China Southern Cover 11B

Annual Report 2011 China Southern Airlines Company Limited H Share Stock Code : 1055 A Share Stock Code : 600029 ADR Code : ZNH H: 1055 A : 600029 ADR : ZNH

1 Contents Company Profile 2 Corporate Information 3 Financial Highlights 5 Chairman s Statement 8 Management Discussion and Analysis 14 Report of the Directors 29 Report of the Supervisory Committee 46 Corporate Governance Report 49 Financial Statements Prepared under International Financial Reporting Standards Independent Auditor s Report 56 Consolidated Income Statement 58 Consolidated Statement of Comprehensive Income 59 Consolidated Balance Sheet 60 Company Balance Sheet 62 Consolidated Statement of Changes in Equity 64 Consolidated Cash Flow Statement 66 68 Supplementary Information 174 Five Year Summary 177 The Board of Directors, Supervisory Committee and Senior Management 179 Glossary 188

2 China Southern Airlines Company Limited Annual Report 2011 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 2011, 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 2007. Up to the date of this report, the Group has established a network connecting 926 destinations of 173 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 three bases in places including Shanghai and 22 domestic offices in cities including Chengdu, Hangzhou and Nanjing. It also maintains 56 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 2011, the Group had a fleet of 444 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 6.20 years as at the year end of 2011. 926 173 444737747 757 777320330 380 6.20

3 Corporate Information DIRECTORS Non-Executive Directors Si Xian Min (Chairman) Wang Quan Hua Yuan Xin An Executive Directors Tan Wan Geng (President) Zhang Zi Fang (Executive Vice President) Xu Jie Bo (Executive Vice President and Chief Financial Officer) Chen Zhen You 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 Agricultural Bank of China The Industrial & Commercial Bank of China LEGAL ADVISERS TO THE COMPANY DLA Piper Hong Kong Z&T Law Firm

4 China Southern Airlines Company Limited Annual Report 2011 Corporate Information SHARE REGISTRAR Hong Kong Registrars Limited 17M Floor Hopewell Centre 183 Queen s Road East Hong Kong BNY Mellon Shareowner Services P.O. Box 358516 Pittsburgh, PA15252-8516 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 510405 Website: www.csair.com 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 8/F, Office Tower E2 Oriental Plaza No. 1 East Chang An Avenue Beijing PRC Postcode 100738 183 17M BNY Mellon Shareowner Services P.O. Box 358516 Pittsburgh, PA15252-8516 U.S.A. 166 36 278510405 www.csair.com 95 9 B1 10 8 1 8 100738

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 2011, prepared in accordance with International Financial Reporting Standards ( IFRSs ), together with the comparative figures for the corresponding period in 2010. 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 2011 12 31 2010 2011 vs 2010 For the year ended 31 December Increase/ (decrease) 2011 2010 2011 2011 RMB million RMB million HK$ million US$ million Traffic revenue: Passenger 81,492 68,704 100,521 12,933 19% Cargo and mail 5,760 5,436 7,105 914 6% 87,252 74,140 107,626 13,847 18% Other operating revenue 3,143 2,355 3,877 499 33% Total operating revenue 90,395 76,495 111,503 14,346 18% Operating expenses: Flight operations 48,344 38,593 59,632 7,673 25% Maintenance 7,531 5,586 9,290 1,195 35% Aircraft and traffic servicing 12,337 10,968 15,218 1,958 12% Promotion and sales 6,568 5,555 8,102 1,042 18% General and administrative 2,807 2,266 3,462 445 24% Impairment on property, plant and equipment 584 212 720 93 175% Depreciation and amortisation 7,689 7,065 9,484 1,220 9% Others 1,203 444 1,484 191 171% Total operating expenses 87,063 70,689 107,392 13,817 23% Other net income 1,021 476 1,259 162 114% Operating profit 4,353 6,282 5,370 691 (31%)

6 China Southern Airlines Company Limited Annual Report 2011 Financial Highlights 2011 vs 2010 For the year ended 31 December Increase/ (decrease) 2011 2010 2011 2011 RMB million RMB million HK$ million US$ million Interest income 179 93 221 28 92% Interest expense (1,067) (1,265) (1,316) (169) (16%) Share of associates results 456 56 562 72 714% Share of jointly controlled entities results 125 112 154 20 12% Gain on sale of a jointly controlled entity classified as held for sale, net 1,078 (100%) Gain/(Loss) on derivatives financial instruments, net 1 (30) 1 (103%) Exchange gain, net 2,755 1,746 3,398 437 58% Interest income on wealth management products 128 158 20 / Gain on deemed disposal of a subsidiary 17 (100%) Profit before taxation 6,930 8,089 8,548 1,099 (14%) Income tax expense (840) (1,677) (1,036) (133) (50%) Profit for the year 6,090 6,412 7,512 966 (5%) Attributable to: Equity shareholders of the Company 5,110 5,792 6,303 810 (12%) Non-controlling interests 980 620 1,209 156 58% Profit for the year 6,090 6,412 7,512 966 (5%) Earnings per share Basic and diluted RMB0.52 RMB0.70 HK$0.64 US$0.08 (26%) Note: The above consolidated income statement has been prepared in Renminbi ( RMB ), the national currency of the PRC. Translations of amounts from RMB into Hong Kong dollars ( HK$ ) and United States dollars ( US$ ) solely for the convenience of readers have been made at the rates of HK$1.00 to RMB0.8107 and US$1.00 to RMB6.3009, respectively, being the average of the buying and selling rates as quoted by the People s Bank of China at the close of business on 31 December 2011. No representation is made that the RMB amounts could have been or could be converted into HK$ or US$ at these rates on 31 December 2011 or on any other date. 2011 12 311 0.810716.3009 2011 12 31

中国南方航空股份有限公司 二零一一年年度報告 財務摘要 Financial Highlights Passenger Traffic (RPK) Passenger 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 130,000 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 122,344 111,328 160,00 0 140,00 0 151,064 140,498 0.8 0.7 120,00 0 0.6 100,00 0 0.5 80,000 0.4 60,000 0.3 40,000 0.2 20,000 0.1 2010 2011 Total Revenue 2011 RMB million 總收入二零一一年 人民幣百萬元 0.67 0 0 2010 0.62 2010 2011 2011 Passenger Traffic Capacity Available Seat Kilometres ( ASK ) 2011 Passenger Traffic Revenue Passenger Kilometres ( RPK ) 2011 million million 客載運力 可用座位公里 二零一一年 客運量 收費客公里 二零一一年 百萬 百萬 s Domestic 120,462 (79.8%) s Hong Kong, Macau and Taiwan 2,753 (1.8%) s International 27,849 (18.4%) s Domestic 99,674 (81.5%) s Hong Kong, Macau and Taiwan 2,082 (1.7%) s International 20,588 (16.8%) s 國內 120,462 (79.8%) s 港澳臺地區 2,753 (1.8%) s 國際 27,849 (18.4%) s 國內 99,674 (81.5%) s 港澳臺地區 2,082 (1.7%) s 國際 20,588 (16.8%) s Domestic passenger revenue 68,222 (75.5%) s Hong Kong, Macau and Taiwan passenger revenue 1,834 (2.0%) s International passenger revenue 11,436 (12.6%) s Cargo and mail 5,760 (6.4%) s Other revenue 3,143 (3.5%) s 國內客運收入 68,222 (75.5%) s 港澳臺地區客運收入 1,834 (2.0%) s 國際客運收入 11,436 (12.6%) s 貨運及郵運收入 5,760 (6.4%) s 其他收入 3,143 (3.5%) 7

8 China Southern Airlines Company Limited Annual Report 2011 Chairman s Statement Si Xian Min Chairman Looking into 2012, we see challenges as well as opportunities, but opportunities prevail. The Company will attach great importance to study the changes in the market environment in 2012, seize opportunities to develop, effectively cope with the challenges in the operations, continue to make effort to push forward the strategic transformation and accelerate structural adjustment and optimization while ensuring safety with full efforts. 2012 2012

9 Chairman s Statement Si Xian Min Chairman In 2011, due to the deepening sovereign debt crisis of the developed economies and slowdown in economic growth of the emerging economies, difficulties were encountered in the course of the global economic recovery. China adhered to implement a proactive fiscal policy and prudent monetary policy, continued to strengthen and refine its macroeconomic control and ensured the steady and relatively fast growth of the economy while allowing a gradual fall in commodity prices. Benefitted from the steady and relatively fast growth of the PRC economy and the growing household consumption demand, the domestic aviation passenger demand maintained growth. However, due to the slow recovery of the developed economies, intense political situations in some regions and unexpected events such as the earthquake in Japan, in 2011, the growth of the international aviation market was slow, the aviation cargo market was also affected and underwent a downturn, and the domestic aviation demand grew at a slower pace compared to 2010. Facing the serious and complicated economic environment, the Company effectively responded to the challenges brought by the sluggish international aviation market and cargo market by making full use of the advantage of the steady growth in domestic civil aviation demand. Through strengthening safety management, accelerating the strategic transformation and internationalization process, reinforcing market expansion while continuing to improve the operational quality and significantly raising its service standards, the Company made progress in safety, operations, transformation, services and other aspects, maintained the best safety record among airlines in China, and once again achieved good results in production and operation, thereby effectively enhancing our brand image and the Company s comprehensive competitiveness. During the reporting period, the Company strictly performed standardized management, strengthened the building of safety management system, brought the alert functions of the safety management system into full play, and averted safety risks effectively on a timely basis, thus achieving the best safety performance ever in its history and significantly improving our safety quality. In 2011, the Group completed a total of 1,507,000 safe flight hours, including 8,777 general flight hours, representing an increase of 1,060 hours as compared with the previous year, and maintained 146 consecutive months of aviation safety and 210 consecutive months of aviation security. The Group maintained the best safety record among airlines in China and realized the excellent results of Two Zeros, i.e. zero company responsibility incident and zero human error incident. 2011 2011 2010 2011 150.78,777 1,060146 210

10 China Southern Airlines Company Limited Annual Report 2011 Chairman s Statement During the reporting period, facing the adverse factors, such as the slowdown in the civil aviation market and the sluggish cargo market, the Company actively strengthened marketing and cooperation, and continued to enhance the quality of the passenger operations by seizing opportunities in the market, strengthening high-end marketing, developing frequent-flyers and enhancing the control of channels. During the reporting period, operating indicators of the Company, including passenger load factor, revenue per seat/ kilometre and average fare continued to increase. Facing the serious situation of the overall cargo transport, the Company actively developed the cargo transport market and effectively reduced cargo transport losses. In addition, during the reporting period, the Company successfully introduced and operated aircraft A380 and became the sole airline that operated aircraft A380 in the aviation industry of China, thereby effectively enhancing the profile, social influence and brand recognition of the Company. We sped up the structural adjustment of the fleet and further optimized our fleet structure by disposing of the older aircraft. In 2011, the Company s major production and operation indicators remained steady on the rise with and created a new high. During the reporting period, the Company continued to promote the energy conservation and emission reduction programmes and further optimized the structure of the fleet by disposing of older aircraft. In 2011, the Company recorded a 3.3% decrease in fuel consumption per tonne kilometre as compared with the previous year with a reduction in carbon dioxide emission of 80,000 tonnes, and was ranked 21st at the China Corporate Social Responsibility List, awarded the honour as China 2011 Top 100 Green Companies, Green Company of the Year, Green Action China 2011 Ten Leading Companies, The Most Socially Responsible Listed Company. Moreover, responding to the needs of the State, we successfully accomplished the special transportation tasks, including the evacuation of PRC citizens from Libya and Japan following the earthquake as well as to ensure the safe air transportation for the 26th Summer Universiade and the 1st Asia- Europe Expo. In 2011, the Company s Ten Cent Care Foundation donated RMB 13.97 million and effectively fulfilled our social responsibility. A380 A380 2011 2011 3.3%8 21 2011 2011 26 2011 1,397

11 Chairman s Statement Looking into 2012, we see challenges as well as opportunities, but opportunities prevail. Although the international economy is still affected by the European debt crisis, the recovery of world economy is still predictable. The PRC economy is still maintaining a steady growth momentum over the medium and long term. Although the current PRC economic growth is slowing down, the government has adopted in advance the policy of micro-adjustment to avoid rapid decline of the economy, and it is expected that the PRC economy will maintain a steady growth in 2012. Increasing income and consumption upgrade of residents make civil aviation become popular which drives the steady growth of aviation demand. Additionally, after the Company recorded profits for three consecutive years and completed refinancing, the balance sheet and capital strength of the Company have seen significant improvement. Meantime, as the negative influence of the European debt crisis, it is anticipated that the world economy will recover at a slow pace in 2012. Along with the sluggish economy in developed economies and the domestic macro control measures, domestic economic activities will be hampered and economic growth in the PRC is expected to slow down. Affected by the overall economic condition, the 2012 international aviation market will be relatively weak with anemic growth, and cargo transport market will also remain depressed. Though the domestic passenger aviation market will continue to grow due to the economic environment in China, the growth rate is expected to slow down. Furthermore, the domestic aviation industry is also facing challenges arising from the faster growing transportation capacity and intensified market competition, so further increase in the passenger revenue will be affected. Due to the factors including the easing monetary policies in major economies and geopolitical tensions, the international oil prices may remain high, which will exert greater pressure on the profits of the aviation industry in 2012. Compared with 2011, the pace of the appreciation of RMB against the US$ will be less impressive in 2012, and the exchange gain for the aviation industry will also decline. Therefore, the Company will attach great importance to study the changes in the market environment in 2012, seize opportunities to develop, effectively cope with the challenges in the operations, continue to make effort to push forward the strategic transformation and accelerate structural adjustment and optimization while ensuring safety with full efforts. Priorities will be given to the following works: 2012 2012 2012 2012 2012 2011 2012 2012 1. To strengthen safety management mechanism and team construction to realize safe operation with full efforts In 2012, the Company will further enhance the safety management mechanism, raise the predictability in safety management and strictly implement safety production and safety management responsibility. We will accelerate the application of new technologies, continue to perform well in the application and promotion of safety management system and proactively explore the new safety management mechanism to construct an effective long-term mechanism of continued safety. Meanwhile, we will enhance our flight crew, stabilize the flight crew team and explore new ways in pilot training. 1 2012

12 China Southern Airlines Company Limited Annual Report 2011 Chairman s Statement In 2012, 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 strengthen market development, increase revenue and create good operating results In 2012, the Company will continue to strengthen market development, accelerate the development of the product system, and make greater effort to conduct the sales for first and business class cabins and international marketing. Emphasis will be put on the operations of wide-body aircraft and long routes. Through co-ordinated arrangement and in line with strategic transformation and internationalization strategy, we will leverage the scale effect of wide-body aircrafts and the driving effect of long routes, with a view to enhance the operational quality. We will optimize our cargo transport business layout, widely conduct external cooperation, strengthen cargo transport marketing and make effort to increase bellyhold income and reduce cargo transport loss. 3. To expand the transformation achievements, improve the quality of transformation and firmly push forward the strategic transformation and internationalization The Company will continue to unswervingly push forward our strategic transformation and internationalization on the back of the existing achievements. In 2012, by further improving the hub routes structure and strengthening the design, promotion and sales of transit products, the Company will strengthen its resources allocation, enhance the recognition and attraction of Southern Airlines transit and further increase our hub competitiveness and customer satisfaction; we will steadily press ahead with our internationalization, secure the Australia route and launch more international routes, including those to London, further expand the Southeast Asia route and enhance our operational capability of international long routes to continue to expand the achievements of transformation and improve the quality of transformation. 2 3 2012 2012 2012

13 Chairman s Statement 4. To strengthen building up our brand and enhance service standards The Company will formally launch its Year of International Brand Service activity in 2012, to drive the Company s ground and on-board services to fully achieve the SKYTRAX Four-star level, thereby significantly improving customer service experiences and the internationalization level of the Company s service. The Company will make greater effort to promote the Southern Airlines brand in the market, thus further increasing the Company s brand influence. We will strengthen the planning, publicity and promotion of our brand, refine our system of branding and enhance our brand recognition targeting at the key customer groups. We will continue to implement the SKYTRAX benchmarking management and be stringent in the standardization and consistence of our services; we will improve our in-flight service, increase the investment in hardware, and improve the services standards for international routes. Focus will also be made on improving the level of high-end service, the enhancement in the consistency, cohesiveness and systematicness for service ends and the improvements on the overall service image. 4 2012 SKYTRAX SKYTRAX

14 China Southern Airlines Company Limited Annual Report 2011 Management Discussion and Analysis Tan Wan Geng President During the reporting period, facing the complicated economic situation, the Company firmly pushed forward its strategic transformation and internationalization strategy, continued to strengthen the hub construction, made great effort to enhance transit capability, proactively enhanced its service standards and brand image and accelerate the course of internationalization, thus significantly improved the Company s competitiveness and risk management ability.

15 Management Discussion and Analysis During the reporting period, benefitted from the steady and relatively fast growth of the PRC economy, the domestic aviation demand recorded a steady growth. However, due to the slow recovery in the developed economies, intense political situations in some regions and other unexpected events such as the earthquake in Japan, the growth of the international aviation and aviation cargo transport markets was slow and underwent a downturn. Facing the complicated economic situation, the Company firmly pushed forward its strategic transformation and internationalization strategy, continued to strengthen the hub construction, made great effort to enhance transit capability, proactively enhanced its service standards and brand image and conducted effective structural adjustment, thus significantly improved the Company s competitiveness and risk management ability.

16 China Southern Airlines Company Limited Annual Report 2011 Management Discussion and Analysis During the reporting period, the Company made greater efforts to push forward the hub construction with increasing degree of hub concentration and the hub effect was gradually demonstrated. In particular, the popularity and competitiveness of the Guangzhou hub was significantly enhanced. During the reporting period, the transit assurance and sales capability were effectively enhanced with fast growth in the number of transit passengers and transit sales income. In 2011, the internationalization process of the Company proceeded at an obviously faster pace. The international routes, including those of direct flight from Guangzhou to Auckland, Vancouver and Perth were successively launched, and those from Guangzhou to Sydney, Melbourne and Los Angeles were intensified. The number of our international and regional flights grew rapidly and the proportion of the available seat kilometres in international routes increased substantially. We are moving towards the goal as an airline of international standard operating with an efficient network. During the reporting period, the Company conducted the Year of Branded Service Innovation activity and fully performed benchmarking management and accelerated the standardization, accuracy and internationalization of its services by leveraging the opportunity of the SKYTRAX Four-star certification; we improved our service flow, increased investment in services and put emphasis on the improvement of the environment for the first class and business class cabins; we strictly rectified the delays of flights and effectively increased the Company s flight on-schedule rate in close collaboration with each of the related units. During the reporting period, the Company was granted SKYTRAX Four-Star Airline and the award of World s Most-Improved Airline in 2011 by SKYTRAX. In addition, the Company stepped up its brand promotion activities through the platforms such as the Australian Tourism Exchange and the Conference of the World Tourism, and was ranked sixth in China s Top 100 Brands of Asian brands ranking and granted Annual Asian Airline Brand Attracting Most Attention. OPERATING DATA SUMMARY The following table sets forth certain financial information and operating data by geographic regions: 2011 SKYTRAX SKYTRAX SKYTRAX 100

17 Management Discussion and Analysis 2011 vs 2010 Increase/ For the year ended (decrease) 31 December 2011 12 31 2010 2011 2010 2011 2010 Traffic Revenue passenger kilometres (RPK) (million) (RPK) Domestic 99,674 94,014 6.0% Hong Kong, Macau and Taiwan 2,082 1,788 16.4% International 20,588 15,526 32.6% Total 122,344 111,328 9.9% Revenue tonne kilometres (RTK) (million) (RTK) Domestic 10,195 9,715 4.9% Hong Kong, Macau and Taiwan 198 171 15.8% International 4,068 3,218 26.4% Total 14,461 13,104 10.4% Passengers carried (thousand) Domestic 72,926 69,727 4.6% Hong Kong, Macau and Taiwan 1,767 1,573 12.3% International 5,984 5,156 16.1% Total 80,677 76,456 5.5% Cargo and mail carried (thousand tonnes) Domestic 857 874 (1.9%) Hong Kong, Macau and Taiwan 13 12 8.3% International 265 231 14.7% Total 1,135 1,117 1.6% Capacity Available seat kilometres (ASK) (million) (ASK) Domestic 120,462 117,383 2.6% Hong Kong, Macau and Taiwan 2,753 2,353 17.0% International 27,849 20,762 34.1% Total 151,064 140,498 7.5% Available tonne kilometres (ATK) (million) (ATK) Domestic 14,145 13,890 1.8% Hong Kong, Macau and Taiwan 316 269 17.5% International 6,334 4,981 27.2% Total 20,795 19,140 8.6%

18 China Southern Airlines Company Limited Annual Report 2011 Management Discussion and Analysis 2011 vs 2010 Increase/ For the year ended (decrease) 31 December 2011 12 31 2010 2011 2010 2011 2010 Load factor Passenger load factor (RPK/ASK) (%) (RPK/ASK) (%) Domestic 82.7 80.1 3.2% Hong Kong, Macau and Taiwan 75.7 76.0 (0.4%) International 73.9 74.8 (1.2%) Overall 81.0 79.2 2.3% Overall load factor (RTK/ATK) (%) (RTK/ATK) (%) Domestic 72.1 69.9 3.1% Hong Kong, Macau and Taiwan 62.6 63.6 (1.6%) International 64.2 64.6 (0.6%) Overall 69.5 68.5 1.5% Yield Yield per RPK (RMB) Domestic 0.68 0.62 9.7% Hong Kong, Macau and Taiwan 0.88 0.85 3.5% International 0.56 0.58 (3.4%) Overall 0.67 0.62 8.1% Yield per RTK (RMB) Domestic 6.90 6.20 11.3% Hong Kong, Macau and Taiwan 9.69 9.29 4.3% International 3.67 3.84 (4.4%) Overall 6.03 5.66 6.5% Fleet Total number of aircraft at year end Boeing 223 208 7.2% Airbus 208 191 8.9% McDonnell Douglas 12 (100.0%) Others 13 11 18.2% Total 444 422 5.2% Overall utilisation rate (hours per day) Boeing 10.02 9.78 2.5% Airbus 9.74 9.47 2.9% McDonnell Douglas 8.54 9.09 (6.1%) Overall 9.80 9.55 2.6%

19 Management Discussion and Analysis FINANCIAL PERFORMANCE The profit attributable to equity shareholders of the Company of RMB5,110 million was recorded in 2011 as compared to the profit attributable to equity shareholders of the Company of RMB5,792 million in 2010. The Group s operating revenue increased by RMB13,900 million or 18.2% from RMB76,495 million in 2010 to RMB90,395 million in 2011. Passenger load factor increased by 1.8 percentage points from 79.2% in 2010 to 81.0% in 2011. Passenger yield (in passenger revenue per RPK) increased by RMB0.05 or 8.1% from RMB0.62 in 2010 to RMB0.67 in 2011. Average yield (in traffic revenue per RTK) increased by 6.5% from RMB5.66 in 2010 to RMB6.03 in 2011. Operating expenses increased by RMB16,374 million or 23.2% from RMB70,689 million in 2010 to RMB87,063 million in 2011. As a result of the increase in operating expenses, operating profit of RMB4,353 million was recorded in 2011 as compared to operating profit of RMB6,282 million in 2010, down by RMB1,929 million. OPERATING REVENUE 201151.10 2010 57.922010 764.95 139.0018.2% 2011903.95 2010 79.2%1.8201181.0% 2010 0.620.058.1% 20110.67 20105.66 20116.036.5% 2010706.89 163.742011870.63 23.2%2011 43.53 2010 62.8219.29 2011 2010 Operating Operating Changes revenue revenue in revenue RMB million Percentage RMB million Percentage Traffic revenue 87,252 96.5% 74,140 96.9% 17.7% Including: Passenger revenue 81,492 68,704 18.6% Domestic 68,222 58,155 17.3% Hong Kong, Macau and Taiwan 1,834 1,521 20.6% International 11,436 9,028 26.7% Cargo and mail revenue 5,760 5,436 6.0% Other operating revenue 3,143 3.5% 2,355 3.1% 33.5% Mainly including: Commission income 643 469 37.1% Hotel and travel services income 614 477 28.7% Ground services income 368 390 (5.6%) Expired sales in advance of carriage 309 249 24.1% Aircraft wet lease income 319 50 >100.0% Total operating revenue 90,395 100.0% 76,495 100.0% 18.2% Less: fuel surcharge income (11,699) (5,583) Total operating revenue excluding fuel surcharge 78,696 70,912

20 China Southern Airlines Company Limited Annual Report 2011 Management Discussion and Analysis Traffic revenue composition 5,760 (6.6%) (RMB million) 5,436 (7.3%) 81,492(93.4%) 68,704 (92.7%) 2011 Cargo and Mail Revenue 2010 Passenger Revenue 1,834 (2.3%) 11,436 (14.0%) Passenger revenue composition (RMB million) 1,521 (2.2%) 9,028 (13.1%) 68,222(83.7%) 58,155 (84.7%) 2011 2010 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 96.5% and 96.9% of total operating revenue in 2011 and 2010 respectively. Passenger revenue and cargo and mail revenue accounted for 93.4% and 6.6% respectively of the total traffic revenue in 2011. 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 aircraft wet lease income. The increase in operating revenue was primarily due to an 18.6% increase in passenger revenue from RMB68,704 million in 2010 to RMB81,492 million in 2011. The total number of passengers carried increased by 5.5% to 80.68 million passengers in 2011. RPKs increased by 9.9% from 111,328 million in 2010 to 122,344 million in 2011, primarily as a result of the increase in number of passengers carried. Passenger yield per RPK increased from RMB0.62 in 2010 to RMB0.67 in 2011. 20112010 96.5% 96.9%2011 93.4%6.6% 2010 687.04 18.6% 2011 814.9220115.5% 8,068 20101,113.28 9.9% 20111,223.44 20100.622011 0.67

21 Management Discussion and Analysis Domestic passenger revenue, which accounted for 83.7% of the total passenger revenue in 2011, increased by 17.3% from RMB58,155 million in 2010 to RMB68,222 million in 2011. Domestic passenger traffic in RPKs increased by 6.0%, while passenger capacity in ASKs increased by 2.6%, resulting in an increase in passenger load factor by 2.6 percentage points from 80.1% in 2010 to 82.7% in 2011. Domestic passenger yield per RPK increased from RMB0.62 in 2010 to RMB0.68 in 2011, mainly resulted from the increase of domestic passenger revenue and fuel surcharge income during the year. Hong Kong, Macau and Taiwan passenger revenue, which accounted for 2.3% of total passenger revenue, increased by 20.6% from RMB1,521 million in 2010 to RMB1,834 million in 2011. For Hong Kong, Macau and Taiwan flights, passenger traffic in RPKs increased by 16.4%, while passenger capacity in ASKs increased by 17.0%, resulting in a decrease in passenger load factor by 0.3 percentage points from 76.0% in 2010 to 75.7% in 2011. Passenger yield per RPK increased from RMB0.85 in 2010 to RMB0.88 in 2011, mainly resulted from the increase of Hong Kong, Macau and Taiwan passenger revenue. International passenger revenue, which accounted for 14.0% of total passenger revenue, increased by 26.7% from RMB9,028 million in 2010 to RMB11,436 million in 2011. For international flights, passenger traffic in RPKs increased by 32.6%, while passenger capacity in ASKs increased by 34.1%, resulting in a 0.9 percentage points decrease in passenger load factor from 74.8% in 2010 to 73.9% in 2011. Passenger yield per RPK decreased from RMB0.58 in 2010 to RMB0.56. Cargo and mail revenue, which accounted for 6.6% of the Group s total traffic revenue and 6.4% of total operating revenue, increased by 6.0% from RMB5,436 million in 2010 to RMB5,760 million in 2011. The increase was attributable to the increase in cargo traffic volume and fuel surcharge income. Other operating revenue increased by 33.5% from RMB2,355 million in 2010 to RMB3,143 million in 2011. The increase was primarily due to the general growth in income from various auxiliary operations. OPERATING EXPENSES Total operating expenses in 2011 amounted to RMB87,063 million, representing an increase of 23.2% or RMB16,374 million over 2010, 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 increased from 92.4% in 2010 to 96.3% in 2011. 2011 83.7% 2010581.55 2011 682.2217.3% 2.6% 6.0%201080.1% 2.6201182.7% 20100.622011 0.68 2.3% 201015.21 2011 18.3420.6% 17.0% 16.4% 201076.0%0.32011 75.7% 2010 0.85 20110.88 14.0%2010 90.28 2011114.36 26.7% 34.1% 32.6%2010 74.8%0.9201173.9% 20100.58 20110.56 6.6% 6.4%201054.36 201157.606.0% 201023.55 33.5% 201131.43 2011870.63 2010163.7423.2% 201092.4%2011 96.3%

22 China Southern Airlines Company Limited Annual Report 2011 Management Discussion and Analysis 2011 2010 Operating expenses RMB million Percentage RMB million Percentage Flight operations 48,344 55.5% 38,593 54.6% Mainly including: Jet fuel costs 32,675 23,492 Operating lease charges 4,654 5,298 Flight personnel payroll and welfare 4,412 3,420 Maintenance 7,531 8.7% 5,586 7.9% Aircraft and traffic servicing 12,337 14.2% 10,968 15.5% Promotion and sales 6,568 7.5% 5,555 7.9% General and administrative 2,807 3.2% 2,266 3.2% Impairment on property, plant and equipment 584 0.7% 212 0.3% Depreciation and amortisation 7,689 8.8% 7,065 10.0% Others 1,203 1.4% 444 0.6% Total operating expenses 87,063 100.0% 70,689 100.0% Composition of operation expenses in 2011 2011 Comparison of operating expenses RMB million 8.8% 0.7% 3.2% 7.5% 14.2% 8.7% 1.4% 55.5% Flight operations Maintenance Aircraft and traffic servicing Promotion and sales General and administrative Impairment on property, plant and equipment Depreciation and amortisation Others 50000 40000 30000 20000 10000 0 Flight operations Maintenance Aircraft and traffic servicing Promotion and sales General and administrative Impairment on property, plant and equipment Depreciation and amortisation Others 2011 2010 Flight operations expenses, which accounted for 55.5% of total operating expenses, increased by 25.3% from RMB38,593 million in 2010 to RMB48,344 million in 2011, primarily as a result of increase in jet fuel costs because of greater consumption of jet fuel and increase in average fuel prices. Jet fuel costs, which accounted for 67.6% of flight operations expenses, increased by 39.1% from RMB23,492 million in 2010 to RMB32,675 million in 2011. Maintenance expenses, which accounted for 8.7% of total operating expenses, increased by 34.8% from RMB5,586 million in 2010 to RMB7,531 million in 2011. The increase was mainly due to the increase in number of engines repaired and routine maintenance during the year. 55.5%2010 385.93 25.3% 2011 483.44 67.6%2010234.92 39.1% 2011326.75 8.7%2010 55.86 34.8% 201175.31

23 Management Discussion and Analysis Aircraft and traffic servicing expenses, which accounted for 14.2% of total operating expenses, increased by 12.5% from RMB10,968 million in 2010 to RMB12,337 million in 2011. The increase was primarily due to an 8.1% rise in landing and navigation fees from RMB7,792 million in 2010 to RMB8,426 million in 2011, resulted from the increase in number of flights. Promotion and sales expenses, which accounted for 7.5% of total operating expenses, increased by 18.2% from RMB5,555 million in 2010 to RMB6,568 million in 2011. General and administrative expenses, which accounted for 3.2% of the total operating expenses, increased by 23.9% from RMB2,266 million in 2010 to RMB2,807 million in 2011. Impairment on property, plant and equipment increased by RMB372 million from RMB212 million in 2010 to RMB584 million in 2011. Depreciation and amortisation, which accounted for 8.8% of total operating expenses, increased by 8.8% from RMB7,065 million in 2010 to RMB7,689 million in 2011, mainly due to the additional depreciation charges on aircraft delivered in 2011. OPERATING PROFIT Operating profit of RMB4,353 million was recorded in 2011 (2010: RMB6,282 million). The decrease in profit was mainly due to the net effect of increase in operating revenue by RMB13,900 million or 18.2% in 2011 and increase in operating expenses by RMB16,374 million or 23.2%. 14.2% 2010109.68 12.5% 2011 123.37 201077.92 8.1% 201184.26 7.5%2010 55.55 18.2% 2011 65.68 3.2%2010 22.66 23.9% 2011 28.07 20102.12 3.7220115.84 8.8%2010 70.65 8.8% 201176.89 2011 2011 43.532010 62.82 2010139.00 18.2% 163.74 23.2%

24 China Southern Airlines Company Limited Annual Report 2011 Management Discussion and Analysis OTHER NET INCOME Other net income increased by RMB545 million from RMB476 million in 2010 to RMB1,021 million in 2011, mainly due to the increase of government grants and gain on disposal of aircraft. Interest expense decreased by RMB198 million from RMB1,265 million in 2010 to RMB1,067 million in 2011 was mainly due to the decrease in weighted average bank and other loans balances during the year. Net exchange gain of RMB2,755 million was recorded in 2011, an increase of RMB1,009 million from RMB1,746 million in 2010, mainly due to Renminbi appreciated significantly against US dollar in 2011. INCOME TAX Income tax expense of RMB840 million was recorded in 2011, the decrease by RMB837 million from RMB1,677 million in 2010, 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 2011. LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE As at 31 December 2011, the Group s current liabilities exceeded its current assets by RMB24,928 million. For the year ended 31 December 2011, the Group recorded a net cash inflow from operating activities of RMB12,557 million, a net cash outflow from investing activities of RMB21,957 million and a net cash inflow from financing activities of RMB8,859 million, which in total resulted in a net decrease in cash and cash equivalents of RMB541 million. 20104.76 5.45201110.21 201012.65 1.98201110.67 201127.55 201017.46 10.092011 8.40 201016.77 8.37 2011 2011 12 31 249.282011 12 31 125.57 219.57 88.595.41 2011 2010 2011 2010 RMB million RMB million Net cash from operating activities 12,557 11,442 Net cash used in investing activities (21,957) (11,568) Net cash from financing activities 8,859 6,187 Net (decrease)/increase in cash and cash equivalents (541) 6,061

25 Management Discussion and Analysis In 2012 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 2011, the Group had banking facilities with several PRC banks for providing loan finance up to approximately RMB127,448 million (2010: RMB146,702 million), of which approximately RMB36,414 million (2010: RMB39,173 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 2012. Based on such forecast, the Directors have determined that adequate liquidity exists to finance the working capital, capital expenditure requirements and dividend payment of the Group during that period. In preparing the cash flow forecast, the directors have considered historical cash requirements of the Group as well as other key factors, including the availability of the above-mentioned loan finance which may impact the operations of the Group during the next twelve-month period. The Board is 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 analysis of the Group s borrowings are as follows: Composition of borrowings 2012 2011 12 31 1,274.4820101,467.02 2011 12 31 364.14 2010391.73 2012 12 3112 12 2011 2010 RMB million RMB million Change Total borrowings 63,663 55,630 14.4% Fixed rate borrowings 6,582 7,417 (11.3%) Floating rate borrowings 57,081 48,213 18.4% 6,582(10.3%) 7,417 (13.3%) 57,081(89.7%) 48,213(86.7%) 2011 Floating rate borrowings 2010 Fixed rate borrowings (RMB million)

26 China Southern Airlines Company Limited Annual Report 2011 Management Discussion and Analysis Analysis of borrowings by currency 2011 2010 RMB million RMB million USD 62,338 54,787 RMB 766 843 Others 559 Total 63,663 55,630 Maturity analysis of borrowings 2011 2010 RMB million RMB million Within 1 year 1 20,573 10,978 After 1 year but within 2 years 12 10,832 12,134 After 2 years but within 5 years 25 16,559 16,475 After 5 years 5 15,699 16,043 Total borrowings 63,663 55,630 The Group s capital structure at the end of the year is as follows: 2011 2010 Change 2011 2010 Net debts (RMB million) 75,790 64,051 18.3% Total equity (RMB million) 37,777 30,316 24.6% Ratio of net debt to total equity 201% 211% (4.7%) 37,777 (33.3%) 30,316 (32.1%) 75,790 (66.7%) 64,051 (67.9%) 2011 2010 Net debts (RMB million) Total equity

27 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 18.3% to RMB75,790 million at 31 December 2011, compared to RMB64,051 million at 31 December 2010. As at 31 December 2011, total equity attributable to equity shareholders of the Company amounted to RMB32,175 million, representing an increase of RMB5,358 million from RMB26,817 million at 31 December 2010. Total equity at 31 December 2011 amounted to RMB37,777 million (2010: RMB30,316 million). Ratio of net debt to total equity of the Group at 31 December 2011 was 201%, as compared to 211% at 31 December 2010. FINANCIAL RISK MANAGEMENT POLICY Foreign currency risk The Renminbi is not freely convertible into foreign currencies. All foreign exchange transactions involving Renminbi must take place either through the People s Bank of China ( 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 and Singapore dollars. Depreciation or appreciation of the Renminbi against foreign currencies affects the Group s results significantly because the Group s foreign currency payments generally exceed its foreign currency receipts. The Group is not able to hedge its foreign currency exposure effectively other than by retaining its foreign currency denominated earnings and receipts to the extent permitted by the State Administration of Foreign Exchange, or subject to certain restrictive conditions, entering into forward foreign exchange contracts with authorised banks. 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. 2011 12 31 2010 12 31 640.51 757.90 18.3% 2011 12 31 321.75 2010 12 31 268.1753.58 2011 12 31 377.772010 303.16 2011 12 31 201%2010 12 31211% 2009

28 China Southern Airlines Company Limited Annual Report 2011 Management Discussion and Analysis MAJOR CHARGE ON ASSETS As at 31 December 2011, certain aircraft of the Group with an aggregate carrying value of approximately RMB53,062 million (2010: certain aircraft and advance payments for aircraft of RMB49,063 million) were mortgaged under certain loans or certain lease agreements.. COMMITMENTS AND CONTINGENCIES Commitments As at 31 December 2011, the Group had capital commitments of approximately RMB65,040 million (2010: RMB76,615 million). Of such amounts, RMB61,250 million related to the acquisition of aircraft and related flight equipment and RMB3,790 million for other projects. As at 31 December 2011, the Group had capital commitments as follows: 2011 12 31 530.62 2010 490.63 2011 12 31 650.402010766.15 612.50 37.90 2011 12 31 2011 2010 RMB million RMB million Authorised and contracted for Capital contributions to a subsidiary 120 Capital contributions for acquisition of interests in associates 119 Share of capital commitments of a jointly controlled entity 27 14 266 14 Contingent Liabilities Details of contingent liabilities of the Group are set out in note 53 to the financial statements prepared under IFRSs. 53

29 Report of the Directors The Board hereby presents this Annual Report and the audited financial statements for the year ended 31 December 2011 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 2011, 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 2011 in accordance with IFRSs. Please refer to pages 58 to 173 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 2011 are set out on pages 177 and 178 of this Annual Report. DIVIDENDS No interim dividend was paid during the year ended 31 December 2011 (2010: nil). The Board recommends the payment of a final dividend of RMB2.00 (inclusive of applicable tax) per 10 shares for the year ended 31 December 2011, totalling approximately RMB1,963,513,400 based on the Company s 9,817,567,000 issued shares. A resolution for the dividend payment will be submitted for consideration at the 2011 annual general meeting of the Company. The dividend will be denominated and declared in RMB and payable in RMB to shareholders of A share, and in HKD to shareholders of H share. The profit distribution proposal is subject to shareholders approval at the general meeting. BANK LOANS AND OTHER BORROWINGS Details of the bank loans and other borrowings of the Company and the Group are set out in note 35 to the financial statements prepared under IFRSs. INTEREST CAPITALISATION For the year ended 31 December 2011, RMB205 million (2010: RMB186 million) was capitalised as the cost of construction in progress and property, plant and equipment in the financial statements prepared under IFRSs. 58173 177178 1,963,513,400 9,817,567,000 2 A H 35 2.05 1.86

30 China Southern Airlines Company Limited Annual Report 2011 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 2011 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 25.5% of the Group s total purchases. Purchases from the five largest suppliers accounted for an aggregate of approximately 37.7% of the Group s total purchases in 2011. 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 2011. TAXATION Details of taxation of the Company and the Group are set out in notes 16 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 46 to the financial statements prepared under IFRSs. EMOLUMENT POLICY As at 31 December 2011, the Group had an aggregate of 71,696 employees (2010: 65,085). 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 48(c) to the financial statements prepared under IFRSs. 21 25.5% 37.7% 5% 30% 16 28 46 71,69665,085 2011 11 30 H 48(c)