GUANGZHOU, 510405

PEOPLE’S REPUBLIC OF CHINA

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

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Title of each class		Name of each exchange on which registered
Ordinary H Shares of par value		New York Stock Exchange, Inc.
RMB1.00 per share
represented by American
Depositary Receipts

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

None

 

(Title of Class)

SEC 1852 (05-06)

Persons who respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

None

 

(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 5,521,150,000 ordinary A Shares of par value RMB1.00 per share and 2,482,417,000 ordinary H Shares of par value RMB1.00 per share were issued and outstanding as of December 31, 2009.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes þ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

¨ Yes þ No

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  þ    Accelerated filer  ¨  Non-accelerated filer ¨

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ¨		International Financial Reporting Standards þ		Other ¨
		as issued by the International Accounting
		Standards Board

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

¨  Item 17  ¨  Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes  þ  No

 

 

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TABLE OF CONTENTS

China Southern Airlines Company Limited

	Page
FORWARD-LOOKING STATEMENTS	1
INTRODUCTORY NOTE	1
GLOSSARY OF AIRLINE INDUSTRY TERMS	2
PART I	3
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.	3
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.	3
ITEM 3. KEY INFORMATION.	3
Selected Financial Data	3
Capitalization and Indebtedness	6
Reasons for the Offer and Use of Proceeds	6
Risk Factors	6
ITEM 4. INFORMATION ON THE COMPANY.	12
History and Development of the Company	12
Business Overview	13
Organizational Structure	29
Property, Plant and Equipment	31
ITEM 4A. UNRESOLVED STAFF COMMENTS.	32
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.	32
Critical Accounting Policies	32
Recently Pronounced International Financial Reporting Standards	33
Overview	33
Certain Financial Information and Operating Data by Geographic Region	34
Operating Results	35
Liquidity and Capital Resources	41
Contractual Obligations and Commitments	43
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.	43
Directors, Senior Management and Employees	43
Compensation	48
Board Practices	49

 

 

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Employees	50
Share Ownership	51
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.	51
Major Shareholders	51
Related Party Transactions	52
Interests of Experts and Counsel	55
ITEM 8. FINANCIAL INFORMATION.	55
Consolidated Statements and Other Financial Information	55
Significant Changes	55
Legal Proceedings	55
Dividend Information	55
ITEM 9. THE OFFER AND LISTING.	55
Offer and Listing Details	55
Plan of Distribution	57
Markets	57
Selling Shareholders	57
Dilution	57
Expenses of the Issue	57
ITEM 10. ADDITIONAL INFORMATION.	57
A. Share Capital	57
B. Memorandum and Articles of Association	57
C. Material Contracts	61
D. Exchange Controls	61
E. Taxation	62
F. Dividends and Paying Agents	66
G. Statement by Experts	66
H. Documents on Display	66
I. Subsidiary Information	66
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	66
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.	68
PART II	70

 

 

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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.	70
ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.	70
ITEM 15. CONTROLS AND PROCEDURES.	70
ITEM 16. RESERVED	71
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.	71
ITEM 16B. CODE OF ETHICS.	72
ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES.	72
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE	72
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.	72
ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT.	72
ITEM 16G. CORPORATE GOVERNANCE.	72
PART III	75
ITEM 17. FINANCIAL STATEMENTS.	75
ITEM 18. FINANCIAL STATEMENTS.	75
ITEM 19. EXHIBITS.	75
Index to Exhibits	75

 

 

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Year ended December 31,

		2009				2008				2007				2006				2005
Capacity
ASK (million)			123,441				112,767				109,733				97,059				88,361
ATK (million)			15,446				14,276				14,208				12,656				11,509
Kilometers flown (thousand)			746,133				686,236				675,127				594,957				539,844
Hours flown (thousand)			1,195				1,106				1,075				931				846
Number of landing and take-offs			616,296				556,914				543,789				481,810				438,674
Traffic
RPK (million)			93,002				83,184				81,727				69,582				61,923
RTK (million)			10,067				9,200				9,250				8,071				7,284
Passengers carried (thousand)			66,281				58,237				56,903				49,206				44,119
Cargo and mail carried (tons)			862,000				835,000				872,000				819,000				775,000
Load Factors
Passenger load factor (RPK/ASK) (%)			75.3				73.8				74.5				71.7				70.1
Overall load factor (RTK/ATK) (%)			65.2				64.4				65.1				63.8				63.3
Breakeven load factor (%)			68.1				73.8				64.8				65.1				67.1
Yield
Yield per RPK (RMB)			0.54				0.61				0.61				0.60				0.55
Yield per cargo and mail ton kilometers (RMB)			1.63				1.96				1.87				1.89				1.75
Yield per RTK (RMB)			5.26				5.86				5.75				5.57				5.13
Fleet
— Boeing			194				179				177				159				140
— Airbus			157				133				119				103				71
— McDonnell Douglas			16				25				25				36				36
— Others			11				11				11				11				14
Total aircraft in service at period end			378				348				332				309				261
Overall utilization rate (hours per day)			9.4				9.1				9.4				9.5				9.6
Cost
Operating cost per ATK (RMB)			3.58				4.33				3.73				3.63				3.44

Model		Capital Lease				Operating Lease				Average Remaining Lease Term
Boeing 777-200A and 777-200B			0				4				2.95
Boeing 757-200			0				8				1.21
Boeing 737-700			9				15				4.60
Boeing 737-800			12				40				6.25
Boeing 737-500			0				2				0.11
Boeing 737-300			0				4				2.36
Boeing 777F			2				0				9.92
Airbus 319-100			6				30				6.20
Airbus 320-200			15				15				6.23
Airbus 321-100			7				20				8.20
Airbus 330-200			4				2				7.90
Airbus 330-300			0				8				10.68
Total			55				148

Capital leases

The majority of the capital leases in respect to aircraft and related equipment have terms of ten to twelve years expiring during the years 2011 to 2019. As of December 31, 2009, the Group’s aggregate future minimum lease payments (including future finance charges) required under its capital leases were RMB15,812 million. The Group’s capital leases typically cover a significant portion of the relevant aircraft’s useful life and transfer the benefits and risks of ownership to the Group. Under its capital leases, the Group generally has an option to purchase the aircraft at or near the end of the lease term. As is customary in the case of capital leases, the Group’s obligations are secured by the related aircraft, as well as other collateral.

Operating Leases

As of December 31, 2009, the Group’s aggregate future minimum lease payments required under its operating leases were RMB30,366 million. As of the year end of 2009, the Group’s operating leases had original terms generally ranging from six to fifteen years from the date of delivery of the relevant aircraft, and the remaining terms of these leases ranged from one to eleven years. Pursuant to the terms of the operating leases, the Group is obligated to make rental payments based on the lease term, with no termination payment obligations or purchase option, and the lessor bears the economic benefits and risks of ownership. Under its operating leases, the Group has no option to purchase the aircraft and is required to return the aircraft in the agreed condition at the end of the lease term. Although title to the aircraft remains with the lessor, the Group is responsible during the lease term for the maintenance, servicing, insurance, repair and overhaul of the aircraft.

For capital leases or operating leases, the Group is obligated to indemnify the lessors against any withholding or similar taxes that may be imposed on the lessors by taxing authorities in China with regard to payments made pursuant to such leases. In accordance with relevant PRC tax regulations, a PRC lessee is liable to withhold PRC withholding tax in respect of any lease payments regularly made to an overseas lessor. Depending on the circumstances, this tax is generally imposed at a fixed rate ranging from 6% to 10% of the lease payments, or in certain cases, the interest components of such payments for capital lease. The PRC withholding tax payable in respect of the lease arrangements amounting RMB198 million, RMB142 million and RMB143 million during 2009, 2008 and 2007 respectively, have been included as part of the lease charges.

 

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Cargo and Mail

The Group also provides air cargo and mail services. A significant portion of these services are combined with passenger flights services. Currently, the Group has two Boeing 747 freighters and two Boeing 777 freighters mainly servicing four international cargo routes, Shanghai to Amsterdam, Shanghai to Anchorage to Chicago, Shanghai to Frankfurt and Shanghai to Urumchi to Frankfurt.

Currently, the Group conducts its cargo business primarily through its cargo division in Guangzhou and Shenzhen.

Sales, Reservations and Marketing

Passenger Ticket Sales and Reservations

The Group’s ticket sales and reservations are conducted by or through independent sales agents and the Group’s own network of exclusive sales offices as well as the CAAC’s sales offices and CSAHC’s associates. The Group has sales offices in Guangzhou and its other route bases. In addition, the Group maintains regional sales offices in other cities in China, including Beijing and Shanghai. The Group maintains international sales offices in Almaty, Amsterdam, Ashkhabad, Astana, Baku, Bangkok, Bishkek, Brisbane, Busan, Chicago, Daegu, Daejeon, Delhi, Dubai (Sharjah), Dushanbe, Frankfurt, Fukuoka, Hanoi, Ho Chi Minh City, Islamabad, Irkutsk, Jakarta, Jeddah, Khabarovsk, Kathmandu, Kuala Lumpur, Lagos, Lahore, London, Los Angeles, Luanda, Manila, Melbourne, Moscow, New York, Novosibirsk, Osaka, Osh, Paris, Penang, Phnom Penh, Samarkand, Sapporo, Seoul, Singapore, Sydney, Tashkent, Tehran, Tokyo, Vancouver, Vladivostok and Yangon.

The Group has agency agreements with airlines in the Asia-Pacific region, Europe, the United States and Africa for the processing of ticket sales and reservations on a reciprocal basis. In 2009, approximately 11.02% of all ticket sales for the Group’s scheduled flights were made by the Group’s network of sales offices and CSAHC’s associates. The Group also sells tickets and accepts reservations through an extensive network of non-exclusive independent sales agents. Under the agency agreements with these sales agents, the Group pays commissions based on the value of tickets sold. The Group pays independent sales agents a commission of 3%-9% of the ticket price. Sales agents are typically permitted to withhold their commission from the proceeds of ticket sales that are remitted to the Group. In 2009, independent sales agents accounted for approximately 88.98% of the Group’s ticket sales for its scheduled flights.

Substantially all of the Group’s sales offices and agents in China are linked electronically to the CAAC’s computerized ticketing and reservations system, which is in turn linked to all domestic airlines for flights throughout China. The Group has also entered into membership agreements with several international reservation systems, including ABACUS in Southeast Asia, SABRE and GALILEO in the United States, AMADEUS in Europe and INFINI in Japan. These systems facilitate reservations and sales of tickets for the Group’s international flights. During 2008, the Group further improved and optimized its online sales network, and launched Tencent sales counters in cooperation with Tencent Technology Limited, thus expanded the consumer sales network of the Group. Meanwhile, the Group upgraded and reconstructed the SMS platform, and launched the 95539 services hotlines, which provide SMS information services on mileage, flight schedule, flight status, and air ticket price.

Cargo

The Group’s cargo and mail services are promoted through its own cargo divisions and independent cargo agents both within and outside China that track available space among all airlines. In particular, the Group employs a number of cargo agents in the Pearl River Delta region. The Group generally pays such agents a commission of 4% - 5% of the relevant cargo freight rate for domestic and international services.

 

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According to CAAC statistics, the following table sets forth the Group’s market share of passengers carried, cargo and mail carried and total traffic of Chinese airlines for the years indicated.

						Cargo and Mail
Airport		Passenger carried (% of total)				Carried (% of total)				Departing flight (% of total)
Beijing			18.05	%			11.33	%			17.22	%
Shanghai Pudong			8.68	%			2.83	%			9.18	%
Guangzhou			49.26	%			26.84	%			48.73	%
Shanghai Hongqiao			15.78	%			18.69	%			15.53	%
Shenzhen			29.06	%			21.96	%			27.69	%
Chengdu			15.01	%			15.71	%			13.67	%
Kunming			16.91	%			19.24	%			15.75	%
Hangzhou			37.47	%			31.99	%			36.06	%
Xi’an			19.27	%			23.03	%			17.97	%
Chongqing			23.12	%			26.43	%			21.85	%

 

Insurance

The CAAC maintains fleet and legal liability insurance on behalf of the Group and all other Chinese airlines with PICC Property and Casualty Company Limited, or PICCP&C, and China Pacific Property Insurance Company Ltd., under the PICCP&C master policy. The Group maintains aviation hull all risks, spares and airline liability insurance, aircraft hull all risks and spare engines deductible insurance, aviation hull war and allied perils policy of the type and in the amount customary in the Chinese aviation industry.

Under the relevant PRC laws, civil liability of Chinese airlines for death or injuries suffered by passengers on domestic flights is limited to RMB400,000 (approximately US$58,581) per passenger. As of July 31, 2006, the Convention for the Unification of Certain Rules for International Carriage by Air of 1999, or Montreal Convention, became effective in China. Under the Montreal Convention, carriers of international flights are strictly liable for proven damages up to 100,000 Special Drawing Rights and beyond that, carriers are only able to exclude liability if they can prove that the damage was not due to negligence or other wrongful act of the carrier (and its agents), or the damage arose solely from the negligence or other wrongful act of a third party. The Group believes that it maintains adequate insurance coverage for the civil liability that can be imposed in respect of death or injuries to passengers under Chinese law, the Montreal Convention and any agreement which the Group is subject to.

 

 

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The CAAC allocates insurance premiums payable in respect of the PICCP&C master policy to each participating airline based on the value of the airline’s insured aircraft or, in the case of leased aircraft, based on the amount required by the terms of the lease. Insurance claims made by any participating airline may cause the premiums paid by the Group under the PICCP&C master policy to increase. PICCP&C’s practice has been to reinsure a substantial portion of its aircraft insurance business through reinsurance brokers on the London reinsurance market.

Intellectual Property

The Group’s businesses and operations, other than the businesses and operations of Xiamen Airlines and Chongqing Airlines, are conducted under the names “China Southern” and “China Southern Airlines” in both English and Chinese. The Group uses as its logo a stylized rendition of a kapok plant. Xiamen Airlines conducts its businesses and operations under the name of “Xiamen Airlines” in English and Chinese and uses its own logo depicting a stylized rendition of an egret. Chongqing Airlines conducts its business and operations under the name of “Chongqing Airlines” in English and Chinese and uses its own logo depicting a cross of two rivers.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS.

Not applicable.

Promotional and sales expenses, which accounted for 5.7% of total operating expenses, increased by 2.0% from RMB3,421 million in 2007 to RMB3,491 million in 2008.

General and administrative expenses, which accounted for 3.3% of the total operating expenses, increased by 8.9% from RMB1,874 million in 2007 to RMB2,041 million in 2008.

Impairment on property, plant and equipment, which accounted for 3.1% of the total operating expenses, increased by RMB1,775 million from RMB109 million in 2007 to RMB1,884 million in 2008. The impairment losses recognised in 2008 mainly comprise the following:

-

During the year, in view of the age and operating efficiency of the Group’s fleet of Boeing 777-200A aircraft, Airbus 300 aircraft and McDonnell Douglas 90 aircraft, the Group determined to dispose of these aircraft. The Group has commenced its process of seeking buyers for these aircraft. As a result, the Group assessed the recoverable amounts of these aircraft. Based on this assessment, the carrying amount of the aircraft and the related fleet assets was written down by RMB1,590 million. The estimates of recoverable amounts were based on the aircraft’s fair value less costs to sell, determined by reference to the recent observable market prices for the respective model of aircraft.

-

There has been a decrease in demand of cargo transportation services as a result of the current economic conditions. In addition, the operating efficiency of the Group’s cargo freighters Boeing 747 is not satisfactory due to lack of economy of scale for the existing small fleet of cargo freighters. As such, the Group assessed the recoverable amounts of its cargo freighters and the related fleet assets. Based on this assessment, the carrying amount of the cargo freighters was written down by RMB291 million. The estimates of recoverable amounts were based on the aircraft’s fair value less costs to sell, determined by reference to the recent observable market prices for the cargo freighters.

Depreciation and amortisation, which accounted for 9.3% of total operating expenses, increased by 3.5% from RMB5,554 million in 2007 to RMB5,746 million in 2008, mainly resulting from the additional depreciation charge on aircraft delivered in 2007 and 2008.

Operating (loss)/profit

Operating loss of RMB5,646 million was recorded in 2008 as compared to an operating profit RMB1,881 million in 2007. This was mainly because operating revenue increased by RMB887 million or 1.6% in 2008 while operating expenses increased by RMB8,811 million or 16.6% in the same period.

Other income/(expenses)

Interest expense decreased by 13.3% from RMB2,291 million in 2007 to RMB1,987 million in 2008, mainly due to the decrease in average effective interest rate of bank and other loans and obligations under capital leases. Interest income increased by 41.1% from RMB73 million in 2007 to RMB103 million in 2008, mainly attributable to the increase in average bank deposits balances during 2008.

Net exchange gain decreased by 8.5% from RMB2,832 million in 2007 to RMB2,592 million in 2008. Such amount mainly represented an unrealised translation gain on retranslation of foreign currency denominated liabilities at the year end.

Taxation

Income tax expenses decreased by 92.7% from RMB847 million in 2007 to RMB62 million in 2008. This was mainly attributable to the net effect of the operating loss of the Group and the effect of certain deferred tax assets not recognised.

In view of the unutilized bank facilities of RMB77,720 million, the anticipated non-public share subscription and cash generated from operations, the Group expects that it will have sufficient funding sources to meet its cash requirements in the foreseeable future.