UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549



FORM 20-F



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



OR



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



For the fiscal year ended December 31, 2012



OR



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



For the transition period from _________
to



OR



| |  ̈ | SHELL COMPANY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | -------------------------------------------------------------------------------------------



Date of event requiring this shell company
report _____________



Commission file number 1-14660





(Exact name of Registrant as specified in
its charter)



CHINA SOUTHERN AIRLINES COMPANY LIMITED



(Translation of Registrant’s name
into English)



THE PEOPLE’S REPUBLIC OF CHINA



(Jurisdiction of incorporation or organization)



278 JI CHANG ROAD

GUANGZHOU, 510405



PEOPLE’S REPUBLIC OF CHINA



(Address of principal executive offices)



Mr. Xie Bing

Telephone: +86 20 86124462

E-mail:ir@csair.com

Fax: +86 20 86659040

Address: 278 JI CHANG ROAD

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:



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



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



None



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



None



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: 7,022,650,000
A Shares of par value RMB1.00 per share and 2,794,917,000 H Shares of par value RMB1.00 per share.



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



 ̈YesþNo



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.



 ̈YesþNo



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.



þYes ̈No



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files).

 ̈YesþNo



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 filerþ | 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 Standardsþ | 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).



 ̈YesþNo











TABLE OF CONTENTS





|FORWARD-LOOKING STATEMENTS                                                                | 4                                                       
|----------------------------------------------------------------------------------------- | --------------------------------------------------------
|INTRODUCTORY NOTE                                                                         | 4                                                       
|GLOSSARY OF AIRLINE INDUSTRY TERMS                                                        | 5                                                       
|PART I                                                                                    | 6                                                       
|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.                            | 6                                                       
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.                                          | 6                                                       
|ITEM 3. KEY INFORMATION.                                                                  | 6                                                       
|A.                                                                                        | Selected Financial Data.                                
|B.                                                                                        | Capitalization and Indebtedness.                        
|C.                                                                                        | Reasons for the Offer and Use of Proceeds.              
|D.                                                                                        | Risk Factors.                                           
|ITEM 4. INFORMATION ON THE COMPANY.                                                       | 15                                                      
|A.                                                                                        | History and Development of the Company                  
|B.                                                                                        | Business Overview                                       
|C.                                                                                        | Organizational Structure.                               
|D.                                                                                        | Property, Plant and Equipment.                          
|ITEM 4A. UNRESOLVED STAFF COMMENTS.                                                       | 35                                                      
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.                                     | 35                                                      
|Critical Accounting Policies                                                              | 35                                                      
|Recently Pronounced International Financial Reporting Standards                           | 36                                                      
|Overview                                                                                  | 36                                                      
|Certain Financial Information and Operating Data by Geographic Region                     | 37                                                      
|A. Operating Results                                                                      | 38                                                      
|B. Liquidity and Capital Resources                                                        | 44                                                      
|ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.                                       | 47                                                      
|A.                                                                                        | Directors, Senior Management and Employees.             
|B.                                                                                        | Compensation.                                           
|C.                                                                                        | Board Practices.                                        
|D.                                                                                        | Employees.                                              
|E.                                                                                        | Share Ownership.                                        
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.                                | 56                                                      
|A.                                                                                        | Major Shareholders.                                     
|B.                                                                                        | Related Party Transactions.                             
|All related party transactions have been approved by Independent Non-executive Directors. | 59                                                      
|C.                                                                                        | Interests of Experts and Counsel.                       
|ITEM 8. FINANCIAL INFORMATION.                                                            | 60                                                      
|A.                                                                                        | Consolidated Statements and Other Financial Information.
|B.                                                                                        | Significant Changes.                                    
|ITEM 9. THE OFFER AND LISTING.                                                            | 60                                                      
|A.                                                                                        | Offer and Listing Details.                              
|B.                                                                                        | Plan of Distribution.                                   
|C.                                                                                        | Markets.                                                
|D.                                                                                        | Selling Shareholders.                                   
|E.                                                                                        | Dilution.                                               
|F.                                                                                        | Expenses of the Issue.                                  
|ITEM 10. ADDITIONAL INFORMATION.                                                          | 62                                                      
|A.                                                                                        | Share Capital.                                          
|B.                                                                                        | Memorandum and Articles of Association.                 
|C.                                                                                        | Material Contracts.                                     
|D.                                                                                        | Exchange Controls.                                      
|E.                                                                                        | Taxation.                                               
|F.                                                                                        | Dividends and Paying Agents.                            
|G.                                                                                        | Statement by Experts.                                   
|H.                                                                                        | Documents on Display.                                   
|I.                                                                                        | Subsidiary Information.                                 
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                      | 70                                                      
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.                          | 71                                                      
|A.                                                                                        | Debt Securities.                                        
|B.                                                                                        | Warrants and Rights.                                    
|C.                                                                                        | Other Securities.                                       
|D.                                                                                        | American Depositary Shares.                             
|PART II                                                                                   | 72                                                      
|ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.                                 | 72                                                      





2









|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS. | 72                                                                                                                  
|-------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------
|A.                                                                                     | Material Modifications to the Instruments Defining the Rights of Security Holders.                                  
|B.                                                                                     | Material Modifications to the Rights of Registered Securities by Issuing or Modifying any other Class of Securities.
|C.                                                                                     | Withdrawal or Substitution of a Material Amount of the Assets Securing any Registered Securities.                   
|D.                                                                                     | Change of Trustees or Paying Agents for any Registered Securities.                                                  
|E.                                                                                     | Use of Proceeds.                                                                                                    
|ITEM 15. CONTROLS AND PROCEDURES.                                                      | 73                                                                                                                  
|ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.                                            | 74                                                                                                                  
|ITEM 16B. CODE OF ETHICS.                                                              | 74                                                                                                                  
|ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES.                                      | 75                                                                                                                  
|ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE                    | 75                                                                                                                  
|ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.      | 75                                                                                                                  
|ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT.                               | 75                                                                                                                  
|ITEM 16G. CORPORATE GOVERNANCE.                                                        | 76                                                                                                                  
|ITEM 16. MINE SAFETY DISCLOSURE.                                                       | 78                                                                                                                  
|ITEM 17. FINANCIAL STATEMENTS.                                                         | 78                                                                                                                  
|ITEM 18. FINANCIAL STATEMENTS.                                                         | 78                                                                                                                  
|ITEM 19. EXHIBITS.                                                                     | 78                                                                                                                  
|Index to Exhibits                                                                      | 78                                                                                                                  





3







FORWARD-LOOKING
STATEMENTS



This Annual Report
contains forward-looking statements. These statements appear in a number of different places in this Annual Report. A forward-looking
statement is usually identified by the use in this Annual Report of certain terminology such as “estimate”, “project”,
“expect”, “intend”, “believe”, “plan”, “anticipate”, “may”,
or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties. Forward-looking
statements include statements regarding the outlook for our future operations, forecasts of future costs and expenditures, evaluation
of market conditions, the outcome of legal proceedings (if any), the adequacy of reserves, or other business plans. You are cautioned
that such forward-looking statements are not guarantees and involve risks, assumptions and uncertainties. Our actual results may
differ materially from those in the forward-looking statements due to risks facing the Company or due to actual facts differing
from the assumptions underlying those forward-looking statements.



Some of these risks
and assumptions, in addition to those identified under Item 3, “Key Information - Risk Factors,” include:



| | · | general economic and business conditions in markets where the Company
operates, including changes in interest rates;
| | - | --------------------------------------------------------------------------------------------------------------------



| | · | the effects of competition on the demand for and price of our services;
| | - | -----------------------------------------------------------------------



| | · | natural phenomena;
| | - | ------------------



| | · | the impact of unusual events on our business and operations;
| | - | ------------------------------------------------------------



| | · | actions by government authorities, including changes in government
regulations, and changes in the CAAC’s regulatory policies;
| | - | ------------------------------------------------------------------------------------------------------------------------------



| | · | our relationship with China Southern Air Holding Company (the “CSAHC”);
| | - | -----------------------------------------------------------------------



| | · | uncertainties associated with legal proceedings;
| | - | ------------------------------------------------



| | · | technological development;
| | - | --------------------------



| | · | our ability to attract key personnel and attract new talent;
| | - | ------------------------------------------------------------



| | · | future decisions by management in response to changing conditions;
| | - | ------------------------------------------------------------------



| | · | the Company’s ability to execute prospective business plans;
| | - | ------------------------------------------------------------



| | · | the availability of qualified flight personnel and airport facilities;
and
| | - | --------------------------------------------------------------------------



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



The Company advises
you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to the Company,
the Group and persons acting on their behalf.



INTRODUCTORY NOTE



In this Annual Report,
unless the context indicates otherwise, the “Company”, “we”, “us” and “our” means
China Southern Airlines Company Limited, a joint stock company incorporated in China on March 25, 1995, the “Group”
means the Company and its consolidated subsidiaries, and “CSAHC” means China Southern Air Holding Company, the Company’s
parent company which holds a 53.12% interest in the Company as of April 19, 2013.



References to “China”
or the “PRC” are to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan. References to “Renminbi”
or “RMB” are to the currency of China, references to “U.S. dollars”, “$” or “US$”
are to the currency of the United States of America (the “U.S.” or “United States”), and reference to “HK$”
is to the currency of Hong Kong. Reference to the “Chinese government” is to the national government of China. References
to “Hong Kong” or “Hong Kong SAR” are to the Hong Kong Special Administrative Region of the PRC. References
to “Macau” or “Macau SAR” are to the Macau Special Administrative Region of the PRC.



The Company presents
its consolidated financial statements in Renminbi. The consolidated financial statements of the Company for the year ended December
31, 2012 (the “Financial Statements”) have been prepared in accordance with all applicable International Financial
Reporting Standards (“IFRSs”), which collective term includes all applicable individual IFRSs, International Accounting
Standards (“IASs”) and Interpretations issued by the International Accounting Standards Board (the “IASB”).



4







Solely for the convenience
of the readers, this Annual Report contains translations of certain Renminbi amounts into U.S. dollars at the rate of US$1.00 =
RMB6.2855, which is the average of the buying and selling rates as quoted by the People’s
Bank of China at the close of business on December 31, 2012. No representation is made that the Renminbi amounts or U.S. dollar
amounts included in this Annual Report could have been or could be converted into U.S. dollars or Renminbi, as the case may be,
at any particular rate or at all. Any discrepancies in the tables included herein between the amounts listed and the totals are
due to rounding.



GLOSSARY OF AIRLINE INDUSTRY TERMS



In this Annual Report, unless the context
indicates otherwise, the following terms have the respective meanings set forth below.



|Capacity Measurements                    |                                                                                                                                                                        
|---------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                         |                                                                                                                                                                        
|“available seat kilometers” or “ASKs”    | the number of seats made available for sale multiplied by the kilometers flown                                                                                         
|                                         |                                                                                                                                                                        
|“available ton kilometers” or “ATKs”     | the tons of capacity available for the transportation of revenue load (passengers and cargo) multiplied by the kilometers flown                                        
|                                         |                                                                                                                                                                        
|Traffic Measurements                     |                                                                                                                                                                        
|                                         |                                                                                                                                                                        
|“cargo ton kilometers”                   | the load in tons multiplied by the kilometers flown                                                                                                                    
|                                         |                                                                                                                                                                        
|“revenue passenger kilometers” or “RPKs” | the number of passengers carried multiplied by the kilometers flown                                                                                                    
|                                         |                                                                                                                                                                        
|“revenue ton kilometers” or “RTKs”       | the load (passenger and cargo) in tons multiplied by the kilometers flown                                                                                              
|                                         |                                                                                                                                                                        
|Yield Measurements                       |                                                                                                                                                                        
|                                         |                                                                                                                                                                        
|“average yield”                          | revenue from airline operations (passenger and cargo) divided by RTKs                                                                                                  
|                                         |                                                                                                                                                                        
|“cargo yield”                            | revenue from cargo operations divided by cargo ton kilometers                                                                                                          
|                                         |                                                                                                                                                                        
|“passenger yield”                        | revenue from passenger operations divided by RPKs                                                                                                                      
|                                         |                                                                                                                                                                        
|“ton”                                    | a metric ton, equivalent to 2,204.6 pounds                                                                                                                             
|                                         |                                                                                                                                                                        
|Load Factors                             |                                                                                                                                                                        
|                                         |                                                                                                                                                                        
|“breakeven load factor”                  | the load factor required to equate scheduled traffic revenue with operating costs assuming that total operating surplus is attributable to scheduled traffic operations
|                                         |                                                                                                                                                                        
|“overall load factor”                    | RTKs expressed as a percentage of ATKs                                                                                                                                 
|                                         |                                                                                                                                                                        
|“passenger load factor”                  | RPKs expressed as a percentage of ASKs                                                                                                                                 
|                                         |                                                                                                                                                                        
|Utilization                              |                                                                                                                                                                        
|                                         |                                                                                                                                                                        
|“utilization rates”                      | the actual number of flight and taxi hours per aircraft per operating day                                                                                              
|                                         |                                                                                                                                                                        
|Equipment                                |                                                                                                                                                                        
|                                         |                                                                                                                                                                        
|“expendables”                            | aircraft parts that are ordinarily used up and replaced with new parts                                                                                                 
|                                         |                                                                                                                                                                        
|“rotables”                               | aircraft parts that are ordinarily repaired and reused                                                                                                                 
|                                         |                                                                                                                                                                        
|Others                                   |                                                                                                                                                                        
|                                         |                                                                                                                                                                        
|“ADR”                                    | American Depositary Receipt                                                                                                                                            
|                                         |                                                                                                                                                                        
|“A Shares”                               | Shares issued by the Company to investors in the PRC for subscription in RMB, with par value of RMB1.00 each                                                           
|                                         |                                                                                                                                                                        
|“CAAC”                                   | Civil Aviation Administration of China                                                                                                                                 
|                                         |                                                                                                                                                                        
|“CAOSC”                                  | China Aviation Oil Supplies Company                                                                                                                                    
|                                         |                                                                                                                                                                        



5







|             |                                                                                                                                                                   
|------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|“CSRC”       | China Securities Regulatory Commission                                                                                                                            
|             |                                                                                                                                                                   
|“H Shares”   | Shares issued by the Company, listed on The Stock Exchange of Hong Kong Limited and subscribed for and traded in Hong Kong dollars, with par value of RMB1.00 each
|             |                                                                                                                                                                   
|“Nan Lung”   | Nan Lung Holding Limited (a wholly-owned subsidiary of CSAHC)                                                                                                     
|             |                                                                                                                                                                   
|“NDRC”       | National Development and Reform Commission of China                                                                                                               
|             |                                                                                                                                                                   
|“SA Finance” | Southern Airlines Group Finance Company Limited                                                                                                                   
|             |                                                                                                                                                                   
|“SAFE”       | State Administration of Foreign Exchange of China                                                                                                                 
|             |                                                                                                                                                                   
|“SEC”        | United States Securities and Exchange Commission                                                                                                                  



PART I



ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.



Not applicable.



ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.



Not applicable.



ITEM 3. KEY INFORMATION.



| | A. | Selected Financial Data.
| | -- | ------------------------



The following tables
present selected financial data for the five-year period ended December 31, 2012. The selected consolidated income statement data
for the three-year period ended December 31, 2010, 2011 and 2012 and selected consolidated statement of financial position data
as of December 31, 2011 and 2012 excluding basic and diluted earnings per ADR, are derived from the audited consolidated financial
statements of the Company, including the related notes, included elsewhere in this Annual Report. The selected consolidated income
statement data for the years ended December 31, 2008 and 2009
and selected consolidated statement of financial position data as of December 31, 2008, 2009 and 2010 are derived from the Company’s
audited consolidated financial statements that are not included in this Annual Report.



Moreover, the selected
financial data should be read in conjunction with our consolidated financial statements together with accompanying notes and “Item
5. Operating and Financial Review and Prospects” which are included elsewhere in this Annual Report. Our consolidated financial
statements are prepared and presented in accordance with International Financial Reporting Standards, or IFRSs.



|                                             |  | Year ended December 31,                         |        
|-------------------------------------------- |  | ----------------------------------------------- | -------
|                                             |  | 2012 US$                                        |        
|                                             |  | (in million, except per share and per ADR data) |        
|Consolidated Income Statement Data:         
|                                             |  |                                                 |        
|Operating revenue                            |  |                                                 | 15,832 
|Operating expenses                           |  |                                                 | (15,254
|Operating profit/(loss)                      |  |                                                 | 811    
|Profit/(loss) before taxation                |  |                                                 | 754    
|Profit/(loss) for the year                   |  |                                                 | 602    
|Profit/(loss) attributable to:               |  |                                                 |        
|Equity shareholders of the Company           |  |                                                 | 417    
|Non-controlling interests                    |  |                                                 | 185    
|Basic and diluted earnings/(loss) per share  |  |                                                 | 0.04   
|Basic and diluted earnings/(loss) per ADR(1) |  |                                                 | 2.12   



(1) Basic and diluted earnings/(loss) per share have been computed
by dividing profit/(loss) attributable to equity shareholders of the Company by the weighted average number of shares in issue.
Basic and diluted earnings/(loss) per ADR have been computed as if all of our issued or potential ordinary shares, including domestic
shares and H shares, are represented by ADRs during each of the years presented. Each ADR represents 50 shares.

6







|                                                                                   |  | Year ended December 31, |       
|---------------------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                                   |  | 2012 US$                |       
|                                                                                   |  | (in million)            |       
|Consolidated Statement of Financial Position Data:                                
|                                                                                   |  |                         |       
|Cash and cash equivalents                                                          |  |                         | 1,604 
|Other current assets                                                               |  |                         | 1,067 
|Asset classified as held for sale                                                  |  |                         | -     
|Property, plant and equipment, net                                                 |  |                         | 15,916
|Total assets                                                                       |  |                         | 22,664
|Bank and other loans, including long-term bank and other loans due within one year |  |                         | 3,484 
|Short-term financing bills                                                         |  |                         | -     
|Obligations under capital leases due within one year                               |  |                         | 397   
|Bank and other loans, excluding balance due within one year                        |  |                         | 4,804 
|Obligations under capital leases, excluding balance due within one year            |  |                         | 3,082 
|Total equity                                                                       |  |                         | 6,322 
|Number of shares (in million)                                                      |  |                         | 9,818 



Selected Operating Data



The operating data
and the profit analysis and comparison for other years below is calculated and disclosed in accordance with the statistical standards,
which have been implemented by the Group since January 1, 2001. See “Glossary of Airline Industry Terms” at the front
of this Annual Report for definitions of certain terms used herein.



|                                              |  | Year ended December 31, |          
|--------------------------------------------- |  | ----------------------- | ---------
|                                              |  | 2012                    |          
|Capacity                                      |  |                         |          
|ASK (million)                                 |  |                         | 169,569  
|ATK (million)                                 |  |                         | 23,065   
|Kilometers flown (thousand)                   |  |                         | 1,052,495
|Hours flown (thousand)                        |  |                         | 1,681    
|Number of landing and take-offs               |  |                         | 757,022  
|Traffic                                       |  |                         |          
|RPK (million)                                 |  |                         | 135,535  
|RTK (million)                                 |  |                         | 16,160   
|Passengers carried (thousand)                 |  |                         | 86,485   
|Cargo and mail carried (tons)                 |  |                         | 1,232,000
|Load Factors                                  |  |                         |          
|Passenger load factor (RPK/ASK) (%)           |  |                         | 79.9     
|Overall load factor (RTK/ATK) (%)             |  |                         | 70.1     
|Breakeven load factor (%)                     |  |                         | 69.9     
|Yield                                         |  |                         |          
|Yield per RPK (RMB)                           |  |                         | 0.66     
|Yield per cargo and mail ton kilometers (RMB) |  |                         | 1.59     
|Yield per RTK (RMB)                           |  |                         | 5.95     
|Fleet                                         |  |                         |          
|— Boeing                                      |  |                         | 243      
|— Airbus                                      |  |                         | 225      
|— McDonnell Douglas                           |  |                         | -        
|— Others                                      |  |                         | 23       
|Total aircraft in service at period end       |  |                         | 491      
|Overall utilization rate (hours per day)      |  |                         | 9.8      



7







Exchange Rate Information



The following table
sets forth certain information concerning exchange rates, based on the noon buying rates in New York City for cable transfers in
foreign currencies, as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”),
between Renminbi and U.S. dollars for the five most recent financial years.



|Period               |  | Period End |        |  | Average (1)(RMB per 
US$) |  |        | High |  |  | Low    | 
|-------------------- |  | ---------- | ------ |  | ------------------------- |  | ------ | ---- |  |  | ------ | 
|Annual Exchange Rate |  |            |        |  |                           |  |        |      |  |  |        | 
|                     |  |            |        |  |                           |  |        |      |  |  |        | 
|2008                 |  |            | 6.8225 |  |                           |  | 6.9477 |      |  |  | 7.2946 | 
|2009                 |  |            | 6.8259 |  |                           |  | 6.8307 |      |  |  | 6.8470 | 
|2010                 |  |            | 6.6000 |  |                           |  | 6.7696 |      |  |  | 6.8330 | 
|2011                 |  |            | 6.2939 |  |                           |  | 6.4630 |      |  |  | 6.6364 | 
|2012                 |  |            | 6.2301 |  |                           |  | 6.3088 |      |  |  | 6.3879 | 



| | (1) | Determined by averaging the rates on the last business day of each month during the relevant period.
| | --- | ----------------------------------------------------------------------------------------------------



The following table
sets out the range of high and low exchange rates, based on the Noon Buying Rate, between Renminbi and U.S. dollars, for the following
periods.



|Period                            |  | High |        |  | Low | 
|--------------------------------- |  | ---- | ------ |  | --- | 
|Monthly Exchange Rate             |  |      |        |  |     | 
|October 2012                      |  |      | 6.2877 |  |     | 
|November 2012                     |  |      | 6.2454 |  |     | 
|December 2012                     |  |      | 6.2502 |  |     | 
|January 2013                      |  |      | 6.2303 |  |     | 
|February 2013                     |  |      | 6.2438 |  |     | 
|March 2013                        |  |      | 6.2246 |  |     | 
|April 2013 (up to April 12, 2013) |  |      | 6.2078 |  |     | 



| | B. | Capitalization and Indebtedness.
| | -- | --------------------------------



Not applicable.



| | C. | Reasons for the Offer and Use of Proceeds.
| | -- | ------------------------------------------



Not applicable.



| | D. | Risk Factors.
| | -- | -------------



Risks Relating to our Business



We are indirectly
majority owned by the Chinese government, which may exert influence in a manner that may conflict with the interests of holders
of ADRs, H Shares and A Shares.



Major Chinese airlines
are wholly- or majority-owned either by the Chinese government or by provincial or municipal governments in China. CSAHC, an entity
wholly-owned by the Chinese government, holds and exercises the rights of ownership of 53.12% of the equity of the Company. In
addition, CSAHC also has the right to subscribe up to 487,804,878 A shares at RMB4.1 each pursuant to the A Share Subscription
Agreement dated June 11, 2012. As of the date of this annual report, the proposed transaction is pending for the approval of CSRC.
The interests of the Chinese government in the Company and in other Chinese airlines may conflict with the interests of the holders
of the ADRs, H Shares and A Shares. The public policy considerations of the Chinese government in regulating the Chinese commercial
aviation industry may also conflict with its indirect ownership interest in the Company. In addition, the Company may accept further
capital injection from CSAHC through non-public subscriptions, which may have dilutive impact for other holders of ADRs, H Shares
and A Shares.



8







Due to high
degree of operating leverage and high fixed costs, a decrease in revenues of the Group could result in a disproportionately
higher decrease in its profit for the year. The results of the Group’s operations are also significantly exposed to
fluctuations in foreign exchange rates.



The airline
industry is generally characterized by a high degree of operating leverage. In addition, due to high fixed costs, the
expenses relating to the operation of any flight do not vary proportionately with the number of passengers carried, while
revenues generated from a flight are directly related to the number of passengers carried and the fare structure of such
flight. Accordingly, a decrease in revenues could result in a disproportionately higher decrease in its profit for the
year. Moreover, as the Group has substantial obligations denominated in foreign currencies, its results of operations
are significantly affected by fluctuations in foreign exchange rates, particularly by fluctuations in the Renminbi-U.S.
dollar exchange rate. Net exchange gain decreased by RMB2,488 million, from RMB2,755
million in 2011 to RMB267 million in 2012 mainly attributable to the exchange gain
arising from translation and settlement of bank and other loans balances and finance lease obligations denominated in U.S.
dollars, which was mainly because the exchange rate of Renminbi to U.S. dollar appreciated significantly in 2011 while
remained stable in 2012.



The Group has
significant committed capital expenditures in the next three years, but may face challenges and difficulties as it seeks to maintain
liquidity.



We have a substantial
amount of debt, lease and other obligations, and will continue to have a substantial amount of debt, lease and other obligations
in the future. As of December 31, 2012, the Group’s current liabilities exceeded its current assets by RMB31,944 million.
The Group generally maintains sound operating cash flow. However, our substantial indebtedness and other obligations may in the
future negatively impact our liquidity. In addition, the Group has significant committed capital expenditures in the next three
years, due to aircraft acquisitions. In 2012 and thereafter, the liquidity of the Group is primarily dependent on its ability to
maintain adequate cash inflow from operations to meet its debt obligations as they fall due, andits ability to obtain adequate external financing to meet its committed future capital expenditures. If our operating cash
flow is materially and adversely affected by factors such as increased competition, a significant decrease in demand for our services,
or a significant increase in jet fuel prices, our liquidity would be materially and adversely affected. Moreover, the Group may
not be able to meet its debt obligations as they fall due and commit future capital expenditures if certain assumptions about the
availability of external financing on acceptable terms are inaccurate. In particular, our ability to obtain adequate external funding
may be impacted by the economic stagnation globally. If we are unable to obtain adequate financing for our capital requirements,
our liquidity and operations would be materially and adversely affected.



As of
December 31, 2012, the Group had banking facilities with several PRC commercial banks for providing loan finance up to approximately
RMB173,162 million, of which approximately RMB60,369 million was utilized. Our directors believe that sufficient financing will
be available to the Group in 2013. However there can be no assurance that such loan financing will be available on terms acceptable
to the Group or at all.



CSAHC will continue
to be our controlling shareholder, and its interests may conflict with those of the Group. CSAHC and certain of its affiliates
will continue to provide certain important services to the Group. Any disruption of the provision of services by CSAHC or its affiliates
could affect the Group’s operations and financial conditions.



CSAHC will continue
to be the controlling shareholder of the Company. CSAHC and certain of its affiliates will continue to provide certain important
services to the Group, including the import and export of aircraft spare parts and other flight equipment, advertising services,
provision of air ticket selling services, property management services, leasing of properties and financial services, and repair,
overhaul and maintenance services on jet engines. The interests of CSAHC may conflict with those of the Group. In addition, any
disruption of the provision of services by CSAHC’s affiliates or a default by CSAHC of its obligations owed to the Group
could affect the Group’s operations and financial conditions. In particular, as part of its cash management system, the Group
periodically places certain amount of demand deposits after independent shareholders’ approval with SA Finance, a PRC authorized
financial institution controlled by CSAHC and an associate of the Company. The Group has taken certain measures to monitor the
fund flows between itself and SA Finance and the placement of funds by SA Finance. Such monitoring measures may help to enhance
the safety of the Group’s deposits with SA Finance. In addition, we have received a letter of
undertakings from CSAHC dated March 31, 2009, in which, among other things, CSAHC warranted that the Group’s
deposits and loans with SA Finance were definitely secure and that SA Finance would continue to operate in strict compliance with
the relevant rules and regulations. However, the deposits may be exposed to risks associated with the business of SA Finance
over which the Group does not have control. As of December 31, 2011 and 2012,
the Group had deposits of RMB2,493 million and RMB2,307 million, respectively, with SA Finance.



Both international
and domestic economic fluctuations and Chinese government’s macroeconomic controls affect the demand for air travel, which
will in turn cause volatility to the Group’s business and results of our operations.



Both
international and domestic economic fluctuations and Chinese macroeconomic controls affect the demand for air travel.
For example, the demand for air travel significantly decreased during the past few years as result of the U.S. subprime
crisis and European debt crisis. In addition, the continuing global economic slowdown may have a negative
effect on the growth rate of the Chinese economy. Chinese macroeconomic controls, taken to counteract such slowdown, such
as financing adjustments, credit adjustments, price controls and exchange rate policies, would present unexpected changes to
the aviation industry. As a result, the changing economic situation and Chinese macroeconomic controls may cause volatility
to the Group’s business and results of our operations.



9







The financial crisis
and other global events may reduce consumer spending or cause shifts in spending. A general reduction or shift in discretionary
spending can result in decreased demand for leisure and business travel and can also impact the Group’s ability to raise
fares to counteract increased fuel and labor costs. No assurance can be given that capacity reductions or other steps we may take
will be adequate to offset the effects of reduced demand.



The Group could
be adversely affected by an outbreak of a disease or large scale natural disasters that affect travel behavior.



The outbreak of
the H1N1 swine flu in March 2009 has had an adverse impact on the aviation industry globally (including the Group). The
spread of the swine flu adversely affected the Group’s international routes operations in 2009. Recently there have
been over 100 cases of reported infection of H7N9 bird flu in China. Even though there is no indication of human-to-human
transmission yet, if H7N9 bird flu spreads further in China and other countries of the world, our regional and domestic route
operations and therefore our results of operation will be materially adversely affected. If there were another outbreak of a
disease that affects travel behavior in the future, it
could have a material adverse impact on us.



In 2011, a number of
large-scale natural disasters occurred globally, such as the nuclear meltdown in Japan caused by earthquakes and subsequent tsunami,
the hurricane on the East Coast of the United States, the flooding
in Thailand and the typhoon in the Philippines. Disasters such as these can affect the
aviation industry and the Group by reducing revenues and impacting travel behavior.



Lack of adequate
documentation for land use rights and ownership of buildings subjects us to challenges and claims by third parties with respect
to the Company’s use of such land and buildings.



Although systems for
registration and transfer of land use rights and related real property interests in China have been implemented, such systems do
not yet comprehensively account for all land and related property interests. The Group leased certain properties and buildings
from CSAHC which are located in Guangzhou, Wuhan, Haikou and other PRC cities.However, CSAHC lacks adequate documentation
evidencing CSAHC’s rights to such land and buildings, and, as a result, the lease agreements between CSAHC and the Company
for such land have not been registered with the relevant authorities. As a result, such lease agreements may not be enforceable.
Lack of adequate documentation for land use rights and ownership of buildings subjects the Company to challenges and claims by
third parties with respect to the Company’s use of such land and buildings.



As of the date of this
Annual Report, we had been occupying all of the land and buildings described above without challenge or claim by third parties.
However, if any challenges to the property ownership or other claims are successful, our operation and business may be materially
adversely affected. CSAHC has agreed to indemnify us against any loss or damage caused by or arising from any challenge of, or
interference with, the Company’s right to use certain land and buildings.



Any discontinuity
or disruption in the direct flight arrangement between Taiwan and Mainland China may negatively affect the Group's results.



The policy restraint
on direct flights between Taiwan and Mainland China has been further loosen in the past few years. As of April 19, 2013, there
were 616 cross-Strait direct passenger flights per week. The Company was the first Chinese carrier to operate non-stop flights
from Mainland China to Taiwan and as a result has benefited from the operation of such flights. However, given the cross-Strait
flight arrangement is subject to the political relationship between Taiwan and Mainland China, any deterioration in such political
relationship may cause the discontinuity or disruption in the flight arrangement, and therefore may have a material adverse impact
on the Group's results.



Terrorist attacks
or the fear of such attacks, even if not made directly on the airline industry, could adversely affect the Company and the airline
industry as a whole. The travel industry continues to face on-going security concerns and cost burdens.



The aviation industry
as a whole has been beset with high-profile terrorist attacks, most notably the attack on September 11, 2001 in the United States.
Terrorist attackscould also affectthe aviation industry in China. Airlines in China have
experienced several incidents of terrorist attacks or threats recently. For example, on March 7, 2008, on a China Southern Airlines
flight boarding in Urumqi, crew members discovered a terrorist suspect. On July 14, 2010, a passenger jet en route from Urumqi
to Guangzhou was forced to make an emergency landing after receiving an anonymous call claiming there was a bomb on the aircraft.
On June 29, 2012, there was an attempted hijacking on a passenger flight operated by Tianjin Airlines between Hotan and Urumqi
in China's Xinjiang region. CAAC has enhanced security measures, but the effectiveness of such measures cannot be ascertained.
Additional terrorist attacks, even if not made directly on the airline industry, or the fear of or the precautions taken in anticipation
of such attacks (including elevated threat warnings or selective cancellation or redirection of flights) could materially and adversely
affect the Company and the aviation industry. Potential impacts that terrorist attacks could have on the Company include substantial
flight disruption costs caused by grounding of fleet, significant increase in security costs and associated passenger inconvenience,
increased insurance costs, substantially higher ticket refunds and significant decrease in traffic measured in revenue passenger
kilometer. Additionally, increasingly strict security measures make air travel a hassle in the eyes of some consumers. These factors
can have an uncertain impact on the development of the aviation industry.



10







We may suffer
losses in the event of an accident involving our aircraft or the aircraft of any other airline.



An accident involving
one of our aircraft could require repair or replacement of a damaged aircraft, and result in its consequential temporary or permanent
loss from service and/or significant liability to injured passengers and others. Although we believe that we currently maintain
liability insurance in amounts and of the types generally consistent with industry practice, the amounts of such coverage may not
be adequate to fully cover the costs related to the accident or incident, which could result in harm to our results of operations
and financial condition. In addition, any aircraft accident, even if fully insured, could cause a public perception that we are
not as safe or reliable as other airlines, which would harm our competitive position and result in a decrease in our operating
revenues. Moreover, a major accident involving the aircraft of any of our competitors may cause demand for air travel to decrease
in general, which would adversely affect our results of operations and financial condition.



The Group could
be adversely affected by a failure or disruption of our computer, communications or other technology systems.



The Group is increasingly
dependent on technology to operate its business. In particular, to enhance its management of flight operations, the Group launched
the computerized flight operations control system in May 1999. The system utilizes advanced computer and telecommunications technology
to manage the Group’s flights on a centralized, real-time basis. The Group believes that the system will enhance the efficiency
of flight schedule, increase the utilization of aircraft and improve the coordination of the Group’s aircraft maintenance
and ground servicing functions. However, the computer and communications systems on which we rely could be disrupted due to various
factors, some of which are beyond our control, including natural disasters, power failures, terrorist attacks, equipment failures,
software failures and computer viruses and hackers. The Group has taken certain steps to reduce the risk of some of these potential
disruptions. There can be no assurance, however, that the measures we have taken are adequate to prevent or remedy disruptions
or failures of those systems. Any substantial or repeated failure of those systems could adversely affect our operations and customer
services, result in the loss of important data, loss of revenues, and increased costs, and generally harm our business. Moreover,
a failure of certain of our vital systems could limit our ability to operate our flights for an extended period of time, which
would have a material adverse effect on our operations and our business.



We may lose investor
confidence in the reliability of our financial statements if we fail to achieve and maintain effective internal control over financial
reporting, which in turn could harm our business and negatively impact the trading prices of our ADRs, H Shares or A Shares.



The United States Securities
and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every
public company in the United States to include a management report on such company’s internal control over financial reporting
in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control
over financial reporting. In addition, the Company’s independent registered public accounting firm is required to report
on the effectiveness of the Company’s internal control over financial reporting.



Since 2011, pursuant
to theBasic Standard for Enterprise Internal Control jointly issued by the Ministry of Finance, China Securities Regulatory
Commission (“CSRC”) and other three PRC authorities on May 22, 2008, and its application guidelines and other relevant
regulations issued subsequently (collectively, “PRC internal control requirements”) , the Company has carried out a
self-assessment of the effectiveness of its internal control and issue a self-assessment report annually in accordance with the
PRC internal control requirements, and the Company’s auditor for its PRC GAAP financial statements (the “PRC Auditor”)
is required to report on the effectiveness of the Company’s internal control over financial reporting.



However, our independent
registered public accounting firm or PRC Auditor may not be satisfied with our internal controls, the level at which our controls
are documented, designed, operated and reviewed. Our independent registered public accounting firm or PRC Auditor may also interpret
the requirements, rules and regulations differently, and reach a different conclusion regarding the effectiveness of our internal
control over financial reporting. Although our management have concluded that our internal control over financial reporting as
of December 31, 2012 was effective, we may discover deficiencies in the course of our future evaluation of our internal control
over financial reporting and may be unable to remediate such deficiencies in a timely manner. If we fail to maintain the adequacy
of our internal control over financial reporting, we may not be able to conclude that we have effective internal control over financial
reporting on an ongoing basis, as required under the above mentioned rules and regulations. Moreover, effective internal control
is necessary for us to produce reliable financial reports and is important to prevent fraud. As a result, our failure to achieve
and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability
of our financial statements, which in turn could harm our business and negatively impact the trading prices of our ADRs, H Shares
or A Shares.



The Company could
be classified as a passive foreign investment company by the United States Internal Revenue Service and may therefore be
subject to adverse tax impact.





Depending upon the
relative values of our passive assets and income as compared to our total assets and income each taxable year, we could be
classified as a passive foreign investment company, or PFIC, by the United States Internal Revenue Service, or IRS, for U.S. federal
income tax purposes. The Company believes that it was not a PFIC for the taxable year 2012. However, there can be no assurance
that we will not be a PFIC for the taxable year 2013 and/or later taxable years, as PFIC status is re-tested each year and depends
on the facts in such year.

11









The Company will be
classified as a PFIC in any taxable year if either: (1) the average value during the taxable year of its assets that produce passive
income, or are held for the production of passive income, is at least 50% of the average value of its total assets for such taxable
year (the “Asset Test”) or (2) 75% or more of its gross income for the taxable year is passive income (such as certain
dividends, interest or royalties) (the “Income Test”). For purposes of the Asset Test: (1) any cash, cash equivalents,
and cash invested in short-term, interest bearing, debt instruments, or bank deposits that is readily convertible into cash, will
generally count as producing passive income or as being held for the production of passive income and (2) the average values of
the Company’s passive and total assets is calculated based on its market capitalization.



If we were a PFIC,
you would generally be subject to additional taxes and interest charges on certain “excess distributions” the Company
makes regardless of whether we continue to be a PFIC in the year in which you receive an “excess distribution”. An
“excess distribution” would be either (1) the excess amount of a distribution with respect to ADRs during a taxable
year in which distributions to you exceed 125% of the average annual distributions to you over the preceding three taxable years
or, if shorter, your holding period for the ADRs, or (2) 100% of the gain from the disposition of ADRs. For more information on
the United States federal income tax consequences to you that would result from our classification as a PFIC, please see Item 10,
“Taxation — United States Federal Income Taxation — U.S. Holders — Passive Foreign Investment Company”.



We may be unable
to retain key management personnel.



We are dependent on the experience and industry
knowledge of our key management employees, and there can be no assurance that we will be able to retain them. Any inability to
retain our key management employees, or attract and retain additional qualified management employees, could have a negative impact
on us.



Risks Relating to the Chinese Commercial
Aviation Industry



The Group’s
business is subject to extensive government regulations, and there can be no assurance as to the equal treatment of all
airlines under those regulations.



The Group’s ability
to implement its business strategy will continue to be affected by regulations and policies issued or implemented by relevant government
agencies, particularly CAAC, which encompasses substantially all aspects of the Chinese commercial aviation industry, such as the
approval of route allocation, the administration of certain airport operations and air traffic control. Such regulations and policies
limit the flexibility of the Group to respond to market conditions, competition or changes in the Group’s cost structure.
The implementation of specific government policies could from time to time adversely affect the Group’s operations.



The Group’s
results may be negatively impacted by the fluctuation in domestic prices for jet fuel, and we would be adversely affected by disruptions
in the supply of fuel.



The availability and
cost of jet fuel have a significant impact on the Group’s results of operations. The
Group’s jet fuel cost for 2012 accounted for 68.4% of
its flight operations expenses. All of the domestic jet fuel requirements of Chinese airlines (other than at the Shenzhen, Zhuhai,
Sanya, Haikou, Shanghai Pudong and other small airports) must be purchased from the exclusive providers, CAOSC and Bluesky Oil
Supplies Company, which are supervised by the CAAC. Chinese airlines may also purchase jet fuel at the Shenzhen, Zhuhai, Sanya,
Haikou, Shanghai Pudong and other small airports from joint ventures in which the CAOSC is a partner. Jet fuel obtained from the
CAOSC’s regional branches is purchased at uniform prices throughout China that are determined and adjusted by the CAOSC from
time to time with the approval of the CAAC and the pricing department of the NDRC based on market conditions and other factors.
As a result, the costs of transportation and storage of jet fuel in all regions of China are spread among all domestic airlines.



Domestic prices
for jet fuel has experienced fluctuations in the past few years. The Group’s   profit for the year may suffer from
an unexpected change in the fuel surcharge collection policies and other factors beyond our control. For more information on
the jet fuel prices, please see “ Item 4, Information on the Company - Business Overview - Jet Fuel” section
below for further discussion.



In summary, given the
constant fluctuation of volatile fuel price, no assurance can be given that the Group’s operation and financial results will
not be negatively impacted by the fluctuation in domestic prices for jet fuel.



In addition, China
has experienced jet fuel shortages. On some rare occasions prior to 1993, the Group had to delay or even cancel flights. Although
such shortages have not materially affected the Group’s operations since 1993, there can be no assurance that such a shortage
will not occur in the future. If such a shortage occurs in the future to the extent that the Group has to delay or cancel flights
due to fuel shortage, its operational reputation among passengers as well as its operations may suffer.



In 2012, a reasonable
possible increase or decrease of 10% in jet fuel price with volume of fuel consumed and all other variables held constant, would
have increased or decreased the Group’s annual fuel costs by approximately RMB3,740 million. Accordingly, even if the jet
fuel supply remains stable, increases in jet fuel prices will nevertheless adversely impact our financial results.



12







The
Group’s   profit for the year may suffer from an unexpected volatility caused by any fluctuation in the level of fuel
surcharges.



The level of fuel
surcharges, which is regulated by Chinese government, affects domestic customers’ air travel demand as well as the
Group’s ability to generate profits. On January 14, 2009, the NDRC and the CAAC jointly announced the collection of
passenger fuel surcharge for domestic routes should be suspended from January 15, 2009 onwards. Subsequently, in response to
the increase in international fuel prices, the NDRC and CAAC issued a notice on November 11, 2009 to introduce a new pricing
mechanism of fuel surcharge that links it with airlines’ jet fuel costs, which was further adjusted    subsequently. We
cannot guarantee that fuel surcharges would not be adjusted further in the future or adjusted in our favor. If fuel
surcharges are not adjusted in correspondence to the increase in jet fuel, our   profit for the year may be materially
adversely affected.



The Group’s
results of operations are subject to seasonality.



The Group’s operating
revenue is substantially dependent on the passenger and cargo traffic volume carried, which is subject to seasonal and other changes
in traffic patterns, the availability of appropriate time slots for the Group’s flights and alternative routes, the degree
of competition from other airlines and alternate means of transportation, as well as other factors that may influence passenger
travel demand and cargo and mail volume. In particular, the Group’s airline revenue is generally higher in the second and
third quarters than in the first and fourth quarters. As a result, the Group’s results may fluctuate from season to season.



The Group’s
operations may be adversely affected by insufficient aviation infrastructure in Chinese commercial aviation industry.



The rapid increase
in air traffic volume in China in recent years has put pressure on many components of the Chinese commercial aviation industry,
including China’s air traffic control system, the availability of qualified flight personnel and airport facilities. Airlines,
such as the Group, which have route networks that emphasize short- to medium-haul routes, are generally more affected by insufficient
aviation infrastructure in terms of on-time performance and high operating costs due to fuel inefficiencies resulting from the
relatively short segments flown, as well as the relatively high proportion of time on the ground during turnaround. All of these
factors may adversely affect the perception of the service provided by an airline and, consequently, the airline’s operating
results. In recent years, the CAAC has placed increasing emphasis on the safety of Chinese airline operations and has implemented
measures aimed at improving the safety record of the industry. The ability of the Group to increase utilization rates and to provide
safe and efficient air transportation in the future will depend in part on factors such as the improvement of national air traffic
control and navigation systems and ground control operations at Chinese airports, factors which are beyond the control of the Group.



The Group faces
increasingly intense competition both in domestic aviation industry and in the international market, as well as from alternative
means of transportation.



The CAAC’s extensive
regulation of the Chinese commercial aviation industry has had the effect of managing competition among Chinese airlines. Nevertheless,
competition has become increasingly intense in recent years due to a number of factors, including relaxation of certain regulations
by the CAAC and an increase in the capacity, routes and flights of Chinese airlines. Competition in the Chinese commercial aviation
industry has led to widespread price-cutting practices that do not in all respects comply with applicable regulations. Until the
interpretation of CAAC regulations limiting such price-cutting has been finalized and strictly enforced, discounted tickets from
competitors will continue to have an adverse effect on the Group’s sales.



The Group faces varying
degrees of competition on its regional routes from certain Chinese airlines and Cathay Pacific Airways, Dragonair and Air Macau,
and on its international routes, primarily from non-Chinese airlines, most of which have significantly longer operating histories,
substantially greater financial and technological resources and greater name recognition than the Group. In addition, the public’s
perception of the safety and service records of Chinese airlines could adversely affect the Group’s ability to compete against
its regional and international competitors. Many of the Group’s international competitors have larger sales networks and
participate in reservation systems that are more comprehensive and convenient than those of the Group, or engage in promotional
activities, which may enhance their ability to attract international passengers.



Furthermore, for short-distance
transportation, airplanes, trains and buses are alternatives to each other. Given the recent development of high-speed trains
(as discussed below), the construction of nationwide high-speed railway network and the improvement of inter-city expressway
network, the commercial aviation sector as a whole faces increasing competition from the alternative means of transportation such
as railways and highways.



We expect to
face substantial competition from the rapid development of the Chinese rail network.



The PRC government
is aggressively implementing the expansion of its high-speed rail network, which will provide train services at a speed of up to
300km per hour connecting major cities such as Beijing, Shanghai, Wuhan, Qingdao, Guangzhou, Dalian and Hong Kong. In December
2012, the Beijing-Guangzhou and Harbin-Dalian High-Speed Railways commenced operation, the expansion of the coverage of this network
and improvements in railway service quality, increased passenger capacity and stations located closer to urban centers than competing
airports could enhance the relative competitiveness of the railway service and affect our market share on some of our key routes,
in particular routes below 800km. The construction of all railways in China’s “Four Longitudinal and one Horizontal”
high-speed railway network is expected to complete in October 2013. We expect it will bring further negative impact on the domestic
aviation industry. Increased competition and pricing pressures from railway service may have a material adverse effect on our financial
condition and results of operations.



13







Due to limitation
on foreign ownership imposed by Chinese government policies, the Company may have limited access to the international equity capital
markets.



Chinese government
policies limit foreign ownership in Chinese airlines. Under these policies, the percentage ownership of our total outstanding ordinary
shares held by investors in Hong Kong and any country outside China (“Foreign Investors”) may not in the aggregate
exceed 49%. Currently, we estimate that 28.47% of the total outstanding ordinary shares of the Company are held by Foreign Investors.
For so long as the limitation on foreign ownership is in force, we will have limited access to the international equity capital
markets.



The European Emissions Trading Scheme
may increase operational cost of the Group.



Starting on January
1, 2012, aviation sector will be included in the European Emissions Trading Scheme (ETS), EU’s mandatory cap-and-trade system
for reduction of greenhouse gas emissions. Airline operators in the EU will receive tradable emission permits (aviation allowances)
covering a certain level of their CO2 emissions per year for their flights operating to and from EU airports. If an
airline fails to obtain free-of-charge emission permits from the EU, it will have to buy around EUR10 million (RMB 100 million)
worth of CO2 emissions allowances from other greener industries. In March 2011, a group representing China’s largest
airlines sent a formal notice to the EU expressing strong opposition to non-member-state airlines’ inclusion in the EU’s
Emissions Trading Scheme. Also, in early February 2012, CAAC issued instructions to various airlines announcing that without approval
from the relevant government authorities, the major airlines are prohibited from joining the ETS and the transport airlines are
also prohibited from raising the freight price or increasing fee items by adducing this reason. On November 12, 2012 , EU announced
to temporarily suspend the implementation of the ETS in the aviation sector in 2013 in order to forge a positive negotiation environment
for all parties. A new globally recognized implementation proposal is expected to be reached in October 2013. There can be no assurance
that the new implementation proposal will not have negative impact on our financial condition and result of operation.



We may utilize fuel hedging arrangements
which may result in losses.



While we have not entered
into any fuel hedging transactions since the fourth quarter of 2008, we have obtained the approval from the board and may in the
future consider to hedge a portion of our future fuel requirements through various financial derivative instruments linked to certain
fuel commodities to lock in fuel costs within a hedged price range. However, these hedging strategies may not always be effective
and high fluctuations in aviation fuel prices exceeding the locked-in price ranges may result in losses. Significant declines in
fuel prices may substantially increase the costs associated with our fuel hedging arrangements. In addition, where we seek to manage
the risk of fuel price increases by using derivative contracts, we cannot assure you that, at any given point in time, our fuel
hedging transactions will provide any particular level of protection against increased fuel costs.



Risks Relating to the PRC



The Group has
significant exposure to foreign currency risk as majority of the Group’s lease obligations and bank and other
loans are denominated in foreign currencies. Due to rigid foreign exchange control by Chinese government, the Group may face difficulties
in obtaining sufficient foreign exchange to pay dividends or satisfy our foreign exchange liabilities.



Under current Chinese
foreign exchange regulations, the Renminbi is fully convertible for current account transactions, but is not freely convertible
for capital account transactions. All foreign exchange transactions involving Renminbi must take place either through the People’s
Bank of China or other institutions authorized to buy and sell foreign exchange or at a swap centre.



The Group has significant
exposure to foreign currency risk as substantially all of the Group’s obligations under leases, bank and other loans and
operating lease commitment are denominated in foreign currencies, principally U.S. dollars, Singapore dollars and Japanese Yen.
Depreciation or appreciation of the Renminbi against foreign currencies affects the Group’s results significantly because
the Group’s foreign currency liabilities generally exceed its foreign currency assets. 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 SAFE, or subject to certain restrictive conditions, entering into foreign exchange forward option contracts with authorized
banks. However, SAFE may limit or eliminate the Group’s ability to purchase and retain foreign currencies in the future.
In addition, foreign currency transactions under the capital account are still subject to limitations and require approvals from
SAFE. This may affect our ability to obtain foreign exchange through debt or equity financing, including by means of loans or capital
contributions. No assurance can be given that the Group will be able to obtain sufficient foreign exchange to pay dividends or
satisfy our foreign exchange liabilities.



The Group also has
exposure to foreign currency risk in respect of net cash inflow denominated in Japanese Yen from ticket sales in overseas branch
office after payment of expenses. The Group entered into certain foreign exchange forward option contracts, which were fully settled
in 2011,to manage this foreign currency risk. However, like other derivative products, there can be no assurance
that such option contracts can provide, at any given time, particular level of protection against foreign exchange risks.



14







The Group’s
operations are subject to immature development of legal system in China. Lack of uniform interpretation and effective enforcement
of laws and regulations may cause significant uncertainties to the Group’s operations.



The members of the
Group are organized under the laws of China. The Chinese legal system is based on written statutes and is a system, unlike common
law systems, in which decided legal cases have little precedential value. Since 1979, the Chinese government has been developing
a comprehensive system of commercial laws and considerable progress has been made in the promulgation of laws and regulations dealing
with economic matters, such as corporate organization and governance, foreign investments, commerce, taxation and trade. These
laws, regulations and legal requirements are relatively recent, and, like other laws, regulations and legal requirements applicable
in China (including with respect to the commercial aviation industry), their interpretation and enforcement involve significant
uncertainties.



The PRC new tax
law may in the future deprive us of preferential income tax rates, which we currently enjoy.



On March 16, 2007,
the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of the PRC which took
effect on January 1, 2008. As a result of the new tax law, the statutory income tax rate adopted by the Company and its subsidiaries
has been changed to 25% with effect starting from January 1, 2008. Prior to enactment of the new tax law, certain branches and
subsidiaries of the Company were taxed at rates ranging from 15% to 33%. Pursuant to the new tax law, the income tax rates of entities
that previously enjoyed preferential tax rates of 15% and 18% have been revised to 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010,
2011 and 2012 onwards respectively. To the extent that there are any withdrawals of, or changes in, the preferential tax treatment
that we currently enjoy, our tax liability may increase correspondingly and our results of operations and financial condition may
be adversely affected.





Pursuant to Cai Shui
[2012] No. 71 jointly issued by the PRC Ministry of Finance (“MoF”) and the State Administration of Taxation (“SAT”)
on July 31, 2012, the pilot program regarding the transition from business tax to Value Added Tax (“VAT”) was launched
in certain provinces since November 1, 2012, including Guangdong and Fujian. Under this pilot program, the traffic revenue and
the other revenues, including ground service income, cargo handling income and others, generated in locations that fall into the
scope of this pilot program are subjected to VAT levied at rates of 17%, 11% or 6% from November 1, 2012; while the revenue generated
in other locations continue to be subject to business tax at applicable tax rates.



The PRC new tax
law may have negative tax impact on holders of H Shares or ADRs of the Company, by requiring the imposition of a withholding tax
on dividends paid by a Chinese company to a non-resident enterprise.



The new tax law generally
provides for a withholding tax on dividends paid by a Chinese company to a non-resident enterprise at a rate of 10%.



For individuals, Chinese
tax law generally provides that an individual who receives dividends from the Company is subject to a 20% income tax. A 50% reduction
of taxable income is granted by Chinese tax law for an individual receiving dividends from a listed company on Shanghai Stock Exchange
or Shenzhen Stock Exchange. As a result, the effective tax rate for dividends received by A Share individual holders is 10% in
2012. Dividend received by any foreign individual that holds overseas shares in Chinese enterprise is
generally subject to individual income tax at a flat rate of 20%, subject to exemption or reduction by an applicable double-taxation
treaty.



Our investors
in the U.S. who rely on our auditor’s audit reports currently do not have the benefit of PCAOB oversight.



Under the Sarbanes-Oxley Act of 2002,
the Public Company Accounting Oversight Board, or PCAOB, has the authority and is required to conduct continuing inspections of
registered public accounting firms that provide audit services to public companies subject to the reporting requirements of the
SEC. Our external auditor is registered with the PCAOB and is subject to inspections by the PCAOB. However, the PCAOB is currently
unable to inspect a registered public accounting firm’s audit work relating to a company’s operations in China where
the documentation of such audit work is located in China, such as our registered public accounting firm’s audit work relating
to our operations in China. As a result, our investors may be deprived of the benefits of PCAOB’s oversight of our independent
registered public accounting firm through such inspections.



ITEM 4. INFORMATION ON THE COMPANY.



| | A. | History and Development of the Company
| | -- | --------------------------------------



We were incorporated
under PRC laws on March 25, 1995 as a joint stock company with limited liability under the name of China Southern Airlines Company
Limited. The address of our principal place of business is 278 Ji Chang Road, Guangzhou, People’s Republic of China 510405.
Our telephone number is +86 20 8612 4462 and our website iswww.csair.com.



In July 1997, we issued 1,174,178,000 H
Shares, par value RMB1.00 per share, and completed the listing of the H Shares on the Stock Exchange of Hong Kong Limited (the
“Hong Kong Stock Exchange”) and the ADRs representing our H shares on the New York Stock Exchange.



On March 13, 2003,
we obtained an approval certificate from the Ministry of Commerce to change to a permanent limited company with foreign investments
and on October 17, 2003 obtained a business license for its new status, as a permanent limited company with foreign investments
issued by the State Administration of Industry and Commerce of the People’s Republic of China.



15







In July 2003, we issued 1,000,000,000 A
Shares, par value RMB1.00 per share, and completed the listing of the A shares on the Shanghai Stock Exchange.



Pursuant to a sale
and purchase agreement dated November 12, 2004 between the Company, CSAHC, China Northern Airlines (“CNA”) and Xinjiang
Airlines (“XJA”), which was approved by our shareholders in an extraordinary general meeting held on December 31, 2004,
we acquired the airline operations and certain related assets of CNA and XJA with effect from December 31, 2004 at a total consideration
of RMB1,959 million.



On May 30, 2007, we,
together with an independent third party, established Chongqing Airlines Company Limited (“Chongqing Airlines”). As
of December 31, 2012, the Company had transferred four aircraft to Chongqing Airlines as capital contribution. We own a total of
60% equity interest in Chongqing Airlines.



On August 14, 2007,
we acquired a 51% equity interest in Nan Lung International Freight Limited beneficially owned by and registered in the name of
Nan Lung Travel & Express (Hong Kong) Limited, and a 100% equity interest in China Southern Airlines Group Air Catering Company
Limited, both a wholly owned subsidiary of CSAHC, for a total consideration of RMB112 million.



In December 2008, we
acquired a 26% equity interest in China Southern West Australian Flying College Pty Ltd. (“Flying College”) from CSAHC,
and Flying College became a 91% owned subsidiary of the Company.



In June 2009, we acquired
a 50% equity interest in Beijing Southern Airlines Ground Services Company Limited (“Beijing Ground Service”) from
the other shareholder, and Beijing Ground Service became a wholly-owned subsidiary of the Company.



On September 28, 2009,
we entered into an agreement with CSAHC to sell our 50% equity interest in MTU Maintenance Zhuhai Co., Ltd (“Zhuhai MTU”),
a jointly controlled entity of the Company, to CSAHC at a consideration of RMB1,607,850,000. The transfer was completed in February
2010.



On June 2, 2010, a
third party company injected capital to Flying College, which diluted the Company’s interest in Flying College from 91% to
48.12%. Flying College became a jointly controlled entity of the Company since then. The retained non-controlling equity interest
in Flying College is re-measured to its fair value at the date when control was lost and a gain on deemed disposal of a subsidiary
of RMB17 million was recorded in 2010.



In December 2010, we
entered into an agreement with Xiamen Jianfa Group Co., Ltd. and Hebei Aviation Investment Group Corporation Limited (“Hebei
Investment”), pursuant to which Hebei Investment agreed to inject a cash capital of RMB1,460 million into Xiamen Airlines
Company Limited (“Xiamen Airlines”). In March 2011, the capital injection was received in full and the Company’s
equity interest in Xiamen Airlines was diluted from 60% to 51%. Xiamen Airlines remains a subsidiary of the Company.







On June 29, 2012 ,
Xiamen Airlines, a subsidiary of the Company and Southern Airlines Culture and Media Co., Ltd. (“SACM”) entered into
an agreement, pursuant to which Xiamen Airlines agreed to sell and SACM agreed to purchase 51% equity interests in Xiamen Airlines
Media Co., Ltd.(“XAMC”), at a consideration of approximately RMB 43.12 million. Immediate prior to the transaction,
XAMC was wholly owned by Xiamen Airlines and primarily engaged in providing advertising, corporate branding, publicity and exhibition
services and was responsible for the overall brand building and publicity of Xiamen Airlines.



Aircraft Acquisitions



Pursuant to an aircraft
acquisition agreement dated April 18, 2008 between Xiamen Airlines and the Boeing Company (“Boeing”), Xiamen Airlines
will acquire 20 Boeing B737 series aircraft from Boeing. According to the information provided by Boeing, the aggregate catalogue
price for those aircraft including the airframe and engines is around US$1.5 billion. The aggregate consideration for the acquisition
will be partly payable in cash by Xiamen Airlines, and partly through financing arrangements with banking institutions. The Boeing
aircraft will be delivered in stages to Xiamen Airlines during the period commencing from April 2014 to October 2015.



16







Pursuant to an A320
Series Aircraft Purchase Agreement dated January 20, 2010 between the Company and Airbus SNC, we will acquire 20 Airbus 320 series
aircraft from Airbus SNC. According to the information provided by Airbus SNC, the catalogue price of an Airbus 320 aircraft, including
airframe and engines, is around US$76.9 million. The aggregate consideration for the acquisition will be partly payable in cash
and partly through financing arrangements with banking institutions. The Airbus aircraft will be delivered in stages to the Company
from 2011 to 2013.



On September 30, 2010,
Xiamen Airlines entered into a supplemental agreement with Boeing to purchase additional 10 Boeing B737 series aircraft. The aggregate
catalogue price for those aircraft, including airframe and engines, is around US$699 million. According to the information provided
by Boeing, the aggregate consideration for the acquisition will be partly payable in cash by Xiamen Airlines, and partly through
financing arrangements with banking institutions. The Boeing aircraft will be delivered in stages to Xiamen Airlines during the
period commencing from 2015 to October 2016.



On November 4, 2010,
we entered into an A320 series aircraft purchase agreement and an A330-300 aircraft purchase agreement with Airbus S.A.S. to purchase
30 Airbus A320 series aircraft and six Airbus A330 series aircraft. According to the information provided by Airbus S.A.S., the
catalogue price of six Airbus A330 series aircraft and 30 Airbus A320 series aircraft, including airframe and engines, is US$1.205
billion and US$2.575 billion, respectively. The aggregate consideration for the acquisition will be partly payable by cash and
partly by financing arrangements with banking institutions. The six Airbus A330 aircraft will be delivered in stages to the Company
during the period commencing from 2013 to 2014 and the 30 Airbus A320 series aircraft will be delivered in stages to the Company
during the period commencing from 2012 to 2015.



On May 31, 2011, we
entered into an aircraft acquisition agreement with Boeing to purchase six Boeing B777F freighters. According to the information
provided by Boeing, the catalogue price of six Boeing B777F aircraft, including airframe and engines, is US$1,584 million. The
aggregate consideration for the Acquisition will be partly payable by cash and partly by financing arrangements with banking institutions.
The six Boeing B777F freighters will be delivered in stages to us during the period commencing from 2013 to 2015.



On May 9, 2011, Xiamen
Airlines entered into an aircraft acquisition agreement to purchase six Boeing B787 series aircraft. According to the information
provided by Boeing, the aggregate catalogue price, including airframe and engines, for the six Boeing B787 series aircraft is US$1,098
million. The aggregate consideration for the acquisition will
be partly payable in cash and partly through financing arrangements with banking institutions. The Boeing aircraft will be delivered
in stages to Xiamen Airlines during the period commencing from 2014 to 2015.



On February 28, 2012,
we entered into an agreement with the Boeing Company to purchase 10 Boeing 777-300ER aircraft. According to the information provided
by Boeing, the catalogue price of one Boeing B777-300ER aircraft, including airframe and engines, is around US$298 million. The
aggregate consideration for the acquisition will be partly payable in cash and partly through financing arrangements with banking
institutions. The Boeing aircraft will be delivered in stages to the Company during the period from 2014 to 2016.



On August 3, 2012,
Xiamen Airlines entered into an agreement with Boeing to purchase 40 Boeing B737 series aircraft from Boeing. The aggregate catalogue
price of the 40 Boeing B737 series aircraft is US$3.36 billion. The aggregate consideration for the acquisition will be partly
payable by cash and partly by financing arrangements with banking institutions. The Boeing aircraft will be delivered in stages
to Xiamen Airlines during the period commencing from 2016 to 2019.



On December 5, 2012,
we entered into the Airbus aircraft acquisition agreement with Airbus S.A.S. to purchase 10 Airbus A330-300 aircraft. The catalogue
price of one Airbus A330-300 aircraft is US$188 million. The aggregate consideration for the acquisition will be partly payable
by cash and partly by financing arrangements with banking institutions. The Airbus aircraft will be delivered in stages to the
Company during the period commencing from 2014 to 2016.



Capital Expenditure



The Group had RMB23,911
million, RMB23,428 million and RMB17,082 million capital expenditures in 2012, 2011 and 2010, respectively. Of such capital expenditures
in 2012, RMB8,178 million was financed by capital leases, RMB15,418 million was financed by bank borrowings while the remaining
RMB315 million was financed by internal resources. The capital expenditures were primarily incurred on the additional investments
in aircraft and flight equipment under the Group’s fleet expansion plans and, to a small extent, additional investments in
other facilities and buildings for operations.



| | B. | Business Overview
| | -- | -----------------



General



The Group provides
commercial airline services throughout Mainland China, Hong Kong, Macau and Taiwan regions, Southeast Asia and other parts of the
world. Based on the statistics from the CAAC, the Group is one of the largest Chinese airlines and, as ofthe year end of 2012, ranked first 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.
During the three years ended December 31, 2012, the Group’s RPKs increased at a compound annual growth rate of 10.3% from
111,328 million in 2010 to 122,344 million in 2011, and 135,535 million in 2012 while its capacity, measured in terms of ASKs,
increased at a compound annual growth rate of 9.9%, from 140,498 million in 2010 to 151,064 million in 2011 and 169,569 million
in 2012. In 2012, the Group carried 86.48 million passengers and had passenger revenue of RMB89,544 million (US$14,246 million).



17







The Group conducts
a portion of its airline operations through its airline subsidiaries namely 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”) (collectively, the “Airline Subsidiaries”).
In 2012, the Airline Subsidiaries carried 24.64 million passengers and had passenger revenue of RMB22,240 million (US$3,538 million)
and accounted for 28% and 25% of the Group’s passengers carried and passenger revenue, respectively.



The Group also provides
air cargo and mail services. The cargo and mail revenue of the Group increased by 13.8% to RMB6,556 million (US$1,043 million)
in 2012 as compared with that of 2011. The Group’s airline operations are fully integrated with its airline-related businesses,
including aircraft and engine maintenance, flight simulation and air catering operations.



As of December 31,
2012, the Group operated 758 routes, of which 608 were domestic, 110 were international and 40 were regional. The Group operates
the most extensive domestic route network among all Chinese airlines. Its route network covers commercial centers and rapidly developing
economic regions in Mainland China.



The Group’s corporate
headquarters and principal base of operations are located in Guangzhou, the capital of Guangdong Province and the largest city
in southern China. Located in the rapidly developing Pearl River Delta region, Guangzhou is also the transportation hub of southern
China and one of China’s major gateway cities. Guangzhou’s significance has increased as the transportation infrastructure
of Guangdong Province has developed through the construction and development of expressways, an extensive rail network and the
port cities of Guangzhou, Shenzhen, Zhanjiang, Zhuhai and Shantou.



In December 2005, we
established a branch company in Beijing and have added wide-body airplanes to our operation base in Beijing, with the view to expanding
our Beijing aviation business and building another main hub there in addition to our Guangzhou base. The establishment of Guangzhou
and Beijing hubs will facilitate strategic refinement and enhancement of our route network operations, putting us in a better position
to explore and seize the opportunities in the aviation market.



The Group’s
operations primarily focus on the domestic market. In addition, the Group also operates regional routes and international
flights. As of December 31, 2012, the Group had 40 regional routes and 110 international routes. The Group’s regional
operations include flights between destinations in Mainland China, Hong Kong, Macau and Taiwan. The Group’s
international operations include scheduled services to cities in Australia, Austria, Bangladesh, United Kingdom, Burma, Cambodia,
Canada, Dutch, France, Georgia, German, India, Indonesia, Japan, Kazakhstan, Kyrgyzstan, Malaysia, Maldives, Nepal, New
Zealand, Pakistan, Philippines, Russia, Saudi, Singapore, South Korea, Tajikistan, Thailand, Turkey, Turkmenistan, United
Arab Emirates (UAE), United States of American (USA), Vietnam and other destinations.



After joining Skyteam
Alliance, the Group has established a network reaching over 1000 destinations globally, connecting 187 countries and regions and
covering major cities around the world.



As of December 31,
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 of December 31,2012.



Restructuring and Initial Public Offering



As part of China’s
economic reforms in the 1980’s, the PRC State Council directed the CAAC to separate its governmental, administrative and
regulatory role from the commercial airline operations that were being conducted by the CAAC and its regional administrators. As
a result, CSAHC was established on January 26, 1991 for the purpose of assuming the airline and airline-related commercial operations
of the Guangzhou Civil Aviation Administration, one of the then six regional bureaus of the CAAC. CSAHC was one of the 55 large-scale
enterprises designated by the Chinese government to play a leading role in their respective industries.



CSAHC was restructured
in 1994 and 1995 in anticipation of our initial public offering. The restructuring was effective through the establishment of the
Company and the execution of the De-merger Agreement on March 25, 1995 by and between CSAHC and the Company. Upon the restructuring,
the Company assumed substantially the entire airline and airline-related businesses, assets and liabilities of CSAHC, and CSAHC
retained its non-airline-related businesses, assets and liabilities. All interests, rights, duties and obligations of CSAHC, whenever
created or accrued, were divided between the Company and CSAHC based on the businesses, assets and liabilities assumed by each
of them under the De-merger Agreement. Under the De-merger Agreement, CSAHC agreed not to conduct or participate or hold any interest
in, either directly or indirectly, any business, activity or entity in or outside China that competes or is likely to compete with
the commercial interests of the Group, although CSAHC may continue to hold and control its affiliates existing on the date of the
De-merger Agreement and may continue to operate the businesses of such associates. Under the De-merger Agreement, CSAHC and the
Company also agreed to indemnify each other against any losses, claims, damage, debts or expenses arising out of or in connection
with the restructuring. As of the date of this Annual Report, no indemnity has been provided by either CSAHC or us.



18







In July 1997, we completed
a private placement of 32,200,000 H Shares to certain limited partnership investment funds affiliated with Goldman Sachs &
Co. and an initial public offering of 1,141,978,000 H Shares, par value RMB1.00 per share, and the listing of the H Shares on the
Hong Kong Stock Exchange and ADRs on the New York Stock Exchange. Prior to the private placement and the initial public offering,
all of our issued and outstanding shares of capital stock, consisting of 2,200,000,000 non-tradable domestic
shares (“Domestic Shares”), par value RMB1.00
per share, were owned by CSAHC, which owned and exercised, on behalf of the Chinese government and under the supervision of the
CAAC, the rights of ownership of such Domestic Shares. After giving effect to the private placement and the initial public offering,
CSAHC maintained its ownership of the 2,200,000,000 Domestic Shares (representing approximately 65.2% of the total share capital
of the Company), and became entitled to elect all the directors of the Company and to control the management and policies of the
Group. The Domestic Shares and H Shares are both ordinary shares of the Company.



In July 2003, we issued
1,000,000,000 A Shares, par value of RMB1.00 per share, and listed these shares on the Shanghai Stock Exchange. Subsequent to the
issuance of the A Shares, the shareholding of CSAHC in the Company was reduced from 65.2% to 50.30%.



Share Reform Scheme



Pursuant to relevant
PRC laws, we launched the share reform scheme in May 2007, whereby all the 2,200,000,000 non-tradable Domestic Shares held by CSAHC
would be converted into tradable A Shares. Upon the completion of such scheme on June 20, 2008, all the non-tradable Domestic Shares
have been successfully converted into tradable A Shares, subject to the restriction that CSAHC shall not transfer or trade these
shares within 36 months after the commencement date of the share reform scheme (which is June 18, 2007).



Bonus Shares Issue by Conversion of Share Premium



On June 25, 2008, our
shareholders approved issuance of bonus shares by way of conversion of share premium, and on August 14, 2008, the Ministry of Commerce
approved the bonus share issue. The issue has been effected by conversion of share premium on the basis of 5 new shares, credited
as fully paid, for every 10 existing shares. Upon the completion of the bonus share issue, which is based on 4,374,178,000 shares
in issue as of December 31, 2007, the number of paid up shares
has increased by 2,187,089,000 shares to 6,561,267,000 shares.



Non-Public Subscriptions



On December 10, 2008,
we entered into an A Shares subscription agreement with CSAHC, pursuant to which CSAHC conditionally agreed to subscribe and the
Company conditionally agreed to allot and issue 721,150,000 new A Shares for a consideration of RMB2,278,834,000, equivalent to
the subscription price of RMB3.16 per new A Share. Separately and on the same date, the Company and Nan Lung (a wholly-owned subsidiary
of CSAHC) entered into an H Shares subscription agreement, pursuant to which Nan Lung conditionally agreed to subscribe and the
Company conditionally agreed to allot and issue 721,150,000 new H Shares for a consideration of RMB721,150,000, equivalent to the
subscription price of RMB1.00 (equivalent to approximately HK$1.13) per new H Share. The subscription agreements were approved
in the Extraordinary General Meeting and the respective Class Meetings of shareholders of A and H Shares on February 26, 2009.
On June 3, 2009, we received the formal approval from CSRC for the proposed non-public issue of H Shares. On August 14, 2009, we
received the formal approval from CSRC for the proposed non-public issue of A Shares. The issuance of 721,150,000 new A Shares
to CSAHC and 721,150,000 new H Shares to Nan Lung were completed on August 20, 2009 and August 21, 2009, respectively.



On March 8, 2010, our
board approved the placement of up to 1,766,780,000 new A shares to not more than 10 specific investors including CSAHC and the
placement of not more than 312,500,000 new H shares to Nan Lung, a wholly-owned subsidiary of CSAHC. On the same date, the Company
entered into the A shares subscription agreement with CSAHC, pursuant to which CSAHC conditionally agreed to subscribe and the
Company conditionally agreed to allot and issue new A shares of not more than 132,510,000 at the subscription price of not less
than RMB5.66 per A share. In addition, the Company and Nan Lung entered into the H shares subscription agreement, pursuant to which
Nan Lung conditionally agreed to subscribe and the Company conditionally agreed to allot and issue new H shares of not more than
312,500,000 at the subscription price of not less than HKD2.73 per H share. The above placement and subscription agreements were
approved in the Extraordinary General Meeting and the respective Class Meetings of shareholders of A and H shares on April 30,
2010. On September 8, 2010, we received the formal approval from CSRC for the proposed non-public issuance of H Shares. On September
15, 2010, we received the formal approval from CSRC for the proposed non-public issue of A Shares. In November 2010, we completed
the placements of 1,501,500,000 new A shares and 312,500,000 H shares, among which 123,900,000 new A shares were issued to CSAHC
at the subscription price of RMB6.66 per share, and 312,500,000 H shares were issued to Nan Lung at the subscription price of HKD2.73
per share.



On June 11, 2012, we
entered into an A Shares subscription agreement with CSAHC, pursuant to which CSAHC conditionally agreed to subscribe and we conditionally
agreed to allot and issue up to 487,804,878 A Shares for a consideration of not more than RMB2 billion, equivalent to the subscription
price of approximately RMB4.1 per new A Share. The subscription agreement was approved in the Extraordinary General Meeting on
August 3, 2012. As of the date of this Annual Report, the proposed transaction is pending for the approval of CSRC.



19







Issuance of Short-term Financing Bills and Medium Term Notes



On April 18, 2008,
our Board approved the proposed issuance of short-term financing bills in the principal amount of up to RMB4 billion in the PRC,
and the submission of this proposal to the annual general meeting for the shareholders’ approval. On June 25, 2008, our shareholders
approved such proposed bill issuance at the annual general meeting for the year 2007. We believed that the bill issuance would
provide a further source of funding at an interest rate which was expected to be lower than that for loans from commercial banks,
lower the financing cost of borrowings for us, and was in the interests of us and our shareholders as a whole. The Company received
the acceptance from National Association of Financial Market Institutional Investors to register the Company’s short-term
financing bills in the amount of RMB3.5 billion for a period up to September 10, 2010. The bills were jointly underwritten by China
CITIC Bank Cooperation Limited and Bank of China Limited. In October 2008, we issued short-term financing bills with total face
value of RMB2 billion with a bearing coupon interest rate at 4.7% and a maturity period of one year for funding of the business
activities of the Company.



On May 28, 2008, the
Board approved the proposed issuance of medium term notes by the Company in the principal amount of up to RMB1.5 billion and the
submission of such proposal to the shareholders for their consideration and approval. On June 25, 2008, shareholders of the Company
approved such notes issuance at the annual general meeting for the year 2007. The Company believed that the notes issue would provide
a further source of medium to long term funding at an interest rate lower than the best lending rate for loans from commercial
banks, lower the finance costs of borrowings for us and improve our debt structure. As of the date of this Annual Report, We have
not issued any medium term notes, even though it has been approved by the Board and shareholders.



In order to capitalize
on opportunities in the market and improve the flexibility and efficiency of financing, on June 25, 2012, the Board resolved to
obtain a general and unconditional mandate from shareholders to issue potential debt financing instruments, in one or multiple
tranches, within the permissible size for debt issuance in accordance with the provisions of the applicable laws and regulations.
On the extraordinary general meeting held on August 10, 2012, shareholders approved the authorization given to the Board, generally
and unconditionally, to determine the specific debt financing instruments and issuance plan, and to issue, in one or multiple tranches,
debt financing instruments within the permissible size for debt issuance in accordance with the provisions of the applicable laws
and regulations. According to the resolution, on October 31, 2012, the Board approved to apply to National Association of Financial
Market Institutional Investors for registration to issue, in one or multiple tranches, ultra-short-term financing bills with an
aggregate principal amount of to RMB10 billion, according to its capital needs and the market conditions. The Company has completed
the issuance of the first tranche of ultra-short-term financing bills on February 8, 2013. The total issuance amount of the first
tranche financing bills was RMB0.5 billion, with a maturity period of 180 days, a par value per unit of RMB100 and a nominal interest
rate of 3.9%.



Traffic



The following table
sets forth certain statistical information with respect to the Group’s passenger, cargo and mail traffic for the years indicated.





|     |  | Passenger carried   |       |  | Cargo and Mail arrived (tons)              |  |      | Total traffic (tons kilometers) | 
|---- |  | ------------------- | ----- |  | ------------------------------------------ |  | ---- | ------------------------------- | 
|Year |  | Total (in millions) |       |  | Increase (decrease) over previous year (%) |  |      | Total (in thousands)            | 
|2010 |  |                     | 76.46 |  |                                            |  | 15.4 |                                 | 
|2011 |  |                     | 80.68 |  |                                            |  | 5.5  |                                 | 
|2012 |  |                     | 86.48 |  |                                            |  | 7.2  |                                 | 





Route Network



Overview



The Group operates
the most extensive route network among all Chinese airlines. As of December 31, 2012, the Group operated 758 routes consisting
of 608 domestic routes, 40 regional routes and 110 international routes.



The Group continually
evaluates its network of domestic, regional and international routes in light of its operating profitability and efficiency. The
Group seeks to coordinate flight schedules with the Airline Subsidiaries on shared routes to maximize load factors and utilization
rates. The acquisition of domestic, regional and international routes is subject to approval of the CAAC, and the acquisition of
regional and international routes is also subject to the existence and the terms of agreements between the Chinese government and
the government of the Hong Kong SAR, the government of the Macau SAR, the government of Taiwan province and the government of the
proposed foreign destination.



20







In order to expand
the Group’s international route network, the Group has entered into code-sharing agreements with several international airlines,
including Delta Airlines, Air France, KLM Royal Dutch Airlines, Asiana Airlines, Korean Air, Japan Airlines Company Limited, Vietnam
Airlines, Garuda Indonesian, Malaysian Airline, Kenya Airways, Pakistan International Airlines, Aeroflot-Russian Airlines, Czech
Airlines, China Eastern Airlines, China Airlines, Mandarin Airlines. Under the code-sharing agreements, the participating airlines
are permitted to sell tickets on certain international routes operated by the Group to passengers using the Group’s codes.
Similarly, the Group is permitted to sell tickets for the other participating airlines using its “CZ” code. The code-sharing
agreements help increase the number of the Group’s international sales outlets. After joining Skyteam Alliance, the Group
has further established a network reaching over 1000 destinations globally, connecting 187 countries of regions and covering major
cities around the world.



Route Bases



In addition to its
main route bases in Guangzhou and Beijing, the Group maintains regional route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Shenyang,
Changchun, Dalian, Harbin, Urumqi, Haikou, Zhuhai, Xiamen, Shanghai, Xi’an, Fuzhou, Nanning, Guilin, Shantou, Guiyang, Chongqing
and Sanya. Most of its regional route bases are located in provincial capitals or major commercial centers in the PRC.



The Group believes
that its extensive network of route bases enable it to coordinate flights and deploy its aircraft more effectively and to provide
more convenient connecting flight schedules and access service and maintenance facilities for its aircraft. The Group believes
that the number and location of these route bases may enhance the Group’s ability to obtain the CAAC’s approval of
requests by the Group to open new routes and provide additional flights between these bases and other destinations in China. Current
regulations of the CAAC generally limit airlines to operations principally conducted from their respective route bases.



Domestic Routes



The Group’s domestic
routes network serves substantially all provinces and autonomous regions in China, including Guangdong, Fujian, Hubei, Hunan, Hainan,
Guangxi, Guizhou, Henan, Heilongjiang, Jilin, Liaoning and Xinjiang, and serves all four centrally-administered municipalities
in China, namely, Beijing, Shanghai, Tianjin, and Chongqing. In 2012, the Group’s most profitable domestic routes were between:
Guangzhou-Beijing, Beijing-Guangzhou, Shenzhen-Beijing, Fuzhou-Beijing, Beijing-Shenzhen, Shanghai-Guangzhou, Guangzhou-Shanghai,
Xiamen-Beijing, Urumqi-Beijing, and Beijing-Urumqi.



Regional Routes



The Group offers scheduled
service between Hong Kong and Guangzhou, Shenyang, Wuyishan, Zhangjiajie, Changchun, Yinchuan, Xiamen, Shantou, Beijing, Guilin,
Meixian, Haikou, Wuhan, Zhengzhou, Nanning, Changsha, Sanya and Hohhot; between Macau and Hangzhou, Xiamen and Tianjin; and between
Taipei and Guangzhou, Shanghai, Fuzhou, Hangzhou, Xiamen, Shenyang, Changsha, Wuhan, Dalian, Guilin, Harbin, Guiyang, Zhengzhou
and Shenzhen. In 2012, the most profitable scheduled regional routes were between: Taipei-Shanghai, Xiamen-Hong Kong, Shanghai-Taipei,
Xiamen-Taipei, Taipei-Guangzhou, Fuzhou-Taipei, Guangzhou-Taipei, Hong Kong-Beijing, Changchun-Guangzhou-Hong Kong, and Hong Kong-Wuhan.



In 2012, the Group
conducted a total of 16,031 flights on its regional routes, accounting for approximately 23.4% of all passengers carried by Chinese
airlines on routes between Hong Kong, Macau or Taiwan and destinations inMainland China according to CAAC statistics.



Previously, direct
flights between Taiwan and Mainland China were only available during certain festivals. Other than that, travelers between Taiwan
and China had to make use of intermediate stops in Hong Kong or elsewhere. Since July, 2008, however, the ban on direct flights
was further liberalized to allow direct charter flights on weekends. We were the first Chinese carrier to fly nonstop to Taiwan.
On November 4, 2008, the Mainland China and Taiwan agreed to have regular direct passenger charter flights across the Taiwan Strait.
On August 31, 2009, the Mainland China and Taiwan increased the number of regular cross-Strait direct passenger flights from 108
to 270 a week. Cross-Strait directpassenger flights were further
increased in the following years. As of April 19, 2013, there were 616 cross-Strait direct passenger flights a week.



In order to further
strengthen its presence in Taiwan, the Company entered into a memorandum of cooperation with China Airlines on June 23, 2008, which
is the largest carrier in Taiwan in terms of route network. Based on the memorandum, the scope of cooperation between the parties
will cover passenger and cargo carrying, maintenance, and ground handling services.



International
Routes



The Group is the principal
Chinese airline serving Southeast Asian destinations, including Singapore and major cities in Bangladesh, Indonesia, Thailand,
Malaysia, Philippines, Vietnam, Myanmar and Cambodia.



In addition, the Group
also provides scheduled services to cities in Australia, Austria, Canada, France, Germany, Georgia, India, Japan, Kazakhstan, Korea,
Kyrgyzstan, Maldives, Nepal, Netherlands, Nigeria, New Zealand, Pakistan, Russia, Saudi Arabia, Tajikistan, Turkmenistan, Turkey
, UAE , UK and USA.



After joining Skyteam
Alliance, the Group has established a network reaching over 1000 destinations globally, connecting 187 countries of regions and
covering major cities around the world.



21







In 2012, the Group’s
most profitable international routes were: Tianjin-Xiamen-Singapore, Beijing-Guangzhou-Phnom Penh, Guangzhou-Beijing-Amsterdam,
Guangzhou-Sydney, Guangzhou-Los Angeles, Phnom Penh-Guangzhou-Beijing, Singapore-Guangzhou-Shenyang, Guangzhou-Tokyo, Beijing-Guangzhou-Hanoi,
Shenyang-Guangzhou-Singapore.



Aircraft Fleet



The Group’s fleet
plan in recent years has emphasized expansion and modernization through the acquisition of new aircraft and the retirement of less
efficient and old aircraft. As of December 31, 2012, the Group operated a fleet of 491 aircraft with an average age of 6.32 years.
Most aircraft of the Group are Boeing and Airbus aircraft. The Group has the largest fleet among Chinese airline companies. Among
all the aircraft, 265aircraft operated by the Group are leased pursuant to various types of leasing arrangements.
Please see the table below for an analysis of our aircraft in terms of average age and average passenger capacity.



|Model |                 |  | Number of 
Aircraft |  |     | Average Age
 (years) |  |  | Average
 Passenger
 Capacity | 
|----- | --------------- |  | ------------------- |  | --- | -------------------- |  |  | ---------------------------- | 
|      | Boeing 777-200A |  |                     |  | 4   |                      |  |  | 16.52                        | 
|      | Boeing 777-200B |  |                     |  | 6   |                      |  |  | 14.20                        | 
|      | Boeing 757-200  |  |                     |  | 19  |                      |  |  | 15.04                        | 
|      | Boeing 747-400F |  |                     |  | 2   |                      |  |  | 10.43                        | 
|      | Boeing 737-800  |  |                     |  | 131 |                      |  |  | 4.60                         | 
|      | Boeing 737-700  |  |                     |  | 54  |                      |  |  | 6.95                         | 
|      | Boeing 737-300  |  |                     |  | 21  |                      |  |  | 18.48                        | 
|      | Boeing 777-200F |  |                     |  | 6   |                      |  |  | 2.42                         | 
|      | Airbus 319-100  |  |                     |  | 44  |                      |  |  | 6.32                         | 
|      | Airbus 380-800  |  |                     |  | 4   |                      |  |  | 0.85                         | 
|      | Airbus 320-200  |  |                     |  | 94  |                      |  |  | 5.71                         | 
|      | Airbus 321-200  |  |                     |  | 59  |                      |  |  | 4.88                         | 
|      | Airbus 330-200  |  |                     |  | 16  |                      |  |  | 3.65                         | 
|      | Airbus 330-300  |  |                     |  | 8   |                      |  |  | 4.55                         | 
|      | EMB190          |  |                     |  | 17  |                      |  |  | 0.87                         | 
|      | EMB145          |  |                     |  | 6   |                      |  |  | 8.24                         | 
|      | Total           |  |                     |  | 491 |                      |  |  | 6.32                         | 



In 2012, the Group
continued to expand and modernize its aircraft fleet. During the year, the Group (i) took scheduled delivery of forty-four aircraft,
including ten A320-200 aircraft, two A321-200 aircraft, two A380 aircraft, three A330-200 aircraft, four B737-700 aircraft and
twenty-three B737-800 aircraft; (ii) took scheduled delivery of ten EMB190 aircraft under operating leases; (iii) returned three
aircraft under operating leases upon expiry, including two B757-200 aircraft and one B737-300 aircraft; (iv) disposed four aircraft,
including three B737-300 aircraft and one B737-800 aircraft; (v) exercised the purchase options stipulated in the aircraft finance
lease agreements and two A321-200 aircraft were reclassified as owned aircraft from finance leased aircraft.



In February 2012, we
entered into an agreement with the Boeing Company for the acquisition of ten Boeing B777-300ER aircraft. In August 2012, Xiamen
Airlines, our subsidiary, entered into an agreement with the Boeing Company for the acquisition of 40 Boeing B737 series aircraft.
In December 2012, we entered into an agreement with Airbus S.A.S. for the acquisition of ten Airbus A330-300 aircraft. Aircraft
under these acquisition agreements are scheduled for delivery during the period from 2014 to 2019.



Aircraft Financing Arrangements



Overview



A significant portion
of the Group’s aircraft is acquired under long-term capital or operating leases or long-term mortgage loans with remaining
terms to maturity ranging from one to eleven years. As of December 31, 2012, 97 of the Group’s 491 aircraft were operated
under capital leases, 168 were operated under operating leases, 226 were either owned aircraft financed by long-term mortgage loans,
or acquired either with cash proceeds or acquired by exercising the purchase options upon expiry of the respective capital leases.
The Group’s planned acquisition of aircraft in the foreseeable future will generally be made through acquisition by bank
loans and the Group’s own funds, and pursuant to operating leases or capital leases. The Group’s determination as to
its acquisition strategy depends on the Group’s evaluation at the time of its capacity requirements, anticipated deliveries
of aircraft, the Group’s capital structure and cash flow, prevailing interest rates and other general market conditions.



The following table sets forth, as of December
31, 2012, the number of aircraft operated by the Group pursuant to capital and operating leases and the remaining terms, of such
leases.



22









|                             |  | Capital 
Lease |    |  | Operating Lease |  |     | Average Remaining Lease Term | 
|---------------------------- |  | -------------- | -- |  | --------------- |  | --- | ---------------------------- | 
|Model                        |  | Year           |    |  | Year            |  |     | Year                         | 
|Boeing 777-200A and 777-200B |  |                | 0  |  |                 |  | 4   |                              | 
|Boeing 737-700               |  |                | 12 |  |                 |  | 15  |                              | 
|Boeing 737-800               |  |                | 22 |  |                 |  | 47  |                              | 
|Boeing 737-300               |  |                | 0  |  |                 |  | 3   |                              | 
|Boeing 777F                  |  |                | 2  |  |                 |  | 0   |                              | 
|Airbus 319-100               |  |                | 6  |  |                 |  | 30  |                              | 
|Airbus 380-800               |  |                | 1  |  |                 |  | 0   |                              | 
|Airbus 320-200               |  |                | 32 |  |                 |  | 22  |                              | 
|Airbus 321-200               |  |                | 11 |  |                 |  | 20  |                              | 
|Airbus 330-200               |  |                | 11 |  |                 |  | 2   |                              | 
|Airbus 330-300               |  |                | 0  |  |                 |  | 8   |                              | 
|EMB190                       |  |                | 0  |  |                 |  | 17  |                              | 
|Total                        |  |                | 97 |  |                 |  | 168 |                              | 





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 2015 to
2024. As of December 31, 2012, the Group’s aggregate future minimum lease payments (including future finance charges) required
under its capital leases were RMB24,596 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,
2012, the Group’s aggregate future minimum lease payments required under its operating leases were RMB22,161 million. As
of the year end of 2012, the Group’s operating leases had original terms generally ranging from five 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 0% to 11.6% 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 RMB182 million, RMB172 million and RMB318 million during 2012, 2011 and 2010 respectively,
has been included as part of the lease charges.



Aircraft Flight Equipment



The jet engines used
in the Group’s aircraft fleet are manufactured by General Electric Corporation, Rolls-Royce plc, United Technologies International,
Inc., CFM International, Inc. and International Aviation Engines Corporation. The Group had 79 and 74 spare jet engines for its
fleet as of the year end of 2012 and 2011, respectively. The Group determines its requirements for jet engines based on all relevant
considerations, including manufacturers’ recommendations, the performance history of the jet engines and the planned utilization
of its aircraft. Acquisition of rotables and certain of the expendables for the Group’s aircraft are generally handled by
Southern Airlines (Group) Import and Export Trading Company Limited (“SAIETC”), a subsidiary of CSAHC acting as agent
for the Group, in consideration of an agency fee. The Group arranges the ordering of aircraft, jet engines and other flight equipment
for the Airline Subsidiaries and keeps an inventory of rotables and expendables for the Airline Subsidiaries.



Aircraft Maintenance



A major part of the
maintenance for the Group’s fleet other than overhauls of jet engines is performed by Guangzhou Aircraft Maintenance Engineering
Company Limited (“GAMECO”), an entity jointly controlled by the Company, Hutchison Whampoa (“Hutchison”)
and South China International Aircraft Engineering Company Limited, consistent with the Group’s strategy to achieve fully
integrated airline operations and to assure continued access to a stable source of high quality maintenance services. The remaining
part of the maintenance for the Group’s fleet other than overhauls of jet engines is performed by service providers in China
and overseas. GAMECO performs all types of maintenance services, ranging from maintenance inspections performed on aircraft (“line
maintenance services”) to major overhaul performed at specified intervals. GAMECO was the first of three aircraft maintenance
facilities in China having been certified as a repair station by both the CAAC and the Federal Aviation Administration. In March
1998, GAMECO received an approval certificate from the United Kingdom Civil Aviation Authority for the repair and maintenance of
aircraft and aircraft engines.



23







The Group believes
that GAMECO performs major maintenance checks on the Group’s aircraft within time periods generally consistent with those
of large international airline maintenance centers. GAMECO’s repair and maintenance capacity include overhaul of more than
70% of the Group’s aircraft. Although rotables for the Group’s aircraft are generally imported through SAIETC, a portion
of expendables and other maintenance materials are directly imported by GAMECO. GAMECO also provides line maintenance services
to other 10 Chinese airlines and 23 international airlines. GAMECO provides heavy maintenance services to 7 other Chinese airlines
and 12 international airlines. Our agreement with GAMECO usually has a term of one year.



Overhauls of jet engines
are performed by Zhuhai MTU, a former jointly controlled entity of the Company and MTU Aero Engines GmbH, and also by overseas
qualified service providers in Germany, Malaysia, Canada and Poland. On September 28, 2009, the Company entered into an agreement
with CSAHC to sell its 50% equity interest in Zhuhai MTU to CSAHC at a consideration of RMB1,607,850,000. The transfer was completed
in February 2010.



The amounts incurred
by the Group for comprehensive maintenance services provided by GAMECO and Zhuhai MTU were RMB2,298 million, RMB2,018 million and
RMB1,742 million for the years ended December 31, 2012, 2011 and 2010, respectively.



Safety



The Group endeavors
to maintain strict compliance with all laws and regulations applicable to flight safety. In addition, the Group has adopted measures
to eliminate or minimize factors that may impair flight safety, including specialized training programs and safety manuals. The
Air Safety Management Department of the Company implements safety-related training programs on an ongoing basis in all of the Group’s
operations to raise the safety awareness of all employees. As a result, overall flight safety has gradually improved. For minor
“incidents” which include various events and conditions prescribed by the CAAC which do not involve serious personal
injury or material damage to flight equipment, the Group has kept the number consistently below what is prescribed by the CAAC.
For example, the Company’s “Accident Signs Per Ten Thousands Hours Ratio” was 0.036, 0, and 0.008in
2012, 2011 and 2010, respectively. In comparison, CAAC’s published maximum acceptable Accident Signs Per Ten Thousands Hours
Ratio was 0.5, 0.5 and 0.5in 2012, 2011 and 2010, respectively. This ratio is defined as the occurrence of one incident
for every 10,000 hours of flight time. In 2012, the Group strengthened its flight safety management on the internal and external
safety requirements. In 2008, the Group received the “Five-Star Flight Safety Award” from CAAC, making it the first
in the aviation industry to receive such a great honor. Subsequently in 2012, we were awarded the "Safe Flight Diamond Award"
by CAAC due to our 10,000,000 safety flight hours record, also the first in the aviation industry to receive such a great honor.
By December 31, 2012, the Company’s continuous safe flight span totaled to 10.37 million hours.



Jet Fuel



Jet fuel costs typically
represent a major component of an airline’s operating expenses. The Group’s jet fuel costs accounted for 39.0%, 37.5%
and 33.2% of the Group’s operating expenses for the years ended December 31, 2012, 2011 and 2010, respectively. Like all
Chinese airlines, the Group is generally required by the Chinese government to purchase its jet fuel requirements from regional
branches of CAOSC and Bluesky Oil Supplies Company, except at the Shenzhen, Zhuhai, Sanya, Haikou, Shanghai Pudong and other small
airports where jet fuel is supplied by Sino-foreign joint venture in which CAOSC is a joint venture partner. CAOSC is a State-owned
organization controlled and supervised by the CAAC that controls the importation and distribution of jet fuel throughout China.



Jet fuel obtained from
CAOSC’s regional branches is purchased at uniform prices throughout China that are determined and adjusted by CAOSC from
time to time with the approval of the CAAC and the pricing department of the NDRC based on market conditions and other factors.
As a result, the costs of transportation and storage of jet fuel in all regions of China are spread among all domestic airlines.
Jet fuel costs in China are influenced by costs at State-owned oil refineries and limitations in the transportation infrastructure,
as well as by insufficient storage facilities for jet fuel in certain regions of China.



Prior to 1994, domestic
jet fuel prices were generally below international jet fuel prices. The Chinese government had gradually increased domestic jet
fuel prices in order to reflect more accurately the costs of supplying jet fuel in China. As a result, domestic jet fuel prices
have become higher than those in the international market since the beginning of 1994. In 2007 through the first half of 2008,
the crude oil prices in the international market reached historic highs. In response to the pressure imposed by such soaring prices,
on November 1, 2007 and June 20, 2008, respectively, NDRC increased the domestic price for jet fuel. Thereafter, in order to reduce
fuel cost pressure faced by Chinese airlines, NDRC approved reductions in domestic prices for jet fuel in 2008 and 2009. However,
starting from February 2009, the crude oil price in the international market continued to increase and maintained at a high level
in 2012. As a result, the domestic price for jet fuel has increased significantly from RMB4,020 per ton on May 19, 2009 to RMB7,926
per ton on October 1, 2012. Our jet fuel costs increased from RMB32,675 million in 2011 to RMB37,401 million in 2012 as a result
of an increase of flights and an increase in average jet fuel price of 0.9%.



24







In addition to purchases
of jet fuel from CAOSC, the Group is also permitted by the Chinese government to purchase a portion of its jet fuel requirements
for its international flights from foreign fuel suppliers located outside China at prevailing international market prices. Jet
fuel purchased from such sources outside China accounted for approximately 12% and 11% of the Group’s total jet fuel consumption
in 2012 and 2011, respectively.



Fuel Surcharge



The NDRC has
lowered the rate of fuel surcharge from 0.00002691 per km to 0.00002541 per km, starting from April 1, 2012 and ending on
March 31, 2013. Based on that rate, for every RMB100 by which the cost of jet fuel exceeds RMB4,140 per ton, the airlines are
allowed to charge RMB0.00002541 per km for the flight distance. The Group’s   profit for the year may suffer from
an unexpected change in the fuel surcharge collection policies and other factors beyond our control.



Flight Operations



Flight operations for
the Group’s flights originating in Guangzhou are managed by our flight operations and marketing divisions, which are responsible
for formulating flight plans and schedules consistent with route and flight approvals received from the CAAC. The Company’s
flight operations center in Guangzhou is responsible for the on-site administration of flights, including the dispatch and coordination
of flights, deployment of aircraft, ground services and crew staffing. In addition, each of the Airline Subsidiaries maintains
flight operations centers at all servicing airports for on-site administration of their flights. Our general dispatch offices are
responsible for monitoring conditions of the Group’s route network, administering the Group’s flight plans, collecting
and monitoring navigation data and analyzing and monitoring airport conditions.



To enhance its management
of flight operations, the Group’s computerized flight operations control system (SOC) began operation in May 1999. The system
utilizes advanced computer and telecommunications technology to manage the Group’s flights on a centralized, real-time basis.
The Group believes that the system will assist it to (i) compile flight schedules more efficiently; (ii) increase the utilization
of aircraft; (iii) allow real-time tracking of all of the Group’s flights; and (iv) improve coordination of the Group’s
aircraft maintenance and ground servicing functions.



Training of Pilots and Flight Attendants



The Group believes
that its pilot training program, which was established in cooperation with the CAAC affiliated Beijing University of Aeronautics
and Aviation (the “BUAA”), has significantly improved the quality of the training received by the Group’s pilots
and has helped maintain the quality of the Group’s staff of pilots at a level consistent with the expansion of operations
called for by the Group’s business strategy.



In the Group’s
pilot training program, trainees have two years of theoretical training at the BUAA. After successful completion of academic and
physical examinations, the trainees receive flight training for a period of approximately 20 months at the Flying College, a company
that is 48.12% owned by the Company, 4.76% owned by CSAHC and 47.12% owned by a third party shareholder. Each trainee at the Flying
College is required to fly at least 250 hours before being awarded a flight certificate. Graduates of the BUAA and the Flying College
are hired by the Group as trainee pilots after passing a CAAC-administered examination to obtain a pilot license. The total training
period for the Group’s trainee pilots is approximately four years. The Group has about 2,128 trainees as of April 19, 2013
about 450 trainees are expected to graduate by the end of 2013.



As part of the pilot
training program, trainee pilots receive their initial training in the operation of a specific aircraft with Zhuhai Xiang Yi Aviation
Technology Company Limited (“Zhuhai Xiang Yi”), a jointly controlled entity between the Company and CAE International
Holdings Limited, which also provides training to pilots from other Chinese airlines. Zhuhai Xiang Yi is equipped with simulators
for majority models of aircraft currently operated by the Group and provides flight simulation training services to the Group.



The Group’s pilots
are required to be licensed by the CAAC, which requires an annual proficiency check. The Group’s pilots attend courses in
simulator training twice annually and in emergency survival training once annually. The Group also conducts regular advanced training
courses for captains and captain candidates. Pilots advance in rank based on number of hours flown, types of aircraft flown and
their performance history.



The Group funded the
training of its recruited pilots in previous years and, as a result, incurred significant costs over the years. Recently, there
has been a trend in the financing of pilot training worldwide from employer-sponsored to self-sponsored scheme. Such a change will
not only cut down the Group’s training expenses significantly, but also ensures the long-term dedicated service of the pilots.
Starting from 2007, the Group began to recruit pilots under the self-sponsored training arrangement. On December 5, 2007, August
27, 2008, August 27, 2009, August 26, 2010 and September 9, 2011, the Board approved the Company to provide a guarantee with joint
liability for the loans incurred under the self-sponsored pilot training program in an aggregate amount of
RMB90,858,000, not more than RMB213,600,000, not more than RMB184,750,000, not more than RMB179,269,600 and not more than
RMB83,850,000, respectively. On December 29, 2009, Xiamen Airlines, 51% owned subsidiary of the Company agreed to provide a guarantee
with joint liability for the loans incurred under the partial self-sponsored pilot training program in an aggregate amount of not
more than RMB100 million up to December 31, 2012.As of December 31, 2012, the Group has provided guarantees with
joint liability for the loans of such self-sponsored pilots in an aggregate amount of RMB581,000,000, under which an aggregate
of personal bank loans of RMB398,000,000 were drawn down from the banks. For the year ended December 31, 2012, the Group made repayments
of RMB3,000,000 due to the default of payments of certain pilot
trainees.



25







Under the program,
the self-sponsored pilots are bound to enter into service contracts with the Group when they finish their training courses. They
have the choice to repay their loans in advance or in installments.



The Group conducts
theoretical and practical training programs for its flight attendants at its Flight Attendants Training Center in Guangzhou (the
“Guangzhou Training Center”). The Guangzhou Training Center is equipped with computerized training equipment, as well
as simulator cabins for all models of aircraft currently operated by the Group. At the Guangzhou Training Center, flight attendants
of the Group receive comprehensive training in areas such as in-flight service, emergency evacuation and water rescue.



Ground Services



The Group makes arrangements
with airport authorities, other airlines or ground services companies for substantially all ground facilities, including jet-ways,
waiting areas, ticket counters and support services buildings, at each airport that it serves. The Group pays landing, parking
and other fees to such airports, including Guangzhou Baiyun International Airport (the “Guangzhou Baiyun Airport”).
At domestic airports, such fees are generally determined by the CAAC.



At Guangzhou Baiyun
Airport, the Group operates its own passenger check-in, cargo, mail and baggage handling, aircraft maintenance and cleaning services.
The Group also provides such services to its customer airlines that operate in Guangzhou Baiyun Airport.



Ground services at
the airports, such as those in Shenzhen, Changsha, Wuhan, Zhengzhou, Haikou, Zhuhai, Xiamen, Fuzhou, Guilin, Shantou, Guiyang,
Shenyang, Harbin, Dalian, Changcun, Sanya, Nanning, Chongqing, Shanghai Hongqiao, Shanghai Pudong and Urumqi, are operated directly
by the Group. Ground services at the airport in Beijing have been primarily provided by Beijing Ground Service, which became
a wholly-own subsidiary of the Company in June 2009. Ground services at other airports in China are provided to the Group by local
airport authorities or local airlines pursuant to various service agreements. Ground services and other services at airports outside
China are provided to the Group by foreign services providers pursuant to various service agreements with such parties. All such
agreements of the Group are short-term and otherwise on terms that are customary in the industry.



Air Catering



We own a 55% equity
interest in Guangzhou Nanland Air Catering Company Limited (“Nanland”).Nanland provides in-flight meals,
snacks, drinks and related services for all of the Group’s flights originating in Guangzhou and substantially all other flights
departing from Guangzhou Baiyun Airport. The Group contracts with various air catering suppliers with respect to in-flight catering
services for flights originating from other airports, generally on an annual basis and otherwise on terms that are customary in
the industry.



In order to optimize
assets structure, tighten cost control, reduce the number of connected transactions and enhance the independence of operations
in the long-run, the Company acquired a 100% equity interest in China Southern Airlines Group Air Catering Company Limited (“SAG
Air Catering”) on August 31, 2007 from CSAHC. SAG Air Catering provides in-flight meals for flights of the Company originating
or stopping at domestic airports, mainly in northern China and Xinjiang regions.



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 sixBoeing 777 freighters, mainly servicing eight international cargo routes, Shanghai
to Amsterdam, Frankfurt, Vienna, Los Angeles, Chicago, Anchorage, Vancouver,Osakaand Guangzhou to Amsterdam and
Los Angeles, Chongqing to Amsterdam, and Qingdao to Los Angeles. The Group conducts its cargo business primarily through its cargo
hubs in Guangzhou and Shanghai.



Sales, Reservations and Marketing



Passenger Ticket
Sales and Reservations



The Group’s ticket
sales and reservations are conducted by or through independent sales agents and the Group’s own network of exclusive sales
offices as well as the CAAC’s sales offices and CSAHC’s affiliates. 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, Auckland, Baku, Bangkok, Bishkek, Brisbane, Busan,
Chicago, Daegu, Daejeon, Delhi, Dubai (Sharjah), Dushanbe, Frankfurt, Fukuoka, Hanoi, Hiroshima, Ho Chi Minh City, Irkutsk, Islamabad,
Jakarta, Jeddah, Kathmandu, Khabarovsk, Khudzhand, Kitakyushu, Kuala Lumpur, London, Los Angeles, Manila, Melbourne, Moscow, Nagoga,
Niigata, Novosibirsk, Oakland, Osaka, Osh, Paris, Penang, Perth, Phnom Penh, Phuket, Sapporo, Sendai, Seoul, Siem Reap, Singapore,
Sydney, Tashkent, Tehran, Tokyo, Toyama, Tbilisi, Vancouver, Vladivostok, Vienna and Yangon.



26







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 2012, approximately 15% of all ticket sales for the Group’s scheduled flights were
made by the Group’s network of sales offices and CSAHC’s affiliates.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 5%-6% 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 2012, independent sales agents accounted for approximately 85% 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. In 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, which provide SMS information services on mileage, flight schedule, flight status and air ticket
price, and launched the “95539” services hotlines.



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 3%-4% of the relevant cargo freight rate for domestic
and international services.



Promotional and
Marketing Activities



The Group engages in
regular promotional and marketing activities in an effort to increase its market share. The Group’s promotional and marketing
activities for domestic routes emphasize safety, passenger comfort and the frequency of the Group’s flights. The Group’s
promotional and marketing activities for international and regional passengers emphasize the Group’s quality of service,
extensive route network in China and greater frequency of flights relative to other Chinese airlines. The Group is among the first
to launch premium economy class of seating. In addition, the Group also promotes and markets its regional and international routes
on the basis of price.



The Group has been
seeking to increase its name recognition by offering new services to passengers. For example, the Group was the first Chinese airline
to provide off-airport check-in services. The Group also offers transfer and baggage “through-handling” services to
passengers connecting to other airlines, including passengers connecting in Hong Kong for flights to Taiwan. The Group widened
its use of information technology and introduced new services such as cell phone check-in and SMS platforms. During the Beijing
Olympic Games, the Group launched a special promotion known as “Welcome the Olympic Games with Gold Medal Services”
and successfully fulfilled its duties to deliver quality services for the Beijing Olympic Games and Paralympics Games. In 2010,
the Group successfully completed its missions to deliver quality services for the 16th Asian Games held in Guangzhou and the World
Exposition Shanghai.In preparation for the hosting of the
Asian Games, Guangzhou has made a huge investment in urban renovation and the construction of sports facilities. In addition, there
has been high consumption before, during and after the Asian Games. Ever since the successful bidding for hosting the Asian Games
in 2004, Guangzhou has achieved a faster growth and improvement in its economy. Even though during the Asian Games, the aviation
market did not show a marked growth trend due to a stricter security policy and there was little change in the pattern of the cycle
of travelers entering and leaving Guangzhou, which was basically following the trend in the normal cycle, in the long run, the
Asian Games will have a positive impact on the tourism and the aviation market in Guangzhou to a certain extent.



On the wake of permitted
direct flights on weekends between Taiwan and Mainland China starting from July 4, 2008, the Company became the first Chinese carrier
to fly nonstop to Taiwan. By taking advantage of such further liberalized air travel policy between Taiwan and Mainland China,
the Company has taken measures to explore opportunities presented by and increase its name recognition in Taiwan market. On June
23, 2008, the Company entered into a memorandum of cooperation with China Airlines, which is the largest carrier in Taiwan by route
network. Based on the memorandum, the scope of cooperation between the parties will cover passenger, cargo, maintenance and ground
handling services. The Company believes that its strategic collaboration with China Airlines will be beneficial to both parties,
expand their route network worldwide, increase their freight load factors, reduce labor and operating costs, and enhance the competitiveness
of both airlines in the global air travel market.



To enhance relationships
with its passengers, the Group has launched two frequent flyer programs, namely the “China Southern Airlines Sky Pearl Club”
and the “Xiamen Airlines’ Egret Card Frequent Flyer Program”. By the end of 2012, the Group had approximately
18,190,000 members (including those of Xiamen Airlines) under these programs.



27







Regulation



The Chinese commercial
aviation industry is subject to a high degree of regulation and oversight by the CAAC. Regulations and policies issued or implemented
by the CAAC encompass substantially all aspects of airline operations, including route allocation, pricing of domestic airfare,
the administration of air traffic control systems and certain airports, air carrier certifications and air operator certification
and aircraft, registration and aircraft airworthiness certification. The Civil Aviation Law, which became effective in March 1996,
provides a framework for regulation of many of these aspects of commercial aviation activities. Although China’s airlines
operate under the supervision and regulation of the CAAC, they are accorded an increasingly significant degree of operational autonomy,
including with respect to the application for domestic, regional and international routes, the allocation of aircraft among routes,
the purchase of flight equipment, the pricing of air fares within a certain range, the training and supervision of personnel and
their day-to-day operations.



As an airline providing
services on international routes, the Group is also subject to a variety of bilateral civil air transport agreements that provide
for the exchange of air traffic rights between China and various other countries. In addition, China is a contracting state, as
well as a permanent member, of the International Civil Aviation Organization (the “ICAO”), an agency of the United
Nations established in 1947 to assist in the planning and development of international air transport, and is a party to many other
international aviation conventions. The ICAO establishes technical standards for the international aviation industry. The Group
believes that it, in all material respects, complies with all such technical standards.



Route Rights



Domestic Routes.
The right of any Chinese airline to carry passengers or cargo on any domestic route must be obtained from the CAAC. Non-Chinese
airlines are not permitted to provide domestic air service between destinations in China. The CAAC’s policy is to assign
a domestic route to the Chinese airline that is best suited to serve the route based, in part, on the location of the airline’s
main or regional base at the point of origin. Under current regulations, airlines are generally expected to operate mainly from
their route bases, and flights within a particular region are expected to be served by airlines based in that region. The Group
believes that these regulatory parameters benefit airlines, such as the Group, that have a large number of regional route bases.
The CAAC also considers other factors that may make a particular airline suitable to operate a domestic route, including the applicant’s
general operating authority, compliance with pricing regulations and regulations applicable to safety and service quality, market
demand, the ability of the applicant in terms of its existing routes, airport facilities and related support services.



The CAAC considers
market conditions for a domestic route in determining whether the route should be allocated to one or more airlines. Generally,
the CAAC requires the passenger load factor on certain route should be above the average rate of the whole market in the last flight
season before additional flights and participants may be put on that route.



Regional Routes.
Hong Kong and Macau routes and landing rights are derived from agreements between the Chinese government and the government of
the Hong Kong SAR, and between the Chinese government and the government of Macau SAR. The rights to fly between Beijing and Hong
Kong, Beijing and Macau, Shanghai and Hong Kong and Shanghai and Macau are allocated by the CAAC among the four Chinese airlines.
The Group understands that the criteria for determining whether a Hong Kong and Macau route will be allocated to a particular airline
include market demand, the ability of the airline to service the route and the appropriateness of the airline’s aircraft
for such route.



A number of Hong Kong
routes are operated by Chinese airlines on a “charter” flight basis. Permission to operate these flights is in theory
subject to monthly review by the CAAC and the Hong Kong Civil Aviation Department. The CAAC has informally indicated that it primarily
considers market demand and airline capability in granting permission for such flights.



Previously, direct
flights between Taiwan and Mainland China were only available during certain festivals. Since July 4, 2008, however, the ban on
direct flights has been further liberalized to allow direct charter flights on weekends. On November 4, 2008, the Mainland China
and Taiwan agreed to regular direct passenger charter flights across the Taiwan Strait. On August 31, 2009, the Mainland China
and Taiwan extended the number of regular cross-Strait direct passenger flights from 108 to 270 a week. Cross-Strait direct passenger
flights were further increased in the following years. As of April 19, 2013, there were 616 cross-Strait direct passenger flights
a week.



International Routes.
International route rights, as well as the corresponding landing rights, are derived from air services agreements negotiated between
the Chinese government, through the CAAC, and the government of the relevant foreign country. Each government grants to the other
the right to designate one or more domestic airlines to operate scheduled service between certain destinations within each of such
countries. Upon entering into an air services agreement, the CAAC determines the airline to be awarded such routes based on various
criteria, including the availability of appropriate aircraft, flight and management personnel, safety record, the overall size
of the airline, financial condition and sufficiency of assets to bear civil liabilities in international air services. These route
rights may be terminated by the CAAC under special circumstances.



The criteria for determining
whether an international route will be allocated to a second airline generally include (i) the terms of the relevant bilateral
civil aviation agreement; (ii) consistency with overall national plans and the national interest and the enhancement of reasonable
competition; and (iii) whether the international airports to be used are sufficient for the aircraft flown and employ security
measures consistent with international standards.



In addition, if the
relevant bilateral civil aviation agreement permits more than one Chinese airline to operate a particular international route,
the CAAC will only permit a second airline to operate on such route if during a specific season, the average load factor is more
than 75%, or for a particular international route, if the flight capacity provided by Chinese airlines is 50% less than that provided
by foreign airlines.



28









Air Fare Pricing
Policy



Pursuant to “Pricing
Reform of Domestic Civil Aviation” as approved by the State Council of the PRC effective on April 20, 2004, prices on domestic
routes now fluctuate freely within a predetermined range. Instead of direct supervision by setting prices of air tickets through
a local price bureau, the government now provides guidance on domestic flights and domestic civil aviation is controlled by the
government indirectly. Market-oriented pricing policy was introduced and pricing system has been adjusted as a result of the above
pricing reform. The CAAC and NDRC issued a notice on April 13, 2010, effective on June 1, 2010, pursuant to which, airlines may
set first-class and business-class airfares freely in accordance with market prices, subject to relevant PRC laws. The economy-class
airfares remain to be subject to the predetermined range.



Published air fares
of Chinese airlines for the Hong Kong and Macau routes are determined by the CAAC and the relevant civil aviation authorities in
Hong Kong or Macau, subject to consultation between the relevant Chinese airlines and Hong Kong or Macau airlines. Airlines may
offer discounts on flights on their Hong Kong regional routes. With respect to the Taiwan routes, the air fares are currently determined
by Chinese airlines at their own discretion and may be subject to certain pricing guidance to be issued by the CAAC in the future.



Published air fares
of Chinese airlines for international routes are determined through consultation between the relevant Chinese airlines and foreign
airlines in accordance with the civil aviation agreements between the Chinese government and the relevant foreign government, taking
into account the international air fare standards established through the International Air Transport Association. All air fares
for international routes must be approved by the CAAC. Discounting of published international air fares is permitted.



Acquisition of
Aircraft and Flight Equipment



If a Chinese airline
plans to acquire an aircraft, the airline must first seek approval from the CAAC and NDRC. The airline must, as a condition of
approval, provide specific acquisition plans, which are subject to modification by the CAAC and NDRC. If the CAAC and NDRC approve
an aircraft acquisition, the airline negotiates the terms of the acquisition with the manufacturer together with China Aviation
Suppliers Import and Export Corporation (“CASC”), an entity controlled by CAAC, because CASC possesses the license
required to import or export aircraft, and CASC receives a commission in respect thereof. Most Chinese airlines are also required
to acquire their aircraft engines, spare parts and other flight equipment through CASC. The Company and a few other Chinese airlines
are permitted to import jet engines and other flight equipment for their own use without the participation of CASC. In the case
of the Company, SAIETC acts as its import agent and receives an agency fee for its services.



Jet Fuel Supply and Pricing



CAOSC and Bluesky Oil
Supplies Company, companies supervised by the CAAC, are the only jet fuel supply companies in China, with the exception of the
joint venture jet fuel supply companies that supply Shenzhen, Zhuhai, Sanya, Haikou, Shanghai Pudong and other small airports,
in each of which CAOSC is a partner. Airlines are generally not permitted to buy jet fuel from other suppliers in their domestic
operations, since the direct import of jet fuel for domestic purposes is prohibited. As a result, all Chinese airlines purchase
their domestic jet fuel supply requirements (other than the above mentioned exceptions) from the seven regional branches of CAOSC.
Jet fuel obtained from such regional branches is purchased at uniform prices throughout China that are determined and adjusted
by CAOSC from time to time with the approval of the CAAC and the pricing department of the NDRC based on market conditions and
other factors.



Safety



The CAAC has made the
improvement of air traffic safety in China a high priority and is responsible for the establishment of operational safety, maintenance
and training standards for all Chinese airlines. The Chinese airlines are required to provide monthly flight safety reports to
the CAAC, including reports of flight or other incidents or accidents and other safety related problems involving such airline’s
aircraft occurring during the relevant reporting period. The CAAC periodically conducts safety inspections on individual airlines.



Every pilot is required
to pass CAAC-administered examinations before obtaining a pilot license and is subject to an annual recertification examination.



All aircraft operated
by Chinese airlines, other than a limited number of leased aircraft registered in foreign countries, are required to be registered
with the CAAC. All aircraft operated by Chinese airlines must have a valid certificate of airworthiness, which is issued annually
by the CAAC. In addition, maintenance permits are issued to a Chinese airline only after its maintenance capabilities have been
examined and assessed by the CAAC. Such maintenance permits are renewed annually. All aircraft operated by Chinese airlines may
be maintained and repaired only by CAAC-certified maintenance facilities, whether located within or outside China. Aircraft maintenance
personnel must be certified by the CAAC before assuming aircraft maintenance posts.



29







Security



The CAAC establishes
and supervises the implementation of security standards and regulations for the Chinese commercial aviation industry. Such standards
and regulations are based on Chinese laws, as well as standards developed by international commercial aviation organizations. Each
airline and airport in China is required to submit to the CAAC an aviation security handbook describing specific security procedures
established by such airline or airport for the day-to-day operations of commercial aviation and procedures for staff training on
security. Such security procedures must be based on relevant CAAC regulations and international commercial aviation treaties. Chinese
airports and airlines that operate international routes must also adopt security measures in accordance with the requirements of
the relevant international agreements.



Noise and Environmental
Regulation



All airlines in China
must comply with the noise and environmental regulations of the PRC State Environmental Protection Agency. Applicable regulations
of the CAAC permit Chinese airports to refuse to grant take-off and landing rights to any aircraft that does not comply with noise
regulations.



Chinese Airport
Policy



The CAAC supervises
and regulates all civilian airports in China. The local government of the PRC manages the administration of most civilian airports
in China. Airports in China are also subject to regulation and ongoing review by the CAAC, which determines take-off and landing
charges, as well as charges for the use of airports and airport services.



Competition



The CAAC’s extensive
regulation of the Chinese commercial aviation industry has had the effect of managing competition among Chinese airlines. Nevertheless,
competition has become increasingly intense in recent years due to a number of factors, including relaxation of certain regulations
by the CAAC, an increase in the number of Chinese airlines and an increase in the capacity, routes and flights of Chinese airlines.



In the Chinese aviation
industry, the three dominant airlines are the Group, Air China Limited (the “Air China”) and China Eastern Airlines
Corporation Limited (the “China Eastern Airlines”). In 2012, these three airlines together controlled approximately
69.8%of the commercial aviation market in China as measured
by passengers carried.



Most major Chinese
airlines have in recent years significantly expanded their fleets, while at the same time passenger traffic may not increased proportionately.
In some years, this has resulted in a reduction in our passenger load factors. As a result, we are required to be more competitive
with respect to, for example, quality of service, including ticketing and reservations, in-flight services, flight scheduling and
timeliness.



The Group expects that
competition in China’s commercial aviation industry will continue to be intense. The Group will also face increasing competition
from alternative means of transport, such as highway and rail, as China’s transportation infrastructure improves. In particular,
the so-called “Four Longitudinal and One Horizontal” high-speed railways have brought negative impact to the domestic
commercial aviation sector.



In June 2011, the
Beijing-Shanghai High-Speed Railway commenced operation. We currently have only one daily flight on the Beijing-Shanghai aviation
route. The opening of the Beijing-Shanghai High-Speed Railway has had a little direct impact on us. The aviation routes along the
way, in particular, short-haul routes have experienced a greater loss of customers, but such losses are within our expectations
and have had minimal impact on the entire industry. In December 2012, the Beijing-Guangzhou and Harbin-Dalian High-Speed Railways
commenced operation and the construction of all railways in China's “Four Longitudinal and One Horizontal” high-speed
railway network is expected to complete in October 2013. We expect it will bring further negative impact on the domestic aviation
industry.



From the perspective
of long term development, with the continuous improvement in the high-speed railway lines and services, the domestic flights of
the airlines will face competition from all sides, which spurs the airlines to constantly improve its network of aviation routes
while stepping up efforts to upgrade service quality and brand influence for the enhancement of its competitiveness as a whole.



The Group believes
that it possesses certain competitive advantages as compared to other Chinese airlines. The Group has the most extensive route
network and the largest number of regional route bases among Chinese airlines, which the Group believes places it in a favorable
position in the route allocation process. The Group also has the largest aircraft fleet among all Chinese airlines, which, together
with the Group’s planned aircraft acquisitions, will permit the Group to expand its operations and to improve the deployment
of the aircraft in its fleet. The Group also believes that its dominant presence in the populous and economically developed southern
and central regions of China provides it with a competitive advantage in attracting new customers and that its fully integrated
flight training, aircraft and engine maintenance and air catering operations enable it to achieve and maintain high quality service
to its customers. In light of increasing competition from high speed trains, the Group intends to place more flight fleet to the
international routes, where the Group will make an effort for a stronger market position. The Group also believes that its optimized
route network, increased operational efficiency and improved service quality will attract more customers. The proposed cooperation
between the Company and the high speed trains operators will also enable the Group to render a seamless air-ground service to customers
which will bring a win-win situation for both the Group and the high speed trains operators.



30







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.



|     |  | Passenger Carried            |       |     | Cargo and Mail Carried (tons)   |  |      | Total Traffic (tons kilometers) | 
|---- |  | ---------------------------- | ----- | --- | ------------------------------- |  | ---- | ------------------------------- | 
|Year |  | Industry Total (in millions) |       |     | Group’s Share
    (% 
of total) |  |      | Industry Total (in thousands)   | 
|2008 |  |                              | 192.5 |     |                                 |  | 30.3 |                                 | 
|2009 |  |                              | 230.5 |     |                                 |  | 28.8 |                                 | 
|2010 |  |                              | 267.7 |     |                                 |  | 28.6 |                                 | 
|2011 |  |                              | 292.2 |     |                                 |  | 27.6 |                                 | 
|2012 |  |                              | 319.0 | (1) |                                 |  | 27.1 | (1)                             | 



(1) The numbers of market shares in 2012
originate from CAAC’s preliminary report and may be subject to changes and thus differ from the final CAAC statistics.



Domestic Routes



The Group competes
against its domestic competitors primarily on the basis of flight schedule, route network, quality of service, safety, type and
age of aircraft and, to a lesser extent and until recently, price. The Group competes against other major Chinese airlines in its
various domestic route markets. Of these competitors, the largest are two airlines owned or controlled by the Chinese government,
and the remaining airlines are operated by or under the control of various Chinese provincial or municipal governments.



The following table
sets forth the Group’s market share in terms of passengers carried, cargo and mail carried on departing flights and total
departing flights at the ten busiest airports in China in 2012 according to passenger volume data from CAAC statistics.



|Airport           |  | Passenger Carried (% of total) |       |   | Cargo and Mail Carried (% of total) |  |       | Departing Flight (% of total) | 
|----------------- |  | ------------------------------ | ----- | - | ----------------------------------- |  | ----- | ----------------------------- | 
|Beijing           |  |                                | 17.24 | % |                                     |  | 11.4  | %                             | 
|Guangzhou         |  |                                | 51.38 | % |                                     |  | 30.17 | %                             | 
|Shanghai Pudong   |  |                                | 8.83  | % |                                     |  | 7.38  | %                             | 
|Shanghai Hongqiao |  |                                | 13.18 | % |                                     |  | 18.05 | %                             | 
|Shenzhen          |  |                                | 27.97 | % |                                     |  | 16.06 | %                             | 
|Chengdu           |  |                                | 12.59 | % |                                     |  | 11.62 | %                             | 
|Kunming           |  |                                | 15.33 | % |                                     |  | 18.83 | %                             | 
|Xi’an             |  |                                | 16.12 | % |                                     |  | 20.59 | %                             | 
|Hangzhou          |  |                                | 31.98 | % |                                     |  | 24.19 | %                             | 
|Chongqing         |  |                                | 24.68 | % |                                     |  | 24.22 | %                             | 



The following table
sets forth the Group’s market share in terms of passengers carried, cargo and mail carried on departing flights and total
departing flights at eight busiest airports in southern and central China (excluding Guangzhou and Shenzhen, which are included
in the table above) in 2012 according to passenger volume data from CAAC statistics.



|Airport       |  | Passenger Carried (% of total) |       |   | Cargo and Mail Carried (% of total) |  |       | Departing Flight (%of total) | 
|------------- |  | ------------------------------ | ----- | - | ----------------------------------- |  | ----- | ---------------------------- | 
|Wuhan         |  |                                | 38.85 | % |                                     |  | 44.74 | %                            | 
|Changsha      |  |                                | 39.35 | % |                                     |  | 52.76 | %                            | 
|Haikou        |  |                                | 25.66 | % |                                     |  | 29.16 | %                            | 
|Sanya         |  |                                | 27.18 | % |                                     |  | 33.20 | %                            | 
|Zhengzhou     |  |                                | 47.12 | % |                                     |  | 37.56 | %                            | 
|Guilin        |  |                                | 37.66 | % |                                     |  | 49.55 | %                            | 
|Nanning       |  |                                | 32.68 | % |                                     |  | 39.84 | %                            | 
|Zhang Jia Jie |  |                                | 26.27 | % |                                     |  | 30.42 | %                            | 



Regional Routes



In 2012, the Group
conducted a total of 16,031 flights on its regional routes, accounting for approximately 23.4% of all passengers carried by Chinese
airlines on routes between Hong Kong, Macau or Taiwan and destinations in China. The Group faces less competition on regional routes
than that on domestic and international, and earns higher operating margin. Air China, Eastern Airlines, Air Macau, Dragon Air
and Cathay Pacific Airways compete with the Group in the regional traffic markets.



31







International
Routes



The Group competes
with Air China, China Eastern Airlines and many well-established foreign airlines on its international routes. Most of these international
competitors have significantly longer operating histories, substantially greater financial and technological resources and greater
name recognition than the Group. In addition, the public’s perception of the safety and service records of Chinese airlines
may adversely affect the Group’s ability to compete against its regional and international competitors. Many of the Group’s
international competitors have larger sales networks and participate in reservation systems that are more comprehensive and convenient
than those of the Group, or engage in promotional activities that may enhance their ability to attract international passengers.



In Southeast Asian
routes, our competitors mainly include Thai Airways International, Singapore Airlines, Malaysian Airlines System, Air China and
China Eastern Airlines. In European routes, our competitors mainly include Air China, China Eastern Airlines, Cathay Pacific Airways
and Lufthansa German Airlines. In U.S. routes, our competitors mainly include Air China, China Eastern Airlines, Cathay Pacific
Airways and United Airlines. In Australian routes, our competitors include Air China, China Eastern Airlines, Cathay Pacific Airways
and Quantas Airways. The Group competes in the international market primarily on the basis of safety, price, timeliness and convenience
of scheduling.



Airline Subsidiaries



The Airline Subsidiaries
are joint ventures established by the Company and local companies in the provinces or special economic zones where the Airline
Subsidiaries are based and are engaged in providing airline and related services. As of December 31, 2012, the Company owns a 51%
or 60% equity interest in each of the Airline Subsidiaries.



As of December 31,
2012, Xiamen Airlines operated under its own “MF” code with a fleet of 86 aircraft on 130 domestic routes, 5 international
routes and 13 regional routes. In 2012, Xiamen Airlines carried a total of about 16.84 million passengers, or approximately 19.5%
of the passengers carried by the Group in that year, and had RMB15,761million in traffic revenue



As of December 31,
2012, Shantou Airlines operated under the Group’s “CZ” code with a fleet of 11 aircraft. In 2012, under the centralized
allocation of flight routes of the Group, Shantou Airlines carried a total of about 2.54 million passengers, or 2.9% of the passengers
carried by the Group in that year. Total traffic revenue of Shantou Airlines for the year ended December 31, 2012 was RMB2,235
million.



As of December 31,
2012, Chongqing Airlines operated under the “OQ” code with a fleet of nine aircraft. In 2012, under the centralized
allocation of flight routes of the Group, Chongqing Airlines carried a total of about 1.87 million passengers, or 2.2% of the total
number of passengers carried by the Group in that year. Total traffic revenue of Chongqing Airlines for the year ended December
31, 2012 was RMB1,521 million.



As of December 31,
2012, Zhuhai Airlines operated under the “CZ” code with a fleet of six aircraft. In 2012, under the centralized allocation
of flight routes of the Group, Zhuhai Airlines carried a total of about 1.17 million passengers, or approximately 1.4% of the total
number of passengers carried by the Group in that year. Total traffic revenue of Zhuhai Airlines for the year ended December 31,
2012 was RMB1,172 million.



As of December
31, 2012, Guizhou Airlines operated under the “CZ” code with a fleet of 12 aircraft. In 2012, under the
centralized allocation of flight routes of the Group, Guizhou Airlines carried a total of about 2.22 million passengers, or
approximately 2.6% of the total number of passengers carried by the Group in that year. Total traffic revenue of Guizhou
Airlines was approximately RMB2,115 million for the year ended December 31, 2012.



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$63,639) 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.



32







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.



We own various trademarks
and trade names related to our business. The names “China Southern” and “China Southern Airlines” contain
Chinese words of common usage and are therefore not eligible for registration as trade names under current Chinese law. The kapok
logo is a trademark registered in China and recorded with the International Air Transport Association (“IATA”), the
rights to which are owned by CSAHC. The Company and CSAHC have entered into a trademark license agreement (the “Trademark
License Agreement”), pursuant to which CSAHC has licensed to the Group the right to use the names “China Southern”
and “China Southern Airlines” in both English and Chinese and granted the Company a 10-year renewable license from
1997 to use the kapok logo on a world-wide basis. CSAHC has retained the right to use the kapok logo in connection with its non-airline
related businesses conducted as of the date of the Trademark License Agreement and to permit its affiliates that do not compete,
directly or indirectly, with the Group to use the kapok logo. Unless CSAHC gives a written notice of termination three months before
the expiration of the agreement, the agreement will be automatically renewed for another ten-year term. In May of 2007, the Trademark
License Agreement has been automatically renewed by the two parties for another ten-year term ending 2017. Xiamen Airlines owns
all rights to its egret logo, which is a trademark registered in China, and recorded with the IATA. Chongqing Airlines also owns
all rights to its logo, which is a trademark registered in China, and recorded with the IATA.



| | C. | Organizational Structure.
| | -- | -------------------------



The following chart
illustrates the corporate structure of the Group as of December 31, 2012 and the aggregate effective equity interest of the Company
in each of its principal subsidiaries, associates and jointly controlled entities.







Note a: Including 12.89%
ownership interest held by CSA’s subsidiaries.



33







The particulars of
the Group’s principal subsidiaries as of December 31, 2012 are as follows:



|Name of Company                                            |  | Place and Date of Establishment/Operation |  | Proportion of Ownership Interest Held by the Company |      
|---------------------------------------------------------- |  | ----------------------------------------- |  | ---------------------------------------------------- | -----
|Shantou Airlines Company Limited                           |  | PRC July 20, 1993                         |  |                                                      | 60   
|Zhuhai Airlines Company Limited                            |  | PRC May 8, 1995                           |  |                                                      | 60   
|Xiamen Airlines Company Limited                            |  | PRC August 11, 1984                       |  |                                                      | 51   
|Guizhou Airlines Company Limited                           |  | PRC November 12, 1991                     |  |                                                      | 60   
|Chongqing Airlines Company Limited                         |  | PRC May 30, 2007                          |  |                                                      | 60   
|Guangzhou Nanland Air Catering Company Limited             |  | PRC November 21, 1989                     |  |                                                      | 55   
|Guangzhou Baiyun International Logistic Company Limited    |  | PRC July 23, 2002                         |  |                                                      | 61   
|Xinjiang Civil Aviation Property Management Limited        |  | PRC December 12, 2002                     |  |                                                      | 51.84
|China Southern Airlines Group Air Catering Company Limited |  | PRC December 25, 2003                     |  |                                                      | 100  
|Nan Lung International Freight Limited                     |  | Hong Kong October 1, 1996                 |  |                                                      | 51   
|Beijing Southern Airlines Ground Services Company Limited  |  | PRC April 1, 2004                         |  |                                                      | 100  



The particulars of the Group’s principal
associates and jointly controlled entities as of December 31, 2012 are as follows:



|                                                               |  |                                           |  | Proportion of Ownership Interest Held by |      
|-------------------------------------------------------------- |  | ----------------------------------------- |  | ---------------------------------------- | -----
|Name of Company                                                |  | Place and Date of Establishment/Operation |  | Group Effective Interest                 |      
|Guangzhou Aircraft Maintenance Engineering Company Limited     |  | PRC October 28, 1989                      |  |                                          | 50   
|Southern Airlines Group Finance Company Limited                |  | PRC June 28, 1995                         |  |                                          | 33.98
|Sichuan Airlines Corporation Limited                           |  | PRC August 28, 2002                       |  |                                          | 39   
|Zhuhai Xiang Yi Aviation Technology Company Limited            |  | PRC July 10, 2002                         |  |                                          | 51   
|Southern Airlines Culture and Media Co., Ltd.                  |  | PRC May 13, 2004                          |  |                                          | 40   
|China Southern West Australian Flying College Pty Ltd.         |  | Australia October 1,1993                  |  |                                          | 48.12
|Guangzhou China Southern Zhongmian Dutyfree Store Co., Limited |  | PRC September 29, 2006                    |  |                                          | 50   





We will also establish a joint venture subsidiary,
China Southern Airlines Henan Company Limited, with Henan Civil Aviation Development and Investment Co., Ltd., but the establishment
is still subject to government approvals.





| | D. | Property, Plant and Equipment.
| | -- | ------------------------------



For a discussion of
the Group’s aircraft, see Item 4 “Information on the Company — History and development of the Company —
Aircraft Acquisitions.”



The Company’s
headquarters in Guangzhou occupy an area of approximately 1,272,201 square meters of land and a total gross floor area of approximately
713,506 square meters. The Company leases from CSAHC the land in Guangzhou on which the Company’s headquarters and other
facilities are located. The Company also leases from CSAHC certain buildings mainly at the Haikou, Wuhan, Nanyang, Shenyang, Dalian,
Jilin, Harbin, Xinjiang and other PRC cities.



The Company’s
principal properties are located at its headquarters site and at its route bases. The following table sets forth certain information
with respect to the Company’s properties at its headquarters in Guangzhou and certain route bases as of the date hereof.



|          |  | Land (in square meters) |           |  | Building (in square meters) | 
|--------- |  | ----------------------- | --------- |  | --------------------------- | 
|          |  | Owned                   |           |  | Leased                      | 
|Guangzhou |  |                         | 1,172,531 |  |                             | 
|Shenzhen  |  |                         | 246,397   |  |                             | 
|Zhuhai    |  |                         | 170,062   |  |                             | 
|Changsha  |  |                         | 173,351   |  |                             | 
|Zhengzhou |  |                         | 425,336   |  |                             | 
|Haikou    |  |                         | 5,265     |  |                             | 
|Wuhan     |  |                         | 16,712    |  |                             | 
|Nanyang   |  |                         | —         |  |                             | 
|Sanya     |  |                         | 106,680   |  |                             | 
|Shenyang  |  |                         | 142,199   |  |                             | 
|Dalian    |  |                         | —         |  |                             | 
|Jilin     |  |                         | 134,488   |  |                             | 
|Harbin    |  |                         | 2,499     |  |                             | 
|Xinjiang  |  |                         | 2,143     |  |                             | 
|Guangxi   |  |                         | 86,201    |  |                             | 
|Beijing   |  |                         | 85,453    |  |                             | 
|Shanghai  |  |                         | 227,775   |  |                             | 
|Chengdu   |  |                         | —         |  |                             | 
|Sydney    |  |                         | —         |  |                             | 





34









The following table
sets forth certain information with respect to the properties of the Airline Subsidiaries as of the date hereof.



|                   |  | Land (in square meters) |           |  | Building (in square meters) | 
|------------------ |  | ----------------------- | --------- |  | --------------------------- | 
|                   |  | Owned                   |           |  | Leased                      | 
|Xiamen Airlines    |  |                         | 1,055,746 |  |                             | 
|Shantou Airlines   |  |                         | 263,598   |  |                             | 
|Zhuhai Airlines    |  |                         | 99,306    |  |                             | 
|Guizhou Airlines   |  |                         | 259,879   |  |                             | 
|Chongqing Airlines |  |                         | 82,449    |  |                             | 



As systems for registration
and transfer of land use rights and related real property interests in China have been implemented relatively recently, such systems
do not yet comprehensively account for all land and related property interests. The land in Guangzhou on which the Company’s
headquarters and other facilities are located and the buildings that the Company uses at its route base in Wuhan and Haikou are
leased by the Company from CSAHC. However, CSAHC lacks adequate documentation evidencing CSAHC’s rights to such land and
buildings, and, as a consequence, the lease agreements between CSAHC and the Company for such land may not be registered with the
relevant authorities. Lack of registration may affect the validity of such lease agreements. There are certain other parcels of
land and buildings owned or used by the Group that lack adequate documentation. Lack of adequate documentation for land use rights
and ownership of buildings may impair the ability of the Group to dispose of or mortgage such land use rights and buildings. As
of April 19, 2013, the Group was in the process of applying for the land use right certificates and property title certificates
in respect of the properties located in Guangzhou (including Guangzhou Baiyun International Airport), Xiamen, Heilongjiang, Jilin,
Dalian, Nanning, Hunan, Beijing, Shanghai, Sanya, Zhuhai, Shenzhen,Shenyang, Xinjiang, Henan, Chengdu and Shantou in which the
Group has interests and for which such certificates have not been granted. The directors of the Company are of the opinion that
the use of and the conduct of operating activities at the properties referred to above are not affected by the fact that the Group
has not yet obtained the relevant land use right certificates and property title certificates.



ITEM 4A. UNRESOLVED STAFF COMMENTS.



Not applicable.



ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.



The following discussion
and analysis should be read in conjunction with the Financial Statements of the Group contained elsewhere in this Annual Report.
The Group maintains its books and accounts in accordance with the Accounting Standards for Business Enterprises-Basic Standard
and 38 Specific Standards, application guidance, bulletins and other relevant accounting regulations (collectively “PRC GAAP”)
and prepares its financial statements in accordance with both PRC GAAP and IFRSs. The Financial Statements contained elsewhere
in this Annual Report have been prepared in accordance with IFRSs.



The discussion and analysis of the Group’s
financial position and results of operations are based on the consolidated financial statements, which have been prepared in accordance
with IFRSs.



Critical Accounting Policies



The preparation of
the consolidated financial statements requires the Group to make estimates and judgments that affect the reported amount of assets
and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated
financial statements. Actual results may differ from these estimates under different assumptions or conditions.



Critical accounting
policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. Our principal accounting policies are set forth in Note 2 to the
consolidated financial statements. The Group believes that the following critical accounting policies involve the most significant
judgments and estimates used in the preparation of our financial statements.



35







Impairment for Long-lived Assets



If circumstances indicate
that the carrying amount of a long-lived asset may not be recoverable, the asset may be considered “impaired”, and
an impairment loss may be recognized in accordance with IAS 36, Impairment of Assets. The carrying amounts of long-lived assets
are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets
are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be
recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount. The recoverable amount
is the greater of the fair value less costs to sell and value in use. In determining the value in use, expected cash flows generated
by the asset are discounted to their present value, which requires significant judgment relating to the level of traffic revenue
and the amount of operating costs. The Group uses all readily available information in determining an amount that is a reasonable
approximation of recoverable amount, including estimates based on reasonable and supportable assumptions for projections of traffic
revenue and amount of operating costs.



Depreciation



Property, plant and
equipment are depreciated on a straight-line basis over the estimated useful lives, after taking into account the estimated residual
value. The Group reviews the estimated useful lives of assets annually in order to determine the amount of depreciation expense
to be recorded during any financial year. The useful lives are based on the Group’s historical experience with similar assets
and take into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant
changes from previous estimates.



Provision for Major Overhauls



Provision for the cost
of major overhauls for airframes and engines under operating leases is accrued and charged to the consolidated income statement
over the estimated overhaul period. This requires estimation of the expected overhaul cycle and overhaul cost, which are based
on the historical experience of actual cost incurred for overhauls of airframes and engines of the same or similar types. Different
estimates could significantly affect the estimated provision and the results of operations.



Frequent Flyer Revenue



The amount of revenue
attributable to the mileages earned by the members of the Group’s frequent flyer award programs is estimated based on the
fair value of the mileages awarded and the expected redemption rate. The fair value of the mileages awarded is estimated by reference
to external sales. The expected redemption rate was estimated based on historical experience, future redemption pattern and program
design.



Recently Pronounced International Financial Reporting Standards



Information relating
to the recently pronounced IFRSs is presented in Note 54 to the consolidated financial statements.



Overview



In 2012, affected by
several factors such as slower economic growth rate of the developed economies including the European and the U.S. 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, we 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
our service standards, we maintained the best safety record among airlines in China, thereby effectively enhancing our comprehensive
competitiveness and achieved good operating results.



In 2012, we 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, we 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. We
maintained the best safety record among airlines in China and was granted the “Safe Flight Diamond Award” by the Civil
Aviation Administration of China.



In 2012, facing the
difficult business environment, we 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 our 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.



36







In 2012, we, aiming
to become an energy saving company and bearing in mind our social responsibility, actively practiced the idea of “green flight”
and advocated lowcarbon travel to our customers. In 2012, our energy efficiency was the same as 2011, which maintained a high standard
and brought us inro rankings such as “China Top Green Companies 2012” and “Top 100 Enterprises of Social Responsibility”.
In 2012, we donated RMB10.12 million to Foundation for Poverty Alleviation in Guangdong Province and different types of schools,
thereby effectively performed our social responsibility.



Nevertheless, the development
of the airlines industry meets with a number of challenges, such as more factors making the recovery of global economy unstable
and uncertain, faster growth in the total traffic capacity of the industry, impact of substitutive services such as Express Rail,
as well as sharp fluctuation in oil price.



Because the Group finances
its aircraft acquisitions mainly through capital leases or bank loans in U.S. dollars, and there are a substantial amount of transactions
and obligations denominated in U.S. dollars in relation to its global purchases of jet fuel, lease and purchase of aviation equipment
as well as major repairs, in addition to the landing fees of its international flights in the airports of other countries, the
Group benefited from the RMB appreciation. RMB appreciation has brought exchange gain to the Group and reduced its operating costs
which are denominated in foreign currencies. However, RMB appreciation also presents the Group with a challenge in price competition
in international route operations.



The Group’s operating
revenue is substantially dependent on the passenger and cargo traffic volume carried, which is subject to seasonal and other changes
in traffic patterns, the availability of appropriate time slots for the Group’s flights and alternative routes, the degree
of competition from other airlines and alternate means of transportation, as well as other factors that may influence passenger
travel demand and cargo and mail volume. In particular, the Group’s airline revenue is generally higher in the second and
third quarters than in the first and fourth quarters.



Like most airlines,
the Group is subject to a high degree of financial and operating leverage. A significant percentage of the Group’s operating
expenses are fixed costs that do not vary proportionally based on the Group’s yields or the load factors. These fixed costs
include depreciation expense, jet fuel costs, landing and navigation fees, financing costs, operating lease payments, aircraft
maintenance costs and labor for flight crew, cabin crew and ground personnel. Thus, a minor change in the Group’s yields
or load factors would have a material effect on the Group’s results of operations. In addition, certain of these expenses,
primarily financing costs and operating lease payments, labor costs and depreciation do not vary based on the number of flights
flown. Thus, the Group’s operating results can also be substantially affected by minor changes in aircraft utilization rates.
The Group is and will continue to be highly leveraged with substantial obligations denominated in foreign currencies and, accordingly,
the results of its operations are significantly affected by fluctuations in foreign exchange rates, particularly for the U.S. dollar.
Net exchange gain decreased by RMB2,488 million, from RMB2,755 million in 2011 to RMB267 million in 2012, mainly attributable to
the exchange rate of Renminbi to U.S. dollar appreciated significantly in 2011 while remained stable in 2012.



A number of other external
variables, including political and economic conditions in China, tend to have a major impact on the Group’s performance.
The Group’s financial performance is also significantly affected by factors arising from operating in a regulated industry.
As substantially all aspects of the Group’s airline operations are regulated by the PRC government, the Group’s operating
revenues and expenses are directly affected by the PRC government’s policies with respect to domestic air fares, jet fuel
prices and landing and navigation fees, among others. The nature and extent of airline competition and the ability of Chinese airlines
to expand are also affected by CAAC’s control over route allocations. Any changes in the PRC government’s regulatory
policies or any implementation of such policies could have a significant impact on the Group’s future operations and its
ability to implement its operating strategy.



Certain Financial Information and Operating Data by Geographic Region



The following table
sets forth certain financial information and operating data by geographic region for the years ended December 31, 2012, 2011 and
2010:



|                                       |  | Year ended December 31, |            |  | 2012 vs. 2011 % increase |  |            | 2011 vs. 2010 % increase | 
|-------------------------------------- |  | ----------------------- | ---------- |  | ------------------------ |  | ---------- | ------------------------ | 
|Traffic                                |  | 2012                    |            |  | 2011                     |  |            | 2010                     | 
|RPK (million)                          |  |                         |            |  |                          |  |            |                          | 
|Domestic                               |  |                         | 107,278.56 |  |                          |  | 99,673.63  |                          | 
|Regional                               |  |                         | 2,536.91   |  |                          |  | 2,082.35   |                          | 
|International                          |  |                         | 25,719.26  |  |                          |  | 20,588.31  |                          | 
|Total                                  |  |                         | 135,534.73 |  |                          |  | 122,344.29 |                          | 
|RTK (million)                          |  |                         |            |  |                          |  |            |                          | 
|Domestic                               |  |                         | 10,924.30  |  |                          |  | 10,195.00  |                          | 
|Regional                               |  |                         | 242.43     |  |                          |  | 197.93     |                          | 
|International                          |  |                         | 4,993.39   |  |                          |  | 4,068.09   |                          | 
|Total                                  |  |                         | 16,160.12  |  |                          |  | 14,461.02  |                          | 
|Passengers carried (thousand)          |  |                         |            |  |                          |  |            |                          | 
|Domestic                               |  |                         | 77,634.23  |  |                          |  | 72,926.29  |                          | 
|Regional                               |  |                         | 1,928.54   |  |                          |  | 1,766.56   |                          | 
|International                          |  |                         | 6,922.22   |  |                          |  | 5,984.18   |                          | 
|Total                                  |  |                         | 86,484.99  |  |                          |  | 80,677.03  |                          | 
|Cargo and mail carried (thousand tons) |  |                         |            |  |                          |  |            |                          | 
|Domestic                               |  |                         | 890.38     |  |                          |  | 856.91     |                          | 
|Regional                               |  |                         | 15.66      |  |                          |  | 12.77      |                          | 
|International                          |  |                         | 325.82     |  |                          |  | 265.45     |                          | 
|Total                                  |  |                         | 1,231.86   |  |                          |  | 1,135.13   |                          | 



37









|                                     |  | Year ended December 31, |            |  | 2012 vs. 2011 %increase |  |            | 2011 vs. 2010 %increase | 
|------------------------------------ |  | ----------------------- | ---------- |  | ----------------------- |  | ---------- | ----------------------- | 
|Capacity                             |  | 2012                    |            |  | 2011                    |  |            | 2010                    | 
|ASK (million)                        |  |                         |            |  |                         |  |            |                         | 
|Domestic                             |  |                         | 131,821.86 |  |                         |  | 120,462.20 |                         | 
|Regional                             |  |                         | 3,464.29   |  |                         |  | 2,752.53   |                         | 
|International                        |  |                         | 34,282.98  |  |                         |  | 27,849.37  |                         | 
|Total                                |  |                         | 169,569.13 |  |                         |  | 151,064.10 |                         | 
|ATK (million)                        |  |                         |            |  |                         |  |            |                         | 
|Domestic                             |  |                         | 15,069.70  |  |                         |  | 14,145.21  |                         | 
|Regional                             |  |                         | 396.74     |  |                         |  | 316.35     |                         | 
|International                        |  |                         | 7,598.25   |  |                         |  | 6,333.84   |                         | 
|Total                                |  |                         | 23,064.69  |  |                         |  | 20,795.40  |                         | 
|Load Factors                         |  |                         |            |  |                         |  |            |                         | 
|Passenger load factor (RPK/ASK) (%)  |  |                         |            |  |                         |  |            |                         | 
|Domestic                             |  |                         | 81.4       |  |                         |  | 82.7       |                         | 
|Regional                             |  |                         | 73.2       |  |                         |  | 75.7       |                         | 
|International                        |  |                         | 75.0       |  |                         |  | 73.9       |                         | 
|Overall                              |  |                         | 79.9       |  |                         |  | 81.0       |                         | 
|Overall load factor (RTK/ATK) (%)    |  |                         |            |  |                         |  |            |                         | 
|Domestic                             |  |                         | 72.5       |  |                         |  | 72.1       |                         | 
|Regional                             |  |                         | 61.1       |  |                         |  | 62.6       |                         | 
|International                        |  |                         | 65.7       |  |                         |  | 64.2       |                         | 
|Overall                              |  |                         | 70.1       |  |                         |  | 69.5       |                         | 
|Yield                                |  |                         |            |  |                         |  |            |                         | 
|Yield per RPK (RMB)                  |  |                         |            |  |                         |  |            |                         | 
|Domestic                             |  |                         | 0.69       |  |                         |  | 0.68       |                         | 
|Regional                             |  |                         | 0.84       |  |                         |  | 0.88       |                         | 
|International                        |  |                         | 0.53       |  |                         |  | 0.56       |                         | 
|Overall                              |  |                         | 0.66       |  |                         |  | 0.67       |                         | 
|Yield per RTK (RMB)                  |  |                         |            |  |                         |  |            |                         | 
|Domestic                             |  |                         | 6.96       |  |                         |  | 6.90       |                         | 
|Regional                             |  |                         | 9.20       |  |                         |  | 9.69       |                         | 
|International                        |  |                         | 3.57       |  |                         |  | 3.67       |                         | 
|Overall                              |  |                         | 5.95       |  |                         |  | 6.03       |                         | 
|Financial                            |  |                         |            |  |                         |  |            |                         | 
|Passenger revenue (RMB million)      |  |                         |            |  |                         |  |            |                         | 
|Domestic                             |  |                         | 73,845     |  |                         |  | 68,222     |                         | 
|Regional                             |  |                         | 2,133      |  |                         |  | 1,834      |                         | 
|International                        |  |                         | 13,566     |  |                         |  | 11,436     |                         | 
|Total                                |  |                         | 89,544     |  |                         |  | 81,492     |                         | 
|Cargo and mail revenue (RMB million) |  |                         | 6,556      |  |                         |  | 5,760      |                         | 







A. Operating Results



The historical results
of operations discussed below may not be indicative of the Group’s future operating performance. In addition to the factors
discussed under “Overview” above, the Group’s future operations will be affected by, among other things, changes
in the aviation market, the cost of jet fuel, aircraft acquisition and leasing costs, aircraft maintenance expenses, take-off and
landing charges, wages, salaries and benefits and other operating expenses, foreign exchange rates and the rates of income taxes
paid.



38







2012 Compared With 2011



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 2011. The Group’s operating revenue increased by RMB9,119 million or 10.1%
from RMB90,395 million in 2011 to RMB99,514 million in 2012. Passenger load factor decreased by 1.1 percentage points from 81.0%
in 2011 to 79.9% in 2012. Passenger yield (in passenger revenue per RPK) decreased by 1.5% from RMB0.67 in 2011 to RMB0.66 in 2012.
Average yield (in traffic revenue per RTK) decreased by 1.3% from RMB6.03 in 2011 to RMB5.95 in 2012. Operating expenses increased
by RMB8,814 million or 10.1% from RMB87,063 million in 2011 to RMB95,877 million in 2012. 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



|                                                 |  | 2012              |         |   | 2011       |  |       |                   | 
|------------------------------------------------ |  | ----------------- | ------- | - | ---------- |  | ----- | ----------------- | 
|                                                 |  | Operating revenue |         |   | Percentage |  |       | Operating revenue | 
|                                                 |  | RMB million       |         |   | %          |  |       | RMB million       | 
|Traffic revenue                                  |  |                   | 96,100  |   |            |  | 96.6  |                   | 
|Including: Passenger revenue                     |  |                   | 89,544  |   |            |  |       |                   | 
|– Domestic                                       |  |                   | 73,845  |   |            |  |       |                   | 
|– Hong Kong, Macau and Taiwan                    |  |                   | 2,133   |   |            |  |       |                   | 
|– International                                  |  |                   | 13,566  |   |            |  |       |                   | 
|Cargo and mail revenue                           |  |                   | 6,556   |   |            |  |       |                   | 
|Other operating revenue                          |  |                   | 3,414   |   |            |  | 3.4   |                   | 
|Mainly including:   Commission  income           |  |                   | 757     |   |            |  |       |                   | 
|Hotel and travel services income                 |  |                   | 647     |   |            |  |       |                   | 
|Ground services income                           |  |                   | 350     |   |            |  |       |                   | 
|Expired sales in advance of carriage             |  |                   | 495     |   |            |  |       |                   | 
|General aviation income                          |  |                   | 445     |   |            |  |       |                   | 
|Aircraft wet lease income                        |  |                   | 2       |   |            |  |       |                   | 
|Total operating revenue                          |  |                   | 99,514  |   |            |  | 100.0 |                   | 
|Less: fuel surcharge income                      |  |                   | (13,378 | ) |            |  |       |                   | 
|                                                 |  |                   |         |   |            |  |       |                   | 
|Total operating revenue excluding fuel surcharge |  |                   | 86,136  |   |            |  |       |                   | 



Traffic revenue composition



|                       |  | 2012            |        |  | 2011       |  |       |                 | 
|---------------------- |  | --------------- | ------ |  | ---------- |  | ----- | --------------- | 
|                       |  | Traffic revenue |        |  | Percentage |  |       | Traffic revenue | 
|                       |  | RMB 
million    |        |  | %          |  |       | RMB 
million    | 
|Passenger Revenue      |  |                 | 89,544 |  |            |  | 93.2  |                 | 
|Cargo and Mail Revenue |  |                 | 6,556  |  |            |  | 6.8   |                 | 
|Traffic revenue        |  |                 | 96,100 |  |            |  | 100.0 |                 | 



Passenger revenue composition



|                            |  | 2012              |        |  | 2011       |  |       |                   | 
|--------------------------- |  | ----------------- | ------ |  | ---------- |  | ----- | ----------------- | 
|                            |  | Passenger revenue |        |  | Percentage |  |       | Passenger revenue | 
|                            |  | RMB million       |        |  | %          |  |       | RMB million       | 
|Domestic                    |  |                   | 73,845 |  |            |  | 82.5  |                   | 
|Hong Kong, Macao and Taiwan |  |                   | 2,133  |  |            |  | 2.4   |                   | 
|International               |  |                   | 13,566 |  |            |  | 15.1  |                   | 
|                            |  |                   |        |  |            |  |       |                   | 
|Passenger revenue           |  |                   | 89,544 |  |            |  | 100.0 |                   | 



39







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 2012. 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 2012.
The total number of passengers carried increased by 7.2% to 86.48 million passengers in 2012. 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 2012.



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 2012. 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 2012. Domestic passenger
yield per RPK increased from RMB0.68 in 2011 to RMB0.69 in 2012.



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 2012. 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 2012. Passenger yield per RPK decreased from RMB0.88 in 2011 to RMB0.84 in 2012.



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 2012. 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 2012. Passenger yield
per RPK decreased from RMB0.56 in 2011 to RMB0.53 in 2012.



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 2012. 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 2012. 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 2012.



|                                            |  | 2012                          |        |  | 2011         |  |       |                               | 
|------------------------------------------- |  | ----------------------------- | ------ |  | ------------ |  | ----- | ----------------------------- | 
|                                            |  | Operating expense RMB million |        |  | Percentage % |  |       | Operating expense RMB million | 
|Flight operations                           |  |                               | 54,690 |  |              |  | 57.0  |                               | 
|Mainly including:           Jet fuel costs  |  |                               | 37,401 |  |              |  |       |                               | 
|Operating lease charges                     |  |                               | 4,897  |  |              |  |       |                               | 
|Flight personnel payroll and welfare        |  |                               | 5,051  |  |              |  |       |                               | 
|Maintenance                                 |  |                               | 7,971  |  |              |  | 8.3   |                               | 
|Aircraft and traffic servicing              |  |                               | 14,072 |  |              |  | 14.7  |                               | 
|Promotion and sales                         |  |                               | 7,134  |  |              |  | 7.5   |                               | 
|General and administrative                  |  |                               | 2,425  |  |              |  | 2.5   |                               | 
|Impairment on property, plant and equipment |  |                               | -      |  |              |  | -     |                               | 
|Depreciation and amortization               |  |                               | 8,264  |  |              |  | 8.6   |                               | 
|Others                                      |  |                               | 1,321  |  |              |  | 1.4   |                               | 
|                                            |  |                               |        |  |              |  |       |                               | 
|Total operating expenses                    |  |                               | 95,877 |  |              |  | 100.0 |                               | 



40







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 in 2012, increased by 14.5% from
RMB32,675 million in 2011 to RMB37,401 million in 2012.



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 2012.
The increase was mainly due to the increase in number of engines repaired and routine maintenance during the year.



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 2012. 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 2012.



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 2012.



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 2012.



Depreciation and amortization,
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 2012.



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%.



Other Income or Expenses



Other net income increased
by RMB441 million from RMB1,021 million in 2011 to RMB1,462 million in 2012, 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 U.S. dollar appreciated significantly in 2011 while remained stable in 2012.



Income Tax



Our effective income tax rates were 20.1% and 12.1% in 2012 and 2011, respectively. The effective income
tax rates differs from the PRC statutory income tax rate of 25% primarily due to the effect of non-taxable share of results of
associates and jointly controlled entities of RMB110 million and RMB145 million in 2012 and 2011 respectively, and the recognition
of unrecognized deferred tax assets of RMB29 million and RMB688 million in 2012 and 2011 respectively.



2011 Compared With 2010



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.



41







Operating Revenue



|                                                 |  | 2011              |         |   | 2010       |  |       |                   | 
|------------------------------------------------ |  | ----------------- | ------- | - | ---------- |  | ----- | ----------------- | 
|                                                 |  | Operating revenue |         |   | Percentage |  |       | Operating revenue | 
|                                                 |  | RMB million       |         |   | %          |  |       | RMB million       | 
|Traffic revenue                                  |  |                   | 87,252  |   |            |  | 96.5  |                   | 
|Including: Passenger revenue                     |  |                   | 81,492  |   |            |  |       |                   | 
|– Domestic                                       |  |                   | 68,222  |   |            |  |       |                   | 
|– Hong Kong, Macau and Taiwan                    |  |                   | 1,834   |   |            |  |       |                   | 
|– International                                  |  |                   | 11,436  |   |            |  |       |                   | 
|Cargo and mail revenue                           |  |                   | 5,760   |   |            |  |       |                   | 
|Other operating revenue                          |  |                   | 3,143   |   |            |  | 3.5   |                   | 
|Mainly including:   Commission  income           |  |                   | 643     |   |            |  |       |                   | 
|Hotel and travel services income                 |  |                   | 614     |   |            |  |       |                   | 
|Ground service income                            |  |                   | 368     |   |            |  |       |                   | 
|Expired sales in advance of carriage             |  |                   | 309     |   |            |  |       |                   | 
|General aviation income                          |  |                   | 322     |   |            |  |       |                   | 
|Aircraft wet lease income                        |  |                   | 319     |   |            |  |       |                   | 
|Total operating revenue                          |  |                   | 90,395  |   |            |  | 100.0 |                   | 
|Less: fuel surcharge income                      |  |                   | (11,699 | ) |            |  |       |                   | 
|                                                 |  |                   |         |   |            |  |       |                   | 
|Total operating revenue excluding fuel surcharge |  |                   | 78,696  |   |            |  |       |                   | 





Traffic Revenue Composition



|                       |  | 2011            |        |  | 2010       |  |       |                 | 
|---------------------- |  | --------------- | ------ |  | ---------- |  | ----- | --------------- | 
|                       |  | Traffic revenue |        |  | Percentage |  |       | Traffic revenue | 
|                       |  | RMB
 million    |        |  | %          |  |       | RMB 
million    | 
|Passenger Revenue      |  |                 | 81,492 |  |            |  | 93.4  |                 | 
|Cargo and Mail Revenue |  |                 | 5,760  |  |            |  | 6.6   |                 | 
|Traffic revenue        |  |                 | 87,252 |  |            |  | 100.0 |                 | 



Passenger Revenue Composition



|                            |  | 2011              |        |  | 2010       |  |       |                   | 
|--------------------------- |  | ----------------- | ------ |  | ---------- |  | ----- | ----------------- | 
|                            |  | Passenger revenue |        |  | Percentage |  |       | Passenger revenue | 
|                            |  | RMB million       |        |  | %          |  |       | RMB million       | 
|Domestic                    |  |                   | 68,222 |  |            |  | 83.7  |                   | 
|Hong Kong, Macao and Taiwan |  |                   | 1,834  |  |            |  | 2.3   |                   | 
|International               |  |                   | 11,436 |  |            |  | 14.0  |                   | 
|                            |  |                   |        |  |            |  |       |                   | 
|Passenger revenue           |  |                   | 81,492 |  |            |  | 100.0 |                   | 



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.



42











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.



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 point 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 RMB 0.56.



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                          |        |  | 2010         |  |       |                               | 
|------------------------------------------- |  | ----------------------------- | ------ |  | ------------ |  | ----- | ----------------------------- | 
|                                            |  | Operating expense RMB million |        |  | Percentage % |  |       | Operating expense RMB million | 
|Flight operations                           |  |                               | 48,344 |  |              |  | 55.5  |                               | 
|Mainly including:      Jet fuel costs       |  |                               | 32,675 |  |              |  |       |                               | 
|Operating lease charges                     |  |                               | 4,654  |  |              |  |       |                               | 
|Flight personnel payroll and welfare        |  |                               | 4,412  |  |              |  |       |                               | 
|Maintenance                                 |  |                               | 7,531  |  |              |  | 8.7   |                               | 
|Aircraft and traffic servicing              |  |                               | 12,337 |  |              |  | 14.2  |                               | 
|Promotion and sales                         |  |                               | 6,568  |  |              |  | 7.5   |                               | 
|General and administrative                  |  |                               | 2,807  |  |              |  | 3.2   |                               | 
|Impairment on property, plant and equipment |  |                               | 584    |  |              |  | 0.7   |                               | 
|Depreciation and amortization               |  |                               | 7,689  |  |              |  | 8.8   |                               | 
|Others                                      |  |                               | 1,203  |  |              |  | 1.4   |                               | 
|                                            |  |                               |        |  |              |  |       |                               | 
|Total operating expenses                    |  |                               | 87,063 |  |              |  | 100.0 |                               | 



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.



43







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.



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 amortization,
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%.



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 U.S. dollar in 2011.



Income Tax



Our effective tax rates were 12.1% and 20.7% in 2011 and 2010, respectively. The effective income tax
rates differs from the PRC statutory income tax rate of 25% primarily due to the effect of non-taxable share of results of associates
and jointly controlled entities of RMB145 million and RMB42 million in 2011 and 2010 respectively, and the recognition of unrecognized
deferred tax assets of RMB688 million and RMB364 million in 2011 and 2010 respectively.



B. Liquidity and Capital Resources



Generally, the Group
meets its working capital and capital expenditure requirements through cash from its operations, the proceeds of certain long-term
and short-term bank loans, capital lease financing and rebates available under certain of the Group’s aircraft leases.



As of December 31,
2012, the Group had banking facilities with several PRC commercial banks for providing loan finance up to an approximate amount
of RMB173,162 million to the Group. As of December 31, 2012, an approximate amount of RMB60,369 million was utilized. As of December
31, 2012 and 2011, the Group’s cash and cash equivalents totaled RMB10,082 million and RMB9,863 million, respectively.



Net cash inflows from
operating activities in 2012, 2011 and 2010 were RMB11,704 million, RMB12,557 million and RMB11,442 million, respectively. Operating
cash inflows of the Group are primarily derived from the provision of air transportation and related service for customers. The
vast majority of tickets are purchased prior to the day on which transportation is provided. Operating cash outflows primarily
are related to the recurring operating expenses, including flight operation, maintenance, aircraft and traffic servicing, etc.



44







Net cash used in investing
activities in 2012, 2011 and 2010 was RMB12,153 million, RMB21,957 million and RMB11,568 million, respectively. Cash capital expenditures
in 2012, 2011 and 2010 were RMB15,733 million, RMB20,038 million and RMB13,469 million, respectively, reflecting predominantly
additional investments in aircraft and flight equipment under the Group’s fleet expansion plans and Guangzhou new airport,
and, to a small extent, additional investments in other facilities and buildings used in operations.



Financing activities
resulted in net cash inflows of RMB668 million, RMB8,859 million and RMB6,187 million in 2012, 2011 and 2010, respectively. Net
cash inflow/(out flow) from new bank and other loans and repayments of bank and other loans amounted to RMB4,407 million, RMB9,254million and RMB(2,876) million in 2012, 2011 and 2010, respectively. The additions of bank loan were used for capital expenditures
and general working capital. Repayment of capital leases in 2012, 2011 and 2010 was RMB1,978 million, RMB1,702 million and RMB1,505
million, respectively, resulting from the aircraft acquisitions under capital leases.



As of December 31,
2012, the Group’s aggregate long-term bank and other loans and obligations under capital leases (including loans and capital
leases obligations due within one year) totaled RMB63,241 million. In 2013, 2014, 2015, 2016 and thereafter, amounts payable under
such loans and obligations will be RMB13,674 million, RMB9,639 million, RMB10,759 million, RMB6,087 million and RMB23,082 million
respectively. Such borrowings were denominated in United States dollars, Singapore dollars and Japanese Yen with a significant
portion being floating interest rate borrowings. In the normal course of business, the Group is exposed to fluctuations in foreign
currencies. The Group’s exposure to foreign currencies primarily results from its foreign currency liabilities. Depreciation
or appreciation of the Renminbi against foreign currencies affects the Group’s results significantly because the Group’s
foreign currency liabilities generally exceed its foreign currency assets. 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 SAFE, or subject to certain restrictive conditions, entering into forward foreign exchange contracts with authorized banks.



As of December 31,
2012, the Group’s short-term bank loans were RMB10,719 million. The Group’s weighted average interest rate on short-term
bank loans was 2.47% per annum as of December 31, 2012. The primary use of the proceeds of the Group’s short-term bank loans
is to finance working capital and capital expenditure needs. The Group has generally been able to arrange short-term bank loans
with domestic banks in China as necessary and believes it can continue to obtain them based on its well-established relationships
with various lenders.



As of December 31,
2012, the Group had obligations under operating leases totaling RMB22,161 million, predominately for aircraft. Of such amount,
RMB4,110 million, RMB3,678 million, RMB3,305 million, RMB2,998 million, RMB2,551 million and RMB5,519 million respectively, is
due in 2013, 2014, 2015, 2016, 2017 and thereafter.



As of December 31,
2012, the Group had a working capital deficit of RMB31,944 million, as compared to a working capital deficit of RMB24,928 million
as of December 31, 2011. Historically, the Group operated in a negative working capital position, relying on cash inflow from operating
activities and renewal of short-term bank loans to meet its short-term liquidity and working capital needs. In 2013 and thereafter,
the liquidity of the Group is primarily dependent on its ability to maintain adequate cash inflows from operations to meet its
debt obligations as they fall due, and its ability to obtain adequate external financing to meet its committed future capital expenditure.
As of December 31, 2012, the Group had banking facilities with several PRC commercial banks for providing loan finance up to approximately
RMB173,162 million (2011: RMB127,448 million), of which approximately RMB60,369 million (2011: RMB36,414 million) was utilized.



The directors of the
Company have carried out a detailed review of the cash flow forecast of the Group for the twelve months ending December 31, 2013.
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 of the Company are of
the opinion that the assumptions and sensitivities which are included in the cash flow forecast are reasonable. However, as with
all assumptions in regard to future events, these are subject to inherent limitations and uncertainties and some or all of these
assumptions may not be realized.



As the Group is subject
to a high degree of operating leverage, a minor decrease in the Group’s yield and/or load factor could result in a significant
decrease in its operating revenue and hence its operating cash flows. This could arise in such circumstances as where competition
between Chinese airlines increases or where PRC aviation demand decreases. Similarly, a minor increase in the jet fuel prices,
particularly in the domestic market, could result in a significant increase in the Group’s operating expenses and hence a
significant decrease in its operating cash flows. This could be caused by fluctuations in supply and demand in international oil
market. Currently, the Group’s existing loans and lease facilities do not contain any financial covenants. Nevertheless,
as the Group is subject to a high degree of financial leverage, an adverse change in the Group’s operating cash flows could
adversely affect its financial health and hence weaken its ability to obtain additional loans and lease facilities and to renew
its short-term bank loans facilities as they fall due.



45







As of December 31, 2012, the Group had capital
commitments as follows:



|                                              |  | 2013          |        |  | 2014 |  |        | 2015 |  |  | 2016   |  |  | 2017 and afterwards |       |  | Total | 
|--------------------------------------------- |  | ------------- | ------ |  | ---- |  | ------ | ---- |  |  | ------ |  |  | ------------------- | ----- |  | ----- | 
|                                              |  | (RMB million) |       
|Acquisition of aircraft and related equipment |  |               | 23,671 |  |      |  | 19,951 |      |  |  | 14,990 |  |  |                     | 6,589 |  |       | 
|Others                                        |  |               | 1,784  |  |      |  | 1,291  |      |  |  | 483    |  |  |                     | 262   |  |       | 
|Total capital commitments                     |  |               | 25,455 |  |      |  | 21,242 |      |  |  | 15,473 |  |  |                     | 6,851 |  |       | 



Others mainly represent
airport and office facilities and equipment, overhaul and maintenance bases and training facilities.



As of December 31,
2012, the cash and cash equivalents of the Group totaled RMB10,082 million. Of such balance, 10% was denominated in U.S. Dollars,
Hong Kong Dollars, Australian Dollars, Japanese Yen and other foreign currencies.



In view of the unutilized
bank facilities of RMB112,793 million, the Group expects that it will have sufficient funding sources to meet its cash requirements
in the foreseeable future.



C. Research and Development, Patents and Licenses, etc.



None.



D. Trend Information



Other than as disclosed
in the foregoing disclosures and elsewhere in this Annual Report, we are not aware of any trends, uncertainties, demands, commitments
or events for the period from January 1, 2013 to December 31, 2013 that are reasonably likely to have a material adverse effect
on our net revenues, income, profitability, liquidity or capital resources, or that would cause our disclosed financial information
to be not necessarily indicative of future operating results or financial conditions.



E. Off-Balance Sheet Arrangements



We have not entered
into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition that is material to investors. In particular, we (i) have not entered into any financial guarantees or other commitments
to guarantee the payment obligations of any unconsolidated entity; (ii) have not entered into any derivative contracts that are
both indexed to our own stock and classified in stockholders’ equity, or not reflected in our statement of financial position;
and (iii) do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit,
liquidity or market risk support to such entity.



F. Tabular Disclosure of Contractual Obligations



The following table
sets forth the Group’s obligations and commitments to make future payments under contracts and under commitments as of December
31, 2012.



|                                        |  |       |         |  | As of December 31, 2012 Payment due by period |  |        |           |  |  | As of December 31, 2011 | 
|--------------------------------------- |  | ----- | ------- |  | --------------------------------------------- |  | ------ | --------- |  |  | ----------------------- | 
|                                        |  | Total |         |  | Less than 1 year                              |  |        | 1-3 years |  |  | 3-5 years               | 
|                                        |  |       |         |  |                                               |  |        |           |  |  |                         | 
|Short-term bank loans (note 1)          |  |       | 10,833  |  |                                               |  | 10,833 |           |  |  | -                       | 
|Long-term bank and other loans (note 1) |  |       | 44,103  |  |                                               |  | 12,032 |           |  |  | 16,282                  | 
|Bills payable                           |  |       | -       |  |                                               |  | -      |           |  |  | -                       | 
|Obligations under capital leases        |  |       | 24,596  |  |                                               |  | 3,021  |           |  |  | 6,023                   | 
|Operating lease commitments             |  |       | 22,161  |  |                                               |  | 4,110  |           |  |  | 6,983                   | 
|Aircraft purchase commitments (Note 2)  |  |       | 71,309  |  |                                               |  | 23,671 |           |  |  | 34,941                  | 
|Other capital commitments               |  |       | 3,820   |  |                                               |  | 1,784  |           |  |  | 1,774                   | 
|Investment commitments                  |  |       | 239     |  |                                               |  | 239    |           |  |  | -                       | 
|Total                                   |  |       | 177,061 |  |                                               |  | 55,690 |           |  |  | 66,003                  | 



Note 1 Interest on variable rate loans was estimated based on
the current rate in effect at December 31, 2012.



Note 2 Amounts shown are net of previously paid purchase deposits.



46







ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.



| | A. | Directors, Senior Management and Employees.
| | -- | -------------------------------------------



The following table
sets forth certain information concerning directors, senior management and supervisors of the Company in 2012. There were certain
changes in the Company’s directors, senior management and supervisors in 2012, details of which are set forth below.



|Name                 |  | Position                                                                        |  | Gender |  | Age
|-------------------- |  | ------------------------------------------------------------------------------- |  | ------ |  | ---
|Si Xian Min          |  | Chairman of the Board, Non-executive Director                                   |  | Male   |  | 55 
|Tan Wan Geng (1)     |  | Executive Director, Vice Chairman of the Board and President                    |  | Male   |  | 48 
|Wang Quan Hua        |  | Non-executive Director                                                          |  | Male   |  | 58 
|Yuan Xin An          |  | Non-executive Director                                                          |  | Male   |  | 56 
|Yang Li Hua (2)      |  | Non-executive Director                                                          |  | Female |  | 57 
|Zhang Zi Fang        |  | Executive Director and Executive Vice President                                 |  | Male   |  | 54 
|Xu Jie Bo (3)        |  | Executive Director, Senior Executive Vice President and Chief Financial Officer |  | Male   |  | 47 
|Li Shao Bin (4)      |  | Executive Director                                                              |  | Male   |  | 47 
|Chen Zhen You        |  | Executive Director (Retired on December 6, 2012)                                |  | Male   |  | 61 
|Gong Hua Zhang       |  | Independent Non-executive Director                                              |  | Male   |  | 67 
|Wei Jin Cai          |  | Independent Non-executive Director                                              |  | Male   |  | 63 
|Ning Xiang Dong      |  | Independent Non-executive Director                                              |  | Male   |  | 47 
|Liu Chang Le         |  | Independent Non-executive Director                                              |  | Male   |  | 61 
|Pan Fu               |  | Chairman of the Supervisory Committee                                           |  | Male   |  | 50 
|Li Jia Shi           |  | Supervisor                                                                      |  | Male   |  | 51 
|Zhang Wei            |  | Supervisor                                                                      |  | Female |  | 46 
|Yang Yi Hua          |  | Supervisor                                                                      |  | Female |  | 52 
|Liang Zhong Gao      |  | Supervisor                                                                      |  | Male   |  | 56 
|Ren Ji Dong          |  | Executive Vice President                                                        |  | Male   |  | 48 
|Liu Qian             |  | Executive Vice President                                                        |  | Male   |  | 48 
|Dong Su Guang        |  | Executive Vice President                                                        |  | Male   |  | 59 
|Chen Gang            |  | Executive Vice President                                                        |  | Male   |  | 47 
|Zhou Yue Hai (5)     |  | Executive Vice President                                                        |  | Male   |  | 52 
|Wang Zhi Xue (6)     |  | Executive Vice President, Chief Pilot                                           |  | Male   |  | 51 
|Zhang Zheng Rong (7) |  | Former Chief Pilot and Former COO Flight Safety                                 |  | Male   |  | 51 
|Hu Chen Jie          |  | Chief Information Officer                                                       |  | Male   |  | 44 
|Su Liang             |  | Chief Economist                                                                 |  | Male   |  | 50 
|Chen Wei Hua         |  | Chief Legal Adviser                                                             |  | Male   |  | 46 
|Yuan Xi Fan (8)      |  | Chief Engineer                                                                  |  | Male   |  | 50 
|Tian Xiao Dong (9)   |  | COO Flight Operations                                                           |  | Male   |  | 43 
|Guo Zhi Qiang (10)   |  | COO Marketing & Sales                                                           |  | Male   |  | 49 
|Xie Bing             |  | Company Secretary                                                               |  | Male   |  | 40 



| | (1) | On January 24, 2013, Mr. Tan Wan Geng was elected as the Vice Chairman of the Board at the ninth
meeting of the six session of the Board of Directors of the Company.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | On January 24, 2013, Ms. Yang Li Hua was appointed as a Non-executive Director of the Company at
the first extra general meeting for 2013 of the Company.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | On September 27, 2012, Mr. Xu Jie Bo was appointed as the Senior Executive Vice President, Chief
Financial Officer and Chief Accountant of the Company.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | On January 24, 2013, Mr. Li Shao Bin was appointed as an Executive Director of the Company at the
first extra general meeting for 2013 of the Company.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | On August 3, 2012, Mr. Zhou Yue Hai was appointed as an Executive Vice President by the Board.
| | --- | ----------------------------------------------------------------------------------------------

| | (6) | On August 3, 2012, Mr. Wang Zhi Xue was appointed as an Executive Vice President and Chief Pilot
by the Board.
| | --- | --------------------------------------------------------------------------------------------------------------

| | (7) | On June 6, 2012, Mr. Zhang Zheng Rong was appointed as Chief Pilot, COO Flight Safety by the Board.
On July 20, 2012, we received a letter of resignation from Mr. Zhang in respect of his position as Chief Pilot and COO Flight Safety
of the Company with effect from the same date due to the work arrangement.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (8) | On April 27, 2012, Mr. Yuan Xi Fan was appointed as Chief Engineer.
| | --- | -------------------------------------------------------------------

| | (9) | On June 6, 2012, Mr. Tian Xiao Dong was appointed as COO Flight Operations by the Board.
| | --- | ----------------------------------------------------------------------------------------

| | (10) | On September 27, 2012, Mr. Guo Zhi Qiang was appointed as COO Marketing & Sales by the Board.
| | ---- | ---------------------------------------------------------------------------------------------



Board of Directors



Si Xian Min,aged
55, graduated with an Executive Master of Business Administration (EMBA) degree from Tsinghua University. He began his career in
1975. Mr. Si served as the Director of the political division of China Southern Airlines Henan Branch; as the party secretary and
vice president of Guizhou Airlines Company Limited; as the Deputy Party Secretary and Secretary of the Disciplinary Committee of
the Company; and as the Party Secretary of CSAHC Northern Division. He has been the President of the Company from October 2004
to January 2009. Since December 31, 2004, Mr. Si has been the Director of the Company. Since January 2009, Mr. Si has been the
President and Deputy Party Secretary of CSAHC and the Chairman of the Board.



47







Tan Wan Geng,aged
48, is an economist graduated from Zhongshan University, majoring in economic geography, with qualification of postgraduate degree.
Mr. Tan began his career in civil aviation in 1990 and served as the head of the Infrastructure Department and Director of Human
Resources and Administration Department of the Beijing Aircraft Maintenance and Engineering Corporation, the Deputy Director General
of Human Resources Division (Personnel and Education Division) of the Civil Aviation Administration of China (CAAC), and has been
the Director General and Party Secretary of Civil Aviation Administration of China Northeastern Region. He has been the Party Secretary
and Executive Vice President of the Company from January 2006 to February 2007; the Party Member of CSAHC and the Party Secretary
and Executive Vice President of the Company from February 2007 to January 2009; the Party Member of CSAHC and the President and
Party Secretary of the Company from January 2009 to February 2009; the Party Member of CSAHC and the President and Deputy Party
Secretary of the Company from February 2009 to May 2011. Since May 2011, Mr. Tan has been the Party Secretary of CSAHC and the
President of the Company. Mr. Tan has been the Director of the Company since June 15, 2006 and has been the Vice Chairman of the
Board since January 24, 2013.



Wang Quan Hua,
aged 58, graduated with a university degree from the Party School of the Central Committee of CPC majoring in economic management.
Mr. Wang began his career in 1972. Mr. Wang served as the Director of the Planning and Operation Division of CSAHC; the General
Manager of Strategy and Development Department of CSAHC; the Assistant to the President and the Director of the Strategy and Development
Department and the Vice President of CSAHC. Mr. Wang has served as the Executive Vice President of CSAHC since September 2002.
Since May 13, 2003, Mr. Wang has been the Director of the Company. Currently, Mr. Wang is also the Chairman of Nan Lung Holding
Limited, Guangzhou Southern Airline Construction Company Limited, the director of TravelSky Technology Limited, Solar Insurance
Group Company Limited, Yazhou Travel Investment Company Limited and China National Aviation Corp (HK) Ltd.



Yuan Xin An,
aged 56, received university education in Aeronautical Machinery from Air Force Engineer University and is a senior engineer. Mr.
Yuan began his career in December 1976 and served as the Vice President of Engineering Department of China Southern Airlines Company,
the Vice President of Guangzhou Aircraft Maintenance Engineering Co., Ltd., the Chief Engineer and the General Manager of Engineering
Department of the Company. Mr. Yuan served as the Executive Vice President of the Company from April 2002 to September 2007; the
Executive Vice President of CSAHC since September 2007; the Executive Vice President and Chief Legal Adviser of CSAHC since July
2008. Since November 30, 2011, Mr. Yuan has been the Director of the Company. Currently, Mr. Yuan is also the Chairman of Southern
Airlines (Group) Import and Export Trading Company Limited, China Southern Airlines Group Construction and Development Company
Limited, MTU Maintenance Zhuhai Co., Ltd., Dalian Acacia Town Villa Co., Ltd. and Shenzhen Air Catering Co., Ltd, and a director
of China Aircraft Services Limited.



Ms. Yang Li Hua,
aged 57, graduated with a master degree from the Party School of the Central Committee of CPC majoring in economics and management
and is a senior expert of political science. Ms. Yang began her career in Air China International Corporation in 1973, and served
as the head of the in-flight service team, manager of in-flight service division and deputy head of the Chief Flight Team of Air
China International Corporation. Subsequently, she was appointed as the General Manager of the Passenger Cabin Service Division
of Air China International Corporation in September 2000, the Vice President of Air China International Corporation in October
2002, the Vice President of Air China Limited in September 2004, and Executive Vice President of CSAHC in May 2009. From July 2010
to August 2012, Ms. Yang also acted as the Chairman of the Labour Union of CSAHC. Since January 24, 2013, Ms. Yang has been the
Director of the Company. Currently, Ms. Yang is also the Chairman of Southern Airlines Culture and Media Co., Ltd.



Zhang Zi Fang,
aged 54, graduated with an Executive Master of Business Administration (EMBA) degree from Tsinghua University and is a senior expert
of political science. Mr. Zhang began his career in 1976. He served as the Deputy Commissar and subsequently the Commissar of the
pilot corps of China Northern Airlines Company; as the Party Secretary of the Jilin Branch of China Northern Airlines Company;
as the General Manager of Dalian Branch of CSAHC Northern Airlines; as the Director of Political Works Department of CSAHC. Mr.
Zhang was the Deputy Party Secretary and Secretary of the Disciplinary Committee of the Company from February 2005 to December
2007. He has been the Executive Vice President and the Deputy Party Secretary of the Company from December 2007 to February 2009.
Since February 2009, he has been the Party Secretary and Executive Vice President of the Company. Mr. Zhang has been the Director
of the Company since June 30, 2009. Currently, Mr. Zhang is also the Vice Chairman of Southern Airlines Culture and Media Co.,
Ltd.



Xu Jie Bo, aged
47, graduated with a university degree from Tianjin University majoring in infrastructure and engineering management, and was subsequently
awarded with a master degree in Business Administration from Hong Kong Baptist University and an Executive Master of Business Administration
(EMBA) degree from Tsinghua University and is a qualified senior accountant. Mr. Xu began his career in 1986. He served as the
Director of the Financial Department of Central and Southern Administration of CAAC; as the Chief Accountant and General Manager
of the Financial Department of the Company. Mr. Xu served as the Director, Chief Financial Officer and Chief Accountant of the
Company since April 2001 and as the Director, Executive Vice President, Chief Financial Officer and Chief Accountant of the Company
from August 2003 to September 2012. Mr. Xu has been the Director, Senior Executive Vice President, Chief Financial Officer and
Chief Accountant of the Company since September 2012. Currently, Mr. Xu is also the Chairman of Guizhou Airlines Company Limited
and the Vice Chairman of Sichuan Airlines Corporation Limited.



48







Mr. Li Shao Bin,
aged 47, graduated with a university degree from the Party School of the Central Committee of CPC majoring in economics and management
and is an expert of political science. Mr. Li began his career in 1984, and served as the Deputy Head of Promotion Department of
the Company, the Director of Political Department of Guangzhou Flight Operations Division of the Company, and the Director of Political
Department and Deputy Party Secretary of Guangzhou Flight Operations Division of the Company. Subsequently, he was appointed as
Party Secretary of Guangzhou Flight Operations Division of the Company in May 2004. Mr. Li served as the Party Secretary and Deputy
General Manager of Guangzhou Flight Operations Division of the Company from March 2006 to August 2012. Mr. Li has been the Chairman
of the Labour Union of the Company since August 2012 and the Director of the Company since January 24, 2013.



Gong Hua Zhang,
aged 67, a senior accountant at professor level. With over 40 years of accounting experience, Mr. Gong served as the Deputy Chief
Accountant, the director of the Financial Division of China Petroleum Pipeline Bureau, the director of Financial Bureau of China
National Petroleum Corporation; as the Chief Accountant of China National Petroleum Corporation. He served as the director of PetroChina
Company Limited from October 1999 to May 2008, the Chairman of the Board of PetroChina Finance Company Limited from May 1999 to
September 2009 and the director of China Cheung Kong Electric Power Co., Ltd. from September 2002 to June 2010. Mr. Gong has been
the Independent Non-executive Director of the Company since June 28, 2007. Currently, Mr. Gong is also the Vice President of Accounting
Society of China, member of the Accounting Standards Committee of the Ministry of Finance and member of China Valuation Standards
Committee. He is also the independent director of China Shenhua Energy Company Limited, the external director of China Dongfang
Electricity Group Company Limited, the independent director of Nanyang Commercial Bank (China) Company Limited, the independent
director of China Railway Group Limited and the external director of COFCO Corporation.



Wei Jin Cai,
aged 63, graduated from the Party School of the Central Committee of CPC majoring in economics and management. Mr. Wei has many
years of experiences in civil aviation. He conducted an in-depth study on the operation and management of civil aviation and is
influential in the civil aviation industry. Mr. Wei served as the Deputy Party Secretary of the Party Committee of the headquarter
of CAAC, the Party Secretary of Civil Aviation Management Institute of China from March 1993 to November 2008 and the President
of Civil Aviation Management Institute of China from November 2008 to August 2010. Mr. Wei has been the Independent Non-executive
Director of the Company since December 29, 2010. Currently, he is also the independent director of Xiamen International Airport
Co., Ltd. and the independent non-executive director of ASR Holdings Limited.



Ning Xiang Dong,
aged 47, graduated from the Quantitative Economics Faculty of the School of Economics and Management of Tsinghua University with
a doctor degree. Mr. Ning began his career in 1990 and served as the assistant, lecturer and associate professor at Tsinghua University
and the Executive Deputy Director of the National Center for Economic Research (NCER) at Tsinghua University. He was also a visiting
scholar at Harvard Business School, University of Illinois, University of New South Wales, University of Sydney and Chinese University
of Hong Kong. Currently, he serves as the professor and the doctorate-tutor of the School of Economics and Management of Tsinghua
University and the executive director of Centre for Corporate Governance of Tsinghua University. Mr. Ning has been the Independent
Non-executive Director of the Company since December 29, 2010. He is also the independent director of Hong Yuan Securities Co.,
Ltd., GoerTek Inc., Aerospace Hi-Tech Holding Group Co., Ltd. and Sichuan ChangHong Electric Company Limited.



Liu Chang Le,
aged 61, was conferred an honorary doctoral degree in literature by the City University of Hong Kong and is a founder of Phoenix
Satellite Television. Mr. Liu has been the Chairman and Chief Executive Officer of Phoenix Satellite Television Company Limited
since 1996 and the Chairman and Chief Executive Officer of Phoenix Satellite Television Holdings Limited, a company listed on the
Stock Exchange since 2000. Mr. Liu gained widespread recognition both locally and overseas for his enthusiasm for and achievements
in the media industry. Mr. Liu is the recipient of numerous titles and awards, among which include “Wiseman of the Media
Industry”, “the Most Innovative Chinese Business Leaders in the Asia Pacific Region”, “the Most Entrepreneurial
Chinese Business Leaders”, and has been awarded the “Robert Mundell Successful World CEO Award”, the “Man
of Year for Asia Brand Innovation Award”, the “Person of the Year” award of the Chinese Business Leaders Annual
Meeting and “Business Person of the Year at DHL/SCMP Hong Kong Business Awards 2012”. Since 2005, Mr. Liu has been
the Chairman of the iEMMYs Festival, which is run by the International Academy of Television Arts & Sciences. In November 2008,
Mr. Liu received the International Emmy Directorate Award. Mr. Liu was appointed as honorary chairman of “World Chinese-language
Media Cooperation Alliance” in 2009 and appointed as special consultant to the Eighth Council of the Buddhist Association
of China in 2010. Mr. Liu was a member of the Tenth and the Eleventh National Committee of the Chinese People’s Political
Consultative Conference, served as the Vice Chairman of the sub-committee on Education, Science, Culture, Health and Sport of the
Eleventh National Committee of the Chinese People’s Political Consultative Conference, and is a member of standing committee
of the Twelfth National Committee of the Chinese People’s Political Consultative Conference. Mr. Liu has been appointed a
Justice of the Peace by the government of the Hong Kong Special Administrative Region. In July 2010, Mr. Liu was awarded the Silver
Bauhinia Star by the Hong Kong Special Administrative Region. Mr. Liu has become an Independent Non-executive Director of the Company
since November 30, 2011.



Supervisory Committee



As required by the
Company Law of the PRC and the Articles of Association of the Company, we have a supervisory committee (the “Supervisory
Committee”) which is primarily responsible for the supervision of senior management of the Company, including the Board,
executive officers and other senior management personnel, to ensure that they act in the interests of the Company, its shareholders
and employees, as well as in compliance with applicable law. The Supervisory Committee consists of five Supervisors. Three of the
Supervisors are appointed by shareholders, and the other two Supervisors are representatives of our employees. The Supervisors
serve terms of three years and may serve consecutive terms.



49







Pan Fu, aged
50, graduated with a master degree from Chongqing University majoring in power systems and automation, and is a senior engineer.
Mr. Pan began his career in 1986, and served successively as the Deputy Chief Engineer of Test Research Institute of Electric Power
Bureau of Yunnan Province and the Deputy Head of the Planning Department of Electric Power Industry Bureau of Yunnan Province (Group
Company), the Deputy Director of the Planning & Development Department of Yunnan Electric Power Group Co., Ltd., the Deputy
Director and Director of Kunming Power Plant, the Deputy Chief Engineer and Chief Engineer of Yunnan Electric Power Corporation,
the Deputy Director and Director of the Department of Security Supervision of China Southern Power Grid Company Ltd., the Director
of the China Southern Power Grid Technology and Research Center. He served as the General Manager and Deputy Party Secretary of
the Guizhou Power Grid Corporation from January 2005 to November 2007, and served as the Director of the Planning Development Department
of China Southern Power Grid Company Ltd. from November 2007 to November 2010. Mr. Pan has been the Team Leader of the Discipline
Inspection Commission of CSAHC since November 2010 and the Chairman of the Supervisory Committee of the Company since December
29, 2010. Currently, he is also the Chairman of China Southern Airlines Group Passenger and Cargo Agent Company Limited.



Li Jia Shi,
aged 51, graduated from Guangdong Polytechnic Normal University majoring in economics and mathematics and obtained an Executive
Master of Business Administration (EMBA) degree from Tsinghua University and is an expert of political science. Mr. Li began his
career in 1976. He served as the Deputy Head of the Organization Division of the Party Committee of the Company, Party Secretary
and Deputy General Manager of Guangzhou Nanland Air Catering Company Limited, the Head of the Organization Division of the Party
Committee of the Company, the Chairman of Southern Airlines Ka Yuen (Guangzhou) Aviation Supply Company Limited and Guangzhou Nanland
Air Catering Company Limited. He served as the Deputy Secretary of the Disciplinary Committee and the Director of the Disciplinary
Committee Office of the Company from December 2003 to December 2007. Mr. Li has been the Secretary of the Disciplinary Committee
of the Company since December 2007 and has been the Deputy Team Leader of the Discipline Inspection Commission of CSAHC and the
Secretary of Disciplinary Committee of the Company since February 2012. Mr. Li has been the Supervisor of the Company since June
30, 2009.



Zhang Wei, aged
46, graduated with a master degree from Tianjin University majoring in investment skills and economics and obtained an Executive
Master of Business Administration (EMBA) degree from Tsinghua University and is a senior accountant. Ms. Zhang began her career
in 1988 and served as the General Manager Assistant and Deputy General Manager of the Finance Department of the Company, the Deputy
Director of the Supervisory Bureau and the Director of the Audit Division of CSAHC and the General Manager of SA Finance. Ms. Zhang
served as the Deputy Director of the Supervisory Bureau and the Director of the Audit Division of CSAHC from October 2007 to October
2008. Since October 2008, she has been the Director of the Audit Division of CSAHC. Ms. Zhang has been the Supervisor of the Company
since June 2008. Currently, Ms. Zhang is also the Chairman of Supervisory Committee of Southern Airlines Culture and Media Co.,
Ltd, SA Finance, Southern Airlines (Group) Import and Export Trading Company Limited and China Southern Airlines Group Construction
and Development Company Limited and the Director of Guangzhou Southern Airline Construction Company Limited.



Yang Yi Hua,
aged 52, has a university degree, and is an accountant and an International Certified Internal Auditor. Ms. Yang served as the
Manager of the Financial Office of the Company’s Financial Division, and Deputy General Manager of the Company’s Audit
Department. Ms. Yang has been the General Manager of the Company’s Audit Department since May 2002 and the Supervisor of
the Company since June 2004. Currently, Ms. Yang is also the Chairman of the Supervisory Committee of Guizhou Airlines, Guangzhou
Baiyun International Logistic Company Limited, Beijing China Southern Airlines Ground Service Company Limited and Nan Lung International
Freight Limited and the supervisor of Xiamen Airlines, SA Finance and Chongqing Airlines.



Liang Zhong Gao,
aged 56, graduated from Nanjing Institute of Politics, majoring in economics and management and is an expert of political science.
Mr. Liang began his aviation career since 1998 and served as Deputy General Manager of the Guangzhou Sales Office of the Company,
Deputy Party Secretary and Secretary of the Disciplinary Committee of the Passenger Traffic Department of the Company, Party Secretary
of the Passenger Traffic Department of the Company and General Manager of the Aviation Service Quality Control Department of the
Company. Mr. Liang served as the Director of the Disciplinary Supervision Department of the Company from February 2007 to December
2012 and was appointed as the Deputy Party Secretary and Deputy General Manager of Basic Construction Project Management Department
of the Company in December 2012. Mr. Liang has been the Supervisor of the Company since June 2007.



Senior Management



Ren Ji Dong,
aged 48, graduated from Nanjing University of Aeronautics and Astronautics, majoring in aircraft engine design and obtained an
Executive Master of Business Administration (EMBA) degree from Tsinghua University, and he is a senior engineer. Mr. Ren began
his career in 1986 and served as the Deputy Director of Urumqi Civil Aviation Administration, the Vice President of Xinjiang Airlines,
the Party Secretary and the Vice President of the Xinjiang branch of the Company, the Executive Vice President of the Company from
March 2005 to January 2007, and the President of the Xinjiang branch of the Company from January 2007 to April 2009. He has been
the Executive Vice President of the Company since May 2009.



Liu Qian, aged
48, graduated from China Civil Aviation Flying College majoring in aircraft piloting. Mr. Liu served the CAAC as an assistant researcher
of the Piloting Skills Supervision Division of the Piloting Standards Department, an assistant researcher of the Operation Supervision
Division, an assistant researcher and the Deputy Head of the Piloting Standards Division, and the Deputy Chief Pilot and Chief
Pilot of the Company. He has been the Executive Vice President of the Company since August 2007. Currently, Mr. Liu is also the
Chairman of Zhuhai Xiang Yi Aviation Technology Company Limited and China Southern West Australian Flying College Pty Ltd.



50







Dong Su Guang,
aged 59, graduated from Northwestern Polytechnical University majoring in aircraft design. Mr. Dong began his career in 1970 and
served as the Vice President of Guangzhou Aircraft Maintaining and Engineering Co., Ltd. (“GAMECO”), the Chief Engineer
and the General Manager of Engineering Department of the Company. He has been the Executive Vice President of the Company since
December 2007. Currently, Mr. Dong is also the Chairman of Shantou Airlines, GAMECO and Shenyang Northern Aircraft Maintenance
Engineering Co., Ltd.



Chen Gang, aged
47, graduated from Zhongnan Finance and Economics University majoring in industrial enterprise management and obtained an Executive
Master of Business Administration (EMBA) degree from Tsinghua University. He began his career in 1987 and served as the Vice President
of Henan branch of the Company, the President of Hubei branch of the Company and the Director of Commercial Steering Committee
of the Company. He has been the Executive Vice President of the Company since August 2009. Currently, Mr. Chen is also the Chairman
of CSN – ETC E-commerce Limited.



Zhou Yue Hai,
aged 52, has a university degree and obtained an Executive Master of Business Administration (EMBA) degree from Tsinghua University
on-the-job. Mr. Zhou began his career in 1980. He served as the Deputy Director of the Flight Safety Technology Division, the Deputy
Director of the Flight Technology Management Division, the Deputy General Manager of the Flight Safety Technology Department, the
Deputy General Manager of the Flight Operation Division of the Company, the Party Secretary and Vice President of Guizhou Airlines
Company Limited. Mr. Zhou served as the General Manager of China Southern Airlines Jilin Branch from September 2004 to January
2009 and the General Manager of China Southern Airlines Northern Branch from January 2009 to July 2012. Mr. Zhou has been the Executive
Vice President of the Company since August 2012. Currently, Mr. Zhou is also the Vice Chairman of Shenyang Airport Logistics Company
Limited and the Chairman of Southern Airlines Ka Yuen (Guangzhou) Aviation Supply Company Limited and Guangzhou Nanland Air Catering
Company Limited.



Wang Zhi Xue,
aged 51, has a university degree. Mr. Wang began his career in 1981. He served as the Manager of the Flight Safety Technology Inspection
Division of Zhuhai Airlines Company Limited, Deputy Chief Pilot and Director of the Flight Safety Technology Division as well as
the Vice President of Shantou Airlines Company Limited. He served as the General Manager of the Flight Management Division of the
Company from October 2004 to February 2009 and the General Manager of the Flight Operation Division of the Company in Guangzhou
from February 2009 to July 2012. Mr. Wang has been the Executive Vice President and Chief Pilot of the Company since August 2012.



Zhang Zheng Rong,
aged 51, graduated from China Civil Aviation Flying College majoring in aircraft piloting and obtained an Executive Master of Business
Administration (EMBA) degree from Tsinghua University. Mr. Zhang began his career in 1982 and served as the Deputy General Manager
of the Flight Operations Division and the Captain of the First Squadron, the General Manager of the Aviation Safety Monitoring
Division and the General Manager of the Guangzhou Flight Operation Division of the Company. He was the Chief Pilot of the Company
from August 2007 to July 20, 2012 and COO Flight Safety of the Company from June 2012 to July 20, 2012. Currently, Mr. Zhang is
also the director of Aviation Data Communication Corporation.



Hu Chen Jie,
aged 44, graduated from Beijing University Aeronautics and Astronautics majoring in information management. Mr. Hu served as a
software engineer in the Computer Center of CAAC, senior software engineer in Wei Hong International Technology Company (Singapore),
the Deputy Director of the Computer Center of the Company, the senior project manager of SITA INC. (U.S.) and the General Manager
of CSN-ETC e-Commerce Limited. He has been the Chief Information Officer of the Company since June 2007. Currently, Mr. Hu is also
the director of Guangzhou Aircraft Hang Yi Information Technology Co., Ltd. and Chairman of Guang Dong China Southern Airlines
Tian He Information Technology Company Limited.



Su Liang, aged
50, graduated from the University of Cranfield, United Kingdom with a master degree in Air Transport Management Engineering and
obtained an Executive Master of Business Administration (EMBA) degree from Tsinghua University. Mr. Su was in charge of the flight
operations, planning and international cargo project of the Company. From July 2000 to November 2007, Mr. Su was the Company Secretary
of the Company. He has been the Chief Economist of the Company since December 2007. Currently, Mr. Su is also the director of Xiamen
Airlines and Sichuan Airlines Corporation Limited.



Chen Wei Hua,
aged 46, graduated from the School of Law of Peking University and obtained an Executive Master of Business Administration (EMBA)
degree from Tsinghua University. He is a qualified lawyer in the PRC and a qualified corporate legal counselor. Mr. Chen joined
the aviation industry in 1988. He served as Deputy Director, Director of the Legal Affairs Office of the Company. Mr. Chen has
been the Chief Legal Adviser of the Company and Director of the Legal Department of the Company since January 2004. Currently,
Mr. Chen is also the director of Xiamen Airlines.



Yuan Xi Fan,
aged 50, graduated from Civil Aviation Institute of China majoring in Aviation Radio, and was subsequently awarded with a master
degree in Aviation Safety Management from the École Nationale de l’Aviation Civile (ENAC) and Ecole Nationale Superieure
d’Ingenieurs de Construction Aeronautique (ENSICA) in France and an Executive Master of Business Administration (EMBA) degree
from Tsinghua University, and is a senior engineer. Mr. Yuan began his career in 1982. Mr. Yuan served as the Deputy Director of
Repair and Maintenance Workshop of Guangzhou Aircraft Maintenance Engineering Co., Ltd., the Deputy General Manager of the Aircraft
Maintenance Engineering Division, the Director of Quality Management and Director of Integrated Business Management of Aircraft
Maintenance Engineering Division of the Company, and the Deputy General Manager of MTU Maintenance Zhuhai Co., Ltd. Mr. Yuan served
as the Deputy General Manager of Guangzhou Aircraft Maintenance Engineering Co., Ltd. from March 2009 to January 2011. Mr. Yuan
served as the General Manager of the Aircraft Engineering Division of the Company since 2011. Mr. Yuan has been the Chief Engineer
of the Company and the General Manager of the Aircraft Engineering Division of the Company since April 2012.



51







Tian Xiao Dong,
aged 43, graduated from Beijing Institute of Meteorology majoring in aviation meteorology, and was subsequently awarded with a
master degree in Aeronautical Engineering from Beijing University of Aeronautics and Astronautics and obtained an Executive Master
of Business Administration (EMBA) degree from Tsinghua University, and is a senior engineer. Mr. Tian began his career in 1989.
Mr. Tian served as the Deputy Manager of Flight Operation Office of General Dispatching Office, the Manager of Planning and Dispatch
Office of System Operation Control Center (SOC), the Deputy Director of Operation Control Division and the Deputy General Manager
of SOC. Mr. Tian has been the general manager of SOC since December 2006 and he has been the COO Flight Operations of the Company
and the general manager of SOC since June 2012.



Guo Zhi Qiang,
aged 49, economist, graduated with a master degree from Party School of Xinjiang Uyghur Autonomous Region majoring in Business
Administration. Mr. Guo began his career in 1980 and served as the Manager of Transportation Department of Xinjiang Airlines; the
Deputy General Manager of Xinjiang Company of China Southern Air Holding Company; the General Manager of China Southern Airlines
Beijing Office; the Deputy General Manager of China Southern Airlines Xinjiang Branch. Mr. Guo served as the Deputy General Manager
of the Shenzhen Branch of the Company from December 2005 to February 2008 and the President and Chief Executive Officer of Chongqing
Airlines Company Limited from December 2008 to May 2009, and served as the Deputy Director General of the Commercial Steering Committee
of the Company from May 2009 to September 2009 and the Director General of the Commercial Steering Committee of the Company from
September 2009 to September 2012. Mr. Guo has been the COO Marketing & Sales of the Company and the Director General of the
Commercial Steering Committee of the Company. Currently, Mr. Guo is also the director of Xiamen Airlines Company Limited.



Xie Bing, aged
40, graduated from Nanjing University of Aeronautics and Astronautics, majoring in civil aviation management. He subsequently received
a master degree of business administration, a master degree of international finance and an Executive Master of Business Administration
(EMBA) degree from Jinan University, the University of Birmingham, Britain and Tsinghua University, respectively. Mr. Xie is a
senior economist. Mr. Xie used to work in the Planning and Development Department, Company Secretary Office of the Company and
Office of CSAHC. He has been the Company Secretary and the Director of Company Secretary Office of the Company since November 2007.



Save as disclosed above,
none of the above Directors or Supervisors, senior management of the Company has any relationship with any Directors, Supervisors,
senior management, substantial shareholders of the Company.



| | B. | Compensation.
| | -- | -------------



The aggregate compensation
paid to all Directors, Supervisors and Senior Management for 2012 was RMB15,957,000. For the year ended December 31, 2012, the
Company paid an aggregate of approximately RMB1,303,000 on behalf of its executive Directors, Supervisors and Senior Management
pursuant to the pension scheme and the retirement plans operated by various municipal and provincial governments in which the Company
participates.



Details of the remuneration
of directors’ and supervisors’ remuneration for the year ended December 31, 2012 are set out below:



|                                    |  | Directors’ fees RMB’000 |     |  | Salaries, allowances and benefits in kind RMB’000 |  |       | Discretionary bonus RMB’000 |  |  | Retirement scheme contributions RMB’000 |  |  | Total RMB’000 |    
|----------------------------------- |  | ----------------------- | --- |  | ------------------------------------------------- |  | ----- | --------------------------- |  |  | --------------------------------------- |  |  | ------------- | ---
|Non-executive Directors             |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |               |    
|Si Xian Min                         |  |                         | -   |  |                                                   |  | -     |                             |  |  | -                                       |  |  |               | -  
|Wang Quan Hua                       |  |                         | -   |  |                                                   |  | -     |                             |  |  | -                                       |  |  |               | -  
|Yuan Xin An                         |  |                         | -   |  |                                                   |  | -     |                             |  |  | -                                       |  |  |               | -  
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |               |    
|Independent Non-executive Directors |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |               |    
|Gong Hua Zhang                      |  |                         | 150 |  |                                                   |  | -     |                             |  |  | -                                       |  |  |               | -  
|Wei Jin Cai                         |  |                         | 150 |  |                                                   |  | -     |                             |  |  | -                                       |  |  |               | -  
|Ning Xiang Dong                     |  |                         | 150 |  |                                                   |  | -     |                             |  |  | -                                       |  |  |               | -  
|Liu Chang Le                        |  |                         | 150 |  |                                                   |  | -     |                             |  |  | -                                       |  |  |               | -  
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |               |    
|Executive Directors                 |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |               |    
|Tan Wan Geng                        |  |                         | -   |  |                                                   |  | -     |                             |  |  | -                                       |  |  |               | -  
|Zhang Zi Fang                       |  |                         | -   |  |                                                   |  | 743   |                             |  |  | -                                       |  |  |               | 70 
|Xu Jie Bo                           |  |                         | -   |  |                                                   |  | 710   |                             |  |  | -                                       |  |  |               | 70 
|Chen Zhen You                       |  |                         | -   |  |                                                   |  | 576   |                             |  |  | -                                       |  |  |               | 44 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |               |    
|Supervisors                         |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |               |    
|Pan Fu                              |  |                         | -   |  |                                                   |  | -     |                             |  |  | -                                       |  |  |               | -  
|Li Jia Shi                          |  |                         | -   |  |                                                   |  | 710   |                             |  |  | -                                       |  |  |               | 69 
|Zhang Wei                           |  |                         | -   |  |                                                   |  | -     |                             |  |  | -                                       |  |  |               | -  
|Yang Yi Hua                         |  |                         | -   |  |                                                   |  | 346   |                             |  |  | -                                       |  |  |               | 68 
|Liang Zhong Gao                     |  |                         | -   |  |                                                   |  | 352   |                             |  |  | -                                       |  |  |               | 69 
|Total                               |  |                         | 600 |  |                                                   |  | 3,437 |                             |  |  | -                                       |  |  |               | 390



52







On November 30, 2011,
the Company’s General Meeting, approved the “H Share Appreciation Rights Scheme of China Southern Airlines Company
Limited” and “Initial Grant under the H Share Appreciation Rights Scheme of China Southern Airlines Company Limited”
(“the Scheme”).



Under the Scheme, 24,660,000
units of Share Appreciation Rights were granted to 118 employees of the Group at the exercise price of HK$3.92 per unit prior to
or on at December 31, 2011. No shares will be issued under the Scheme and each of the SAR is notionally linked to one existing
H Share of the Company. Upon exercise of the Share Appreciation Rights, a recipient will receive an amount of cash equal to the
difference between the market share price of the relevant H Share and the exercise price.



The Share Appreciation
Rights will have an exercise period of six years from the date of grant. Upon the satisfaction of certain performance conditions
after the second, third and fourth anniversary of the date of grant, each one third of the Share Appreciation Rights will become
exercisable.



A dividend of RMB0.2
(equivalent to HK$0.25) (inclusive of applicable tax) per share was approved by the Company’s General Meeting on May 31,
2012, therefore, the exercise price for the Share Appreciation Rights was adjusted to HK$3.67 per share in accordance with the
predetermined formula stipulated in the Scheme. During the year, 940,000 units of Share Appreciation Rights were forfeited.



The fair value of the
liability for Share Appreciation Rights is measured using the Black-Scholes option pricing model. The risk free rate, expected
dividend yield and expected volatility of the share price are used as the inputs into the model. The fair value of the liability
for Share Appreciation Rights as of December 31, 2012 was RMB2,303,000 and a corresponding staff costs of RMB2,072,000 was recognized
during 2012.



| | C. | Board Practices.
| | -- | ----------------



Each Director’s
service contract with the Company or any of its subsidiaries provides prorated monthly salary upon termination of employment in
accordance with his contract. The Director is entitled to paid leave under his contract. The term of office of a director is three
years. The term of office of the current directors will end in 2013. A Director may serve consecutive terms upon re-election.



Audit Committee



The Audit Committee
is appointed by the Board of Directors and consists of three independent Non-executive Directors. The current members of the Audit
Committee are Gong Hua Zhang, Wei Jin Cai and Ning Xiang Dong.Gong Hua Zhang is the Chairman of the Audit Committee.
The term of office of each member will end in 2013. A member may serve consecutive terms upon re-election. At least once a year,
the committee is required to meet with the Company’s external auditors without any executive members of the Board in attendance.
The quorum necessary for the transaction of any business is two committee members. The Audit Committee held five meetings in 2012,
which were attended by all members.



The Audit Committee
is required, amongst other things, to oversee the relationship with the external auditors, to review the Group’s interim
results and annual financial statements, to monitor compliance with statutory and listing requirements, to review the scope, if
necessary, to engage independent legal or other advisers as it determines is necessary and to perform investigations. In addition,
the Audit Committee also examines the effectiveness of the Company’s internal controls, which involves regular reviews of
the internal controls of various corporate structures and business processes on a continuous basis, and takes into account their
respective potential risks and severity, in order to ensure the effectiveness of the Company’s business operations and the
realization of its corporate objectives and strategies. The scope of such examinations and reviews includes finance, operations,
regulatory compliance and risk management. The Audit Committee also reviews the Company’s internal audit plan, and submits
relevant reports and concrete recommendations to the Board on a regular basis.



The Company has an
internal audit department which reviews procedures in all major financial and operational activities. This department is led by
the head of internal audit.



Remuneration and Assessment Committee



The Remuneration and
Assessment Committee is comprised of three members. Currently, the Remuneration and Assessment Committee is chaired by Independent
Non-executive Director Ning Xiang Dong with Independent Non-executive Director Gong Hua Zhang and Non-executive Director Wang Quan
Hua as members. The term of office of each member is three years. The term of office of the current members will end in 2013. A
member may serve consecutive terms upon re-election. The Remuneration and Assessment Committee held two meetings in 2012, which
were attended by all members.



53







The responsibilities
of the Remuneration and Assessment Committee are to make recommendations on the remuneration policy and structure for Directors
and senior management of the Company, to establish regular and transparent procedures on remuneration policy development and improvement
and submit the Company’s “Administrative Measures on Remuneration of Directors” and “Administrative Measures
on Remuneration of Senior Management”. In particular, the Remuneration and Assessment Committee has the duty to ensure that
the Directors or any of their associates shall not be involved in the determination of their own remuneration packages.



The Remuneration and
Assessment Committee consulted, when appropriate, the Chairman and/or the President about its proposals relating to the remuneration
of other executive Directors. The Remuneration and Assessment Committee is provided with sufficient resources to discharge its
duties and professional advice is available if necessary. The Remuneration and Assessment Committee is also responsible for assessing
performance of executive Directors and approving the terms of executive Directors’ service contracts. The Remuneration and
Assessment Committee has performed all its responsibilities under its terms of reference in 2012.



Nomination Committee



The Nomination Committee
was established on June 28, 2007. Before that, nomination of Directors and other senior management was mainly undertaken by the
Board. According to the Articles of Association, the Board has the authority to appoint from time to time any person as Director
to fill a vacancy or as additional Director. In selecting candidate Directors, the Board focuses on their qualifications, technical
skills, experiences (in particular, the experience in the industry in which the Group operates in case of candidates of executive
directors) and expected contributions to the Group.



As of December 31,
2012, the Nomination Committee consists of three members, including Si Xian Min as Chairman and Wei Jin Cai (Independent Non-executive
Director) and Gong Hua Zhang (Independent Non-executive Director) as members. The responsibilities of the Nomination Committee
are to make recommendations to the Board in respect of the size and composition of the Board based on the operational activities,
assets and shareholding structure of the Company; study the selection criteria and procedures of Directors and executives and give
advice to the Board; identify qualified candidates for Directors and executives; investigate and propose candidates for Directors
and managers and other senior management members to the Board.



In accordance with
relevant laws and regulations as well as the provisions of the Articles of Association of the Company, the Nomination Committee
shall study and resolve on the selection criteria, procedures and terms of office for directors and managers with reference to
the Company’s actual situation. Any resolution made in this regard shall be filed and proposed to the Board for approval
and shall be implemented accordingly. The Nomination Committee is provided with sufficient resources to discharge its duties and
independently engages intermediate agencies to provide professional advice on its proposals if necessary.



The Nomination Committee held five meetings
in 2012, which was attended by all members.



| | D. | Employees.
| | -- | ----------



As of December 31,
2012, the Group had 73,668 employees, including 5,876 pilots, 12,009 flight attendants, 10,848 maintenance personnel, 7,674 passenger
transportation personnel, 6,041 cargo transportation personnel, 7,760 ground service personnel, 2,299 flight operation officers,
617 flight security guards, 969 information system personnel, 2,331 financial personnel, and 17,244 other personnel. All of our
pilots, flight attendants, maintenance personnel, administrative personnel and sales and marketing personnel are contract employees.



The Company’s
employees are members of a trade union organized under the auspices of the All-China Federation of Trade Unions, which is established
in accordance with the Trade Union Law of China. Two representatives of the Company labor union currently serve on the Supervisory
Committee of the Company. Each of the Company’s subsidiaries has its own trade union. The Group has not experienced any strikes,
slowdowns or labor disputes that have interfered with its operations, and the Group believes that its relations with its employees
are good.



All employees of the
Group receive cash remuneration and certain non-cash benefits. Cash remuneration consists of salaries, bonuses and cash subsidies
provided by the Group. Salaries are determined in accordance with the national basic wage standards. The total amount of wages
payable by the Group to its employees is subject to a maximum limit based on the profitability of the Group and other factors.
Bonuses are based on the profitability of the Group. Cash subsidies are intended as a form of cost-of-living adjustment. In addition
to cash compensation, the Group’s contract employees receive certain non-cash benefits, including housing, education and
health services, and the Group’s temporary employees also receive certain health services, housing fund and education.



54







Employee benefits



Employee benefits are
all forms of considerations given and other related expenditures incurred in exchange for services rendered by employees. Except
for termination benefits, employee benefits are recognized as a liability in the period in which the associated services are rendered
by employees, with a corresponding increase in cost of relevant assets or expenses in the current period.



Retirement benefits



Employees of the Group
participate in several defined contribution retirement schemes organized separately by the PRC municipal and provincial governments
in regions where the major operations of the Group are located. The Group is required to contribute to these schemes at rates ranging
from 8% to 25% (2011: 8% to 24%) of salary costs including certain allowances. A member of the retirement schemes is entitled to
pension benefits from the Local Labor and Social Security Bureau upon his/her retirement. The retirement benefit obligations of
all retired staff of the Group are assumed by these schemes.



In addition, the Group
has established a supplementary defined contribution retirement scheme for the benefit of employees in accordance with relevant
regulations in the PRC. Employees of the Group participate in a supplementary defined contribution retirement scheme whereby the
Group is required to make contributions not exceeding one-twelfth of the prior year’s total salaries.



Housing fund
and other social insurances



The Group contributes
on a monthly basis to housing funds organized by municipal and provincial governments based on certain percentages of the salaries
of employees. The Group’s liability in respect of these funds is limited to the contributions payable in each year. In addition
to the housing funds, certain employees of the Group are eligible to one of the following housing benefit schemes:



| | (1) | Pursuant to a staff housing benefit scheme effective in September 2002, the Group agreed to pay
lump sum housing allowances to certain employees who have not received living quarters from CSAHC or the Group according to the
relevant PRC housing reform policy. An employee who leaves the Company prior to the end of the vesting benefit period is required
to pay back a portion of the lump sum housing benefits determined on a pro rata basis of the vesting benefit period. The Group
has the right to effect a charge on the employee’s house and to enforce repayment through the sale of the house in the event
of default in repayment. Any remaining shortfall is reflected in the consolidated income statement. The amount was fully amortized
in 2012.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | The Group also pays cash housing subsidies on a monthly basis to eligible employees. The monthly cash housing subsidies are
reflected in the consolidated income statement.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Termination benefits



When the Group terminates
the employment relationship with employees before the employment contracts expire, or provides compensation as an offer to encourage
employees to accept voluntary redundancy, a provision for the termination benefits provided is recognized in the consolidated income
statement when both of the following conditions are satisfied:



| | · | The Group has a formal plan for the termination of employment or has
made an offer to employees for voluntary redundancy, which will be implemented shortly; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The Group is not allowed to withdraw from termination plan or redundancy
offer unilaterally.
| | - | --------------------------------------------------------------------------------------------



Workers’ Compensation



There is no workers’
compensation or other similar compensation scheme under the Chinese labor and employment system. As required by Chinese law, however,
the Group, subject to certain conditions and limitations, pays for the medical expenses of any contract employee who suffer a work-related
illness, injury or disability, and continues to pay the full salary of, and provides all standard cash subsidies to, such employee
during the term of such illness, injury or disability. The Group also pays for certain medical expenses of its temporary employees.



| | E. | Share Ownership.
| | -- | ----------------



On November 30, 2011,
the Company’s General Meeting, approved the “H Share Appreciation Rights Scheme of China Southern Airlines Company
Limited” and “Initial Grant under the H Share Appreciation Rights Scheme of China Southern Airlines Company Limited”
(“the Scheme”).



Under the Scheme, 24,660,000
units of Share Appreciation Rights were granted to 118 employees of the Group at the exercise price of HK$3.92 per unit prior to
or on at December 31, 2011. No shares will be issued under the Scheme and each of the SAR is notionally linked to one existing
H Share of the Company. Upon exercise of the Share Appreciation Rights, a recipient will receive an amount of cash equal to the
difference between the market share price of the relevant H Share and the exercise price.



55







The Share Appreciation
Rights will have an exercise period of six years from the date of grant. Upon the satisfaction of certain performance conditions
after the second, third and fourth anniversary of the date of grant, each one third of the Share Appreciation Rights will become
exercisable.



A dividend of RMB0.2
(equivalent to HK$0.25) (inclusive of applicable tax) per share was approved by the Company’s General Meeting on May 31,
2012, therefore, the exercise price for the Share Appreciation Rights was adjusted to HK$3.67 per share in accordance with the
predetermined formula stipulated in the Scheme. During the year, 940,000 units of Share Appreciation Rights were forfeited.



The fair value of the
liability for Share Appreciation Rights is measured using the Black-Scholes option pricing model. The risk free rate, expected
dividend yield and expected volatility of the share price are used as the inputs into the model. The fair value of the liability
for Share Appreciation Rights as of December 31, 2012 was RMB2,303,000 and a corresponding staff costs of RMB2,072,000 was recognized
during 2012.



None of our directors
and senior management own any shares or options in the Group as of April 19, 2013.



ITEM 7. MAJOR SHAREHOLDERS AND RELATED
PARTY TRANSACTIONS.



| | A. | Major Shareholders.
| | -- | -------------------



The table below sets
forth information regarding the ownership of our share capital as of April 19, 2013 by all persons who are known to us to be the
beneficial owners of 5.0% or more of each class of our voting securities.



| | Title of Shares                                      |  |  | Identity of Person or Group |  | Beneficially Owned(1) |               |     | Percentage
ofthe Respective Class
                                                                                                                                                                                                                                                                                                                                          of Shares(2) |  |       | Percentage
                                                                                                         of Total
                                                                                                                                                                                                                         Shares(2) | 
| | ---------------------------------------------------- |  |  | --------------------------- |  | --------------------- | ------------- | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | A
                                            shares |  |  | CSAHC                       |  |                       | 4,150,050,000 |     |                                                                                                                                                                                                                                                                                                                                                                                          |  | 59.10 | %                                                                                                                                                                                                                                                                                                                                                               | 
| | H
                                            shares |  |  | HKSCC Nominees Limited(3)   |  |                       | 1,750,227,298 |     |                                                                                                                                                                                                                                                                                                                                                                                          |  | 62.62 | %                                                                                                                                                                                                                                                                                                                                                               | 
| | H
                                            shares |  |  | CSAHC(4)                    |  |                       | 1,064,770,000 |     |                                                                                                                                                                                                                                                                                                                                                                                          |  | 38.10 | %                                                                                                                                                                                                                                                                                                                                                               | 
| | H
                                            shares |  |  | Nan Lung Holding Limited    |  |                       | 1,033,650,000 |     |                                                                                                                                                                                                                                                                                                                                                                                          |  | 36.98 | %                                                                                                                                                                                                                                                                                                                                                               | 
| | H
                                            shares |  |  | FIL Limited                 |  |                       | 167,462,000   | (5) |                                                                                                                                                                                                                                                                                                                                                                                          |  | 5.99  | %                                                                                                                                                                                                                                                                                                                                                               | 





|(1) | Beneficial ownership is determined in accordance with the rules of the SEC.                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Percentage of A shares and percentage of H shares is based on 7,022,650,000 A shares and 2,794,917,000 H shares, respectively, issued as of April 19, 2013. Percentage of total shares is based on 9,817,567,000 shares issued as of April 19, 2013.                                                                                                     
|(3) | As custodian of the Depositary for American
Depositary Shares representing H Shares. Amount of shares owned by HKSCC Nominees Limited also includes 167,462,000 H shares held
by FIL Limited.                                                                                                                                                            
|(4) | Includes (i) 31,120,000 H Shares held by Yazhou Travel Investment Company Limited, representing 1.11% of the total number of H shares and 0.32% of the total number of all outstanding shares, and 1,033,650,000 H Shares held by Nan Lung, representing 36.98% of the total number of H shares and 10.53% of the total number of all outstanding shares.
|(5) | Beneficial ownership calculation is based solely on a review on April 25, 2013 of disclosure of interest forms filed by FIL Limited with the Hong Kong Stock Exchange.                                                                                                                                                                                   





Shareholders of H
Shares and A shares enjoy the same voting rights with respect to each share. None of our major shareholders has voting rights
that differ from the voting rights of other shareholders. We are not aware of any arrangement which may at a subsequent date result
in a change of control of our Company.



As of April 19, 2013,
there were 44 registered holders of 1,943,151 American Depositary Shares in the United States, consisting of 0.99% of our outstanding
shares. Since certain of the ADSs are held by nominees, the above number may not be representative of the actual number of U.S.
beneficial holders of ADSs or the number of ADSs beneficially held by U.S. persons.



Our Company is currently
a majority-owned subsidiary of CSAHC, which is an entity wholly-owned by the Chinese government.



| | B. | Related Party Transactions.
| | -- | ---------------------------



For a detailed
description of our related party transactions, please see Note 44 to the Financial Statements. In particular, the
following arrangements, which the Company believes are material to its operations, have been made between the Company and
CSAHC and its affiliates during the year ended December 31, 2012 and up to the latest practicable date. The Company believes
that these arrangements have been entered into by the Company in the ordinary course of business and in accordance with the
agreements governing such transactions.



56









Arrangements with CSAHC



De-merger Agreement



The De-merger Agreement
dated March 25, 1995 (such agreement was amended by the Amendment Agreement No.1 dated May 22, 1997) was entered into between CSAHC
and the Company for the purpose of defining and allocating the assets and liabilities between CSAHC and the Company. Under the
De-merger Agreement, CSAHC and the Company have agreed to indemnify the other party against claims, liabilities and expenses incurred
by such other party relating to the businesses, assets and liabilities held or assumed by CSAHC or the Company pursuant to the
De-merger Agreement.



Neither the Company
nor CSAHC has made any payments in respect of such indemnification obligations from the date of the De-merger Agreement up to the
date of this Annual Report.



Trademark License
Agreement



The Company and CSAHC
entered into a ten-year trademark license agreement dated May 22, 1997. Pursuant to which CSAHC acknowledges that the Company has
the right to use the name “China Southern” and “China Southern Airlines” in both Chinese and English, and
grants the Company a renewable and royalty free license to use the kapok logo on a worldwide basis in connection with the Company’s
airline and airline-related businesses. Unless CSAHC gives a written notice of termination three months before the expiration of
the agreement, the agreement will be automatically renewed for another ten-year term. In May 2007, the trademark license agreement
entered into by the Company and CSAHC was automatically renewed for 10 years.



Leases



The Group (as lessee)
and CSAHC (as lessor) entered into lease agreements as follows:



| | (1) | On December 29, 2008, the Company renewed a master asset lease agreement with CSAHC with a term
valid from January 1, 2009 to December 31, 2011 (the “existing Asset Lease Agreement”).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company and CSAHC entered
into the new Asset Lease Agreement (the “New Asset Lease Agreement”) on September 25, 2012 to renew the leases transactions
for a term of three years from January 1, 2012 to December 31, 2014. Pursuant to the New Asset Lease Agreement, CSAHC agrees to
continue to lease to the Company certain parcels of land, properties, and civil aviation structures and facilities at existing
locations in Guangzhou, Haikou, Wuhan, Hengyang, Jingzhou (previously known as “Shashi”), Zhanjiang and Changsha.
The annual rents payable to CSAHC under the New Asset Lease Agreement is RMB35,924,000 for the three years ending December 31,
2014.



The Company also entered into
the individual lease agreement (the “Tenancy Contract”) with CSAHC on September 25, 2012 in relation to certain
fragemented leases for properties located in Harbin, Changchun, Dalian, Beijing and Shanghai as originally covered in the existing
Asset Lease Agreement for an aggregate annual rental of RMB4,437,000 for a term of two years from January 1, 2012 to December 31,
2013.



The Company further entered
into the Lease Agreement of Nanyang Base Assets (the “Nanyang Asset Lease Agreement”) with CSAHC
on January 24, 2013 for the leases transaction relating to certain lands and properties at Nanyang Jiangying Airport
as originally covered in the existing Asset Lease Agreement for the period from January 1, 2012 to December 31, 2012. The
rent payable under the Nanyang Asset Lease Agreement was RMB12,441,000.



For the year ended December
31, 2012, the rent incurred by the Group amounted to RMB52,802,000 pursuant to the New Asset Lease Agreement, Tenancy
Contract and Nanyang Asset Lease Agreement.



| | (2) | The Company and CSAHC entered into an indemnification agreement dated May 22, 1997 in which CSAHC
has agreed to indemnify the Company against any loss or damage caused by or arising from any challenge of, or interference with,
the Company’s right to use certain lands and buildings.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | On February 14, 2011, in order to ensure normal operation of the Company, the Company, based on
the actual leasing requirement, once again reviewed the land and properties contemplated under the lease, adjusted part of these
projects, and engaged a real estate appraisal company to assess the rent of land, properties, structures and pipes under the lease.
It then determined the rent according to the assessment and re-entered into the Land Lease Contract and the Tenancy Contract.
Pursuant to the Land Lease Contract, the parties agreed that the annual rent for land from 2011 to 2013 would be RMB56,329,131.
Pursuant to the Tenancy Contract, the annual rent for properties, structures and pipes leased by the Company from CSAHC
from 2011 to 2013 would be RMB42,975,542.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For the year ended December
31, 2012, the rents for land lease and property lease incurred by the Group amounted to RMB56,329,000 and RMB42,606,000 respectively
pursuant to the lease agreements.



57









Southern Airlines (Group) Import and
Export Trading Company Limited (“SAIETC”), a wholly-owned subsidiary of CSAHC



On January 28, 2011,
the Company renewed the Import and Export Agency Framework Agreement with SAIETC. The scope of cooperation under the agreement
covers import and export services, custom clearing services, customs declaration and inspection services, and tendering and agency
services etc. The agreement is effective for a period from January 1, 2011 to December 31, 2013, with the annual cap for the commission
not exceeding RMB97,200,000.



For the year ended
December 31, 2012, the agency fee incurred by the Group in respect of the above import and export services was RMB96,157,000.



Southern Airlines
Culture and Media Co., Ltd. (“SACM”), which is 40% owned by the Company and 60% owned by CSAHC



On May 11, 2010, the
Company renewed the Media Services Framework Agreement with SACM, for a term of three years commencing from January 1, 2010. Pursuant
to the agreement, the Company has appointed SACM to provide advertising agency services, production of in-flight TV and movie program
agency services, public relations services relating to recruitments of airhostess, and services relating to the distribution of
newspapers and magazines. The parties have determined the various rates for providing advertising services after negotiations on
an arm’s length basis, and SACM has promised that the advertising fees for which they charged the Company were all based
on the prevailing market prices for similar businesses which were accepted by the Company. The annual cap under the agreement for
each year is RMB40,000,000, RMB48,000,000 and RMB58,000,000, respectively.



For the year ended
December 31, 2012, the media fees incurred by the Group for the media services amounted to RMB49,273,000.



Southern Airlines
Group Finance Company Limited (“SA Finance”), which is 66% owned by CSAHC, 21% owned by the Company and 13% owned in
aggregate by four subsidiaries of the Company



On November 8, 2010,
the Company renewed the Financial Services Framework Agreement with SA Finance for a term of three years starting from January
1, 2011 to December 31, 2013.



Under such agreement,
SA Finance agrees to provide to the Company deposit and loan services. SA Finance shall pay interests to the Company regularly
at a rate not lower than the current deposit rates set by the People’s Bank of China. The Group’s deposits placed with
SA Finance were re-deposited in a number of banks. SA Finance has agreed that the loans provided to CSAHC and its subsidiaries
other than the Group should not exceed the sum of SA Finance’s shareholders’ equity, capital reserves and total deposits
received from other companies (excluding the Group). The rates should be determined on an arm’s length basis and based on
fair market rate, and should not be higher than those available from independent third parties. The parties agreed that the balance
of the Group’s deposits placed with SA Finance (including accrued interests) should not at any time exceed RMB4,000,000,000,
nor should the balance of loans borrowed from SA Finance at any time exceed the above-mentioned level. The annual cap of fees payable
to SA Finance for the other financial services should not exceed RMB5,000,000.



On March 16, 2012,
the Company entered into a supplemental agreement to the Financial Services Framework Agreement with SA Finance, for a term effective
from May 31, 2012, the date of passing of the resolution at the General Meeting, to December 31, 2013. In line with the Company’s
business requirement, the parties agreed that deposit balance placed with SA Finance (including interest payable accrued thereon)
in any day may not exceed RMB6,000,000,000, and the balance for provision of loan service to the Company by SA Finance (including
total interests paid) in any day may not exceed the above level.



As of December 31,
2012, the Group’s deposits placed with SA Finance amounted to RMB2,307,449,000.



China Southern
Airlines Group Passenger and Cargo Agent Company Limited (“PCACL”), a wholly-owned subsidiary of CSAHC



The Company and PCACL
have entered into a new Sales Agency Services Framework Agreement dated January 28, 2011, which is valid from January 1, 2011 to
December 31, 2013. Pursuant to the agreement, the cooperative scope of both parties thereto mainly comprises extended businesses
including air ticket sales agency services, airfreight forwarding sales agency services, chartered flight and pallets agency services,
internal operation services for the inside storage area, and delivery services for the outside storage area and chartered flight
and pallets sales agency business. PCACL charges commission with reference to the prevailing market rate. Besides, the Company
has other air ticket sales agents in China who also charge commission at the same rates. PCACL also acts as the ticket sales agents
of other airline companies in China, and charge commission at the same rates offered to the Group. The annual transaction cap of
the sales value shall not exceed RMB250,000,000.



For the year ended
December 31, 2012, the commission expense and goods handling fee paid to PCACL were RMB18,292,000 and RMB18,325,000 respectively,
and the income relating to other services was RMB88,347,000.





58











Guangzhou China
Southern Airlines Property Management Company Limited (the “GCSAPMC”), a wholly-owned subsidiary of CSAHC



The Company and GCSAPMC
renewed the Framework Agreement for the Engagement of Property Management (the “existing Property Management Framework Agreement”)
on December 29, 2008 for a term of three years.



The Company has entered
into a New Framework Agreement for Engagement of Property Management (the “New Property Management Framework Agreement”)
on December 28, 2012 to renew the property management transactions for a term of three years from January 1, 2012 to December 31,
2014. Pursuant to the New Property Management Framework Agreement, the Company has renewed the appointment of GCSAPMC for provision
of property management and maintenance services for the Company’s leased properties in the airport terminal, the base and
the 110KV transformer substation at the new Baiyun International Airport (other than certain properties in the Company’s
headquarter located in the old Baiyun Airport which were covered in the existing Property Management Framework Agreement) to
ensure the ideal working conditions of the Company’s production and office facilities and physical environment, and the normal
operation of equipment.



The Company has further
entered into the airport property management framework agreement (the “Airport Property Management Framework Agreement”)
on January 11, 2013 to renew the property management at the old Baiyun Airport for a term of three years from January 1, 2012 to
December 31, 2014. Pursuant to the Airport Property Management Framework Agreement, the Company has renewed the appointment of
GCSAPMC for the provision of property management and maintenance services for the Company’s properties at the old Baiyun
Airport and surrounding in Guangzhou.



The fee charging schedule
(or charge standard) under the New Property Management Framework Agreement and the Airport Property Management Framework Agreement
shall be determined on an arm’s length basis between both parties, and shall not be higher than the one charged by any independent
third parties in the similar industry. The annual cap for the New Property Management Framework Agreement and the Airport Property
Management Framework Agreement are set at RMB32,750,000 and RMB22,250,000, respectively.



For the year ended
December 31, 2012, the property management and maintenance fee incurred by the Group amounted to RMB49,822,000 pursuant to the
New Property Management Framework Agreement and the Airport Property Management Framework Agreement.



Zhuhai MTU, which
is 50% owned by CSAHC



The Company entered
into an agreement relating to continuing connected transactions with CSAHC, MTU Aero Engines GmbH (“MTU GmbH”) and
Zhuhai MTU on September 28, 2009, by which Zhuhai MTU shall continue to provide the Company with engine repair and maintenance
services subject to the international competitiveness and at the net most favorable terms, while the Company shall make relevant
payment to Zhuhai MTU according to related charging standard. The agreement is effective from its date to April 5, 2031. The maximum
aggregate annual consideration for the continuing connected transactions under the above agreement were disclosed in the announcement
of the Company dated September 28, 2009 and such maximum aggregate annual consideration for the year ended December 31, 2012 is
RMB1.2 billion.



For the year ended
December 31, 2012, the Group’s engine repair and maintenance service fees incurred under the agreement amounted to RMB830,147,000.



Sale of Aircraft
to Hebei Airlines Company Limited (“Hebei Airlines”) by Xiamen Airlines



On September 26, 2012,
the Board announced that Xiamen Airlines and Hebei Airlines entered into the Aircraft Sale Agreement, pursuant to which Xiamen
Airlines agreed to sell and Hebei Airlines agreed to purchase one B737-800 aircraft at the consideration of approximately RMB257
million.



Sale of 51% Equity
Interests in XAMC



On June 29, 2012, the
Board announced that Xiamen Airlines and SACM entered into an agreement, pursuant to which Xiamen Airlines agreed to sell and SACM
agreed to purchase 51% equity interests in XAMC at the consideration of RMB43.12 million. The Company believes that the disposal
of the 51% equity interests in XAMC can promote the integration of media resources owned by SACM and XAMC, and they can achieve
a better development by mutual use of the platforms and resources owned by each other. As XAMC shall be owned as to 49% by Xiamen
Airlines, Xiamen Airlines shall continue to benefit from long-term development of XAMC.



Subscription
of New A Shares by CSAHC



On June 11, 2012,
the Board approved the proposed issuance of not more than 487,804,878 new A Shares (after the adjustment with reference to
the profit distribution proposal for 2011) to CSAHC at the subscription price of RMB4.10 (after the adjustment with reference
to the profit distribution proposal for 2011) per A Share (the “Non public A Share Issue”). The proceeds to be
raised from the proposed Non public A Share Issue will be not more than RMB2 billion. CSAHC entered into the Subscription
Agreement with the Company, pursuant to which CSAHC has conditionally agreed to subscribe for and the Company has
conditionally agreed to allot and issue not more than 487,804,878 new A Shares for an aggregate consideration of not more
than RMB2 billion, equivalent to the subscription price of RMB4.10 per new A Share (the “Subscription”). As of
April 19, 2013, the proposed transaction is pending for the approval of CSRC.



All
related party transactions have been approved by Independent Non-executive Directors.



59







| | C. | Interests of Experts and Counsel.
| | -- | ---------------------------------



Not applicable.



| |  | ITEM 8. FINANCIAL INFORMATION.
| |  | ------------------------------



| | A. | Consolidated Statements and Other Financial Information.
| | -- | --------------------------------------------------------



Our audited consolidated financial statements
are set forth beginning on page F-1, which can be found after Item 19.



Legal Proceedings



The Company received
a claim on July 11, 2011 from an overseas entity (the “claimant”) against the Company for the alleged breach of certain
terms and conditions of an aircraft acquisition agreement. The claimant has made a claim against the Company for an indemnity of
US$46 million, or for the refund of the down payments of US$12 million and the interest thereon, which is calculated in accordance
with Clause 35A, United Kingdom Supreme Court Act 1981. The claim is still under investigation and the directors are of the opinion
that the claim is without merit and the Company has involved its legal advisor to defend the claim and filed a defense to the claimant
declining all the claims and made a counter claim for an indemnity of around US$34 million caused by the claimant’s non-execution
of the aircraft sale agreement. During the year, the claimant subsequently changed its claim for the refund of the down payment
of US$12 million to US$13 million. The directors are of the opinion that an outflow of resource embodying economic benefits is
not probable to occur.



Dividend Information



A dividend in respect
of the year ended December 31, 2012 of RMB0.05 (inclusive of applicable tax) per share, amounting to a total dividend of RMB490,878,350
was proposed by the Directors on March 26, 2013. The final dividend proposed after the end of the financial year has not been recognized
as a liability at the end of the financial year.



Our Board declares
dividends, if any, in Renminbi with respect to H Shares on a per share basis and pays such dividends in HK dollars. Any final dividend
for a fiscal year is subject to shareholders’ approval. Bank of New York Mellon, as depositary, converts the HK dollar dividend
payments and distributes them to holders of ADSs in U.S. dollars, less expenses of conversion. Under the Company Law of the PRC
and our Articles of Association, all of our shareholders have equal rights to dividends and distributions. The holders of the H
Shares share proportionately on a per share basis in all dividends and other distributions declared by our Board, if any, based
on the foreign exchange conversion rate published by the People’s Bank of China, or PBOC, on the date of the distribution
of the cash dividend.



We believe that our
dividend policy strikes a balance between two important goals providing our shareholders with a competitive return on investment
and assuring sufficient reinvestment of profits to enable us to achieve our strategic objectives. The declaration of dividends
is subject to the discretion of our Board, which takes into account the following factors:



| | · | our financial results;
| | - | ----------------------

| | · | capital requirements;
| | - | ---------------------

| | · | contractual restrictions on the payment of dividends by us to our
shareholders or by our subsidiaries to us;
| | - | ------------------------------------------------------------------------------------------------------------

| | · | our shareholders interests;
| | - | ---------------------------

| | · | the effect on our creditworthiness;
| | - | -----------------------------------

| | · | general business and economic conditions; and
| | - | ---------------------------------------------

| | · | other factors our Board may deem relevant.
| | - | ------------------------------------------



Pursuant to PRC laws
and regulations and the Articles of Association of the Company, dividends may only be distributed after allowance has been made
for: (i) recovery of losses, if any, and (ii) allocations to the statutory surplus reserve. The allocation to the statutory surplus
reserve is 10% of our net profit determined in accordance with PRC GAAP. Our distributable profits for the current fiscal year
will be equal to our net profits determined in accordance with IFRSs, less allocations to the statutory surplus reserve.



| | B. | Significant Changes.
| | -- | --------------------



No significant changes have occurred since
the date of the consolidated financial statements.



| | ITEM | 9. THE OFFER AND LISTING.
| | ---- | -------------------------



| | A. | Offer and Listing Details.
| | -- | --------------------------



The principal trading
market for the Company’s H Shares is the Hong Kong Stock Exchange, and the Company’s trading code is “1055”.
The Company completed its initial public offering of H Shares on July 30, 1997. The ADRs, each representing 50 H Shares, have been
listed for trading on the New York Stock Exchange since July 31, 1997, under the symbol “ZNH”.



60







The principal trading
market for the Company’s A Shares is the Shanghai Stock Exchange with trading code of “600029”. On July 25, 2003,
the Company completed its initial public offering of A Shares.



Set forth below for
the periods indicated are the high and low sales prices of H Shares on the Hong Kong Stock Exchange, ADRs on the New York Stock
Exchange and A Shares on the Shanghai Stock Exchange.



|                                    |  | The Hong Kong Stock Exchange Price per H Share (HK$) |       |  | The New York Stock Exchange Price per ADR (US$) |  |      | The Shanghai Stock Exchange Price per A Share (RMB) | 
|----------------------------------- |  | ---------------------------------------------------- | ----- |  | ----------------------------------------------- |  | ---- | --------------------------------------------------- | 
|                                    |  | High                                                 |       |  | Low                                             |  |      | High                                                | 
|Annual Market Prices                |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Fiscal Year ended December 31, 2008 |  |                                                      | 10.44 |  |                                                 |  | 0.83 |                                                     | 
|Fiscal Year ended December 31, 2009 |  |                                                      | 2.99  |  |                                                 |  | 1.14 |                                                     | 
|Fiscal Year ended December 31, 2010 |  |                                                      | 5.91  |  |                                                 |  | 2.47 |                                                     | 
|Fiscal Year ended December 31, 2011 |  |                                                      | 5.37  |  |                                                 |  | 3.08 |                                                     | 
|Fiscal Year ended December 31, 2012 |  |                                                      | 4.54  |  |                                                 |  | 3.22 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Quarterly Market Prices             |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Fiscal Year ended December 31, 2011 |  |                                                      |       |  |                                                 |  |      |                                                     | 
|First Quarter                       |  |                                                      | 4.89  |  |                                                 |  | 3.08 |                                                     | 
|Second Quarter                      |  |                                                      | 4.51  |  |                                                 |  | 3.24 |                                                     | 
|Third Quarter                       |  |                                                      | 5.37  |  |                                                 |  | 3.58 |                                                     | 
|Fourth Quarter                      |  |                                                      | 4.83  |  |                                                 |  | 3.16 |                                                     | 
|Fiscal Year ended December 31, 2012 |  |                                                      |       |  |                                                 |  |      |                                                     | 
|First Quarter                       |  |                                                      | 4.54  |  |                                                 |  | 3.40 |                                                     | 
|Second Quarter                      |  |                                                      | 3.66  |  |                                                 |  | 3.22 |                                                     | 
|Third Quarter                       |  |                                                      | 3.90  |  |                                                 |  | 3.25 |                                                     | 
|Fourth Quarter                      |  |                                                      | 4.00  |  |                                                 |  | 3.40 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Monthly Market Prices               |  |                                                      |       |  |                                                 |  |      |                                                     | 
|October 2012                        |  |                                                      | 3.78  |  |                                                 |  | 3.41 |                                                     | 
|November 2012                       |  |                                                      | 3.78  |  |                                                 |  | 3.40 |                                                     | 
|December 2012                       |  |                                                      | 4.00  |  |                                                 |  | 3.44 |                                                     | 
|January 2013                        |  |                                                      | 4.67  |  |                                                 |  | 3.89 |                                                     | 
|February 2013                       |  |                                                      | 4.68  |  |                                                 |  | 4.12 |                                                     | 
|March 2013                          |  |                                                      | 4.44  |  |                                                 |  | 4.12 |                                                     | 
|April 2013 (up to April 19, 2013)   |  |                                                      | 4.34  |  |                                                 |  | 3.87 |                                                     | 



| | B. | Plan of Distribution.
| | -- | ---------------------



Not applicable.



| | C. | Markets.
| | -- | --------



See “Offer and Listing Details”
above.



| | D. | Selling Shareholders.
| | -- | ---------------------



Not applicable.



| | E. | Dilution.
| | -- | ---------



Not applicable.



| | F. | Expenses of the Issue.
| | -- | ----------------------



Not applicable.



61







| | ITEM | 10. ADDITIONAL INFORMATION.
| | ---- | ---------------------------



| | A. | Share Capital.
| | -- | --------------



Not applicable.



| | B. | Memorandum and Articles of Association.
| | -- | ---------------------------------------



The following is a
summary of certain provisions of our Articles of Association. As this is a summary, it does not contain all the information that
may be important to you. You and your advisors should read the text of our most updated Articles of Association for further information,
which is filed as an exhibit to this Annual Report.



General



The Company is registered
with and has obtained a business license from the State Administration Bureau of Industry and Commerce of the People’s Republic
of China on March 25, 1995. On March 13, 2003, the Company obtained an approval certificate from the Ministry of Commerce to change
to a permanent limited company with foreign investments.



Other Senior
Administrative Officers



Pursuant to the Article
16 of the Articles of Association, other senior administrative officers of the Company refer to executive vice president, chief
financial officer, the board secretary, chief economist, chief engineer, chief pilot, and chief legal adviser and chief information
officer.



Objects and Purposes



Pursuant to the Article
18 of the Articles of Association, the scope of business of the Company includes: (I) provision of scheduled and non-scheduled
domestic, regional and international air transportation services for passengers, cargo, mail and luggage; (II) undertaking general
aviation services; (III) provision of aircraft repair and maintenance services; (IV) acting as agent for other domestic and international
airlines; (V) provision of air catering services; (VI) provision of hotel business; (VII) acting as sale agent for aircraft leasing
and aviation accident insurance; (VIII) engaging in other airline or airline-related business, including advertising for such services;
and (IX) insurance agency business. (subject to approved of State Administration of Industry and Commerce).



Directors



Pursuant to Article
243 of the Articles of Association, where a Director of the Company is in any way, directly or indirectly, materially interested
in a contract, transaction or arrangement or proposed contract, transaction or arrangement with the Company, other than his contract
of service with the Company, he shall declare the nature and extent of his interests to the Board of Directors at the earliest
opportunity, whether or not the contract, transaction or arrangement or proposal is otherwise subject to the approval of the Board
of Directors. For the purposes of this Article, a director is deemed to be interested in a contract, transaction or agreement in
which an associate of him is interested.



Pursuant to Article
173 of the Articles of Association, where a Director is interested in any resolution proposed at a board meeting, such Director
shall not be present and shall not have a right to vote. Such Director shall not be counted in the quorum of the relevant meeting.
Such directors also shall not vote on behalf of other directors. Board meetings may be convened by more than half of the directors
who are not interested in the proposal. Resolutions of board meetings shall be passed by more than half of directors who are not
interested in the proposal.



Pursuant to Article
251 of the Articles of Association, the Company shall, with the prior approval of shareholders in general meeting, enter into a
contract in writing with a Director wherein his emoluments are stipulated. The aforesaid emoluments include, emoluments in respect
of his service as Director, Supervisor or senior administrative officer of the Company or any subsidiary of the Company, emoluments
in respect of the provision of other services in connection with the management of the affairs of the Company and any of its subsidiaries,
and payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office.
There is no specific provisions concerning a director’s power, in the absence of an independent quorum, to vote compensation
to themselves or any members of their body, other than the above Article 173 with respect to a director’s voting power in
matters he is materially interested.



Ordinary Shares



Pursuant to Article
26 of the Articles of Association, subject to the approval of the securities authority of the State Council, the Company may issue
and offer shares to domestic investors or foreign investors for subscription. Foreign investors are those investors of foreign
countries and regions of Hong Kong, Macau and Taiwan who subscribe for shares issued by the Company. Domestic investors are those
investors within the territory of the PRC (excluding investors of the regions referred to in the preceding sentence) who subscribe
for shares issued by the Company.



62







Pursuant to Article
27 of the Articles of Association, shares issued by the Company to domestic investors for subscription in Renminbi shall be referred
to as “Domestic-Invested Shares”. Shares issued by the Company to foreign investors for subscription in foreign currencies
shall be referred to as “Foreign-Invested Shares”. Foreign-Invested Shares which are listed overseas are called “Overseas-Listed
Foreign-Invested Shares”. The foreign currencies mean the legal currencies (apart from Renminbi) of other countries or districts
which are recognized by the foreign exchange control authority of the state and can be used to pay the Company for the share price.



Pursuant to Article
28 of the Articles of Association, Domestic-Invested Shares issued by the Company are called “A Shares”. Overseas-Listed
Foreign-Invested Shares issued by the Company and listed in Hong Kong are called “H Shares”. H Shares are shares which
have been admitted for listing on the Stock Exchange of Hong Kong Limited, the par value of which is denominated in Renminbi and
which are subscribed for and traded in Hong Kong dollars. H Shares can also be listed on a stock exchange in the United States
of America in the form of ADR. Shares issued by the Company, including A Shares and H Shares, are all ordinary shares.



Pursuant to Article
62 of the Articles of Association, the ordinary shareholders of the Company shall enjoy the following rights:



| | (1) | the right to attend or appoint a proxy to attend shareholders’ general meetings and to vote
thereat;
| | --- | ----------------------------------------------------------------------------------------------------



| | (2) | the right to dividends and other distributions in proportion to the number of shares held;
| | --- | ------------------------------------------------------------------------------------------



| | (3) | the right of supervisory management over the Company’s business operations, and the right
to present proposals or enquiries;
| | --- | ----------------------------------------------------------------------------------------------------------------------------



| | (4) | the right to transfer, donate or pledge his shares in accordance with laws, administrative regulations
and provisions of these Articles of Association;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | the right of knowledge and decision making power with respect to important matters of the Company
in accordance with laws, administrative regulations and these Articles of Association;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | the right to obtain relevant information in accordance with the provisions of these Articles of
Association, including:
| | --- | -----------------------------------------------------------------------------------------------------------------------



| | (i) | the right to obtain a copy of these Articles of Association, subject to payment of the cost of
such copy;
| | --- | ---------------------------------------------------------------------------------------------------------



| | (ii) | the right to inspect and copy, subject to payment of a reasonable charge;
| | ---- | -------------------------------------------------------------------------



| | (iii) | all parts of the register of shareholders;
| | ----- | ------------------------------------------



| | (a) | personal particulars of each of the Company’s directors, supervisors, president and other
senior administrative officers, including:
| | --- | ------------------------------------------------------------------------------------------------------------------------------------



| | (aa) | present name and alias and any former name or alias;
| | ---- | ----------------------------------------------------



| | (bb) | principal address (residence);
| | ---- | ------------------------------



| | (cc) | nationality;
| | ---- | ------------



| | (dd) | primary and all other part-time occupations and duties;
| | ---- | -------------------------------------------------------



| | (ee) | identification documents and their relevant numbers;
| | ---- | ----------------------------------------------------



| | (b) | state of the Company’s share capital;
| | --- | -------------------------------------



| | (c) | reports showing the aggregate par value, quantity, highest and lowest price paid in respect of
each class of shares repurchased by the Company since the end of last accounting year and the aggregate amount paid by the Company
for this purpose;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | minutes of shareholders’ general meetings; and
| | --- | ----------------------------------------------



| | (e) | interim and annual reports of the Company.
| | --- | ------------------------------------------



| | (7) | in the event of the termination or liquidation of the Company, to participate in the distribution
of surplus assets of the Company in accordance with the number of shares held; and
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | other rights conferred by laws, administrative regulations and these Articles of Association.
| | --- | ---------------------------------------------------------------------------------------------



63







According to Article
266, dividends shall be distributed in accordance with the proportion of shares held by shareholders.



According to Article
67 of the Articles of Association, shareholders of the company have the obligation not to withdraw their shares unless required
by laws and regulations.



According to Article
37 of the Articles of Association, the Company may repurchase its issued shares under the following circumstances: (1) cancellation
of shares for the reduction of its capital; (2) merging with another company that holds shares in the Company; (3) awarding its
employees with shares; (4) at the request of the dissenting shareholders; and (5) other circumstances permitted by laws and administrative
regulations.



According to Article
41 of the Articles of Association, unless the Company is in the course of liquidation, it must comply with the following provisions
in relation to repurchase of its issued shares: (1) where the Company repurchases shares of the Company at par value, payment shall
be made out of book surplus distributable profits of the Company or out of proceeds of a fresh issue of shares made for that purpose;
(2) where the Company repurchases shares of the Company at a premium to its par value, payment up to the par value may be made
out of the book surplus distributable profits of the Company or out of the proceeds of a fresh issue of shares made for that purpose;
and (3) payment by the Company in consideration of the following shall be made out of the Company’s distributable profits:
(i) acquisition of rights to repurchase shares of the Company; (ii) Variation of any contract to repurchase shares of the Company;
and (iii) release of any of the Company’s obligation under any contract to repurchase shares of the Company.



According to Article
263 of the Articles of Association, when distributing each year’s after-tax profits, the Company shall set aside 10% of such
profits for the Company’s statutory common reserve fund, except where the accumulated balance of the said fund has reached
50% of the Company’s registered capital. After the Company has allocated its after-tax profits to the statutory common reserve
fund, it may, with the approval of the shareholders by way of resolution in a shareholders’ general meeting, further allocate
its after-tax profits to the discretionary common reserve fund.



According to Article
67 of the Articles of Association, shareholders are not liable to make any further contribution to the share capital other than
as agreed by the subscriber of the relevant shares on subscription.



The Articles of Association
does not have specific provisions discriminating against any existing or prospective holder of such securities as a result of other
shareholders owning a substantial number of shares.



Action Necessary to Change Rights of
Shareholders



Pursuant to Article
151 of the Articles of Association, shareholders who hold different classes of shares are shareholders of different classes. The
holders of the Domestic Shares and holders of Overseas Listed Foreign Shares are deemed to be shareholders of different classes.



Pursuant to Article
152 of the Articles of Association, rights conferred on any class of shareholders in the capacity of shareholders (“class
rights”) may not be varied or abrogated unless approved by a special resolution of shareholders in general meeting and by
holders of shares of that class at a separate meeting.



Pursuant to Article
154 of the Articles of Association, shareholders of the affected class, whether or not otherwise having the right to vote at shareholders’
general meetings, shall nevertheless have the right to vote at class meetings in respect of the following matters: (i) to effect
an exchange of all or part of the shares of such class into shares of another class or to effect an exchange or create a right
of exchange of all or part of the shares of another class into the shares of such class; (ii) to restrict the transfer or ownership
of the shares of such class or add to such restriction; (iii) to restructure the Company where the proposed restructuring will
result in different classes of shareholders bearing a disproportionate burden of such proposed restructuring; and (iv) to vary
or abrogate the provisions of these Articles of Association. However, interested shareholder(s) shall not be entitled to vote at
class meetings.



Pursuant to Article
155 of the Articles of Association, resolutions of a class of shareholders shall be passed by votes representing more than two-thirds
of the voting rights of shareholders of that class represented at the relevant meeting who are entitled to vote at class meetings.



Pursuant to Article
156 of the Articles of Association, written notice of a class meeting shall be given forty-five days before the date of the class
meeting to notify all of the shareholders in the share register of the class of the matters to be considered, the date and the
place of the class meeting. A shareholder who intends to attend the class meeting shall deliver his written reply concerning attendance
at the class meeting to the Company twenty days before the date of the class meeting. If the number of shares carrying voting rights
at the meeting represented by the shareholders who intend to attend the class meeting reaches more than one half of the voting
shares at the class meeting, the Company may hold the class meeting; if not, the Company shall within five (5) days notify the
shareholders again by public notice of the matters to be considered, the date and the place for the class meeting. The Company
may then hold the class meeting after such publication of notice.



64







Pursuant to Article
157 of the Articles of Association, notice of class meetings need only be served on shareholders entitled to vote thereat. Meeting
of any class of shareholders shall be conducted in a manner as similar as possible to that of general meetings of shareholders.
The provisions of these Articles of Association relating to the manner to conduct any shareholders’ general meeting shall
apply to any meeting of a class of shareholders.



Meetings of Shareholders



According to Article
78, shareholders’ general meetings are divided into annual general meetings and extraordinary general meetings. Shareholders’
general meetings shall be convened by the Board of Directors. Annual general meetings are held once every year and within six months
from the end of the preceding financial year.



According to Article
79, under any of the following circumstances, the Board of Directors shall convene an extraordinary general meeting within two
months: (1) the number of directors is less than that is required by the Company Law or two thirds of the number of directors specified
in these Articles of Association; (2) the accrued losses of the Company amount to one third of the total amount of its share capital;
(3) shareholder(s) individually or jointly holding 10% or more of the Company’s issued and outstanding shares carrying voting
rights request(s) in writing the convening of an extraordinary general meeting; (4) it is deemed necessary by the Board of Directors
or requested by the supervisory committee to convene an extraordinary general meeting; (5) more than one half of the independent
directors propose to convene the meeting.



According to Article
91 of the Articles of Association, notice of a shareholders’ general meeting shall be given by way of announcement or by
any other manner as provided in these Articles of Association (if necessary), not less than forty-five days (including forty-five
days) before the date of the meeting to notify all of the shareholders in the share register of the matters to be considered, the
date and the place of the meeting.



According to Article
92 of the Articles of Association, the Company shall, based on the written replies received twenty days before the date of the
shareholders’ general meeting from the shareholders, calculate the number of voting shares represented by the shareholders
who intend to attend the meeting. If the number of voting shares represented by the shareholders who intend to attend the meeting
reaches one half or more of the Company’s total voting shares, the Company may hold the meeting; if not, then the Company
shall within five days notify the shareholders again by public notice of the matters to be considered, the place and date for,
the meeting. The Company may then hold the meeting after such publication of notice.



Limitation on Right to Own Securities



The Articles of Association
does not specifically provide for the limitations on the rights to own securities by certain shareholders, however, the PRC Special
Regulations on Overseas Offering and the Listing of Shares by Companies Limited by Share (the “Special Regulations”)
and the Mandatory Provisions for Articles of Association of Companies to be Listed Overseas (the “Mandatory Provisions”)
provide for different classes of shares to be subscribed for and traded by local and overseas investors respectively. Shares which
can be traded by overseas investors must be in registered form and while denominated in Renminbi, they are traded in foreign currency
with dividends payable in foreign currency. Local investors are prohibited from dealing in such shares.



Merger, Acquisition or Corporate Restructuring



Pursuant to Article
291 of the Articles of Association, in the event of the merger or division of the Company, a plan shall be presented by the Company’s
Board of Directors and shall be approved in shareholders’ general meeting and the relevant examining and approving formalities
shall be processed as required by law. A shareholder who objects to the plan of merger or division shall have the right to demand
the Company or the shareholders who consent to the plan of merger or division to acquire that dissenting shareholder’s shareholding
at a fair price. The contents of the resolution of merger or division of the Company shall be made into special documents for shareholders’
inspection. Such special documents shall be sent by mail to holders of Overseas-Listed Foreign-Invested Shares.



Ownership to Be Disclosed



The Articles of Association
do not contain any provisions governing the ownership threshold above which shareholder ownership must be disclosed.



| | C. | Material Contracts.
| | -- | -------------------



Other than such contracts
as are described in our disclosure in Item 4 “Information on the Company” and Item 7 "Related Party Transactions",
we have not entered into any material contracts outside the ordinary course of our business within the two years preceding the
date of this annual report.



| | D. | Exchange Controls.
| | -- | ------------------



Under current Chinese
foreign exchange regulations, Renminbi is fully convertible for current account transactions, but is not freely convertible for
capital account transactions. Current account foreign currency transactions can be undertaken without prior approval from the relevant
Chinese government agencies by producing commercial documents evidencing such transactions, provided that they are processed through
Chinese banks licensed to engage in foreign currency transactions. Conversion from Renminbi into a foreign currency or vice versa
for purposes of capital account transactions requires prior approvals of relevant Chinese government agencies. This restriction
on capital account transactions could affect the ability of the Company to acquire foreign currency for capital expenditures.



65







The Company is generally
required by law to sell all its foreign currency revenues to Chinese banks. The Company may purchase foreign currency directly
from Chinese banks for any current account transactions, such as trade transactions in its usual and normal course of business,
including acquisition of aircraft, jet fuel and flight equipment (such acquisition requires approvals from the relevant Chinese
government agencies). Payment of dividends by the Company to holders of the Company’s H Shares and ADRs is also considered
a current account transaction under Chinese law. Therefore, there is no legal restriction on the conversion of Renminbi into foreign
currency for the purpose of paying dividends to such holders of H Shares and ADRs. In addition, the Company’s Articles of
Association require the Company to pay dividends to holders of the Company’s H Shares and ADRs in foreign currency.



On July 21, 2005, the
PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar so that the Renminbi is now permitted
to fluctuate within a band against a basket of certain foreign currencies. On May 18, 2007, the People’s Bank of China announced
that the floating band of Renminbi trading prices against U.S. dollar in the inter-bank spot foreign exchange market would be permitted
to rise or fall by as much as 0.5%. The floating band was subsequently expanded to 1% by the People’s Bank of China, effective
from April 16, 2012.



The PRC government
has stated publicly that it intends to further liberalize its currency policy, which could result in a further and more significant
change in the value of the Renminbi against the U.S. dollar. Any significant revaluation of the Renminbi may have a material adverse
effect on the Company’s financial performance, and the value of, and any dividends payable on, the Company’s H Shares
and ADRs in foreign currency terms.



Other Limitations



There are no limitations
on the right of non-resident or foreign owners to hold or vote H Shares or ADRs imposed by Chinese law or by the Articles of Association
or other constituent documents of the Company. However, under current Chinese law, foreign ownership of the Company may not exceed
49%.



| | E. | Taxation.
| | -- | ---------



Chinese Taxation



The following is a
general summary of certain Chinese tax consequences of the acquisition, ownership and disposition of A Shares, H Shares and ADRs.
This summary is based upon tax laws of China as in effect on the date of this Annual Report, including the income tax treaty between
the United States and China (the “U.S.-PRC Tax Treaty”), all of which are subject to change or different interpretation.



In general, for Chinese
tax purposes, holders of ADRs will be treated as the owners of the H Shares represented by those ADRs, and exchanges of H Shares
for ADRs, and ADRs for H Shares, will not be subject to taxation under the laws of China.



This summary does not
purport to address all material tax consequences for holders or prospective purchasers of A Shares, H Shares or ADRs, and does
not take into account the specific circumstances of such investors. Investors should consult their own tax advisors as to Chinese
or other tax consequences of the acquisition, ownership and disposition of A shares, H Shares or ADRs.



As a result of the
new corporate income tax law, the statutory corporate income tax rate adopted by the Company and its subsidiaries has been changed
from 33% to 25% with effect from January 1, 2008. Pursuant to new corporate income tax law, the corporate income tax rates of entities
that previously enjoyed preferential tax rates of 15% have been revised to 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011
and 2012 onwards, respectively.



Dividends



The new corporate income
tax law and its relevant regulations generally provide for the imposition of a withholding tax on dividends paid by a Chinese company
to a non-resident enterprise at a rate of 10%.



China currently has
double-taxation treaties with a number of countries, such as Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands,
Singapore, the United Kingdom and the United States. Under the U.S.-PRC Tax Treaty, China may tax a dividend paid by the Company
to a U.S. holder up to a maximum of 10% of the gross amount of such dividend.



For individuals, Chinese
tax law generally provides that an individual who receives dividends from Chinese companies is subject to a 20% individual income
tax. A 50% reduction of taxable income is granted by Chinese tax law for an individual receiving dividends from a listed company
on Shanghai Stock Exchange or Shenzhen Stock Exchange. As a result, the effective tax rate for dividends received by A share individual
holder is 10% in 2012. Dividend income received by any foreign individual that holds overseas shares
in Chinese enterprise is generally subject to individual income tax at a flat rate of 20%, subject to exemption or reduction by
an applicable double-taxation treaty.



66







Capital Gains from Transfer or Disposition
of Shares



The new corporate income
tax law and its relevant regulations generally provides that a non-resident enterprise is subject to a 10% capital gains tax for
the transfer or disposition of shares of a Chinese company.



For individual shareholders,
Chinese tax law generally provide that an individual who transfers or otherwise disposes of a company’s shares of capital
stock is subject to a 20% individual income tax on the capital gain, if any. Currently, all individuals are temporarily exempt
from individual income tax on transfers of shares of joint stock companies listed on Shanghai Stock Exchange or Shenzhen Stock
Exchange, such as the Company. Should such temporary exemption be discontinued, such holders may be subject to a 20% individual
income tax on the capital gain, if any, unless reduced by an applicable double-taxation treaty.



United States Federal Income Taxation



This discussion describes
general U.S. federal income tax consequences of the purchase, ownership and disposition of the Company’s ADRs. This discussion
does not address any aspect of U.S. federal gift or estate tax, or the state, local or foreign tax consequences of an investment
in the Company’s ADRs. This discussion applies to you only if you hold and beneficially own the Company's ADRs as capital
assets for tax purposes. This discussion does not apply to you if you are a member of a class of holders subject to special rules,
such as:



| | · | dealers in securities or currencies;
| | - | ------------------------------------



| | · | traders in securities that elect to use
a mark-to-market method of accounting for securities holdings;
| | - | ------------------------------------------------------------------------------------------------------



| | · | banks or other financial institutions;
| | - | --------------------------------------



| | · | insurance companies;
| | - | --------------------





| | · | tax-exempt organizations, retirement plans,
individual retirement accounts or tax deferred accounts;
| | - | ----------------------------------------------------------------------------------------------------



| | · | partnerships or other pass-through entities
(including entities treated as partnerships for U.S. federal income tax purposes) or persons holding ADRs through any such entities;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | persons that hold ADRs as part of a hedge,
straddle, constructive sale, conversion transaction or other integrated investment;
| | - | ------------------------------------------------------------------------------------------------------------------------------



| | · | persons whose functional currency for
tax purposes is not the U.S. dollar;
| | - | --------------------------------------------------------------------------



| | · | persons who are U.S. expatriates;
| | - | ---------------------------------



| | · | persons liable for alternative minimum
tax; or
| | - | ----------------------------------------------



| | · | persons who directly, indirectly or constructively
own 10% or more of the total combined voting power of all classes of the Company’s shares (including ADRs) entitled to vote.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





This discussion is
based on the U.S. Internal Revenue Code of 1986, as amended, which is referred to in this discussion as the Code, its legislative
history, existing and proposed regulations promulgated thereunder, published rulings and court decisions, all as currently in effect.
These laws are subject to change, possibly on a retroactive basis. In addition, this discussion relies on the assumptions regarding
the value of the Company’s shares and the nature of its business over time. Finally, this discussion is based in part upon
the representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement
will be performed in accordance with its terms. For U.S. federal income tax purposes, as a holder of ADRs, you are treated as the
owner of the underlying ordinary shares represented by such ADRs.



The discussions
and comments included herein are only a general description of the tax aspects and they do not constitute a tax advice or opinion.
Therefore, you should consult your own tax advisor concerning the particular U.S. federal income tax consequences to you of the
purchase, ownership and disposition of the Company’s ADRs, as well as the consequences to you arising under the laws of any
other taxing jurisdiction.



For purposes of the
U.S. federal income tax discussion below, you are a “U.S. Holder” if you beneficially own ADRs and are:



| | · | a citizen or resident of the United States for U.S. federal income
tax purposes;
| | - | --------------------------------------------------------------------------------



| | · | a corporation, or other entity taxable as a corporation, that was
created or organized in or under the laws of the United States or any political subdivision thereof;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | an estate the income of which is subject to U.S. federal income tax
regardless of its source; or
| | - | ------------------------------------------------------------------------------------------------



67







| | · | a trust if (a) a court within the United States is able to exercise
primary supervision over its administration and one or more U.S. persons have the authority to control all substantial decisions
of the trust, or (b) the trust has a valid election in effect to be treated as a U.S. person.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If you are not a U.S.
person, please refer to the discussion below under “Non-U.S. Holders.”



U.S. Holders



Dividends on
ADRs





Subject to the Passive
Foreign Investment Company (“PFIC”) discussion below, if the Company makes distributions and you are a U.S. Holder,
the gross amount of any distributions you receive on your ADRs will generally be treated as dividend income if the distributions
are made from the Company’s current or accumulated earnings and profits, calculated according to U.S. federal income tax
principles. Dividends will generally be subject to U.S. federal income tax as ordinary income on the day you actually or constructively
receive such income. However, if you are an individual and have held your ADRs for a sufficient period of time, dividend distributions
on the Company’s ADRs will generally constitute qualified dividend income taxed at a preferential rate as long as the Company
is not treated as a PFIC, the Company’s ADRs continue to be readily tradable on the New York Stock Exchange and certain other
conditions apply. You should consult your own tax adviser as to the rate of tax that will apply to you with respect to dividend
distributions, if any, you receive from us.



Distributions in excess
of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a non-taxable
return of capital to the extent of your adjusted tax basis in the ADRs and thereafter as capital gain. However, the Company does
not intend to maintain calculations of its earnings and profits in accordance with U.S. federal income tax principles, so each
U.S. Holder should therefore assume that any distribution by the Company with respect to the ADRs will constitute ordinary dividend
income. Even if you are a corporation, you will not be entitled to claim a dividends-received deduction with respect to distributions
you receive from the Company. Dividends generally will constitute foreign source passive income for U.S. foreign tax credit limitation
purposes. You should consult your own tax advisor to determine the foreign tax credit implications of owning ADRs.



Sales and other
dispositions of ADRs





Subject to the PFIC
discussion below, when you sell or otherwise dispose of the Company’s ADRs, you will generally recognize capital gain or
loss in an amount equal to the difference between the amount realized on the sale or other disposition and your adjusted tax basis
in the ADRs, both as determined in U.S. dollars. Your adjusted tax basis will generally equal the amount you paid for the ADRs.
Any gain or loss you recognize is long-term capital gain or loss if your holding period in the Company’s ADRs is more than
one year at the time of disposition. If you are an individual, any such long-term capital gain is eligible for preferential rates.
Your ability to deduct capital losses is subject to various limitations.



Passive Foreign
Investment Company





If the Company is currently
or were to become a PFIC, as a U.S. Holder, you would generally be subject to adverse U.S. tax consequences, in the form of increased
tax liabilities and special U.S. tax reporting requirements.



The Company will be
classified as a PFIC in any taxable year if either: (1) the average value during the taxable year of its assets that produce passive
income, or are held for the production of passive income, is at least 50% of the average value of its total assets for such taxable
year (the “Asset Test”); or (2) 75% or more of its gross income for the taxable year is passive income (such as certain
dividends, interest or royalties)(the “Income Test”). For purposes of the Asset Test: (1) any cash, cash equivalents,
and cash invested in short-term, interest bearing, debt instruments, or bank deposits that is readily convertible into cash, will
generally count as producing passive income or as being held for the production of passive income; and (2) the average values of
the Company’s passive and total assets is calculated based on its market capitalization. In the case of publicly traded corporations,
fair market value must be used for purposes of applying the Asset Test. In addition, regarding the above two tests, there are complex
look-through rules to consider with respect to the assets and activities of related corporations from which the Company either
receives income or in which it holds an interest. More specifically, certain adjustments are made to exclude certain income received
from a related party or to include income earned and assets held by a 25% or more owned subsidiary in determining whether the Company
qualifies as a PFIC under the two tests. In particular: 1) passive income received from a related party is excluded if it is properly
allocable to the non-passive income of the related party, and 2) if the Company owns directly or indirectly 25% or more of the
stock of another corporation, the Company is treated as if it owned directly a proportionate share of that corporation’s
assets and income.



The Company believes
that it was not a PFIC for the taxable year 2012. However, there can be no assurance that the Company will not be a PFIC for the
taxable year 2013 and/or later taxable years, as PFIC status is re-tested each year and depends on the facts in such year. For
example, the Company would be a PFIC for the taxable year 2012 if the sum of its average market capitalization, which is its share
price multiplied by the total amount of its outstanding shares, and its liabilities over that taxable year is not more than twice
the value of its cash, cash equivalents, and other assets that are readily converted into cash.



68









If the Company were
a PFIC, you would generally be subject to additional taxes and interest charges on certain “excess distributions” the
Company makes regardless of whether the Company continues to be a PFIC in the year in which you receive an “excess distribution”.
An “excess distribution” would be either (1) the excess amount of a distribution with respect to ADRs during a taxable
year in which distributions to you exceed 125% of the average annual distributions to you over the preceding three taxable years
or, if shorter, your holding period for the ADRs, or (2) 100% of the gain from the disposition of ADRs.



To compute the tax
on “excess” distributions or any gain, (1) the “excess distribution” would be allocated ratably to each
day in your holding period, (2) the amounts allocated to the current year and to any tax year before the first day on which the
Company became a PFIC would be taxed as ordinary income in the current year, (3) the amount allocated to other taxable years would
be taxable at the highest applicable marginal rate in effect for that year, and (4) an interest charge at the rate for underpayment
of U.S. federal income tax for any period described under (3) above would be imposed with respect to any portion of the “excess”
distribution that is allocated to such period. In addition, if the Company were a PFIC, no distribution that you receive from the
Company would qualify for taxation at the preferential rate discussed in the “Dividends on ADRs” section above.



If the Company were
a PFIC in any year, as a U.S. Holder, you would be required to make an annual return on IRS Form 8621 “Information Return
by a Shareholder of a Passive Foreign Investment Company or a Qualified Electing Fund.” However, the Company does not intend
to generate, or share with you, information that you might need to properly complete IRS Form 8621. You should consult with your
own tax adviser regarding reporting requirements with regard to your ADRs.



If the Company were
a PFIC in any year, you would generally be able to avoid the “excess” distribution rules described above by making
a timely so-called “mark-to-market” election with respect to your ADRs provided the Company’s ADRs are “marketable”.
The Company’s ADRs will be “marketable” as long as they remain regularly traded on a national securities exchange,
such as the New York Stock Exchange. If you made this election in a timely fashion, you would generally recognize as ordinary income
or ordinary loss the difference between the fair market value of your ADRs on the first day of any taxable year and their value
on the last day of that taxable year. Any ordinary income resulting from this election would generally be taxed at ordinary income
rates and would not be eligible for the reduced rate of tax applicable to qualified dividend income. Any ordinary losses would
be limited to the extent of the net amount of previously included income as a result of the mark-to-market election, if any. Your
basis in the ADRs would be adjusted to reflect any such income or loss. Any gains recognized on the sale or other disposition of
the ADRs would be treated as ordinary income and any losses would be treated as ordinary losses (but only to the extent of the
net amount of previously included income as a result of the mark-to-market election, if any). You should consult with your own
tax adviser regarding potential advantages and disadvantages to you of making a “mark-to-market” election with respect
to your ADRs.



Separately, if the
Company were a PFIC in any year, you would be able to avoid the “excess” distribution rules by making a timely election
to treat us as a so-called “Qualified Electing Fund” or “QEF”. You would then generally be required to
include in gross income for any taxable year (1) as ordinary income, your pro rata share of the Company’s ordinary earnings
for the taxable year, and (2) as long-term capital gain, your pro rata share of the Company’s net capital gain for the taxable
year. However, the Company does not intend to provide you with the information you would need to make or maintain a “QEF”
election and you will, therefore, not be able to make or maintain such an election with respect to your ADRs.



Medicare Tax



Recently enacted legislation requires
certain U.S. Holders who are individuals, estates or trusts to pay up to an additional 3.8% tax on, among other things, dividends
and capital gains for tax years beginning after December 12, 2012.



Non-U.S. Holders





If you beneficially
own ADRs and are not a U.S. Holder for U.S. federal income tax purposes (a “Non-U.S. Holder”), you generally will not
be subject to U.S. federal income tax or U.S. withholding tax on dividends received from the Company with respect to ADRs unless
that income is considered effectively connected with your conduct of a U.S. trade or business and, if an applicable income tax
treaty so requires as a condition for you to be subject to U.S. federal income tax with respect to income from your ADRs, such
dividends are attributable to a permanent establishment that you maintain in the United States.



You generally will
not be subject to U.S. federal income tax, including withholding tax, on any gain realized upon the sale or exchange of ADRs, unless:



| | · | that gain is effectively connected with
the conduct of a U.S. trade or business and, if an applicable income tax treaty so requires as a condition for you to be subject
to U.S. federal income tax with respect to income from your ADRs, such gain is attributable to a permanent establishment that you
maintain in the United States; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | you
are a non-resident alien individual and are present in the United States for at least 183 days in the taxable year of the sale
or other disposition and certain other conditions are met.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If you are engaged
in a U.S. trade or business, unless an applicable tax treaty provides otherwise, the income from your ADRs, including dividends
and the gain from the disposition of the Company’s ADRs, that is effectively connected with the conduct of that trade or
business will generally be subject to the rules applicable to U.S. Holders discussed above. In addition, if you are a corporation,
you may be subject to an additional branch profits tax at a rate of 30% or any lower rate under an applicable tax treaty.



69







U.S. information reporting and backup withholding rules





In general, dividend
payments with respect to the ADRs and the proceeds received on the sale or other disposition of those ADRs may be subject to information
reporting to the IRS and to backup withholding (currently imposed at a rate of 28%). Backup withholding will not apply, however,
if you (1) are a corporation or come within certain other exempt categories and, when required, can demonstrate that fact or (2)
provide a taxpayer identification number, certify as to no loss of exemption from backup withholding and otherwise comply with
the applicable backup withholding rules. To establish your status as an exempt person, you will generally be required to provide
certification on IRS Form W-9, W-8BEN or W-8ECI, or an appropriate substitute, as applicable. Any amounts withheld from payments
to you under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability,
provided that you furnish the required information to the IRS.



HOLDERS OF THE COMPANY’S
ADRS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR
SITUATIONS AS WELL AS ANY TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF THE ADRS, INCLUDING THE APPLICABILITY
AND EFFECT OF THE TAX LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION AND INCLUDING ESTATE, GIFT, AND INHERITANCE LAWS.



| | F. | Dividends and Paying Agents.
| | -- | ----------------------------



Not applicable.



| | G. | Statement by Experts.
| | -- | ---------------------



Not applicable.



| | H. | Documents on Display.
| | -- | ---------------------



The Company has filed
this Annual Report on Form 20-F with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.
Statements made in this Annual Report as to the contents of any document referred to are not necessarily complete. With respect
to each such document filed as an exhibit to this Annual Report, reference is made to the exhibit for a more complete description
of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.



The Company is subject
to the informational requirements of the Exchange Act and file reports and other information with the Securities and Exchange Commission.
Reports and other information which the Company filed with the Securities and Exchange Commission, including this Annual Report
on Form 20-F, may be inspected and copied at the public reference room of the Securities and Exchange Commission at 450 Fifth Street
N.W. Washington D.C. 20549.



You can also obtain
copies of this Annual Report on Form 20-F by mail from the Public Reference Section of the Securities and Exchange Commission,
450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from
the Securities and Exchange Commission’s Internet site at http://www.sec.gov. The Commission’s telephone number is
1-800-SEC-0330. Copies of this material may also be obtained for the Company’s website at http:// www.csair.com.



| | I. | Subsidiary Information.
| | -- | -----------------------



Not applicable.



| |  | ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
| |  | --------------------------------------------------------------------



Fuel Price Fluctuation Risk



The Group’s earnings
are affected by changes in the price and availability of jet fuel. There are currently no effective means available to manage the
Group’s exposure to the fluctuations in jet fuel prices. The Group’s results of operations may be significantly affected
by fluctuations in fuel prices which is a significant expense for the Group. A reasonable possible increase or decrease of 10%
in jet fuel price, with volume of fuel consumed and all other variables held constant, would have increased/decreased the fuel
costs by approximately RMB3,740 million. The sensitivity analysis of jet fuel price risk is disclosed in Note 48(e) to the consolidated
Financial Statements.



Interest Rate Risk



The Group is subject
to market risks due to fluctuations in interest rates. The majority of the Group’s borrowing is in the form of long-term
fixed-rate and variable-rate debts with original maturities ranging from three to twelve years . Fluctuations in interest rates
can lead to significant fluctuations in the fair value of such debt instruments. From time to time, the Group may enter into interest
rate swaps designed to mitigate exposure relating to interest rate risks. The sensitivity analysis of interest rate risk is disclosed
in Note 48(b) to the consolidated Financial Statements.



The following table
provides information regarding the Group’s financial instruments that are sensitive to changes in interest rate as of December
31, 2012 and 2011:



70







|                                           |  | As
    of December 31, 2012 |        |   |                             | 
|------------------------------------------ |  | --------------------------- | ------ | - | --------------------------- | 
|                                           |  | Expected
    Maturity Date  |        |   | As
    of December 31, 2011
|                                           |  | 2013                        |        |   | 2014                        | 
|Fixed-rate bank and other loans in
    US$ |  |                             | 794    |   |                             | 
|Average interest rate                      |  |                             | 3,66   | % |                             | 
|                                           |  |                             |        |   |                             | 
|Variable-rate bank and other loans in US$  |  |                             | 20,569 |   |                             | 
|Average interest rate                      |  |                             | 2.27   | % |                             | 
|                                           |  |                             |        |   |                             | 
|Fixed-rate bank and other loans in RMB     |  |                             | 60     |   |                             | 
|Average interest rate                      |  |                             | 4.86   | % |                             | 
|                                           |  |                             |        |   |                             | 
|Variable-rate bank and other loans in RMB  |  |                             | 476    |   |                             | 
|Average interest rate                      |  |                             | 5.84   | % |                             | 
|                                           |  |                             |        |   |                             | 
|Fixed-rate bills payable in RMB            |  |                             | -      |   |                             | 
|Average interest rate                      |  |                             | -      |   |                             | 



| | (1) | These interest rates are calculated based on the year end indices.
| | --- | ------------------------------------------------------------------

| | (2) | Fair value of debt instruments was estimated based on the interest rates applicable to similar debt instruments as of December
31, 2012 and 2011
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------



Foreign Currency Exchange Risk



The Group is also exposed
to foreign currency risk as a result of its aircraft and flight equipment being sourced from overseas suppliers. Specifically,
the Group’s foreign currency exposure relates primarily to its foreign currency long-term bank and other loans used to finance
such capital expenditures and its capital commitments. Subject to certain restrictive conditions imposed by the SAFE, the Group
may, from time to time, enter into foreign exchange forward option contracts to mitigate its foreign currency exposures. The sensitivity
analysis of foreign currency risk is disclosed in Note 48(c) to the consolidated Financial Statements.



As of December 31,
2012, the Group operated a total of 265 aircraft under operating leases and capital leases at rates that are substantially fixed.
Such leases expose the Group to market risks. However, in accordance with Item 305 of Regulation S-K, such leases have been excluded
from the following market risk tables. Commitments under capital leases and operating leases are disclosed in Note 33 and Note
49 to the consolidated Financial Statements, respectively.



The following table
provides information regarding the Group’s material foreign currency sensitive financial instruments and capital commitments
as of December 31, 2012 and 2011:



|                                               |  | As
    of December 31, 2012 |        |  |                             | 
|---------------------------------------------- |  | --------------------------- | ------ |  | --------------------------- | 
|                                               |  | Expected
    Maturity Date  |        |  | As
    of December 31, 2011 | 
|                                               |  | 2013                        |        |  | 2014                        | 
|Fixed-rate
    bank and other loans in US$     |  |                             | 794    |  |                             | 
|Variable-rate
    bank and other loans  in US$ |  |                             | 20,569 |  |                             | 
|Capital
    commitment in US$                  |  |                             | 23,671 |  |                             | 



| | (1) | Fair value of debt instruments was estimated based on the floating interest rates applicable to similar debt instruments as
of December 31, 2012 and 2011.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | ITEM | 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
| | ---- | -----------------------------------------------------------



| | A. | Debt Securities.
| | -- | ----------------



Not applicable.



| | B. | Warrants and Rights.
| | -- | --------------------



Not applicable.



71







| | C. | Other Securities.
| | -- | -----------------



Not applicable.



| | D. | American Depositary Shares.
| | -- | ---------------------------



The Bank of New York
Mellon collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for
the purpose of withdrawal or from intermediaries acting for them. The Bank of New York Mellon collects fees for making distributions
to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the
fees. The Bank of New York Mellon may collect its annual fee for depositary services by deductions from cash distributions or by
directly billing investors or by charging the book-entry system accounts of participants acting for them. The Bank of New York
Mellon may generally refuse to provide fee-attracting services until its fees for those services are paid.



|Persons depositing or withdrawing
        shares must pay:                                                                                                                                                 |  | For:                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)                                                                                                                                                      |  | •	      Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property                                      
|                                                                                                                                                                                                           |  | •	      Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates                                              
|                                                                                                                                                                                                           |  |                                                                                                                                                        
|$.02 (or less) per ADS                                                                                                                                                                                     |  | •	      Any cash distribution to ADS registered holders                                                                                                
|                                                                                                                                                                                                           |  |                                                                                                                                                        
|A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs                                                  |  | •	     Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS registered holders     
|                                                                                                                                                                                                           |  |                                                                                                                                                        
|$.02 (or less) per ADSs per calendar year                                                                                                                                                                  |  | •		      Depositary services                                                                                                                           
|                                                                                                                                                                                                           |  |                                                                                                                                                        
|Registration or transfer fees                                                                                                                                                                              |  | •	     Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares
|                                                                                                                                                                                                           |  |                                                                                                                                                        
|Expenses of the depositary                                                                                                                                                                                 |  | •	    Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)                                                      
|                                                                                                                                                                                                           |  | •	      Converting foreign currency to U.S. dollars                                                                                                    
|Taxes and other governmental charges the
        depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or
        withholding taxes |  | •	      As necessary                                                                                                                                   
|Any charges incurred by the depositary or its agents for servicing the deposited securities                                                                                                                |  | •	      As necessary                                                                                                                                   



Fees and Payments from the Depositary to Us



In 2012, the Company
received from the depositary a reimbursement of US$60,659.72, net of withholding tax, for continuing annual stock exchange listing
fees and expenses incurred by the Company in connection with the administration and maintenance of the depositary receipt facility.



Indirect payments



As part of its service
to the Company, the Bank of New York Mellon waived a total amount of US$130,189.10 for the standard costs associated with the administration
of the ADS program in 2012.



PART II





| |  | ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
| |  | ---------------------------------------------------------



None.





| | ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS.
| | -------- | -----------------------------------------------------------------------------





| | A. | Material Modifications to the Instruments Defining the Rights of Security Holders.
| | -- | ----------------------------------------------------------------------------------



None.



72







| | B. | Material Modifications to the Rights of Registered Securities by Issuing or Modifying any other Class of Securities.
| | -- | --------------------------------------------------------------------------------------------------------------------



None.



| | C. | Withdrawal or Substitution of a Material Amount of the Assets Securing any Registered Securities.
| | -- | -------------------------------------------------------------------------------------------------



Not applicable.



| | D. | Change of Trustees or Paying Agents for any Registered Securities.
| | -- | ------------------------------------------------------------------



Not applicable.



| | E. | Use of Proceeds.
| | -- | ----------------



Not applicable.



| | ITEM | 15. CONTROLS AND PROCEDURES.
| | ---- | ----------------------------



Disclosure controls and procedures



Our President and Chief
Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules
13a-15(e) or 15d-15(e)), and concluded that, based on their evaluation, our disclosure controls and procedures are effective as
of the end of the period covered by this Annual Report to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms, and were also effective to ensure that information required to be disclosed
in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our President
and Chief Financial Officer, to allow timely decisions regarding required disclosure.



Management’s annual report on
internal control over financial reporting



Our management is responsible
for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in
accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only
in accordance with authorizations of a company’s management and directors, and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material
effect on the consolidated financial statements. Our management has assessed the effectiveness of internal control over financial
reporting based on the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Our management has concluded that our internal control over financial reporting was effective as of December 31, 2012



Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with policies or procedures may deteriorate.



KPMG, an independent
registered public accounting firm, has audited the consolidated financial statements included in this Annual Report, and, as part
of the audit, has issued a report, included herein, on the effectiveness of our internal control over financial reporting.



Attestation of the Registered Public Accounting Firm



Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders of

China Southern Airlines Company Limited:



We have audited the
internal control over financial reporting of China Southern Airlines Company Limited (the “Company”) as of December
31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit.



73







We conducted our audit
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.



A company’s internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.



Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, China
Southern Airlines Company Limited maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the COSO.



We also have audited,
in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements
of financial position of China Southern Airlines Company Limited and its subsidiaries as of December 31, 2012 and 2011, and the
related consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in
equity, and consolidated cash flow statements for each of the years in the three-year period ended December 31, 2012, and our report
dated March 26, 2013, expressed an unqualified opinion on those consolidated financial statements.



/s/ KPMG

Hong Kong, China

March 26, 2013



Changes in internal control over financial reporting



During the year ended
December 31, 2012, there have been no changes in our internal control over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.



| |  | ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.
| |  | -------------------------------------------



The Board of Directors
has determined that Mr. Gong Hua Zhang qualifies as an audit committee financial expert in accordance with the terms of Item 16A
of Form 20-F. Mr. Gong Hua Zhang satisfies as an “independent director” within the meaning of NYSE Manual Section 303A
and meets the criteria for independence set forth in Section 10A(m)(3) of the U.S. Securities Exchange Act of 1934, as amended,
or the Exchange Act, and Rule 10A-3 under the Exchange Act. See “Item 6 Directors, Senior Management and Employees —
Directors and Senior Management”.



| |  | ITEM 16B. CODE OF ETHICS.
| |  | -------------------------



We have adopted a code
of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer. Such code
is included in the director service agreements, a form of which is incorporated by reference in this Annual Report in Exhibit 4.1.
Each of the aforementioned senior corporate officers currently serves as a Director and all of our Directors are subject to the
director service contracts with the Company. Pursuant to the director service agreements, among other things, Directors (i) owe
fiduciary duties to the Company and shall perform their duties in compliance with applicable governmental laws, rules and regulations;
(ii) shall not engage in any activities in competition with the Company’s business or carry out any activities detrimental
to the interests of the Company; and (iii) shall be held liable for any loss or injury incurred to the Company as a result of such
Director’s violation of applicable laws and regulations.



74







| |  | ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES.
| |  | -------------------------------------------------



The following table
sets forth the aggregate audit fees, audit-related fees and tax fees of our principal accountants and all other fees billed for
products and services provided by our principal accountants other than the audit fees, audit-related fees and tax fees for each
of the fiscal years 2011 and 2012:





|     |  | Audit Fees       |     |  | Audit-Related Fees |  |     | Tax Fees |  |  | Other Fees | 
|---- |  | ---------------- | --- |  | ------------------ |  | --- | -------- |  |  | ---------- | 
|     |  | RMB (in million) |    
|2011 |  |                  | 9.0 |  |                    |  | 3.0 |          |  |  | 0.3        | 
|2012 |  |                  | 9.2 |  |                    |  | 4.0 |          |  |  | 0.5        | 





Audit-related Fees

Review of the Group’s 2011 interim
financial report prepared under IFRSs and 2012 interim financial report prepared under IFRSs.



Tax Fees

Services provided primarily consist of tax
compliance services.



Other Fees

Provision of services in respect of work
on statement of working capital sufficiency, indebtedness statement and profit forecast as required by Hong Kong Listing
Rules, and other assurance and advisory services.



Before our principal
accountants were engaged by the Company or our subsidiaries to render the audit or non-audit services, the engagements were approved
by our Audit Committee.



| |  | ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEE
| |  | -------------------------------------------------------------------



Not applicable.



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



None.



| |  | ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT.
| |  | --------------------------------------------------------



On March 26, 2013,
the board of the directors of the Company resolved, as recommended by our audit committee, to propose to change our principal accountants,
KPMG, after the completion of their audit of our consolidated financial statements as of and for the year ended December 31, 2012
and the effectiveness of internal control over financial reporting as of December 31, 2012 and to appoint PricewaterhouseCoopers
Zhong Tian CPAs Limited (to be renamed as PricewaterhouseCoopers Zhong Tian LLP), or PwC as our new principal accountants effective
upon the approval by the shareholders of the Company at the forthcoming annual general meeting. Such change in our principal accountants
is due to the relevant requirements issued by the State-Owned Assets Supervision and Administration Commission of the PRC. According
to the relevant requirements, if the service term of the external auditor appointed by the state-owned enterprises to continuously
undertake financial auditing work exceeds the prescribed time limit, such auditor needs to be changed. In this connection, the
Company, a listed company controlled by a stated-owned enterprise, will not reappoint KPMG as our principal accountants at the
forthcoming annual general meeting.



The audit reports
of KPMG on our consolidated financial statements as of and for the fiscal years ended December 31, 2011 and 2012 contain no adverse
opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles.



During the two fiscal
years ended December 31, 2011 and 2012 and through April 26, 2013, there have been no disagreements with KPMG on any matter of
accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of KPMG, would have caused them to make reference to the subject matter of the disagreements in connection
with their report, nor have there been any reportable events (as defined in Item 16F(a)(1)(v) of Form 20-F). We have provided
a copy of the foregoing disclosure to KPMG and requested that KPMG furnish a letter addressed to the SEC stating whether or not
KPMG agrees with such disclosure. A copy of the letter from KPMG addressed to SEC, dated April 26, 2013, is filed as Exhibit 15.1
to this Form 20-F.



During the two most
recent fiscal years and through April 26, 2013, neither we nor any person on our behalf consulted PwC regarding either (i) the
application of accounting principles to a specific transaction, either completed or proposed; or the type of audit opinion that
might be rendered on our financial statements, or (ii) any matter that was either the subject of a “disagreement” (as
defined in Item 16F(a)(1)(iv) of Form 20-F and related instructions to Item 16-F of Form 20-F) with PwC or a “reportable
event” (as defined in Item 16F(a)(1)(v) of Form 20-F). Also, during the two most recent fiscal years and through April 26,
2013, we have not obtained any written report or oral advice that PwC concluded was an important factor considered by us in reaching
a decision as to the accounting, auditing or financial reporting issue.



75







| |  | ITEM 16G. CORPORATE GOVERNANCE.
| |  | -------------------------------



Set out below is a
summary of any significant ways in which the Company’s corporate governance practices differ from those followed by domestic
companies under the listing standards of the New York Stock Exchange (“NYSE”):





|NYSE corporate
        governance rules                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | The Company’s governance
        practices                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Director Independence                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|A listed company must have a majority of independent directors on its board of directors. No director qualifies as “independent” unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company).  In addition, a director must meet certain standards to be deemed independent. For example, a director is not independent if the director is, or has been within the last three years, an employee of the listed company, or if the director has received, during any twelve-month period within the last three years, more than US$120,000 in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service). |  | The Company has complied with the relevant Chinese corporate governance rules and has implemented internal rules governing the independence and responsibilities of independent directors. The Company determines the independence of independent directors every year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Executive Sessions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|The non-management directors of each listed company must meet at regularly scheduled executive sessions without management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | No similar requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Nominating/Corporate Governance Committee                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Listed companies must have a nominating/corporate governance committee composed entirely of independent directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | The Company has established a nominating committee.  As of December 31, 2012, the Nomination Committee consists of three members, Si Xian Min, Wei Jin Cai (Independent non-executive Director) and Gong Hua Zhang (Independent non-executive Director).  Mr. Si Xian Min was appointed as the chairman of the Nomination Committee on December 29, 2012. The responsibilities of the Nomination Committee are to make recommendations to the Board in respect of the size and composition of the Board based on the operational activities, assets and shareholding structure of the Company; study the selection criteria and procedures of directors and executives and give advice to the Board; identify qualified candidates for directors and executives; investigate and propose candidates for directors and managers and other senior management members to the Board.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|The nominating/corporate governance committee must have a written charter that addresses the committee’s purposes and responsibilities which, at minimum, must be to: identify individuals qualified to become board members, consistent with criteria approved by the board, and to select, or to recommend that the board select, the director nominees for the next annual meeting of shareholders; develop and recommend to the board a set of corporate governance guidelines applicable to the corporation; and oversee the evaluation of the board and management, and evaluate the performance of the committee every year.                                                                                                                                                                                                                                                                                                                                            | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Compensation Committee                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Listed companies must have a compensation committee composed entirely of independent directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | The Company has established a remuneration committee consisting of three members. As of December 31, 2012, the remuneration committee is chaired by independent non-executive Director Ning Xiang Dong with independent non-executive Director Gong Hua Zhang and non-executive Director Wang Quan Hua as members.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|The written charter of the compensation committee must state, at least, the following purposes and responsibilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(1)      
     	review and approve the corporate goals associated with CEO’s compensation, evaluate the performance of the
    CEO in fulfilling these goals, and based on such evaluation determine and approve the CEO’s compensation
    level;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | The responsibilities are similar to those stipulated by the NYSE rules, but the committee is not required to produce a report on the executive compensation or make an annual performance evaluation of the committee. The responsibilities of the remuneration committee are to approve the remuneration packages of Directors and senior management of the Group, and the Company’s “preliminary proposals on annual emoluments of the directors and senior management of the Group”. The remuneration committee is also responsible for assessing performance of executive director and approving the terms of executive directors’ service contracts.                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|(2)	      
     make recommendations to the board with respect to non-CEO executive officer compensation, and
    incentive-compensation and equity-based plans that are subject to board approval;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|(3)          produce a committee report on executive compensation as required by the SEC to be included in the annual proxy statement or annual report filed with the SEC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 









76









|NYSE  corporate
         governance  rules                                                                                                                                                                                                                                                                                                                                                         |  | The Company’s governance
        practices                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The charter must also include the requirement for an annual performance evaluation of the compensation committee.                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Audit Committee                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 of Exchange Act. It must have a minimum of three members, and all audit committee members must satisfy the requirements for independence set forth in Section 303A.02 of NYSE Corporate Governance Rules as well as the requirements of Rule 10A-3b (1) of the Exchange Act.                           |  | The Board of Directors of the Company has established an audit committee that satisfies relevant domestic requirements and the audit committee has a written charter. As ofDecember 31, 2012, the Audit Committee consists of three members, Mr. Ning Xiang Dong, Wei Jin Cai and Gong Hua Zhang, with Gong Hua Zhang being the Chairman of the Audit Committee.                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|The written charter of the audit committee must specify that the purpose of the audit committee is to assist the board oversight of the integrity of financial statements, the company’s compliance with legal and regulatory requirements, qualifications and independence of independent auditors and the performance of the listed company’s internal audit function and independent auditors.  |  | The responsibilities of the audit committee are similar to those stipulated by the NYSE rules, but according to the domestic practices, the Company is not required to make an annual performance evaluation of the audit committee and the audit committee is not required to prepare an audit report to be included in the Company’s annual proxy statement.                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|The written charter must also require the audit committee to prepare an audit committee report as required by the SEC to be included in the listed company’s annual proxy statement as well as an annual performance evaluation of the audit committee.                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Shareholder Approval of Equity Compensation Plans                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Shareholders must be given the opportunity to vote on equity-compensation plans and material revisions thereto, except for employment incentive plans, certain awards and plans in the context of mergers and acquisitions.                                                                                                                                                                        |  | The relevant regulations of China require the board of directors to propose plans and types of director compensation for the shareholders’ meeting to approve. The compensation plan of executive officers is subject to approval by the board  and disclosed to the public upon the approval of the board of directors. The approval of director compensation and compensation plan of executive officers of the Company satisfies relevant domestic requirements.
|                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Corporate Governance Guidelines                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Listed companies must adopt and disclose corporate governance guidelines, involving director qualification standards, director responsibilities, director access to management and , as necessary and appropriate, independent advisors, director compensation, director orientation continuing education, management succession and annual performance evaluation of the board of directors, etc. |  | CSRC has issued the Corporate Governance Rules, with which the Company has complied.                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Certification Requirements                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards and he or she must promptly notify the NYSE in writing of any material non-compliance with any applicable provisions of Section 303A.                                                                                        |  | There are no similar requirements under the domestic corporate governance rules in China.                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Each listed company must submit an executed Written Affirmation annually to the NYSE. In addition, each listed company must submit an interim Written Affirmation as and when required by the interim Written Affirmation form specified by the NYSE.                                                                                                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    





77









| |  | ITEM 16. MINE SAFETY DISCLOSURE.
| |  | --------------------------------



Not applicable.





| |  | ITEM 17. FINANCIAL STATEMENTS.
| |  | ------------------------------



We have elected to provide the financial
statements and related information specified in Item 18 in lieu of Item 17.



| |  | ITEM 18. FINANCIAL STATEMENTS.
| |  | ------------------------------



See F-pages following Item 19.



| |  | ITEM 19. EXHIBITS.
| |  | ------------------





Index to Exhibits



|Exhibit No. |  | Description
        of Exhibit                                                                                                                                                                                                                                                                                                   
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1         |  | Restated and Amended Articles of Association of China Southern Airlines Company Limited (as amended) (English translation)(1)                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                  
|2.1         |  | Specimen Certificate for the H Shares                                                                                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                  
|2.2         |  | Form of Deposit Agreement among the Registrant, The Bank of New York, as depositary, and Owners and Beneficial Owners from time to time of American Depositary Shares evidenced by American Depositary Receipt issued thereunder, including the form of American Depositary Receipt(2)                                           
|            |  |                                                                                                                                                                                                                                                                                                                                  
|4.1         |  | Form of Director’s Service Agreement(3)                                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                  
|4.2         |  | Form of Non-executive Director’s Service Agreement(4)                                                                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                  
|4.3         |  | Aircraft Acquisition Agreement entered into by and between the Company and Boeing on February 28, 2012(5)                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                  
|4.4         |  | Aircraft Acquisition Agreement entered into by and between Xiamen Airlines and Boeing on August 8, 2012*                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                  
|4.5         |  | Aircraft Acquisition Agreement entered into by and between the Company and Airbus S.A.S. on December 5, 2012*                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                  
|4.6         |  | Land Lease Contract and Tenancy
    Contract entered into by and between the Company and CSAHC on February 14, 2011                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                  
|4.7         |  | Asset Lease Agreement entered into by and between the Company and CSAHC on September 25, 2012                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                  
|4.8         |  | Tenancy Contract entered into by and
    between the Company and CSAHC in relation to certain fragmented leases located in various locations on September 25,
    2012                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                  
|4.9         |  | Lease Agreement of Nanyang Base
    Assets entered     into by     and     between the     Company and CSAHC on January 24, 2013                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                  
|4.10        |  | Trademark License Agreement entered into by and between the Company and CSAHC on May 22, 1997(6)                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                  
|4.11        |  | A Share subscription agreement entered into by and between the Company and CSAHC on June 11, 2012                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                  
|4.12        |  | Supplemental Agreement to the
    financial service framework agreement entered     into     by and between the Company and CSAHC regarding revising each of
    the Cap in     relation to     the     Provision of Deposit     Services and     the annual cap for the Provision of the Loan
    Services on     March 16, 2012
|            |  |                                                                                                                                                                                                                                                                                                                                  
|8.1         |  | Subsidiaries of China Southern Airlines Company Limited (as of the date of the report)                                                                                                                                                                                                                                           



78







|11.1 |  | Code of Ethics (included in Exhibit 4.1)                 
|---- |  | ---------------------------------------------------------
|     |  |                                                          
|12.1 |  | Section 302 Certification of President                   
|     |  |                                                          
|12.2 |  | Section 302 Certification of Chief Financial Officer     
|     |  |                                                          
|13.1 |  | Section 906 Certification of President                   
|     |  |                                                          
|13.2 |  | Section 906 Certification of Chief Financial Officer     
|     |  |                                                          
|15.1 |  | Letter from KPMG regarding Item 16F of this Annual Report



|*   | Portions of this document have been omitted pursuant to a confidential treatment request, and the full, unredacted document has been separately submitted to the Securities and Exchange Commission with a confidential treatment request.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                           
|(1) | Incorporated by reference to the Exhibit 99.5 to our Form 6-K (File No. 001-14600) filed with the Securities and Exchange Commission on January 24, 2013.                                                                                 
|    |                                                                                                                                                                                                                                           
|(2) | Incorporated by reference to our Registration Statement on Form F-6 (File No. 333-07116), filed with the Securities and Exchange Commission on August 7, 2012.                                                                            
|    |                                                                                                                                                                                                                                           
|(3) | Incorporated by reference to the Exhibit 4.1 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2005 filed with the Securities and Exchange Commission on June 30, 2006                                                
|    |                                                                                                                                                                                                                                           
|(4) | Incorporated by reference to the Exhibit 4.2 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2005 filed with the Securities and Exchange Commission on June 30, 2006                                                
|    |                                                                                                                                                                                                                                           
|(5) | Incorporated by reference to the Exhibit 4.5 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2011 filed with the Securities and Exchange Commission on April 27, 2012.                                              
|    |                                                                                                                                                                                                                                           
|(6) | Incorporated by reference to the Exhibit 4.10 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2008 filed with the Securities and Exchange Commission on June 25, 2009.                                              



79







SIGNATURES



The registrant hereby certifies that it
meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.



| | CHINA SOUTHERN AIRLINES COMPANY LIMITED  
| | -----------------------------------------
| |                                          
| | /s/ Si Xian Min                          
| | Name: Si Xian Min                        
| |                                          
| | Title: Chairman of the Board of Directors



Date: April 26, 2013



80







CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                     |  | Page
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  |     
|Report of Independent Registered Public Accounting Firm                                              |  | F-1 
|Consolidated Income Statements for the years ended December 31, 2012, 2011 and 2010                  |  | F-2 
|Consolidated Statements of Comprehensive Income for
the years ended December 31, 2012, 2011 and 2010 |  | F-4 
|Consolidated Statements of Financial Position at December 31, 2012 and 2011                          |  | F-5 
|Consolidated Statements of Changes in Equityfor the years ended December 31, 2012, 2011 and 2010     |  | F-7 
|Consolidated Cash Flow Statementsfor the years ended December 31, 2012, 2011 and 2010                |  | F-10
|Notes to the Consolidated Financial Statements                                                       |  | F-12



81







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Shareholders of

China Southern Airlines Company Limited



We have audited the accompanying consolidated
statements of financial position of China Southern Airlines Company Limited (the “Company”) and its subsidiaries (collectively,
the “Group”) as of December 31, 2012 and 2011, and the related consolidated income statements, consolidated statements
of comprehensive income, consolidated statements of changes in equity, and consolidated cash flow statements for each of the years
in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statements presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of China Southern Airlines Company
Limited and its subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2012, in conformity with International Financial Reporting Standards as
issued by the International Accounting Standards Board.



We also have audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 26, 2013 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.



/s/ KPMG



Hong Kong, China



March 26, 2013



F-1







Consolidated income statements for the years ended

December
31, 2012, 2011 and 2010



(Prepared in accordance with International
Financial Reporting Standards)



(Expressed in Renminbi)



|                                              |  | Note |    |  | 2012        |  |        | 2011        |  |  | 2010        |  
|--------------------------------------------- |  | ---- | -- |  | ----------- |  | ------ | ----------- |  |  | ----------- | -
|                                              |  |      |    |  | RMB million |  |        | RMB million |  |  | RMB million |  
|Operating revenue                             |  |      |    |  |             |  |        |             |  |  |             |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Traffic revenue                               |  |      | 4  |  |             |  | 96,100 |             |  |  | 87,252      |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Other operating revenue                       |  |      | 5  |  |             |  | 3,414  |             |  |  | 3,143       |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Total operating revenue                       |  |      |    |  |             |  | 99,514 |             |  |  | 90,395      |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Operating expenses                            |  |      |    |  |             |  |        |             |  |  |             |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Flight operations                             |  |      | 6  |  |             |  | 54,690 |             |  |  | 48,344      |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Maintenance                                   |  |      | 7  |  |             |  | 7,971  |             |  |  | 7,531       |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Aircraft and traffic servicing                |  |      | 8  |  |             |  | 14,072 |             |  |  | 12,337      |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Promotion and sales                           |  |      | 9  |  |             |  | 7,134  |             |  |  | 6,568       |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|General and administrative                    |  |      | 10 |  |             |  | 2,425  |             |  |  | 2,807       |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Impairment on property, plant and equipment   |  |      |    |  |             |  | -      |             |  |  | 584         |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Depreciation and amortization                 |  |      | 11 |  |             |  | 8,264  |             |  |  | 7,689       |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Others                                        |  |      |    |  |             |  | 1,321  |             |  |  | 1,203       |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Total operating expenses                      |  |      |    |  |             |  | 95,877 |             |  |  | 87,063      |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Other net income                              |  |      | 13 |  |             |  | 1,462  |             |  |  | 1,021       |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Operating profit                              |  |      |    |  |             |  | 5,099  |             |  |  | 4,353       |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Interest income                               |  |      |    |  |             |  | 235    |             |  |  | 179         |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Interest expense                              |  |      | 14 |  |             |  | (1,376 | )           |  |  | (1,067      | )
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Share of associates’ results                  |  |      | 22 |  |             |  | 317    |             |  |  | 456         |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Share of jointly controlled entities’ results |  |      | 23 |  |             |  | 121    |             |  |  | 125         |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Exchange gain, net                            |  |      |    |  |             |  | 267    |             |  |  | 2,755       |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Other non-operating income                    |  |      | 15 |  |             |  | 75     |             |  |  | 129         |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Profit before taxation                        |  |      |    |  |             |  | 4,738  |             |  |  | 6,930       |  
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Income tax                                    |  |      | 17 |  |             |  | (954   | )           |  |  | (840        | )
|                                              |  |      |    |  |             |  |        |             |  |  |             |  
|Profit for the year                           |  |      |    |  |             |  | 3,784  |             |  |  | 6,090       |  



F-2







Consolidated income statements for the years ended



December 31, 2012, 2011 and 2010 (continued)



(Prepared in accordance with International
Financial Reporting Standards)



(Expressed in Renminbi)



|                                   |  | Note |    |  | 2012        |     |       | 2011        |  |  | 2010        | 
|---------------------------------- |  | ---- | -- |  | ----------- | --- | ----- | ----------- |  |  | ----------- | 
|                                   |  |      |    |  | RMB million |     |       | RMB million |  |  | RMB million | 
|Attributable to:                   |  |      |    |  |             |     |       |             |  |  |             | 
|                                   |  |      |    |  |             |     |       |             |  |  |             | 
|Equity shareholders of the Company |  |      |    |  |             |     | 2,619 |             |  |  | 5,110       | 
|                                   |  |      |    |  |             |     |       |             |  |  |             | 
|Non-controlling interests          |  |      |    |  |             |     | 1,165 |             |  |  | 980         | 
|                                   |  |      |    |  |             |     |       |             |  |  |             | 
|Profit for the year                |  |      |    |  |             |     | 3,784 |             |  |  | 6,090       | 
|                                   |  |      |    |  |             |     |       |             |  |  |             | 
|Earnings per share                 |  |      |    |  |             |     |       |             |  |  |             | 
|                                   |  |      |    |  |             |     |       |             |  |  |             | 
|Basic and diluted                  |  |      | 19 |  |             | RMB |       | 0.27        |  |  | RMB         | 



The notes on pages F-12 to F-93 form part
of these consolidated financial statements.



F-3











Consolidated statements of comprehensive
income for the years ended December 31, 2012, 2011 and 2010

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                                      |  | Note |    |  | 2012        |  |       | 2011        |  |  | 2010        |  
|------------------------------------------------------------------------------------- |  | ---- | -- |  | ----------- |  | ----- | ----------- |  |  | ----------- | -
|                                                                                      |  |      |    |  | RMB million |  |       | RMB million |  |  | RMB million |  
|                                                                                      |  |      |    |  |             |  |       |             |  |  |             |  
|Profit for the year                                                                   |  |      |    |  |             |  | 3,784 |             |  |  | 6,090       |  
|                                                                                      |  |      |    |  |             |  |       |             |  |  |             |  
|Other comprehensive income for the year (after tax and reclassification adjustments): |  |      |    |  |             |  |       |             |  |  |             |  
|                                                                                      |  |      |    |  |             |  |       |             |  |  |             |  
|Available-for-sale securities:                                                        |  |      |    |  |             |  |       |             |  |  |             |  
|net movement in the fair value reserve                                                |  |      | 18 |  |             |  | 4     |             |  |  | (12         | )
|                                                                                      |  |      |    |  |             |  |       |             |  |  |             |  
|Total comprehensive income for the year                                               |  |      |    |  |             |  | 3,788 |             |  |  | 6,078       |  
|                                                                                      |  |      |    |  |             |  |       |             |  |  |             |  
|Attributable to:                                                                      |  |      |    |  |             |  |       |             |  |  |             |  
|Equity shareholders of the Company                                                    |  |      |    |  |             |  | 2,622 |             |  |  | 5,100       |  
|Non-controlling interests                                                             |  |      |    |  |             |  | 1,166 |             |  |  | 978         |  
|                                                                                      |  |      |    |  |             |  |       |             |  |  |             |  
|Total comprehensive income for the year                                               |  |      |    |  |             |  | 3,788 |             |  |  | 6,078       |  



The notes on pages F-12 to F-93 form part
of these consolidated financial statements.



F-4







Consolidated statements of financial
position at December 31, 2012 and 2011

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi)



|                                          |  | Note |       |  | 2012        |  |         | 2011        | 
|----------------------------------------- |  | ---- | ----- |  | ----------- |  | ------- | ----------- | 
|                                          |  |      |       |  | RMB million |  |         | RMB million | 
|Non-current assets                        |  |      |       |  |             |  |         |             | 
|Property, plant and equipment, net        |  |      | 20    |  |             |  | 100,040 |             | 
|Construction in progress                  |  |      | 21    |  |             |  | 18,689  |             | 
|Lease prepayments                         |  |      |       |  |             |  | 2,198   |             | 
|Interest in associates                    |  |      | 22    |  |             |  | 1,033   |             | 
|Interest in jointly controlled entities   |  |      | 23    |  |             |  | 1,103   |             | 
|Other investments in equity securities    |  |      | 24    |  |             |  | 160     |             | 
|Lease deposits                            |  |      |       |  |             |  | 672     |             | 
|Available-for-sale equity securities      |  |      | 25    |  |             |  | 69      |             | 
|Deferred tax assets                       |  |      | 26    |  |             |  | 1,223   |             | 
|Other assets                              |  |      | 27    |  |             |  | 480     |             | 
|                                          |  |      |       |  |             |  | 125,667 |             | 
|                                          |  |      |       |  |             |  |         |             | 
|Current assets                            |  |      |       |  |             |  |         |             | 
|Inventories                               |  |      | 28    |  |             |  | 1,708   |             | 
|Trade receivables                         |  |      | 29    |  |             |  | 1,853   |             | 
|Other receivables                         |  |      | 30    |  |             |  | 2,139   |             | 
|Prepaid expenses and other current assets |  |      |       |  |             |  | 758     |             | 
|Amounts due from related companies        |  |      | 36    |  |             |  | 247     |             | 
|Pledged bank deposits                     |  |      | 32(g) |  |             |  | -       |             | 
|Cash and cash equivalents                 |  |      | 31    |  |             |  | 10,082  |             | 
|                                          |  |      |       |  |             |  | 16,787  |             | 
|                                          |  |      |       |  |             |  |         |             | 
|Current liabilities                       |  |      |       |  |             |  |         |             | 
|Bank and other loans                      |  |      | 32    |  |             |  | 21,899  |             | 
|Obligations under finance leases          |  |      | 33    |  |             |  | 2,494   |             | 
|Trade payables                            |  |      | 34    |  |             |  | 1,825   |             | 
|Sales in advance of carriage              |  |      |       |  |             |  | 4,854   |             | 
|Deferred revenue                          |  |      | 35    |  |             |  | 1,201   |             | 
|Current taxation                          |  |      |       |  |             |  | 346     |             | 
|Amounts due to related companies          |  |      | 36    |  |             |  | 308     |             | 
|Accrued expenses                          |  |      | 37    |  |             |  | 11,800  |             | 
|Other liabilities                         |  |      | 38    |  |             |  | 4,004   |             | 
|                                          |  |      |       |  |             |  |         |             | 
|                                          |  |      |       |  |             |  | 48,731  |             | 
|                                          |  |      |       |  |             |  |         |             | 
|Net current liabilities                   |  |      | 48    |  |             |  | (31,944 | )           | 
|                                          |  |      |       |  |             |  |         |             | 
|Total assets less current liabilities     |  |      |       |  |             |  | 93,723  |             | 



F-5







Consolidated statements of financial
position at December 31, 2012 and 2011 (continued)

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                |  | Note |    |  | 2012        |  |        | 2011        | 
|--------------------------------------------------------------- |  | ---- | -- |  | ----------- |  | ------ | ----------- | 
|                                                                |  |      |    |  | RMB million |  |        | RMB million | 
|Non-current liabilities and deferred items                      |  |      |    |  |             |  |        |             | 
|Bank and other loans                                            |  |      | 32 |  |             |  | 30,196 |             | 
|Obligations under finance leases                                |  |      | 33 |  |             |  | 19,371 |             | 
|Deferred revenue                                                |  |      | 35 |  |             |  | 1,649  |             | 
|Provision for major overhauls                                   |  |      | 39 |  |             |  | 902    |             | 
|Provision for early retirement benefits                         |  |      | 40 |  |             |  | 66     |             | 
|Deferred benefits and gains                                     |  |      | 41 |  |             |  | 1,011  |             | 
|Deferred tax liabilities                                        |  |      | 26 |  |             |  | 794    |             | 
|                                                                |  |      |    |  |             |  | 53,989 |             | 
|                                                                |  |      |    |  |             |  |        |             | 
|Net assets                                                      |  |      |    |  |             |  | 39,734 |             | 
|                                                                |  |      |    |  |             |  |        |             | 
|Capital and reserves                                            |  |      |    |  |             |  |        |             | 
|Share capital                                                   |  |      | 42 |  |             |  | 9,818  |             | 
|Reserves                                                        |  |      | 43 |  |             |  | 23,021 |             | 
|                                                                |  |      |    |  |             |  |        |             | 
|Total equity attributable to equity shareholders of the Company |  |      |    |  |             |  | 32,839 |             | 
|                                                                |  |      |    |  |             |  |        |             | 
|Non-controlling interests                                       |  |      |    |  |             |  | 6,895  |             | 
|                                                                |  |      |    |  |             |  |        |             | 
|Total equity                                                    |  |      |    |  |             |  | 39,734 |             | 



The notes on pages F-12 to F-93 form part
of these consolidated financial statements.



F-6







Consolidated statements of changes
in equity for the years ended December 31, 2012, 2011 and 2010

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                                        |  | Attributable
    to equity shareholders of the Company |       |  |         |  |        |            | 
|--------------------------------------------------------------------------------------- |  | ------------------------------------------------------ | ----- |  | ------- |  | ------ | ---------- | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|                                                                                        |  | Share                                                  |       |  | Share   |  |        | Fair value | 
|                                                                                        |  | capital                                                |       |  | premium |  |        | reserve    | 
|                                                                                        |  | RMB                                                    |       |  | RMB     |  |        | RMB        | 
|                                                                                        |  | million                                                |       |  | million |  |        | million    | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Balance at
    January 1, 2010                                                          |  |                                                        | 8,003 |  |         |  | 5,121  |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Changes
    in equity for 2010:                                                         |  |                                                        |       |  |         |  |        |            | 
|Profit for the year                                                                     |  |                                                        | -     |  |         |  | -      |            | 
|Other
    comprehensive income                                                          |  |                                                        | -     |  |         |  | -      |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Total
    comprehensive income                                                          |  |                                                        | -     |  |         |  | -      |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Issuance of shares                                                                      |  |                                                        | 1,815 |  |         |  | 8,757  |            | 
|Decrease in non-controlling
    interest as a result of loss of control of a subsidiary |  |                                                        | -     |  |         |  | -      |            | 
|Distributions to non-controlling
    interests                                          |  |                                                        | -     |  |         |  | -      |            | 
|Acquisition of non-controlling
    interests in a subsidiary                            |  |                                                        | -     |  |         |  | -      |            | 
|Government
    contributions                                                            |  |                                                        | -     |  |         |  | -      |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Balance at December 31,
    2010 and January 1, 2011                                    |  |                                                        | 9,818 |  |         |  | 13,878 |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Changes
    in equity for 2011:                                                         |  |                                                        |       |  |         |  |        |            | 
|Profit for the year                                                                     |  |                                                        | -     |  |         |  | -      |            | 
|Other
    comprehensive income                                                          |  |                                                        | -     |  |         |  | -      |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Total
    comprehensive income                                                          |  |                                                        | -     |  |         |  | -      |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Appropriations to reserves                                                              |  |                                                        | -     |  |         |  | -      |            | 
|Distributions to non-controlling
    interests                                          |  |                                                        | -     |  |         |  | -      |            | 
|Capital injection into
    a subsidiary by a third party (Note (b))                     |  |                                                        | -     |  |         |  | 253    |            | 
|Capital injection from
    a non-controlling interest of a subsidiary (Note (c))        |  |                                                        | -     |  |         |  | -      |            | 
|Share
    of an associate’s reserves movement                                           |  |                                                        | -     |  |         |  | -      |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Balance
    at December 31, 2011 and January 1, 2012                                    |  |                                                        | 9,818 |  |         |  | 14,131 |            | 



F-7







Consolidated statements of changes
in equity for the years ended December 31, 2012, 2011 and 2010 (continued)

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                                       |  | Attributable
    to equity shareholders of the Company |       |  |         |  |        |            | 
|-------------------------------------------------------------------------------------- |  | ------------------------------------------------------ | ----- |  | ------- |  | ------ | ---------- | 
|                                                                                       |  |                                                        |       |  |         |  |        |            | 
|                                                                                       |  |                                                        |       |  |         |  |        |            | 
|                                                                                       |  | Share                                                  |       |  | Share   |  |        | Fair value | 
|                                                                                       |  | capital                                                |       |  | premium |  |        | reserve    | 
|                                                                                       |  | RMB                                                    |       |  | RMB     |  |        | RMB        | 
|                                                                                       |  | million                                                |       |  | million |  |        | million    | 
|                                                                                       |  |                                                        |       |  |         |  |        |            | 
|                                                                                       |  |                                                        |       |  |         |  |        |            | 
|Balance at
    December 31, 2011 and January 1, 2012                                   |  |                                                        | 9,818 |  |         |  | 14,131 |            | 
|                                                                                       |  |                                                        |       |  |         |  |        |            | 
|Changes
    in equity for 2012:                                                        |  |                                                        |       |  |         |  |        |            | 
|Profit for the year                                                                    |  |                                                        | -     |  |         |  | -      |            | 
|Other
    comprehensive income                                                         |  |                                                        | -     |  |         |  | -      |            | 
|                                                                                       |  |                                                        |       |  |         |  |        |            | 
|Total
    comprehensive income                                                         |  |                                                        | -     |  |         |  | -      |            | 
|                                                                                       |  |                                                        |       |  |         |  |        |            | 
|Appropriations to reserves                                                             |  |                                                        | -     |  |         |  | -      |            | 
|Dividends approved in
    respect of the previous year (Note 43(b))                    |  |                                                        | -     |  |         |  | -      |            | 
|Acquisition of non-controlling
    interests in a subsidiary (Note 47(b))              |  |                                                        | -     |  |         |  | -      |            | 
|Capital injection from
    the non- controlling shareholder of a subsidiary (Note (d)) |  |                                                        | -     |  |         |  | -      |            | 
|Government contributions
    (Note 43(c))                                              |  |                                                        | -     |  |         |  | -      |            | 
|Distributions to non-controlling
    interests                                         |  |                                                        | -     |  |         |  | -      |            | 
|Share
    of an associate’s reserves movement                                          |  |                                                        | -     |  |         |  | -      |            | 
|                                                                                       |  |                                                        |       |  |         |  |        |            | 
|Balance
    at December 31, 2012                                                       |  |                                                        | 9,818 |  |         |  | 14,131 |            | 



F-8







Consolidated statements of changes
in equity for the years ended December 31, 2012, 2011 and 2010 (continued)

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi)



| | Note (a): | Other reserves represent statutory surplus reserve, discretionary
surplus reserve and others. Details are set out in Note 43.
| | --------- | -----------------------------------------------------------------------------------------------------------------------------



| | Note (b): | On December 20, 2010, the Company, Xiamen Jianfa Group
Co., Ltd. (“Xiamen Jianfa”), a non-controlling interest of Xiamen Airlines Company Limited (“Xiamen Airlines”),
and Hebei Aviation Investment Group Corporation Limited (“Hebei Investment”) entered into an agreement. Pursuant to
the agreement, Hebei Investment agreed to inject cash of RMB1,460 million into Xiamen Airlines for 15% equity interests in Xiamen
Airlines. In March 2011, the capital injection was received in full and the Company’s equity interest in Xiamen Airlines
was diluted from 60% to 51%. Xiamen Airlines remains a subsidiary of the Company.
| | --------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Note (c): | Pursuant to an agreement entered into by the equity holders
of Guizhou Airlines Company Limited (“Guizhou Airlines”), a subsidiary of the Company, in May 2011, the equity holders
of Guizhou Airlines agreed to further inject capital of RMB300 million into Guizhou Airlines by the end of 2013 pari passu based
on their existing equity percentages. The Company and the non-controlling interest holder injected RMB60 million and RMB40 million,
respectively into Guizhou Airlines in 2011.
| | --------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Note (d): | On May 31, 2012, the Board of the Company approved the
plan for the increase in registered capital in Xiamen Airlines, pursuant to which, the registered capital of Xiamen Airlines increased
from RMB3 billion to RMB5 billion. The Company, Xiamen Jianfa and Hebei Investment converted their portions of reserves and retained
earnings in Xiamen Airlines that amounted to RMB1,020 million, RMB680 million and RMB160 million, respectively into the share
capital of Xiamen Airlines. Hebei Investment made further capital injection of RMB140 million in cash. As a result, the percentage
of equity interests held by the three parties in Xiamen Airlines remains unchanged before and after the capital injection.
| | --------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The notes on pages F-12 to F-93 form part
of these consolidated financial statements.



F-9







Consolidated cash flow statements
for the years ended December 31, 2012, 2011 and 2010

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                              |  | Note |       |  | 2012        |  |         | 2011        |  |  | 2010        |  
|----------------------------------------------------------------------------- |  | ---- | ----- |  | ----------- |  | ------- | ----------- |  |  | ----------- | -
|                                                                              |  |      |       |  | RMB million |  |         | RMB million |  |  | RMB million |  
|Operating activities                                                          |  |      |       |  |             |  |         |             |  |  |             |  
|Cash generated from operating activities                                      |  |      | 31(b) |  |             |  | 14,475  |             |  |  | 16,187      |  
|Interest received                                                             |  |      |       |  |             |  | 224     |             |  |  | 176         |  
|Interest paid                                                                 |  |      |       |  |             |  | (1,758  | )           |  |  | (1,235      | )
|Income tax paid                                                               |  |      |       |  |             |  | (1,237  | )           |  |  | (2,571      | )
|                                                                              |  |      |       |  |             |  |         |             |  |  |             |  
|Net cash from operating activities                                            |  |      |       |  |             |  | 11,704  |             |  |  | 12,557      |  
|                                                                              |  |      |       |  |             |  |         |             |  |  |             |  
|Investing activities                                                          |  |      |       |  |             |  |         |             |  |  |             |  
|Proceeds from disposal of property, plant and equipment and lease prepayments |  |      |       |  |             |  | 522     |             |  |  | 1,531       |  
|Proceeds from sale of a jointly controlled entity                             |  |      |       |  |             |  | -       |             |  |  | -           |  
|Net cash settlement of derivative financial instruments                       |  |      |       |  |             |  | -       |             |  |  | (12         | )
|Dividends received from associates                                            |  |      |       |  |             |  | 77      |             |  |  | 53          |  
|Dividends received from a jointly controlled entity                           |  |      |       |  |             |  | -       |             |  |  | 3           |  
|Dividends received from other investments                                     |  |      | 24/25 |  |             |  | 12      |             |  |  | 10          |  
|Loans repaid by an associate                                                  |  |      |       |  |             |  | 2       |             |  |  | 4           |  
|Payment for lease deposits                                                    |  |      |       |  |             |  | (101    | )           |  |  | (78         | )
|Payment for purchase of available-for-sale equity securities                  |  |      |       |  |             |  | -       |             |  |  | -           |  
|Payment for wealth management products                                        |  |      |       |  |             |  | (1,100  | )           |  |  | (28,650     | )
|Refund of lease deposits                                                      |  |      |       |  |             |  | 10      |             |  |  | 12          |  
|Proceeds from maturity of wealth management products                          |  |      |       |  |             |  | 4,100   |             |  |  | 25,150      |  
|Capital expenditures                                                          |  |      |       |  |             |  | (15,733 | )           |  |  | (20,038     | )
|Capital injection in an associate                                             |  |      |       |  |             |  | -       |             |  |  | (37         | )
|Interest received on wealth management products                               |  |      |       |  |             |  | 53      |             |  |  | 95          |  
|Disposal / deemed disposal of a
    subsidiary and other                      |  |      | 47(b) |  |             |  | 5       |             |  |  | -           |  
|                                                                              |  |      |       |  |             |  |         |             |  |  |             |  
|Net cash used in investing activities                                         |  |      |       |  |             |  | (12,153 | )           |  |  | (21,957     | )



F-10







Consolidated cash flow statements
for the years ended December 31, 2012, 2011 and 2010 (continued)

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                       |  | Note |       |  | 2012        |  |         | 2011        |  |  | 2010        |  
|---------------------------------------------------------------------- |  | ---- | ----- |  | ----------- |  | ------- | ----------- |  |  | ----------- | -
|                                                                       |  |      |       |  | RMB million |  |         | RMB million |  |  | RMB million |  
|Financing activities                                                   |  |      |       |  |             |  |         |             |  |  |             |  
|Proceeds from issue of shares                                          |  |      |       |  |             |  | -       |             |  |  | -           |  
|Dividends paid to equity shareholders of the Company                   |  |      | 43(b) |  |             |  | (1,964  | )           |  |  | -           |  
|Proceeds from bank and other loans                                     |  |      |       |  |             |  | 31,940  |             |  |  | 19,395      |  
|Repayment of bank and other loans                                      |  |      |       |  |             |  | (27,533 | )           |  |  | (10,141     | )
|Repayment of principal under finance lease obligations                 |  |      |       |  |             |  | (1,978  | )           |  |  | (1,702      | )
|Capital contribution received from government                          |  |      |       |  |             |  | 20      |             |  |  | -           |  
|Capital injection from the non-controlling shareholder of a subsidiary |  |      |       |  |             |  | 140     |             |  |  | 1,500       |  
|Dividends paid to non-controlling interests                            |  |      |       |  |             |  | (12     | )           |  |  | (121        | )
|Payment for purchase of non-controlling interest                       |  |      |       |  |             |  | (17     | )           |  |  | -           |  
|Withdrawal / (placement) of pledged bank deposits                      |  |      | 32(g) |  |             |  | 72      |             |  |  | (72         | )
|                                                                       |  |      |       |  |             |  |         |             |  |  |             |  
|Net cash from financing activities                                     |  |      |       |  |             |  | 668     |             |  |  | 8,859       |  
|                                                                       |  |      |       |  |             |  |         |             |  |  |             |  
|Net increase / (decrease) in cash and cash equivalents                 |  |      |       |  |             |  | 219     |             |  |  | (541        | )
|Cash and cash equivalents at January 1                                 |  |      |       |  |             |  | 9,863   |             |  |  | 10,404      |  
|                                                                       |  |      |       |  |             |  |         |             |  |  |             |  
|Cash and cash equivalents at December 31                               |  |      |       |  |             |  | 10,082  |             |  |  | 9,863       |  



The notes on pages F-12 to F-93 form part
of these consolidated financial statements.



F-11







Notes to the consolidated financial
statements

(Prepared in accordance with
International Financial Reporting Standards)

(Expressed in Renminbi)



| | 1 | Reporting entity
| | - | ----------------



China Southern Airlines Company Limited
(the “Company”) and its subsidiaries (the “Group”) are principally engaged in the provision of domestic,
Hong Kong, Macau and Taiwan and international passenger, cargo and mail airline services.



The Company was established in the People’s
Republic of China (the “PRC” or “China”) on March 25, 1995 as a joint stock limited company as part of
the reorganization of the Company’s holding company, China Southern Air Holding Company (“CSAHC”). CSAHC is a
state-owned enterprise under the supervision of the PRC central government.



The Company’s H Shares and American
Depositary Receipts (“ADR”) (each ADR representing 50 H shares) have been listed on The Stock Exchange of Hong Kong
Limited and the New York Stock Exchange, respectively since July 1997. In July 2003, the Company issued 1,000,000,000 A shares
which are listed on the Shanghai Stock Exchange.



The 2007 bonus share issue of 2,187,089,000
shares, by the conversion of share premium to share capital, was implemented in August 2008.



On August 20, 2009 and August 21, 2009,
the Company issued 721,150,000 A shares to CSAHC and 721,150,000 H shares to Nan Lung Holding Limited (“Nan Lung”),
a wholly-owned subsidiary of CSAHC, respectively.



On October 29, 2010, the Company issued
123,900,000 A shares and 1,377,600,000 A shares to CSAHC and certain third party investors, respectively. On November 1, 2010,
the Company issued 312,500,000 H shares to Nan Lung.



The share capital of the Company comprised
7,022,650,000 A shares and 2,794,917,000 H shares as of December 31, 2012.



| | 2 | Significant accounting policies
| | - | -------------------------------



| | (a) | Statement of compliance
| | --- | -----------------------



These financial statements have been prepared
in accordance with all applicable International Financial Reporting Standards (“IFRSs”), which collective term includes
all applicable individual IFRSs, International Accounting Standards (“IASs”) and Interpretations issued by the International
Accounting Standards Board (the “IASB”).



The IASB has issued certain amendments
to IFRSs that are first effective for the current accounting period of the Group and the Company. Note 3 provides information on
any changes in accounting policies resulting from initial application of these developments to the extent that they are relevant
to the Group for the current and prior accounting periods reflected in these consolidated financial statements.



F-12







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (b) | Basis of preparation of the consolidated financial
statements
| | --- | -------------------------------------------------------------



At December 31, 2012, the Group’s
current liabilities exceeded its current assets by RMB31,944 million, which includes bank and other loans repayable within one
year of RMB21,899 million. In preparing the consolidated financial statements, the directors have considered the Group’s
sources of liquidity and believe that adequate funding is available to fulfill the Group’s short-term obligations and capital
expenditure requirements. Accordingly, the consolidated financial statements have been prepared on a basis that the Group will
be able to continue as a going concern. Further details are set out in Note 48(a).



The consolidated financial statements for
the year ended December 31, 2012 comprise the Company and its subsidiaries and the Group’s interest in associates and jointly
controlled entities.



The measurement basis used in the preparation
of the consolidated financial statements is the historical cost basis except that the following assets and liabilities are stated
at their fair value as explained in the accounting policies set out below:



| | - | Derivative financial instruments (Note 2(g)); and
| | - | -------------------------------------------------



| | - | Available-for-sale equity securities (Note 2(f)).
| | - | -------------------------------------------------



The preparation of consolidated financial
statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application
of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based
on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which
form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.



The estimates and underlying assumptions
are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised
if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current
and future periods.



Judgments made by management in the application
of IFRSs that have significant effect on the financial statements and major sources of estimation uncertainty are discussed in
Note 53.



| | (c) | Subsidiaries and non-controlling interests
| | --- | ------------------------------------------



Subsidiaries are entities controlled by
the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.



An investment in a subsidiary is consolidated
into the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group
balances and transactions and any unrealized profits arising from intra-group transactions are eliminated in full in preparing
the consolidated financial statements. Unrealized losses resulting from intra-group transactions are eliminated in the same way
as unrealized gains but only to the extent that there is no evidence of impairment.



F-13







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (c) | Subsidiaries and non-controlling interests (continued)
| | --- | ------------------------------------------------------



Non-controlling interests represent the
equity in a subsidiary not attributable directly or indirectly to the Company, and in respect of which the Group has not agreed
any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation
in respect of those interests that meets the definition of a financial liability. For each business combination, the Group measures
non-controlling interests at their proportionate share of the subsidiary’s net identifiable assets.



Non-controlling interests are presented
in the consolidated statement of financial position within equity, separately from equity attributable to the equity shareholders
of the Company. Non-controlling interests in the results of the Group are presented on the face of the consolidated income statement
and the consolidated statement of comprehensive income as an allocation of the total profit or loss and total comprehensive income
for the year between non-controlling interests and the equity shareholders of the Company. Loans from holders of non-controlling
interests and other contractual obligations towards these holders are presented as financial liabilities in accordance with Notes
2(o) or (p) depending on the nature of the liability.



Changes in the Group’s interests
in a subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby adjustments are made
to the amounts of controlling and non-controlling interests within consolidated equity to reflect the change in relative interests,
but no adjustments are made to goodwill and no gain or loss is recognized.



When the Group loses control of a subsidiary,
it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognized in
the consolidated income statement. Any interest retained in that former subsidiary at the date when control is lost is recognized
at fair value and this amount is regarded as the fair value on initial recognition of a financial asset (Note 2(f)) or, when appropriate,
the cost on initial recognition of an investment in an associate or jointly controlled entity (Note 2(d)).



| | (d) | Associates and jointly controlled entities
| | --- | ------------------------------------------



An associate is an entity in which the
Group or the Company has significant influence, but not control or joint control, over its management, including participation
in the financial and operating policy decisions.



A jointly controlled entity is an entity
which operates under a contractual arrangement between the Group or the Company and other parties, where the contractual arrangement
establishes that the Group or the Company and one or more of the other parties share joint control over the economic activities
of the entity.



F-14







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (d) | Associates and jointly controlled entities (continued)
| | --- | ------------------------------------------------------



An investment in an associate or a jointly
controlled entity is accounted for in the consolidated financial statements under the equity method and is initially recorded at
cost, adjusted for any excess of the Group’s share of the acquisition-date fair values of the investee’s identifiable
net assets over the cost of the investment (if any). Thereafter, the investment is adjusted for the post acquisition change in
the Group’s share of the investee’s net assets and any impairment loss relating to the investment (Notes 2(e) and (l)).
The Group’s share of the post-acquisition, post-tax results of the investees, adjusted for any acquisition-date excess over
cost and any impairment losses for the year are recognized in the consolidated income statement, whereas the Group’s share
of the post-acquisition post-tax items of the investees’ other comprehensive income is recognized in the consolidated statement
of comprehensive income.



When the Group’s share of losses
exceeds its interest in the associate or the jointly controlled entity, the Group’s interest is reduced to nil and recognition
of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments
on behalf of the investee. For this purpose, the Group’s interest is the carrying amount of the investment under the equity
method together with the Group’s long-term interests that in substance form part of the Group’s net investment in the
associate or the jointly controlled entity.



Unrealized profits and losses resulting
from transactions between the Group and its associates and jointly controlled entities are eliminated to the extent of the Group’s
interest in the investee, except where unrealized losses provide evidence of an impairment of the asset transferred, in which case
they are recognized immediately in the consolidated income statement.



When the Group ceases to have significant
influence over an associate or joint control over a jointly controlled entity, it is accounted for as a disposal of the entire
interest in that investee, with a resulting gain or loss being recognized in the consolidated income statement. Any interest retained
in that former investee at the date when significant influence or joint control is lost is recognized at fair value and this amount
is regarded as the fair value on initial recognition of a financial asset.



| | (e) | Goodwill
| | --- | --------



Goodwill represents the excess of



| | (i) | the aggregate of the fair value of the consideration transferred, the amount of any non-controlling
interest in the acquiree and the fair value of the Group’s previously held equity interest in the acquiree; over
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | the Group’s interest in the net fair value of the acquiree’s identifiable assets and
liabilities measured as at the acquisition date.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------



When (ii) is greater than (i), then this
excess is recognized immediately in the consolidated income statement as a gain on a bargain purchase.



F-15







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (e) | Goodwill (continued)
| | --- | --------------------



Goodwill is stated at cost less accumulated
impairment losses. Goodwill arising on a business combination is allocated to each cash-generating unit, or groups of cash generating
units, that is expected to benefit from the synergies of the combination and is tested annually for impairment (Note 2(l)).



| | (f) | Other investments in equity securities
| | --- | --------------------------------------



The Group’s policies for investments
in equity securities, other than investments in subsidiaries, associates and jointly controlled entities, are as follows:



Investments in equity securities are initially
stated at fair value, which is their transaction price unless fair value can be more reliably estimated using valuation techniques
whose variables include only data from observable markets. Cost includes attributable transaction costs, except where indicated
otherwise below. These investments are subsequently accounted for as follows, depending on their classification:



Available-for-sale equity securities are
those non-derivative financial assets that are designated as available for sale. At the end of each financial year the fair value
is remeasured, with any resultant gain or loss being recognized in other comprehensive income and accumulated separately in equity
in the fair value reserve. Dividend income from these investments is recognized in the consolidated income statement in accordance
with the policy set out in Note 2(v)(iv). When these investments are derecognized or impaired (Note 2(l)), the cumulative gain
or loss is reclassified from equity to profit or loss.



The Group’s other investments in
equity securities represent unlisted equity securities of companies established in the PRC. These securities do not have a quoted
market price in an active market and their fair values cannot be reliably measured. Accordingly, they are recognized in the consolidated
statement of financial position at cost less impairment losses (Note 2(l)).



Investments are recognized / derecognized
on the date the Group commits to purchase / sell the investments or they expire.



| | (g) | Derivative financial instruments
| | --- | --------------------------------



Derivative financial instruments are recognized
initially at fair value. At the end of each financial year the fair value is remeasured. The gain or loss on remeasurement to fair
value is recognized immediately in the consolidated income statement.



F-16







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (h) | Property, plant and equipment
| | --- | -----------------------------



| | (i) | Investment property
| | --- | -------------------



Investment properties are land and / or
buildings which are owned or held under leasehold interest (Note 2(j)) to earn rental income and / or for capital appreciation.



Investment properties are stated at cost,
less accumulated depreciation and impairment losses (Note 2(l)). Depreciation is calculated to write off the cost of items of investment
property, less their estimated residual value, if any, using the straight line method over their estimated useful lives. Rental
income from investment properties is accounted for as described in Note 2(v)(iii).



| | (ii) | Other property, plant and equipment
| | ---- | -----------------------------------



Property, plant and equipment are stated
at cost less accumulated depreciation and impairment losses (Note 2(l)).



The cost of self-constructed items of property,
plant and equipment includes the cost of materials, direct labor, the initial estimate, where relevant, of the costs of dismantling
and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads
and borrowing costs (Note 2(y)).



Gains or losses arising from the retirement
or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and
the carrying amount of the item and are recognized in the consolidated income statement on the date of retirement or disposal.



Depreciation is calculated to write off
the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight line method
over their estimated useful lives as follows:





|Buildings                          | 5 to 35 years 
|---------------------------------- | --------------
|                                   |               
|Owned and leased aircraft          | 15 to 20 years
|                                   |               
|Other flight equipment             |               
|                                   |               
|- Jet engines                      | 15 to 20 years
|                                   |               
|- Others, including rotable spares | 3 to 15 years 
|                                   |               
|Machinery and equipment            | 4 to 10 years 
|                                   |               
|Vehicles                           | 6 to 8 years  



Where parts of an item of property, plant
and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part
is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually.



F-17







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (i) | Construction in progress
| | --- | ------------------------



Construction in progress represents office
buildings, various infrastructure projects under construction and equipment pending for installation, and is stated at cost less
impairment losses (Note 2(l)). Capitalization of these costs ceases and the construction in progress is transferred to property,
plant and equipment when the asset is substantially ready for its intended use, notwithstanding any delay in the issue of the relevant
commissioning certificates by the relevant PRC authorities.



No depreciation is provided in respect
of construction in progress.



| | (j) | Leased assets
| | --- | -------------



An arrangement, comprising a transaction
or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific
asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based
on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.



| | (i) | Classification of assets leased to the Group
| | --- | --------------------------------------------



Assets that are held by the Group under
leases which transfer to the Group substantially all the risks and rewards of ownership are classified as being held under finance
leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating
leases, except for land held for own use under an operating lease, the fair value of which cannot be measured separately from the
fair value of a building situated thereon at the inception of the lease, is accounted for as being held under a finance lease,
unless the building is also clearly held under an operating lease. For these purposes, the inception of the lease is the time that
the lease was first entered into by the Group, or taken over from the previous lessee.



| | (ii) | Assets acquired under finance leases
| | ---- | ------------------------------------



Where the Group acquires the use of assets
under finance leases, the amounts representing the fair value of the leased asset, or, if lower, the present value of the minimum
lease payments, of such assets are included in property, plant and equipment and the corresponding liabilities, net of finance
charges, are recorded as obligations under finance leases. Depreciation is provided at rates which write off the cost or valuation
of the assets over the term of the relevant lease or, where it is likely the Group will obtain ownership of the asset, the life
of the asset, as set out in Note 2(h)(ii). Impairment losses are accounted for in accordance with the accounting policy as set
out in Note 2(l). Finance charges implicit in the lease payments are charged to the consolidated income statement over the period
of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for
each accounting period. Contingent rentals are charged to the consolidated income statement in the accounting period in which they
are incurred.



F-18







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (j) | Leased assets (continued)
| | --- | -------------------------



| | (iii) | Operating lease charges
| | ----- | -----------------------



Where the Group has the use of assets held
under operating leases, payments made under the leases are charged to the consolidated income statement in equal installments over
the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits
to be derived from the leased asset. Lease incentives received are recognized in the consolidated income statement as an integral
part of the aggregate net lease payments made. Contingent rentals are charged to the consolidated income statement in the accounting
period in which they are incurred.



The cost of acquiring land held under an
operating lease is amortized on a straight-line basis over the respective periods of lease terms which range from 30 to 70 years.



| | (iv) | Sale and leaseback transactions
| | ---- | -------------------------------



Gains or losses on aircraft sale and leaseback
transactions which result in finance leases are deferred and amortized over the terms of the related leases.



Gains or losses on aircraft sale and leaseback
transactions which result in operating leases are recognized immediately if the transactions are established at fair value. If
the sale price is below fair value then the gain or loss is recognized immediately. However, if a loss is compensated for by future
rentals at a below-market price, then the loss is deferred and amortized over the period that the aircraft is expected to be used.
If the sale price is above fair value, then any gain is deferred and amortized over the useful life of the assets.



| | (k) | Deferred expenditure
| | --- | --------------------



Lump sum housing benefits payable to employees
of the Group are deferred and amortized on a straight-line basis over a period of 10 years, which represents the benefit vesting
period of the employees.



Deferred expenditure is stated at cost
less impairment losses (Note 2(l)).



| | (l) | Impairment of assets
| | --- | --------------------



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



Investments in equity securities and other
current and non-current receivables that are stated at cost or amortized cost or are classified as available-for-sale equity securities
are reviewed at the end of each financial year to determine whether there is objective evidence of impairment. Objective evidence
of impairment includes observable data that comes to the attention of the Group about one or more of the following loss events:



| | - | significant financial difficulty of the debtor;
| | - | -----------------------------------------------



| | - | a breach of contract, such as a default or delinquency in interest or principal payments;
| | - | -----------------------------------------------------------------------------------------



| | - | it becoming probable that the debtor will enter bankruptcy or other financial reorganization;
| | - | ---------------------------------------------------------------------------------------------



F-19







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (l) | Impairment of assets (continued)
| | --- | --------------------------------



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



| | - | significant changes in the technological, market, economic or legal environment that have an adverse
effect on the debtor; and
| | - | ------------------------------------------------------------------------------------------------------------------------------



| | - | a significant or prolonged declined in the fair value of an investment in an equity instrument
below its cost.
| | - | --------------------------------------------------------------------------------------------------------------



If any such evidence exists, any impairment
loss is determined and recognized as follows:



| | - | For investments in subsidiaries, associates and jointly controlled entities (including those recognized
using the equity method (Note 2(d)), the impairment loss is measured by comparing the recoverable amount of the investment with
its carrying amount in accordance with Note 2(l)(ii). The impairment loss is reversed if there has been a favorable change in the
estimates used to determine the recoverable amount in accordance with Note 2(l)(ii).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | For unquoted equity securities carried at cost, the impairment loss is measured as the difference
between the carrying amount of the financial asset and the estimated future cash flows, discounted at the current market rate of
return for a similar financial asset where the effect of discounting is material. Impairment losses for equity securities carried
at cost are not reversed.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | For trade and other current receivables and other financial assets carried at amortized cost, the
impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future
cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed
at initial recognition of these assets), where the effect of discounting is material. This assessment is made collectively where
these financial assets share similar risk characteristics, such as similar past due status, and have not been individually assessed
as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss
experience for assets with credit risk characteristics similar to the collective group.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If in a subsequent period the amount of
an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized,
the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s
carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years.



| | - | For available-for-sale securities, the cumulative loss that has been recognized in the fair value
reserve is reclassified to profit or loss. The amount of the cumulative loss that is recognized in the consolidated income statement
is the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any
impairment loss on that asset previously recognized in the consolidated income statement.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-20







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (l) | Impairment of assets (continued)
| | --- | --------------------------------



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



Impairment losses recognized in the consolidated
income statement in respect of available-for-sale equity securities are not reversed through profit or loss. Any subsequent increase
in the fair value of such assets is recognized directly in other comprehensive income.



Impairment losses are written off against
the corresponding asset directly, except for impairment losses recognized in respect of trade and other receivables, whose recovery
is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account.
When the Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against trade and other
receivables directly and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of
amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance
account and subsequent recoveries of amounts previously written off directly are recognized in the consolidated income statement.



| | (ii) | Impairment of other assets
| | ---- | --------------------------



Internal and external sources of information
are reviewed at the end of each financial year to identify indications that the following assets may be impaired or, except in
the case of goodwill, an impairment loss previously recognized no longer exists or may have decreased:



| | - | Property, plant and equipment;
| | - | ------------------------------



| | - | Construction in progress;
| | - | -------------------------



| | - | Lease deposits;
| | - | ---------------



| | - | Lease prepayments;
| | - | ------------------



| | - | Other assets; and
| | - | -----------------



| | - | Goodwill.
| | - | ---------



If any such indication exists, the asset’s
recoverable amount is estimated. The recoverable amount of goodwill is estimated annually whether or not there is any indication
of impairment.



| | - | Calculation of recoverable amount
| | - | ---------------------------------



The recoverable amount of an asset is the
greater of its fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the
risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the
recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating
unit)



F-21







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (l) | Impairment of assets (continued)
| | --- | --------------------------------



| | (ii) | Impairment of other assets (continued)
| | ---- | --------------------------------------



| | - | Recognition of impairment losses
| | - | --------------------------------



An impairment loss is recognized in the
consolidated income statement if the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its
recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying
amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the
other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced
below its individual fair value less costs to sell, or value in use, if determinable.



| | - | Reversals of impairment losses
| | - | ------------------------------



In respect of assets other than goodwill,
an impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount.
An impairment loss in respect of goodwill is not reversed.



A reversal of an impairment loss is limited
to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals
of impairment losses are credited to the consolidated income statement in the year in which the reversals are recognized.



| | (iii) | Interim financial reporting and impairment
| | ----- | ------------------------------------------



The Group prepared an interim financial
report in compliance with IAS 34, Interim financial reporting, in respect of the first six months of the financial year.
At the end of the interim period, the Group applies the same impairment testing, recognition, and reversal criteria as it would
at the end of the financial year (Notes 2(l)(i) and (ii)).



Impairment losses recognized in an interim
period in respect of goodwill, available-for-sale equity securities and unquoted equity securities carried at cost are not reversed
in a subsequent period. This is the case even if no loss, or a smaller loss, would have been recognized had the impairment been
assessed only at the end of the financial year to which the interim period relates. Consequently, if the fair value of an available-for-sale
equity security increases in the remainder of the annual period, or in any other period subsequently, the increase is recognized
in other comprehensive income and not profit or loss.



| | (m) | Inventories
| | --- | -----------



Inventories, which consist primarily of
expendable spare parts and supplies, are stated at cost less any applicable provision for obsolescence, and are charged to the
consolidated income statement when used in operations. Cost represents the average unit cost.



Inventories held for sale or disposal are
carried at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course
of business less the estimated costs of completion and the estimated costs necessary to make the sale.



F-22







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (m) | Inventories (continued)
| | --- | -----------------------



When inventories are sold, the carrying
amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. The amount of
any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period
the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognized as a reduction in the
amount of inventories recognized as an expense in the period in which the reversal occurs.



| | (n) | Trade and other receivables
| | --- | ---------------------------



Trade and other receivables are initially
recognized at fair value and thereafter stated at amortized cost less allowance for impairment of doubtful debts (Note 2(l)), except
where the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less allowance for impairment
of bad and doubtful debts.



| | (o) | Interest-bearing borrowings
| | --- | ---------------------------



Interest-bearing borrowings are recognized
initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are
stated at amortized cost with any difference between the amount initially recognized and redemption value being recognized in the
consolidated income statement over the period of the borrowings, together with any interest and fees payable, using the effective
interest method.



| | (p) | Trade and other payables
| | --- | ------------------------



Trade and other payables are initially
recognized at fair value. Except for financial guarantee liabilities measured in accordance with Note 2(r)(i), trade and other
payables are subsequently stated at amortized cost unless the effect of discounting would be immaterial, in which case they are
stated at cost.



| | (q) | Cash and cash equivalents
| | --- | -------------------------



Cash and cash equivalents comprise cash
at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that
are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been
generally within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part
of the Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated
cash flow statement.



| | (r) | Financial guarantees issued, provisions and contingent
liabilities
| | --- | ------------------------------------------------------------------



| | (i) | Financial guarantees issued
| | --- | ---------------------------



Financial guarantees are contracts that
require the issuer (i.e. the guarantor) to make specified payments to reimburse the beneficiary of the guarantee (the “holder”)
for a loss the holder incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument.



F-23







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (r) | Financial guarantees issued, provisions and contingent
liabilities (continued)
| | --- | ------------------------------------------------------------------------------



| | (i) | Financial guarantees issued (continued)
| | --- | ---------------------------------------



Where the Group issues a financial guarantee,
the fair value of the guarantee (being the transaction price, unless the fair value can otherwise be reliably estimated) is initially
recognized as deferred income within trade and other payables.



The amount of the guarantee initially recognized
as deferred income is amortized in the consolidated income statement over the term of the guarantee as income from financial guarantees
issued. In addition, provisions are recognized in accordance with Note 2(r)(ii) if and when (i) it becomes probable that the holder
of the guarantee will call upon the Group under the guarantee, and (ii) the amount of that claim on the Group is expected to exceed
the amount currently carried in trade and other payables in respect of that guarantee i.e. the amount initially recognized, less
accumulated amortization.



| | (ii) | Provision and contingent liabilities
| | ---- | ------------------------------------



Provisions are recognized for other liabilities
of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is
probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where
the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.



Where it is not probable that an outflow
of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent
liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be
confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless
the probability of outflow of economic benefits is remote.



| | (s) | Defeasance of long-term liabilities
| | --- | -----------------------------------



Where long-term liabilities have been defeased
by the placement of security deposits, those liabilities and deposits (and income and charge arising therefrom) are netted off
in order to reflect the overall commercial effect of the arrangements. Such netting off has been effected where a right is held
by the Group to insist on net settlement of the liability and deposit including in all situations of default and where that right
is assured beyond doubt.



| | (t) | Deferred benefits and gains
| | --- | ---------------------------



In connection with the acquisitions or
leases of certain aircraft and engines, the Group receives various credits. Such credits are deferred until the aircraft and engines
are delivered, at which time they are either applied as a reduction of the cost of acquiring the aircraft and engines, resulting
in a reduction of future depreciation, or amortized as a reduction of rental expense for aircraft and engines under operating leases.



F-24







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (u) | Income tax
| | --- | ----------



Income tax for the year comprises current
tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are
recognized in the consolidated income statement except to the extent that they relate to items recognized in other comprehensive
income or directly in equity, in which case the relevant amounts of tax are recognized in other comprehensive income or directly
in equity, respectively.



Current tax is the expected tax payable
on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the financial year, and any
adjustment to tax payable in respect of previous years.



Deferred tax assets and liabilities arise
from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and
liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused
tax credits.



Apart from certain limited exceptions,
all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be
available against which the asset can be utilized, are recognized. Future taxable profits that may support the recognition of deferred
tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary
differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to
reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax
loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether
existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits,
that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and
are expected to reverse in a period, or periods, in which the tax loss or credit can be utilized.



The limited exception to the recognition
of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the
initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a
business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable
differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable
future, or in the case of deductible differences, unless it is probable that they will reverse in the future.



The amount of deferred tax recognized is
measured based on the expected manner of realization or settlement of the carrying amount of the assets and liabilities, using
tax rates enacted or substantively enacted at the end of the financial year. Deferred tax assets and liabilities are not discounted.



The carrying amount of a deferred tax asset
is reviewed at the end of each financial year and is reduced to the extent that it is no longer probable that sufficient taxable
profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it
becomes probable that sufficient taxable profits will be available.



F-25













| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (u) | Income tax (continued)
| | --- | ----------------------



Current tax balances and deferred tax balances,
and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current
tax liabilities, and deferred tax assets against deferred tax liabilities, if the Company or the Group has the legally enforceable
right to set off current tax assets against current tax liabilities and the following additional conditions are met:



| | - | in the case of current tax assets and liabilities, the Company or the Group intends either to settle
on a net basis, or to realize the asset and settle the liability simultaneously; or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the
same taxation authority on either:
| | - | -----------------------------------------------------------------------------------------------------------------------------------



| | - | the same taxable entity; or
| | - | ---------------------------



| | - | different taxable entities, which, in each future period in which significant amounts of deferred
tax liabilities or assets are expected to be settled or recovered, intend to realize the current tax assets and settle the current
tax liabilities on a net basis or realize and settle simultaneously.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) | Revenue recognition
| | --- | -------------------



Revenue is measured at the fair value of
the consideration received or receivable. Provided it is probable that the economic benefits will flow to the Group and the revenue
and costs, if applicable, can be measured reliably, revenue is recognized in the consolidated income statement as follows:



| | (i) | Passenger, cargo and mail revenues
| | --- | ----------------------------------



Passenger revenue is recognized
at the fair value of the consideration received when the transportation is provided or when an unused ticket expires rather than
a ticket is sold. Ticket sales for transportation not yet provided are included in current liabilities as sales in advance of carriage.



Cargo and mail revenues are recognized
when the transportation is provided.



Revenues from airline-related
business are recognized when services are rendered. Revenue is stated net of sales tax.



| | (ii) | Frequent flyer revenue
| | ---- | ----------------------



The Group maintains two frequent
flyer award programs, namely, the China Southern Airlines Sky Pearl Club and the Xiamen Airlines’ Egret Card Frequent Flyer
Program, which provide travel and other awards to members based on accumulated mileages.



Amount received in relation to
mileage earning flights is allocated, based on fair value, between the flight and mileages earned by members of the Group’s
frequent flyer award programs. The value attributed to the awarded mileages is deferred as a liability, within deferred revenue,
until the mileages are redeemed or expired.



Amount received from third parties
for the issue of mileages under the frequent flyer award programs is also deferred as a liability, within deferred revenue.



F-26







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (v) | Revenue recognition (continued)
| | --- | -------------------------------



| | (ii) | Frequent flyer revenue (continued)
| | ---- | ----------------------------------



As members of the frequent flyer
award programs redeem mileages for an award, revenue is recorded in the consolidated income statement. Revenue in relation to flight
awards is recognized when the transportation is provided. Revenue in relation to non-flight rewards is recognized at the point
of redemption where non-flight rewards are selected.



| | (iii) | Rental income receivable under operating leases is recognized in the consolidated income statement
in equal installments over the periods covered by the lease term, except where an alternative basis is more representative of the
pattern of benefits to be derived from the use of the leased asset. Lease incentives granted are recognized in the consolidated
income statement as an integral part of the aggregate net lease payments receivables. Contingent rentals are recognized as income
in the accounting period in which they are earned.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | Dividends
| | ---- | ---------



| | - | Dividend income from unlisted investments is recognized when the shareholder’s right to receive
payment is established.
| | - | -----------------------------------------------------------------------------------------------------------------------



| | - | Dividend income from listed investments is recognized when the share price of the investment goes
ex-dividend.
| | - | --------------------------------------------------------------------------------------------------------------



| | (v) | Government grants are recognized in the consolidated statement of financial position initially
when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them.
Grants that compensate the Group for expenses incurred are recognized as revenue in the consolidated income statement on a systematic
basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are deducted
from the carrying amount of the asset and consequently are effectively recognized in the consolidated income statement over the
useful life of the asset by way of reduced depreciation expense.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vi) | Interest income is recognized as it accrues using the effective interest method.
| | ---- | --------------------------------------------------------------------------------



| | (w) | Traffic commissions
| | --- | -------------------



Traffic commissions are expensed in the
consolidated income statement when the transportation is provided and the related revenue is recognized. Traffic commissions for
transportation not yet provided are recorded on the consolidated statement of financial position as prepaid expense.



| | (x) | Maintenance and overhaul costs
| | --- | ------------------------------



Routine maintenance, repairs and overhauls
are charged to the consolidated income statement as and when incurred.



F-27







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (x) | Maintenance and overhaul costs (continued)
| | --- | ------------------------------------------



In respect of owned and finance leased
aircraft, components within the aircraft subject to replacement during major overhauls are depreciated over the average expected
life between major overhauls. When each major overhaul is performed, its cost is recognized in the carrying amount of property,
plant and equipment and is depreciated over the estimated period between major overhauls. Any remaining carrying amount of cost
of previous major overhaul is derecognized and charged to the consolidated income statement.



In respect of aircraft held under operating
leases, the Group has responsibility to fulfill certain return conditions under relevant lease agreements. In order to fulfill
these return conditions, major overhauls are required to be conducted on a regular basis. Accordingly, estimated costs of major
overhauls are accrued and charged to the consolidated income statement over the estimated period between overhauls. After the aircraft
has completed its last overhaul cycle prior to being returned, expected cost of overhaul to be incurred at the end of the lease
is estimated and accrued over the remaining period of the lease. Differences between the estimated costs and the actual costs of
overhauls are charged to the consolidated income statement in the period when the overhaul is performed.



| | (y) | Borrowing costs
| | --- | ---------------



Borrowing costs that are directly attributable
to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for
its intended use are capitalized as part of the cost of that asset. Other borrowing costs are expensed in the period in which they
are incurred.



The capitalization of borrowing costs as
part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred
and activities that are necessary to prepare the asset for its intended use are in progress. Capitalization of borrowing costs
is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use are
interrupted or complete.



| | (z) | Employee benefits
| | --- | -----------------



| | (i) | Short term employee benefits and contributions to defined contribution retirement schemes
| | --- | -----------------------------------------------------------------------------------------



Salaries, annual bonuses and contributions
to defined contribution retirement schemes are accrued in the year in which the associated services are rendered by employees.
Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.



| | (ii) | Termination benefits
| | ---- | --------------------



Termination benefits are recognized when,
and only when, the Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy
by having a detailed formal plan which is without realistic possibility of withdrawal.



F-28







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (z) | Employee benefits (continued)
| | --- | -----------------------------



| | (iii) | Share-based payment
| | ----- | -------------------



The fair value of the amount payable to
employee in respect of share appreciation rights (“SARs”), which are settled in cash, is recognized as an expense with
a corresponding increase in liabilities, over the vesting period. The liability is remeasured at each reporting date and at settlement
date. Any changes in the fair value of the liability are recognized as staff cost in the consolidated income statement.



| | (aa) | Translation of foreign currencies
| | ---- | ---------------------------------



Foreign currencies transactions during
the year are translated into Renminbi at the applicable rates of exchange quoted by the People’s Bank of China (“PBOC”)
prevailing at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into Renminbi
at the PBOC exchange rates prevailing at the end of the financial year. Exchange gains and losses are recognized in the consolidated
income statement.



Non-monetary assets and liabilities that
are measured in terms of historical cost in a foreign currency are translated into Renminbi at the PBOC exchange rates prevailing
at the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are
translated into Renminbi at the PBOC exchange rates prevailing at the dates the fair value was determined.



| | (bb) | Related parties
| | ---- | ---------------



| | (a) | A person, or a close member of that person’s family,
is related to the Group if that person:
| | --- | --------------------------------------------------------------------------------------------



| | (i) | has control or joint control over the Group;
| | --- | --------------------------------------------



| | (ii) | has significant influence over the Group; or
| | ---- | --------------------------------------------



| | (iii) | is a member of the key management personnel of the Group
or the Group’s parent.
| | ----- | -------------------------------------------------------------------------------



| | (b) | An entity is related to the Group if any of the following conditions applies:
| | --- | -----------------------------------------------------------------------------



| | (i) | The entity and the Group are members of the same group
(which means that each parent, subsidiary and fellow subsidiary is related to the others).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | One entity is an associate or joint venture of the other
entity (or an associate or joint venture of a member of a group of which the other entity is a member).
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Both entities are joint ventures of the same third party.
| | ----- | ---------------------------------------------------------



| | (iv) | One entity is a joint venture of a third entity and the other entity is an associate of the third
entity.
| | ---- | ---------------------------------------------------------------------------------------------------------



| | (v) | The entity is a post-employment benefit plan for the benefit of employees of either the Group or
an entity related to the Group.
| | --- | --------------------------------------------------------------------------------------------------------------------------------



| | (vi) | The entity is controlled or jointly controlled by a person
identified in (a).
| | ---- | -----------------------------------------------------------------------------



| | (vii) | A person identified in (a)(i) has significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the entity).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-29







| | 2 | Significant accounting policies (continued)
| | - | -------------------------------------------



| | (bb) | Related parties (continued)
| | ---- | ---------------------------



Close members of the family of a person
are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.



| | (cc) | Segmental reporting
| | ---- | -------------------



Operating segments, and the amounts of
each segment item reported in the consolidated financial statements, are identified from the financial information provided regularly
to the Group’s most senior executive management, who is the chief operating decision maker, for the purposes of allocating
resources to, and assessing the performance of, the Group’s various lines of business and geographical locations.



Individually material operating segments
are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in
respect of the nature of products and services, the nature of production processes, the type or class of customers, the methods
used to distribute the products or provide the services, and the nature of the regulatory environment. Operating segments which
are not individually material may be aggregated if they share a majority of these criteria.



| | 3 | Changes in accounting policies
| | - | ------------------------------



The IASB has issued certain amendments
to IFRSs that are first effective for the current accounting period of the Group. Of these, Amendments to IFRS 7, Financial
instruments: Disclosures – Transfers of financial assets are relevant to the Group’s consolidated financial
statements. The amendments to IFRS 7 require certain disclosures to be included in the consolidated financial statements in respect
of all transferred financial assets that are not derecognized in their entirety and for any continuing involvement in transferred
assets that are derecognized in their entirety, irrespective of when the related transfer transaction occurred. However, an entity
need not provide the disclosures for the comparative period in the first year of adoption. The Group did not have any significant
transfers of financial assets in previous periods or the current period which require disclosure in the current accounting period
under the amendments.



The Group has not applied any new standard
or interpretation that is not yet effective for the current accounting period.



| | 4 | Traffic revenue
| | - | ---------------



|                      |  | 2012        |        |  | 2011        |  |        | 2010        | 
|--------------------- |  | ----------- | ------ |  | ----------- |  | ------ | ----------- | 
|                      |  | RMB million |        |  | RMB million |  |        | RMB million | 
|                      |  |             |        |  |             |  |        |             | 
|Passenger             |  |             | 77,937 |  |             |  | 71,435 |             | 
|                      |  |             |        |  |             |  |        |             | 
|Cargo and mail        |  |             | 4,785  |  |             |  | 4,118  |             | 
|                      |  |             |        |  |             |  |        |             | 
|Fuel surcharge income |  |             | 13,378 |  |             |  | 11,699 |             | 
|                      |  |             |        |  |             |  |        |             | 
|                      |  |             | 96,100 |  |             |  | 87,252 |             | 



F-30







| | 4 | Traffic revenue (continued)
| | - | ---------------------------



Pursuant to various sales tax rules and
regulations, the Group is required to pay sales tax (mainly including business tax) to national and local tax authorities at the
rate of approximately 3% of the traffic revenue in respect of domestic flights and international, Hong Kong, Macau and Taiwan flights.



Pursuant to the “Notice of exemption
of business tax on international traffic revenue” issued jointly by the PRC Ministry of Finance (“MoF”) and the
State Administration of Taxation (“SAT”) in 2010, the Group is exempted from business tax on international, including
Hong Kong, Macau and Taiwan, traffic revenue from January 1, 2010.



Pursuant to the “Notice of exemption
of business tax on fuel surcharge for airline companies” issued jointly by the MoF and the SAT, the Group is exempted from
business tax on fuel surcharge income received during the period from January 1, 2008 to December 31, 2010.



Pursuant to Cai Shui [2012] No. 71 jointly
issued by the MoF and the SAT on July 31, 2012, the pilot program regarding the transition from business tax to Value Added Tax
(“VAT”) was launched in certain provinces since November 1, 2012, including Guangdong and Fujian. Under this pilot
program, the traffic revenue and the other revenues, including ground service income, cargo handling income and others, generated
in locations that fall into the scope of this pilot program are subjected to VAT levied at rates of 17%, 11% or 6% from November
1, 2012; while the revenue generated in other locations continue to be subject to business tax at applicable tax rates.



Sales tax incurred by the Group during
the year ended December 31, 2012, which were net off against revenue, amounted to RMB2,281 million (2011: RMB2,434 million; 2010:
RMB1,851 million). Traffic revenue is stated net of sales tax.



| | 5 | Other operating revenue
| | - | -----------------------



|                                     |  | 2012        |       |  | 2011        |  |       | 2010        | 
|------------------------------------ |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                                     |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                                     |  |             |       |  |             |  |       |             | 
|Commission income                    |  |             | 757   |  |             |  | 643   |             | 
|                                     |  |             |       |  |             |  |       |             | 
|Hotel and travel services income     |  |             | 647   |  |             |  | 614   |             | 
|                                     |  |             |       |  |             |  |       |             | 
|Ground services income               |  |             | 350   |  |             |  | 368   |             | 
|                                     |  |             |       |  |             |  |       |             | 
|General aviation income              |  |             | 445   |  |             |  | 322   |             | 
|                                     |  |             |       |  |             |  |       |             | 
|Expired sales in advance of carriage |  |             | 495   |  |             |  | 309   |             | 
|                                     |  |             |       |  |             |  |       |             | 
|Air catering income                  |  |             | 176   |  |             |  | 166   |             | 
|                                     |  |             |       |  |             |  |       |             | 
|Rental income                        |  |             | 123   |  |             |  | 121   |             | 
|                                     |  |             |       |  |             |  |       |             | 
|Aircraft wet lease income            |  |             | 2     |  |             |  | 319   |             | 
|                                     |  |             |       |  |             |  |       |             | 
|Cargo handling agency income         |  |             | 109   |  |             |  | 73    |             | 
|                                     |  |             |       |  |             |  |       |             | 
|Others                               |  |             | 310   |  |             |  | 208   |             | 
|                                     |  |             |       |  |             |  |       |             | 
|                                     |  |             | 3,414 |  |             |  | 3,143 |             | 



F-31







| | 6 | Flight operations expenses
| | - | --------------------------



|                                                                                               |  | 2012        |        |  | 2011        |  |        | 2010        | 
|---------------------------------------------------------------------------------------------- |  | ----------- | ------ |  | ----------- |  | ------ | ----------- | 
|                                                                                               |  | RMB million |        |  | RMB million |  |        | RMB million | 
|                                                                                               |  |             |        |  |             |  |        |             | 
|Jet fuel costs                                                                                 |  |             | 37,401 |  |             |  | 32,675 |             | 
|                                                                                               |  |             |        |  |             |  |        |             | 
|Operating lease charges                                                                        |  |             | 4,897  |  |             |  | 4,654  |             | 
|                                                                                               |  |             |        |  |             |  |        |             | 
|Air catering expenses                                                                          |  |             | 2,352  |  |             |  | 2,073  |             | 
|                                                                                               |  |             |        |  |             |  |        |             | 
|Aircraft insurance                                                                             |  |             | 203    |  |             |  | 201    |             | 
|                                                                                               |  |             |        |  |             |  |        |             | 
|Flight personnel payroll and welfare                                                           |  |             | 5,051  |  |             |  | 4,412  |             | 
|                                                                                               |  |             |        |  |             |  |        |             | 
|Training expenses                                                                              |  |             | 660    |  |             |  | 681    |             | 
|                                                                                               |  |             |        |  |             |  |        |             | 
|Civil Aviation Administration of China
 (“CAAC”) Infrastructure Development Fund contributions |  |             | 1,868  |  |             |  | 1,655  |             | 
|                                                                                               |  |             |        |  |             |  |        |             | 
|Inventory provision (Note 28)                                                                  |  |             | -      |  |             |  | 141    |             | 
|                                                                                               |  |             |        |  |             |  |        |             | 
|Others                                                                                         |  |             | 2,258  |  |             |  | 1,852  |             | 
|                                                                                               |  |             |        |  |             |  |        |             | 
|                                                                                               |  |             | 54,690 |  |             |  | 48,344 |             | 



| | 7 | Maintenance expenses
| | - | --------------------



|                                        |  | 2012        |       |  | 2011        |  |       | 2010        | 
|--------------------------------------- |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                                        |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                                        |  |             |       |  |             |  |       |             | 
|Aviation repair and maintenance charges |  |             | 7,217 |  |             |  | 6,885 |             | 
|                                        |  |             |       |  |             |  |       |             | 
|Maintenance materials                   |  |             | 754   |  |             |  | 646   |             | 
|                                        |  |             |       |  |             |  |       |             | 
|                                        |  |             | 7,971 |  |             |  | 7,531 |             | 





| | 8 | Aircraft and traffic servicing expenses
| | - | ---------------------------------------



|                                 |  | 2012        |        |  | 2011        |  |        | 2010        | 
|-------------------------------- |  | ----------- | ------ |  | ----------- |  | ------ | ----------- | 
|                                 |  | RMB million |        |  | RMB million |  |        | RMB million | 
|                                 |  |             |        |  |             |  |        |             | 
|Landing and navigation fees      |  |             | 8,984  |  |             |  | 8,426  |             | 
|                                 |  |             |        |  |             |  |        |             | 
|Ground service and other charges |  |             | 5,088  |  |             |  | 3,911  |             | 
|                                 |  |             |        |  |             |  |        |             | 
|                                 |  |             | 14,072 |  |             |  | 12,337 |             | 



F-32







| | 9 | Promotion and sales expenses
| | - | ----------------------------



|                              |  | 2012        |       |  | 2011        |  |       | 2010        | 
|----------------------------- |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                              |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                              |  |             |       |  |             |  |       |             | 
|Sales commissions             |  |             | 3,865 |  |             |  | 3,521 |             | 
|                              |  |             |       |  |             |  |       |             | 
|Ticket office expenses        |  |             | 2,183 |  |             |  | 1,894 |             | 
|                              |  |             |       |  |             |  |       |             | 
|Computer reservation services |  |             | 458   |  |             |  | 471   |             | 
|                              |  |             |       |  |             |  |       |             | 
|Advertising and promotion     |  |             | 260   |  |             |  | 292   |             | 
|                              |  |             |       |  |             |  |       |             | 
|Others                        |  |             | 368   |  |             |  | 390   |             | 
|                              |  |             |       |  |             |  |       |             | 
|                              |  |             | 7,134 |  |             |  | 6,568 |             | 



| | 10 | General and administrative expenses
| | -- | -----------------------------------



|                           |  | 2012        |       |  | 2011        |  |       | 2010        | 
|-------------------------- |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                           |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                           |  |             |       |  |             |  |       |             | 
|General corporate expenses |  |             | 2,327 |  |             |  | 2,713 |             | 
|                           |  |             |       |  |             |  |       |             | 
|Auditors’ remuneration     |  |             | 14    |  |             |  | 13    |             | 
|                           |  |             |       |  |             |  |       |             | 
|Other taxes and levies     |  |             | 84    |  |             |  | 81    |             | 
|                           |  |             |       |  |             |  |       |             | 
|                           |  |             | 2,425 |  |             |  | 2,807 |             | 





| | 11 | Depreciation and amortization
| | -- | -----------------------------



|                                            |  | 2012        |       |   | 2011        |  |       | 2010        | 
|------------------------------------------- |  | ----------- | ----- | - | ----------- |  | ----- | ----------- | 
|                                            |  | RMB million |       |   | RMB million |  |       | RMB million | 
|                                            |  |             |       |   |             |  |       |             | 
|Depreciation                                |  |             |       |   |             |  |       |             | 
|                                            |  |             |       |   |             |  |       |             | 
|- Owned assets                              |  |             | 6,328 |   |             |  | 5,723 |             | 
|                                            |  |             |       |   |             |  |       |             | 
|- Assets acquired under finance leases      |  |             | 1,874 |   |             |  | 1,917 |             | 
|                                            |  |             |       |   |             |  |       |             | 
|Amortization of deferred benefits and gains |  |             | (74   | ) |             |  | (73   | )           | 
|                                            |  |             |       |   |             |  |       |             | 
|Other amortization                          |  |             | 136   |   |             |  | 122   |             | 
|                                            |  |             |       |   |             |  |       |             | 
|                                            |  |             | 8,264 |   |             |  | 7,689 |             | 



| | 12 | Staff costs
| | -- | -----------



|                                    |  | 2012        |        |  | 2011        |  |        | 2010        | 
|----------------------------------- |  | ----------- | ------ |  | ----------- |  | ------ | ----------- | 
|                                    |  | RMB million |        |  | RMB million |  |        | RMB million | 
|                                    |  |             |        |  |             |  |        |             | 
|Salaries, wages and welfare         |  |             | 11,953 |  |             |  | 10,345 |             | 
|                                    |  |             |        |  |             |  |        |             | 
|Retirement scheme contributions     |  |             | 939    |  |             |  | 960    |             | 
|                                    |  |             |        |  |             |  |        |             | 
|Early retirement benefits (Note 40) |  |             | 20     |  |             |  | 37     |             | 
|                                    |  |             |        |  |             |  |        |             | 
|                                    |  |             | 12,912 |  |             |  | 11,342 |             | 



F-33







| | 12 | Staff costs (continued)
| | -- | -----------------------



Staff costs relating to flight operations,
maintenance, aircraft and traffic servicing, promotion and sales and general and administrative expenses are also included in the
respective total amounts disclosed separately in Notes 6 to 10 above. Details of staff costs arising from cash-settled share appreciation
rights are disclosed in Note 45(c).



| | 13 | Other net income
| | -- | ----------------



|                                                                                       |  | 2012        |       |  | 2011        |  |       | 2010        | 
|-------------------------------------------------------------------------------------- |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                                                                                       |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                                                                                       |  |             |       |  |             |  |       |             | 
|Government grants                                                                      |  |             | 1,243 |  |             |  | 828   |             | 
|                                                                                       |  |             |       |  |             |  |       |             | 
|Gain / (loss) on disposal of property, plant 
and equipment, net and lease prepayments |  |             |       |  |             |  |       |             | 
|                                                                                       |  |             |       |  |             |  |       |             | 
|- Aircraft and spare engines                                                           |  |             | 9     |  |             |  | 180   |             | 
|                                                                                       |  |             |       |  |             |  |       |             | 
|- Other property, plant and equipment 
and lease prepayments                           |  |             | 7     |  |             |  | (35   | )           | 
|                                                                                       |  |             |       |  |             |  |       |             | 
|Others                                                                                 |  |             | 203   |  |             |  | 48    |             | 
|                                                                                       |  |             |       |  |             |  |       |             | 
|                                                                                       |  |             | 1,462 |  |             |  | 1,021 |             | 



| | 14 | Interest expense
| | -- | ----------------



|                                                                     |  | 2012        |       |   | 2011        |  |       | 2010        | 
|-------------------------------------------------------------------- |  | ----------- | ----- | - | ----------- |  | ----- | ----------- | 
|                                                                     |  | RMB million |       |   | RMB million |  |       | RMB million | 
|                                                                     |  |             |       |   |             |  |       |             | 
|Interest on bank and other loans wholly 
repayable within five years |  |             | 872   |   |             |  | 543   |             | 
|                                                                     |  |             |       |   |             |  |       |             | 
|Interest on other loans                                              |  |             | 417   |   |             |  | 333   |             | 
|                                                                     |  |             |       |   |             |  |       |             | 
|Finance charges on obligations 
under finance leases                 |  |             | 468   |   |             |  | 388   |             | 
|                                                                     |  |             |       |   |             |  |       |             | 
|Other interest expense (Note 40)                                     |  |             | 8     |   |             |  | 8     |             | 
|                                                                     |  |             |       |   |             |  |       |             | 
|Less: interest expense capitalized                                   |  |             | (389  | ) |             |  | (205  | )           | 
|                                                                     |  |             |       |   |             |  |       |             | 
|                                                                     |  |             | 1,376 |   |             |  | 1,067 |             | 



The borrowing costs have been capitalized
at rates ranging from 2.25% to 3.23% per annum in 2012 (2011: 1.79% to 2.99% per annum; 2010: 1.13% to 1.87% per annum).



F-34







| | 15 | Other non-operating income
| | -- | --------------------------



|                                                                                     |  | 2012        |    |  | 2011        |  |     | 2010        | 
|------------------------------------------------------------------------------------ |  | ----------- | -- |  | ----------- |  | --- | ----------- | 
|                                                                                     |  | RMB million |    |  | RMB million |  |     | RMB million | 
|                                                                                     |  |             |    |  |             |  |     |             | 
|Interest income on wealth 
management products                                       |  |             | 21 |  |             |  | 128 |             | 
|                                                                                     |  |             |    |  |             |  |     |             | 
|Gain on disposal / deemed disposal and losing 
control of a subsidiary (Note 47 (b)) |  |             | 54 |  |             |  | -   |             | 
|                                                                                     |  |             |    |  |             |  |     |             | 
|Gain on derivative financial instruments, net                                        |  |             | -  |  |             |  | 1   |             | 
|                                                                                     |  |             |    |  |             |  |     |             | 
|Gain on sale of a jointly controlled entity 
classified as held for sale, net        |  |             | -  |  |             |  | -   |             | 
|                                                                                     |  |             |    |  |             |  |     |             | 
|                                                                                     |  |             | 75 |  |             |  | 129 |             | 





| | 16 | Remuneration of directors, supervisors and senior
management
| | -- | ------------------------------------------------------------



Details of directors’
and supervisors’ remuneration for the year ended December 31, 2012 are set out below:

|                                    |  |            |     |  | Salaries,  |  |       |               |  |  |               |  |  |         |    
|----------------------------------- |  | ---------- | --- |  | ---------- |  | ----- | ------------- |  |  | ------------- |  |  | ------- | ---
|                                    |  |            |     |  | allowances |  |       |               |  |  |               |  |  |         |    
|                                    |  |            |     |  | and        |  |       |               |  |  | Retirement    |  |  |         |    
|                                    |  | Directors’ |     |  | benefits   |  |       | Discretionary |  |  | scheme        |  |  |         |    
|Name                                |  | fees       |     |  | in kind    |  |       | bonuses       |  |  | contributions |  |  | Total   |    
|                                    |  | RMB’000    |     |  | RMB’000    |  |       | RMB’000       |  |  | RMB’000       |  |  | RMB’000 |    
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Non-executive directors             |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Si Xian Min (Note (i))              |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Wang Quan Hua (Note (i))            |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Yuan Xin An (Note (i))              |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Executive directors                 |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Tan Wan Geng (Note (ii))            |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Zhang Zi Fang                       |  |            | -   |  |            |  | 743   |               |  |  | -             |  |  |         | 70 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Xu Jie Bo                           |  |            | -   |  |            |  | 710   |               |  |  | -             |  |  |         | 70 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Chen Zhen You (Note (iii))          |  |            | -   |  |            |  | 576   |               |  |  | -             |  |  |         | 44 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Supervisors                         |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Pan Fu (Note (i))                   |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Li Jia Shi                          |  |            | -   |  |            |  | 710   |               |  |  | -             |  |  |         | 69 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Zhang Wei (Note (i))                |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Yang Yi Hua                         |  |            | -   |  |            |  | 346   |               |  |  | -             |  |  |         | 68 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Liang Zhong Gao                     |  |            | -   |  |            |  | 352   |               |  |  | -             |  |  |         | 69 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Independent non-executive directors |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Gong Hua Zhang                      |  |            | 150 |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Wei Jin Cai                         |  |            | 150 |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Ning Xiang Dong                     |  |            | 150 |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Liu Chang Le                        |  |            | 150 |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                    |  |            | 600 |  |            |  | 3,437 |               |  |  | -             |  |  |         | 390



F-35







| | 16 | Remuneration of directors, supervisors and senior management (continued)
| | -- | ------------------------------------------------------------------------



Details of directors’
and supervisors’ remuneration for the year ended December 31, 2011 are set out below:



|                                    |  |            |     |  | Salaries,  |  |       |               |  |  |               |  |  |         |    
|----------------------------------- |  | ---------- | --- |  | ---------- |  | ----- | ------------- |  |  | ------------- |  |  | ------- | ---
|                                    |  |            |     |  | allowances |  |       |               |  |  |               |  |  |         |    
|                                    |  |            |     |  | and        |  |       |               |  |  | Retirement    |  |  |         |    
|                                    |  | Directors’ |     |  | benefits   |  |       | Discretionary |  |  | scheme        |  |  |         |    
|Name                                |  | fees       |     |  | in kind    |  |       | bonuses       |  |  | contributions |  |  | Total   |    
|                                    |  | RMB’000    |     |  | RMB’000    |  |       | RMB’000       |  |  | RMB’000       |  |  | RMB’000 |    
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Non-executive directors             |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Si Xian Min (Note (i))              |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Wang Quan Hua (Note (i))            |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Yuan Xin An (Note (i) and (iv))     |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Executive directors                 |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Tan Wan Geng (Note (ii))            |  |            | -   |  |            |  | 517   |               |  |  | 300           |  |  |         | 29 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Zhang Zi Fang                       |  |            | -   |  |            |  | 687   |               |  |  | 300           |  |  |         | 71 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Xu Jie Bo                           |  |            | -   |  |            |  | 601   |               |  |  | 250           |  |  |         | 71 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Chen Zhen You                       |  |            | -   |  |            |  | 601   |               |  |  | 250           |  |  |         | 70 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Supervisors                         |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Pan Fu (Note (i))                   |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Li Jia Shi                          |  |            | -   |  |            |  | 601   |               |  |  | 250           |  |  |         | 69 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Zhang Wei (Note (i))                |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Yang Yi Hua                         |  |            | -   |  |            |  | 332   |               |  |  | 30            |  |  |         | 68 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Liang Zhong Gao                     |  |            | -   |  |            |  | 337   |               |  |  | 30            |  |  |         | 69 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Independent non-executive directors |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Gong Hua Zhang                      |  |            | 104 |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Wei Jin Cai                         |  |            | 104 |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Ning Xiang Dong                     |  |            | 104 |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Liu Chang Le (Note (iv))            |  |            | 13  |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Lam Kwong Yu (Note (v))             |  |            | 56  |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                    |  |            | 381 |  |            |  | 3,676 |               |  |  | 1,410         |  |  |         | 447



F-36







| | 16 | Remuneration of directors, supervisors and senior
management (continued)
| | -- | ------------------------------------------------------------------------



Details of directors’
and supervisors’ remuneration for the year ended December 31, 2010 are set out below:



|                                      |  |            |     |  | Salaries,  |  |       |               |  |  |               |  |  |         |    
|------------------------------------- |  | ---------- | --- |  | ---------- |  | ----- | ------------- |  |  | ------------- |  |  | ------- | ---
|                                      |  |            |     |  | allowances |  |       |               |  |  |               |  |  |         |    
|                                      |  |            |     |  | and        |  |       |               |  |  | Retirement    |  |  |         |    
|                                      |  | Directors’ |     |  | benefits   |  |       | Discretionary |  |  | scheme        |  |  |         |    
|Name                                  |  | fees       |     |  | in kind    |  |       | bonuses       |  |  | contributions |  |  | Total   |    
|                                      |  | RMB’000    |     |  | RMB’000    |  |       | RMB’000       |  |  | RMB’000       |  |  | RMB’000 |    
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Non-executive directors               |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Si Xian Min (Note (i) and (vii))      |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Li Wen Xin (Note (i), (vi) and (vii)) |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Wang Quan Hua (Note (i) and (vii))    |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Executive directors                   |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Liu Bao Heng (Note (i) and (viii))    |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Tan Wan Geng (Note (ii))              |  |            | -   |  |            |  | 817   |               |  |  | 150           |  |  |         | 61 
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Zhang  Zi Fang                        |  |            | -   |  |            |  | 778   |               |  |  | 150           |  |  |         | 60 
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Xu Jie Bo                             |  |            | -   |  |            |  | 706   |               |  |  | 100           |  |  |         | 60 
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Chen Zhen You                         |  |            | -   |  |            |  | 706   |               |  |  | 100           |  |  |         | 59 
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Supervisors                           |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Pan Fu (Note (i) and (ix))            |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Sun Xiao Yi (Note (i) and (x))        |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Li Jia Shi                            |  |            | -   |  |            |  | 708   |               |  |  | 100           |  |  |         | 58 
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Zhang Wei (Note (i))                  |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Yang Yi Hua                           |  |            | -   |  |            |  | 368   |               |  |  | 20            |  |  |         | 56 
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Liang Zhong Gao                       |  |            | -   |  |            |  | 373   |               |  |  | 20            |  |  |         | 57 
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Independent non-executive directors   |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Wang Zhi (Note (x))                   |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Sui Guang Jun (Note (x))              |  |            | 100 |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Gong Hua Zhang                        |  |            | 100 |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Lam Kwong Yu                          |  |            | 87  |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Wei Jin Cai (Note (ix))               |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Ning Xiang Dong (Note (ix))           |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                      |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|                                      |  |            | 287 |  |            |  | 4,456 |               |  |  | 640           |  |  |         | 411



F-37







| | 16 | Remuneration of directors, supervisors and senior
management (continued)
| | -- | ------------------------------------------------------------------------



In addition to the above, certain directors
have been granted SARs in respect of their services to the Group, further details of which are set out in note 45(c).



Notes:



| | (i) | These directors or supervisors did not receive any remuneration for their services in the capacity
of the directors or supervisors of the Company. They also held management positions in CSAHC and their salaries were borne by CSAHC.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | This director did not receive remuneration for the service in the capacity of the director of the
Company since June 2011, when he started to hold management position in CSAHC and his salary was borne by CSAHC.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Retired on December 6, 2012.
| | ----- | ----------------------------



| | (iv) | Appointed on November 30, 2011.
| | ---- | -------------------------------



| | (v) | Resigned on August 5, 2011.
| | --- | ---------------------------



| | (vi) | Resigned on August 8, 2011.
| | ---- | ---------------------------



| | (vii) | These three directors were appointed as non-executive directors on December 29, 2010.
| | ----- | -------------------------------------------------------------------------------------



| | (viii) | Resigned on November 24, 2010.
| | ------ | ------------------------------



| | (ix) | Appointed on December 29, 2010.
| | ---- | -------------------------------



| | (x) | Resigned on December 29, 2010.
| | --- | ------------------------------



| | 17 | Income tax
| | -- | ----------



| | (a) | Income tax expense in the consolidated income statement
| | --- | -------------------------------------------------------



|                                                                                |  | 2012        |     |   | 2011        |  |       | 2010        | 
|------------------------------------------------------------------------------- |  | ----------- | --- | - | ----------- |  | ----- | ----------- | 
|                                                                                |  | RMB million |     |   | RMB million |  |       | RMB million | 
|                                                                                |  |             |     |   |             |  |       |             | 
|PRC income tax                                                                  |  |             |     |   |             |  |       |             | 
|                                                                                |  |             |     |   |             |  |       |             | 
|Provision for the year                                                          |  |             | 774 |   |             |  | 1,516 |             | 
|                                                                                |  |             |     |   |             |  |       |             | 
|Over-provision in prior year                                                    |  |             | (61 | ) |             |  | (59   | )           | 
|                                                                                |  |             |     |   |             |  |       |             | 
|                                                                                |  |             | 713 |   |             |  | 1,457 |             | 
|                                                                                |  |             |     |   |             |  |       |             | 
|Deferred tax (Note 26)                                                          |  |             |     |   |             |  |       |             | 
|                                                                                |  |             |     |   |             |  |       |             | 
|Origination and reversal of temporary differences                               |  |             | 241 |   |             |  | (369  | )           | 
|                                                                                |  |             |     |   |             |  |       |             | 
|Recognition of
    deductible temporary differences unrecognized in prior years |  |             | -   |   |             |  | (248  | )           | 
|                                                                                |  |             |     |   |             |  |       |             | 
|                                                                                |  |             | 241 |   |             |  | (617  | )           | 
|                                                                                |  |             |     |   |             |  |       |             | 
|Actual tax expense                                                              |  |             | 954 |   |             |  | 840   |             | 



F-38







| | 17 | Income tax (continued)
| | -- | ----------------------



| | (a) | Income tax expense in the consolidated income statement (continued)
| | --- | -------------------------------------------------------------------



In respect of majority of the Group’s
overseas airline activities, the Group has either obtained exemptions from overseas taxation pursuant to the bilateral aviation
agreements between the overseas governments and the PRC government, or has sustained tax losses in these overseas jurisdictions.
Accordingly, no provision for overseas tax has been made for overseas airline activities in the current year and prior years.



Effective from January 1, 2008, under the
Corporate Income Tax Law of the PRC (“new tax law”), the Company and its subsidiaries are subject to income tax at
the statutory rate of 25% unless otherwise specified.



Pursuant to the new tax law, the income
tax rates of entities that previously enjoyed preferential tax rates of 15% and 18% have been revised to 22%, 24% and 25% for 2010,
2011 and 2012 onwards, respectively.



| | (b) | Reconciliation between actual tax expense and calculated tax based on accounting profit at
applicable tax rates
| | --- | ---------------------------------------------------------------------------------------------------------------



|                                                                                                                                |  | 2012        |       |   | 2011        |  |       | 2010        | 
|------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----- | - | ----------- |  | ----- | ----------- | 
|                                                                                                                                |  | RMB million |       |   | RMB million |  |       | RMB million | 
|                                                                                                                                |  |             |       |   |             |  |       |             | 
|Profit before taxation                                                                                                          |  |             | 4,738 |   |             |  | 6,930 |             | 
|                                                                                                                                |  |             |       |   |             |  |       |             | 
|Notional tax on profit before taxation, calculated at the rates applicable to profits in the tax jurisdictions concerned (Note) |  |             | 1,157 |   |             |  | 1,706 |             | 
|                                                                                                                                |  |             |       |   |             |  |       |             | 
|Adjustments for tax effect of:                                                                                                  |  |             |       |   |             |  |       |             | 
|                                                                                                                                |  |             |       |   |             |  |       |             | 
|Non-deductible expenses                                                                                                         |  |             | 26    |   |             |  | 36    |             | 
|                                                                                                                                |  |             |       |   |             |  |       |             | 
|Non-taxable income                                                                                                              |  |             | (9    | ) |             |  | (9    | )           | 
|                                                                                                                                |  |             |       |   |             |  |       |             | 
|Share of results of associates and jointly controlled entities                                                                  |  |             | (110  | ) |             |  | (145  | )           | 
|                                                                                                                                |  |             |       |   |             |  |       |             | 
|Recognition of deductible temporary differences unrecognized in prior years                                                     |  |             | -     |   |             |  | (248  | )           | 
|                                                                                                                                |  |             |       |   |             |  |       |             | 
|Unused tax losses and deductible temporary  differences not recognized                                                          |  |             | 3     |   |             |  | 16    |             | 
|                                                                                                                                |  |             |       |   |             |  |       |             | 
|Utilization of unused tax losses and deductible temporary differences not recognized in prior year                              |  |             | (29   | ) |             |  | (440  | )           | 
|                                                                                                                                |  |             |       |   |             |  |       |             | 
|Over provision in prior year                                                                                                    |  |             | (61   | ) |             |  | (59   | )           | 
|                                                                                                                                |  |             |       |   |             |  |       |             | 
|Tax rates differential                                                                                                          |  |             | (23   | ) |             |  | (17   | )           | 
|                                                                                                                                |  |             |       |   |             |  |       |             | 
|Actual tax expense                                                                                                              |  |             | 954   |   |             |  | 840   |             | 



Note:



The headquarters of the Company and its
branches are taxed at rate at 25% (2011: 24% to 25%; 2010: 22% to 25%). The subsidiaries of the Group are taxed at rates ranging
from 15% to 25% (2011: 15% to 25%; 2010: 15% to 25%).



F-39







| | 18 | Other comprehensive income
| | -- | --------------------------



| |  | Tax effects relating to other comprehensive income
| |  | --------------------------------------------------



|                                       |  | 2012       |   |  | 2011    |  |    | 2010       | 
|-------------------------------------- |  | ---------- | - |  | ------- |  | -- | ---------- | 
|                                       |  | Before-tax |   |  | Tax     |  |    | Net-of-tax | 
|                                       |  | amount     |   |  | expense |  |    | amount     | 
|                                       |  | RMB        |   |  | RMB     |  |    | RMB        | 
|                                       |  | million    |   |  | million |  |    | million    | 
|                                       |  |            |   |  |         |  |    |            | 
|Available-for-sales securities:        |  |            |   |  |         |  |    |            | 
|                                       |  |            |   |  |         |  |    |            | 
|net movement in fair
    value reserve |  |            | 5 |  |         |  | (1 | )          | 



F-40







| | 19 | Earnings per share
| | -- | ------------------



The calculation of basic earnings per share
for the year ended December 31, 2012 is based on the profit attributable to equity shareholders of the Company of RMB2,619 million
(2011: RMB5,110 million; 2010: RMB5,792 million) and the weighted average of 9,817,567,000 shares in issue during the year (2011:
9,817,567,000 shares; 2010: 8,314,100,000 shares), calculated as follows:



|                                                          |  | 2012           |       |  | 2011           |  |       | 2010           | 
|--------------------------------------------------------- |  | -------------- | ----- |  | -------------- |  | ----- | -------------- | 
|                                                          |  | Million shares |       |  | Million shares |  |       | Million shares | 
|                                                          |  |                |       |  |                |  |       |                | 
|Issued ordinary shares at January 1                       |  |                | 9,818 |  |                |  | 9,818 |                | 
|                                                          |  |                |       |  |                |  |       |                | 
|Effect of issuance of A shares                            |  |                | -     |  |                |  | -     |                | 
|                                                          |  |                |       |  |                |  |       |                | 
|Effect of issuance of H shares                            |  |                | -     |  |                |  | -     |                | 
|                                                          |  |                |       |  |                |  |       |                | 
|Weighted average number of ordinary shares at December 31 |  |                | 9,818 |  |                |  | 9,818 |                | 



The amounts of diluted earnings per share
are the same as basic earnings per share as there were no dilutive potential ordinary shares in existence for both the current
and prior years.



F-41







| | 20 | Property, plant and equipment, net
| | -- | ----------------------------------



|                                                                |  |            |     |  |           |  |       | Aircraft |  |  | Other    |   |  |            |        |   |            | 
|--------------------------------------------------------------- |  | ---------- | --- |  | --------- |  | ----- | -------- |  |  | -------- | - |  | ---------- | ------ | - | ---------- | 
|                                                                |  |            |     |  |           |  |       |          |  |  | Acquired |   |  | flight     |        |   | Machinery, | 
|                                                                |  |            |     |  |           |  |       |          |  |  | under    |   |  | equipment, |        |   | equipment  | 
|                                                                |  | Investment |     |  |           |  |       |          |  |  | finance  |   |  | including  |        |   | and        | 
|                                                                |  | properties |     |  | Buildings |  |       | Owned    |  |  | leases   |   |  | rotables   |        |   | vehicles   | 
|                                                                |  | RMB        |     |  | RMB       |  |       | RMB      |  |  | RMB      |   |  | RMB        |        |   | RMB        | 
|                                                                |  | million    |     |  | million   |  |       | million  |  |  | million  |   |  | million    |        |   | million    | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Cost:                                                           |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At
    January 1, 2011                                          |  |            | 611 |  |           |  | 7,583 |          |  |  | 71,109   |   |  |            | 25,468 |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Additions                                                       |  |            | -   |  |           |  | 4     |          |  |  | 2,050    |   |  |            | 2,959  |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Transfer
    from construction in progress (Note 21)            |  |            | -   |  |           |  | 524   |          |  |  | 6,975    |   |  |            | 2,409  |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Reclassification
    on exercise of purchase options            |  |            | -   |  |           |  | -     |          |  |  | 768      |   |  |            | (768   | ) |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Disposals                                                       |  |            | -   |  |           |  | (80   | )        |  |  | (5,380   | ) |  |            | (136   | ) |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At
    December 31, 2011                                        |  |            | 611 |  |           |  | 8,031 |          |  |  | 75,522   |   |  |            | 29,932 |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At January
    1, 2012                                          |  |            | 611 |  |           |  | 8,031 |          |  |  | 75,522   |   |  |            | 29,932 |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Additions                                                       |  |            | -   |  |           |  | 72    |          |  |  | 2,676    |   |  |            | 4,106  |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Transfer
    from construction in progress (Note 21)            |  |            | -   |  |           |  | 610   |          |  |  | 5,526    |   |  |            | 5,525  |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Reclassification                                                |  |            | 56  |  |           |  | (56   | )        |  |  | -        |   |  |            | -      |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Reclassification
    on exercise of purchase options (Note (e)) |  |            | -   |  |           |  | -     |          |  |  | 764      |   |  |            | (764   | ) |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Disposals                                                       |  |            | -   |  |           |  | (58   | )        |  |  | (1,477   | ) |  |            | (132   | ) |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At
    December 31, 2012                                        |  |            | 667 |  |           |  | 8,599 |          |  |  | 83,011   |   |  |            | 38,667 |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Accumulated
    depreciation and impairment losses:             |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At January
    1, 2011                                          |  |            | 138 |  |           |  | 1,892 |          |  |  | 24,122   |   |  |            | 5,228  |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Depreciation
    charge for the year                            |  |            | 19  |  |           |  | 281   |          |  |  | 4,274    |   |  |            | 1,917  |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Reclassification
    on exercise of purchase options            |  |            | -   |  |           |  | -     |          |  |  | 324      |   |  |            | (324   | ) |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Disposals                                                       |  |            | -   |  |           |  | (25   | )        |  |  | (3,171   | ) |  |            | (136   | ) |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Impairment
    losses for the year                              |  |            | -   |  |           |  | -     |          |  |  | 526      |   |  |            | -      |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Impairment
    losses written off on disposal                   |  |            | -   |  |           |  | -     |          |  |  | (846     | ) |  |            | -      |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At
    December 31, 2011                                        |  |            | 157 |  |           |  | 2,148 |          |  |  | 25,229   |   |  |            | 6,685  |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At January
    1, 2012                                          |  |            | 157 |  |           |  | 2,148 |          |  |  | 25,229   |   |  |            | 6,685  |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Depreciation
    charge for the year                            |  |            | 21  |  |           |  | 343   |          |  |  | 4,732    |   |  |            | 1,874  |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Reclassification                                                |  |            | 8   |  |           |  | (8    | )        |  |  | -        |   |  |            | -      |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Reclassification
    on exercise of purchase options (Note (e)) |  |            | -   |  |           |  | -     |          |  |  | 329      |   |  |            | (329   | ) |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Disposals                                                       |  |            | -   |  |           |  | (43   | )        |  |  | (1,133   | ) |  |            | (132   | ) |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Impairment
    losses written off on disposal (Note (g))        |  |            | -   |  |           |  | -     |          |  |  | (48      | ) |  |            | -      |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At
    December 31, 2012                                        |  |            | 186 |  |           |  | 2,440 |          |  |  | 29,109   |   |  |            | 8,098  |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Net
    book value:                                             |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At
    December 31, 2012                                        |  |            | 481 |  |           |  | 6,159 |          |  |  | 53,902   |   |  |            | 30,569 |   |            | 
|                                                                |  |            |     |  |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At
    December 31, 2011                                        |  |            | 454 |  |           |  | 5,883 |          |  |  | 50,293   |   |  |            | 23,247 |   |            | 



F-42







| | 20 | Property, plant and equipment, net (continued)
| | -- | ----------------------------------------------



| | (a) | Most of the Group’s buildings are located in the PRC. The Group was formally granted the
rights to use certain parcels of land in Guangzhou, Shenzhen, Zhuhai, Beihai, Changsha, Shantou, Haikou, Zhengzhou, Jilin, Guiyang
and other PRC cities by the relevant PRC authorities for periods of 30 to 70 years, which expire between 2020 and 2073. For other
land in the PRC on which the Group’s buildings are erected, the Group was formally granted the rights to use such land pursuant
to various lease agreements between the Company and CSAHC. In this connection, rental payments in respect of land use rights totaling
RMB56 million were paid to CSAHC during 2012 (2011: RMB56 million; 2010: RMB22 million) in respect of these leases.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | As at December 31, 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 (Notes 32 and 33).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | As at December 31, 2012, certain buildings of the Group with an aggregate carrying value of approximately
RMB17 million were mortgaged for certain banking facilities granted by a PRC commercial bank (2011: RMB17 million).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | The Group leased out investment properties and certain flight training facilities under operating
leases. The leases typically run for an initial period of one to fourteen years, with an option to renew the leases after that
date at which time all terms are renegotiated. None of the leases includes contingent rentals. In this connection, rental income
totaling RMB80 million (2011: RMB82 million; 2010: RMB74 million) was received by the Group during the year in respect of the leases.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All properties held under operating leases
that would otherwise meet the definition of investment property are classified as investment property.



The Group’s total future minimum
lease payments under non-cancellable operating leases are as follows:



|                                |  | 2012        |     |  | 2011        | 
|------------------------------- |  | ----------- | --- |  | ----------- | 
|                                |  | RMB million |     |  | RMB million | 
|                                |  |             |     |  |             | 
|Within 1 year                   |  |             | 79  |  |             | 
|                                |  |             |     |  |             | 
|After 1 year but within 5 years |  |             | 46  |  |             | 
|                                |  |             |     |  |             | 
|After 5 years                   |  |             | 5   |  |             | 
|                                |  |             |     |  |             | 
|                                |  |             | 130 |  |             | 



As at December 31, 2012, the net book value
of the aircraft and flight training facilities leased out by the Group under operating leases amounted to RMB24 million (2011:
RMB33 million).



| | (e) | During the year, the Company exercised the purchase options stipulated in the aircraft finance
lease agreements and two A321-200 aircraft were reclassified as owned aircraft from finance leased aircraft.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-43









| | 20 | Property, plant and equipment, net (continued)
| | -- | ----------------------------------------------



| | (f) | The Company entered into two separate arrangements (the “Arrangements”) with certain
independent third parties during each of 2002 and 2003. Under each of the Arrangements, the Company sold an aircraft and then immediately
leased back the aircraft for an agreed period. The Company has an option to purchase the aircraft at a pre-determined date. In
the event that the lease agreement is early terminated by the Company, the Company is liable to pay a pre-determined penalty to
the lessor. Provided that the Company complies with the lease agreements, the Company is entitled to the continued possession and
operation of the aircraft. Since the Company retains substantially all risks and rewards incidental to ownership of the aircraft
and enjoys substantially the same rights to their use as before the Arrangements, no adjustment has been made to the property,
plant and equipment.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (g) | In view of the age of the Group’s fleet of Boeing B737-300 aircraft, the Group had plans
to dispose of these aircraft and commenced the process of seeking buyers in 2011. These aircraft and related assets’ carrying
amounts were written down to their recoverable amounts and impairment losses of RMB544 million were made as at December 31, 2011.
During the year, three Boeing 737-300 aircraft were disposed of and the impairment provision of RMB48 million for the three aircraft
was written off on disposal. As at December 31, 2012, the Group reviewed the recoverable amounts of the remaining aircraft and
related assets and concluded no further impairment or reversal of impairment was required.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The estimates of recoverable
amounts were based on the greater of the assets’ fair value less costs to sell and the value in use. The fair value was determined
by reference to the recent observable market prices for the aircraft fleet.



| | (h) | As at December 31, 2012 and up to the date of approval of these consolidated financial statements,
the Group is in the process of applying for the land use right certificates and property title certificates in respect of the properties
located in Guangzhou (including Guangzhou Baiyun International Airport), Xiamen, Heilongjiang, Jilin, Dalian, Nanning, Hunan, Beijing,
Shanghai, Sanya, Zhuhai, Shenzhen, Shenyang, Xinjiang, Henan, Chengdu and Shantou, in which the Group has interests and for which
such certificates have not been granted. As at December 31, 2012, carrying value of such properties of the Group amounted to RMB3,669
million (2011: RMB3,303 million). The directors of the Company are of the opinion that the use of and the conduct of operating
activities at the properties referred to above are not affected by the fact that the Group has not yet obtained the relevant land
use right certificates and property title certificates.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-44







| | 21 | Construction in progress
| | -- | ------------------------



|                                                                                                       |  | 2012        |         |   | 2011        | 
|------------------------------------------------------------------------------------------------------ |  | ----------- | ------- | - | ----------- | 
|                                                                                                       |  | RMB million |         |   | RMB million | 
|                                                                                                       |  |             |         |   |             | 
|At January 1                                                                                           |  |             | 15,940  |   |             | 
|                                                                                                       |  |             |         |   |             | 
|Additions                                                                                              |  |             | 15,290  |   |             | 
|                                                                                                       |  |             |         |   |             | 
|Transferred to property, plant and equipment (Note 20)                                                 |  |             | (12,239 | ) |             | 
|                                                                                                       |  |             |         |   |             | 
|Transferred to lease prepayments and other assets upon completion of development, or other receivables |  |             | (302    | ) |             | 
|                                                                                                       |  |             |         |   |             | 
|At December 31                                                                                         |  |             | 18,689  |   |             | 



The construction in progress
as at December 31, 2012 mainly related to advance payments for acquisition of aircraft and progress payments for other construction
projects at the Xiamen Airlines Changsha Base, Shenyang aircraft maintenance warehouse and Xi’an Sales Office Building.



| | 22 | Interest in associates
| | -- | ----------------------



|                    |  | 2012        |       |  | 2011        | 
|------------------- |  | ----------- | ----- |  | ----------- | 
|                    |  | RMB million |       |  | RMB million | 
|                    |  |             |       |  |             | 
|Share of net assets |  |             | 1,033 |  |             | 



The details of the Group’s
principal associates are set out in Note 56, all of which are unlisted corporate entities.



Summary of financial information
of associates



|                                         |  | 100 Percent |         |   | Group’s effective interest | 
|---------------------------------------- |  | ----------- | ------- | - | -------------------------- | 
|                                         |  | 2012        |         |   | 2011                       | 
|                                         |  | RMB         |         |   | RMB                        | 
|                                         |  | million     |         |   | million                    | 
|                                         |  |             |         |   |                            | 
|Non-current assets                       |  |             | 17,577  |   |                            | 
|Current assets                           |  |             | 7,086   |   |                            | 
|Non-current liabilities                  |  |             | (10,313 | ) |                            | 
|Current liabilities                      |  |             | (11,326 | ) |                            | 
|                                         |  |             |         |   |                            | 
|Net assets                               |  |             | 3,024   |   |                            | 
|                                         |  |             |         |   |                            | 
|Revenue                                  |  |             | 16,616  |   |                            | 
|Expenses                                 |  |             | (15,728 | ) |                            | 
|                                         |  |             |         |   |                            | 
|Profit for the year                      |  |             | 888     |   |                            | 
|                                         |  |             |         |   |                            | 
|Net profit not shared by the Group       |  |             |         |   |                            | 
|                                         |  |             |         |   |                            | 
|The Group’s share of associates’ results |  |             |         |   |                            | 



F-45







| | 23 | Interest in jointly controlled entities
| | -- | ---------------------------------------



|                    |  | 2012        |       |  | 2011        | 
|------------------- |  | ----------- | ----- |  | ----------- | 
|                    |  | RMB million |       |  | RMB million | 
|                    |  |             |       |  |             | 
|Share of net assets |  |             | 1,103 |  |             | 



The details of the Group’s
principal jointly controlled entities are set out in Note 56, all of which are unlisted corporate entities.



Summary of financial information
of jointly controlled entities



|                        |  | Group’s effective interest |       
|----------------------- |  | -------------------------- | ------
|                        |  | 2012                       |       
|                        |  | RMB million                |       
|                        |  |                            |       
|Non-current assets      |  |                            | 1,254 
|                        |  |                            |       
|Current assets          |  |                            | 806   
|                        |  |                            |       
|Non-current liabilities |  |                            | (401  
|                        |  |                            |       
|Current liabilities     |  |                            | (556  
|                        |  |                            |       
|Net assets              |  |                            | 1,103 
|                        |  |                            |       
|Revenue                 |  |                            | 1,221 
|                        |  |                            |       
|Expenses                |  |                            | (1,100
|                        |  |                            |       
|Profit for the year     |  |                            | 121   



| | 24 | Other investments in equity securities
| | -- | --------------------------------------



|                                    |  | 2012        |     |  | 2011        | 
|----------------------------------- |  | ----------- | --- |  | ----------- | 
|                                    |  | RMB million |     |  | RMB million | 
|                                    |  |             |     |  |             | 
|Unlisted equity securities, at cost |  |             | 160 |  |             | 



Dividend income from unlisted
equity securities of the Group amounted to RMB11 million during the year ended December 31, 2012 (2011: RMB10 million; 2010: RMB11
million).



F-46







| | 25 | Available-for-sale equity securities
| | -- | ------------------------------------



|                                     |  | 2012        |    |  | 2011        | 
|------------------------------------ |  | ----------- | -- |  | ----------- | 
|                                     |  | RMB million |    |  | RMB million | 
|                                     |  |             |    |  |             | 
|Available-for-sale equity securities |  |             |    |  |             | 
|                                     |  |             |    |  |             | 
|- Listed in the PRC                  |  |             | 69 |  |             | 
|                                     |  |             |    |  |             | 
|Market value of listed securities    |  |             | 69 |  |             | 



Dividend income from listed securities
of the Group amounted to RMB1 million during the year ended December 31, 2012 (2011:RMB0.3 million; 2010: RMB2 million).



| | 26 | Deferred tax assets / (liabilities)
| | -- | -----------------------------------



| | (a) | Movements of net deferred tax assets / (liabilities) are as follows:
| | --- | --------------------------------------------------------------------



|                                                                       |  | 2012        |      |   | 2011        | 
|---------------------------------------------------------------------- |  | ----------- | ---- | - | ----------- | 
|                                                                       |  | RMB million |      |   | RMB million | 
|                                                                       |  |             |      |   |             | 
|At January 1                                                           |  |             | 671  |   |             | 
|                                                                       |  |             |      |   |             | 
|(Charged) / credited to the consolidated income statement (Note 17(a)) |  |             | (241 | ) |             | 
|                                                                       |  |             |      |   |             | 
|(Charged) / credited to other comprehensive income (Note 18)           |  |             | (1   | ) |             | 
|                                                                       |  |             |      |   |             | 
|At December 31                                                         |  |             | 429  |   |             | 



| | (b) | The components of deferred tax assets / (liabilities) recognized are analyzed as follows:
| | --- | -----------------------------------------------------------------------------------------



|                                |  | 2012        |       |  | 2011        | 
|------------------------------- |  | ----------- | ----- |  | ----------- | 
|                                |  | RMB million |       |  | RMB million | 
|                                |  |             |       |  |             | 
|Deferred tax assets:            |  |             |       |  |             | 
|                                |  |             |       |  |             | 
|Accrued expenses                |  |             | 1,015 |  |             | 
|                                |  |             |       |  |             | 
|Deferred revenue                |  |             | 106   |  |             | 
|                                |  |             |       |  |             | 
|Provision for impairment losses |  |             | 345   |  |             | 
|                                |  |             |       |  |             | 
|Others                          |  |             | 47    |  |             | 
|                                |  |             |       |  |             | 
|Total deferred tax assets       |  |             | 1,513 |  |             | 



F-47







| | 26 | Deferred tax assets / (liabilities) (continued)
| | -- | -----------------------------------------------



| | (b) | The components of deferred tax assets / (liabilities) recognized are analyzed as follows:
(continued)
| | --- | -----------------------------------------------------------------------------------------------------



|Deferred tax liabilities:                                     |  |  |        |   |  |  |      |  
|------------------------------------------------------------- |  |  | ------ | - |  |  | ---- | -
|                                                              |  |  |        |   |  |  |      |  
|Accrued expenses                                              |  |  | (319   | ) |  |  | (270 | )
|                                                              |  |  |        |   |  |  |      |  
|Depreciation allowances in excess of the related depreciation |  |  | (643   | ) |  |  | (591 | )
|                                                              |  |  |        |   |  |  |      |  
|Change in fair value of available-for-sale equity securities  |  |  | (11    | ) |  |  | (10  | )
|                                                              |  |  |        |   |  |  |      |  
|Others                                                        |  |  | (111   | ) |  |  | (102 | )
|                                                              |  |  |        |   |  |  |      |  
|Total deferred tax liabilities                                |  |  | (1,084 | ) |  |  | (973 | )
|                                                              |  |  |        |   |  |  |      |  
|Net deferred tax assets                                       |  |  | 429    |   |  |  | 671  |  



|                                                                                            |  | 2012        |       |   | 2011        | 
|------------------------------------------------------------------------------------------- |  | ----------- | ----- | - | ----------- | 
|                                                                                            |  | RMB million |       |   | RMB million | 
|                                                                                            |  |             |       |   |             | 
|Net deferred tax assets recognized in the consolidated statement of financial position      |  |             | 1,223 |   |             | 
|                                                                                            |  |             |       |   |             | 
|Net deferred tax liabilities recognized in the consolidated statement of financial position |  |             | (794  | ) |             | 
|                                                                                            |  |             |       |   |             | 
|                                                                                            |  |             | 429   |   |             | 



F-48







| | 26 | Deferred tax assets / (liabilities) (continued)
| | -- | -----------------------------------------------



| | (c) | Deferred tax assets not recognized
| | --- | ----------------------------------



At December 31, 2012, deferred
tax assets were not recognized in relation to certain unused tax losses and other deductible temporary differences. The unrecognized
unused tax losses and deductible temporary differences are analyzed as follows:



|                                        |  | 2012        |     |  | 2011        | 
|--------------------------------------- |  | ----------- | --- |  | ----------- | 
|                                        |  | RMB million |     |  | RMB million | 
|                                        |  |             |     |  |             | 
|Tax losses                              |  |             | 240 |  |             | 
|                                        |  |             |     |  |             | 
|Other deductible temporary differences: |  |             |     |  |             | 
|                                        |  |             |     |  |             | 
|- Accrued expenses                      |  |             | 97  |  |             | 
|                                        |  |             |     |  |             | 
|                                        |  |             | 337 |  |             | 



At December 31, 2012, the Group’s
deductible temporary differences amounting to RMB97 million (2011: RMB87 million) have not been recognized as deferred tax assets
as it was determined by management that it is not probable that future taxable profits will be available for these deductible temporary
differences to reverse in the foreseeable future.



Tax losses in the PRC are available
for carrying forward to set off future assessable income for a maximum period of five years. The Group’s unused tax losses
of RMB240 million (2011: RMB365 million) have not been recognized as deferred tax assets, as it was determined by management that
it is not probable that future taxable profits against which the losses can be utilized will be available before they expire. The
expiry dates of unrecognized unused tax losses are analyzed as follows:



|             |  | 2012        |     |  | 2011        | 
|------------ |  | ----------- | --- |  | ----------- | 
|             |  | RMB million |     |  | RMB million | 
|             |  |             |     |  |             | 
|Expiring in: |  |             |     |  |             | 
|             |  |             |     |  |             | 
|2013         |  |             | 92  |  |             | 
|             |  |             |     |  |             | 
|2014         |  |             | 131 |  |             | 
|             |  |             |     |  |             | 
|2015         |  |             | -   |  |             | 
|             |  |             |     |  |             | 
|2016         |  |             | 11  |  |             | 
|             |  |             |     |  |             | 
|2017         |  |             | 6   |  |             | 
|             |  |             |     |  |             | 
|             |  |             | 240 |  |             | 



F-49







| | 27 | Other assets
| | -- | ------------



|                                          |  |               |     |   | Prepayment    |  |     |             |  |  |             |  
|----------------------------------------- |  | ------------- | --- | - | ------------- |  | --- | ----------- |  |  | ----------- | -
|                                          |  |               |     |   | for exclusive |  |     |             |  |  |             |  
|                                          |  | Lump sum      |     |   | use right of  |  |     |             |  |  |             |  
|                                          |  | housing       |     |   | an airport    |  |     |             |  |  |             |  
|                                          |  | benefits      |     |   | terminal      |  |     | Others      |  |  | Total       |  
|                                          |  | RMB million   |     |   | RMB million   |  |     | RMB million |  |  | RMB million |  
|                                          |  |               |     |   |               |  |     |             |  |  |             |  
|                                          |  | Note 45(b)(i) |     |   |               |  |     |             |  |  |             |  
|                                          |  |               |     |   |               |  |     |             |  |  |             |  
|At January 1, 2011                        |  |               | 40  |   |               |  | 290 |             |  |  | 196         |  
|Additions                                 |  |               | -   |   |               |  | -   |             |  |  | 46          |  
|Transferred from construction in progress |  |               | -   |   |               |  | -   |             |  |  | 33          |  
|Amortization for the year                 |  |               | (26 | ) |               |  | (10 | )           |  |  | (69         | )
|At December 31, 2011                      |  |               | 14  |   |               |  | 280 |             |  |  | 206         |  
|                                          |  |               |     |   |               |  |     |             |  |  |             |  
|At January 1, 2012                        |  |               | 14  |   |               |  | 280 |             |  |  | 206         |  
|Additions                                 |  |               | -   |   |               |  | -   |             |  |  | 36          |  
|Transferred from construction in progress |  |               | -   |   |               |  | -   |             |  |  | 56          |  
|Amortization for the year                 |  |               | (14 | ) |               |  | (10 | )           |  |  | (82         | )
|Disposals                                 |  |               | -   |   |               |  | -   |             |  |  | (6          | )
|At December 31, 2012                      |  |               | -   |   |               |  | 270 |             |  |  | 210         |  





| | 28 | Inventories
| | -- | -----------



| | (a) | Inventories in the consolidated statement of financial position comprise:
| | --- | -------------------------------------------------------------------------



|                                                 |  | 2012        |       |  | 2011        | 
|------------------------------------------------ |  | ----------- | ----- |  | ----------- | 
|                                                 |  | RMB million |       |  | RMB million | 
|                                                 |  |             |       |  |             | 
|Expendable spare parts and maintenance materials |  |             | 1,542 |  |             | 
|                                                 |  |             |       |  |             | 
|Other supplies                                   |  |             | 166   |  |             | 
|                                                 |  |             |       |  |             | 
|                                                 |  |             | 1,708 |  |             | 



| | (b) | The analysis of the amount of inventories recognized as an expense and included in the consolidated
income statement is as follows:
| | --- | -----------------------------------------------------------------------------------------------------------------------------------



|                            |  | 2012        |       |  | 2011        |  |       | 2010        | 
|--------------------------- |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                            |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                            |  |             |       |  |             |  |       |             | 
|Consumption                 |  |             | 1,614 |  |             |  | 1,134 |             | 
|                            |  |             |       |  |             |  |       |             | 
|Written-down of inventories |  |             | -     |  |             |  | 141   |             | 
|                            |  |             |       |  |             |  |       |             | 
|                            |  |             | 1,614 |  |             |  | 1,275 |             | 



Certain expendable spare parts
and maintenance materials have been written down as a result of fleet adjustments in prior years (Note 6).



F-50







| | 29 | Trade receivables
| | -- | -----------------



|                                   |  | 2012        |       |   | 2011        | 
|---------------------------------- |  | ----------- | ----- | - | ----------- | 
|                                   |  | RMB million |       |   | RMB million | 
|                                   |  |             |       |   |             | 
|Trade receivables                  |  |             | 1,879 |   |             | 
|                                   |  |             |       |   |             | 
|Less: allowance for doubtful debts |  |             | (26   | ) |             | 
|                                   |  |             |       |   |             | 
|                                   |  |             | 1,853 |   |             | 



| | (a) | Ageing analysis
| | --- | ---------------



Credit terms granted by the Group
to sales agents and other customers generally range from one to three months. An ageing analysis of trade receivables, net of allowance
for doubtful debts, is set out below:



|                                           |  | 2012        |       |  | 2011        | 
|------------------------------------------ |  | ----------- | ----- |  | ----------- | 
|                                           |  | RMB million |       |  | RMB million | 
|                                           |  |             |       |  |             | 
|Within 1 month                             |  |             | 1,519 |  |             | 
|                                           |  |             |       |  |             | 
|More than 1 month but less than 3 months   |  |             | 304   |  |             | 
|                                           |  |             |       |  |             | 
|More than 3 months but less than 12 months |  |             | 29    |  |             | 
|                                           |  |             |       |  |             | 
|More than 1 year                           |  |             | 1     |  |             | 
|                                           |  |             |       |  |             | 
|                                           |  |             | 1,853 |  |             | 



All of the trade receivables
are expected to be recovered within one year.



| | (b) | Impairment of trade receivables
| | --- | -------------------------------



Impairment loss in respect of
trade receivables is recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in
which case the impairment loss is written off against trade receivables directly (Note 2(l)).



The movements in the allowance
for doubtful debts during the year are as follows:



|                                  |  | 2012        |    |   | 2011        | 
|--------------------------------- |  | ----------- | -- | - | ----------- | 
|                                  |  | RMB million |    |   | RMB million | 
|                                  |  |             |    |   |             | 
|At January 1                      |  |             | 29 |   |             | 
|                                  |  |             |    |   |             | 
|Impairment loss recognized        |  |             | 8  |   |             | 
|                                  |  |             |    |   |             | 
|Impairment loss written back      |  |             | (7 | ) |             | 
|                                  |  |             |    |   |             | 
|Uncollectible amounts written off |  |             | (4 | ) |             | 
|                                  |  |             |    |   |             | 
|At December 31                    |  |             | 26 |   |             | 



F-51







| | 29 | Trade receivables (continued)
| | -- | -----------------------------



| | (c) | Trade receivables that are not impaired
| | --- | ---------------------------------------



The ageing analysis of trade
receivables that are neither individually nor collectively considered to be impaired is as follows:



|                              |  | 2012        |       |  | 2011        | 
|----------------------------- |  | ----------- | ----- |  | ----------- | 
|                              |  | RMB million |       |  | RMB million | 
|                              |  |             |       |  |             | 
|Neither past due nor impaired |  |             | 1,823 |  |             | 



Trade receivables that were neither
past due nor impaired relate to customers for whom there was no recent history of default.



| | 30 | Other receivables
| | -- | -----------------



As at December 31, 2012, other
receivables included the short-term wealth management product purchased by Xiamen Airlines from a state-owned commercial bank.
The principal of the outstanding wealth management product was RMB500 million as at December 31, 2012 (2011: RMB3,500 million),
which subsequently matured in January 2013.



| | 31 | Cash and cash equivalents
| | -- | -------------------------



| | (a) | Cash and cash equivalents comprise:
| | --- | -----------------------------------



|                                                                              |  | 2012        |        |  | 2011        | 
|----------------------------------------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                                                              |  | RMB million |        |  | RMB million | 
|                                                                              |  |             |        |  |             | 
|Deposits with banks and other financial institution                           |  |             | 6,454  |  |             | 
|                                                                              |  |             |        |  |             | 
|Cash at bank and in hand                                                      |  |             | 3,628  |  |             | 
|                                                                              |  |             |        |  |             | 
|Cash and cash equivalents in the consolidated statement of financial position |  |             | 10,082 |  |             | 



Southern Airlines Group Finance
Company Limited (“SA Finance”) is a PRC authorized financial institution controlled by CSAHC and is an associate of
the Group. In accordance with the financial agreement between the Company and SA Finance dated May 22, 1997, as revised and amended,
all of the Group’s deposits accepted by SA Finance would be simultaneously placed with several designated major PRC banks
by SA Finance.



As at December 31, 2012, the
Group’s deposits with SA Finance amounted to RMB2,307 million (2011: RMB2,493 million) (Note 44(d)(iii)).



F-52







| | 31 | Cash and cash equivalents (continued)
| | -- | -------------------------------------



| | (b) | Reconciliation of profit before taxation to cash generated from operating activities:
| | --- | -------------------------------------------------------------------------------------



|                                                                                  |  |  | Note  |  |  | 2012        |        |   | 2011        |  |        | 2010        | 
|--------------------------------------------------------------------------------- |  |  | ----- |  |  | ----------- | ------ | - | ----------- |  | ------ | ----------- | 
|                                                                                  |  |  |       |  |  | RMB million |        |   | RMB million |  |        | RMB million | 
|                                                                                  |  |  |       |  |  |             |        |   |             |  |        |             | 
|Profit before taxation                                                            |  |  |       |  |  |             | 4,738  |   |             |  | 6,930  |             | 
|Depreciation of property, plant and equipment                                     |  |  | 20    |  |  |             | 8,202  |   |             |  | 7,640  |             | 
|Other amortization                                                                |  |  | 11    |  |  |             | 136    |   |             |  | 122    |             | 
|Amortization of deferred benefits and gains                                       |  |  | 11    |  |  |             | (74    | ) |             |  | (73    | )           | 
|Impairment losses on property, plant and equipment                                |  |  | 20    |  |  |             | -      |   |             |  | 584    |             | 
|Share of profits of associates                                                    |  |  | 22    |  |  |             | (317   | ) |             |  | (456   | )           | 
|Share of profits of jointly controlled entities                                   |  |  | 23    |  |  |             | (121   | ) |             |  | (125   | )           | 
|(Gain) / loss on sale of property, plant and equipment, net and lease prepayments |  |  | 13    |  |  |             | (16    | ) |             |  | (145   | )           | 
|Other non-operating income                                                        |  |  | 15    |  |  |             | (75    | ) |             |  | (129   | )           | 
|Interest income                                                                   |  |  |       |  |  |             | (235   | ) |             |  | (179   | )           | 
|Interest expense                                                                  |  |  | 14    |  |  |             | 1,376  |   |             |  | 1,067  |             | 
|Dividend income from other investments in equity securities                       |  |  | 24/25 |  |  |             | (12    | ) |             |  | (10    | )           | 
|Exchange gain, net                                                                |  |  |       |  |  |             | (308   | ) |             |  | (2,882 | )           | 
|Increase in inventories                                                           |  |  |       |  |  |             | (90    | ) |             |  | (263   | )           | 
|Decrease / (increase) in trade receivables                                        |  |  |       |  |  |             | 292    |   |             |  | (155   | )           | 
|(Increase) / decrease in other receivables                                        |  |  |       |  |  |             | (206   | ) |             |  | 283    |             | 
|(Increase) / decrease in prepaid expenses and other current assets                |  |  |       |  |  |             | (42    | ) |             |  | 4      |             | 
|Increase / (decrease)  in net amounts due to related companies                    |  |  |       |  |  |             | 114    |   |             |  | (220   | )           | 
|(Decrease) / increase in trade payables                                           |  |  |       |  |  |             | (1,022 | ) |             |  | 1,041  |             | 
|(Decrease) / increase in sales in advance of carriage                             |  |  |       |  |  |             | (445   | ) |             |  | 1,695  |             | 
|Increase in accrued expenses                                                      |  |  |       |  |  |             | 2,325  |   |             |  | 113    |             | 
|(Decrease) / increase in other liabilities                                        |  |  |       |  |  |             | (314   | ) |             |  | 554    |             | 
|Increase in deferred revenue                                                      |  |  |       |  |  |             | 765    |   |             |  | 737    |             | 
|(Decrease) / increase in provision for major overhauls                            |  |  |       |  |  |             | (276   | ) |             |  | 5      |             | 
|Decrease in provision for early retirement benefits                               |  |  |       |  |  |             | (31    | ) |             |  | (29    | )           | 
|Increase in deferred benefits and gains                                           |  |  |       |  |  |             | 111    |   |             |  | 78     |             | 
|                                                                                  |  |  |       |  |  |             |        |   |             |  |        |             | 
|Cash generated from operating activities                                          |  |  |       |  |  |             | 14,475 |   |             |  | 16,187 |             | 



F-53







| | 32 | Bank and other loans
| | -- | --------------------



| | (a) | At December 31, 2012, bank and other loans were repayable as follows:
| | --- | ---------------------------------------------------------------------



|                                 |  | 2012        |        |  | 2011        | 
|-------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                 |  | RMB million |        |  | RMB million | 
|                                 |  |             |        |  |             | 
|Within 1 year or on demand       |  |             | 21,899 |  |             | 
|                                 |  |             |        |  |             | 
|After 1 year but within 2 years  |  |             | 7,317  |  |             | 
|                                 |  |             |        |  |             | 
|After 2 years but within 5 years |  |             | 14,833 |  |             | 
|                                 |  |             |        |  |             | 
|After 5 years                    |  |             | 8,046  |  |             | 
|                                 |  |             |        |  |             | 
|                                 |  |             | 30,196 |  |             | 
|                                 |  |             |        |  |             | 
|                                 |  |             | 52,095 |  |             | 



| | (b) | At December 31, 2012, bank and other loans are analyzed as follows:
| | --- | -------------------------------------------------------------------



|                                                                                          |  | 2012        |        |  | 2011        | 
|----------------------------------------------------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                                                                          |  | RMB million |        |  | RMB million | 
|                                                                                          |  |             |        |  |             | 
|Short-term bank loans                                                                     |  |             | 10,719 |  |             | 
|                                                                                          |  |             |        |  |             | 
|Long-term bank and other loans due within one year (classified as current liabilities)    |  |             | 11,180 |  |             | 
|                                                                                          |  |             |        |  |             | 
|                                                                                          |  |             | 21,899 |  |             | 
|                                                                                          |  |             |        |  |             | 
|Long-term bank and other loans due after one year (classified as non-current liabilities) |  |             | 30,196 |  |             | 
|                                                                                          |  |             |        |  |             | 
|                                                                                          |  |             | 52,095 |  |             | 
|                                                                                          |  |             |        |  |             | 
|Representing:                                                                             |  |             |        |  |             | 
|                                                                                          |  |             |        |  |             | 
|Bank loans                                                                                |  |             | 52,092 |  |             | 
|                                                                                          |  |             |        |  |             | 
|Other loans                                                                               |  |             | 3      |  |             | 
|                                                                                          |  |             |        |  |             | 
|                                                                                          |  |             | 52,095 |  |             | 



| | (c) | As at December 31, 2012, the Group’s weighted average interest rates on short-term borrowings
were 2.47% per annum (2011: 3.09% per annum).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------



F-54







| | 32 | Bank and other loans (continued)
| | -- | --------------------------------



| | (d) | Details of bank and other loans with original maturity over one year are as follows:
| | --- | ------------------------------------------------------------------------------------



|                                                                                                                                                            |  | 2012        |         |   | 2011        | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | - | ----------- | 
|                                                                                                                                                            |  | RMB million |         |   | RMB million | 
|                                                                                                                                                            |  |             |         |   |             | 
|Renminbi denominated loans                                                                                                                                  |  |             |         |   |             | 
|                                                                                                                                                            |  |             |         |   |             | 
|Non-interest bearing loan from a municipal government authority                                                                                             |  |             | 3       |   |             | 
|                                                                                                                                                            |  |             |         |   |             | 
|Fixed interest rate at 4.86% per annum as at December 31, 2012, with maturities through 2013                                                                |  |             | 60      |   |             | 
|                                                                                                                                                            |  |             |         |   |             | 
|Floating interest rates 90%, 95%, 100% of benchmark interest rate (stipulated by PBOC) as at December 31, 2012, with maturities through 2015                |  |             | 635     |   |             | 
|                                                                                                                                                            |  |             |         |   |             | 
|United States Dollars denominated loans                                                                                                                     |  |             |         |   |             | 
|                                                                                                                                                            |  |             |         |   |             | 
|Fixed interest rates ranging from 3.00% to 3.26% per annum as at December 31, 2012, with maturities through 2017                                            |  |             | 423     |   |             | 
|                                                                                                                                                            |  |             |         |   |             | 
|Floating interest rates ranging from one-month LIBOR + 0.80% to one-month LIBOR + 2.20% per annum as at December 31, 2012, with maturities through 2020     |  |             | 2,156   |   |             | 
|                                                                                                                                                            |  |             |         |   |             | 
|Floating interest rates ranging from three-month LIBOR + 0.59% to three-month LIBOR + 3.80% per annum as at December 31, 2012, with maturities through 2022 |  |             | 31,018  |   |             | 
|                                                                                                                                                            |  |             |         |   |             | 
|Floating interest rates ranging from six-month LIBOR + 0.30% to six-month LIBOR + 2.80% per annum as at December 31, 2012, with maturities through 2021     |  |             | 7,081   |   |             | 
|                                                                                                                                                            |  |             |         |   |             | 
|                                                                                                                                                            |  |             | 41,376  |   |             | 
|                                                                                                                                                            |  |             |         |   |             | 
|Less: loans due within one year classified as current liabilities                                                                                           |  |             | (11,180 | ) |             | 
|                                                                                                                                                            |  |             |         |   |             | 
|                                                                                                                                                            |  |             | 30,196  |   |             | 



F-55







| | 32 | Bank and other loans (continued)
| | -- | --------------------------------



| | (e) | The remaining contractual maturities at the end of the financial year of the Group’s bank
and other loans, which are based on contractual undiscounted cash flows (including interest payments computed using contractual
rates, or if floating, based on rates current at the end of the financial year) and the earliest date the Group can be required
to pay, are as follows:
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                              |  | 2012        |        |  | 2011        | 
|------------------------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                                              |  | RMB million |        |  | RMB million | 
|                                                              |  |             |        |  |             | 
|Contractual undiscounted cash flows                           |  |             |        |  |             | 
|                                                              |  |             |        |  |             | 
|Within 1 year                                                 |  |             | 22,865 |  |             | 
|                                                              |  |             |        |  |             | 
|After 1 year but within 2 years                               |  |             | 7,906  |  |             | 
|                                                              |  |             |        |  |             | 
|After 2 years but within 5 years                              |  |             | 15,779 |  |             | 
|                                                              |  |             |        |  |             | 
|After 5 years                                                 |  |             | 8,386  |  |             | 
|                                                              |  |             |        |  |             | 
|                                                              |  |             | 54,936 |  |             | 
|                                                              |  |             |        |  |             | 
|Consolidated statement of financial position carrying amounts |  |             | 52,095 |  |             | 



| | (f) | The Group has significant bank and other loans balances as well as obligations under finance leases
(Note 33) which are denominated in US dollars as at December 31, 2012. The net exchange gain of RMB267 million (2011: RMB2,755
million; 2010: RMB1,746 million) recorded by the Group was mainly attributable to the exchange gain arising from translation of
bank and other loans balances and finance lease obligations denominated in US dollars. The foreign currency risk is further discussed
in Note 48(c).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (g) | The analysis of the carrying amounts of bank and other loans is as follows:
| | --- | ---------------------------------------------------------------------------



|                        |  |  | Note      |  |  | 2012        |        |  | 2011        | 
|----------------------- |  |  | --------- |  |  | ----------- | ------ |  | ----------- | 
|                        |  |  |           |  |  | RMB million |        |  | RMB million | 
|                        |  |  |           |  |  |             |        |  |             | 
|Bank and other loans    |  |  |           |  |  |             |        |  |             | 
|                        |  |  |           |  |  |             |        |  |             | 
|-Secured                |  |  | (i)       |  |  |             | 23,961 |  |             | 
|                        |  |  |           |  |  |             |        |  |             | 
|-Secured and guaranteed |  |  | (i), (ii) |  |  |             | 94     |  |             | 
|                        |  |  |           |  |  |             |        |  |             | 
|-Unsecured              |  |  |           |  |  |             | 28,040 |  |             | 
|                        |  |  |           |  |  |             |        |  |             | 
|                        |  |  |           |  |  |             | 52,095 |  |             | 



Notes:



| | (i) | As at December 31, 2012, bank and other loans of the Group totaling RMB24,055 million (2011: RMB23,653
million) were secured by mortgages over certain of the Group’s aircraft with aggregate carrying amounts of RMB29,969 million
(2011: RMB29,815 million).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As at December 31, 2011, a long-term
loan due within one year of the Group amounting to RMB48 million was secured by pledged bank deposits of RMB72 million. The loan
was repaid in August 2012 and the pledged deposits were released accordingly.



F-56







| | 32 | Bank and other loans (continued)
| | -- | --------------------------------



| | (g) | The analysis of the carrying amounts of bank and other loans is as follows (continued):
| | --- | ---------------------------------------------------------------------------------------



Notes (continued):



| | (ii) | The following bank and other loans secured by certain aircraft mentioned in Note (i) are also guaranteed
by CSAHC:
| | ---- | ------------------------------------------------------------------------------------------------------------------



|                   |  | 2012        |    |  | 2011        | 
|------------------ |  | ----------- | -- |  | ----------- | 
|                   |  | RMB million |    |  | RMB million | 
|                   |  |             |    |  |             | 
|Guarantor          |  |             |    |  |             | 
|                   |  |             |    |  |             | 
|CSAHC (Note 44(e)) |  |             | 94 |  |             | 



| | (h) | As at December 31, 2012, loans to the Group from SA finance amounted to RMB426 million (2011: RMB480
million) (Note 44(d)(i)).
| | --- | ------------------------------------------------------------------------------------------------------------------------------



| | 33 | Obligations under finance leases
| | -- | --------------------------------



The Group has commitments under
finance lease agreements in respect of aircraft and related equipment. The majority of these leases have terms of 10 to 12 years
expiring during the years 2015 to 2024. As at December 31, 2012, future payments under these finance leases are as follows:



|                                                                     |  | 2012         |        |   | 2011     | 
|-------------------------------------------------------------------- |  | ------------ | ------ | - | -------- | 
|                                                                     |  | Present      |        |   |          | 
|                                                                     |  | value of the |        |   | Total    | 
|                                                                     |  | minimum      |        |   | minimum  | 
|                                                                     |  | lease        |        |   | lease    | 
|                                                                     |  | payments     |        |   | payments | 
|                                                                     |  | RMB          |        |   | RMB      | 
|                                                                     |  | million      |        |   | million  | 
|                                                                     |  |              |        |   |          | 
|Within 1 year                                                        |  |              | 2,494  |   |          | 
|After 1 year but within 2 years                                      |  |              | 2,322  |   |          | 
|After 2 years but within 5 years                                     |  |              | 8,279  |   |          | 
|After 5 years                                                        |  |              | 8,770  |   |          | 
|                                                                     |  |              |        |   |          | 
|                                                                     |  |              | 21,865 |   |          | 
|                                                                     |  |              |        |   |          | 
|Less:  balance due within one year classified as current liabilities |  |              | (2,494 | ) |          | 
|                                                                     |  |              |        |   |          | 
|                                                                     |  |              | 19,371 |   |          | 



F-57







| | 33 | Obligations under finance leases (continued)
| | -- | --------------------------------------------



Details of obligations under
finance leases are as follows:



|                                                                                                                              |  | 2012        |        |  | 2011        | 
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                                                                                                              |  | RMB million |        |  | RMB million | 
|                                                                                                                              |  |             |        |  |             | 
|United States Dollars denominated obligations                                                                                 |  |             |        |  |             | 
|                                                                                                                              |  |             |        |  |             | 
|Fixed interest rates ranging from 3.43% to 6.01% per annum as at December 31, 2012                                            |  |             | 4,962  |  |             | 
|                                                                                                                              |  |             |        |  |             | 
|Floating interest rates ranging from three-month LIBOR + 0.55% to three-month LIBOR + 3.00% per annum as at December 31, 2012 |  |             | 8,724  |  |             | 
|                                                                                                                              |  |             |        |  |             | 
|Floating interest rates ranging from six-month LIBOR + 0.03% to six-month LIBOR + 2.85% per annum as at December 31, 2012     |  |             | 5,891  |  |             | 
|                                                                                                                              |  |             |        |  |             | 
|Singapore Dollars denominated obligations                                                                                     |  |             |        |  |             | 
|                                                                                                                              |  |             |        |  |             | 
|Floating interest rate at six-month SIBOR + 1.44% per annum as at December 31, 2012                                           |  |             | 553    |  |             | 
|                                                                                                                              |  |             |        |  |             | 
|Japanese Yen denominated obligations                                                                                          |  |             |        |  |             | 
|                                                                                                                              |  |             |        |  |             | 
|Floating interest rate at three-month TIBOR + 0.75% to three-month TIBOR + 1.90% per annum as at December 31, 2012            |  |             | 1,213  |  |             | 
|                                                                                                                              |  |             |        |  |             | 
|Floating interest rate at six-month LIBOR + 3.00% per annum as at December 31, 2012                                           |  |             | 522    |  |             | 
|                                                                                                                              |  |             |        |  |             | 
|                                                                                                                              |  |             | 21,865 |  |             | 



Charges over the assets concerned
and relevant insurance policies are provided to the lessors as collateral and security. As at December 31, 2012, certain of the
Group’s aircraft with carrying amounts of RMB30,569 million (2011: RMB23,247 million) secured finance lease obligations totaling
RMB21,865 million (2011: RMB15,837 million).



F-58







| | 34 | Trade payables
| | -- | --------------



|                  |  | 2012        |       |  | 2011        | 
|----------------- |  | ----------- | ----- |  | ----------- | 
|                  |  | RMB million |       |  | RMB million | 
|                  |  |             |       |  |             | 
|Bills payable     |  |             | -     |  |             | 
|                  |  |             |       |  |             | 
|Accounts payables |  |             | 1,825 |  |             | 
|                  |  |             |       |  |             | 
|                  |  |             | 1,825 |  |             | 



The following is the ageing analysis of trade payables :



|                                          |  | 2012        |       |  | 2011        | 
|----------------------------------------- |  | ----------- | ----- |  | ----------- | 
|                                          |  | RMB million |       |  | RMB million | 
|                                          |  |             |       |  |             | 
|Within 1 month                            |  |             | 1,287 |  |             | 
|                                          |  |             |       |  |             | 
|More than 1 month but less than 3 months  |  |             | 309   |  |             | 
|                                          |  |             |       |  |             | 
|More than 3 months but less than 6 months |  |             | 185   |  |             | 
|                                          |  |             |       |  |             | 
|More than 6 months but less than 1 year   |  |             | 8     |  |             | 
|                                          |  |             |       |  |             | 
|More than 1 year                          |  |             | 36    |  |             | 
|                                          |  |             |       |  |             | 
|                                          |  |             | 1,825 |  |             | 



| | 35 | Deferred revenue
| | -- | ----------------



|                    |  | 2012        |       |  | 2011        | 
|------------------- |  | ----------- | ----- |  | ----------- | 
|                    |  | RMB million |       |  | RMB million | 
|                    |  |             |       |  |             | 
|Current portion     |  |             | 1,201 |  |             | 
|                    |  |             |       |  |             | 
|Non-current portion |  |             | 1,649 |  |             | 
|                    |  |             |       |  |             | 
|                    |  |             | 2,850 |  |             | 



Deferred revenue represents the
unredeemed credits under the frequent flyer award programs.



F-59







| | 36 | Amounts due from / to related companies
| | -- | ---------------------------------------



| | (a) | Amounts due from related companies
| | --- | ----------------------------------



|                            |  |  | Note  |  |  | 2012        |     |  | 2011        | 
|--------------------------- |  |  | ----- |  |  | ----------- | --- |  | ----------- | 
|                            |  |  |       |  |  | RMB million |     |  | RMB million | 
|                            |  |  |       |  |  |             |     |  |             | 
|CSAHC and its affiliates    |  |  |       |  |  |             | 122 |  |             | 
|                            |  |  |       |  |  |             |     |  |             | 
|Associates                  |  |  |       |  |  |             | 29  |  |             | 
|                            |  |  |       |  |  |             |     |  |             | 
|Jointly controlled entities |  |  |       |  |  |             | 90  |  |             | 
|                            |  |  |       |  |  |             |     |  |             | 
|Other related company       |  |  |       |  |  |             | 6   |  |             | 
|                            |  |  |       |  |  |             |     |  |             | 
|                            |  |  | 44(c) |  |  |             | 247 |  |             | 



The amounts due from related
companies are unsecured, interest free and have no fixed terms of repayment. They are expected to be recovered within one year.



| | (b) | Amounts due to related companies
| | --- | --------------------------------



|                                     |  |  | Note  |  |  | 2012        |     |  | 2011        | 
|------------------------------------ |  |  | ----- |  |  | ----------- | --- |  | ----------- | 
|                                     |  |  |       |  |  | RMB million |     |  | RMB million | 
|                                     |  |  |       |  |  |             |     |  |             | 
|CSAHC and its affiliates             |  |  |       |  |  |             | 109 |  |             | 
|                                     |  |  |       |  |  |             |     |  |             | 
|A jointly controlled entity of CSAHC |  |  |       |  |  |             | 188 |  |             | 
|                                     |  |  |       |  |  |             |     |  |             | 
|An associate                         |  |  |       |  |  |             | -   |  |             | 
|                                     |  |  |       |  |  |             |     |  |             | 
|Jointly controlled entities          |  |  |       |  |  |             | 11  |  |             | 
|                                     |  |  |       |  |  |             |     |  |             | 
|Other related company                |  |  |       |  |  |             | -   |  |             | 
|                                     |  |  |       |  |  |             |     |  |             | 
|                                     |  |  | 44(c) |  |  |             | 308 |  |             | 



The amounts due to related companies
are unsecured, interest free and have no fixed terms of repayment. They are expected to be settled within one year.







| | 37 | Accrued expenses
| | -- | ----------------



|                                                  |  | 2012        |        |  | 2011        | 
|------------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                                  |  | RMB million |        |  | RMB million | 
|                                                  |  |             |        |  |             | 
|Jet fuel costs                                    |  |             | 2,217  |  |             | 
|                                                  |  |             |        |  |             | 
|Air catering expenses                             |  |             | 293    |  |             | 
|                                                  |  |             |        |  |             | 
|Salaries and welfare                              |  |             | 2,222  |  |             | 
|                                                  |  |             |        |  |             | 
|Repairs and maintenance                           |  |             | 2,845  |  |             | 
|                                                  |  |             |        |  |             | 
|Provision for major overhauls (Note 39)           |  |             | 1,010  |  |             | 
|                                                  |  |             |        |  |             | 
|Provision for early retirement benefits (Note 40) |  |             | 38     |  |             | 
|                                                  |  |             |        |  |             | 
|Landing and navigation fees                       |  |             | 2,084  |  |             | 
|                                                  |  |             |        |  |             | 
|Computer reservation services                     |  |             | 596    |  |             | 
|                                                  |  |             |        |  |             | 
|Interest expense                                  |  |             | 156    |  |             | 
|                                                  |  |             |        |  |             | 
|Others                                            |  |             | 339    |  |             | 
|                                                  |  |             |        |  |             | 
|                                                  |  |             | 11,800 |  |             | 



F-60







| | 38 | Other liabilities
| | -- | -----------------



|                                                                                                 |  | 2012        |       |  | 2011        | 
|------------------------------------------------------------------------------------------------ |  | ----------- | ----- |  | ----------- | 
|                                                                                                 |  | RMB million |       |  | RMB million | 
|                                                                                                 |  |             |       |  |             | 
|CAAC Infrastructure Development Fund, airport construction
    surcharge and airport tax payable |  |             | 1,137 |  |             | 
|                                                                                                 |  |             |       |  |             | 
|Payable for property, plant and equipment                                                        |  |             | 763   |  |             | 
|                                                                                                 |  |             |       |  |             | 
|Advance payments received for chartered flights                                                  |  |             | 110   |  |             | 
|                                                                                                 |  |             |       |  |             | 
|Sales agent deposits                                                                             |  |             | 321   |  |             | 
|                                                                                                 |  |             |       |  |             | 
|Other taxes payable                                                                              |  |             | 351   |  |             | 
|                                                                                                 |  |             |       |  |             | 
|Others                                                                                           |  |             | 1,322 |  |             | 
|                                                                                                 |  |             |       |  |             | 
|                                                                                                 |  |             | 4,004 |  |             | 



| | 39 | Provision for major overhauls
| | -- | -----------------------------



Details of provision for major overhauls
in respect of aircraft held under operating leases are as follows:



|                                                                |  | 2012        |        |   | 2011        | 
|--------------------------------------------------------------- |  | ----------- | ------ | - | ----------- | 
|                                                                |  | RMB million |        |   | RMB million | 
|                                                                |  |             |        |   |             | 
|At January 1                                                    |  |             | 1,753  |   |             | 
|                                                                |  |             |        |   |             | 
|Additional provision made                                       |  |             | 562    |   |             | 
|                                                                |  |             |        |   |             | 
|Provision utilized                                              |  |             | (403   | ) |             | 
|                                                                |  |             |        |   |             | 
|At December 31                                                  |  |             | 1,912  |   |             | 
|                                                                |  |             |        |   |             | 
|Less:    current portion included in accrued expenses (Note 37) |  |             | (1,010 | ) |             | 
|                                                                |  |             |        |   |             | 
|                                                                |  |             | 902    |   |             | 



F-61







| | 40 | Provision for early retirement benefits
| | -- | ---------------------------------------



Details of provision for early retirement
benefits in respect of obligations to early retired employees are as follows:



|                                                               |  | 2012        |     |   | 2011        | 
|-------------------------------------------------------------- |  | ----------- | --- | - | ----------- | 
|                                                               |  | RMB million |     |   | RMB million | 
|                                                               |  |             |     |   |             | 
|At January 1                                                   |  |             | 136 |   |             | 
|                                                               |  |             |     |   |             | 
|Provision for the year (Note 12)                               |  |             | 20  |   |             | 
|                                                               |  |             |     |   |             | 
|Financial cost (Note 14)                                       |  |             | 8   |   |             | 
|                                                               |  |             |     |   |             | 
|Payments made during the year                                  |  |             | (62 | ) |             | 
|                                                               |  |             |     |   |             | 
|Effect of changes in discount rates                            |  |             | 2   |   |             | 
|                                                               |  |             |     |   |             | 
|At December 31                                                 |  |             | 104 |   |             | 
|                                                               |  |             |     |   |             | 
|Less:   current portion included in accrued expenses (Note 37) |  |             | (38 | ) |             | 
|                                                               |  |             |     |   |             | 
|                                                               |  |             | 66  |   |             | 



The Group has implemented an early retirement
plan for certain employees. The benefits of the early retirement plan are calculated based on factors including the remaining number
of years of service from the date of early retirement to the normal retirement date and the salary amount on the date of early
retirement of the employees. The present value of the future cash flows expected to be required to settle the obligations is recognized
as provision for early retirement benefits.





| | 41 | Deferred benefits and gains
| | -- | ---------------------------



|                                        |  | 2012        |       |  | 2011        | 
|--------------------------------------- |  | ----------- | ----- |  | ----------- | 
|                                        |  | RMB million |       |  | RMB million | 
|                                        |  |             |       |  |             | 
|Leases rebates (Note (i))               |  |             | 714   |  |             | 
|                                        |  |             |       |  |             | 
|Gains on sale and leaseback (Note (ii)) |  |             | 146   |  |             | 
|                                        |  |             |       |  |             | 
|Government grants                       |  |             | 121   |  |             | 
|                                        |  |             |       |  |             | 
|Others                                  |  |             | 30    |  |             | 
|                                        |  |             |       |  |             | 
|                                        |  |             | 1,011 |  |             | 



Notes:



| | (i) | The Company was granted cash rebates by the lessors under certain lease arrangements when it fulfilled
certain requirements. The rebates are deferred and amortized using the straight line method over the remaining lease terms.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | The Company entered into sale and leaseback transactions with certain third parties under operating
leases. The gains are deferred and amortized over the lease terms of the aircraft.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-62







| | 42 | Share capital and capital management
| | -- | ------------------------------------



| | (a) | Share capital
| | --- | -------------



|                                                 |  | 2012        |       |  | 2011        | 
|------------------------------------------------ |  | ----------- | ----- |  | ----------- | 
|                                                 |  | RMB million |       |  | RMB million | 
|                                                 |  |             |       |  |             | 
|Registered, issued and paid up capital:          |  |             |       |  |             | 
|                                                 |  |             |       |  |             | 
|123,900,000 domestic state-owned                 |  |             |       |  |             | 
|                                                 |  |             |       |  |             | 
|shares with selling restrictions of RMB1.00 each |  |             |       |  |             | 
|                                                 |  |             |       |  |             | 
|(2011: 845,050,000 shares of RMB1.00 each)       |  |             | 124   |  |             | 
|                                                 |  |             |       |  |             | 
|4,026,150,000 domestic state-owned               |  |             |       |  |             | 
|                                                 |  |             |       |  |             | 
|shares of RMB1.00 each                           |  |             |       |  |             | 
|                                                 |  |             |       |  |             | 
|(2011: 3,300,000,000 of RMB1.00 each)            |  |             | 4,026 |  |             | 
|                                                 |  |             |       |  |             | 
|2,872,600,000 A shares of RMB1.00 each           |  |             |       |  |             | 
|                                                 |  |             |       |  |             | 
|(2011: 2,877,600,000 shares of RMB1.00 each )    |  |             | 2,873 |  |             | 
|                                                 |  |             |       |  |             | 
|2,794,917,000  H shares of RMB1.00 each          |  |             |       |  |             | 
|                                                 |  |             |       |  |             | 
|(2011: 2,794,917,000 shares of RMB1.00 each)     |  |             | 2,795 |  |             | 
|                                                 |  |             |       |  |             | 
|                                                 |  |             | 9,818 |  |             | 



On August 20, 2009, the Company issued
721,150,000 A shares to CSAHC. These A shares were subject to a lock-up period to August 20, 2012 and became listed and tradable
since then.



On October 29, 2010, the Company issued
123,900,000 A shares to CSAHC and 1,377,600,000 A shares to certain third party investors for net cash considerations of RMB812
million and RMB9,026 million, respectively. The A shares issued to CSAHC and certain third party investors are subject to a lock-up
period to November 1, 2013 and November 1, 2011, respectively.



All the domestic state-owned, H and A shares
rank pari passu in all material respects.



| | (b) | Capital management
| | --- | ------------------



The Group’s primary objectives in
managing capital are to safeguard the Group’s ability to continue as a going concern, and to generate sufficient profit to
maintain growth and provide returns to its shareholders, by securing access to finance at a reasonable cost.





The Group manages the amount of capital
in proportion to risk and manages its debt portfolio in conjunction with projected financing requirements. The Group monitors capital
on the basis of the debt to equity ratio, which is calculated as net debt as a percentage of total equity where net debt is represented
by the aggregate of bank and other loans, obligations under finance leases, trade payables, sales in advance of carriage, amounts
due to related companies, accrued expenses and other liabilities less cash and cash equivalents and pledged bank deposits.



There was no change in the Group’s
approach to capital management during 2012 as compared with previous years. Neither the Company nor any of its subsidiaries are
subject to externally imposed capital requirements. The Group’s debt to equity ratio is 218% at December 31, 2012 (2011:
201%).



F-63







| | 43 | Reserves
| | -- | --------



|                                                             |  | 2012        |        |   | 2011        | 
|------------------------------------------------------------ |  | ----------- | ------ | - | ----------- | 
|                                                             |  | RMB million |        |   | RMB million | 
|                                                             |  |             |        |   |             | 
|Share premium                                                |  |             |        |   |             | 
|                                                             |  |             |        |   |             | 
|At January 1                                                 |  |             | 14,131 |   |             | 
|                                                             |  |             |        |   |             | 
|Capital injection into a subsidiary by a third party         |  |             | -      |   |             | 
|                                                             |  |             |        |   |             | 
|At December 31                                               |  |             | 14,131 |   |             | 
|                                                             |  |             |        |   |             | 
|Fair value reserve                                           |  |             |        |   |             | 
|                                                             |  |             |        |   |             | 
|At January 1                                                 |  |             | 21     |   |             | 
|                                                             |  |             |        |   |             | 
|Change in fair value of available-for-sale equity securities |  |             | 3      |   |             | 
|                                                             |  |             |        |   |             | 
|At December 31                                               |  |             | 24     |   |             | 
|                                                             |  |             |        |   |             | 
|Statutory surplus reserve (Note (a))                         |  |             |        |   |             | 
|                                                             |  |             |        |   |             | 
|At January 1                                                 |  |             | 847    |   |             | 
|                                                             |  |             |        |   |             | 
|Appropriations to reserves                                   |  |             | 132    |   |             | 
|                                                             |  |             |        |   |             | 
|At December 31                                               |  |             | 979    |   |             | 
|                                                             |  |             |        |   |             | 
|Discretionary surplus reserve                                |  |             |        |   |             | 
|                                                             |  |             |        |   |             | 
|At January 1 and at December 31                              |  |             | 77     |   |             | 
|                                                             |  |             |        |   |             | 
|Other reserve                                                |  |             |        |   |             | 
|                                                             |  |             |        |   |             | 
|At January 1                                                 |  |             | 158    |   |             | 
|                                                             |  |             |        |   |             | 
|Share of an associate’s reserves movement                    |  |             | 2      |   |             | 
|                                                             |  |             |        |   |             | 
|Government contributions (Note (c))                          |  |             | 10     |   |             | 
|                                                             |  |             |        |   |             | 
|At December 31                                               |  |             | 170    |   |             | 
|                                                             |  |             |        |   |             | 
|Retained profits / (accumulated losses)                      |  |             |        |   |             | 
|                                                             |  |             |        |   |             | 
|At January 1                                                 |  |             | 7,123  |   |             | 
|                                                             |  |             |        |   |             | 
|Profit for the year                                          |  |             | 2,619  |   |             | 
|                                                             |  |             |        |   |             | 
|Appropriations to reserves                                   |  |             | (132   | ) |             | 
|                                                             |  |             |        |   |             | 
|Dividends approved in respect of the previous year           |  |             | (1,964 | ) |             | 
|                                                             |  |             |        |   |             | 
|Acquisition of non-controlling interests in a subsidiary     |  |             | (6     | ) |             | 
|                                                             |  |             |        |   |             | 
|At December 31                                               |  |             | 7,640  |   |             | 
|                                                             |  |             |        |   |             | 
|Total                                                        |  |             | 23,021 |   |             | 



F-64







| | 43 | Reserves (continued)
| | -- | --------------------



| | (a) | Appropriations to reserves
| | --- | --------------------------



According to the PRC Company Law and the
Articles of Association of the Company and certain of its subsidiaries, the Company and the relevant subsidiaries are required
to transfer 10% of their annual net profits after taxation, as determined under the PRC accounting rules and regulations, to a
statutory surplus reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be
made before distribution of dividend to shareholders and when there are retained profits at the end of the financial year.



Statutory surplus reserve can be used to
offset prior years’ losses, if any, and may be converted into share capital by the issue of new shares to shareholders in
proportion to their existing shareholding or by increasing the par value of the shares currently held by them, provided that the
balance after such issue is not less than 25% of the registered capital.



| | (b) | Dividends
| | --- | ---------



| | (i) | Dividends payable to equity shareholders of the Company attributable to the year
| | --- | --------------------------------------------------------------------------------



|                                                                                                                                                            |  | 2012 |             |  | 2011 | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- |  | ---- | 
|                                                                                                                                                            |  |      | RMB million |  |      | 
|                                                                                                                                                            |  |      |             |  |      | 
|Final dividend proposed after the end of the reporting period of RMB0.05 per ordinary share (2011: RMB0.2 per ordinary share) (inclusive of applicable tax) |  |      | 491         |  |      | 



Dividend distributions may be proposed
at the discretion of the Company’ board of directors, after making up cumulative prior years’ losses and consideration
of profit appropriation to reserves. Pursuant to the Articles of Association of the Company, the net profit of the Company for
the purpose of profit distribution is deemed to be the lesser of (i) the net profit determined in accordance with the PRC accounting
rules and regulations, and (ii) the net profit determined in accordance with IFRSs. As at December 31, 2012, the distributable
reserves of the Company was RMB1,109 million (2011: RMB2,215 million). After the end of the financial year, the directors proposed
a dividend of RMB0.05 per ordinary share (inclusive of applicable tax), amounting to RMB490,878,350 (2011: RMB1,963,513,400). The
final dividend proposed after the end of the reporting period has not been recognized as a liability at the end of the reporting
period (Note 51(b)).



| | (ii) | Dividends payable to equity shareholders of the Company attributable to the previous financial
year, approved and paid during the year
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                                                                    |  | 2012 |             |  | 2011 | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- |  | ---- | 
|                                                                                                                                                                    |  |      | RMB million |  |      | 
|                                                                                                                                                                    |  |      |             |  |      | 
|Final dividend in respect of the previous financial year, approved and paid during the year, of RMB0.2 per ordinary share (2011: Nil) (inclusive of applicable tax) |  |      | 1,964       |  |      | 



F-65











| | 43 | Reserves (continued)
| | -- | --------------------



| | (c) | Government contributions
| | --- | ------------------------



Pursuant to the “Grants approval
for Civil Aviation Development Fund for Safety Management System (“SMS”) projects of Xiamen Airlines”, national
funds amounting to RMB20 million were contributed during the year by the PRC government to Xiamen Airlines. Such funds are to be
used specifically for the SMS projects. Pursuant to the requirements of the relevant notice, the national funds were designated
as capital contribution and vested solely by the PRC government and accounted for as other reserves. These amounts can be converted
to share capital of the entities receiving the funds upon approval by their shareholders and completion of relevant procedures.



| | 44 | Material related party transactions
| | -- | -----------------------------------



| | (a) | Key management personnel remuneration
| | --- | -------------------------------------



Remuneration for key management personnel
of the Group, including amounts paid to the Company’s directors as disclosed in Note 16, is as follows:



|                              |  | 2012    |        |  | 2011    |  |        | 2010    | 
|----------------------------- |  | ------- | ------ |  | ------- |  | ------ | ------- | 
|                              |  | RMB’000 |        |  | RMB’000 |  |        | RMB’000 | 
|                              |  |         |        |  |         |  |        |         | 
|Short-term employees benefits |  |         | 14,124 |  |         |  | 14,675 |         | 
|Post-employment benefits      |  |         | 1,303  |  |         |  | 1,091  |         | 
|Share appreciation rights     |  |         | 530    |  |         |  | 57     |         | 
|                              |  |         |        |  |         |  |        |         | 
|                              |  |         | 15,957 |  |         |  | 15,823 |         | 



|                                    |  | 2012    |        |  | 2011    |  |        | 2010    | 
|----------------------------------- |  | ------- | ------ |  | ------- |  | ------ | ------- | 
|                                    |  | RMB’000 |        |  | RMB’000 |  |        | RMB’000 | 
|                                    |  |         |        |  |         |  |        |         | 
|Directors and supervisors (Note 16) |  |         | 4,615  |  |         |  | 5,938  |         | 
|Senior management                   |  |         | 11,342 |  |         |  | 9,885  |         | 
|                                    |  |         |        |  |         |  |        |         | 
|                                    |  |         | 15,957 |  |         |  | 15,823 |         | 



Total remuneration is included in “staff
costs” (Note 12).



| | (b) | Contributions to post-employment benefit plans
| | --- | ----------------------------------------------



The Group participates in various defined
contribution retirement plans organized by municipal and provincial governments for its staff. Details of the Group’s employee
benefits plan are disclosed in Note 45.



F-66







| | 44 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (c) | Transactions with CSAHC and its affiliates (the “CSAHC Group”), associates, jointly
controlled entities and other related company of the Group
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------



The Group provided or received various
operational services to or by the CSAHC Group, associates, jointly controlled entities and other related company of the Group during
the normal course of its business.



Details of the significant transactions
carried out by the Group are as follows:



|                                                                                          |  | Note |        |  | 2012        |  |       | 2011        |  |  | 2010        | 
|----------------------------------------------------------------------------------------- |  | ---- | ------ |  | ----------- |  | ----- | ----------- |  |  | ----------- | 
|                                                                                          |  |      |        |  | RMB million |  |       | RMB million |  |  | RMB million | 
|Income received from the CSAHC Group                                                      |  |      |        |  |             |  |       |             |  |  |             | 
|                                                                                          |  |      |        |  |             |  |       |             |  |  |             | 
|Charter flight and pallet income                                                          |  |      | (i)    |  |             |  | 82    |             |  |  | 46          | 
|Cargo handling income                                                                     |  |      | (i)    |  |             |  | 7     |             |  |  | 15          | 
|Commission income                                                                         |  |      | (ii)   |  |             |  | 8     |             |  |  | 7           | 
|                                                                                          |  |      |        |  |             |  |       |             |  |  |             | 
|Income received from other related company                                                |  |      |        |  |             |  |       |             |  |  |             | 
|                                                                                          |  |      |        |  |             |  |       |             |  |  |             | 
|Aircraft sales income                                                                     |  |      | (iii)  |  |             |  | 257   |             |  |  | 426         | 
|Aircraft purchase right transfer income                                                   |  |      | (iii)  |  |             |  | 16    |             |  |  | -           | 
|Aircraft wet lease income                                                                 |  |      | (iii)  |  |             |  | -     |             |  |  | 242         | 
|                                                                                          |  |      |        |  |             |  |       |             |  |  |             | 
|Expenses paid to the CSAHC Group                                                          |  |      |        |  |             |  |       |             |  |  |             | 
|                                                                                          |  |      |        |  |             |  |       |             |  |  |             | 
|Repairing charges                                                                         |  |      | (iv)   |  |             |  | 830   |             |  |  | 752         | 
|Handling charges                                                                          |  |      | (v)    |  |             |  | 96    |             |  |  | 87          | 
|Commission expenses                                                                       |  |      | (vi)   |  |             |  | 18    |             |  |  | 27          | 
|Cargo handling charges                                                                    |  |      | (i)    |  |             |  | 18    |             |  |  | 17          | 
|Lease charges for land and buildings                                                      |  |      | (vii)  |  |             |  | 152   |             |  |  | 140         | 
|Property management fee                                                                   |  |      | (viii) |  |             |  | 50    |             |  |  | 34          | 
|Air catering supplies                                                                     |  |      | (ix)   |  |             |  | 79    |             |  |  | 7           | 
|                                                                                          |  |      |        |  |             |  |       |             |  |  |             | 
|Expenses paid to jointly controlled entities and an associate                             |  |      |        |  |             |  |       |             |  |  |             | 
|                                                                                          |  |      |        |  |             |  |       |             |  |  |             | 
|Repairing charges                                                                         |  |      | (x)    |  |             |  | 1,468 |             |  |  | 1,266       | 
|Flight simulation service charges                                                         |  |      | (xi)   |  |             |  | 257   |             |  |  | 228         | 
|Advertising expenses                                                                      |  |      | (xii)  |  |             |  | 49    |             |  |  | 29          | 
|Training expenses                                                                         |  |      | (xiii) |  |             |  | 118   |             |  |  | 142         | 
|                                                                                          |  |      |        |  |             |  |       |             |  |  |             | 
|Income received from a jointly controlled entity and associates                           |  |      |        |  |             |  |       |             |  |  |             | 
|                                                                                          |  |      |        |  |             |  |       |             |  |  |             | 
|Rental income                                                                             |  |      | (xi)   |  |             |  | 36    |             |  |  | 36          | 
|Repairing income                                                                          |  |      | (xiv)  |  |             |  | 22    |             |  |  | 5           | 
|Entrustment income for advertising media business                                         |  |      | (xii)  |  |             |  | 17    |             |  |  | -           | 
|                                                                                          |  |      |        |  |             |  |       |             |  |  |             | 
|Issuance of A shares to CSAHC                                                             |  |      | (xv)   |  |             |  | -     |             |  |  | -           | 
|                                                                                          |  |      |        |  |             |  |       |             |  |  |             | 
|Issuance of H shares to Nan Lung                                                          |  |      | (xv)   |  |             |  | -     |             |  |  | -           | 
|                                                                                          |  |      |        |  |             |  |       |             |  |  |             | 
|Disposal to CSAHC Group                                                                   |  |      |        |  |             |  |       |             |  |  |             | 
|Consideration for disposal of equity interest in MTU Maintenance Zhuhai Co., Ltd. (“MTU”) |  |      | (iv)   |  |             |  | -     |             |  |  | -           | 
|Disposal and losing control of a subsidiary                                               |  |      | (xii)  |  |             |  | 43    |             |  |  | -           | 



F-67







| | 44 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (c) | Transactions with CSAHC and its affiliates (the “CSAHC Group”), associates, jointly
controlled entities and other related company of the Group (continued)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | (i) | China Southern Airlines Group Passenger and Cargo Agent Company Limited (“PCACL”),
a wholly-owned subsidiary of CSAHC, purchases cargo spaces and charter flights from the Group. In addition, cargo handling income
/ charges are earned / payable by the Group in respect of the cargo handling services with PCACL.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | The Group provided certain website resources to SA Finance for the sales of air insurance to passengers.
| | ---- | --------------------------------------------------------------------------------------------------------



| | (iii) | Hebei Airlines Company Limited (“Hebei Airlines”) is a subsidiary of a non-controlling
interest of Xiamen Airlines.
| | ----- | -------------------------------------------------------------------------------------------------------------------



On August 27, 2010, Xiamen
Airlines and Hebei Airlines entered into an Aircraft Wet Lease Agreement to wet lease three aircraft to Hebei Airlines. The agreement
was terminated in December 2011.



During the year, Xiamen Airlines
and Hebei Airlines entered into an aircraft sale agreement, pursuant to which Xiamen Airlines sold and Hebei Airlines purchased
one B737-800 aircraft at the consideration of approximately RMB257 million.



In addition,
Xiamen Airlines transferred the purchase right of one B737-800 aircraft to Hebei Airlines at the consideration of approximately
RMB16 million.



| | (iv) | MTU, a former jointly controlled entity of the Company, was sold to CSAHC in February 2010 at consideration
of RMB1,608 million with a gain on disposal of RMB1,078 million. MTU provides comprehensive maintenance services to the Group.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) | The Group acquires aircraft, flight equipment and other airline-related facilities through Southern
Airlines (Group) Import and Export Trading Company Limited (“SAIETC”), a wholly-owned subsidiary of CSAHC and pays
handling charges to SAIETC.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vi) | Commission is earned by certain subsidiaries of CSAHC in connection with the air tickets sold by
them on behalf of the Group. Commission is calculated based on the rates stipulated by the CAAC and International Air Transportation
Association.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vii) | The Group leases certain land and buildings in the PRC from CSAHC. The amount represents rental
payments for land and buildings paid or payable to CSAHC.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| | (viii) | Guangzhou China Southern Airlines Property Management Company Limited, a subsidiary of CSAHC, provides
property management services to the Group.
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------



| | (ix) | Shenzhen Air Catering Company Limited (“SZ Catering”) became a related party of the
Group since its Chairman, Mr. Yuan Xin An was appointed as a non-executive Director of the Company in November 2011. Certain in-flight
meals and related services were provided by SZ Catering to the Group.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (x) | Guangzhou Aircraft Maintenance Engineering Company Limited (“GAMECO”), a jointly controlled
entity of the Group, provides comprehensive maintenance services to the Group.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-68







| | 44 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (c) | Transactions with CSAHC and its affiliates (the “CSAHC Group”), associates, jointly
controlled entities and other related company of the Group (continued)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xi) | Zhuhai Xiang Yi Aviation Technology Company Limited (“Zhuhai Xiang Yi”), a jointly
controlled entity of the Group, provides flight simulation services to the Group. In addition, the Group leased certain flight
training facilities and buildings to Zhuhai Xiang Yi under operating lease agreements.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xii) | Southern Airlines Culture and Media Co., Ltd. (“CSA Culture”), an associate of the
Group, provides advertising services to the Group.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------



In addition, Xiamen Airlines
provides certain media resources to Xiamen Airlines Media Co., Ltd (“Xiamen Media”), a subsidiary of CSA Culture since
29 June 2012 (Note 47(b)).



| | (xiii) | China Southern West Australian Flying College Pty Limited. (“Flying College”), a former
subsidiary of the Group, provides training services to the Group. Flying College became a jointly controlled entity of the Company
since June 2010.
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xiv) | The Company provides aircraft maintenance services to Sichuan Airlines Corporation Limited (“Sichuan
Airlines”), which is an associate of the Group.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------



| | (xv) | On October 29, 2010 and November 1, 2010, the Company issued 123,900,000 A shares to CSAHC and
312,500,000 H shares to Nan Lung, for cash consideration of RMB825 million and RMB736 million, respectively.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition to the above, certain affiliates
of CSAHC also provided hotel and other services to the Group during the years ended December 31, 2012, 2011 and 2010. The total
amount paid or payable to CSAHC Group was not material to the results of the Group for the year.



F-69







| | 44 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (c) | Transactions with CSAHC and its affiliates (the “CSAHC Group”), associates, jointly
controlled entities and other related party of the Group (continued)
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------



Details of amounts due from / to the CSAHC
Group, associates, jointly controlled entities and other related company of the Group:



|                            |  | Note |       |  | 2012        |  |     | 2011        | 
|--------------------------- |  | ---- | ----- |  | ----------- |  | --- | ----------- | 
|                            |  |      |       |  | RMB million |  |     | RMB million | 
|Receivables:                |  |      |       |  |             |  |     |             | 
|The CSAHC Group             |  |      |       |  |             |  | 122 |             | 
|Associates                  |  |      |       |  |             |  | 29  |             | 
|Jointly controlled entities |  |      |       |  |             |  | 90  |             | 
|Other related company       |  |      |       |  |             |  | 6   |             | 
|                            |  |      |       |  |             |  |     |             | 
|                            |  |      | 36(a) |  |             |  | 247 |             | 



|                                     |  | Note |       |  | 2012        |  |     | 2011        | 
|------------------------------------ |  | ---- | ----- |  | ----------- |  | --- | ----------- | 
|                                     |  |      |       |  | RMB million |  |     | RMB million | 
|Payables:                            |  |      |       |  |             |  |     |             | 
|The CSAHC Group                      |  |      |       |  |             |  | 109 |             | 
|A jointly controlled entity of CSAHC |  |      |       |  |             |  | 188 |             | 
|An associate                         |  |      |       |  |             |  | -   |             | 
|Jointly controlled entities          |  |      |       |  |             |  | 11  |             | 
|Other related company                |  |      |       |  |             |  | -   |             | 
|                                     |  |      |       |  |             |  |     |             | 
|                                     |  |      | 36(b) |  |             |  | 308 |             | 



The amounts due from / to the CSAHC Group,
associates, jointly controlled entities and other related company of the Group are unsecured, interest free and have no fixed terms
of repayment.



F-70







| | 44 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (d) | Loans from and deposits placed with SA Finance
| | --- | ----------------------------------------------



| | (i) | Loans from SA Finance
| | --- | ---------------------



At December 31, 2012, loans from
SA Finance to the Group amounted to RMB426 million (2011: RMB480 million).



The unsecured loans are repayable
as follows:



|                                 |  | Note |       |  | 2012        |  |     | 2011        | 
|-------------------------------- |  | ---- | ----- |  | ----------- |  | --- | ----------- | 
|                                 |  |      |       |  | RMB million |  |     | RMB million | 
|Within 1 year                    |  |      |       |  |             |  | 406 |             | 
|After 1 year but within 2 years  |  |      |       |  |             |  | 20  |             | 
|After 2 years but within 5 years |  |      |       |  |             |  | -   |             | 
|                                 |  |      |       |  |             |  |     |             | 
|                                 |  |      | 32(h) |  |             |  | 426 |             | 



Interest expense paid on such
loans amounted to RMB30 million (2011: RMB27 million; 2010: RMB27 million) and the interest rates ranged from 4.86% to 5.84% per
annum during the year ended December 31, 2012 (2011: 4.86% to 6.32% per annum; 2010: 4.86% to 5.27% per annum).



| | (ii) | Entrusted loan from CSAHC
| | ---- | -------------------------



At December 31, 2012, CSAHC,
SA Finance and the Group entered into an entrusted loan agreement, pursuant to which, CSAHC, as the lender, entrusted SA Finance
to lend RMB105 million to the Group from December 31, 2012 to December 31, 2013. The interest rate is 90% of benchmark interest
rate stipulated by PBOC per annum.



| | (iii) | Deposits placed with SA Finance
| | ----- | -------------------------------



At December 31, 2012, the Group’s
deposits with SA Finance amounted to RMB2,307 million (2011: RMB2,493 million). The applicable interest rates are determined in
accordance with the rates published by the PBOC.



Interest income received on such
deposits amounted to RMB61 million (2011: RMB32 million; 2010: RMB17 million) during the year ended December 31, 2012.



| | (e) | Guarantees from CSAHC
| | --- | ---------------------



Certain bank loans of the Group amounting
to RMB94 million (2011: RMB221 million) were guaranteed by CSAHC (Note 32 (g)(ii)).



| | (f) | Commitments to CSAHC
| | --- | --------------------



At December 31, 2012, the Group had operating
lease commitments to CSAHC in respect of lease payments for land and buildings of RMB175 million (2011: RMB199 million).



F-71







| | 44 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (g) | Transactions with other state-controlled entities
| | --- | -------------------------------------------------



The Company is a state-controlled entity
and operates in an economic regime currently dominated by entities directly or indirectly controlled by the PRC government (“state-controlled
entities”) through its government authorities, agencies, affiliations and other organizations.



Other than those transactions with the
CSAHC Group, associates, jointly controlled entities and other related company of the Group as disclosed in Notes 44(c), (d), (e)
and (f) above, the Group conducts transactions with other state-controlled entities which include but are not limited to the following:



| | - | Transportation services;
| | - | ------------------------



| | - | Leasing arrangements;
| | - | ---------------------



| | - | Purchase of equipment;
| | - | ----------------------



| | - | Purchase of ancillary materials and spare parts;
| | - | ------------------------------------------------



| | - | Ancillary and social services; and
| | - | ----------------------------------



| | - | Financial services arrangement.
| | - | -------------------------------



These transactions are conducted in the
ordinary and usual course of the Group’s business on terms comparable to those with other entities that are not state-controlled.
The Group has established its buying, pricing strategy and approval process for purchases and sales of products and services. Such
buying, pricing strategy and approval processes do not depend on whether or not the counterparties are state-controlled entities.



Having considered the potential for transactions
to be impacted by related party relationships, the Group’s pricing strategy, buying and approval processes, and what information
would be necessary for an understanding of the potential effect of the relationship on the financial statements, the directors
are of the opinion that the following transactions with other state-controlled entities require disclosure:



| | (i) | The Group’s transactions with other state-controlled entities, including state-controlled
banks in the PRC
| | --- | ----------------------------------------------------------------------------------------------------------



|                 |  | 2012        |        |  | 2011        |  |        | 2010        | 
|---------------- |  | ----------- | ------ |  | ----------- |  | ------ | ----------- | 
|                 |  | RMB million |        |  | RMB million |  |        | RMB million | 
|                 |  |             |        |  |             |  |        |             | 
|Jet fuel costs   |  |             | 33,096 |  |             |  | 25,497 |             | 
|Interest income  |  |             | 146    |  |             |  | 50     |             | 
|Interest expense |  |             | 1,199  |  |             |  | 816    |             | 



F-72







| | 44 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (g) | Transactions with other state-controlled entities
(continued)
| | --- | -------------------------------------------------------------



| | (ii) | The Group’s balances with other state-controlled entities, including state-controlled banks
in the PRC
| | ---- | ------------------------------------------------------------------------------------------------------



|                                                                  |  | 2012        |        |  | 2011        | 
|----------------------------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                                                  |  | RMB million |        |  | RMB million | 
|                                                                  |  |             |        |  |             | 
|Trade payables-jet fuel                                           |  |             | 544    |  |             | 
|Cash and deposits at bank                                         |  |             | 7,480  |  |             | 
|Short-term bank loans and current portion of long-term bank loans |  |             | 21,149 |  |             | 
|Long-term bank loans, less current portion                        |  |             | 29,575 |  |             | 



| | 45 | Employee benefits plan
| | -- | ----------------------



| | (a) | Retirement benefits
| | --- | -------------------



Employees of the Group participate in several
defined contribution retirement schemes organized separately by the PRC municipal and provincial governments in regions where the
major operations of the Group are located. The Group is required to contribute to these schemes at rates ranging from 8% to 25%
(2011: 8% to 24%; 2010: 8% to 25%) of salary costs including certain allowances. A member of the retirement schemes is entitled
to pension benefits from the Local Labor and Social Security Bureau upon his / her retirement. The retirement benefit obligations
of all retired staff of the Group are assumed by these schemes.



In addition, the Group has established
a supplementary defined contribution retirement scheme for the benefit of employees in accordance with relevant regulations in
the PRC. Employees of the Group participate in a supplementary defined contribution retirement scheme whereby the Group is required
to make contributions not exceeding one-twelfth of the prior year’s total salaries.



| | (b) | Housing benefits
| | --- | ----------------



The Group contributes on a monthly basis
to housing funds organized by municipal and provincial governments based on certain percentages of the salaries of employees. The
Group’s liability in respect of these funds is limited to the contributions payable in each year.



In addition to the housing funds, certain
employees of the Group are eligible to one of the following housing benefit schemes:



F-73







| | 45 | Employee benefits plan (continued)
| | -- | ----------------------------------



| | (b) | Housing benefits (continued)
| | --- | ----------------------------



| | (i) | Pursuant to a staff housing benefit scheme effective
on September 2002, the Group agreed to pay lump sum housing allowances to certain employees who have not received quarters from
CSAHC or the Group according to the relevant PRC housing reform policy. An employee who leaves the Company prior to the end of
the vesting benefit period is required to pay back a portion of the lump sum housing benefits determined on a pro rata basis of
the vesting benefit period. The Group has the right to effect a charge on the employee’s house and to enforce repayment
through the sale of the house in the event of default in repayment. Any remaining shortfall is charged to the consolidated income
statement. The amount was fully amortized in 2012.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | The Group also pays cash housing subsidies on a monthly
basis to eligible employees. The monthly cash housing subsidies are charged to the consolidated income statement.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Share Appreciation Rights Scheme
| | --- | --------------------------------



On November 30, 2011, the Company’s
General Meeting approved the “H Share Appreciation Rights Scheme of China Southern Airlines Company Limited” and “Initial
Grant under the H Share Appreciation Rights Scheme of China Southern Airlines Company Limited” (“the Scheme”).



Under the Scheme, 24,660,000 units of SARs
were granted to 118 employees of the Group at the exercise price of HK$3.92 per unit prior to December 31, 2011. No shares will
be issued under the Scheme and each SAR is notionally linked to one existing H share of the Company. Upon exercise of the SARs,
a recipient will receive an amount of cash equal to the difference between the market share price of the relevant H share and the
exercise price.



The SARs will have an exercise period of
six years from the date of grant. Upon the satisfaction of certain performance conditions after the second, third and fourth anniversary
of the date of grant, each one third of the SARs will become exercisable.



A dividend of RMB0.2 (equivalent to HKD0.25)
(inclusive of applicable tax) per share was approved by the Company’s General Meeting on May 31, 2012 (Note 43(b)(ii)), therefore,
the exercise price for the SARs was adjusted to HKD3.67 per share in accordance with the predetermined formula stipulated in the
Scheme. During the year, 940,000 units of SARs were forfeited.



The fair value of the liability for SARs
is measured using the Black-Scholes option pricing model. The risk free rate, expected dividend yield and expected volatility of
the share price are used as the inputs into the model. The fair value of the liability for SARs as at December 31, 2012 was RMB2,303,000
(2011: RMB231,000) and a corresponding staff costs of RMB2,072,000 was recognized during the year ended December 31, 2012 (2011:
RMB231,000; 2010: Nil).



F-74







| | 46 | Segmental reporting
| | -- | -------------------



| | (a) | Business segments
| | --- | -----------------



The Group’s network passenger and
cargo operations are managed as a single business unit. The Group’s chief operating decision maker makes resource allocation
decisions based on route profitability, which considers aircraft type and route economics. The objective in making resource allocation
decisions is to optimize consolidated financial results. Therefore, based on the way the Group manages the network passenger and
cargo operations, and the manner in which resource allocation decisions are made, the Group has only one reportable operating segment
for financial reporting purposes, reported as the “airline business”.



Financial results from other operating
segments are below the quantitative threshold for determining reportable operating segments and consist primarily of business segments
of ground services, air catering and other miscellaneous services. These other operating segments are combined and reported as
“all other segments”. Inter-segment sales are based on prices set on an arm’s length basis.



For the purposes of assessing segment performance
and allocating resources between segments, the Group’s chief operating decision maker monitors the results, assets and liabilities
attributable to each reportable segment based on financial results prepared under PRC GAAP. As such, the amount of each material
reconciling items from the Group’s reportable segment revenue, profit or loss, assets and liabilities arising from different
accounting policies are set out in Note 46(c).



F-75







| | 46 | Segmental reporting (continued)
| | -- | -------------------------------



| | (a) | Business segments (continued)
| | --- | -----------------------------



Information regarding the Group’s
reportable segments as provided to the Group’s chief operating decision maker for the purposes of resource allocation and
assessment of segment performance for the years ended December 31, 2012, 2011 and 2010 is set out below.





|                                                                                                                                         |  | Airline business |         |   | All other segments |  |         | Eliminations |  |  | Unallocated* |  |  | Total   |      
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------------ |  | ------- | ------------ |  |  | ------------ |  |  | ------- | -----
|                                                                                                                                         |  | 2012             |         |   | 2011               |  |         | 2010         |  |  | 2012         |  |  | 2011    |      
|                                                                                                                                         |  | RMB              |         |   | RMB                |  |         | RMB          |  |  | RMB          |  |  | RMB     |      
|                                                                                                                                         |  | million          |         |   | million            |  |         | million      |  |  | million      |  |  | million |      
|                                                                                                                                         |  |                  |         |   |                    |  |         |              |  |  |              |  |  |         |      
|Revenue from external
    customers                                                                                                      |  |                  | 101,007 |   |                    |  | 92,274  |              |  |  | 77,394       |  |  |         | 476  
|Inter-segment sales                                                                                                                      |  |                  | -       |   |                    |  | -       |              |  |  | -            |  |  |         | 1,159
|Reportable
    segment revenue                                                                                                           |  |                  | 101,007 |   |                    |  | 92,274  |              |  |  | 77,394       |  |  |         | 1,635
|                                                                                                                                         |  |                  |         |   |                    |  |         |              |  |  |              |  |  |         |      
|Reportable
    segment profit before taxation                                                                                            |  |                  | 4,120   |   |                    |  | 6,105   |              |  |  | 6,742        |  |  |         | 102  
|Reportable
    segment assets                                                                                                            |  |                  | 138,023 |   |                    |  | 122,159 |              |  |  |              |  |  |         | 1,905
|Addition to non-current
    segment  assets during the year                                                                              |  |                  | 24,316  |   |                    |  | 23,553  |              |  |  |              |  |  |         | 57   
|                                                                                                                                         |  |                  |         |   |                    |  |         |              |  |  |              |  |  |         |      
|Reportable
    segment liabilities                                                                                                       |  |                  | 102,011 |   |                    |  | 90,667  |              |  |  |              |  |  |         | 1,200
|                                                                                                                                         |  |                  |         |   |                    |  |         |              |  |  |              |  |  |         |      
|Other
    segment information                                                                                                            |  |                  |         |   |                    |  |         |              |  |  |              |  |  |         |      
|                                                                                                                                         |  |                  |         |   |                    |  |         |              |  |  |              |  |  |         |      
|Interest income                                                                                                                          |  |                  | 230     |   |                    |  | 174     |              |  |  | 91           |  |  |         | 5    
|Interest expense                                                                                                                         |  |                  | 1,329   |   |                    |  | 1,023   |              |  |  | 1,222        |  |  |         | 47   
|Depreciation and amortization
    for  the year                                                                                          |  |                  | 8,204   |   |                    |  | 7,617   |              |  |  | 7,050        |  |  |         | 80   
|Impairment losses (including
    impact on property, plant and  equipment,  allowance for doubtful debts and  provision for inventories) |  |                  | (7      | ) |                    |  | 726     |              |  |  | 220          |  |  |         | 1    



| | * | Unallocated assets primarily include investments in associates
and jointly controlled entities, available-for-sale equity securities, other investments in equity securities and the principal
and interest receivables of wealth management products. Unallocated results primarily include the share of results of associates
and jointly controlled entities, gain on disposal / deemed disposal and losing control of a subsidiary, the interest income on
wealth management products, dividend income from other investments, and the gain on disposal of a jointly controlled entity classified
as held for sale in 2010.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-76







| | 46 | Segmental reporting (continued)
| | -- | -------------------------------



| | (b) | Geographic information of reportable segment revenue
| | --- | ----------------------------------------------------



|                            |  | 2012        |         |  | 2011        |  |        | 2010        | 
|--------------------------- |  | ----------- | ------- |  | ----------- |  | ------ | ----------- | 
|                            |  | RMB million |         |  | RMB million |  |        | RMB million | 
|                            |  |             |         |  |             |  |        |             | 
|Domestic                    |  |             | 81,322  |  |             |  | 75,807 |             | 
|Hong Kong, Macau and Taiwan |  |             | 2,340   |  |             |  | 1,958  |             | 
|International *             |  |             | 17,821  |  |             |  | 14,942 |             | 
|                            |  |             |         |  |             |  |        |             | 
|                            |  |             | 101,483 |  |             |  | 92,707 |             | 



| | * | Asian market accounted for approximately 58% (2011: 56%;
2010: 57%) of the Group’s total international traffic revenue for the year ended December 31, 2012. The remaining portion
was mainly derived from the Group’s flights to / from Europe and North America regions and Australia.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The major revenue earning assets of the
Group are its aircraft fleet which is registered in the PRC and is employed across its worldwide route network. The chief operating
decision maker considers that there is no suitable basis for allocating such assets and related liabilities to geographical locations.
Accordingly, geographical segment assets and liabilities are not disclosed.



| | (c) | Reconciliations of reportable segment revenue,
profit, assets and liabilities arising from different accounting policies
| | --- | ------------------------------------------------------------------------------------------------------------------------



|                                                         |  | Note |       |  | 2012        |  |         | 2011        |  |  | 2010        |  
|-------------------------------------------------------- |  | ---- | ----- |  | ----------- |  | ------- | ----------- |  |  | ----------- | -
|                                                         |  |      |       |  | RMB million |  |         | RMB million |  |  | RMB million |  
|Revenue                                                  |  |      |       |  |             |  |         |             |  |  |             |  
|                                                         |  |      |       |  |             |  |         |             |  |  |             |  
|Reportable segment revenue                               |  |      |       |  |             |  | 102,642 |             |  |  | 93,606      |  
|Elimination of inter-segment revenue                     |  |      |       |  |             |  | (1,159  | )           |  |  | (899        | )
|Reclassification of expired sales in advance of carriage |  |      | 5/(i) |  |             |  | 495     |             |  |  | 309         |  
|Reclassification of sales tax                            |  |      | (ii)  |  |             |  | (2,464  | )           |  |  | (2,621      | )
|                                                         |  |      |       |  |             |  |         |             |  |  |             |  
|Consolidated revenue                                     |  |      |       |  |             |  | 99,514  |             |  |  | 90,395      |  



F-77







| | 46 | Segmental reporting (continued)
| | -- | -------------------------------



| | (c) | Reconciliations of reportable segment revenue,
profit, assets and liabilities arising from different accounting policies (continued)
| | --- | ------------------------------------------------------------------------------------------------------------------------------------



|                                                                    |  | Note |       |  | 2012        |  |       | 2011        |  |  | 2010        |  
|------------------------------------------------------------------- |  | ---- | ----- |  | ----------- |  | ----- | ----------- |  |  | ----------- | -
|                                                                    |  |      |       |  | RMB million |  |       | RMB million |  |  | RMB million |  
|Profit                                                              |  |      |       |  |             |  |       |             |  |  |             |  
|Reportable segment profit before taxation                           |  |      |       |  |             |  | 4,222 |             |  |  | 6,148       |  
|Unallocated amounts                                                 |  |      |       |  |             |  | 526   |             |  |  | 720         |  
|Losses on lump sum housing benefits                                 |  |      | (iii) |  |             |  | (14   | )           |  |  | (26         | )
|Adjustments arising from business combinations under common control |  |      | (iv)  |  |             |  | (1    | )           |  |  | -           |  
|Capitalization of exchange difference of specific loans             |  |      | (v)   |  |             |  | 3     |             |  |  | 87          |  
|Government grants                                                   |  |      | (vi)  |  |             |  | 2     |             |  |  | 1           |  
|                                                                    |  |      |       |  |             |  |       |             |  |  |             |  
|Consolidated profit before taxation                                 |  |      |       |  |             |  | 4,738 |             |  |  | 6,930       |  



|                                                                                  |  | Note |       |  | 2012        |  |         | 2011        | 
|--------------------------------------------------------------------------------- |  | ---- | ----- |  | ----------- |  | ------- | ----------- | 
|                                                                                  |  |      |       |  | RMB million |  |         | RMB million | 
|Assets                                                                            |  |      |       |  |             |  |         |             | 
|                                                                                  |  |      |       |  |             |  |         |             | 
|Reportable segment assets                                                         |  |      |       |  |             |  | 139,928 |             | 
|Elimination of inter-segment balances                                             |  |      |       |  |             |  | (313    | )           | 
|Unallocated amounts                                                               |  |      |       |  |             |  | 2,879   |             | 
|Losses on lump sum housing benefits                                               |  |      | (iii) |  |             |  | -       |             | 
|Adjustments arising from an associate’s business combination under common control |  |      | (iv)  |  |             |  | 10      |             | 
|Capitalization of exchange difference of specific loans                           |  |      | (v)   |  |             |  | 218     |             | 
|Government grants                                                                 |  |      | (vi)  |  |             |  | (225    | )           | 
|Effect of the above adjustments on taxation                                       |  |      |       |  |             |  | (43     | )           | 
|                                                                                  |  |      |       |  |             |  |         |             | 
|Consolidated total assets                                                         |  |      |       |  |             |  | 142,454 |             | 
|                                                                                  |  |      |       |  |             |  |         |             | 
|Liabilities                                                                       |  |      |       |  |             |  |         |             | 
|                                                                                  |  |      |       |  |             |  |         |             | 
|Reportable segment liabilities                                                    |  |      |       |  |             |  | 103,211 |             | 
|Elimination of inter-segment balances                                             |  |      |       |  |             |  | (313    | )           | 
|Government grants                                                                 |  |      | (vi)  |  |             |  | (190    | )           | 
|Effect of the above adjustments on taxation                                       |  |      |       |  |             |  | 12      |             | 
|                                                                                  |  |      |       |  |             |  |         |             | 
|Consolidated total liabilities                                                    |  |      |       |  |             |  | 102,720 |             | 



F-78







| | 46 | Segmental reporting (continued)
| | -- | -------------------------------



| | (c) | Reconciliations of reportable segment revenue, profit, assets and liabilities arising from
different accounting policies (continued)
| | --- | ------------------------------------------------------------------------------------------------------------------------------------



Notes:



| | (i) | In accordance with the PRC GAAP, expired sales in advance of carriage are recorded under non-operating
income. Under IFRSs, such income is recognized in revenue as other operating revenue.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | In accordance with the PRC GAAP, business tax and surcharge is separately disclosed rather than
deducted from revenue under IFRSs.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------



| | (iii) | In accordance with the PRC GAAP, losses on the lump sum housing benefits executed by CSAHC are
charged to retained profits as of January 1, 2001 pursuant to the relevant regulations. Under IFRSs, losses on lump sum housing
benefits are initially deferred and charged to the consolidated income statement, over the vesting benefit periods stipulated by
the relevant contracts.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | In accordance with the PRC GAAP, the Company and its associate account for the business combination
under common control by applying the pooling-of-interest method. Under the pooling-of-interest method, the difference between the
historical carrying amount of the acquiree and the consideration paid is accounted for as an equity transaction. Under IFRSs, the
Company adopts the purchase accounting method for acquisition of business under common control.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Adjustments are also made to the associate’s financial statements in regards of business
combination under common control so that to conform with the accounting policy of the Company when the associate’s financial
statements are used by the Company in applying the equity method when preparing its financial statements in accordance with IFRSs.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) | In accordance with the PRC GAAP, exchange difference arising on translation of specific loans and
related interest denominated in a foreign currency is capitalized as part of the cost of qualifying assets. Under IFRSs, such exchange
difference should be recognized in the consolidated income statement unless the exchange difference represents an adjustment to
interest.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vi) | In accordance with the PRC GAAP, special funds such as investment grants allocated by the government,
if clearly defined on official documents as part of “capital reserves”, are credited to capital reserves. Otherwise,
government grants related to assets are recognized as deferred income and amortized to profit or loss on a straight line basis
over the useful life of the related assets. Under IFRSs, government grants relating to purchase of fixed assets are deducted from
the cost of the related fixed assets.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 47 | Supplementary information to the consolidated cash
flow statements
| | -- | ------------------------------------------------------------------



| | (a) | Non-cash transactions - acquisition of aircraft
| | --- | -----------------------------------------------



During the year ended December 31, 2012,
aircraft acquired under finance leases amounted to RMB8,178 million (2011: RMB3,390 million; 2010: RMB3,056 million).



F-79







| | 47 | Supplementary information to the consolidated cash flow statements (continued)
| | -- | ------------------------------------------------------------------------------



| | (b) | Effect of the disposal and losing control of Xiamen Media
| | --- | ---------------------------------------------------------



Xiamen Airlines held 80% equity
interests in Xiamen Media since its incorporation. In June 2012, Xiamen Airlines acquired the remaining 20% equity interests in
Xiamen Media from its non-controlling shareholder at a consideration of RMB17 million and Xiamen Airlines subsequently disposed
51% equity interests in Xiamen Media to CSA Culture, which is a 40% owned associate of the Company with the remaining 60% owned
by CSAHC, at the consideration of RMB43 million while retaining the remaining 49% equity interests in Xiamen Media. The disposal
was completed and Xiamen Media became an associate of the Group on June 29, 2012. The net gain on disposal and losing control of
the subsidiary was recorded in the consolidated income statement.



|                                                 |  |      |    |  | Net book value | 
|------------------------------------------------ |  | ---- | -- |  | -------------- | 
|                                                 |  |      |    |  | as of the      | 
|                                                 |  | Note |    |  | disposal date  | 
|                                                 |  |      |    |  | RMB million    | 
|                                                 |  |      |    |  |                | 
|Non-current assets                               |  |      |    |  |                | 
|                                                 |  |      |    |  |                | 
|Trade and other receivables                      |  |      |    |  |                | 
|                                                 |  |      |    |  |                | 
|Cash and cash equivalents                        |  |      |    |  |                | 
|                                                 |  |      |    |  |                | 
|Trade and other payables                         |  |      |    |  |                | 
|                                                 |  |      |    |  |                | 
|Current Taxation                                 |  |      |    |  |                | 
|                                                 |  |      |    |  |                | 
|Net identifiable assets                          |  |      |    |  |                | 
|                                                 |  |      |    |  |                | 
|Consideration received, satisfied in cash        |  |      |    |  |                | 
|                                                 |  |      |    |  |                | 
|Fair value of the remaining 49% equity interests |  |      |    |  |                | 
|                                                 |  |      |    |  |                | 
|Net gain on disposal and losing control          |  |      | 15 |  |                | 
|                                                 |  |      |    |  |                | 
|Cash and cash equivalent disposed                |  |      |    |  |                | 
|                                                 |  |      |    |  |                | 
|Consideration received                           |  |      |    |  |                | 
|                                                 |  |      |    |  |                | 
|Net cash inflow from the disposal                |  |      |    |  |                | 



F-80







| | 48 | Financial risk management and fair values
| | -- | -----------------------------------------



The Group is exposed to liquidity,
interest rate, currency, credit risks and commodity jet fuel price risk in the normal course of business. The Group’s exposure
to these risks and the financial risk management policies and practices used by the Group to manage these risks are described below.



| | (a) | Liquidity risk
| | --- | --------------



As at December 31, 2012, the
Group’s current liabilities exceeded its current assets by RMB31,944 million. For the year ended December 31, 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.



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 December 31,
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 utilized.
The directors of the Company believe that sufficient financing will be available to the Group when and where needed.



The directors of the Company
have carried out a detailed review of the cash flow forecast of the Group for the twelve months ending December 31, 2013. 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 of the Company are of
the opinion that the assumptions and sensitivities which are included in the cash flow forecast are reasonable. However, as with
all assumptions in regard to future events, these are subject to inherent limitations and uncertainties and some or all of these
assumptions may not be realized.



As at December 31, 2012, the
contractual maturities at the end of financial years of the Group’s bank and other loans, obligations under finance leases,
trade payables and amounts due to related companies are disclosed in Notes 32, 33, 34 and 36, respectively. During the year ended
December 31, 2011, the Group had forward foreign exchange contracts, of which the outflow amounted to RMB65 million and inflow
amounted to RMB53 million. All forward foreign contracts were fully settled in 2011. As at December 31, 2012, the Group had no
outstanding forward foreign exchange contract.



F-81







| | 48 | Financial risk management and fair values (continued)
| | -- | -----------------------------------------------------



| | (b) | Interest rate risk
| | --- | ------------------



The interest rates and maturity
information of the Group’s bank and other loans and obligations under finance lease are disclosed in Notes 32 and 33, respectively.



At December 31, 2012, it is estimated
that a general increase / decrease of 100 basis points in interest rates, with all other variables held constant, would have decreased
/ increased the Group’s profit after tax and retained profits by approximately RMB307 million (2011: RMB245 million; 2010:
RMB220 million). Other components of consolidated equity would not be affected (2011 and 2010: Nil, respectively) by the changes
in interest rates.



The sensitivity analysis above
indicates the instantaneous change in the Group’s profit after tax and retained profits and other components of consolidated
equity that would arise assuming that the change in interest rates had occurred at the end of the reporting period and had been
applied to re-measure those financial instruments held by the Group which expose the Group to fair value interest rate risk at
the end of the reporting period. In respect of the exposure to cash flow interest rate risk arising from floating rate non-derivative
instruments held by the Group at the end of the reporting period, the impact on the Group’s profit after tax (and retained
profits) and other components of consolidated equity is estimated as an annualized impact on interest expense or income of such
a change in interest rates. The analysis is performed on the same basis for 2011 and 2010.



| | (c) | Foreign currency risk
| | --- | ---------------------



Renminbi is not freely convertible
into foreign currencies. All foreign exchange transactions involving Renminbi must take place either through the PBOC or other
institutions authorized to buy and sell foreign exchange or at a swap center.



The Group has significant exposure
to foreign currency risk as substantially all of the Group’s obligations under finance leases (Note 33), bank and other loans
(Note 32) and operating lease commitments (Note 49(b)) 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.



The exchange rate of Renminbi
to US dollar is set by the PBOC and had fluctuated within a narrow band prior to July 21, 2005. Since then, a managed floating
exchange rate regime based on market supply and demand with reference to a basket of foreign currencies has been used and the US
dollar exchange rate has gradually declined against Renminbi.



F-82







| | 48 | Financial risk management and fair values (continued)
| | -- | -----------------------------------------------------



| | (c) | Foreign currency risk (continued)
| | --- | ---------------------------------



The following table indicates the instantaneous
change in Group’s profit after tax and retained profits that would arise if foreign exchange rates to which the Group has
significant exposure at the beginning of the financial year had changed at that date, assuming all other risk variables remained
constant.



|              |  | 2012            |     |    | 2011             |  |        | 2010            | 
|------------- |  | --------------- | --- | -- | ---------------- |  | ------ | --------------- | 
|              |  | Appreciation /  |     |    | Increase /       |  |        | Appreciation /  | 
|              |  | (depreciation)  |     |    | (decrease) on    |  |        | (depreciation)  | 
|              |  | of Renminbi     |     |    | profit           |  |        | of Renminbi     | 
|              |  | against foreign |     |    | after tax and    |  |        | against foreign | 
|              |  | currency        |     |    | retained profits |  |        | currency        | 
|              |  |                 |     |    | RMB million      |  |        |                 | 
|              |  |                 |     |    |                  |  |        |                 | 
|United States |  |                 |     |    |                  |  |        |                 | 
|              |  |                 |     |    |                  |  |        |                 | 
|Dollars       |  |                 | 2   | %  |                  |  | 1,033  |                 | 
|              |  |                 |     |    |                  |  |        |                 | 
|              |  |                 | (2  | )% |                  |  | (1,033 | )               | 
|              |  |                 |     |    |                  |  |        |                 | 
|Singapore     |  |                 |     |    |                  |  |        |                 | 
|              |  |                 |     |    |                  |  |        |                 | 
|Dollars       |  |                 | 2   | %  |                  |  | 8      |                 | 
|              |  |                 |     |    |                  |  |        |                 | 
|              |  |                 | (2  | )% |                  |  | (8     | )               | 
|              |  |                 |     |    |                  |  |        |                 | 
|Japanese      |  |                 |     |    |                  |  |        |                 | 
|              |  |                 |     |    |                  |  |        |                 | 
|Yen           |  |                 | 10  | %  |                  |  | 125    |                 | 
|              |  |                 |     |    |                  |  |        |                 | 
|              |  |                 | (10 | )% |                  |  | (125   | )               | 



Results of the analysis as presented
in the above table represent an aggregation of the instantaneous effects on each of the Group entities’ profit after tax
and retained profits measured in the respective functional currencies, translated into Renminbi at the exchange rate ruling at
the end of the financial year for presentation purposes.



The sensitivity analysis assumes
that the change in foreign exchange rates had been applied to re-measure those financial instruments and lease commitments and
obligations held by the Group which expose the Group to foreign currency risk at the end of the financial year, including inter-company
payables and receivables within the Group which are denominated in a currency other than the functional currencies of the lender
or the borrower. The analysis excludes differences that would result from the translation of the financial statements of foreign
operations into the Group’s presentation currency. The analysis is performed on the same basis for 2011 and 2010.



| | (d) | Credit risk
| | --- | -----------



The Group’s credit risk
is primarily attributable to cash and cash equivalents and trade receivables.



Substantially all of the Group’s
cash and cash equivalents are deposited with PRC financial institutions, which management believes are of high credit quality.





A significant portion of the
Group’s air tickets are sold by agents participating in the Billing and Settlement Plan (“BSP”), a clearing scheme
between airlines and sales agents organized by International Air Transportation Association. The use of the BSP reduces credit
risk to the Group. As at December 31, 2012, the balance due from BSP agents amounted to RMB887 million (2011: RMB923 million).
The credit risk exposure to BSP and the remaining trade receivables balance are monitored by the Group on an ongoing basis and
the allowance for impairment of doubtful debts is within management’s expectations. Further quantitative disclosures in respect
of the Group’s exposure to credit risk arising from trade receivables is set out in Note 29.



F-83







| | 48 | Financial risk management and fair values (continued)
| | -- | -----------------------------------------------------



| | (e) | Jet fuel price risk
| | --- | -------------------



The Group’s results of
operations may be significantly affected by fluctuations in fuel prices since the jet fuel expenses are a significant cost for
the Group. A reasonable possible increase / decrease of 10% (2011 and 2010: 10%, respectively) in jet fuel price, with volume of
fuel consumed and all other variables held constant, would have increased / decreased the fuel costs by approximately RMB3,740
million (2011: RMB3,268 million; 2010: RMB2,349 million). The sensitivity analysis indicates the instantaneous change in the Group’s
fuel cost that would arise assuming that the change in fuel price had occurred at the beginning of the financial year.



| | (f) | Fair value
| | --- | ----------



| | (i) | Financial instruments carried at fair value
| | --- | -------------------------------------------



The following table presents
the carrying value of financial instruments measured at fair value at the end of financial period across the three levels of the
fair value hierarchy defined in IFRS 7,Financial Instruments: Disclosures, with the fair value of each financial instrument
categorized in its entirety based on the lowest level of input that is significant to that fair value measurement. The levels are
defined as follows:



| | - | Level 1 (highest level): fair values measured using quoted prices (unadjusted) in active markets
for identical financial instruments
| | - | ------------------------------------------------------------------------------------------------------------------------------------



| | - | Level 2: fair values measured using quoted prices in active markets for similar financial instruments,
or using valuation techniques in which all significant inputs are directly or indirectly based on observable market data
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Level 3 (lowest level): fair values measured using valuation techniques in which any significant
input is not based on observable market data
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



2012



|                                      |  | Level 1 |    |  | Level 2 |  |   | Level 3 |  |  | Total   | 
|------------------------------------- |  | ------- | -- |  | ------- |  | - | ------- |  |  | ------- | 
|                                      |  | RMB     |    |  | RMB     |  |   | RMB     |  |  | RMB     | 
|                                      |  | million |    |  | million |  |   | million |  |  | million | 
|                                      |  |         |    |  |         |  |   |         |  |  |         | 
|Assets                                |  |         |    |  |         |  |   |         |  |  |         | 
|                                      |  |         |    |  |         |  |   |         |  |  |         | 
|Available-for-sale equity securities: |  |         |    |  |         |  |   |         |  |  |         | 
|                                      |  |         |    |  |         |  |   |         |  |  |         | 
|- Listed                              |  |         | 69 |  |         |  | - |         |  |  | -       | 



F-84







| | 48 | Financial risk management and fair values (continued)
| | -- | -----------------------------------------------------



| | (f) | Fair value (continued)
| | --- | ----------------------



| | (i) | Financial instruments carried at fair value (continued)
| | --- | -------------------------------------------------------



2011



|                                      |  | Level 1 |    |  | Level 2 |  |   | Level 3 |  |  | Total   | 
|------------------------------------- |  | ------- | -- |  | ------- |  | - | ------- |  |  | ------- | 
|                                      |  | RMB     |    |  | RMB     |  |   | RMB     |  |  | RMB     | 
|                                      |  | million |    |  | million |  |   | million |  |  | million | 
|                                      |  |         |    |  |         |  |   |         |  |  |         | 
|Assets                                |  |         |    |  |         |  |   |         |  |  |         | 
|                                      |  |         |    |  |         |  |   |         |  |  |         | 
|Available-for-sale equity securities: |  |         |    |  |         |  |   |         |  |  |         | 
|                                      |  |         |    |  |         |  |   |         |  |  |         | 
|- Listed                              |  |         | 64 |  |         |  | - |         |  |  | -       | 



During the years ended December 31, 2012
and 2011, there were no significant transfers between instruments in Level 1 and Level 2.



Fair value of available-for-sale securities
is based on quoted market prices at the end of the financial year without any deduction for transaction costs.



| | (ii) | Non-current investments represent unlisted equity securities of companies established in the PRC.
There is no quoted market price for such equity securities and accordingly a reasonable estimate of the fair value could not be
measured reliably.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Amounts due from / to related companies are unsecured, interest-free and have no fixed terms of
repayment. Given these terms, it is not meaningful to disclose fair values of these balances.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | All other financial instruments, including trade and other receivables, trade and other payables,
are carried at amounts not materially different from their fair values as at December 31, 2012 and December 31, 2011.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-85







| | 49 | Commitments
| | -- | -----------



| | (a) | Capital commitments
| | --- | -------------------



Capital commitments outstanding
at December 31, 2012 not provided for in the consolidated financial statements were as follows:



|                                                                   |  | 2012        |        |  | 2011        | 
|------------------------------------------------------------------ |  | ----------- | ------ |  | ----------- | 
|                                                                   |  | RMB million |        |  | RMB million | 
|                                                                   |  |             |        |  |             | 
|Commitments in respect of aircraft  and flight equipment           |  |             |        |  |             | 
|                                                                   |  |             |        |  |             | 
|- authorized and contracted for                                    |  |             | 71,309 |  |             | 
|                                                                   |  |             |        |  |             | 
|                                                                   |  |             | 71,309 |  |             | 
|                                                                   |  |             |        |  |             | 
|Investment commitments                                             |  |             |        |  |             | 
|                                                                   |  |             |        |  |             | 
|-authorized 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      |  |             | 113    |  |             | 
|                                                                   |  |             |        |  |             | 
|                                                                   |  |             | 352    |  |             | 
|                                                                   |  |             |        |  |             | 
|-authorized but not contracted for                                 |  |             |        |  |             | 
|                                                                   |  |             |        |  |             | 
|- Share of capital commitments of a jointly controlled entity      |  |             | 218    |  |             | 
|                                                                   |  |             |        |  |             | 
|                                                                   |  |             | 570    |  |             | 
|                                                                   |  |             |        |  |             | 
|Other commitments                                                  |  |             |        |  |             | 
|                                                                   |  |             |        |  |             | 
|- authorized and contracted for                                    |  |             | 1,406  |  |             | 
|                                                                   |  |             |        |  |             | 
|- authorized but not contracted for                                |  |             | 2,414  |  |             | 
|                                                                   |  |             |        |  |             | 
|                                                                   |  |             | 3,820  |  |             | 
|                                                                   |  |             |        |  |             | 
|                                                                   |  |             | 75,699 |  |             | 



F-86







| | 49 | Commitments (continued)
| | -- | -----------------------



| | (a) | Capital commitments
| | --- | -------------------



As at December 31, 2012, the
Group placed orders for 195 aircraft, which are scheduled for deliveries from 2013 to 2019. Advance payments of RMB17,333 million
have been made towards the purchase of these aircraft and related equipment. As at December 31, 2012, the approximate total future
payments, including estimated amounts for price escalation through anticipated delivery dates for these aircraft and flight equipment
are as follows:



|                    |  |  | 2012        |  |  |  | 2011        | 
|------------------- |  |  | ----------- |  |  |  | ----------- | 
|                    |  |  | RMB million |  |  |  | RMB million | 
|                    |  |  |             |  |  |  |             | 
|2012                |  |  | -           |  |  |  | 19,014      | 
|                    |  |  |             |  |  |  |             | 
|2013                |  |  | 23,671      |  |  |  | 19,673      | 
|                    |  |  |             |  |  |  |             | 
|2014                |  |  | 19,951      |  |  |  | 13,328      | 
|                    |  |  |             |  |  |  |             | 
|2015                |  |  | 14,990      |  |  |  | 8,580       | 
|                    |  |  |             |  |  |  |             | 
|2016                |  |  | 6,589       |  |  |  | 655         | 
|                    |  |  |             |  |  |  |             | 
|2017 and afterwards |  |  | 6,108       |  |  |  | -           | 
|                    |  |  |             |  |  |  |             | 
|                    |  |  | 71,309      |  |  |  | 61,250      | 





| | (b) | Operating lease commitments
| | --- | ---------------------------



As at December 31, 2012, the
total future minimum lease payments under non-cancellable operating leases in respect of properties, aircraft and flight equipment
are as follows:



|                                |  | 2012        |        |  | 2011        | 
|------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                |  | RMB million |        |  | RMB million | 
|                                |  |             |        |  |             | 
|Payments due                    |  |             |        |  |             | 
|                                |  |             |        |  |             | 
|Within 1 year                   |  |             | 4,110  |  |             | 
|                                |  |             |        |  |             | 
|After 1 year but within 5 years |  |             | 12,532 |  |             | 
|                                |  |             |        |  |             | 
|After 5 years                   |  |             | 5,519  |  |             | 
|                                |  |             |        |  |             | 
|                                |  |             | 22,161 |  |             | 





| | 50 | Contingent liabilities
| | -- | ----------------------



| | (a) | The Group leased certain properties and buildings from CSAHC which are located in Guangzhou, Wuhan
and Haikou and other PRC cities. These properties and buildings lack adequate documentation evidencing CSAHC’s rights thereto.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pursuant to the indemnification agreement
dated May 22, 1997 between the Group and CSAHC, CSAHC has agreed to indemnify the Group against any loss or damage arising from
any challenge of the Group’s right to use the properties and buildings.



F-87







| | 50 | Contingent liabilities (continued)
| | -- | ----------------------------------



| | (b) | The Group entered into agreements with its pilot trainees and certain banks to provide
                                                                           guarantee on personal bank facilities in relation to the individual flight training tuitions amounting to RMB581 million as
                                                                           at December 31, 2012(2011: RMB395 million). As at December 31, 2012, RMB398 million were withdrawn by the trainees and
                                                                           therefore guaranteed by the Group (2011: RMB293 million). During the year, the Group has paid RMB3 million (2011: RMB4
                                                                           million; 2010: RMB2 million) to the banks due to the default of payments of certain pilot trainees.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | The Company received a claim on July 11, 2011 from an overseas entity (the “claimant”)
against the Company for the alleged breach of certain terms and conditions of an aircraft sale agreement. The claimant has made
a claim against the Company for an indemnity of USD46 million or for the refund of the down payments of USD12 million, and the
interest thereon which is calculated in accordance with Clause 35A, United Kingdom Supreme Court Act 1981. The claim is still being
investigated and the directors are of the opinion that the claim is without merit and the Company has involved its legal advisor
to defend the claim and filed a defense to the claimant declining all the claims and made a counter claim for an indemnity of around
USD34 million caused by the claimant’s non-execution of the aircraft sale agreement. During the year, the claimant subsequently
changed its claim for the refund of the down payment of USD12 million to USD13 million. The directors are of the opinion that an
outflow of resource embodying economic benefits is not probable to occur.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 51 | Non-adjusting events after the financial year end
| | -- | -------------------------------------------------



| | (a) | On October 31, 2012, the Board approved the proposal of issuance of ultra-short-term financing
bills in the PRC in the principal amount of up to RMB10 billion with the authorization given by the Extraordinary General Meeting
of the Company. The ultra-short-term financing bills are to be used to fund the operating activities of the Company. On February
8, 2013, the Company issued ultra-short-term financing bills with total face value of RMB500 million, with a maturity period of
180 days and coupon interest rate of 3.9%.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | On March 26, 2013, the directors proposed a final dividend in respect of the year ended December
31, 2012. Further details are disclosed in Note 43(b).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | 52 | Immediate and ultimate controlling party
| | -- | ----------------------------------------



As at December 31, 2012, the directors
of the Company consider the immediate parent and ultimate controlling party of the Group to be CSAHC, a state-owned enterprise
established in the PRC. CSAHC does not produce financial statements available for public use.



| | 53 | Accounting judgments and estimates
| | -- | ----------------------------------



The Groups’ financial position and
results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the financial
statements. The Group bases the assumptions and estimates on historical experience and on various other assumptions that the Group
believes to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other
sources. On an ongoing basis, management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances
and conditions change.



F-88







| | 53 | Accounting judgments and estimates (continued)
| | -- | ----------------------------------------------



The selection of critical accounting policies,
the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes
in condition and assumptions are factors to be considered when reviewing the financial statements. In addition to the assumptions
and estimates regarding provision for early retirement benefits and fair value measurements of financial instruments disclosed
in Note 40 and Note 48(f) respectively, the Group believes the following critical accounting policies also involve the most significant
judgments and estimates used in the preparation of the financial statements.



| | (a) | Impairment of long-lived assets
| | --- | -------------------------------



If circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable, the asset may be considered “impaired”, and an impairment loss
may be recognized in accordance with IAS 36, Impairment of Assets. The carrying amounts of long-lived assets are reviewed
periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested
for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable.
When such a decline has occurred, the carrying amount is reduced to the recoverable amount. The recoverable amount is the greater
of the fair value less costs to sell and value in use. In determining the value in use, expected cash flows generated by the asset
are discounted to their present value, which requires significant judgment relating to the level of traffic revenue and the amount
of operating costs. The Group uses all readily available information in determining an amount that is a reasonable approximation
of recoverable amount, including estimates based on reasonable and supportable assumptions for projections of traffic revenue and
amount of operating costs.



| | (b) | Depreciation
| | --- | ------------



Property, plant and equipment are depreciated
on a straight-line basis over the estimated useful lives, after taking into account the estimated residual value. The Group reviews
the estimated useful lives of assets annually in order to determine the amount of depreciation expense to be recorded during any
financial year. The useful lives are based on the Group’s historical experience with similar assets and take into account
anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from
previous estimates.



| | (c) | Provision for major overhauls
| | --- | -----------------------------



Provision for the cost of major overhauls
for airframes and engines under operating leases is accrued and charged to the consolidated income statement over the estimated
overhaul period. This requires estimation of the expected overhaul cycle and overhaul cost, which are based on the historical experience
of actual cost incurred for overhauls of airframes and engines of the same or similar types. Different estimates could significantly
affect the estimated provision and the results of operations.



F-89







| | 53 | Accounting judgments and estimates (continued)
| | -- | ----------------------------------------------



| | (d) | Frequent flyer revenue
| | --- | ----------------------



The amount of revenue attributable to the
mileages earned by the members of the Group’s frequent flyer award programs is estimated based on the fair value of the mileages
awarded and the expected redemption rate. The fair value of the mileages awarded is estimated by reference to external sales. The
expected redemption rate was estimated based on historical experience, future redemption pattern and program design.



| | 54 | Possible impact of amendments, new standards and interpretations issued but not yet effective
for the year ended December 31, 2012
| | -- | ----------------------------------------------------------------------------------------------------------------------------------



Up to the date of issue of these consolidated
financial statements, the IASB has issued a number of amendments and five new standards which are not yet effective for the year
ended December 31, 2012 and which have not been adopted in these consolidated financial statements.



|                                                                      | Effective for        
|--------------------------------------------------------------------- | ---------------------
|                                                                      | accounting periods   
|                                                                      | beginning on or after
|                                                                      |                      
|Amendments to IAS 1, Presentation of financial statements             | July 1, 2012         
|                                                                      |                      
|– Presentation of items of other comprehensive income                 |                      
|                                                                      |                      
|IFRS 10, Consolidated financial statements                            | January 1, 2013      
|                                                                      |                      
|IFRS 11, Joint arrangements                                           | January 1, 2013      
|                                                                      |                      
|IFRS 12, Disclosure of interests in other entities                    | January 1, 2013      
|                                                                      |                      
|IFRS 13, Fair value measurement                                       | January 1, 2013      
|                                                                      |                      
|IAS 27, Separate financial statements (2011)                          | January 1, 2013      
|                                                                      |                      
|IAS 28, Investments in associates and joint ventures                  | January 1, 2013      
|                                                                      |                      
|Revised IAS 19, Employee benefits                                     | January 1, 2013      
|                                                                      |                      
|Annual Improvements to IFRSs 2009-2011 Cycle                          | January 1, 2013      
|                                                                      |                      
|Amendments to IFRS 7, Financial instruments: Disclosures              | January 1, 2013      
|                                                                      |                      
|– Disclosures - Offsetting financial assets and financial liabilities |                      
|                                                                      |                      
|Amendments to IAS 32, Financial instruments: Presentation             | January 1, 2014      
|                                                                      |                      
|– Offsetting financial assets and financial liabilities               |                      
|                                                                      |                      
|IFRS 9, Financial instruments                                         | January 1, 2015      



F-90







| | 54 | Possible impact of amendments, new standards and interpretations issued but not yet effective
for the year ended December 31, 2012 (continued)
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------



The Group is in the process of
making an assessment of what the impact of these amendments is expected to be in the period of initial application. So far it has
concluded that the adoption of them is unlikely to have a significant impact on the consolidated financial statements except for
the following:



IFRS 10, Consolidated financial
statements



IFRS 10 replaces the requirements
in IAS 27, Consolidated and separate financial statements relating to the preparation of consolidated financial statements.  It
introduces a single control model to determine whether an investee should be consolidated, by focusing on whether the entity has
power over the investee, exposure to variable returns from its involvement with the investee and the ability to use its power to
affect the amount of those returns.



The application of IFRS 10 is
not expected to change any of the control conclusions reached by the Group in respect of its involvement with other entities as
at January 1, 2013. However, it may in the future result in investees being consolidated which would not have been consolidated
under the Group’s existing policies or vice versa.



F-91







| | 55 | Subsidiaries
| | -- | ------------



The following list contains only
the particulars of subsidiaries which principally affect the results, assets or liabilities of the Group.



|Name of company                                                    |  | Place of
    establishment /
    operation |  | Registered capital |               | Proportion of
    ownership
    interest held by
    the Company |  |       | Principal
    activity
|------------------------------------------------------------------ |  | ------------------------------------------ |  | ------------------ | ------------- | ---------------------------------------------------------------- |  | ----- | ----------------------
|                                                                   |  |                                            |  |                    |               |                                                                  |  |       |                       
|Shantou Airlines
    Company Limited (a)                           |  | PRC                                        |  | RMB                | 280,000,000   |                                                                  |  | 60    | %                     
|Chongqing Airlines Company
    Limited (a)                         |  | PRC                                        |  | RMB                | 1,200,000,000 |                                                                  |  | 60    | %                     
|Zhuhai Airlines Company
    Limited (a)                            |  | PRC                                        |  | RMB                | 250,000,000   |                                                                  |  | 60    | %                     
|Xiamen Airlines (a)                                                |  | PRC                                        |  | RMB                | 5,000,000,000 |                                                                  |  | 51    | %                     
|Guizhou Airlines (a)                                               |  | PRC                                        |  | RMB                | 180,000,000   |                                                                  |  | 60    | %                     
|Nan
    Lung International Freight Limited                         |  | Hong Kong                                  |  | HKD                | 3,270,000     |                                                                  |  | 51    | %                     
|Guangzhou Baiyun International
    Logistic Company Limited (a)    |  | PRC                                        |  | RMB                | 50,000,000    |                                                                  |  | 61    | %                     
|China Southern Airlines
    Group Air Catering Company Limited (a) |  | PRC                                        |  | RMB                | 10,200,000    |                                                                  |  | 100   | %                     
|Guangzhou Nanland Air
    Catering Company Limited (b)             |  | PRC                                        |  | RMB                | 120,000,000   |                                                                  |  | 55    | %                     
|Xinjiang Civil Aviation
    Property Management Limited (a)        |  | PRC                                        |  | RMB                | 251,332,832   |                                                                  |  | 51.84 | %                     
|Beijing Southern Airlines
    Ground Services Company Limited (a)  |  | PRC                                        |  | RMB                | 18,000,000    |                                                                  |  | 100   | %                     



| | (a) | These subsidiaries are PRC limited liability companies.
| | --- | -------------------------------------------------------



| | (b) | This subsidiary is a Sino-foreign equity joint venture company established in the PRC.
| | --- | --------------------------------------------------------------------------------------



| | (c) | Certain subsidiaries of the Group are PRC joint ventures which have limited terms pursuant to the
PRC law.
| | --- | ----------------------------------------------------------------------------------------------------------



F-92







| | 56 | Associates and jointly controlled entities
| | -- | ------------------------------------------



The particulars of the Group’s
principal associates and jointly controlled entities as of December 31, 2012 are as follows:



|                                                                       |  |                |  |           |        |  | Proportion
    of ownership |  |        | Proportion    |  |  |                
|---------------------------------------------------------------------- |  | -------------- |  | --------- | ------ |  | --------------------------- |  | ------ | ------------- |  |  | ---------------
|                                                                       |  |                |  |           |        |  | interest
    held by        |  |        | of
    voting |  |  |                
|                                                                       |  | Place of       |  | Group’s   |        |  |                             |  |        |               |  |  | rights
    held
|                                                                       |  | Establishment/ |  | effective |        |  | The                         |  |        |               |  |  | by
    the     
|Name of company                                                        |  | operation      |  | interest  |        |  | Company                     |  |        | Subsidiaries  |  |  | Group          
|                                                                       |  |                |  |           |        |  |                             |  |        |               |  |  |                
|GAMECO
    (a)                                                         |  | PRC            |  |           | 50%    |  |                             |  | 50%    |               |  |  | -              
|SA
    Finance                                                         |  | PRC            |  |           | 33.98% |  |                             |  | 21.09% |               |  |  | 12.89%         
|Sichuan
    Airlines                                                   |  | PRC            |  |           | 39%    |  |                             |  | 39%    |               |  |  | -              
|CSA Culture                                                            |  | PRC            |  |           | 40%    |  |                             |  | 40%    |               |  |  | -              
|Zhuhai
    Xiang Yi (a)                                                |  | PRC            |  |           | 51%    |  |                             |  | 51%    |               |  |  | -              
|Guangzhou
    China Southern Zhongmian Dutyfree Store Co., Limited (a) |  | PRC            |  |           | 50%    |  |                             |  | 50%    |               |  |  | -              
|Flying
    College (a)                                                 |  | Australia      |  |           | 48.12% |  |                             |  | 48.12% |               |  |  | -              



| | (a) | These are jointly controlled entities.
| | --- | --------------------------------------



| | (b) | Certain jointly controlled entities of the Group are PRC joint ventures which have limited terms
pursuant to the PRC law.
| | --- | -------------------------------------------------------------------------------------------------------------------------



F-93