. The Group maintained the best safety record among airlines in China and was granted the Safe Flight Diamond Award by the Civil Aviation Administration of China. During the reporting period, facing the difficult business environment, the Company actively adjusted and optimized the structure by untiringly consolidating the domestic market and developing international market and took efforts to increase income and strictly control cost, thereby effectively offset risks accompanying the economic downturn and the stagnation in the industry, and maintained its status in the industry. Furthermore, 7 aircraft were retired or returned upon expiration of lease terms and 54 new aircraft were added, which further optimized the fleet structure

11 10 China Southern Airlines Company Limited Annual Report 2012 Chairman s Statement During the reporting period, the Company, aiming to become an energy saving company and bearing in mind its social responsibility, actively practiced the idea of green flight and advocated lowcarbon travel to its customers. In 2012, energy efficiency of the Company was the same as 2011, which maintained a high standard and brought the Company into rankings such as China Top Green Companies 2012 and Top 100 Enterprises of Social Responsibility. In 2012, the Company donated RMB10.12 million to Foundation for Poverty Alleviation in Guangdong Province and different types of schools, thereby effectively performed its social responsibility. Looking into 2013, global economy will undergo a moderate recovery. However, there are still uncertainties prolonging the weak growth. China s economic development will remain in a period of strategic opportunities and is expected to recover moderately in 2013, which, however, affected by adverse factors such as domestic macroeconomic control and weak external demand, will not be a robust rebound. Under the influence of the overall global economic environment, demand for international aviation is expected to maintain its low growth rate in Driven by the moderate recovery of China s economy, industrialization, urbanization, informatization, agricultural modernization and implementation of the double income plan, overall demand in China s aviation market is expected to gradually pick up speed. On the other hand, with its expansion in fleet, flight and route, the Company must be more cautious about flight safety. It is expected that annual capacity of civil aviation will maintain a rapid growth, which will intensify competition in the industry. In addition, demand for short and mid-distance aviation will be further suppressed by the coming into service of the high-speed rail network. In 2013, affected by geographic politics and continued quantitative easing monetary policy of major economies, international oil price may rise and thus adversely affect operating results of the Company. In preparation for this, the Company will conduct serious research on changes in internal and external environment in 2013 in order to strengthen safety management capability and actively enhance management level by sufficiently utilizing advantages in operational development. The Company will also optimize its route structure and strictly control cost to actively enhance operating efficiency; carry out in-depth strategic transformation and utilize its advantage as a network hub to actively cope with the competition of high-speed rail; enhance fuel efficiency through modification to engines and optimization of fleet structure and route, and take into account the reduction of the adverse impact of oil price fluctuations on the Company by its fuel hedging. Priorities will be given to the following tasks: ,

12 11 Chairman s Statement 1. To enhance safety management level to ensure the realization of safety operation In 2013, the Company will continue to strengthen its safety management capability, and will make safety management more standardized and scientific by adopting advanced philosophy and scientific management methods. The Company will increase training management for the establishment of a safety team; put emphasis on process management and strictly observe regulations and standards; enhance the safety responsibilities to implement safety accountability strictly; and innovate in safety management mode for the establishment of safety management systems. In 2013, the Company must eliminate aviation transport accident and major general aviation accident, as well as major aviation on-ground accident and major aircraft repair and maintenance accident so as to realize our goal in the aviation safety year. 2. To enhance operating efficiency through various methods In 2013, the Company will conduct serious assessment on situations to discover market potential, strengthen competitive advantage in key markets and enhance business capability. The Company will increase cost management, improve supervision mechanism on cost reduction and efficiency enhancement, assess prospects of cargo markets for better cargo marketing and amend its weakness by leveraging on its advantages to actively cope with competition of the high-speed rail. 3. To emphasize both quality and quantity and firmly push forward the strategic transformation In 2013, the Company will continue to concentrate its resources on strengthening the Guangzhou hub, refining the Beijing hub and solidifying and reorganizing the Urumqi hub and the Chongqing hub. The Company will implement quality transformation starting from the Canton Route to steadily push forward its internationalization, carry on its organizational transformation to further optimize structure, and establish management systems adapted to its strategic transformation and business development to enhance efficiency of core resources allocation. 4. To put effort in comprehensive budget management for better comprehensive management In 2013, the Company will carry out comprehensive budget management systematically in stages with focus on budget formulation and process control and introduce comprehensive benchmarking to find out points and methods of cost reduction. The Company will learn from experience of foreign advanced companies to raise staff s budget awareness and control process and effect of budget. Management will be guided by rules to enhance each fundamental management. 5. To enhance level of both ground and on-board services In 2013, the Company will continue to enhance quality of onboard services by specifying service standards, improving cabin equipment, diversifying in-flight entertainment and striving to design unique flight meals with our characteristics. The Company will focus on improving quality of ground services by improving transit process and services, increase capability of ordinary and extraordinary flight services and decrease luggage error. The Company will raise staff s service consciousness and techniques to actively make innovation in service with the improved incentive mechanism in order to establish a unique service brand with characteristics of China Southern Airlines

13 12 China Southern Airlines Company Limited Annual Report 2012 Management Discussion and Analysis Tan Wan Geng President During the reporting period, the Company steadily pushed forward its internationalization and in-depth strategic transformation, comprehensively enhanced service level, actively promoted brand image, strived for higher revenue quality and strictly controlled operational cost, thereby obtained its good operation results, strengthened its overall competitiveness and maintained its status in the industry.

14 13 Management Discussion and Analysis During the reporting period, facing threats and challenges posed by certain adverse operating factors such as the rapid growth in capacity, intensified competition in the industry and full impact of the high-speed rail, the Company steadily pushed forward its internationalization and in-depth strategic transformation, comprehensively enhanced service level, actively promoted brand image, strived for higher revenue quality and strictly controlled operational cost, thereby obtained its good operation results, strengthened its overall competitiveness and maintained its status in the industry.

15 14 China Southern Airlines Company Limited Annual Report 2012 Management Discussion and Analysis During the reporting period, the Company launched a new route from Guangzhou to London, increased the flight frequency of international routes such as from Guangzhou to Vancouver. The Company, taking the opportunity of opening routes from Guangzhou to London, actively constructed the Canton Route to build Guangzhou into a hub connecting Europe and Oceania and Southeast Asia, which significantly increased international influence of the Company. During the reporting period, the Company continued to strengthen hub establishment, thereby further strengthened the integrated support capability of hubs and improved route network. During the reporting period, number of transit passengers and transit sales income of the Company increased significantly, marking the Company s advancing to its goal of becoming an airline of international standard operating with a large-scale network. During the reporting period, the Company launched its Year of International Brand Service and activity put more resources in services. These attempts improved premises where high-end passengers were served and enriched services in first and business class cabins of international long-distance routes, thereby further elevated quality of ground and on-board services. It also improved the four-grade alert and response mechanism, which enhanced service support capability of extraordinary flights and pushed normal flight rate of the year up to 2.9 percentage points over the industry average. During the reporting period, through activities such as Sydney Festival, the Company actively promoted the brand of China Southern Airlines and was selected by Fortune Magazine as 2012 Top 50 Most Praised Companies of China and ranked the top in the Traffic, Transportation and Logistics Star Rankings

16 15 Management Discussion and Analysis OPERATING DATA SUMMARY The following table sets forth certain financial information and operating data by geographic regions: 2012 vs 2011 Increase/ For the year ended (decrease) 31 December Traffic Revenue passenger kilometres (RPK) (million) (RPK) Domestic 107, , % Hong Kong, Macau and Taiwan 2, , % International 25, , % Total 135, , % Revenue tonne kilometres (RTK) (million) (RTK) Domestic 10, , % Hong Kong, Macau and Taiwan % International 4, , % Total 16, , % Passengers carried (thousand) Domestic 77, , % Hong Kong, Macau and Taiwan 1, , % International 6, , % Total 86, , % Cargo and mail carried (thousand tonnes) Domestic % Hong Kong, Macau and Taiwan % International % Total 1, , % Capacity Available seat kilometres (ASK) (million) (ASK) Domestic 131, , % Hong Kong, Macau and Taiwan 3, , % International 34, , % Total 169, , % Available tonne kilometres (ATK) (million) (ATK) Domestic 15, , % Hong Kong, Macau and Taiwan % International 7, , % Total 23, , %

17 16 China Southern Airlines Company Limited Annual Report 2012 Management Discussion and Analysis 2012 vs 2011 Increase/ For the year ended (decrease) 31 December Load factor Passenger load factor (RPK/ASK) (%) (RPK/ASK) (%) Domestic (1.6%) Hong Kong, Macau and Taiwan (3.3%) International % Overall (1.4%) Overall load factor (RTK/ATK) (%) (RTK/ATK) (%) Domestic % Hong Kong, Macau and Taiwan (2.4%) International % Overall % Yield Yield per RPK (RMB) Domestic % Hong Kong, Macau and Taiwan (4.5%) International (5.4%) Overall (1.5%) Yield per RTK (RMB) Domestic % Hong Kong, Macau and Taiwan (5.1%) International (2.7%) Overall (1.3%) Fleet Total number of aircraft at year end Boeing % Airbus % Others % Total % Overall utilisation rate (hours per day) Boeing % Airbus % Others (30.1%) Overall %

18 17 Management Discussion and Analysis FINANCIAL PERFORMANCE Part of the financial information presented in this section is derived from the Company s audited financial statements that have been prepared in accordance with IFRSs. The profit attributable to equity shareholders of the Company of RMB2,619 million was recorded in 2012 as compared to the profit attributable to equity shareholders of the Company of RMB5,110 million in The Group s operating revenue increased by RMB9,119 million or 10.1% from RMB90,395 million in 2011 to RMB99,514 million in Passenger load factor decreased by 1.1 percentage points from 81.0% in 2011 to 79.9% in Passenger yield (in passenger revenue per RPK) decreased by 1.5% from RMB0.67 in 2011 to RMB0.66 in Average yield (in traffic revenue per RTK) decreased by 1.3% from RMB6.03 in 2011 to RMB5.95 in Operating expenses increased by RMB8,814 million or 10.1% from RMB87,063 million in 2011 to RMB95,877 million in Operating profit of RMB5,099 million was recorded in 2012 as compared to operating profit of RMB4,353 million in 2011, increased by RMB746 million. OPERATING REVENUE % % % % % % Operating revenue Operating revenue Changes RMB million Percentage RMB million Percentage in revenue Traffic revenue 96, % 87, % 10.1% Including: Passenger revenue 89,544 81, % Domestic 73,845 68, % Hong Kong, Macau and Taiwan 2,133 1, % International 13,566 11, % Cargo and mail revenue 6,556 5, % Other operating revenue 3, % 3, % 8.6% Mainly including: Commission income % Hotel and Travel services income % Ground services income (4.9%) Expired sales in advance of carriage % General aviation income % Aircraft wet lease income (99.4%) Total operating revenue 99, % 90, % 10.1% Less: fuel surcharge income (13,378) (11,699) Total operating revenue excluding fuel surcharge 86,136 78,696

19 18 China Southern Airlines Company Limited Annual Report 2012 Management Discussion and Analysis Traffic revenue composition 6,556 (6.8%) (RMB million) 5,760 (6.6%) 89,544 (93.2%) 81,492 (93.4%) 2012 Passenger Revenue 2011 Cargo and Mail Revenue 2,133 (2.4%) 13,566 (15.1%) Passenger revenue composition (RMB million) 1,834 (2.3%) 11,436 (14.0%) 73,845 (82.5%) 68,222 (83.7%) Domestic Hong Kong, Macau and Taiwan International Substantially all of the Group s operating revenue is attributable to airline and airline-related operations. Traffic revenue accounted for 96.6% and 96.5% of total operating revenue in 2012 and 2011, respectively. Passenger revenue and cargo and mail revenue accounted for 93.2% and 6.8%, respectively of the total traffic revenue in The other operating revenue is mainly derived from commission income, hotel and travel services income, fees charged for ground services rendered to other Chinese airlines, income from expired sales in advance of carriage and general aviation income. The increase in operating revenue was primarily due to a 9.9% increase in passenger revenue from RMB81,492 million in 2011 to RMB89,544 million in The total number of passengers carried increased by 7.2% to million passengers in RPKs increased by 10.8% from 122,344 million in 2011 to 135,535 million in 2012, primarily as a result of the increase in number of passengers carried. Passenger yield per RPK decreased from RMB0.67 in 2011 to RMB0.66 in % 96.5% %6.8% % % 8, , % 20121,

20 19 Management Discussion and Analysis Domestic passenger revenue, which accounted for 82.5% of the total passenger revenue in 2012, increased by 8.2% from RMB68,222 million in 2011 to RMB73,845 million in Domestic passenger traffic in RPKs increased by 7.6%, while passenger capacity in ASKs increased by 9.4%, resulting in a decrease in passenger load factor by 1.3 percentage points from 82.7% in 2011 to 81.4% in Domestic passenger yield per RPK increased from RMB0.68 in 2011 to RMB0.69 in Hong Kong, Macau and Taiwan passenger revenue, which accounted for 2.4% of total passenger revenue, increased by 16.3% from RMB1,834 million in 2011 to RMB2,133 million in For Hong Kong, Macau and Taiwan flights, passenger traffic in RPKs increased by 21.8%, while passenger capacity in ASKs increased by 25.9%, resulting in a decrease in passenger load factor by 2.5 percentage points from 75.7% in 2011 to 73.2% in Passenger yield per RPK decreased from RMB0.88 in 2011 to RMB0.84 in International passenger revenue, which accounted for 15.1% of total passenger revenue, increased by 18.6% from RMB11,436 million in 2011 to RMB13,566 million in For international flights, passenger traffic in RPKs increased by 24.9%, while passenger capacity in ASKs increased by 23.1%, resulting in a 1.1 percentage points increase in passenger load factor from 73.9% in 2011 to 75.0% in Passenger yield per RPK decreased from RMB0.56 in 2011 to RMB0.53 in Cargo and mail revenue, which accounted for 6.8% of the Group s total traffic revenue and 6.6% of total operating revenue, increased by 13.8% from RMB5,760 million in 2011 to RMB6,556 million in The increase was attributable to the increase in cargo traffic volume. Other operating revenue increased by 8.6% from RMB3,143 million in 2011 to RMB3,414 million in The increase was primarily due to the general growth in income from various auxiliary operations. OPERATING EXPENSES Total operating expenses in 2012 amounted to RMB95,877 million, representing an increase of RMB8,814 million or 10.1% over 2011, primarily due to the total effect of increases in jet fuel costs, landing and navigation fees, maintenance expenses and other operating costs. Total operating expenses as a percentage of total operating revenue remained at 96.3% in 2011 and % % 9.4% 7.6% % % % % 25.9% 21.8% % % % % 23.1% 24.9% % % % 6.6% % % % 96.3%2011

21 20 China Southern Airlines Company Limited Annual Report 2012 Management Discussion and Analysis Operating expenses RMB million Percentage RMB million Percentage Flight operations 54, % 48, % Mainly including: Jet fuel costs 37,401 32,675 Operating lease charges 4,897 4,654 Flight personnel payroll and welfare 5,051 4,412 Maintenance 7, % 7, % Aircraft and traffic servicing 14, % 12, % Promotion and sales 7, % 6, % General and administrative 2, % 2, % Impairment on property, plant and equipment % Depreciation and amortisation 8, % 7, % Others 1, % 1, % Total operating expenses 95, % 87, % Composition of operating expenses in Comparison of operating expenses RMB million 8.6% 2.5% 7.5% 14.7% 8.3% 1.4% 57.0% Flight operations Maintenance Aircraft and traffic servicing Promotion and sales General and administrative Depreciation and amortisation Others 60,000 50,000 40,000 30,000 20,000 10,000 0 Flight operations Maintenance Aircraft and traffic servicing Promotion and sales General and administrative Impairment on property, plant and equipment Depreciation and amortisation Others Flight operations expenses, which accounted for 57.0% of total operating expenses, increased by 13.1% from RMB48,344 million in 2011 to RMB54,690 million in 2012, primarily as a result of increase in jet fuel costs derived from increased consumption of jet fuel and fuel prices. Jet fuel costs, which accounted for 68.4% of flight operations expenses, increased by 14.5% from RMB32,675 million in 2011 to RMB37,401 million in Maintenance expenses, which accounted for 8.3% of total operating expenses, increased by 5.8% from RMB7,531 million in 2011 to RMB7,971 million in The increase was mainly due to the increase in number of engines repaired and routine maintenance during the year. 57.0% % % % % %

22 21 Management Discussion and Analysis Aircraft and traffic servicing expenses, which accounted for 14.7% of total operating expenses, increased by 14.1% from RMB12,337 million in 2011 to RMB14,072 million in The increase was primarily due to a 6.6% rise in landing and navigation fees from RMB8,426 million in 2011 to RMB8,984 million in 2012, resulted from the increase in number of flights, and increase of rental expenses in Promotion and sales expenses, which accounted for 7.5% of total operating expenses, increased by 8.6% from RMB6,568 million in 2011 to RMB7,134 million in General and administrative expenses, which accounted for 2.5% of the total operating expenses, decreased by 13.6% from RMB2,807 million in 2011 to RMB2,425 million in Depreciation and amortisation, which accounted for 8.6% of total operating expenses, increased by 7.5% from RMB7,689 million in 2011 to RMB8,264 million in 2012, mainly due to the additional depreciation charges on aircraft delivered in OPERATING PROFIT Operating profit of RMB5,099 and RMB4,353 million was recorded in 2012 and 2011, respectively. The increase in profit was mainly due to the net effect of increase in operating revenue by RMB9,119 million or 10.1% in 2012 and increase in operating expenses by RMB8,814 million or 10.1%. 14.7% % % % % % % % % % %

23 22 China Southern Airlines Company Limited Annual Report 2012 Management Discussion and Analysis OTHER INCOME OR EXPENSES Other net income increased by RMB441 million from RMB1,021 million in 2011 to RMB1,462 million in 2012, was mainly due to the increase of government grants. Interest expense increased by RMB309 million from RMB1,067 million in 2011 to RMB1,376 million in 2012 was mainly due to the increase in weighted average bank and other loans balances during the year. Net exchange gain of RMB267 million and RMB2,755 million was recorded in 2012 and 2011, respectively. The significant decrease was mainly due to the exchange rate of Renminbi to US dollar appreciated significantly in 2011 while remained stable in INCOME TAX Income tax expense of RMB954 million was recorded in 2012, the increase by RMB114 million from RMB840 million in 2011, mainly due to the utilisation of unrecognised deductible temporary differences and unused tax losses balance brought forward from prior years and the recognition of deductible temporary differences in LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE As at 31 December 2012, the Group s current liabilities exceeded its current assets by RMB31,944 million. For the year ended 31 December 2012, the Group recorded a net cash inflow from operating activities of RMB11,704 million, a net cash outflow from investing activities of RMB12,153 million and a net cash inflow from financing activities of RMB668 million, which in total resulted in a net increase in cash and cash equivalents of RMB219 million RMB million RMB million Net cash generated from operating activities 11,704 12,557 Net cash used in investing activities (12,153) (21,957) Net cash generated from financing activities 668 8,859 Net increase/(decrease) in cash and cash equivalents 219 (541)

24 23 Management Discussion and Analysis In 2013 and thereafter, the Group is primarily dependent on its ability to maintain adequate cash inflow from operations to meet its debt obligations as they fall due, and its ability to obtain adequate external financing to meet its committed future capital expenditures. As at 31 December 2012, the Group had banking facilities with several PRC banks and financial institutions for providing bank financing up to approximately RMB173,162 million (2011: RMB127,448 million), of which approximately RMB60,369 million (2011: RMB36,414 million) was utilised. The Directors believe that sufficient financing will be available to the Group when and where needed. The Directors have carried out a detailed review of the cash flow forecast of the Group for the twelve months ending 31 December Based on such forecast, the Directors have determined that adequate liquidity exists to finance the working capital, capital expenditure requirements and dividend payments of the Group during that period. In preparing the cash flow forecast, the Directors have considered historical cash requirements of the Group as well as other key factors, including the availability of the above-mentioned bank financing which may impact the operations of the Group during the next twelve-month period. The Directors are of the opinion that the assumptions and sensitivities which are included in the cash flow forecast are reasonable. However, as with all assumptions in regard to future events, these are subject to inherent limitations and uncertainties and some or all of these assumptions may not be realised. The analyses of the Group s borrowings are as follows: Composition of borrowings , , RMB million RMB million Change Total borrowings 73,960 63, % Fixed rate borrowings 6,139 6,582 (6.7%) Floating rate borrowings 67,821 57, % 6,139 (8.3%) 6,582 (10.3%) 67,821 (91.7%) 57,081 (89.7%) 2012 Floating rate borrowings 2011 Fixed rate borrowings (RMB million)

25 24 China Southern Airlines Company Limited Annual Report 2012 Management Discussion and Analysis Analysis of borrowings by currency RMB million RMB million USD 70,865 62,338 RMB Others 2, Total 73,960 63,663 Maturity analysis of borrowings RMB million RMB million Within 1 year 1 24,393 20,573 After 1 year but within 2 years 1 2 9,639 10,832 After 2 years but within 5 years ,112 16,559 After 5 years 5 16,816 15,699 Total borrowings 73,960 63,663 The Group s capital structure at the end of the year is as follows: Change Net debts (RMB million) 86,669 75, % Total equity (RMB million) 39,734 37, % Ratio of net debt to total equity 218% 201% 8.5% 39,734 (31.4%) 37,777 (33.3%) 86,669 (68.6%) 75,790 (66.7%) Net debts (RMB million) Total equity

26 25 Management Discussion and Analysis Net debts (aggregate of bank and other loans, obligations under finance leases, trade payables, sales in advance of carriage, amounts due to related companies, accrued expenses and other liabilities less cash and cash equivalents and pledged bank deposits) increased by 14.4% to RMB86,669 million at 31 December 2012 from RMB75,790 million at 31 December As at 31 December 2012, total equity attributable to equity shareholders of the Company amounted to RMB32,839 million, representing an increase of RMB664 million from RMB32,175 million at 31 December Total equity at 31 December 2012 amounted to RMB39,734 million (2011: RMB37,777 million). Ratio of net debt to total equity of the Group at 31 December 2012 was increased to 218%, from 201% at 31 December FINANCIAL RISK MANAGEMENT POLICY Foreign currency risk Renminbi is not freely convertible into foreign currencies. All foreign exchange transactions involving Renminbi must take place either through the People s Bank of China ( PBOC ) or other institutions authorised to buy and sell foreign exchange or at a swap centre. The Group has significant exposure to foreign currency risk as substantially all of the Group s obligations under finance leases, bank and other loans and operating lease commitments are denominated in foreign currencies, principally US dollars, Singapore dollars and Japanese Yen. Depreciation or appreciation of Renminbi against foreign currencies affects the Group s results significantly because the Group s foreign currency liabilities generally exceed its foreign currency assets. Jet fuel price risk The Group is required to procure a majority of its jet fuel domestically at PRC spot market prices. There are currently no effective means available to manage the Group s exposure to the fluctuations in domestic jet fuel prices. However, according to a pricing mechanism that was jointly introduced by the National Development and Reform Commission and the Civil Aviation Administration of China in 2009, which allows certain flexible levy of fuel surcharge linked to the jet fuel price, airline companies may, within a prescribed scope, make its own decision as to fuel surcharges for domestic routes and the pricing structure. The pricing mechanism, to a certain extent, reduces the Group s exposure to fluctuation in jet fuel price % % % 2009

27 26 China Southern Airlines Company Limited Annual Report 2012 Management Discussion and Analysis MAJOR CHARGE ON ASSETS As at 31 December 2012, certain aircraft of the Group with an aggregate carrying value of approximately RMB60,538 million (2011: RMB53,062 million) were mortgaged under certain loans or certain lease agreements. COMMITMENTS AND CONTINGENCIES Commitments As at 31 December 2012, the Group had capital commitments of approximately RMB75,129 million (2011: RMB65,040 million). Of such amounts, RMB71,309 million related to the acquisition of aircraft and related flight equipment and RMB3,820 million for other projects. As at 31 December 2012, the Group had investment commitments as follows: RMB million RMB million Authorised and contracted for Capital contributions to a subsidiary Capital contributions for acquisition of interests in associates Share of capital commitments of a jointly controlled entity Authorised but not contracted for Share of capital commitments of a jointly controlled entity Contingent Liabilities Details of contingent liabilities of the Group are set out in note 52 to the financial statements prepared under IFRSs. 52

28 27 Report of the Directors The Board hereby presents this Annual Report and the audited financial statements for the year ended 31 December 2012 of the Group to the shareholders of the Company. PRINCIPAL ACTIVITIES, OPERATING RESULTS AND FINANCIAL POSITION The Group is principally engaged in airline operations. The Group also operates certain airline related businesses, including provision of aircraft maintenance and air catering services. The Group is one of the largest airlines in China. In 2012, the Group ranked first among all Chinese airlines in terms of number of passengers carried, number of scheduled flights per week, number of hours flown, number of routes and size of aircraft fleet. The Group has prepared the financial statements for the year ended 31 December 2012 in accordance with IFRSs. Please refer to pages 63 to 179 of this Annual Report for details. FIVE YEAR SUMMARY A summary of the results and the assets and liabilities of the Group prepared under IFRSs for the five-year period ended 31 December 2012 are set out on pages 183 and 184 of this Annual Report. DIVIDENDS No interim dividend was paid during the year ended 31 December 2012 (2011: nil). The Board recommends the payment of a final dividend of RMB0.50 (inclusive of applicable tax) per 10 shares for the year ended 31 December 2012, totalling approximately RMB490,878,350 based on the Company s 9,817,567,000 issued shares. A resolution for the dividend payment will be submitted for consideration at the 2012 Annual General Meeting of the Company. The dividend will be denominated and declared in RMB and payable in RMB to holders of A shares, and in HKD to holders of H shares. The profit distribution proposal is subject to shareholders approval at the General Meeting. BANK LOANS AND OTHER BORROWINGS Details of the bank and other loans and obligations under finance leases of the Company and the Group are set out in note 34 and note 35 to the financial statements prepared under IFRSs. INTEREST CAPITALISATION For the year ended 31 December 2012, RMB389 million (2011: RMB205 million) was capitalised as the cost of construction in progress and property, plant and equipment in the financial statements prepared under IFRSs ,878,350 9,817,567, A H

29 28 China Southern Airlines Company Limited Annual Report 2012 Report of the Directors PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment of the Company and the Group and movements of property, plant and equipment during the year ended 31 December 2012 are set out in note 21 to the financial statements prepared under IFRSs. MAJOR CUSTOMERS AND SUPPLIERS The Group s purchases from the largest supplier for the year represented approximately 22.9% of the Group s total purchases. Purchases from the five largest suppliers accounted for an aggregate of approximately 40.6% of the Group s total purchases in At no time during the year have the Directors, their associates or any shareholder of the Company (which to the knowledge of the Directors owns more than 5% of the Company s share capital) had any interest in these five largest suppliers. The Group s aggregate turnover with its five largest customers did not exceed 30% of the Group s total turnover in TAXATION Details of taxation of the Company and the Group are set out in notes 17 and 28 to the financial statements prepared under IFRSs. RESERVES Movements in the reserves of the Company and the Group during the year are set out in note 45 to the financial statements prepared under IFRSs. EMOLUMENT POLICY As at 31 December 2012, the Group had an aggregate of 73,668 employees (2011: 71,696). The emolument policy for the employees of the Group is principally set up by the Board on the basis of their merit, qualifications, competence and the Group s operating results. The emolument policy of the Directors and senior management of the Company are recommended by the Remuneration and Assessment Committee to the Board, having regard to the Group s operating results, individual performance and comparable market statistics in accordance with the Administrative Measures on Remuneration of Directors and Administrative Measures on Remuneration of Senior Management. On 30 November 2011, the Company s General Meeting approved the H Share Appreciation Rights Scheme of China Southern Airlines Company Limited with an aim to provide medium to long term incentive to certain Directors, senior management, managerial personnel and key technical of the Company and promote the continuous development of the business of the Group, details of the scheme is set out in note 47(c) to the financial statements prepared under IFRSs % 40.6% 5% 30% ,66871,696 H 47(c)

30 29 Report of the Directors Details of the remuneration of the Directors, Supervisors and senior management of the Company are set out in note 16 to the financial statements prepared under IFRSs. Details of other employees retirement and housing benefits are set out in notes 12 and 47 to the financial statements prepared under IFRSs. The remunerations of the senior management of the Company fall within the following band: Band Number of Senior Management HK$ , ,001-1,000, ,000,001-1,500, ,500,001-2,000, Total SUBSIDIARIES Details of the principal subsidiaries of the Company are set out in note 57 to the financial statements prepared under IFRSs. SHARE CAPITAL STRUCTURE Change in Share Capital There was no change in the share capital of the Company in Share Capital Structure As at 31 December 2012, the share capital of the Company comprised the following: 57 Approximate percentage Type of Shares Number of Shares of total share capital (%) 1. A Shares with selling restrictions A 123,900, H Shares H 2,794,917, A Shares without selling restrictions A 6,898,750, Total issued Shares 9,817,567,

31 30 China Southern Airlines Company Limited Annual Report 2012 Report of the Directors SUBSTANTIAL SHAREHOLDERS As at 31 December 2012, to the knowledge of the Directors, chief executives and Supervisors of the Company, the following persons (other than the Directors, chief executive or Supervisors of the Company) had interests and short positions in the shares and underlying shares of the Company which were required to be recorded in the register of the Company required to be kept under section 336 of the Securities and Futures Ordinance (the SFO ): 336 % of the total % of the % of the issued share Name of Type of Number of total issued total issued capital of shareholder Capacity Share Shares held A Shares H Shares the Company A H CSAHC (Note 1) Beneficial owner A Share 4,150,050,000 (L) 59.10% 42.27% 1 Interest in controlled corporation A H Share 1,064,770,000 (L) 38.10% 10.85% H Total 5,214,820,000 (L) 53.12% Nan Lung Holding Limited Beneficial Owner H Share 1,064,770,000 (L) 38.10% 10.85% ( Nan Lung ) (Note 1) Interest in controlled corporation H 1 FIL Limited (Note 2) Investment Manager H Share 196,488,000 (L) 7.03% 2.00% FIL Limited 2 H Note: (1) CSAHC was deemed to be interested in an aggregate of 1,064,770,000 H Shares through its direct and indirect wholly-owned subsidiaries in Hong Kong, of which 31,120,000 H Shares were directly held by Yazhou Travel Investment Company Limited (representing approximately 1.11% of its then total issued H Shares) and 1,033,650,000 H Shares were directly held by Nan Lung (representing approximately 36.98% of its then total issued H Shares). As Yazhou Travel Investment Company Limited is also an indirect wholly-owned subsidiary of Nan Lung, Nan Lung was also deemed to be interested in the 31,120,000 H Shares held by Yazhou Travel Investment Company Limited. (2) According to the disclosure of interests form filed by FIL Limited, it was interested in an aggregate of 194,438,000 H Shares in the capacity as an investment manager since 28 February 2013, representing approximately 6.96% of the then total issued H Shares of the Company. Save as disclosed above, as at 31 December 2012, so far as was known to the Directors, chief executive and Supervisors of the Company, no other person (other than the Directors, chief executive or Supervisors of the Company) had an interest or a short position in the shares and underlying shares of the Company recorded in the register of the Company required to be kept under section 336 of the SFO. (1) 1,064,770,000 H 31,120,000 H H 1.11%1,033,650,000 H H 36.98% 31,120,000 H (2) FIL Limited 194,438,000 H H 6.96% 336