UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549



FORM 20-F



(Mark One)



| |  ̈ | 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, 2011



OR



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



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 _____________

For the transition period from _________ to _________



Commission file number
1-14660







(Exact name of Registrant as specified in
its charter)



CHINA SOUTHERN AIRLINES COMPANY LIMITED



(Translation of Registrant’s name
into English)



THE PEOPLE’S REPUBLIC OF CHINA



(Jurisdiction of incorporation or organization)



278 JI CHANG ROAD

GUANGZHOU, 510405



PEOPLE’S REPUBLIC OF CHINA



(Address of principal executive offices)



Mr. Xie Bing

Telephone: +86 20 86124462

E-mail:ir@csair.com

Fax: +86 20 86659040

Address: 278 JI CHANG ROAD



1







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



(Title of Class)



|SEC 1852 (05-06) | Persons who respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.
|---------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



None



(Title of Class)



Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 7,022,650,000
ordinary A Shares of par value RMB1.00 per share and 2,794,917,000 ordinary H Shares of par value RMB1.00 per share were issued
and outstanding as of December 31, 2011.



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



 ̈YesþNo



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



 ̈YesþNo



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



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



þYes ̈No



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



 ̈YesþNo



2







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 filerþAccelerated filer ̈Non-accelerated filer ̈



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



|U.S. GAAP ̈ |  | International Financial Reporting Standardsþ |  | Other ̈
|---------- |  | -------------------------------------------- |  | ------
|           |  | as issued by the International Accounting    |  |       
|           |  | Standards Board                              |  |       



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



 ̈Item 17 ̈Item
18



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



 ̈YesþNo



3







TABLE OF CONTENTS

China Southern Airlines Company Limited



|FORWARD-LOOKING STATEMENTS                                      | 7 
|--------------------------------------------------------------- | --
|                                                                |   
|INTRODUCTORY NOTE                                               | 7 
|                                                                |   
|GLOSSARY OF AIRLINE INDUSTRY TERMS                              | 8 
|                                                                |   
|PART I                                                          | 9 
|                                                                |   
|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.  | 9 
|                                                                |   
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.                | 9 
|                                                                |   
|ITEM 3. KEY INFORMATION.                                        | 9 
|                                                                |   
|A. Selected Financial Data.                                     | 9 
|                                                                |   
|B. Capitalization and Indebtedness.                             | 12
|                                                                |   
|C. Reasons for the Offer and Use of
    Proceeds.               | 12
|                                                                |   
|D. Risk Factors.                                                | 12
|                                                                |   
|ITEM 4. INFORMATION ON THE COMPANY.                             | 20
|                                                                |   
|A. History and Development of the Company.                      | 20
|                                                                |   
|B. Business Overview.                                           | 22
|                                                                |   
|C. Organizational Structure.                                    | 38
|                                                                |   
|D. Property, Plant and Equipment.                               | 39
|                                                                |   
|ITEM 4A. UNRESOLVED STAFF COMMENTS.                             | 41
|                                                                |   
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.           | 41
|                                                                |   
|A. Operating Results.                                           | 45
|                                                                |   
|B. Liquidity and Capital Resources.                             | 52
|                                                                |   
|C. Research and Development, Patents and
    Licenses, etc.     | 53
|                                                                |   
|D. Trend Information.                                           | 53
|                                                                |   
|E. Off-Balance Sheet Arrangements.                              | 54
|                                                                |   
|F. Tabular Disclosure of Contractual Obligations.               | 54
|                                                                |   
|ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.             | 54
|                                                                |   
|A. Directors, Senior Management and
    Employees.              | 54
|                                                                |   
|B. Compensation.                                                | 59
|                                                                |   
|C. Board Practices.                                             | 60
|                                                                |   
|D. Employees.                                                   | 62
|                                                                |   
|E. Share Ownership.                                             | 63
|                                                                |   
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.      | 63
|                                                                |   
|A. Major Shareholders.                                          | 63
|                                                                |   
|B. Related Party Transactions.                                  | 64
|                                                                |   
|C. Interests of Experts and Counsel.                            | 67
|                                                                |   
|ITEM 8. FINANCIAL INFORMATION.                                  | 67
|                                                                |   
|A. Consolidated Statements and Other Financial
    Information. | 67
|                                                                |   
|B. Significant Changes.                                         | 68
|                                                                |   
|ITEM 9. THE OFFER AND LISTING.                                  | 68
|                                                                |   
|A. Offer and Listing Details.                                   | 68



4







|B. Plan of Distribution.                                                                                                | 70
|----------------------------------------------------------------------------------------------------------------------- | --
|                                                                                                                        |   
|C. Markets.                                                                                                             | 70
|                                                                                                                        |   
|D. Selling Shareholders.                                                                                                | 70
|                                                                                                                        |   
|E. Dilution.                                                                                                            | 70
|                                                                                                                        |   
|F. Expenses of the Issue.                                                                                               | 70
|                                                                                                                        |   
|ITEM 10. ADDITIONAL INFORMATION.                                                                                        | 70
|                                                                                                                        |   
|A. Share Capital.                                                                                                       | 70
|                                                                                                                        |   
|B. Memorandum and Articles of Association.                                                                              | 70
|                                                                                                                        |   
|C. Material Contracts.                                                                                                  | 74
|                                                                                                                        |   
|D. Exchange Controls.                                                                                                   | 75
|                                                                                                                        |   
|E. Taxation.                                                                                                            | 75
|                                                                                                                        |   
|F. Dividends and Paying Agents.                                                                                         | 79
|                                                                                                                        |   
|G. Statement by Experts.                                                                                                | 79
|                                                                                                                        |   
|H. Documents on Display.                                                                                                | 79
|                                                                                                                        |   
|I. Subsidiary Information.                                                                                              | 79
|                                                                                                                        |   
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                                                    | 80
|                                                                                                                        |   
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.                                                        | 82
|                                                                                                                        |   
|A. Debt Securities.                                                                                                     | 82
|                                                                                                                        |   
|B. Warrants and Rights.                                                                                                 | 82
|                                                                                                                        |   
|C. Other Securities.                                                                                                    | 82
|                                                                                                                        |   
|D. American Depositary Shares.                                                                                          | 82
|                                                                                                                        |   
|PART II                                                                                                                 | 83
|                                                                                                                        |   
|ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.                                                               | 83
|                                                                                                                        |   
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.                                  | 83
|                                                                                                                        |   
|A. Material Modifications to the Instruments Defining the Rights of Security Holders.                                   | 83
|                                                                                                                        |   
|B. Material Modifications to the Rights of Registered Securities by Issuing or Modifying any other Class
of Securities. | 83



5







|C. Withdrawal or Substitution of a Material Amount of the Assets Securing any Registered Securities. | 83
|---------------------------------------------------------------------------------------------------- | --
|                                                                                                     |   
|D. Change of Trustees or Paying Agents for any Registered Securities.                                | 83
|                                                                                                     |   
|ITEM 15. CONTROLS AND PROCEDURES.                                                                    | 83
|                                                                                                     |   
|ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.                                                          | 85
|                                                                                                     |   
|ITEM 16B. CODE OF ETHICS.                                                                            | 85
|                                                                                                     |   
|ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES.                                                    | 85
|                                                                                                     |   
|ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE.                                 | 86
|                                                                                                     |   
|ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.                    | 86
|                                                                                                     |   
|ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT.                                             | 86
|                                                                                                     |   
|ITEM 16G. CORPORATE GOVERNANCE.                                                                      | 86
|                                                                                                     |   
|ITEM 16H. MINE SAFETY DISCLOSURE.                                                                    | 86
|                                                                                                     |   
|PART III                                                                                             | 89
|                                                                                                     |   
|ITEM 17. FINANCIAL STATEMENTS.                                                                       | 89
|                                                                                                     |   
|ITEM 18. FINANCIAL STATEMENTS.                                                                       | 89
|                                                                                                     |   
|ITEM 19. EXHIBITS.                                                                                   | 89
|                                                                                                     |   
|Index to Exhibits                                                                                    | 89



6







FORWARD-LOOKING STATEMENTS



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



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



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



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



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





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



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



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



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



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



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



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



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



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



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



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



INTRODUCTORY NOTE



In this Annual Report, unless the context
indicates otherwise, the “Company”, “we”, “us” and “our” means China Southern Airlines
Company Limited, a joint stock company incorporated in China on March 25, 1995, the “Group” means the Company and its
consolidated subsidiaries, and “CSAHC” means China Southern Air Holding Company, the Company’s parent company
which holds a 53.07% interest in the Company as of April 20, 2012.



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.



7







The Company presents its consolidated financial
statements in Renminbi. The consolidated financial statements of the Company for the year ended December 31, 2011 (the “Financial
Statements”) have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRSs”),
which collective term includes all applicable individual International Financial Reporting Standards, International Accounting
Standards (“IAS”) 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 = RMB6.3009,
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, 2011. No representation is made that the Renminbi amounts or U.S. dollar amounts included in this Annual Report could
have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. Any discrepancies
in the tables included herein between the amounts listed and the totals are due to rounding.



GLOSSARY OF AIRLINE INDUSTRY TERMS



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



|Capacity Measurements                    |  |                                                                                                                                                                        
|---------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                         |  |                                                                                                                                                                        
|“available seat kilometers” or “ASKs”    |  | the number of seats made available for sale multiplied by the kilometers flown                                                                                         
|                                         |  |                                                                                                                                                                        
|“available ton kilometers” or “ATKs”     |  | the tons of capacity available for the transportation of revenue load (passengers and cargo) multiplied by the kilometers flown                                        
|                                         |  |                                                                                                                                                                        
|Traffic Measurements                     |  |                                                                                                                                                                        
|                                         |  |                                                                                                                                                                        
|“cargo ton kilometers”                   |  | the load in tons multiplied by the kilometers flown                                                                                                                    
|                                         |  |                                                                                                                                                                        
|“revenue passenger kilometers” or “RPKs” |  | the number of passengers carried multiplied by the kilometers flown                                                                                                    
|                                         |  |                                                                                                                                                                        
|“revenue ton kilometers” or “RTKs”       |  | the load (passenger and cargo) in tons multiplied by the kilometers flown                                                                                              
|                                         |  |                                                                                                                                                                        
|Yield Measurements                       |  |                                                                                                                                                                        
|                                         |  |                                                                                                                                                                        
|“average yield”                          |  | revenue from airline operations (passenger and cargo) divided by RTKs                                                                                                  
|                                         |  |                                                                                                                                                                        
|“cargo yield”                            |  | revenue from cargo operations divided by cargo ton kilometers                                                                                                          
|                                         |  |                                                                                                                                                                        
|“passenger yield”                        |  | revenue from passenger operations divided by RPKs                                                                                                                      
|                                         |  |                                                                                                                                                                        
|“ton”                                    |  | a metric ton, equivalent to 2,204.6 pounds                                                                                                                             
|                                         |  |                                                                                                                                                                        
|Load Factors                             |  |                                                                                                                                                                        
|                                         |  |                                                                                                                                                                        
|“breakeven load factor”                  |  | the load factor required to equate scheduled traffic revenue with operating costs assuming that total operating surplus is attributable to scheduled traffic operations
|                                         |  |                                                                                                                                                                        
|“overall load factor”                    |  | RTKs expressed as a percentage of ATKs                                                                                                                                 
|                                         |  |                                                                                                                                                                        
|“passenger load factor”                  |  | RPKs expressed as a percentage of ASKs                                                                                                                                 



|Utilization         |  |                                                                          
|------------------- |  | -------------------------------------------------------------------------
|                    |  |                                                                          
|“utilization rates” |  | the actual number of flight and taxi hours per aircraft per operating day



8







|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.



ITEM 3. KEY INFORMATION.



A. Selected Financial Data.



The following tables present selected financial
data for the five-year period ended December 31, 2011. The selected consolidated income statement data for the three-year period
ended December 31, 2009, 2010 and 2011 and selected consolidated statement of financial position data as of December 31, 2010 and
2011 excluding basic and diluted earnings per ADR, are derived from the 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, 2007 and 2008
and selected consolidated statement of financial position data as of December 31, 2007, 2008 and 2009 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” are included elsewhere in this Annual Report. Our consolidated financial statements are
prepared and presented in accordance with International Financial Reporting Standards, or IFRSs.



9







Year ended December 31,



|                                            |  | 2011 US$                                        |         |   | 2011 RMB |  |         | 2010 RMB |  |  | 2009 RMB |   |  | 2008 RMB |         |   | 2007 RMB | 
|------------------------------------------- |  | ----------------------------------------------- | ------- | - | -------- |  | ------- | -------- |  |  | -------- | - |  | -------- | ------- | - | -------- | 
|                                            |  | (in million, except per share and per ADR data) |        
|                                            |  |                                                 |         |   |          |  |         |          |  |  |          |   |  |          |         |   |          | 
|Consolidated Income Statement Data:         |  |                                                 |         |   |          |  |         |          |  |  |          |   |  |          |         |   |          | 
|                                            |  |                                                 |         |   |          |  |         |          |  |  |          |   |  |          |         |   |          | 
|Operating revenue                           |  |                                                 | 14,346  |   |          |  | 90,395  |          |  |  | 76,495   |   |  |          | 54,802  |   |          | 
|Operating expenses                          |  |                                                 | (13,817 | ) |          |  | (87,063 | )        |  |  | (70,689  | ) |  |          | (55,355 | ) |          | 
|Operating profit/(loss)                     |  |                                                 | 691     |   |          |  | 4,353   |          |  |  | 6,282    |   |  |          | 1,436   |   |          | 
|profit/(loss) before taxation               |  |                                                 | 1,099   |   |          |  | 6,930   |          |  |  | 8,089    |   |  |          | 428     |   |          | 
|profit/(loss) for the year                  |  |                                                 | 966     |   |          |  | 6,090   |          |  |  | 6,412    |   |  |          | 524     |   |          | 
|profit/(loss) attributable to:              |  |                                                 |         |   |          |  |         |          |  |  |          |   |  |          |         |   |          | 
|Equity shareholders of the Company          |  |                                                 | 810     |   |          |  | 5,110   |          |  |  | 5,792    |   |  |          | 327     |   |          | 
|Non-controlling interests                   |  |                                                 | 156     |   |          |  | 980     |          |  |  | 620      |   |  |          | 197     |   |          | 
|Basic and diluted earnings/(loss) per share |  |                                                 | 0.08    |   |          |  | 0.52    |          |  |  | 0.70     |   |  |          | 0.05    |   |          | 
|Basic and diluted earnings/(loss) per ADR   |  |                                                 | 4.13    |   |          |  | 26.02   |          |  |  | 34.83    |   |  |          | 2.31    |   |          | 



Year ended December 31,



|                                                                                   |  | 2011 US$     |        |  | 2011 RMB |  |         | 2010 RMB |  |  | 2009 RMB |  |  | 2008 RMB |        |  | 2007 RMB | 
|---------------------------------------------------------------------------------- |  | ------------ | ------ |  | -------- |  | ------- | -------- |  |  | -------- |  |  | -------- | ------ |  | -------- | 
|                                                                                   |  | (in million) |       
|                                                                                   |  |              |        |  |          |  |         |          |  |  |          |  |  |          |        |  |          | 
|Consolidated Statement of Financial Position Data:                                 |  |              |        |  |          |  |         |          |  |  |          |  |  |          |        |  |          | 
|                                                                                   |  |              |        |  |          |  |         |          |  |  |          |  |  |          |        |  |          | 
|Cash and cash equivalents                                                          |  |              | 1,565  |  |          |  | 9,863   |          |  |  | 10,404   |  |  |          | 4,343  |  |          | 
|Other current assets                                                               |  |              | 1,527  |  |          |  | 9,622   |          |  |  | 5,455    |  |  |          | 4,785  |  |          | 
|Asset classified as held for sale                                                  |  |              | -      |  |          |  | -       |          |  |  | -        |  |  |          | 529    |  |          | 
|Property, plant and equipment, net                                                 |  |              | 13,920 |  |          |  | 87,711  |          |  |  | 80,214   |  |  |          | 63,673 |  |          | 
|Total assets                                                                       |  |              | 20,539 |  |          |  | 129,412 |          |  |  | 111,335  |  |  |          | 94,856 |  |          | 
|Bank and other loans, including long-term bank and other loans due within one year |  |              | 2,982  |  |          |  | 18,789  |          |  |  | 9,324    |  |  |          | 17,452 |  |          | 
|Short-term financing bills                                                         |  |              | -      |  |          |  | -       |          |  |  | -        |  |  |          | -      |  |          | 
|Obligations under capital leases due within one year                               |  |              | 283    |  |          |  | 1,784   |          |  |  | 1,654    |  |  |          | 1,431  |  |          | 
|Bank and other loans, excluding balance due within one year                        |  |              | 4,608  |  |          |  | 29,037  |          |  |  | 31,876   |  |  |          | 27,875 |  |          | 
|Obligations under capital leases, excluding balance due within one year            |  |              | 2,230  |  |          |  | 14,053  |          |  |  | 12,776   |  |  |          | 11,887 |  |          | 
|Total equity                                                                       |  |              | 5,995  |  |          |  | 37,777  |          |  |  | 30,316   |  |  |          | 13,368 |  |          | 
|Number of shares (in million)                                                      |  |              | 9,818  |  |          |  | 9,818   |          |  |  | 9,818    |  |  |          | 8,003  |  |          | 



10







Selected Operating Data



The following selected operating data of
the Group for each of the years in the five-year period ended December 31, 2011 have been derived from consolidated financial statements
prepared in accordance with IFRSs and other data provided by the Group which have not been audited.



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,



|                                              |  | 2011 |           |  | 2010 |  |           | 2009 |  |  | 2008    |  |  | 2007 |        
|--------------------------------------------- |  | ---- | --------- |  | ---- |  | --------- | ---- |  |  | ------- |  |  | ---- | -------
|Capacity                                      |  |      |           |  |      |  |           |      |  |  |         |  |  |      |        
|ASK (million)                                 |  |      | 151,064   |  |      |  | 140,498   |      |  |  | 123,441 |  |  |      | 112,767
|ATK (million)                                 |  |      | 20,795    |  |      |  | 19,140    |      |  |  | 15,446  |  |  |      | 14,276 
|Kilometers flown (thousand)                   |  |      | 939,233   |  |      |  | 872,899   |      |  |  | 746,133 |  |  |      | 686,236
|Hours flown (thousand)                        |  |      | 1,507     |  |      |  | 1,392     |      |  |  | 1,195   |  |  |      | 1,106  
|Number of landing and take-offs               |  |      | 702,264   |  |      |  | 686,223   |      |  |  | 616,296 |  |  |      | 556,914
|Traffic                                       |  |      |           |  |      |  |           |      |  |  |         |  |  |      |        
|RPK (million)                                 |  |      | 122,344   |  |      |  | 111,328   |      |  |  | 93,002  |  |  |      | 83,184 
|RTK (million)                                 |  |      | 14,461    |  |      |  | 13,104    |      |  |  | 10,067  |  |  |      | 9,200  
|Passengers carried (thousand)                 |  |      | 80,677    |  |      |  | 76,456    |      |  |  | 66,281  |  |  |      | 58,237 
|Cargo and mail carried (tons)                 |  |      | 1,135,000 |  |      |  | 1,117,000 |      |  |  | 862,000 |  |  |      | 835,000
|Load Factors                                  |  |      |           |  |      |  |           |      |  |  |         |  |  |      |        
|Passenger load factor (RPK/ASK) (%)           |  |      | 81.0      |  |      |  | 79.2      |      |  |  | 75.3    |  |  |      | 73.8   
|Overall load factor (RTK/ATK) (%)             |  |      | 69.5      |  |      |  | 68.5      |      |  |  | 65.2    |  |  |      | 64.4   
|Breakeven load factor (%)                     |  |      | 69.4      |  |      |  | 65.3      |      |  |  | 68.1    |  |  |      | 73.8   
|Yield                                         |  |      |           |  |      |  |           |      |  |  |         |  |  |      |        
|Yield per RPK (RMB)                           |  |      | 0.67      |  |      |  | 0.62      |      |  |  | 0.54    |  |  |      | 0.61   
|Yield per cargo and mail ton kilometers (RMB) |  |      | 1.61      |  |      |  | 1.70      |      |  |  | 1.63    |  |  |      | 1.96   
|Yield per RTK (RMB)                           |  |      | 6.03      |  |      |  | 5.66      |      |  |  | 5.26    |  |  |      | 5.86   
|Fleet                                         |  |      |           |  |      |  |           |      |  |  |         |  |  |      |        
|— Boeing                                      |  |      | 223       |  |      |  | 208       |      |  |  | 194     |  |  |      | 179    
|— Airbus                                      |  |      | 208       |  |      |  | 191       |      |  |  | 157     |  |  |      | 133    
|— McDonnell Douglas                           |  |      | -         |  |      |  | 12        |      |  |  | 16      |  |  |      | 25     
|— Others                                      |  |      | 13        |  |      |  | 11        |      |  |  | 11      |  |  |      | 11     
|Total aircraft in service at period end       |  |      | 444       |  |      |  | 422       |      |  |  | 378     |  |  |      | 348    
|Overall utilization rate (hours per day)      |  |      | 9.8       |  |      |  | 9.6       |      |  |  | 9.4     |  |  |      | 9.1    



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.



11







|Period               |  | Period End |        |  | Average (1) (RMB per US$) |  |        | High |  |  | Low    | 
|-------------------- |  | ---------- | ------ |  | ------------------------- |  | ------ | ---- |  |  | ------ | 
|                     |  |            |        |  |                           |  |        |      |  |  |        | 
|Annual Exchange Rate |  |            |        |  |                           |  |        |      |  |  |        | 
|                     |  |            |        |  |                           |  |        |      |  |  |        | 
|2007                 |  |            | 7.2946 |  |                           |  | 7.6058 |      |  |  | 7.8127 | 
|2008                 |  |            | 6.8225 |  |                           |  | 6.9477 |      |  |  | 7.2946 | 
|2009                 |  |            | 6.8259 |  |                           |  | 6.8307 |      |  |  | 6.8470 | 
|2010                 |  |            | 6.6000 |  |                           |  | 6.7696 |      |  |  | 6.8330 | 
|2011                 |  |            | 6.2939 |  |                           |  | 6.4630 |      |  |  | 6.6364 | 



| | (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 2011                      |  |      | 6.3825 |  |     | 
|November 2011                     |  |      | 6.3839 |  |     | 
|December 2011                     |  |      | 6.3733 |  |     | 
|January 2012                      |  |      | 6.3330 |  |     | 
|February 2012                     |  |      | 6.3120 |  |     | 
|March 2012                        |  |      | 6.3315 |  |     | 
|April 2012 (up to April 20, 2012) |  |      | 6.3150 |  |     | 



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 53.07% of the equity of the Company.
On March 8, 2010, we entered into the A shares subscription agreement with CSAHC, pursuant to which CSAHC has conditionally
agreed to subscribe and the Company has conditionally agreed to allot and issue new A shares of not more than 132,510,000
shares. In addition, the Company and Nan Lung, a wholly-owned subsidiary of CSAHC, entered into an H shares subscription
agreement, pursuant to which Nan Lung has conditionally agreed to subscribe and we have conditionally agreed to allot and
issue new H shares of not more than 312,500,000 shares. The foregoing subscriptions of 123,900,000 A shares by CSAHC and
312,500,000 H shares by Nan Lung were completed on October
29, 2010 and November 1, 2010, respectively. 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.



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 net income.
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 net income. Moreover, as the Group has
substantial obligations denominated in foreign currencies, its results of operations are significantly affected by
fluctuations in foreign exchange rates, particularly by fluctuations in the Renminbi-U.S. dollar exchange rate. Net exchange
gain increased by RMB1,009 million, from RMB1,746 million in 2010 to RMB2,755 million
in 2011 mainly attributable to the exchange gain arising from retranslation and settlement of bank and other loans balances
and finance lease obligations denominated in U.S. dollars, as a result of the significant appreciation of Renminbi against
U.S. dollar in 2011.



12







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, 2011, the Group’s current liabilities exceeded its current assets by RMB24,928 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 2011 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. In particular,
our ability to obtain adequate external funding may be impacted by the economic stagnation globally. If we are unable to obtain
adequate financing for our capital requirements, our liquidity and operations would be materially and adversely affected.



As of
December 31, 2011, the Group had banking facilities with several PRC commercial banks for providing loan finance up to approximately
RMB127,448 million, of which approximately RMB36,414 million was utilized. Our directors believe that sufficient financing will
be available to the Group in 2012. 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 the risks associated with the business of SA Finance over which
the Group does not exercise control. As of December 31, 2010 and 2011,
the Group had deposits of RMB1,111 million and RMB2,493 million, respectively, with SA Finance.



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



Both international and domestic economic
fluctuations and Chinese macroeconomic controls affect the demand for air travel. For example, US subprime crisis, an adverse impact
on the global economy beginning in 2007 and lasting several years has significantly weakened the demand for air travel during the
past few years. Although the macroeconomic environment showed overall improvement in the first half of fiscal 2011, the development
of certain economic indicators as well as the recent turbulences in the financial markets in the second half of fiscal 2011, primarily
as a result of the ongoing sovereign debt crisis in the Eurozone, still indicate a highly volatile macroeconomic environment. It
is uncertain how long these effects will last.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.



13







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.



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.



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 A/H1-N swine flu in
March 2009 has had an adverse impact on the aviation industry globally (including the Group). The spread of the swine flu has been
adversely affecting the Group’s international routes operations. If the swine flu spreads more widely, it could also affect
the Group’s regional and domestic routes operations, and result in significant impact on our business operations. If there
were another outbreak of a disease that affects travel behavior
in the future, it could have a material adverse impact on us.



In 2011, a number of large-scale natural
disasters occurred globally, such as the nuclear meltdown in Japan caused by earthquakes and subsequent tsunami, the hurricane
on the East Coast of the United States, the flooding in Thailand
and the typhoon in the Philippines. Disasters such as these can affect the airline 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 consequence, the lease agreements between CSAHC and the Company for such land have not been
registered with the relevant authorities. As a result, such lease agreements may not be enforceable. Lack of adequate documentation
for land use rights and ownership of buildings subjects the Company to challenges and claims by third parties with respect to the
Company’s use of such land and buildings.



As of the date of this Annual Report, we
have been occupying all of the land and buildings described above without challenge or claim by third parties.
CSAHC has received written assurance from the CAAC to the effect that CSAHC is entitled to continued use and occupancy of the land
and certain related buildings and facilities. However, such assurance does not constitute formal evidence of CSAHC’s right
to occupy such lands, buildings and facilities or the right to transfer, mortgage or lease such real property interests. We cannot
predict the magnitude of the adverse effect on its operations if its use of any one or more of these parcels of land or buildings
were successfully challenged. 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.



Given the preliminary stage of direct
flights arrangement between Taiwan and Mainland China, no assurance can be given that the Group will generate significant yields
from such new route. In addition, any discontinuity or disruption in such arrangement may negatively affect the Group’s results.



Further to temporary lifts of the ban on
direct flights between Taiwan and Mainland China during certain festivals, as of July 4, 2008, the ban has been further liberalized
to allow direct charter flights on weekends. Previously, travelers between Taiwan and Mainland China have had to make use of intermediate
stops in Hong Kong or elsewhere. The Company became the first Chinese carrier to fly non-stop from Mainland China to Taiwan. On
November 4, 2008, Mainland China and Taiwan agreed to regular direct passenger charter flights across the Taiwan Strait. On August
31, 2009, Mainland China and Taiwan extended the number of regular cross-Strait direct passenger flights from 108 to 270 a week.
From October 31, 2010, cross-Strait directpassenger flights increased
to 370 per week. On June 15, 2011, the transport departments on both sides of the Strait decided that the number of weekly cross-Strait
direct passenger flights would significantly increase to 558, representing an increase of over 50% from the previous number.



As a result, the permitted direct flights
may benefit the Group by shortening flights time, cutting fuel costs and reducing flight fares between Taiwan and Mainland China.
However, given the preliminary stage of such direct flights arrangement, no assurance can be given that the Group will generate
significant yields from the new route. In addition, the results of the Group’s operations will be negatively impacted by
any discontinuity or disruption in the direct flight arrangement, which in turn will be subject to a number of factors beyond our
control.



14







Terrorist attacks or the fear of such
attacks, even if not made directly on the airline industry, could negatively 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 on September 11, 2001 in the United States. Terrorist
attackscould also affect the aviation industry in
China. Notably, on March 7, 2008, on a China Southern Airlines flight boarding in Urumqi, crew members discovered a suspected terrorist.
On July 15, 2010, a passenger jet en route from Urumqi to Guangzhou was forced to make an emergency landing due to a bomb scare.
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. Among possible effects that terrorist attacks could have on the Company are substantial flight disruption
costs caused by grounding of fleet, significant increase of security costs and associated passenger inconvenience, increased insurance
costs, substantially higher ticket refunds and significant decrease in traffic measured in revenue passenger kilometer.



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



An accident or incident involving one of
our aircraft could require repair or replacement of a damaged aircraft, 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 or incident, 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 or incident involving the aircraft of any of our competitors may cause demand for air travel in general to decrease,
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
events, 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 help reduce the risk of some of these
potential disruptions. There can be no assurance, however, that the measures we have taken are adequate to prevent or remedy disruptions
or failures of those systems. Any substantial or repeated failure of those systems could adversely affect our operations and customer
services, result in the loss of important data, loss of revenues, and increased costs, and generally harm our business. Moreover,
a failure of certain of our vital systems could limit our ability to operate our flights for an extended period of time, which
would have a material adverse effect on our operations and our business.



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



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



Since 2011, pursuant to theBasic Standard
for Enterprise Internal Control jointly issued by the Ministry of Finance, China Securities Regulatory Commission (“CSRC”)
and other three PRC authorities on 22 May 2008, its application guidelines and other relevant regulations (collectively “PRC
internal control requirements”) issued subsequently, the Company shall carry 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 (“PRC Auditor”) is required to report on the effectiveness
of the Company's internal control over financial reporting.



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, 2011 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.



15







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 value of our shares
and ADRs and the nature of our assets and income over time, 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 2011. However, there can be no assurance that we will
not be a PFIC for the taxable year 2012 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 percentage value of its gross assets during the taxable year that produce passive
income or are held for the production of passive income is at least 50% of the value of its total gross assets (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 held for the production of passive income and (2) the average value of the Company’s gross
assets is calculated based on its market capitalization.



If we were a PFIC, you would generally
be subject to additional taxes and interest charges on certain “excess” distributions the Company makes regardless
of whether we continue to be a PFIC in the year in which you receive an “excess” distribution or dispose of or are
deemed to dispose of your ADRs. An excess distribution would be either (1) a distribution with respect to ADRs that is greater
than 125% of the average of such distributions over the preceding three years, or (2) 100% of the gain from the disposition of
shares/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 and pricing of domestic air fare, 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 CAAC has confirmed in writing that the Company will be treated equally with other Chinese airlines with respect
to certain matters regulated by the CAAC. Nevertheless, there can be no assurance that the CAAC will, in all circumstances, apply
its regulations and policies in a manner that results in equal treatment of all airlines.



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 2011 accounted for 67.6% 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.



16







Given the constant fluctuation in global
oil prices, there is no way to assure that domestic prices for jet fuel do not fluctuate as well. For example, prior to 1994, domestic
jet fuel prices were generally below international jet fuel prices. From 1994 to 2006, however, CAOSC’s domestic jet fuel
prices were above international jet fuel prices, sometimes creating tensions over the fuel supply. In 2007 through the first half
of 2008, the crude oil price in the international market reached its historic high level. In response to the pressure imposed by
such rocketing price, NDRC increased the domestic price for jet fuel on November 1, 2007 and June 20, 2008, respectively. The increased
fuel costs have significantly limited the Group’s ability to generate operating profit. In the second half of 2008, the crude
oil price in the international market began to decrease continuously. In order to cushion fuel cost pressure faced by Chinese airlines,
on December 19, 2008 and January 1, 2009, respectively, NDRC approved reductions in domestic prices for jet fuel. Starting from
February 2009, the crude oil price in the international market started to pick up gradually. As a result, NDRC increased the domestic
price for jet fuel in July 2009 and made several adjustments thereafter. The NDRC further adjusted domestic price for jet fuel
for multiple times in 2010, which have resulted in an increase in jet fuel price. In addition, the NDRC has recently lowered the
rate of fuel surcharge from 0.00002691 per km to 0.00002541 per km, starting from April 1, 2012 and ending on March 31, 2013. Based
on that rate, for every RMB100 by which the cost of jet fuel exceeds RMB4,140 per ton, the airlines are allowed to charge RMB0.00002541
per km for the flight distance. The Group’s net income may suffer from an unexpected change in the fuel surcharge collection
policies and other factors beyond our control.

(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, jet fuel shortages have occurred
in China and, on some rare occasions prior to 1993, required the Group 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 and the Group is forced to delay or cancel flights due to fuel shortage,
its operational reputation among passengers as well as its operations may suffer.



In 2011, a reasonable possible
increase or decrease of 10% in jet fuel price with volume of fuel consumed and all other variables held constant, would have
increased or decreased the Group’s annual fuel costs by approximately RMB3,268 million. Accordingly, even if the jet
fuel supply remains uninterrupted, increases in jet fuel prices will nevertheless adversely impact our financial results.



The Group’s net income 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
net incomes. On January 14, 2009, the NDRC and the CAAC jointly announced the suspension of the collection of passenger fuel surcharge
for domestic routes since January 15, 2009. In response to the pick up of international fuel prices, the NDRC and CAAC issued
a notice to introduce a new pricing mechanism of fuel surcharge that links it with airlines’ jet fuel costs on November
11, 2009. According to the new mechanism, when the purchase cost of jet fuel is lower than RMB4,140 per ton (i.e., the benchmark
price of jet fuel), airlines should not charge fuel surcharge. When the purchase cost of jet fuel exceeds RMB4,140 per ton, the
airlines may charge appropriate fuel surcharge provided that such airlines should digest at least 20 percent of the increasedcost. As such, following a suspension period of more than one year, in November, 2009, the Group resumed the imposing of
fuel surcharges for the domestic routes. However, the Group’s net income may suffer from an unexpected change in the fuel
surcharge collection policy and a number of factors beyond our control.



The Group’s results of operations
tend to be volatile and fluctuate due 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 tend to be volatile and subject to rapid and unexpected
change.



17







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



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



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



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



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



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







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



The PRC government
is aggressively implementing the expansion of its high-speed rail network, which will provide train services at a speed of up to
350km per hour connecting major cities such as Beijing, Shanghai, Wuhan, Qingdao, Guangzhou, Dalian and Hong Kong. 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 our routes of between 500km to 800km. 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 GHG
emissions. Airline operators arriving and departing in the EU will receive tradable emission permits (aviation allowances) covering
a certain level of their CO2 emissions per year for their flights operating to and from EU airports. If an airline fails
to obtain free-of-charge emission permits from the EU, it will have to buy around EUR10 million (RMB 100 million) worth of CO2
emissions allowances from other greener industries. The China Air Transport Association estimated that Chinese carriers will be
forced to pay an estimated RMB743 million annually to comply with the ETS. Recently, 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. There can be no assurance that
the formal notice and instructions would change the position of the EU on the non-member-state airlines’ inclusion in the
ETS.



18







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



While we have not entered into any fuel
hedging contracts since the fourth quarter of 2008, as the protection against increases in fuel prices, 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 US dollars. Depreciation or appreciation of the Renminbi against foreign currencies
affects the Group’s results significantly because the Group’s foreign currency payments generally exceed its foreign
currency receipts. The Group is not able to hedge its foreign currency exposure effectively other than by retaining its foreign
currency denominated earnings and receipts to the extent permitted by 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.



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



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



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



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
the imposition of a withholding tax on dividends paid by a Chinese company to a non-resident enterprise at a rate of 10%.



19







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 income tax
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%. 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.



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



As a public company, our auditor is required
by law to undergo regular Public Company Accounting Oversight Board ("PCAOB") inspection to assess its compliance with
US law and professional standards in connection with its audits of our financial statements filed with the SEC. The PCAOB,
however, is currently unable to inspect the audit work and practices of our auditor, which prevents PCAOB from regularly evaluating
our auditor's audits and its quality control procedures. As a result, our investors in the US cannot rely on PCAOB's oversight
of our audited financial statements.



ITEM 4. INFORMATION ON THE COMPANY.



A. History and Development of the
Company.



We are a joint stock company incorporated
in China on March 25, 1995, and is 53.07% owned by CSAHC. Our registered address is Guangzhou Economic & Technology Development
Zone, People’s Republic of China (telephone no: (86)20-8612-4462, website: www.csair.com).



In July 1997, we issued 1,174,178,000 H Shares, par value RMB1.00
per share, and listing of the H Shares on The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”)
and ADRs 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 with a par value
of RMB1.00 each and listed these shares on the Shanghai Stock Exchange.



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



On June 16, 2007, we, together with
an independent third party, established Chongqing Airlines Company Limited (“Chongqing Airlines”), a non-wholly
owned subsidiary of the Company. As of December 31, 2009, the Company has transferred four aircraft to Chongqing Airlines as
capital contribution.



On August 14, 2007, we signed an agreement
to acquire a 51% equity interest of Nan Lung International Freight Company Limited beneficially owned by and registered in the
name of Nan Lung Travel & Express (Hong Kong) Limited which is a wholly-owned subsidiary of CSAHC and a 100% equity interest
in Southern Airlines (Group) Catering Co., Limited, 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”), a subsidiary of the Company,
from CSAHC, and Flying College became a 91% owned subsidiary of the Company.



In June 2009, we acquired 50% equity interest
in a jointly controlled entity of the Company, Beijing Southern Airlines Ground Services Company Limited (“Beijing Ground
Service”) from the other venturer, which has become a wholly-owned subsidiary of the Company since then.



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



On June 2, 2010, a third party company
injected certain 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 during 2010.



20







In December 2010, we, Xiamen Jianfa Group
Co., Ltd. and Hebei Aviation Investment Group Corporation Limited (“Hebei Investment”) entered into an agreement, 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.



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 is around US$1.5 billion, including the purchase price for airframe and engines. 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.



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 is around US$76.9 million
including price for airframe and engines. The aggregate consideration for the acquisition will be partly payable in cash and partly
through financing arrangements with banking institutions. The Airbus aircraft will be delivered in stages to the Company from 2011
to 2013.



On September 30, 2010, Xiamen Airlines
entered into a supplemental agreement with Boeing to purchase additional 10 Boeing B737 series aircraft. The aggregate catalogue
price for those aircraft is around US$699 million, including price for airframe and engines. 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 is US$1.205 billion and US$2.575
billion, respectively, including the price for the airframe and engines. 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 for one aircraft is US$264 million, including the price for the airframe and engines. 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 for the six Boeing B787 series aircraft is US$1,098 million, including
the price for the airframe and engines. The aggregate consideration for the acquisition
will be partly payable by cash from Xiamen Airlines
and partly by 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 is around US$298 million, including price for airframe and engines. 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 2013 to 2016.



Capital Expenditure



The Group had RMB23,428 million, RMB17,082
million and RMB17,178 million capital expenditures in 2011, 2010 and 2009, respectively. Of such capital expenditures in 2011,
RMB3,349 million was financed by capital leases, RMB13,032 million was financed by bank borrowings while the remaining RMB7,047
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.



21







B. Business
Overview.



General



The Group provides commercial airline services
throughout Mainland China, Hong Kong, Macau and Taiwan regions, Southeast Asia and other parts of the world. Based on the statistics
from the CAAC, the Group is one of the largest Chinese airlines and, as ofthe
year end of 2011, 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, 2011, the Group’s RPKs increased
at a compound annual growth rate of 14.7% from 93,002 million in 2009 to 111,328million in 2010, and to 122,344 million in 2011,
while its capacity, measured in terms of ASKs, increased at a compound annual growth rate of 10.6%, from 123,441 million in 2009
to 140,498 million in 2010, and to 151,064 million in 2011. In 2011, the Group carried 80.68 million passengers and had passenger
revenue of RMB81,492 million (US$12,933 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”) and Chongqing Airlines Company Limited (“Chongqing Airlines”) (collectively, the
“Airline Subsidiaries”). In 2011, the Airline Subsidiaries carried 22.17 million passengers and had passenger
revenue of RMB19,251 million (US$3,055 million) and accounted for 27% and 24% 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 6% to RMB5,760 million (US$914 million) in 2011 as compared with
that of 2010. 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 the year end of 2011, the Group operated
720 routes, of which 576 were domestic, 106 were international and 38 were regional. The Group operates the most extensive domestic
route network among all Chinese airlines. Its route network covers commercial centers and rapidly developing economic regions in
Mainland China.



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



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 its Beijing
aviation business and building another main hub there in addition to its Guangzhou base. The establishment of Guangzhou and Beijing
hubs will facilitate strategic refinement and enhancement of its route network operations, putting the Company 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 the year end of 2011, the Group had 38 regional routes and 106 international routes. The Group’s regional
operations include flights between destinations in MainlandChina
Hong Kong, Macau and Taiwan. The Group’s international operations include scheduled services to cities in Australia, Bangladesh,
Canada, France, Georgia, India,
Japan, Kazakhstan, Korea, Kyrgyzstan, Maldives, Nepal, Netherlands, Nigeria, Pakistan, Russia, Saudi Arabia, Tajikistan, Turkey,
UAE, USA and Southeast Asian destinations.



After joining Skyteam Alliance, the Group
has established a network reaching 926 destinations globally, connecting 173 countries of regions and covering major cities around
the world.



As of December 31, 2011, the Group had
a fleet of 444 aircraft, consisting primarily of Boeing 737 series, 747, 757, 777, Airbus 320 series, 330, 380 etc. The average
age of the Group’s registered aircraft was 6.20 years as of the year end of 2011.



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.



22







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 and all 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.



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 listing of the H Shares on The Stock Exchange of Hong Kong
Limited (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 with a par value of RMB1.00 each and listed these shares on the Shanghai Stock Exchange. Subsequent to the A Share issue,
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 shall 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
a bonus share issue 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 has conditionally agreed to subscribe and the Company has 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 a H Shares subscription agreement, pursuant to which Nan Lung has conditionally agreed to subscribe and the Company has 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.



23







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



Issuance of Short-term Financing Bills and Medium Term Notes



On April 18, 2008, our Board approved the
proposed issue 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 issue at the annual general meeting for the year 2007. We believes that the bill issue will provide a further source of funding
at an interest rate which is expected to be lower than that for loans from commercial banks, lower the financing cost of borrowings
for us, and is in the interests of us and its shareholders as a whole. The Company has 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, bearing coupon
interest rate at 4.7% with a maturity period of one year for funding of the business activities of the Company.



On May 28, 2008, the Board approved the
proposed issue 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 issue
at the annual general meeting for the year 2007. The Company believes that the notes issue will 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
as approved by the Board and shareholders.



Traffic



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



|     |  | Passenger carried   |       |  | Cargo and Mail Carried (tons)              |  |      | Total traffic (tons kilometers) | 
|---- |  | ------------------- | ----- |  | ------------------------------------------ |  | ---- | ------------------------------- | 
|Year |  | Total (in millions) |       |  | Increase (decrease) over previous year (%) |  |      | Total (in thousands)            | 
|2009 |  |                     | 66.28 |  |                                            |  | 13.8 |                                 | 
|2010 |  |                     | 76.46 |  |                                            |  | 15.4 |                                 | 
|2011 |  |                     | 80.68 |  |                                            |  | 5.5  |                                 | 



Route Network



Overview



The Group operates the most extensive
route network among all Chinese airlines. As of December 31, 2011, the Group operated 720 routes consisting of 576 domestic
routes, 106 regional routes and 38 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.



24







In order to expand the Group’s
international route network, the Group has entered into code-sharing agreements with several international airlines,
including China Airlines, Mandarin Airlines, Japan Airlines, Korean Air, Asiana Airlines, Malaysia Airlines, PT. Garuda
Indonesia, Kenya Airways, Pakistan International Airlines, Czech Airlines, Vietnam Airlines, Aeroflot-Russian Airlines, Air
France, KLM Royal Dutch Airlines and Delta Air Lines. 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 926 destinations globally, connecting 173
countries of regions and covering major cities around the world.



Route Bases



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



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



Domestic Routes



The Group’s domestic routes network
serves substantially all provinces and autonomous regions in China, including Guangdong, Fujian, Hubei, Hunan, Hainan, Guangxi,
Guizhou, Henan, Heilongjiang, Jilin, Liaoning and Xinjiang, and serves all four centrally-administered municipalities in China,
namely, Beijing, Shanghai, Tianjin, and Chongqing. In 2011, the Group’s most profitable domestic routes were between: Guangzhou-Beijing,
Beijing-Guangzhou, Shenzhen-Beijing, Beijing-Shenzhen, Urumqi-Beijing, Fuzhou-Beijing, Guangzhou-Shanghai, Shanghai-Guangzhou,
Beijing-Urumqi and Xiamen-Shanghai.



Regional Routes



The Group offers scheduled service between
Hong Kong and Guangzhou, Shenyang, Wu Yi Shan, Changchun, Xiamen, Shantou, Beijing, Guilin, Meixian, Wuhan, Zhengzhou, Zhanjiang,
Luoyang and Nanning; between Macau and Hangzhou, Fuzhou, Xiamen and Quanzhou; between Taipei and Guangzhou, Shanghai, Fuzhou, Hangzhou,
Xiamen, Shenyang, Changsha, Wuhan, Dalian, Guilin, Harbin, Guiyang, Changchun, Nanning, Zhengzhou and Shenzhen; between Kaohsiung
and Fuzhou, Xiamen; between Taichung and Xiamen. In 2011, the most profitable scheduled regional routes were between: Xiamen-Hong
Kong, Taipei-Guangzhou, Guangzhou-Taipei, Xiamen-Taoyuan, Shanghai-Taipei, Fuzhou-Taoyuan, Hong Kong-Beijing, Taipei-Shanghai,
Hong Kong -Guangzhou- Changchun and Xiamen-Songshan.



In 2011, the Group conducted a total of
15,382 flights on its regional routes, accounting for approximately 23.2% of all passengers carried by Chinese airlines on routes
between Hong Kong, Macau or Taiwan and destinations inMainland
China according to CAAC statistics.



Previously, direct flights between Taiwan
and Mainland China had only been available during certain festivals. And travelers between Taiwan and China have had to make use
of intermediate stops in Hong Kong or elsewhere. Since July, 2008, however, the ban on direct flights has been further liberalized
to allow direct charter flights on weekends. The Company became the first Chinese carrier to fly nonstop to Taiwan. 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 increased the number of regular cross-Strait direct passenger flights from 108 to 270 a week.
The 108 direct passenger flights previously operating were all classed as charter flights. The new services comprise both regular
charter and scheduled flights.



In order to further strengthen its presence
in Taiwan, on June 23, 2008, the Company entered into a memorandum of cooperation with China Airlines, 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 Indonesia, Thailand, Malaysia, the Philippines, Vietnam,
Myanmar and Cambodia.



25







In addition, the Group also provides scheduled
services to the cities in Korea, Japan, Australia, The United Arab Emirates, Russia, Holland, New Zealand,
India, France, Kazakhstan, Nepal, the United States, Kirghizstan, Iran, Turkmenistan, Tajikistan, Pakistan, Canada, Georgia, Azerbaijan,
Bangladesh, Maldives andUzbekistan.



After joining Skyteam Alliance, the Group
has established a network reaching 926 destinations globally, connecting 173 countries of regions and covering major cities around
the world.



In 2011, the Group’s most profitable
international routes were: Guangzhou-Osaka, Seoul-Shenyang, Seoul-Dalian, Shenyang-Seoul, Guangzhou-Los Angeles, Tianjin-Xiamen-Singapore,
Beijing-Guangzhou-Phnom Penh, Dalian-Seoul, Guangzhou-Sydney and Osaka-Guangzhou.



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,
older aircraft. As of December 31, 2011, the Group operated a fleet of 444 aircraft with an average age of 6.20 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,
237 aircraft operated by the Group are leased pursuant to various types of leasing arrangements.





|Model           |  | Number of Aircraft |     |  | Average age (years) |  |       | Average Passenger Capacity | 
|--------------- |  | ------------------ | --- |  | ------------------- |  | ----- | -------------------------- | 
|Boeing 777-200A |  |                    | 4   |  |                     |  | 15.74 |                            | 
|Boeing 777-200B |  |                    | 6   |  |                     |  | 13.38 |                            | 
|Boeing 757-200  |  |                    | 21  |  |                     |  | 13.11 |                            | 
|Boeing 747F     |  |                    | 2   |  |                     |  | 9.56  |                            | 
|Boeing 737-800  |  |                    | 109 |  |                     |  | 4.04  |                            | 
|Boeing 737-700  |  |                    | 50  |  |                     |  | 6.53  |                            | 
|Boeing 737-300  |  |                    | 25  |  |                     |  | 17.38 |                            | 
|Boeing 777F     |  |                    | 6   |  |                     |  | 1.43  |                            | 
|Airbus 319-100  |  |                    | 44  |  |                     |  | 5.39  |                            | 
|Airbus 380-800  |  |                    | 2   |  |                     |  | 0.13  |                            | 
|Airbus 320-200  |  |                    | 84  |  |                     |  | 5.36  |                            | 
|Airbus 321-200  |  |                    | 57  |  |                     |  | 4.10  |                            | 
|Airbus 330-200  |  |                    | 13  |  |                     |  | 3.40  |                            | 
|Airbus 330-300  |  |                    | 8   |  |                     |  | 3.60  |                            | 
|EMB190          |  |                    | 7   |  |                     |  | 0.27  |                            | 
|EMB145          |  |                    | 6   |  |                     |  | 7.33  |                            | 
|                |  |                    |     |  |                     |  |       |                            | 
|Total           |  |                    | 444 |  |                     |  |       |                            | 





In 2011, the Group continued
to expand and modernize its aircraft fleet. During the year, the Group: (i) took scheduled delivery of twenty-nine
aircraft, including seven A320-200 aircraft, four A330-200 aircraft, two A380 aircraft, six B737-700 aircraft, one B777F
aircraft and nine B737-800 aircraft; (ii) purchased one originally operating leased B757-200 aircraft; (iii) took scheduled
delivery of twenty-three aircraft under operating leases, including eleven A320-200 aircraft, five B737-800 aircraft and
seven E190 aircraft; (iv) returned five aircraft under operating leases upon expiry, including two B757-200 aircraft and
three A320-200 aircraft; (v) disposed twenty-five aircraft, including twelve MD90 aircraft, four A300-600 aircraft, five
ATR-72 aircraft, two B757-200 aircraft and two B737-700 aircraft; (vi) exercised the purchase options stipulated in the
aircraft finance lease agreements and two A321-200 aircraft were reclassified as owned aircraft from finance leased aircraft.



In May 2011, we entered into one agreement
for the acquisition of six Boeing B777F freighters and Xiamen Airlines entered into one purchase agreement for the acquisition
of six Boeing B787 series aircraft. In February 2012, we entered into one agreement for the acquisition of ten Boeing 777-300ER
aircraft. Aircraft under those acquisition agreements are scheduled for delivery during the period from 2013 to 2016.



Aircraft Financing Arrangements



26







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, 2011, 76 of the Group’s 444 aircraft were
operated under capital leases, 161 were operated under operating leases, 207 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, 2011, the
number of aircraft operated by the Group pursuant to capital and operating leases and the remaining terms, expressed in years,
of such leases.



|Model                        |  | Capital Lease |    |  | Operating Lease |  |     | Average Remaining Lease Term | 
|---------------------------- |  | ------------- | -- |  | --------------- |  | --- | ---------------------------- | 
|Boeing 777-200A and 777-200B |  |               | 0  |  |                 |  | 4   |                              | 
|Boeing 757-200               |  |               | 0  |  |                 |  | 2   |                              | 
|Boeing 737-700               |  |               | 12 |  |                 |  | 15  |                              | 
|Boeing 737-800               |  |               | 15 |  |                 |  | 47  |                              | 
|Boeing 737-300               |  |               | 0  |  |                 |  | 4   |                              | 
|Boeing 777F                  |  |               | 2  |  |                 |  | 0   |                              | 
|Airbus 319-100               |  |               | 6  |  |                 |  | 30  |                              | 
|Airbus 320-200               |  |               | 22 |  |                 |  | 22  |                              | 
|Airbus 321-200               |  |               | 11 |  |                 |  | 20  |                              | 
|Airbus 330-200               |  |               | 8  |  |                 |  | 2   |                              | 
|Airbus 330-300               |  |               | 0  |  |                 |  | 8   |                              | 
|EMB190                       |  |               | 0  |  |                 |  | 7   |                              | 
|Total                        |  |               | 76 |  |                 |  | 161 |                              | 



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 2012 to 2023. As of December 31,
2011, the Group’s aggregate future minimum lease payments (including future finance charges) required under its capital leases
were RMB17,952 million. The Group’s capital leases typically cover a significant portion of the relevant aircraft’s
useful life and transfer the benefits and risks of ownership to the Group. Under its capital leases, the Group generally has an
option to purchase the aircraft at or near the end of the lease term. As is customary in the case of capital leases, the Group’s
obligations are secured by the related aircraft, as well as other collateral.



Operating Leases



As of December 31, 2011, the Group’s
aggregate future minimum lease payments required under its operating leases were RMB25,139 million. As of the year end of 2011,
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 twelve years. Pursuant to the terms of the operating
leases, the Group is obligated to make rental payments based on the lease term, with no termination payment obligations or purchase
option, and the lessor bears the economic benefits and risks of ownership. Under its operating leases, the Group has no option
to purchase the aircraft and is required to return the aircraft in the agreed condition at the end of the lease term. Although
title to the aircraft remains with the lessor, the Group is responsible during the lease term for the maintenance, servicing, insurance,
repair and overhaul of the aircraft.



For capital leases or operating leases,
the Group is obligated to indemnify the lessors against any withholding or similar taxes that may be imposed on the lessors by
taxing authorities in China with regard to payments made pursuant to such leases. In accordance with relevant PRC tax regulations,
a PRC lessee is liable to withhold PRC withholding tax in respect of any lease payments regularly made to an overseas lessor. Depending
on the circumstances, this tax is generally imposed at a fixed rate ranging from 0% to 11.6% of the lease payments, or in certain
cases, the interest components of such payments for capital lease. The PRC withholding tax payable in respect of the lease arrangements
amounting RMB172 million, RMB318 million and RMB198 million during 2011, 2010 and 2009 respectively, has been included as part
of the lease charges.



27







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 74 and 79 spare jet engines for its fleet as
of the year end of 2011 and 2010, 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 & Export Trading Corporation (“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 GAMECO, an entity jointly controlled by the Company, Hutchison
Whampoa (“Hutchison”) and South China International Aircraft Engineering Company Limited, consistent with the Group’s
strategy to achieve fully integrated airline operations and to assure continued access to a stable source of high quality maintenance
services. The remaining part of the maintenance for the Group’s fleet other than overhauls of jet engines is performed by
service providers in China and overseas. GAMECO performs all types of maintenance services, ranging from maintenance inspections
performed on aircraft (“line maintenance services”) to major overhaul performed at specified intervals. GAMECO was
the first of three aircraft maintenance facilities in China having been certified as a repair station by both the CAAC and the
Federal Aviation Administration. In March 1998, GAMECO received an approval certificate from the United Kingdom Civil Aviation
Authority for the repair and maintenance of aircraft and aircraft engines.



The Group believes that GAMECO
performs major maintenance checks on the Group’s aircraft within time periods generally consistent with those of large
international airline maintenance centers. GAMECO’s repair and maintenance capacity include overhaul of more than 70%
of the Group’s aircraft. Although rotables for the Group’s aircraft are generally imported through SAIETC, a
portion of expendables and other maintenance materials are directly imported by GAMECO. GAMECO also provides line maintenance
services to other nine Chinese airlines and 23 international airlines. GAMECO provides heavy maintenance services to 10
other Chinese airlines and 18 international airlines.



The Company and GAMECO had entered into
an Aircraft Maintenance and Engineering Agreement for the provision of aircraft repair and maintenance services. On May 17, 1996,
the Company and GAMECO entered into an agreement regarding the fee arrangement for the provision of such repair and maintenance
services.



Overhauls of jet engines are performed
by Zhuhai MTU, a former jointly controlled entity of the Company and MTU Aero Engines GmbH, and also by overseas qualified service
providers in Germany, Malaysia, Canada and England. On September 28, 2009, the Company entered into an agreement with CSAHC to
dispose of 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 MTU were RMB2,018 million RMB1,742 million and RMB1,344 million for the years ended
December 31, 2011, 2010 and 2009, 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. There were no serious incidents involving casualty or flight damage throughout the three years ended December 31,
2011. For minor “incidents” which include various events and conditions prescribed by the CAAC which do not
involve serious personal injury or material damage to flight equipment, the Group has kept the number consistently below the
standard prescribed by the CAAC. For example, the Company’s “Accident Signs Per Ten Thousands Hours Ratio”
was 0, 0.008 and 0.089 in 2011, 2010 and 2009, respectively. In comparison, CAAC’s published maximum acceptable
Accident Signs Per Ten Thousands Hours Ratio was 0.6, 0.6 and 0.6 in 2011, 2010 and 2009, respectively. This ratio is defined
as the occurrence of one incident for every 10,000 hours of flight time. In 2011, the Group strengthened its flight safety
management as per the internal and external safety requirements. In 2008, the Group received the “Five-Star Flight
Safety Award” from CAAC, making it the first in the aviation industry to receive such a great honor. By December 2011,
the Company’s continuous safe flight span totaled to 8.98 million hours.



28







Jet Fuel



Jet fuel costs typically represent a major
component of an airline’s operating expenses. The Group’s jet fuel costs accounted for 37.5%, 33.2% and 29.6% of the
Group’s operating expenses for the years ended December 31, 2011, 2010 and 2009, respectively. Like all Chinese airlines,
the Group is generally required by the Chinese government to purchase its jet fuel requirements from regional branches of CAOSC
and Bluesky Oil Supplies Company, except at the Shenzhen, Zhuhai, Sanya, Haikou, Shanghai Pudong and other small airports where
jet fuel is supplied by Sino-foreign joint venture in which CAOSC is a joint venture partner. CAOSC is a State-owned organization
controlled and supervised by the CAAC that controls the importation and distribution of jet fuel throughout China.



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



Prior to 1994, domestic jet fuel prices
were generally below international jet fuel prices. The Chinese government had gradually increased domestic jet fuel prices in
order to reflect more accurately the costs of supplying jet fuel in China. As a result, domestic jet fuel prices have become higher
than those in the international market since the beginning of 1994. In 2007 through the first half of 2008, the crude oil prices
in the international market reached historic highs. In response to the pressure imposed by such rocketing prices, on November 1,
2007 and June 20, 2008, respectively, NDRC increased the domestic price for jet fuel. Thereafter, in order to cushion fuel cost
pressure faced by Chinese airlines, on December 19, 2008 and January 1, 2009, respectively, NDRC approved reductions in domestic
prices for jet fuel. However, starting from February 2009, the crude oil price in the international market started to pick up gradually.
As a result, NDRC increased the domestic price for jet fuel in July 2009 and made several subsequent adjustments thereafter.



Jet fuel costs increased from RMB23,492
million in 2010 to RMB32,675 million in 2011 as a result of increase in average jet fuel price by 28.4%.



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 22% and 19% of the Group’s total jet fuel consumption in 2011 and 2010,
respectively.



Fuel Surcharge



The NDRC has recently lowered the rate
of fuel surcharge from 0.00002691 per km to 0.00002541 per km, starting from April 1, 2012 and ending on March 31, 2013. Based
on that rate, for every RMB100 by which the cost of jet fuel exceeds RMB4,140 per ton, the airlines are allowed to charge RMB0.00002541
per km for the flight distance. The Group’s net income 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 on the Group’s route network, administering the Group’s flight plans, collecting and monitoring
navigation data and analyzing and monitoring airport conditions.



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



Training of Pilots and Flight Attendants



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



29







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 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 investor. Each trainee at the Flying College is required
to fly at least 230 hours before being awarded a flight certificate. Graduates of the BUAA and the Flying College are hired by
the Group as trainee pilots after passing a CAAC-administered examination to obtain a pilot license. The total training period
for the Group’s trainee pilots is approximately four years. The Group has about 1,624 trainees as of April 20, 2012 about
636 trainees are expected to graduate in 2012 .



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 simulator emergency procedures 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, a now 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, 2011. As of December 31, 2011, the Group has provided guarantees with
joint liability for the loans of such self-sponsored pilots in an aggregate amount of RMB395,000,000, under which an aggregate
of personal bank loans of RMB293,000,000 were drawn down from the banks. During the year, the Group has made repayments of RMB4,000,000
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 jet-ways, waiting areas,
ticket counters and support services buildings, at each airport that it serves. The Group pays landing, parking and other fees
to such airports, including Guangzhou Baiyun International Airport (the "Guangzhou Baiyun Airport"). At domestic airports,
such fees are generally determined by the CAAC.



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



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



30







Air Catering



We own a 55% equity interest in Guangzhou
Nanland Air Catering Company Limited (“Nanland”) as of December 31, 2011.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 100% interest in China Southern Airlines Group Air Catering Company Limited (“SAG Air Catering”) on
August 31, 2007 from CSAHC. SAG Air Catering provides in-flight meals for flights of the Company originating or stopping at domestic
airports, mainly in northern China and Xinjiang regions.



Cargo and Mail



The Group also provides air cargo and mail
services. A significant portion of these services are combined with passenger flights services. Currently, the Group has two Boeing
747 freighters and sixBoeing 777 freighters, mainly servicing six international cargo routes, Shanghai to Amsterdam, Frankfurt,
Vienna, Los Angeles, Chicago, Vancouverand Guangzhou to Amsterdam.



Currently, the Group conducts its cargo
business primarily through its cargo division 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, Baku, Bangkok, Bishkek, Brisbane, Busan, Chicago, Daegu, Daejeon, Delhi,
Dubai (Sharjah), Dushanbe, Frankfurt, Fukuoka, Hanoi, Hiroshima, Ho Chi Minh City, Irkutsk, Islamabad, Jakarta, Jeddah, Kathmandu,
Khabarovsk, Kitakyushu, Kuala Lumpur, London, Los Angeles, Manila, Melbourne, Moscow, Nagoga, Niigata, Novosibirsk, Oakland, Osaka,
Osh, Paris, Penang, Perth, Phnom Penh, Phuket, Sapporo, Sendai, Seoul, Siem Reap, Singapore, Sydney, Tashkent, Tehran, Tokyo, Toyama,
Vancouver, Vladivostok and Yangon.



The Group has agency agreements with airlines
in the Asia-Pacific region, Europe, the United States and Africa for the processing of ticket sales and reservations on a reciprocal
basis. In 2011, approximately 12% of all ticket sales for the Group’s scheduled flights were made by the Group’s network
of sales offices and CSAHC’s affiliates. The Group also sells tickets and accepts reservations through an extensive network
of non-exclusive independent sales agents. Under the agency agreements with these sales agents, the Group pays commissions based
on the value of tickets sold. The Group pays independent sales agents a commission of 5%-6% of the ticket price. Sales agents are
typically permitted to withhold their commission from the proceeds of ticket sales that are remitted to the Group. In 2011, independent
sales agents accounted for approximately 88% of the Group’s ticket sales for its scheduled flights.



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



Cargo



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



31







Promotional and Marketing Activities



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



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



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



To enhance relationships with its passengers,
the Group has launched two frequent flyer programs, namely the “China Southern Airlines Sky Pearl Club” and the “Egret
Mileage Plus”. By the end of 2011, the Group had approximately14,206,800members (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.



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.



32







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 had only been 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. The 108 direct passenger flights previously
operating were all classed as charter flights. The new services comprise both regular charter and scheduled flights. The Company
became the first Chinese carrier to fly nonstop to Taiwan. Previously, travelers between Taiwan and Mainland China have had to
make use of intermediate stops in Hong Kong or elsewhere.



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



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



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



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.



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



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



33













Acquisition of Aircraft and Flight Equipment



The CAAC requires all Chinese airlines
to acquire their aircraft through China Aviation Supplies Import and Export Corporation (“CASC”), an entity controlled
by the CAAC. 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 CASC 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 is paid an agency fee
for its services.



Jet Fuel Supply and Pricing



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



Safety



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



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



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



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 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, including the
Guangzhou Baiyun Airport with limited exceptions. 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.



34







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 2011, these three airlines together controlled approximately 74.5%of the commercial aviation market in China as measured by passengers carried.



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



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



In June 2011, the Beijing-Shanghai
High-Speed Railway was opened. 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. Meanwhile, the main arteries of Beijing-Shanghai, Beijing-Guangzhou,
Beijing-Harbin, the "Four Vertical Lines" on the coastal areas (except the Xiamen-Shenzhen High-Speed Rail) will be
all opened in 2012, and the travelling time between provinces and cities along the routes will have nearly saved
approximately 50% over travel on the existing railways, and a number of regional intercity high-speed railways will also be
opened during the year. With enormous expansion of the territory covered by the High-Speed Rail, the effect of network
operation should be visible in the early stage.



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.



Relative to other Chinese airlines, however,
the Group believes that it possesses certain competitive advantages. 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 of any Chinese airline, 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, 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 (ton kilometers) | 
|---- |  | ----------------------------- | ----- |  | ----------------------------- |  | ---- | ------------------------------ | 
|Year |  | Industry Total (in
 millions) |       |  | Group’s Share (% of
 total)   |  |      | Industry Total (in thousands)  | 
|2007 |  |                               | 185.8 |  |                               |  | 30.6 |                                | 
|2008 |  |                               | 192.5 |  |                               |  | 30.3 |                                | 
|2009 |  |                               | 230.5 |  |                               |  | 28.8 |                                | 
|2010 |  |                               | 267.7 |  |                               |  | 28.6 |                                | 
|2011 |  |                               | 292.2 |  |                               |  | 27.6 |                                | 



35







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 of the passengers carried, cargo and mail carried on departing flights and total departing flights at the ten busiest
airports in China, based on passenger volume data from CAAC statistics, in 2011.



|Airport           |  | Passenger carried (% of total) |      |  | Cargo and Mail carried (% of total) |  |      | Departing flight (% of total) | 
|----------------- |  | ------------------------------ | ---- |  | ----------------------------------- |  | ---- | ----------------------------- | 
|Beijing           |  |                                | 17.4 |  |                                     |  | 12.5 |                               | 
|Guangzhou         |  |                                | 50.2 |  |                                     |  | 28.4 |                               | 
|Shanghai Pudong   |  |                                | 9.1  |  |                                     |  | 6.3  |                               | 
|Shanghai Hongqiao |  |                                | 13.6 |  |                                     |  | 17.8 |                               | 
|Shenzhen          |  |                                | 27.8 |  |                                     |  | 16.3 |                               | 
|Chengdu           |  |                                | 12.4 |  |                                     |  | 12.5 |                               | 
|Kunming           |  |                                | 15.7 |  |                                     |  | 19.0 |                               | 
|Xi’an             |  |                                | 17.8 |  |                                     |  | 20.0 |                               | 
|Hangzhou          |  |                                | 33.4 |  |                                     |  | 26.4 |                               | 
|Chongqing         |  |                                | 25.1 |  |                                     |  | 22.0 |                               | 



The following table sets forth the Group’s
market share of the 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), based on passenger
volume data from CAAC statistics, in 2011.



|Airport   |  | Passenger carried (% of total ) |      |  | Cargo and Mail carried (% of total) |  |      | Departing flight (% of total) | 
|--------- |  | ------------------------------- | ---- |  | ----------------------------------- |  | ---- | ----------------------------- | 
|Changsha  |  |                                 | 40.5 |  |                                     |  | 53.6 |                               | 
|Wuhan     |  |                                 | 39.7 |  |                                     |  | 43.7 |                               | 
|Sanya     |  |                                 | 29.1 |  |                                     |  | 33.6 |                               | 
|Haikou    |  |                                 | 26.4 |  |                                     |  | 27.8 |                               | 
|Zhengzhou |  |                                 | 50.6 |  |                                     |  | 52.6 |                               | 
|Nanning   |  |                                 | 34.6 |  |                                     |  | 38.5 |                               | 
|Guilin    |  |                                 | 38.7 |  |                                     |  | 47.6 |                               | 
|Zhuhai    |  |                                 | 49.0 |  |                                     |  | 59.0 |                               | 



Regional Routes



In 2011, the Group conducted a total of
15,382 flights on its regional routes, accounting for approximately
23.2% of all passengers carried by Chinese airlines on routes between Hong Kong, Macau or Taiwan and destinations in China. The
Group faces less competition on regional routes than that on domestic and international, and earns higher operating margin. Air
China, Eastern Airlines, Air Macau, Dragon Air and Cathay Pacific Airways compete with the Group in the regional traffic markets.



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.



36







Air China has the most extensive international
route network among Chinese airlines. Beijing, the hub of Air China’s operations, has been the destination for most international
flights to China. The Group competes against, among other airlines, Thai Airways International, Singapore Airlines, Malaysian Airlines
System, Air China and China Eastern Airlines on flights to Southeast Asian destinations. In the case of its European routes, the
Group’s competitors include Cathay Pacific Airways. The Group faces competition on its international routes from Air China
and China Eastern Airlines, each of which operates several routes between destinations in China and the United States, as well
as international airlines that fly to Los Angeles from Hong Kong. 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, 2011, the Company owns a 51% or 60% equity interest
in each of the Airline Subsidiaries.



As of December 31, 2011, Xiamen Airlines
operated under its own “MF” code with a fleet of 76 aircraft on 102 domestic routes, 5 international routes and 14
regional routes. In 2011, Xiamen Airlines carried a total of about 15.32 million passengers, or approximately 19% of the passengers
carried by the Group in that year, and had RMB13,651 million in traffic revenue.



As of December 31, 2011, Shantou Airlines
operated under the Group’s “CZ” code with a fleet of ten aircraft. In 2011, under the centralized allocation
of flight routes of the Group, Shantou Airlines carried a total of about 2.32 million passengers, or 3% of the passengers carried
by the Group in that year. Total traffic revenue of Shantou Airlines for the year ended December 31, 2011 was RMB1,979 million.



As of December 31, 2011, Chongqing Airlines
operated under the “OQ” code with a fleet of seven aircraft. In 2011, under the centralized allocation of flight routes
of the Group, Chongqing Airlines carried a total of about 1.63 million passengers, or 2% of the total number of passengers carried
by the Group in that year. Total traffic revenue of Chongqing Airlines for the year ended December 31, 2011 was RMB1,313 million
..



As of December 31, 2011, Zhuhai Airlines
operated under the “CZ” code with a fleet of five aircraft. In 2011, under the centralized allocation of flight routes
of the Group, Zhuhai Airlines carried a total of about 1.05 million passengers, or approximately 1% 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, 2011 was RMB1,043 million.



As of December 31, 2011, Guizhou Airlines
operated under the “CZ” code with a fleet of eight aircraft. In 2011, under the centralized allocation of flight routes
of the Group, Guizhou Airlines carried a total of about 1.85 million passengers, or approximately 2% of the total number of passengers
carried by the Group in that year. Total traffic revenue of Guizhou Airlines was approximatelyRMB1,777 million for the year ended
December 31, 2011.



Insurance



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



Under the relevant PRC laws, civil liability
of Chinese airlines for death or injuries suffered by passengers on domestic flights is limited to RMB400,000 (approximately US$63,483)
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.



37









Intellectual Property



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



We own various trademarks and tradenames
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 tradenames under current Chinese law. The kapok logo is a trademark
registered in China and recorded with the International Air Transport Association (“IATA”), the rights to which are
owned by CSAHC. The Company and CSAHC have entered into a trademark license agreement (the “Trademark License Agreement”),
pursuant to which CSAHC has licensed to the Group the right to use the names “China Southern” and “China Southern
Airlines” in both English and Chinese and granted the Company a 10-year renewable license from 1997 to use the kapok logo
on a world-wide basis. CSAHC has retained the right to use the kapok logo in connection with its non-airline related businesses
conducted as of the date of the Trademark License Agreement and to permit its affiliates that do not compete, directly or indirectly,
with the Group to use the kapok logo. Unless CSAHC gives a written notice of termination three months before the expiration of
the agreement, the agreement will be automatically renewed for another ten-year term. In May of 2007, the Trademark License Agreement
has been 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, 2011 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.





38









The particulars of the Group’s principal
subsidiaries as of December 31, 2011 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 June 16, 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 February 12, 2002                      |  |                                                       | 51.84
|China Southern Airlines Group Air Catering Company Limited |  | PRC December 25, 2003                      |  |                                                       | 100  
|Nan Lung International Freight Limited                     |  | Hong Kong October 1, 1996                  |  |                                                       | 51   
|Beijing Southern Airlines Ground Services Company Limited  |  | PRC April 1, 2004                          |  |                                                       | 100  



The particulars of the Group’s principal associates and
jointly controlled entities as of December 31, 2011 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 January 26, 1971                 |  |                                          | 48.12 | %
|Guangzhou China Southern Zhongmian Dutyfree Store Co., Limited |  | PRC September 29, 2006                     |  |                                          | 50    | %



D. Property, Plant and
Equipment.



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



The Company’s headquarters in Guangzhou
occupy an area of approximately 1,272,201 square meters of land and a total gross floor area of approximately 705,323 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.



39







|          |  | Land (in square meters) |           | Buildings (in square meters
    )
|--------- |  | ----------------------- | --------- | ---------------------------------
|          |  | Owned                   |           |                                  
|          |  |                         |           |                                  
|Guangzhou |  |                         | 1,172,531 |                                  
|Shenzhen  |  |                         | 246,397   |                                  
|Zhuhai    |  |                         | 170,062   |                                  
|Changsha  |  |                         | 173,351   |                                  
|Zhengzhou |  |                         | 425,336   |                                  
|Haikou    |  |                         | 5,265     |                                  
|Wuhan     |  |                         | 16,712    |                                  
|Nanyang   |  |                         | —         |                                  
|Sanya     |  |                         | 106,680   |                                  
|Shenyang  |  |                         | 135,455   |                                  
|Dalian    |  |                         | —         |                                  
|Jilin     |  |                         | 134,488   |                                  
|Harbin    |  |                         | 2,499     |                                  
|Xinjiang  |  |                         | —         |                                  
|Guilin    |  |                         | 120,705   |                                  



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) |         | Buildings (in square meters)
|------------------ |  | ----------------------- | ------- | ----------------------------
|                   |  | Owned                   |         |                             
|                   |  |                         |         |                             
|Xiamen Airlines    |  |                         | 871,137 |                             
|Shantou Airlines   |  |                         | 36,931  |                             
|Zhuhai Airlines    |  |                         | 99,306  |                             
|Guizhou Airlines   |  |                         | 259,879 |                             
|Chongqing Airlines |  |                         | 82,449  |                             



As systems for registration and transfer
of land use rights and related real property interests in China have been implemented relatively recently, such systems do not
yet comprehensively account for all land and related property interests. The land in Guangzhou on which the Company’s headquarters
and other facilities are located and the buildings that the Company uses at its route base in Wuhan and Haikou are leased by the
Company from CSAHC. However, CSAHC lacks adequate documentation evidencing CSAHC’s rights to such land and buildings, and,
as a consequence, the lease agreements between CSAHC and the Company for such land may not be registered with the relevant authorities.
Lack of registration may affect the validity of such lease agreements. There are certain other parcels of land and buildings owned
or used by the Group that lack adequate documentation. Lack of adequate documentation for land use rights and ownership of buildings
may impair the ability of the Group to dispose of or mortgage such land use rights and buildings. As of April 20, 2012, 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 Airport), Xiamen, Heilongjiang, Jilin, Dalian, Hunan, Xinjiang, Henan, Shenzhen,
Beijing, Shanghai, Sanya, Zhuhai and Shenyang 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.



40







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 for long-lived assets



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



Depreciation



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



Recently Pronounced
International Financial Reporting Standards



Information relating to the recently pronounced
IFRSs is presented in Note 56 to the consolidated financial statements.



41







Overview



In 2011, due to the deepening sovereign
debt crisis of the developed economies and slowdown in economic growth of the emerging economies, difficulties were encountered
in the course of the global economic recovery. China implemented a proactive fiscal policy and prudent monetary policy,
continued to strengthen and refine its macroeconomic control and ensured the steady and relatively fast growth of the economy while
allowing a gradual fall in commodity prices. Benefitted from the steady and relatively fast growth of the PRC economy and the growing
household consumption demand, the domestic aviation passenger demand maintained growth. However, due to the slow recovery of the
developed economies, intense political situations in some regions and unexpected events such as the earthquake in Japan, in 2011,
the growth of the international aviation market was slow, the aviation cargo market was also affected and underwent a downturn,
and the domestic aviation demand grew at a slower pace compared to 2010. Facing the serious and complicated economic environment,
the Company effectively responded to the challenges brought by the sluggish international aviation market and cargo market by making
full use of the advantage of the steady growth in domestic civil aviation demand. Through strengthening safety management, accelerating
the strategic transformation and internationalization process, reinforcing market expansion while continuing to improve the operational
quality and significantly raising its service standards, the Company made progress in safety, operations, transformation, services
and other aspects, maintained the best safety record among airlines in China, and once again achieved good results in production
and operation, thereby effectively enhancing our brand image and our comprehensive competitiveness.



In 2011, we strictly performed
standardized management, strengthened the building of safety management system, brought the alert functions of the safety management
system into full play, and averted safety risks effectively on a timely basis, thus achieving the best safety performance ever
in its history and significantly improving our safety quality. In 2011, the Group completed a total of 1,507,000 safe flight hours,
including 8,777 general flight hours, representing an increase of 1,060 hours as compared with the previous year, and maintained
146 consecutive months of aviation safety and 210 consecutive months of aviation security. The Group maintained the best safety
record among airlines in China and realized the excellent results of “Two Zeros”, i.e. zero company responsibility
incidents and zero human error incidents.



In 2011, facing the adverse factors,
such as the slowdown in the civil aviation market and the sluggish cargo market, we actively strengthened marketing and
cooperation, and continued to enhance the quality of the passenger operations by seizing opportunities in the market,
strengthening high-end marketing, developing frequent-flyers and enhancing the control of channels. During the reporting
period, operating indicators of the Company, including passenger load factor, revenue per seat/ kilometer and average fare
continued to increase. Facing the serious situation of the overall cargo transport, the Company actively developed the cargo
transport market and effectively reduced cargo transport losses. In addition, during the reporting period, the Company
successfully introduced and operated aircraft A380 and became the sole airline that operated aircraft A380 in the aviation
industry of China, thereby effectively enhancing the profile, social influence and brand recognition of the Company. We sped
up the structural adjustment of the fleet and further optimized our fleet structure by disposing of the older aircraft. In
2011, the Company’s major production and operation indicators remained steady on the rise with and created a new
high.



In 2011, we continued to promote
the energy conservation and emission reduction programs and further optimized the structure of the fleet by disposing of older
aircraft. In 2011, we recorded a 3.3% decrease in fuel consumption per tonne kilometer as compared with the previous year
with a reduction in carbon dioxide emission of 80,000 tonnes, and was ranked 21st at the “China Corporate Social Responsibility
List(中国企业社会责任排行榜)”, awarded the honor as “China
2011 Top 100 Green Companies(2011年中国百强绿色企业)”, “Green
Company of the Year(年度绿色企业)”, “Green Action China 2011 Ten Leading Companies(绿色感动中国2011十大领军企业)”,
“The Most Socially Responsible Listed Company(最具社会责任感上市公司)”.
Moreover, responding to the needs of the State, we successfully accomplished the special transportation tasks, including the evacuation
of PRC citizens from Libya and Japan following the earthquake as well as to ensure the safe air transportation for the 26th Summer
Universiade and the 1st Asia-Europe Expo. In 2011, the Company’s Ten Cent Care Foundation donated RMB 13.97 million and effectively
fulfilled our social responsibility.



Nevertheless, the development of
the airline industry has a number of challenges, such as the uncertain recovery of global economy, faster growth in the total
traffic capacity of the industry, the impact of substitutive services such as Express Rail, and sharp fluctuation in
oil prices.



Since July 21, 2005, the PRC government
has adopted a managed floating exchange rate system based on market supply and demand of currencies, which is subject to adjustments
with reference to a basket of currencies. The exchange rate of Renminbi would no longer be pegged to the U.S. dollar only and a
more flexible exchange rate system was established. Because the Group finances its aircraft acquisitions mainly through capital
leases or bank loans in U.S. dollars, and there are a substantial amount of transactions and obligations denominated in U.S. dollars
in relation to its global purchases of jet fuel, lease and purchase of aviation equipment as well as major repairs, in addition
to the landing fees of its international flights in the airports of other countries, the Group benefited from the RMB appreciation.
RMB appreciation has brought exchange gain to the Group and reduced its operating costs which are denominated in foreign
currencies. However, RMB appreciation also presents the Group with a challenge in price competition in international route operations.



42







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



Like most airlines, the Group is subject
to a high degree of financial and operating leverage. A significant percentage of the Group’s operating expenses are fixed
costs that do not vary proportionally based on the Group’s yields or the load factors. These fixed costs include depreciation
expense, jet fuel costs, landing and navigation fees, financing costs, operating lease payments, aircraft maintenance costs and
labor for flight crew, cabin crew and ground personnel. Thus, a minor change in the Group’s yields or load factors would
have a material effect on the Group’s results of operations. In addition, certain of these expenses, primarily financing
costs and operating lease payments, labor costs and depreciation do not vary based on the number of flights flown. Thus, the Group’s
operating results can also be substantially affected by minor changes in aircraft utilization rates. The Group is and will continue
to be highly leveraged with substantial obligations denominated in foreign currencies and, accordingly, the results of its operations
are significantly affected by fluctuations in foreign exchange rates, particularly for the U.S. dollar. Net exchange gain increased
by RMB1,009 million, from RMB1,746 million in 2010 to RMB2,755 million in 2011, mainly attributable to the exchange gain arising
from retranslation and settlement of bank and other loans balances and financial lease obligations denominated in U.S. dollars,
as a result of the significant appreciation of Renminbi against U.S. dollars in 2011.



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



Certain Financial Information and Operating
Data by Geographic Region



The following table sets forth certain
financial information and operating data by geographic region for the years ended December 31, 2011, 2010 and 2009:



43







|                                       |  | Year ended December 31, |         |  | 2011 vs. 2010 % increase |  |         | 2010 vs. 2009 % increase | 
|-------------------------------------- |  | ----------------------- | ------- |  | ------------------------ |  | ------- | ------------------------ | 
|Traffic                                |  | 2011                    |         |  | 2010                     |  |         | 2009                     | 
|RPK (million)                          |  |                         |         |  |                          |  |         |                          | 
|Domestic                               |  |                         | 99,674  |  |                          |  | 94,014  |                          | 
|Regional                               |  |                         | 2,082   |  |                          |  | 1,788   |                          | 
|International                          |  |                         | 20,588  |  |                          |  | 15,526  |                          | 
|Total                                  |  |                         | 122,344 |  |                          |  | 111,328 |                          | 
|RTK (million)                          |  |                         |         |  |                          |  |         |                          | 
|Domestic                               |  |                         | 10,195  |  |                          |  | 9,715   |                          | 
|Regional                               |  |                         | 198     |  |                          |  | 171     |                          | 
|International                          |  |                         | 4,068   |  |                          |  | 3,218   |                          | 
|Total                                  |  |                         | 14,461  |  |                          |  | 13,104  |                          | 
|Passengers carried (thousand)          |  |                         |         |  |                          |  |         |                          | 
|Domestic                               |  |                         | 72,926  |  |                          |  | 69,727  |                          | 
|Regional                               |  |                         | 1,767   |  |                          |  | 1,573   |                          | 
|International                          |  |                         | 5,984   |  |                          |  | 5,156   |                          | 
|Total                                  |  |                         | 80,677  |  |                          |  | 76,456  |                          | 
|Cargo and mail carried (thousand tons) |  |                         |         |  |                          |  |         |                          | 
|Domestic                               |  |                         | 857     |  |                          |  | 874     |                          | 
|Regional                               |  |                         | 13      |  |                          |  | 12      |                          | 
|International                          |  |                         | 265     |  |                          |  | 231     |                          | 
|Total                                  |  |                         | 1,135   |  |                          |  | 1,117   |                          | 



|                                     |  | Year ended December 31, |         |  | 2011 vs. 2010 %increase |  |         | 2010 vs. 2009 %increase | 
|------------------------------------ |  | ----------------------- | ------- |  | ----------------------- |  | ------- | ----------------------- | 
|Capacity                             |  | 2011                    |         |  | 2010                    |  |         | 2009                    | 
|ASK (million)                        |  |                         |         |  |                         |  |         |                         | 
|Domestic                             |  |                         | 120,462 |  |                         |  | 117,383 |                         | 
|Regional                             |  |                         | 2,753   |  |                         |  | 2,353   |                         | 
|International                        |  |                         | 27,849  |  |                         |  | 20,762  |                         | 
|Total                                |  |                         | 151,064 |  |                         |  | 140,498 |                         | 
|ATK (million)                        |  |                         |         |  |                         |  |         |                         | 
|Domestic                             |  |                         | 14,145  |  |                         |  | 13,890  |                         | 
|Regional                             |  |                         | 316     |  |                         |  | 269     |                         | 
|International                        |  |                         | 6,334   |  |                         |  | 4,981   |                         | 
|Total                                |  |                         | 20,795  |  |                         |  | 19,140  |                         | 
|Load Factors                         |  |                         |         |  |                         |  |         |                         | 
|Passenger load factor (RPK/ASK) (%)  |  |                         |         |  |                         |  |         |                         | 
|Domestic                             |  |                         | 82.7    |  |                         |  | 80.1    |                         | 
|Regional                             |  |                         | 75.7    |  |                         |  | 76.0    |                         | 
|International                        |  |                         | 73.9    |  |                         |  | 74.8    |                         | 
|Overall                              |  |                         | 81.0    |  |                         |  | 79.2    |                         | 
|Overall load factor (RTK/ATK) (%)    |  |                         |         |  |                         |  |         |                         | 
|Domestic                             |  |                         | 72.1    |  |                         |  | 69.9    |                         | 
|Regional                             |  |                         | 62.6    |  |                         |  | 63.6    |                         | 
|International                        |  |                         | 64.2    |  |                         |  | 64.6    |                         | 
|Overall                              |  |                         | 69.5    |  |                         |  | 68.5    |                         | 
|Yield                                |  |                         |         |  |                         |  |         |                         | 
|Yield per RPK (RMB)                  |  |                         |         |  |                         |  |         |                         | 
|Domestic                             |  |                         | 0.68    |  |                         |  | 0.62    |                         | 
|Regional                             |  |                         | 0.88    |  |                         |  | 0.85    |                         | 
|International                        |  |                         | 0.56    |  |                         |  | 0.58    |                         | 
|Overall                              |  |                         | 0.67    |  |                         |  | 0.62    |                         | 
|Yield per RTK (RMB)                  |  |                         |         |  |                         |  |         |                         | 
|Domestic                             |  |                         | 6.90    |  |                         |  | 6.20    |                         | 
|Regional                             |  |                         | 9.69    |  |                         |  | 9.29    |                         | 
|International                        |  |                         | 3.67    |  |                         |  | 3.84    |                         | 
|Overall                              |  |                         | 6.03    |  |                         |  | 5.66    |                         | 
|Financial                            |  |                         |         |  |                         |  |         |                         | 
|Passenger revenue (RMB million)      |  |                         |         |  |                         |  |         |                         | 
|Domestic                             |  |                         | 68,222  |  |                         |  | 58,155  |                         | 
|Regional                             |  |                         | 1,834   |  |                         |  | 1,521   |                         | 
|International                        |  |                         | 11,436  |  |                         |  | 9,028   |                         | 
|Total                                |  |                         | 81,492  |  |                         |  | 68,704  |                         | 
|Cargo and mail revenue (RMB million) |  |                         | 5,760   |  |                         |  | 5,436   |                         | 



44







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.



2011 compared with 2010



The profit attributable to equity shareholders
of the Company of RMB5,110 million was recorded in 2011 as compared to the profit attributable to equity shareholders of the Company
of RMB5,792 million in 2010. The Group’s operating revenue increased by RMB13,900 million or 18.2% from RMB76,495 million
in 2010 to RMB90,395 million in 2011. Passenger load factor increased by 1.8 percentage points from 79.2% in 2010 to 81.0% in 2011.
Passenger yield (in passenger revenue per RPK) increased by RMB0.05 or 8.1% from RMB0.62 in 2010 to RMB0.67 in 2011. Average yield
(in traffic revenue per RTK) increased by 6.5% from RMB5.66 in 2010 to RMB6.03 in 2011. Operating expenses increased by RMB16,374
million or 23.2% from RMB70,689 million in 2010 to RMB87,063 million in 2011. As a result of the increase in operating expenses,
operating profit of RMB4,353 million was recorded in 2011 as compared to operating profit of RMB6,282 million in 2010, down by
RMB1,929 million.



Operating
revenue





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



45









Traffic revenue composition



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



Passenger revenue composition



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



Substantially all of the Group’s
operating revenue is attributable to airline and airline-related operations. Traffic revenue accounted for 96.5% and 96.9% of total
operating revenue in 2011 and 2010 respectively. Passenger revenue and cargo and mail revenue accounted for 93.4% and 6.6% respectively
of the total traffic revenue in 2011. The other operating revenue is mainly derived from commission income, hotel and travel services
income, fees charged for ground services rendered to other Chinese airlines, income from expired sales in advance of carriage and
aircraft wet lease income.



The increase in operating revenue was primarily
due to an 18.6% increase in passenger revenue from RMB68,704 million in 2010 to RMB81,492 million in 2011. The total number of
passengers carried increased by 5.5% to 80.68 million passengers in 2011. RPKs increased by 9.9% from 111,328 million in 2010 to
122,344 million in 2011, primarily as a result of the increase in number of passengers carried. Passenger yield per RPK increased
from RMB0.62 in 2010 to RMB0.67 in 2011.



Domestic passenger revenue, which accounted
for 83.7% of the total passenger revenue in 2011, increased by 17.3% from RMB58,155 million in 2010 to RMB68,222 million in 2011.
Domestic passenger traffic in RPKs increased by 6.0%, while passenger capacity in ASKs increased by 2.6%, resulting in an increase
in passenger load factor by 2.6 percentage points from 80.1% in 2010 to 82.7% in 2011. Domestic passenger yield per RPK increased
from RMB0.62 in 2010 to RMB0.68 in 2011, mainly resulted from the increase of domestic passenger revenue and fuel surcharge income
during the year.



Hong Kong, Macau and Taiwan passenger revenue,
which accounted for 2.3% of total passenger revenue, increased by 20.6% from RMB1,521 million in 2010 to RMB1,834 million in 2011.
For Hong Kong, Macau and Taiwan flights, passenger traffic in RPKs increased by 16.4%, while passenger capacity in ASKs increased
by 17.0%, resulting in a decrease in passenger load factor by 0.3 percentage points from 76.0% in 2010 to 75.7% in 2011. Passenger
yield per RPK increased from RMB0.85 in 2010 to RMB0.88 in 2011, mainly resulted from the increase of Hong Kong, Macau and Taiwan
passenger revenue.



46









International passenger revenue, which
accounted for 14.0% of total passenger revenue, increased by 26.7% from RMB9,028 million in 2010 to RMB11,436 million in 2011.
For international flights, passenger traffic in RPKs increased by 32.6%, while passenger capacity in ASKs increased by 34.1%, resulting
in a 0.9 percentage point decrease in passenger load factor from 74.8% in 2010 to 73.9% in 2011. Passenger yield per RPK decreased
from RMB0.58 in 2010 to RMB 0.56.



Cargo and mail revenue, which accounted
for 6.6% of the Group’s total traffic revenue and 6.4% of total operating revenue, increased by 6.0% from RMB5,436 million
in 2010 to RMB5,760 million in 2011. The increase was attributable to the increase in cargo traffic volume and fuel surcharge income.



Other operating revenue increased by 33.5%
from RMB2,355 million in 2010 to RMB3,143 million in 2011. The increase was primarily due to the general growth in income from
various auxiliary operations.



Operating expenses



Total operating expenses in 2011 amounted
to RMB87,063 million, representing an increase of 23.2% or RMB16,374 million over 2010, primarily due to the total effect of increases
in jet fuel costs, landing and navigation fees, maintenance expenses and other operating costs. Total operating expenses as a percentage
of total operating revenue increased from 92.4% in 2010 to 96.3% in 2011.



|                                            |  | 2011         |        |  | 2010       |  |       | Change 
in operating 
expenses | 
|------------------------------------------- |  | ------------ | ------ |  | ---------- |  | ----- | ------------------------------ | 
|                                            |  | RMB
 million |        |  | Percentage |  |       | RMB
 million                   | 
|Flight operations                           |  |              | 48,344 |  |            |  | 55.5  |                                | 
|Mainly including:      Jet fuel costs       |  |              | 32,675 |  |            |  |       |                                | 
|Operating lease charges                     |  |              | 4,654  |  |            |  |       |                                | 
|Flight personnel payroll
      and welfare  |  |              | 4,412  |  |            |  |       |                                | 
|Maintenance                                 |  |              | 7,531  |  |            |  | 8.7   |                                | 
|Aircraft and traffic servicing              |  |              | 12,337 |  |            |  | 14.2  |                                | 
|Promotion and sales                         |  |              | 6,568  |  |            |  | 7.5   |                                | 
|General and administrative                  |  |              | 2,807  |  |            |  | 3.2   |                                | 
|Impairment on property, plant and equipment |  |              | 584    |  |            |  | 0.7   |                                | 
|Depreciation and amortization               |  |              | 7,689  |  |            |  | 8.8   |                                | 
|Others                                      |  |              | 1,203  |  |            |  | 1.4   |                                | 
|                                            |  |              |        |  |            |  |       |                                | 
|Total operating expenses                    |  |              | 87,063 |  |            |  | 100.0 |                                | 



Flight operations expenses, which accounted
for 55.5% of total operating expenses, increased by 25.3% from RMB38,593 million in 2010 to RMB48,344 million in 2011, primarily
as a result of increase in jet fuel costs because of greater consumption of jet fuel and increase in average fuel prices. Jet fuel
costs, which accounted for 67.6% of flight operations expenses, increased by 39.1% from RMB23,492 million in 2010 to RMB32,675
million in 2011.



Maintenance expenses, which accounted for
8.7% of total operating expenses, increased by 34.8% from RMB5,586 million in 2010 to RMB7,531 million in 2011. The increase was
mainly due to the increase in number of engines repaired and routine maintenance during the year.



Aircraft and traffic servicing expenses,
which accounted for 14.2% of total operating expenses, increased by 12.5% from RMB10,968 million in 2010 to RMB12,337 million in
2011. The increase was primarily due to an 8.1% rise in landing and navigation fees from RMB7,792 million in 2010 to RMB8,426 million
in 2011, resulted from the increase in number of flights.



Promotion and sales expenses, which accounted
for 7.5% of total operating expenses, increased by 18.2% from RMB5,555 million in 2010 to RMB6,568 million in 2011.



General and administrative expenses, which
accounted for 3.2% of the total operating expenses, increased by 23.9% from RMB2,266 million in 2010 to RMB2,807 million in 2011.



47











Impairment on property, plant and equipment
increased by RMB372 million from RMB212 million in 2010 to RMB584 million in 2011.



Depreciation and amortization, which accounted
for 8.8% of total operating expenses, increased by 8.8% from RMB7,065 million in 2010 to RMB7,689 million in 2011, mainly due to
the additional depreciation charges on aircraft delivered in 2011.



Operating profit



Operating profit of RMB4,353 million was
recorded in 2011 (2010: RMB6,282 million). The decrease in profit was mainly due to the net effect of increase in operating revenue
by RMB13,900 million or 18.2% in 2011 and increase in operating expenses by RMB16,374 million or 23.2%.



Other net income



Other net income increased by RMB545 million
from RMB476 million in 2010 to RMB1,021 million in 2011, mainly due to the increase of government grants and gain on disposal of
aircraft.



Interest expense decreased by RMB198 million
from RMB1,265 million in 2010 to RMB1,067 million in 2011 was mainly due to the decrease in weighted average bank and other loans
balances during the year.



Net exchange gain of RMB2,755 million was
recorded in 2011, an increase of RMB1,009 million from RMB1,746 million in 2010, mainly due to Renminbi appreciated significantly
against US dollar in 2011.



Income tax



Income tax expense of RMB840 million was
recorded in 2011, decrease by RMB837 million from RMB1,677 million in 2010, mainly due to the utilization of unrecognized deductible
temporary differences and unused tax losses balance brought forward from prior years and the recognition of deductible temporary
differences in 2011.



2010 compared with 2009



The profit attributable to equity shareholders
of the Company of RMB5,792 million was recorded in 2010 as compared to the profit attributable to equity shareholders of the Company
of RMB327 million in 2009, owing to the Group’s operating revenue increased substantially. The Group’s operating revenue
increased by RMB21,693 million or 39.6% from RMB54,802 million in 2009 to RMB76,495 million in 2010. Passenger load factor increased
by 3.9 percentage point from 75.3% in 2009 to 79.2% in 2010. Passenger yield (in passenger revenue per RPK) increased by RMB0.08
or 14.8% from RMB0.54 in 2009 to RMB0.62 in 2010. Average yield (in traffic revenue per RTK) increased by 7.6% from RMB5.26 in
2009 to RMB5.66 in 2010. Operating expenses increased by RMB15,334 million or 27.7% from RMB55,355 million in 2009 to RMB70,689
million in 2010. As a result of the increase in operating revenue, operating profit of RMB6,282 million was recorded in 2010 as
compared to operating profit of RMB1,436 million in 2009, up by RMB4,846 million.







Operating revenue



|                                                 |  | 2010              |        |   | 2009       |  |       |                   | 
|------------------------------------------------ |  | ----------------- | ------ | - | ---------- |  | ----- | ----------------- | 
|                                                 |  | Operating revenue |        |   | Percentage |  |       | Operating revenue | 
|                                                 |  | RMB million       |        |   | %          |  |       | RMB million       | 
|Traffic revenue                                  |  |                   | 74,140 |   |            |  | 96.9  |                   | 
|Including:      Passenger revenue                |  |                   | 68,704 |   |            |  |       |                   | 
|– Domestic                                       |  |                   | 58,155 |   |            |  |       |                   | 
|– Hong Kong, Macau and Taiwan                    |  |                   | 1,521  |   |            |  |       |                   | 
|– International                                  |  |                   | 9,028  |   |            |  |       |                   | 
|Cargo and mail revenue                           |  |                   | 5,436  |   |            |  |       |                   | 
|Other operating revenue                          |  |                   | 2,355  |   |            |  | 3.1   |                   | 
|Mainly including:        Commission income       |  |                   | 469    |   |            |  |       |                   | 
|Hotel and travel services income                 |  |                   | 477    |   |            |  |       |                   | 
|Ground services income                           |  |                   | 390    |   |            |  |       |                   | 
|Expired sales in advance of carriage             |  |                   | 249    |   |            |  |       |                   | 
|Aircraft wet lease income                        |  |                   | 50     |   |            |  |       |                   | 
|Total operating revenue                          |  |                   | 76,495 |   |            |  | 100.0 |                   | 
|Less: fuel surcharge income                      |  |                   | (5,583 | ) |            |  |       |                   | 
|                                                 |  |                   |        |   |            |  |       |                   | 
|Total operating revenue excluding fuel surcharge |  |                   | 70,912 |   |            |  |       |                   | 



48







Traffic revenue composition



|                       |  | 2010            |        |  | 2009         |  |       |                 | 
|---------------------- |  | --------------- | ------ |  | ------------ |  | ----- | --------------- | 
|                       |  | Traffic revenue |        |  |              |  |       | Traffic revenue | 
|                       |  | RMB million     |        |  | Percentage % |  |       | RMB million     | 
|Passenger Revenue      |  |                 | 68,704 |  |              |  | 92.7  |                 | 
|Cargo and Mail Revenue |  |                 | 5,436  |  |              |  | 7.3   |                 | 
|Traffic revenue        |  |                 | 74,140 |  |              |  | 100.0 |                 | 



Passenger revenue composition



|                            |  | 2010              |        |  | 2009       |  |       |                   | 
|--------------------------- |  | ----------------- | ------ |  | ---------- |  | ----- | ----------------- | 
|                            |  | Passenger revenue |        |  | Percentage |  |       | Passenger revenue | 
|                            |  | RMB million       |        |  | %          |  |       | RMB million       | 
|Domestic                    |  |                   | 58,155 |  |            |  | 84.7  |                   | 
|Hong Kong, Macau and Taiwan |  |                   | 1,521  |  |            |  | 2.2   |                   | 
|International               |  |                   | 9,028  |  |            |  | 13.1  |                   | 
|                            |  |                   |        |  |            |  |       |                   | 
|Passenger revenue           |  |                   | 68,704 |  |            |  | 100.0 |                   | 



49







Substantially all of the Group’s
operating revenue is attributable to airline and airline related operations. Traffic revenue accounted for 96.9% and 96.7% of total
operating revenue in 2010 and 2009, respectively. Passenger revenue and cargo and mail revenue accounted for 92.7% and 7.3%, respectively
of the total traffic revenue in 2010. The other operating revenue is mainly derived from commission income, hotel and travel services
income, income from general aviation operations, fees charged for ground services rendered to other Chinese airlines, income from
expired sales in advance of carriage and aircraft wet lease income.



The increase in operating revenue was primarily
due to a 37.2% increase in passenger revenue from RMB50,059 million in 2009 to RMB68,704 million in 2010. The total number of passengers
carried increased by 15.4% to 76.46 million passengers in 2010. RPKs increased by 19.7% from 93,002 million in 2009 to 111,328
million in 2010, primarily as a result of the increase in number of passengers carried. Passenger yield per RPK increased from
RMB0.54 in 2009 to RMB0.62 in 2010.



Domestic passenger revenue, which accounted
for 84.7% of the total passenger revenue in 2010, increased by 35.1% from RMB43,033 million in 2009 to RMB58,155 million in 2010.
Domestic passenger traffic in RPKs increased by 16.5%, while passenger capacity in ASKs increased by 11.4%, resulting in an increase
in passenger load factor by 3.5 percentage point from 76.6% in 2009 to 80.1% in 2010. Domestic passenger yield per RPK increased
from RMB0.53 in 2009 to RMB0.62 in 2010, mainly resulted from the increase of domestic passenger revenue and fuel surcharge income
during the year.



Hong Kong, Macau and Taiwan passenger revenue,
which accounted for 2.2% of total passenger revenue, increased by 52.1% from RMB1,000 million in 2009 to RMB1,521 million in 2010.
For Hong Kong, Macau and Taiwan flights, passenger traffic in RPKs increased by 33.7%, while passenger capacity in ASKs increased
by 22.8%, resulting in an increase in passenger load factor by 6.2 percentage points from 69.8% in 2009 to 76.0% in 2010. Passenger
yield per RPK increased from RMB0.75 in 2009 to RMB0.85 in 2010, mainly resulted from the increase of Hong Kong, Macau and Taiwan
passenger revenue.



International passenger revenue, which
accounted for 13.1% of total passenger revenue, increased by 49.8% from RMB6,026 million in 2009 to RMB9,028 million in 2010. For
international flights, passenger traffic in RPKs increased by 41.6%, while passenger capacity in ASKs increased by 28.6%, resulting
in a 6.9 percentage point increase in passenger load factor from 67.9% in 2009 to 74.8% in 2010. Passenger yield per RPK increased
from RMB0.55 in 2009 to RMB0.58 in 2010, mainly resulted from the increase in international passenger revenue and fuel surcharge
income during the year.



Cargo and mail revenue, which accounted
for 7.3% of the Group’s total traffic revenue and 7.1% of total operating revenue, increased by 86.9% from RMB2,908 million
in 2009 to RMB5,436 million in 2010. The increase was attributable to the increase in cargo traffic volume and fuel surcharge income.



Other operating revenue increased by 28.3%
from RMB1,835 million in 2009 to RMB2,355 million in 2010. The increase was primarily due to the general growth in income from
various auxiliary operations.



Operating expenses



Total operating expenses in 2010 amounted
to RMB70,689 million, representing an increase of 27.7% or RMB15,334 million over 2009, primarily due to the total effect of increases
in jet fuel costs, landing and navigation fees, maintenance expenses and other operating costs. Total operating expenses as a percentage
of total operating revenue decreased from 101.0% in 2009 to 92.4% in 2010.



50







|                                            |  | 2010         |        |  | 2009       |  | Change in operating 
expenses |             
|------------------------------------------- |  | ------------ | ------ |  | ---------- |  | ----------------------------- | ------------
|                                            |  | RMB
 million |        |  | Percentage |  |                               | RMB
 million
|Flight operations                           |  |              | 38,593 |  |            |  | 54.6                          |             
|Mainly including:     Jet fuel costs        |  |              | 23,492 |  |            |  |                               |             
|Operating lease charges                     |  |              | 5,298  |  |            |  |                               |             
|Flight
    personnel payroll and welfare    |  |              | 3,420  |  |            |  |                               |             
|Maintenance                                 |  |              | 5,586  |  |            |  | 7.9                           |             
|Aircraft and traffic servicing              |  |              | 10,968 |  |            |  | 15.5                          |             
|Promotion and sales                         |  |              | 5,555  |  |            |  | 7.9                           |             
|General and administrative                  |  |              | 2,266  |  |            |  | 3.2                           |             
|Impairment on property, plant and equipment |  |              | 212    |  |            |  | 0.3                           |             
|Depreciation and amortization               |  |              | 7,065  |  |            |  | 10.0                          |             
|Others                                      |  |              | 444    |  |            |  | 0.6                           |             
|                                            |  |              |        |  |            |  |                               |             
|Total operating expenses                    |  |              | 70,689 |  |            |  | 100.0                         |             



Flight operations expenses, which accounted
for 54.6% of total operating expenses, increased by 31.7% from RMB29,296 million in 2009 to RMB38,593 million in 2010, primarily
as a result of increase in jet fuel costs because greater consumption of jet fuel and increase in average fuel prices. Jet fuel
costs, which accounted for 60.9% of flight operations expenses, increased by 43.3% from RMB16,390 million in 2009 to RMB23,492
million in 2010.



Maintenance expenses, which accounted for
7.9% of total operating expenses, increased by 25.6% from RMB4,446 million in 2009 to RMB5,586 million in 2010. The increase was
mainly due to the increase in number of engines repaired and routine maintenance during the year.



Aircraft and traffic servicing expenses,
which accounted for 15.5% of total operating expenses, increased by 19.6% from RMB9,169 million in 2009 to RMB10,968 million in
2010. The increase was primarily due to a 15.1% rise in landing and navigation fees from RMB6,772 million in 2009 to RMB7,792 million
in 2010, resulted from the increase in number of flights.



Promotion and sales expenses, which accounted
for 7.9% of total operating expenses, increased by 33.2% from RMB4,170 million in 2009 to RMB5,555 million in 2010.



General and administrative expenses, which
accounted for 3.2% of the total operating expenses, increased by 22.9% from RMB1,844 million in 2009 to RMB2,266 million in 2010.



Impairment on property, plant and equipment
increased by RMB186 million from RMB26 million in 2009 to RMB212 million in 2010.



Depreciation and amortization, which accounted
for 10.0% of total operating expenses, increased by 18.2% from RMB5,975 million in 2009 to RMB7,065 million in 2010, mainly due
to the additional depreciation charges on aircraft delivered in 2010.



Operating profit



Operating profit of RMB6,282 million was
recorded in 2010 (2009: RMB1,436 million). The increase in profit was mainly due to the net effect of increase in operating revenue
by RMB21,693 million or 39.6% in 2010 and increase in operating expenses by RMB15,334 million or 27.7%.



Other net income



Other net income decreased from RMB1,989
million in 2009 to RMB476 million in 2010, down by 76.1%, mainly due to the receipt of CAAC Infrastructure Development Fund contributions
of RMB1,328 million in 2009, and there was no such refund in 2010.



51







Interest expense decreased by RMB232 million
from RMB1,497 million in 2009 to RMB1,265 million in 2010 was mainly due to the decrease in average effective interest rate, which
ranged from 1.55% to 3.30% in 2009 while ranged from 1.13% to 1.97% in 2010.



In 2009, the Company entered into an
agreement with CSAHC to dispose of its entire equity interest in Zhuhai MTU with carrying amount of RMB529 million to CSAHC.
As of December 31, 2009, the investment in Zhuhai MTU was classified as asset held for sale. The sale was completed in
February 2010 and the Company recorded a gain of RMB1,078 million in 2010.



Income tax



Income tax expense of RMB1,678 million
was recorded in 2010 as compared to an income tax benefit of RMB95 million in 2009.



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, 2011, the Group had
banking facilities with several PRC commercial banks for providing loan finance up to an approximate amount of RMB127,448 million
to the Group. As of December 31, 2011, an approximate amount of RMB36,414 million was utilized. As of December 31, 2011 and 2010,
the Group’s cash and cash equivalents totaled RMB9,863 million and RMB10,404 million, respectively.



Net cash inflows from operating activities
in 2011, 2010 and 2009 were RMB12,557 million, RMB11,442 million and RMB8,959 million, respectively. Operating cash inflows of
the Group are primarily derived from the provision of air transportation and related service for customers. The vast majority of
tickets are purchased prior to the day on which transportation is provided. Operating cash outflows primarily are related to the
recurring operating expenses, including flight operation, maintenance, aircraft and traffic servicing, etc.



Net cash used in investing activities in
2011, 2010 and 2009 was RMB21,957 million, RMB11,568 million and RMB14,478 million, respectively. Cash capital expenditures in
2011, 2010 and 2009 were RMB20,038 million, RMB13,469 million and RMB15,007 million, respectively, reflecting predominantly additional
investments in aircraft and flight equipment under the Group’s fleet expansion plans and Guangzhou new airport, and, to a
small extent, additional investments in other facilities and buildings used in operations.



Financing activities resulted in net cash
inflows of RMB8,859 million, RMB6,187 million and RMB5,213 million in 2011, 2010 and 2009, respectively. Net cash inflow/(out flow)
from new bank and other loans and repayments of bank and other loans and short-term financing bills amounted to RMB9,254 million,
RMB(2,876) million and RMB3,750 million in 2011, 2010 and 2009, respectively. The additions
of bank loan were used for capital expenditures and general working capital. Repayment of capital leases in 2011, 2010 and 2009
was RMB1,702 million, RMB1,505 million and RMB1,750 million, respectively, resulting from the aircraft acquisitions under capital
leases.



As of December 31, 2011, 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 RMB56,738 million. In 2012, 2013, 2014, 2015 and thereafter, amounts payable under such loans and obligations
will be RMB13,648 million, RMB10,832 million, RMB6,066 million, RMB5,271 million and RMB20,921 million, respectively.Such
borrowings were denominated in United States dollars and Singapore dollars 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 payments generally
exceed its foreign currency receipts. The Group is not able to hedge its foreign currency exposure effectively other than by retaining
its foreign currency denominated earnings and receipts to the extent permitted by the SAFE, or subject to certain restrictive conditions,
entering into forward foreign exchange contracts with authorized banks.



As of December 31, 2011, the Group’s
short-term bank loans were RMB6,925 million. The Group’s weighted average interest rate on short-term bank loans was 3.09%
per annum as of December 31, 2011. 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.



52







As of December 31, 2011, the Group had
obligations under operating leases totaling RMB25,139 million, predominately for aircraft. Of such amount, RMB4,369 million, RMB3,871
million, RMB3,471 million, RMB3,128 million, RMB2,813 million, and RMB7,487 million respectively, is due in 2012, 2013, 2014, 2015,
2016 and thereafter.



As of December 31, 2011, the Group had
a working capital deficit of RMB24,928 million, as compared to a working capital deficit of RMB16,466 million as of December 31,
2010. 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 2012 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, 2011, the Group had banking facilities with several PRC commercial banks for providing loan finance up to approximately
RMB127,448 million (2010: RMB146,702 million), of which approximately RMB36,414 million (2010: RMB39,173 million) was utilized.



The directors of the Company have carried
out a detailed review of the cash flow forecast of the Group for the twelve months ending 31 December 2012. Based on such forecast,
the directors have determined that adequate liquidity exists to finance the working capital and capital expenditure requirements
of the Group during that period. In preparing the cash flow forecast, the directors have considered historical cash requirements
of the Group as well as other key factors, including the availability of the above-mentioned loan finance which may impact the
operations of the Group during the next twelve-month period. The directors are of the opinion that the assumptions and sensitivities
which are included in the cash flow forecast are reasonable. However, as with all assumptions in regard to future events, these
are subject to inherent limitations and uncertainties and some or all of these assumptions may not be 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.



As of December 31, 2011, the Group had
capital commitments as follows:



|                                              |  | 2012          |        |  | 2013 |  |        | 2014 |  |  | 2015   |  |  | 2016 and afterwards |       |  | Total | 
|--------------------------------------------- |  | ------------- | ------ |  | ---- |  | ------ | ---- |  |  | ------ |  |  | ------------------- | ----- |  | ----- | 
|                                              |  | (RMB million) |       
|Acquisition of aircraft and related equipment |  |               | 19,014 |  |      |  | 19,673 |      |  |  | 13,328 |  |  |                     | 8,580 |  |       | 
|Others                                        |  |               | 2,198  |  |      |  | 1,473  |      |  |  | 106    |  |  |                     | 13    |  |       | 
|Total capital commitments                     |  |               | 21,212 |  |      |  | 21,146 |      |  |  | 13,434 |  |  |                     | 8,593 |  |       | 



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



As of December 31, 2011, the cash and cash
equivalents of the Group totaled RMB9,863 million. Of such balance, 7% was denominated in US Dollars, Hong Kong Dollars, Australian
Dollars, Japanese Yen and other foreign currencies.



In view of the unutilized bank facilities
of RMB91,034 million, the Group expects that it will have sufficient funding sources to meet its cash requirements in the foreseeable
future.





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



None.



D. Trend Information.



Other than as disclosed in the foregoing
disclosures and elsewhere in this Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events
for the period from January 1, 2012 to December 31, 2012 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.



53







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, 2011.





|                                        |  |       |         |  | As of December 31, 2011 Payment due by period |  |        |           |  |  | As of December 31, 2010 | 
|--------------------------------------- |  | ----- | ------- |  | --------------------------------------------- |  | ------ | --------- |  |  | ----------------------- | 
|                                        |  | Total |         |  | Less than 1 year                              |  |        | 1-3 years |  |  | 3-5 years               | 
|                                        |  |       |         |  |                                               |  |        |           |  |  |                         | 
|Short-term bank loans (note 1)          |  |       | 7,060   |  |                                               |  | 7,060  |           |  |  | -                       | 
|Long-term bank and other loans (note 1) |  |       | 45,303  |  |                                               |  | 13,724 |           |  |  | 14,749                  | 
|Bills payable                           |  |       | 50      |  |                                               |  | 50     |           |  |  | -                       | 
|Obligations under capital leases        |  |       | 17,952  |  |                                               |  | 2,216  |           |  |  | 4,283                   | 
|Operating lease commitments             |  |       | 25,139  |  |                                               |  | 4,369  |           |  |  | 7,342                   | 
|Aircraft purchase commitments (Note 2)  |  |       | 61,250  |  |                                               |  | 19,014 |           |  |  | 33,001                  | 
|Other capital commitments               |  |       | 3,790   |  |                                               |  | 2,198  |           |  |  | 1,579                   | 
|Investment commitments                  |  |       | 239     |  |                                               |  | 179    |           |  |  | 60                      | 
|Total                                   |  |       | 160,783 |  |                                               |  | 48,810 |           |  |  | 61,014                  | 



Note 1 Interest on variable rate loans was estimated based on
the current rate in effect at December 31, 2011.



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 in 2011. There were certain changes in the Company’s
directors, senior management and supervisors subsequent to December 31, 2010, details of which are set forth below.



|Name            |  | Position                                      |  | Gender |  | Age
|--------------- |  | --------------------------------------------- |  | ------ |  | ---
|                |  |                                               |  |        |  |    
|Si Xian Min     |  | Chairman of the Board, Non-executive Director |  | Male   |  | 55 
|Li Wen Xin (1)  |  | Former Non-executive Director                 |  | Male   |  | 62 
|Wang Quan Hua   |  | Non-executive Director                        |  | Male   |  | 58 
|Yuan Xin An (2) |  | Non-executive Director                        |  | Male   |  | 55 
|Tan Wan Geng    |  | Executive Director                            |  | Male   |  | 48 
|Zhang Zi Fang   |  | Executive Director                            |  | Male   |  | 54 
|Xu Jie Bo       |  | Executive Director                            |  | Male   |  | 47 
|Chen Zhen You   |  | Executive Director                            |  | Male   |  | 60 
|Gong Hua Zhang  |  | Independent Non-executive Director            |  | Male   |  | 66 
|Lam Kwong Yu(3) |  | Former Independent Non-executive Director     |  | Male   |  | 68 
|Wei Jin Cai     |  | Independent Non-executive Director            |  | Male   |  | 62 
|Ning Xiang Dong |  | Independent Non-executive Director            |  | Male   |  | 47 
|Liu Chang Le(4) |  | Independent Non-executive Director            |  | Male   |  | 60 
|Pan Fu          |  | Chairman of the Supervisory Committee         |  | Male   |  | 49 
|Li Jia Shi      |  | Supervisor                                    |  | Male   |  | 51 
|Zhang Wei       |  | Supervisor                                    |  | Female |  | 46 



54







|Yang Yi Hua      |  | Supervisor                |  | Female |  | 52
|---------------- |  | ------------------------- |  | ------ |  | --
|Liang Zhong Gao  |  | Supervisor                |  | Male   |  | 56
|Ren Ji Dong      |  | Executive Vice President  |  | Male   |  | 47
|He Zong Kai      |  | Executive Vice President  |  | Male   |  | 61
|Liu Qian         |  | Executive Vice President  |  | Male   |  | 48
|Dong Su Guang    |  | Executive Vice President  |  | Male   |  | 58
|Chen Gang        |  | Executive Vice President  |  | Male   |  | 46
|Zhang Zheng Rong |  | Chief Pilot               |  | Male   |  | 50
|Hu Chen Jie      |  | Chief Information Officer |  | Male   |  | 43
|Su Liang         |  | Chief Economist           |  | Male   |  | 50
|Chen Wei Hua     |  | Chief Legal Adviser       |  | Male   |  | 46
|Xie Bing         |  | Company Secretary         |  | Male   |  | 39



(1) On August 8, 2011, the Company received
a letter of resignation from Mr. Li Wen Xin in respect of his directorship with the Company with effect from the same date due
to change in his work arrangement.



(2) On November 30, 2011, Mr. Yuan Xin
An was appointed at the first extraordinary general meeting for 2011 of the Company (the "EGM") as the non-executive
director of the Company .



(3) On
August 5, 2011, the Company received a letter of resignation from Mr. Lam Kwong Yu in respect of his directorship with the Company
with effect from the same date due to his personal time allocation arrangement.



(4) On November 30, 2011, Mr. Liu ChangLe was appointed at the EGM as independent non-executive director of the Company .



Since January 1, 2012 through the date
of this Annual Report, there has been no change to the Directors, Senior Management or Supervisors.



Board of
Directors



Si Xian Min, aged 55, graduated
with an Executive Master of Business Administration (EMBA) degree from Tsinghua University. He began his career in 1975. Mr. Si
served as the director of the political division of China Southern Airlines Henan Branch; as the party secretary and vice president
of Guizhou Airlines Company Limited; as the Vice Party Secretary and secretary to 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.



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



Yuan Xin An, 55, 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 CSAHC; the Vice President of Guangzhou Aircraft Maintenance
Engineering Co., Ltd.; the Chief Engineer and the President of Engineering Department of China Southern Airlines Company Limited;
the Executive Vice President of China Southern Airlines Company Limited from April 2002 to June 2007. Mr. Yuan has served as the
Executive Vice President of China Southern Airlines Company Limited since September 2007; also the Chief Legal Adviser of CSAHC
from July 2008. Since November 30, 2011, Mr. Yuan has become a director of the Company. Mr. Yuan Xin An 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.



55







Tan Wan Geng, aged 48, is an economist
graduated from Zhongshan University, majoring in economic geography, with qualification of post graduate degree. Mr. Tan began
his career in civil aviation in 1990 and has served as the head of the infrastructure department and director of human resources
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 Vice President
of the Company from February 2006 to February 2007; the member of the Party of CSAHC and the Party Secretary of the Company from
February 2007 to January 2009; the member of the Party of CSAHC and the President of the Company from January 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 a Director of
the Company since June 15, 2006.



Zhang Zi Fang, aged 54, graduated
with an Executive Master of Business Administration (EMBA) degree from Tsinghua University and is a senior expert of political
science. Mr. Zhang began his career in 1976. He served as the deputy commissar and subsequently the commissar of the pilot corps
of China Northern Airlines Company; as the party secretary of the Jilin Branch of China Northern Airlines Company and the General
Manager of Dalian Branch of CSAHC Northern Airlines. Mr. Zhang was the Director of Political Works Department of CSAHC and was
the Vice 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 Vice Party Secretary of the Company from December 2007 to February 2009. He has been
the Party Secretary and Executive Vice President of the Company since February 2009. Mr. Zhang has been a director of the Company
since June 30, 2009. He is also the Vice Chairman of SACM.



Xu Jie Bo, aged 47, graduated with
a bachelor degree from Tianjin University majoring in infrastructure and engineering management, and was subsequently awarded with
a master degree in Business Administration from Hong Kong Baptist University and an Executive Master of Business Administration
(EMBA) degree from Tsinghua University and is a qualified senior accountant. Mr. Xu began his career in 1986. He served as the
deputy director and director of the financial department of Central and Southern China Civil Aviation Administration; as the Chief
Accountant and the General Manager of the Financial Department of the Company. He has been a director and the Chief Financial Officer
(Chief Accountant) of the Company since April 2001 and a director, the Executive Vice President and the Chief Financial Officer
(Chief Accountant) of the Company since August 2003. Mr. Xu is also the chairman of Guizhou Airlines Company Limited; the vice
chairman of Xiamen Airlines Company Limited and the vice chairman of Sichuan Airlines Corporation Limited.



Chen Zhen You, aged 60, graduated
with an MBA degree from Murdoch University in Australia. Mr. Chen started his career in 1969. He worked as the vice director of
the Office of International Affairs of Guangzhou Civil Aviation Administration; as the general manager of the Department of Foreign
Affairs of the Company; and as the Director of General Administration Office and the Director of the Planning and Investment Department
of CSAHC. He has been the Chairman of the Labor Union of the Company since February 2005. Mr. Chen has been a director of the Company
since June 15, 2006. He is also the chairman of Zhuhai Airlines.



Gong Hua Zhang, aged 66, a senior
accountant at professor level. With over 40 years of accounting experience, Mr. Gong had served as a Deputy Chief Accountant, a
director of the Financial division of China Petroleum Pipeline Bureau, a director of Financial Bureau of China National Petroleum
Corporation and a Chief Accountant of China National Petroleum Corporation. He was a director of PetroChina Company Limited from
October 1999 to May 2008, the Chairman of the Board of PetroChina Finance Company Limited from May 1999 to September 2009 and a
Director of China Cheung Kong Electric Power Co., Ltd. from September 2002 to June 2010. Mr. Gong has been an independent non-executive
director of the Company since June 28, 2007 and vice president of Accounting Society of China, member of the Accounting Standards
Committee of the Ministry of Finance and member of China Valuation Standards Committee. He is also an independent director of China
Shenhua Energy Company Limited, an external director of China Dongfang Electricity Group Company Limited, an independent director
of Nanyang Commercial Bank (China) Company Limited, an independent director of China Railway Group Limited and an external director
of COFCO Corporation.



Wei Jin Cai, aged 62, 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 headquarters of Civil Aviation Administration
of China before he was appointed as 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 an independent
nonexecutive director of the Company since December 29, 2010. He currently also serves as an independent director of Shandong Airlines
Company Limited and Xiamen International Airport Co., Ltd. and an independent non-executive director of ASR Holdings Limited.



56







Ning Xiang Dong, aged 47, graduated
from the Quantitative Economics Faculty of the School of Economics and Management of Tsinghua University with a doctor degree.
Mr. Ning started his career in 1990 and served as the assistant, lecturer and associate professor at Tsinghua University and the
executive vice 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. He currently serves as a professor and a doctorate-tutor of the School of Economics and Management of Tsinghua University,
and the executive director of Centre for Corporate Governance at Tsinghua University. Mr. Ning has been an independent non-executive
director of the Company since December 29, 2010. He is concurrently also serves as an independent director of four listed companies,
namely, Hong Yuan Securities Co., Ltd., Goer Tek Inc., Aerospace Hi-Tech Holding Group Co., Ltd. and Sichuan ChangHong Electric
Company Limited.



Liu Chang Le, aged 60, was conferred
an honorary doctoral degree in literature by the City University of Hong Kong and is a founder of Phoenix Satellite Television.
Mr. Liu has been the chairman and chief executive officer of Phoenix Satellite Television Company Limited since 1996 and the chairman
and chief executive officer of Phoenix Satellite Television Holdings Limited, a company listed on the Stock Exchange since 2000.
Mr. Liu gained widespread recognition both locally and overseas for his enthusiasm for and achievements in the media industry.
Mr. Liu is the recipient of numerous titles and awards, among which include “Wiseman of the Media Industry”, “the
Most Innovative Chinese Business Leaders in the Asia Pacific Region”, “the Most Entrepreneurial Chinese Business Leaders”,
and has been awarded the “Robert Mundell Successful World CEO Award”, the “Man of Year for Asia Brand Innovation
Award”, the “Person of the Year” award of the Chinese Business Leaders Annual Meeting. Since 2005, Mr. Liu has
been the Chairman of the iEMMYs Festival, which is run by the International Academy of Television Arts & Sciences, for five
consecutive years. In November 2008, Mr. Liu received the International Emmy® Directorate Award. Mr. Liu was appointed as honorary
chairman of “World Chinese-language Media Co-operation Alliance” in 2009 and appointed as special consultant to the
8th Council of the Buddhist Association of China in 2010. Mr. Liu is also a member of the Tenth and the Eleventh National Committee
of the Chinese People’s Political Consultative Conference, and currently serves as the Vice Chairman of the Subcommittee
on Education, Science, Culture, Health and Sport, of the Eleventh National Committee of the Chinese People’s Political Consultative
Conference. Mr. Liu has been appointed a Justice of the Peace by the government of the Hong Kong Special Administrative Region.
In July 2010, Mr. Liu was awarded the Silver Bauhinia Star by the Hong Kong Special Administrative Region. Mr. Liu has become an
independent non-executive director of the Company since November 30 , 2011.



SUPERVISORYCOMMITTEE



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.



Pan Fu, aged 49, graduated with
a master degree from Chongqing University majoring in power systems and automation, and also a senior engineer. Mr. Pan started
his career in 1986, and served successively as the Deputy Chief Engineer and the Deputy Head of the Planning Department of Power
Laboratory of Yunnan Provincial Electric Power Bureau, 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; the General Manager, the
Deputy Secretary of The Party of the Guizhou Power Grid Corporation from January 2005 to November 2007; the Director of the Planning
Development Department of China Southern Power Grid Company Ltd. from November 2007 to November 2010. He served as the Party Member
and the Party Discipline Inspection Team leader of CSAHC since November 2010 and served as the supervisor of the Company and the
Chairman of the Supervisory Committee since December 29, 2010. He is also the Chairman of PCACL.



Li Jia Shi, aged 51, graduated from
Guangdong Institute for Nationalities majoring in economics and mathematics and obtained an Executive Master of Business Administration
(EMBA) degree from Tsinghua University, EMBA major and is an expert of political science. Mr. Li started his career in 1976. He
served as the Deputy Head of the Organization Division of the Party Committee of the Company, Party Secretary and vice general
manager of Guangzhou Nanland Air Catering Company Limited; the Head of the Organization Division of the Party Committee of the
Company. 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 served as the Secretary and Director of the Disciplinary Committee
of the Company since December 2007, and the Party Discipline Inspection Team Vice Leader of CSAHC and the Secretary of the disciplinary
committee of the Company since February 2012. Mr. Li has become a supervisor of the Company since June 30, 2009. He currently is
also the chairman of Southern Airlines Ka Yuen (Guangzhou) Aviation Supply Company Limited and Guangzhou Nanland Air Catering Company
Limited.



57







Zhang Wei, aged 46, graduated with
a master degree from Tianjin University majoring in investment skills and economics and a senior accountant with university qualification.
Ms. Zhang started her career in 1988 and served as the General Manager Assistant and Vice General Manager of the Finance Department
of the Company; the Vice Director of the Supervisory Bureau and the Director of the Audit Division of CSAHC; and the General Manager
of SA Finance. Ms. Zhang had then been the Vice 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 a supervisor of the Company since June 2008. Ms. Zhang is currently also the Chairman of Supervisory Committee of SACM, SA
Finance, Southern Airlines (Group) Import and Export Trading Company Limited and China Southern Airlines Group Construction and
Development Company Limited and a director of Guangzhou Southern Airline Construction Company Limited.



Yang Yi Hua, aged 52, Ms Yang, graduated
with university education, is an accountant and a Certified Internal Auditor. Ms. Yang was 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 a supervisor of the Company since June 2004. Ms
Yang currently is also the Chairman of the Supervisory Committee of Xiamen Airlines, Guizhou Airlines, Guangzhou Baiyun International
Logistic Company Limited (“Baiyun Logistic”), Beijing China Southern Airlines Ground Service Company Limited and Nan
Lung International Freight Limited and a supervisor of Chongqing Airlines and SA Finance.



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



SENIORMANAGEMENT



Ren Ji Dong, aged 47, graduated
from Nanjing Institute of Aviation, majoring in aircraft engine design and the School of Economics and Management of Tsinghua University
with a master degree in Business Administration (EMBA), and he is a senior engineer. Mr. Ren started his career since 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 served as the Executive Vice
President of the Company since May 2009.



He Zong Kai, aged 61, graduated
from Beijing Foreign Language Institute majoring in French, and he is a senior economist. Mr. He served as the Deputy Manager of
the Operation Department of the Company, Manager of Passenger Transportation Department, Head of Seats Arrangement Department,
Vice General Manager of the Marketing Department and General Manager of the Ground Services Department, President of Hubei Branch.
Mr. He has been an Executive Vice President of the Company since March 2005. Currently, Mr. He is also the Chairman of Chongqing
Airlines.



Liu Qian, aged 48, graduated from
China Civil Aviation Flying College with majoring in aircraft piloting. Mr. Liu served the CAAC as an assistant researcher of the
piloting skills supervision division of the piloting standards department, an assistant researcher of the operation supervision
division, an assistant researcher and the Deputy Head of the Piloting Standards Division, and the Deputy Chief Pilot and Chief
Pilot of the Company. He has been the Executive Vice President of the Company since August 2007. Mr. Liu served as the Chairman
of Zhuhai Xiang Yi Aviation Technology Company Limited, a jointly-controlled entity of the Company.



58







Dong Su Guang, aged 58, graduated
from Northwestern Polytechnical University majoring in aircraft design. Mr. Dong started his career since 1970 and used to be a
Vice President of Guangzhou Aircraft Maintaining and Engineering Co., Ltd. (“GAMECO”, a jointly-controlled entity of
the Company), as well as Chief Engineer and the General Manager of Engineering Department of the Company. He has been the Executive
Vice President of the Company since December 2007. Mr. Dong is also the Chairman of Shantou Airlines, GAMECO and Shenyang Northern
Aircraft Maintenance Engineering Co., Ltd.



Chen Gang, aged 46, graduated from
Zhongnan Finance and Economics University majoring in Industrial Enterprise Management and the School of Economics and Management
of Tsinghua University with a master degree in Business Administration (EMBA). He began his career in 1987 and the Vice President
of Henan Branch of the Company, the President of Hubei Branch of the Company, and the Director of Commercial Steering Committee
of the Company. He has been the Executive Vice President of the Company since August 2009. Currently, Mr. Chen is also the Chairman
of CSN – ETC E-commerce Limited and Baiyun Logistics.



Zhang Zheng Rong, aged 50, graduated
from China Civil Aviation Flying College majoring in aircraft piloting and the School of Economics and Management of Tsinghua University
with a master degree in Business Administration (EMBA). Mr. Zhang used to serve as the Deputy General Manager of the Flight Operations
Division and the Captain of the First Squadron as well as the General Manager of the Aviation Safety Monitoring Division, and the
General Manager of the Guangzhou Flight Operations Division of the Company. He has been the Chief Pilot of the Company since August
2007. Mr. Zhang is also a director of Aviation Data Communication Corporation.



Hu Chen Jie, aged 43, graduated
from Beijing University Aeronautics and Astronautics majoring in information management. Mr. Hu used to be a software engineer
in the Computer Center of CAAC, a senior software engineer in Wei Hong International Technology Company (Singapore), Deputy Director
of the Computer Center of the Company, a senior project manager of SITA INC. (US) and the General Manager of CSN-ETC e-Commerce
Limited. He has been the Chief Information Officer of the Company since June 2007. Mr. Hu is also a director of Guangzhou Aircraft
Hang Yi Information Technology Co., Ltd. and Chairman of THITC.



Su Liang, aged 50, graduated from
the University of Cranfield, United Kingdom with a master degree in Air Transport Management Engineering and the School of Economics
and Management of Tsinghua University with a master degree in Business Administration (EMBA). 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. Mr. Su is also the Chairman of Flying College
and the Director of Sichuan Airlines Corporation Limited.



Chen Wei Hua, aged 46, graduated
from the school of law of Peking University and the School of Economics and Management of Tsinghua University with a master degree
in Business Administration (EMBA). He is a qualified solicitor in the PRC and a qualified corporate legal counselor. Mr. Chen joined
the aviation industry in 1988. He then served as Vice Director, a Director of the Legal Affairs Office of the Company. Mr. Chen
has been the Chief Legal Adviser to the Company and the Director of the Legal Department of the Company since January 2004. Currently,
Mr. Chen is also the Director of Xiamen Airlines.



Xie Bing, aged 39, graduated from
Nanjing University of Aeronautics and Astronautics, majoring in civil aviation management. He subsequently received a master degree
of business administration, a master degree of international finance and a master degree in Business Administration (EMBA) from
Jinan University, the University of Birmingham, Britain and School of Economics and Management of Tsinghua University, respectively.
Mr. Xie is a senior economist. Mr. Xie used to work in the Planning and Development Department, Company Secretary Office of the
Company and Office of CSAHC. He has been the Company Secretary since November 2007.



Save as disclosed above, none of the above
Directors or Supervisors or 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 2011 was RMB15,823,000. For the year ended December 31, 2011, the Company paid
an aggregate of approximately RMB1,091,000 on behalf of its executive Directors, Supervisors and Senior Management pursuant to
the pension scheme and the retirement plans operated by various municipal governments in which the Company participates.



59







Details of Directors’ and Supervisors’
remuneration for the year ended December 31, 2011 are set out below:



|                                    |  | Directors’ fees RMB’000 |     |  | Salaries, allowances and benefits in kind RMB’000 |  |       | Discretionary bonus RMB’000 |  |  | Retirement scheme contributions RMB’000 |  |  | Subtotal RMB’000 |     |  | Share
appreciation
rights 
RMB’000 |  |       | Total RMB’000 | 
|----------------------------------- |  | ----------------------- | --- |  | ------------------------------------------------- |  | ----- | --------------------------- |  |  | --------------------------------------- |  |  | ---------------- | --- |  | ---------------------------------- |  | ----- | ------------- | 
|Non-executive directors             |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Si Xian Min                         |  |                         | -   |  |                                                   |  | -     |                             |  |  | -                                       |  |  |                  | -   |  |                                    |  | -     |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Li Wen Xin                          |  |                         | -   |  |                                                   |  | -     |                             |  |  | -                                       |  |  |                  | -   |  |                                    |  | -     |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Wang Quan Hua                       |  |                         | -   |  |                                                   |  | -     |                             |  |  | -                                       |  |  |                  | -   |  |                                    |  | -     |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Yuan Xin An                         |  |                         | -   |  |                                                   |  | -     |                             |  |  | -                                       |  |  |                  | -   |  |                                    |  | -     |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Executive directors                 |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Tan Wan Geng                        |  |                         | -   |  |                                                   |  | 517   |                             |  |  | 300                                     |  |  |                  | 29  |  |                                    |  | 846   |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Zhang Zi Fang                       |  |                         | -   |  |                                                   |  | 687   |                             |  |  | 300                                     |  |  |                  | 71  |  |                                    |  | 1,058 |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Xu Jie Bo                           |  |                         | -   |  |                                                   |  | 601   |                             |  |  | 250                                     |  |  |                  | 71  |  |                                    |  | 922   |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Chen Zhen You                       |  |                         | -   |  |                                                   |  | 601   |                             |  |  | 250                                     |  |  |                  | 70  |  |                                    |  | 921   |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Supervisors                         |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Pan Fu                              |  |                         | -   |  |                                                   |  | -     |                             |  |  | -                                       |  |  |                  | -   |  |                                    |  | -     |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Li Jia Shi                          |  |                         | -   |  |                                                   |  | 601   |                             |  |  | 250                                     |  |  |                  | 69  |  |                                    |  | 920   |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Zhang Wei                           |  |                         | -   |  |                                                   |  | -     |                             |  |  | -                                       |  |  |                  | -   |  |                                    |  | -     |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Yang Yi Hua                         |  |                         | -   |  |                                                   |  | 332   |                             |  |  | 30                                      |  |  |                  | 68  |  |                                    |  | 430   |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Liang Zhong Gao                     |  |                         | -   |  |                                                   |  | 337   |                             |  |  | 30                                      |  |  |                  | 69  |  |                                    |  | 436   |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Independent non-executive directors |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Gong Hua Zhang                      |  |                         | 104 |  |                                                   |  | -     |                             |  |  | -                                       |  |  |                  | -   |  |                                    |  | 104   |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Wei Jin Cai                         |  |                         | 104 |  |                                                   |  | -     |                             |  |  | -                                       |  |  |                  | -   |  |                                    |  | 104   |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Ning Xiang Dong                     |  |                         | 104 |  |                                                   |  | -     |                             |  |  | -                                       |  |  |                  | -   |  |                                    |  | 104   |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Liu Chang Le                        |  |                         | 13  |  |                                                   |  | -     |                             |  |  | -                                       |  |  |                  | -   |  |                                    |  | 13    |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Lam Kwong Yu                        |  |                         | 56  |  |                                                   |  | -     |                             |  |  | -                                       |  |  |                  | -   |  |                                    |  | 56    |               | 
|                                    |  |                         |     |  |                                                   |  |       |                             |  |  |                                         |  |  |                  |     |  |                                    |  |       |               | 
|Total                               |  |                         | 381 |  |                                                   |  | 3,676 |                             |  |  | 1,410                                   |  |  |                  | 447 |  |                                    |  | 5,914 |               | 



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 in accordance with his contract. The term of office of a Director is three
years. The term of office of the current Directors will end in 2013.  A Director may serve consecutive terms upon re-election.



60







Audit Committee



The audit committee is appointed by the
Board of Directors and consists of three independent non-executive Directors. The current members of the audit committee are Gong
Hua Zhang, Wei Jin Cai and Ning Xiang Dong. Gong Hua Zhang is the chairman of the audit committee. The term of office of each
member will end in 2013. A member may serve consecutive terms upon re-election. At least once a year, the committee is required
to meet with the Company’s external auditors without any executive members of the Board in attendance. The quorum necessary
for the transaction of any business is two committee members. The Audit Committee held sevenmeetings in 2011, which were attended by all members.



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



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



Remuneration and Assessment Committee



The Remuneration and Assessment Committee
is comprised of three members. Currently, the Remuneration and Assessment Committee is chaired by independent non-executive Director
Ning Xiang Dong with independent non-executive Director Gong Hua Zhang and non-executive Director Wang Quan Hua as members. The
term of office of each member is three years. The term of office of the current members will end in 2013. A member may serve consecutive
terms upon re-election. The Remuneration and Assessment Committee held two meetings in 2011, 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 2011.



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, 2011, the Nomination
Committee consists of three members, including Si Xian Min as chairman and Wei Jin Cai (Independent non-executive director) and
Gong Hua Zhang (Independent non-executive director) as members. The responsibilities of the Nomination Committee are to make recommendations
to the Board in respect of the size and composition of the Board based on the operational activities, assets and shareholding structure
of the Company; study the selection criteria and procedures of Directors and executives and give advice to the Board; identify
qualified candidates for Directors and executives; investigate and propose candidates for Directors and managers and other senior
management members to the Board.



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



61







The Nomination Committee held one meeting in 2011, which was
attended by all members.



D. Employees.



As of December 31, 2011, the Company had
54,326 employees, including 4,188 pilots, 7,658 flight attendants, 7,658 maintenance personnel, 5,775 passenger transportation
personnel, 5,087 cargo transportation personnel, 5,945 ground service personnel, 1,699 flight operation officers, 448 flight security
guards, 772 information system personnel, 1,776 financial personnel, and 13,320 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. A representative of the Company labor union currently serves 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 receive limited health services, but not housing or 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.



(a) Retirement benefits



Employees of the Group participate in several
defined contribution retirement schemes organized separately by the PRC municipal governments in regions where the major operations
of the Group are located. The Group is required to contribute to these schemes at rates ranging from 8% to 24% (2010: 8% to 25%)
of salary costs including certain allowances. A member of the retirement schemes is entitled to pension benefits from the Local
Labor and Social Security Bureau upon his/her retirement. The retirement benefit obligations of all retired staff of the Group
are assumed by these schemes.



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



(b) Housing fund and other social insurances



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



|(1) | Pursuant to a staff housing
        benefit scheme effective on September 2002, the Group agreed to pay lump sum housing allowances to certain employees who have
        not received quarters from CSAHC or the Group according to the relevant PRC housing reform policy. An employee who leaves the
        Company prior to the end of the vesting benefit period is required to pay back a portion of the lump sum housing benefits
        determined on a pro rata basis of the vesting benefit period. The Group has the right to effect a charge on the
        employee’s house and to enforce repayment through the sale of the house in the event of default in repayment. Any
        remaining shortfall is charged to the consolidated income statement.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The Group also pays cash housing subsidies on a monthly basis to eligible employees. The monthly cash housing subsidies are charged to the consolidated income statement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               





62







(c) Termination benefits



When the Group terminates the employment
relationship with employees before the employment contracts have expired, 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 have been 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;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------



|– | 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 this Scheme, 24,660,000 units of SARs were granted to 118 employees of the Group at the exercise price of HK$3.92 per unit
prior to at December 31, 2011. No shares will be issued under the Scheme and each SAR is notionally linked to one existing H Share
of the Company. Upon exercise of the SARs, a recipient will receive an amount of cash equal to the difference between the market
share price of the relevant H Share and the exercise price. The SARs will have an exercise period of six years from the date of
grant. Upon the satisfaction of certain performance conditions after the second, third and fourth anniversary of the date of grant,
each one third of the SARs will become exercisable. 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 was remeasured as at December 31, 2011 of RMB231,000 and a corresponding
staff costs of RMB231,000 was recognized during 2011.



ITEM 7. MAJOR SHAREHOLDERS AND RELATED
PARTY TRANSACTIONS.



A. Major Shareholders.



Share Capital Structure



As of April 20, 2012 the total share capital
of the Company included an aggregate of 9,817,567,000 shares, of which approximately 42.22% (4,145,050,000 A Shares) was directly
held by CSAHC, approximately 29.31% (2,877,600,000 A Shares) was held by other domestic shareholders, and approximately 28.47%
(2,794,917,000 H Shares) was held by Hong Kong and overseas shareholders (among which, approximately 38.10% (1,064,770,000 H Shares)
was indirectly held by CSAHC). CSAHC owns, directly and indirectly, 53.07% of the total share capital of the Company, therefore
it is entitled to exercise all the rights of a controlling shareholder, including the election of executive Directors.



Substantial Shareholders



As of April 20, 2012, the following shareholders had an interest
of 5% or more in the Company’s shares:



|Name                   |  | Number of Shares       |     |  |  |  | Approximate Percentage of the total Number of Shares | 
|---------------------- |  | ---------------------- | --- |  |  |  | ---------------------------------------------------- | 
|                       |  |                        |     |  |  |  |                                                      | 
|CSAHC                  |  | 4,145,050,000A Shares  |     |  |  |  |                                                      | 
|                       |  |                        |     |  |  |  |                                                      | 
|HKSCC Nominees Limited |  | 1,749,976,298 H Shares |     |  |  |  |                                                      | 
|                       |  |                        |     |  |  |  |                                                      | 
|Nan Lung               |  | 1,064,770,000 H Shares | (1) |  |  |  |                                                      | 



63







The table below sets forth, as of April 20, 2012, the following
entities holding 5% or more of the total number of H Shares issued by the Company.



|Name                   |  | Number of H Shares |               |  | Approximate Percentage of the total Number of Shares | 
|---------------------- |  | ------------------ | ------------- |  | ---------------------------------------------------- | 
|                       |  |                    |               |  |                                                      | 
|HKSCC Nominees Limited |  |                    | 1,749,976,298 |  |                                                      | 
|                       |  |                    |               |  |                                                      | 
|Nan Lung               |  |                    | 1,033,650,000 |  |                                                      | 



A Shares and H Shares have identical voting rights.



|(1) | CSAHC was deemed to be interested in an
        aggregate of 1,064,770,000 H Shares through its direct and indirect wholly-owned subsidiaries in Hong Kong, of which 31,120,000
        H Shares were directly held by Yazhou Travel Investment Company Limited (representing approximately 1.11% of its then total issued
        H Shares) and 1,033,650,000 H Shares were directly held by Nan Lung (representing approximately 36.98% of its then total issued
        H Shares). As Yazhou Travel Investment Company Limited is also an indirect wholly-owned subsidiary of Nan Lung, Nan Lung was also
        deemed to be interested in the 31,120,000 H Shares held by Yazhou Travel Investment Company Limited.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



B. Related Party Transactions.



The Company enters into transactions from
time to time with CSAHC and its affiliates. For a description of such transactions, see Note 45 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, 2011 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 Company and CSAHC entered into a De-merger
Agreement (“De-merger Agreement”) on March 25, 1995 (such agreement was amended by the Amendment Agreement No.1 on
May 22, 1997), 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 “Southern Airlines” and “China Southern Airlines” in both Chinese and English, and grants the Company
a renewable and royalty free license to use the kapok logo on a worldwide basis in connection with the Company’s airline
and airline-related businesses. Unless CSAHC gives a written notice of termination three months before the expiration of the agreement,
the agreement will be automatically renewed for another ten-year term. In May 2007, the trademark license agreement entered into
by the Company and CSAHC was automatically renewed for 10 years.



64







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 lease agreement with CSAHC with a term valid
from January 1, 2009 to December 31, 2011 (“Lease Agreement”). Pursuant to the 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”) and Nanyang as well as some additional
locations in Beijing, Shanghai, Changsha, Shenyang, Dalian, Harbin, Changchun and other PRC cities. The annual rents payable to
CSAHC under the Lease Agreement for 2009, 2010 and 2011 are RMB37,148,660, RMB39,006,093 and RMB40,956,397.65, respectively.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For the year ended December 31,
2011, the rent incurred by the Group amounted to RMB40,956,397.65 pursuant to the 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 Agreement and the Property Lease Agreement.
Pursuant to the Land Lease Agreement, the parties agreed that the annual rent for land from 2011 to 2013 would be RMB56,329,131
for each year. Pursuant to the Property Lease Agreement, 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, 2011, the
rents for land lease and property lease incurred by the Group amounted to RMB56,329,131 and RMB42,975,542, respectively pursuant
to the lease agreements.



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



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



For the year ended December 31, 2011, the
agency fee incurred by the Group in respect of the above import and export services was RMB87,460,000.



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



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



For the year ended December 31, 2011, the
media fees incurred by the Group for the media services amounted to RMB28,621,000.



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



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



65













Under such agreement, SA
Finance agrees to provide to us with 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 it 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, we entered into a
supplemental agreement to the Financial Services Framework Agreement with SA Finance, for a term effective from the date of
passing of the resolution at the general meeting to December 31, 2013. In line with our 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. The above issue is still subject to the shareholders’
approval at the general meeting.



As of December 31, 2011, the Group’s deposits placed with
SA Finance amounted to RMB2,493,338,000.



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



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



For the year ended December 31, 2011, the commission expense
and goods handling fee paid to PCACL were RMB26,868,000 and RMB16,794,000 respectively, and the income relating to other services
was RMB61,355,000.



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 “Property Management Framework Agreement”) on December 29, 2008 to engage
GCSAPMC to provide property management and improvement service for a term of three years.



Pursuant to the agreement, the Company has appointed GCSAPMC
to provide management and maintenance services for the Company’s headquarters in Guangzhou and to provide maintenance and
management services for the 110KV transformer substation to ensure the ideal working conditions of the Company’s production
and office facilities and physical environment, and the normal operation of equipment. The fee charging schedule (or charge standard)
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 Property Management Framework Agreement is set at RMB47,010,000.



For the year ended December 31, 2011, the property management
and maintenance fee incurred by the Group amounted to RMB34,202,000 pursuant to the Property Management Framework Agreement.



Zhuhai MTU, which is 50% owned by CSAHC



The Company entered into an agreement relating to continuing
connected transactions with CSAHC, MTU Aero Engines GmbH (“MTU GmbH”) and Zhuhai MTU on September 28, 2009, by which
Zhuhai MTU shall continue to provide the Company with engine repair and maintenance services subject to the international competitiveness
and at the net most favorable terms, while the Company shall make relevant payment to Zhuhai MTU according to related charging
standard. The agreement is effective from its date to April 5, 2031.



For the year ended December 31, 2011, the Group’s engine
repair and maintenance service fees incurred under the agreement amounted to RMB752,415,000.



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



66







On December 23, 2011, the Board
announced that Xiamen Airlines, a subsidiary of the Company and Hebei Airlines entered into an Aircraft Sale Agreement,
pursuant to which Xiamen Airlines agreed to sell and Hebei Airlines agreed to purchase the aircraft at the consideration of
approximately RMB426 million. Hebei Airlines is a controlled subsidiary of Hebei Airlines Investment Group Company Limited,
which is the 15% shareholder of Xiamen Airlines.



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. The claimant has made a claim against the Company for an indemnity of USD46 million
or for the refund of the down payments of USD12 million, and the interest thereon which is calculated in accordance with
Clause 35A, United Kingdom Supreme Court Act 1981. The claim is still under investigation and the directors are of the
opinion that the claim is without merit and the Company has involved its legal advisor to defend the claim and filed a
defense to the claimant declining all the claims and made a counter claim for an indemnity of around USD34 million caused by
the claimant’s non-execution of the aircraft sale agreement. The directors are of the opinion that an outflow of
resource embodying economic benefits is not probable to occur.



Dividend Information



A dividend in respect of the year ended December 31, 2011 of
RMB0.2 (inclusive of applicable tax) per share, amounting to a total dividend of RMB1,964 million was proposed by the Directors
on March 29, 2012. The final dividend proposed after the end of the financial year has not been recognized as a liability at the
end of the financial year.



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



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



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



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



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



67







| | · | 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, are evidenced by ADRs issued by the Bank
of New York as the depositary. The ADRs have been listed for trading on the New York Stock Exchange since July 31, 1997, under
the symbol “ZNH”.



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.



68







|                                    |  | 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, 2007 |  |                                                      | 13.90 |  |                                                 |  | 3.25 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Fiscal Year ended December 31, 2008 |  |                                                      | 10.44 |  |                                                 |  | 0.83 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Fiscal Year ended December 31, 2009 |  |                                                      | 2.99  |  |                                                 |  | 1.14 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Fiscal Year ended December 31, 2010 |  |                                                      | 5.91  |  |                                                 |  | 2.47 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Fiscal Year ended December 31, 2011 |  |                                                      | 5.37  |  |                                                 |  | 3.08 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Quarterly Market Prices             |  |                                                      |       |  |                                                 |  |      |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Fiscal Year ended December 31, 2010 |  |                                                      |       |  |                                                 |  |      |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|First Quarter                       |  |                                                      | 3.57  |  |                                                 |  | 2.47 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Second Quarter                      |  |                                                      | 4.09  |  |                                                 |  | 3.11 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Third Quarter                       |  |                                                      | 4.61  |  |                                                 |  | 3.06 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Fourth Quarter                      |  |                                                      | 5.91  |  |                                                 |  | 4.34 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Fiscal Year ended December 31, 2011 |  |                                                      |       |  |                                                 |  |      |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|First Quarter                       |  |                                                      | 4.89  |  |                                                 |  | 3.08 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Second Quarter                      |  |                                                      | 4.51  |  |                                                 |  | 3.24 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Third Quarter                       |  |                                                      | 5.37  |  |                                                 |  | 3.58 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Fourth Quarter                      |  |                                                      | 4.83  |  |                                                 |  | 3.16 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|Monthly Market Prices               |  |                                                      |       |  |                                                 |  |      |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|October 2011                        |  |                                                      | 4.83  |  |                                                 |  | 3.16 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|November 2011                       |  |                                                      | 4.32  |  |                                                 |  | 3.75 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|December 2011                       |  |                                                      | 4.33  |  |                                                 |  | 3.84 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|January 2012                        |  |                                                      | 4.54  |  |                                                 |  | 3.92 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|February 2012                       |  |                                                      | 4.29  |  |                                                 |  | 3.71 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|March 2012                          |  |                                                      | 4.00  |  |                                                 |  | 3.40 |                                                     | 
|                                    |  |                                                      |       |  |                                                 |  |      |                                                     | 
|April 2012 (up to April 20, 2012)   |  |                                                      | 3.62  |  |                                                 |  | 3.36 |                                                     | 



69







B. Plan of Distribution.



Not applicable.



C. Markets.



See “Offer and Listing Details” above.



D. Selling Shareholders.



Not applicable.



E. Dilution.



Not applicable.



F. Expenses of the Issue.



Not applicable.



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.



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 Purpose



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).



70







Directors



Pursuant to Article 244 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.



Pursuant to Article 174 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.



Pursuant to Article 252 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.



Pursuant to Article 162(6) of the Articles of Association, the
Board of Directors has the power to formulate proposals for increases or reductions in the Company’s registered capital and
the issue of debentures of the Company; such resolutions must be passed by more than two-thirds of all the Directors.



There is no mandatory retirement age for the Directors of the
Company. The Directors of the Company are not required to hold shares of the Company.



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.



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



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



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



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



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



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



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



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



71







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



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



| | (b) | 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;
| | ---- | ----------------------------------------------------



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



| | (d) | 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;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | (f) | 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.
|--- | ---------------------------------------------------------------------------------------------



Pursuant to Article 67 of the Articles of Association, the ordinary
shareholders of the Company shall assume the following obligations:



|(1) | to abide by these Articles of Association;
|--- | ------------------------------------------



|(2) | to pay subscription monies according to the number of shares subscribed and the method of subscription;
|--- | -------------------------------------------------------------------------------------------------------



|(3) | no right to return shares to the Company unless laws and regulations provide otherwise; and
|--- | -------------------------------------------------------------------------------------------



|(4) | other obligations imposed by laws, administrative regulations and these 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.



Action necessary to change rights of shareholders



Pursuant to Article 152 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 153 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.



72







Pursuant to Article 155 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 156 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 157 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.



Pursuant to Article 158 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.



Pursuant to Article 160 of the Articles of Association, the
special procedures for voting at any meeting of a class of shareholders shall not apply to the following circumstances:



|(1) | where the Company issues, upon the approval by special resolution of its shareholders in general meeting, either separately or concurrently once every twelve months, not more than 20 percent of each of its existing issued Domestic Shares and Overseas Listed Foreign Shares; and
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | where the Company’s plan to issue Domestic Shares and Overseas Listed Foreign Shares at the time of its establishment is carried out within fifteen months from the date of approval of the competent securities authority of the State Council.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Meetings of Shareholders



Shareholders’ general meetings is the organ of authority
of the Company and shall exercise its functions and powers, among other things, to decide on the Company’s operational policies
and investment plans, to elect and replace directors and decide on matters relating to the remuneration of directors, to examine
and approve reports of the board of directors, etc.



There are two types of shareholders’ general meetings:
annual general meetings and extraordinary general meetings. Shareholders’ general meetings are 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.



Under any of the following circumstances, the Board of Directors
shall convene an extraordinary general meeting within two months:



|(1) | when the number of Directors is less than the number of Directors required by the Company Law or two thirds of the number of Directors specified in the Articles of Association;
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | when the accumulated losses of the Company amount to one third of the total amount of its share capital;
|--- | --------------------------------------------------------------------------------------------------------



|(3) | when shareholder(s) holding 10 percent 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) | when deemed necessary by the Board of Directors or as requested by the Supervisory Committee;
|--- | ---------------------------------------------------------------------------------------------



|(5) | More than one half of the independent directors propose to convene the meeting.
|--- | -------------------------------------------------------------------------------



73







When the Company convenes a shareholders’ general meeting,
written notice of the meeting is given 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 and the date and the place of the meeting. A shareholder who intends to attend the
meeting shall deliver his written reply concerning the attendance of the meeting to the Company twenty days before the date of
the meeting.



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 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.



Cash Dividends Policy



Pursuant to Article 268 of the Articles of Association, in the
event of distribution of dividend by way of cash, the accumulated payment of dividend by way of cash for the last three years may
not be less than 30% of the Company’s average distributable profit for the last three years. Where the Company makes a payment
of dividend satisfied by an allotment of new shares or completed conversion of capital common reserve fund into capital, the Company
may not distribute dividend by way of cash in the same year.



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.



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



C. Material Contracts.



The Company has not entered into any material contracts other
than in the ordinary course of business and other than those described in this Item 10, Item 7, “Related Party Transactions”,
Item 4, “Information on the Company” or elsewhere in this Annual Report on Form 20-F.



|(a) | Pursuant to an aircraft acquisition agreement dated May 9, 2011 entered into between Xiamen Airlines and Boeing, Xiamen Airlines agreed to purchase from Boeing 6 Boeing B787 series aircraft. The aggregate catalogue price for those aircraft is around US$1,098 million, including price for airframe and engines. 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 from 2014 to 2015.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Pursuant to an Aircraft Acquisition Agreement dated May 31, 2011 entered into between the Company and Boeing, the Company will acquire 6 Boeing B777F freighters from Boeing. According to the information provided by Boeing, the catalogue price of one Boeing B777F freighter is around US$264 million, including price for airframe and engine. The aggregate consideration for the acquisition will be partly payable in cash and partly through financing arrangements with banking institutions. The Boeing B777F freighters will be delivered in stages to the Company from 2013 to 2015.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



74







|(c) | Pursuant to an Aircraft Acquisition Agreement dated February 28, 2012 entered into between the Company and Boeing, the Company will acquire 10 Boeing 777-300ER aircraft from Boeing. According to the information provided by Boeing, the catalogue price of one Boeing B777-300ER aircraft is around US$298 million, including price for airframe and engine. 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 2013 to 2016.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 would
be permitted to rise or fall by as much as 0.5%. The floating band was subsequently increased to 1% by the People’s Bank
of China, effective from April 16, 2012.



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



Other Limitations



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



E. Taxation.



Chinese Taxation



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



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



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



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



75







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, including 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%. 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.



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



| | · | partnerships and other 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;
| | - | ------------------------------------------------------------------------------------------------------------------------------



| | · | U.S. Holders (as defined below) whose functional currency for tax purposes is not the U.S. dollar;
| | - | --------------------------------------------------------------------------------------------------



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



| | · | persons who actually 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.



76







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



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



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



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



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



| | · | 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.”



For U.S. federal income tax purposes, income earned through
a foreign or domestic partnership or other flow-through entity is attributed to its owners. Accordingly, if a partnership or other
flow-through entity holds ADRs, the tax treatment of the holder will generally depend on the status of the partner or other owner
and the activities of the partnership or other flow-through entity.



U.S. Holders



Dividends on ADRs



Subject to the 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 (generally 15% for dividend distributions before January 1, 2009) as long as 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 on the Company’s ADRs, if any, will generally
be taxed to you as dividend distributions for U.S. tax purposes. 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.



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 amounts 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 will be 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 will be taxed at preferential rates. Your ability to deduct capital losses will
be subject to various limitations.



Passive Foreign Investment Company



If the PFIC in any taxable year in which you hold the Company’s
ADRs, 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.



77







The Company will be classified as a PFIC in any taxable year
if either: (1) the average percentage value of its gross assets during the taxable year that produce passive income or are held
for the production of passive income is at least 50% of the value of its total gross assets (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 held for the production of passive income; and (2) the average value of the Company’s gross 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 foreign corporation 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 include income
and assets held by a 25% or more owned subsidiary in determining whether a foreign 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) a foreign company that owns directly or indirectly 25% or more of the stock of another corporation
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 2011. However, there can be no assurance that the Company will not be a PFIC for the taxable year 2012 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 2011 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 or dispose of or are deemed
to dispose of your ADRs. An excess distribution would be either (1) a distribution with respect to ADRs that is greater than 125%
of the average of such distributions over the preceding three years, or (2) 100% of the gain from the disposition of shares/ADRs.



To compute the tax on “excess” distributions or
any gain, (1) the “excess” distribution or the gain would be allocated ratably to each day in your holding period,
(2) the amount allocated to the current year and any tax year before 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 taxes for any period described under (3) above
would be imposed with respect to any portion of the “excess” distribution or gain 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 “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.



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



Non-US Holders



If you beneficially own ADRs and are not a U.S. Holder for U.S.
federal income tax purposes (a “Non-US 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:



78







| | · | 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 either (1) your gain is attributable to an office or other fixed place of business that you maintain in the United States or (2) you have a tax home in the United States.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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,
as applicable. Any amounts withheld from payments to you under the backup withholding rules will be allowed as a refund or a credit
against your U.S. federal income tax liability, provided that you furnish the required information to the IRS.



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



F. Dividends and Paying Agents



Not applicable.



G. Statement by Experts



Not applicable.



H. Documents on Display



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



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



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



I. Subsidiary Information



Not applicable.



79







ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.



Price Fluctuation Fuel 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 RMB3,268 million.
The sensitivity analysis of jet fuel price risk is disclosed in Note 49(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. No such contract was outstanding as of December 31, 2011. The
sensitivity analysis of interest rate risk is disclosed in Note 49(b) to the consolidated Financial Statements.



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. During the year, the Group’s two outstanding
forward option contracts were fully settled (2010: Notional amount ranging from USD4 million to USD8 million). The contracts are
to buy USD1 million and USD1.5 million respectively (or USD2 million and USD3 million respectively if the spot exchange rate at
settlement date is below certain specified strike rates) by selling Japanese Yen at certain specified rates on monthly settlement
dates until the maturity of the contracts in 2011. Both contracts have a knock-out clause where the contracts early terminate upon
the exchange rate of Japanese Yen to US dollar reaching a certain knock-out level. For the year ended December 31, 2011, a net
gain of approximately RMB13 million (2010: a gain of RMB31 million) arising from changes in the fair value of these foreign exchange
forward option contracts has been recognized in the consolidated income statement. The sensitivity analysis of foreign currency
risk is disclosed in Note 49(c) to the consolidated Financial Statements.



As of December 31, 2011, the Group operated a total of 237 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 50 to the consolidated Financial Statements, respectively.



The following table provides information regarding the Group’s
material interest rate sensitive financial instruments as of December 31, 2011 and 2010:



80







|                                           |  | As of December 31, 2011 |        |   | As of December 31, | 
|------------------------------------------ |  | ----------------------- | ------ | - | ------------------ | 
|                                           |  | Expected maturity date  |        |   | 2010               | 
|                                           |  | 2012                    |        |   | 2013               | 
|Fixed-rate bank and other loans in
    US$ |  |                         | 139    |   |                    | 
|                                           |  |                         |        |   |                    | 
|Average interest rate                      |  |                         | 3.23   | % |                    | 
|                                           |  |                         |        |   |                    | 
|Variable-rate bank and other loans in US$  |  |                         | 18,303 |   |                    | 
|                                           |  |                         |        |   |                    | 
|Average interest rate                      |  |                         | 2.44   | % |                    | 
|                                           |  |                         |        |   |                    | 
|Fixed-rate bank and other loans in RMB     |  |                         | -      |   |                    | 
|                                           |  |                         |        |   |                    | 
|Average interest rate                      |  |                         |        |   |                    | 
|                                           |  |                         |        |   |                    | 
|Variable-rate bank and other loans in RMB  |  |                         | 347    |   |                    | 
|                                           |  |                         |        |   |                    | 
|Average interest rate                      |  |                         | 5.95   | % |                    | 
|                                           |  |                         |        |   |                    | 
|Fixed-rate bills payable in RMB            |  |                         | 50     |   |                    | 
|                                           |  |                         |        |   |                    | 
|Average interest rate                      |  |                         | 0      | % |                    | 



| | (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, 2011 and 2010
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------



The following table provides information regarding the Group’s
material foreign currency sensitive financial instruments and capital commitments as of December 31, 2011 and 2010:



81







|                                           |  | As of December 31, 2011 |        |  | As of December 31, | 
|------------------------------------------ |  | ----------------------- | ------ |  | ------------------ | 
|                                           |  | Expected maturity date  |        |  | 2010               | 
|                                           |  | 2012                    |        |  | 2013               | 
|Fixed-rate bank and other loans in US$     |  |                         | 139    |  |                    | 
|                                           |  |                         |        |  |                    | 
|Variable-rate bank and other loans  in US$ |  |                         | 18,303 |  |                    | 
|                                           |  |                         |        |  |                    | 
|Capital commitment in US$                  |  |                         | 19,014 |  |                    | 







|(1) | Fair value of debt instruments was estimated based on the floating interest rates applicable to similar debt instruments as of December 31, 2011 and 2010.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



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





82









Fees and Payments from the Depositary to Us



In 2011, the Company received from the depositary a reimbursement
of US$60,475.22, 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$133,682.45 for the standard costs associated with the administration of the ADS program in 2011.



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.



(a) 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.



83







(b)                       Management’s annual report on internal control
over financial reporting



Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of a company’s assets, (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting
principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s
management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of a company’s assets that could have a material effect on the consolidated financial statements. Our
management has assessed the effectiveness of internal control over financial reporting based on the Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has concluded that our
internal control over financial reporting was effective as of December 31, 2011.



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.



|(c) | Attestation of the Registered Public Accounting Firm
|--- | ----------------------------------------------------



Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders of

China Southern Airlines Company Limited:



We have audited the internal control over financial reporting
of China Southern Airlines Company Limited (the “Company”) as of December 31, 2011, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit.



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



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



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



In our opinion, China Southern Airlines Company Limited maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established
in Internal Control-Integrated Framework issued by the COSO.



84







We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of China Southern
Airlines Company Limited and its subsidiaries as of December 31, 2011 and 2010, and the related consolidated income statements,
consolidated statements of comprehensive income, consolidated statements of changes in equity, and consolidated cash flow statements
for each of the years in the three-year period ended December 31, 2011, and our report dated March 29, 2012, expressed an unqualified
opinion on those consolidated financial statements.



/s/KPMG



Hong Kong, China



March 29, 2012



|(d) | Changes in internal control over financial reporting
|--- | ----------------------------------------------------



During the year ended December 31, 2011, there have been no
changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.



ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.



The Board of Directors has determined that Mr. Gong Hua Zhang
qualifies as an audit committee financial expert in accordance with the terms of Item 16A of Form 20-F. Mr. Gong Hua Zhang satisfies
as an “independent director” within the meaning of NYSE Manual Section 303A and meets the criteria for independence
set forth in Section 10A(m)(3) of the US 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 has 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.



ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES.



The following table sets forth the
aggregate audit fees, audit-related fees, 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 2010 and 2011:





|     |  | Audit Fees |             |  | Audit-Related
        Fees |     |             | Tax Fees |  |     | Other Fees   | 
|---- |  | ---------- | ----------- |  | -------------------------- | --- | ----------- | -------- |  | --- | ------------ | 
|     |  |            |             |  |                            |     |             |          |  |     |              | 
|2010 |  | RMB        | 9.0 million |  |                            | RMB | 3.3 million |          |  | RMB | 0.25 million | 
|     |  |            |             |  |                            |     |             |          |  |     |              | 
|2011 |  | RMB        | 9.0 million |  |                            | RMB | 3.0 million |          |  | RMB | 0.3 million  | 







Audit-related fees



Review of the Group’s 2010 interim financial report prepared
under IFRSs and 2011 interim financial report prepared under IFRSs.



Tax fees



Services provided primarily consist of
tax compliance services.



85







Other fees



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



Prior to our principal accountant being engaged by the Company
or our subsidiaries to render the audit or non audit services, the engagements have been 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.



The Company and its associates have not purchased any issued
common shares of the Company during 2011 and up to the date of this Annual Report.



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”):





86







|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). |  | Director Independence
        
        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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Executive Sessions
        
        No similar requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Nominating/Corporate Governance Committee
        
        Listed companies must have a nominating/corporate governance
        committee composed entirely of independent directors.
        
        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.                                                                                                                                                                                           |  | Nominating/Corporate Governance Committee
        
        The Company has established a nominating committee. As of December
        31, 2011, the Nomination Committee consists of three members, Si Xian Min, Wei Jin Cai (Independent non-executive Director) and
        Gong Hua Zhang (Independent non-executive Director). Mr. Si Xian Min was appointed as the chairman of the Nomination Committee
        on December 29, 2011. 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.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Compensation Committee
        
        Listed companies must have a compensation committee composed
        entirely of independent directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | Compensation Committee
        
        The Company has established a remuneration committee consisting
        of three members. As of December 31, 2011, the remuneration committee is chaired by independent non-executive Director Ning Xiang
        Dong with independent non-executive Director Gong Hua Zhang and non-executive Director Wang Quan Hua as members.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|The written charter of the compensation committee must state,
        at least, the following purposes and responsibilities:
        (1) review and approve the corporate goals associated with CEO’s
        compensation, evaluate the performance of the CEO in fulfilling these goals, and based on such evaluation determine and approve
        the CEO’s compensation level;
        (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.
        The charter must also include
the requirement for an annual performance evaluation of the compensation committee.                                                                                                                                                                          |  | The responsibilities are similar to those stipulated by the NYSE rules, but the committee is not required to produce a report on the executive compensation or make an annual performance evaluation of the committee. The responsibilities of the remuneration committee are to approve the remuneration packages of Directors and senior management of the Group, and the Company’s “preliminary proposals on annual emoluments of the directors and senior management of the Group”. The remuneration committee is also responsible for assessing performance of executive director and approving the terms of executive directors’ service contracts.                                                                                                                                                                                                                                                                                                                                        



87









|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.                                                                                                                                                                                                                                                                                  |  | Audit Committee
        
        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, 2011,
        the Audit Committee consists of three members, Mr. Ning Xiang Dong, Wei Jin Cai and Gong Hua Zhang, with Gong Hua Zhang being the
        Chairman of the Audit Committee.                                                                                                                                   
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The written charter of the audit committee must specify that
        the purpose of the audit committee is to assist the board oversight of the integrity of financial statements, the company’s
        compliance with legal and regulatory requirements, qualifications and independence of independent auditors and the performance
        of the listed company’s internal audit function and independent auditors.
        
        The 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. |  | 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.                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|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.                                                                                                                                                                                                                                                                                                                                                                                                     |  | Shareholder Approval of Equity Compensation Plans
        
        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.                                                                                                                                                                                                                                        |  | Corporate Governance Guidelines
        
        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.
        
        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.                                                                     |  | Certification Requirements
        
        There are no similar requirements under the domestic corporate
        governance rules in China.                                                                                                                                                                                                                                                                                                                                                                                                                





ITEM 16H. MINE SAFETY DISCLOSURE.



Not applicable.



88









PART III



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.



Reference is made to pages F-1 to F-84.



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                                                           
|            |  |                                                                                                                                                   
|4.1         |  | Form of Director’s Service Agreement (1)                                                                                                          
|            |  |                                                                                                                                                   
|4.2         |  | Form of Non-Executive Director’s Service Agreement (2                                                                                             
|            |  |                                                                                                                                                   
|4.3         |  | Aircraft Acquisition Agreement entered into by and between Xiamen Airlines and Boeing on May 9, 2011*                                             
|            |  |                                                                                                                                                   
|4.4         |  | Aircraft Acquisition Agreement entered into by and between the Company and Boeing on May 31, 2011*                                                
|            |  |                                                                                                                                                   
|4.5         |  | Aircraft Acquisition Agreement entered into by and between the Company and Boeing on February 28, 2012*                                           
|            |  |                                                                                                                                                   
|4.6         |  | Supplemental Agreement No.1 to Purchase Agreement Number PA-03600 entered into by and between the Company and Boeing Company on February 28, 2012*
|            |  |                                                                                                                                                   
|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 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



(2) 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



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 27, 2012



89







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, 2011, 2010 and 2009                          |  | F-2 
|Consolidated Statements of Comprehensive Income
        for the years ended December 31, 2011, 2010 and 2009 |  | F-4 
|Consolidated Statements of Financial Position at December 31, 2011 and 2010                                  |  | F-5 
|Consolidated Statements of Changes in Equity for the years ended December 31, 2011, 2010 and 2009            |  | F-7 
|Consolidated Cash Flow Statements for the years ended December 31, 2011, 2010 and 2009                       |  | F-9 
|Notes to the Consolidated Financial Statements                                                               |  | F-11





90









REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM



The Board of Directors and Shareholders
of

China Southern Airlines Company Limited



We have audited the accompanying consolidated
statements of financial position of China Southern Airlines Company Limited (the “Company”) and its subsidiaries (collectively,
the “Group”) as of December 31, 2011 and 2010, and the related consolidated income statements, consolidated statements
of comprehensive income, consolidated statements of changes in equity, and consolidated cash flow statements for each of the years
in the three-year period ended December 31, 2011.  These consolidated financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



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



In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of China Southern
Airlines Company Limited and its subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with International Financial
Reporting Standards as issued by the International Accounting Standards Board.



We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control
over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated
March 29, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.



/s/KPMG



Hong Kong, China



March 29, 2012



F-1







Consolidated Income Statements for the years ended December
31, 2011, 2010 and 2009

(Prepared in accordance with
International Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                             |  | Note |       |  | 2011        |  |        | 2010        |  |  | 2009        |  
|---------------------------------------------------------------------------- |  | ---- | ----- |  | ----------- |  | ------ | ----------- |  |  | ----------- | -
|                                                                             |  |      |       |  | RMB million |  |        | RMB million |  |  | RMB million |  
|Operating revenue                                                            |  |      |       |  |             |  |        |             |  |  |             |  
|Traffic revenue                                                              |  |      | 4     |  |             |  | 87,252 |             |  |  | 74,140      |  
|Other operating revenue                                                      |  |      | 5     |  |             |  | 3,143  |             |  |  | 2,355       |  
|Total operating revenue                                                      |  |      |       |  |             |  | 90,395 |             |  |  | 76,495      |  
|                                                                             |  |      |       |  |             |  |        |             |  |  |             |  
|Operating expenses                                                           |  |      |       |  |             |  |        |             |  |  |             |  
|Flight operations                                                            |  |      | 6     |  |             |  | 48,344 |             |  |  | 38,593      |  
|Maintenance                                                                  |  |      | 7     |  |             |  | 7,531  |             |  |  | 5,586       |  
|Aircraft and traffic servicing                                               |  |      | 8     |  |             |  | 12,337 |             |  |  | 10,968      |  
|Promotion and sales                                                          |  |      | 9     |  |             |  | 6,568  |             |  |  | 5,555       |  
|General and administrative                                                   |  |      | 10    |  |             |  | 2,807  |             |  |  | 2,266       |  
|Impairment on property, plant and equipment                                  |  |      | 20(h) |  |             |  | 584    |             |  |  | 212         |  
|Depreciation and amortization                                                |  |      | 11    |  |             |  | 7,689  |             |  |  | 7,065       |  
|Others                                                                       |  |      |       |  |             |  | 1,203  |             |  |  | 444         |  
|Total operating expenses                                                     |  |      |       |  |             |  | 87,063 |             |  |  | 70,689      |  
|Other net income                                                             |  |      | 13    |  |             |  | 1,021  |             |  |  | 476         |  
|                                                                             |  |      |       |  |             |  |        |             |  |  |             |  
|Operating profit                                                             |  |      |       |  |             |  | 4,353  |             |  |  | 6,282       |  
|Interest income                                                              |  |      |       |  |             |  | 179    |             |  |  | 93          |  
|Interest expense                                                             |  |      | 14    |  |             |  | (1,067 | )           |  |  | (1,265      | )
|Share of associates’ results                                                 |  |      | 22    |  |             |  | 456    |             |  |  | 56          |  
|Share of jointly controlled entities’ results                                |  |      | 23    |  |             |  | 125    |             |  |  | 112         |  
|Gain / (loss) on derivative financial instruments, net                       |  |      |       |  |             |  | 1      |             |  |  | (30         | )
|Exchange gain, net                                                           |  |      |       |  |             |  | 2,755  |             |  |  | 1,746       |  
|Interest income on wealth management products                                |  |      | 30    |  |             |  | 128    |             |  |  | -           |  
|Gain on sale of a jointly controlled entity classified as held for sale, net |  |      |       |  |             |  | -      |             |  |  | 1,078       |  
|Gain on deemed disposal of a subsidiary                                      |  |      |       |  |             |  | -      |             |  |  | 17          |  
|                                                                             |  |      |       |  |             |  |        |             |  |  |             |  
|Profit before taxation                                                       |  |      |       |  |             |  | 6,930  |             |  |  | 8,089       |  
|Income tax (expense) / benefit                                               |  |      | 16    |  |             |  | (840   | )           |  |  | (1,677      | )
|Profit for the year                                                          |  |      |       |  |             |  | 6,090  |             |  |  | 6,412       |  



F-2







Consolidated Income Statements for the years ended December
31,

2011, 2010 and 2009 (continued)

(Prepared in accordance with
International Financial Reporting Standards)

(Expressed in Renminbi)





|                                   |  | Note |  | 2011        |       |             | 2010 |             |  | 2009 |     
|---------------------------------- |  | ---- |  | ----------- | ----- | ----------- | ---- | ----------- |  | ---- | ----
|                                   |  |      |  | RMB million |       | RMB million |      | RMB million | 
|Attributable to:                   |  |      |  |             |       |             |      |             |  |      |     
|Equity shareholders of the Company |  |      |  |             | 5,110 |             |      | 5,792       |  |      | 327 
|Non-controlling interests          |  |      |  |             | 980   |             |      | 620         |  |      | 197 
|Profit for the year                |  |      |  |             | 6,090 |             |      | 6,412       |  |      | 524 
|                                   |  |      |  |             |       |             |      |             |  |      |     
|Earnings per share                 |  | 19   |  |             |       |             |      |             |  |      |     
|Basic and diluted                  |  |      |  | RMB         | 0.52  |             | RMB  | 0.70        |  | RMB  | 0.05





The notes on pages F-11 to F-83 form part
of these consolidated financial statements.



F-3







Consolidated Statements of Comprehensive Income for the years
ended December 31, 2011, 2010 and 2009

(Prepared in accordance with
International Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                                      |  | Note |    |  | 2011        |  |       | 2010        |  |  | 2009        |  
|------------------------------------------------------------------------------------- |  | ---- | -- |  | ----------- |  | ----- | ----------- |  |  | ----------- | -
|                                                                                      |  |      |    |  | RMB million |  |       | RMB million |  |  | RMB million |  
|                                                                                      |  |      |    |  |             |  |       |             |  |  |             |  
|Profit for the year                                                                   |  |      |    |  |             |  | 6,090 |             |  |  | 6,412       |  
|                                                                                      |  |      |    |  |             |  |       |             |  |  |             |  
|Other comprehensive income for the year (after tax and reclassification adjustments): |  |      | 17 |  |             |  |       |             |  |  |             |  
|                                                                                      |  |      |    |  |             |  |       |             |  |  |             |  
|Available-for-sale securities:                                                        |  |      |    |  |             |  |       |             |  |  |             |  
|net movement in the fair value reserve                                                |  |      |    |  |             |  | (12   | )           |  |  | (15         | )
|                                                                                      |  |      |    |  |             |  |       |             |  |  |             |  
|Total comprehensive income for the year                                               |  |      |    |  |             |  | 6,078 |             |  |  | 6,397       |  
|                                                                                      |  |      |    |  |             |  |       |             |  |  |             |  
|Attributable to:                                                                      |  |      |    |  |             |  |       |             |  |  |             |  
|Equity shareholders of the Company                                                    |  |      |    |  |             |  | 5,100 |             |  |  | 5,786       |  
|Non-controlling interests                                                             |  |      |    |  |             |  | 978   |             |  |  | 611         |  
|                                                                                      |  |      |    |  |             |  |       |             |  |  |             |  
|Total comprehensive income for the year                                               |  |      |    |  |             |  | 6,078 |             |  |  | 6,397       |  



The notes on pages F-11 to F-83 form part of these consolidated
financial statements.



F-4







Consolidated Statements of Financial Position at December 31,
2011 and 2010

(Prepared in accordance with
International Financial Reporting Standards)

(Expressed in Renminbi)



|                                          |  | Note |       |  | 2011        |  |         | 2010        | 
|----------------------------------------- |  | ---- | ----- |  | ----------- |  | ------- | ----------- | 
|                                          |  |      |       |  | RMB million |  |         | RMB million | 
|Non-current assets                        |  |      |       |  |             |  |         |             | 
|Property, plant and equipment, net        |  |      | 20    |  |             |  | 87,711  |             | 
|Construction in progress                  |  |      | 21    |  |             |  | 15,940  |             | 
|Lease prepayments                         |  |      |       |  |             |  | 1,932   |             | 
|Interest in associates                    |  |      | 22    |  |             |  | 746     |             | 
|Interest in jointly controlled entities   |  |      | 23    |  |             |  | 985     |             | 
|Other investments in equity securities    |  |      | 24    |  |             |  | 166     |             | 
|Lease deposits                            |  |      |       |  |             |  | 583     |             | 
|Available-for-sale equity securities      |  |      | 25    |  |             |  | 64      |             | 
|Deferred tax assets                       |  |      | 26    |  |             |  | 1,300   |             | 
|Other assets                              |  |      | 27    |  |             |  | 500     |             | 
|                                          |  |      |       |  |             |  | 109,927 |             | 
|                                          |  |      |       |  |             |  |         |             | 
|Current assets                            |  |      |       |  |             |  |         |             | 
|Inventories                               |  |      | 28    |  |             |  | 1,618   |             | 
|Trade receivables                         |  |      | 29    |  |             |  | 2,147   |             | 
|Other receivables                         |  |      | 30    |  |             |  | 4,988   |             | 
|Prepaid expenses and other current assets |  |      |       |  |             |  | 630     |             | 
|Amounts due from related companies        |  |      | 37    |  |             |  | 167     |             | 
|Pledged bank deposits                     |  |      | 33(g) |  |             |  | 72      |             | 
|Cash and cash equivalents                 |  |      | 31    |  |             |  | 9,863   |             | 
|                                          |  |      |       |  |             |  | 19,485  |             | 
|                                          |  |      |       |  |             |  |         |             | 
|Current liabilities                       |  |      |       |  |             |  |         |             | 
|Financial liabilities                     |  |      | 32    |  |             |  | -       |             | 
|Bank and other loans                      |  |      | 33    |  |             |  | 18,789  |             | 
|Obligations under finance leases          |  |      | 34    |  |             |  | 1,784   |             | 
|Trade payables                            |  |      | 35    |  |             |  | 2,847   |             | 
|Sales in advance of carriage              |  |      |       |  |             |  | 5,299   |             | 
|Deferred revenue                          |  |      | 36    |  |             |  | 907     |             | 
|Current taxation                          |  |      |       |  |             |  | 871     |             | 
|Amounts due to related companies          |  |      | 37    |  |             |  | 122     |             | 
|Accrued expenses                          |  |      | 38    |  |             |  | 9,480   |             | 
|Other liabilities                         |  |      | 39    |  |             |  | 4,314   |             | 
|                                          |  |      |       |  |             |  | 44,413  |             | 
|Net current liabilities                   |  |      | 49    |  |             |  | (24,928 | )           | 
|Total assets less current liabilities     |  |      |       |  |             |  | 84,999  |             | 



F-5







Consolidated Statements of Financial Position at
December 31, 2011 and 2010 (continued)

(Prepared in accordance with
International Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                |  | Note |    |  | 2011        |  |        | 2010        | 
|--------------------------------------------------------------- |  | ---- | -- |  | ----------- |  | ------ | ----------- | 
|                                                                |  |      |    |  | RMB million |  |        | RMB million | 
|Non-current liabilities and deferred items                      |  |      |    |  |             |  |        |             | 
|Bank and other loans                                            |  |      | 33 |  |             |  | 29,037 |             | 
|Obligations under finance leases                                |  |      | 34 |  |             |  | 14,053 |             | 
|Deferred revenue                                                |  |      | 36 |  |             |  | 1,178  |             | 
|Provision for major overhauls                                   |  |      | 40 |  |             |  | 1,178  |             | 
|Provision for early retirement benefits                         |  |      | 41 |  |             |  | 89     |             | 
|Deferred benefits and gains                                     |  |      | 42 |  |             |  | 1,058  |             | 
|Deferred tax liabilities                                        |  |      | 26 |  |             |  | 629    |             | 
|                                                                |  |      |    |  |             |  | 47,222 |             | 
|Net assets                                                      |  |      |    |  |             |  | 37,777 |             | 
|                                                                |  |      |    |  |             |  |        |             | 
|Capital and reserves                                            |  |      |    |  |             |  |        |             | 
|Share capital                                                   |  |      | 43 |  |             |  | 9,818  |             | 
|Reserves                                                        |  |      | 44 |  |             |  | 22,357 |             | 
|                                                                |  |      |    |  |             |  |        |             | 
|Total equity attributable to equity shareholders of the Company |  |      |    |  |             |  | 32,175 |             | 
|Non-controlling interests                                       |  |      |    |  |             |  | 5,602  |             | 
|Total equity                                                    |  |      |    |  |             |  | 37,777 |             | 



The notes on pages F-11 to F-83 form part
of these consolidated financial statements.



F-6







Consolidated Statements of Changes in Equity for
the years ended December 31, 2011, 2010 and 2009

(Prepared in accordance with
International Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                                        |  | Attributable
    to equity shareholders of the Company |       |  |         |  |        |            | 
|--------------------------------------------------------------------------------------- |  | ------------------------------------------------------ | ----- |  | ------- |  | ------ | ---------- | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|                                                                                        |  | Share                                                  |       |  | Share   |  |        | Fair value | 
|                                                                                        |  | capital                                                |       |  | premium |  |        | reserves   | 
|                                                                                        |  | RMB                                                    |       |  | RMB     |  |        | RMB        | 
|                                                                                        |  | million                                                |       |  | million |  |        | million    | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Balance at January 1,
    2009                                                          |  |                                                        |       |  |         |  |        |            | 
|- as previously reported                                                                |  |                                                        | 6,561 |  |         |  | 3,138  |            | 
|- adjustment for the change
    in accounting policy (Note 3)                           |  |                                                        | -     |  |         |  | 445    |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Balance at January 1,
    2009 (as adjusted)                                            |  |                                                        | 6,561 |  |         |  | 3,583  |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Changes
    in equity for 2009:                                                         |  |                                                        |       |  |         |  |        |            | 
|Profit for the year                                                                     |  |                                                        | -     |  |         |  | -      |            | 
|Other comprehensive income                                                              |  |                                                        | -     |  |         |  | -      |            | 
|Total
    comprehensive income                                                          |  |                                                        | -     |  |         |  | -      |            | 
|Issuance of shares (Note 43(a))                                                         |  |                                                        | 1,442 |  |         |  | 1,538  |            | 
|Paid in capital from non-controlling
    equity holders of subsidiaries                 |  |                                                        | -     |  |         |  | -      |            | 
|Liquidation of subsidiaries                                                             |  |                                                        | -     |  |         |  | -      |            | 
|Distributions to non-controlling
    interests                                          |  |                                                        | -     |  |         |  | -      |            | 
|Government
    contributions                                                            |  |                                                        | -     |  |         |  | -      |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Balance at December 31,
    2009 and January 1, 2010                                    |  |                                                        | 8,003 |  |         |  | 5,121  |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Changes
    in equity for 2010:                                                         |  |                                                        |       |  |         |  |        |            | 
|Profit for the year                                                                     |  |                                                        | -     |  |         |  | -      |            | 
|Other comprehensive income                                                              |  |                                                        | -     |  |         |  | -      |            | 
|Total
    comprehensive income                                                          |  |                                                        | -     |  |         |  | -      |            | 
|Issuance of shares  (Note 43(a))                                                        |  |                                                        | 1,815 |  |         |  | 8,757  |            | 
|Decrease in non-controlling
    interest as a result of loss of control of a subsidiary |  |                                                        | -     |  |         |  | -      |            | 
|Distributions to non-controlling
    interests                                          |  |                                                        | -     |  |         |  | -      |            | 
|Acquisition of equity
    interest of a subsidiary from a non-controlling interest      |  |                                                        | -     |  |         |  | -      |            | 
|Government
    contributions                                                            |  |                                                        | -     |  |         |  | -      |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Balance at December 31,
    2010 and January 1, 2011                                    |  |                                                        | 9,818 |  |         |  | 13,878 |            | 
|                                                                                        |  |                                                        |       |  |         |  |        |            | 
|Changes
    in equity for 2011:                                                         |  |                                                        |       |  |         |  |        |            | 
|Profit for the year                                                                     |  |                                                        | -     |  |         |  | -      |            | 
|Other comprehensive income                                                              |  |                                                        | -     |  |         |  | -      |            | 
|Total
    comprehensive income                                                          |  |                                                        | -     |  |         |  | -      |            | 
|Appropriations to reserves                                                              |  |                                                        | -     |  |         |  | -      |            | 
|Distributions to non-controlling
    interests                                          |  |                                                        | -     |  |         |  | -      |            | 
|Capital injection into
    a subsidiary by a third party (Note (b))                     |  |                                                        | -     |  |         |  | 253    |            | 
|Capital injection from
    a non-controlling interest of a subsidiary                   |  |                                                        | -     |  |         |  | -      |            | 
|Share
    of an associate’s reserves movement                                           |  |                                                        | -     |  |         |  | -      |            | 
|Balance
    at December 31, 2011                                                        |  |                                                        | 9,818 |  |         |  | 14,131 |            | 



F-7









Consolidated Statements of Changes in Equity for
the years ended December 31, 2011, 2010 and 2009 (continued)

(Prepared in accordance with
International Financial Reporting Standards)

(Expressed in Renminbi)



|Note (a): | Other reserves represent statutory surplus reserve, discretionary surplus reserve and others.  Details are set out in Note 44.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Note (b): | On December 20, 2010, the Company, Xiamen Jianfa Group Co., Ltd., a non-controlling interest of Xiamen Airlines Company Limited (“Xiamen Airlines”), and Hebei Aviation Investment Group Corporation Limited (“Hebei Investment”) entered into an agreement. Pursuant to the agreement, Hebei Investment agreed to inject cash of RMB1,460 million into Xiamen Airlines for 15% equity interests in Xiamen Airlines.  In March 2011, the capital injection was received in full and the Company’s equity interest in Xiamen Airlines was diluted from 60% to 51%.  Xiamen Airlines remains a subsidiary of the Company.



The notes on pages F-11 to F-83 form part
of these consolidated financial statements.





F-8









Consolidated Cash Flow Statements for the years ended December
31, 2011, 2010 and 2009

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi)



|                                                                                                             |  | Note |       |  | 2011        |  |         | 2010        |  |  | 2009        |  
|------------------------------------------------------------------------------------------------------------ |  | ---- | ----- |  | ----------- |  | ------- | ----------- |  |  | ----------- | -
|                                                                                                             |  |      |       |  | RMB million |  |         | RMB million |  |  | RMB million |  
|Operating activities                                                                                         |  |      |       |  |             |  |         |             |  |  |             |  
|Cash generated from operating activities                                                                     |  |      | 31(b) |  |             |  | 16,187  |             |  |  | 13,024      |  
|Interest received                                                                                            |  |      |       |  |             |  | 176     |             |  |  | 84          |  
|Interest paid                                                                                                |  |      |       |  |             |  | (1,235  | )           |  |  | (1,473      | )
|Income tax paid                                                                                              |  |      |       |  |             |  | (2,571  | )           |  |  | (193        | )
|Net cash from operating activities                                                                           |  |      |       |  |             |  | 12,557  |             |  |  | 11,442      |  
|                                                                                                             |  |      |       |  |             |  |         |             |  |  |             |  
|Investing activities                                                                                         |  |      |       |  |             |  |         |             |  |  |             |  
|Proceeds from disposal of property, plant and equipment and lease prepayments                                |  |      |       |  |             |  | 1,531   |             |  |  | 364         |  
|Proceeds from sale of available- for-sale equity securities                                                  |  |      |       |  |             |  | -       |             |  |  | -           |  
|Proceeds from sale of a jointly controlled entity                                                            |  |      |       |  |             |  | -       |             |  |  | 1,607       |  
|Net cash settlement of derivative financial instruments                                                      |  |      |       |  |             |  | (12     | )           |  |  | (61         | )
|Dividends received from associates                                                                           |  |      |       |  |             |  | 53      |             |  |  | -           |  
|Dividends received from a jointly controlled entity                                                          |  |      |       |  |             |  | 3       |             |  |  | 10          |  
|Dividends received from other investments                                                                    |  |      |       |  |             |  | 10      |             |  |  | 13          |  
|Loans repaid by an associate                                                                                 |  |      |       |  |             |  | 4       |             |  |  | 4           |  
|Payment for lease deposits                                                                                   |  |      |       |  |             |  | (78     | )           |  |  | (16         | )
|Payment for purchase of available-for-sale equity securities                                                 |  |      |       |  |             |  | -       |             |  |  | (5          | )
|Payment for wealth management products                                                                       |  |      |       |  |             |  | (28,650 | )           |  |  | -           |  
|Refund of lease deposits                                                                                     |  |      |       |  |             |  | 12      |             |  |  | 19          |  
|Refund of wealth management products                                                                         |  |      |       |  |             |  | 25,150  |             |  |  | -           |  
|Capital expenditures                                                                                         |  |      |       |  |             |  | (20,038 | )           |  |  | (13,469     | )
|Decrease in pledged bank deposits                                                                            |  |      |       |  |             |  | -       |             |  |  | -           |  
|Capital injection in an associate / payment for the investments in jointly control entities and a subsidiary |  |      |       |  |             |  | (37     | )           |  |  | -           |  
|Interest received on wealth management products                                                              |  |      |       |  |             |  | 95      |             |  |  | -           |  
|Liquidation of subsidiaries                                                                                  |  |      |       |  |             |  | -       |             |  |  | -           |  
|Acquisition of non-controlling interest in a subsidiary                                                      |  |      |       |  |             |  | -       |             |  |  | (15         | )
|Deemed disposal of a subsidiary                                                                              |  |      |       |  |             |  | -       |             |  |  | (19         | )
|Net cash used in investing activities                                                                        |  |      |       |  |             |  | (21,957 | )           |  |  | (11,568     | )



F-9







Consolidated Cash Flow Statements for the years ended December
31, 2011, 2010 and 2009 (continued)

(Prepared in accordance with International
Financial Reporting Standards)

(Expressed in Renminbi)



|                                                       |  | Note |       |  | 2011        |  |         | 2010        |  |  | 2009        |  
|------------------------------------------------------ |  | ---- | ----- |  | ----------- |  | ------- | ----------- |  |  | ----------- | -
|                                                       |  |      |       |  | RMB million |  |         | RMB million |  |  | RMB million |  
|Financing activities                                   |  |      |       |  |             |  |         |             |  |  |             |  
|Proceeds from issue of shares                          |  |      | 43(a) |  |             |  | -       |             |  |  | 10,572      |  
|Proceeds from bank and other loans                     |  |      |       |  |             |  | 19,395  |             |  |  | 22,100      |  
|Repayment of bank and other loans                      |  |      |       |  |             |  | (10,141 | )           |  |  | (24,976     | )
|Repayment of short-term financing bills                |  |      |       |  |             |  | -       |             |  |  | -           |  
|Repayment of principal under finance lease obligations |  |      |       |  |             |  | (1,702  | )           |  |  | (1,505      | )
|Capital contributions received from government         |  |      |       |  |             |  | -       |             |  |  | 2           |  
|Capital injections by non-controlling interests        |  |      |       |  |             |  | 1,500   |             |  |  | -           |  
|Dividends paid to non-controlling interests            |  |      |       |  |             |  | (121    | )           |  |  | (6          | )
|Increase in pledged bank deposits                      |  |      | 33(g) |  |             |  | (72     | )           |  |  | -           |  
|                                                       |  |      |       |  |             |  |         |             |  |  |             |  
|Net cash from financing activities                     |  |      |       |  |             |  | 8,859   |             |  |  | 6,187       |  
|                                                       |  |      |       |  |             |  |         |             |  |  |             |  
|Net (decrease) / increase in cash and cash equivalents |  |      |       |  |             |  | (541    | )           |  |  | 6,061       |  
|Cash and cash equivalents at January 1                 |  |      |       |  |             |  | 10,404  |             |  |  | 4,343       |  
|Cash and cash equivalents at December 31               |  |      |       |  |             |  | 9,863   |             |  |  | 10,404      |  



The notes on pages F-11 to F-83 form part
of these consolidated financial statements.



F-10







Notes to the Consolidated Financial Statements

(Prepared in accordance with International Financial
Reporting Standards)

(Expressed in Renminbi)



| | 1 | Basis of presentation
| | - | ---------------------



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



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



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



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



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



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



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



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



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



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



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



At December 31, 2011, the Group’s
current liabilities exceeded its current assets by RMB24,928 million, which includes bank and other loans repayable within one
year of RMB18,789 million. In preparing the consolidated financial statements, the directors have considered the Group’s
sources of liquidity and believe that adequate funding is available to fulfill the Group’s short-term obligations and capital
expenditure requirements. Accordingly, the financial statements have been prepared on a basis that the Group will be able to continue
as a going concern. Further details are set out in Note 49(a).



F-11







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



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



The consolidated financial statements
for the year ended December 31, 2011 comprise the Company and its subsidiaries and the Group’s interest in associates and
jointly controlled entities.



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



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



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



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



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



Judgments made by management
in the application of IFRSs that have significant effect on the financial statements and major sources of estimation uncertainty
are discussed in Note 55.



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



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



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



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



F-12









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



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



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



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



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



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



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



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



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



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



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



F-13







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



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



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



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



Goodwill represents the excess
of



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



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



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



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



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



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



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



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



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



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



F-14







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



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



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



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



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



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



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



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



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



The cost of self-constructed items
of property, plant and equipment includes the cost of materials, direct labor, the initial estimate, where relevant, of the costs
of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production
overheads and borrowing costs (Note 2(y)).



Gains or losses arising from the
retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds
and the carrying amount of the item and are recognized in the consolidated income statement on the date of retirement or disposal.



Depreciation is calculated to write
off the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight line method
over their estimated useful lives as follows:



|Buildings                          |  | 30 to 35 years | 
|---------------------------------- |  | -------------- | 
|Owned and leased aircraft          |  | 15 to 20 years | 
|Other flight equipment             |  |                | 
|- Jet engines                      |  | 15 to 20 years | 
|- Others, including rotable spares |  | 3 to 15 years  | 
|Machinery and equipment            |  | 4 to 10 years  | 
|Vehicles                           |  | 6 to 8 years   | 



Where parts of an item of property,
plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and
each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually.





F-15















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



| | (i) | Construction in progress
| | --- | ------------------------



Construction in progress represents
office buildings, various infrastructure projects under construction and equipment pending for installation, and is stated at cost
less impairment losses (Note 2(l)). Capitalization of these costs ceases and the construction in progress is transferred to property,
plant and equipment when the asset is substantially ready for its intended use, notwithstanding any delay in the issue of the relevant
commissioning certificates by the relevant PRC authorities.



No depreciation is provided in
respect of construction in progress.



| | (j) | Leased assets
| | --- | -------------



An arrangement, comprising a
transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to
use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination
is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal
form of a lease.



| | (i) | Classification of assets leased to the Group
| | --- | --------------------------------------------



Assets that are held by the Group
under leases which transfer to the Group substantially all the risks and rewards of ownership are classified as being held under
finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as
operating leases, except for land held for own use under an operating lease, the fair value of which cannot be measured separately
from the fair value of a building situated thereon at the inception of the lease, is accounted for as being held under a finance
lease, unless the building is also clearly held under an operating lease. For these purposes, the inception of the lease is the
time that the lease was first entered into by the Group, or taken over from the previous lessee.



| | (ii) | Assets acquired under finance leases
| | ---- | ------------------------------------



Where the Group acquires the use
of assets under finance leases, the amounts representing the fair value of the leased asset, or, if lower, the present value of
the minimum lease payments, of such assets are included in property, plant and equipment and the corresponding liabilities, net
of finance charges, are recorded as obligations under finance leases. Depreciation is provided at rates which write off the cost
or valuation of the assets over the term of the relevant lease or, where it is likely the Group will obtain ownership of the asset,
the life of the asset, as set out in Note 2(h)(ii). Impairment losses are accounted for in accordance with the accounting policy
as set out in Note 2(l). Finance charges implicit in the lease payments are charged to the consolidated income statement over the
period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations
for each accounting period. Contingent rentals are charged to the consolidated income statement in the accounting period in which
they are incurred.



F-16







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



| | (j) | Leased assets (continued)
| | --- | -------------------------



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



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



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



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



Gains or losses on aircraft sale
and leaseback transactions which result in finance leases are deferred and amortized over the terms of the related leases.



Gains or losses on aircraft sale
and leaseback transactions which result in operating leases are recognized immediately if the transactions are established at fair
value. If the sale price is at or below fair value then the gain or loss is recognized immediately. However, if a loss is compensated
for by future rentals at a below-market price, then the loss is deferred and amortized over the period that the aircraft is expected
to be used. If the sale price is above fair value, then any gain is deferred and amortized over the useful life of the assets.



| | (k) | Deferred expenditure
| | --- | --------------------



Lump sum housing benefits payable
to employees of the Group are deferred and amortized on a straight-line basis over a period of 10 years, which represents the benefit
vesting period of the employees.



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



| | (l) | Impairment of assets
| | --- | --------------------



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



Investments in equity securities
and other current and non-current receivables that are stated at cost or amortized cost or are classified as available-for-sale
equity securities are reviewed at the end of each financial year to determine whether there is objective evidence of impairment.
Objective evidence of impairment includes observable data that comes to the attention of the Group about one or more of the following
loss events:



| | - | significant financial difficulty of the debtor;
| | - | -----------------------------------------------



| | - | a breach of contract, such as a default or delinquency in interest or principal payments;
| | - | -----------------------------------------------------------------------------------------



| | - | it becoming probable that the debtor will enter bankruptcy or other financial reorganization;
| | - | ---------------------------------------------------------------------------------------------



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



| | - | a significant or prolonged declined in the fair value of an investment in an equity instrument
below its cost.
| | - | --------------------------------------------------------------------------------------------------------------



F-17







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



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



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



If any such evidence exists, any
impairment loss is determined and recognized as follows:



| | - | For investments in subsidiaries, associates and jointly controlled entities (including those recognized
using the equity method (Note 2(d)), the impairment loss is measured by comparing the recoverable amount of the investment with
its carrying amount in accordance with Note 2(l)(ii). The impairment loss is reversed if there has been a favorable change in the
estimates used to determine the recoverable amount in accordance with Note 2(l)(ii).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | For unquoted equity securities carried at cost, the impairment loss is measured as the difference
between the carrying amount of the financial asset and the estimated future cash flows, discounted at the current market rate of
return for a similar financial asset where the effect of discounting is material. Impairment losses for equity securities carried
at cost are not reversed.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | For trade and other current receivables and other financial assets carried at amortized cost, the
impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future
cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed
at initial recognition of these assets), where the effect of discounting is material. This assessment is made collectively where
these financial assets share similar risk characteristics, such as similar past due status, and have not been individually assessed
as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss
experience for assets with credit risk characteristics similar to the collective group.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If in a subsequent period the
amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss
was recognized, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the
asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years.



| | - | For available-for-sale securities, the cumulative loss that has been
recognized in the fair value reserve is reclassified to profit or loss. The amount of the cumulative loss that is recognized in
theconsolidated income statement is the difference between the acquisition cost (net of any
principal repayment and amortization) and current fair value, less any impairment loss on that asset previously recognized in theconsolidated income statement.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Impairment
losses recognized inconsolidated income statement in respect of available-for-sale equity securities
are not reversed through profit or loss. Any subsequent increase in the fair value of such assets is recognized directly in other
comprehensive income.



Impairment losses are written off
against the corresponding asset directly, except for impairment losses recognized in respect of trade and other receivables, whose
recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance
account. When the Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against trade
and other receivables directly and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries
of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance
account and subsequent recoveries of amounts previously written off directly are recognized in the consolidated income statement.



F-18







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



| | (l) | Impairmentof 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;
| | - | ------------------------------



| | - | Construction in progress;
| | - | -------------------------



| | - | Lease deposits;
| | - | ---------------



| | - | Lease prepayments;
| | - | ------------------



| | - | Deferred expenditure; 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 the consolidated income statement if the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds
its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying
amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the
other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced
below its individual fair value less costs to sell, or value in use, if determinable.



| | - | Reversals of impairment losses
| | - | ------------------------------



In respect of assets other than
goodwill, an impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable
amount. An impairment loss in respect of goodwill is not reversed.



A reversal of an impairment loss
is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior
years. Reversals of impairment losses are credited to the consolidated income statement in the year in which the reversals are
recognized.



F-19







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



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



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



The Group prepared an interim
financial report in compliance with IAS 34, Interim financial reporting, in respect of the first six months of the financial
year. At the end of the interim period, the Group applies the same impairment testing, recognition, and reversal criteria as it
would at the end of the financial year (Notes 2(l)(i) and (ii)).



Impairment losses recognized
in an interim period in respect of goodwill, available-for-sale equity securities and unquoted equity securities carried at cost
are not reversed in a subsequent period. This is the case even if no loss, or a smaller loss, would have been recognized had the
impairment been assessed only at the end of the financial year to which the interim period relates. Consequently, if the fair value
of an available-for-sale equity security increases in the remainder of the annual period, or in any other period subsequently,
the increase is recognized in other comprehensive income and not profit or loss.



| | (m) | Inventories
| | --- | -----------



Inventories, which consist primarily
of expendable spare parts and supplies, are stated at cost less any applicable provision for obsolescence, and are charged to the
consolidated income statement when used in operations. Cost represents the average unit cost.



Inventories held for disposal
are carried at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary
course of business less the estimated costs of completion and the estimated costs necessary to make the sale.



When inventories are sold, the
carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. The
amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the
period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognized as a reduction
in the amount of inventories recognized as an expense in the period in which the reversal occurs.



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



Trade and other receivables are
initially recognized at fair value and thereafter stated at amortized cost less allowance for impairment of doubtful debts (Note
2(l)), except where the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less allowance
for impairment of bad and doubtful debts.



| | (o) | Interest-bearing borrowings
| | --- | ---------------------------



Interest-bearing borrowings are
recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings
are stated at amortized cost with any difference between the amount initially recognized and redemption value being recognized
in the consolidated income statement over the period of the borrowings, together with any interest and fees payable, using the
effective interest method.



| | (p) | Trade and other payables
| | --- | ------------------------



Trade and other payables are
initially recognized at fair value. Except for financial guarantee liabilities measured in accordance with Note 2(r)(i), trade
and other payables are subsequently stated at amortized cost unless the effect of discounting would be immaterial, in which case
they are stated at cost.



F-20







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



| | (q) | Cash and cash equivalents
| | --- | -------------------------



Cash and cash equivalents comprise
cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments
that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having
been generally within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral
part of the Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the
consolidated cash flow statement.



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



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



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



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



The amount of the guarantee initially
recognized as deferred income is amortized in the consolidated income statement over the term of the guarantee as income from financial
guarantees issued. In addition, provisions are recognized in accordance with Note 2(r)(ii) if and when (i) it becomes probable
that the holder of the guarantee will call upon the Group under the guarantee, and (ii) the amount of that claim on the Group is
expected to exceed the amount currently carried in trade and other payables in respect of that guarantee i.e. the amount initially
recognized, less accumulated amortization.



| | (ii) | Provision and contingent liabilities
| | ---- | ------------------------------------



Provisions are recognized for other
liabilities of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event,
it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made.
Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the
obligation.



Where it is not probable that an
outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent
liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be
confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless
the probability of outflow of economic benefits is remote.



F-21







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



| | (s) | Defeasance of long-term liabilities
| | --- | -----------------------------------



Where long-term liabilities have
been defeased by the placement of security deposits, those liabilities and deposits (and income and charge arising therefrom) are
netted off in order to reflect the overall commercial effect of the arrangements. Such netting off has been effected where a right
is held by the Group to insist on net settlement of the liability and deposit including in all situations of default and where
that right is assured beyond doubt.



| | (t) | Deferred benefits and gains
| | --- | ---------------------------



In connection with the acquisitions
or leases of certain aircraft and engines, the Group receives various credits. Such credits are deferred until the aircraft and
engines are delivered, at which time they are either applied as a reduction of the cost of acquiring the aircraft and engines,
resulting in a reduction of future depreciation, or amortized as a reduction of rental expense for aircraft and engines under operating
leases.



| | (u) | Income tax
| | --- | ----------



Income tax for the year comprises
current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities
are recognized in the consolidated income statement except to the extent that they relate to items recognized in other comprehensive
income or directly in equity, in which case the relevant amounts of tax are recognized in other comprehensive income or directly
in equity, respectively.



Current tax is the expected tax
payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the financial year,
and any adjustment to tax payable in respect of previous years.



Deferred tax assets and liabilities
arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets
and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and
unused tax credits.



Apart from certain limited exceptions,
all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be
available against which the asset can be utilized, are recognized. Future taxable profits that may support the recognition of deferred
tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary
differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to
reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax
loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether
existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits,
that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and
are expected to reverse in a period, or periods, in which the tax loss or credit can be utilized.



The limited exception to the
recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax
purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are
not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the
case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse
in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.



F-22







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



| | (u) | Income tax (continued)
| | --- | ----------------------



The amount of deferred tax recognized
is measured based on the expected manner of realization or settlement of the carrying amount of the assets and liabilities, using
tax rates enacted or substantively enacted at the end of the financial year. Deferred tax assets and liabilities are not discounted.



The carrying amount of a deferred
tax asset is reviewed at the end of each financial year and is reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed to the extent
that it becomes probable that sufficient taxable profits will be available.



Current tax balances and deferred
tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset
against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Company or the Group has the
legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions
are met:



| | - | in the case of current tax assets and liabilities, if the Company or the Group intends either to
settle on a net basis, or to realize the asset and settle the liability simultaneously; or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the
same taxation authority on either:
| | - | -----------------------------------------------------------------------------------------------------------------------------------



| | - | the same taxable entity; or
| | - | ---------------------------



| | - | different taxable entities, which, in each future period in which significant amounts of deferred
tax liabilities or assets are expected to be settled or recovered, intend to realize the current tax assets and settle the current
tax liabilities on a net basis or realize and settle simultaneously.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) | Revenue recognition
| | --- | -------------------



Revenue is measured at the fair
value of the consideration received or receivable. Provided it is probable that the economic benefits will flow to the Group and
the revenue and costs, if applicable, can be measured reliably, revenue is recognized in the consolidated income statement as follows:



| | (i) | Passenger, cargo and mail revenues
| | --- | ----------------------------------



Passenger revenue is recognized
at the fair value of the consideration received when the transportation is provided or when an unused ticket expires rather than
a ticket is sold. Ticket sales for transportation not yet provided are included in current liabilities as sales in advance of carriage.



Cargo and mail revenues are recognized
when the transportation is provided.



Revenues from airline-related business
are recognized when services are rendered. Revenue is stated net of sales tax.



| | (ii) | Frequent flyer revenue
| | ---- | ----------------------



The Group maintains two frequent
flyer award programs, namely, the China Southern Airlines Sky Pearl Club and the Egrets Mileage Plus, which provide travel and
other awards to members based on accumulated mileages.



Revenue received in relation to
mileage earning flights is allocated, based on fair value, between the flight and mileages earned by members of the Group’s
frequent flyer award programs. The value attributed to the awarded mileages is deferred as a liability, within deferred revenue,
until the mileages are redeemed or expired.



Revenue received from third parties
for the issue of mileages under the frequent flyer award programs is also deferred as a liability, within deferred revenue.



F-23







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



| | (v) | Revenue recognition (continued)
| | --- | -------------------------------



| | (ii) | Frequent flyer revenue (continued)
| | ---- | ----------------------------------



As members
of the frequent flyer award programs redeem mileages for an award, revenue is recorded in the consolidated income statement. Revenue
in relation to flight awards is recognized when the transportation is provided. Revenue is recognized at the point of redemption
where non-flight rewards are selected.



| | (iii) | Rental income receivable under operating leases is recognized in the consolidated income statement
in equal installments over the periods covered by the lease term, except where an alternative basis is more representative of the
pattern of benefits to be derived from the use of the leased asset. Lease incentives granted are recognized in the consolidated
income statement as an integral part of the aggregate net lease payments receivables. Contingent rentals are recognized as income
in the accounting period in which they are earned.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | Dividend income is recognized when the shareholder’s right to receive payment is established.
| | ---- | ---------------------------------------------------------------------------------------------



| | (v) | Government grants are recognized in the consolidated statement of financial position initially
when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them.
Grants that compensate the Group for expenses incurred are recognized as revenue in the consolidated income statement on a systematic
basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are deducted
from the carrying amount of the asset and consequently are effectively recognized in the consolidated income statement over the
useful life of the asset by way of reduced depreciation expense.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vi) | Interest income is recognized as it accrues using the effective interest method.
| | ---- | --------------------------------------------------------------------------------



| | (w) | Traffic commissions
| | --- | -------------------



Traffic commissions are expensed
in the consolidated income statement when the transportation is provided and the related revenue is recognized. Traffic commissions
for transportation not yet provided are recorded on the consolidated statement of financial position as prepaid expense.



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



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



In respect of owned and finance
leased aircraft, components within the aircraft subject to replacement during major overhauls are depreciated over the average
expected life between major overhauls. When each major overhaul is performed, its cost is recognized in the carrying amount of
property, plant and equipment and is depreciated over the estimated period between major overhauls. Any remaining carrying amount
of cost of previous major overhaul is derecognized and charged to the consolidated income statement.



In respect of aircraft held under
operating leases, the Group has responsibility to fulfill certain return conditions under relevant lease agreements. In order to
fulfill these return conditions, major overhauls are required to be conducted on a regular basis. Accordingly, estimated costs
of major overhauls are accrued and charged to the consolidated income statement over the estimated period between overhauls. After
the aircraft has completed its last overhaul cycle prior to being returned, expected cost of overhaul to be incurred at the end
of the lease is estimated and accrued over the remaining period of the lease. Differences between the estimated costs and the actual
costs of overhauls are charged to the consolidated income statement in the period when the overhaul is performed.



F-24







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



| | (y) | Borrowing costs
| | --- | ---------------



Borrowing costs that are directly
attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to
get ready for its intended use are capitalized as part of the cost of that asset. Other borrowing costs are expensed in the period
in which they are incurred.



The capitalization of borrowing
costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are
being incurred and activities that are necessary to prepare the asset for its intended use are in progress. Capitalization of borrowing
costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use
are interrupted or complete.



| | (z) | Employee benefits
| | --- | -----------------



| | (i) | Short term employee benefits and contributions to defined contribution retirement schemes
| | --- | -----------------------------------------------------------------------------------------



Salaries,
annual bonuses and contributions to defined contribution retirement schemes are accrued in the year in which the associated services
are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at
their present values.



| | (ii) | Termination benefits
| | ---- | --------------------



Termination
benefits are recognized when, and only when, the Group demonstrably commits itself to terminate employment or to provide benefits
as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.



| | (iii) | Share-based payment
| | ----- | -------------------



The fair
value of the amount payable to employee in respect of share appreciation rights (“SARs”), which are settled in cash,
is recognized as an expense with a corresponding increase in liabilities, over the vesting period. The liability is remeasured
at each reporting date and at settlement date. Any changes in the fair value of the liability are recognized as staff cost in the
consolidated income statement.



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



Foreign currencies transactions
during the year are translated into Renminbi at the applicable rates of exchange quoted by the People’s Bank of China (“PBOC”)
prevailing at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into Renminbi
at the PBOC exchange rates prevailing at the end of the financial year. Exchange gains and losses are recognized in the
consolidatedincome 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-25







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



| | (bb) | Related parties
| | ---- | ---------------



| | (a) | A person, or a close member of that person’s family, is related to the Group if that person:
| | --- | --------------------------------------------------------------------------------------------



| | (i) | has control or joint control over the Group;
| | --- | --------------------------------------------



| | (ii) | has significant influence over the Group; or
| | ---- | --------------------------------------------



| | (iii) | is a member of the key management personnel of the Group or the Group’s parent.
| | ----- | -------------------------------------------------------------------------------



| | (b) | An entity is related to the Group if any of the following conditions applies:
| | --- | -----------------------------------------------------------------------------



| | (i) | The entity and the Group are members of the same Group (which means that each parent, subsidiary
and fellow subsidiary is related to the others).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | One entity is an associate or joint venture of the other entity (or an associate or joint venture
of a member of a group of which the other entity is a member).
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Both entities are joint ventures of the same third party.
| | ----- | ---------------------------------------------------------



| | (iv) | One entity is a joint venture of a third entity and the other entity is an associate of the third
entity.
| | ---- | ---------------------------------------------------------------------------------------------------------



| | (v) | The entity is a post-employment benefit plan for the benefit of employees of either the Group or
an entity related to the Group.
| | --- | --------------------------------------------------------------------------------------------------------------------------------



| | (vi) | The entity is controlled or jointly controlled by a person identified in (a).
| | ---- | -----------------------------------------------------------------------------



| | (vii) | A person identified in (a)(i) has significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the entity).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



Close members of the family of
a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the
entity.



| | (cc) | Segmental reporting
| | ---- | -------------------



Operating segments are identified
from the financial information provided regularly to the Group’s most senior executive management 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-26







| | 3 | Changes in accounting policies
| | - | ------------------------------



The IASB has issued a number
of amendments to IFRSs and one new Interpretation that are first effective for the current accounting period of the Group. Of these,
the following developments are relevant to the Group’s financial statements:



| | • | IAS 24 (revised 2009), Related party disclosures
| | - | ------------------------------------------------



| | • | Improvements to IFRSs (2010)
| | - | ----------------------------



The impacts of these developments
are as follows:



| | • | IAS 24 (revised 2009) revises the definition of a related party. As a result, the Group has re-assessed
the identification of related parties and restated certain comparative amounts due to / from related companies balances. As the
effect of changes in accounting policy was not material to financial statements, no comparative consolidated statement of financial
position as at January 1 is presented. IAS 24 (revised 2009) also introduces modified disclosure requirements for government-related
entities. As a result, the Group has re-assessed the modified disclosure requirements for government-related entities and revised
the disclosures accordingly.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | In the Improvements to IFRSs (2010) omnibus standard, the IASB extended the scope of paragraph
D8 of IFRS 1, First time adoption of IFRSs, for the use of the deemed cost exemption for an event-driven fair value. Under
the amended standard, an entity is permitted to take as deemed cost the fair value of some or all of its assets and liabilities,
when these fair values were determined under previous GAAP at one particular date because of a specific event which occurred during
the period covered by its first financial statements prepared under IFRSs. Previously, IFRS 1 only permitted such valuations to
be used as deemed cost if the event occurred before the date of the entity’s transition to IFRSs (being the start of the
earliest comparative period included in the first set of IFRS financial statements).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Group’s first financial
statements prepared under IFRSs were for the three years ended December 31, 1996, with the start of the earliest comparative period
being on January 1, 1994. During that period and pursuant to applicable laws and regulations of the PRC, the Group’s financial
statements prepared under the PRC accounting standards for business enterprises(“ASBE”) and other relevant rules and
regulations included property, plant and equipment and leasehold land use rights at deemed cost based on the valuation performed
by independent valuers as at December 31, 1996. As these valuations were performed as of a date later than the date of transition
to IFRSs, the Group was not permitted to adopt these valuations as deemed cost for the purposes of its IFRS financial statements.
Before 2009, the Group adopted the revaluation model for its property, plant and equipment in accordance with IAS 16, Property,
Plant and Equipment and the leasehold land use rights were measured at historical cost. In 2009, the Group changed its IFRS
accounting policy in respect of property, plant and equipment from the revaluation model to the historical cost model to increase
the relevance of financial data to the users of the financial statements.



During the year, the Group has
chosen to adopt the amendments to IFRS 1 by making retrospective adjustments in order to eliminate the aforementioned differences
between the Group’s financial statements under IFRSs and those under the Accounting Standards for Business Enterprises –
Basic Standard and 38 Specific Standards, application guidance, bulletins and other relevant accounting regulations (collectively
“PRC GAAP”). Specifically, the Group has retrospectively adjusted the amounts reported for previous periods in its
IFRS financial statements to reflect the recognition of the property, plant and equipment and leasehold land use rights at their
deemed cost based on the valuation performed by the independent valuers as at December 31, 1996, with consequential adjustments
for amortization charged in subsequent periods.



F-27







| | 3 | Changes in accounting policies (continued)
| | - | ------------------------------------------



The results of operation previously
reported by the Group for the years ended December 31, 2009 and 2010, and financial condition previously reported by the Group
as at December 31, 2010, have been restated to include the adoption of Improvements to IFRSs (2010) as set out below.



| | (a) | For the year ended December 31, 2009
| | --- | ------------------------------------



|                                                          |  | The Group,    |     |  | Adoption of     |  |    |             | 
|--------------------------------------------------------- |  | ------------- | --- |  | --------------- |  | -- | ----------- | 
|                                                          |  | as previously |     |  | Improvements    |  |    | The Group,  | 
|                                                          |  | reported      |     |  | to IFRSs (2010) |  |    | as restated | 
|                                                          |  | RMB million   |     |  | RMB million     |  |    | RMB million | 
|Results of operation:                                     |  |               |     |  |                 |  |    |             | 
|Profit attributable to equity shareholders of the Company |  |               | 330 |  |                 |  | (3 | )           | 



Total equity attributable to equity
shareholders of the Company as at December 31, 2009 increased by RMB109 million due to the adoption of Improvements to IFRSs
(2010).



| | (b) | As at and for the year ended December 31, 2010
| | --- | ----------------------------------------------



|                                                                |  | The Group,    |        |  | Adoption of     |  |     |             | 
|--------------------------------------------------------------- |  | ------------- | ------ |  | --------------- |  | --- | ----------- | 
|                                                                |  | as previously |        |  | Improvements    |  |     | The Group,  | 
|                                                                |  | reported      |        |  | to IFRSs (2010) |  |     | as restated | 
|                                                                |  | RMB million   |        |  | RMB million     |  |     | RMB million | 
|Results of operation:                                           |  |               |        |  |                 |  |     |             | 
|Profit attributable to equity shareholders of the Company       |  |               | 5,795  |  |                 |  | (3  | )           | 
|                                                                |  |               |        |  |                 |  |     |             | 
|Financial condition:                                            |  |               |        |  |                 |  |     |             | 
|Lease prepayments                                               |  |               | 1,605  |  |                 |  | 138 |             | 
|Deferred tax assets                                             |  |               | 997    |  |                 |  | (35 | )           | 
|Total non-current assets                                        |  |               | 95,373 |  |                 |  | 103 |             | 
|Total equity attributable to equity shareholders of the Company |  |               | 26,714 |  |                 |  | 103 |             | 



There is no material impact on
the Group’s financial position as a result of the change in accounting policy as mentioned above, accordingly additional
consolidated statement of financial position and related notes are not presented as at the beginning of the comparative period
of these consolidated financial statements.



The Group has not applied any
new standard or interpretation that is not yet effective for the current accounting period.



F-28







| | 4 | Traffic revenue
| | - | ---------------



|                      |  | 2011        |        |  | 2010        |  |        | 2009        | 
|--------------------- |  | ----------- | ------ |  | ----------- |  | ------ | ----------- | 
|                      |  | RMB million |        |  | RMB million |  |        | RMB million | 
|                      |  |             |        |  |             |  |        |             | 
|Passenger             |  |             | 71,435 |  |             |  | 64,308 |             | 
|Cargo and mail        |  |             | 4,118  |  |             |  | 4,249  |             | 
|Fuel surcharge income |  |             | 11,699 |  |             |  | 5,583  |             | 
|                      |  |             | 87,252 |  |             |  | 74,140 |             | 



Pursuant to various sales tax
rules and regulations, the Group is required to pay sales tax (mainly including business tax) to national and local tax authorities
at the rate of approximately 3% of the traffic revenue in respect of domestic flights and international, Hong Kong, Macau and Taiwan
flights.



Pursuant to the “Notice
of exemption of business tax on international traffic revenue” issued jointly by the PRC Ministry of Finance and the State
Administration of Taxation in 2010, the Group is exempted from business tax on international (including Hong Kong, Macau and Taiwan)
traffic revenue from January 1, 2010.



Pursuant to the “Notice
of exemption of business tax on fuel surcharge for airline companies” issued jointly by the PRC Ministry of Finance and the
State Administration of Taxation, the Group is exempted from business tax on fuel surcharge income received during the period from
January 1, 2008 to December 31, 2010.



Sales
tax incurred by the Group during the year ended December 31, 2011, netted off against revenue, amounted to RMB2,434 million (2010:
RMB1,851 million;2009: RMB1,532 million).
Traffic revenue is stated net of sales tax.



| | 5 | Other operating revenue
| | - | -----------------------



|                                     |  | 2011        |       |  | 2010        |  |       | 2009        | 
|------------------------------------ |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                                     |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                                     |  |             |       |  |             |  |       |             | 
|Commission income                    |  |             | 643   |  |             |  | 469   |             | 
|Hotel and travel services income     |  |             | 614   |  |             |  | 477   |             | 
|Ground services income               |  |             | 368   |  |             |  | 390   |             | 
|General aviation income              |  |             | 322   |  |             |  | 283   |             | 
|Expired sales in advance of carriage |  |             | 309   |  |             |  | 249   |             | 
|Air catering income                  |  |             | 166   |  |             |  | 132   |             | 
|Rental income                        |  |             | 121   |  |             |  | 122   |             | 
|Aircraft wet lease income            |  |             | 319   |  |             |  | 50    |             | 
|Others                               |  |             | 281   |  |             |  | 183   |             | 
|                                     |  |             | 3,143 |  |             |  | 2,355 |             | 



F-29







| | 6 | Flight operations expenses
| | - | --------------------------



|                                                                                              |  | 2011        |        |  | 2010        |  |        | 2009        | 
|--------------------------------------------------------------------------------------------- |  | ----------- | ------ |  | ----------- |  | ------ | ----------- | 
|                                                                                              |  | RMB million |        |  | RMB million |  |        | RMB million | 
|                                                                                              |  |             |        |  |             |  |        |             | 
|Jet fuel costs                                                                                |  |             | 32,675 |  |             |  | 23,492 |             | 
|Operating lease charges                                                                       |  |             | 4,654  |  |             |  | 5,298  |             | 
|Air catering expenses                                                                         |  |             | 2,073  |  |             |  | 1,808  |             | 
|Aircraft insurance                                                                            |  |             | 201    |  |             |  | 206    |             | 
|Flight personnel payroll and welfare                                                          |  |             | 4,412  |  |             |  | 3,420  |             | 
|Training expenses                                                                             |  |             | 681    |  |             |  | 628    |             | 
|Civil Aviation Administration of China (“CAAC”) Infrastructure Development Fund contributions |  |             | 1,655  |  |             |  | 1,622  |             | 
|Inventory provision (Note 28)                                                                 |  |             | 141    |  |             |  | 8      |             | 
|Others                                                                                        |  |             | 1,852  |  |             |  | 2,111  |             | 
|                                                                                              |  |             | 48,344 |  |             |  | 38,593 |             | 



| | 7 | Maintenance expenses
| | - | --------------------



|                               |  | 2011        |       |  | 2010        |  |       | 2009        | 
|------------------------------ |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                               |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                               |  |             |       |  |             |  |       |             | 
|Repair and maintenance charges |  |             | 6,885 |  |             |  | 4,985 |             | 
|Maintenance materials          |  |             | 646   |  |             |  | 601   |             | 
|                               |  |             | 7,531 |  |             |  | 5,586 |             | 



| | 8 | Aircraft and traffic servicing expenses
| | - | ---------------------------------------



|                                 |  | 2011        |        |  | 2010        |  |        | 2009        | 
|-------------------------------- |  | ----------- | ------ |  | ----------- |  | ------ | ----------- | 
|                                 |  | RMB million |        |  | RMB million |  |        | RMB million | 
|                                 |  |             |        |  |             |  |        |             | 
|Landing and navigation fees      |  |             | 8,426  |  |             |  | 7,792  |             | 
|Ground service and other charges |  |             | 3,911  |  |             |  | 3,176  |             | 
|                                 |  |             | 12,337 |  |             |  | 10,968 |             | 





F-30











| | 9 | Promotion and sales expenses
| | - | ----------------------------



|                              |  | 2011        |       |  | 2010        |  |       | 2009        | 
|----------------------------- |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                              |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                              |  |             |       |  |             |  |       |             | 
|Sales commissions             |  |             | 3,521 |  |             |  | 3,232 |             | 
|Ticket office expenses        |  |             | 1,894 |  |             |  | 1,373 |             | 
|Computer reservation services |  |             | 471   |  |             |  | 446   |             | 
|Advertising and promotion     |  |             | 292   |  |             |  | 147   |             | 
|Others                        |  |             | 390   |  |             |  | 357   |             | 
|                              |  |             | 6,568 |  |             |  | 5,555 |             | 



| | 10 | General and administrative expenses
| | -- | -----------------------------------



|                           |  | 2011        |       |  | 2010        |  |       | 2009        | 
|-------------------------- |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                           |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                           |  |             |       |  |             |  |       |             | 
|General corporate expenses |  |             | 2,713 |  |             |  | 2,158 |             | 
|Auditors’ remuneration     |  |             | 13    |  |             |  | 14    |             | 
|Other taxes and levies     |  |             | 81    |  |             |  | 94    |             | 
|                           |  |             | 2,807 |  |             |  | 2,266 |             | 



| | 11 | Depreciation and amortization
| | -- | -----------------------------



|                                            |  | 2011        |       |   | 2010        |  |       | 2009        | 
|------------------------------------------- |  | ----------- | ----- | - | ----------- |  | ----- | ----------- | 
|                                            |  | RMB million |       |   | RMB million |  |       | RMB million | 
|Depreciation                                |  |             |       |   |             |  |       |             | 
|- Owned assets                              |  |             | 5,723 |   |             |  | 5,724 |             | 
|- Assets acquired under finance leases      |  |             | 1,917 |   |             |  | 1,301 |             | 
|Amortization of deferred benefits and gains |  |             | (73   | ) |             |  | (71   | )           | 
|Other amortization                          |  |             | 122   |   |             |  | 111   |             | 
|                                            |  |             | 7,689 |   |             |  | 7,065 |             | 



| | 12 | Staff costs
| | -- | -----------



|                                    |  | 2011        |        |  | 2010        |  |       | 2009        | 
|----------------------------------- |  | ----------- | ------ |  | ----------- |  | ----- | ----------- | 
|                                    |  | RMB million |        |  | RMB million |  |       | RMB million | 
|                                    |  |             |        |  |             |  |       |             | 
|Salaries, wages and welfare         |  |             | 10,345 |  |             |  | 7,713 |             | 
|Retirement scheme contributions     |  |             | 960    |  |             |  | 808   |             | 
|Early retirement benefits (Note 41) |  |             | 37     |  |             |  | 29    |             | 
|                                    |  |             | 11,342 |  |             |  | 8,550 |             | 



Staff costs relating to flight operations,
maintenance, aircraft and traffic servicing, promotion and sales and general and administrative expenses are also included in the
respective total amounts disclosed separately in Notes 6 to 10 above. Details of staff costs arising from cash-settled share appreciation
rights are disclosed in Note 46(c).



F-31







| | 13 | Other net income
| | -- | ----------------



|                                                                                  |  | 2011        |       |   | 2010        |  |     | 2009        | 
|--------------------------------------------------------------------------------- |  | ----------- | ----- | - | ----------- |  | --- | ----------- | 
|                                                                                  |  | RMB million |       |   | RMB million |  |     | RMB million | 
|                                                                                  |  |             |       |   |             |  |     |             | 
|Refund of CAAC infrastructure development fund                                    |  |             | -     |   |             |  | -   |             | 
|Government grants                                                                 |  |             | 828   |   |             |  | 553 |             | 
|Gain / (loss) on sale of property, plant and equipment, net and lease prepayments |  |             |       |   |             |  |     |             | 
|- Aircraft and spare engines                                                      |  |             | 180   |   |             |  | (8  | )           | 
|- Other property, plant and equipment and lease prepayments                       |  |             | (35   | ) |             |  | (1  | )           | 
|Gain on sale of available-for-sale equity securities (Note 17(b))                 |  |             | -     |   |             |  | -   |             | 
|Others                                                                            |  |             | 48    |   |             |  | (68 | )           | 
|                                                                                  |  |             | 1,021 |   |             |  | 476 |             | 



Pursuant to the “Notice of refund
of CAAC infrastructure development fund” jointly issued by CAAC and the Ministry of Finance of the PRC in 2009, RMB1,328
million of CAAC infrastructure development fund paid for the period from July 1, 2008 to June 30, 2009 was refunded in 2009. There
was no such refund during 2011 and 2010.



| | 14 | Interest expense
| | -- | ----------------



|                                                                    |  | 2011        |       |   | 2010        |  |       | 2009        | 
|------------------------------------------------------------------- |  | ----------- | ----- | - | ----------- |  | ----- | ----------- | 
|                                                                    |  | RMB million |       |   | RMB million |  |       | RMB million | 
|                                                                    |  |             |       |   |             |  |       |             | 
|Interest on bank and other loans wholly repayable within five years |  |             | 543   |   |             |  | 777   |             | 
|Interest on other loans                                             |  |             | 333   |   |             |  | 263   |             | 
|Finance charges on obligations under finance leases                 |  |             | 388   |   |             |  | 403   |             | 
|Other interest expense (Note 41)                                    |  |             | 8     |   |             |  | 8     |             | 
|Less: interest expense capitalized                                  |  |             | (205  | ) |             |  | (186  | )           | 
|                                                                    |  |             | 1,067 |   |             |  | 1,265 |             | 



The borrowing costs have been capitalized
at rates ranging from 1.79% to 2.99% per annum in 2011 (2010: 1.13% to 1.87% per annum; 2009: 1.55% to 3.30% per annum).



F-32







| | 15 | Remuneration of directors, supervisors and senior management
| | -- | ------------------------------------------------------------



Details of directors’ and supervisors’
remuneration for the year ended December 31, 2011 are set out below:



|                                        |  |            |     |  | Salaries,  |  |       |               |  |  |               |  |  |          |     |  |              |  |       |         | 
|--------------------------------------- |  | ---------- | --- |  | ---------- |  | ----- | ------------- |  |  | ------------- |  |  | -------- | --- |  | ------------ |  | ----- | ------- | 
|                                        |  |            |     |  | allowances |  |       |               |  |  |               |  |  |          |     |  |              |  |       |         | 
|                                        |  |            |     |  | and        |  |       |               |  |  | Retirement    |  |  |          |     |  | Share        |  |       |         | 
|                                        |  | Directors’ |     |  | benefits   |  |       | Discretionary |  |  | scheme        |  |  |          |     |  | appreciation |  |       |         | 
|Name                                    |  | fees       |     |  | in kind    |  |       | bonuses       |  |  | contributions |  |  | Subtotal |     |  | rights       |  |       | Total   | 
|                                        |  | RMB’000    |     |  | RMB’000    |  |       | RMB’000       |  |  | RMB’000       |  |  | RMB’000  |     |  | RMB’000      |  |       | RMB’000 | 
|                                        |  |            |     |  |            |  |       |               |  |  |               |  |  |          |     |  |              |  |       |         | 
|Non-executive directors                 |  |            |     |  |            |  |       |               |  |  |               |  |  |          |     |  |              |  |       |         | 
|Si Xian Min (Note (i) and (xii))        |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |          | -   |  |              |  | -     |         | 
|Li Wen Xin (Note (i) and (iv))          |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |          | -   |  |              |  | -     |         | 
|Wang Quan Hua (Note (i) and (xii))      |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |          | -   |  |              |  | -     |         | 
|Yuan Xin An (Note (i), (iii) and (xii)) |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |          | -   |  |              |  | -     |         | 
|                                        |  |            |     |  |            |  |       |               |  |  |               |  |  |          |     |  |              |  |       |         | 
|Executive directors                     |  |            |     |  |            |  |       |               |  |  |               |  |  |          |     |  |              |  |       |         | 
|Tan Wan Geng (Note (ii) and (xii))      |  |            | -   |  |            |  | 517   |               |  |  | 300           |  |  |          | 29  |  |              |  | 846   |         | 
|Zhang Zi Fang (Note (xii))              |  |            | -   |  |            |  | 687   |               |  |  | 300           |  |  |          | 71  |  |              |  | 1,058 |         | 
|Xu Jie Bo (Note (xii)                   |  |            | -   |  |            |  | 601   |               |  |  | 250           |  |  |          | 71  |  |              |  | 922   |         | 
|Chen Zhen You (Note (xii))              |  |            | -   |  |            |  | 601   |               |  |  | 250           |  |  |          | 70  |  |              |  | 921   |         | 
|                                        |  |            |     |  |            |  |       |               |  |  |               |  |  |          |     |  |              |  |       |         | 
|Supervisors                             |  |            |     |  |            |  |       |               |  |  |               |  |  |          |     |  |              |  |       |         | 
|Pan Fu (Note (i))                       |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |          | -   |  |              |  | -     |         | 
|Li Jia Shi                              |  |            | -   |  |            |  | 601   |               |  |  | 250           |  |  |          | 69  |  |              |  | 920   |         | 
|Zhang Wei (Note (i))                    |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |          | -   |  |              |  | -     |         | 
|Yang Yi Hua                             |  |            | -   |  |            |  | 332   |               |  |  | 30            |  |  |          | 68  |  |              |  | 430   |         | 
|Liang Zhong Gao                         |  |            | -   |  |            |  | 337   |               |  |  | 30            |  |  |          | 69  |  |              |  | 436   |         | 
|                                        |  |            |     |  |            |  |       |               |  |  |               |  |  |          |     |  |              |  |       |         | 
|Independent non-executive directors     |  |            |     |  |            |  |       |               |  |  |               |  |  |          |     |  |              |  |       |         | 
|Gong Hua Zhang                          |  |            | 104 |  |            |  | -     |               |  |  | -             |  |  |          | -   |  |              |  | 104   |         | 
|Lam Kwong Yu (Note (v))                 |  |            | 56  |  |            |  | -     |               |  |  | -             |  |  |          | -   |  |              |  | 56    |         | 
|Wei Jin Cai                             |  |            | 104 |  |            |  | -     |               |  |  | -             |  |  |          | -   |  |              |  | 104   |         | 
|Ning Xiang Dong                         |  |            | 104 |  |            |  | -     |               |  |  | -             |  |  |          | -   |  |              |  | 104   |         | 
|Liu Chang Le (Note (iii))               |  |            | 13  |  |            |  | -     |               |  |  | -             |  |  |          | -   |  |              |  | 13    |         | 
|                                        |  |            | 381 |  |            |  | 3,676 |               |  |  | 1,410         |  |  |          | 447 |  |              |  | 5,914 |         | 



F-33







| | 15 | Remuneration of directors, supervisors and senior management (continued)
| | -- | ------------------------------------------------------------------------



Details of directors’ and supervisors’
remuneration for the year ended December 31, 2010 are set out below:



|                                        |  |            |     |  | Salaries,  |  |       |               |  |  |               |  |  |         |    
|--------------------------------------- |  | ---------- | --- |  | ---------- |  | ----- | ------------- |  |  | ------------- |  |  | ------- | ---
|                                        |  |            |     |  | allowances |  |       |               |  |  |               |  |  |         |    
|                                        |  |            |     |  | and        |  |       |               |  |  | Retirement    |  |  |         |    
|                                        |  | Directors’ |     |  | benefits   |  |       | Discretionary |  |  | scheme        |  |  |         |    
|Name                                    |  | fees       |     |  | in kind    |  |       | bonuses       |  |  | contributions |  |  | Total   |    
|                                        |  | RMB’000    |     |  | RMB’000    |  |       | RMB’000       |  |  | RMB’000       |  |  | RMB’000 |    
|                                        |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Non-executive directors                 |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Si Xian Min (Note (i) and (viii))       |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|Li Wen Xin (Note (i) and (viii))        |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|Wang Quan Hua (Note (i) and (viii))     |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                        |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Executive directors                     |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Liu Bao Heng (Note (i) and (vi))        |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|Tan Wan Geng                            |  |            | -   |  |            |  | 817   |               |  |  | 150           |  |  |         | 61 
|Zhang  Zi Fang                          |  |            | -   |  |            |  | 778   |               |  |  | 150           |  |  |         | 60 
|Xu Jie Bo                               |  |            | -   |  |            |  | 706   |               |  |  | 100           |  |  |         | 60 
|Chen Zhen You                           |  |            | -   |  |            |  | 706   |               |  |  | 100           |  |  |         | 59 
|                                        |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Supervisors                             |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Pan Fu (Note (i) and (ix))              |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|Sun Xiao Yi (Note (i) and (vii))        |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|Li Jia Shi                              |  |            | -   |  |            |  | 708   |               |  |  | 100           |  |  |         | 58 
|Zhang Wei (Note (i))                    |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|Yang Yi Hua                             |  |            | -   |  |            |  | 368   |               |  |  | 20            |  |  |         | 56 
|Liang Zhong Gao                         |  |            | -   |  |            |  | 373   |               |  |  | 20            |  |  |         | 57 
|                                        |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Independent
    non-executive directors |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Wang Zhi (Note (vii))                   |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|Sui Guang Jun (Note (vii))              |  |            | 100 |  |            |  | -     |               |  |  | -             |  |  |         | -  
|Gong Hua Zhang                          |  |            | 100 |  |            |  | -     |               |  |  | -             |  |  |         | -  
|Lam Kwong Yu                            |  |            | 87  |  |            |  | -     |               |  |  | -             |  |  |         | -  
|Wei Jin Cai (Note (ix))                 |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|Ning Xiang Dong (Note (ix))             |  |            | -   |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                        |  |            | 287 |  |            |  | 4,456 |               |  |  | 640           |  |  |         | 411



F-34







| | 15 | Remuneration of directors, supervisors and senior management
(continued)
| | -- | ------------------------------------------------------------------------



Details of directors’ and supervisors’
remuneration for the year ended December 31, 2009 are set out below:



|                                    |  |            |     |  | Salaries,  |  |       |               |  |  |               |  |  |         |    
|----------------------------------- |  | ---------- | --- |  | ---------- |  | ----- | ------------- |  |  | ------------- |  |  | ------- | ---
|                                    |  |            |     |  | allowances |  |       |               |  |  |               |  |  |         |    
|                                    |  |            |     |  | and        |  |       |               |  |  | Retirement    |  |  |         |    
|                                    |  | Directors’ |     |  | benefits   |  |       | Discretionary |  |  | scheme        |  |  |         |    
|Name                                |  | fees       |     |  | in kind    |  |       | bonuses       |  |  | contributions |  |  | Total   |    
|                                    |  | RMB’000    |     |  | RMB’000    |  |       | RMB’000       |  |  | RMB’000       |  |  | RMB’000 |    
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Executive directors                 |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Si Xian Min                         |  |            | -   |  |            |  | 698   |               |  |  | -             |  |  |         | 40 
|Li Wen Xin                          |  |            | -   |  |            |  | 608   |               |  |  | -             |  |  |         | 40 
|Wang Quan Hua                       |  |            | -   |  |            |  | 550   |               |  |  | -             |  |  |         | 40 
|Liu Bao Heng                        |  |            | -   |  |            |  | 550   |               |  |  | -             |  |  |         | 40 
|Tan Wan Geng                        |  |            | -   |  |            |  | 672   |               |  |  | -             |  |  |         | 38 
|Xu Jie Bo                           |  |            | -   |  |            |  | 572   |               |  |  | -             |  |  |         | 38 
|Chen Zhen You                       |  |            | -   |  |            |  | 572   |               |  |  | -             |  |  |         | 38 
|Zhang Zi Fang (Note (x))            |  |            | -   |  |            |  | 590   |               |  |  | -             |  |  |         | 38 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Supervisors                         |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Sun Xiao Yi                         |  |            | -   |  |            |  | 550   |               |  |  | -             |  |  |         | 40 
|Yang Guang Hua (Note (xi))          |  |            | -   |  |            |  | 407   |               |  |  | -             |  |  |         | 17 
|Zhang Wei                           |  |            | -   |  |            |  | 345   |               |  |  | -             |  |  |         | 40 
|Yang Yi Hua                         |  |            | -   |  |            |  | 266   |               |  |  | -             |  |  |         | 38 
|Liang Zhong Gao                     |  |            | -   |  |            |  | 269   |               |  |  | -             |  |  |         | 38 
|Li Jia Shi (Note (x))               |  |            | -   |  |            |  | 118   |               |  |  | -             |  |  |         | 19 
|                                    |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Independent non-executive directors |  |            |     |  |            |  |       |               |  |  |               |  |  |         |    
|Wang Zhi                            |  |            | 50  |  |            |  | -     |               |  |  | -             |  |  |         | -  
|Sui Guang Jun                       |  |            | 100 |  |            |  | -     |               |  |  | -             |  |  |         | -  
|Gong Hua Zhang                      |  |            | 100 |  |            |  | -     |               |  |  | -             |  |  |         | -  
|Lam Kwong Yu                        |  |            | 88  |  |            |  | -     |               |  |  | -             |  |  |         | -  
|                                    |  |            | 338 |  |            |  | 6,767 |               |  |  | -             |  |  |         | 504



F-35







| | 15 | Remuneration of directors, supervisors and senior management
(continued)
| | -- | ------------------------------------------------------------------------



Notes:



| | (i) | These directors or supervisors did not receive any remuneration for their services in the capacity
of the directors or supervisors of the Company. They also held management positions in CSAHC and their salaries were borne by CSAHC.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | This director did not receive remuneration for the service in the capacity of the director of the
Company since June 2011, when he started to hold management position in CSAHC and his salary was borne by CSAHC.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Appointed on November 30, 2011.
| | ----- | -------------------------------



| | (iv) | Resigned on August 8, 2011.
| | ---- | ---------------------------



| | (v) | Resigned on August 5, 2011.
| | --- | ---------------------------



| | (vi) | Resigned on November 24, 2010.
| | ---- | ------------------------------



| | (vii) | Resigned on December 29, 2010.
| | ----- | ------------------------------



| | (viii) | These three directors were appointed as non-executive directors on December 29, 2010.
| | ------ | -------------------------------------------------------------------------------------



| | (ix) | Appointed on December 29, 2010.
| | ---- | -------------------------------



| | (x) | Appointed on June 30, 2009.
| | --- | ---------------------------



| | (xi) | Resigned on June 30, 2009.
| | ---- | --------------------------



| | (xii) | These directors have been granted SARs in 2011. The amount represented the estimated value of SARs
granted to the directors under the Group’s share appreciation scheme. The value of these SARs of RMB24,000 as at December
31, 2011 is measured according to the Group’s accounting policies for share-based payment transactions as set out in note
2(z)(iii). The details of the principal terms and SARs granted, are disclosed in Note 46(c).
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 16 | Income tax expense
| | -- | ------------------



| | (a) | Income tax expense / (benefit) in the consolidated income statements
| | --- | --------------------------------------------------------------------



|                                                                            |  | 2011        |       |   | 2010        |  |       | 2009        | 
|--------------------------------------------------------------------------- |  | ----------- | ----- | - | ----------- |  | ----- | ----------- | 
|                                                                            |  | RMB million |       |   | RMB million |  |       | RMB million | 
|                                                                            |  |             |       |   |             |  |       |             | 
|PRC income tax                                                              |  |             |       |   |             |  |       |             | 
|Provision for the year                                                      |  |             | 1,516 |   |             |  | 2,134 |             | 
|Over-provision in prior year                                                |  |             | (59   | ) |             |  | -     |             | 
|                                                                            |  |             | 1,457 |   |             |  | 2,134 |             | 
|Deferred tax (Note 26)                                                      |  |             |       |   |             |  |       |             | 
|Origination and reversal of temporary differences                           |  |             | (369  | ) |             |  | (457  | )           | 
|Recognition of deductible temporary differences unrecognized in prior years |  |             | (248  | ) |             |  | -     |             | 
|                                                                            |  |             | (617  | ) |             |  | (457  | )           | 
|Actual tax expense / (benefit)                                              |  |             | 840   |   |             |  | 1,677 |             | 



F-36







| | 16 | Income tax expense (continued)
| | -- | ------------------------------



| | (a) | Income tax expense / (benefit) in the consolidated income statements (continued)
| | --- | --------------------------------------------------------------------------------



In respect of majority of the Group’s
overseas airline activities, the Group has either obtained exemptions from overseas taxation pursuant to the bilateral aviation
agreements between the overseas governments and the PRC government, or has sustained tax losses in these overseas jurisdictions.
Accordingly, no provision for overseas tax has been made for overseas airline activities in the current year and prior years.



Effective from January 1, 2008, under the
Corporate Income Tax Law of the PRC (“new tax law”), the Company and its subsidiaries are subject to income tax at
the statutory rate of 25% unless otherwise specified.



Pursuant to the new tax law, the income
tax rates of entities that previously enjoyed preferential tax rates of 15% and 18% have been revised to 20%, 22%, 24% and 25%
for 2009, 2010, 2011 and 2012 onwards, respectively.



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



|                                                                                                                               |  | 2011        |       |   | 2010        |  |       | 2009        | 
|------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | ----- | - | ----------- |  | ----- | ----------- | 
|                                                                                                                               |  | RMB million |       |   | RMB million |  |       | RMB million | 
|                                                                                                                               |  |             |       |   |             |  |       |             | 
|Profit before taxation                                                                                                         |  |             | 6,930 |   |             |  | 8,089 |             | 
|                                                                                                                               |  |             |       |   |             |  |       |             | 
|Notional tax on profit before taxation, calculated at the rates applicable to profit in the tax jurisdictions concerned (Note) |  |             | 1,706 |   |             |  | 1,974 |             | 
|Adjustments for tax effect of:                                                                                                 |  |             |       |   |             |  |       |             | 
|Non-deductible expenses                                                                                                        |  |             | 36    |   |             |  | 111   |             | 
|Non-taxable income                                                                                                             |  |             | (9    | ) |             |  | (2    | )           | 
|Share of results of associates and jointly controlled entities                                                                 |  |             | (145  | ) |             |  | (42   | )           | 
|Recognition of taxable temporary difference on asset classified as held for sale                                               |  |             | -     |   |             |  | -     |             | 
|Recognition of deductible temporary differences unrecognized in prior years                                                    |  |             | (248  | ) |             |  | -     |             | 
|Unused tax losses and deductible temporary differences not recognized                                                          |  |             | 16    |   |             |  | -     |             | 
|Utilization of unused tax losses and deductible temporary differences not recognized in prior years                            |  |             | (440  | ) |             |  | (364  | )           | 
|Over provision in prior years                                                                                                  |  |             | (59   | ) |             |  | -     |             | 
|Tax rates differential                                                                                                         |  |             | (17   | ) |             |  | -     |             | 
|Others                                                                                                                         |  |             | -     |   |             |  | -     |             | 
|Actual tax expense / (benefit)                                                                                                 |  |             | 840   |   |             |  | 1,677 |             | 



Notes:



The headquarters of the Company and its
branches are taxed at rates ranging from 24% to 25% (2010: 22% to 25%; 2009: 20% to 25%). The subsidiaries of the Group are taxed
at rates ranging from 15% to 25% (2010: 15% to 25%; 2009: 15% to 25%).





F-37







| | 17 | Other comprehensive income
| | -- | --------------------------



| | (a) | Tax effects relating to other comprehensive income
| | --- | --------------------------------------------------



|                                       |  | 2011       |     |   | 2010    |  | 2009 |           
|-------------------------------------- |  | ---------- | --- | - | ------- |  | ---- | ----------
|                                       |  | Before-tax |     |   | Tax     |  |      | Net-of-tax
|                                       |  | amount     |     |   | benefit |  |      | amount    
|                                       |  | RMB        |     |   | RMB     |  |      | RMB       
|                                       |  | million    |     |   | million |  |      | million   
|Available-for-sales securities:        |  |            |     |   |         |  |      |           
|net movement in fair value
    reserve |  |            | (16 | ) |         |  | 4    |           







| | (b) | Reclassification adjustments relating to components of other comprehensive income
| | --- | ---------------------------------------------------------------------------------





|                                                                                                   |  | 2011        |     |   | 2010        |  |     | 2009        | 
|-------------------------------------------------------------------------------------------------- |  | ----------- | --- | - | ----------- |  | --- | ----------- | 
|                                                                                                   |  | RMB million |     |   | RMB million |  |     | RMB million | 
|                                                                                                   |  |             |     |   |             |  |     |             | 
|Available-for-sale securities:                                                                     |  |             |     |   |             |  |     |             | 
|Changes in fair value recognized during the year                                                   |  |             | (16 | ) |             |  | (18 | )           | 
|Reclassification adjustment for amount transferred to profit or loss: - gain on disposal (Note 13) |  |             | -   |   |             |  | -   |             | 
|Net deferred tax credited / (debited) to other comprehensive income (Note 26(a))                   |  |             | 4   |   |             |  | 3   |             | 
|Net movement in the fair value reserve during the year recognized in other comprehensive income    |  |             | (12 | ) |             |  | (15 | )           | 



| | 18 | Dividends
| | -- | ---------



A dividend in respect of the year ended
December 31, 2011 of RMB0.2 per share, amounting to a total dividend of RMB1,964 million was proposed by the directors on March
29, 2012. 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 (Note 52(b)).



No dividend was proposed or paid in 2010
and 2009.



| | 19 | Earnings per share
| | -- | ------------------



The calculation of basic earnings per share
for the year ended December 31, 2011 is based on the profit attributable to equity shareholders of the Company of RMB5,110 million
(2010: RMB5,792 million; 2009: RMB327 million) and the weighted average of 9,817,567,000 shares in issue during the year (2010:
8,314,100,000 shares; 2009: 7,084,842,000 shares), calculated as follows:



|                                                          |  | 2011           |       |  | 2010           |  |       | 2009           | 
|--------------------------------------------------------- |  | -------------- | ----- |  | -------------- |  | ----- | -------------- | 
|                                                          |  | Million shares |       |  | Million shares |  |       | Million shares | 
|                                                          |  |                |       |  |                |  |       |                | 
|Issued ordinary shares at January 1                       |  |                | 9,818 |  |                |  | 8,003 |                | 
|Effect of issuance of A shares (Note 43)                  |  |                | -     |  |                |  | 259   |                | 
|Effect of issuance of H shares (Note 43)                  |  |                | -     |  |                |  | 52    |                | 
|Weighted average number of ordinary shares at December 31 |  |                | 9,818 |  |                |  | 8,314 |                | 



The amounts of diluted earnings per share
are the same as basic earnings per share as there were no dilutive potential ordinary shares in existence for both the current
and prior years.



F-38







| | 20 | Property, plant and equipment, net
| | -- | ----------------------------------



|                                                                |  |            |     |   |           |  |       | Aircraft |  |  | Other    |   |  |            |        |   |            | 
|--------------------------------------------------------------- |  | ---------- | --- | - | --------- |  | ----- | -------- |  |  | -------- | - |  | ---------- | ------ | - | ---------- | 
|                                                                |  |            |     |   |           |  |       |          |  |  | Acquired |   |  | flight     |        |   | Machinery, | 
|                                                                |  |            |     |   |           |  |       |          |  |  | under    |   |  | equipment, |        |   | equipment  | 
|                                                                |  | Investment |     |   |           |  |       |          |  |  | finance  |   |  | including  |        |   | and        | 
|                                                                |  | properties |     |   | Buildings |  |       | Owned    |  |  | leases   |   |  | rotables   |        |   | vehicles   | 
|                                                                |  | RMB        |     |   | RMB       |  |       | RMB      |  |  | RMB      |   |  | RMB        |        |   | RMB        | 
|                                                                |  | million    |     |   | million   |  |       | million  |  |  | million  |   |  | million    |        |   | million    | 
|Cost /
    revalued amounts:                                    |  |            |     |   |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At January 1, 2010                                              |  |            | 583 |   |           |  | 6,974 |          |  |  | 54,837   |   |  |            | 21,927 |   |            | 
|Additions                                                       |  |            | -   |   |           |  | 18    |          |  |  | 4,921    |   |  |            | 3,552  |   |            | 
|Transfer from construction
    in progress (Note 21)            |  |            | -   |   |           |  | 700   |          |  |  | 12,665   |   |  |            | -      |   |            | 
|Disposals                                                       |  |            | -   |   |           |  | (81   | )        |  |  | (1,273   | ) |  |            | (11    | ) |            | 
|Other
    reclassifications                                     |  |            | 28  |   |           |  | (28   | )        |  |  | (41      | ) |  |            | -      |   |            | 
|At December 31, 2010                                            |  |            | 611 |   |           |  | 7,583 |          |  |  | 71,109   |   |  |            | 25,468 |   |            | 
|                                                                |  |            |     |   |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At January 1, 2011                                              |  |            | 611 |   |           |  | 7,583 |          |  |  | 71,109   |   |  |            | 25,468 |   |            | 
|Additions                                                       |  |            | -   |   |           |  | 4     |          |  |  | 2,050    |   |  |            | 2,959  |   |            | 
|Transfer from construction
    in progress (Note 21)            |  |            | -   |   |           |  | 524   |          |  |  | 6,975    |   |  |            | 2,409  |   |            | 
|Reclassification on exercise
    of purchase options (Note (e)) |  |            | -   |   |           |  | -     |          |  |  | 768      |   |  |            | (768   | ) |            | 
|Disposals                                                       |  |            | -   |   |           |  | (80   | )        |  |  | (5,380   | ) |  |            | (136   | ) |            | 
|At December 31, 2011                                            |  |            | 611 |   |           |  | 8,031 |          |  |  | 75,522   |   |  |            | 29,932 |   |            | 
|                                                                |  |            |     |   |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Accumulated
    depreciation and impairment losses:             |  |            |     |   |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At January 1, 2010                                              |  |            | 122 |   |           |  | 1,670 |          |  |  | 20,844   |   |  |            | 3,938  |   |            | 
|Depreciation charge for the
    year                            |  |            | 18  |   |           |  | 248   |          |  |  | 4,226    |   |  |            | 1,301  |   |            | 
|Disposals                                                       |  |            | -   |   |           |  | (28   | )        |  |  | (946     | ) |  |            | (11    | ) |            | 
|Other reclassifications                                         |  |            | (2  | ) |           |  | 2     |          |  |  | (35      | ) |  |            | -      |   |            | 
|Impairment losses for the
    year                              |  |            | -   |   |           |  | -     |          |  |  | 189      |   |  |            | -      |   |            | 
|Impairment
    losses written off on disposal                   |  |            | -   |   |           |  | -     |          |  |  | (156     | ) |  |            | -      |   |            | 
|At December 31, 2010                                            |  |            | 138 |   |           |  | 1,892 |          |  |  | 24,122   |   |  |            | 5,228  |   |            | 
|                                                                |  |            |     |   |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At January 1, 2011                                              |  |            | 138 |   |           |  | 1,892 |          |  |  | 24,122   |   |  |            | 5,228  |   |            | 
|Depreciation charge for the
    year                            |  |            | 19  |   |           |  | 281   |          |  |  | 4,274    |   |  |            | 1,917  |   |            | 
|Reclassification on exercise
    of purchase options(Note (e))  |  |            | -   |   |           |  | -     |          |  |  | 324      |   |  |            | (324   | ) |            | 
|Disposals                                                       |  |            | -   |   |           |  | (25   | )        |  |  | (3,171   | ) |  |            | (136   | ) |            | 
|Impairment losses for the
    year (Note (h))                   |  |            | -   |   |           |  | -     |          |  |  | 526      |   |  |            | -      |   |            | 
|Impairment
    losses written off on disposal                   |  |            | -   |   |           |  | -     |          |  |  | (846     | ) |  |            | -      |   |            | 
|At December 31, 2011                                            |  |            | 157 |   |           |  | 2,148 |          |  |  | 25,229   |   |  |            | 6,685  |   |            | 
|                                                                |  |            |     |   |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|Net book value:                                                 |  |            |     |   |           |  |       |          |  |  |          |   |  |            |        |   |            | 
|At December 31, 2011                                            |  |            | 454 |   |           |  | 5,883 |          |  |  | 50,293   |   |  |            | 23,247 |   |            | 
|At December 31, 2010                                            |  |            | 473 |   |           |  | 5,691 |          |  |  | 46,987   |   |  |            | 20,240 |   |            | 



F-39







| | 20 | Property, plant and equipment, net (continued)
| | -- | ----------------------------------------------



| | (a) | Most of the Group’s buildings are located in the PRC. The Group was formally granted the
rights to use the certain parcels of land in Guangzhou, Shenzhen, Zhuhai, Beihai, Changsha, Shantou, Haikou, Zhengzhou, Jilin,
Guiyang, Wuhan and other PRC cities by the relevant PRC authorities for periods of 30 to 70 years, which expire between 2020 and
2073. For other land in the PRC on which the Group’s buildings are erected, the Group was formally granted the rights to
use such land for periods of three years pursuant to various lease agreements between the Company and CSAHC. In this connection,
rental payments in respect of land use rights totaling RMB56 million were paid to CSAHC during 2011 (2010 and 2009: RMB22 million,
respectively) in respect of these leases.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | As at December 31, 2011, certain aircraft of the Group with an aggregate carrying value of approximately
RMB53,062 million (2010: RMB46,194 million) were mortgaged under certain loans or certain lease agreements (Notes 33 and 34).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | As at December 31, 2011, certain buildings of the Group with an aggregate carrying value of approximately
RMB17 million were mortgaged for certain banking facilities granted by a PRC commercial bank (2010: RMB18 million).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | The Group leased out investment properties and certain flight training facilities under operating
leases. The leases typically run for an initial period of one to fourteen years, with an option to renew the lease after that date
at which time all terms are renegotiated. None of the leases includes contingent rentals. In this connection, rental income totaling
RMB82 million (2010: RMB74 million; 2009: RMB62 million) was received by the Group during the year in respect of the leases.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All properties held under operating
leases that would otherwise meet the definition of investment property are classified as investment property.



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



|                                |  | 2011        |    |  | 2010        | 
|------------------------------- |  | ----------- | -- |  | ----------- | 
|                                |  | RMB million |    |  | RMB million | 
|                                |  |             |    |  |             | 
|Within 1 year                   |  |             | 36 |  |             | 
|After 1 year but within 5 years |  |             | 62 |  |             | 
|After 5 years                   |  |             | -  |  |             | 
|                                |  |             | 98 |  |             | 



As at December 31, 2011, the net book value
of the aircraft and flight training facilities leased out by the Group under operating leases amounted to RMB33 million (2010:
RMB43 million).



| | (e) | During the year, the Company exercised the purchase options stipulated in the aircraft finance
lease agreements and two A321-200 aircraft were reclassified as owned aircraft from finance leased aircraft.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (f) | The investment properties are located in the PRC, where comparable market transactions are infrequent.
In the absence of the current or recent prices in an active market and alternative reliable estimates of fair value (for example,
discounted cash flow projection) are not available, the Group could not reliably determine the fair value of the investment properties.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-40







| | 20 | Property, plant and equipment, net (continued)
| | -- | ----------------------------------------------



| | (g) | The Company entered into two separate arrangements (the “Arrangements”) with certain
independent third parties during each of 2002 and 2003. Under each of the Arrangements, the Company sold an aircraft and then immediately
leased back the aircraft for an agreed period. The Company has an option to purchase the aircraft at a pre-determined date. In
the event that the lease agreement is early terminated by the Company, the Company is liable to pay a pre-determined penalty to
the lessor. Provided that the Company complies with the lease agreements, the Company is entitled to the continued possession and
operation of the aircraft. Since the Company retains substantially all risks and rewards incidental to ownership of the aircraft
and enjoys substantially the same rights to their use as before the Arrangements, no adjustment has been made to the property,
plant and equipment.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (h) | During the year, in view of the age of the Group’s fleet of Boeing 737-300 aircraft, the
Group planned to dispose of these aircraft and commenced the process of seeking buyers. The Group assessed the recoverable amounts
of these aircraft and related fleet assets. Based on the assessment, the carrying amounts of these aircraft and the related fleet
assets were written down by RMB544 million as at December 31, 2011.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In prior years, the Group planned
to dispose of its fleet of MD90, Airbus 300-600 aircraft and Boeing 757-200 aircraft. These aircraft and related assets’
carrying amounts were written down to their recoverable amounts and impairment losses of RMB1,056 million were made as at December
31, 2010. During the year, the MD90 and Airbus 300-600 aircraft fleet and two Boeing 757-200 aircraft were disposed of and a net
gain of RMB123 million was recognized in the consolidated income statement. As at December 31, 2011, the Group reviewed the recoverable
amounts of the remaining aircraft related assets and a further RMB40 million impairment provision was made.



The estimates of recoverable
amounts were based on the greater of the assets’ fair value less costs to sell and its value in use. The fair value was determined
by reference to the recent observable market prices for the aircraft fleet.



| | (i) | As at December 31, 2011 and up to the date of approval of these financial statements, the Group
is in the process of applying for the land use right certificates and property title certificates in respect of the properties
located in Guangzhou (including Guangzhou Baiyun International Airport), Xiamen, Heilongjiang, Jilin, Dalian, Hunan, Xinjiang,
Henan, Shenzhen, Beijing, Shanghai, Sanya, Zhuhai and Shenyang, in which the Group has interests and for which such certificates
have not been granted. As at December 31, 2011, carrying value of such properties of the Group amounted to RMB3,303 million (2010:
RMB3,271 million). The directors of the Company are of the opinion that the use of and the conduct of operating activities at the
properties referred to above are not affected by the fact that the Group has not yet obtained the relevant land use right certificates
and property title certificates.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-41







| | 21 | Construction in progress
| | -- | ------------------------



|                                                                                                       |  | 2011        |         |   | 2010        | 
|------------------------------------------------------------------------------------------------------ |  | ----------- | ------- | - | ----------- | 
|                                                                                                       |  | RMB million |         |   | RMB million | 
|                                                                                                       |  |             |         |   |             | 
|At January 1                                                                                           |  |             | 10,069  |   |             | 
|Additions                                                                                              |  |             | 16,449  |   |             | 
|Transferred to property, plant and equipment (Note 20)                                                 |  |             | (10,079 | ) |             | 
|Transferred to lease prepayments and other assets upon completion of development, or other receivables |  |             | (499    | ) |             | 
|At December 31                                                                                         |  |             | 15,940  |   |             | 



The construction in progress
as at December 31, 2011 mainly related to advance payments for acquisition of aircraft and progress payments for other construction
projects at the Shantou New Airport, Sydney Office Building and Shenyang aircraft maintenance warehouse.



The construction of Yuanquan
Pilot Apartment Building Project was commenced in 2008 and the progress payments for the construction paid by Xiamen Airlines was
recorded in construction in progress in previous years according to the signed agreement with a third party. Pursuant to a supplementary
contract entered in 2011, construction progress payments of RMB242 million paid by Xiamen Airlines for certain buildings of the
project will be transferred to the third party and accordingly such payments will be reimbursed to the Group. Therefore, the amount
was reclassified from construction in progress to other receivables during the year.



As at December 31, 2011, no advance
payments for acquisition of aircraft of the Group (2010: RMB2,869 million) were mortgaged under loan agreements (Note 33).



F-42







| | 22 | Interest in associates
| | -- | ----------------------



|                    |  | 2011        |     |  | 2010        | 
|------------------- |  | ----------- | --- |  | ----------- | 
|                    |  | RMB million |     |  | RMB million | 
|                    |  |             |     |  |             | 
|Share of net assets |  |             | 746 |  |             | 



During the year, the Company
injected capital of RMB37 million to an associate according to its existing share percentages.



The details of the Group’s
principal associates are set out in Note 58, all of which are unlisted corporate entities.



Summary financial information
on associates



|                                            |  | 100 Percent |         |   | Group’s effective interest | 
|------------------------------------------- |  | ----------- | ------- | - | -------------------------- | 
|                                            |  | 2011        |         |   | 2010                       | 
|                                            |  | RMB         |         |   | RMB                        | 
|                                            |  | million     |         |   | million                    | 
|                                            |  |             |         |   |                            | 
|Non-current assets                          |  |             | 15,244  |   |                            | 
|Current assets                              |  |             | 6,331   |   |                            | 
|Non-current liabilities                     |  |             | (9,977  | ) |                            | 
|Current liabilities                         |  |             | (9,319  | ) |                            | 
|Net assets                                  |  |             | 2,279   |   |                            | 
|Net liabilities not shared by the Group     |  |             |         |   |                            | 
|                                            |  |             |         |   |                            | 
|                                            |  |             |         |   |                            | 
|                                            |  |             |         |   |                            | 
|Revenue                                     |  |             | 13,534  |   |                            | 
|Expenses                                    |  |             | (11,985 | ) |                            | 
|Profit for the year                         |  |             | 1,549   |   |                            | 
|                                            |  |             |         |   |                            | 
|Net (profit) / loss not shared by the Group |  |             |         |   |                            | 
|The Group’s share of associates’ results    |  |             |         |   |                            | 



F-43









| | 23 | Interest in jointly controlled entities
| | -- | ---------------------------------------



|                    |  | 2011        |     |  | 2010        | 
|------------------- |  | ----------- | --- |  | ----------- | 
|                    |  | RMB million |     |  | RMB million | 
|                    |  |             |     |  |             | 
|Share of net assets |  |             | 985 |  |             | 



The details of the Group’s
principal jointly controlled entities are set out in Note 58, all of which are unlisted corporate entities.



Summary financial information
on jointly controlled entities



|                        |  | Group’s effective interest |      
|----------------------- |  | -------------------------- | -----
|                        |  | 2011                       |      
|                        |  | RMB million                |      
|                        |  |                            |      
|Non-current assets      |  |                            | 931  
|Current assets          |  |                            | 811  
|Non-current liabilities |  |                            | (282 
|Current liabilities     |  |                            | (475 
|Net assets              |  |                            | 985  
|                        |  |                            |      
|Revenue                 |  |                            | 1,107
|Expenses                |  |                            | (982 
|Profit for the year     |  |                            | 125  



| | 24 | Other investments in equity securities
| | -- | --------------------------------------



|                                    |  | 2011        |     |  | 2010        | 
|----------------------------------- |  | ----------- | --- |  | ----------- | 
|                                    |  | RMB million |     |  | RMB million | 
|                                    |  |             |     |  |             | 
|Unlisted equity securities, at cost |  |             | 166 |  |             | 



Dividend income from unlisted securities
of the Group amounted to RMB10 million during the year ended December 31, 2011 (2010: RMB11 million; 2009: RMB10 million).



| | 25 | Available-for-sale equity securities
| | -- | ------------------------------------



|                                     |  | 2011        |    |  | 2010        | 
|------------------------------------ |  | ----------- | -- |  | ----------- | 
|                                     |  | RMB million |    |  | RMB million | 
|                                     |  |             |    |  |             | 
|Available-for-sale equity securities |  |             |    |  |             | 
|- Listed in the PRC                  |  |             | 64 |  |             | 
|                                     |  |             |    |  |             | 
|Market value of listed securities    |  |             | 64 |  |             | 



Dividend income from listed securities
of the Group amounted to RMB318,000 during the year ended December 31, 2011 (2010 and 2009: RMB2 million, respectively).



F-44







| | 26 | Deferred tax assets/ (liabilities)
| | -- | ----------------------------------



| | (a) | Movements of net deferred tax assets/ (liabilities) are as follows:
| | --- | -------------------------------------------------------------------



|                                                           |  | 2011        |     |  | 2010        | 
|---------------------------------------------------------- |  | ----------- | --- |  | ----------- | 
|                                                           |  | RMB million |     |  | RMB million | 
|                                                           |  |             |     |  |             | 
|At January 1                                               |  |             | 50  |  |             | 
|Credited to the consolidated income statement (Note 16(a)) |  |             | 617 |  |             | 
|Credited to other comprehensive income (Note 17(b))        |  |             | 4   |  |             | 
|At December 31                                             |  |             | 671 |  |             | 



| | (b) | The components of deferred tax assets / (liabilities) recognized are analyzed as follows:
| | --- | -----------------------------------------------------------------------------------------



|                                                              |  | 2011        |       |   | 2010        | 
|------------------------------------------------------------- |  | ----------- | ----- | - | ----------- | 
|                                                              |  | RMB million |       |   | RMB million | 
|Deferred tax assets:                                          |  |             |       |   |             | 
|Accrued expenses                                              |  |             | 1,045 |   |             | 
|Deferred revenue                                              |  |             | 127   |   |             | 
|Provision for impairment losses                               |  |             | 443   |   |             | 
|Others                                                        |  |             | 29    |   |             | 
|Total deferred tax assets                                     |  |             | 1,644 |   |             | 
|                                                              |  |             |       |   |             | 
|Deferred tax liabilities:                                     |  |             |       |   |             | 
|Accrued expenses                                              |  |             | (270  | ) |             | 
|Depreciation allowances in excess of the related depreciation |  |             | (591  | ) |             | 
|Change in fair value of available-for-sale equity securities  |  |             | (10   | ) |             | 
|Others                                                        |  |             | (102  | ) |             | 
|Total deferred tax liabilities                                |  |             | (973  | ) |             | 
|Net deferred tax assets                                       |  |             | 671   |   |             | 



|                                                                                            |  | 2011        |       |   | 2010        | 
|------------------------------------------------------------------------------------------- |  | ----------- | ----- | - | ----------- | 
|                                                                                            |  | RMB million |       |   | RMB million | 
|Net deferred tax assets recognized in the consolidated statement of financial position      |  |             | 1,300 |   |             | 
|Net deferred tax liabilities recognized in the consolidated statement of financial position |  |             | (629  | ) |             | 
|                                                                                            |  |             | 671   |   |             | 



F-45







| | 26 | Deferred tax assets / (liabilities) (continued)
| | -- | -----------------------------------------------



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



At December 31, 2011, deferred
tax assets were not recognized in relation to certain unused tax losses and other deductible temporary differences. The unrecognized
unused tax losses and deductible temporary differences are analyzed as follows:



|                                        |  | 2011    |     |  | 2010    | 
|--------------------------------------- |  | ------- | --- |  | ------- | 
|                                        |  | RMB     |     |  | RMB     | 
|                                        |  | million |     |  | million | 
|                                        |  |         |     |  |         | 
|Tax losses                              |  |         | 365 |  |         | 
|Other deductible temporary differences: |  |         |     |  |         | 
|- Accrued expenses                      |  |         | 87  |  |         | 
|- Provision for impairment losses       |  |         | -   |  |         | 
|                                        |  |         | 87  |  |         | 
|                                        |  |         | 452 |  |         | 



At December 31, 2011, the Group’s
deductible temporary differences amounting to RMB87 million (2010: RMB2,550 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
RMB365 million (2010: RMB574 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:



|             |  | 2011        |     |  | 2010        | 
|------------ |  | ----------- | --- |  | ----------- | 
|             |  | RMB million |     |  | RMB million | 
|Expiring in: |  |             |     |  |             | 
|             |  |             |     |  |             | 
|2011         |  |             | -   |  |             | 
|2012         |  |             | -   |  |             | 
|2013         |  |             | 223 |  |             | 
|2014         |  |             | 131 |  |             | 
|2015         |  |             | -   |  |             | 
|2016         |  |             | 11  |  |             | 
|             |  |             | 365 |  |             | 



F-46







| | 27 | Other assets
| | -- | ------------



|                                                    |  |             |     |   | Prepayment    |  |     |             |  |  |             |  
|--------------------------------------------------- |  | ----------- | --- | - | ------------- |  | --- | ----------- |  |  | ----------- | -
|                                                    |  |             |     |   | for exclusive |  |     |             |  |  |             |  
|                                                    |  | Lump sum    |     |   | use right of  |  |     |             |  |  |             |  
|                                                    |  | housing     |     |   | an airport    |  |     |             |  |  |             |  
|                                                    |  | benefits    |     |   | terminal      |  |     | Others      |  |  | Total       |  
|                                                    |  | RMB million |     |   | RMB million   |  |     | RMB million |  |  | RMB million |  
|                                                    |  |             |     |   |               |  |     |             |  |  |             |  
|At January 1, 2010                                  |  |             | 66  |   |               |  | 300 |             |  |  | 192         |  
|Additions                                           |  |             | -   |   |               |  | -   |             |  |  | 44          |  
|Transferred from construction in progress (Note 21) |  |             | -   |   |               |  | -   |             |  |  | 39          |  
|Amortization for the year                           |  |             | (26 | ) |               |  | (10 | )           |  |  | (79         | )
|At December 31, 2010                                |  |             | 40  |   |               |  | 290 |             |  |  | 196         |  
|                                                    |  |             |     |   |               |  |     |             |  |  |             |  
|At January 1, 2011                                  |  |             | 40  |   |               |  | 290 |             |  |  | 196         |  
|Additions                                           |  |             | -   |   |               |  | -   |             |  |  | 46          |  
|Transferred from construction in progress (Note 21) |  |             | -   |   |               |  | -   |             |  |  | 33          |  
|Amortization for the year                           |  |             | (26 | ) |               |  | (10 | )           |  |  | (69         | )
|At December 31, 2011                                |  |             | 14  |   |               |  | 280 |             |  |  | 206         |  



| | 28 | Inventories
| | -- | -----------



| | (a) | Inventories in the consolidated statement of financial position comprise:
| | --- | -------------------------------------------------------------------------



|                                                 |  | 2011        |       |  | 2010        | 
|------------------------------------------------ |  | ----------- | ----- |  | ----------- | 
|                                                 |  | RMB million |       |  | RMB million | 
|                                                 |  |             |       |  |             | 
|Expendable spare parts and maintenance materials |  |             | 1,430 |  |             | 
|Other supplies                                   |  |             | 188   |  |             | 
|                                                 |  |             | 1,618 |  |             | 



| | (b) | The analysis of the amount of inventories recognized as an expense and included in consolidated
income statement is as follows:
| | --- | -------------------------------------------------------------------------------------------------------------------------------



|                                   |  | 2011        |       |  | 2010        |  |       | 2009        | 
|---------------------------------- |  | ----------- | ----- |  | ----------- |  | ----- | ----------- | 
|                                   |  | RMB million |       |  | RMB million |  |       | RMB million | 
|                                   |  |             |       |  |             |  |       |             | 
|Consumption                        |  |             | 1,134 |  |             |  | 1,040 |             | 
|Write-down of inventories (Note 6) |  |             | 141   |  |             |  | 8     |             | 
|                                   |  |             | 1,275 |  |             |  | 1,048 |             | 



Certain expendable spare parts and maintenance materials have
been written down as a result of fleet adjustments during the current and prior year.



F-47







| | 29 | Trade receivables
| | -- | -----------------



|                                   |  | 2011        |       |   | 2010        | 
|---------------------------------- |  | ----------- | ----- | - | ----------- | 
|                                   |  | RMB million |       |   | RMB million | 
|                                   |  |             |       |   |             | 
|Trade receivables                  |  |             | 2,176 |   |             | 
|Less: allowance for doubtful debts |  |             | (29   | ) |             | 
|                                   |  |             | 2,147 |   |             | 



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



Credit terms granted by the Group
to sales agents and other customers generally range from one to three months. An ageing analysis of trade receivables, net of allowance
for doubtful debts, is set out below:



|                                           |  | 2011        |       |  | 2010        | 
|------------------------------------------ |  | ----------- | ----- |  | ----------- | 
|                                           |  | RMB million |       |  | RMB million | 
|                                           |  |             |       |  |             | 
|Within 1 month                             |  |             | 1,977 |  |             | 
|More than 1 month but less than 3 months   |  |             | 164   |  |             | 
|More than 3 months but less than 12 months |  |             | 6     |  |             | 
|                                           |  |             | 2,147 |  |             | 



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



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



Impairment loss in respect of
trade receivables is recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in
which case the impairment loss is written off against trade receivables directly (Note 2(l)).



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



|                                  |  | 2011        |    |   | 2010        | 
|--------------------------------- |  | ----------- | -- | - | ----------- | 
|                                  |  | RMB million |    |   | RMB million | 
|                                  |  |             |    |   |             | 
|At January 1                      |  |             | 30 |   |             | 
|Impairment loss recognized        |  |             | 6  |   |             | 
|Impairment loss written back      |  |             | (5 | ) |             | 
|Uncollectible amounts written off |  |             | (2 | ) |             | 
|At December 31                    |  |             | 29 |   |             | 



| | (c) | Trade receivables that are not impaired
| | --- | ---------------------------------------



The ageing analysis of trade receivables
that is neither individually nor collectively considered to be impaired is as follows:



|                              |  | 2011        |       |  | 2010        | 
|----------------------------- |  | ----------- | ----- |  | ----------- | 
|                              |  | RMB million |       |  | RMB million | 
|                              |  |             |       |  |             | 
|Neither past due nor impaired |  |             | 2,141 |  |             | 



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



F-48







| | 30 | Other receivables
| | -- | -----------------



As at December 31, 2011, other
receivables of RMB4,988 million mainly includes the wealth management products purchased by Xiamen Airlines from a state-owned
commercial bank. These products are repo bonds and bear annualized interest rates from 5.00% to 5.82% with maturity dates from
92 days to 183 days from dates of purchase. The principal of the outstanding wealth management products was RMB3,500 million as
at December 31, 2011, of which RMB3,400 million subsequently matured and received as of the date of the issuance of the report.
The total interest income on these wealth management products was RMB128 million in 2011.



| | 31 | Cash and cash equivalents
| | -- | -------------------------



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



|                                                                              |  | 2011        |       |  | 2010        | 
|----------------------------------------------------------------------------- |  | ----------- | ----- |  | ----------- | 
|                                                                              |  | RMB million |       |  | RMB million | 
|                                                                              |  |             |       |  |             | 
|Deposits with banks and other financial institution                           |  |             | 5,108 |  |             | 
|Cash at bank and in hand                                                      |  |             | 4,755 |  |             | 
|Cash and cash equivalents in the consolidated statement of financial position |  |             | 9,863 |  |             | 



Southern Airlines Group Finance Company
Limited (“SA Finance”) is a PRC authorized financial institution controlled by CSAHC and is an associate of the Group.
In accordance with the financial agreement dated May 22, 1997, as revised subsequently on December 31, 2004, November 15, 2007
and November 8, 2010 between the Company and SA Finance, all of the Group’s deposits accepted by SA Finance would be simultaneously
placed with several designated major PRC banks by SA Finance.



As at December 31, 2011, the Group’s
deposits with SA Finance amounted to RMB2,493 million (2010: RMB1,111 million)(Note 45(d)(ii)).



F-49









| | 31 | Cash and cash equivalents (continued)
| | -- | -------------------------------------



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



|                                                                                  |  |      |       | 2011        |  |        | 2010        |  |  | 2009        |  
|--------------------------------------------------------------------------------- |  | ---- | ----- | ----------- |  | ------ | ----------- |  |  | ----------- | -
|                                                                                  |  | Note |       | RMB million |  |        | RMB million |  |  | RMB million |  
|                                                                                  |  |      |       |             |  |        |             |  |  |             |  
|Profit before taxation                                                            |  |      |       |             |  | 6,930  |             |  |  | 8,089       |  
|Depreciation of property, plant and equipment                                     |  |      | 20    |             |  | 7,640  |             |  |  | 7,025       |  
|Other amortization                                                                |  |      | 11    |             |  | 122    |             |  |  | 111         |  
|Amortization of deferred benefits and gains                                       |  |      | 11    |             |  | (73    | )           |  |  | (71         | )
|Impairment losses on property, plant and equipment                                |  |      | 20(h) |             |  | 584    |             |  |  | 212         |  
|Share of profits of associates                                                    |  |      | 22    |             |  | (456   | )           |  |  | (56         | )
|Share of profits of jointly controlled entities’                                  |  |      | 23    |             |  | (125   | )           |  |  | (112        | )
|(Gain) / loss on sale of property, plant and equipment, net and lease prepayments |  |      | 13    |             |  | (145   | )           |  |  | 9           |  
|Gain on sale of available-for-sale equity securities                              |  |      | 13    |             |  | -      |             |  |  | -           |  
|Gain on sale of a jointly controlled entity                                       |  |      |       |             |  | -      |             |  |  | (1,078      | )
|Gain on deemed disposal of equity interest in a subsidiary                        |  |      |       |             |  | -      |             |  |  | (17         | )
|Interest income                                                                   |  |      |       |             |  | (179   | )           |  |  | (93         | )
|Interest income on wealth management products                                     |  |      | 30    |             |  | (128   | )           |  |  | -           |  
|Interest expense                                                                  |  |      | 14    |             |  | 1,067  |             |  |  | 1,265       |  
|(Gain) / loss on derivative financial instruments, net                            |  |      |       |             |  | (1     | )           |  |  | 30          |  
|Dividend income from other investments in equity securities                       |  |      |       |             |  | (10    | )           |  |  | (13         | )
|Exchange gain, net                                                                |  |      |       |             |  | (2,882 | )           |  |  | (1,673      | )
|Increase in inventories                                                           |  |      |       |             |  | (263   | )           |  |  | (107        | )
|Increase in trade receivables                                                     |  |      |       |             |  | (155   | )           |  |  | (647        | )
|Decrease / (increase) in other receivables                                        |  |      |       |             |  | 283    |             |  |  | 14          |  
|Decrease / (increase) in prepaid expenses and other current assets                |  |      |       |             |  | 4      |             |  |  | 130         |  
|(Decrease) / increase  in net amounts due to related companies                    |  |      |       |             |  | (220   | )           |  |  | 74          |  
|Increase / (decrease) in trade payables                                           |  |      |       |             |  | 1,041  |             |  |  | (3,109      | )
|Increase / (decrease) in sales in advance of carriage                             |  |      |       |             |  | 1,695  |             |  |  | 1,408       |  
|Increase / (decrease) in accrued expenses                                         |  |      |       |             |  | 113    |             |  |  | 1,199       |  
|Increase / (decrease) in other liabilities                                        |  |      |       |             |  | 554    |             |  |  | (200        | )
|Increase in deferred revenue                                                      |  |      |       |             |  | 737    |             |  |  | 438         |  
|Increase in provision for major overhauls                                         |  |      |       |             |  | 5      |             |  |  | 220         |  
|Decrease in provision for early retirement benefits                               |  |      |       |             |  | (29    | )           |  |  | (30         | )
|Increase in deferred benefits and gains                                           |  |      |       |             |  | 78     |             |  |  | 6           |  
|Cash generated from operating activities                                          |  |      |       |             |  | 16,187 |             |  |  | 13,024      |  



F-50







| | 32 | Financial liabilities
| | -- | ---------------------



|                                          |  | 2011        |   |  | 2010        | 
|----------------------------------------- |  | ----------- | - |  | ----------- | 
|                                          |  | RMB million |   |  | RMB million | 
|                                          |  |             |   |  |             | 
|Foreign exchange forward option contracts |  |             | - |  |             | 



Further disclosures of the financial
derivative instruments are set out in Notes 49(c) and (f).



| | 33 | Bank and other loans
| | -- | --------------------



| | (a) | At December 31, 2011, bank and other loans were repayable as follows:
| | --- | ---------------------------------------------------------------------



|                                 |  | 2011        |        |  | 2010        | 
|-------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                 |  | RMB million |        |  | RMB million | 
|                                 |  |             |        |  |             | 
|Within 1 year or on demand       |  |             | 18,789 |  |             | 
|                                 |  |             |        |  |             | 
|After 1 year but within 2 years  |  |             | 9,085  |  |             | 
|After 2 years but within 5 years |  |             | 10,687 |  |             | 
|After 5 years                    |  |             | 9,265  |  |             | 
|                                 |  |             | 29,037 |  |             | 
|                                 |  |             | 47,826 |  |             | 



| | (b) | At December 31, 2011, bank and other loans are analyzed as follows:
| | --- | -------------------------------------------------------------------



|                                                                                          |  | 2011        |        |  | 2010        | 
|----------------------------------------------------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                                                                          |  | RMB million |        |  | RMB million | 
|                                                                                          |  |             |        |  |             | 
|Short-term bank loans                                                                     |  |             | 6,925  |  |             | 
|Long-term bank and other loans due within one year (classified as current liabilities)    |  |             | 11,864 |  |             | 
|                                                                                          |  |             | 18,789 |  |             | 
|Long-term bank and other loans due after one year (classified as non-current liabilities) |  |             | 29,037 |  |             | 
|                                                                                          |  |             | 47,826 |  |             | 
|                                                                                          |  |             |        |  |             | 
|Representing:                                                                             |  |             |        |  |             | 
|Bank loans                                                                                |  |             | 47,823 |  |             | 
|Other loans                                                                               |  |             | 3      |  |             | 
|                                                                                          |  |             | 47,826 |  |             | 



| | (c) | As at December 31, 2011, the Group’s weighted average interest rates on short-term borrowings
were 3.09% per annum (2010: 1.78% per annum).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------



F-51







| | 33 | Bank and other loans (continued)
| | -- | --------------------------------



| | (d) | Details of bank and other loans with original maturity over one year are as follows:
| | --- | ------------------------------------------------------------------------------------



|                                                                                                                                             |  | 2011        |         |   | 2010        | 
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | - | ----------- | 
|                                                                                                                                             |  | RMB million |         |   | RMB million | 
|Renminbi denominated loans                                                                                                                   |  |             |         |   |             | 
|Non-interest bearing loan from a municipal government authority                                                                              |  |             | 3       |   |             | 
|Fixed interest rate at 4.86% per annum as at December 31, 2011, with maturities through 2013                                                 |  |             | 60      |   |             | 
|Floating interest rates 90%, 95% ,100% of benchmark interest rate (stipulated by PBOC) as at December 31, 2011, with maturities through 2014 |  |             | 683     |   |             | 
|                                                                                                                                             |  |             |         |   |             | 
|United States Dollars denominated loans                                                                                                      |  |             |         |   |             | 
|Fixed interest rates ranging from 3.00% to 4.69% per annum as at December 31, 2011, with maturities through 2017                             |  |             | 563     |   |             | 
|                                                                                                                                             |  |             |         |   |             | 
|Floating interest rates ranging from 1-month LIBOR + 0.50% to 2.20% per annum as at December 31, 2011, with maturities through 2020          |  |             | 3,823   |   |             | 
|                                                                                                                                             |  |             |         |   |             | 
|Floating interest rates ranging from 3-month LIBOR + 0.50% to 3.01% per annum as at December 31, 2011, with maturities through 2021          |  |             | 27,707  |   |             | 
|                                                                                                                                             |  |             |         |   |             | 
|Floating interest rates ranging from 6-month LIBOR + 0.30% to 3.15% per annum as at December 31, 2011, with maturities through 2021          |  |             | 8,062   |   |             | 
|                                                                                                                                             |  |             | 40,901  |   |             | 
|Less: loans due within one year classified as current liabilities                                                                            |  |             | (11,864 | ) |             | 
|                                                                                                                                             |  |             | 29,037  |   |             | 



F-52







| | 33 | Bank and other loans (continued)
| | -- | --------------------------------



| | (e) | The remaining contractual maturities at the end of the financial year of the Group’s bank
and other loans, which are based on contractual undiscounted cash flows (including interest payments computed using contractual
rates, or if floating, based on rates current at the end of the financial year) and the earliest date the Group can be required
to pay, are as follows:
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                               |  | 2011        |        |  | 2010        | 
|-------------------------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                                               |  | RMB million |        |  | RMB million | 
|Contractual undiscounted cash flows                            |  |             |        |  |             | 
|                                                               |  |             |        |  |             | 
|Within 1 year                                                  |  |             | 20,784 |  |             | 
|After 1 year but within 2 years                                |  |             | 10,072 |  |             | 
|After 2 years but within 5 years                               |  |             | 11,677 |  |             | 
|After 5 years                                                  |  |             | 9,830  |  |             | 
|                                                               |  |             | 52,363 |  |             | 
|                                                               |  |             |        |  |             | 
|Consolidated statement of financial  position carrying amounts |  |             | 47,826 |  |             | 



| | (f) | The Group has significant bank and other loans balances as well as obligations under finance leases
(Note 34) which are denominated in US dollars as at December 31, 2011. The net exchange gain of RMB2,755 million (2010: RMB1,746
million; 2009: RMB93 million) recorded by the Group was mainly attributable to the exchange gain arising from retranslation and
settlement of bank and other loans balances and finance lease obligations denominated in US dollars. The foreign currency risk
is further discussed in Note 49(c).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (g) | The analysis of the carrying amounts of bank and other loans is as follows:
| | --- | ---------------------------------------------------------------------------



|                        |  |           |  |  | 2011        |  |  | 2010        | 
|----------------------- |  | --------- |  |  | ----------- |  |  | ----------- | 
|                        |  | Note      |  |  | RMB million |  |  | RMB million | 
|Bank and other loans    |  |           |  |  |             |  |  |             | 
|-Secured                |  | (i)       |  |  | 23,480      |  |  | 21,675      | 
|-Secured and guaranteed |  | (i), (ii) |  |  | 221         |  |  | 385         | 
|-Unsecured              |  |           |  |  | 24,125      |  |  | 19,140      | 
|                        |  |           |  |  | 47,826      |  |  | 41,200      | 



Notes:



| | (i) | As at December 31, 2011, bank and other loans of the Group totaling RMB23,653 million (2010: RMB22,060
million) were secured by mortgages over certain of the Group’s aircraft with aggregate carrying amounts of RMB29,815 million
(2010: the Group’s aircraft and advance payments with aggregate carrying amounts of RMB28,823 million).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As at December 31, 2011, a long-term
loan due within one year of the Group amounting to RMB48 million was secured by pledged bank deposits of RMB72 million (2010: Nil).



| | (ii) | The following bank and other loans secured by certain aircraft mentioned in Note (i) are also guaranteed
by:
| | ---- | ------------------------------------------------------------------------------------------------------------



|                                        |  | 2011        |     |  | 2010        | 
|--------------------------------------- |  | ----------- | --- |  | ----------- | 
|                                        |  | RMB million |     |  | RMB million | 
|Guarantors                              |  |             |     |  |             | 
|Export-Import Bank of the United States |  |             | -   |  |             | 
|CSAHC (Note 45(e))                      |  |             | 221 |  |             | 
|                                        |  |             | 221 |  |             | 



F-53







| | 33 | Bank and other loans (continued)
| | -- | --------------------------------



| | (h) | As at December 31, 2011, loans to the Group from SA finance amounted to RMB480 million (2010: RMB520
million) (Note 45(d)(i)).
| | --- | ------------------------------------------------------------------------------------------------------------------------------



| | 34 | Obligations under finance leases
| | -- | --------------------------------



The Group has commitments under
finance lease agreements in respect of aircraft and related equipment. The majority of these leases have terms of 10 to 12 years
expiring during the years 2012 to 2023. As at December 31, 2011, future payments under these finance leases are as follows:



|                                                                      |  | 2011          |        |   | 2010     | 
|--------------------------------------------------------------------- |  | ------------- | ------ | - | -------- | 
|                                                                      |  | Present       |        |   | Total    | 
|                                                                      |  | value of the  |        |   | minimum  | 
|                                                                      |  | minimum lease |        |   | lease    | 
|                                                                      |  | payments      |        |   | payments | 
|                                                                      |  | RMB           |        |   | RMB      | 
|                                                                      |  | million       |        |   | million  | 
|                                                                      |  |               |        |   |          | 
|Within 1 year                                                         |  |               | 1,784  |   |          | 
|After 1 year but within 2 years                                       |  |               | 1,747  |   |          | 
|After 2 years but within 5 years                                      |  |               | 5,872  |   |          | 
|After 5 years                                                         |  |               | 6,434  |   |          | 
|                                                                      |  |               | 15,837 |   |          | 
|                                                                      |  |               |        |   |          | 
|Less: balance due within  one year classified as  current liabilities |  |               | (1,784 | ) |          | 
|                                                                      |  |               | 14,053 |   |          | 



F-54







| | 34 | Obligations under finance leases (continued)
| | -- | --------------------------------------------



Details of obligations under
finance leases are as follows:



|                                                                                                        |  | 2011        |        |  | 2010        | 
|------------------------------------------------------------------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                                                                                        |  | RMB million |        |  | RMB million | 
|                                                                                                        |  |             |        |  |             | 
|United States Dollars denominated obligations                                                           |  |             |        |  |             | 
|Fixed interest rates ranging from 3.43% to 6.01% per annum as at December 31, 2011                      |  |             | 5,956  |  |             | 
|                                                                                                        |  |             |        |  |             | 
|Floating interest rates ranging from  3-month LIBOR + 0.55%  to 3.00% per annum as at December 31, 2011 |  |             | 5,730  |  |             | 
|                                                                                                        |  |             |        |  |             | 
|Floating interest rates ranging from 6-month LIBOR + 0.03%  to 2.05% per annum  as at December 31, 2011 |  |             | 3,592  |  |             | 
|                                                                                                        |  |             |        |  |             | 
|Singapore Dollars denominated obligations                                                               |  |             |        |  |             | 
|Floating interest rate at 6-month SIBOR + 1.44% per annum as at  December 31, 2011                      |  |             | 559    |  |             | 
|                                                                                                        |  |             | 15,837 |  |             | 



Charges over the assets concerned
and relevant insurance policies are provided to the lessors as collateral and security. As at December 31, 2011, certain of the
Group’s aircraft with carrying amounts of RMB23,247 million (2010: RMB20,240 million) secured finance lease obligations totaling
RMB15,837 million (2010: RMB14,430 million).



| | 35 | Trade payables
| | -- | --------------



|                 |  | 2011        |       |  | 2010        | 
|---------------- |  | ----------- | ----- |  | ----------- | 
|                 |  | RMB million |       |  | RMB million | 
|                 |  |             |       |  |             | 
|Bills payable    |  |             | 50    |  |             | 
|Accounts payable |  |             | 2,797 |  |             | 
|                 |  |             | 2,847 |  |             | 



F-55







| | 35 | Trade payables (continued)
| | -- | --------------------------



The following is the ageing analysis
of trade payables :



|                                          |  | 2011        |       |  | 2010        | 
|----------------------------------------- |  | ----------- | ----- |  | ----------- | 
|                                          |  | RMB million |       |  | RMB million | 
|                                          |  |             |       |  |             | 
|Within 1 month                            |  |             | 2,328 |  |             | 
|More than 1 month but less than 3 months  |  |             | 315   |  |             | 
|More than 3 months but less than 6 months |  |             | 152   |  |             | 
|More than 6 months but less than 1 year   |  |             | 12    |  |             | 
|More than 1 year                          |  |             | 40    |  |             | 
|                                          |  |             | 2,847 |  |             | 



| | 36 | Deferred revenue
| | -- | ----------------



|                    |  | 2011        |       |  | 2010        | 
|------------------- |  | ----------- | ----- |  | ----------- | 
|                    |  | RMB million |       |  | RMB million | 
|                    |  |             |       |  |             | 
|Current portion     |  |             | 907   |  |             | 
|Non-current portion |  |             | 1,178 |  |             | 
|                    |  |             | 2,085 |  |             | 



Deferred revenue represents the
unredeemed credits under the frequent flyer mileage programs.



| | 37 | Amounts due from/to related companies
| | -- | -------------------------------------



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



|                            |  |      |       |  | 2011        |  |     | 2010        | 
|--------------------------- |  | ---- | ----- |  | ----------- |  | --- | ----------- | 
|                            |  | Note |       |  | RMB million |  |     | RMB million | 
|                            |  |      |       |  |             |  |     |             | 
|CSAHC and its affiliates    |  |      |       |  |             |  | 43  |             | 
|Associates                  |  |      |       |  |             |  | 12  |             | 
|Jointly controlled entities |  |      |       |  |             |  | 88  |             | 
|Other related company       |  |      |       |  |             |  | 24  |             | 
|                            |  |      | 45(c) |  |             |  | 167 |             | 



The amounts due from related
companies are unsecured, interest free and have no fixed terms of repayment. They are expected to be recovered within one year.



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



|                                      |  |      |       |  | 2011        |  |     | 2010        | 
|------------------------------------- |  | ---- | ----- |  | ----------- |  | --- | ----------- | 
|                                      |  | Note |       |  | RMB million |  |     | RMB million | 
|                                      |  |      |       |  |             |  |     |             | 
|CSAHC and its affiliates              |  |      |       |  |             |  | 68  |             | 
|A jointly controlled entity  of CSAHC |  |      |       |  |             |  | 1   |             | 
|An associate                          |  |      |       |  |             |  | 13  |             | 
|Jointly controlled entities           |  |      |       |  |             |  | 39  |             | 
|Other related company                 |  |      |       |  |             |  | 1   |             | 
|                                      |  |      | 45(c) |  |             |  | 122 |             | 



F-56







| | 37 | Amounts due from/to related companies (continued)
| | -- | -------------------------------------------------



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



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.



| | 38 | Accrued expenses
| | -- | ----------------



|                                                  |  | 2011        |       |  | 2010        | 
|------------------------------------------------- |  | ----------- | ----- |  | ----------- | 
|                                                  |  | RMB million |       |  | RMB million | 
|                                                  |  |             |       |  |             | 
|Jet fuel costs                                    |  |             | 1,099 |  |             | 
|Air catering expenses                             |  |             | 183   |  |             | 
|Salaries and welfare                              |  |             | 2,272 |  |             | 
|Repairs and maintenance                           |  |             | 2,446 |  |             | 
|Provision for major overhauls (Note 40)           |  |             | 575   |  |             | 
|Provision for early retirement benefits (Note 41) |  |             | 47    |  |             | 
|Landing and navigation fees                       |  |             | 1,807 |  |             | 
|Computer reservation services                     |  |             | 593   |  |             | 
|Interest expense                                  |  |             | 160   |  |             | 
|Others                                            |  |             | 298   |  |             | 
|                                                  |  |             |       |  |             | 
|                                                  |  |             | 9,480 |  |             | 



| | 39 | Other liabilities
| | -- | -----------------



|                                                                                             |  | 2011        |       |  | 2010        | 
|-------------------------------------------------------------------------------------------- |  | ----------- | ----- |  | ----------- | 
|                                                                                             |  | RMB million |       |  | RMB million | 
|                                                                                             |  |             |       |  |             | 
|CAAC Infrastructure Development Fund, airport construction surcharge and airport tax payable |  |             | 979   |  |             | 
|Payable for property, plant and equipment                                                    |  |             | 889   |  |             | 
|Advance payments received for chartered flights                                              |  |             | 95    |  |             | 
|Sales agent deposits                                                                         |  |             | 308   |  |             | 
|Other taxes payable                                                                          |  |             | 618   |  |             | 
|Others                                                                                       |  |             | 1,425 |  |             | 
|                                                                                             |  |             |       |  |             | 
|                                                                                             |  |             | 4,314 |  |             | 



| | 40 | Provision for major overhauls
| | -- | -----------------------------



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



|                                                               |  | 2011        |       |   | 2010        | 
|-------------------------------------------------------------- |  | ----------- | ----- | - | ----------- | 
|                                                               |  | RMB million |       |   | RMB million | 
|                                                               |  |             |       |   |             | 
|At January 1                                                   |  |             | 1,396 |   |             | 
|Additional provision made                                      |  |             | 468   |   |             | 
|Provision utilized                                             |  |             | (111  | ) |             | 
|                                                               |  |             |       |   |             | 
|At December 31                                                 |  |             | 1,753 |   |             | 
|Less: current portion  included in accrued  expenses (Note 38) |  |             | (575  | ) |             | 
|                                                               |  |             |       |   |             | 
|                                                               |  |             | 1,178 |   |             | 



F-57







| | 41 | Provision for early retirement benefits
| | -- | ---------------------------------------



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



|                                                             |  | 2011        |     |   | 2010        | 
|------------------------------------------------------------ |  | ----------- | --- | - | ----------- | 
|                                                             |  | RMB million |     |   | RMB million | 
|                                                             |  |             |     |   |             | 
|At January 1                                                 |  |             | 170 |   |             | 
|Provision for the year (Note 12)                             |  |             | 37  |   |             | 
|Financial costs (Note 14)                                    |  |             | 8   |   |             | 
|Payments made during the year                                |  |             | (72 | ) |             | 
|Effect of changes in discount rates                          |  |             | (7  | ) |             | 
|                                                             |  |             |     |   |             | 
|At December 31                                               |  |             | 136 |   |             | 
|Less: current portion included in accrued expenses (Note 38) |  |             | (47 | ) |             | 
|                                                             |  |             |     |   |             | 
|                                                             |  |             | 89  |   |             | 



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.



| | 42 | Deferred benefits and gains
| | -- | ---------------------------



|                                        |  | 2011        |       |  | 2010        | 
|--------------------------------------- |  | ----------- | ----- |  | ----------- | 
|                                        |  | RMB million |       |  | RMB million | 
|                                        |  |             |       |  |             | 
|Leases rebates (Note (i))               |  |             | 640   |  |             | 
|Gains on sale and leaseback (Note (ii)) |  |             | 171   |  |             | 
|Government grants                       |  |             | 213   |  |             | 
|Others                                  |  |             | 34    |  |             | 
|                                        |  |             |       |  |             | 
|                                        |  |             | 1,058 |  |             | 



Notes:



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



| | (ii) | The Company entered into sale and leaseback transactions with certain third parties under operating
leases. The gains were deferred and amortized over the lease terms of these aircraft.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-58







| | 43 | Share capital and capital management
| | -- | ------------------------------------



| | (a) | Share capital
| | --- | -------------



|                                                                                                                             |  | 2011        |       |  | 2010        | 
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----- |  | ----------- | 
|                                                                                                                             |  | RMB million |       |  | RMB million | 
|Registered, issued and paid up capital:                                                                                      |  |             |       |  |             | 
|845,050,000 domestic state-owned shares with selling restrictions of RMB1.00 each (2010: 845,050,000 shares of RMB1.00 each) |  |             | 845   |  |             | 
|3,300,000,000 domestic state-owned shares of RMB1.00 each (2010: 3,300,000,000 of RMB1.00 each)                              |  |             | 3,300 |  |             | 
|Nil A shares with selling restrictions of RMB1.00 each (2010: 1,377,600,000 of RMB1.00 each )                                |  |             | -     |  |             | 
|2,877,600,000 A shares of RMB1.00 each (2010: 1,500,000,000 shares of RMB1.00 each )                                         |  |             | 2,878 |  |             | 
|2,794,917,000  H shares of RMB1.00 each (2010: 2,794,917,000 shares of RMB1.00 each)                                         |  |             | 2,795 |  |             | 
|                                                                                                                             |  |             |       |  |             | 
|                                                                                                                             |  |             | 9,818 |  |             | 



On August 20, 2009 and August
21, 2009, the Company issued 721,150,000 A shares to CSAHC and 721,150,000 H shares to Nan Lung, a wholly-owned subsidiary of CSAHC,
for net cash considerations of RMB2,259 million and RMB721 million, respectively (Note 45(c)(xiv)). The A shares and H shares are
subject to a lock-up period to August 20, 2012 and August 21, 2010, respectively.



On October 29, 2010, the Company
issued 123,900,000 A shares to CSAHC and 1,377,600,000 A shares to certain third party investors for net cash considerations of
RMB812 million and RMB9,026 million, respectively. The A shares issued to CSAHC and certain third party investors are subject to
a lock-up period to November 1, 2013 and November 1, 2011, respectively.



On November 1, 2010, the Company
issued 312,500,000 H shares to Nan Lung, for a net cash consideration of RMB734 million.



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



| | (b) | Capital management
| | --- | ------------------



The Group’s primary objectives
in managing capital are to safeguard the Group’s ability to continue as a going concern, and to generate sufficient profit
to maintain growth and provide returns to its shareholders, by securing access to finance at a reasonable cost.



The Group manages the amount
of capital in proportion to risk and managing its debt portfolio in conjunction with projected financing requirements. The Group
monitors capital on the basis of the debt to equity ratio, which is calculated as net debt as a percentage of total equity where
net debt is represented by the aggregate of bank and other loans, obligations under finance leases, trade payables, sales in advance
of carriage, amounts due to related companies, accrued expenses and other liabilities less cash and cash equivalents and pledged
bank deposits.



There
was no change in the Group’s approach to capital management during 2011 as compared with previous years. Neither the Company
nor any of its subsidiaries are subject to externally imposed capital requirements. The Group’s debt to equity ratio is 201%
at December 31, 2011 (2010: 211%).



F-59







| | 44 | Reserves
| | -- | --------



|                                                             |  | 2011        |        |   | 2010        | 
|------------------------------------------------------------ |  | ----------- | ------ | - | ----------- | 
|                                                             |  | RMB million |        |   | RMB million | 
|Share premium                                                |  |             |        |   |             | 
|At January 1 (as previously reported)                        |  |             | 13,433 |   |             | 
|Adjustment for the changes in accounting policy              |  |             | 445    |   |             | 
|                                                             |  |             |        |   |             | 
|At January 1 (as adjusted)                                   |  |             | 13,878 |   |             | 
|Capital injection into a subsidiary by a third party         |  |             | 253    |   |             | 
|                                                             |  |             |        |   |             | 
|Issue of shares (Note 43)                                    |  |             | -      |   |             | 
|                                                             |  |             |        |   |             | 
|At December 31                                               |  |             | 14,131 |   |             | 
|                                                             |  |             |        |   |             | 
|Fair value reserve                                           |  |             |        |   |             | 
|At January 1                                                 |  |             | 31     |   |             | 
|Change in fair value of available-for-sale equity securities |  |             | (10    | ) |             | 
|                                                             |  |             |        |   |             | 
|At December 31                                               |  |             | 21     |   |             | 
|                                                             |  |             |        |   |             | 
|Statutory surplus reserve (Note (a))                         |  |             |        |   |             | 
|At January 1                                                 |  |             | 526    |   |             | 
|Appropriations to reserves                                   |  |             | 321    |   |             | 
|                                                             |  |             |        |   |             | 
|At December 31                                               |  |             | 847    |   |             | 
|                                                             |  |             |        |   |             | 
|Discretionary surplus reserve                                |  |             |        |   |             | 
|At January 1 and at December 31                              |  |             | 77     |   |             | 
|                                                             |  |             |        |   |             | 
|Other reserve                                                |  |             |        |   |             | 
|At January 1                                                 |  |             | 153    |   |             | 
|Share of an associate’s                                      |  |             |        |   |             | 
|reserves movement                                            |  |             | 5      |   |             | 
|                                                             |  |             |        |   |             | 
|Government contributions                                     |  |             | -      |   |             | 
|                                                             |  |             |        |   |             | 
|At December 31                                               |  |             | 158    |   |             | 
|                                                             |  |             |        |   |             | 
|Retained profits / (accumulated losses)                      |  |             |        |   |             | 
|At January 1 (as previously reported)                        |  |             | 2,676  |   |             | 
|Adjustment for the changes in accounting policy              |  |             | (342   | ) |             | 
|                                                             |  |             |        |   |             | 
|At January 1 (as adjusted)                                   |  |             | 2,334  |   |             | 
|Profit for the year                                          |  |             | 5,110  |   |             | 
|Appropriation to reserves                                    |  |             | (321   | ) |             | 
|                                                             |  |             |        |   |             | 
|At December 31                                               |  |             | 7,123  |   |             | 
|                                                             |  |             |        |   |             | 
|Total                                                        |  |             | 22,357 |   |             | 



F-60







| | 44 | Reserves (continued)
| | -- | --------------------



| | (a) | 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 a dividend to shareholders and
when there are retained profits at the end of the financial year.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Statutory surplus reserve can
be used to offset prior years’ losses, if any, and may be converted into share capital by the issue of new shares to shareholders
in proportion to their existing shareholding or by increasing the par value of the shares currently held by them, provided that
the balance after such issue is not less than 25% of the registered capital.



| | (b) | Dividend distributions may be proposed at the discretion of the Company’ board of directors,
after making up cumulative prior years’ losses and consideration of profit appropriation to reserves. Pursuant to the Articles
of Association of the Company, the net profit of the Company for the purpose of profit distribution is deemed to be the lesser
of (i) the net profit determined in accordance with the PRC accounting rules and regulations, and (ii) the net profit determined
in accordance with IFRSs. As at December 31, 2011, the distributable reserves of the Company was RMB2,215 million (2010: Nil).
After the end of the financial year, the directors proposed a dividend of RMB0.2 per ordinary share, amounting to RMB1,964 million
(2010:Nil). This dividend has not been recognized as a liability as at December 31, 2011.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 45 | 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 15, is as follows:



|                              |  | 2011    |        |  | 2010    |  |        | 2009    | 
|----------------------------- |  | ------- | ------ |  | ------- |  | ------ | ------- | 
|                              |  | RMB’000 |        |  | RMB’000 |  |        | RMB’000 | 
|                              |  |         |        |  |         |  |        |         | 
|Short-term employees benefits |  |         | 14,675 |  |         |  | 14,277 |         | 
|Post-employment benefits      |  |         | 1,091  |  |         |  | 1,009  |         | 
|Share appreciation rights     |  |         | 57     |  |         |  | -      |         | 
|                              |  |         |        |  |         |  |        |         | 
|                              |  |         | 15,823 |  |         |  | 15,286 |         | 



|                                    |  | 2011    |        |  | 2010    |  |        | 2009    | 
|----------------------------------- |  | ------- | ------ |  | ------- |  | ------ | ------- | 
|                                    |  | RMB’000 |        |  | RMB’000 |  |        | RMB’000 | 
|                                    |  |         |        |  |         |  |        |         | 
|Directors and supervisors (Note 15) |  |         | 5,938  |  |         |  | 5,794  |         | 
|Senior management                   |  |         | 9,885  |  |         |  | 9,492  |         | 
|                                    |  |         |        |  |         |  |        |         | 
|                                    |  |         | 15,823 |  |         |  | 15,286 |         | 



Total remuneration is included
in “staff costs” (Note 12).



| | (b) | Contributions to post-employment benefit plans
| | --- | ----------------------------------------------



The Group participates in various
defined contribution retirement plans organized by municipal and provincial governments for its staff. Details of the Group’s
employee benefits plan are disclosed in Note 46.



F-61







| | 45 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (c) | Transactions with CSAHC and its affiliates (the “CSAHC Group”), associates, jointly
controlled entities and other related party of the Group
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------



The Group provided or received
various operational services to or by the CSAHC Group, associates, jointly controlled entities and other related party of the Group
during the normal course of its business.



Details of the significant transactions
carried out by the Group are as follows:



|                                                                                            |  |      |        |  | 2011        |  |       | 2010        |  |  | 2009        | 
|------------------------------------------------------------------------------------------- |  | ---- | ------ |  | ----------- |  | ----- | ----------- |  |  | ----------- | 
|                                                                                            |  | Note |        |  | RMB million |  |       | RMB million |  |  | RMB million | 
|                                                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|Income received from the CSAHC Group                                                        |  |      |        |  |             |  |       |             |  |  |             | 
|                                                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|Charter flight and pallet income                                                            |  |      | (i)    |  |             |  | 46    |             |  |  | 36          | 
|Cargo handling income                                                                       |  |      | (i)    |  |             |  | 15    |             |  |  | 14          | 
|Commission income                                                                           |  |      | (ii)   |  |             |  | 7     |             |  |  | 4           | 
|                                                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|Income received from other related company                                                  |  |      |        |  |             |  |       |             |  |  |             | 
|                                                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|Aircraft wet lease income                                                                   |  |      | (iii)  |  |             |  | 242   |             |  |  | -           | 
|Aircraft sales income                                                                       |  |      | (iii)  |  |             |  | 426   |             |  |  | -           | 
|                                                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|Expenses paid to the CSAHC Group                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|                                                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|Repairing charges                                                                           |  |      | (iv)   |  |             |  | 752   |             |  |  | 487         | 
|Handling charges                                                                            |  |      | (v)    |  |             |  | 87    |             |  |  | 79          | 
|Commission expenses                                                                         |  |      | (vi)   |  |             |  | 27    |             |  |  | 16          | 
|Cargo handling charges                                                                      |  |      | (i)    |  |             |  | 17    |             |  |  | -           | 
|Lease charges for land and buildings                                                        |  |      | (vii)  |  |             |  | 140   |             |  |  | 109         | 
|Property management fee                                                                     |  |      | (viii) |  |             |  | 34    |             |  |  | 30          | 
|                                                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|Expenses paid to jointly controlled  entities and an associate                              |  |      |        |  |             |  |       |             |  |  |             | 
|                                                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|Ground service expenses                                                                     |  |      | (ix)   |  |             |  | -     |             |  |  | -           | 
|Repairing charges                                                                           |  |      | (x)    |  |             |  | 1,266 |             |  |  | 1,255       | 
|Flight simulation service charges                                                           |  |      | (xi)   |  |             |  | 228   |             |  |  | 198         | 
|Advertising expenses                                                                        |  |      | (xii)  |  |             |  | 29    |             |  |  | 34          | 
|Training expenses                                                                           |  |      | (xiii) |  |             |  | 142   |             |  |  | 63          | 
|                                                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|Income received from a jointly  controlled entity                                           |  |      |        |  |             |  |       |             |  |  |             | 
|                                                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|Rental income                                                                               |  |      | (xi)   |  |             |  | 36    |             |  |  | 37          | 
|                                                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|Issuance of A shares to CSAHC                                                               |  |      | (xiv)  |  |             |  | -     |             |  |  | 825         | 
|                                                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|Issuance of H shares to Nan Lung                                                            |  |      | (xiv)  |  |             |  | -     |             |  |  | 736         | 
|                                                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|Disposal to the CSAHC Group                                                                 |  |      |        |  |             |  |       |             |  |  |             | 
|                                                                                            |  |      |        |  |             |  |       |             |  |  |             | 
|Consideration for disposal of  equity interest in MTU Maintenance Zhuhai Co., Ltd.  (“MTU”) |  |      | (iv)   |  |             |  | -     |             |  |  | 1,608       | 



F-62







| | 45 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (c) | Transactions with CSAHC and its affiliates (the “CSAHC Group”), associates, jointly
controlled entities and other related party of the Group (continued)
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------



| | (i) | China Southern Airlines Group Passenger and Cargo Agent Company Limited (“PCACL”),
a wholly-owned subsidiary of CSAHC, purchases cargo spaces and charters flight from the Group. The balance mainly represents receivable
from PCACL in respect of charter flight receivables. In addition, cargo handling income / expenses are earned / payable by the
Group in respect of the cargo handling services with PCACL.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | The Group provided certain website resources to SA Finance for the sales of air insurance to passengers.
| | ---- | --------------------------------------------------------------------------------------------------------



| | (iii) | Hebei Airlines Company Limited (“Hebei Airlines”) is a subsidiary of a non-controlling
interest holder of Xiamen Airlines. On August 27, 2010, Xiamen Airlines and Hebei Airlines entered into an Aircraft Wet Lease Agreement
to wet lease three aircraft to Heibei Airlines.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The agreement
terminated in December 2011 when Xiamen Airlines sold two aircraft to Hebei Airlines at consideration of RMB426 million with a net
loss of RMB38 million.



| | (iv) | MTU, a former jointly controlled entity of the Company, was sold to CSAHC in February 2010 at consideration
of RMB1,608 million with a gain on disposal of RMB1,078 million. MTU provides comprehensive maintenance services to the Group.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) | The Group acquires aircraft, flight equipment and other airline-related facilities through Southern
Airlines (Group) Import and Export Trading Company Limited (“SAIETC”), a wholly-owned subsidiary of CSAHC and pays
handling charges to SAIETC.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vi) | Commission is earned by certain subsidiaries of CSAHC in connection with the air tickets sold by
them on behalf of the Group. Commission is calculated based on the rates stipulated by the CAAC and International Air Transport
Association.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vii) | The Group leases certain land and buildings in the PRC from CSAHC. Amount represents rental payments
for land and buildings paid or payable to CSAHC.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------



| | (viii) | Guangzhou China Southern Airlines Property Management Co.,
Ltd., a subsidiary of CSAHC, provides property management services to the Group.
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------



| | (ix) | Beijing Southern Airlines Ground Services Company Limited
(“Beijing Ground Services”), a former jointly controlled entity of the Group, provides airport ground service to the
Group. In June 2009, the Company acquired 50% equity interests in Beijing Ground Services from the other venture of Beijing Ground
Services and it became a wholly-owned subsidiary of the Company.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (x) | Guangzhou Aircraft Maintenance Engineering Company Limited (“GAMECO”), a jointly controlled
entity of the Group, provides comprehensive maintenance services to the Group.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xi) | Zhuhai Xiang Yi Aviation Technology Company Limited (“Zhuhai
Xiang Yi”), a jointly controlled entity of the Group, provides flight simulation services to the Group. In addition, the
Group leased certain flight training facilities and buildings to Zhuhai Xiang Yi under operating lease agreements.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xii) | Southern Airlines Culture and Media Co., Ltd., an associate
of the Group, provides advertising services to the Group.
| | ----- | ---------------------------------------------------------------------------------------------------------------------



| | (xiii) | China Southern West Australian Flying College Pty Ltd.
(“Flying College”), a former subsidiary of the Company, provides training services to the Group. Flying College became
a jointly controlled entity of the Company since June 2010.
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-63







| | 45 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (c) | Transactions with CSAHC and its affiliates (the “CSAHC Group”), associates,
                                                                  jointly controlled entities and other related party of the Group (continued)
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xiv) | On October 29, 2010 and November 1, 2010, the Company issued
123,900,000 A shares to CSAHC and 312,500,000 H shares to Nan Lung, for cash consideration of RMB825 million and RMB736 million,
respectively.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On August 20, 2009 and August 21,
2009, the Company issued 721,150,000 A shares to CSAHC and 721,150,000 H shares to Nan Lung, a wholly-owned subsidiary of CSAHC,
for cash considerations of RMB2,279 million and RMB721 million, respectively.



In addition to the above, certain
subsidiaries of CSAHC also provided hotel and other services to the Group during the year. The total amount paid or payable to
CSAHC Group was not material to the results of the Group for the year.



Details of amounts due from /
to the CSAHC Group, associates, jointly controlled entities and other related party of the Group:



|                                     |  |      |       | 2011        |  |     | 2010        | 
|------------------------------------ |  | ---- | ----- | ----------- |  | --- | ----------- | 
|                                     |  | Note |       | RMB million |  |     | RMB million | 
|Receivables:                         |  |      |       |             |  |     |             | 
|The CSAHC Group                      |  |      |       |             |  | 43  |             | 
|Associates                           |  |      |       |             |  | 12  |             | 
|Jointly controlled entities          |  |      |       |             |  | 88  |             | 
|Other related company                |  |      |       |             |  | 24  |             | 
|                                     |  |      |       |             |  |     |             | 
|                                     |  |      | 37(a) |             |  | 167 |             | 
|                                     |  |      |       |             |  |     |             | 
|Payables:                            |  |      |       |             |  |     |             | 
|The CSAHC Group                      |  |      |       |             |  | 68  |             | 
|A jointly controlled entity of CSAHC |  |      |       |             |  | 1   |             | 
|An associate                         |  |      |       |             |  | 13  |             | 
|Jointly controlled entities          |  |      |       |             |  | 39  |             | 
|Other related company                |  |      |       |             |  | 1   |             | 
|                                     |  |      |       |             |  |     |             | 
|                                     |  |      | 37(b) |             |  | 122 |             | 



The amounts due from / to the
CSAHC Group, associates, jointly controlled entities and other related party of the Group are unsecured, interest free and have
no fixed terms of repayment.



F-64







| | 45 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (d) | Loans from and deposits placed with SA Finance
| | --- | ----------------------------------------------



| | (i) | Loans from SA Finance
| | --- | ---------------------



At December 31, 2011, loans from SA Finance to the Group
amounted to RMB480 million (2010: RMB520 million).



The unsecured loans are repayable as follows:



|                                 |  |      |       | 2011        |  |     | 2010        | 
|-------------------------------- |  | ---- | ----- | ----------- |  | --- | ----------- | 
|                                 |  | Note |       | RMB million |  |     | RMB million | 
|                                 |  |      |       |             |  |     |             | 
|Within 1 year                    |  |      |       |             |  | 102 |             | 
|After 1 year but within 2 years  |  |      |       |             |  | 358 |             | 
|After 2 years but within 5 years |  |      |       |             |  | 20  |             | 
|                                 |  |      |       |             |  |     |             | 
|                                 |  |      | 33(h) |             |  | 480 |             | 



Interest expense paid on such loans amounted
to RMB27 million (2010: RMB27 million; 2009: RMB71 million) and the interest rates ranged from 4.86%
to 6.32% per annum during the year ended December 31, 2011 (2010: 4.86% to 5.27% per annum;
2009: 1.25% to 7.56% per annum).



| | (ii) | Deposits placed with SA Finance
| | ---- | -------------------------------



At December 31, 2011, the Group’s deposits with
SA Finance amounted to RMB2,493 million (2010: RMB1,111 million). The applicable interest rates are determined in accordance with
the rates published by the PBOC.



Interest income received on such deposits amounted to
RMB32 million (2010: RMB17 million; 2009: RMB11 million) during the year ended December 31, 2011.



| | (e) | Guarantees from CSAHC
| | --- | ---------------------



Certain bank loans of the Group
amounting to RMB221 million (2010: RMB364 million) were guaranteed by CSAHC.



| | (f) | Commitments to CSAHC
| | --- | --------------------



At December 31, 2011, the Group
had operating lease commitments to CSAHC in respect of lease payments for land and buildings of RMB199 million (2010: RMB41 million).



F-65







| | 45 | Material related party transactions (continued)
| | -- | -----------------------------------------------



| | (g) | Transactions with other state-controlled entities
| | --- | -------------------------------------------------



The Company is a state-controlled
entity and operates in an economic regime currently dominated by entities directly or indirectly controlled by the PRC government
(“state-controlled entities”) through its government authorities, agencies, affiliations and other organizations.



Other than those transactions
with the CSAHC Group, associates, jointly controlled entities and other related party of the Group as disclosed in Notes 45(c),
(d), (e) and (f) above, the Group conducts transactions with other state-controlled entities which include but are not limited
to the following:



| | - | Transportation services;
| | - | ------------------------

| | - | Leasing arrangements;
| | - | ---------------------

| | - | Purchase of equipment;
| | - | ----------------------

| | - | Purchase of ancillary materials and spare parts;
| | - | ------------------------------------------------

| | - | Ancillary and social services; and
| | - | ----------------------------------

| | - | Financial services arrangement.
| | - | -------------------------------



These transactions are conducted
in the ordinary course of the Group’s business on terms comparable to those with other entities that are not state-controlled.
The Group has established its buying, pricing strategy and approval process for purchases and sales of products and services. Such
buying, pricing strategy and approval processes do not depend on whether or not the counterparties are state-controlled entities.



Having considered the potential
for transactions to be impacted by related party relationships, the Group’s pricing strategy, buying and approval processes,
and what information would be necessary for an understanding of the potential effect of the relationship on the financial statements,
the directors are of the opinion that the following transactions with other state-controlled entities require disclosure:



| | (i) | The Group’s transactions with other state-controlled entities, including state-controlled
banks in the PRC
| | --- | ----------------------------------------------------------------------------------------------------------



|                 |  | 2011        |        |  | 2010        |  |        | 2009        | 
|---------------- |  | ----------- | ------ |  | ----------- |  | ------ | ----------- | 
|                 |  | RMB million |        |  | RMB million |  |        | RMB million | 
|                 |  |             |        |  |             |  |        |             | 
|Jet fuel cost    |  |             | 25,497 |  |             |  | 21,345 |             | 
|Interest income  |  |             | 50     |  |             |  | 66     |             | 
|Interest expense |  |             | 816    |  |             |  | 808    |             | 



| | (ii) | The Group’s balances with other state-controlled entities, including state-controlled
banks in the PRC
| | ---- | ------------------------------------------------------------------------------------------------------



|                                                                   |  | 2011        |        |  | 2010        | 
|------------------------------------------------------------------ |  | ----------- | ------ |  | ----------- | 
|                                                                   |  | RMB million |        |  | RMB million | 
|                                                                   |  |             |        |  |             | 
|Trade payables-jet fuel                                            |  |             | 1,267  |  |             | 
|Cash and deposits at bank                                          |  |             | 5,702  |  |             | 
|Short-term bank loans and current portion  of long-term bank loans |  |             | 18,630 |  |             | 
|Long-term bank loans, less current portion                         |  |             | 28,144 |  |             | 



F-66







| | 46 | Employee benefits plan
| | -- | ----------------------



| | (a) | Retirement benefits
| | --- | -------------------



Employees of the Group participate
in several defined contribution retirement schemes organized separately by the PRC municipal governments in regions where the major
operations of the Group are located. The Group is required to contribute to these schemes at rates ranging from 8% to 24% (2010:
8% to 25%; 2009: 10% to 25%) of salary costs including certain allowances. A member of the retirement schemes is entitled to pension
benefits from the Local Labor and Social Security Bureau upon his / her retirement. The retirement benefit obligations of all retired
staff of the Group are assumed by these schemes.



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



| | (b) | Housing benefits
| | --- | ----------------



The Group contributes on a monthly
basis to housing funds organized by municipal and provincial governments based on certain percentages of the salaries of employees.
The Group’s liability in respect of these funds is limited to the contributions payable in each year.



In addition to the housing funds,
certain employees of the Group are eligible to one of the following housing benefit schemes:



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



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



| | (c) | Share Appreciation Rights Scheme
| | --- | --------------------------------



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



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



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



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 was remeasured as at December
31, 2011 of RMB231,000 and a corresponding staff costs of RMB231,000 was recognized during 2011.



F-67







| | 47 | Segmental reporting
| | -- | -------------------



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



The Group’s network passenger
and cargo operations are managed as a single business unit. The Group’s chief operating decision maker makes resource allocation
decisions based on route profitability, which considers aircraft type and route economics. The objective in making resource allocation
decisions is to optimize consolidated financial results. Therefore, based on the way the Group manages the network passenger and
cargo operations, and the manner in which resource allocation decisions are made, the Group has only one reportable operating segment
for financial reporting purposes, which is the “airline business”.



Financial results from other
operating segments are below the quantitative threshold for determining reportable operating segments and consist primarily of
business segments of ground services, air catering and other miscellaneous services. These other operating segments are combined
and reported as “all other segments”. Inter-segment sales are based on prices set on an arm’s length basis.



For the purposes of assessing
segment performance and allocating resources between segments, the Group’s chief operating decision maker monitors the results,
assets and liabilities attributable to each reportable segment based on financial results prepared under PRC GAAP. As such, the
amount of each material reconciling items from the Group’s reportable segment revenue, profit or loss, assets and liabilities
arising from different accounting policies are set out in Note 47(c).



F-68







| | 47 | Segmental reporting (continued)
| | -- | -------------------------------



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



Information regarding the Group’s
reportable segments as provided to the Group’s chief operating decision maker for the purposes of resource allocation and
assessment of segment performance for the years ended December 31, 2011, 2010 and 2009 is set out below.



|                                                                                                                                        |  | Airline business |         |  | All other segments |  |         | Elimination |  |  | Unallocated* |  |  | Total   |      
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- |  | ------------------ |  | ------- | ----------- |  |  | ------------ |  |  | ------- | -----
|                                                                                                                                        |  | 2011             |         |  | 2010               |  |         | 2009        |  |  | 2011         |  |  | 2010    |      
|                                                                                                                                        |  | RMB              |         |  | RMB                |  |         | RMB         |  |  | RMB          |  |  | RMB     |      
|                                                                                                                                        |  | million          |         |  | million            |  |         | million     |  |  | million      |  |  | million |      
|                                                                                                                                        |  |                  |         |  |                    |  |         |             |  |  |              |  |  |         |      
|Revenue from external  Customers                                                                                                        |  |                  | 92,274  |  |                    |  | 77,394  |             |  |  | 55,708       |  |  |         | 433  
|Inter-segment sales                                                                                                                     |  |                  | -       |  |                    |  | -       |             |  |  | -            |  |  |         | 899  
|                                                                                                                                        |  |                  |         |  |                    |  |         |             |  |  |              |  |  |         |      
|Reportable segment  Revenue                                                                                                             |  |                  | 92,274  |  |                    |  | 77,394  |             |  |  | 55,708       |  |  |         | 1,332
|                                                                                                                                        |  |                  |         |  |                    |  |         |             |  |  |              |  |  |         |      
|Reportable segment profit before taxation                                                                                               |  |                  | 6,105   |  |                    |  | 6,742   |             |  |  | 27           |  |  |         | 43   
|                                                                                                                                        |  |                  |         |  |                    |  |         |             |  |  |              |  |  |         |      
|Reportable segment assets                                                                                                               |  |                  | 122,159 |  |                    |  | 108,222 |             |  |  |              |  |  |         | 1,909
|Addition to non- current segment  assets during the  year                                                                               |  |                  | 23,553  |  |                    |  | 17,188  |             |  |  |              |  |  |         | 51   
|                                                                                                                                        |  |                  |         |  |                    |  |         |             |  |  |              |  |  |         |      
|Reportable segment Liabilities                                                                                                          |  |                  | 90,667  |  |                    |  | 80,033  |             |  |  |              |  |  |         | 1,289
|                                                                                                                                        |  |                  |         |  |                    |  |         |             |  |  |              |  |  |         |      
|Other segment  information                                                                                                              |  |                  |         |  |                    |  |         |             |  |  |              |  |  |         |      
|                                                                                                                                        |  |                  |         |  |                    |  |         |             |  |  |              |  |  |         |      
|Interest income                                                                                                                         |  |                  | 174     |  |                    |  | 91      |             |  |  | 65           |  |  |         | 5    
|Interest expense                                                                                                                        |  |                  | 1,023   |  |                    |  | 1,222   |             |  |  | 1,446        |  |  |         | 44   
|Depreciation and  amortization for  the year                                                                                            |  |                  | 7,617   |  |                    |  | 7,050   |             |  |  | 5,954        |  |  |         | 70   
|Impairment losses (including impact on property, plant and  equipment, allowance for
    doubtful debts and  provision for inventories) |  |                  | 726     |  |                    |  | 220     |             |  |  | 57           |  |  |         | 1    



| | * | Unallocated assets primarily include investments in associates and jointly controlled entities,
available-for-sale securities, other investments and the principal and interest receivables of wealth management products. Unallocated
results primarily include the share of results of associates and jointly controlled entities, the interest income on wealth management
products, the gain on disposal of a jointly controlled entity classified as held for sale in 2010, and the gain on sale of available-for-sale
securities in 2009.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-69









| | 47 | Segmental reporting (continued)
| | -- | -------------------------------



| | (b) | Geographic information
| | --- | ----------------------



|                            |  | 2011        |        |  | 2010        |  |        | 2009        | 
|--------------------------- |  | ----------- | ------ |  | ----------- |  | ------ | ----------- | 
|                            |  | RMB million |        |  | RMB million |  |        | RMB million | 
|                            |  |             |        |  |             |  |        |             | 
|Domestic                    |  |             | 75,807 |  |             |  | 63,850 |             | 
|Hong Kong, Macau and Taiwan |  |             | 1,958  |  |             |  | 1,589  |             | 
|International *             |  |             | 14,942 |  |             |  | 12,349 |             | 
|                            |  |             | 92,707 |  |             |  | 77,788 |             | 



| | * | Asian market accounted for approximately 56% (2010: 57%; 2009: 74%) of the Group’s total
international traffic revenue for the year ended December 31, 2011. The remaining portion was mainly derived from the Group’s
flights to / from Europe and North America regions and Australia.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The major revenue earning assets
of the Group are its aircraft fleet which is registered in the PRC and is employed across its worldwide route network. The chief
operating decision maker considers that there is no suitable basis for allocating such assets and related liabilities to geographical
locations. Accordingly, geographical segment assets and liabilities are not disclosed.



| | (c) | Reconciliations of reportable segment revenue, profit, assets and liabilities arising from different
accounting policies
| | --- | ------------------------------------------------------------------------------------------------------------------------



|                                                     |  | Note |      |  | 2011        |  |        | 2010        |  |  | 2009        |  
|---------------------------------------------------- |  | ---- | ---- |  | ----------- |  | ------ | ----------- |  |  | ----------- | -
|                                                     |  |      |      |  | RMB million |  |        | RMB million |  |  | RMB million |  
|Revenue                                              |  |      |      |  |             |  |        |             |  |  |             |  
|                                                     |  |      |      |  |             |  |        |             |  |  |             |  
|Reportable segment revenue                           |  |      |      |  |             |  | 93,606 |             |  |  | 78,649      |  
|Elimination of inter-segment revenues                |  |      |      |  |             |  | (899   | )           |  |  | (861        | )
|Reclassification of items in other operating revenue |  |      | (i)  |  |             |  | 309    |             |  |  | 664         |  
|Reclassification of business tax                     |  |      | (ii) |  |             |  | (2,621 | )           |  |  | (1,957      | )
|Consolidated revenue                                 |  |      |      |  |             |  | 90,395 |             |  |  | 76,495      |  





F-70







| | 47 | Segmental
                                                                                                      reporting (continued)
| | -- | -------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Reconciliations of reportable segment revenue, profit, assets and liabilities arising from different
accounting policies (continued)
| | --- | ------------------------------------------------------------------------------------------------------------------------------------



|                                                                    |  | Note |       |  | 2011        |  |       | 2010        |  |  | 2009        |  
|------------------------------------------------------------------- |  | ---- | ----- |  | ----------- |  | ----- | ----------- |  |  | ----------- | -
|                                                                    |  |      |       |  | RMB million |  |       | RMB million |  |  | RMB million |  
|Profit                                                              |  |      |       |  |             |  |       |             |  |  |             |  
|                                                                    |  |      |       |  |             |  |       |             |  |  |             |  
|Reportable segment profit before taxation                           |  |      |       |  |             |  | 6,148 |             |  |  | 6,823       |  
|Unallocated amounts                                                 |  |      |       |  |             |  | 720   |             |  |  | 1,275       |  
|Losses on lump sum housing benefits                                 |  |      | (iii) |  |             |  | (26   | )           |  |  | (26         | )
|Adjustments arising from business combinations under common control |  |      | (iv)  |  |             |  | -     |             |  |  | (1          | )
|Capitalization of exchange difference of specific loans             |  |      | (v)   |  |             |  | 87    |             |  |  | 17          |  
|Government grants                                                   |  |      | (vi)  |  |             |  | 1     |             |  |  | 1           |  
|Consolidated profit before taxation                                 |  |      |       |  |             |  | 6,930 |             |  |  | 8,089       |  
|                                                                    |  |      |       |  |             |  |       |             |  |  |             |  



|                                                        |  |      |       |  | 2011        |  |         | 2010        | 
|------------------------------------------------------- |  | ---- | ----- |  | ----------- |  | ------- | ----------- | 
|                                                        |  | Note |       |  | RMB million |  |         | RMB million | 
|                                                        |  |      |       |  |             |  |         |             | 
|Assets                                                  |  |      |       |  |             |  |         |             | 
|                                                        |  |      |       |  |             |  |         |             | 
|Reportable segment assets                               |  |      |       |  |             |  | 124,068 |             | 
|Elimination of inter-segment balances                   |  |      |       |  |             |  | (325    | )           | 
|Unallocated amounts                                     |  |      |       |  |             |  | 5,517   |             | 
|Losses on lump sum housing benefits                     |  |      | (iii) |  |             |  | 14      |             | 
|Capitalization of exchange difference of specific loans |  |      | (v)   |  |             |  | 215     |             | 
|Government grants                                       |  |      | (vi)  |  |             |  | (37     | )           | 
|Effect of the above adjustments on taxation             |  |      |       |  |             |  | (40     | )           | 
|Consolidated total assets                               |  |      |       |  |             |  | 129,412 |             | 



|                                            |  |  |  |  | 2011        |  |        | 2010        | 
|------------------------------------------- |  |  |  |  | ----------- |  | ------ | ----------- | 
|                                            |  |  |  |  | RMB million |  |        | RMB million | 
|Liabilities                                 |  |  |  |  |             |  |        |             | 
|                                            |  |  |  |  |             |  |        |             | 
|Reportable segment liabilities              |  |  |  |  |             |  | 91,956 |             | 
|Elimination of inter-segment balances       |  |  |  |  |             |  | (335   | )           | 
|Effect of the above adjustments on taxation |  |  |  |  |             |  | 14     |             | 
|Consolidated total liabilities              |  |  |  |  |             |  | 91,635 |             | 





F-71







| | 47 | Segmental
                                                                                                      information (continued)
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Reconciliations of reportable segment revenue, profit, assets and liabilities arising from different
accounting policies (continued)
| | --- | ------------------------------------------------------------------------------------------------------------------------------------



Notes:



| | (i) | In accordance with the PRC GAAP, expired sales in advance of carriage and related taxes are recorded
under non-operating income. Under IFRSs, such income is recognized in revenue as other operating income.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | (iii) | In accordance with the PRC GAAP, losses on the lump sum housing benefits are executed by CSAHC
are charged to retained profits as of January 1, 2001 pursuant to the relevant regulations. Under IFRSs, losses on lump sum housing
benefits are initially deferred and charged to the consolidated income statement, over the vesting benefit periods stipulated by
the relevant contracts.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | In accordance with the PRC GAAP, business combinations under common control are accounted for by
applying the pooling-of-interest method. The assets and liabilities of acquired subsidiaries are recorded at the subsidiaries’
historical amounts. Under IFRSs, purchase accounting is adopted where the assets and liabilities of the acquired subsidiaries are
recorded at fair value.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) | In accordance with the PRC GAAP, exchange difference arising on translation of specific loans and
related interest denominated in a foreign currency is capitalized as part of the cost of qualifying assets. Under IFRSs, such exchange
difference should be recognized in the consolidated income statement unless the exchange difference represents an adjustment to
interest.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vi) | In accordance with the PRC GAAP, special funds such as investment grants allocated by the government,
if clearly defined in official documents as part of “capital reserve”, are credited to capital reserve. Under IFRSs,
government grants relating to purchase of fixed assets are deducted from the cost of the related fixed assets.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 48 | Supplementary information to the consolidated cash flow statements
| | -- | ------------------------------------------------------------------



Non cash transactions - acquisition
of aircraft



During the year ended December 31, 2011,
aircraft acquired under finance leases amounted to RMB3,390 million (2010: RMB3,056 million; 2009: RMB2,171 million).



F-72







| | 49 | 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 business. The Group’s exposure
to these risks and the financial risk management policies and practices used by the Group to manage these risks are described below.



| | (a) | Liquidity risk
| | --- | --------------



As at December 31, 2011, the
Group’s current liabilities exceeded its current assets by RMB24,928 million. For the year ended December 31, 2011, the Group
recorded a net cash inflow from operating activities of RMB12,557 million, a net cash outflow from investing activities of RMB21,957
million and a net cash inflow from financing activities of RMB8,859 million, which in total resulted in a net decrease in cash
and cash equivalents of RMB541 million.



In 2012 and thereafter, the Group
is primarily dependent on its ability to maintain adequate cash inflow from operations to meet its debt obligations as they fall
due, and its ability to obtain adequate external financing to meet its committed future capital expenditures. As at December 31,
2011, the Group had banking facilities with several PRC banks for providing loan finance up to approximately RMB127,448 million
(2010: RMB146,702 million), of which approximately RMB36,414 million (2010: RMB39,173 million) was utilized. The directors of the
Company believe that sufficient financing will be available to the Group when and where needed.



The directors of the Company
have carried out a detailed review of the cash flow forecast of the Group for the twelve months ending December 31, 2012. Based
on such forecast, the directors have determined that adequate liquidity exists to finance the working capital, capital expenditure
requirements and dividend payment of the Group during that period. In preparing the cash flow forecast, the directors have considered
historical cash requirements of the Group as well as other key factors, including the availability of the above-mentioned loan
finance which may impact the operations of the Group during the next twelve-month period. The directors are of the opinion that
the assumptions and sensitivities which are included in the cash flow forecast are reasonable. However, as with all assumptions
in regard to future events, these are subject to inherent limitations and uncertainties and some or all of these assumptions may
not be realized.



As at December 31, 2011,
the Group’s bank and other loans, obligations under finance leases, trade payables and amounts due to related companies
as disclosed in Notes 33, 34, 35 and 37 respectively, are not materially different from the amount determined 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). During the year ended December 31, 2011, the Group had forward foreign
exchange contracts, of which the outflow amounted to RMB65 million (2010: RMB467 million; 2009: RMB426 million) and inflow
amounted to RMB53 million (2010: RMB406 million; 2009: RMB399 million). All forward foreign contracts were fully settled in
2011. As at December 31, 2011, the Group has no outstanding forward foreign exchange contracts.



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



The interest rates and maturity
information of the Group’s bank and other loans and obligations under finance lease are disclosed in Notes 33 and 34 respectively.



At December 31, 2011, 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 RMB245 million
(2010: RMB220 million; 2009: would have decreased/increased the Group’s profit after tax and increased/decreased
accumulated losses by approximately RMB238 million). Other components of consolidated equity would not be affected (2010 and 2009:
Nil, respectively) by the changes in interest rates.



F-73







| | 49 | Financial
                                                                                                                        risk management
                                                                                                                        and fair
                                                                                                                        values
                                                                                                                        (continued)
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



The
sensitivity analysis above indicates the instantaneous change in the Group’s profit after tax and
retained profits/accumulated losses that would arise assuming that the change of interest rates 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 beginning of the
financial year. 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 financial year, the impact on the Group’s profit after tax and retained
profits is estimated as an annualized impact on interest expense or income of such a change in interest rates. The analysis
is performed on the same basis for 2010 and 2009.



| | (c) | Foreign currency risk
| | --- | ---------------------



The Renminbi is not freely convertible
into foreign currencies. All foreign exchange transactions involving Renminbi must take place either through the PBOC or other
institutions authorized to buy and sell foreign exchange or at a swap centre.



The Group has significant exposure
to foreign currency risk as substantially all of the Group’s obligations under finance leases (Note 34), bank and other loans
(Note 33) and operating lease commitments (Note 50(b)) are denominated in foreign currencies, principally US dollars and Singapore
dollars. Depreciation or appreciation of the Renminbi against foreign currencies affects the Group’s results significantly
because the Group’s foreign currency payments generally exceed its foreign currency receipts. The Group is not able to hedge
its foreign currency exposure effectively other than by retaining its foreign currency denominated earnings and receipts to the
extent permitted by the State Administration of Foreign Exchange, or subject to certain restrictive conditions, entering into forward
foreign exchange contracts with authorized banks.



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. During the year, the Group’s two outstanding forward option contracts were
fully settled (2010: Notional amount ranging from USD4 million to USD8 million). The contracts are to buy USD1 million and
USD1.5 million respectively (or USD2 million and USD3 million respectively if the spot exchange rate at settlement date is
below certain specified strike rates) by selling Japanese Yen at certain specified rates on monthly settlement dates until
the maturity of the contracts in 2011. Both contracts have a knock-out clause where the contracts early terminate upon
the exchange rate of Japanese Yen to US dollar reaching a certain knock-out level. For the year ended December 31, 2011, a
net gain of approximately RMB13 million (2010: RMB31 million; 2009: RMB72 million) arising from changes in the fair value of these
foreign exchange forward option contracts has been recognized in the consolidated income statement.



F-74







| | 49 | Financial risk management and fair values (continued)
| | -- | -----------------------------------------------------



| | (c) | Foreign currency risk (continued)
| | --- | ---------------------------------



The exchange rate of Renminbi
to US dollar is set by the PBOC and had fluctuated within a narrow band prior to July 21, 2005. Since then, a managed floating
exchange rate regime based on market supply and demand with reference to a basket of foreign currencies has been used and the US
dollar exchange rate has gradually declined against the Renminbi.



The following table
indicates the instantaneous change in Group’s profit after tax and retained profits/accumulated losses 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.



|                      |  | 2011                                                                  |    |    | 2010                                                             |  |      | 2009                                                                  | 
|--------------------- |  | --------------------------------------------------------------------- | -- | -- | ---------------------------------------------------------------- |  | ---- | --------------------------------------------------------------------- | 
|                      |  | Appreciation/
    (depreciation) of Renminbi against foreign currency |    |    | Increase/(decrease)
    on profit after tax and retained profits |  |      | Appreciation/
    (depreciation) of Renminbi against foreign currency | 
|                      |  |                                                                       |    |    | RMB
    million                                                  |  |      |                                                                       | 
|                      |  |                                                                       |    |    |                                                                  |  |      |                                                                       | 
|United States Dollars |  |                                                                       | 2  | %  |                                                                  |  | 912  |                                                                       | 
|                      |  |                                                                       | (2 | )% |                                                                  |  | (912 | )                                                                     | 
|Singapore Dollars     |  |                                                                       | 2  | %  |                                                                  |  | 8    |                                                                       | 
|                      |  |                                                                       | (2 | )% |                                                                  |  | (8   | )                                                                     | 



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/accumulated losses 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 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 2010 and 2009.



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



The Group’s credit risk
is primarily attributable to cash and cash equivalents and trade receivables.



Substantially all of the Group’s
cash and cash equivalents are deposited with PRC financial institutions, which management believes are of high credit quality.



A significant portion of the
Group’s air tickets are sold by agents participating in the Billing and Settlement Plan (“BSP”), a clearing scheme
between airlines and sales agents organized by International Air Transport Association. The use of the BSP reduces credit
risk to the Group. As at December 31, 2011, the balance due from BSP agents amounted to RMB923 million (2010: RMB909 million).
The credit risk exposure to BSP and the remaining trade receivables balance are monitored by the Group on an ongoing basis and
the allowance for impairment of doubtful debts is within management’s expectations. Further quantitative disclosures in respect
of the Group’s exposure to credit risk arising from trade receivables is set out in Note 29.



F-75







| | 49 | Financial risk management and fair values (continued)
| | -- | -----------------------------------------------------



| | (e) | Jet fuel price risk
| | --- | -------------------



The Group’s
results of operations may be significantly affected by fluctuations in fuel prices and the jet fuel expenses are a
significant cost for the Group. A reasonable possible increase or decrease of 10% (2010 and 2009: 10%, respectively) in jet
fuel price, with volume of fuel consumed and all other variables held constant, would have increased / decreased the fuel
costs by approximately RMB3,268 million (2010: RMB2,349 million; 2009: RMB1,639 million). The sensitivity analysis indicates the
instantaneous change in the Group’s fuel cost that would arise assuming that the change in fuel price had occurred at
the beginning of the financial year.



| | (f) | Fair value
| | --- | ----------



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



The following table presents
the carrying value of financial instruments measured at fair value at the end of financial period across the three levels of the
fair value hierarchy defined in IFRS 7, Financial Instruments: Disclosures, with the fair value of each financial instrument categorized
in its entirety based on the lowest level of input that is significant to that fair value measurement. The levels are defined as
follows:



| | - | Level 1 (highest level): fair values measured using quoted prices (unadjusted) in active markets
for identical financial instruments
| | - | ------------------------------------------------------------------------------------------------------------------------------------



| | - | Level 2: fair values measured using quoted prices in active markets for similar financial instruments,
or using valuation techniques in which all significant inputs are directly or indirectly based on observable market data
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Level 3 (lowest level): fair values measured using valuation techniques in which any significant
input is not based on observable market data
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



2011



|                                      |  | Level 1 |    |  | Level 2 |  |   | Level 3 |  |  | Total   | 
|------------------------------------- |  | ------- | -- |  | ------- |  | - | ------- |  |  | ------- | 
|                                      |  | RMB     |    |  | RMB     |  |   | RMB     |  |  | RMB     | 
|                                      |  | million |    |  | million |  |   | million |  |  | million | 
|Assets                                |  |         |    |  |         |  |   |         |  |  |         | 
|Available-for-sale equity securities: |  |         |    |  |         |  |   |         |  |  |         | 
|- Listed                              |  |         | 64 |  |         |  | - |         |  |  | -       | 





F-76







| | 49 | Financial risk management and fair values (continued)
| | -- | -----------------------------------------------------



| | (f) | Fair value (continued)
| | --- | ----------------------



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



2010



|                                            |  | Level 1 |    |  | Level 2 |  |    | Level 3 |  |  | Total   | 
|------------------------------------------- |  | ------- | -- |  | ------- |  | -- | ------- |  |  | ------- | 
|                                            |  | RMB     |    |  | RMB     |  |    | RMB     |  |  | RMB     | 
|                                            |  | million |    |  | million |  |    | million |  |  | million | 
|Assets                                      |  |         |    |  |         |  |    |         |  |  |         | 
|Available-for-sale equity securities:       |  |         |    |  |         |  |    |         |  |  |         | 
|- Listed                                    |  |         | 80 |  |         |  | -  |         |  |  | -       | 
|                                            |  |         |    |  |         |  |    |         |  |  |         | 
|Liabilities                                 |  |         |    |  |         |  |    |         |  |  |         | 
|Derivative financial instruments:           |  |         |    |  |         |  |    |         |  |  |         | 
|- Foreign exchange forward option contracts |  |         | -  |  |         |  | 13 |         |  |  | -       | 



During the years ended December
31, 2011 and 2010, there were no significant transfers between instruments in Level 1 and Level 2.



Fair value of available-for-sale
securities is based on quoted market prices at the end of the financial year without any deduction for transaction costs.



The fair value of forward exchange
contracts is estimated by using Black-Scholes option pricing model, taking into account the terms and conditions of the forward
exchange contracts. The major inputs used in estimation process include implied volatility, benchmark interest rates and foreign
exchange spot and forward rates, which can be obtained from observable markets.



| | (ii) | Non-current investments represent unlisted equity securities
of companies established in the PRC. There is no quoted market price for such equity securities and accordingly a reasonable estimate
of the fair value could not be measured reliably.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Amounts due from / to related companies are unsecured,
interest-free and have no fixed terms of repayment. Given these terms, it is not meaningful to disclose fair values of these balances.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | All other financial instruments, including trade and other receivables, prepaid expenses and other
current assets, trade and other payables, are carried at amounts not materially different from their fair values as at December
31, 2011 and December 31, 2010.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-77







| | 50 | Commitments
| | -- | -----------



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



Capital commitments outstanding
at December 31, 2011 not provided for in the consolidated financial statements were as follows:



|                                                        |  | 2011        |        |  | 2010        | 
|------------------------------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                                        |  | RMB million |        |  | RMB million | 
|Commitments in respect of aircraft and flight equipment |  |             |        |  |             | 
|- authorized and contracted for                         |  |             | 61,250 |  |             | 
|Other commitments                                       |  |             |        |  |             | 
|- authorized and contracted for                         |  |             | 1,534  |  |             | 
|- authorized but not contracted for                     |  |             | 2,256  |  |             | 
|                                                        |  |             | 3,790  |  |             | 
|                                                        |  |             |        |  |             | 
|                                                        |  |             | 65,040 |  |             | 



As at December 31, 2011, the
Group placed orders for 180 aircraft and certain flight equipment, which are scheduled for deliveries in 2012 to 2016. Deposits
of RMB14,477 million have been made towards the purchase of these aircraft and related equipment. As at December 31, 2011, the
approximate total future payments, including estimated amounts for price escalation through anticipated delivery dates for these
aircraft and flight equipment are as follows:



|                    |  | 2011        |        |  | 2010        | 
|------------------- |  | ----------- | ------ |  | ----------- | 
|                    |  | RMB million |        |  | RMB million | 
|                    |  |             |        |  |             | 
|2011                |  |             | -      |  |             | 
|2012                |  |             | 19,014 |  |             | 
|2013                |  |             | 19,673 |  |             | 
|2014                |  |             | 13,328 |  |             | 
|2015                |  |             | 8,580  |  |             | 
|2016 and afterwards |  |             | 655    |  |             | 
|                    |  |             | 61,250 |  |             | 



As at December 31, 2011, the
Group has capital commitments as follows:



|                                                                 |  | 2011        |     |  | 2010        | 
|---------------------------------------------------------------- |  | ----------- | --- |  | ----------- | 
|                                                                 |  | RMB million |     |  | RMB million | 
|                                                                 |  |             |     |  |             | 
|Authorized and contracted for                                    |  |             |     |  |             | 
|Capital contributions to subsidiary                              |  |             | 120 |  |             | 
|Capital contributions for acquisition of interests in associates |  |             | 119 |  |             | 
|Share of capital commitments of a jointly controlled entity      |  |             | 27  |  |             | 
|                                                                 |  |             | 266 |  |             | 



F-78







| | 50 | Commitments (continued)
| | -- | -----------------------



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



As at December 31, 2011, the
total future minimum lease payments under non-cancellable operating leases in respect of properties, aircraft and flight equipment
are as follows:



|                                |  | 2011        |        |  | 2010        | 
|------------------------------- |  | ----------- | ------ |  | ----------- | 
|                                |  | RMB million |        |  | RMB million | 
|Payments due                    |  |             |        |  |             | 
|Within 1 year                   |  |             | 4,369  |  |             | 
|After 1 year but within 5 years |  |             | 13,283 |  |             | 
|After 5 years                   |  |             | 7,487  |  |             | 
|                                |  |             | 25,139 |  |             | 



| | 51 | Contingent liabilities
| | -- | ----------------------



| | (a) | The Group leased certain properties and buildings from CSAHC which are located in Guangzhou, Wuhan
and Haikou and other PRC cities. These properties and buildings lack adequate documentation evidencing CSAHC’s rights thereto.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pursuant to the indemnification
agreement dated May 22, 1997 between the Group and CSAHC, CSAHC has agreed to indemnify the Group against any loss or damage arising
from any challenge of the Group’s right to use the properties and buildings.



| | (b) | The Company and its subsidiary, Xiamen Airlines, entered into agreements with its pilot trainees
and certain banks whereby, the Company and Xiamen Airlines provided guarantees on personal bank loans amounting up to RMB395 million
(2010: RMB250 million) that can be drawn by the pilot trainees to finance their respective flight training expenses. As at December
31, 2011, an aggregate of personal bank loans of RMB293 million (2010: RMB151 million), under these guarantees, were drawn down
from the banks. During the year, the Group has made repayments of RMB4 million (2010: RMB2 million) due to the default of payments
of certain pilot trainees.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | The Company received a claim on July 11, 2011 from an overseas entity (the “claimant”)
against the Company for the alleged breach of certain terms and conditions of an aircraft sale agreement. The claimant has made
a claim against the Company for an indemnity of USD46 million or for the refund of the down payments of USD12 million, and the
interest thereon which is calculated in accordance with Clause 35A, United Kingdom Supreme Court Act 1981. The claim is still being
investigated and the directors are of the opinion that the claim is without merit and the Company has involved its legal advisor
to defend the claim and filed a defense to the claimant declining all the claims and made a counter claim for an indemnity of around
USD34 million caused by the claimant’s non-execution of the aircraft sale agreement. The directors are of the opinion that
an outflow of resource embodying economic benefits is not probable to occur.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-79







| | 52 | Non-adjusting events after the financial year end
| | -- | -------------------------------------------------



| | (a) | On February 28, 2012, the Company entered into an agreement with the Boeing Company to purchase
10 Boeing 777-300ER aircraft at a predetermined price, which are scheduled for delivery from 2013 to 2016.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | On March 29,2012, the directors proposed a final dividend in respect of the year ended December
31, 2011. Further details are disclosed in Note 18.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------



| | 53 | Comparative figures
| | -- | -------------------



As a result of the application
of IAS24 (revised 2009), Related party disclosure and Improvements to IFRSs (2010), certain comparative figures have
been adjusted to conform to current year’s presentation and to provide comparative amounts in respect of items disclosed
in 2011. Further details of these developments are disclosed in Note 3.



| | 54 | Immediate and ultimate controlling party
| | -- | ----------------------------------------



As at December 31, 2011, 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.



| | 55 | Accounting judgments and estimates
| | -- | ----------------------------------



The Groups’ financial position
and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the financial
statements. The Group bases the assumptions and estimates on historical experience and on various other assumptions that the Group
believes to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other
sources. On an ongoing basis, management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances
and conditions change.



The selection of critical accounting
policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results
to changes in condition and assumptions are factors to be considered when reviewing the financial statements. In addition to the
assumptions and estimates regarding provision for early retirement benefits and fair value measurements of financial instruments
disclosed in Note 41 and Note 49(f) respectively, the Group believes the following critical accounting policies also involve the
most significant judgments and estimates used in the preparation of the consolidated financial statements.



F-80







| | 55 | Accounting judgments and estimates (continued)
| | -- | ----------------------------------------------



| | (a) | Impairment of long-lived assets
| | --- | -------------------------------



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



| | (b) | Depreciation
| | --- | ------------



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



| | 56 | Possible impact of amendments, new standards and interpretations
issued but not yet effective for the year ended December 31, 2010
| | -- | ----------------------------------------------------------------------------------------------------------------------------------



Up to the date of issue of these
financial statements, the IASB has issued a number of amendments and five new standards which are not yet effective for the year
ended December 31, 2011 and which have not been adopted in these consolidated financial statements.



|                                                                                                                |  | Effective for accounting
periods beginning on or after
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------
|                                                                                                                |  |                                                       
|Amendments to IFRS 7, Financial instruments:                                                                    |  |                                                       
|Disclosures – Transfers of financial asset                                                                      |  | July 1, 2011                                          
|Amendments to IAS 12, Income taxes – Deferred tax:                                                              |  |                                                       
|Recovery of underlying assets                                                                                   |  | January 1, 2012                                       
|Amendments to IAS 1, Presentation of financial statements – Presentation of items of other comprehensive income |  | July 1, 2012                                          
|IFRS 9, Financial instruments                                                                                   |  | January 1, 2013                                       
|IFRS 10, Consolidated financial statements                                                                      |  | January 1, 2013                                       
|IFRS 11, Joint arrangements                                                                                     |  | January 1, 2013                                       
|IFRS 12, Disclosure of interests in other entities                                                              |  | January 1, 2013                                       
|IFRS 13, Fair value measurement                                                                                 |  | January 1, 2013                                       
|IAS 27, Separate financial statements (2011)                                                                    |  | January 1, 2013                                       
|IAS 28, Investments in associates and joint ventures                                                            |  | January 1, 2013                                       
|Revised IAS 19, Employee benefits                                                                               |  | January 1, 2013                                       



The Group is in the process of
making an assessment of what the impact of these amendments is expected to be in the period of initial application. So far it has
concluded that the adoption of them is unlikely to have a significant impact on the Group’s consolidated results of operations
and consolidated financial position.



F-81







| | 57 | Subsidiaries
| | -- | ------------



The following list contains only
the particulars of subsidiaries which principally affect the results, assets or liabilities of the Group.





|Name of company                                                |  |  | Place of
        establishment
        / operation |  |  | Registered capital |               |  | Proportion of
        ownership
        interest held
        by the
        Company |       |   | Principal
        activities
|-------------------------------------------------------------- |  |  | -------------------------------------------------- |  |  | ------------------ | ------------- |  | ------------------------------------------------------------------------------------ | ----- | - | ----------------------------
|                                                               |  |  |                                                    |  |  |                    |               |  |                                                                                      |       |   |                             
|Shantou Airlines Company Limited (a)                           |  |  | PRC                                                |  |  | RMB                | 280,000,000   |  |                                                                                      | 60    | % |                             
|Chongqing Airlines Company Limited (a)                         |  |  | PRC                                                |  |  | RMB                | 1,200,000,000 |  |                                                                                      | 60    | % |                             
|Zhuhai Airlines Company Limited (a)                            |  |  | PRC                                                |  |  | RMB                | 250,000,000   |  |                                                                                      | 60    | % |                             
|Xiamen Airlines (a)                                            |  |  | PRC                                                |  |  | RMB                | 3,000,000,000 |  |                                                                                      | 51    | % |                             
|Guizhou Airlines Company Limited (a)                           |  |  | PRC                                                |  |  | RMB                | 180,000,000   |  |                                                                                      | 60    | % |                             
|Nan Lung International Freight Limited                         |  |  | Hong Kong                                          |  |  | HKD                | 3,270,000     |  |                                                                                      | 51    | % |                             
|Guangzhou Baiyun International Logistic Company Limited (a)    |  |  | PRC                                                |  |  | RMB                | 50,000,000    |  |                                                                                      | 61    | % |                             
|China Southern Airlines Group Air Catering Company Limited (a) |  |  | PRC                                                |  |  | RMB                | 10,200,000    |  |                                                                                      | 100   | % |                             
|Guangzhou Nanland Air Catering Company Limited (b)             |  |  | PRC                                                |  |  | RMB                | 120,000,000   |  |                                                                                      | 55    | % |                             
|Xinjiang Civil Aviation Property Management Limited (a)        |  |  | PRC                                                |  |  | RMB                | 251,332,832   |  |                                                                                      | 51.84 | % |                             
|Beijing Southern Airlines Ground Services Company Limited (a)  |  |  | PRC                                                |  |  | RMB                | 18,000,000    |  |                                                                                      | 100   | % |                             





| | (a) | These subsidiaries are PRC limited liability companies.
| | --- | -------------------------------------------------------



| | (b) | This subsidiary is Sino-foreign equity joint venture company established in the PRC.
| | --- | ------------------------------------------------------------------------------------



| | (c) | Certain Group’s subsidiaries are PRC joint ventures which have limited lives pursuant to
the PRC law.
| | --- | -----------------------------------------------------------------------------------------------------

F-82







| | 58 | Associates and jointly controlled entities
| | -- | ------------------------------------------



The particulars of the Group’s
principal associates and jointly controlled entities as of December 31, 2011 are as follows:









|Name of company                                                    |  | Place of
establishment/
operation |             | Proportion of ownership interest held by |   | Proportion
of voting
rights held
by the
Group |       |   | Principal
activities
|------------------------------------------------------------------ |  | --------------------------------- | ----------- | ---------------------------------------- | - | --------------------------------------------- | ----- | - | --------------------
|Group’s
effective
interest                                         |  |                                   | The
Company |                                          |   | Subsidiaries                                  |      
|                                                                   |  |                                   |             |                                          |   |                                               |       |   |                     
|GAMECO (a)                                                         |  | PRC                               |             | 50                                       | % |                                               | 50    | % |                     
|SA Finance                                                         |  | PRC                               |             | 33.98                                    | % |                                               | 21.09 | % |                     
|Sichuan Airlines Corporation Limited                               |  | PRC                               |             | 39                                       | % |                                               | 39    | % |                     
|Southern Airlines Culture and Media Co., Ltd.                      |  | PRC                               |             | 40                                       | % |                                               | 40    | % |                     
|Zhuhai Xiang Yi (a)                                                |  | PRC                               |             | 51                                       | % |                                               | 51    | % |                     
|Guangzhou China Southern Zhongmian Dutyfree Store Co., Limited (a) |  | PRC                               |             | 50                                       | % |                                               | 50    | % |                     
|Flying College (a)                                                 |  | Australia                         |             | 48.12                                    | % |                                               | 48.12 | % |                     













| | (a) | These are jointly controlled entities.
| | --- | --------------------------------------



| | (b) | Certain Group’s jointly controlled entities are PRC joint ventures which have limited lives
pursuant to the PRC law.
| | --- | --------------------------------------------------------------------------------------------------------------------



F-83