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, 2014



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 BingTelephone: +86 20 86124462E-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.



oYesþNo



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.



þYesoNo



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).



oYesþNo



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 filero | Non-accelerated filero
|------------------------ | ------------------ | ----------------------



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



|U.S.
        GAAPo | International Financial Reporting Standardsþas issued by the International Accounting Standards Board | Othero
|------------------ | ----------------------------------------------------------------------------------------------------- | ------





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.



oItem 17oItem 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).



oYesþNo











TABLE OF CONTENTS





|FORWARD-LOOKING STATEMENTS                                            | 1                                                      
|--------------------------------------------------------------------- | -------------------------------------------------------
|INTRODUCTORY NOTE                                                     | 2                                                      
|GLOSSARY OF AIRLINE INDUSTRY TERMS                                    | 3                                                      
|PART I                                                                |                                                        
|ITEM 1.                                                               | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS. 
|ITEM 2.                                                               | OFFER STATISTICS AND EXPECTED TIMETABLE.               
|ITEM 3.                                                               | KEY INFORMATION.                                       
|                                                                      |                                                        
|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.                            
|A.                                                                    | History and Development of the Company                 
|B.                                                                    | Business Overview                                      
|C.                                                                    | Organizational Structure                               
|D.                                                                    | Property, Plant and Equipment                          
|ITEM 4A.                                                              | UNRESOLVED STAFF COMMENTS                              
|ITEM 5.                                                               | OPERATING AND FINANCIAL REVIEW AND PROSPECTS           
|Critical Accounting Policies                                          | 46                                                     
|Recently Pronounced International Financial Reporting Standards       | 48                                                     
|Overview                                                              | 48                                                     
|Certain Financial Information and Operating Data by Geographic Region | 52                                                     
|A.                                                                    | Operating Results                                      
|B.                                                                    | Liquidity and Capital Resources                        
|ITEM 6.                                                               | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES             
|A.                                                                    | Directors, Senior Management and Employees             
|B.                                                                    | Compensation                                           
|C.                                                                    | Board Practices                                        
|D.                                                                    | Employees                                              
|E.                                                                    | Share Ownership                                        
|ITEM 7.                                                               | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      
|A.                                                                    | Major Shareholders                                     
|B.                                                                    | Related Party Transactions                             
|C.                                                                    | Interests of Experts and Counsel                       
|ITEM 8.                                                               | FINANCIAL INFORMATION                                  
|A.                                                                    | Consolidated Statements and Other Financial Information
|B.                                                                    | Significant Changes                                    
|ITEM 9.                                                               | THE OFFER AND LISTING                                  
|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                                 
|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                                                                                                | 99 
|----------------- | ------------------------------------------------------------------------------------------------------------------- | ---
|H.                | Documents on Display                                                                                                | 99 
|I.                | Subsidiary Information                                                                                              | 99 
|ITEM 11.          | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                          | 99 
|ITEM 12.          | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                                                              | 101
|A.                | Debt Securities                                                                                                     | 101
|B.                | Warrants and Rights                                                                                                 | 101
|C.                | Other Securities                                                                                                    | 101
|D.                | American Depositary Shares                                                                                          | 101
|PART II           |                                                                                                                     | 102
|ITEM 13.          | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                                                                     | 102
|ITEM 14.          | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS                                        | 102
|A.                | Material Modifications to the Instruments Defining the Rights of Security Holders                                   | 102
|B.                | Material Modifications to the Rights of Registered Securities by Issuing or Modifying any other Class of Securities | 102
|C.                | Withdrawal or Substitution of a Material Amount of the Assets Securing any Registered Securities                    | 102
|D.                | Change of Trustees or Paying Agents for any Registered Securities                                                   | 102
|E.                | Use of Proceeds                                                                                                     | 102
|ITEM 15.          | CONTROLS AND PROCEDURES                                                                                             | 102
|ITEM 16A.         | AUDIT COMMITTEE FINANCIAL EXPERT                                                                                    | 103
|ITEM 16B.         | CODE OF ETHICS                                                                                                      | 103
|ITEM 16C.         | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                              | 104
|ITEM 16D.         | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE                                                           | 104
|ITEM 16E.         | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS                                              | 104
|ITEM 16F.         | CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT                                                                       | 104
|ITEM 16G.         | CORPORATE GOVERNANCE                                                                                                | 104
|ITEM 16.          | MINE SAFETY DISCLOSURE                                                                                              | 108
|ITEM 17.          | FINANCIAL STATEMENTS                                                                                                | 108
|ITEM 18.          | FINANCIAL STATEMENTS                                                                                                | 108
|ITEM 19.          | EXHIBITS                                                                                                            | 108
|Index to Exhibits | 108                                                                                                                











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.



1







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 53.72% interest in the Company as of April 17, 2015.



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, 2014 (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").



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 =
RMB6.1190, 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, 2014. 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.



2







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                                |  |                                                                                                                                
|--------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------
|                                        |  |                                                                                                                                
|"available seat kilometers" or "ASK"    |  | the number of seats made available for sale multiplied by the kilometers flown                                                 
|                                        |  |                                                                                                                                
|"available ton kilometers" or "ATK"     |  | the tons of capacity available for the transportation of revenue load (passengers and cargo) multiplied by the kilometers flown
|                                        |  |                                                                                                                                
|Traffic                                 |  |                                                                                                                                
|                                        |  |                                                                                                                                
|"cargo ton kilometers"                  |  | the load in tons multiplied by the kilometers flown                                                                            
|                                        |  |                                                                                                                                
|"revenue passenger kilometers" or "RPK" |  | the number of passengers carried multiplied by the kilometers flown                                                            
|                                        |  |                                                                                                                                
|"revenue ton kilometers" or "RTK"       |  | the load (passenger and cargo) in tons multiplied by the kilometers flown                                                      
|                                        |  |                                                                                                                                
|"revenue ton kilometers-cargo"          |  | revenue freight ton kilometers (RFTK), the load (cargo) in tons multiplied by the kilometers flown                             
|                                        |  |                                                                                                                                
|"revenue ton kilometers-passenger"      |  | the load (passenger) in tons multiplied by the kilometers flown                                                                
|                                        |  |                                                                                                                                
|"ton"                                   |  | a metric ton, equivalent to 2,204.6 pounds                                                                                     
|                                        |  |                                                                                                                                
|Yield                                   |  |                                                                                                                                
|                                        |  |                                                                                                                                
|"yield per RPK"                         |  | revenue from passenger operations divided by RPK                                                                               
|                                        |  |                                                                                                                                
|"yield per RFTK"                        |  | revenue from cargo operations divided by RFTK                                                                                  
|                                        |  |                                                                                                                                
|"yield per RTK"                         |  | revenue from airline operations (passenger and cargo) divided by RTK                                                           
|                                        |  |                                                                                                                                
|Cost                                    |  |                                                                                                                                
|                                        |  |                                                                                                                                
|"operating cost per ATK"                |  | operating expenses divided by ATK                                                                                              
|                                        |  |                                                                                                                                
|Load Factors                            |  |                                                                                                                                
|                                        |  |                                                                                                                                
|"overall load factor"                   |  | RTK expressed as a percentage of ATK                                                                                           
|                                        |  |                                                                                                                                
|"passenger load factor"                 |  | RPK expressed as a percentage of ASK                                                                                           
|                                        |  |                                                                                                                                
|Utilization                             |  |                                                                                                                                
|                                        |  |                                                                                                                                
|"utilization rates"                     |  | the actual number of flight and taxi hours per aircraft per operating day                                                      



3









|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                                                                                                                               
|              |  |                                                                                                                                                                   
|"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.



4









| | ITEM 3. | KEY INFORMATION.
| | ------- | ----------------





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



The following tables present
selected financial data for the five-year period ended December 31, 2014. The selected consolidated income statement data
for the three-year period ended December 31, 2012, 2013 and 2014 and selected consolidated statement of financial position data
as of December 31, 2013 and 2014 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, 2010 and 2011 and selected consolidated statement of financial position data as
of December 31, 2010, 2011 and 2012 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,                         |        
|------------------------------------- |  | ----------------------------------------------- | -------
|                                      |  | 2014 US$                                        |        
|                                      |  | (in million, except per share and per ADR data) |        
|                                     
|Consolidated Income Statement Data:  
|                                      |  |                                                 |        
|Operating revenue                     |  |                                                 | 17,745 
|Operating expenses                    |  |                                                 | (17,327
|Operating profit                      |  |                                                 | 776    
|Profit before income tax              |  |                                                 | 501    
|Profit for the year                   |  |                                                 | 392    
|Profit attributable to:               |  |                                                 |        
|Equity shareholders of the Company    |  |                                                 | 291    
|Non-controlling interests             |  |                                                 | 101    
|Basic and diluted earnings per share  |  |                                                 | 0.03   
|Basic and diluted earnings per ADR(1) |  |                                                 | 1.48   



(1) Basic and diluted earnings per share have
been computed by dividing profit attributable to equity shareholders of the Company by the weighted average number of shares in
issue. Basic and diluted earnings 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.



5







|                                                                                   |  | Year ended December 31, |       
|---------------------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                                   |  | 2014 US$                |       
|                                                                                   |  | (in million)            |       
|                                                                                  
|Consolidated Statement of Financial Position Data:                                
|                                                                                   |  |                         |       
|Cash and cash equivalents                                                          |  |                         | 2,519 
|Other current assets                                                               |  |                         | 1,982 
|Property, plant and equipment, net                                                 |  |                         | 21,973
|Total assets                                                                       |  |                         | 31,000
|Bank and other loans, including long-term bank and other loans due within one year |  |                         | 3,429 
|Obligations under capital leases due within one year                               |  |                         | 979   
|Bank and other loans, excluding balance due within one year                        |  |                         | 6,875 
|Obligations under capital leases, excluding balance due within one year            |  |                         | 7,177 
|Total equity                                                                       |  |                         | 7,271 
|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 |          
|---------------------------------------- |  | ----------------------- | ---------
|                                         |  | 2014                    |          
|                                        
|Capacity                                
|ASK (million)                            |  |                         | 209,807  
|ATK (million)                            |  |                         | 28,454   
|Kilometers flown (thousand)              |  |                         | 1,275,570
|Hours flown (thousand)                   |  |                         | 2,026    
|Number of landing and take-offs          |  |                         | 884,070  
|Traffic                                  |  |                         |          
|RPK (million)                            |  |                         | 166,629  
|RTK (million)                            |  |                         | 19,780   
|Passengers carried (thousand)            |  |                         | 100,919  
|Cargo and mail carried (tons)            |  |                         | 1,433,250
|Load Factors                             |  |                         |          
|Passenger load factor (RPK/ASK) (%)      |  |                         | 79.4     
|Overall load factor (RTK/ATK) (%)        |  |                         | 69.5     
|Yield                                    |  |                         |          
|Yield per RPK (RMB)                      |  |                         | 0.58     
|Yield per RFTK (RMB)                     |  |                         | 1.42     
|Yield per RTK (RMB)                      |  |                         | 5.27     
|Fleet                                    |  |                         |          
|- Boeing                                 |  |                         | 311      
|- Airbus                                 |  |                         | 276      
|- McDonnell Douglas                      |  |                         | -        
|- Others                                 |  |                         | 25       
|Total aircraft in service at period end  |  |                         | 612      
|Overall utilization rate (hours per day) |  |                         | 9.6      



6







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)(RMBper US$) |  |        | High |  |  | Low    | 
|-------------------- |  | ---------- | ------ |  | ---------------------- |  | ------ | ---- |  |  | ------ | 
|Annual Exchange Rate |  |            |        |  |                        |  |        |      |  |  |        | 
|2010                 |  |            | 6.6000 |  |                        |  | 6.7696 |      |  |  | 6.8330 | 
|2011                 |  |            | 6.2939 |  |                        |  | 6.4630 |      |  |  | 6.6364 | 
|2012                 |  |            | 6.2301 |  |                        |  | 6.3088 |      |  |  | 6.3879 | 
|2013                 |  |            | 6.0537 |  |                        |  | 6.1412 |      |  |  | 6.2213 | 
|2014                 |  |            | 6.2046 |  |                        |  | 6.1704 |      |  |  | 6.2591 | 



| | (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 2014                      |  |      | 6.1385 |  |     | 
|November 2014                     |  |      | 6.1429 |  |     | 
|December 2014                     |  |      | 6.2256 |  |     | 
|January 2015                      |  |      | 6.2046 |  |     | 
|February 2015                     |  |      | 6.2573 |  |     | 
|March 2015                        |  |      | 6.2741 |  |     | 
|April 2015 (up to April 17, 2015) |  |      | 6.2152 |  |     | 



| | 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 53.72% of the equity of the Company. 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.



7







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 gains of RMB2,903 million
was recorded in 2013 mainly due to Renminbi appreciated significantly against U.S. dollar in 2013. Our net exchange losses of RMB292
million was recorded in 2014 as Renminbi depreciated slightly against U.S. dollar in 2014.



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, 2014, the Group’s current liabilities exceeded its current assets by RMB26,545 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 2014 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, and its 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. 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, 2014,
the Group had banking facilities with several PRC commercial banks for providing loan finance up to approximately RMB187,133 million,
of which approximately RMB126,703 million was unutilized. Our directors believe that sufficient financing will be available to
the Group in 2015. 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,
2013 and 2014, the Group had deposits of RMB2,675 million and RMB4,264 million, respectively, with SA Finance.



8







We have experienced
incidents of employee misconduct in the past, and may be unable to prevent similar incidents in the future, which could adversely
impact our reputation, our business and the trading price of our securities.



We were informed by PRC
authorities on December 30, 2014 that Mr. Chen Gang, then Executive Vice President of the Company and Mr. Tian Xiao Dong, then
COO Flight Operations of the Company were under investigation by such authorities for suspicion of job-related crimes. On January
5, 2015, we were informed that Mr. Xu Jie Bo, then Executive Director, Executive Vice President, Chief Financial Officer and Chief
Accountant of the Company and Mr. Zhou Yue Hai, then Executive Vice President of the Company were also under investigation for
suspicion of job-related crimes. We had no prior knowledge of the incidents that led to the investigation by the PRC authorities.
We responded immediately to this information in accordance with our internal policies, and removed each of the affected employees
from office. In March 2015, we were further informed that these former executives have been formally arrested by the PRC authorities
for suspicion of receiving bribes. As of the date of this Annual Report, the investigation of these individuals by the government authorities is on-going. Legal proceedings are subject to many uncertainties and we cannot predict the outcome of individual
matters with absolute assurance. However, after due inquiry and to the best of our knowledge, neither we nor any of our current
directors, senior management, or controlling shareholders is subject to any investigation by PRC authorities involved in these
incidents or otherwise, and based on current information, we do not, believe there will be any material impact on our financial
condition or results of operations.



We may not be able
to detect or prevent employee misconduct, including misconduct by senior management, and such misconduct may damage
our reputation and could adversely affect the financial condition of the Company and results of our operations. We have
limited knowledge of the status or scope of the on-going investigation against our former executives by PRC authorities and
currently are unaware of what determinations and conclusions may be reached by the authorities against these former
executives. Based on current information, we do not, however, believe there will be any material impact on the
Company’s financial condition or results of operations or internal control over our financial reporting. We will
further enhance our training and corporate governance policies and procedures in order to strengthen our
ability to detect and prevent similar and other misconduct. Despite our proactive actions, however, we cannot assure you that
we will be able to detect or prevent such alleged personal misconduct in a timely fashion, or at all. If we fail to prevent
employee personal misconduct, our reputation may be harmed, and financial
 condition and results of operations could be adversely affected.



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 a number of outbreaks
of H7N9 bird flu in several provinces in the PRC. A further spread of H7N9 bird flu may have a negative impact on the economic
and business activities in China and thereby adversely affect our results of operation. A future outbreak of an infectious disease
or any other serious public health concerns in Asia and elsewhere could have a material adverse effect on our business, financial
condition and results of operations.



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 has 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 loosened in the past few years. As of April 17, 2015, there were
75 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.



10







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 attacks could also affect the 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 kilometers. 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.



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.



11







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
the Basic 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, 2014 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 2014. However, there can be no assurance that we will
not be a PFIC for the taxable year 2015 and/or later taxable years, as PFIC status is re-tested each year and depends on the facts
in such year.



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.



12







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 2014 accounted
for 64.05% 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 price 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.



13







In 2014, a
reasonable possible increase or decrease of 10% in average jet fuel price (VAT inclusive) with volume of fuel consumed and
all other variables held constant, would have increased or decreased the Group’s annual fuel costs by approximately
RMB3,773 million. Accordingly, even if the jet fuel supply remains stable, increases in jet fuel prices will nevertheless
adversely impact our financial results.



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.



14







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 provides train services at a speed of up to 300 kilometers per
hour connecting major cities such as Beijing, Shanghai, Wuhan, Zhengzhou, Xi'an, Qingdao, Guangzhou, Harbin and Dalian. 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 800 kilometers. The aggregate high-speed railway mileage in China reached over 16,000 kilometers as
of December 31, 2014. The construction of all railways in China’s "Four Longitudinal and Four Horizontal" high-speed
railway network is expected to complete by the end of 2015. 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.



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 (RMB100 million) worth of CO2 emissions
allowances from other greener industries. Pursuant to this policy, the domestic airlines having flight points in Europe undertake
the same carbon emission reductions obligation as the European local airlines, which will result in a significant increase in the
operating cost of domestic airlines in Europe, including our Company, and further have an adverse impact on the results of operations
and financial condition. 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. In November 2014,
CAAC issued a notification on the ETS. The notification provided that CAAC would not prohibit Chinese airlines to take part in
the ETS if the relevant flights take off and land between the airports within the EU during 2012 and 2016. We operated few flights
between airports within the EU since 2012. We expect we would operate few flights between airports within the EU in the future.
Therefore, we will submit emissions report and pay the quota between 2012 and 2016 for our flights between airports within the
EU. At the same time, we will be in strict compliance with the requirements of relevant PRC laws and implement the related obligations
of EU carbon emissions trading. There can be no assurance that the new implementation proposal will not have negative impact on
our financial condition and result of operation.



15







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 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.



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.



16







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 financial condition and results of operations may
be adversely affected.



On July 31, 2012, the Ministry
of Finance ("MOF") and the State Administration of Taxation ("SAT") jointly issued a pilot program (the "Pilot
Program"), pursuant to which, commencing on November 1, 2012, business tax is replaced by a value-added tax ("VAT").
According to the Pilot Program, all traffic revenues and the other revenues that fall within the scope of the Pilot Program, including
ground service income and cargo handling income, are subjected to VAT levied at the applicable tax rates of 17%, 11% or 6%. Other
revenues that are not within the scope of the Pilot Program continue to be subject to business tax at applicable tax rates. However,
as the Pilot Program has only been implemented recently, there is uncertainty as to how its impact on our financial condition and
results of operations is not certain, but it may affect the way we record our revenues and taxes in our financial statements. As
a result, it may be difficult to compare our financial statements in future periods with these before the Pilot Program was implemented.



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
2014. 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.



17







If additional remedial
measures are imposed against four PRC-based accounting firms, including our independent registered public accounting firm, in administrative
proceedings brought by the SEC, it could result in our financial statements being determined to not be in compliance with the requirements
of the Securities Exchange Act of 1934.

In December 2012, the SEC
instituted administrative proceedings against four PRC-based accounting firms, including our independent registered public accounting
firm, alleging that these firms had violated U.S. securities laws and the SEC's rules and regulations thereunder by failing to
provide to the SEC the firms' work papers related to their audits of certain PRC-based companies that are publicly traded in the
United States. On January 22, 2014, an initial administrative law decision was issued, which determined that the four PRC-based
accounting firms should be censured and barred from practicing before the SEC for a period of six months. The four PRC-based
accounting firms appealed the initial administrative law decision to the SEC. The initial law decision is neither final nor legally
effective unless and until it is endorsed by the full SEC. In February 2015, each of the four PRC-based accounting firms agreed
to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC.
The settlement requires the firms to follow detailed procedures to provide the SEC with access to PRC-based firms’ audit
documents via the CSRC.



We were not and are not
the subject of any SEC investigations nor are we involved in the proceedings brought by the SEC against the accounting firms. If
the firms do not follow these procedures or if there is a failure in the process between the SEC and the CSRC, the SEC could impose
penalties such as suspensions or it could restart the administrative proceedings. If the accounting firms including our independent
registered public accounting firm were denied, temporarily or permanently, the ability to practice before the SEC, and we are unable
to find timely another registered public accounting firm which can audit and issue a report on our financial statements, our financial
statements could be determined to not be in compliance with the requirements for financial statements of public companies registered
under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such a determination could ultimately lead to the delisting
of our common stock from the NYSE for CSA's case or deregistration from the SEC, or both, which would substantially reduce or effectively
terminate the trading of our common stock in the United States.



| | 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 is www.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.



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.



18







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 RMB 1,607,850,000. 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 RMB43.12 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.



On September 24, 2012,
we entered into a joint venture agreement with Henan Civil Aviation Development and Investment Co., Ltd. ("Henan Aviation
Investment") for the establishment of China Southern Airlines Henan Company Limited, a joint venture company with a total
registered capital of RMB6 billion, which will be owned as 60% and 40% by the Company and Henan Aviation Investment, respectively.
The first installment of paid-in capital of RMB1.2 billion was received in full. On September 28, 2013, Henan Aviation Investment
was established.



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.



19







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 have been delivered in stages to the Company.



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.

20







On May 16, 2014, we entered
into the aircraft acquisition agreement with Airbus S.A.S to purchase 30 Airbus A320 series aircraft and 50 A320 NEO series aircraft.
The catalogue price of one Airbus A320 series aircraft is priced differently in the range of US$85.8 million and US$110.1 million
and one A320 NEO series aircraft is priced differently in the range of US$94.4 million to US$120.5 million. The aggregate consideration
for the acquisition will be funded partly by internal resources of the Company and partly through commercial loans by commercial
banks. The Airbus aircraft will be delivered in stages to the Company during the period commencing from 2016 to 2020.



Capital Expenditure



The Group had RMB26,481
million, RMB29,576 million, and RMB23,911 million capital expenditures in 2014, 2013 and 2012 respectively. Of such capital expenditures
in 2014, RMB17,832 million was financed by capital leases, RMB8,189 million was financed by bank borrowings while the remaining
RMB460 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. As of December 31, 2014, we had total capital commitments for aircraft, engines
and related equipment of approximately RMB59,467 million.



| | 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 of the year end of 2014, 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, 2014, the Group’s RPKs increased at a compound annual growth
rate of 12.77% from 135,535 million in 2012 to 148,417 million in 2013 and 166,629 million in 2014 while its capacity, measured
in terms of ASKs, increased at a compound annual growth rate of 12.32%, from 169,569 million in 2012 to 186,800 million in 2013
and 209,807 million in 2014. In 2014, the Group carried 10,092 million passengers and had passenger revenue of RMB97,145 million
(approximately US$15,876 million).



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"), Chongqing Airlines Company Limited ("Chongqing Airlines") and Henan Airlines Company Limited (“Henan
Airlines”), (collectively, the "Airline Subsidiaries"). In 2014, the Airline Subsidiaries carried 3,470 million
passengers and had passenger revenue of RMB25,100 million (approximately US$4,102 million) and accounted for 34.5% and 25.8% 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 12.0% to RMB7,183 million (approximately US$1,174
million) in 2014 as compared with that of 2013. 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, 2014,
the Group operated 1,220 routes, of which 978 were domestic, 185 were international and 57 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.



21







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, 2014, the Group had 57 regional routes and 185 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, Azerbaijan, Bangladesh, United Kingdom,
Burma, Cambodia, Canada, Dutch, France, Georgia, German, India, Indonesia, Japan, Kazakhstan, Kyrgyzstan, Malaysia, Maldives, Nepal,
New Zealand, Pakistan, Philippines, Russia, Singapore, South Korea, Tajikistan, Thailand, Turkey, Turkmenistan, United Arab Emirates
(UAE), United States of American (USA), Vietnam, Mauritius, Uzbekistan, Iran.



After joining Skyteam Alliance,
the Group has established a network reaching over 1,052 destinations globally, connecting 177 countries and regions and covering
major cities around the world.



As of December 31, 2014,
the Group had a fleet of 612 aircraft, consisting primarily of Boeing 737 series, 747, 757, 777, 787, Airbus 320 series, 330, 380
etc. The average age of the Group’s registered aircraft was 5.9 years as of December 31, 2014.



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.



22







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 HK$2.73 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 HK$2.73 per share.



23







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 10, 2012, which remained effective for a period of twelve months from the date of approval of the resolution at the
general meeting. As of August 9, 2013, the relevant work regarding the 2012 Non-public A Share Issue of the Company had not been
completed. The proposal for the 2012 Non-public A Share Issue of the Company and A Shares subscription agreement therefore were
lapsed automatically due to the expiration of the resolution passed at the general meeting.



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%.



24







On March 21, 2014, the
Company completed the issuance of the first tranche of ultra-short-term financing bills for the year 2014 of China Southern Airlines
Company Limited (the "First Tranche Financing Bills"). The total issuance amount of the First Tranche Financing Bills
was RMB3 billion, with a maturity period of 180 days, a par value per unit of RMB100 and a nominal interest rate of 5.1%.



On April 17, 2014, the
Company completed the issuance of the second tranche of ultra-short-term financing bills for the year 2014 of China Southern Airlines
Company Limited (the "Second Tranche Financing Bills"). The total issuance amount of the Second Tranche Financing Bills
was RMB3 billion, with a maturity period of 270 days, a par value per unit of RMB100 and a nominal interest rate of 5.1%.



On August 14, 2014, the
Board approved to make an application to National Association of Financial Market Institutional Investors for the registration
and issuance of medium-term notes with an aggregate maximum principal amount of RMB10 billion for the purpose of replenishing the
working capital and optimizing the debt structure of the Company. The annual general meeting for the year 2013 of the Company held
on June 26, 2014 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 tranche(s), debt financing instruments within the permissible size
for debt issuance in accordance with the provisions of the applicable laws and regulations. As of the date of this Annual Report,
we have not issued any medium term notes.



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)            | 
|2012 |  |                     | 86.48 |  |                                            |  | 7.2 |                                 | 
|2013 |  |                     | 91.79 |  |                                            |  | 6.1 |                                 | 
|2014 |  |                     | 100.2 |  |                                            |  | 9.9 |                                 | 



Route Network



Overview



The Group operates the
most extensive route network among all Chinese airlines. As of December 31, 2014, the Group operated 1,220 routes consisting
of 978 domestic routes, 185 regional routes and 57 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.



25







In order to expand the
Group’s international route network, the Group has entered into code-sharing agreements with several international airlines,
including Aeroflot-Russian Airlines, Air France, CSA Czech Airlines, Asiana Airlines, China Airlines, China Eastern Airlines, Delta
Air Lines, Japan Airlines International, Kenya Airways, KLM Royal Dutch Airline, Korean Air, Mandarin Airlines, Pakistan International
Airlines, PT Garuda Indonesia (Persero) Tbk., Qantas Airways Limited, Vietnam Airlines, WestJet, and Xiamen 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 1,052 destinations globally,
connecting 177 countries and regions and covering major cities around the world.



Route Bases



In addition to its main
route bases including Guangzhou as core hub, Beijing as major hub, Urumqi as regional hub and Chongqing as seasonal hub, the Group
maintains regional route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Shenyang, Changchun, Dalian, Harbin, Haikou, Zhuhai, Xiamen,
Shanghai, Xi’an, Fuzhou, Nanning, Guilin, Shantou, Guiyang 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 2014, the Group’s most profitable domestic routes were between:
Shenyang-Beijing, Beijing-Shenyang, Urumqi-Beijing, Beijing-Urumqi, Guiyang-Beijing, Beijing-Guiyang, Changchun- Beijing and Beijing
-Changchun.



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 2014, the most profitable scheduled regional routes were between: Shenzhen-Taipei, Taipei-Shenzhen, Taipei-Guangzhou,
Shanghai-Taipei, Taipei-Shanghai, Guangzhou-Taipei, Taipei-Guangzhou, Changchun-Taipei and Taipei- Changchun.



In 2014, the Group conducted
a total of 19.86 thousands flights on its regional routes, accounting for approximately 23.7% of all passengers carried by Chinese
airlines on routes between Hong Kong, Macau or Taiwan and destinations in Mainland China according to CAAC statistics briefing
..



Previously, direct flights
between Taiwan and Mainland China were only available during certain festivals. Other than that, travelers between Taiwan and Mainland
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 direct passenger flights were further increased in the following years. As of April 17, 2015, there
were 420 cross-Strait direct passenger flights a week.



26







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, Azerbaijan, Bangladesh, United Kingdom, Burma, Cambodia,
Canada, Dutch, France, Georgia, German, India, Indonesia, Japan, Kazakhstan, Kyrgyzstan, Malaysia, Maldives, Nepal, New
Zealand, Pakistan, Philippines, Russia, Singapore, South Korea, Tajikistan, Thailand, Turkey, Turkmenistan, UAE, United
States, Vietnam, Mauritius, Uzbekistan and Iran.



Since joining Skyteam Alliance,
the Group has established a network reaching over 1,052 destinations globally, connecting 177 countries and regions and covering
major cities around the world.



In 2014, the Group’s
most profitable international routes were: Shenyang-Seoul, Seoul-Shenyang, Dalian-Seoul, Seoul-Dalian, Yanji-Seoul, Seoul-Yanji,
Changchun-Seoul and Seoul-Changchun.



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, 2014, the Group operated a fleet of 612 aircraft with an average age of 5.92 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, 383 aircraft 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 respective passenger capacity.



|Model            |  | Number of Aircraft |  | Passenger Capacity     
|---------------- |  | ------------------ |  | -----------------------
|Boeing 787       |  | 12                 |  | 228/237                
|Boeing 777-300ER |  | 5                  |  | 309                    
|Boeing 777-200   |  | 4                  |  | 360                    
|Boeing 757-200   |  | 19                 |  | 174/180/192/196/197/204
|Boeing 737-800   |  | 208                |  | 159/160/161/164/170    
|Boeing 737-700   |  | 50                 |  | 120/128                
|Boeing 737-300   |  | 3                  |  | 126                    
|Boeing 747-400F  |  | 2                  |  | N/A                    
|Boeing 777-200F  |  | 8                  |  | N/A                    
|Airbus 380-800   |  | 5                  |  | 506                    
|Airbus 330-300   |  | 15                 |  | 275/284                
|Airbus 330-200   |  | 16                 |  | 218/258                
|Airbus 321       |  | 75                 |  | 179                    
|Airbus 320       |  | 122                |  | 152                    
|Airbus 319       |  | 43                 |  | 122/138                
|EMB190           |  | 25                 |  | 98                     
|Total            |  | 612                |  | N/A                    



In 2014, the Group continued
to expand and modernize its aircraft fleet. During 2014, the Group (i) took scheduled delivery of 51 aircraft under purchase
agreements, including four A3330 aircraft, two B787 aircraft, five B777-300ER aircraft, twelve A320/A321 aircraft and six B738
aircraft; (ii) took scheduled delivery of 22 aircraft under operating leases, including nine A320/A321 aircraft and thirteen B738
aircraft; (iii) returned six aircraft under operating leases upon expiry, including four B737-700 aircraft one A319 and one A320
aircraft; and (iv) disposed seventeen aircraft, including seven B737-300, six EMB145 and four B777-200ERS.



27







During 2014, Xiamen Airlines
took scheduled delivery of 13 aircraft under purchase agreement, including two B787 and eleven B737-800 aircraft and returned one
B737-800 aircraft at its lease end.



In May 2014, we entered
into an agreement with the Airbus S.A.S for the acquisition of eighty A320 family aircraft to be delivered from 2016 to 2020. In
December 2014, we entered into an agreement with Aercap for the operating lease of twenty-four A320 family aircraft to be delivered
from 2016 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, 2014, 186 of the Group’s 612 aircraft were operated under
capital leases, 197 were operated under operating leases, 229 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, 2014, the number of aircraft operated by the Group pursuant to capital and operating leases and the average
remaining terms, of such leases.



|                 |  | Capital Lease      |     |  | Operating Lease    |  |     | Average Remaining Lease Term | 
|---------------- |  | ------------------ | --- |  | ------------------ |  | --- | ---------------------------- | 
|Model            |  | Number of Aircraft |     |  | Number of Aircraft |  |     | Year                         | 
|Boeing 787       |  |                    | 12  |  |                    |  | 0   |                              | 
|Boeing 737-800   |  |                    | 58  |  |                    |  | 67  |                              | 
|Boeing 737-700   |  |                    | 14  |  |                    |  | 9   |                              | 
|Boeing 777-200F  |  |                    | 4   |  |                    |  | 0   |                              | 
|Boeing 777-300ER |  |                    | 5   |  |                    |  | 0   |                              | 
|Airbus 380-800   |  |                    | 2   |  |                    |  | 0   |                              | 
|Airbus 330-300   |  |                    | 7   |  |                    |  | 8   |                              | 
|Airbus 330-200   |  |                    | 11  |  |                    |  | 2   |                              | 
|Airbus 321-200   |  |                    | 23  |  |                    |  | 22  |                              | 
|Airbus 320-200   |  |                    | 40  |  |                    |  | 40  |                              | 
|Airbus 319-100   |  |                    | 6   |  |                    |  | 29  |                              | 
|EMB190           |  |                    | 4   |  |                    |  | 20  |                              | 
|Total            |  |                    | 186 |  |                    |  | 197 |                              | 



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 2029. As
of December 31, 2014, the Group’s aggregate future minimum lease payments (including future finance charges) required under
its capital leases were RMB56,577 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.





28









Operating Leases



As of December 31, 2014,
the Group’s aggregate future minimum lease payments required under its operating leases were RMB28,798 million. As of the
year end of 2014, 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 nil to 10.0% 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 RMB257 million, RMB198 million and RMB182 million during 2014, 2013 and 2012 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 90 and 85 spare jet engines for its
fleet as of the year end of 2014 and 2013, 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 the Joint Civil Aviation Authorities certificate, which was transferred to European Aviation Safety Agency
certification in November 2004, for the repair and maintenance of aircraft and aircraft engines.



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 55% 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. Our agreement with GAMECO usually has a term of one
year.



29







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 domestic
qualified service providers in Beijing (AMECO), Xiamen (TEXL) and Hong Kong (HAESL), and by overseas qualified service providers
in England, Korea, Singapore, France, Germany, Canada, Poland, Thailand, Israel. 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 RMB2,095 million, RMB2,579 million and
RMB2,298 million for the years ended December 31, 2014, 2013 and 2012, 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 "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
"Air Transportation Incidents Per Ten Thousands Hours Ratio" was 0.012, 0.02 and 0.036 in 2014, 2013 and 2012, respectively.
In comparison, CAAC’s published maximum acceptable Air Transportation Incidents Per Ten Thousands Hours Ratio was 0.5, 0.5
and 0.5 in 2014, 2013 and 2012, respectively. This ratio is defined as the number of occurrences of air transportation incident
for every 10,000 hours of flight time. In 2013, 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, being the first in domestic
aviation industry to receive such a great honor. Subsequently in 2012, we were awarded the "Safe Flight Diamond Award"
by CAAC for our 10,000,000 safety flight hours record, also being the first in domestic aviation industry to receive such a great
honor. By December 31, 2014, the Company’s continuous safe flight span totaled to 13.5 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 35.6%, 36.2%
and 39.0% of the Group’s operating expenses for the years ended December 31, 2014, 2013 and 2012, 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, 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.



30







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 2013. As a result, the domestic price for jet fuel has increased significantly from RMB 4,020 per ton in May 2009 to RMB 7292
per ton in January 2014. Our jet fuel costs increased from RMB 35,538 million in 2013 to RMB 37,728 million in 2014 as a result
of an increase in average jet fuel prices from 2013 to 2014.



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 14.48% and 12.6% of the Group’s total jet fuel
consumption in 2014 and 2013, respectively.



Fuel Surcharge



The NDRC has lowered the
rate of fuel surcharge from RMB 0.00002541 per kilometer to RMB 0.00002656 per kilometer, starting from April 1, 2013 and ending
on March 31, 2014. Based on that rate, for every RMB100 by which the cost of jet fuel exceeds RMB 4,140 per ton, the airlines are
allowed to charge RMB0.00002656 per kilometer for the flight distance. From April 1, 2015, The NDRC has adjusted the benchmark
oil price to RMB5000 per ton, for every RMB100 by which the cost of jet fuel exceeds that price, the airlines are allowed to charge
RMB0.00002543 per kilometer 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
Astronautics (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.



31







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 had about 3,100 trainees as of April 17, 2015.
Approximately 500 trainees are expected to graduate by the end of 2015.



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,
2013. As of December 31, 2014, the Group has provided guarantees with joint liability for the loans of such self-sponsored pilots
in an aggregate amount of RMB646 million under which an aggregate of personal bank loans of RMB486 million were drawn down from
the banks. For the year ended December 31, 2014, the Group made repayments of RMB2 million due to the default of payments of certain
pilot trainees.



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 runway,
ramp, terminal 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.



32







Ground services at the
airports, such as those in Shenzhen, Changsha, Wuhan, Zhengzhou, Haikou, Zhuhai, Xiamen, Guilin, Jieyang, Guiyang, Shenyang, Harbin,
Dalian, Changchun, 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 China Southern Airlines Ground Services Co.,
Ltd, 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 Group 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.
In 2014, the Group had two Boeing 747 freighters and eight Boeing 777 freighters, mainly servicing 13 international cargo
routes, including Guangzhou – Chongqing –Amsterdam – Guangzhou, Guangzhou – Amsterdam –
Guangzhou, Guangzhou – Vienna – Frankfurt – Guangzhou, Guangzhou – Frankfurt – Guangzhou,
Guangzhou – Qingdao – Los Angeles – Tianjin – Guangzhou, Shanghai Pudong – Amsterdam –
Vienna – Shanghai Pudong, Shanghai Pudong – Amsterdam – Chongqing – Shanghai Pudong, Shanghai Pudong
– Amsterdam – Shanghai Pudong, Shanghai Pudong – Frankfurt – Shanghai Pudong, Shanghai Pudong –
Zhengzhou – Anchorage – Chicago – Shanghai Pudong, Shanghai Pudong – Anchorage – Chicago
– Shanghai Pudong, Shanghai Pudong – Los Angeles – Vancouver– Shanghai Pudong and Pudong –
LosAngeles – Tianjin – Shanghai Pudong. 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, Dhaka, Dubai (Sharjah), Dushanbe, Frankfurt, Fukuoka, Hanoi, Hiroshima, Ho Chi Minh City, Irkutsk,
Islamabad, Istanbul, Jakarta, Jeddah, Kathmandu, Khabarovsk, Khudzhand, Kitakyushu, Kuala Lumpur, London, Los Angeles, Manila,
Melbourne, Moscow, Nagoga, New York, Niigata, Novosibirsk, Oakland, Osaka, Osh, Paris, Penang, Perth, Phnom Penh, Phuket, San Francisco,
Sapporo, Sendai, Seoul, Siem Reap, Singapore, Sydney, Tashkent, Tehran, Tokyo, Toyama, Tbilisi, Vancouver, Vladivostok, Vienna
and Yangon.



33







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 2014, approximately 18.9%% 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 3.35% 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 2014, sales by independent sales agents accounted for approximately 81.1% of the Group’s ticket sales of its
scheduled flights.



Substantially all of the
Group’s sales offices and agents in China are linked electronically to the TravelSky Technology Limited’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 provided 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. In 2014, the Group generally pays the cargo agents an average commission of 1.75% of the relevant cargo
freight rate for domestic and international services, of which the commission of cargo agents in the Pearl River Delta region
is 2.02%.



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 was 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 competitiveness.



The Group seeks 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 offered 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, SMS platforms and online meal booking. In 2014, the Group strengthened
the cooperation with Air France-KLM by co-promotion, agent and corporate joint visits and workshops, further integrating resources
to benefit to both parties. Along with new route launches of Guangzhou - Changsha - Frankfurt, Guangzhou - New York and Guangzhou
- Wuhan - San Francisco, the Group held workshops in the origin and destination cities, announcing our new flights to local agents
and clients. Besides, the Group cooperated with government agencies, Tourism Australasia and Tourism New Zealand, to promote and
attract people to Australia and New Zealand. In addition, the Group broadcast the first micro film “Dream from the Heart”,
successfully expressed its brand, social responsibility and customer-oriented services.



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 was 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 competitiveness.



34







The Group seeks 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 offered 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 was 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 few changes in the pattern
of the normal cycle of travelers entering and leaving Guangzhou 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 2014, the Group had approximately 25.8
million members (including those of Xiamen Airlines) under these programs.



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.



35







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 17, 2015, there were 75 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.



36







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.



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, pursuant to which, effective on June 1, 2010, 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. The CAAC and NDRC further issued a notice, pursuant to which, effective
on October 20, 2013, airlines are free to set domestic flights airfares not exceeding up to 25% above the bench mark prices where
governmental pricing guidance is applicable. In recent years, there were a series of air fare reform to deregulate the control
on the air fare pricing policy step by step.



Published air fares of
Chinese airlines for the Hong Kong and Taiwan routes are determined by the CAAC and the relevant civil aviation authorities in
Hong Kong or Taiwan. Airlines may offer discounts on flights on their Hong Kong and Taiwan regional routes.



Published air fares of
Chinese airlines for international routes (except for Japan) are determined by Chinese airlines at their own discretion, taking
into account the international air fare standards established through the International Air Transport Association. For Japan routes,
air fares must be approved by the  relevant civil aviation authorities in Japan, and 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. 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.



37







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.



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 2014, these three airlines together controlled approximately 68% 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 increase 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.



38







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. Currently, the Four Longitudinal High-Speed Railways, including
Beijing-Shanghai, Beijing-Guangzhou-Shenzhen, Harbin-Dalian, Shanghai-H hangzhou-Shenzhen High-Speed Railways, have commenced
operation. the Four Horizontal High-Speed Railways, including Shijiazhuang-Taiyuan, Jinan-Qingdao, Zhenzhou-Xi'an-Baoji,
Nanjing-Wuhan-Chongqing, Hangzhou-Nanchang-Changsha High-Speed Railways, have partly commenced operation, and the rest will be
finished at the end of 2015. The expansion of the coverage of this network, improvements in the 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 800
kilometers. The aggregate high-speed railway mileage in China reached over 16,000 kilometers as of December 31, 2014. The
construction of all railways in China’s "Four Longitudinal and Four Horizontal" high-speed railway network is
expected to complete by the end of 2015. 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.



According to CAAC statistics
briefing, 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)   | 
|2010 |  |                              | 267.7 |  |                               |  | 28.6 |                                 | 
|2011 |  |                              | 292.2 |  |                               |  | 27.6 |                                 | 
|2012 |  |                              | 319.4 |  |                               |  | 27.1 |                                 | 
|2013 |  |                              | 354.0 |  |                               |  | 25.9 |                                 | 
|2014 |  |                              | 391.7 |  |                               |  | 25.8 |                                 | 



39







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 2014 according to passenger volume data from CAAC statistics briefing.



|Airport           |  | Passenger Carried (% of total) |      |  | Cargo and Mail Carried (% of total) |  |      | Departing Flight (% of total) | 
|----------------- |  | ------------------------------ | ---- |  | ----------------------------------- |  | ---- | ----------------------------- | 
|Beijing           |  |                                | 16.9 |  |                                     |  | 11.7 |                               | 
|                  |  |                                |      |  |                                     |  |      |                               | 
|Guangzhou         |  |                                | 49.8 |  |                                     |  | 32.2 |                               | 
|                  |  |                                |      |  |                                     |  |      |                               | 
|Shanghai Pudong   |  |                                | 8.7  |  |                                     |  | 6.4  |                               | 
|                  |  |                                |      |  |                                     |  |      |                               | 
|Shanghai Hongqiao |  |                                | 13.2 |  |                                     |  | 21.6 |                               | 
|                  |  |                                |      |  |                                     |  |      |                               | 
|Chengdu           |  |                                | 12.9 |  |                                     |  | 12.8 |                               | 
|                  |  |                                |      |  |                                     |  |      |                               | 
|Shenzhen          |  |                                | 27.7 |  |                                     |  | 15.5 |                               | 
|                  |  |                                |      |  |                                     |  |      |                               | 
|Kunming           |  |                                | 12.8 |  |                                     |  | 19.0 |                               | 
|                  |  |                                |      |  |                                     |  |      |                               | 
|Chongqing         |  |                                | 23.2 |  |                                     |  | 20.2 |                               | 
|                  |  |                                |      |  |                                     |  |      |                               | 
|Xi’an             |  |                                | 15.3 |  |                                     |  | 14.6 |                               | 
|                  |  |                                |      |  |                                     |  |      |                               | 
|Hangzhou          |  |                                | 28.0 |  |                                     |  | 19.8 |                               | 



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 2014 according to passenger volume data from CAAC statistics briefing.



40







|Airport   |  | Passenger Carried (% of total) |      |   | Cargo and Mail Carried (% of total) |  |      | Departing Flight (% of total) | 
|--------- |  | ------------------------------ | ---- | - | ----------------------------------- |  | ---- | ----------------------------- | 
|Changsha  |  |                                | 34.9 | % |                                     |  | 39.7 | %                             | 
|          |  |                                |      |   |                                     |  |      |                               | 
|Wuhan     |  |                                | 38.2 | % |                                     |  | 37.2 | %                             | 
|          |  |                                |      |   |                                     |  |      |                               | 
|Zhengzhou |  |                                | 37.1 | % |                                     |  | 15.7 | %                             | 
|          |  |                                |      |   |                                     |  |      |                               | 
|Sanya     |  |                                | 25.6 | % |                                     |  | 33.6 | %                             | 
|          |  |                                |      |   |                                     |  |      |                               | 
|Haikou    |  |                                | 26.0 | % |                                     |  | 33.1 | %                             | 
|          |  |                                |      |   |                                     |  |      |                               | 
|Nanning   |  |                                | 31.8 | % |                                     |  | 36.5 | %                             | 
|          |  |                                |      |   |                                     |  |      |                               | 
|Guilin    |  |                                | 29.4 | % |                                     |  | 34.5 | %                             | 
|          |  |                                |      |   |                                     |  |      |                               | 
|Zhuhai    |  |                                | 44.4 | % |                                     |  | 50.7 | %                             | 



Regional Routes



In 2014, the Group conducted
a total of 19.86 thousands flights on its regional routes, accounting for approximately 23.7% 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, China Eastern Airlines, Air Macau, Dragon
Air and Cathay Pacific Airways compete with the Group in the regional traffic markets.



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 the United States 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 Qantas 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, 2014, the Company owns a 51%
or 60%equity interest in each of the Airline Subsidiaries.



As of December 31, 2014,
Xiamen Airlines operated under its own "MF" code with a fleet of 113 aircraft on 200 domestic routes, 22 international
routes and 16 regional routes. In 2014, Xiamen Airlines carried a total of about 20.5 million passengers, or approximately 20.3%
of the passengers carried by the Group in that year, and had RMB16,983 million in traffic revenue.



As of December 31, 2014,
Shantou Airlines operated under the Group’s "CZ" code with a fleet of 14 aircraft. In 2014, under the centralized
allocation of flight routes of the Group, Shantou Airlines carried a total of about 3.1 million passengers, or 3.1% of the passengers
carried by the Group in that year. Total traffic revenue of Shantou Airlines for the year ended December 31, 2014 was RMB2,534
million.



41







As of December 31, 2014,
Chongqing Airlines operated under the "OQ" code with a fleet of 11 aircraft. In 2014, under the centralized allocation
of flight routes of the Group, Chongqing Airlines carried a total of about 2.5 million passengers, or 2.5% 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, 2014
was RMB1,862 million.



As of December 31, 2014,
Zhuhai Airlines operated under the "CZ" code with a fleet of 9 aircraft. In 2014, under the centralized allocation of
flight routes of the Group, Zhuhai Airlines carried a total of about 1.6 million passengers, or approximately 1.6% 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,
2014 was RMB1,491 million.



As of December 31, 2014,
Guizhou Airlines operated under the "CZ" code with a fleet of 16 aircraft. In 2014, under the centralized allocation
of flight routes of the Group, Guizhou Airlines carried a total of about 2.6 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 RMB2,271 million
for the year ended December 31, 2014.



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$65,370) 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.



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.



42







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 ten-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, 2014 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.



43









The particulars of the
Group’s principal subsidiaries as of December 31, 2014 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  
|                                                           |  |                                           |  |                                                      |      
|China Southern Airlines Henan Airlines Company Limited     |  | PRC September 28, 2013                    |  |                                                      | 60   



The particulars of the
Group’s principal associates and jointly controlled entities as of December 31, 2014 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 March 1, 2001                         |  |                                          | 50   









44







| | 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 1,172,531 square meters of land and a total gross floor area of approximately 691,355
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  |  |                         | 256,280   |  |                             | 
|Zhuhai    |  |                         | 179,415   |  |                             | 
|Changsha  |  |                         | 302,794   |  |                             | 
|Zhengzhou |  |                         | 449,290   |  |                             | 
|Haikou    |  |                         | 332,961   |  |                             | 
|Wuhan     |  |                         | 16,712    |  |                             | 
|Nanyang   |  |                         | —         |  |                             | 
|Sanya     |  |                         | 106,680   |  |                             | 
|Shenyang  |  |                         | 142,199   |  |                             | 
|Dalian    |  |                         | —         |  |                             | 
|Jilin     |  |                         | 134,488   |  |                             | 
|Harbin    |  |                         | 5,381     |  |                             | 
|Xinjiang  |  |                         | 2,143     |  |                             | 
|Guangxi   |  |                         | 108,133   |  |                             | 
|Beijing   |  |                         | 85,453    |  |                             | 
|Shanghai  |  |                         | 42,292    |  |                             | 
|Chengdu   |  |                         | —         |  |                             | 
|Sydney    |  |                         | —         |  |                             | 





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    |  |                         | 1,534,087 |  |                             | 
|Shantou Airlines   |  |                         | 260,639   |  |                             | 
|Zhuhai Airlines    |  |                         | 99,306    |  |                             | 
|Guizhou Airlines   |  |                         | 259,879   |  |                             | 
|Chongqing Airlines |  |                         | 82,449    |  |                             | 



45







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 bases 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 17, 2015, 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.



Impairment of account receivables



Trade receivables are recognized
initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment.
A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able
to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor,
probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered
indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying
amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount
of the assets is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement.
When a trade receivable is uncollectible, it is written off against the provision account for trade receivables. Subsequent recoveries
of amounts previously written off are credited in the income statement.



46







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 IAS36, 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 judgement 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 to fulfil certain return condition for airframes and engines under operating leases is accrued and charged to
the 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 programmes 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, anticipated redemption pattern and the frequent
flyer programme design.



Provision for consumable spare
parts and maintenance materials



Provision for consumable
spare parts and maintenance materials is made based on the difference between the carrying amount and the net realisable value.
The net realisable value is estimated based on current market condition, historical experience and Company’s future operation
plan for the consumable spare parts and maintenance materials. The net realisable value may be adjusted significantly due to the
change of market condition and the future plan for the consumable spare parts and maintenance materials.



47







Income tax



Significant judgment is
required in determining the provision for income tax. There are many transactions and calculations for which the ultimate tax determination
is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated tax audit issues based on
estimates of whether additional tax will be due. Where the final tax outcome of these matters is different from the amounts that
were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the year in
which such determination is made.



Retirement benefits



According to IAS 19, an
entity shall account not only for its legal obligation under the formal terms of a defined benefit plan, but also for any constructive
obligation that arises from the entity’s informal practices where the entity has no realistic alternative but to pay the
employee benefits. The Company believes the payments to those retirees who retired before the establishment of Pension scheme (as
defined in Note 49 (a)) are discretionary and have not created a legal or constructive obligation. Such payments are made according
to the Group’s business performance, and can be suspended at any time (Note 14).



Recently Pronounced International Financial
Reporting Standards



Information relating to
the recently pronounced IFRSs is presented in Note 2 to the consolidated financial statements.



Overview



During the reporting period,
a series of challenges existed including complex and volatile international economic environment, China’s economic slowdown,
the global aviation accidents, more intense competition in domestic civil aviation industry, the impact of high-speed rail, foreign
exchange losses. Faced with the difficult operating environment, the Company adhered to its stable development philosophy, strengthened
safety management system, enhanced the management level of refined marketing, and steadily promoted strategic transformation and
internationalization, actively enhanced brand service impact, which had effectively resolved adverse factors including complex
and volatile market, shortage of development resources, competitive pressures. The Company’s overall competitiveness continued
to grow.



Operational Safety and
Fleet Development



During the reporting period,
the Group further refined safety measures against accident prevention, established an air traffic control real-time monitoring
and coordination mechanism, and carried out route optimization. Operational control level was significantly improved. The Group
continued to maintain the best safety record among Chinese airlines. In 2014, we completed 2.02 million hours of flight transportation,
accumulated 13.52 million safe flight hours, 12,486 hours of general aviation service, continuously maintained 182 consecutive
months of aviation safety and 246 consecutive months of aviation security.



During the reporting period,
the Group continued to optimize the fleet structure. 64 aircraft were introduced, 17 old aircraft were sold and 7 leased aircraft
were returned. In August 2014, the Group became the first among Chinese airlines with a fleet of over 600 aircraft, ranked fifth
in the world, first in Asia, creating a new historical starting point.



Hub Network and Services



During the reporting period,
the Group actively expanded route network to further improve global route layout. We launched intercontinental routes including
Guangzhou – New York, Guangzhou – Changsha – Frankfurt, Guangzhou – Wuhan – Moscow, Guangzhou –
Wuhan – San Francisco, and increased frequency of flight to Europe, America, Australia and New Zealand, and Southeast Asia.
Domestic capacity was also optimized. A pattern with domestic and international mutual complement and mutually supportive hub bases
were initially formed.



48







During the reporting period,
the Group continued to improve hub construction and hub operation service, which further highlighted the results of the strategic
transformation. By the end of 2014, Hub Control Center (HCC) of Guangzhou and Urumqi commenced operation, respectively. Capacity
concentration of the four largest hubs, i.e., Guangzhou, Beijing, Urumqi and Chongqing reached 67.9%. Passengers transit on-time
rate increased two percentage points to 97.8%. Transit ratio of passengers of major international routes exceeded 55%. International
transit passengers increased by 7.3% as compared with last year.



During the reporting period,
the Group increased investment both in hardware and software, continued to create and improve our product and service, so as to
constantly improve passenger experience. We launched a series of personalized services and products, such as the launch of “Mu
Mian Tong Fei” for unaccompanied children, and “Health and Love” series of health travel products for Los Angeles
routes; upgraded pearl economy class service with exclusive Samsung PAD, special tableware and various cuisines; further improved
meal service and launched Auckland chef cooperation projects, to enhance the meal quality of international long-haul routes; continuously
upgraded in-flight entertainment equipment, and updated 10-12 Hollywood movies each month.



Passenger Business



During the reporting period,
the Group actively responded to market changes and focused on matching capacity and revenue, in order to further enhance its level
of operations. In 2014, the total number of passengers reached 101 million, representing an increase of 9.9% as compared with last
year, which was the first airlines in China.



We further strengthened
market forecast, refined procedural management, explored regional management, and implemented differentiated marketing strategy
to enhance the matching between capacity and market. During the reporting period, network & revenue department and E-commerce
department were established. Channel control model was gradually improved, as new marketing tools were familiarized. The company’s
direct sale revenue from website increased 2.2% as compared with last year. The total number in fans of social media has reached
6.28 million, ahead of our domestic competitors.



We continued to improve
marketing services and strengthened frequent flyer marketing to enhance quality management of the major account. In 2014, our revenue
from frequent flyer was RMB28.54 billion, representing an increase of 5.8% as compared with last year. Call center platform achieved
sales revenue of RMB5.83 billion, representing an increase of 4.1% as compared with last year, with the satisfaction rate reached
97.74%. We obtained three significant awards, including “Best Call Center Award 2013-2014”, “China’s Best
Call Center Service Marketing Team 2013-2014” and “China’s Call Center Best Solution Award 2013-2014”.



We continued to optimize
the structure of international passengers and enhance the international sales ability. In 2014, the load factor of first class
and business class of the international routes improved 6.6 percentage points as compared with last year, revenue grew 25.3% as
compared with last year, TMC (travel management companies) international sales grew 16.5%, of which high yield revenue grew 12.9%,
accounted for 45.5% of the total revenue.



Freight Business



During the reporting period,
domestic demand for logistics continued to increase due to rapid development of E-commerce. The international freight market also
appeared to pick up. The Group seized the opportunities, improved cost efficiency, strived to improve management level of freight
business, and was awarded the “China Logistics Industry Brand Value Top 100 2014” and the “China’s Top
Ten Logistics Enterprises 2014.”



We actively promoted the
E-freight project, endeavored to promote the “China Southern Express” products, enhanced operational efficiency, and
improved management quality. At present, the domestic application of electronic waybill of the Company ranks second in the global
aviation industry. Annual sales revenue of “China Southern Express” products was RMB210 million, representing an increase
of 65% as compared with last year.



49







We strengthened cooperation
with courier and E-commerce corporate headquarters, caught the cross-border E-commerce opportunities, actively expanded the transport
of international mail and parcel. Annual volume of cooperation with SF Express amounted to 81,000 tonnes, representing an increase
of 15.5% as compared with last year; international mail traffic revenue grew 99% and 97%, respectively, representing an increase
of RMB160 million as compared with last year. We also further promoted cooperation with major account. Number of international
headquarter partners reached 11, with the revenue of RMB1.3 billion, representing an increase of 19% as compared with last year.



General Aviation



During the reporting period,
the Group completed 98,165 general aviation person-time passengers of transportation, representing an increase of 9.7% as compared
with last year; achieved general aviation revenue of RMB576 million, representing an increase of 19% as compared with last year;
and achieved 10 consecutive years of making profit.



During the reporting period,
we actively explored cooperation and research for general aviation projects, including Guangzhou – Macau unscheduled charter
flights, ranger service in the northeast, Lijiang helicopter air tour, Heyuan, Huizhou power line patrol, and also launched the
research of general aviation training business in Nanyang, Henan, travel medical and rescue services and other feasible cooperative
projects.



In November 2014, in order
to consolidate our traditional strengths in maritime logistics services, and take advantage of favorable market opportunity to
actively develop other navigation services, and cultivate new business growth chances for the company, the Board approved the restructuring
of Zhuhai Helicopter Branch and established a wholly-owned subsidiary named Southern Airlines General Aviation Company Limited
to promote the development of the Company’s general aviation operations and enhance its competitiveness in general aviation
market.



Strategic Cooperation and
Staff Development



During the reporting period,
the Group further strengthened cooperation with different parties to consolidate development foundation. We entered into strategic
cooperation agreements with CITIC Group, the city of Los Angeles and the Oakland Airport, continued to deepen cooperation with
airline companies within or outside the Skyteam Alliance, made use of opportunities including domestic and international forums,
sports and cultural events, to effectively promote the brand of “China Southern”. By the end of 2014, through code
sharing with Qantas and Czech Airlines, we shared codes with 18 domestic and international airlines for 379 routes, increased 109
international destinations. Through the close cooperation with partners such as Sydney Festival, Melbourne Festival and Melbourne
Football Club, our influence and reputation in the Australian market was effectively raised. By increasing cooperation with foreign
rail transport companies, new products, interline service products were constantly launched.



During the reporting period,
the Group focused on staff development and innovated staff training. By optimizing our training system, implementing key projects
and strengthening process management, etc., we focused on strengthening the Company’s business personnel, management personnel
and international personnel training, to ensure that staff will grow with the Company. In 2014, the Company carried out a variety
of 7,529 training programmes, trained 290,000 person-times, including training frontline operational staff of approximately 230,000
person-times, achieving about 86% training coverage. The Company also developed staff online learning platform applications, including
159 online courses and 1,160 micro courses, to facilitate self-enhancement of staff anytime and anywhere.



During the reporting period,
the Group further enhanced internationalization brought by staff, promoted exchanges between domestic and foreign employees. The
Company currently has 90 pilots from 19 countries and 203 cabin crew from six different nationalities including Japanese, Korean,
French, Dutch, Australian and Malay. Hiring foreign crew on one hand gives full play to their home friendly service, on the other
hand promotes cultural understanding as well as dining habits and society features through cooperation between domestic and foreign
staff, so they can better serve our international customers.



50







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 high-speed
railway, 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 Renminbi appreciation. Renminbi appreciation has brought exchange gain to the Group and reduced its operating
costs which are denominated in foreign currencies. However, Renminbi 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 gains of RMB2,903 million was recorded in 2013 mainly due to Renminbi appreciated significantly against U.S. dollar
in 2013. Our net exchange losses of RMB292 million was recorded in 2014 as Reminbi depreciated slightly against U.S. dollar in
2014.



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.



In late 2014 and
early 2015, we learned that certain former executives were and remain the subject of investigation by PRC authorities. See
"Risk Factors - We have experienced incidents of employee personal misconduct in the past, and may be unable to prevent
similar incidents in the future, which could adversely impact our reputation and our business". Upon learning of this
information, we took a number of steps to determine the appropriate response, and learn whether the alleged personal
misconduct of these former executives had impacted the  Company’s financial  condition or results of operations or
internal control over financial reporting. These steps included efforts to seek clarification from the
investigating authorities regarding the alleged personal misconduct of the former executives and performance of a detailed
review of those areas which may be impacted. Additionally, our Audit Committee retained outside counsel, a major
international law firm, and independent forensic accountants from an accounting firm unrelated to our external auditors, to
gain an understanding of whether the alleged personal misconduct of the former executives had any impact on the
Company’s financial  condition, results of operations or internal control over financial reporting.



51







As of the date
of this Annual Report, our management has completed its review and the Audit Committee has completed its investigation
and analysis of the information provided by the external experts it retained and has reported to the Board of Directors
regarding its findings. Based on our careful evaluation of the results of such work performed and the investigative findings,
we do not believe that the alleged personal misconduct of the former executives had a material impact on our financial
condition, results of operations or our internal control over financial reporting.



In response
to learning of the alleged personal misconduct of the former executives, the Group has decided to enhance further its
corporate governance and processes control environment in an effort to reduce, to the maximum extent possible, the
chance that personal misconduct of this type of event might recur in future periods with other of our employees or
management. We are currently working to determine the procedures and policies that we will implement to accomplish this goal.
We expect that our enhanced measures to include additional training programs tailored to our employees' area of
responsibilities.
While we know that we can never completely eliminate the possibility that an employee or manager will engage in inappropriate
or illegal personal misconduct, we believe our policies and procedures will minimize the chance of that happening.



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, 2014, 2013 and 2012:



|                                       |  | Year ended December 31, |            |  | 2014 vs. 2013 % increase |  |            | 2013 vs. 2012 % increase | 
|-------------------------------------- |  | ----------------------- | ---------- |  | ------------------------ |  | ---------- | ------------------------ | 
|Traffic                                |  | 2014                    |            |  | 2013                     |  |            | 2012                     | 
|RPK (million)                          |  |                         |            |  |                          |  |            |                          | 
|Domestic                               |  |                         | 127,681.88 |  |                          |  | 116,105.71 |                          | 
|Regional                               |  |                         | 3,214.52   |  |                          |  | 2,574.27   |                          | 
|International                          |  |                         | 35,732.78  |  |                          |  | 29,736.57  |                          | 
|Total                                  |  |                         | 166,629.18 |  |                          |  | 148,416.55 |                          | 
|RTK (million)                          |  |                         |            |  |                          |  |            |                          | 
|Domestic                               |  |                         | 12,916.60  |  |                          |  | 11,765.27  |                          | 
|Regional                               |  |                         | 300.65     |  |                          |  | 241.05     |                          | 
|International                          |  |                         | 6,562.71   |  |                          |  | 5,462.27   |                          | 
|Total                                  |  |                         | 19,779.96  |  |                          |  | 17,468.59  |                          | 
|Passengers carried (thousand)          |  |                         |            |  |                          |  |            |                          | 
|Domestic                               |  |                         | 89,363.18  |  |                          |  | 82,172.28  |                          | 
|Regional                               |  |                         | 2,385.37   |  |                          |  | 2,019.28   |                          | 
|International                          |  |                         | 9,170.47   |  |                          |  | 7,599.41   |                          | 
|Total                                  |  |                         | 100,919.02 |  |                          |  | 91,790.97  |                          | 
|Cargo and mail carried (thousand tons) |  |                         |            |  |                          |  |            |                          | 
|Domestic                               |  |                         | 1,014.90   |  |                          |  | 923.73     |                          | 
|Regional                               |  |                         | 16.40      |  |                          |  | 13.70      |                          | 
|International                          |  |                         | 401.95     |  |                          |  | 338.92     |                          | 
|Total                                  |  |                         | 1,433.25   |  |                          |  | 1,276.35   |                          | 



52







|                                     |  | Year ended December 31, |            |  | 2014 vs. 2013 %increase |  |            | 2013 vs. 2012 %increase | 
|------------------------------------ |  | ----------------------- | ---------- |  | ----------------------- |  | ---------- | ----------------------- | 
|Capacity                             |  | 2014                    |            |  | 2013                    |  |            | 2012                    | 
|ASK (million)                        |  |                         |            |  |                         |  |            |                         | 
|Domestic                             |  |                         | 160,482.40 |  |                         |  | 144,732.62 |                         | 
|Regional                             |  |                         | 4,379.07   |  |                         |  | 3,594.29   |                         | 
|International                        |  |                         | 44,945.99  |  |                         |  | 38,472.93  |                         | 
|Total                                |  |                         | 209,807.46 |  |                         |  | 186,799.84 |                         | 
|ATK (million)                        |  |                         |            |  |                         |  |            |                         | 
|Domestic                             |  |                         | 18,640.00  |  |                         |  | 16,486.17  |                         | 
|Regional                             |  |                         | 497.79     |  |                         |  | 407.59     |                         | 
|International                        |  |                         | 9,315.94   |  |                         |  | 8,058.23   |                         | 
|Total                                |  |                         | 28,453.73  |  |                         |  | 24,951.99  |                         | 
|Load Factors                         |  |                         |            |  |                         |  |            |                         | 
|Passenger load factor (RPK/ASK) (%)  |  |                         |            |  |                         |  |            |                         | 
|Domestic                             |  |                         | 79.6       |  |                         |  | 80.2       |                         | 
|Regional                             |  |                         | 73.4       |  |                         |  | 71.6       |                         | 
|International                        |  |                         | 79.5       |  |                         |  | 77.3       |                         | 
|Overall                              |  |                         | 79.4       |  |                         |  | 79.4       |                         | 
|Overall load factor (RTK/ATK) (%)    |  |                         |            |  |                         |  |            |                         | 
|Domestic                             |  |                         | 69.3       |  |                         |  | 71.4       |                         | 
|Regional                             |  |                         | 60.4       |  |                         |  | 59.1       |                         | 
|International                        |  |                         | 70.4       |  |                         |  | 67.8       |                         | 
|Overall                              |  |                         | 69.5       |  |                         |  | 70.0       |                         | 
|Yield                                |  |                         |            |  |                         |  |            |                         | 
|Yield per RPK (RMB)                  |  |                         |            |  |                         |  |            |                         | 
|Domestic                             |  |                         | 0.60       |  |                         |  | 0.61       |                         | 
|Regional                             |  |                         | 0.78       |  |                         |  | 0.84       |                         | 
|International                        |  |                         | 0.50       |  |                         |  | 0.50       |                         | 
|Overall                              |  |                         | 0.58       |  |                         |  | 0.59       |                         | 
|Yield per RTK (RMB)                  |  |                         |            |  |                         |  |            |                         | 
|Domestic                             |  |                         | 6.10       |  |                         |  | 6.24       |                         | 
|Regional                             |  |                         | 8.64       |  |                         |  | 9.33       |                         | 
|International                        |  |                         | 3.50       |  |                         |  | 3.49       |                         | 
|Overall                              |  |                         | 5.27       |  |                         |  | 5.42       |                         | 
|Financial                            |  |                         |            |  |                         |  |            |                         | 
|Passenger revenue (RMB million)      |  |                         |            |  |                         |  |            |                         | 
|Domestic                             |  |                         | 76,647     |  |                         |  | 71,277     |                         | 
|Regional                             |  |                         | 2,497      |  |                         |  | 2,162      |                         | 
|International                        |  |                         | 18,001     |  |                         |  | 14,832     |                         | 
|Total                                |  |                         | 97,145     |  |                         |  | 88,271     |                         | 
|Cargo and mail revenue (RMB million) |  |                         | 7,183      |  |                         |  | 6,413      |                         | 



53







| | 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.



2014 Compared With 2013



The profit attributable
to equity shareholders of the Company of RMB1,777 million was recorded in 2014 as compared to the profit attributable to equity
shareholders of the Company of RMB1,986 million in 2013. The Group’s operating revenue increased by RMB10,037 million or
10.2% from RMB98,547 million in 2013 to RMB108,584 million in 2014. Passenger load factor was 79.4% in 2014 which was stable compared
to 79.4% in 2013. Passenger yield (in passenger revenue per RPK) decreased by 1.7% from RMB0.59 in 2013 to RMB0.58 in 2014. Average
yield (in traffic revenue per RTK) decreased by 2.8% from RMB5.42 in 2013 to RMB5.27 in 2014. Operating expenses increased by RMB7,746
million or 7.9% from RMB98,280 million in 2013 to RMB 106,026 million in 2014. Operating profit of RMB4,748 million was recorded
in 2014 as compared to operating profit of RMB1,510 million in 2013, increased by RMB3,238 million.



Operating Revenue



|                                                 |  | 2014              |         |   | 2013             |  |       |                   | 
|------------------------------------------------ |  | ----------------- | ------- | - | ---------------- |  | ----- | ----------------- | 
|                                                 |  | Operating revenue |         |   |                  |  |       | Operating revenue | 
|                                                 |  | RMB
    million   |         |   | Percentage
    % |  |       | RMB
    million   | 
|Traffic revenues                                 |  |                   | 104,328 |   |                  |  | 96.1  |                   | 
|Including: Passenger revenues                    |  |                   | 97,145  |   |                  |  |       |                   | 
|– Domestic                                       |  |                   | 76,647  |   |                  |  |       |                   | 
|– Hong Kong, Macau and Taiwan                    |  |                   | 2,497   |   |                  |  |       |                   | 
|– International                                  |  |                   | 18,001  |   |                  |  |       |                   | 
|Cargo and mail revenues                          |  |                   | 7,183   |   |                  |  |       |                   | 
|Other operating revenues                         |  |                   | 4,256   |   |                  |  | 3.9   |                   | 
|Mainly including:  Commission income             |  |                   | 1,335   |   |                  |  |       |                   | 
|Ground
    services income                       |  |                   | 293     |   |                  |  |       |                   | 
|Expired
    sales in advance of carriage         |  |                   | 459     |   |                  |  |       |                   | 
|General
    aviation income                      |  |                   | 576     |   |                  |  |       |                   | 
|Hotel
    and tour operation income              |  |                   | 508     |   |                  |  |       |                   | 
|Total operating revenues                         |  |                   | 108,584 |   |                  |  | 100.0 |                   | 
|Less: fuel surcharge income                      |  |                   | (13,746 | ) |                  |  |       |                   | 
|                                                 |  |                   |         |   |                  |  |       |                   | 
|Total operating revenue excluding fuel surcharge |  |                   | 94,838  |   |                  |  |       |                   | 



54







Traffic revenue composition



|                        |  | 2014            |         |  | 2013         |  |       |                 | 
|----------------------- |  | --------------- | ------- |  | ------------ |  | ----- | --------------- | 
|                        |  | Traffic revenue |         |  |              |  |       | Traffic revenue | 
|                        |  | RMB million     |         |  | Percentage % |  |       | RMB million     | 
|Passenger Revenues      |  |                 | 97,145  |  |              |  | 93.1  |                 | 
|Cargo and Mail Revenues |  |                 | 7,183   |  |              |  | 6.9   |                 | 
|Traffic revenues        |  |                 | 104,328 |  |              |  | 100.0 |                 | 



Passenger revenue composition



|                            |  | 2014              |        |  | 2013       |  |       |                   | 
|--------------------------- |  | ----------------- | ------ |  | ---------- |  | ----- | ----------------- | 
|                            |  | Passenger revenue |        |  | Percentage |  |       | Passenger revenue | 
|                            |  | RMB million       |        |  | %          |  |       | RMB million       | 
|Domestic                    |  |                   | 76,647 |  |            |  | 78.9  |                   | 
|Hong Kong, Macao and Taiwan |  |                   | 2,497  |  |            |  | 2.6   |                   | 
|International               |  |                   | 18,001 |  |            |  | 18.5  |                   | 
|                            |  |                   |        |  |            |  |       |                   | 
|Passenger revenue           |  |                   | 97,145 |  |            |  | 100.0 |                   | 



Substantially all of the
Group’s operating revenue is attributable to airline and airline-related operations. Traffic revenue accounted for 96.1%
and 96.1% of total operating revenue in 2014 and 2013 respectively. Passenger revenue and cargo and mail revenue accounted for
93.1% and 6.9% respectively of the total traffic revenue in 2014. During the reporting period, the Group’s total traffic
revenues was RMB104.328 million, representing an increase of RMB 9,644 million or 10.2% from prior year, mainly due to the increase
of RPK by 12.27% which leads to the increase of passenger revenues. The other operating revenue is mainly derived from commission
income, expired sales in advance of carriage hotel and tour operation income, general aviation income and ground services income.



The increase in operating
revenue was primarily due to a 10.1% increase in passenger revenue from RMB88,271 million in 2013 to RMB97,145million in 2014.
The total number of passengers carried increased by 9.9% to 101 million passengers in 2014. RPKs increased by 12.3% from 148,417
million in 2013 to 166,629 million in 2014, primarily as a result of the increase in number of passengers carried. Passenger yield
per RPK decreased from RMB0.59 in 2013 to RMB 0.58 in 2014, which is mainly due to a slightly fell of domestic passenger ticket
prices.



Domestic passenger revenue,
which accounted for 78.9% of the total passenger revenue in 2014, increased by 7.5% from RMB 71,277 million in 2013 to RMB 76,647
million in 2014. Domestic passenger traffic in RPKs increased by 10.0%, while passenger capacity in ASKs increased by 10.9%, resulting
in a decrease in passenger load factor by 0.6 percentage points from 80.2% in 2013 to 79.6% in 2014. Domestic passenger yield per
RPK decreased from RMB0.61 in 2013 to RMB0.60 in 2014.





55









Hong Kong, Macau and
Taiwan passenger revenue, which accounted for 2.6% of total passenger revenue, increased by 15.5% from RMB2,162 million in 2013
to RMB 2,497 million in 2014. For Hong Kong, Macau and Taiwan flights, passenger traffic in RPKs increased by 24.9%, while passenger
capacity in ASKs increased by 21.8 %, resulting in an increase in passenger load factor by 1.8 percentage points from 71.6% in
2013 to 73.4% in 2014. Passenger yield per RPK decreased from RMB0.84 in 2013 to RMB0.78 in 2014.



International passenger
revenue, which accounted for 18.5% of total passenger revenue, increased by 21.4% from RMB14,832 million in 2013 to RMB18,001 million
in 2014. For international flights, passenger traffic in RPKs increased by 20.2 %, while passenger capacity in ASKs increased by
16.8%, resulting in a 2.2 percentage points increase in passenger load factor from 77.3% in 2013 to 79.5% in 2014. Passenger yield
per RPK remained at RMB0.50 in 2013 and 2014.



Cargo and mail revenue,
which accounted for 6.9% of the Group’s total traffic revenue and 6.6% of total operating revenue, increased by 12.0% from
RMB6,413 million in 2013 to RMB7,183 million in 2014. The increase was attributable to the increase of cargo and mail in RTKs by
16.8% as the demand in the cargo market was warming up.



Other operating revenue
increased by 10.2% from RMB3,863 million in 2013 to RMB4,256 million in 2014. The increase was primarily due to the general growth
in income from commission and general aviation.



Operating Expenses



Total operating expenses
in 2014 amounted to RMB106,026 million, representing an increase of RMB7,746 million or 7.9% over 2013, primarily due to the total
effect of increases in jet fuel cost, payroll, landing and navigation fees, and depreciation and amortisation. Total operating
expenses as a percentage of total operating revenue was 97.6 % in 2014 and 99.7% in 2013.



|                                             |  | 2014                          |         |  | 2013         |  |       |                               | 
|-------------------------------------------- |  | ----------------------------- | ------- |  | ------------ |  | ----- | ----------------------------- | 
|                                             |  | Operating expense RMB million |         |  | Percentage % |  |       | Operating expense RMB million | 
|Flight operations                            |  |                               | 58,901  |  |              |  | 55.6  |                               | 
|Mainly including:             Jet fuel costs |  |                               | 37,728  |  |              |  |       |                               | 
|Aircraft operating lease charges             |  |                               | 5,383   |  |              |  |       |                               | 
|Flight personnel payroll and welfare         |  |                               | 6,803   |  |              |  |       |                               | 
|Maintenance                                  |  |                               | 8,304   |  |              |  | 7.8   |                               | 
|Aircraft and traffic servicing expenses      |  |                               | 16,402  |  |              |  | 15.5  |                               | 
|Promotion and selling expenses               |  |                               | 7,841   |  |              |  | 7.4   |                               | 
|General and administrative expenses          |  |                               | 2,337   |  |              |  | 2.2   |                               | 
|Depreciation and amortization                |  |                               | 10,828  |  |              |  | 10.2  |                               | 
|Impairment on property, plant and equipment  |  |                               | 215     |  |              |  | 0.2   |                               | 
|Others                                       |  |                               | 1,198   |  |              |  | 1.1   |                               | 
|Total operating expenses                     |  |                               | 106,026 |  |              |  | 100.0 |                               | 



56







Flight operations expenses,
which accounted for 55.6% of total operating expenses, increased by 9.1% from RMB54,010 million in 2013 to RMB58,901 million in
2014, primarily as a result of increase in RTK due to the increase of capacity. Jet fuel costs, which accounted for 64.1% of flight
operations expenses in 2014, increased by 6.2% from to RMB35,538 million in 2013 to RMB37,728 million in 2014.



Maintenance
expenses, which accounted for 7.8% of total operating expenses, increased by 6.4% from RMB7,805 million in 2013 to RMB8,304
million in 2014. The increase was mainly due to the expansion of the fleet by increasing 53 aircraft.



Aircraft and traffic
servicing expenses, which accounted for 15.5% of total operating expenses, increase by 8.7% from RMB15,091 million in 2013 to RMB16,402
million in 2014. The increase was primarily due to a 10.4% rise in landing and navigation fees from RMB9,510 million in 2013 to
RMB10,496 million in 2014, resulted from the increase in number of flights due to the increase of capacity.



Promotion and selling
expenses, which accounted for 7.4% of total operating expenses, increased by 1.1% from RMB7,754 million in 2013 to RMB7,841million
in 2014.



General and administrative
expenses, which accounted for 2.2% of the total operating expenses, decreased by 5.4% from RMB2,470 million in 2013 to RMB2,337million
in 2014.



Depreciation and amortization,
which accounted for 10.2% of total operating expenses, increased by 15.8% from RMB9,347 million in 2013 to RMB10,828million in
2014, mainly due to the increase of 53 aircraft and flight equipment.



Operating Profit



Operating profit of
RMB4,748 million and RMB1,510 was recorded in 2014 and 2013 respectively. The increase in profit was mainly due to the net effect
of increase in operating revenue by RMB10,037 million or 10.2% in 2014 and increase in operating expenses by RMB7,746million or
7.9%.



Other Income or Expenses



Other net income increased
by RMB947million from RMB1,243 million in 2013 to RMB2,190 million in 2014, mainly due to the increase of government grants and
gain on disposal of aircrafts.



Interest expense increased
by RMB542 million from RMB1,651 million in 2013 to RMB2,193 million in 2014 was mainly due to the increase in number of aircraft
held through a finance lease and the increase of interest payment of borrowings.



Net exchange losses
of RMB292 million was recorded in 2014 as RMB depreciated slightly against US dollar in 2014. Net exchange gains of RMB2,903 million
was recorded in 2013 mainly due to RMB appreciated significantly against US dollar in 2013.



Income Tax



Income tax expense
of RMB668 million was recorded in 2014, decreased by RMB66 million from RMB734 million in 2013, mainly due to the decrease of profit
before income tax.



57







2013 Compared With 2012



The profit attributable
to equity shareholders of the Company of RMB1,986 million was recorded in 2013 as compared to the profit attributable to equity
shareholders of the Company of RMB2,619 million in 2012. The Group’s operating revenue decreased by RMB967 million or 1.0%
from RMB99,514 million in 2012 to RMB98,547 million in 2013. Passenger load factor decreased by 0.5 percentage points from 79.9%
in 2012 to 79.4% in 2013. Passenger yield (in passenger revenue per RPK) decreased by 10.6% from RMB0.66 in 2012 to RMB0.59 in
2013. Average yield (in traffic revenue per RTK) decreased by 8.9% from RMB5.95 in 2012 to RMB5.42 in 2013. Operating expenses
increased by RMB2,403 million or 2.5% from RMB95,877 million in 2012 to RMB98,280 million in 2013. Operating profit of RMB1,510
million was recorded in 2013 as compared to operating profit of RMB5,099 million in 2012, decreased by RMB3,589 million.



Operating Revenue



|                                                 |  | 2013              |         |   | 2012         |  |       |                   | 
|------------------------------------------------ |  | ----------------- | ------- | - | ------------ |  | ----- | ----------------- | 
|                                                 |  | Operating revenue |         |   |              |  |       | Operating revenue | 
|                                                 |  | RMB million       |         |   | Percentage % |  |       | RMB million       | 
|Traffic revenues                                 |  |                   | 94,684  |   |              |  | 96.1  |                   | 
|Including: Passenger revenues                    |  |                   | 88,271  |   |              |  |       |                   | 
|– Domestic                                       |  |                   | 71,277  |   |              |  |       |                   | 
|– Hong Kong, Macau and Taiwan                    |  |                   | 2,162   |   |              |  |       |                   | 
|– International                                  |  |                   | 14,832  |   |              |  |       |                   | 
|Cargo and mail revenues                          |  |                   | 6,413   |   |              |  |       |                   | 
|Other operating revenues                         |  |                   | 3,863   |   |              |  | 3.9   |                   | 
|Mainly including:  Commission income             |  |                   | 1,040   |   |              |  |       |                   | 
|Ground services income                           |  |                   | 349     |   |              |  |       |                   | 
|Expired sales in advance of carriage             |  |                   | 684     |   |              |  |       |                   | 
|General aviation income                          |  |                   | 484     |   |              |  |       |                   | 
|Hotel and tour operation income                  |  |                   | 565     |   |              |  |       |                   | 
|Total operating revenues                         |  |                   | 98,547  |   |              |  | 100.0 |                   | 
|Less: fuel surcharge income                      |  |                   | (13,062 | ) |              |  |       |                   | 
|                                                 |  |                   |         |   |              |  |       |                   | 
|Total operating revenue excluding fuel surcharge |  |                   | 85,485  |   |              |  |       |                   | 



Traffic revenue composition



|                        |  | 2013            |        |  | 2012         |  |       |                 | 
|----------------------- |  | --------------- | ------ |  | ------------ |  | ----- | --------------- | 
|                        |  | Traffic revenue |        |  |              |  |       | Traffic revenue | 
|                        |  | RMB million     |        |  | Percentage % |  |       | RMB million     | 
|Passenger Revenues      |  |                 | 88,271 |  |              |  | 93.2  |                 | 
|Cargo and Mail Revenues |  |                 | 6,413  |  |              |  | 6.8   |                 | 
|Traffic revenues        |  |                 | 94,684 |  |              |  | 100.0 |                 | 



58







Passenger revenue composition



|                            |  | 2013              |        |  | 2012       |  |       |                   | 
|--------------------------- |  | ----------------- | ------ |  | ---------- |  | ----- | ----------------- | 
|                            |  | Passenger revenue |        |  | Percentage |  |       | Passenger revenue | 
|                            |  | RMB million       |        |  | %          |  |       | RMB million       | 
|Domestic                    |  |                   | 71,277 |  |            |  | 80.8  |                   | 
|Hong Kong, Macao and Taiwan |  |                   | 2,162  |  |            |  | 2.4   |                   | 
|International               |  |                   | 14,832 |  |            |  | 16.8  |                   | 
|                            |  |                   |        |  |            |  |       |                   | 
|Passenger revenue           |  |                   | 88,271 |  |            |  | 100.0 |                   | 



Substantially all of
the Group’s operating revenue is attributable to airline and airline-related operations. Traffic revenue accounted for 96.1%
and 96.6% of total operating revenue in 2013 and 2012 respectively. Passenger revenue and cargo and mail revenue accounted for
93.2% and 6.8% respectively of the total traffic revenue in 2013. During the reporting period, the Group’s total traffic
revenues was RMB94,684 million, representing a decrease of RMB1,416 million or 1.5% from prior year, mainly due to the VAT reform
which leads to the decrease of domestic revenues of RMB4,798 million. The other operating revenue is mainly derived from commission
income, expired sales in advance of carriage hotel and tour operation income, general aviation income and ground services income.



The decrease in operating
revenue was primarily due to a 1.4% decrease in passenger revenue from RMB89,544 million in 2012 to RMB88,271 million in 2013.
The total number of passengers carried increased by 6.1% to 91.79 million passengers in 2013. RPKs increased by 9.5% from 135,535
million in 2012 to 148,417 million in 2013, primarily as a result of the increase in number of passengers carried. Passenger yield
per RPK decreased from RMB0.66 in 2012 to RMB0.59 in 2013, which is mainly due to the impact from VAT reform.



Domestic passenger
revenue, which accounted for 80.8% of the total passenger revenue in 2013, decreased by 3.5% from RMB73,845 million in 2012 to
RMB71,277 million in 2013. Domestic passenger traffic in RPKs increased by 8.2%, while passenger capacity in ASKs increased by
9.8%, resulting in a decrease in passenger load factor by 1.2 percentage points from 81.4% in 2012 to 80.2% in 2013. Domestic passenger
yield per RPK decreased from RMB0.69 in 2012 to RMB0.61 in 2013.



Hong Kong, Macau and
Taiwan passenger revenue, which accounted for 2.4% of total passenger revenue, increased by 1.4% from RMB2,133 million in 2012
to RMB2,162 million in 2013. For Hong Kong, Macau and Taiwan flights, passenger traffic in RPKs increased by 1.5%, while passenger
capacity in ASKs increased by 3.8%, resulting in a decrease in passenger load factor by 1.6 percentage points from 73.2% in 2012
to 71.6% in 2013. Passenger yield per RPK remained at RMB0.84 in 2012 and 2013.



International passenger
revenue, which accounted for 16.8% of total passenger revenue, increased by 9.3% from RMB13,566 million in 2012 to RMB14,832 million
in 2013. For international flights, passenger traffic in RPKs increased by 15.6%, while passenger capacity in ASKs increased by
12.2%, resulting in a 2.3 percentage points increase in passenger load factor from 75.0% in 2012 to 77.3% in 2013. Passenger yield
per RPK decreased from RMB0.53 in 2012 to RMB0.50 in 2013.



Cargo and mail revenue,
which accounted for 6.8% of the Group’s total traffic revenue and 6.5% of total operating revenue, decreased by 2.2% from
RMB6,556 million in 2012 to RMB6,413 million in 2013. The decrease was attributable to the continued downturn of the demand in
the cargo market and the low level cargo fare.



Other operating revenue
increased by 13.2% from RMB3,414 million in 2012 to RMB3,863 million in 2013. The increase was primarily due to the general growth
in income from commission and expired sales in advance of carriage.



59







Operating Expenses



Total operating expenses
in 2013 amounted to RMB98,280 million, representing an increase of RMB2,403 million or 2.5% over 2012, primarily due to the total
effect of increases in payroll, landing and navigation fees, depreciation and amortization, and other operating costs. Total operating
expenses as a percentage of total operating revenue was 99.7% in 2013 and 96.3% in 2012.



|                                             |  | 2013                          |        |  | 2012         |  |       |                               | 
|-------------------------------------------- |  | ----------------------------- | ------ |  | ------------ |  | ----- | ----------------------------- | 
|                                             |  | Operating expense RMB million |        |  | Percentage % |  |       | Operating expense RMB million | 
|Flight operations                            |  |                               | 54,010 |  |              |  | 55.0  |                               | 
|Mainly including:             Jet fuel costs |  |                               | 35,538 |  |              |  |       |                               | 
|Aircraft operating lease charges             |  |                               | 4,767  |  |              |  |       |                               | 
|Flight personnel payroll and welfare         |  |                               | 5,799  |  |              |  |       |                               | 
|Maintenance                                  |  |                               | 7,805  |  |              |  | 7.9   |                               | 
|Aircraft and traffic servicing expenses      |  |                               | 15,091 |  |              |  | 15.4  |                               | 
|Promotion and selling expenses               |  |                               | 7,754  |  |              |  | 7.9   |                               | 
|General and administrative expenses          |  |                               | 2,470  |  |              |  | 2.5   |                               | 
|Depreciation and amortization                |  |                               | 9,347  |  |              |  | 9.5   |                               | 
|Impairment on property, plant and equipment  |  |                               | 536    |  |              |  | 0.5   |                               | 
|Others                                       |  |                               | 1,267  |  |              |  | 1.3   |                               | 
|                                             |  |                               |        |  |              |  |       |                               | 
|Total operating expenses                     |  |                               | 98,280 |  |              |  | 100.0 |                               | 



Flight operations expenses,
which accounted for 55.0% of total operating expenses, decreased by 1.2% from RMB54,690 million in 2012 to RMB54,010 million in
2013, primarily as a result of decrease in jet fuel costs because of decrease in average fuel prices. Jet fuel costs, which accounted
for 65.8% of flight operations expenses in 2013, decreased by 5.0% from to RMB37,401 million in 2012 to RMB35,538 million in 2013.



Maintenance expenses,
which accounted for 7.9% of total operating expenses, decreased by 2.1% from RMB7,971 million in 2012 to RMB7,805 million in 2013.
The decrease was mainly due to the impact of the VAT reform.



Aircraft and traffic
servicing expenses, which accounted for 15.4% of total operating expenses, increased by 7.2% from RMB14,072 million in 2012 to
RMB15,091 million in 2013. The increase was primarily due to a 5.9% rise in landing and navigation fees from RMB8,984 million in
2012 to RMB9,510 million in 2013, resulted from the increase in number of take-off and landings and the average unit price of take-off
and landing charges.



Promotion and selling
expenses, which accounted for 7.9% of total operating expenses, increased by 8.7% from RMB7,134 million in 2012 to RMB7,754 million
in 2013.



General and administrative
expenses, which accounted for 2.5% of the total operating expenses, increased by 1.9% from RMB2,425 million in 2012 to RMB2,470
million in 2013.



Depreciation and amortization,
which accounted for 9.5% of total operating expenses, increased by 13.1% from RMB8,264 million in 2012 to RMB9,347 million in 2013,
mainly due to the additional depreciation charges on aircraft delivered in 2013.



60







Operating Profit



Operating profit of
RMB1,510 million and RMB5,099 was recorded in 2013 and 2012 respectively. The decrease in profit was mainly due to the net effect
of decrease in operating revenue by RMB967 million or 1.0% in 2013 and increase in operating expenses by RMB2,403 million or 2.5%.



Other Income or Expenses



Other net income decreased
by RMB219 million from RMB1,462 million in 2012 to RMB1,243 million in 2013, mainly due to the decrease of government grants and
loss on disposal of property, plant and equipment.



Interest expense increased
by RMB275 million from RMB1,376 million in 2012 to RMB1,651 million in 2013 was mainly due to the increase in number of aircraft
held through a finance lease.



Net exchange gain of
RMB2,903 million was recorded in 2013, an increase of RMB2,636 million from RMB267 million in 2012, mainly due to the significant
appreciation of Renminbi against U.S. dollar in 2013.



Income Tax



Income tax expense
of RMB734 million was recorded in 2013, decrease by RMB220 million from RMB954 million in 2012, mainly due to the decrease of profit
before income tax.



| | 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,
2014, the Group had banking facilities with several PRC commercial banks for providing loan finance up to an approximate amount
of RMB187.1 billion to the Group. As of December 31, 2014, an approximate amount of RMB126.7 billion was unutilized. As of December
31, 2014 and 2013, the Group’s cash and cash equivalents totaled RMB15,414 million and RMB11,748 million, respectively.



Net cash inflows from
operating activities in 2014, 2013 and 2012 were RMB13,570 million, RMB9,703 million and RMB11,704 million, respectively. Operating
cash inflows of the Group are primarily derived from the provision of air transportation and related service for customers. The
increase of operating cash inflows of the Group was mainly due to the increase of passenger revenue. 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.



Net cash used in investing
activities in 2014, 2013 and 2012 was RMB9,760 million, RMB12,205 million and RMB12,153 million, respectively. Cash capital expenditures
in 2014, 2013 and 2012 were RMB8,649 million, RMB12,308 million and RMB15,733 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 (outflows)/inflows of RMB(131)million, RMB4,168 million and RMB668 million in 2014, 2013 and 2012, respectively.
Net cash inflow from new bank and other loans and repayments of bank and other loans amounted to RMB1,362 million, RMB7,081 million
and RMB4,407 million in 2014, 2013 and 2012, respectively. The additions of bank loan were used for capital expenditures and general
working capital. Repayment of capital leases in 2014, 2013 and 2012 was RMB4,072 million, RMB2,895 million and RMB1,978 million,
respectively, resulting from the increase of aircraft acquisitions under capital leases.



61







As of December 31,
2014, 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 RMB102,713 million. In 2015, 2016, 2017, 2018 and thereafter, amounts payable under
such loans and obligations will be RMB16,728 million, RMB22,713 million, RMB19,638 million, RMB8,422 million and RMB35,212 million
respectively. Such borrowings were denominated in U.S. 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,
2014, the Group’s short-term bank loans were RMB10,243 million. The Group’s weighted average interest rate on short-term
bank loans was 3.3% per annum as of December 31, 2014. 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,
2014, the Group had obligations under operating leases totaling RMB28,798 million, predominately for aircraft. Of such amount,
RMB5,072 million, RMB4,732 million, RMB4,098 million, RMB3,641 million, RMB3,025 million and RMB8,230 million, respectively, is
due in 2015, 2016, 2017, 2018, 2019 and thereafter.



As of December 31,
2014, the Group had a working capital deficit of RMB26,545 million, as compared to a working capital deficit of RMB28,640 million
as of December 31, 2013. 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 2015 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, 2014, the Group had banking facilities with several PRC commercial banks for providing loan finance up to approximately
RMB187,133 million (2013: RMB166,270 million), of which approximately RMB126,703 million (2013: RMB120,904 million) was unutilized.



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,
2015. 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.



62







As of December 31,
2014, the Group had capital commitments as follows:



|                                              |  | 2015          |        |  | 2016 |  |        | 2017 |  |  | 2018   |  |  | 2019 and afterwards |       |  | Total | 
|--------------------------------------------- |  | ------------- | ------ |  | ---- |  | ------ | ---- |  |  | ------ |  |  | ------------------- | ----- |  | ----- | 
|                                              |  | (RMB million) |       
|Acquisition of aircraft and related equipment |  |               | 18,146 |  |      |  | 11,628 |      |  |  | 10,081 |  |  |                     | 7,552 |  |       | 
|Others                                        |  |               | 2,839  |  |      |  | 947    |      |  |  | 1,170  |  |  |                     | 103   |  |       | 
|Total capital commitments                     |  |               | 20,985 |  |      |  | 12,575 |      |  |  | 11,251 |  |  |                     | 7,655 |  |       | 



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



As of December 31,
2014, the cash and cash equivalents of the Group totaled RMB15,414 million. Of such balance, 11.5% 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 RMB126,703million, 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, 2015 to December 31, 2015 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, 2014.



63







|                                                         |  |       |         |  | As of December 31, 2014 Payment due by period |  |        |           |  |  | As of December 31, 2013 | 
|-------------------------------------------------------- |  | ----- | ------- |  | --------------------------------------------- |  | ------ | --------- |  |  | ----------------------- | 
|                                                         |  | Total |         |  | Less than 1 year                              |  |        | 1-3 years |  |  | 3-5 years               | 
|                                                         |  |       |         |  |                                               |  |        |           |  |  |                         | 
|Short-term bank loans and ultra-short-term bills(note 1) |  |       | 10,343  |  |                                               |  | 10,343 |           |  |  | -                       | 
|Long-term bank and other loans (note 1)                  |  |       | 55,846  |  |                                               |  | 11,950 |           |  |  | 31,770                  | 
|Obligations under capital leases                         |  |       | 56,577  |  |                                               |  | 7,312  |           |  |  | 13,971                  | 
|Operating lease commitments                              |  |       | 28,798  |  |                                               |  | 5,072  |           |  |  | 8,830                   | 
|Aircraft purchase commitments (Note 2)                   |  |       | 59,467  |  |                                               |  | 18,146 |           |  |  | 21,709                  | 
|Other capital commitments                                |  |       | 5,122   |  |                                               |  | 2,839  |           |  |  | 2,117                   | 
|Investment commitments                                   |  |       | 70      |  |                                               |  | 70     |           |  |  | -                       | 
|Total                                                    |  |       | 216,223 |  |                                               |  | 55,732 |           |  |  | 78,397                  | 



Note 1 Interest on variable rate loans
was estimated based on the current rate in effect at December 31, 2014.



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



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. There were certain changes
in the Company’s directors, senior management and supervisors as of April 17, details of which are set forth below.



|Name            |  | Position                                                     |  | Gender |  | Age
|--------------- |  | ------------------------------------------------------------ |  | ------ |  | ---
|Si Xian Min     |  | Chairman of the Board, Non-executive Director                |  | Male   |  | 57 
|Tan Wan Geng    |  | Executive Director, Vice Chairman of the Board and President |  | Male   |  | 50 
|Wang Quan Hua   |  | Non-executive Director                                       |  | Male   |  | 60 
|Yuan Xin An     |  | Non-executive Director                                       |  | Male   |  | 58 
|Yang Li Hua     |  | Non-executive Director                                       |  | Female |  | 59 
|Zhang Zi Fang   |  | Executive Director and Executive Vice President              |  | Male   |  | 56 
|Li Shao Bin     |  | Executive Director                                           |  | Male   |  | 49 
|Wei Jin Cai     |  | Independent Non-executive Director                           |  | Male   |  | 65 
|Ning Xiang Dong |  | Independent Non-executive Director                           |  | Male   |  | 49 
|Liu Chang Le    |  | Independent Non-executive Director                           |  | Male   |  | 63 
|Tan Jin Song    |  | Independent Non-executive Director                           |  | Male   |  | 50 
|Pan Fu          |  | Chairman of the Supervisory Committee                        |  | Male   |  | 52 
|Li Jia Shi      |  | Supervisor                                                   |  | Male   |  | 53 
|Zhang Wei       |  | Supervisor                                                   |  | Female |  | 48 
|Yang Yi Hua     |  | Supervisor                                                   |  | Female |  | 54 
|Wu De Ming      |  | Supervisor                                                   |  | Male   |  | 57 
|Ren Ji Dong     |  | Executive Vice President                                     |  | Male   |  | 50 
|Liu Qian        |  | Executive Vice President                                     |  | Male   |  | 50 
|Dong Su Guang   |  | Executive Vice President                                     |  | Male   |  | 61 
|Wang Zhi Xue    |  | Executive Vice President and Chief Pilot                     |  | Male   |  | 53 
|Hu Chen Jie     |  | Chief Information Officer                                    |  | Male   |  | 46 
|Su Liang        |  | Chief Economist                                              |  | Male   |  | 52 
|Chen Wei Hua    |  | Chief Legal Adviser                                          |  | Male   |  | 48 
|Guo Zhi Qiang   |  | COO Marketing & Sales                                        |  | Male   |  | 51 
|Yuan Xi Fan     |  | Chief Engineer                                               |  | Male   |  | 52 
|Li Tong Bin     |  | Chief Engineer                                               |  | Male   |  | 52 
|Xie Bing        |  | Company Secretary                                            |  | Male   |  | 43 
|Feng Hua Nan    |  | COO Flight Safety                                            |  | Male   |  | 51 
|Xiao Li Xin     |  | Chief Accountant and Chief Financial Officer                 |  | Male   |  | 48 



64







Note 1. On April 30, 2014, the Board approved
that Mr. Dong Su Guang ceased to be the Executive Vice President of the Company due to retirement. On April 30, 2014, the Board
approved that Mr. Yuan Xi Fan ceased to be the Chief Engineer of the Company due to work arrangement and the Board also approved
to appoint Mr. Li Tong Bin as the Chief Engineer of the Company. On August 15, 2014, the Board approved to appoint Mr. Feng Hua
Nan as the COO Flight Safety of the Company. On February 27, 2015, the Board approved to remove the office of Mr. Hu Chen Jie as
the Chief Information Officer of the Company. On March 25, 2015, Mr. Wang Quan Hua tendered his resignation as the Non-executive
Director due to retirement; on March 27, 2015, the Board appointed Mr. Xiao Li Xin as the Chief Accountant and Chief Financial
Officer of the Company. On April 9, 2015, Mr. Wei Jin Cai has tendered his resignation as an Independent Non-executive Director
to the Board which shall take effect upon the date of the effective appointment of the new independent non-executive Director.



Note 2. On December 30, 2014, the Board
approved to remove the offices of Mr. Chen Gang as the Executive Vice President of the Company and Mr. Tian Xiao Dong as the COO
Flight Operations of the Company as they were under investigation on suspicion of job-related crimes. On January 5, 2015, Mr. Xu
Jie Bo tendered his resignation as the Director, and the Board approved to remove the office of Mr. Xu Jie Bo as the Executive
Vice President, Chief Financial Officer and Chief Accountant of the Company as he was under investigation on suspicion of job-related
crimes. On January 5, 2015, the Board approved to remove the office of Mr. Zhou Yue Hai as the Executive Vice President of the
Company as he was under investigation on suspicion of job-related crimes.



Board of Directors



Mr. Si Xian Min,
aged 57, 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.



Mr. Tan Wan Geng,
aged 50, 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.



65







Mr. Yuan Xin An,
aged 58, 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. Mr.
Yuan has served as the Executive Vice President of CSAHC since September 2007 and the 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 59, 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 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., China Southern Airlines Group Property Management Company Limited and
China Southern Airlines Group Ground Services Co., Ltd.



Mr. Zhang Zi Fang,
aged 56, 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 has been 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 30 June 2009.



Mr. Li Shao Bin,
aged 49, 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.



Mr. Wei Jin Cai,
aged 65, 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.



66







Mr. Ning Xiang Dong,
aged 49, 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, and the independent director of a number of listed companies including Datang Telecom Technology Co., Ltd., Shantui
Construction Machine Co Ltd, Hong Yuan Securities Co., Ltd and Goer TekInc.. 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 a number of listed companies including Aerospace Hi-Tech Holding Group Co., Ltd., Sichuan Changhong
Electric Company Limited, Yango Group Co., Ltd. and Weichai Power Co., Ltd.



Mr. Liu Chang Le,
aged 63, 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” and the “Person of the Year” award of the Chinese Business Leaders Annual
Meeting. Since 2005, Mr. Liu has been the Chairman of the iEMMYs Festival. In 2008, Mr. Liu received the International Emmy®
Directorate Award granted by International Academy of Television Arts & Sciences. Mr. Liu was appointed as honorary chairman
of “World Chinese-language Media Cooperation Alliance” in 2009 and appointed as special consultant to the 8th Council
of the Buddhist Association of China in 2010. He served as the Vice Chairman of the 6th Council of The Buddha’s Light International
Association, Board of Directors of Headquarters in 2014. Mr. Liu was a member of the Tenth, the Eleventh and the Twelfth 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 serving as 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 2010, Mr. Liu was awarded the Silver Bauhinia Star by the Hong Kong Special Administrative Region. Mr. Liu has been
the Independent Non-executive Director of the Company since November 30, 2011.



Mr. Tan Jin Song,
aged 50, graduated from Renmin University of China with an on-job doctor degree in Accounting. Mr. Tan is a Chinese Certified Public
Accountant. Mr. Tan began his career in 1985 and was a teacher in Shaoyang School of Finance and Accounting of Hunan Province and
the Deputy Dean of the School of Management of Zhongshan University; Mr. Tan is currently the Party Secretary, a professor and
a doctorate-tutor of the School of Management of Zhongshan University. He is also a member of the MPAcc Education Instruction Committee,
a member of China Institute of Internal Audit, an executive member of Guangdong Institute of Certified Public Accountants and a
member of China Audit Society. Currently, Mr. Tan also serves as the Chairman of Guangzhou Zhongda Holding Co., Ltd., the independent
director of Grandhope Biotech Co., Ltd., Poly Real Estate Company Limited and Guangzhou Hengyun Enterprises Holdings Limited. In
addition, Mr. Tan also acts as the independent non-executive director of Welling Holding Limited. Mr. Tan has been the Independent
Non-executive Director of the Company since December 26, 2013.



67







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.



Mr. Pan Fu,
aged 52, 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,
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.



Mr. Li Jia Shi,
aged 53, 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, the 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 Team Deputy 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. Mr. Li is the Vice Chairman of Southern Airlines Culture and Media Co., Ltd.



Ms. Zhang Wei,
aged 48, has a master degree. She graduated 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 Southern
Airlines Group Finance Company Limited. 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 a number of companies including Southern Airlines Culture and Media Co., Ltd., Southern Airlines Group Finance Company
Limited and Southern Airlines (Group) Import and Export Trading Company Limited, and the Director of Guangzhou Southern Airline
Construction Company Limited.



Ms. Yang Yi Hua,
aged 54, 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 Company
Limited, Nan Lung International Freight Limited, the supervisor convener of Beijing China Southern Airlines Ground Service Company
Limited and Zhuhai Airlines Company Limited, and the supervisor of Xiamen Airlines Company Limited, Guangzhou Baiyun International
Logistic Company Limited, Southern Airlines Group Finance Company Limited and Chongqing Airlines Company Limited.



68







Mr. Wu De Ming,
aged 56, graduated from South China Normal University majoring in political management. He obtained a degree after beginning his
career from 1976. Mr. Wu served as the Director of the political division of Operation Department of Company, the Deputy Party
Secretary and Secretary of Disciplinary Committee of Guangzhou ticket office of Company, the Deputy Secretary and Secretary of
the party general branch of ticket office of Transportation Department of Company, the Director of the Disciplinary Supervision
Department of CSAHC; and the General Director of the Supervision Bureau and Chief Officer of Disciplinary Committee Office of CSAHC.
He has been a member of Party Committee of Commercial Steering Committee of the Company, Secretary to the Disciplinary Committee
and President of the Labour Union since April 2009, and the Supervisor of the Company since December 2013.



Senior Management



Mr. Ren Ji Dong,
aged 50, 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.



Mr. Liu Qian,
aged 50, 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. 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.



Mr. Wang Zhi Xue,
aged 53, 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.
Mr. Wang is also the chairman of Zhuhai Airlines Company Limited.



Mr. Su Liang,
aged 52, graduated from the University of Cranfield, United Kingdom with a master degree majoring in Air Transport Management 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 Company Limited and Sichuan Airlines Co., Ltd..



Mr. Chen Wei Hua,
aged 48, 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 Company Limited.



69







Mr. Guo Zhi Qiang,
aged 51, 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 General Manager of Transportation Department of Xinjiang Airlines;
the Deputy General Manager of Xinjiang Airlines; 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 February 2008 to May 2009, and served as the Deputy Director General of the Commercial Steering Committee of the Company since
May 2009 and the Director General of the Commercial Steering Committee of the Company from September 2009 to September 2012. Mr.
Guo acted as the COO Marketing & Sales of the Company and the Director General of the Commercial Steering Committee of the
Company from September 2012 to July 2014. He served as the COO Marketing & Sales of the Company since July 2014. Currently,
Mr. Guo is also the Chairman of Guangzhou Nanland Air Catering Company Limited and Guangzhou Baiyun International Logistic Company
Limited, and the director of Xiamen Airlines Company Limited.



Mr. Li Tong Bin,
aged 53, has college qualification and graduated from Civil Aviation Institute of China majoring in maintenance of aircraft electrical
equipment. He obtained on-job Master of Business Administration (MBA) from Hainan University and Executive Master of Business Administration
(EMBA) form Tsinghua University, and is a senior engineer. Mr. Li began his career in July 1983, and was the Deputy Head of Technical
Division of Aircraft Maintenance Plant, the Head of Maintenance Plant of aircraft maintenance base and the Deputy Director of aircraft
maintenance base, the Director of Aircraft Engineering Department of China Northern Airlines Company, the General Manager of Jilin
branch of China Northern Airlines Company, and the Deputy General Manager of Zhuhai Airlines Company Limited. He served as the
General Manager of Zhuhai Airlines Company Limited from January 2005 to April 2012, and the Party Secretary and Deputy General
Manager of Northern Branch of the Company from April 2012 to April 2014. Mr. Li has been the Chief Engineer of the Company since
April 2014. Currently, Mr. Li is also the Chairman of Guangzhou Aircraft Maintenance Engineering Company Limited and Shenyang Northern
Aircraft Maintenance Engineering Co., Ltd.



Mr. Xie Bing,
aged 43, 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 business administration (international banking and 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 worked in the Planning and Development Department, Company
Secretary Office of the Company and General Office of CSAHC. He has been the Company Secretary of the Company since November 2007.



Mr. Feng Hua Nan,
aged 52, graduated with a university degree from China Civil Aviation Flying College, majoring in aircraft piloting, and obtained
an on-job master degree in Aeronautical Engineering from Beijing University of Aeronautics and Astronautics and an Executive Master
of Business Administration (EMBA) from the School of Economics and Management of Tsinghua University. He is a commanding pilot.
Mr. Feng began his career in 1983. He served as the Director of Zhuhai Flight Training Centre of the Company, the Deputy General
Manager of Flight Operation Division, the General Manager of Flight Safety Technology Department and the General Manager of Flight
Technology Management Department of the Company. Mr. Feng served as the Party Secretary and Deputy General Manager of Guizhou Airlines
Company Limited from September 2004 to February 2006, and then served as the Director and General Manager of Guizhou Airlines Company
Limited from February 2006 to July 2014. He has been the COO Flight Safety of the Company since August 2014. Currently, Mr. Feng
is also the Chairman of Zhuhai Xiang Yi Aviation Technology Company Limited, Southern Airlines General Aviation Company Limited
and China Southern West Australian Flying College Pty Ltd.



Mr. Xiao Li Xin,
aged 48. Mr. Xiao graduated from GuangDong Academy of Social Sciences with a master degree in economics and then obtained an Executive
Master of Business Administration (EMBA) degree from Tsinghua University. He is a qualified senior accountant and a certified public
accountant. Mr. Xiao began his career in July 1991 and served as the General Manager Assistant, Deputy General Manager, General
Manager and Deputy Secretary of the General Party Branch of the Finance Department of the Company. He served as the Deputy Chief
Accountant and General Manager of the Finance Department of the Company from March 2007 to October 2007. He served as the Director,
General Manager and Secretary of the General Party Branch of Southern Airlines Group Finance Company Limited from October 2007
to February 2008. He served as the Director, General Manager and Party Secretary of Southern Airlines Group Finance Company Limited
from February 2008 to March 2015. He concurrently held the positions of the Director and Vice Chairman of Air Union Insurance Brokers
Co., Ltd. from March 2012 to March 2015. Mr. Xiao has been the Chief Accountant and Chief Financial Officer of the Company since
March 27, 2015.

70







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 2014 was RMB13.56 million. For the year ended December 31, 2014, the
Company paid an aggregate of approximately RMB2.36 million 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, 2014 are set out below:



|                                    |  | Directors’ fees RMB’000 |     |  | Salaries, allowances and benefits in kind RMB’000 |  |       | Retirement scheme contributions RMB’000 |  |  | Total RMB’000 | 
|----------------------------------- |  | ----------------------- | --- |  | ------------------------------------------------- |  | ----- | --------------------------------------- |  |  | ------------- | 
|Non-executive Directors             |  |                         |     |  |                                                   |  |       |                                         |  |  |               | 
|Si Xian Min                         |  |                         | -   |  |                                                   |  | -     |                                         |  |  | -             | 
|Wang Quan Hua                       |  |                         | -   |  |                                                   |  | -     |                                         |  |  | -             | 
|Yuan Xin An                         |  |                         | -   |  |                                                   |  | -     |                                         |  |  | -             | 
|Yang Li Hua                         |  |                         | -   |  |                                                   |  | -     |                                         |  |  | -             | 
|                                    |  |                         |     |  |                                                   |  |       |                                         |  |  |               | 
|Independent Non-executive Directors |  |                         |     |  |                                                   |  |       |                                         |  |  |               | 
|Wei Jin Cai                         |  |                         | 150 |  |                                                   |  | -     |                                         |  |  | -             | 
|Ning Xiang Dong                     |  |                         | 150 |  |                                                   |  | -     |                                         |  |  | -             | 
|Liu Chang Le                        |  |                         | 150 |  |                                                   |  | -     |                                         |  |  | -             | 
|Tan Jin Song                        |  |                         | 150 |  |                                                   |  | -     |                                         |  |  | -             | 
|                                    |  |                         |     |  |                                                   |  |       |                                         |  |  |               | 
|Executive Directors                 |  |                         |     |  |                                                   |  |       |                                         |  |  |               | 
|Tan Wan Geng                        |  |                         | -   |  |                                                   |  | -     |                                         |  |  | -             | 
|Zhang Zi Fang                       |  |                         | -   |  |                                                   |  | -     |                                         |  |  | -             | 
|Li Shao Bin                         |  |                         | -   |  |                                                   |  | 636   |                                         |  |  | 130           | 
|                                    |  |                         |     |  |                                                   |  |       |                                         |  |  |               | 
|Supervisors                         |  |                         |     |  |                                                   |  |       |                                         |  |  |               | 
|Pan Fu                              |  |                         | -   |  |                                                   |  | -     |                                         |  |  | -             | 
|Li Jia Shi                          |  |                         | -   |  |                                                   |  | 636   |                                         |  |  | 132           | 
|Zhang Wei                           |  |                         | -   |  |                                                   |  | -     |                                         |  |  | -             | 
|Yang Yi Hua                         |  |                         | -   |  |                                                   |  | 294   |                                         |  |  | 140           | 
|Wu De Ming                          |  |                         | -   |  |                                                   |  | 367   |                                         |  |  | 140           | 
|Total                               |  |                         | 600 |  |                                                   |  | 1,933 |                                         |  |  | 542           | 



Note: The total remuneration received from
the Company are RMB766,000 by Mr. Xu Jie Bo for the reporting period.



71







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 Share Appreciation Rights 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) and a dividend of RMB0.05 (equivalent to HK$0.06) per share was approved
by the Company’s General Meeting on May 31, 2012 and June 18, 2013, respectively. A dividend of RMB0.04 (equivalent to HK$0.05)
(inclusive of applicable tax) was approved by the Company’s General Meeting on June 26, 2014. Therefore, the exercise price
for the Share Appreciation Rights was adjusted to HK$3.56 per share in accordance with the predetermined formula stipulated in
the Scheme. During the year, 8,326,667 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, 2014 was RMB0 (2013: RMB1,893,000) and a corresponding staff costs of RMB1,893,000
was reversed for the year ended December 31, 2014 (2013: RMB410,000).



| | 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 2016. 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 Tan Jing Song, Wei Jin Cai and Ning Xiang Dong.Tan Jing Song is the Chairman of the Audit Committee.
The term of office of each member will end in 2016. 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 9 meetings in 2014,
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.



72







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 Tan Jing Song and Non-executive Director Wang Quan
Hua as members. The term of office of each member is three years. Wang Quan Hua resigned from office because of retirement in March
25, 2015. The term of office of the current members will end in 2016. A member may serve consecutive terms upon re-election. The
Remuneration and Assessment Committee held one meeting in 2014, which were attended by all members.



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 2014.



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,
2014, the Nomination Committee consists of three members, including Si Xian Min as Chairman and Wei Jin Cai (Independent Non-executive
Director) and Tan Jing Song (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 two meeting in 2014, which was attended by all members.



73







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



As of December 31,
2014, the Group had 83,132 employees, including 6,908 pilots, 13,797 flight attendants, 11,981 maintenance personnel, 8,820 passenger
transportation personnel, 5,564 cargo transportation personnel, 9,053 ground service personnel, 2,302 flight operation officers,
1,004 flight security guards, 914 information system personnel, 2,326 financial personnel, and 19,463 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.



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 organised 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 11% to 21% (2013: 10% to 22%) of salary costs including certain allowances. A member of the retirement schemes is entitled
to pension benefits from the Local Labour and Social Security Bureau upon his/her retirement. The retirement benefit obligations
of all retired staff of the Group are assumed by these schemes. The Group, at its sole discretion, had made certain welfare subsidy
payments to these retirees.



In 2014, the Company
and its major subsidiaries joined a new defined contribution retirement scheme (“Pension Scheme”) that was implemented
by CSAHC. The annual contribution to the Pension Scheme is based on a fixed specified percentage of prior year’s annual wage.
There will be no further obligation beyond the annual contribution according to the Pension Scheme. The total contribution into
the Pension Scheme in 2014 was approximately RMB407,000,000.



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:



74







| | (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 affect 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.



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) and a dividend of RMB0.05 (equivalent to HK$0.06) per share was approved
by the Company’s General Meeting on May 31, 2012 and June 18, 2013, respectively. A dividend of RMB0.04 (equivalent to HK$0.05)
per share (inclusive of applicable tax) was approved by the Company’s General Meeting on June 26, 2014. Therefore, the exercise
price for the Share Appreciation Rights was adjusted to HK$3.56 per share in accordance with the predetermined formula stipulated
in the Scheme. During the year, 8,326,667 units of Share Appreciation Rights were forfeited.



75







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, 2014 was RMB0(2013: RMB1,893,000) and a corresponding staff costs of RMB1,893,000
was reversed for the year ended December 31, 2014 (2013: RMB410,000).



None of our directors
and senior management owns any shares or options in the Group as of April 17, 2015.



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 17, 2015 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 ofShares |  | Identity of Person or Group |  | Beneficially
        Owned (1) |               |  | Percentage of
        the
        Respective
        Class of
        Shares (2) |  |       | Percentage of
        Total Shares (2) | 
|-------------- |  | --------------------------- |  | ------------------------------ | ------------- |  | -------------------------------------------------------------------------------- |  | ----- | -------------------------------------- | 
|A shares       |  | CSAHC                       |  |                                | 4,208,586,278 |  |                                                                                  |  | 59.93 | %                                      | 
|H shares       |  | HKSCC Nominees Limited      |  |                                | 1,745,649,197 |  |                                                                                  |  | 62.62 | %                                      | 
|H shares       |  | CSAHC (3)                   |  |                                | 1,064,770,000 |  |                                                                                  |  | 38.10 | %                                      | 
|H shares       |  | Nan Lung Holding Limited    |  |                                | 1,033,650,000 |  |                                                                                  |  | 36.98 | %                                      | 



| | (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 17, 2015. Percentage of total shares is based on 9,817,567,000 shares issued as of April
17, 2015.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Includes 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.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 17, 2015,
there were 48 registered holders of 2,557,552 American Depositary Shares in the United States, consisting of 4.58% 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.



76







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



For a detailed description
of our related party transactions, please see Note 48 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, 2014 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.



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 ten 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 Company also entered into
the individual lease agreement (the "2012 Property Lease Agreement") with CSAHC on September 25, 2012 in relation to
certain fragmented 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.



77







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. As the Nanyang Asset Lease Agreement had expired and the lease transaction contemplated under the
Nanyang Asset Lease Agreement would continue to be entered into on a recurring basis, the Company further entered into the 2013
Nanyang Asset Lease Agreement (the "2013 Nanyang Asset Lease Agreement") with CSAHC on April 19, 2013, pursuant to which
CSAHC agreed to lease to the Company certain lands, properties, facilities and structures at Nanyang Jiangying Airport for a term
of two years, commencing from January 1, 2013 to December 31, 2014.



As the lease transactions contemplated
under the New Asset Lease Agreement and the 2013 Nanyang Asset Lease Agreement would continue to be entered into on a recurring
basis, the Company and CSAHC entered into the new Asset Lease Agreement (the "Asset Lease Agreement") on December 29,
2014 for a term of three years from January 1, 2015 to December 31, 2017 to renew lease transactions originally covered under the
New Asset Lease Agreement and the 2013 Nanyang Asset Lease Agreement. The annual rents payable to CSAHC under the Asset Lease Agreement
is RMB86,268,700 for the three years ending December 31, 2017.



For the year ended December 31,
2014, the rent incurred by the Group amounted to RMB66 million pursuant to the New Asset Lease Agreement, 2013 Nanyang Asset Lease
Agreement and 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,
2014, the rents for land lease and property lease incurred by the Group amounted to RMB40 million and RMB64 million respectively
pursuant to the lease agreements.



| | (4) | On January 9, 2014, the Company and CSAHC have entered into two new lease agreements (the "Lease
Agreements"), namely, the property lease agreement (the "Property Lease Agreement") and the land lease agreement
(the "Land Lease Agreement") to renew the land and property leases transactions contemplated thereunder for the period
from January 1, 2014 to December 31, 2016. Pursuant to the Property Lease Agreement, CSAHC agreed to lease certain properties,
facilities and other infrastructure located in various cities such as Guangzhou, Shenyang, Dalian, Harbin, Xinjiang, Changchun,
Beijing and Shanghai held by CSAHC or its subsidiaries to the Company for office use related to the civil aviation business development.
The property lease transactions contemplated under the existing 2012 Property Lease Agreements have now been covered under the
Property Lease Agreement so as to save resources as well as time of management of various property leases with CSAHC. Pursuant
to the Land Lease Agreement, CSAHC agreed to lease certain lands located in Xinjiang, Harbin, Changchun, Dalian and Shenyang by
leasing the land use rights of such lands to the Company for the purposes of civil aviation and related businesses of the Company.
The maximum annual aggregate amount of rent payable by the Company to CSAHC under the Property Lease Agreement and the Land Lease
Agreement for each of the three years ending December 31, 2016 shall not exceed RMB40,114,700 and RMB63,582,200, respectively,
and such payment shall be made quarterly.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



78







For the year ended
December 31, 2014, the rents incurred by the Group amounted to RMB40 million and RMB64 million pursuant to the Lease Agreement
and the Land Lease Agreement.



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.



On April 19, 2013,
the Company entered into the Supplemental Agreement to the Import and Export Agency Framework Agreement dated January 28, 2011
with SAIETC to revise the maximum annual service fee payable by the Company to SAIETC for the period from January 1, 2013 to December
31, 2013 from RMB97.2 million to RMB160 million.



For the year ended
December 31, 2014, the agency fee incurred by the Group in respect of the above import and export services was RMB119 million.



On January 9, 2014,
the Company and SAIETC have entered into a new import and export agency framework agreement (the "New Import and Export Agency
Framework Agreement") to renew the continuing connected transactions contemplated therein for a fixed term of three years
commencing from January 1, 2014 to December 31, 2016. During the period of the New Import and Export Agency Framework Agreement,
the annual cap shall remain at RMB160 million per annum.



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.



On April 19, 2013,
the Company entered into a new Media Services Framework Agreement with SACM to renew the annual cap, expand the services scope
and extend the term for an additional term of three years, commencing from January 1, 2013 to December 31, 2015. Pursuant to the
agreement, the Company has appointed SACM to provide advertising agency services, plotting, purchase and production of in-flight
TV and movie program agency services, channel publicity and production services, public relations services relating to recruitments
of airhostess, and services relating to the distribution of newspapers and magazines. The annual cap under the agreement for each
year is RMB98 million, RMB105 million and RMB113 million for each of years ended December 31, 2013, 2014 and 2015, respectively.



Due to the increase
in demand for the advertising services provided by XAMC, the original annual cap will no longer be sufficient to cover the transaction
amount to be incurred by the Group during the remaining term of the Media Services Framework Agreement. Accordingly, the Company
and SACM entered into a supplemental agreement to the Media Services Framework Agreement (the "Supplemental Agreement to the
Media Services Framework Agreement") on 29 December 2014 to revise, among others, the annual cap. Pursuant to the Supplemental
Agreement to the Media Services Framework Agreement, the Company and SACM have agreed to revise the annual cap for services provided
by the SACM Group for the period from January 1, 2015 to December 31, 2015 from RMB113 million to RMB118.5 million.



79







For the year ended
December 31, 2014, the media fees incurred by the Group for the media services amounted to RMB75 million.



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.



On November 8, 2013,
the Company and SA Finance entered into the new Financial Services Framework Agreement for a term of three years starting from
January 1, 2014 to December 31, 2016 to renew the provision of the financial services contemplated under the Financial Services
Framework Agreement.



Under the new Financial
Services Framework Agreement, SA Finance agrees to provide to the Company deposit services, loan services and other financial services.
SA Finance shall accept deposit of money from the Group at interest rates not lower than those set by the People’s Bank of
China, or PBOC for the same term of deposit. SA Finance will in turn deposit the whole of such sums of money with certain stated-owned
commercial banks and listed commercial banks to control the risk. SA Finance shall make loans or provide credit line services to
the Group and the entering into of separate loan agreements, which will set out the terms and conditions of the loans, upon application
by the Company during the term of the new Financial Services Framework Agreement. SA Finance shall not charge interest rates higher
than those set by the PBOC for similar loans. The total amount of outstanding loans extended by SA Finance to CSAHC (excluding
the Group) must not exceed the sum of SA Finance's shareholders' equity, capital reserves and money deposit received from other
parties (except the Group). The interest rate for loans provided to the Group by SA Finance shall not be higher than the basis
rate allowed by the PBOC for the same type of loan and, subject to the above, the interest rate charged on the loans to the Group
shall be equal to or lower than the rate charged by normal commercial banks in the PRC for comparable loans (whichever is lower).
Upon request by the Company, SA Finance shall also provide other financial services to the Group, including financial and financing
consultation, credit certification and other relevant advice and agency services, insurance agency services, and other businesses
which SA Finance are approved by China Banking Regulatory Commission, or CBRC to operate by entering into of separate agreements,
which will set out the terms and conditions of such services. The parties agreed that the balance of the Company’s deposits
placed with SA Finance (including accrued interests) should not at any time exceed RMB6,000,000,000, 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.



80







As of December 31,
2014, the Group’s deposits placed with SA Finance amounted to RMB4,264 million, the outstanding loans provided by SA Finance
amounted to RMB105 million.



On November 21, 2014,
Guangdong CSA E-commerce Co., Ltd. (the "E-commerce Company") entered into four electronic aviation passenger comprehensive
insurance four-parties cooperation agreements (the "Cooperation Agreements") with SA Finance, Air Union Insurance Brokers
(Beijing) Co., Ltd. (the "Air Union") and Ping An Property & Casualty Insurance Company of China, Ltd. Guangdong
Branch, Sunshine Property and Casualty Insurance Company Limited, Taiping Pension Co., Ltd. and PICC Property and Casualty Company
Limited Guangzhou Branch the Insurance Companies, respectively (the "Insurance Companies"), for a term of three years
commencing from June 12, 2014 to May 31, 2017. Pursuant to the Cooperation Agreements, the E-commerce Company agreed to authorize
other parties to use the B2C website, the mobile terminal air tickets sale platform and VOS sale system of the Company for sales
of online insurances in consideration for a fixed service fees for each policy sold through its electronic platform. SA Finance
(the only entity within the CSAHC Group holding the comprehensive insurance agent qualification which was approved by both China
Banking Regulatory Commission and CIRC) shall be responsible for the general coordination and support, financial settlement and
assisting the settlement for insurance claims in relation to the sales of online insurance procured by Air Union through the electronic
platforms of the Company. Air Union shall act as the agent of the Insurance Companies to sell the electronic aviation passenger
comprehensive insurance through the electronic platforms of the Company and the Insurance Companies shall provide the standard
insurance products and corresponding consulting services, and will be responsible for the insured risks under the electronic aviation
passenger comprehensive insurance. The Group will charge a fixed service fee of RMB5 for each insurance policy sold through its
electronic platforms. For the year ended December 31, 2014, the service fee charged by the Group amounted to RMB20.87 million.



China Southern
Air Holding Ground Services Company Limited ("GSC"), a wholly-owned subsidiary of CSAHC



The Company and GSC
entered into a Sales Agency Services Framework Agreement dated January 28, 2011, which is valid from January 1, 2011 to December
31, 2013. The Company and GSC entered into a new Passenger and Cargo Sales Agency Services Framework Agreement dated November 8,
2013, which is valid from January 1, 2014 to December 31, 2016 to renew the continued cooperation with GSC. Pursuant to the new
Passenger and Cargo Sales Agency Services Framework 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
sales agency services, internal operation services for the inside storage area, and delivery services for the outside storage area.
GSC 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. GSC 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, 2014, the commission expense and goods handling fee paid to GSC were RMB8 million and RMB46 million respectively,
and the income relating to other services was RMB32 million.



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.



81







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.



On December 31, 2013,
the Company further entered into an agreement supplemental to the New Property Management Framework Agreement (the "New Property
Management Supplemental Agreement") and an agreement supplemental to the Airport Property Management Framework Agreement (the
"Airport Property Management Supplemental Agreement"). Pursuant to the New Property Management Supplemental Agreement,
the parties have agreed to revise the services fee in relation to the provision of property management and maintenance services
by GCSAPMC for the Company’s leased properties at the airport terminal, the base and the 110KV transformer substation at
the new Baiyun International Airport from RMB32,750,000 per annum to RMB42,700,000 per annum for the year ended December 31, 2014.
Pursuant to the Airport Property Management Supplemental Agreement, the parties have agreed to revise the services fee in relation
to provision of property management and maintenance services by GCSAPMC for the Company’s several properties at the old Baiyun
Airport and surrounding in Guangzhou from RMB22,250,000 per annum to RMB27,300,000 per annum for the year ended December 31, 2014.



As the transactions
contemplated under the New Property Management Framework Agreement and the Airport Property Management Framework Agreement will
continue to be entered into on a recurring basis, the Company entered into the new Property Management Framework Agreement (the
"Property Management Framework Agreement") with ise the services fee in relation to the provision of property management
and maintenance services by GCSAPMC on December 29, 2014 to renew the property management transactions originally covered under
the New Property Management Framework Agreement and the Airport Property Management Framework Agreement for a term of three years
from January 1, 2015 to December 31, 2017. The annual cap for the Property Management Framework Agreement is set at RMB90 million,
RMB92 million and RMB96 million for the three years ending December 31, 2015, 2016 and 2017, respectively.



For the year ended
December 31, 2014, the property management and maintenance fee incurred by the Group amounted to RMB61 million pursuant to the
New Property Management Framework Agreement, the Airport Property Management Framework Agreement and the Property Management Framework
Agreement.



Shenzhen Air
Catering Co., Ltd. (the "SACC"), which is 50.1% owned by CSAHC



The Company entered
into a Catering Services Framework Agreement with Shenzhen Air Catering Co., Ltd., a non-wholly-owned subsidiary of CSAHC on April
19, 2013 for a term of three years, commencing from January 1, 2013 to December 31, 2015, pursuant to which SACC agrees to provide
the in-flight lunch box, and order, supply, allot, recycle, store and install the in-flight supply with their respective services
for the arrival and departure flights designated by the Group at the airport where SACC located at. The maximum annual aggregate
amount of the services fee payable by the Company to SACC shall not exceed RMB100 million, RMB115 million and RMB132.5 million
for each of the years ended December 31, 2013, 2014 and 2015, respectively.



82







For the year ended
December 31, 2014, the services fee incurred by the Group for the catering services amounted to RMB89 million.



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, 2014, the Group’s engine repair and maintenance service fees incurred under the agreement amounted to RMB780
million.



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.



Acquisition of
95.4% Equity Interests in Hebei Airlines by Xiamen Airlines



On October 13, 2014,
the Board announced that Xiamen Airlines and Hebei Airlines Investment Group Company Limited (the "Hebei Airlines Investment")
entered into an agreement, pursuant to which Hebei Airlines Investment agreed to sell and Xiamen Airlines agreed to purchase 95.4%%
equity interests (the "Targeted Equity Interests") in Hebei Airlines at the consideration of RMB680 million (the "Acquisition").
Hebei Airlines is a company incorporated in the PRC and its principal business activity is that of operation of international and
domestic air routes, and cargo, mail and luggage transportation business; agency business between airlines; service business related
to air transportation; provision of general aviation services; aircraft management business; aircraft maintenance; agency business
between airlines, and ground service and air express (except mails and items with mail nature) related to the principal business;
in-flight duty free goods; aircraft leasing and sales agent for aviation accident insurance; aviation food producing and sale,
insurance industry and agency services; other aviation business and related business, including advertising for such businesses;
logistics, trading and storage.



The audited and unaudited
net asset value of Hebei Airlines as of December 31, 2013 and August 31, 2014 was approximately RMB 1,305.84 million and RMB 1,181.36
million, respectively. According to the valuation report dated June 30, 2014 prepared by Beijing Zhong Qi Hua Assets Valuation
Co., Ltd. (an independent qualified valuer in the PRC), the appraisal value of the total equity interests of Hebei Airlines amounted
to RMB831,293,200 as of April 30, 2014. As such, the appraisal value of the Targeted Equity Interests amounted to RMB793,053,700
as of April 30, 2014. The consideration of RMB 680 million is determined after an arm’s length negotiation between the parties
in accordance with prevailing market conditions and after taking into account, inter alia, the net asset value of Hebei Airlines
and the abovementioned appraisal value of the Targeted Equity Interests as of April 30, 2014.



The Company believes
that the Acquisition can help the Group to further develop the aviation market in Hebei, facilitate the integration of the North
China market by Xiamen Airlines and improve its domestic route network; the Acquisition will also achieve the synergies of Xiamen
Airlines and Hebei Airlines to strengthen their market positions, so as to further enhance the competitiveness of the Company,
Xiamen Airlines and Hebei Airlines as a whole.



83







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.



84





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 August 9, 2013, the relevant work regarding the 2012 Non-public A
Share Issue of the Company has not been completed. The proposal for the 2012 Non-public A Share Issue of the Company and A Shares
subscription agreement therefore were lapsed automatically due to the expiration of the resolution passed at the general meeting.



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



| | 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 sale agreement for aircraft sold by the Company to the claimant. The
claimant claimed against the Company for damages in the sum of approximately USD46 million or for the refund of its down
payments of approximately USD12 million paid to the Company, and also interest thereon which is to be calculated in
accordance with Section 35A, Supreme Court Act 1981 of the United Kingdom. In 2012, the claimant subsequently changed its
claim for the refund of the down payment to approximately USD14 million. On July 25, 2013, the High Court of England and
Wales dismissed the claimant’s claim in its entirety but awarded damages in the sum of approximately USD28 million,
interest thereon and also legal costs to the Company in respect of its counterclaim made against the claimant. The claimant
appealed to the Court of Appeal and on December 17, 2014, the Court of Appeal dismissed the claimant’s appeal but
varied the award of damages to the Company from USD28 million to USD18 million. The Court of Appeal also ordered the claimant
to pay the Company’s costs of the appeal. The claimant has applied for permission to further appeal the case to the
Supreme Court but the application has been rejected by both the Court of Appeal and the Supreme Court. Based on existing
information available, the Directors are of the opinion that an outflow of resource embodying economic benefits is
not probable to occur.



On 31 May 2014, the
Company received a notice from the International Court of Arbitration of International Chamber of Commerce (“ICC”).
The notice states that SASOF TR-81 AVIATION IRELAND LIMITED (the “lessor”) has applied for arbitration for the alleged
breach of certain terms and conditions of an aircraft leasing agreement. The lessor has made a claim against the Company for an
indemnity of approximately USD13 million, including the compensation for engine thrust upgrade damages, life components of engine,
reserves of engines, cost of termination of the lease, external legal counsel’s remuneration and the interest thereon. On
July 31, 2014, the Company has established a team to handle this arbitration and applied to ICC for a counter claim to request
the lessor to compensate the Company for insurance fees amounting to USD8.2 million, deposits, default penalty, extra technical
support fees and legal expenses and the interest thereon. As of the date of this report, the arbitration is still in preliminary
preparation phase and the arbitration session is expected to be held in early 2016. The Company cannot reasonably predict the result
and potential impact of this pending arbitration. Therefore, no additional provision has been made against this pending arbitration.



85







Dividend Information



A dividend in respect
of the year ended December 31, 2014 of RMB0.4 (inclusive of applicable tax) per ten shares, amounting to a total dividend of RMB393
million was proposed by the Directors on March 30, 2015. 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 Hong Kong 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".



86







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, 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 |                                                     | 
|Fiscal Year ended December 31, 2013 |  |                                                      | 4.43 |  |                                                 |  | 2.61 |                                                     | 
|Fiscal Year ended December 31, 2014 |  |                                                      | 3.90 |  |                                                 |  | 2.23 |                                                     | 
|                                    |  |                                                      |      |  |                                                 |  |      |                                                     | 
|Quarterly Market Prices             |  |                                                      |      |  |                                                 |  |      |                                                     | 
|Fiscal Year ended December 31, 2013 |  |                                                      |      |  |                                                 |  |      |                                                     | 
|First Quarter                       |  |                                                      | 4.68 |  |                                                 |  | 3.89 |                                                     | 
|Second Quarter                      |  |                                                      | 4.43 |  |                                                 |  | 2.94 |                                                     | 
|Third Quarter                       |  |                                                      | 3.14 |  |                                                 |  | 2.61 |                                                     | 
|Fourth Quarter                      |  |                                                      | 3.48 |  |                                                 |  | 2.69 |                                                     | 
|Fiscal Year ended December 31, 2014 |  |                                                      |      |  |                                                 |  |      |                                                     | 
|First Quarter                       |  |                                                      | 3.08 |  |                                                 |  | 2.47 |                                                     | 
|Second Quarter                      |  |                                                      | 2.64 |  |                                                 |  | 2.23 |                                                     | 
|Third Quarter                       |  |                                                      | 2.88 |  |                                                 |  | 2.39 |                                                     | 
|Fourth Quarter                      |  |                                                      | 3.90 |  |                                                 |  | 2.49 |                                                     | 
|                                    |  |                                                      |      |  |                                                 |  |      |                                                     | 
|Monthly Market Prices               |  |                                                      |      |  |                                                 |  |      |                                                     | 
|October 2014                        |  |                                                      | 2.81 |  |                                                 |  | 2.49 |                                                     | 
|November 2014                       |  |                                                      | 3.52 |  |                                                 |  | 2.84 |                                                     | 
|December 2014                       |  |                                                      | 3.90 |  |                                                 |  | 3.47 |                                                     | 
|January 2015                        |  |                                                      | 4.25 |  |                                                 |  | 3.64 |                                                     | 
|February 2015                       |  |                                                      | 4.05 |  |                                                 |  | 3.60 |                                                     | 
|March 2015                          |  |                                                      | 5.45 |  |                                                 |  | 3.54 |                                                     | 
|April 2015 (up to April 17, 2015)   |  |                                                      | 7.89 |  |                                                 |  | 6.00 |                                                     | 



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



Not applicable.



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



See "Offer and
Listing Details" above.



87







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



Not applicable.



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



Not applicable.



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



Not applicable.



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).



88







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.



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;
| | --- | ----------------------------------------------------------------------------------------------------------------------------



89







| | (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.
| | --- | ---------------------------------------------------------------------------------------------



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.



90







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.



91







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.



92







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.



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%.



93







| | 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.



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.



94







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;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



95







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



| | · | 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.



96







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 2014. However, there can be no assurance that the Company will not be a PFIC for the
taxable year 2015 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 2014 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.



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.



97







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.



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.



98







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 RMB3,773 million. The sensitivity analysis of jet fuel price risk is disclosed in Note 4(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 4(b) to the consolidated Financial Statements.



99







The following table
provides information regarding the Group’s financial instruments that are sensitive to changes in interest rate as of December
31, 2014 and 2013:



|                                          |  | As of December 31, 2014 |        |   |                         | 
|----------------------------------------- |  | ----------------------- | ------ | - | ----------------------- | 
|                                          |  | Expected Maturity Date  |        |   | As of December 31, 2013 | 
|                                          |  | 2015                    |        |   | 2016                    | 
|Fixed-rate bank and other loans in US$    |  |                         | 31     |   |                         | 
|Average interest rate                     |  |                         | 3.98   | % |                         | 
|                                          |  |                         |        |   |                         | 
|Variable-rate bank and other loans in US$ |  |                         | 17,157 |   |                         | 
|Average interest rate                     |  |                         | 2.27   | % |                         | 
|                                          |  |                         |        |   |                         | 
|Fixed-rate bank and other loans in RMB    |  |                         | 257    |   |                         | 
|Average interest rate                     |  |                         | 5.11   | % |                         | 
|                                          |  |                         |        |   |                         | 
|Variable-rate bank and other loans in RMB |  |                         | 534    |   |                         | 
|Average interest rate                     |  |                         | 5.61   | % |                         | 



| | (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, 2014 and 2013.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------



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 4(c) to the consolidated Financial Statements.



As of December 31,
2014, the Group operated a total of 383 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 35
and Note 46(b) 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, 2014 and 2013:



|                                              |  | As of December 31, 2014 |        |  |                         | 
|--------------------------------------------- |  | ----------------------- | ------ |  | ----------------------- | 
|                                              |  | Expected Maturity Date  |        |  | As of December 31, 2013 | 
|                                              |  | 2015                    |        |  | 2016                    | 
|Fixed-rate
    bank and other loans in US$    |  |                         | 31     |  |                         | 
|Variable-rate bank and
    other loans in US$ |  |                         | 17,157 |  |                         | 
|Capital commitment in
    US$                 |  |                         | 18,146 |  |                         | 



| | (1) | Fair value of debt instruments was estimated based on the floating interest rates applicable to
similar debt instruments as of December 31, 2014 and 2013.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



100







ITEM 12. DESCRIPTION OF SECURITIES
OTHER THAN EQUITY SECURITIES



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



Not applicable.



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



Not applicable.



| | 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:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)                                                                                                                                      |  | •   
|                                                                                                                                                                                           |  | •   
|$.02 (or less) per ADS                                                                                                                                                                     |  | •   
|                                                                                                                                                                                           |  |     
|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                                  |  | •   
|                                                                                                                                                                                           |  |     
|$.02 (or less) per ADSs per calendar year                                                                                                                                                  |  | •   
|                                                                                                                                                                                           |  |     
|Registration or transfer fees                                                                                                                                                              |  | •   
|                                                                                                                                                                                           |  |     
|Expenses of the depositary                                                                                                                                                                 |  | •   
|                                                                                                                                                                                           |  | •   
|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 |  | •   
|                                                                                                                                                                                           |  |     
|Any charges incurred by the depositary or its agents for servicing the deposited securities                                                                                                |  | •   



101







Fees and Payments from the Depositary
to Us



In 2014, the Company
received from the depositary a reimbursement of US$46,176.11, 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$130,384.94 for the standard costs associated with the administration
of the ADS program in 2014.



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.



| | 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.



102







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 (1992) 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, 2014.



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.



PricewaterhouseCoopers
Zhong Tian LLP, 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 Report of the Registered
Public Accounting Firm



PricewaterhouseCoopers
Zhong Tian LLP, our independent registered public accounting firm, audited the effectiveness of our company's internal control
over financial reporting as of December 31, 2014, the audit report of which appears on page F-1 of this Form 20-F.



Changes in internal control over financial
reporting



During the year ended
December 31, 2014, 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. Tan Jing Song qualifies as an audit committee financial expert in accordance with the terms of Item 16A
of Form 20-F. Mr. Tan Jing Song 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.



103







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 2013 and 2014:



|     |  | Audit Fees       |      |  | Audit-RelatedFees |  |   | Tax Fees |  |  | Other Fees | 
|---- |  | ---------------- | ---- |  | ----------------- |  | - | -------- |  |  | ---------- | 
|     |  | RMB (in million) |      | 
|2013 |  |                  | 12.0 |  |                   |  | - |          |  |  | 0.8        | 
|2014 |  |                  | 17.7 |  |                   |  | - |          |  |  | 1.1        | 



Tax Fees



Services provided primarily
consist of tax compliance services.



Other Fees



Provision of 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



Not applicable.



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"):



104







|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, 2014, the Nomination Committee consists of three members, Si Xian Min, Wei Jin Cai (Independent non-executive Director) and Tan Jing Song (Independent non-executive Director).  Mr.  Si Xian Min was appointed as the chairman of the Nomination Committee on December 26, 2013. 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.                                                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



105







|Compensation Committee                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Listed companies must have a compensation committee composed entirely of independent directors.                                                                                                                                                                                                                                                                           |  | The Company has established a remuneration and assessment committee consisting of three members.  As of December 31, 2014, the remuneration and assessment committee is chaired by independent non-executive Director Ning Xiang Dong with independent non-executive Director Tan Jing Song 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 and assessment 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 and assessment 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.                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|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 of December 31, 2014, the Audit Committee consists of three members, Mr.  Ning Xiang Dong, Wei Jin Cai and Tan Jing Song, with Tan Jing Song being the Chairman of the Audit Committee.                                                                                                                                                                                                                                                                                                                        





106







|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.                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



107







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)                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                        
|2.2         |  | 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 (3)
|            |  |                                                                                                                                                                                                                                                                                        
|4.1         |  | Form of Director’s Service Agreement (4)                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                        
|4.2         |  | Form of Non-executive Director’s Service Agreement (5)                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                        
|4.3         |  | Aircraft Acquisition Agreement entered into by and between the Company and Boeing on February 28, 2012* (6)                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                        
|4.4         |  | Aircraft Acquisition Agreement entered into by and between Xiamen Airlines and Boeing on August 8, 2012*(7)                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                        
|4.5         |  | Aircraft Acquisition Agreement entered into by and between the Company and Airbus S.A.S.  on December 5, 2012 *(8)                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                        
|4.6         |  | Asset Lease Agreement entered into by and between the Company and CSAHC on September 25, 2012(9)                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                        
|4.7         |  | 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(10)                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                        
|4.8         |  | Lease Agreement of Nanyang Base Assets entered into by and between the Company and CSAHC on January 24, 2013(11)                                                                                                                                                                       



108







|4.9  |  | 2013 Nanyang Asset Lease Agreement entered into by and between the Company and CSAHC on April 19, 2013(12)                                                                                                                                                                               
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                                                                                                                          
|4.10 |  | Supplemental Agreement to the Import and Export Agency Framework Agreement entered into by and between the Company and Southern Airlines (Group) Import and Export Trading Company Limited on April 19, 2013(13)                                                                         
|     |  |                                                                                                                                                                                                                                                                                          
|4.11 |  | Import and Export Agency Framework Agreement entered into by and between the Company and Southern Airlines (Group) Import and Export Trading Company Limited on January 9, 2014(14)                                                                                                      
|     |  |                                                                                                                                                                                                                                                                                          
|4.12 |  | Media Services Framework Agreement entered into by and between the Company and Southern Airlines Culture and Media Co., Ltd. on April 19, 2013(15)                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                          
|4.13 |  | Financial Services Framework Agreement entered into by and between the Company and Southern Airlines Group Finance Company Limited on November 8, 2013(16)                                                                                                                               
|     |  |                                                                                                                                                                                                                                                                                          
|4.14 |  | Passenger and Cargo Sales Agency Services Framework Agreement entered into by and between the Company and China Southern Airlines Group Passenger and Cargo Agent Company Limited on November 8, 2013(17)                                                                                
|     |  |                                                                                                                                                                                                                                                                                          
|4.15 |  | Airport Property Management Supplemental Agreement entered into by and between the Company and Guangzhou China Southern Airlines Property Management Company Limited on December 31, 2013(18)                                                                                            
|     |  |                                                                                                                                                                                                                                                                                          
|4.16 |  | Property Management Framework Agreement entered into by and between the Company and Guangzhou China Southern Airlines Property Management Company Limited on December 31, 2013(19)                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                          
|4.17 |  | Catering Service Framework Agreement entered into by and between the Company and Shenzhen Air Catering Co., Ltd. on April 19, 2013(20)                                                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                          
|4.18 |  | Property Lease Agreement entered into by and between the Company
    and CSAHC on January 9, 2014(21)                                                                                                                                                                                    
|     |  |                                                                                                                                                                                                                                                                                          
|4.19 |  | Land Lease Agreement entered into by and between the Company and CSAHC on January 9, 2014(22)                                                                                                                                                                                            
|     |  |                                                                                                                                                                                                                                                                                          
|4.20 |  | Trademark License Agreement entered into by and between the Company and CSAHC on May 22, 1997 (23)                                                                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                          
|4.21 |  | A Share subscription agreement entered into by and between the Company and CSAHC on June 11, 2012(24)                                                                                                                                                                                    
|     |  |                                                                                                                                                                                                                                                                                          
|4.22 |  | 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(25)
|     |  |                                                                                                                                                                                                                                                                                          
|4.23 |  | Aircraft Acquisition Agreement entered into by and between the Company and Airbus S.A.S. on May 16, 2014*                                                                                                                                                                                
|     |  |                                                                                                                                                                                                                                                                                          
|4.24 |  | English translation of Asset Lease Agreement entered into by and between the Company and CSAHC on December 29, 2014                                                                                                                                                                      
|     |  |                                                                                                                                                                                                                                                                                          
|4.25 |  | English translation of Supplemental Agreement to the Media Services Framework Agreement entered into by and between the Company and Southern Airlines Culture and Media Co., Ltd. on December 29, 2014                                                                                   



109







|4.26 |  | English translation of Property Management Framework Agreement entered into by and between the Company and Guangzhou China Southern Airlines Property Management Company Limited on December 29, 2014                                                                                                                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                                                                                                                                                                                 
|4.27 |  | English translation of Electronic aviation passenger comprehensive insurance four-parties cooperation agreement entered into by and among Guangdong CSA E-commerce Co., Ltd. SA Finance, Air Union Insurance Brokers (Beijing) Co., Ltd. and Ping An Property & Casualty Insurance Company of China, Ltd. Guangdong Branch on November 21, 2014.
|     |  |                                                                                                                                                                                                                                                                                                                                                 
|4.28 |  | English translation of Electronic aviation passenger comprehensive insurance four-parties cooperation agreement entered into by and among Guangdong CSA E-commerce Co., Ltd. SA Finance, Air Union Insurance Brokers (Beijing) Co., Ltd. and Sunshine Property and Casualty Insurance Company Limited on November 21, 2014.                     
|     |  |                                                                                                                                                                                                                                                                                                                                                 
|4.29 |  | English translation of Electronic aviation passenger comprehensive insurance four-parties cooperation agreement entered into by and among Guangdong CSA E-commerce Co., Ltd. SA Finance, Air Union Insurance Brokers (Beijing) Co., Ltd. and PICC Property and Casualty Company Limited Guangzhou Branch on November 21, 2014.                  
|     |  |                                                                                                                                                                                                                                                                                                                                                 
|4.30 |  | English translation of Electronic aviation passenger comprehensive insurance four-parties cooperation agreement entered into by and among Guangdong CSA E-commerce Co., Ltd. SA Finance, Air Union Insurance Brokers (Beijing) Co., Ltd. and Taiping Pension Co., Ltd. on November 21, 2014.                                                    
|     |  |                                                                                                                                                                                                                                                                                                                                                 
|4.31 |  | English translation of Equity Transfer Agreement entered into by and between Xiamen Airlines Company Limited and Hebei Airlines Investment Group Company Limited on October 13, 2014.                                                                                                                                                           
|     |  |                                                                                                                                                                                                                                                                                                                                                 
|8.1  |  | Subsidiaries of China Southern Airlines Company Limited                                                                                                                                                                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                                 
|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                                                                                                                                                                                                                                                                                            



| | * | 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 December 27, 2013.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Incorporated by reference to the Exhibit 2.1 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2012 filed with the Securities and Exchange Commission on April 26, 2013.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | 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.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | 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
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | 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
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



110







| | (6) | 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.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | Incorporated by reference to the Exhibit 4.4 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2012 filed with the Securities and Exchange Commission on April 26, 2013.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | Incorporated by reference to the Exhibit 4.5 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2012 filed with the Securities and Exchange Commission on April 26, 2013.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (9) | Incorporated by reference to the Exhibit 4.7 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2012 filed with the Securities and Exchange Commission on April 26, 2013.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (10) | Incorporated by reference to the Exhibit 4.8 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2012 filed with the Securities and Exchange Commission on April 26, 2013.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (11) | Incorporated by reference to the Exhibit 4.9 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2012 filed with the Securities and Exchange Commission on April 26, 2013.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (12) | Incorporated by reference to the Exhibit 4.9 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (13) | Incorporated by reference to the Exhibit 4.10 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (14) | Incorporated by reference to the Exhibit 4.11 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (15) | Incorporated by reference to the Exhibit 4.12 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (16) | Incorporated by reference to the Exhibit 4.13 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (17) | Incorporated by reference to the Exhibit 4.14 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (18) | Incorporated by reference to the Exhibit 4.15 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (19) | Incorporated by reference to the Exhibit 4.16 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (20) | Incorporated by reference to the Exhibit 4.17 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (21) | Incorporated by reference to the Exhibit 4.18 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (22) | Incorporated by reference to the Exhibit 4.19 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (23) | 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.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



111







| | (24) | Incorporated by reference to the Exhibit 4.11 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2012 filed with the Securities and Exchange Commission on April 26, 2013.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (25) | Incorporated by reference to the Exhibit 4.12 to our Form 20-F (File No. 001-14660) for the year
ended December 31, 2012 filed with the Securities and Exchange Commission on April 26, 2013.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 30, 2015



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, 2014, 2013 and 2012                  |  | F-3 
|Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012 |  | F-4 
|Consolidated Balance Sheet at December 31, 2014 and 2013                                             |  | F-5 
|Consolidated Statements of Changes in Equity for the years ended December 31, 2014, 2013 and 2012    |  | F-7 
|Consolidated Cash Flow Statements for the years ended December 31, 2014, 2013 and 2012               |  | F-9 
|Notes to the Consolidated Financial Statements                                                       |  | F-10





112







Report of Independent Registered Public
Accounting Firm



To the Board of Directors and Shareholders of China Southern
Airlines Company Limited



In our opinion, the accompanying consolidated
balance sheets and the related consolidated income statement, the consolidated statement of comprehensive income, the consolidated
statement of changes in equity and the consolidated cash flows statement present fairly, in all material respects, the financial
position of China Southern Airlines Company Limited and its subsidiaries at December 31, 2014 and December 31, 2013, and the results
of their operations and their cash flows for each of the two years in the period ended December 31, 2014 in conformity with International
Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company's management is responsible for these financial statements, 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 Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these
financial statements and on the Company's internal control over financial reporting based on our integrated 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 audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits
of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting 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 audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.





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 (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.





/s/ PricewaterhouseCoopers Zhong Tian LLP

Shanghai, China

April 30, 2015







F-1









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 income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, and
consolidated cash flow statement of China Southern Airlines Company Limited (the “Company”) and its subsidiaries for
the year 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 audit.



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 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
statement presentation. We believe that our audit provides a reasonable basis for our opinion.



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





/s/ KPMG

Hong Kong, China

March 26, 2013





F-2











Consolidated income statements for the years ended December 31,
2014, 2013 and 2012

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi)





|                                                                      |  |       |  | 2014        |         |   | 2013        |  |         | 2012        | 
|--------------------------------------------------------------------- |  | ----- |  | ----------- | ------- | - | ----------- |  | ------- | ----------- | 
|                                                                      |  | Note  |  | RMB million |         |   | RMB million |  |         | RMB million | 
|Operating revenue                                                     |  |       |  |             |         |   |             |  |         |             | 
|Traffic revenue                                                       |  | 5     |  |             | 104,328 |   |             |  | 94,684  |             | 
|Other operating revenue                                               |  | 7     |  |             | 4,256   |   |             |  | 3,863   |             | 
|Total operating revenue                                               |  |       |  |             | 108,584 |   |             |  | 98,547  |             | 
|                                                                      |  |       |  |             |         |   |             |  |         |             | 
|Operating expenses                                                    |  |       |  |             |         |   |             |  |         |             | 
|Flight operation expenses                                             |  | 8     |  |             | 58,901  |   |             |  | 54,010  |             | 
|Maintenance expenses                                                  |  | 9     |  |             | 8,304   |   |             |  | 7,805   |             | 
|Aircraft and transportation service expenses                          |  | 10    |  |             | 16,402  |   |             |  | 15,091  |             | 
|Promotion and selling expenses                                        |  | 11    |  |             | 7,841   |   |             |  | 7,754   |             | 
|General and administrative expenses                                   |  | 12    |  |             | 2,337   |   |             |  | 2,470   |             | 
|Depreciation and amortisation                                         |  | 13    |  |             | 10,828  |   |             |  | 9,347   |             | 
|Impairment on property, plant and equipment                           |  | 21    |  |             | 215     |   |             |  | 536     |             | 
|Others                                                                |  |       |  |             | 1,198   |   |             |  | 1,267   |             | 
|Total operating expenses                                              |  |       |  |             | 106,026 |   |             |  | 98,280  |             | 
|                                                                      |  |       |  |             |         |   |             |  |         |             | 
|Other net income                                                      |  | 15    |  |             | 2,190   |   |             |  | 1,243   |             | 
|                                                                      |  |       |  |             |         |   |             |  |         |             | 
|Operating profit                                                      |  |       |  |             | 4,748   |   |             |  | 1,510   |             | 
|                                                                      |  |       |  |             |         |   |             |  |         |             | 
|Interest income                                                       |  |       |  |             | 376     |   |             |  | 307     |             | 
|Interest expense                                                      |  | 16    |  |             | (2,193  | ) |             |  | (1,651  | )           | 
|Share of associates’ results                                          |  | 24    |  |             | 261     |   |             |  | 294     |             | 
|Share of joint ventures’ results                                      |  | 25    |  |             | 140     |   |             |  | 96      |             | 
|Exchange (loss)/gain, net                                             |  | 34(e) |  |             | (292    | ) |             |  | 2,903   |             | 
|Other non-operating income                                            |  | 17    |  |             | 26      |   |             |  | 25      |             | 
|Profit before income tax                                              |  |       |  |             | 3,066   |   |             |  | 3,484   |             | 
|Income tax                                                            |  | 19    |  |             | (668    | ) |             |  | (734    | )           | 
|Profit for the year                                                   |  |       |  |             | 2,398   |   |             |  | 2,750   |             | 
|                                                                      |  |       |  |             |         |   |             |  |         |             | 
|Profit attributable to:                                               |  |       |  |             |         |   |             |  |         |             | 
|Equity shareholders of the Company                                    |  | 20    |  |             | 1,777   |   |             |  | 1,986   |             | 
|Non-controlling interests                                             |  |       |  |             | 621     |   |             |  | 764     |             | 
|Profit for the year                                                   |  |       |  |             | 2,398   |   |             |  | 2,750   |             | 
|                                                                      |  |       |  |             |         |   |             |  |         |             | 
|Earnings per share attributable to equity shareholders of the Company |  |       |  |             |         |   |             |  |         |             | 
|Basic and diluted                                                     |  | 20    |  |             | RMB0.18 |   |             |  | RMB0.20 |             | 



The accompanying notes form part of these consolidated
financial statements.



F-3







Consolidated statements of comprehensive income

for the years ended December 31, 2014, 2013 and 2012

(Prepared in accordance with International Financial Reporting
Standards)

(Expressed in Renminbi)



|                                                              |  |      |    |  | 2014        |  |       | 2013        |  |  | 2012        |  
|------------------------------------------------------------- |  | ---- | -- |  | ----------- |  | ----- | ----------- |  |  | ----------- | -
|                                                              |  | Note |    |  | RMB million |  |       | RMB million |  |  | RMB million |  
|                                                              |  |      |    |  |             |  |       |             |  |  |             |  
|Profit for the year                                           |  |      |    |  | 2,398       |  |       | 2,750       |  |  | 3,784       |  
|                                                              |  |      |    |  |             |  |       |             |  |  |             |  
|Other comprehensive income for the year:                      |  |      |    |  |             |  |       |             |  |  |             |  
|Items that may be reclassified subsequently to profit or loss |  |      |    |  |             |  |       |             |  |  |             |  
|- Fair value movement of available-for-sale financial assets  |  |      | 27 |  |             |  | 43    |             |  |  | (8          | )
|- Share of other comprehensive income/(loss) of an associate  |  |      |    |  |             |  | 21    |             |  |  | (3          | )
|- Deferred tax relating to above items                        |  |      | 28 |  |             |  | (11   | )           |  |  | 2           |  
|Total comprehensive income for the year                       |  |      |    |  |             |  | 2,451 |             |  |  | 2,741       |  
|                                                              |  |      |    |  |             |  |       |             |  |  |             |  
|Total comprehensive income attributable to:                   |  |      |    |  |             |  |       |             |  |  |             |  
|Equity shareholders of the Company                            |  |      |    |  |             |  | 1,813 |             |  |  | 1,981       |  
|Non-controlling interests                                     |  |      |    |  |             |  | 638   |             |  |  | 760         |  
|Total comprehensive income for the year                       |  |      |    |  |             |  | 2,451 |             |  |  | 2,741       |  



The accompanying notes form part of
these consolidated financial statements.



F-4







Consolidated balance sheet at December
31, 2014 and 2013

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi)



|                                                    |  |         |  | 2014        |         |   | 2013        | 
|--------------------------------------------------- |  | ------- |  | ----------- | ------- | - | ----------- | 
|                                                    |  | Note    |  | RMB million |         |   | RMB million | 
|Non-current assets                                  |  |         |  |             |         |   |             | 
|Property, plant and equipment, net                  |  | 21      |  |             | 134,453 |   |             | 
|Construction in progress                            |  | 22      |  |             | 19,347  |   |             | 
|Lease prepayments                                   |  | 23      |  |             | 2,349   |   |             | 
|Interest in associates                              |  | 24      |  |             | 1,583   |   |             | 
|Interest in joint ventures                          |  | 25      |  |             | 1,338   |   |             | 
|Other investments in equity securities              |  | 26      |  |             | 136     |   |             | 
|Aircraft operating lease deposits                   |  |         |  |             | 651     |   |             | 
|Available-for-sale financial assets                 |  | 27      |  |             | 104     |   |             | 
|Deferred tax assets                                 |  | 28      |  |             | 966     |   |             | 
|Other receivables                                   |  | 32      |  |             | 300     |   |             | 
|Other assets                                        |  | 29      |  |             | 920     |   |             | 
|                                                    |  |         |  |             | 162,147 |   |             | 
|Current assets                                      |  |         |  |             |         |   |             | 
|Inventories                                         |  | 30      |  |             | 1,661   |   |             | 
|Trade receivables                                   |  | 31      |  |             | 2,683   |   |             | 
|Other receivables                                   |  | 32      |  |             | 5,864   |   |             | 
|Cash and cash equivalents                           |  | 33      |  |             | 15,414  |   |             | 
|Restricted bank deposits                            |  |         |  |             | 438     |   |             | 
|Prepaid expenses and other current assets           |  |         |  |             | 995     |   |             | 
|Amounts due from related companies                  |  | 38      |  |             | 486     |   |             | 
|                                                    |  |         |  |             | 27,541  |   |             | 
|Current liabilities                                 |  |         |  |             |         |   |             | 
|Borrowings                                          |  | 34      |  |             | 20,979  |   |             | 
|Current portion of obligations under finance leases |  | 35      |  |             | 5,992   |   |             | 
|Trade payables                                      |  | 36      |  |             | 1,657   |   |             | 
|Sales in advance of carriage                        |  |         |  |             | 6,101   |   |             | 
|Deferred revenue                                    |  | 37      |  |             | 1,160   |   |             | 
|Current income tax                                  |  |         |  |             | 296     |   |             | 
|Amounts due to related companies                    |  | 38      |  |             | 458     |   |             | 
|Accrued expenses                                    |  | 39      |  |             | 12,122  |   |             | 
|Other liabilities                                   |  | 40      |  |             | 5,321   |   |             | 
|                                                    |  |         |  |             | 54,086  |   |             | 
|                                                    |  |         |  |             |         |   |             | 
|Net current liabilities                             |  | 2(a(i)) |  |             | (26,545 | ) |             | 
|                                                    |  |         |  |             |         |   |             | 
|Total assets less current liabilities               |  |         |  |             | 135,602 |   |             | 



F-5







Consolidated balance sheet at December
31, 2014 and 2013 (continued)

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                |  |      |  | 2014        |        |  | 2013        | 
|--------------------------------------------------------------- |  | ---- |  | ----------- | ------ |  | ----------- | 
|                                                                |  | Note |  | RMB million |        |  | RMB million | 
|Non-current liabilities                                         |  |      |  |             |        |  |             | 
|Borrowings                                                      |  | 34   |  |             | 42,066 |  |             | 
|Obligations under finance leases                                |  | 35   |  |             | 43,919 |  |             | 
|Deferred revenue                                                |  | 37   |  |             | 1,750  |  |             | 
|Provision for major overhauls                                   |  | 41   |  |             | 1,623  |  |             | 
|Provision for early retirement benefits                         |  | 42   |  |             | 25     |  |             | 
|Deferred benefits and gains                                     |  | 43   |  |             | 853    |  |             | 
|Deferred tax liabilities                                        |  | 28   |  |             | 873    |  |             | 
|                                                                |  |      |  |             | 91,109 |  |             | 
|                                                                |  |      |  |             |        |  |             | 
|Net assets                                                      |  |      |  |             | 44,493 |  |             | 
|                                                                |  |      |  |             |        |  |             | 
|Capital and reserves                                            |  |      |  |             |        |  |             | 
|Share capital                                                   |  | 44   |  |             | 9,818  |  |             | 
|Reserves                                                        |  | 45   |  |             | 25,930 |  |             | 
|Total equity attributable to equity shareholders of the Company |  |      |  |             | 35,748 |  |             | 
|Non-controlling interests                                       |  |      |  |             | 8,745  |  |             | 
|Total equity                                                    |  |      |  |             | 44,493 |  |             | 



The accompanying notes form part of these consolidated
financial statements.



F-6







Consolidated statements of
changes in equity

for the years ended December
31, 2014, 2013 and 2012

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                           |  | Attributable
    to equity shareholders of the Company |         |  |         | 
|-------------------------------------------------------------------------- |  | ------------------------------------------------------ | ------- |  | ------- | 
|                                                                           |  | Share                                                  |         |  | Share   | 
|                                                                           |  | capital                                                |         |  | premium | 
|                                                                           |  | RMB                                                    |         |  | RMB     | 
|                                                                           |  |                                                        | million |  |         | 
|Balance
    at January 1, 2012                                             |  |                                                        | 9,818   |  |         | 
|                                                                           |  |                                                        |         |  |         | 
|Changes
    in equity for 2012:                                            |  |                                                        |         |  |         | 
|Profit
    for the year                                                    |  |                                                        | -       |  |         | 
|Other
    comprehensive income                                             |  |                                                        | -       |  |         | 
|Total
    comprehensive income                                             |  |                                                        | -       |  |         | 
|Appropriations
    to reserves                                             |  |                                                        | -       |  |         | 
|Dividends
    relating to 2011                                             |  |                                                        | -       |  |         | 
|Acquisition
    of non-controlling interests in a subsidiary               |  |                                                        | -       |  |         | 
|Capital
    injection from the non-controlling shareholder of a subsidiary |  |                                                        | -       |  |         | 
|Government
    contributions                                               |  |                                                        | -       |  |         | 
|Distributions
    to non-controlling interests                             |  |                                                        | -       |  |         | 
|Share
    of an associate’s reserves movement                              |  |                                                        | -       |  |         | 
|Balance
    at December 31, 2012                                           |  |                                                        | 9,818   |  |         | 



|                                                                           |  | Attributable
    to equity shareholders of the Company |         |  |         |  |         |                | 
|-------------------------------------------------------------------------- |  | ------------------------------------------------------ | ------- |  | ------- |  | ------- | -------------- | 
|                                                                           |  | Share                                                  |         |  | Share   |  |         | Fair
    value | 
|                                                                           |  | capital                                                |         |  | premium |  |         | reserves       | 
|                                                                           |  | RMB                                                    |         |  | RMB     |  |         | RMB            | 
|                                                                           |  |                                                        | million |  |         |  | million |                | 
|Balance
    at January 1, 2013                                             |  |                                                        | 9,818   |  |         |  | 14,131  |                | 
|                                                                           |  |                                                        |         |  |         |  |         |                | 
|Changes
    in equity for 2013:                                            |  |                                                        |         |  |         |  |         |                | 
|Profit
    for the year                                                    |  |                                                        | -       |  |         |  | -       |                | 
|Other
    comprehensiveincome                                              |  |                                                        | -       |  |         |  | -       |                | 
|Total
    comprehensive income                                             |  |                                                        | -       |  |         |  | -       |                | 
|Appropriations
    to reserves                                             |  |                                                        | -       |  |         |  | -       |                | 
|Dividends
    relating to 2012 (Note 45)                                   |  |                                                        | -       |  |         |  | -       |                | 
|Acquisition
    of non-controlling interests in a subsidiary               |  |                                                        | -       |  |         |  | -       |                | 
|Capital
    injection from the non-controlling shareholder of a Subsidiary |  |                                                        | -       |  |         |  | -       |                | 
|Distributions
    to non-controlling interests                             |  |                                                        | -       |  |         |  | -       |                | 
|Balance
    at December 31, 2013                                           |  |                                                        | 9,818   |  |         |  | 14,131  |                | 



F-7







Consolidated statements of
changes in equity

for the years ended December
31, 2014, 2013 and 2012 (continued)

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                   |  | Attributable
    to equity shareholders of the Company |         |  |         | 
|------------------------------------------------------------------ |  | ------------------------------------------------------ | ------- |  | ------- | 
|                                                                   |  | Share                                                  |         |  | Share   | 
|                                                                   |  | capital                                                |         |  | premium | 
|                                                                   |  | RMB                                                    |         |  | RMB     | 
|                                                                   |  |                                                        | million |  |         | 
|Balance
    at January 1, 2014                                     |  |                                                        | 9,818   |  |         | 
|                                                                   |  |                                                        |         |  |         | 
|Changes
    in equity for 2014:                                    |  |                                                        |         |  |         | 
|Profit for the year                                                |  |                                                        | -       |  |         | 
|Other comprehensive income                                         |  |                                                        | -       |  |         | 
|Total
    comprehensive income                                     |  |                                                        | -       |  |         | 
|Appropriations
    to reserves                                     |  |                                                        | -       |  |         | 
|Dividends
    relating to 2013(note 45)                            |  |                                                        | -       |  |         | 
|Capital
    injection of non-controlling interests in a subsidiary |  |                                                        | -       |  |         | 
|Acquisition
    of non-controlling interests in a subsidiary       |  |                                                        | -       |  |         | 
|Non-controlling
    interest arising on business combination       |  |                                                        | -       |  |         | 
|Distributions to non-controlling
    interests                     |  |                                                        | -       |  |         | 
|Balance
    at December 31, 2014                                   |  |                                                        | 9,818   |  |         | 



The accompanying notes form part of these consolidated
financial statements.



F-8





.

Consolidated cash flow statements for the years ended December
31, 2014, 2013 and 2012

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                                                       |  |       |  | 2014         |         |   | 2013         |  |         | 2012         | 
|------------------------------------------------------------------------------------------------------ |  | ----- |  | ------------ | ------- | - | ------------ |  | ------- | ------------ | 
|                                                                                                       |  | Note  |  | RMB 
million |         |   | RMB
 million |  |         | RMB
 million | 
|                                                                                                       |  |       |  |              |         |   |              |  |         |              | 
|Operating activities                                                                                   |  |       |  |              |         |   |              |  |         |              | 
|Cash generated from operating activities                                                               |  | 33(b) |  |              | 15,826  |   |              |  | 11,546  |              | 
|Interest received                                                                                      |  |       |  |              | 360     |   |              |  | 220     |              | 
|Interest paid                                                                                          |  |       |  |              | (1,991  | ) |              |  | (1,538  | )            | 
|Income tax paid                                                                                        |  |       |  |              | (625    | ) |              |  | (525    | )            | 
|Net cash generated from operating activities                                                           |  |       |  |              | 13,570  |   |              |  | 9,703   |              | 
|                                                                                                       |  |       |  |              |         |   |              |  |         |              | 
|Investing activities                                                                                   |  |       |  |              |         |   |              |  |         |              | 
|Acquisition of subsidiaries, net of cash acquired                                                      |  |       |  |              | (657    | ) |              |  | -       |              | 
|Proceeds from disposal of property, plant and equipment and lease prepayments                          |  |       |  |              | 1,611   |   |              |  | 205     |              | 
|Dividends received from associates                                                                     |  |       |  |              | 86      |   |              |  | 33      |              | 
|Dividends received from a joint venture                                                                |  |       |  |              | -       |   |              |  | 5       |              | 
|Dividends received from other investments in equity securities and available-for-sale financial assets |  |       |  |              | 13      |   |              |  | 14      |              | 
|Loans repaid by an associate                                                                           |  |       |  |              | -       |   |              |  | -       |              | 
|Acquisition of term deposits and wealth management products                                            |  |       |  |              | (3,286  | ) |              |  | (8,402  | )            | 
|Proceeds from maturity of term deposits and wealth management products                                 |  |       |  |              | 1,254   |   |              |  | 8,481   |              | 
|Interest received on wealth management products                                                        |  |       |  |              | -       |   |              |  | 25      |              | 
|Additions of property, plant and equipment, lease prepayments and other assets                         |  |       |  |              | (8,649  | ) |              |  | (12,308 | )            | 
|Capital injection into associates and other investment                                                 |  |       |  |              | -       |   |              |  | (72     | )            | 
|Payment for aircraft lease deposits                                                                    |  |       |  |              | (172    | ) |              |  | (51     | )            | 
|Refund of aircraft lease deposits                                                                      |  |       |  |              | 87      |   |              |  | 142     |              | 
|Placement of pledged bank deposits                                                                     |  |       |  |              | (1,656  | ) |              |  | (277    | )            | 
|Withdrawal of pledged bank deposits                                                                    |  |       |  |              | 1,609   |   |              |  | -       |              | 
|Proceeds from disposal of a subsidiary                                                                 |  |       |  |              | -       |   |              |  | -       |              | 
|Net cash used in investing activities                                                                  |  |       |  |              | (9,760  | ) |              |  | (12,205 | )            | 
|                                                                                                       |  |       |  |              |         |   |              |  |         |              | 
|Financing activities                                                                                   |  |       |  |              |         |   |              |  |         |              | 
|Dividends paid to equity shareholders of the Company                                                   |  | 45(b) |  |              | (393    | ) |              |  | (491    | )            | 
|Proceeds from borrowings                                                                               |  |       |  |              | 32,488  |   |              |  | 38,324  |              | 
|Proceeds from ultra-short-term financing bills                                                         |  |       |  |              | 6,000   |   |              |  | 500     |              | 
|Repayment of borrowings                                                                                |  |       |  |              | (31,126 | ) |              |  | (31,243 | )            | 
|Repayment of principal under finance lease obligations                                                 |  |       |  |              | (4,072  | ) |              |  | (2,895  | )            | 
|Repayment of ultra-short-term financing bills                                                          |  |       |  |              | (3,000  | ) |              |  | (500    | )            | 
|Capital injection from the non-controlling interests of subsidiaries                                   |  |       |  |              | 108     |   |              |  | 560     |              | 
|Dividends paid to non-controlling interests                                                            |  |       |  |              | (128    | ) |              |  | (87     | )            | 
|Payment for purchase of non-controlling interest                                                       |  |       |  |              | (8      | ) |              |  | -       |              | 
|Government contribution                                                                                |  |       |  |              | -       |   |              |  | -       |              | 
|Withdrawal of pledged bank deposits                                                                    |  |       |  |              | -       |   |              |  | -       |              | 
|Net cash (used in)/generated from financing activities                                                 |  |       |  |              | (131    | ) |              |  | 4,168   |              | 
|                                                                                                       |  |       |  |              |         |   |              |  |         |              | 
|Net increase in cash and cash equivalents                                                              |  |       |  |              | 3,679   |   |              |  | 1,666   |              | 
|Cash and cash equivalents at January 1                                                                 |  |       |  |              | 11,748  |   |              |  | 10,082  |              | 
|Exchange losses on cash and cash equivalents                                                           |  |       |  |              | (13     | ) |              |  | -       |              | 
|Cash and cash equivalents at December 31                                                               |  |       |  |              | 15,414  |   |              |  | 11,748  |              | 



The accompanying notes form part of these consolidated
financial statements.



F-9







Notes to the consolidated
financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 1 | Corporate information
| | - | ---------------------



China
Southern Airlines Company Limited (the “Company”), a joint stock company limited by shares, was incorporated in the
People’s Republic of China (the “PRC”) on March 25, 1995. The address of the Company’s registered office
is House 203, No. 233 Kaifa Avenue, Guangzhou Economic & Technology Development Zone, Luogang District, Guangzhou, Guangdong
Province, the PRC. The Company and its subsidiaries (the “Group”) are principally engaged in the operation of civil
aviation, including the provision of passenger, cargo, mail delivery and other extended transportation services.



The
Company’s majority interest is owned by China Southern Air Holding Company (“CSAHC”), a state-owned enterprise
incorporated in the PRC.



The
Company’s shares are traded on the Shanghai Stock Exchange, the Stock Exchange of Hong Kong Limited and the New York Stock
Exchange.



These financial
statements are presented in RMB, unless otherwise stated.



These consolidated
financial statements were approved for issue by the Company’s Board on March 30, 2015.



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



The
principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies
have been consistently applied to all the years presented, unless otherwise stated.



| | (a) | Basis of preparation
| | --- | --------------------



The
consolidated 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 measurement basis used
in the preparation of the financial statements is the historical cost basis, except that available-for-sale equity securities are
stated at their fair value as explained in the accounting policies set out in Note 2(e).



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



The
estimates and relevant 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.



Judgements
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 3.



The
consolidated financial statements comprise the Company and its subsidiaries and the Group’s interest in associates and joint
ventures.



F-10







Notes to the consolidated
financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



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



| | (a) | Basis
                                         of preparation (continued)
| | --- | -------------------------------------------------------------------------



| | (i) | Going concern
| | --- | -------------



As at December 31, 2014, the
Group’s current liabilities exceeded its current assets by RMB26,545 million. In preparing the consolidated financial statements,
the Board has given careful consideration to the going concern status of the Group in the context of the Group’s current
working capital deficit and believe that adequate funding is available to fulfil the Group’s short-term obligations and capital
expenditure requirements.



As at December 31, 2014, the
Group had banking facilities with several PRC banks and financial institutions for providing bank financing up to approximately
RMB187.1 billion (2013: RMB166.3 billion), of which approximately RMB126.7 billion (2013: RMB120.9 billion) was unutilized. The
Board believes that, based on experience to date, it is likely that these facilities will be rolled over in future years if required.
Accordingly, the Board believes that it is appropriate to prepare the consolidated financial statements on a going concern basis
without including any adjustments that would be required should the Company and the Group fail to continue as a going concern.



| | (ii) | New and amended standards adopted by the Group
| | ---- | ----------------------------------------------



The
following standards have been adopted by the Group for the first time for the financial year beginning on or after January 1, 2014:



| |  | 
| |  | 

| | • | Amendment to IAS 32, 'Financial instruments: Presentation' on offsetting financial assets and financial
liabilities. This amendment clarifies that the right of set-off must not be contingent on a future event. It must also be legally
enforceable for all counterparties in the normal course of business, as well as in the event of default, insolvency or bankruptcy.
The amendment also considers settlement mechanisms. The amendment did not have a significant effect on the Group’s financial
statements.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Amendments to IFRS 10, 12 and IAS 27, 'Consolidation for investment entities'. These amendments
mean that many funds and similar entities will be exempt from consolidating most of their subsidiaries. Instead, they will measure
them at fair value through profit or loss. The amendments give an exception to entities that meet an ‘investment entity’
definition and which display particular characteristics. Changes have also been made to IFRS 12 to introduce disclosures that an
investment entity needs to make. The amendments did not have an impact on the Group’s financial statements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Amendments to IAS 36, 'Impairment of assets', on the recoverable amount
disclosures for non-financial assets. This amendment removed certain disclosures of the recoverable amount of cash-generating units
which had been included in IAS 36 by the issue of IFRS 13. It also enhanced the disclosures of information about the recoverable
amount of impaired assets if that amount is based on fair value less costs of disposal. The
Group has applied the amendment and there has been no significant impact on the Group financial statements as a result.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Amendment to IAS 39, 'Financial instruments: Recognition and measurement' on the novation of derivatives
and the continuation of hedge accounting. This amendment considers legislative changes to 'over-the-counter' derivatives and the
establishment of central counterparties. Under IAS 39, novation of derivatives to central counterparties would result in discontinuance
of hedge accounting. The amendment provides relief from discontinuing hedge accounting when novation of a hedging instrument meets
specified criteria. The Group has applied the amendment and there has been no significant impact on the Group financial statements
as a result.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-11







Notes to the consolidated
financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



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



| | (a) | Basis
                                         of preparation (continued)
| | --- | -------------------------------------------------------------------------



| | (ii) | New and amended standards adopted by the Group (continued)
| | ---- | ----------------------------------------------------------



| | • | IFRIC 21, 'Levies', sets out the accounting for an obligation to pay a levy if that liability is
within the scope of IAS 37 'Provisions'. The interpretation addresses what the obligating event is that gives rise to the payment
a levy and when a liability should be recognized. The Group is not currently subjected to significant levies so the impact on the
Group is not material.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Annual improvements 2012. These amendments include changes from the 2010-2012 cycle of the annual
improvements project, that affect 7 standards, only the below are effective for relevant transactions on or after July 1, 2014.
IFRS 2, ‘Share-based payment’, the amendment clarifies the definition of a ‘vesting condition’ and separately
defines ‘performance condition’ and ‘service condition’. IFRS 3, ‘Business combinations’ and
consequential amendments to IFRS 9, ‘Financial instruments’, IAS 37, ‘Provisions, contingent liabilities and
contingent assets’, and IAS39, ‘Financial instruments – Recognition and measurement’. The standard is amended
to clarify that an obligation to pay contingent consideration which meets the definition of a financial instrument is classified
as a financial liability or as equity, on the basis of the definitions in IAS 32,’Financial instruments: Presentation’.
All non-equity contingent consideration, both financial and non-financial, is measured at fair value at each reporting date, with
changes in fair value recognized in profit and loss. These annual improvements did not have an impact on the Group’s financial
statements.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | New standards and interpretations not yet adopted
| | ----- | -------------------------------------------------



A number of new standards and
amendments to standards and interpretations are effective for annual periods beginning after January 1, 2014, and have not been
applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated
financial statements of the Group, except the following set out below:



| | • | IFRS 9, ‘Financial instruments’, addresses the classification, measurement and recognition
of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance
in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed
measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through
OCI and fair value through P&L. The basis of classification depends on the entity's business model and the contractual cash
flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through
profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new
expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were
no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income,
for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing
the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument
and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purposes.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Contemporaneous documentation is still required but is different to that currently prepared under
IAS 39. The standard is effective for accounting periods beginning on or after January 1, 2018. Early adoption is permitted. The
Group is yet to assess IFRS 9’s full impact.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-12







Notes to the consolidated
financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



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



| | (a) | Basis
                                         of preparation (continued)
| | --- | -------------------------------------------------------------------------



| | (iii) | New standards and interpretations not yet adopted (continued)
| | ----- | -------------------------------------------------------------



| | • | IFRS 15, 'Revenue from contracts with customers' deals with revenue recognition and establishes
principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of
revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognized when a customer obtains control
of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard
replaces IAS 18 'Revenue' and IAS 11 'Construction contracts' and related interpretations. The standard is effective for annual
periods beginning on or after January 1, 2017 and earlier application is permitted. The Group is assessing the impact of IFRS 15.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



There are no other IFRSs or
IFRIC/HK interpretations that are not yet effective that would be expected to have a material impact on the Group.



F-13







Notes to the consolidated
financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



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



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



Subsidiaries are all entities
(including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or
has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power
over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated
from the date that control ceases.



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 transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses
are also eliminated. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group’s accounting
policies.



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. With regards to each business combination, the
Group recognized non-controlling interests based on the proportion of the net identifiable assets of the subsidiary owned by the
non-controlling interests.



Non-controlling interests are
presented in the consolidated balance sheet 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(n)) or (Note 2(o)) 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 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(e)) or, when appropriate,
the cost on initial recognition of an investment in an associate or joint venture (Note 2(c)).



The Group
applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary
is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests
issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent
consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination
are measured initially at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquiree
on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of
the recognized amounts of acquiree’s identifiable net assets.



Acquisition-related costs
are expensed as incurred.



F-14







Notes to the consolidated
financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



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



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



If the
business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity
interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement
are recognized in profit or loss.



Any contingent consideration
to be transferred by the Group is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the
contingent consideration that is deemed to be an asset or liability is recognized in accordance with IAS 39 either in profit or
loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not remeasured, and
its subsequent settlement is accounted for within equity.



| | (c) | Associates and joint arrangements
| | --- | ---------------------------------



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



The Group
has applied IFRS 11 to all joint arrangements. Under IFRS 11, investments in joint arrangements are classified as either joint
operations or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature
of its joint arrangements and determined them to be joint ventures.



An investment in an associate
or a joint venture 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 2(k)).
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 joint venture, 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 joint venture.



Unrealized profits and losses
resulting from transactions between the Group and its associates and joint ventures 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.



F-15







Notes to the consolidated
financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



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



| | (d) | 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.



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(k)).



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



The Group’s
policies for investments in equity securities, other than investments in subsidiaries, associates and joint ventures, 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(w)(iv)). When these investments are derecognized or impaired (Note 2(k)), 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
balance sheet at cost less impairment losses (Note 2(k)).



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



| | (f) | Investment properties
| | --- | ---------------------



Investment properties are buildings
which are owned to earn rental income and/or for capital appreciation.



Investment properties are stated
at cost, less accumulated depreciation and impairment losses (Note 2(k)). Depreciation is calculated to write off the cost of items
of investment properties, 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(w)(iii).



F-16







Notes to the consolidated
financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



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



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



Property, plant and equipment
are stated at cost less accumulated depreciation and impairment losses (Note 2(k)).



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(z)).



Subsequent
costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable
that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably.
The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the income statement
during the financial period in which they are incurred.



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 income statement on the date of retirement or disposal.



When each major aircraft overhaul
is performed, its cost is recognized in the carrying amount of the component of aircraft and is depreciated over the appropriate
maintenance cycles. Components related to overhaul cost, are depreciated on a straight-line basis over 3 to 12 years. Upon completion
of an overhaul, any remaining carrying amount of the cost of the previous overhaul is derecognized and charged to the income statement.



Except
for components related to overhaul costs, the depreciation method of which has been described in the preceding paragraph, depreciation
of other property, plant and equipment is calculated to write off the cost of items 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 finance 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.



| | (h) | Construction in progress
| | --- | ------------------------



Construction in progress represents
aircraft prepayment, office buildings, various infrastructure projects under construction and equipment pending for installation,
and is stated at cost less impairment losses(Note 2(k)). 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.



F-17









Notes to the consolidated
financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



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



| | (i) | 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 (Note2(g)). Impairment losses are accounted for in accordance with the accounting policy
as set out in (Note 2(k)). Finance charges implicit in the lease payments are charged to 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 income statement in the accounting period in which they are incurred.



| | (iii) | Operating
lease charges
| | ----- | -----------------------



Where the Group has the use
of assets held under operating leases, payments made under the leases are charged to income statement in equal instalments over
the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits
to be derived from the leased asset. Lease incentives received are recognized in income statement as an integral part of the aggregate
net lease payments made. Contingent rentals are charged to income statement in the accounting period in which they are incurred.



The cost
of acquiring land held under an operating lease is amortised on a straight-line basis over the respective periods of lease terms
which range from 30 to 70 years.



F-18







Notes to the consolidated
financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



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



| | (i) | Leased assets (continued)
| | --- | -------------------------



| | (iv) | Sale
and leaseback transactions
| | ---- | -------------------------------



Gains or losses on aircraft
sale and leaseback transactions which result in finance leases are deferred and amortised 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 amortised 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 amortised over the useful life of the assets.



| | (j) | Deferred expenditure
| | --- | --------------------



Lump sum housing benefits payable
to employees of the Group are deferred and amortised on a straight- line basis over beneficial period.



Deferred
expenditure is stated at cost less impairment losses (Note 2(k)).



| | (k) | Impairment of assets
| | --- | --------------------



| | (i) | Impairment of investments in equity securities and receivables
| | --- | --------------------------------------------------------------



Investments in equity securities
and current and non-current receivables that are stated at cost or amortised cost or are classified as available-for-sale equity
securities are reviewed at 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 reorganisation;
| | - | ---------------------------------------------------------------------------------------------



| | – | significant changes in the technological, market, economic or legal environment that have an adverse
effect on the debtor; and
| | - | ------------------------------------------------------------------------------------------------------------------------------



| | – | a significant or prolonged decline 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 joint ventures (including those recognized using
the equity method (Note 2(c)), the impairment loss is measured by comparing the recoverable amount of the investment with its carrying
amount in accordance with (Note 2(k(ii))). The impairment loss is reversed if there has been a favourable change in the estimates
used to determine the recoverable amount in accordance with (Note 2(k(ii)).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-19







Notes to the consolidated
financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



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



| | (k) | Impairment of assets (continued)
| | --- | --------------------------------



| | (i) | Impairment of investments in equity securities and receivables
(continued)
| | --- | --------------------------------------------------------------------------



| | – | 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 amortised cost, the
impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future
cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed
at initial recognition of these assets), where the effect of discounting is material. This assessment is made collectively where
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 income statement is the difference
between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss
on that asset previously recognized in income statement.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Impairment losses recognized
in 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 income statement.



F-20







Notes to the consolidated
financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



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



| | (k) | Impairment
                                         of assets (continued)
| | --- | -------------------------------------------------------------------------



| | (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;
| | - | ------------------------------

| | – | Investment properties;
| | - | ----------------------

| | – | 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).



| | – | Recognition of impairment losses
| | - | --------------------------------



An impairment loss is recognized
in 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 favourable 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 income statement in the year in which the reversals are recognized.



| | (iii) | Interim financial reporting and impairment
| | ----- | ------------------------------------------



Under the Rules Governing the
Listing of Securities on The Stock Exchange of Hong Kong Limited, the Group is required to prepare 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(k)(i) and (ii)).



F-21







Notes to the consolidated
financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



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



| | (k) | Impairment
                                         of assets (continued)
| | --- | -------------------------------------------------------------------------



| | (iii) | Interim financial reporting and impairment (continued)
| | ----- | ------------------------------------------------------



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.



| | (l) | Inventories
| | --- | -----------



Inventories,
which consist primarily of consumable spare parts and supplies, are stated at cost less any applicable provision for obsolescence,
and are charged to 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 realisable value. Net realisable value is the estimated selling
price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.



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 realisable 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.



| | (m) | Trade and other receivables
| | --- | ---------------------------



Trade and
other receivables are initially recognized at fair value and thereafter stated at amortised cost less allowance for impairment
of doubtful debts (Note 2(k)), 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.



| | (n) | 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 amortised cost with any difference between the amount initially recognized and redemption value being
recognized in income statement over the period of the borrowings, together with any interest and fees payable, using the effective
interest method.



| | (o) | 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(q)(i)), trade and other payables are subsequently stated at amortised cost unless the effect of discounting would be immaterial,
in which case they are stated at cost.



F-22







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



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



| | (p) | 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.



| | (q) | Financial guarantees issued, provisions and contingent liabilities
| | --- | ------------------------------------------------------------------



| | (i) | Financial guarantees issued
| | --- | ---------------------------



Financial guarantees are contracts
that require the issuer (i.e. the guarantor) to make specified payments to reimburse the beneficiary of the guarantee (the “holder”)
for a loss the holder incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument.



Where the Group issues a financial
guarantee, the fair value of the guarantee (being the transaction price, unless the fair value can otherwise be reliably estimated)
is initially recognized as deferred income within trade and other payables.



The amount of the guarantee initially
recognized as deferred income is amortised in income statement over the term of the guarantee as income from financial guarantees
issued. In addition, provisions are recognized in accordance with (Note 2(q)(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 amortisation.



(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.



| | (r) | Dividend distribution
| | --- | ---------------------



Dividend distribution to the Company’s
shareholders is recognized as a liability in the Group’s consolidated financial statements in the period in which the dividends
are approved by the Company’s shareholders.



| | (s) | Share capital
| | --- | -------------



Ordinary shares are classified as
equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of
tax, from the proceeds.



F-23







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



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



| | (t) | 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.



| | (u) | 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 amortised as a reduction of rental expense for aircraft and engines under leases.



| | (v) | Income tax
| | --- | ----------



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, 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 and it is probable that future taxable profit
will be available against which the temporary difference can be utilized.



The amount of deferred tax recognized
is measured based on the expected manner of realisation 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 and are expected to apply when related deferred tax
asset is realized or the deferred tax liability is settled. Deferred tax assets and liabilities are not discounted.



F-24







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



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



| | (v) | 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 Group has the legally enforceable
right to set off current tax assets against current tax liabilities and the following additional conditions are met:



| | – | in the case of current tax assets and liabilities, the Group intends either to settle on a net
basis, or to 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (w) | 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 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 programmes, namely, the China Southern Airlines Sky Pearl Club and the Xiamen Airlines’ Egret Card Frequent Flyer
Programme, 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 programmes. 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 programmes is also deferred as a liability, within deferred revenue.



As members of the frequent flyer
award programmes redeem mileages for an award, revenue is recorded in 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.



F-25







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



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



| | (w) | Revenue recognition (continued)
| | --- | -------------------------------



| | (iii) | Operating rental income
| | ----- | -----------------------



Receivable under operating leases
is recognized in income statement in equal instalments over the periods covered by the lease term, except where an alternative
basis is more representative of the pattern of benefits to be derived from the use of the leased asset. Lease incentives granted
are recognized in 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 consolidated balance sheet initially when there is reasonable
assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate
the Group for expenses incurred are recognized as revenue in 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 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.
| | ---- | --------------------------------------------------------------------------------



| | (x) | Traffic commissions
| | --- | -------------------



Traffic commissions are expensed
in 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 balance sheet as prepaid expense.



| | (y) | Maintenance and overhaul costs
| | --- | ------------------------------



Routine maintenance, repairs and
overhauls are charged to income statement as and when incurred.



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 income statement.



In respect of aircraft held under
operating leases, the Group has responsibility to fulfil certain return conditions under relevant lease agreements. In order to
fulfil 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 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 income statement in the period when the overhaul is performed.



F-26







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



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



| | (z) | 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.



| | (aa) | 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.



(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.



| | (ab) | Translation of foreign currencies
| | ---- | ---------------------------------



Items included in the financial statements
of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates
(‘the functional currency’). The consolidated financial statements are presented in Renminbi, which is the Company’s
functional and the Group’s presentation currency.



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 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.



F-27







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



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



| | (ac) | 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).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



| | (ad) | Segmental information
| | ---- | ---------------------



Operating segments, and the amounts
of each segment item reported in the 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.



F-28







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 3 | Accounting judgements 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 judgements 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.



The selection of critical accounting
policies, the judgements 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 Note42 and Note 4(g) respectively, the Group believes the following critical accounting policies also involve the
most significant judgements and estimates used in the preparation of the financial statements.



| | (a) | Impairment of trade receivables
| | --- | -------------------------------



Trade receivables are recognized
initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment.
A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able
to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor,
probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered
indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying
amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount
of the assets is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement.
When a trade receivable is uncollectible, it is written off against the provision account for trade receivables. Subsequent recoveries
of amounts previously written off are credited in the income statement.



| | (b) | 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 IAS36, 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 judgement 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.



| | (c) | 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.



F-29







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 3 | Accounting judgements and estimates (continued)
| | - | -----------------------------------------------



| | (d) | Provision for major overhauls
| | --- | -----------------------------



Provision for the cost of major overhauls
to fulfil certain return condition for airframes and engines under operating leases is accrued and charged to the 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.



| | (e) | Frequent flyer revenue
| | --- | ----------------------



The amount of revenue attributable
to the mileages earned by the members of the Group’s frequent flyer award programmes 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, anticipated redemption pattern and the frequent
flyer programme design.



| | (f) | Provision for consumable spare parts and maintenance materials
| | --- | --------------------------------------------------------------



Provision for consumable spare parts
and maintenance materials is made based on the difference between the carrying amount and the net realisable value. The net realisable
value is estimated based on current market condition, historical experience and Company’s future operation plan for the consumable
spare parts and maintenance materials. The net realisable value may be adjusted significantly due to the change of market condition
and the future plan for the consumable spare parts and maintenance materials.



| | (g) | Income tax
| | --- | ----------



Significant judgment is required
in determining the provision for income tax. There are many transactions and calculations for which the ultimate tax determination
is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated tax audit issues based on
estimates of whether additional tax will be due. Where the final tax outcome of these matters is different from the amounts that
were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the year in
which such determination is made.



| | (h) | Retirement benefits
| | --- | -------------------



According to IAS 19, an entity shall
account not only for its legal obligation under the formal terms of a defined benefit plan, but also for any constructive obligation
that arises from the entity’s informal practices where the entity has no realistic alternative but to pay the employee benefits.
The Company believes the payments of welfare subsidy to those retirees who retired before the establishment of Pension Scheme (as
defined in Note 49 (a)) are discretionary and have not created a legal or constructive obligation. Such payments are made according
to the Group’s business performance, and can be suspended at any time (Note 14).



F-30







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 4 | 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 overall
risk management programme focuses on the unpredictability of financial market seeks to minimize the adverse effects on the Group’s
financial performance. 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, 2014, the Group’s
current liabilities exceeded its current assets by RMB26,545 million. For the year ended December 31, 2014, the Group recorded
a net cash inflow from operating activities of RMB13,570 million, a net cash outflow from investing activities of RMB9,760 million
and a net cash outflow from financing activities of RMB131 million, which in total resulted in a net increase in cash and cash
equivalents of RMB3,679 million.



The Group is dependent on its ability
to maintain adequate cash inflow from operations, its ability to maintain existing external financing, and its ability to obtain
new external financing to meet its debt obligations as they fall due and to meet its committed future capital expenditures. As
at December 31, 2014, the Group had banking facilities with several PRC banks and financial institutions for providing bank financing
up to approximately RMB187,133 million (2013: RMB166,270 million), of which approximately RMB126,703 million (2013: RMB120,904
million) was unutilized. 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, 2015. 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 facilities,
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, 2014, the contractual
maturities at the end of financial years of the Group’s borrowings and obligations under finance leases are disclosed in
Notes 34, 35 respectively.



| | (b) | Interest rate risk
| | --- | ------------------



The interest rates and maturity information
of the Group’s borrowings and obligations under finance leases are disclosed in Note 34 and Note 35, respectively. Majority
of the Group’s borrowing are at floating interest rates which expose the Group to cash flow interest rate risk. Borrowings
at fixed interest rates expose the Group to fair value interest risk.



At December 31, 2014, 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 RMB569 million (2013: RMB443 million; 2012: RMB307 million).
Other components of consolidated equity would not be affected (2013 and 2012: Nil) 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 annualised impact on interest expense or income of such a change in
interest rates. This analysis is performed on the same basis as that for 2013 and 2012.



F-31







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 4 | Financial risk management and fair values (continued)
| | - | -----------------------------------------------------



| | (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 authorised to buy and sell foreign exchange or at a swap centre.



The Group has significant exposure
to foreign currency risk as substantially all of the Group’s obligations under finance leases (Note 35), borrowings (Note
34) and operating lease commitments (Note 46(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 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.



|              |  | 2014                                                                  |     |    | 2013                                                                          |  |      | 2012                                                                  | 
|------------- |  | --------------------------------------------------------------------- | --- | -- | ----------------------------------------------------------------------------- |  | ---- | --------------------------------------------------------------------- | 
|              |  | Appreciation /(depreciation)
    of Renminbi against foreign currency |     |    | Increase /(decrease)
    on profit after tax and retained profits RMB million |  |      | Appreciation/ (depreciation)
    of Renminbi against foreign currency | 
|              |  |                                                                       |     |    |                                                                               |  |      |                                                                       | 
|United States |  |                                                                       |     |    |                                                                               |  |      |                                                                       | 
|Dollars       |  |                                                                       | 1   | %  |                                                                               |  | 767  |                                                                       | 
|              |  |                                                                       | (1  | )% |                                                                               |  | (767 | )                                                                     | 
|              |  |                                                                       |     |    |                                                                               |  |      |                                                                       | 
|Singapore     |  |                                                                       |     |    |                                                                               |  |      |                                                                       | 
|Dollars       |  |                                                                       | 2   | %  |                                                                               |  | 6    |                                                                       | 
|              |  |                                                                       | (2  | )% |                                                                               |  | (6   | )                                                                     | 
|              |  |                                                                       |     |    |                                                                               |  |      |                                                                       | 
|Japanese      |  |                                                                       |     |    |                                                                               |  |      |                                                                       | 
|Yen           |  |                                                                       | 10  | %  |                                                                               |  | 145  |                                                                       | 
|              |  |                                                                       | (10 | )% |                                                                               |  | (145 | )                                                                     | 



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, borrowings, and lease 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 2013 and 2012.



F-32







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 4 | Financial risk management and fair values (continued)
| | - | -----------------------------------------------------



| | (d) | Credit risk
| | --- | -----------



The Group’s credit risk is
primarily attributable to cash and cash equivalents, trade receivables and the guarantees on personal bank loans provided to the
Group’s pilot trainees.



Substantially all of the Group’s
cash and cash equivalents are deposited with major reputable 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 organised by International Air Transportation Association. The use of the BSP reduces credit risk to
the Group. As at December 31, 2014, the balance due from BSP agents amounted to RMB990 million (2013: RMB1,046 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 31).



The Company and its subsidiary, Xiamen
Airlines, entered into agreements with their pilot trainees and certain banks to provide guarantees on personal bank loans amounting
to RMB646 million (December 31, 2013: RMB656 million) that can be drawn by the pilot trainees to finance their respective flight
training expenses. As at December 31, 2014, total personal bank loans of RMB486 million (December 31, 2013: RMB464million), under
these guarantees, were drawn down from the banks. During the year, the Group has paid RMB2 million (2013: RMB6 million) to the
banks due to the default of payments of certain pilot trainees.



| | (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% (2013 and 2012:10%) in jet fuel price, with volume of fuel consumed and all other
variables held constant, would have increased/decreased the fuel costs by approximately RMB3,773 million (2013: RMB3,554 million;
2012: RMB3,740 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) | 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 ratio, which is calculated as total liabilities divided by total assets.



Neither the Company nor any of its
subsidiaries are subject to externally imposed capital requirements. The Group’s debt ratio was 77% at December 31, 2014
(2013: 74%).



F-33







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 4 | Financial risk management and fair values (continued)
| | - | -----------------------------------------------------



| | (g) | 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 categorised
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



The following table presents the Group’s financial
assets that are measured at fair value at December 31, 2014.



|2014                                  |  | Level 1 RMB million |     |  | Level 2 RMB million |  |   | Level 3 RMB million |  |  | Total RMB million | 
|------------------------------------- |  | ------------------- | --- |  | ------------------- |  | - | ------------------- |  |  | ----------------- | 
|                                      |  |                     |     |  |                     |  |   |                     |  |  |                   | 
|Assets                                |  |                     |     |  |                     |  |   |                     |  |  |                   | 
|Available-for-sale equity securities: |  |                     |     |  |                     |  |   |                     |  |  |                   | 
|-Listed                               |  |                     | 104 |  |                     |  | - |                     |  |  | -                 | 
|                                      |  |                     |     |  |                     |  |   |                     |  |  |                   | 
|2013                                  |  |                     |     |  |                     |  |   |                     |  |  |                   | 
|                                      |  |                     |     |  |                     |  |   |                     |  |  |                   | 
|Assets                                |  |                     |     |  |                     |  |   |                     |  |  |                   | 
|Available-for-sale equity securities: |  |                     |     |  |                     |  |   |                     |  |  |                   | 
|-Listed                               |  |                     | 61  |  |                     |  | - |                     |  |  | -                 | 



F-34







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 4 | Financial risk management and fair values (continued)
| | - | -----------------------------------------------------



| | (g) | Fair value (continued)
| | --- | ----------------------



| | (i) | Financial instruments carried at fair value (continued)
| | --- | -------------------------------------------------------



During the years ended December 31,
2014 and 2013, there were no significant transfers between instruments in Level 1 and Level 2.



| | (a) | Financial instruments in level 1
| | --- | --------------------------------



The fair value of financial instruments
traded in active markets is based on quoted market prices at the balance sheet date without any deduction for transaction costs.
A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry
group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on
an arm’s length basis. The quoted market price used for financial assets held by the Group is the current bid price. These
instruments are included in level 1. Instruments included in level 1 comprise primarily A share equity investments classified as
trading securities or available-for-sale.



| | (ii) | Financial instruments not carried at fair value
| | ---- | -----------------------------------------------



| | (a) | Other investments in equity securities 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. Accordingly, they are recognized in the consolidated balance sheet at cost less impairment losses.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | 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.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | All other financial instruments, including trade and other receivables, trade and other payables,
borrowings and obligation under finance leases are carried at amounts not materially different from their fair values as at December
31, 2014 and December 31, 2013.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5 | Traffic revenue
| | - | ---------------



|                      |  | 2014        |         |  | 2013        |  |        | 2012        | 
|--------------------- |  | ----------- | ------- |  | ----------- |  | ------ | ----------- | 
|                      |  | RMB million |         |  | RMB million |  |        | RMB million | 
|                      |  |             |         |  |             |  |        |             | 
|Passenger             |  |             | 84,740  |  |             |  | 76,687 |             | 
|Cargo and mail        |  |             | 5,842   |  |             |  | 4,935  |             | 
|Fuel Surcharge Income |  |             | 13,746  |  |             |  | 13,062 |             | 
|                      |  |             | 104,328 |  |             |  | 94,684 |             | 



F-35







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 6 | Segmental information
| | - | ---------------------



| | (a) | Business segments
| | --- | -----------------



The Group’s network passenger,
cargo and mail transportation are managed as a single business unit. The Group’s chief operating decision maker (“CODM”),
which is the senior executive management, makes resource allocation decisions based on route profitability, which considers aircraft
type and route economics. The objective in making resource allocation decisions is to optimise 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
transportation operations”.



Other operating segments consist
primarily of business segments of hotel and tour operation, ground services, cargo handling and other miscellaneous services. These
other operating segments are combined and reported as “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 CODM monitors the results, assets and liabilities attributable
to each reportable segment based on financial results prepared under the People’s Republic of China Accounting Standards
for Business Enterprises (“PRC GAAP”). As such, the amount of each material reconciling item from the Group’s
reportable segment revenue, profit before tax, assets and liabilities arising from different accounting policies are set out in
Note 6(c).



Information regarding the Group’s
reportable segments as provided to the Group’s CODM for the purposes of resource allocation and assessment of segment performance
is set out below.



The segment results of the Group
for the year ended December 31, 2014 are as follows:



|                                             |  | Airline transportation operations |         |  | Other segments |  |       | Elimination |  |  | Unallocated* |   |  | Total       |    
|-------------------------------------------- |  | --------------------------------- | ------- |  | -------------- |  | ----- | ----------- |  |  | ------------ | - |  | ----------- | ---
|                                             |  | RMB million                       |         |  | RMB million    |  |       | RMB million |  |  | RMB million  |   |  | RMB million |    
|                                             |  |                                   |         |  |                |  |       |             |  |  |              |   |  |             |    
|Revenue from external customers              |  |                                   | 107,790 |  |                |  | 523   |             |  |  | -            |   |  |             | -  
|Inter-segment sales                          |  |                                   | -       |  |                |  | 1,364 |             |  |  | (1,364       | ) |  |             | -  
|Reportable segment revenue                   |  |                                   | 107,790 |  |                |  | 1,887 |             |  |  | (1,364       | ) |  |             | -  
|Reportable segment profit before taxation    |  |                                   | 2,422   |  |                |  | 257   |             |  |  | -            |   |  |             | 416
|Reportable segment profit after taxation     |  |                                   | 1,800   |  |                |  | 202   |             |  |  | -            |   |  |             | 416
|Other segment information                    |  |                                   |         |  |                |  |       |             |  |  |              |   |  |             |    
|Income tax                                   |  |                                   | 622     |  |                |  | 55    |             |  |  | -            |   |  |             | -  
|Interest income                              |  |                                   | 369     |  |                |  | 7     |             |  |  | -            |   |  |             | -  
|Interest expense                             |  |                                   | 2,155   |  |                |  | 38    |             |  |  | -            |   |  |             | -  
|Depreciation and amortisation                |  |                                   | 10,915  |  |                |  | 88    |             |  |  | -            |   |  |             | -  
|Impairment  loss                             |  |                                   | 205     |  |                |  | -     |             |  |  | -            |   |  |             | -  
|Share of associates’ results                 |  |                                   | -       |  |                |  | -     |             |  |  | -            |   |  |             | 263
|Share of joint ventures’ results             |  |                                   | -       |  |                |  | -     |             |  |  | -            |   |  |             | 140
|Non-current assets additions during the year |  |                                   | 29,523  |  |                |  | 98    |             |  |  | -            |   |  |             | -  



F-36







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 6 | Segment reporting (continued)
| | - | -----------------------------



| | (a) | Business segments (continued)
| | --- | -----------------------------



The segment results of the Group for the year ended December
31, 2013 are as follows:



|                                             |  | Airline transportation operations |        |  | Other segments |  |       | Elimination |  |  | Unallocated* |   |  | Total       |    
|-------------------------------------------- |  | --------------------------------- | ------ |  | -------------- |  | ----- | ----------- |  |  | ------------ | - |  | ----------- | ---
|                                             |  | RMB million                       |        |  | RMB million    |  |       | RMB million |  |  | RMB million  |   |  | RMB million |    
|                                             |  |                                   |        |  |                |  |       |             |  |  |              |   |  |             |    
|Revenue from external customers              |  |                                   | 97,659 |  |                |  | 471   |             |  |  | -            |   |  |             | -  
|Inter-segment sales                          |  |                                   | -      |  |                |  | 1,147 |             |  |  | (1,147       | ) |  |             | -  
|Reportable segment revenue                   |  |                                   | 97,659 |  |                |  | 1,618 |             |  |  | (1,147       | ) |  |             | -  
|Reportable segment profit before taxation    |  |                                   | 2,796  |  |                |  | 123   |             |  |  | -            |   |  |             | 431
|Reportable segment profit after taxation     |  |                                   | 2,118  |  |                |  | 100   |             |  |  | -            |   |  |             | 431
|Other segment information                    |  |                                   |        |  |                |  |       |             |  |  |              |   |  |             |    
|Income tax                                   |  |                                   | 678    |  |                |  | 23    |             |  |  | -            |   |  |             | -  
|Interest income                              |  |                                   | 300    |  |                |  | 7     |             |  |  | -            |   |  |             | -  
|Interest expense                             |  |                                   | 1,611  |  |                |  | 40    |             |  |  | -            |   |  |             | -  
|Depreciation and amortisation                |  |                                   | 9,425  |  |                |  | 80    |             |  |  | -            |   |  |             | -  
|Impairment loss                              |  |                                   | 567    |  |                |  | 1     |             |  |  | -            |   |  |             | -  
|Share of associates’ results                 |  |                                   | -      |  |                |  | -     |             |  |  | -            |   |  |             | 296
|Share of joint ventures’ results             |  |                                   | -      |  |                |  | -     |             |  |  | -            |   |  |             | 96 
|Non-current assets additions during the year |  |                                   | 28,780 |  |                |  | 82    |             |  |  | -            |   |  |             | -  



The segment results of the Group for the year ended December 31,
2012 are as follows:



|                                             |  | Airline transportation operations |         |   | Other segments |  |       | Elimination  |  |  | Unallocated* |   |  | Total        |    
|-------------------------------------------- |  | --------------------------------- | ------- | - | -------------- |  | ----- | ------------ |  |  | ------------ | - |  | ------------ | ---
|                                             |  | RMB million                       |         |   | RMB
 million   |  |       | RMB
 million |  |  | RMB
 million |   |  | RMB 
million |    
|                                             |  |                                   |         |   |                |  |       |              |  |  |              |   |  |              |    
|Revenue from external customers              |  |                                   | 101,007 |   |                |  | 476   |              |  |  | -            |   |  |              | -  
|Inter-segment sales                          |  |                                   | -       |   |                |  | 1,159 |              |  |  | (1,159       | ) |  |              | -  
|Reportable segment revenue                   |  |                                   | 101,007 |   |                |  | 1,635 |              |  |  | (1,159       | ) |  |              | -  
|Reportable segment profit before taxation    |  |                                   | 4,120   |   |                |  | 102   |              |  |  | -            |   |  |              | 526
|Reportable segment profit after taxation     |  |                                   | 3,179   |   |                |  | 90    |              |  |  | -            |   |  |              | 526
|Other segment information                    |  |                                   |         |   |                |  |       |              |  |  |              |   |  |              |    
|Income tax                                   |  |                                   | 941     |   |                |  | 12    |              |  |  | -            |   |  |              | -  
|Interest income                              |  |                                   | 230     |   |                |  | 5     |              |  |  | -            |   |  |              | -  
|Interest expense                             |  |                                   | 1,329   |   |                |  | 47    |              |  |  | -            |   |  |              | -  
|Depreciation and amortisation                |  |                                   | 8,204   |   |                |  | 80    |              |  |  | -            |   |  |              | -  
|Impairment loss                              |  |                                   | (7      | ) |                |  | 1     |              |  |  | -            |   |  |              | -  
|Share of associates’ results                 |  |                                   | -       |   |                |  | -     |              |  |  | -            |   |  |              | 318
|Share of joint ventures’ results             |  |                                   | -       |   |                |  | -     |              |  |  | -            |   |  |              | 121
|Non-current assets additions during the year |  |                                   | 24,316  |   |                |  | 57    |              |  |  | -            |   |  |              | -  



F-37









Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 6 | Segment reporting (continued)
| | - | -----------------------------



| | (a) | Business segments (continued)
| | --- | -----------------------------



The segment assets and liabilities
of the Group as at December 31, 2014 and December 31, 2013 are as follows:



|                                |  | Airline transportation operations |         |  | Other segments |  |       | Elimination |  |  | Unallocated* |   |  | Total       |      
|------------------------------- |  | --------------------------------- | ------- |  | -------------- |  | ----- | ----------- |  |  | ------------ | - |  | ----------- | -----
|                                |  | RMB million                       |         |  | RMB million    |  |       | RMB million |  |  | RMB million  |   |  | RMB million |      
|                                |  |                                   |         |  |                |  |       |             |  |  |              |   |  |             |      
|As at December 31, 2014         |  |                                   |         |  |                |  |       |             |  |  |              |   |  |             |      
|Reportable segment assets       |  |                                   | 184,661 |  |                |  | 2,427 |             |  |  | (568         | ) |  |             | 3,177
|Reportable segment  liabilities |  |                                   | 144,782 |  |                |  | 1,209 |             |  |  | (568         | ) |  |             | -    
|As at December 31, 2013         |  |                                   |         |  |                |  |       |             |  |  |              |   |  |             |      
|Reportable segment assets       |  |                                   | 160,759 |  |                |  | 2,304 |             |  |  | (658         | ) |  |             | 2,740
|Reportable segment  liabilities |  |                                   | 122,320 |  |                |  | 1,271 |             |  |  | (658         | ) |  |             | -    



* Unallocated assets primarily include
investments in associates and joint ventures, available-for-sale financial assets and other investments in equity securities. Unallocated
results primarily include the share of results of associates and joint ventures, gain on disposal of a subsidiary, dividend income
from available-for-sales financial assets and other investments in equity securities and interest income from wealth management
products.



F-38







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 6 | Segment reporting (continued)
| | - | -----------------------------



| | (b) | The Group’s business segments operate in three main geographical
areas, even though they are managed on a worldwide basis.
| | --- | --------------------------------------------------------------------------------------------------------------------------



The Group’s revenues by geographical
segment are analyzed based on the following criteria:



| | (1) | Traffic revenues from services within the PRC (excluding Hong Kong Special Administrative Region,
Macau Special Administrative Region and Taiwan (“Hong Kong, Macau and Taiwan”)), is classified as domestic operations.
Traffic revenue from inbound and outbound services between overseas markets, excluding Hong Kong, Macau and Taiwan, is classified
as international operations.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Revenues from commission income, hotel and tour operation, ground services, cargo handling and
other miscellaneous services are classified on the basis of where the services are performed.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                            |  | 2014        |         |  | 2013        |  |        | 2012        | 
|--------------------------- |  | ----------- | ------- |  | ----------- |  | ------ | ----------- | 
|                            |  | RMB Million |         |  | RMB Million |  |        | RMB Million | 
|                            |  |             |         |  |             |  |        |             | 
|Domestic                    |  |             | 82,764  |  |             |  | 76,828 |             | 
|International               |  |             | 22,952  |  |             |  | 19,053 |             | 
|Hong Kong, Macau and Taiwan |  |             | 2,597   |  |             |  | 2,249  |             | 
|                            |  |             | 108,313 |  |             |  | 98,130 |             | 



The major revenue earning assets
of the Group are its aircraft fleet which is registered in the PRC and is deployed across its worldwide route network. Majority
of the Group’s other assets are located in the PRC. CODM 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) | Reconciliation of reportable segment revenues, profit before income tax, assets and liabilities
to the consolidated figures as reported in the consolidated financial statement.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                         |  | 2014 |  |             | 2013    |   |             | 2012 |       
|-------------------------------------------------------- |  | ---- |  | ----------- | ------- | - | ----------- | ---- | ------
|                                                         |  | Note |  | RMB million |         |   | RMB million |      |       
|Revenue                                                  |  |      |  |             |         |   |             |      |       
|                                                         |  |      |  |             |         |   |             |      |       
|Reportable segment revenues                              |  |      |  |             | 108,313 |   |             |      | 98,130
|Reclassification of expired sales in advance of carriage |  | (i)  |  |             | 459     |   |             |      | 684   
|Reclassification of sales tax                            |  | (ii) |  |             | (188    | ) |             |      | (267  
|Consolidated revenues                                    |  |      |  |             | 108,584 |   |             |      | 98,547



|                                                        |  | 2014  |  |             | 2013  |   |             | 2012 |      
|------------------------------------------------------- |  | ----- |  | ----------- | ----- | - | ----------- | ---- | -----
|                                                        |  | Note  |  | RMB million |       |   | RMB million |      |      
|Profit before income tax                                |  |       |  |             |       |   |             |      |      
|                                                        |  |       |  |             |       |   |             |      |      
|Reportable segment profit before taxation               |  |       |  |             | 3,095 |   |             |      | 3,350
|Losses on housing benefits                              |  |       |  |             | -     |   |             |      | -    
|Capitalization of exchange difference of specific loans |  | (iii) |  |             | (28   | ) |             |      | 133  
|Government grants                                       |  | (iv)  |  |             | 1     |   |             |      | 3    
|Others                                                  |  |       |  |             | (2    | ) |             |      | (2   
|Consolidated profit before income tax                   |  |       |  |             | 3,066 |   |             |      | 3,484



F-39







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 6 | Segment reporting (continued)
| | - | -----------------------------



| | (c) | Reconciliation of reportable segment revenue, profit before income tax, assets and liabilities
to the consolidated figures as reported in the consolidated financial statement. (continued)
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                        |  |       |  | 2014        |         |   | 2013        | 
|------------------------------------------------------- |  | ----- |  | ----------- | ------- | - | ----------- | 
|                                                        |  | Note  |  | RMB million |         |   | RMB million | 
|Assets                                                  |  |       |  |             |         |   |             | 
|Reportable segment assets                               |  |       |  |             | 189,697 |   |             | 
|Capitalization of exchange difference of specific loans |  | (iii) |  |             | 323     |   |             | 
|Government grants                                       |  | (iv)  |  |             | (259    | ) |             | 
|Others                                                  |  |       |  |             | (73     | ) |             | 
|Consolidated total assets                               |  |       |  |             | 189,688 |   |             | 



|                               |  |      |  | 2014        |         |   | 2013        | 
|------------------------------ |  | ---- |  | ----------- | ------- | - | ----------- | 
|                               |  | Note |  | RMB million |         |   | RMB million | 
|Liabilities                    |  |      |  |             |         |   |             | 
|                               |  |      |  |             |         |   |             | 
|Reportable segment liabilities |  |      |  |             | 145,423 |   |             | 
|Government grants              |  | (iv) |  |             | (228    | ) |             | 
|Others                         |  |      |  |             | -       |   |             | 
|Consolidated total liabilities |  |      |  |             | 145,195 |   |             | 



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 as other operating income.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | In accordance with the PRC GAAP, sales tax is separately disclosed rather than deducted from revenue
under IFRSs.
| | ---- | -----------------------------------------------------------------------------------------------------------------



| | (iii) | 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 is recognized in income statement unless the exchange difference represents an adjustment to interest.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | 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 reserve”, are credited to capital reserve. Otherwise,
government grants related to assets are recognized as deferred income and amortised 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.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-40







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 7 | Other operating revenue
| | - | -----------------------



|                                     |  | 2014        |       |  | 2013        |  |       | 2012        | 
|------------------------------------ |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                                     |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                                     |  |             |       |  |             |  |       |             | 
|Commission income                    |  |             | 1,335 |  |             |  | 1,040 |             | 
|Expired sales in advance of carriage |  |             | 459   |  |             |  | 684   |             | 
|Hotel and tour operation income      |  |             | 508   |  |             |  | 565   |             | 
|General aviation income              |  |             | 576   |  |             |  | 484   |             | 
|Ground services income               |  |             | 293   |  |             |  | 349   |             | 
|Air catering income                  |  |             | 272   |  |             |  | 226   |             | 
|Cargo handling income                |  |             | 236   |  |             |  | 176   |             | 
|Rental income                        |  |             | 156   |  |             |  | 137   |             | 
|Others                               |  |             | 421   |  |             |  | 202   |             | 
|                                     |  |             | 4,256 |  |             |  | 3,863 |             | 



| | 8 | Flight operation expenses
| | - | -------------------------



|                                     |  | 2014        |        |  | 2013        |  |        | 2012        | 
|------------------------------------ |  | ----------- | ------ |  | ----------- |  | ------ | ----------- | 
|                                     |  | RMB million |        |  | RMB million |  |        | RMB million | 
|                                     |  |             |        |  |             |  |        |             | 
|Jet fuel costs                       |  |             | 37,728 |  |             |  | 35,538 |             | 
|Flight personnel payroll and welfare |  |             | 6,803  |  |             |  | 5,799  |             | 
|Aircraft operating lease charges     |  |             | 5,383  |  |             |  | 4,767  |             | 
|Air catering expenses                |  |             | 2,497  |  |             |  | 2,295  |             | 
|Civil Aviation Development Fund      |  |             | 2,279  |  |             |  | 2,036  |             | 
|Training expenses                    |  |             | 1,003  |  |             |  | 784    |             | 
|Aircraft insurance                   |  |             | 202    |  |             |  | 194    |             | 
|Others                               |  |             | 3,006  |  |             |  | 2,597  |             | 
|                                     |  |             | 58,901 |  |             |  | 54,010 |             | 



| | 9 | Maintenance expenses
| | - | --------------------



|                                        |  | 2014        |       |  | 2013        |  |       | 2012        | 
|--------------------------------------- |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                                        |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                                        |  |             |       |  |             |  |       |             | 
|Aviation repair and maintenance charges |  |             | 5,525 |  |             |  | 5,334 |             | 
|Staff payroll and welfare               |  |             | 1,966 |  |             |  | 1,712 |             | 
|Maintenance materials                   |  |             | 813   |  |             |  | 759   |             | 
|                                        |  |             | 8,304 |  |             |  | 7,805 |             | 



| | 10 | Aircraft and transportation service expenses
| | -- | --------------------------------------------



|                                 |  | 2014        |        |  | 2013        |  |        | 2012        | 
|-------------------------------- |  | ----------- | ------ |  | ----------- |  | ------ | ----------- | 
|                                 |  | RMB million |        |  | RMB million |  |        | RMB million | 
|                                 |  |             |        |  |             |  |        |             | 
|Landing and navigation fees      |  |             | 10,496 |  |             |  | 9,510  |             | 
|Ground service and other charges |  |             | 5,906  |  |             |  | 5,581  |             | 
|                                 |  |             | 16,402 |  |             |  | 15,091 |             | 



F-41







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 11 | Promotion and selling expenses
| | -- | ------------------------------



|                              |  | 2014        |       |  | 2013        |  |       | 2012        | 
|----------------------------- |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                              |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                              |  |             |       |  |             |  |       |             | 
|Sales commissions             |  |             | 4,263 |  |             |  | 4,356 |             | 
|Ticket office expenses        |  |             | 2,465 |  |             |  | 2,303 |             | 
|Computer reservation services |  |             | 542   |  |             |  | 526   |             | 
|Advertising and promotion     |  |             | 116   |  |             |  | 118   |             | 
|Others                        |  |             | 455   |  |             |  | 451   |             | 
|                              |  |             | 7,841 |  |             |  | 7,754 |             | 



| | 12 | General and administrative expenses
| | -- | -----------------------------------



|                           |  | 2014        |       |  | 2013        |  |       | 2012        | 
|-------------------------- |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                           |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                           |  |             |       |  |             |  |       |             | 
|General corporate expenses |  |             | 2,195 |  |             |  | 2,334 |             | 
|Auditors’ remuneration     |  |             | 18    |  |             |  | 16    |             | 
|Other taxes and levies     |  |             | 124   |  |             |  | 120   |             | 
|                           |  |             | 2,337 |  |             |  | 2,470 |             | 



| | 13 | Depreciation and amortisation
| | -- | -----------------------------



|                                            |  | 2014        |        |   | 2013        |  |       | 2012        | 
|------------------------------------------- |  | ----------- | ------ | - | ----------- |  | ----- | ----------- | 
|                                            |  | RMB million |        |   | RMB million |  |       | RMB million | 
|                                            |  |             |        |   |             |  |       |             | 
|Depreciation                                |  |             |        |   |             |  |       |             | 
|– Owned assets                              |  |             | 8,021  |   |             |  | 6,861 |             | 
|– Assets acquired under finance leases      |  |             | 2,768  |   |             |  | 2,477 |             | 
|Amortisation of deferred benefits and gains |  |             | (156   | ) |             |  | (146  | )           | 
|Other amortisation                          |  |             | 195    |   |             |  | 155   |             | 
|                                            |  |             | 10,828 |   |             |  | 9,347 |             | 



| | 14 | Staff costs
| | -- | -----------



|                                    |  | 2014        |        |  | 2013        |  |        | 2012        | 
|----------------------------------- |  | ----------- | ------ |  | ----------- |  | ------ | ----------- | 
|                                    |  | RMB million |        |  | RMB million |  |        | RMB million | 
|                                    |  |             |        |  |             |  |        |             | 
|Salaries, wages and welfare         |  |             | 14,667 |  |             |  | 12,938 |             | 
|Contribution to retirement schemes  |  |             | 1,554  |  |             |  | 1,324  |             | 
|Other retirement welfare payments   |  |             | 167    |  |             |  | 175    |             | 
|Early retirement benefits (Note 42) |  |             | 7      |  |             |  | 12     |             | 
|                                    |  |             | 16,395 |  |             |  | 14,449 |             | 



Staff costs relating to flight operations
and maintenance are also included in the respective total amounts disclosed separately in Note 8 to Note 9 above.



Details of staff costs arising from
cash-settled share appreciation rights are disclosed in Note 49(c). Such costs have been included in “salaries, wages and
welfare” above.



F-42







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 15 | Other net income
| | -- | ----------------



|                                        |  | 2014        |       |   | 2013        |  |       | 2012        | 
|--------------------------------------- |  | ----------- | ----- | - | ----------- |  | ----- | ----------- | 
|                                        |  | RMB million |       |   | RMB million |  |       | RMB million | 
|                                        |  |             |       |   |             |  |       |             | 
|Government grants (Note)                |  |             | 1,700 |   |             |  | 1,155 |             | 
|Gain/ (losses) on disposal of property, |  |             |       |   |             |  |       |             | 
|plant and equipment, net                |  |             |       |   |             |  |       |             | 
|– Aircraft and spare engines            |  |             | 344   |   |             |  | (8    | )           | 
|– Other property, plant and equipment   |  |             | (77   | ) |             |  | (70   | )           | 
|Others                                  |  |             | 223   |   |             |  | 166   |             | 
|                                        |  |             | 2,190 |   |             |  | 1,243 |             | 



Note:



Government grants mainly represent
(i) subsidies based on certain amount of tax paid granted by governments to the Group; (ii) subsidies granted by various local
governments to encourage the Group to operate certain routes to cities where these governments are located. The government grants
are recognized when fulfilling the requirements and when cash is received.



There are no unfulfilled conditions
and other contingencies related to subsidies that have been recognized during the year ended December 31, 2014.



| | 16 | Interest expense
| | -- | ----------------



|                                                                      |  | 2014        |       |   | 2013        |  |       | 2012        | 
|--------------------------------------------------------------------- |  | ----------- | ----- | - | ----------- |  | ----- | ----------- | 
|                                                                      |  | RMB million |       |   | RMB million |  |       | RMB million | 
|                                                                      |  |             |       |   |             |  |       |             | 
|Interest on borrowings                                                |  |             | 1,628 |   |             |  | 1,275 |             | 
|Interest relating to obligations under finance leases                 |  |             | 978   |   |             |  | 692   |             | 
|Interest relating to provision for early retirement benefits(Note 42) |  |             | 4     |   |             |  | 5     |             | 
|Less: interest expense capitalized (Note)                             |  |             | (417  | ) |             |  | (321  | )           | 
|                                                                      |  |             | 2,193 |   |             |  | 1,651 |             | 



Note:



The interest rates used for interest capitalization
ranged from 2.12% to 2.73% per annum in 2014 (2013: 2.06% to 2.81% per annum; 2012: 2.25% to 3.23% per annum).



| | 17 | Other non-operating income
| | -- | --------------------------



|                                                         |  | 2014        |    |  | 2013        |  |    | 2012        | 
|-------------------------------------------------------- |  | ----------- | -- |  | ----------- |  | -- | ----------- | 
|                                                         |  | RMB million |    |  | RMB million |  |    | RMB million | 
|                                                         |  |             |    |  |             |  |    |             | 
|Interest income on wealth management products            |  |             | -  |  |             |  | 25 |             | 
|Gain on disposal of a subsidiary                         |  |             | -  |  |             |  | -  |             | 
|Gain recognized on acquisition of a subsidiary (Note 47) |  |             | 26 |  |             |  | -  |             | 
|                                                         |  |             | 26 |  |             |  | 25 |             | 



F-43







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 18 | Remuneration of directors, supervisors and senior management
| | -- | ------------------------------------------------------------



| | (a) | Directors’ and supervisors’ remuneration
| | --- | ----------------------------------------



Details of directors’ and supervisors’ remuneration
for the year ended December 31, 2014 are set out below:



|Name                                |  | Directors’ fees |     |  | Salaries, wages and welfare |  |       | Retirement scheme contributions |  |  | Total        | 
|----------------------------------- |  | --------------- | --- |  | --------------------------- |  | ----- | ------------------------------- |  |  | ------------ | 
|                                    |  | RMB thousand    |     |  | RMB thousand                |  |       | RMB thousand                    |  |  | RMB thousand | 
|                                    |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Non-executive directors             |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Si Xian Min (Note (i))              |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Wang Quan Hua (Note (i))            |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Yuan Xin An (Note (i))              |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Yang Li Hua (Note (i) & (ii))       |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|                                    |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Executive directors                 |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Tan Wan Geng (Note (i))             |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Zhang Zi Fang (Note (i))            |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Li Shao Bin (Note (ii))             |  |                 | -   |  |                             |  | 636   |                                 |  |  | 130          | 
|                                    |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Supervisors                         |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Li Jia Shi                          |  |                 | -   |  |                             |  | 636   |                                 |  |  | 132          | 
|Zhang Wei (Note (i))                |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Yang Yi Hua                         |  |                 | -   |  |                             |  | 294   |                                 |  |  | 140          | 
|Wu De Ming  (Note (iv))             |  |                 | -   |  |                             |  | 367   |                                 |  |  | 140          | 
|                                    |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Independent non-executive directors |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Wei Jin Cai                         |  |                 | 150 |  |                             |  | -     |                                 |  |  | -            | 
|Ning Xiang Dong                     |  |                 | 150 |  |                             |  | -     |                                 |  |  | -            | 
|Liu Chang Le                        |  |                 | 150 |  |                             |  | -     |                                 |  |  | -            | 
|Tan Jin Song(Note(iv))              |  |                 | 150 |  |                             |  | -     |                                 |  |  | -            | 
|                                    |  |                 | 600 |  |                             |  | 1,933 |                                 |  |  | 542          | 



F-44







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 18 | Remuneration of directors, supervisors and senior management (continued)
| | -- | ------------------------------------------------------------------------



| | (a) | Directors’ and supervisors’ remuneration (continued)
| | --- | ----------------------------------------------------



Details of directors’ and supervisors’ remuneration
for the year ended December 31, 2013 are set out below:



|Name                                |  | Directors’ fees |     |  | Salaries, wages and welfare |  |       | Retirement scheme contributions |  |  | Total        | 
|----------------------------------- |  | --------------- | --- |  | --------------------------- |  | ----- | ------------------------------- |  |  | ------------ | 
|                                    |  | RMB thousand    |     |  | RMB thousand                |  |       | RMB thousand                    |  |  | RMB thousand | 
|                                    |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Non-executive directors             |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Si Xian Min (Note (i))              |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Wang Quan Hua (Note (i))            |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Yuan Xin An (Note (i))              |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Yang Li Hua (Note (i) & (ii))       |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|                                    |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Executive directors                 |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Tan Wan Geng (Note (i))             |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Zhang Zi Fang (Note (i))            |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Li Shao Bin (Note (ii))             |  |                 | -   |  |                             |  | 639   |                                 |  |  | 120          | 
|                                    |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Supervisors                         |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Pan Fu (Note (i))                   |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Li Jia Shi                          |  |                 | -   |  |                             |  | 636   |                                 |  |  | 120          | 
|Zhang Wei (Note (i))                |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Yang Yi Hua                         |  |                 | -   |  |                             |  | 291   |                                 |  |  | 122          | 
|Liang Zhong Gao (Note (iii))        |  |                 | -   |  |                             |  | 300   |                                 |  |  | 122          | 
|Wu De Ming (Note (iv))              |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|                                    |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Independent non-executive directors |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Gong Hua Zhang(Note (iii))          |  |                 | 150 |  |                             |  | -     |                                 |  |  | -            | 
|Wei Jin Cai                         |  |                 | 150 |  |                             |  | -     |                                 |  |  | -            | 
|Ning Xiang Dong                     |  |                 | 150 |  |                             |  | -     |                                 |  |  | -            | 
|Liu Chang Le                        |  |                 | 150 |  |                             |  | -     |                                 |  |  | -            | 
|Tan Jin Song(Note(iv))              |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|                                    |  |                 | 600 |  |                             |  | 1,866 |                                 |  |  | 484          | 



F-45







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 18 | Remuneration of directors, supervisors and senior management (continued)
| | -- | ------------------------------------------------------------------------



| | (a) | Directors’ and supervisors’ remuneration (continued)
| | --- | ----------------------------------------------------



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



|Name                                |  | Directors’ fees |     |  | Salaries, wages and welfare |  |       | Retirement scheme contributions |  |  | Total        | 
|----------------------------------- |  | --------------- | --- |  | --------------------------- |  | ----- | ------------------------------- |  |  | ------------ | 
|                                    |  | RMB thousand    |     |  | RMB thousand                |  |       | RMB thousand                    |  |  | RMB thousand | 
|                                    |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Non-executive directors             |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Si Xian Min (Note (i))              |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Wang Quan Hua (Note (i))            |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Yuan Xin An (Note (i))              |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|                                    |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Executive directors                 |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Tan Wan Geng (Note (i))             |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Zhang Zi Fang                       |  |                 | -   |  |                             |  | 743   |                                 |  |  | 70           | 
|Chen Zhen You (Note (v))            |  |                 | -   |  |                             |  | 576   |                                 |  |  | 44           | 
|                                    |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Supervisors                         |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Pan Fu (Note (i))                   |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Li Jia Shi                          |  |                 | -   |  |                             |  | 710   |                                 |  |  | 69           | 
|Zhang Wei (Note (i))                |  |                 | -   |  |                             |  | -     |                                 |  |  | -            | 
|Yang Yi Hua                         |  |                 | -   |  |                             |  | 346   |                                 |  |  | 68           | 
|Liang Zhong Gao (Note (iii))        |  |                 | -   |  |                             |  | 352   |                                 |  |  | 69           | 
|                                    |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Independent non-executive directors |  |                 |     |  |                             |  |       |                                 |  |  |              | 
|Gong Hua Zhang(Note (iii))          |  |                 | 150 |  |                             |  | -     |                                 |  |  | -            | 
|Wei Jin Cai                         |  |                 | 150 |  |                             |  | -     |                                 |  |  | -            | 
|Ning Xiang Dong                     |  |                 | 150 |  |                             |  | -     |                                 |  |  | -            | 
|Liu Chang Le                        |  |                 | 150 |  |                             |  | -     |                                 |  |  | -            | 
|                                    |  |                 | 600 |  |                             |  | 2,727 |                                 |  |  | 320          | 



Save as disclosed above, the Company’s
executive director, Mr. Xu Jie Bo resigned on January 5, 2015. For the year ended December 31, 2014, Mr. Xu Jie Bo’s total
remuneration was RMB766 thousand, including salaries, wages and welfare of RMB636 thousand and retirement scheme of RMB130 thousand.
For the year ended December 31, 2013, Mr. Xu Jie Bo’s total remuneration was RMB757 thousand, including salaries, wages and
welfare of RMB636 thousand and retirement scheme of RMB121 thousand. For the year ended December 31, 2012, Mr. Xu Jie Bo’s
total remuneration was RMB780 thousand, including salaries, wages and welfare of RMB710 thousand and retirement scheme of RMB70
thousand.



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 49(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) | Appointed on January 24, 2013.
| | ---- | ------------------------------



| | (iii) | Resigned on December 26, 2013.
| | ----- | ------------------------------



| | (iv) | Appointed on December 26, 2013.
| | ---- | -------------------------------



| | (v) | Resigned on December 6, 2012.
| | --- | -----------------------------



F-46







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 19 | Income tax
| | -- | ----------



| | (a) | Income tax expense in the consolidated income statement
| | --- | -------------------------------------------------------



|                                                  |  | 2014        |     |   | 2013        |  |     | 2012        | 
|------------------------------------------------- |  | ----------- | --- | - | ----------- |  | --- | ----------- | 
|                                                  |  | RMB million |     |   | RMB million |  |     | RMB million | 
|                                                  |  |             |     |   |             |  |     |             | 
|PRC income tax                                    |  |             |     |   |             |  |     |             | 
|– Provision for the year                          |  |             | 430 |   |             |  | 705 |             | 
|– Over-provision in prior year                    |  |             | (29 | ) |             |  | (31 | )           | 
|                                                  |  |             | 401 |   |             |  | 674 |             | 
|Deferred tax (Note 28)                            |  |             |     |   |             |  |     |             | 
|Origination and reversal of temporary differences |  |             | 267 |   |             |  | 60  |             | 
|                                                  |  |             |     |   |             |  |     |             | 
|Tax expense                                       |  |             | 668 |   |             |  | 734 |             | 



In respect of majority of the Group’s
airline operation outside mainland China, 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 those overseas jurisdictions.
Accordingly, no provision for overseas tax has been made for overseas airlines operation in the current and prior years.



Under the Corporate Income Tax Law
of the PRC, the Company and majority of its subsidiaries are subject to PRC income tax at 25% (2013: 25%). Certain subsidiaries
of the Company are subject to preferential income tax rate at 15% according to the preferential tax policy in locations, where
those subsidiaries are located.



| | (b) | Reconciliation between actual tax expense and calculated tax based on accounting profit at applicable tax rates
| | --- | ---------------------------------------------------------------------------------------------------------------



|                                                                                                                                      |  | 2014        |       |   | 2013        |  |       | 2012        | 
|------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----- | - | ----------- |  | ----- | ----------- | 
|                                                                                                                                      |  | RMB million |       |   | RMB million |  |       | RMB million | 
|                                                                                                                                      |  |             |       |   |             |  |       |             | 
|Profit before taxation                                                                                                                |  |             | 3,066 |   |             |  | 3,484 |             | 
|                                                                                                                                      |  |             |       |   |             |  |       |             | 
|Notional tax on profit before taxation, calculated at the rates applicable to profits in the tax jurisdictions concerned (Note)       |  |             | 738   |   |             |  | 863   |             | 
|                                                                                                                                      |  |             |       |   |             |  |       |             | 
|Adjustments for tax effect of:                                                                                                        |  |             |       |   |             |  |       |             | 
|Non-deductible expenses                                                                                                               |  |             | 11    |   |             |  | 19    |             | 
|Non-taxable income                                                                                                                    |  |             | -     |   |             |  | -     |             | 
|Share of results of associates and joint ventures                                                                                     |  |             | (104  | ) |             |  | (108  | )           | 
|Unused tax losses and deductible temporary differences for which no deferred tax assets were recognized                               |  |             | 63    |   |             |  | 32    |             | 
|Utilisation of unused tax losses and deductible temporary differences for which no deferred tax assets were recognized in prior years |  |             | (11   | ) |             |  | (41   | )           | 
|Over-provision in prior year                                                                                                          |  |             | (29   | ) |             |  | (31   | )           | 
|Tax rates differential                                                                                                                |  |             | -     |   |             |  | -     |             | 
|Tax expense                                                                                                                           |  |             | 668   |   |             |  | 734   |             | 



F-47







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 19 | Income tax (continued)
| | -- | ----------------------



| | (b) | Reconciliation between actual tax expense and calculated tax based on accounting profit at applicable tax rates (continued)
| | --- | ---------------------------------------------------------------------------------------------------------------------------



Note:



The headquarters of the Company and
its branches are taxed at rate at 25% (2013 and 2012: 25%). The subsidiaries of the Group are taxed at rates ranging from 15% to
25% (2013 and 2012: 15% to 25%).



| | 20 | Earnings per share
| | -- | ------------------



The calculation of basic earnings
per share for the year ended December 31, 2014 is based on the profit attributable to equity shareholders of the Company of RMB1,777
million (2013: RMB1,986 million; 2012: RMB2,619 million) and the weighted average of 9,817,567,000 shares in issue during the year
(2013 and 2012: 9,817,567,000 shares).



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 the year ended
December 31, 2014 and 2013.



F-48







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 21 | Property, plant and equipment, net
| | -- | ----------------------------------



|                                                                |  |                       |     |   |             |  |       | Aircraft    |  |  |                                   |   |  |                                               |        |   |                                        | 
|--------------------------------------------------------------- |  | --------------------- | --- | - | ----------- |  | ----- | ----------- |  |  | --------------------------------- | - |  | --------------------------------------------- | ------ | - | -------------------------------------- | 
|                                                                |  | Investment properties |     |   | Buildings   |  |       | Owned       |  |  | Acquired under finance
    leases |   |  | Other flight equipment
    including rotables |        |   | Machinery,
 equipment and
    vehicles | 
|                                                                |  | RMB million           |     |   | RMB million |  |       | RMB million |  |  | RMB million                       |   |  | RMB million                                   |        |   | RMB million                            | 
|Cost:                                                           |  |                       |     |   |             |  |       |             |  |  |                                   |   |  |                                               |        |   |                                        | 
|At January 1, 2013                                              |  |                       | 667 |   |             |  | 8,599 |             |  |  | 83,011                            |   |  |                                               | 38,667 |   |                                        | 
|Additions                                                       |  |                       | 17  |   |             |  | 41    |             |  |  | 2,772                             |   |  |                                               | 10,935 |   |                                        | 
|Transfer from construction
    in progress (Note 22)            |  |                       | -   |   |             |  | 68    |             |  |  | 4,707                             |   |  |                                               | 9,363  |   |                                        | 
|Transfer to buildings
    upon cease of lease intention         |  |                       | (72 | ) |             |  | 72    |             |  |  | -                                 |   |  |                                               | -      |   |                                        | 
|Transfer to investment
    properties upon lease out            |  |                       | 69  |   |             |  | (69   | )           |  |  | -                                 |   |  |                                               | -      |   |                                        | 
|Reclassification on exercise
    of purchase options            |  |                       | -   |   |             |  | -     |             |  |  | 327                               |   |  |                                               | (327   | ) |                                        | 
|Disposals                                                       |  |                       | -   |   |             |  | (39   | )           |  |  | (1,953                            | ) |  |                                               | (320   | ) |                                        | 
|At December 31, 2013                                            |  |                       | 681 |   |             |  | 8,672 |             |  |  | 88,864                            |   |  |                                               | 58,318 |   |                                        | 
|                                                                |  |                       |     |   |             |  |       |             |  |  |                                   |   |  |                                               |        |   |                                        | 
|At January 1, 2014                                              |  |                       | 681 |   |             |  | 8,672 |             |  |  | 88,864                            |   |  |                                               | 58,318 |   |                                        | 
|Additions                                                       |  |                       | -   |   |             |  | 151   |             |  |  | 726                               |   |  |                                               | 8,521  |   |                                        | 
|Transfer from construction
    in progress (Note 22)            |  |                       | 1   |   |             |  | 444   |             |  |  | 382                               |   |  |                                               | 11,546 |   |                                        | 
|Transfer to buildings
    upon cease of lease intention         |  |                       | (99 | ) |             |  | 99    |             |  |  | -                                 |   |  |                                               | -      |   |                                        | 
|Transfer to lease prepayments
    upon cease of lease intention |  |                       | (21 | ) |             |  | -     |             |  |  | -                                 |   |  |                                               | -      |   |                                        | 
|Transfer to investment
    properties upon lease out            |  |                       | 84  |   |             |  | (84   | )           |  |  | -                                 |   |  |                                               | -      |   |                                        | 
|Acquisition of a subsidiary
    (Note 47)                       |  |                       | -   |   |             |  | -     |             |  |  | 539                               |   |  |                                               | 1,931  |   |                                        | 
|Disposals                                                       |  |                       | -   |   |             |  | (77   | )           |  |  | (5,390                            | ) |  |                                               | (443   | ) |                                        | 
|At December 31, 2014                                            |  |                       | 646 |   |             |  | 9,205 |             |  |  | 85,121                            |   |  |                                               | 79,873 |   |                                        | 



F-49







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 21 | Property, plant and equipment, net (continued)
| | -- | ----------------------------------------------



|                                                                |  |                       |     |   |             |  |       | Aircraft    |  |  |                               |   |  |                                               |        |   |                                       | 
|--------------------------------------------------------------- |  | --------------------- | --- | - | ----------- |  | ----- | ----------- |  |  | ----------------------------- | - |  | --------------------------------------------- | ------ | - | ------------------------------------- | 
|                                                                |  | Investment properties |     |   | Buildings   |  |       | Owned       |  |  | Acquired under finance leases |   |  | Other flight equipment including
    rotables |        |   | Machinery, equipment and
    vehicles | 
|                                                                |  | RMB million           |     |   | RMB million |  |       | RMB million |  |  | RMB million                   |   |  | RMB million                                   |        |   | RMB million                           | 
|Accumulated
    depreciation and impairment losses:             |  |                       |     |   |             |  |       |             |  |  |                               |   |  |                                               |        |   |                                       | 
|At January 1, 2013                                              |  |                       | 186 |   |             |  | 2,440 |             |  |  | 29,109                        |   |  |                                               | 8,098  |   |                                       | 
|Depreciation charge for
    the year                            |  |                       | 22  |   |             |  | 339   |             |  |  | 5,023                         |   |  |                                               | 2,477  |   |                                       | 
|Transfer to buildings
    upon cease of lease intention         |  |                       | (39 | ) |             |  | 39    |             |  |  | -                             |   |  |                                               | -      |   |                                       | 
|Transfer to investment
    properties upon lease out            |  |                       | 4   |   |             |  | (4    | )           |  |  | -                             |   |  |                                               | -      |   |                                       | 
|Reclassification on exercise
    of purchase options            |  |                       | -   |   |             |  | -     |             |  |  | 15                            |   |  |                                               | (15    | ) |                                       | 
|Disposals                                                       |  |                       | -   |   |             |  | (20   | )           |  |  | (1,665                        | ) |  |                                               | (320   | ) |                                       | 
|Provision for impairment
    loss                               |  |                       | -   |   |             |  | -     |             |  |  | 500                           |   |  |                                               | -      |   |                                       | 
|Impairment
    losses written off on disposal                   |  |                       | -   |   |             |  | -     |             |  |  | (170                          | ) |  |                                               | -      |   |                                       | 
|At December 31, 2013                                            |  |                       | 173 |   |             |  | 2,794 |             |  |  | 32,812                        |   |  |                                               | 10,240 |   |                                       | 
|                                                                |  |                       |     |   |             |  |       |             |  |  |                               |   |  |                                               |        |   |                                       | 
|At January 1, 2014                                              |  |                       | 173 |   |             |  | 2,794 |             |  |  | 32,812                        |   |  |                                               | 10,240 |   |                                       | 
|Depreciation charge for
    the year                            |  |                       | 21  |   |             |  | 292   |             |  |  | 6,095                         |   |  |                                               | 2,768  |   |                                       | 
|Transfer to buildings
    upon cease of lease intention         |  |                       | (22 | ) |             |  | 22    |             |  |  | -                             |   |  |                                               | -      |   |                                       | 
|Transfer to lease prepayments
    upon cease of lease intention |  |                       | (4  | ) |             |  | -     |             |  |  | -                             |   |  |                                               | -      |   |                                       | 
|Transfer to investment
    properties upon lease out            |  |                       | 19  |   |             |  | (19   | )           |  |  | -                             |   |  |                                               | -      |   |                                       | 
|Disposals                                                       |  |                       | -   |   |             |  | (61   | )           |  |  | (3,966                        | ) |  |                                               | (429   | ) |                                       | 
|Provision for impairment
    loss (Note 21(d))                  |  |                       | -   |   |             |  | -     |             |  |  | 176                           |   |  |                                               | -      |   |                                       | 
|Impairment
    losses written off on disposal (Note 21(c))      |  |                       | -   |   |             |  | -     |             |  |  | (317                          | ) |  |                                               | -      |   |                                       | 
|At December 31, 2014                                            |  |                       | 187 |   |             |  | 3,028 |             |  |  | 34,800                        |   |  |                                               | 12,579 |   |                                       | 
|                                                                |  |                       |     |   |             |  |       |             |  |  |                               |   |  |                                               |        |   |                                       | 
|Net book value                                                  |  |                       |     |   |             |  |       |             |  |  |                               |   |  |                                               |        |   |                                       | 
|At December 31, 2014                                            |  |                       | 459 |   |             |  | 6,177 |             |  |  | 50,321                        |   |  |                                               | 67,294 |   |                                       | 
|At December 31, 2013                                            |  |                       | 508 |   |             |  | 5,878 |             |  |  | 56,052                        |   |  |                                               | 48,078 |   |                                       | 



F-50







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 21 | Property, plant and equipment, net (continued)
| | -- | ----------------------------------------------



| | (a) | As at December 31, 2014, the accumulated impairment provision of aircraft and flight equipment
of the Group is RMB1,623 million and RMB108 million respectively (2013: RMB1,764 million and RMB120 million respectively).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | As at December 31, 2014, certain aircraft and other flight equipment of the Group with an aggregate
carrying value of approximately RMB99,119 million (2013: RMB80,233 million) were mortgaged under certain loans or certain lease
agreements (Notes 34 and 35).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | During the year ended December 31, 2014, 7 Boeing 737-300 aircraft and 6 EMB145 aircraft against
which impairment provision had been provided in previous years were disposed of and the impairment provision of RMB317 million
for these aircraft was written of on disposal.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | As at December 31, 2014, the Group reviewed the recoverable amounts of the aircrafts and related
assets and made additional RMB176 million impairment provision for two Boeing B747-400F aircraft against which impairment provision
had been provided in previous years. The Group also made impairment provision of RMB39 million on certain flight equipment considering
that these equipment’s corresponding aircraft has ceased operation. 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 and flight equipment.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | As at December 31, 2014 and up to the date of approval of these financial statements, the Group
is in the process of applying for the property title certificates in respect of the properties located in Guangzhou (including
Guangzhou Baiyun International Airport), Xiamen, Heilongjiang, Jilin, Dalian, Guangxi, Hunan, Beijing, Shanghai, Zhuhai, Shenzhen,
Shenyang, Xinjiang, Henan, Chengdu, Guizhou, Hainan, Hubei and Shantou, in which the Group has interests and for which such certificates
have not been granted. As at December 31, 2014, carrying value of such properties of the Group amounted to RMB3,572 million (2013:
RMB3,557 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 property title certificates.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-51







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 21 | Property, plant and equipment, net (continued)
| | -- | ----------------------------------------------



| | (f) | 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
totalling RMB94 million (2013: RMB85 million) was received by the Group during the year in respect of the leases. Directors estimated
the fair value of these investment properties approximate the carrying amount.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The properties are reclassified between
investment properties and property, plant and equipment, upon the intention of commencement or cease of lease.



The Group’s total future minimum
lease income under non-cancellable operating leases are as follows:



|                                |  | 2014        |     |  | 2013        | 
|------------------------------- |  | ----------- | --- |  | ----------- | 
|                                |  | RMB million |     |  | RMB million | 
|                                |  |             |     |  |             | 
|Within 1 year                   |  |             | 54  |  |             | 
|After 1 year but within 5 years |  |             | 72  |  |             | 
|After 5 years                   |  |             | 11  |  |             | 
|                                |  |             | 137 |  |             | 



| | 22 | Construction in progress
| | -- | ------------------------



|                                                                              |  | Advance payment for aircraft and flight equipment |         |   | Others      |  |       | Total       | 
|----------------------------------------------------------------------------- |  | ------------------------------------------------- | ------- | - | ----------- |  | ----- | ----------- | 
|                                                                              |  | RMB million                                       |         |   | RMB million |  |       | RMB million | 
|                                                                              |  |                                                   |         |   |             |  |       |             | 
|At January 1, 2013                                                            |  |                                                   | 18,115  |   |             |  | 574   |             | 
|Additions                                                                     |  |                                                   | 12,721  |   |             |  | 795   |             | 
|Transferred to property, plant and  equipment (Note 21)                       |  |                                                   | (14,423 | ) |             |  | (79   | )           | 
|Transfer to lease prepayments and other assets upon completion of development |  |                                                   | -       |   |             |  | (244  | )           | 
|At  December 31, 2013                                                         |  |                                                   | 16,413  |   |             |  | 1,046 |             | 
|                                                                              |  |                                                   |         |   |             |  |       |             | 
|At January 1, 2014                                                            |  |                                                   | 16,413  |   |             |  | 1,046 |             | 
|Additions                                                                     |  |                                                   | 13,742  |   |             |  | 1,342 |             | 
|Acquisition of a subsidiary (Note 47)                                         |  |                                                   | 484     |   |             |  | 2     |             | 
|Transferred to property, plant and  equipment (Note 21)                       |  |                                                   | (12,885 | ) |             |  | (578  | )           | 
|Transfer to lease prepayments and other assets upon completion of development |  |                                                   | -       |   |             |  | (219  | )           | 
|At December 31, 2014                                                          |  |                                                   | 17,754  |   |             |  | 1,593 |             | 



F-52







Notes to the consolidated financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 23 | Lease prepayments
| | -- | -----------------



In 2014, the
amount of amortisation charged to consolidated income statement was RMB61 million (2013: RMB58 million; 2012: RMB47 million).



A majority
of the Group’s properties 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.



As at December
31, 2014 and up to the date of approval of these financial statements, the Group is in the process of applying for certain land
use right certificates. As at December 31, 2014, carrying value of such land use rights of the Group amounted to RMB1,038 million
(2013: RMB1,056 million). The Directors of the Company are of the opinion that the use of and the conduct of operating activities
at the land use rights referred to above are not affected by the fact that the Group has not yet obtained the relevant land use
right certificates.



| | 24 | Interest in associates
| | -- | ----------------------



|                    |  | 2014        |       |  | 2013        | 
|------------------- |  | ----------- | ----- |  | ----------- | 
|                    |  | RMB million |       |  | RMB million | 
|                    |  |             |       |  |             | 
|Share of net assets |  |             | 1,583 |  |             | 



All the Group’s associates are
unlisted without quoted market price. The particulars of the Group’s principal associates as of December 31, 2014 are as
follows:



|                                                      |  |                                    |  |                            |       |   | Proportion of ownership interest held by |  |       |              |  |  |                                              
|----------------------------------------------------- |  | ---------------------------------- |  | -------------------------- | ----- | - | ---------------------------------------- |  | ----- | ------------ |  |  | ---------------------------------------------
|                                                      |  | Place of establishment / operation |  | Group’s effective interest |       |   | The Company                              |  |       | Subsidiaries |  |  | Proportion of voting rights held by the Group
|                                                      |  |                                    |  |                            |       |   |                                          |  |       |              |  |  |                                              
|China Southern Group  Finance Co.,Ltd  (“SA Finance”) |  | PRC                                |  |                            | 33.98 | % |                                          |  | 21.09 | %            |  |  | 12.89                                        
|Sichuan Airlines Co.,Ltd  (“Sichuan Airlines”)        |  | PRC                                |  |                            | 39    | % |                                          |  | 39    | %            |  |  | -                                            
|Southern Airlines Culture and Meida Co., Ltd (“SACM”) |  | PRC                                |  |                            | 40    | % |                                          |  | 40    | %            |  |  | -                                            



There is no associate that is individually material
to the Group.



The Group has interests in a number of individually immaterial associates that are accounted for using the equity method. The aggregate financial information of these associates is summarized as following:



|                                                                |  | 2014        |       |  | 2013        |  |       | 2012        | 
|--------------------------------------------------------------- |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                                                                |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                                                                |  |             |       |  |             |  |       |             | 
|Aggregate carrying amount of individually immaterial associates |  |             | 1,583 |  |             |  | 1,305 |             | 
|Aggregate amounts of the Group’s share of:                      |  |             |       |  |             |  |       |             | 
|Profit from continuing activities                               |  |             | 261   |  |             |  | 294   |             | 
|Other comprehensive income/(loss)                               |  |             | 21    |  |             |  | (3    | )           | 
|Total comprehensive income                                      |  |             | 282   |  |             |  | 291   |             | 



F-53







Notes to the consolidated financial
statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 25 | Interest in joint ventures
| | -- | --------------------------



|                    |  | 2014        |       |  | 2013        | 
|------------------- |  | ----------- | ----- |  | ----------- | 
|                    |  | RMB million |       |  | RMB million | 
|                    |  |             |       |  |             | 
|Share of net assets |  |             | 1,338 |  |             | 



All the Group’s joint ventures are unlisted without
quoted market price. The particulars of the Group’s principal joint ventures as of December 31, 2014 are as follows:



|                                                                         |  |                                   |  |                            |       |   | Proportion of ownership interest held by |  |       |              |  |  |                                              
|------------------------------------------------------------------------ |  | --------------------------------- |  | -------------------------- | ----- | - | ---------------------------------------- |  | ----- | ------------ |  |  | ---------------------------------------------
|                                                                         |  | Place of establishment/ operation |  | Group’s effective interest |       |   | The Company                              |  |       | Subsidiaries |  |  | Proportion of voting rights held by the Group
|                                                                         |  |                                   |  |                            |       |   |                                          |  |       |              |  |  |                                              
|Guangzhou Aircraft Maintenance Engineering Co.,Ltd (”GAMECO”)            |  | PRC                               |  |                            | 50    | % |                                          |  | 50    | %            |  |  | -                                            
|Zhuhai Xiang Yi Aviation Technology Company Limited (“Zhuhai Xiang Yi”)  |  | PRC                               |  |                            | 51    | % |                                          |  | 51    | %            |  |  | -                                            
|Guangzhou China Southern Zhongmian Dutyfree Store Co., Limited           |  | PRC                               |  |                            | 50    | % |                                          |  | 50    | %            |  |  | -                                            
|China Southern West Australian Flying College Pty Ltd (“Flying College”) |  | Australia                         |  |                            | 48.12 | % |                                          |  | 48.12 | %            |  |  | -                                            



There is no joint venture that is individually
material to the Group.



The Group has interest in a number of individually immaterial
joint ventures that are accounted for using the equity method. The aggregate financial information of these joint ventures is summarized
as following:



|                                                                   |  | 2014        |       |  | 2013        |  |       | 2012        | 
|------------------------------------------------------------------ |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                                                                   |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                                                                   |  |             |       |  |             |  |       |             | 
|Aggregate carrying amount of individually immaterial joint venture |  |             | 1,338 |  |             |  | 1,197 |             | 
|Aggregate amounts of the Group’s share of:                         |  |             |       |  |             |  |       |             | 
|Profit from continuing activities                                  |  |             | 140   |  |             |  | 96    |             | 
|Total comprehensive income                                         |  |             | 140   |  |             |  | 96    |             | 



F-54







Notes to the consolidated financial
statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 26 | Other investments in equity securities
| | -- | --------------------------------------



|                                    |  | 2014        |     |  | 2013        | 
|----------------------------------- |  | ----------- | --- |  | ----------- | 
|                                    |  | RMB million |     |  | RMB million | 
|                                    |  |             |     |  |             | 
|Unlisted equity securities, at cost |  |             | 136 |  |             | 



Dividend income from unlisted equity
securities of the Group amounted to RMB10 million during the year ended December 31, 2014 (2013: RMB11 million; 2012: RMB11 million).



| | 27 | Available-for-sale financial assets
| | -- | -----------------------------------



|                                         |  | 2014        |     |  | 2013        | 
|---------------------------------------- |  | ----------- | --- |  | ----------- | 
|                                         |  | RMB million |     |  | RMB million | 
|                                         |  |             |     |  |             | 
|Available-for-sale financial assets      |  |             |     |  |             | 
|- Listed in the PRC                      |  |             | 104 |  |             | 
|Quoted market value of listed securities |  |             | 104 |  |             | 



Dividend income from listed securities
of the Group amounted to RMB3 million during the year ended December 31, 2014 (2013: RMB3 million, 2012: RMB1 million).



| | 28 | Deferred tax assets/(liabilities)
| | -- | ---------------------------------



| | (a) | The analysis of deferred tax assets and deferred tax liabilities is as follows:
| | --- | -------------------------------------------------------------------------------



|                                                        |  | 2014        |      |   | 2013        | 
|------------------------------------------------------- |  | ----------- | ---- | - | ----------- | 
|                                                        |  | RMB million |      |   | RMB million | 
|                                                        |  |             |      |   |             | 
|Deferred tax assets                                     |  |             |      |   |             | 
|– Deferred tax asset to be utilized after 12 months     |  |             | 390  |   |             | 
|– Deferred tax asset to be utilized  within 12 months   |  |             | 576  |   |             | 
|                                                        |  |             | 966  |   |             | 
|                                                        |  |             |      |   |             | 
|Deferred tax liabilities                                |  |             |      |   |             | 
|– Deferred tax liability to be realized after 12 months |  |             | (873 | ) |             | 
|Net deferred tax assets                                 |  |             | 93   |   |             | 



F-55







Notes to the consolidated financial
statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 28 | Deferred tax assets/(liabilities) (continued)
| | -- | ---------------------------------------------



| | (b) | Movements of net deferred tax assets are as follows:
| | --- | ----------------------------------------------------



|                                                                                         |  | At the beginning of the year |        |   | (Charged)/ credited to income 
statement |  |      | Charged to other
 comprehensive income |  |  | At the end of
 the year |  
|---------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---------------------------------------- |  | ---- | -------------------------------------- |  |  | ----------------------- | -
|                                                                                         |  | RMB million                  |        |   | RMB million                              |  |      | RMB million                            |  |  | RMB million             |  
|For the year ended December 31, 2014                                                     |  |                              |        |   |                                          |  |      |                                        |  |  |                         |  
|Deferred tax assets:                                                                     |  |                              |        |   |                                          |  |      |                                        |  |  |                         |  
|Accrued expenses                                                                         |  |                              | 847    |   |                                          |  | (286 | )                                      |  |  | -                       |  
|Provision for major overhauls                                                            |  |                              | 173    |   |                                          |  | 123  |                                        |  |  | -                       |  
|Deferred revenue                                                                         |  |                              | 75     |   |                                          |  | 1    |                                        |  |  | -                       |  
|Provision for impairment losses                                                          |  |                              | 393    |   |                                          |  | (158 | )                                      |  |  | -                       |  
|Others                                                                                   |  |                              | 69     |   |                                          |  | 13   |                                        |  |  | -                       |  
|                                                                                         |  |                              | 1,557  |   |                                          |  | (307 | )                                      |  |  | -                       |  
|                                                                                         |  |                              |        |   |                                          |  |      |                                        |  |  |                         |  
|Deferred tax liabilities:                                                                |  |                              |        |   |                                          |  |      |                                        |  |  |                         |  
|Provision for major overhauls                                                            |  |                              | (363   | ) |                                          |  | -    |                                        |  |  | -                       |  
|Depreciation allowances under tax in excess of the related depreciation under accounting |  |                              | (707   | ) |                                          |  | 18   |                                        |  |  | -                       |  
|Change in fair value of available-for-sale equity securities                             |  |                              | (9     | ) |                                          |  | -    |                                        |  |  | (11                     | )
|Others                                                                                   |  |                              | (107   | ) |                                          |  | 22   |                                        |  |  | -                       |  
|                                                                                         |  |                              | (1,186 | ) |                                          |  | 40   |                                        |  |  | (11                     | )
|                                                                                         |  |                              |        |   |                                          |  |      |                                        |  |  |                         |  
|Net deferred tax assets                                                                  |  |                              | 371    |   |                                          |  | (267 | )                                      |  |  | (11                     | )



|                                                                                         |  | At the beginning of the year |        |   | (Charged)/ credited to income 
statement |  |      | Credited to other
 comprehensive income |  |  | At the end of
 the year | 
|---------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---------------------------------------- |  | ---- | --------------------------------------- |  |  | ----------------------- | 
|                                                                                         |  | RMB million                  |        |   | RMB million                              |  |      | RMB million                             |  |  | RMB million             | 
|For the year ended December 31, 2013                                                     |  |                              |        |   |                                          |  |      |                                         |  |  |                         | 
|Deferred tax assets:                                                                     |  |                              |        |   |                                          |  |      |                                         |  |  |                         | 
|Accrued expenses                                                                         |  |                              | 870    |   |                                          |  | (23  | )                                       |  |  | -                       | 
|Provision for major overhauls                                                            |  |                              | 145    |   |                                          |  | 28   |                                         |  |  | -                       | 
|Deferred revenue                                                                         |  |                              | 106    |   |                                          |  | (31  | )                                       |  |  | -                       | 
|Provision for impairment losses                                                          |  |                              | 345    |   |                                          |  | 48   |                                         |  |  | -                       | 
|Others                                                                                   |  |                              | 47     |   |                                          |  | 22   |                                         |  |  | -                       | 
|                                                                                         |  |                              | 1,513  |   |                                          |  | 44   |                                         |  |  | -                       | 
|                                                                                         |  |                              |        |   |                                          |  |      |                                         |  |  |                         | 
|Deferred tax liabilities:                                                                |  |                              |        |   |                                          |  |      |                                         |  |  |                         | 
|Provision for major overhauls                                                            |  |                              | (319   | ) |                                          |  | (44  | )                                       |  |  | -                       | 
|Depreciation allowances under tax in excess of the related depreciation under accounting |  |                              | (643   | ) |                                          |  | (64  | )                                       |  |  | -                       | 
|Change in fair value of available-for-sale equity securities                             |  |                              | (11    | ) |                                          |  | -    |                                         |  |  | 2                       | 
|Others                                                                                   |  |                              | (111   | ) |                                          |  | 4    |                                         |  |  | -                       | 
|                                                                                         |  |                              | (1,084 | ) |                                          |  | (104 | )                                       |  |  | 2                       | 
|                                                                                         |  |                              |        |   |                                          |  |      |                                         |  |  |                         | 
|Net deferred tax assets                                                                  |  |                              | 429    |   |                                          |  | (60  | )                                       |  |  | 2                       | 



F-56







Notes to the consolidated financial
statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 28 | Deferred tax assets/(liabilities) (continued)
| | -- | ---------------------------------------------



| | (c) | Deferred tax assets not recognized
| | --- | ----------------------------------



At December
31, 2014, the Group’s deductible temporary differences amounting to RMB23 million (2013: RMB29 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 RMB932 million (2013: RMB236 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:



|             |  | 2014        |     |  | 2013        | 
|------------ |  | ----------- | --- |  | ----------- | 
|             |  | RMB million |     |  | RMB million | 
|             |  |             |     |  |             | 
|Expiring in: |  |             |     |  |             | 
|2014         |  |             | -   |  |             | 
|2015         |  |             | 95  |  |             | 
|2016         |  |             | 98  |  |             | 
|2017         |  |             | 201 |  |             | 
|2018         |  |             | 250 |  |             | 
|2019         |  |             | 288 |  |             | 
|             |  |             | 932 |  |             | 



The significant increase in unrecognized
unused tax losses as of December 31, 2014 is attributable to the acquisition of a subsidiary (Note 47) with significant unused
tax losses brought forward from previous years.



| | 29 | Other assets
| | -- | ------------



|                                          |  | Prepayment for exclusive use right of an airport
 terminal |     |   | Software    |  |     | Leasehold
 improvement |  |  | Others      |   |  | Total       |    
|----------------------------------------- |  | ---------------------------------------------------------- | --- | - | ----------- |  | --- | ---------------------- |  |  | ----------- | - |  | ----------- | ---
|                                          |  | RMB million                                                |     |   | RMB million |  |     | RMB million            |  |  | RMB million |   |  | RMB million |    
|                                          |  |                                                            |     |   |             |  |     |                        |  |  |             |   |  |             |    
|At January 1, 2013                        |  |                                                            | 270 |   |             |  | 75  |                        |  |  | 68          |   |  |             | 67 
|Additions                                 |  |                                                            | -   |   |             |  | 15  |                        |  |  | -           |   |  |             | 9  
|Transferred from construction in progress |  |                                                            | -   |   |             |  | 136 |                        |  |  | 46          |   |  |             | -  
|Amortization for the year                 |  |                                                            | (10 | ) |             |  | (52 | )                      |  |  | (23         | ) |  |             | (12
|At December 31, 2013                      |  |                                                            | 260 |   |             |  | 174 |                        |  |  | 91          |   |  |             | 64 
|                                          |  |                                                            |     |   |             |  |     |                        |  |  |             |   |  |             |    
|At January 1, 2014                        |  |                                                            | 260 |   |             |  | 174 |                        |  |  | 91          |   |  |             | 64 
|Additions                                 |  |                                                            | -   |   |             |  | 18  |                        |  |  | 37          |   |  |             | 8  
|Acquisition of a subsidiary (Note 47)     |  |                                                            | -   |   |             |  | 5   |                        |  |  | -           |   |  |             | 290
|Transferred from construction in progress |  |                                                            | -   |   |             |  | 63  |                        |  |  | 45          |   |  |             | -  
|Disposal                                  |  |                                                            | -   |   |             |  | (1  | )                      |  |  | -           |   |  |             | -  
|Amortization for the year                 |  |                                                            | (10 | ) |             |  | (72 | )                      |  |  | (36         | ) |  |             | (16
|At December 31, 2014                      |  |                                                            | 250 |   |             |  | 187 |                        |  |  | 137         |   |  |             | 346



F-57







Notes to the consolidated financial
statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 30 | Inventories
| | -- | -----------



|                                                 |  | 2014        |       |   | 2013        | 
|------------------------------------------------ |  | ----------- | ----- | - | ----------- | 
|                                                 |  | RMB million |       |   | RMB million | 
|                                                 |  |             |       |   |             | 
|Consumable spare parts and maintenance materials |  |             | 1,587 |   |             | 
|Other supplies                                   |  |             | 178   |   |             | 
|                                                 |  |             | 1,765 |   |             | 
|                                                 |  |             |       |   |             | 
|Less: impairment                                 |  |             | (104  | ) |             | 
|                                                 |  |             |       |   |             | 
|                                                 |  |             | 1,661 |   |             | 



Impairment of inventory is shown as below:



|                                                             |  | 2014        |      |   | 2013        | 
|------------------------------------------------------------ |  | ----------- | ---- | - | ----------- | 
|                                                             |  | RMB million |      |   | RMB million | 
|                                                             |  |             |      |   |             | 
|At January 1                                                 |  |             | 305  |   |             | 
|Provision for impairment of inventories                      |  |             | -    |   |             | 
|Provision written off in relation to disposal of inventories |  |             | (201 | ) |             | 
|At December 31                                               |  |             | 104  |   |             | 



| | 31 | Trade receivables
| | -- | -----------------



|                  |  | 2014        |       |   | 2013        | 
|----------------- |  | ----------- | ----- | - | ----------- | 
|                  |  | RMB million |       |   | RMB million | 
|                  |  |             |       |   |             | 
|Trade receivables |  |             | 2,716 |   |             | 
|Less: impairment  |  |             | (33   | ) |             | 
|                  |  |             | 2,683 |   |             | 



| | (a) | Ageing analysis
| | --- | ---------------



Credit terms granted by the Group to sales agents and other customers generally range from one to three months. Ageing analysis of trade receivables is set out below:



|                                           |  | 2014        |       |   | 2013        | 
|------------------------------------------ |  | ----------- | ----- | - | ----------- | 
|                                           |  | RMB million |       |   | RMB million | 
|                                           |  |             |       |   |             | 
|Within 1 month                             |  |             | 2,133 |   |             | 
|More than 1 month but less than 3 months   |  |             | 535   |   |             | 
|More than 3 months but less than 12 months |  |             | 25    |   |             | 
|More than 1 year                           |  |             | 23    |   |             | 
|                                           |  |             | 2,716 |   |             | 
|Less: impairment                           |  |             | (33   | ) |             | 
|                                           |  |             | 2,683 |   |             | 



All of the trade receivables are expected to
be recovered within one year.



F-58







Notes to the consolidated financial
statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 31 | Trade receivables (continued)
| | -- | -----------------------------



| | (b) | Impairment of trade receivables
| | --- | -------------------------------



| |  | 
| |  | 

| | (i) | 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(k)).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The movements in the allowance for doubtful
debts during the year are as follows:



|                                  |  | 2014        |    |   | 2013        | 
|--------------------------------- |  | ----------- | -- | - | ----------- | 
|                                  |  | RMB million |    |   | RMB million | 
|                                  |  |             |    |   |             | 
|At January 1                      |  |             | 27 |   |             | 
|Impairment loss recognized        |  |             | 12 |   |             | 
|Impairment loss written back      |  |             | (2 | ) |             | 
|Uncollectible amounts written off |  |             | (4 | ) |             | 
|At December 31                    |  |             | 33 |   |             | 



| | (ii) | As of December 31, 2014, trade receivables of RMB5 million (2013: RMB11 million) were past due
but not impaired. These relate to a number of independent customers for whom there is no significant financial difficulty and based
on past experience, the overdue amounts can be recovered.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The ageing analysis of these trade receivables
is as follows:



|               |  | 2014        |   |  | 2013        | 
|-------------- |  | ----------- | - |  | ----------- | 
|               |  | RMB million |   |  | RMB million | 
|               |  |             |   |  |             | 
|3 to 12 months |  |             | 5 |  |             | 



| | (iii) | As of December 31, 2014, trade receivables of RMB43 million (2013: RMB34 million) were impaired.
The amount of the provision was RMB33 million as of December 31, 2014 (2013: RMB27 million). The individually impaired receivables
mainly relate to customers, which are in unexpectedly difficult economic situations. It was assessed that a portion of the receivables
is expected to be recovered. The ageing of these receivables is as follows:
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|               |  | 2014        |    |  | 2013        | 
|-------------- |  | ----------- | -- |  | ----------- | 
|               |  | RMB million |    |  | RMB million | 
|               |  |             |    |  |             | 
|3 to 12 months |  |             | 20 |  |             | 
|Over 12 months |  |             | 23 |  |             | 
|               |  |             | 43 |  |             | 



| | (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:



|                              |  | 2014        |       |  | 2013        | 
|----------------------------- |  | ----------- | ----- |  | ----------- | 
|                              |  | RMB million |       |  | RMB million | 
|                              |  |             |       |  |             | 
|Neither past due nor impaired |  |             | 2,668 |  |             | 



Trade receivables that were neither
past due nor impaired relate to customers for whom there was no recent history of default.



F-59







Notes to the consolidated financial
statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 31 | Trade receivables (continued)
| | -- | -----------------------------



| | (d) | Trade receivables by currencies
| | --- | -------------------------------



The carrying amounts of the Group’s trade receivables
are denominated in the following currencies:



|                  |  | 2014        |       |  | 2013        | 
|----------------- |  | ----------- | ----- |  | ----------- | 
|                  |  | RMB million |       |  | RMB million | 
|                  |  |             |       |  |             | 
|Renminbi          |  |             | 2,231 |  |             | 
|Euro              |  |             | 134   |  |             | 
|US dollar         |  |             | 118   |  |             | 
|Australian dollar |  |             | 36    |  |             | 
|Taiwan dollar     |  |             | 30    |  |             | 
|UK pound          |  |             | 38    |  |             | 
|Other currencies  |  |             | 129   |  |             | 
|                  |  |             | 2,716 |  |             | 



As at December 31, 2014, the fair value of trade
receivables approximate its carrying amount.



| | 32 | Other receivables
| | -- | -----------------



|                                                                                  |  | 2014        |       |   | 2013        | 
|--------------------------------------------------------------------------------- |  | ----------- | ----- | - | ----------- | 
|                                                                                  |  | RMB million |       |   | RMB million | 
|                                                                                  |  |             |       |   |             | 
|VAT recoverable                                                                   |  |             | 1,562 |   |             | 
|Rebate receivables on aircraft acquisitions                                       |  |             | 1,018 |   |             | 
|Term deposit (Note)                                                               |  |             | 2,454 |   |             | 
|Deposits for aircraft purchase                                                    |  |             | 239   |   |             | 
|Interest receivables                                                              |  |             | 126   |   |             | 
|Other rental deposits                                                             |  |             | 73    |   |             | 
|Others                                                                            |  |             | 695   |   |             | 
|                                                                                  |  |             |       |   |             | 
|Subtotal                                                                          |  |             | 6,167 |   |             | 
|Less: impairment                                                                  |  |             | (3    | ) |             | 
|                                                                                  |  |             | 6,164 |   |             | 
|Less: non-current portion of term deposit recognized as non-current assets (Note) |  |             | (300  | ) |             | 
|Current portion of other receivables                                              |  |             | 5,864 |   |             | 



Note:



As at December 31, 2014, the balance
represents the term deposit amounting to RMB2,454 million at bank with maturity over 3 months (2013: RMB422 million). Term deposit
with maturity over 1 years amounting to RMB300 million is classified as non-current asset. The weighted average annualized interest
rate of term deposits as of December 31, 2014 is 3.06%.



As at December 31, 2014, the fair value of other
receivables approximates its carrying amount.



F-60







Notes to the consolidated financial
statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 33 | Cash and cash equivalents
| | -- | -------------------------



| | (a) | Cash and cash equivalents comprise:
| | --- | -----------------------------------



|                                                            |  | 2014        |        |  | 2013        | 
|----------------------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                                            |  | RMB million |        |  | RMB million | 
|                                                            |  |             |        |  |             | 
|Deposits in banks and other financial institution           |  |             | 4,445  |  |             | 
|Cash at bank and in hand                                    |  |             | 10,969 |  |             | 
|Cash and cash equivalents in the statement of balance sheet |  |             | 15,414 |  |             | 



As at December 31, 2014, the Group’s
deposits with SA Finance, this is a qualified financial institution amounted to RMB4,264 million (2013: RMB2,675 million) (Note
48(d)(ii)).



As at December 31, 2014, the fair
value of cash and cash equivalents approximate its carrying amount.



The carrying amounts of the Group’s
cash and cash equivalents are denominated in the following currencies:



|                  |  | 2014        |        |  | 2013        | 
|----------------- |  | ----------- | ------ |  | ----------- | 
|                  |  | RMB million |        |  | RMB million | 
|                  |  |             |        |  |             | 
|Renminbi          |  |             | 13,649 |  |             | 
|US dollar         |  |             | 1,296  |  |             | 
|Euro              |  |             | 136    |  |             | 
|Japanese Yen      |  |             | 5      |  |             | 
|Hong Kong Dollars |  |             | 60     |  |             | 
|Others            |  |             | 268    |  |             | 
|                  |  |             | 15,414 |  |             | 



F-61







Notes to the consolidated financial
statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 33 | Cash and cash equivalents (continued)
| | -- | -------------------------------------



| | (b) | Reconciliation of profit before income tax to cash generated from operating activities:
| | --- | ---------------------------------------------------------------------------------------



|                                                                                                    |  |      |         |  | 2014         |  |        | 2013         |  |  | 2012         |  
|--------------------------------------------------------------------------------------------------- |  | ---- | ------- |  | ------------ |  | ------ | ------------ |  |  | ------------ | -
|                                                                                                    |  | Note |         |  | RMB
 million |  |        | RMB 
million |  |  | RMB 
million |  
|                                                                                                    |  |      |         |  |              |  |        |              |  |  |              |  
|Profit before income tax                                                                            |  |      |         |  |              |  | 3,066  |              |  |  | 3,484        |  
|Depreciation charges                                                                                |  |      | 13      |  |              |  | 10,789 |              |  |  | 9,338        |  
|Other amortisation                                                                                  |  |      | 13      |  |              |  | 195    |              |  |  | 155          |  
|Amortisation of deferred benefits and gains                                                         |  |      | 13      |  |              |  | (156   | )            |  |  | (146         | )
|Impairment losses on property, plant, equipment                                                     |  |      | 21      |  |              |  | 215    |              |  |  | 536          |  
|Share of profits of associates                                                                      |  |      | 24      |  |              |  | (261   | )            |  |  | (294         | )
|Share of profits of joint ventures                                                                  |  |      | 25      |  |              |  | (140   | )            |  |  | (96          | )
|(Gain)/losses on sale of property, plant and equipment, net and lease prepayments                   |  |      | 15      |  |              |  | (267   | )            |  |  | 78           |  
|Other non-operating income                                                                          |  |      | 17      |  |              |  | (26    | )            |  |  | (25          | )
|Interest income                                                                                     |  |      |         |  |              |  | (376   | )            |  |  | (307         | )
|Interest expense                                                                                    |  |      | 16      |  |              |  | 2,193  |              |  |  | 1,651        |  
|Dividend income from other investments in equity securities and available-for-sale financial assets |  |      | 26 & 27 |  |              |  | (13    | )            |  |  | (14          | )
|Exchange losses/(gain), net                                                                         |  |      |         |  |              |  | 292    |              |  |  | (2,903       | )
|Decrease/(increase) in inventories                                                                  |  |      |         |  |              |  | 15     |              |  |  | 61           |  
|(Increase)/decrease in trade receivables                                                            |  |      |         |  |              |  | (391   | )            |  |  | (321         | )
|Decrease/(increase) in other receivables                                                            |  |      |         |  |              |  | 108    |              |  |  | (959         | )
|Increase in prepaid expenses and other current assets                                               |  |      |         |  |              |  | (203   | )            |  |  | (205         | )
|(Decrease)/increase in net amounts due to related companies                                         |  |      |         |  |              |  | (154   | )            |  |  | 118          |  
|Increase/(decrease) in trade payables                                                               |  |      |         |  |              |  | 45     |              |  |  | (418         | )
|Increase/(decrease) in sales in advance of carriage                                                 |  |      |         |  |              |  | 261    |              |  |  | 961          |  
|Increase in accrued expenses                                                                        |  |      |         |  |              |  | 308    |              |  |  | 648          |  
|Increase/(decrease) in other liabilities                                                            |  |      |         |  |              |  | 369    |              |  |  | 200          |  
|(Decrease)/increase in deferred revenue                                                             |  |      |         |  |              |  | (410   | )            |  |  | 463          |  
|Increase/(decrease) in provision for major overhauls                                                |  |      |         |  |              |  | 244    |              |  |  | (421         | )
|Decrease in provision for early retirement benefits                                                 |  |      |         |  |              |  | (28    | )            |  |  | (31          | )
|Increase/(decrease) in deferred benefits and gains                                                  |  |      |         |  |              |  | 151    |              |  |  | (7           | )
|Cash generated from operating activities                                                            |  |      |         |  |              |  | 15,826 |              |  |  | 11,546       |  



F-62







Notes to the consolidated financial
statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 34 | Borrowings
| | -- | ----------



| | (a) | As at December 31, 2014, borrowings are analyzed as follows:
| | --- | ------------------------------------------------------------



|                                             |  | 2014        |        |  | 2013        | 
|-------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                             |  | RMB million |        |  | RMB million | 
|                                             |  |             |        |  |             | 
|Non-current                                  |  |             |        |  |             | 
|Long-term bank borrowings                    |  |             |        |  |             | 
|– secured(Note (i)(iii))                     |  |             | 19,846 |  |             | 
|– unsecured                                  |  |             | 22,220 |  |             | 
|                                             |  |             | 42,066 |  |             | 
|                                             |  |             |        |  |             | 
|Current                                      |  |             |        |  |             | 
|Current portion of long-term bank borrowings |  |             |        |  |             | 
|– secured(Note (i)(ii))                      |  |             | 3,834  |  |             | 
|– unsecured                                  |  |             | 6,902  |  |             | 
|Short-term bank borrowings                   |  |             |        |  |             | 
|– secured(Note (ii))                         |  |             | 232    |  |             | 
|– unsecured                                  |  |             | 10,011 |  |             | 
|                                             |  |             | 20,979 |  |             | 
|                                             |  |             |        |  |             | 
|Total borrowings                             |  |             | 63,045 |  |             | 
|                                             |  |             |        |  |             | 
|The borrowings are repayable:                |  |             |        |  |             | 
|Within one year                              |  |             | 20,979 |  |             | 
|In the second year                           |  |             | 17,226 |  |             | 
|In the third to fifth year inclusive         |  |             | 19,991 |  |             | 
|After the fifth year                         |  |             | 4,849  |  |             | 
|Total borrowings                             |  |             | 63,045 |  |             | 



Notes:



| | (i) | As at December 31, 2014, borrowings of the Group totalling RMB22,946 million (2013: RMB24,755 million)
were secured by mortgages over certain of the Group’s aircraft and other flight equipment with aggregate carrying amounts
of RMB31,825 million (2013: RMB32,155 million).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | As at December 31, 2014, borrowings of the Group amounting to RMB532 million (2013: RMB265 million)
were secured by pledged bank deposits of RMB324 million (2013:RMB277 million).
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | As at December 31, 2014, borrowings of the Group amounting to RMB434 million (2013: nil) was secured
by land use rights of RMB119 million (2013: nil).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------



F-63







Notes to the consolidated financial
statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 34 | Borrowings (continued)
| | -- | ----------------------



| | (b) | As at December 31, 2014, the Group’s weighted average interest rates on short-term borrowings
were 3.30% per annum (2013: 2.10% per annum).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Details of borrowings with original maturity over one year are as follows:
| | --- | --------------------------------------------------------------------------



|                                                                                                                                                            |  | 2014        |         |   | 2013        | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | - | ----------- | 
|                                                                                                                                                            |  | RMB million |         |   | RMB million | 
|                                                                                                                                                            |  |             |         |   |             | 
|Renminbi denominated loans                                                                                                                                  |  |             |         |   |             | 
|Fixed interest rates ranging from 5.54% to 6.40% per annum as at December 31, 2014, with maturities through 2022                                            |  |             | 226     |   |             | 
|Floating interest rates 90%, 95%,100% of benchmark interest rate (stipulated by PBOC) as at December 31, 2014, with maturities through 2016                 |  |             | 570     |   |             | 
|                                                                                                                                                            |  |             |         |   |             | 
|United States Dollars denominated loans                                                                                                                     |  |             |         |   |             | 
|Fixed interest rates ranging from 1.89% to 3.30% per annum as at December 31, 2014, with maturities through 2017                                            |  |             | 927     |   |             | 
|Floating interest rates ranging from one-month LIBOR + 0.80% to one-month LIBOR + 2.20% per  annum as at December 31, 2014, with maturities through 2021    |  |             | 1,832   |   |             | 
|Floating interest rates ranging from three-month LIBOR + 0.35% to three-month LIBOR + 3.25% per annum as at December 31, 2014, with maturities through 2024 |  |             | 38,546  |   |             | 
|Floating interest rates ranging from six-month LIBOR + 0.4% to six-month LIBOR + 5.5% per annum as at December 31, 2014, with maturities through 2023       |  |             | 10,701  |   |             | 
|                                                                                                                                                            |  |             | 52,802  |   |             | 
|Less: loans due within one year classified as current liabilities                                                                                           |  |             | (10,736 | ) |             | 
|                                                                                                                                                            |  |             | 42,066  |   |             | 



| | (d) | The remaining contractual maturities at the end of the financial year of the Group’s borrowings,
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:
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                    |  | 2014        |        |  | 2013        | 
|----------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                    |  | RMB million |        |  | RMB million | 
|                                    |  |             |        |  |             | 
|Contractual undiscounted cash flows |  |             |        |  |             | 
|                                    |  |             |        |  |             | 
|Within 1 year                       |  |             | 22,293 |  |             | 
|After 1 year but within 2 years     |  |             | 18,098 |  |             | 
|After 2 years but within 5 years    |  |             | 20,758 |  |             | 
|After 5 years                       |  |             | 5,040  |  |             | 
|                                    |  |             |        |  |             | 
|                                    |  |             | 66,189 |  |             | 



F-64







Notes to the consolidated financial
statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 34 | Borrowings (continued)
| | -- | ----------------------



| | (e) | The carrying amounts of the borrowings are denominated
in the following currencies:
| | --- | -----------------------------------------------------------------------------------



|           |  | 2014        |        |  | 2013        | 
|---------- |  | ----------- | ------ |  | ----------- | 
|           |  | RMB million |        |  | RMB million | 
|           |  |             |        |  |             | 
|Renminbi   |  |             | 4,444  |  |             | 
|US Dollars |  |             | 58,601 |  |             | 
|           |  |             | 63,045 |  |             | 



The Group has significant borrowings
balances as well as obligations under finance leases (Note 35) which are denominated in US dollars as at December 31, 2014. The
net exchange loss of RMB292 million (2013: net exchange gain of RMB2,903 million; 2012: net exchange gain RMB267 million) recorded
by the Group was mainly attributable to the exchange loss/gain arising from translation of borrowings balances and finance lease
obligations denominated in US dollars.



| | (f) | As at December 31, 2014, loans to the Group from SA finance amounted to RMB105 million (2013: RMB520 million) (Note 48(d)(i)).
| | --- | ------------------------------------------------------------------------------------------------------------------------------



| | (g) | As at December 31, 2014, the fair value of borrowings approximate their carrying amount. The fair value is within level 2 of
the fair value hierarchy.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 35 | Obligations under finance leases
| | -- | --------------------------------



The Group have 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 2025. The Group has made careful assessment on the classification of leased aircraft pursuant
to IAS 17 and believes all leased aircraft classified as finance lease meet one or more of the criteria as set out in IAS 17 that
would lead to a lease being classified as a finance lease (i.e. the lease transfers ownership of the asset to the lessee by the
end of the lease term; the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than
the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that
the option will be exercised; at the inception of the lease the present value of the minimum lease payments amounts to at least
substantially all of the fair value of the leased asset).



As at December 31, 2014, future
payments under these finance leases are as follows:



|                                                                    |  | 2014                                        |        |   | 2013                         | 
|------------------------------------------------------------------- |  | ------------------------------------------- | ------ | - | ---------------------------- | 
|                                                                    |  | Present value of the minimum lease payments |        |   | Total minimum lease payments | 
|                                                                    |  | RMB million                                 |        |   | RMB
 million                 | 
|                                                                    |  |                                             |        |   |                              | 
|Within 1 year                                                       |  |                                             | 5,992  |   |                              | 
|After 1 year but within 2 years                                     |  |                                             | 5,487  |   |                              | 
|After 2 years but within 5 years                                    |  |                                             | 15,781 |   |                              | 
|After 5 years                                                       |  |                                             | 22,651 |   |                              | 
|                                                                    |  |                                             |        |   |                              | 
|                                                                    |  |                                             | 49,911 |   |                              | 
|Less: balance due within one year classified as current liabilities |  |                                             | (5,992 | ) |                              | 
|                                                                    |  |                                             |        |   |                              | 
|                                                                    |  |                                             | 43,919 |   |                              | 



F-65







Notes to the consolidated financial
statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 35 | Obligations under finance leases (continued)
| | -- | --------------------------------------------



Details of obligations under finance leases are
as follows:



|                                                                                                                                      |  | 2014        |        |  | 2013        | 
|------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                                                                                                                      |  | RMB million |        |  | RMB million | 
|                                                                                                                                      |  |             |        |  |             | 
|United States Dollars denominated obligations                                                                                         |  |             |        |  |             | 
|Fixed interest rates ranging from 3.20% to 6.01% per annum as at December 31, 2014                                                    |  |             | 4,176  |  |             | 
|                                                                                                                                      |  |             |        |  |             | 
|Floating interest rates ranging from three-month LIBOR + 0.18% to three-month LIBOR + 3.30% per annum as at December 31, 2014         |  |             | 25,819 |  |             | 
|                                                                                                                                      |  |             |        |  |             | 
|Floating interest rates ranging from six-month LIBOR + 0.03% to six-month LIBOR + 3.30% per annum as at December 31, 2014             |  |             | 16,797 |  |             | 
|                                                                                                                                      |  |             |        |  |             | 
|Singapore Dollars denominated obligations                                                                                             |  |             |        |  |             | 
|Floating interest rate at six-month SIBOR + 1.44% per annum as at December 31, 2014                                                   |  |             | 418    |  |             | 
|                                                                                                                                      |  |             |        |  |             | 
|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, 2014                    |  |             | 1,610  |  |             | 
|                                                                                                                                      |  |             |        |  |             | 
|Floating interest rate at six-month TIBOR + 3.00% per annum as at December 31, 2014                                                   |  |             | 331    |  |             | 
|                                                                                                                                      |  |             |        |  |             | 
|Renminbi denominated obligations                                                                                                      |  |             |        |  |             | 
|Floating interest rate at 130% of five-year RMB loan bench mark interest rate announced by the PBOC per annum as at December 31, 2014 |  |             | 438    |  |             | 
|                                                                                                                                      |  |             |        |  |             | 
|Floating interest rate at 100% of five-year RMB loan benchmark interest rate announced by the PBOC per annum as at December 31, 2014  |  |             | 322    |  |             | 
|                                                                                                                                      |  |             |        |  |             | 
|                                                                                                                                      |  |             | 49,911 |  |             | 



Charges over the assets concerned
and relevant insurance policies are provided to the lessors as collateral and security. As at December 31, 2014, certain of the
Group’s aircraft with carrying amounts of RMB67,294 million (2013: RMB48,078 million) secured finance lease obligations totaling
RMB49,911 million (2013: RMB35,009 million).



As at December 31, 2014, the fair
value of obligation under finance leases approximate their carrying amount. The fair value is within level 2 of the fair value
hierarchy.



F-66







Notes to the consolidated financial
statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 36 | Trade payables
| | -- | --------------



|                                          |  | 2014        |       |  | 2013        | 
|----------------------------------------- |  | ----------- | ----- |  | ----------- | 
|                                          |  | RMB million |       |  | RMB million | 
|                                          |  |             |       |  |             | 
|Within 1 month                            |  |             | 755   |  |             | 
|More than 1 month but less than 3 months  |  |             | 633   |  |             | 
|More than 3 months but less than 6 months |  |             | 107   |  |             | 
|More than 6 months but less than 1 year   |  |             | 76    |  |             | 
|More than 1 year                          |  |             | 86    |  |             | 
|                                          |  |             |       |  |             | 
|                                          |  |             | 1,657 |  |             | 



As at December 31, 2014, the fair
value of trade payable approximate their carrying amounts.



The carrying amounts of the Group’s
trade payable are denominated in the following currencies:



|           |  | 2014        |       |  | 2013        | 
|---------- |  | ----------- | ----- |  | ----------- | 
|           |  | RMB million |       |  | RMB million | 
|           |  |             |       |  |             | 
|Renminbi   |  |             | 1,558 |  |             | 
|US Dollars |  |             | 86    |  |             | 
|Others     |  |             | 13    |  |             | 
|           |  |             | 1,657 |  |             | 



| | 37 | Deferred revenue
| | -- | ----------------



Deferred revenue represents the unredeemed
credits under the frequent flyer award programme.



| | 38 | Amounts due from/to related companies
| | -- | -------------------------------------



| | (a) | Amounts due from related companies
| | --- | ----------------------------------



|                         |  |       |  | 2014        |     |  | 2013        | 
|------------------------ |  | ----- |  | ----------- | --- |  | ----------- | 
|                         |  | Note  |  | RMB million |     |  | RMB million | 
|                         |  |       |  |             |     |  |             | 
|CSAHC and its affiliates |  |       |  |             | 78  |  |             | 
|Associates               |  |       |  |             | 284 |  |             | 
|Joint ventures           |  |       |  |             | 124 |  |             | 
|                         |  | 48(c) |  |             | 486 |  |             | 



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.



F-67







Notes to the consolidated financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 38 | Amounts due from/to related companies (continued)
| | -- | -------------------------------------------------



| | (b) | Amounts due to related companies
| | --- | --------------------------------



|                         |  |       |  | 2014        |     |  | 2013        | 
|------------------------ |  | ----- |  | ----------- | --- |  | ----------- | 
|                         |  | Note  |  | RMB million |     |  | RMB million | 
|                         |  |       |  |             |     |  |             | 
|CSAHC and its affiliates |  |       |  |             | 144 |  |             | 
|A joint venture of CSAHC |  |       |  |             | 112 |  |             | 
|An associate             |  |       |  |             | 13  |  |             | 
|Joint ventures           |  |       |  |             | 119 |  |             | 
|Other related company    |  |       |  |             | 70  |  |             | 
|                         |  | 48(c) |  |             | 458 |  |             | 



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.



| | 39 | Accrued expenses
| | -- | ----------------



|                                                  |  | 2014        |        |  | 2013        | 
|------------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                                  |  | RMB million |        |  | RMB million | 
|                                                  |  |             |        |  |             | 
|Repairs and maintenance                           |  |             | 3,518  |  |             | 
|Jet fuel costs                                    |  |             | 1,814  |  |             | 
|Salaries and welfare                              |  |             | 2,385  |  |             | 
|Landing and navigation fees                       |  |             | 2,240  |  |             | 
|Computer reservation services                     |  |             | 338    |  |             | 
|Provision for major overhauls (Note 41)           |  |             | 112    |  |             | 
|Interest expense                                  |  |             | 471    |  |             | 
|Air catering expenses                             |  |             | 311    |  |             | 
|Provision for early retirement benefits (Note 42) |  |             | 20     |  |             | 
|Others                                            |  |             | 913    |  |             | 
|                                                  |  |             | 12,122 |  |             | 



| | 40 | Other liabilities
| | -- | -----------------



|                                                                     |  | 2014        |       |  | 2013        | 
|-------------------------------------------------------------------- |  | ----------- | ----- |  | ----------- | 
|                                                                     |  | RMB million |       |  | RMB million | 
|                                                                     |  |             |       |  |             | 
|Civil Aviation Development Fund and airport
    tax payable          |  |             | 1,379 |  |             | 
|Payable for purchase of property, plant and equipment                |  |             | 703   |  |             | 
|Sales agent deposits                                                 |  |             | 418   |  |             | 
|Other taxes payable                                                  |  |             | 397   |  |             | 
|Deposit received for chartered flights                               |  |             | 188   |  |             | 
|Payable due to the former shareholder of a subsidiary
    (Note (a)) |  |             | 758   |  |             | 
|Others                                                               |  |             | 1,478 |  |             | 
|                                                                     |  |             | 5,321 |  |             | 



(a)
Balance represented an interest-free loan of a subsidiary acquired by the Group in 2014 (Note 47) due to its former shareholder,
which has no fixed repayment terms and is repayable on demand.



F-68







Notes to the consolidated financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 41 | Provision for major overhauls
| | -- | -----------------------------



Details of provision for major overhauls in respect
of aircraft held under operating leases are as follows:



|                                |  | 2014        |       |   | 2013        | 
|------------------------------- |  | ----------- | ----- | - | ----------- | 
|                                |  | RMB million |       |   | RMB million | 
|                                |  |             |       |   |             | 
|At January 1                    |  |             | 1,491 |   |             | 
|Additional provision            |  |             | 682   |   |             | 
|Utilisation                     |  |             | (438  | ) |             | 
|                                |  |             |       |   |             | 
|At December 31                  |  |             | 1,735 |   |             | 
|Less: current portion (Note 39) |  |             | (112  | ) |             | 
|                                |  |             |       |   |             | 
|                                |  |             | 1,623 |   |             | 



| | 42 | Provision for early retirement benefits
| | -- | ---------------------------------------



Details of provision for early retirement
benefits in respect of obligations to early retired employees are as follows:



|                                    |  | 2014        |     |   | 2013        | 
|----------------------------------- |  | ----------- | --- | - | ----------- | 
|                                    |  | RMB million |     |   | RMB million | 
|                                    |  |             |     |   |             | 
|At January 1                        |  |             | 73  |   |             | 
|Provision for the year (Note 14)    |  |             | 7   |   |             | 
|Financial cost (Note 16)            |  |             | 4   |   |             | 
|Payments made during the year       |  |             | (39 | ) |             | 
|                                    |  |             |     |   |             | 
|At December 31                      |  |             | 45  |   |             | 
|Less: current portion (Note
    39) |  |             | (20 | ) |             | 
|                                    |  |             |     |   |             | 
|                                    |  |             | 25  |   |             | 



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.



F-69







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 43 | Deferred benefits and gains
| | -- | ---------------------------



|                                                  |  | 2014        |     |  | 2013        | 
|------------------------------------------------- |  | ----------- | --- |  | ----------- | 
|                                                  |  | RMB million |     |  | RMB million | 
|                                                  |  |             |     |  |             | 
|Leases rebates (Note (i))                         |  |             | 184 |  |             | 
|Maintenance rebates (Note (ii))                   |  |             | 367 |  |             | 
|Gains relating to sale and leaseback (Note (iii)) |  |             | 103 |  |             | 
|Government grants                                 |  |             | 177 |  |             | 
|Others                                            |  |             | 22  |  |             | 
|                                                  |  |             | 853 |  |             | 



Notes:



| | (i) | The Company was granted rebates
                                         by the lessors under certain lease arrangements when it fulfilled certain requirements.
                                         The rebates are deferred and amortised using the straight line method over the remaining
                                         lease terms.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(ii)	The
Company was granted rebates by the engine suppliers under certain arrangements when it fulfilled certain requirements. The rebates
are deferred and amortised using the straight line method over the beneficial period.



(iii)	The
Company entered into sale and leaseback transactions with certain third parties under operating leases. The gains are deferred
and amortised over the lease terms of the aircraft.



| | 44 | Share capital
| | -- | -------------



|                                                                                                           |  | 2014        |       |  | 2013        | 
|---------------------------------------------------------------------------------------------------------- |  | ----------- | ----- |  | ----------- | 
|                                                                                                           |  | RMB million |       |  | RMB million | 
|                                                                                                           |  |             |       |  |             | 
|Registered, issued and paid up capital:                                                                    |  |             |       |  |             | 
|4,208,586,278 domestic state-owned shares of RMB1.00 each
    (2013: 4,150,050,000 shares of RMB1.00 each) |  |             | 4,209 |  |             | 
|2,814,063,722 A shares of RMB1.00 each (2013: 2,877,000,000 shares
    of RMB1.00 each)                    |  |             | 2,814 |  |             | 
|2,794,917,000 H shares of RMB1.00 each (2013:
    2,794,917,000 shares of RMB1.00 each)                    |  |             | 2,795 |  |             | 
|                                                                                                           |  |             | 9,818 |  |             | 



All the domestic state-owned, H and A shares rank pari
passu in all material respects.



F-70









Notes to the consolidated financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 45 | Reserves
| | -- | --------



|                                                                 |  | 2014        |        |   | 2013        | 
|---------------------------------------------------------------- |  | ----------- | ------ | - | ----------- | 
|                                                                 |  | RMB million |        |   | RMB million | 
|                                                                 |  |             |        |   |             | 
|Share premium                                                    |  |             |        |   |             | 
|At January 1 and December 31                                     |  |             | 14,131 |   |             | 
|                                                                 |  |             |        |   |             | 
|Fair value reserve                                               |  |             |        |   |             | 
|At January 1                                                     |  |             | 22     |   |             | 
|Change in fair value of available-for-sale
    equity securities |  |             | 22     |   |             | 
|                                                                 |  |             |        |   |             | 
|At December 31                                                   |  |             | 44     |   |             | 
|                                                                 |  |             |        |   |             | 
|Statutory and discretionary surplus reserve                      |  |             |        |   |             | 
|At January 1                                                     |  |             | 1,169  |   |             | 
|Appropriations to reserves (Note (a))                            |  |             | 137    |   |             | 
|                                                                 |  |             |        |   |             | 
|At December 31                                                   |  |             | 1,306  |   |             | 
|                                                                 |  |             |        |   |             | 
|Other reserve                                                    |  |             |        |   |             | 
|At January 1                                                     |  |             | 167    |   |             | 
|Share of an associate’s reserves movement                        |  |             | 14     |   |             | 
|Acquisition of non-controlling
    interests in a subsidiary     |  |             | (1     | ) |             | 
|                                                                 |  |             |        |   |             | 
|At December 31                                                   |  |             | 180    |   |             | 
|                                                                 |  |             |        |   |             | 
|Retained profits                                                 |  |             |        |   |             | 
|At January 1                                                     |  |             | 9,022  |   |             | 
|Profit for the year                                              |  |             | 1,777  |   |             | 
|Appropriations to reserves                                       |  |             | (137   | ) |             | 
|Dividends approved in respect of the
    previous year           |  |             | (393   | ) |             | 
|                                                                 |  |             |        |   |             | 
|At December 31                                                   |  |             | 10,269 |   |             | 
|                                                                 |  |             |        |   |             | 
|Total                                                            |  |             | 25,930 |   |             | 



| | (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.



F-71







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 45 | Reserves (continued)
| | -- | --------------------



| | (b) | Dividends
| | --- | ---------



Dividends payable to equity shareholders of the Company
attributable to the year



|                                                                                                                                       |  | 2014        |     |  | 2013        | 
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | --- |  | ----------- | 
|                                                                                                                                       |  | RMB million |     |  | RMB million | 
|                                                                                                                                       |  |             |     |  |             | 
|Final dividend proposed after the end of the
    reporting year of RMB0.4 per 10 ordinary shares (2013: RMB0.4 per 10 ordinary shares) |  |             |     |  |             | 
|(inclusive of applicable tax)                                                                                                          |  |             | 393 |  |             | 



A dividend in respect of the year
ended December 31, 2014 of RMB0.4 per 10 shares (inclusive of applicable tax) (2013: RMB0.4 per 10 shares (inclusive of applicable
tax)), amounting to a total dividend of RMB393 million (2013: RMB393 million), was proposed by the directors on March 30, 2015.
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.



| | 46 | Commitments
| | -- | -----------



| | (a) | Capital commitments
| | --- | -------------------



Capital commitments outstanding
at December 31, 2014 not provided for in the financial statements were as follows:



|                                                                        |  | 2014        |        |  | 2013        | 
|----------------------------------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                                                        |  | RMB million |        |  | RMB million | 
|Commitments in respect of aircraft and flight equipment                 |  |             |        |  |             | 
|– authorised
    and contracted for                                     |  |             | 59,467 |  |             | 
|                                                                        |  |             |        |  |             | 
|                                                                        |  |             | 59,467 |  |             | 
|                                                                        |  |             |        |  |             | 
|Investment commitments                                                  |  |             |        |  |             | 
|– authorised and contracted for                                         |  |             |        |  |             | 
|– capital contributions for acquisition of interests
    in  associates |  |             | 70     |  |             | 
|– share of capital commitments
    of a joint venture                   |  |             | 52     |  |             | 
|                                                                        |  |             |        |  |             | 
|                                                                        |  |             | 122    |  |             | 
|                                                                        |  |             |        |  |             | 
|– authorised but not contracted for                                     |  |             |        |  |             | 
|– share of capital commitments
    of a joint venture                   |  |             | -      |  |             | 
|                                                                        |  |             |        |  |             | 
|                                                                        |  |             | 122    |  |             | 
|                                                                        |  |             |        |  |             | 
|Commitments for other property, plant and equipment                     |  |             |        |  |             | 
|– authorised and contracted for                                         |  |             | 1,512  |  |             | 
|– authorised but not contracted
    for                                 |  |             | 3,610  |  |             | 
|                                                                        |  |             |        |  |             | 
|                                                                        |  |             | 5,122  |  |             | 
|                                                                        |  |             |        |  |             | 
|                                                                        |  |             | 64,711 |  |             | 



F-72







Notes to
the consolidated financial statements

(Prepared in
accordance with International Financial Reporting Standards)

(Expressed
in Renminbi unless otherwise indicated)



| | 46 | Commitments (continued)
| | -- | -----------------------



| | (a) | Capital commitments (continued)
| | --- | -------------------------------



As at December 31, 2014, the approximate
total future payments, including estimated amounts for price escalation through anticipated delivery dates for aircraft and flight
equipment are as follows:



|                    |  | 2014        |        |  | 2013        | 
|------------------- |  | ----------- | ------ |  | ----------- | 
|                    |  | RMB million |        |  | RMB million | 
|                    |  |             |        |  |             | 
|2014                |  |             | -      |  |             | 
|2015                |  |             | 18,146 |  |             | 
|2016                |  |             | 11,628 |  |             | 
|2017                |  |             | 10,081 |  |             | 
|2018 and afterwards |  |             | 19,612 |  |             | 
|                    |  |             | 59,467 |  |             | 



| | (b) | Operating lease commitments
| | --- | ---------------------------



As at December 31, 2014, the total
future minimum lease payments under non-cancellable operating leases in respect of properties, aircraft and flight equipment are
as follows:



|                                |  | 2014        |        |  | 2013        | 
|------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                |  | RMB million |        |  | RMB million | 
|                                |  |             |        |  |             | 
|Payments due                    |  |             |        |  |             | 
|Within 1 year                   |  |             | 5,072  |  |             | 
|After 1 year but within 5 years |  |             | 15,496 |  |             | 
|After 5 years                   |  |             | 8,230  |  |             | 
|                                |  |             | 28,798 |  |             | 



| | 47 | Business Combination
| | -- | --------------------



On December 15, 2014, the Group
acquired 99.23% of the share capital of Hebei Airlines Company Limited (“Hebei Airline”) from Hebei Airlines Investment
Group Co., Ltd and Sichuan Airlines Group Co., Ltd, third parties of the Group, for RMB749 million and obtained the control of
Hebei Airline.



The following table summarises the
consideration paid for Hebei Airline, the fair value of assets acquired, liabilities assumed and the non-controlling interest
at the acquisition date. The Group has recognized a gain amounting to RMB26 million related to this business combination. The
Group believes that the major reason for this bargain purchase is that Hebei Airline had incurred loss for several years and the
former shareholders were eager to sell their equity interests in Hebei Airline. As a result, the Group was able to negotiate a
relatively lower consideration and a gain was incurred accordingly.



F-73







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 47 | Business Combination (Continued)
| | -- | --------------------------------



|Consideration:                                                             |  |             |       
|-------------------------------------------------------------------------- |  | ----------- | ------
|At December 15, 2014                                                       |  | RMB million |       
|– Cash                                                                     |  |             | 680   
|– Fair value of liability assumed                                          |  |             | 69    
|Total consideration                                                        |  |             | 749   
|                                                                           |  |             |       
|Recognized amounts of identifiable assets acquired and liabilities assumed |  |             |       
|Property, plant and equipment (Note 21)                                    |  |             | 2,754 
|Construction in progress (Note 22)                                         |  |             | 486   
|Other assets (Note 29)                                                     |  |             | 295   
|Inventories                                                                |  |             | 29    
|Trade receivables                                                          |  |             | 119   
|Other receivables                                                          |  |             | 109   
|Cash and cash equivalents                                                  |  |             | 23    
|Prepaid expenses and other current assets                                  |  |             | 81    
|Borrowings                                                                 |  |             | (724  
|Obligations under finance leases                                           |  |             | (1,331
|Trade and other payables                                                   |  |             | (206  
|Sales in advance of carriage                                               |  |             | (25   
|Deferred revenue                                                           |  |             | (9    
|Accrued expenses                                                           |  |             | (29   
|Other liabilities                                                          |  |             | (791  
|Total identifiable net assets                                              |  |             | 781   
|                                                                           |  |             |       
|Non-controlling interest                                                   |  |             | (6    
|Gain recognized (note 17)                                                  |  |             | (26   
|                                                                           |  |             |       
|                                                                           |  |             | 749   



Acquisition-related costs of RMB287,000
have been charged to operating expenses in the consolidated income statement for the year ended December 15, 2014.



The revenue included in the consolidated
income statement since December 31, 2014 contributed by Hebei Airline was RMB94 million. Hebei Airline also incurred a loss of
RMB52 million over the same period. Had Hebei Airline been consolidated from January 1, 2014, the consolidated income statement
would show pro-forma revenue of RMB109,859 million and net profit of RMB2,162 million.



F-74







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 48 | 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 18, is as follows:



|                                |  | 2014          |        |  | 2013          |  |        | 2012          | 
|------------------------------- |  | ------------- | ------ |  | ------------- |  | ------ | ------------- | 
|                                |  | RMB
 thousand |        |  | RMB
 thousand |  |        | RMB
 thousand | 
|                                |  |               |        |  |               |  |        |               | 
|Salaries, wages and welfare     |  |               | 13,013 |  |               |  | 12,412 |               | 
|Retirement scheme contributions |  |               | 2,359  |  |               |  | 2,074  |               | 
|                                |  |               | 15,372 |  |               |  | 14,486 |               | 



|                                       |  | 2014          |        |  | 2013          |  |        | 2012          | 
|-------------------------------------- |  | ------------- | ------ |  | ------------- |  | ------ | ------------- | 
|                                       |  | RMB
 thousand |        |  | RMB
 thousand |  |        | RMB
 thousand | 
|                                       |  |               |        |  |               |  |        |               | 
|Directors and supervisors (Note 18(a)) |  |               | 3,241  |  |               |  | 3,108  |               | 
|Senior management                      |  |               | 12,131 |  |               |  | 11,378 |               | 
|                                       |  |               | 15,372 |  |               |  | 14,486 |               | 



Total remuneration is included in “staff costs”
(Note 14).



F-75







Notes to the consolidated financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 48 | Material related party transactions (Continued)
| | -- | -----------------------------------------------



| | (b) | Transactions with CSAHC and its affiliates (the “CSAHC
                                         Group”), associates, joint ventures and other related company of the Group
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Group provided or received various
operational services to or by the CSAHC Group, associates, joint ventures 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:



|                                                   |  |         |  | 2014        |       |  | 2013        |  |       | 2012        | 
|-------------------------------------------------- |  | ------- |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                                                   |  | Note    |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                                                   |  |         |  |             |       |  |             |  |       |             | 
|Income received from the CSAHC Group               |  |         |  |             |       |  |             |  |       |             | 
|Charter flight and pallet income                   |  | (i)     |  |             | 32    |  |             |  | 107   |             | 
|Air catering supplies income                       |  | (ii)    |  |             | 1     |  |             |  | -     |             | 
|Cargo handling income                              |  | (i)     |  |             | -     |  |             |  | 1     |             | 
|                                                   |  |         |  |             |       |  |             |  |       |             | 
|Income received from other related company         |  |         |  |             |       |  |             |  |       |             | 
|Aircraft sales income                              |  | (iii)   |  |             | -     |  |             |  | -     |             | 
|Aircraft purchase right transfer income            |  | (iii)   |  |             | -     |  |             |  | -     |             | 
|                                                   |  |         |  |             |       |  |             |  |       |             | 
|Expenses paid to the CSAHC Group                   |  |         |  |             |       |  |             |  |       |             | 
|Repairing charges                                  |  | (iv)    |  |             | 780   |  |             |  | 796   |             | 
|Lease charges for land and buildings               |  | (v)     |  |             | 170   |  |             |  | 169   |             | 
|Handling charges                                   |  | (vi)    |  |             | 119   |  |             |  | 121   |             | 
|Property management fee                            |  | (vii)   |  |             | 61    |  |             |  | 63    |             | 
|Air catering supplies expenses                     |  | (ii)    |  |             | 89    |  |             |  | 84    |             | 
|Cargo handling charges                             |  | (i)     |  |             | 46    |  |             |  | 33    |             | 
|Commission expenses                                |  | (i)     |  |             | 8     |  |             |  | 19    |             | 
|Printing expenses                                  |  | (viii)  |  |             | 4     |  |             |  | -     |             | 
|                                                   |  |         |  |             |       |  |             |  |       |             | 
|Expenses paid to joint ventures and associates     |  |         |  |             |       |  |             |  |       |             | 
|Repairing charges                                  |  | (ix)    |  |             | 1,335 |  |             |  | 1,783 |             | 
|Flight simulation service charges                  |  | (x)     |  |             | 316   |  |             |  | 270   |             | 
|Training expenses                                  |  | (xi)    |  |             | 169   |  |             |  | 120   |             | 
|Ground service expenses                            |  | (xii)   |  |             | 111   |  |             |  | 14    |             | 
|Air catering supplies                              |  | (xiii)  |  |             | 102   |  |             |  | -     |             | 
|Advertising expenses                               |  | (xiv)   |  |             | 75    |  |             |  | 77    |             | 
|Commission expense                                 |  | (xv)    |  |             | 29    |  |             |  | -     |             | 
|Maintenance material purchase expenses             |  | (ix)    |  |             | 24    |  |             |  | -     |             | 
|                                                   |  |         |  |             |       |  |             |  |       |             | 
|Income received from joint ventures and associates |  |         |  |             |       |  |             |  |       |             | 
|Entrustment income for advertising media business  |  | (xiv)   |  |             | 34    |  |             |  | 32    |             | 
|Rental income                                      |  | (x)     |  |             | 33    |  |             |  | 31    |             | 
|Commission income                                  |  | (xvi)   |  |             | 40    |  |             |  | 12    |             | 
|Repairing income                                   |  | (xv)    |  |             | 17    |  |             |  | 14    |             | 
|Air catering supplies                              |  | (xv)    |  |             | 10    |  |             |  | 18    |             | 
|Ground service income                              |  | (xvii)  |  |             | 8     |  |             |  | 7     |             | 
|Air ticket Income                                  |  | (xvi)   |  |             | 2     |  |             |  | -     |             | 
|Maintenance material sales revenue                 |  | (xviii) |  |             | 2     |  |             |  | -     |             | 
|Air catering supplies income                       |  | (xiii)  |  |             | 1     |  |             |  | -     |             | 
|                                                   |  |         |  |             |       |  |             |  |       |             | 
|Income received from other related company         |  |         |  |             |       |  |             |  |       |             | 
|Air tickets income                                 |  | (xix)   |  |             | 12    |  |             |  | 12    |             | 



F-76









Notes to the consolidated financial statements

(Prepared in accordance
with International Financial Reporting Standards)

(Expressed in Renminbi
unless otherwise indicated)



| | 48 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (b) | Transactions with CSAHC and its affiliates (the “CSAHC
                                         Group”), associates, joint ventures and other related company of the Group (continued)
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Expenses paid to other related company      |  |       |  |  |     |  |  |  |     |  |  |  |     | 
|------------------------------------------- |  | ----- |  |  | --- |  |  |  | --- |  |  |  | --- | 
|Computer reservation services               |  | (xx)  |  |  | 435 |  |  |  | 444 |  |  |  | 440 | 
|Advertising expenses                        |  | (xix) |  |  | 20  |  |  |  | 10  |  |  |  | -   | 
|                                            |  |       |  |  |     |  |  |  |     |  |  |  |     | 
|Disposal to the CSAHC Group                 |  |       |  |  |     |  |  |  |     |  |  |  |     | 
|Disposal and losing control of a subsidiary |  | (xiv) |  |  | -   |  |  |  | -   |  |  |  | 43  | 



| | (i) | China Southern Air Holding Ground
                                         Services Co.,Ltd (“CSA Groud Services”), 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 CSA Ground Services.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Commission is earned
by CSA Ground Services 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.



| | (ii) | 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.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Air catering supplies
income/expenses are earned/payable by the group in respect of certain in-flight meals and related services with SZ catering.



| | (iii) | During the year 2012, Xiamen
                                         Airlines and Hebei Airline, a subsidiary of a non-controlling interest of Xiamen Airlines,
                                         entered into an aircraft sale agreement, pursuant to which Xiamen Airlines sold and Hebei
                                         Airline 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 Airline at the consideration of approximately RMB16 million
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On December 15, 2014,
the Group acquired 99.23% of the share capital of Hebei Airline from Hebei Airlines Investment Group Co., Ltd and Sichuan Airlines,
third parties of the Group, for RMB749 million and obtained the control of Hebei Airline.



| | (iv) | MTU Maintenance Zhuhai Co., Ltd,
                                         a joint venture of CSAHC, provides comprehensive maintenance services to the Group.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) | 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.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vi) | 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.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vii) | Guangzhou China Southern Airlines
                                         Property Management Company Limited, a subsidiary of CSAHC, provides property management
                                         services to the Group.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (viii) | Printing Plant of China Northern
                                         Airlines Vestibule School provides printing services for the Group.
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------



| | (ix) | GAMECO and Shenyang Northern Aircraft
                                         Maintenance Limited (“AMECO”), joint ventures of the Group, provide comprehensive
                                         maintenance services to the Group.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Group purchases maintenance material
from GAMECO.



F-77







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 48 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (b) | Transactions with CSAHC and its affiliates (the “CSAHC
                                         Group”), associates, joint ventures and other related company of the Group (continued)
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (x) | Zhuhai
                                         Xiang Yi, a joint venture 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.



| | (xi) | Flying College, a joint venture
                                         of the Group, provides training services to the Group.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------



| | (xii) | Beijing Aviation Ground Services
                                         Co.,Ltd. and Shenyang Konggang Logistic Company Limited (“Shenyang Konggang Logistic”),
                                         associates of the Group provide ground service to the group.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xiii) | Air catering supplies income/expenses
                                         are earned/payable by the Group in respect of certain in-flight meals and related services
                                         with Beijing Airport Inflight Kitchen Co.,Ltd. which is an associate of the Group.
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xiv) | SACM, an associate of the Group,
                                         provides advertising services to the Group.
| | ----- | ---------------------------------------------------------------------------------------------------------------------



In addition, Xiamen
Airlines provides certain media resources to Xiamen Airlines Culture and Media Co., Ltd., a subsidiary of SACM.



| | (xv) | Sichuan Airlines, an associate
                                         of the Group, provides commission service to the Group. The charge is determined according
                                         to the market price.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, The Company
provides aircraft maintenance services to Sichuan Airlines. The Group provides air catering services and repairing services to
Sichuan Airlines.



| | (xvi) | The Group provides certain website
                                         resources to SA Finance and Sichuan Airlines for the sales of air insurance to passengers.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Group sells tickets
to SA Finance as a gift to passengers for the sales of insurance.



| | (xvii) | The Group provides ground services
                                         to Shenyang Konggang Logistic and Sichuan Airlines.
| | ------ | -------------------------------------------------------------------------------------------------------------------------------



| | (xviii) | The Company sells maintenance
                                         materials to AMECO.
| | ------- | ------------------------------------------------------------------------------------------



| | (xix) | Phoenix Satellite Television
                                         Holding Limited (“the Phoenix Group”) provides advertising services to the
                                         Group.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, the Group
sells tickets to the Phoenix Group on market price.



| | (xx) | China Travel Sky Holding Company
                                         provides computer reservation services to the Group.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------



F-78







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 48 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (c) | Balances with the CSAHC Group, associates, joint ventures
                                         and other related company of the Group
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------



Details of amounts due from/to the CSAHC Group, associates,
joint ventures and other related company of the Group:



|                |  |       |  | 2014        |     |  | 2013        | 
|--------------- |  | ----- |  | ----------- | --- |  | ----------- | 
|                |  | Note  |  | RMB million |     |  | RMB million | 
|                |  |       |  |             |     |  |             | 
|Receivables:    |  |       |  |             |     |  |             | 
|The CSAHC Group |  |       |  |             | 78  |  |             | 
|Associates      |  |       |  |             | 284 |  |             | 
|Joint ventures  |  |       |  |             | 124 |  |             | 
|                |  | 38(a) |  |             | 486 |  |             | 



|                      |  |       |  | 2014        |     |  | 2013        | 
|--------------------- |  | ----- |  | ----------- | --- |  | ----------- | 
|                      |  | Note  |  | RMB million |     |  | RMB million | 
|                      |  |       |  |             |     |  |             | 
|Payables:             |  |       |  |             |     |  |             | 
|The CSAHC Group       |  |       |  |             | 256 |  |             | 
|An associate          |  |       |  |             | 13  |  |             | 
|Joint ventures        |  |       |  |             | 119 |  |             | 
|Other related company |  |       |  |             | 70  |  |             | 
|                      |  | 38(b) |  |             | 458 |  |             | 



|                      |  | 2014        |       |  | 2013        | 
|--------------------- |  | ----------- | ----- |  | ----------- | 
|                      |  | RMB million |       |  | RMB million | 
|                      |  |             |       |  |             | 
|Accrued expenses:     |  |             |       |  |             | 
|The CSAHC Group       |  |             | 451   |  |             | 
|Associates            |  |             | 92    |  |             | 
|Joint ventures        |  |             | 836   |  |             | 
|Other related company |  |             | 269   |  |             | 
|                      |  |             | 1,648 |  |             | 



The amounts due from/to the CSAHC Group, associates,
joint ventures and other related company of the Group are unsecured, interest free and have no fixed terms of repayment.



F-79







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 48 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (d) | Loans from and deposits placed with related parties
| | --- | ---------------------------------------------------



| | (i) | Loans from related parties
| | --- | --------------------------



At December 31, 2014, loans from SA Finance to the Group
amounted to RMB105 million (2013: RMB520 million).



In 2014, 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 March 10, 2014 to March 9, 2015. The interest rate is 90% of benchmark interest rate stipulated by PBOC
per annum.



The unsecured loans are repayable as follows:



|                                 |  |       |  | 2014        |     |  | 2013        | 
|-------------------------------- |  | ----- |  | ----------- | --- |  | ----------- | 
|                                 |  | Note  |  | RMB million |     |  | RMB million | 
|                                 |  |       |  |             |     |  |             | 
|Within 1 year                    |  |       |  |             | 105 |  |             | 
|After 1 year but within 2 years  |  |       |  |             | -   |  |             | 
|After 2 years but within 5 years |  |       |  |             | -   |  |             | 
|                                 |  | 34(f) |  |             | 105 |  |             | 



Interest expense paid on such loans
amounted to RMB11 million (2013: RMB28 million; 2012: RMB30 million) and the interest rates ranged from 5.04% to 5.70% per annum
during the year ended December 31, 2014(2013: 5.54% to 5.84%per annum; 2012: 4.86% to 5.84% per annum).



| | (ii) | Deposits placed with SA Finance
| | ---- | -------------------------------



At December 31, 2014 the Group’s
deposits with SA Finance are presented in the table below. The applicable interest rates are determined in accordance with the
rates published by the PBOC.



|                                |  |      |  | 2014        |       |  | 2013        | 
|------------------------------- |  | ---- |  | ----------- | ----- |  | ----------- | 
|                                |  | Note |  | RMB million |       |  | RMB million | 
|                                |  |      |  |             |       |  |             | 
|Deposits placed with SA Finance |  | 33   |  |             | 4,264 |  |             | 



Interest income received on such
deposits amounted to RMB68 million during the year ended December 31, 2014 (2013: RMB66 million; 2012: RMB61 million).



| | (e) | Commitments to CSAHC
| | --- | --------------------



At December 31, 2014, the Group
had operating lease commitments to CSAHC in respect of lease payments for land and buildings of RMB207 million (2013: RMB66 million).



F-80







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 49 | Employee benefits plan
| | -- | ----------------------



| | (a) | Retirement benefits
| | --- | -------------------



Employees of the Group
participate in several defined contribution retirement schemes organised 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 11% to 21% (2013: 10% to 22%; 2012: 8% to 25%) of salary costs including certain allowances. A
member of the retirement schemes is entitled to pension benefits from the Local Labour and Social Security Bureau upon
his/her retirement. The retirement benefit obligations of all retired staff of the Group are assumed by these schemes. The
Group, as its sole discretion, had made certain welfare subsidy payments to these retirees.



In 2014, the Company and its major
subsidiaries joined a new defined contribution retirement scheme (“Pension Scheme”) that was implemented by CSAHC.
The annual contribution to the Pension Scheme is based on a fixed specified percentage of prior year’s annual wage. There
will be no further obligation beyond the annual contribution according to the Pension Scheme. The total contribution into the
Pension Scheme in 2014 was approximately RMB407,000,000.



| | (b) | Housing benefits
| | --- | ----------------



The Group contributes on a monthly
basis to housing funds organised 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:



| | (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 income statement. The amount was fully amortised 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 income statement.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-81







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 49 | Employee benefits plan (continued)
| | -- | ----------------------------------



| | (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 HKD3.92 per unit in December 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), a dividend of RMB 0.05(equivalent to HKD0.06) (inclusive of applicable tax) and a dividend
of RMB0.04 (equivalent to HKD0.05) (inclusive of applicable tax) per share was approved by the Company’s General Meeting
on May 31, 2012, June 18, 2013 and June 26, 2014 respectively (Note 45(b)), therefore, the exercise price for the SARs was adjusted
to HKD3.56 per share in accordance with the predetermined formula stipulated in the Scheme. During the year, 8,326,667 units of
SARs were lapsed.



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, 2014 was
determined to be 0 (2013: RMB1,893,000) and correspondingly, staff cost of RMB1,893,000 was reversed during the year ended December
31, 2014 (2013: RMB410,000).



| | 50 | Supplementary information to the consolidated cash flow
                                         statement
| | -- | ----------------------------------------------------------------------------------------------------------



Non-cash transactions-acquisition of aircraft



During the year ended December 31,
2014, aircraft acquired under finance leases amounted to RMB19,162 million (2013: RMB17,268 million; 2012: RMB8,178 million).



| | 51 | Contingent liabilities
| | -- | ----------------------



| | (a) | The Group leased certain properties
                                         and buildings from CSAHC which located in Guangzhou, Wuhan and Haikou, etc. which had
                                         been used by CSAHC before they are leased by the Company. However, such 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 such properties and buildings.



In addition, as disclosed in notes
21 and 23, the Group is applying title certificates for certain of the Group’s properties and land use rights certificates
for certain parcels of land. The Company is of the opinion that the use of and the conduct of operating activities at these properties
and these parcels of land are not affected by the fact that the Group has not yet obtained the relevant certificates.



F-82







Notes to the consolidated financial statements

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi unless otherwise indicated)



| | 51 | Contingent liabilities (continued)
| | -- | ----------------------------------



| | (b) | The Company and its subsidiary,
                                         Xiamen Airlines, entered into agreements with their pilot trainees and certain banks
                                         to provide guarantees on personal bank loans amounting to RMB646 million (December 31,
                                         2013: RMB656 million) that can be drawn by the pilot trainees to finance their respective
                                         flight training expenses. As at December 31, 2014, total personal bank loans of RMB486
                                         million (December 31, 2013: RMB464million), under these guarantees, were drawn down from
                                         the banks. During the year, the Group paid RMB2 million (2013: RMB6 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
                                         for aircraft sold by the Company to the claimant. The claimant claimed against the Company
                                         for damages in the sum of approximately USD46 million or for the refund of its down payments
                                         of approximately USD12 million paid to the Company, and also interest thereon which is
                                         to be calculated in accordance with Section 35A, Supreme Court Act 1981 of the United
                                         Kingdom. In 2012, the claimant subsequently changed its claim for the refund of the down
                                         payment to approximately USD14 million. On July 25, 2013, the High Court of England and
                                         Wales dismissed the claimant’s claim in its entirely but awarded damages in the
                                         sum of approximately USD28 million, interest thereon and also legal costs to the Company
                                         in respect of its counterclaim made against the claimant. The claimant appealed to the
                                         Court of Appeal and on December 17, 2014, the Court of Appeal dismissed the claimant’s
                                         appeal but varied the award of damages to the Company from USD28 million to USD18 million.
                                         The Court of Appeal also ordered the claimant to pay the Company’s costs of the
                                         appeal. The claimant has applied for permission to further appeal the case to the Supreme
                                         Court but the application has been rejected by both the Court of Appeal and the Supreme
                                         Court. Based on existing information available, the Directors are of the opinion that
                                         an outflow of resource embodying economic benefits is not probable to occur.
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| | (d) | On May 31, 2014, the Company received
                                         a notice from the International Court of Arbitration of International Chamber of Commerce
                                         (“ICC”). The notice states that SASOF TR-81 AVIATION IRELAND LIMITED (the
                                         “lessor”) has applied for arbitration for the alleged breach of certain terms
                                         and conditions of an aircraft leasing agreement. The lessor has made a claim against
                                         the Company for an indemnity of approximately USD13 million, including the compensation
                                         for engine thrust upgrade damages, life components of engine, reserves of engines, cost
                                         of termination of the lease, external legal counsel’s remuneration and the interest
                                         thereon. On July 31, 2014, the Company has established a team to handle this arbitration
                                         and applied to ICC for a counter claim to request the lessor to compensate the Company
                                         for insurance fees amounting to USD8.2 million, deposits, default penalty, extra technical
                                         support fees and legal expenses and the interest thereon. As of the date of this report,
                                         the arbitration is still in early preparation phase and the arbitration session is expected
                                         to be held in early 2016. The Company cannot reasonably predict the result and potential
                                         impact of this pending litigation. Therefore, no additional provision has been made against
                                         this pending litigation.
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| | (e) | According to
                                         publicly available information, certain former members of the Group's senior management
                                         are subjects of investigation. The Company has assessed the implications on this matter
                                         on the Group's financial results and financial position. Based on the results of the
                                         review, the Company's directors consider that there were no material consequential impact
                                         on the Group's financial statements. As of the date of this report, the investigation
                                         of these former members of the senior management is ongoing.
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| | (f) | In late 2014 and early 2015, certain former executives of the Company became subjects of
                                                                                  investigation by the PRC authorities for job-related crimes and the Company then removed each of these executives from
                                                                                  office                                                                                   with immediate effect. In order to
                                                                                  assess any implications on the Group’s financial  statements, the Company and the Audit
                                                                                  Committee has retained an outside counsel and independent forensic accountants to review those areas which may be
                                                                                  impacted.                                                                                   Based
                                                                                  on the                                                                                   results of the review,
                                                                                  the                                                                                     Company’s directors concluded
                                                                                  that there was no material impact on the Group’s
                                                                                  financial statements. As of the date of this report, the PRC Authorities’ investigation of these former executives is
                                                                                  ongoing and legal proceedings are subject to many uncertainties. Based on current information, the Company does not believe
                                                                                  there will be any material impact on the Group’s financial statements.
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| | 52 | Immediate and ultimate controlling party
| | -- | ----------------------------------------



As at December 31, 2014, 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.



F-83