**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      20-F**




**(Mark
      One)**


o
            
            **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, 2007**




**OR**


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




**OR**


o
            
            **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***




***PEOPLE’S
      REPUBLIC OF CHINA, 510405***




(Address
      of principal executive offices)









***Mr.
      Xie Bing, 02086124462,***


***webmaster@csair.com*** ***and/or 02086659040***


***278
      JI CHANG ROAD***


***GUANGZHOU***


***PEOPLE’S
      REPUBLIC OF CHINA, 510405***





(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, Inc.**RMB1.00
                per share**represented
                by American**Depositary
                Receipts*




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




None




(Title
      of
      Class)




(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.
      2,200,000,000 ordinary Domestic Shares of par value RMB1.00 per share and
      1,174,178,000 ordinary H Shares of par value RMB1.00 per share and 1,000,000,000
      ordinary A Shares of par value RMB1.00 per share were issued and outstanding
      as
      of December 31, 2007.




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




o Yes
þ No





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




o Yes
þ No




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









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




þ Yes
o No





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





Large
      accelerated filer þ    Accelerated
      filer o  Non-accelerated
      filer o




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


U.S. GAAP o
              International Financial Reporting Standards þ
              Other oas issued by the International AccountingStandards 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.




o  Item
      17 o  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).





o Yes þ  No










**TABLE
      OF CONTENTS**


**China
      Southern Airlines Company Limited**





**Page**FORWARD-LOOKING
                STATEMENTS
            
            1INTRODUCTORY
                NOTE
            
            1GLOSSARY
                OF AIRLINE INDUSTRY TERMS
            
            2**PART
                I**ITEM
                1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
            
            3ITEM
                2. OFFER STATISTICS AND EXPECTED TIMETABLE
            
            3ITEM
                3. KEY INFORMATION
            
            3Selected
                Financial Data
            
            3Capitalization
                and Indebtedness
            
            6Reasons
                for the Offer and Use of Proceeds
            
            6Risk
                Factors
            
            7ITEM
                4. INFORMATION ON THE COMPANY
            
            12History
                and Development of the Company
            
            12Aircraft
                Acquisitions
            
            13Capital
                Expenditure
            
            14Business
                Overview
            
            14Organizational
                Structure
            
            33Property,
                Plant and Equipment
            
            34ITEM
                4A. UNRESOLVED STAFF COMMENTS
            
            36ITEM
                5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
            
            36Critical
                Accounting Policies
            
            36Recently
                Pronounced International Financial Reporting Standards
            
            37Overview
            
            37Certain
                Financial Information and Operating Data by Geographic
                Region
            
            38Operating
                Results
            
            39Liquidity
                and Capital Resources
            
            44Contractual
                Obligations and Commercial Commitments
            
            46ITEM
                6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
            
            46Directors,
                Senior Management and Employees
            
            46Compensation
            
            52




i




Board
                Practices
            
            53Employees
            
            54Share
                Ownership
            
            56ITEM
                7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
            
            56Major
                Shareholders
            
            56Related
                Party Transactions
            
            56Interests
                of Experts and Counsel
            
            62ITEM
                8. FINANCIAL INFORMATION
            
            62Consolidated
                Statements and Other Financial Information
            
            62Significant
                Changes
            
            62Legal
                Proceedings
            
            62Dividend
                Information
            
            62ITEM
                9. THE OFFER AND LISTING
            
            62Offer
                and Listing Details
            
            62Plan
                of Distribution
            
            64Markets
            
            64Selling
                Shareholders
            
            64Dilution
            
            64Expenses
                of the Issue
            
            64ITEM
                10. ADDITIONAL INFORMATION
            
            64A.
            Share
                Capital
            
            64B.
            Memorandum
                and Articles of Association
            
            64C.
            Material
                Contracts
            
            69D.
            Exchange
                Controls
            
            70E.
            Taxation
            
            71F.
            Dividends
                and Paying Agents
            
            75G.
            Statement
                by Experts
            
            75H.
            Documents
                on Display
            
            75I.
            Subsidiary
                Information
            
            76Comparison
                of New York Stock Exchange Corporate Governance Rules and China Corporate
                Governance Rules for Listed Companies
            
            76ITEM
                11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK
            
            79




ii




ITEM
                12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
            
            81**PART
                II**ITEM
                13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
            
            81ITEM
                14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
                USE OF
                PROCEEDS
            
            81ITEM
                15. CONTROLS AND PROCEDURES
            
            81ITEM
                16. RESERVED
            
            83ITEM
                16A. AUDIT COMMITTEE FINANCIAL EXPERT
            
            83ITEM
                16B. CODE OF ETHICS
            
            83ITEM
                16C. PRINCIPAL ACCOUNTING FEES AND SERVICES
            
            83ITEM
                16D. EXEMPTIONS
                FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
            
            84ITEM
                16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                PURCHASERS
            
            84**PART
                III**ITEM
                17. FINANCIAL STATEMENTS
            
            84ITEM
                18. FINANCIAL STATEMENTS
            
            84ITEM
                19. EXHIBITS
            
            85





iii





**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 “estimates”, “projects”, “expects”, “intends”, “believes”, “plans”,
“anticipates”, 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 the Company’s 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. The
      Company’s 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, including changes in interest
                rates;





·
            prices
                and other economic conditions;





·
            natural
                phenomena;





·
            actions
                by government authorities, including changes in government
                regulations;





·
            the
                Company’s relationship with CSAHC;





·
            uncertainties
                associated with legal proceedings;





·
            technological
                development;





·
            future
                decisions by management in response to changing
                conditions;





·
            the
                Company’s ability to execute prospective business plans;
                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” 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 50.3% controlling interest in the
      Company.




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 People’s Republic of
      China. References to “Macau” or “Macau SAR” are to the Macau Special
      Administrative Region of the People’s Republic of China.




The
      Company presents its consolidated financial statements in Renminbi. The
      consolidated financial statements of the Company for the year ended December
      31,
      2007 (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 (“IASs”) and
      interpretations issued by the International Accounting Standard Board (the
      “IASB”).




1




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 = RMB7.3046,
      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, 2007. 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
      shall
      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
                number of tons of capacity available for the transportation of revenue
                load (passengers and cargo) multiplied by the kilometers flown*Traffic
                Measurements*“revenue
                passenger kilometers” or “RPKs”
            
            the
                number of revenue passengers carried multiplied by the kilometers
                flown“cargo
                ton kilometers”
            
            the
                cargo load in tons multiplied by the kilometers flown“revenue
                ton kilometers” or “RTKs”
            
            the
                load (passenger and cargo) in tons multiplied by the kilometers flown*Yield
                Measurements*“passenger
                yield”
            
            revenue
                from passenger operations divided by RPKs“cargo
                yield”
            
            revenue
                from cargo operations divided by cargo ton kilometers“average
                yield”
            
            revenue
                from airline operations (passenger and cargo) divided by RTKs“ton”
            
            a
                metric ton, equivalent to 2,204.6 pounds*Load
                Factors*“passenger
                load factor”
            
            RPKs
                expressed as a percentage of ASKs“overall
                load factor”
            
            RTKs
                expressed as a percentage of ATKs“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*Utilization*“utilization
                rate”
            
            the
                actual number of flight hours per aircraft per operating day




2




*Equipment*“rotables”
            
            aircraft
                parts that are ordinarily repaired and reused“expendables”
            
            aircraft
                parts that are ordinarily used up and replaced with new parts





**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.******




**Selected
      Financial Data**




The
      following tables present selected financial data of the Company as of and for
      each of the years in the five-year period ended December 31, 2007. The selected
      consolidated statement of operations data for each of the years in the
      three-year period ended December 31, 2007 and selected consolidated balance
      sheet data as of December 31, 2007 and 2006, have been derived from the
      consolidated financial statements of the Company, including the related notes,
      included elsewhere in this Annual Report. The selected consolidated statement
      of
      operations data for the years ended December 31, 2003 and 2004 and selected
      consolidated balance sheet data as of December 31, 2005, 2004 and 2003 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” included elsewhere in this Annual Report. Unless
      otherwise indicated, our consolidated financial statements are prepared and
      presented in accordance with International Financial Reporting Standards, or
      IFRSs.




**Year ended December 31,****2007**
              **US$**
            
            **2007**
              **RMB**
            
            **2006**
              **RMB**
            
            **2005**
              **RMB**
            
            **2004**
              **RMB**
            
            **2003**
              **RMB****Consolidated
                Statement of Operations Data:**
            
            **(in
                million, except per share data)**Operating
                revenue
            
            
            7,461
            
            
            54,502
            
            
            46,219
            
            
            38,293
            
            
            23,974
            
            
            17,470Operating
                expenses
            
            
            (7,256
            )
            
            (53,013
            )
            
            (45,907
            )
            
            (39,598
            )
            
            (23,065
            )
            
            (17,014
            )Operating
                profit/(loss)
            
            
            223
            
            
            1,619
            
            
            645
            
            
            (1,337
            )
            
            908
            
            
            434Profit/(loss)
                before taxation
            
            
            400
            
            
            2,923
            
            
            357
            
            
            (1,853
            )
            
            220
            
            
            (511
            )Profit/(loss)
                for the year
            
            
            283
            
            
            2,065
            
            
            204
            
            
            (1,846
            )
            
            155
            
            
            (187
            )Profit/(loss)
                attributable to :Equity
                shareholders of the Company
            
            
            256
            
            
            1,871
            
            
            188
            
            
            (1,848
            )
            
            (48
            )
            
            (358
            )Minority
                interests
            
            
            27
            
            
            194
            
            
            16
            
            
            2
            
            
            203
            
            
            171Basic
                and diluted earnings/(loss) per share
            
            
            0.06
            
            
            0.43
            
            
            0.04
            
            
            (0.42
            )
            
            (0.01
            )
            
            (0.09
            )Basic
                and diluted earnings/(loss) per ADR
            
            
            2.93
            
            
            21.39
            
            
            2.15
            
            
            (21.12
            )
            
            (0.55
            )
            
            (4.68
            )Cash
                dividends declared per share
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —




3




**As of December 31,****2007**
              **US$**
            
            **2007**
              **RMB**
            
            **2006**
              **RMB**
            
            **2005**
              **RMB**
            
            **2004**
              **RMB**
            
            **2003**
              **RMB****Consolidated
                Balance Sheet Data:**
            
            **(in
                million)**Cash
                and cash equivalents
            
            
            524
            
            
            3,824
            
            
            2,264
            
            
            2,901
            
            
            3,083
            
            
            2,080Other
                current assets
            
            
            680
            
            
            4,966
            
            
            4,419
            
            
            4,320
            
            
            4,286
            
            
            1,922Property,
                plant and equipment, net
            
            
            8,001
            
            
            58,441
            
            
            56,335
            
            
            54,254
            
            
            46,841
            
            
            28,536Total
                assets
            
            
            11,217
            
            
            81,933
            
            
            75,584
            
            
            71,402
            
            
            62,383
            
            
            39,062Bank
                and other loans, including long-term bankand
                other loans due within one year
            
            
            3,415
            
            
            24,948
            
            
            23,822
            
            
            16,223
            
            
            11,518
            
            
            7,097Obligations
                under finance leases due within one year
            
            
            394
            
            
            2,877
            
            
            3,091
            
            
            3,373
            
            
            2,144
            
            
            1,298Bank
                and other loans, excluding balance due within one year
            
            
            1,242
            
            
            9,074
            
            
            10,018
            
            
            12,740
            
            
            11,935
            
            
            4,522Obligations
                under finance leases, excluding balance due within one
                year
            
            
            1,760
            
            
            12,858
            
            
            12,307
            
            
            12,459
            
            
            9,599
            
            
            5,543Total
                equity
            
            
            2,014
            
            
            14,712
            
            
            12,121
            
            
            11,936
            
            
            13,903
            
            
            13,569





Selected
      Operating Data




The
      following selected operating data of the Group for the five years ended December
      31, 2007 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 since January 1, 2001. See “Glossary of Airline Industry
      Terms” at the front of this Annual Report for definitions of certain terms used
      herein.




4





**Year ended December 31,****Capacity**
            
            **2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**ASK
                (million)
            
            
            109,733
            
            
            97,059
            
            
            88,361
            
            
            53,769
            
            
            40,867ATK
                (million)
            
            
            14,208
            
            
            12,656
            
            
            11,509
            
            
            7,446
            
            
            5,921Kilometers
                flown (thousand)
            
            
            675,127
            
            
            594,957
            
            
            539,844
            
            
            324,827
            
            
            249,068Hours
                flown (thousand)
            
            
            1,075
            
            
            931
            
            
            846
            
            
            501
            
            
            385Number
                of landing and take-offs
            
            
            543,789
            
            
            481,810
            
            
            438,674
            
            
            274,580
            
            
            214,190**Traffic**RPK
                (million)
            
            
            81,727
            
            
            69,582
            
            
            61,923
            
            
            37,196
            
            
            26,387RTK
                (million)
            
            
            9,250
            
            
            8,071
            
            
            7,284
            
            
            4,663
            
            
            3,561Passengers
                carried (thousand)
            
            
            56,903
            
            
            49,206
            
            
            44,119
            
            
            28,207
            
            
            20,470Cargo
                and mail carried (tons)
            
            
            872,000
            
            
            819,000
            
            
            775,000
            
            
            545,000
            
            
            464,000**Load
                Factors**Passenger
                load factor (RPK/ASK) (%)
            
            
            74.5
            
            
            71.7
            
            
            70.1
            
            
            69.2
            
            
            64.6Overall
                load factor (RTK/ATK) (%)
            
            
            65.1
            
            
            63.8
            
            
            63.3
            
            
            62.6
            
            
            60.1Breakeven
                load factor (%)
            
            
            64.8
            
            
            64.9
            
            
            67.0
            
            
            61.9
            
            
            61.6**Yield**Yield
                per RPK (RMB)
            
            
            0.61
            
            
            0.60
            
            
            0.55
            
            
            0.57
            
            
            0.57Yield
                per cargo and mail ton kilometers (RMB)
            
            
            1.87
            
            
            1.89
            
            
            1.75
            
            
            1.67
            
            
            1.62Yield
                per RTK (RMB)
            
            
            5.76
            
            
            5.59
            
            
            5.14
            
            
            5.01
            
            
            4.76**Fleet**—
                Boeing
            
            
            177
            
            
            159
            
            
            140
            
            
            137
            
            
            108—
                Airbus
            
            
            119
            
            
            103
            
            
            71
            
            
            46
            
            
            24—
                McDonnell Douglas
            
            
            25
            
            
            36
            
            
            36
            
            
            35
            
            
            ——
                Others
            
            
            11
            
            
            11
            
            
            14
            
            
            13
            
            
            —Total
                aircraft in service at period end
            
            
            332
            
            
            309
            
            
            261
            
            
            231
            
            
            132Overall
                utilization rate (hours per day)
            
            
            9.4
            
            
            9.5
            
            
            9.6
            
            
            9.9
            
            
            8.5**Financial**Operating
                cost per ATK (RMB)
            
            
            3.73
            
            
            3.63
            
            
            3.44
            
            
            3.10
            
            
            2.87





5


Exchange
      Rate Information




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




**Period**
            
            **Period End**
            
            **Average(1)**
              **(RMB per US$)**
            
            **High**
            
            **Low****Annual
                Exchange Rate**2003
            
            
            8.2767
            
            
            8.2772
            
            
            8.2800
            
            
            8.27692004
            
            
            8.2765
            
            
            8.2765
            
            
            8.2889
            
            
            8.26412005
            
            
            8.0694
            
            
            8.1825
            
            
            8.2767
            
            
            8.07022006
            
            
            7.8041
            
            
            7.9723
            
            
            8.0702
            
            
            7.80412007
            
            
            7.2946
            
            
            7.6058
            
            
            7.8127
            
            
            7.2946





(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**December
                2007
            
            
            7.4120
            
            
            7.2946January
                2008
            
            
            7.2946
            
            
            7.1818February
                2008
            
            
            7.1973
            
            
            7.1100March
                2008
            
            
            7.1110
            
            
            7.0105April
                2008
            
            
            7.0185
            
            
            6.9840May
                2008
            
            
            7.0000
            
            
            6.9377June
                2008 (up to June 19, 2008)
            
            
            6.9633
            
            
            6.8770





Dividend
      Payments




No
      interim dividends were paid during the year ended December 31, 2007. The Board
      of Directors of the Company (“Board of Directors”) did not recommended payment
      of a final dividend in respect of the year ended December 31, 2007.




**Capitalization
      and Indebtedness******




Not
      applicable.




**Reasons
      for the Offer and Use of Proceeds******




Not
      applicable.




6


**Risk
      Factors** ****




Risks
      Relating to the Company




*Government
      ownership and control of the Company*




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 all of the Domestic Shares or 50.3% of the equity of the Company.
      The interests of the Chinese Government in the Company and in other Chinese
      airlines may conflict with the interests of the holders of the ADRs, H Shares
      and A Shares. The public policy considerations of the Chinese Government in
      regulating the Chinese commercial aviation industry may also conflict with
      its
      indirect ownership interest in the Company.




*High
      operating leverage and foreign exchange exposure*




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 proportionately 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 for the U.S.
      dollar and the Japanese yen. The Company incurred a net exchange gain of
      RMB1,492 million and RMB2,832 million for 2006 and 2007, respectively, mainly
      as
      a result of Reminbi appreciation. A majority of this exchange gain was
      unrealized in nature.




*Liquidity*




As
      of
      December 31, 2007, the Group had net current liabilities position of RMB33,811
      million which was due to the use of short-term bank loans for the aircraft
      acquisitions and other capital expenditures. The Group’s short-term bank loans
      amounted to RMB24,948 million as at December 31, 2007. In 2008 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, the renewal of its short-term bank loans and on its ability to obtain
      adequate external financing to meet its committed future capital expenditures.
      The Group may not be able to meet its debt obligations as they fall due and
      committed future capital expenditures if certain assumptions about the
      operations and the availability of external financing on acceptable terms are
      inaccurate.




The
      Group
      has obtained firm commitments from its principal bankers to renew its short-term
      bank loans outstanding as of December 31, 2007 when they fall due during 2008.
      Subsequent to December 31, 2007 through March 31, 2008, the Group renewed
      short-term bank loans outstanding of RMB3,179 million. The directors of the
      Company believe that sufficient financing will be available to the Group,
      however there can be no assurance that such loan financing will be available
      on
      terms acceptable to the Group.





*Potential
      conflicts of interest*




CSAHC
      will continue to be the controlling shareholder of the Company. CSAHC and
      certain of its associates will continue to provide certain important services
      to
      the Company, including the import and export of aircraft spare parts and other
      flight equipment, advertising services, provision of air catering , pilot
      training services, air ticket selling services, cleaning services, property
      management services, leasing of properties and financial services. In addition,
      Mr. Liu Shao Yong, the Chairman of the Board of Directors, also serves as the
      General Manager of CSAHC. The interests of CSAHC may conflict with those of
      the
      Company. In addition, any disruption of the provision of services by CSAHC’s
      associates or a default by CSAHC of its obligations owed to the Company could
      affect the Company’s operations and financial conditions. In particular, as part
      of its cash management system, the Company periodically places significant
      amount of demand deposits with China Southern Airlines Group Finance Company
      Limited (“SA Finance”), a PRC authorized financial institution controlled by
      CSAHC and an associate of the Company. As a result, the Company’s deposits with
      SA Finance are subject to the risks associated with the business of SA Finance
      over which the Company does not exercise control. As of December 31, 2006 and
      2007, the Group had short-term deposits of RMB629 million and RMB906 million,
      respectively, with SA Finance.




7




Certain
      transactions between the Company and CSAHC or its associates (as defined in
      the
      Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong
      Limited (the “Hong Kong Listing Rules”)) will constitute connected transactions
      of the Company under the Hong Kong Listing Rules and, unless exemptions are
      applicable or waivers are granted, will be subject to disclosure requirements
      and/or independent shareholders’ approval in a general meeting.




*General
      Economic and Business conditions and natural phenomena*





The
      US
      subprime crisis meltdown is an ongoing economic problem manifesting itself
      through liquidity issues in the global banking system owing to foreclosures
      which accelerated in the United States in late 2006 and has an adverse impact
      on
      global economy in 2007 and 2008. The financial crisis and other global events
      may reduce consumer spending or cause shifts in spending. A general reduction
      or
      shift in discretionary spending could result in decreased demand for leisure
      and
      business travel and can also impact the Company’s ability to raise fares to
      counteract increased fuel and labor costs.





The
      US
      subprime crisis added
      to
      the global economic slowdown which may also affect the growth of the Chinese
      economy. Chinese macroeconomic controls such as financing adjustments, credit
      adjustments, price controls and exchange rate policies will also affect the
      Chinese economic condition. This domestic economic condition and the increase
      of
      jet fuel prices will also affect the development of the aviation
      industry.





In
      2008,
      a number of large-scale natural disasters occurred in China, such as the
      southern China snow storms in January and the May 12 earthquake in Sichuan
      province. Disasters such as these can affect the airline industry and the
      Company by reducing revenues and impacting travel behavior.





In
      summary, both international and domestic economic fluctuations and Chinese
      macroeconomic controls affect the demand for air travel. 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.





*Risks
      relating to certain real property*




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 land
      in
      Guangzhou on which the Company’s headquarters and other facilities are located
      and the buildings that the Company uses at its route bases in Wuhan and Haikou
      are leased by the Company from CSAHC. However, CSAHC lacks adequate
      documentation evidencing CSAHC’s rights to such land and buildings, and, as a
      consequence, the lease agreements between CSAHC and the Company for such land
      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.




The
      Company has been occupying all of the land and buildings described above without
      challenge or claim by third parties. CSAHC has received written assurance from
      the General Administration of Civil Aviation of China (“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. The
      Company 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 the Company and Guangzhou
      Aircraft Maintenance Engineering Company Limited (“GAMECO”), the Company’s
      jointly controlled entity, against any loss or damage caused by any challenge
      of, or interference with, the use by the Company and GAMECO of any of their
      respective land and buildings.




*Risks
      associated with Hong Kong and Macau routes*




The
      Company’s Hong Kong regional routes benefit from traffic originating in Taiwan.
      Apart from temporary lifts of the ban on direct flights between Taiwan and
      Mainland China during the Lunar Chinese New Year and the Mid-Autumn Festival,
      travelers between Taiwan and China have had to make use of intermediate stops
      in
      Hong Kong or elsewhere. In such event, Xiamen Airlines Company Limited (“Xiamen
      Airlines”), the Company’s subsidiary, might apply for route rights for direct
      flights between Taiwan and Mainland China, due partly to the proximity to Taiwan
      of Fujian province, where Xiamen Airlines is based. However, there can be no
      assurance that sufficient routes and flights between destinations in Taiwan
      and
      Mainland China could be obtained by Xiamen Airlines, if at all, or that adequate
      yields will be generated on these routes and flights.




8




*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. 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. The issue could
      also affect China. Notably, on March 7, 2008, on a China Southern Airlines
      flight boarding in Urumqi, crew members discovered a suspected terrorist.
      Thereafter, the CAAC implemented increased security measures. 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 airline industry.
      Among possible effects that the Company could experience from terrorist attacks
      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 significantly
      decreased traffic and revenue per revenue passenger mile.





*Risks
      associated with the requirements of Section 404 of the Sarbanes-Oxley Act of
      2002 to evaluate internal controls over financial reporting*





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. Our independent registered public accounting firm may
      not
      be satisfied with our internal controls, the level at which our controls are
      documented, designed, operated and reviewed, or our independent registered
      public accounting firm may interpret the requirements, rules and regulations
      differently from us, then it may conclude that our internal control over
      financial reporting are not effective. Although our management concluded
      that our internal control over financial reporting as of December 31, 2007
      was
      effective, we may discover other deficiencies in the course of our future
      evaluation of our internal control over our 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, in accordance with the Sarbanes-Oxley Act.
      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.





*Passive
      Foreign Investment Company*




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 2007. However, there can be no assurance that the Company will not be
      a
      PFIC for the taxable year 2008 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 or (2) 75% or more of its
      gross
      income for the taxable year is passive income (such as certain dividends,
      interest or royalties). For purposes of the first 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
      the
      Company were a PFIC, you would generally be subject to additional taxes and
      interest charges on certain “excess” distributions the Company makes and on any
      gain realized on the disposition or deemed disposition of your ADRs, 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.
      Distributions in respect of your ADRs during a taxable year would generally
      constitute “excess” distributions if, in the aggregate, they exceed 125% of the
      average amount of distributions in respect of your ADRs over the three preceding
      taxable years or, if shorter, the portion of your holding period before such
      taxable year. 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”.




9




Risks
      Relating to the Chinese Commercial Aviation Industry




*Government
      regulation*




The
      Company’s ability to implement its business strategy will continue to be
      affected by regulations and policies issued or implemented by the CAAC, which
      encompasses substantially all aspects of the Chinese commercial aviation
      industry, including the approval of domestic, Hong Kong regional and
      international route allocation, air fares, aircraft acquisition, jet fuel prices
      and standards for aircraft maintenance, airport operations and air traffic
      control. Such regulations and policies limit the flexibility of the Company
      to
      respond to market conditions, competition or changes in the Company’s cost
      structure. The implementation of specific CAAC policies could from time to
      time
      adversely affect the Company’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.




*Jet
      fuel supply and costs*




The
      availability and cost of jet fuel have a significant impact on the Group’s
      results of operations. The Group’s jet fuel costs for 2007 accounted for 62.98%
      of its flight operations expenses. All of the domestic jet fuel requirements
      of
      Chinese airlines (other than at the Shenzhen, Zhuhai and Sanya airports) must
      be
      purchased from the exclusive providers, China Aviation Oil Supplies Company
      (“CAOSC”) and Bluesky Oil Supplies Company, companies controlled and supervised
      by the CAAC. Chinese airlines may also purchase their jet fuel requirements
      at
      the Shenzhen, Zhuhai and Sanya 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 State Planning Commission 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.





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, the domestic price of jet fuel from CAOSC was below international
      jet
      fuel prices. However, given the rapid increase and constant fluctuation in
      world
      oil prices, there is no way to assure that domestic prices for jet fuel do
      not
      fluctuate as well.





In
      addition, jet fuel shortages have occurred in China and, on some rare occasions
      prior to 1993, required the Company to delay or even cancel flights. Although
      such shortages have not materially affected the Company’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 Company is forced to delay or
      cancel flights due to fuel shortage, its operational reputation among passengers
      as well as its operations may suffer.





A
      change
      in annual average price of US$1 per tonne of jet fuel affects the Group’s annual
      fuel costs by approximately RMB22 million, assuming no change in volume of
      fuel
      consumed. Accordingly, even if the jet fuel supply remains uninterrupted,
      increases in jet fuel prices will nevertheless adversely impact our financial
      results.




*Infrastructure
      limitations*




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 Company, 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 Company 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 Company.




10




*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 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 Company’s sales.




The
      Company faces varying degrees of competition on its Hong Kong and Macau 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 Company. In addition, the public’s perception of the safety and service
      records of Chinese airlines could adversely affect the Company’s ability to
      compete against its Hong Kong regional and international competitors. Many
      of
      the Company’s international competitors have larger sales networks and
      participate in reservation systems that are more comprehensive and convenient
      than those of the Company, or engage in promotional activities, that may enhance
      their ability to attract international passengers.




*Limitation
      on foreign ownership*




Chinese
      Government policies limit foreign ownership in Chinese airlines. Under these
      policies, the percentage ownership of the Company’s 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, 26.8% 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, the Company will have
      no meaningful access to the international equity capital markets.





Risks
      relating to the PRC





*Foreign
      exchange risks*




Under
      current Chinese foreign exchange regulations, 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 (“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 lease obligations and bank and other loans are denominated in foreign
      currencies, principally US dollars and Japanese Yen. Depreciation or
      appreciation of the Renminbi against foreign currencies affects the Group’s
      results significantly because the Group’s foreign currency 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. The Group entered into certain foreign exchange forward
      option contracts to manage this foreign currency risk.




11




The
      exchange rate of Renminbi to US dollar was set by the PBOC and had fluctuated
      within a narrow band prior to 21 July 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 US dollar exchange rate has
      gradually declined against the Renminbi.




*Developing
      legal system*




The
      Company is 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.





*PRC
      new tax law*





On
      16
      March 2007, the Fifth Plenary Session of the Tenth National People’s Congress
      passed the Corporate Income Tax Law of the PRC (“new tax law”) which has taken
      effect from January 1, 2008.





The
      Company and certain subsidiaries of the Group were entitled to preferential
      income tax rates in the range of 15% to 27%.  According to the new tax
      law, the income tax rate of companies who enjoyed preferential income tax
      rates lower
      than 25% in2007 is expected to increase to the standard rate of 25%
      within five-year transition period.  Pursuant to the new tax law, the
      income tax rates of entities that previously enjoyed preferential tax rates
      of
      15% and 18% shall be levied to 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010,
      2011 and 2012 respectively.





*Taxation
      of holders of H Shares or ADR by China*




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%.





For
      individuals, Chinese tax law generally provides that an individual who receives
      dividends from the Company is subject to a 20% income tax. Currently, dividend
      income received by any foreign individual that holds overseas shares in any
      Chinese domestic enterprise is temporarily exempt from income tax. In the event
      that the exemption is discontinued, such payments will be subject to individual
      income tax at the 20% rate unless the holder is entitled to a tax waiver or
      a
      lower tax rate under an applicable double-taxation treaty.





**ITEM
      4. INFORMATION ON THE COMPANY.** ****




**History
      and Development of the Company******




The
      Company is a joint stock company incorporated in China on March 25, 1995, and
      is
      50.3% owned by CSAHC. The registered address of the Company is Guangzhou
      Economic & Technology Development Zone, People’s Republic of China
      (telephone no: (86)20-8612-4462, website: www.csair.com).




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
      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.




Pursuant
      to an extraordinary general meeting of shareholders held on May 21, 2002, a
      resolution was passed authorizing the Company to issue not more than
      1,000,000,000 A Shares of par value of RMB1.00 each. The Company issued and
      listed its 1,000,000,000 A Shares with a par value of RMB1.00 each on the
      Shanghai Stock Exchange in July 2003.




12




Pursuant
      to a sale and purchase agreement dated November 12, 2004 between the Company,
      China Southern Airlines Holding Company, CNA and XJA which was approved by
      the
      Company’s shareholders in an extraordinary general meeting held on December 31,
      2004, the Company acquired the airline operations and certain related assets
      of
      China Northern Airlines Company (“CNA”) and Xinjiang Airlines Company (“XJA”)
      with effect from December 31, 2004 (the “CNA/XJA Acquisitions”). The
      consideration payable for the CNA/XJA Acquisitions amounting to RMB15,522
      million was determined based on the fair value of the acquired assets. Such
      consideration was partly satisfied by assumption of debts and liabilities of
      CNA
      and XJA totaling RMB13,563 million outstanding as of December 31, 2004 and
      the
      remaining balance of RMB1,959 million was fully paid in cash during
      2005.





On
      April
      30, 2006, the Company acquired certain assets of CSAHC Hainan Co., Limited
      (“CSAHC Hainan”), a wholly-owned subsidiary of CSAHC, at a total consideration
      of RMB294 million, which was partly satisfied by assumption of debts and
      liabilities of CSAHC Hainan totaling RMB289 million outstanding as of that
      date.
      The remaining balance of RMB5 million was settled in cash during 2006.





On
      June
      16, 2007, the Company together with an independent third party established
      Chongqing Airlines Company Limited (“Chongqing Airlines”), a non-wholly owned
      subsidiary of the Company. The Company transferred three aircraft to Chongqing
      Airlines as capital contribution.





On
      August
      14, 2007, the Company 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.





On
      August
      14, 2007, the Company signed an agreement to dispose of its 90% equity interest
      in Guangzhou Aviation Hotel Company Limited to CSAHC at a consideration of
      RMB75
      million.





**Aircraft
      Acquisitions** ****





Pursuant
      to the Aircraft Acquisition Agreement dated July 16, 2007 between the Company
      and Airbus SNC, the Company will acquire **** 20
      Airbus
      A320 series aircraft from Airbus SNC. The catalogue price for each of the Airbus
      A320 series aircraft is in the range from US$66.5 to US$85.9 million. Such
      catalogue price includes the price for airframe and engines. The aggregate
      consideration for the acquisition of the A320 aircraft will be partly payable
      by
      cash of the Company, and partly by financing arrangements with banking
      institutions. The A320 aircraft will be delivered in stages to the Company
      during the period commencing from March 2009 to August 2010.





Pursuant
      to the Xiamen Aircraft Acquisition Agreement dated July 16, 2007 between Xiamen
      Airlines and Boeing, Xiamen Airlines will acquire **** 25
      Boeing
      B737 aircraft from Boeing. The catalogue price for each of the Boeing B737
      aircraft is in the range from US$70.5 to US$79 million. Such catalogue price
      includes the price for airframe and engines. The aggregate consideration for
      the
      acquisition of the B737 aircraft will be partly payable by cash of Xiamen
      Airlines, and partly by financing arrangements with banking institutions. The
      B737 aircraft will be delivered in stages to Xiamen Airlines during the period
      commencing from July 2011 to November 2013.





Pursuant
      to t he
      Aircraft Acquisition Agreement dated August 20, 2007 between the Company and
      Boeing, the Company will acquire 55 Boeing B737 series aircraft from Boeing,
      the
      catalogue price of a Boeing B737 series aircraft is in the range of US$57 to
      US$79 million. Such catalogue price includes price for airframe and engines.
      The
      aggregate consideration for the acquisition of the Boeing aircraft will be
      partly payable by cash of the Company, and partly by financing arrangements
      with
      banking institutions. The Boeing aircraft will be delivered in stages to the
      Company during the period commencing from May 2011 to October 2013.





Pursuant
      to the
      Aircraft Acquisition Agreement dated October 23, 2007 between the Company and
      Airbus SNC, the Company will acquire 10
      Airbus
      A330-200 aircraft from Airbus
      SNC, the
      catalogue price of an Airbus A330-200 aircraft is in the range of US$167.7-176.7
      million. Such catalogue price includes price for airframe and engines. The
      aggregate consideration for the acquisition will be partly payable by cash
      of
      the Company, and partly by financing arrangements with banking institutions.
      The
      Airbus aircraft will be delivered in stages to the Company during the period
      commencing from March 2010 to August 2012.




13




Pursuant
      to the Xiamen Aircraft Acquisition Agreement dated April 18, 2008 between Xiamen
      Airlines and Boeing, Xiamen Airlines will acquire 20 Boeing B737 series aircraft
      from Boeing. According the information provided by Boeing, the aggregate
      catalogue price for the 20 Boeing B737 series aircraft is around US$1,500
      million. Such catalogue price includes price for airframe and engines. The
      aggregate consideration for the acquisition of the Boeing aircraft will be
      partly payable by cash of 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 April 2014 to October
      2015.




**Capital
      Expenditure**




The
      Group
      had RMB9,832 million, RMB9,446 million and RMB13,713 million capital
      expenditures in 2007, 2006 and 2005, respectively. Of such capital expenditures
      in 2007, RMB4,330 million was financed by finance leases, RMB4,973 million
      was
      financed by bank borrowings while the remaining RMB529 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.




**Business
      Overview** ****




General




The
      Group
      provides commercial airline services throughout China, Hong Kong and Macau
      regions, Southeast Asia and other parts of the world. Based on the
      statistics from the CAAC, the Group is one of the three largest Chinese
      airlines and, as of year end 2007, ranked first in terms of passengers carried,
      number of scheduled flights per week, number of hours flown and size of route
      network and aircraft fleet. During the three years ended December 31, 2007,
      the
      Group’s RPKs increased at a compound annual rate of 17.5%, from 61,923 million
      in 2005 to 69,582 million in 2006, and to 81,727 million in 2007, while its
      capacity, measured in terms of ASKs, increased at a compound annual rate of
      13.1%, from 88,361 million in 2005 to 97,059 million in 2006, and to 109,733
      million in 2007. In 2007, the Group carried 56.9 million passengers and had
      passenger revenue of RMB49,600 million (US$6,790 million).




The
      Group
      conducts a portion of its airline operations through its airline subsidiaries
      namely Xiamen Airlines, Southern Airlines (Group) Shantou Airlines Company
      Limited (“Shantou Airlines”), Zhuhai Airlines Company Limited (“Zhuhai
      Airlines”), Guizhou Airlines Company Limited (“Guizhou Airlines”) and Chongqing
      Airlines (collectively, the “Airline Subsidiaries”). In 2007, the Airline
      Subsidiaries carried 13.70 million passengers and had passenger revenue of
      RMB14,083 million (US$1,928 million) and accounted for 24.1% and 28.4% 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 5% to RMB3,697 million (US$506 million) in 2007 as compared
      with 2006. 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 2007, the Group operated 689 routes, of which 560 were domestic,
      105
      were international and 24 were to/from Hong Kong and Macau. The Group operates
      the most extensive domestic route network among all Chinese airlines. Its route
      network covers commercial centers and rapidly developing economic regions in
      Mainland China.




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





In
      December 2005, the Company established a branch company in Beijing and has
      added
      wide-body airplanes to its 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 regional aviation market expected to be brought about by the 2008 Beijing
      Olympic Games.




14




The
      Group’s operations primarily focus on the domestic market. In addition, the
      Group also operates Hong Kong and Macau and international flights. As of the
      year end of 2007, the Group had 24 Hong Kong and Macau routes and 105
      international routes. The Group’s Hong Kong and Macau operations include flights
      between destinations in China and Hong Kong and Macau. The Group’s international
      operations include scheduled services to the cities in Australia, Belgium,
      France, India, Iran, Japan, Kazakhstan, Korea, Kyrgyzstan, Nepal, Netherlands,
      Nigeria, Pakistan, Russia, Saudi Arabia, Tajikstan, UAE, USA and 13 Southeast
      Asian destinations.





After
      joining Skyteam Alliance, the Group has established a network reaching 841
      destinations globally, connecting 162 countries of regions and covering major
      cities around the world.




As
      of
      December 31, 2007, the Group operated a fleet of 332 aircraft, consisting
      primarily of Boeing 737 series, 747, 757, 777, Airbus 320 series, 300, 330,
      McDonnell Douglas 82, 90. The average age of the Group’s fleet was 6.37 years as
      of the year end of 2007.





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 six
      regional bureaus of the CAAC. CSAHC was one of the 55 large-scale enterprises
      designated by the Chinese Government to play a leading role in their respective
      industries.




CSAHC
      was
      restructured in 1994 and 1995 in anticipation of the initial public offering
      of
      the Company. The restructuring was effected through the establishment of the
      Company and the execution of the Demerger Agreement, dated as of March 25,
      1995,
      as amended (the “Demerger Agreement”), between CSAHC and the Company. Upon the
      restructuring, the Company assumed substantially all of the airline and
      airline-related businesses, assets and liabilities of CSAHC, and CSAHC retained
      its non-airline-related businesses, assets and liabilities. Upon this
      separation, 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 Demerger
      Agreement. Under the Demerger 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 the associates of CSAHC existing on the date of the Demerger
      Agreement and may continue to operate the businesses of such associates.




In
      July
      1997, the Company 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 American Depositary Receipts
      (“ADRs”, each ADR representing 50 H Shares) on the New York Stock Exchange.
      Prior to the private placement and the initial public offering, all of the
      issued and outstanding shares of capital stock of the Company, consisting of
      2,200,000,000 Domestic Shares, par value RMB1.00 per share, were owned by CSAHC,
      which owns and exercises, on behalf of the Chinese Government and under the
      supervision of the CAAC, the rights of ownership of the Domestic Shares held
      by
      CSAHC. After giving effect to the private placement and the initial public
      offering, CSAHC’s continued ownership of the 2,200,000,000 Domestic Shares,
      represented approximately 65.2% of the total share capital of the Company,
      and
      will be entitled to elect all the directors of the Company and to control the
      management and policies of the Group. Domestic Shares and H Shares are both
      ordinary shares of the Company.




Pursuant
      to an extraordinary general meeting of shareholders held on May 21, 2002, a
      resolution was passed authorizing the Company to issue not more than
      1,000,000,000 A Shares of par value of RMB1.00 each. The Company issued
      1,000,000,000 A Shares with a par value of RMB1.00 each in July 2003 and listed
      these shares on the Shanghai Stock Exchange. Subsequent to the A Share issue,
      the shareholding of CSAHC on the Company was reduced from 65.2% to 50.3%.




15




Share
      Reform Plan




Pursuant
      to the regulations including the "Guidelines of the State Council for Promoting
      the Reform and Opening-up and Sustained Development of the Capital Market"
      promulgated by the State Council of the PRC and the "Guiding Opinions on the
      State Share Reform of the Listed Companies" jointly promulgated by the China
      Securities Regulatory Commission (“CSRC”), the State-owned Assets Supervision
      and Administration Commission of the State Council, the Ministry of Finance,
      People's Bank of China and the Ministry of Commerce, and pursuant to the
      operating procedures of share reform proposals, the Company announced the Share
      Reform Plan (“Plan”) on April 13, 2007 which was subsequently amended on April
      23, 2007. Under the Plan, all the 2,200,000,000 non-tradable domestic shares
      held by CSAHC will be converted into tradable A shares 36 months after the
      commencement date of the Plan. In return, CSAHC will grant 1,400,000,000 put
      options to those holders of tradable A shares who are listed in the
      Shareholders’ register on the record date which is May 8, 2007, which will be
      equivalent to 1.5970 shares for every 10 A shares held by the holders of
      tradable A shares. The rights under the put options as referred above will
      be
      automatically exercised in a European way on the expiring date in that the
      exercise ratio will be 2 to 1 (i.e., the value of the exercise ratio is 0.5),
      the effective period will be 12 months period, the initial exercise price will
      be RMB7.43, and the put options will be paid in cash. The share reform plan
      was
      approved in the relevant shareholder’s meeting held on May 17, 2007. Details and
      schedule for the implementation of the share reform plan was approved in
      relevant shareholder's meeting held on June 12, 2007.




Proposed
      Bonus Shares Issue by Conversion of Capital Reserve





The
      share
      premium of the Company amounted to RMB5,325 million. On
      April
      18, 2008, the Board proposed to the shareholders of the Company for their
      consideration and approval a bonus share issue (the “Bonus Share Issue”) by the
      conversion of share premium to share capital. Pursuant to the Bonus Share Issue,
      which is based on 4,374,178,000 shares in issue as at December 31, 2007, the
      number of paid up shares will be increased by 2,187,089,000 shares to
      6,561,267,000 shares. The Bonus Share Issue is conditional upon (i) the passing
      of the special resolution to approve the Bonus Share Issue at the Annual General
      Meeting, the class meeting of holders of H shares and A shares of the Company;
      (ii) approval from the Ministry of Commerce of the PRC being obtained; and
      (iii)
      in respect of the new H Shares, the Listing Committee of the Stock Exchange
      granting or agreeing to grant the listing of, and permission to deal in, the
      new
      H Shares.





Proposed
      Issuance of Short-term Financing Bills and Medium Term Notes





On
      April
      18, 2008, the Company's 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 in accordance with the relevant procedural requirements under
      applicable PRC laws and regulations and the Articles of Association, and
      pursuant to Article 76(10) of the Articles of Association. The Board believes
      that the proposed issue of short-term financing bills will provide the Company
      with a further source of funding at an interest rate which is expected to be
      lower than the interest rate for loans from commercial banks. The Board
      considers that the issue of the short-term financing bills will lower the
      financing cost of borrowings for the Company and is in the interests of the
      Company and its shareholders as a whole. Subject to the shareholders’ approval,
      the Company will, if required or as otherwise considered appropriate, make
      further announcement when the issue of short-term financing bills takes
      place.





On
      May
      28, 2008, the Board proposed the 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. The Board believes
      that the proposed issue of medium term notes will provide the Company with
      a
      further source of medium to long term funding at an interest rate lower than
      the
      best lending rate for loans from commercial bank. The Board considers that
      the
      issue of the medium term notes will lower the finance costs of borrowings for
      the Company and improve the debt structure of the Company.





Traffic





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




16




**Passenger carried**
            
            **Cargo and Mail**
              **Carried (tons)**
            
            **Total traffic**
              **(tons kilometers)****Year**
            
            **Total**
              **(in million)**
            
            **Increase**
              **(decrease)**
              **over**
              **previous**
              **year (%)**
            
            **Total**
              **(in**
              **thousand)**
            
            **Increase**
              **(decrease)**
              **over**
              **previous**
              **year (%)**
            
            **Total**
              **(in million)**
            
            **Increase**
              **(decrease)**
              **over**
              **previous**
              **year (%)**2003
            
            
            20.47
            
            
            (4.7
            )
            
            464.0
            
            
            (1.3
            )
            
            3,561.0
            
            
            (1.5
            )2004
            
            
            28.21
            
            
            37.8
            
            
            545.0
            
            
            17.5
            
            
            4,663.0
            
            
            30.92005
            
            
            44.12
            
            
            56.4
            
            
            775.0
            
            
            42.2
            
            
            7,284.0
            
            
            56.22006
            
            
            49.21
            
            
            11.6
            
            
            819.0
            
            
            5.7
            
            
            8,071.0
            
            
            10.82007
            
            
            56.90
            
            
            15.6
            
            
            872.0
            
            
            6.5
            
            
            9,250.0
            
            
            14.6





China
      Southern Airlines carried 49.21 million passengers in 2006. It was the ninth
      largest airline in the world in terms of annual passenger traffic in 2006.
      This
      ranking was officially announced by the International Air Transport
      Association.





China
      Southern Airlines Co., Ltd. ranks fourth in the global aviation industry and
      first in Asia, transporting 56.90 million passengers throughout the year 2007,
      according to the latest ranking released by the International Air Transport
      Association.





Route
      Network




Overview




The
      Group
      operates the most extensive route network among the Chinese airlines. As of
      December 31, 2007, the Group operated 689 routes consisting of 560 domestic
      routes, 24 Hong Kong and Macau routes and 105 international routes.




The
      Group
      continually evaluates its network of domestic, Hong Kong and Macau 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, Hong Kong and Macau and international routes is subject to approval of
      the CAAC, and the acquisition of Hong Kong and Macau 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 and the government of the proposed foreign destination.




In
      order
      to expand the Group’s international route network, the Group has entered into
      code-sharing agreements with several international airlines, including Delta
      Airlines, Asiana Airlines, Japan Air System, Vietnam Airlines, KLM Royal Dutch
      Airlines and Garuda Indonesian. 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
      841 destinations globally, connecting 162 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, Sanya and Beihai. Most
      of
      its regional route bases are located in provincial capitals or major commercial
      centers in the PRC.




17




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 2007, the Group’s most profitable domestic
      routes were between: Guangzhou
      and Beijing, Beijing and Guangzhou, Shenzhen and Beijing, Beijing and Shenzhen,
      Guangzhou and Shanghai, Urumqi and Beijing, Shenzhen and Shanghai, Shanghai
      and
      Guangzhou, Beijing and Urumqi, and Sanya and Beijing.




Hong
      Kong
      and Macau Routes





The
      Group
      offers scheduled service between Hong Kong and Guangzhou, Luoyang, Shenyang,
      Harbin, Wu Yi Shan, Zhang Jia Jie, Changchun, Yinchuan, Urumqi, Xiamen, Shantou,
      Beijing, Guilin, Meixian, Haikou, Wuhan, Zhengzhou, Nanning, Changsha and Sanya;
      and between Macau and Fuzhou, Hangzhou and Xiamen. In 2007, the most profitable
      scheduled Hong Kong and Macau routes were between: Hong Kong and Guangzhou,
      Guangzhou and Hong Kong, Hong Kong and Beijing, Beijing and Hong Kong, Hong
      Kong
      and Wuhan, Wuhan and Hong Kong, Guilin and Hong Kong, Hong Kong and Shantou,
      Shantou and Hong Kong, Hong Kong and Zhengzhou.





In
      2007,
      the Group conducted a total of 15,035 flights on its Hong Kong and Macau routes,
      accounting for approximately 24.7% of all passengers carried by Chinese airlines
      on routes between Hong Kong or Macau and destinations in China.





International
      Routes




The
      Group
      is the principal Chinese airline connecting the rapidly developing Pearl River
      Delta region of China to Southeast Asia, with 28 routes serving 13 Southeast
      Asian destinations, including Singapore and major cities in Indonesia, Thailand,
      Malaysia, the Philippines, Vietnam, Myanmar and Cambodia. In 2007, the Group’s
      most profitable international routes were: Guangzhou-Beijing-Amsterdam,
      Amsterdam-Beijing-Guangzhou, Guangzhou-Los Angeles, Shenyang-Seoul,
      Bejijing-Guangzhou-Pyongyang, Seoul-Shenyang, Beijing-Guangzhou-Hanoi,
      Guangzhou-Sydney, Guangzhou-Tokyo, and Guangzhou-Osaka.




In
      addition to the 28 routes serving 13 Southeast Asian destinations, the Group
      operates 77 other international routes providing scheduled services to the
      cities in Australia, Belgium, France, India, Iran, Japan, Kazakhstan, Korea,
      Kyrgyzstan, Nepal, Netherlands, Nigeria, Pakistan, Russia, Saudi Arabia,
      Tajikistan, UAE and USA.





After
      joining Skyteam Alliance, the Group has established a network reaching 841
      destinations globally, connecting 162 countries of regions and covering major
      cities around the world.





Aircraft
      Fleet




The
      Group’s fleet plan in recent years has emphasized expansion and modernization
      through the acquisition of new aircraft, the acquisition of existing aircraft
      in
      conjunction with our acquisition of CNA and XJA, and the retirement of less
      efficient, older aircraft. As of December 31, 2007, the Group operated a fleet
      of 332 aircraft with an average age of 6.37 years. Most aircraft of the Group
      are Boeing and Airbus aircraft. The Group has the largest fleet among Chinese
      airline companies. Most of the aircraft operated by the Group are leased
      pursuant to various types of leasing arrangements.





18




The
      following table sets forth certain information regarding the Group’s fleet of
      332 aircraft as of December 31, 2007.




**Model**
            
            **Number of**
              **Aircraft**
            
            **Average age**
              **(years)**
            
            **Average**
              **Passenger**
              **Capacity**Boeing
                777-200
            
            
            4
            
            
            11.53
            
            
            380Boeing
                777-21B
            
            
            6
            
            
            9.20
            
            
            292Boeing
                757-200
            
            
            31
            
            
            8.81
            
            
            200Boeing
                747F
            
            
            2
            
            
            5.42
            
            
            n/aBoeing
                737-800
            
            
            58
            
            
            1.89
            
            
            167Boeing
                737-700
            
            
            43
            
            
            3.58
            
            
            138Boeing
                737-500
            
            
            8
            
            
            13.57
            
            
            130Boeing
                737-300
            
            
            25
            
            
            13.14
            
            
            145Airbus
                300-600
            
            
            6
            
            
            12.96
            
            
            272Airbus
                319-100
            
            
            33
            
            
            2.24
            
            
            128Airbus
                320-200
            
            
            49
            
            
            5.09
            
            
            158Airbus
                321-200
            
            
            23
            
            
            2.54
            
            
            182Airbus
                330-200
            
            
            6
            
            
            2.04
            
            
            264Airbus
                330-300
            
            
            2
            
            
            0.04
            
            
            292McDonnell
                Douglas 82
            
            
            12
            
            
            15.04
            
            
            144McDonnell
                Douglas 90
            
            
            13
            
            
            9.85
            
            
            157Embraer
                145 Jet
            
            
            6
            
            
            3.23
            
            
            50ATR-72
            
            
            5
            
            
            9.95
            
            
            72Total
            
            
            332





During
      2007, the Group continued to expand and modernize its aircraft fleet. The
      Group’s major aircraft transactions included:





In
      2007,
      the Group exercised purchase options of one Boeing 777-200, three Boeing
      737-300, three McDonnell Douglas 90, eight Airbus 320-200 and two Airbus 300-600
      upon expiry of the respective lease terms.





Six
      Airbus 319-100, three Airbus 321-200 and four Boeing 737-800 aircraft were
      acquired under operating lease, and three Boeing 757-200 and four Boeing 737-400
      aircraft under operating lease were returned during 2007. In addition, five
      Boeing 737-700 and fourteen Boeing 737-800 aircraft acquired in 2007 were
      financed by a combination of internal funds, long-term bank loans and finance
      lease agreements.




In
      July
      2007, the Group entered into a purchase agreement with Airbus to acquire five
      Airbus 319, ten Airbus 320 and five Airbus 321 aircraft, scheduled for
      deliveries in 2009 to 2010.





In
      July
      2007, the Group entered into a purchase agreement with Boeing to acquire 25
      Boeing 737-800 aircraft, scheduled for deliveries in 2011 to 2013.





In
      August
      2007, the Group entered into a purchase agreement with Boeing to acquire 55
      Boeing 737 series, scheduled for deliveries in 2011 to 2013.




In
      October 2007, the Group entered into a purchase agreement with Airbus to acquire
      ten Airbus 330-200 aircraft, scheduled for deliveries in 2010 to
      2012.





In
      2007,
      the Group disposed of 11 McDonnell Douglas 82 aircraft.




19


Aircraft
      Financing Arrangements




*Overview*




A
      significant portion of the Group’s aircraft is acquired under long-term finance
      or operating leases or long-term mortgage loans with remaining terms to maturity
      ranging from one to fifteen years. As of December 31, 2007, 69 of the Group’s
      332 aircraft were operated under finance leases, 130 were operated under
      operating leases, 41 were financed by long-term mortgage loans, while the
      remaining were acquired either with cash proceeds or acquired by exercising
      the
      purchase options upon expiry of the respective finance leases. The Group’s
      planned acquisition of aircraft in the foreseeable future will generally be
      made
      pursuant to operating leases or finance 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, 2007, 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
                777-200 and 777-21B
            
            
            4
            
            
            4
            
            
            2.96Boeing
                757-200
            
            
            0
            
            
            11
            
            
            2.53Boeing
                737-700
            
            
            9
            
            
            15
            
            
            6.46Boeing
                737-800
            
            
            10
            
            
            28
            
            
            7.61Boeing
                737-500
            
            
            0
            
            
            8
            
            
            0.81Boeing
                737-300
            
            
            0
            
            
            4
            
            
            5.20Airbus
                300-600
            
            
            1
            
            
            0
            
            
            0.07Airbus
                319-100
            
            
            6
            
            
            27
            
            
            7.83Airbus
                320-200
            
            
            25
            
            
            16
            
            
            6.24Airbus
                321-100
            
            
            6
            
            
            13
            
            
            9.55Airbus
                330-200 and 330-300
            
            
            4
            
            
            4
            
            
            9.97McDonnell
                Douglas 90
            
            
            4
            
            
            0
            
            
            0.46Total
            
            
            69
            
            
            130





*Finance
      leases*




As
      of
      December 31, 2007, the Group’s aggregate future minimum lease payments
      (including future finance charges) required under its finance leases were RMB
      19,499 million (US$ 2,669 million). As of the year end of 2007, a majority
      of
      the Group’s finance leases had original terms ranging from ten to fifteen years
      from the date of delivery of the relevant aircraft, and the remaining terms
      of
      these leases ranged from one to fifteen years. The Group’s finance 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 finance
      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 finance leases, the
      Group’s obligations are secured by the related aircraft, as well as other
      collateral.




*Operating
      Leases*




As
      of
      December 31, 2007, the Group’s aggregate future minimum lease payments required
      under its operating leases were RMB28,179 million (US$3,858 million). As of
      the
      year end of 2007, 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 generally ranged from one
      to
      thirteen 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.


20




Pursuant
      to finance 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 pay 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 10% to 20% of the lease payments, or in certain
      cases, the interest components of such payments. Pursuant to an approval
      document from the State Taxation Bureau, lease arrangements executed prior
      to
      September 1, 1999 are exempt from PRC withholding tax. The PRC withholding
      tax
      payable in respect of the operating leases executed after September 1, 1999
      of
      RMB143 million, RMB60 million and RMB55 million during 2007, 2006 and 2005
      respectively, have been included as part of the operating lease charges.




Aircraft
      Flight Equipment




The
      jet
      engines used in the Group’s aircraft fleet are manufactured by General Electric
      Corporation, Rolls-Royce plc, United Technologies International, Inc., CFM
      International, Inc. and International Aviation Engines Corporation. The Group
      had 71 and 69 spare jet engines for its fleet as of the year end of 2007 and
      2006, 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, a jointly controlled entity established 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 FAA.
      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 capabilities
      include overhaul of more than 64% 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 eight other Chinese airlines
      and 18 international airlines. GAMECO provides heavy maintenance services to
      four other Chinese airlines and nine 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 (the
“Fee
      Agreement”). Pursuant to the Fee Agreement and subsequent agreements, GAMECO
      charged the Company for expendables at cost plus 16%, and labour costs at US$30
      per hour during 2007. The amounts incurred by the Group for such repair and
      maintenance services were RMB661 million, RMB686 million, and RMB535 million
      for
      the years ended December 31, 2007, 2006 and 2005, respectively.





Overhauls
      of jet engines are performed by MTU Maintenance Zhuhai Co., Ltd., (“MTU
      Zhuhai”), a jointly controlled entity of the Company and MTU Aero Engines Gmbh,
      and also by overseas qualified service providers in Germany, Malaysia, Canada
      and England. Repair fees amounting to RMB386 million, RMB497 million and RMB583
      million were paid to MTU Zhuhai for the years ended December 31, 2007, 2006
      and
      2005, respectively.


21





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, 2007. 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 “flight incident”
ratio was 0.065, 0.064 and 0.13 in 2007, 2006 and 2005, respectively. In
      comparison, CAAC’s published maximum acceptable flight incident ratio was 0.7 in
      2007, 0.7 in 2006 and 0.29 in 2005. This ratio is defined as the occurrence
      of
      one incident for every 10,000 hours of flight time.




Jet
      Fuel




Jet
      fuel
      costs typically represent a major component of an airline’s operating expenses.
      The Group’s jet fuel costs accounted for 34.6%, 35.2% and 30.1% of the Group’s
      operating expenses for the years ended December 31, 2007, 2006 and 2005,
      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 and
      Sanya airports which are supplied by Sino-foreign joint ventures 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 National
      Development and Reform Commission (“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, the domestic price
      of
      jet fuel from CAOSC was below international jet fuel prices due to the increase
      of international jet fuel prices.




The
      average price paid by the Group in 2007 was RMB5,962 per ton, which represents
      a
      2.1% increase from that of 2006.




According
      to the NDRC and the CAAC on Issues Relating to Introduction of the Fuel
      Surcharge for Domestic Routes, domestic airlines imposed fuel surcharges for
      all
      the domestic routes (excluding those from the mainland PRC to Hong Kong and
      Macau) with effect from August 1, 2005 (based on flight time). On February
      16,
      2006, the NDRC and CAAC released a supplementary document on Issues Relating
      to
      the Introduction of Fuel Surcharge for Domestic Routes, stating that due to
      the
      rising jet fuel price, the period of imposition of fuel surcharge by airlines
      was extended. The NDRC and CAAC released separate supplementary documents on
      Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes on
      March 28, 2006 and September 1, 2006, respectively, thereby adjusting the amount
      of fuel surcharges in a range of RMB20 to RMB60 per passenger for distance,
      flown less than 800 kilometers, and in a range of RMB40 to RMB100 for distance,
      exceeding 800 kilometers, during the period temporarily from April 10, 2006
      to
      October 10, 2006. On January 21, 2007, the NDRC and CAAC released additional
      supplementary documents on Issues Relating to the Introduction of Fuel Surcharge
      for Domestic Routes, thereby adjusting the amount of fuel surcharges from RMB60
      to RMB50 per passenger for distance, flown less than 800 kilometers, and from
      RMB100 to RMB80 for distance exceeding 800 kilometers. On November 5, 2007,
      the
      NDRC and CAAC released additional supplementary documents on Issues Relating
      to
      the Introduction of Fuel Surcharge for Domestic Routes, thereby adjusting the
      amount of fuel surcharges from RMB50 to RMB60 per passenger for distance, flown
      less than 800 kilometers, and from RMB80 to RMB100 for distance exceeding 800
      kilometers. The introduction of fuel surcharge and the extension of the duration
      of the same will help relieve, to a certain extent, the burden of high jet
      fuel
      cost, on the Group.


22





In
      addition to purchases of jet fuel from CAOSC, the Group is also permitted by
      the
      Chinese Government to purchase a portion of its jet fuel requirements for its
      international flights from foreign fuel suppliers located outside China at
      prevailing international market prices. Jet fuel purchased from such sources
      outside China accounted for approximately 12% of the Group’s total jet fuel
      consumption in both 2007 and 2006.





Flight
      Operations




Flight
      operations for the Group’s flights originating in Guangzhou are managed by the
      Company’s 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. The Company’s 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 Aeronautics and Aviation University (the
“BAAU”) has significantly improved the quality of the training received by the
      Group’s pilots and has helped maintain the quality of the Group’s staff of
      pilots at a level consistent with the expansion of operations called for by
      the
      Group’s business strategy.




In
      the
      Group’s pilot training program, trainees have two years of theoretical training
      at the BAAU. After successful completion of academic and physical examinations,
      the trainees receive flight training for a period of approximately 20 months
      at
      China Southern West Australian Flying College Pty Ltd. (the “Australian Pilot
      College”), a company that is 65% owned by the Company and 35% owned by CSAHC.
      Each trainee at the Australian Pilot College is required to fly at least 230
      hours before being awarded a flight certificate. Graduates of the BAAU and
      the
      Australian Pilot 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 five years. The Group has
      about 1,900 trainees as at the end of April 2008, more than 400 and
      500 are expected to graduate in 2008 and
      2009, respectively.





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 all 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
      recertification examination. 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
      used to fund 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. Accordingly, the Group planed to recruit 150 pilots under the
      self-sponsored training arrangement.


23





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 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 other airlines that operate in Guangzhou Baiyun
      Airport.




Ground
      services at the airports in Shenzhen, Changsha, Wuhan, Zhengzhou, Haikou,
      Zhuhai, Xiamen, Fuzhou, Guilin, Shantou, Guiyang and Beihai are primarily
      operated directly by the Group. Ground services at the airport in Beijing are
      primarily provided by Beijing Southern Airlines Ground Services Company Limited,
      a jointly controlled entity between the Company and Beijing Aviation Ground
      Services Co. Ltd., since April 2004. Ground services at other airports in China
      are provided to the Group by local airport authorities or local airlines
      pursuant to various service agreements. Ground services and other services
      at
      airports outside China are provided to the Group by foreign services providers
      pursuant to various service agreements with such parties. All such agreements
      of
      the Group are short-term and otherwise on terms that are customary in the
      industry.





Air
      Catering





The
      Company owns a 75% equity interest in Guangzhou Nanland Air Catering Company
      Limited (“Nanland”) as of December 31, 2007. 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 January 2008, the Company disposed of a 20% equity interest in
      Nanland to CIE EXPLOITATION DES SERVICES AUXILIAIRES AERIENS SERVAIR with a
      consideration of EUR5.8 million.





To
      facilitate the Company to optimize its assets structure, better tightening
      its
      cost control, reduce the number of connected transactions and enhance the
      independence of the Company’s operations in the long-run, the Company acquired
      100% interest in Southern Airlines Group Air Catering Company Limited (“SAG Air
      Catering”) at August 31, 2007. SAG Air Catering mainly provides in-flight meals
      to airlines for different flights of the Company originating or stopping at
      the
      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 747-400 freighters mainly servicing four international cargo routes,
      Shenzhen to Shanghai to Anchorage to Chicago, Shenzhen to Anchorage to Chicago,
      Shanghai to Anchorage to Chicago and Shenzhen to Shanghai to Amsterdam.




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


24





Sales,
      Reservations and Marketing




*Passenger
      Ticket Sales and Reservations*




The
      Group’s ticket sales and reservations are conducted by or through independent
      sales agents and the Group’s own network of exclusive sales offices as well as
      the CAAC’s sales offices and CSAHC’s associates. The Group has sales offices in
      Guangzhou and its other route bases. In addition, the Group maintains regional
      sales offices in other cities in China, including Beijing and Shanghai. The
      Group maintains international sales offices in Almaty, Amsterdam, Baku, Bangkok,
      Bishkek, Daejeon, Delhi, Dubai, Dushanbe, Fukuoka, Hanoi, Hiroshima, Ho Chi
      Minh
      City, Islamabad, Irkutsk, Jakarta, Jeddah, Khabarovsk, Kathmandu, Kita Kyushu,
      Kuala Lumpur, Lagos, Los Angeles, Manila, Melbourne, Moscow, Nagoya, Nigata,
      Novosibirsk, Osaka, Paris, Penang, Phnom Penh, Phuket, Pusan, Sapporo, Sendai,
      Seoul, Sharjah, Siemreap, Singapore, Sydney, Taegu, Tashkent, Teheran, Tokyo,
      Toyama and Vientiane, Vladivostok 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 2007, approximately 10.5 % of all ticket sales for the
      Group’s scheduled flights were made by the Group’s network of sales offices and
      CSAHC’s associates. The Group also sells tickets and accepts reservations
      through an extensive network of non-exclusive independent sales agents. Under
      the agency agreements with these sales agents, the Group pays commissions based
      on the value of tickets sold. The Group pays independent sales agents a
      commission of 1.5%-9% of the ticket price. Sales agents are typically permitted
      to withhold their commission from the proceeds of ticket sales that are remitted
      to the Group. In 2007, independent sales agents accounted for approximately
      89.5
      % 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.




*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.




*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
      Hong Kong and Macau regional passengers emphasize the Group’s quality of
      service, extensive route network in China and greater frequency of flights
      relative to other Chinese airlines. In addition, the Group also promotes and
      markets its Hong Kong and Macau 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.




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 2007, the Group had approximately 5,265,500
      members under these programs.




25




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 the
      approval of domestic, Hong Kong and Macau and international route allocation,
      published air fares, aircraft acquisition, jet fuel prices and standards for
      aircraft maintenance, airport operations and air traffic control. 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, Hong Kong and Macau
      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, and airport facilities and related support services.




The
      CAAC
      considers market conditions for a domestic route in determining whether the
      route should be allocated to one or more airlines. The CAAC requires the
      passenger load factor on a particular route to reach 75% before additional
      flights may be put on that route. Airlines serving the route are given priority
      for such additional flights, and only if such airlines cannot operate more
      flights will the CAAC permit another airline to commence service.




*Hong
      Kong and Macau 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. Such rights are allocated
      by
      the CAAC among the four Chinese airlines permitted to fly to Hong Kong or Macau.
      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.




*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.


26





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 the number of
      passengers carried annually exceeds 100,000 and if there is a minimum average
      load factor of 68% for routes with at least five weekly flights by Chinese
      airlines, or 80% for routes with four or fewer weekly flights by Chinese
      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.




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




*Acquisition
      of Aircraft and Flight Equipment*




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 controlled and 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 the Shenzhen, Zhuhai and Sanya
      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 in respect of their Shenzhen, Zhuhai or Sanya
      operations) 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.


27




*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.




The
      CAAC
      oversees the standards of all Chinese airline pilots through its operation
      of
      the CAAC Aviation College. The CAAC Aviation College is a monitoring unit
      located in Tianjin which implements a uniform pilot certification process
      applicable to all Chinese airline pilots and is responsible for the issuance,
      renewal, suspension and cancellation of pilot licenses. 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.




*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
      and China Eastern Airlines (“China Eastern”). In 2007, these three airlines
      together controlled approximately 71.8% of the commercial aviation market in
      China as measured by passengers carried.


28





Most
      major Chinese airlines have in recent years significantly expanded their fleets,
      while at the same time passenger traffic has not increased proportionately.
      This
      has resulted in a reduction in the passenger load factors for most Chinese
      airlines. As a result, Chinese airlines 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.




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.




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)**
            
            **Group’s**
              **Share**
              **(% of total)**
            
            **Industry**
              **Total**
              **(in billion)**
            
            **Group’s**
              **Share**
              **(% of total)**2000
            
            
            67.2
            
            
            24.9
            
            
            1,967
            
            
            22.5
            
            
            12.3
            
            
            20.02001
            
            
            75.2
            
            
            25.4
            
            
            1,709
            
            
            23.3
            
            
            14.1
            
            
            21.52002
            
            
            85.9
            
            
            25.0
            
            
            2,021
            
            
            23.3
            
            
            16.5
            
            
            21.92003
            
            
            87.6
            
            
            23.4
            
            
            2,190
            
            
            21.2
            
            
            17.1
            
            
            20.82004
            
            
            121.2
            
            
            23.3
            
            
            2,770
            
            
            19.7
            
            
            23.1
            
            
            20.22005
            
            
            138.3
            
            
            31.8
            
            
            3,067
            
            
            25.3
            
            
            26.1
            
            
            27.92006
            
            
            159.7
            
            
            30.8
            
            
            3,494
            
            
            23.4
            
            
            30.6
            
            
            26.42007
            
            
            185.8
            
            
            30.6
            
            
            4,018
            
            
            21.7
            
            
            36.5
            
            
            25.3





*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
      10
      other 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 eight 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, in 2007.


29





**Cargo and Mail****Airport**
            
            **Passenger carried**
              **(% of total)**
            
            **Carried**
              **(% of total)**
            
            **Departing
                flight**
              **(% of total)**Beijing
            
            
            18.39
            %
            
            12.21
            %
            
            17.17
            %Shanghai
                Pudong
            
            
            9.32
            %
            
            3.26
            %
            
            10.00
            %Guangzhou
            
            
            50.46
            %
            
            39.61
            %
            
            50.85
            %Shanghai
                Hongqiao
            
            
            17.57
            %
            
            22.39
            %
            
            16.39
            %Shenzhen
            
            
            30.10
            %
            
            23.41
            %
            
            28.97
            %Chengdu
            
            
            14.26
            %
            
            16.20
            %
            
            12.60
            %Kunming
            
            
            17.18
            %
            
            20.97
            %
            
            16.09
            %Hangzhou
            
            
            38.72
            %
            
            35.06
            %
            
            36.64
            %Xi'an
            
            
            18.66
            %
            
            21.37
            %
            
            17.12
            %Chongqing
            
            
            24.91
            %
            
            27.44
            %
            
            22.86
            %





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,
      in
      2007.





**Cargo and Mail****Airport**
            
            **Passenger carried**
              **(% of total
                )**
            
            **Carried**
              **(% of total)**
            
            **Departing flight**
              **(% of total)**Wuhan
            
            
            39.59
            %
            
            47.65
            %
            
            34.93
            %Changsha
            
            
            51.17
            %
            
            69.45
            %
            
            50.37
            %Haikou
            
            
            28.57
            %
            
            29.6
            %
            
            27.85
            %Sanya
            
            
            35.32
            %
            
            33.9
            %
            
            36.76
            %Zhengzhou
            
            
            58.67
            %
            
            63.32
            %
            
            51.78
            %Guilin
            
            
            39.02
            %
            
            39.11
            %
            
            37.98
            %Nanning
            
            
            43.06
            %
            
            39.14
            %
            
            38.61
            %Zhang
                Jia Jie
            
            
            39.59
            %
            
            67.78
            %
            
            40.31
            %





*Hong
      Kong and Macau Routes*





In
      2007,
      the Group conducted a total of 15,035 flights on its Hong Kong and Macau routes,
      accounting for approximately 24.7% of all passengers carried by Chinese airlines
      on routes between Hong Kong or Macau 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, Air Macau, Dragon Air and Cathay
      Pacific Airways compete with Group in the regional traffic markets.





*International
      Routes*




The
      Group
      competes with Air China, China Eastern 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 Hong
      Kong and Macau 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.


30





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 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, 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. The Company owns a 60% equity interest in each of the Airline
      Subsidiaries.




As
      of
      December 31, 2007, Xiamen Airlines operated under its own “MF” code a fleet of
      46 aircraft on 97 domestic routes, 11 international routes and six Hong Kong
      and
      Macau routes. In 2007, Xiamen Airlines carried a total of about 9.25 million
      passengers, or approximately 16.26% of the passengers carried by the Group
      in
      that year, and had RMB 7,485 million
      in traffic revenue.




As
      of
      December 31, 2007, Shantou Airlines operated under the Group’s “CZ” code nine
      aircraft on 14 domestic routes, one international route and one Hong Kong and
      Macau route. In 2007, Shantou Airlines carried a total of about 1.86 million
      passengers, or 3.26% of the passengers carried by the Group in that year. Total
      traffic revenue of Shantou Airlines for the year ended December 31, 2007 was
      RMB1,289 million.




As
      of
      December 31, 2007, Chongqing Airlines operated under the “OQ” code four aircraft
      on five domestic routes previously operated by the Company. In 2007, Chongqing
      Airlines carried a total of about 217,000 passengers, or 0.38% 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, 2007 was RMB119
      million.




As
      of
      December 31, 2007, Zhuhai Airlines operated under the “CZ” code five aircraft on
      14 domestic routes. In 2007, Zhuhai Airlines carried a total of about 917,600
      passengers, or approximately 1.61% 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, 2007 was RMB723 million.




As
      of
      December 31, 2007, Guizhou Airlines operated under the “CZ” code eight aircraft
      on 22 domestic routes. In 2007, Guizhou Airlines carried a total of about 1.46
      million passengers, or approximately 2.56% of the total number of passengers
      carried by the Group in 2007. Total traffic revenue of Guizhou Airlines was
      approximately RMB1,070 million for the year ended December 31, 2007.





Insurance




The
      CAAC
      maintains fleet and legal liability insurance on behalf of the Group and all
      other Chinese airlines with the People’s Insurance Company of China (“PICC”)
      under the PICC 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.




31




Under
      Chinese law, civil liability of Chinese airlines for injuries suffered by
      passengers on domestic flights is limited to RMB400,000 (approximately
      US$54,760) per passenger. Under the Convention for the Unification of Certain
      Rules Relating to International Transportation by Air of 1929 (as amended by
      the
      protocol of 1955, the “Warsaw Convention”), unless a separate agreement has been
      entered into between China and a specific country, civil liability for injuries
      suffered by passengers on international flights is limited to US$122,000 per
      passenger. The Group believes that it maintains adequate insurance coverage
      for
      the maximum civil liability that can be imposed in respect of injuries to
      passengers under Chinese law, the Warsaw Convention or any separate agreement
      applicable to the Group.




The
      CAAC
      allocates insurance premiums payable in respect of the PICC 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 PICC master policy to increase. PICC’s
      practice has been to reinsure a substantial portion of its aircraft insurance
      business through reinsurance brokers on the London reinsurance market.




Intellectual
      Property




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




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 associates 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. 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.




The
      Company owns all rights to three trademarks, being SKY PEARL CLUB, the logo
      relating to Easy Cargo 5000 and “SKY PEARL CARD” which are registered in China,
      and recorded with Trademark Office of the State Administration for Industry
      and
      Commerce. Zhuhai Airlines Company Limited owns all rights to the airline logo
      which is registered with the Trademark Office of the State Administration for
      Industry and Commerce.


32


**Organizational
      Structure**




The
      following chart illustrates the corporate structure of the Group as of year
      end
      2007 and the aggregate effective equity interest of the Company in each of
      its
      principal subsidiaries, associates and jointly controlled entities.





CHINA SOUTHERN AIRLINES COMPANY LIMITED




Note
      a:
      Including 13% ownership interest held by CSA’s subsidiaries.




The
      particulars of the Company’s principal subsidiaries as of December 31, 2007 are
      as follows: ****





**Name
                of company**
            
            **Place
                and date of**
              **establishment**
              **/operation**
            
            **Proportion
                of ownership**
              **interest
                held**
              **by the Company**Southern
                Airlines (Group) 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
            
            
            60
            %Guizhou
                Airlines Company Limited
            
            
            PRC
                November 12, 1991
            
            
            60
            %Chongqing
                Airlines Company Limited
            
            
            PRC
                June 16, 2007
            
            
            60
            %Guangzhou
                Air Cargo Company Limited
            
            
            PRC
                March 31, 2004
            
            
            70
            %Guangzhou
                Nanland Air Catering Company Limited
            
            
            PRC
                November 21, 1989
            
            
            75
            %China
                Southern West Australian Flying College Pty Ltd.
            
            
            Australia
                January 26, 1971
            
            
            65
            %Guangzhou
                Baiyun International Logistics Company Ltd
            
            
            PRC
                July 23, 2002
            
            
            61
            %Xinjiang
                Civil Aviation Property Management Limited
            
            
            PRC
                February 12, 2002
            
            
            51.8
            %Southern
                Airlines Group Air Catering Company Limited
            
            
            PRC
                December 25, 2003
            
            
            100
            %Nanlung
                International Freight Company Limited
            
            
            Hong
                Kong October 1, 1996
            
            
            51
            %


33





The
      particulars of the Group’s principal associates and jointly controlled entities
      as of December 31, 2007 are as follows:





**Name
                of company**
            
            **Place
                and date of**
              **establishment**
              **/operation**
            
            **Proportion
                of ownership**
              **interest
                held by****Group**
              **effective****interest**
            
            **The****Company**
            
            **Subsidiaries**Guangzhou
                Aircraft Maintenance Engineering Company Limited
            
            
            PRC
                October 28, 1989
            
            
            50
            %
            
            50
            %
            
            —China
                Southern Airlines Group Finance Company Limited
            
            
            PRC
                June 28, 1995
            
            
            34
            %
            
            21.1
            %
            
            12.9
            %Sichuan
                Airlines Corporation Limited
            
            
            PRC
                August 28, 2002
            
            
            39
            %
            
            39
            %
            
            —China
                Postal Airlines Limited
            
            
            PRC
                November 25, 1996
            
            
            49
            %
            
            49
            %
            
            —MTU
                Maintenance Zhuhai Co. Ltd
            
            
            PRC
                April 6, 2001
            
            
            50
            %
            
            50
            %
            
            —Zhuhai
                Xiang Yi Aviation Technology Company Limited
            
            
            PRC
                July 10, 2002
            
            
            51
            %
            
            51
            %
            
            —Beijing
                Southern Airlines Ground Service Company Limited
            
            
            PRC
                April 1, 2004
            
            
            50
            %
            
            50
            %
            
            —





**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
      Group’s headquarters in Guangzhou occupy an area of approximately 254,400 square
      meters of land and a total gross floor area of approximately 536,652 square
      meters. The Group leases from CSAHC the land in Guangzhou on which the Group’s
      headquarters and other facilities are located. The Group also leases from CSAHC
      certain buildings mainly at the Haikou, Wuhan, Nanyang, Shenyang, Dalian, Jilin,
      Harbin and Xinjiang.


34





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





**Land**
              **(in
                square meters)**
            
            **Buildings**
              **(in
                square meters****)****Owned**
            
            **Leased**
            
            **Owned**
            
            **Leased**Guangzhou
            
            
            123,962
            
            
            130,438
            
            
            529,375
            
            
            7,277Shenzhen
            
            
            208,740
            
            
            —
            
            
            54,093
            
            
            —Zhuhai
            
            
            170,062
            
            
            —
            
            
            18,791
            
            
            —Changsha
            
            
            138,949
            
            
            —
            
            
            47,190
            
            
            —Zhengzhou
            
            
            290,841
            
            
            —
            
            
            60,582
            
            
            —Haikou
            
            
            5,265
            
            
            —
            
            
            63,570
            
            
            19,633Wuhan
            
            
            —
            
            
            31,061
            
            
            17,335
            
            
            22,831Nanyang
            
            
            —
            
            
            —
            
            
            12,156
            
            
            60,003Sanya
            
            
            106,680
            
            
            —
            
            
            16,968
            
            
            —Shenyang
            
            
            —
            
            
            167,502
            
            
            79,626
            
            
            93,445Dalian
            
            
            —
            
            
            14,403
            
            
            17,250
            
            
            33,597Jilin
            
            
            —
            
            
            65,076
            
            
            33,656
            
            
            7,767Harbin
            
            
            —
            
            
            286,871
            
            
            36,925
            
            
            3,188Xinjiang
            
            
            —
            
            
            545,146
            
            
            177,710
            
            
            4,135Guilin
            
            
            72,563
            
            
            —
            
            
            73,379
            
            
            139





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**
            
            **Leased**
            
            **Owned**
            
            **Leased**Xiamen
            
            
            579,530
            
            
            —
            
            
            436,617
            
            
            19,113Shantou
            
            
            36,931
            
            
            55,407
            
            
            42,682
            
            
            —Zhuhai
            
            
            94,024
            
            
            —
            
            
            44,351
            
            
            2,245Guizhou
            
            
            259,879
            
            
            —
            
            
            95,705
            
            
            3,533Chongqing
            
            
            —
            
            
            —
            
            
            —
            
            
            3,009





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 Group’s headquarters and other
      facilities are located and the buildings that the Group 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.


35





**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 PRC Accounting
      Standards for Business Enterprises (“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.





**Critical
      Accounting Policies** ****




The
      discussion and analysis of the Group’s financial condition and results of
      operations are based upon the consolidated financial statements, which have
      been
      prepared in accordance with IFRSs. The preparation of such 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 net book value of a long-lived asset may not
      be
      recoverable, this 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 recoverable amount.
      The recoverable amount is the greater of the net selling price and the 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 level of traffic revenue and 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 and projections of traffic revenue and
      amount of operating costs.




*Depreciation*




Property,
      plant and equipment are depreciated on a straight-line basis over their
      estimated useful lives, after taking into account the estimated residual value.
      The Group reviews the estimated useful lives of the assets regularly in order
      to
      determine the amount of depreciation expense to be recorded during any reporting
      period. 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.




*Impairment
      of trade receivables*




The
      Group
      maintains an impairment loss for doubtful accounts for estimated losses
      resulting from the inability of the debtors to make required payments. The
      Group
      bases the estimates of future cash flows on the ageing of the trade receivables
      balance, debtors’ credit-worthiness, and historical write-off experience. If the
      financial condition of the debtors were to deteriorate, actual write-offs would
      be higher than estimated.


36





**Recently
      Pronounced International Financial Reporting Standards**





Information
      relating to the recently pronounced IFRSs is presented in Note 50 to the
      consolidated financial statements.





**Overview**




In
      2007,
      the booming domestic economic development directly led to the rapid development
      momentum of the air transportation business. Under the precondition of ensuring
      flight safety, the Group continued to improve its corporate governance and
      business model. However, due to fierce competition in the industry and
      skyrocketing fuel prices, the Group was faced with comparatively significant
      cost pressures. The Group dealt with such pressures by optimizing the structure
      of flight routes and the composition of fleet, increasing its overall revenue,
      taking a series of fuel saving measures and utilizing financial derivatives.
      The
      Group continued to reinforce financial budget management and cost control.
      It
      also improved the performance-assessment-by-objective mechanism geared towards
      operating efficiency of the flight routes network. All of these helped to
      realize a satisfactory improvement in operating standards and results benchmarks
      of the Company.





Nevertheless,
      the Group is facing pressures on its operations due to the result of the
      sub-prime crisis in the US, the slowing down of the world economy, the
      contractionary credit policies of the People’s Bank of China, fierce competition
      in the aviation industry and the rise of fuel prices.





Since
      July 21, 2005, the PRC Government has begun to adopt 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. The exchange rate of U.S. dollar and
      RMB
      was at USD1.00: RMB7.3046. Because the Group finances its aircraft acquisitions
      mainly through finance 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 a one-off 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.




According
      to the Notice of the NDRC and the CAAC on Issues Relating to Introduction of
      the
      Fuel Surcharge for Domestic Routes, domestic airlines imposed fuel surcharges
      for all the domestic routes (excluding those from the mainland PRC to Hong
      Kong
      and Macau) with effect from August 1, 2005 (based on flight time). On February
      16, 2006, the NDRC and CAAC released a supplementary document on Issues Relating
      to the Introduction of Fuel Surcharge for Domestic Routes, stating that due
      to
      the rising jet fuel price, the period of imposition of fuel surcharge by
      airlines was extended. The NDRC and CAAC released separate supplementary
      documents on Issues Relating to the Introduction of Fuel Surcharge for Domestic
      Routes on March 28, 2006 and September 1, 2006, respectively, thereby adjusting
      the amount of fuel surcharges in a range of RMB20 to RMB60 per passenger for
      distance, flown less than 800 kilometers, and in a range of RMB40 to RMB100
      for
      distance, exceeding 800 kilometers, during the period temporarily from April
      10,
      2006 to October 10, 2006. On January 21, 2007, the NDRC and CAAC released
      additional supplementary documents on Issues Relating to the Introduction of
      Fuel Surcharge for Domestic Routes, thereby adjusting the amount of fuel
      surcharges from RMB60 to RMB50 per passenger for distance, flown less than
      800
      kilometers, and from RMB100 to RMB80 for distance exceeding 800 kilometers.
      On
      November 5, 2007, the NDRC and CAAC released additional supplementary documents
      on Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes,
      thereby adjusting the amount of fuel surcharges from RMB50 to RMB60 per
      passenger for distance, flown less than 800 kilometers, and from RMB80 to RMB100
      for distance exceeding 800 kilometers. The introduction of fuel surcharge,
      and
      the extension of the duration of the same will help relieve, to a certain
      extent, the burden of high jet fuel cost, on the Group.




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.


37





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 and
      the
      Japanese yen. The Group recognized a net exchange gain of RMB2,832 million
      and
      RMB1,492 million in 2007 and 2006, respectively. These amounts represented
      mainly unrealized exchange differences resulting from the retranslation of
      the
      foreign currency borrowings.





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, 2007, 2006 and 2005:





**Traffic**
            
            **Year ended December 31,**
            
            **2007 vs. 2006**
            
            **2006 vs. 2005****2007**
            
            **2006**
            
            **2005**
            
            **%
                increase**
              **(decrease)**
            
            **%
                increase**
              **(decrease)**RPK
              (million)Domestic
            
            
            68,369
            
            
            58,128
            
            
            51,472
            
            
            17.6
            
            
            12.9Hong
                Kong and Macau
            
            
            1,180
            
            
            1,541
            
            
            1,549
            
            
            (23.4
            )
            
            (0.5
            )International
            
            
            12,178
            
            
            9,913
            
            
            8,902
            
            
            22.8
            
            
            11.4Total
            
            
            81,727
            
            
            69,582
            
            
            61,923
            
            
            17.5
            
            
            12.4RTK
                (million)Domestic
            
            
            7,219
            
            
            6,226
            
            
            5,571
            
            
            15.9
            
            
            11.8Hong
                Kong and Macau
            
            
            115
            
            
            156
            
            
            159
            
            
            (26.3
            )
            
            (1.9
            )International
            
            
            1,916
            
            
            1,689
            
            
            1,554
            
            
            13.4
            
            
            8.7Total
            
            
            9,250
            
            
            8,071
            
            
            7,284
            
            
            14.6
            
            
            10.8Passengers
                carried (thousand)Domestic
            
            
            51,326
            
            
            44,225
            
            
            39,545
            
            
            16.1
            
            
            11.8Hong
                Kong and Macau
            
            
            1,339
            
            
            1,545
            
            
            1,556
            
            
            (13.3
            )
            
            (0.7
            )International
            
            
            4,238
            
            
            3,436
            
            
            3,018
            
            
            23.3
            
            
            13.9Total
            
            
            56,903
            
            
            49,206
            
            
            44,119
            
            
            15.6
            
            
            11.5Cargo
                and mail carried (thousand tons)Domestic
            
            
            733
            
            
            674
            
            
            639
            
            
            8.8
            
            
            5.5Hong
                Kong and Macau
            
            
            12
            
            
            16
            
            
            19
            
            
            (25.0
            )
            
            (15.8
            )International
            
            
            127
            
            
            129
            
            
            117
            
            
            (1.6
            )
            
            10.3Total
            
            
            872
            
            
            819
            
            
            775
            
            
            6.5
            
            
            5.7


38





**Capacity**
            
            **Year
                ended**
              **December
                31,**
            
            **2007 vs. 2006**
              **% increase**
              **(decrease)**
            
            **2006 vs. 2005**
              **% increase**
              **(decrease)****2007**
            
            **2006**
            
            **2005**ASK
              (million)Domestic
            
            
            89,452
            
            
            79,773
            
            
            72,107
            
            
            12.1
            
            
            10.6Hong
                Kong and Macau
            
            
            1,881
            
            
            2,459
            
            
            2,656
            
            
            (23.5
            )
            
            (7.4
            )International
            
            
            18,400
            
            
            14,827
            
            
            13,598
            
            
            24.1
            
            
            9.0Total
            
            
            109,733
            
            
            97,059
            
            
            88,361
            
            
            13.1
            
            
            9.8ATK
                (million)
              Domestic
            
            
            10,440
            
            
            9,311
            
            
            8,352
            
            
            12.1
            
            
            11.5Hong
                Kong and Macau
            
            
            210
            
            
            289
            
            
            315
            
            
            (27.3
            )
            
            (8.3
            )International
            
            
            3,558
            
            
            3,056
            
            
            2,842
            
            
            16.4
            
            
            7.5Total
            
            
            14,208
            
            
            12,656
            
            
            11,509
            
            
            12.3
            
            
            10.0**Load
                Factors**Passenger
                load factor (RPK/ASK) (%)Domestic
            
            
            76.4
            
            
            72.9
            
            
            71.4
            
            
            4.8
            
            
            2.1Hong
                Kong and Macau
            
            
            62.7
            
            
            62.7
            
            
            58.3
            
            
            0.0
            
            
            7.5International
            
            
            66.2
            
            
            66.9
            
            
            65.5
            
            
            (1.0
            )
            
            2.1Overall
            
            
            74.5
            
            
            71.7
            
            
            70.1
            
            
            3.9
            
            
            2.3Overall
                load factor (RTK/ATK) (%)Domestic
            
            
            69.1
            
            
            66.9
            
            
            66.7
            
            
            3.3
            
            
            0.3Hong
                Kong and Macau
            
            
            55.1
            
            
            54.0
            
            
            50.4
            
            
            2.0
            
            
            7.1International
            
            
            53.8
            
            
            55.3
            
            
            54.7
            
            
            (2.7
            )
            
            1.1Overall
            
            
            65.1
            
            
            63.8
            
            
            63.3
            
            
            2.0
            
            
            0.8**Yield**Yield
                per RPK (RMB)Domestic
            
            
            0.60
            
            
            0.59
            
            
            0.55
            
            
            1.7
            
            
            7.3Hong
                Kong and Macau
            
            
            0.91
            
            
            0.80
            
            
            0.77
            
            
            13.8
            
            
            3.9International
            
            
            0.63
            
            
            0.62
            
            
            0.56
            
            
            1.6
            
            
            10.7Overall
            
            
            0.61
            
            
            0.60
            
            
            0.55
            
            
            1.7
            
            
            9.1Yield
                per RTK (RMB)Domestic
            
            
            5.89
            
            
            5.74
            
            
            5.30
            
            
            2.6
            
            
            8.3Hong
                Kong and Macau
            
            
            9.91
            
            
            8.52
            
            
            8.18
            
            
            16.3
            
            
            4.2International
            
            
            5.03
            
            
            4.77
            
            
            4.24
            
            
            5.5
            
            
            12.5Overall
            
            
            5.76
            
            
            5.59
            
            
            5.14
            
            
            3.0
            
            
            8.8**Financial**Passenger
                revenue (RMB million)Domestic
            
            
            40,818
            
            
            34,174
            
            
            28,182
            
            
            19.4
            
            
            21.3Hong
                Kong and Macau
            
            
            1,074
            
            
            1,230
            
            
            1,194
            
            
            (12.7
            )
            
            3.0International
            
            
            7,708
            
            
            6,145
            
            
            4,952
            
            
            25.4
            
            
            24.1Total
            
            
            49,600
            
            
            41,549
            
            
            34,328
            
            
            19.4
            
            
            21.0Cargo
                and mail revenue (RMB million)
            
            
            3,697
            
            
            3,538
            
            
            3,091
            
            
            4.5
            
            
            14.5


**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.




39




2007
      compared with 2006





The
      profit attributable to equity shareholders of the Company increased from RMB188
      million in 2006 to RMB1,871 million in 2007. The scale of operations increased
      as a result of steady growth in China’s economy and strong demand for air
      transportation. The Group’s operating revenue increased by RMB8,283 million or
      17.9% from RMB46,219 million in 2006 to RMB54,502 million in 2007. Passenger
      load factor increased by 2.8 percentage point, from 71.7% in 2006 to 74.5%
      in
      2007. Passenger yield (in passenger revenue per RPK) increased by 1.7% to
      RMB0.61. Average yield (in traffic revenue per RTK) increased by 3.0% from
      RMB5.59 in 2006 to RMB5.76 in 2007. Operating expenses increased by RMB7,106
      million or 15.5% from RMB45,907 million in 2006 to RMB53,013 million in 2007.
      As
      a result of improved passenger load factor and average yield, operating income
      was increased by RMB974 million, from RMB645 million in 2006 to RMB1,619 million
      in 2007. The Group’s net non-operating income was RMB1,304 million as compared
      to net non-operating expenses of RMB288 million in 2006. The improvement in
      non-operating result was mainly attributable to the net effect of increase
      in
      exchange gain of RMB1,340 million, increase in fuel derivatives profit of RMB109
      million, increase in share of results of associates and jointly controlled
      entities of RMB60 million and increase in interest expense of RMB221
      million .





*Operating
      revenue*





Substantially
      all of the Group’s operating revenue is attributable to airline and airline
      related operations. Traffic revenue accounted for 97.8% and 97.6% of total
      operating revenue in 2007 and 2006, respectively. Passenger revenue and, cargo
      and mail revenue accounted for 93.1% and 6.9%, respectively, of total traffic
      revenue in 2007. The other operating revenue is mainly derived from commission
      income, income from general aviation operations, fees charged for ground
      services rendered to other Chinese airlines and air catering services.




The
      increase in operating revenue was primarily due to a 19.4% rise in passenger
      revenue from RMB41,549 million in 2006 to RMB49,600 million in 2007 resulting
      from increased traffic volume. The total number of passengers carried increased
      by 15.6% to 56.90 million passengers in 2007. RPKs increased by 17.5% from
      69,582 million in 2006 to 81,727 million in 2007, primarily as a result of
      the
      increase in passengers carried. Passenger yield increased slightly by
      RMB0.01.




Domestic
      passenger revenue, which accounted for 82.3% of the total passenger revenue
      in
      2007, increased by 19.4% from RMB34,174 million in 2006 to RMB40,818 million
      in
      2007. Domestic passenger traffic in RPKs increased by 17.6%, mainly due to
      an
      increase in passengers carried. Domestic passenger yield increased from RMB0.59
      in 2006 to RMB 0.60 in 2007.




Hong
      Kong
      and Macau passenger revenue, which accounted for 2.2% of total passenger
      revenue, decreased by 12.7% from RMB1,230 million in 2006 to RMB1,074 million
      in
      2007. Owing to the keen competition in Hong Kong and Macau routes, the
      Group scheduled certain flight capacity to other domestic and international
      routes in 2007. For Hong Kong and Macau flights, passenger traffic in RPKs
      decreased by 23.4%, while passenger capacity in ASKs decreased by 23.5%,
      resulting in the passenger load factor of 62.7%, which is unchanged from 2006.
      Passenger yield increased from RMB0.80 in 2006 to RMB0.91 in 2007 mainly caused
      by the decrease of long distance routes such as Hong Kong - Beijing. Generally,
      long distance routes have a lower yield than short distance ones.




International
      passenger revenue, which accounted for 15.5% of total passenger revenue,
      increased by 25.4% from RMB6,145 million in 2006 to RMB7,708 million in 2007.
      For international flights, passenger traffic in RPKs increased by 22.8%, while
      passenger capacity in ASKs increased by 24.1%, resulting in decrease of a 0.7
      percentage point in passenger load factor from 2006. Passenger yield increased
      by 1.6% from RMB0.62 in 2006 to RMB0.63 in 2007 mainly resulted from the
      continued growth of demand for international flights in the PRC.





Cargo
      and
      mail revenue, which accounted for 6.9% of the Group’s total traffic revenue and
      6.8% of total operating revenue, increased by 4.5% from RMB3,538 million in
      2006
      to RMB3,697 million in 2007. The increase was attributable to the increasing
      traffic demand.





Other
      operating revenue increased by 6.4% from RMB1,132 million in 2006 to RMB1,205
      million in 2007. The increase was primarily due to the general growth in income
      from various auxiliary operations.




*Operating
      expenses*




Total
      operating expenses in 2007 amounted to RMB53,013 million, representing an
      increase of 15.5% or RMB7,106 million over 2006, primarily due to the
      total
      effect of increases in jet fuel costs, operating lease charges of aircraft,
      servicing expenses and maintenance expenses. Total
      operating expenses as a percentage of total operating revenue decreased from
      99.3% in 2006 to 97.3% in 2007.





Flight
      operations expenses, which accounted for 54.9% of total operating expenses,
      increased by 16.2% from RMB25,022 million in 2006 to RMB29,082 million in 2007,
      primarily as a result of increases in jet fuel costs, operating lease charges
      of
      aircraft, catering expenses, and CAAC Infrastructure Development Fund
      Contributions. Jet fuel costs, which accounted for 63.0% of flight operations
      expenses, increased by 13.1% from RMB16,193 million in 2006 to RMB18,316 million
      in 2007 mainly as a result of increased fuel prices and fuel consumption.
      Operating lease charges of aircraft increased by 23.4% from RMB3,027 million
      in
      2006 to RMB3,735 million in 2007 primarily due to the additional rental payments
      for new aircraft under operating leases. Catering expenses increased by 15.4%
      from RMB1,170 million in 2006 to RMB1,350 million in 2007 due to the increase
      in
      number of passengers carried. CAAC Infrastructure Development Fund Contributions
      increased by 10.9% from RMB1,127 million in 2006 to RMB1,250 million in
      2007.


40





Maintenance
      expenses which accounted for 8.8% of total operating expenses, increased by
      16.1% from RMB3,999 million in 2006 to RMB4,643 million in 2007. The increase
      was mainly due to fleet expansion in recent years.





Aircraft
      and traffic servicing expenses, which accounted for 15.4% of total operating
      expenses, increased by 15.5% from RMB7,063 million in 2006 to RMB8,160 million
      in 2007. The increase primarily resulted from a 12.9% rise in landing and
      navigation fees from RMB5,343 million in 2006 to RMB6,030 million in 2007,
      due
      to an increase in number of landing and takeoffs.





Promotional
      and sales expenses, which accounted for 6.6% of total operating expenses,
      increased by 23.7% from RMB2,811 million in 2006 to RMB3,478 million in 2007,
      mainly due to the increase in commission charges as a result of increase in
      traffic revenue by 18.2%.





Depreciation
      and amortization, which accounted for 10.5% of total operating expenses,
      increased by 11.7% from RMB4,971 million in 2006 to RMB5,554 million in 2007,
      mainly resulting from the additional depreciation charge on aircraft delivered
      in 2006 and 2007.





*Other
      income/ (expenses), net*





Net
      gain
      on disposal of property, plant and equipment decreased by 61.0% from RMB333
      million in 2006 to RMB130 million in 2007. The gain in 2007 was mainly due
      to
      the disposal of 11 MD82 aircraft to certain independent third
      parties.





*Operating
      income*




The
      operating income increased, from RMB645 million in 2006 to RMB1,619 million
      in
      2007. This was mainly because operating revenue increased by RMB8,283 million
      or
      17.9% in 2007 while operating expenses increased by RMB7,106 million or 15.5%
      in
      the same period.




*Non-operating
      income/(expenses)*




Interest
      expense increased by 10.7% from RMB2,070 million in 2006 to RMB2,291 million
      in
      2007, mainly due to the increase in loans and obligations under finance leases.
      Interest income increased by 78.0% from RMB41 million in 2006 to RMB73 million
      in 2007, mainly attributable to the increase in average bank deposits balances
      during 2007 .




Net
      exchange gain increased by 89.8% from RMB1,492 million in 2006 to RMB2,832
      million in 2007, mainly resulted from Renminbi appreciation during 2007. Such
      amount mainly represented unrealized translation gain on retranslation of
      foreign currency denominated liabilities at year end .





*Taxation*





Income
      tax expense increased from RMB153 million in 2006 to RMB858 million in 2007.
      The
      effective tax rate decreased from 42.9% in 2006 to 29.4% in 2007. This is mainly
      attributable to the tax effect of the decrease of non-deductible expenses as
      a
      percentage to profit before taxation in 2007, which is offset to a lesser extent
      by the increase in deferred tax expenses recognized in 2007 resulting from
      the
      changes in tax rates in accordance with the new tax law effective from January
      1, 2008.




2006
      Compared with 2005




The
      profit for 2006 attributable to equity shareholders of the Company was RMB188
      million, as compared to a loss of RMB1,848 million for 2005. The scale of
      operations increased as a result of continued growth in China’s economy and
      strong demand in air transportation. The Group’s operating revenue increased by
      RMB7,926 million or 20.7% from RMB38,293 million in 2005 to RMB46,219 million
      in
      2006. Passenger load factor increased by 1.6 percentage points from 70.1% in
      2005 to 71.7% in 2006. Passenger yield (in passenger revenue per RPK) increased
      by 9.1% to RMB0.60. Average yield (in traffic revenue per RTK) increased by
      8.8%
      from RMB5.14 in 2005 to RMB5.59 in 2006. Operating expenses increased by
      RMB6,309 million or 15.9% from RMB39,598 million in 2005 to RMB45,907 million
      in
      2006. As a result of improved passenger load factor and average yield, operating
      profit was RMB645 million in 2006 as compared to an operating loss of RMB1,337
      million in 2005. The Group’s net non-operating expense was RMB288 million in
      2006 as compared to a net non-operating expense of RMB516 million in 2005.
      The
      improvement in non-operating results was mainly attributable to the increase
      in
      exchange gain of RMB272 million, an increase in share of results of associates
      and jointly controlled entities of RMB369 million. The decrease in net operating
      expenses was partly offset by the increase in interest expense of RMB454
      million.


41





*Operating
      revenue*




Substantially
      all of the Group’s operating revenue is attributable to airline and airline
      related operations. Traffic revenue accounted for 97.6% and 97.7% of total
      operating revenue in 2006 and 2005, respectively. Passenger revenue and, cargo
      and mail revenue accounted for 92.2% and 7.8%, respectively, of total traffic
      revenue in 2006. The other operating revenue is mainly derived from commission
      income, income from general aviation operations, fees charged for ground
      services rendered to other Chinese airlines and air catering services.




The
      increase in operating revenue was primarily due to a 21.0% rise in passenger
      revenue from RMB34,328 million in 2005 to RMB41,549 million in 2006 resulting
      from increased traffic volume. The total number of passengers carried increased
      by 11.5 % to 49.21 million passengers in 2006.




Passenger
      yield increased slightly by RMB0.05. RPKs increased by 12.4% from 61,923 million
      in 2005 to 69,582 million in 2006, primarily as a result of the increase in
      passengers carried.




Domestic
      passenger revenue, which accounted for 82.2% of the total passenger revenue
      in
      2006, increased by 21.3% from RMB28,182 million in 2005 to RMB34,174 million
      in
      2006. Domestic passenger traffic in RPKs increased by 12.9%, mainly due to
      an
      increase in passengers carried. Domestic passenger yield increased from RMB0.55
      in 2005 to RMB0.59 in 2006.




Hong
      Kong
      and Macau passenger revenue, which accounted for 3.0% of total passenger
      revenue, increased by 3.0% from RMB1,194 million in 2005 to RMB1,230 million
      in
      2006. For Hong Kong and Macau flights, passenger traffic in RPKs decreased
      slightly by 0.5%, while passenger capacity in ASKs decreased by 7.4%, resulting
      in a 4.4 percentage point increase in passenger load factor from 2005. Passenger
      yield increased from RMB0.77 in 2005 to RMB0.80 in 2006 mainly due to higher
      ticket price as a result of soaring jet fuel cost.




International
      passenger revenue, which accounted for 14.8 % of total passenger revenue,
      increased by 24.1% from RMB4,952 million in 2005 to RMB6,145 million in 2006.
      For international flights, passenger traffic in RPKs increased by 11.4%, while
      passenger capacity in ASKs increased by 9.0%, resulting in a 1.4  percentage
      point rise in passenger load factor from 2005. Passenger yield increased by
      10.7% from RMB0.56 in 2005 to RMB0.62 in 2006 mainly due to the continued growth
      of demand in international flights in the PRC.




Cargo
      and
      mail revenue, which accounted for 7.8% of the Group’s total traffic revenue and
      7.7% of total operating revenue, increased by 14.5% from RMB3,091 million in
      2005 to RMB3,538 million in 2006. The increase was attributable to the
      increasing traffic demand.




Other
      operating revenue increased by 29.5 % from RMB874 million in 2005 to RMB1,132
      million in 2006. The increase was primarily due to the general growth in income
      from various auxiliary operations.





*Operating
      expenses*




Total
      operating expenses in 2006 amounted to RMB45,907 million, representing an
      increase of 15.9% or RMB6,309 million over 2005, primarily due to the total
      effect of increases in jet fuel costs, maintenance expenses and aircraft and
      traffic servicing expenses. Total operating expenses as a percentage of total
      operating revenue decreased from 103.4 % in 2005 to 99.3% in 2006.




Flight
      operations expenses, which accounted for 54.4% of total operating expenses,
      increased by 26.6% from RMB19,761 million in 2005 to RMB25,022 million in 2006,
      primarily as a result of increases in jet fuel costs, operating lease charges
      of
      aircraft and labour costs for flight personnel. Jet fuel costs, which accounted
      for 64.7% of flight operations expenses, increased by 35.7 % from RMB11,929
      million in 2005 to RMB16,193 million in 2006 mainly as a result of increased
      fuel prices and fuel consumption. Operating lease charges of aircraft increased
      by 21.2 % from RMB2,497 million in 2005 to RMB3,027 million in 2006 primarily
      due to the additional rental payments for new aircraft under operating leases.
      Labour costs for flight personnel increased by 6.1% from RMB1,599 million in
      2005 to RMB1,697 million in 2006, largely due to the increase in flying hours
      and allowance standard. CAAC Infrastructure Development Fund Contributions
      increased by 15.2% from RMB978 million in 2005 to RMB1,127 million in 2006.


42





Maintenance
      expenses which accounted for 8.7% of total operating expenses, decreased by
      12.9% from RMB4,589 million in 2005 to RMB3,999 million in 2006. The decrease
      was mainly due to certain major overhaul costs capitalized during the
      year.




Aircraft
      and traffic servicing expenses, which accounted for 15.4% of total operating
      expenses, increased by 8.1% from RMB6,534 million in 2005 to RMB7,063 million
      in
      2006. The increase primarily resulted from a 7.4% rise in landing and navigation
      fees from RMB4,977 million in 2005 to RMB5,343 million in 2006, due to an
      increase in the number of landings and takeoffs.




Promotional
      and marketing expenses, which accounted for 6.1% of total operating expenses,
      increased by 1.1% from RMB2,780 million in 2005 to RMB2,811 million in 2006.




General
      and administrative expenses, which accounted for 4.2% of the total operating
      expenses, increased by 47.6% from RMB1,315 million in 2005 to RMB1,941 million
      in 2006. This was mainly attributable to increased scale of operations and
      a
      provision for early retirement benefits of RMB392 million in 2006.




Depreciation
      and amortisation, which accounted for 10.8% of total operating expenses,
      increased by 12.0% from RMB4,440 million in 2005 to RMB4,971 million in 2006,
      mainly resulting from the additional depreciation charge on aircraft delivered
      in 2005 and 2006 and depreciation charge on capitalized major overhaul
      costs.





*Other
      income/ (expenses), net*





Net
      gain
      on disposal of property, plant and equipment was RMB333 million in 2006 as
      compared to a net loss on disposal of property, plant and equipment of RMB32
      million in 2005. The gain in 2006 was mainly due to the disposal of three Boeing
      757-200 aircraft to independent third parties.





*Operating
      profit/(loss)*




The
      Group
      recorded an operating profit of RMB645 million in 2006 as compared to an
      operating loss of RMB1,337 million in 2005. The gain was mainly due to an
      increase in operating revenue by RMB7,926 million or 20.7% in 2006 while
      operating expenses increased by RMB6,309 million or 15.9% in the same period.




*Non-operating
      income/(expenses)*




Interest
      expense increased by 28.1% from RMB1,616 million in 2005 to RMB2,070 million
      in
      2006, mainly due to the increase in loans and lease obligations and changes
      in
      interest rates. Interest income decreased by 25.5% from RMB55 million in 2005
      to
      RMB41 million in 2006, mainly attributable to the decrease in average bank
      balances in 2006.




Net
      exchange gain increased by 22.3% from RMB1,220 million in 2005 to RMB1,492
      million in 2006, mainly resulting from Renminbi appreciation during 2006. Such
      amount mainly represents unrealized translation gain on re-translation of
      foreign currency denominated liabilities at the end of fiscal year.





*Taxation*





Income
      tax expense increased to RMB153 million as compared to an income tax benefit
      of
      RMB7 million in 2005. This is mainly attributable to the improved financial
      performance of the Group.


43




**Liquidity
      and Capital Resources**




Prior
      to
      the initial public offering of the Company, the Group met its working capital
      and capital expenditure requirements through cash from its operations, the
      proceeds of certain long-term and short-term bank loans, finance lease financing
      and rebates available under certain of the Group’s aircraft leases.




In
      July
      1997, the Company received net proceeds of RMB5,459 million from its initial
      public offering. A majority part of these net proceeds was utilized to finance
      the Group’s working capital and capital expenditure requirements. In July 2003,
      the Company issued 1,000,000,000 A Shares with a par value of RMB1.00 each
      at
      issue price of RMB2.70 by way of a public offering to natural persons and
      institutional investors in the PRC. The proceeds received by the Company of
      RMB2,641 million, net of the issuance costs of RMB59 million have been used
      for
      the purchase of Boeing 737-800 aircraft in accordance with the disclosure in
      the
      Prospectus for Offering of the A Shares.




As
      of
      December 31, 2007, the Group had banking facilities with several PRC commercial
      banks for providing loan finance up to an approximate amount of RMB50,262
      million to the Group. As of December 31, 2007, an approximate amount of
      RMB29,338 million was utilized. As of December 31, 2007 and 2006, the Group’s
      cash and cash equivalents totaled RMB3,824 million and RMB2,264 million,
      respectively.




Net
      cash
      inflows from operating activities in 2007, 2006 and 2005 were RMB6,869 million,
      RMB2,297 million and RMB3,835 million, respectively. The decrease in 2006 was
      mainly due to a delay of payments to suppliers at the end of 2005 which were
      subsequently made in 2006. The increase in 2007 was mainly due to the
      increased cash flow from improved operating results and sales of tickets in
      advance of carriage as well as the increase in accrual balances as a result
      of
      increase in operation volume and delays in billings by certain suppliers when
      compared with 2006.


Net
      cash
      used in investing activities in 2007, 2006 and 2005 was RMB4,844 million,
      RMB5,484 million and RMB8,009 million, respectively. Cash capital expenditures
      in 2007, 2006 and 2005 were RMB5,502 million, RMB6,044 million and RMB6,775
      million, respectively, reflecting predominantly additional investments in
      aircraft and flight equipment under the Group’s fleet expansion plans and
      Guangzhou new airport, and, to a small extent, additional investments in other
      facilities and buildings used in operations.




Financing
      activities resulted in net cash (outflows)/inflows of RMB(465) million, RMB2,550
      million and RMB3,992 million in 2007, 2006 and 2005, respectively. Net cash
      inflow from new bank loans and repayments amounted to RMB2,324 million, RMB5,870
      and RMB6,045 million in 2007, 2006 and 2005, respectively. The additions of
      bank
      loan were used for capital expenditures and general working capital. Repayment
      of finance leases in 2007, 2006 and 2005 was RMB3,021 million, RMB3,313 million
      and RMB2,050 million, respectively, resulting from the aircraft acquisitions
      under finance leases.




As
      of
      December 31, 2007, the Group’s aggregate long-term bank and other loans and
      obligations under finance leases totaled RMB28,444 million. In 2008, 2009,
      2010,
      2011 and thereafter, amounts payable under such loans and obligations will
      be
      RMB6,512 million, RMB4,575 million, RMB3,296 million, RMB2,923 million and
      RMB11,138 million respectively. Such borrowings were denominated, to a larger
      extent, in United States dollars and, to a smaller extent, in Japanese yen
      and
      Hong Kong 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 State
      Administration of Foreign Exchange, or subject to certain restrictive
      conditions, entering into forward foreign exchange contracts with authorized
      PRC
      banks.




As
      of
      December 31, 2007, the Group’s short-term bank loans were RMB21,313 million. The
      Group’s weighted average interest rate on short-term bank loans was 5.14% per
      annum as of December 31, 2007. The primary use of the proceeds of the Group’s
      short-term bank loans is to finance working capital 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.


44


Through
      April 30, 2008, the Group renewed certain short-term bank loans of RMB4,440
      million. The renewed bank loans are unsecured, bear interest at floating rates
      ranging from 6-month LIBOR +1.40% to 2.75% per annum and the People’s bank of
      China benchmark interest rate-10% , these bank loans are repayable one year
      from
      their respective renewal dates. In addition, the Group entered into new
      short-term bank loan agreements totalling RMB8,053 million subsequent to
      December 31, 2007. These new short-term bank loans are unsecured and bear
      interest at floating rates ranging from 3-month/6-month/12-month LIBOR + 0.55%
      to 4% per annum, the People’s bank of China benchmark interest rate-10% and
      12-month HIBOR+2.25% per annum which are repayable within one year from their
      respective origination dates.




As
      of
      December 31, 2007, the Group had obligations under operating leases totaling
      RMB28,179 million, predominately for aircraft. Of such amount, RMB3,512 million,
      RMB3,616 million, RMB3,483 million, RMB3,413 million, RMB3,324 million and
      RMB10,831 million, respectively, is due in 2008, 2009, 2010, 2011, 2012 and
      thereafter.





As
      of
      December 31, 2007, the Group had a working capital deficit of RMB33,811 million,
      as compared to a working capital deficit of RMB32,180 million as of December
      31,
      2006. 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. The increase
      in the Group’s working capital deficit from 2006 to 2007 was mainly because the
      Group sought increased short-term bank loans to finance its aircraft
      acquisitions. Upon deliveries of the aircraft, the Group continued to seek
      renewal of its short-term bank loans instead of replacing such loans with
      long-term bank loans, as the interest rates for short-term bank loans are lower.
      In 2008 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, the renewal of its short-term bank loans and
      on
      its ability to obtain adequate external financing to meet its committed future
      capital expenditure. At December 31, 2007, the Group entered into loan financing
      agreements with several PRC banks to provide financing up to RMB50,262 million,
      of which approximately RMB29,338 million was utilized. Subsequent to December
      31, 2007 and up to April 30, 2008, the Group entered into additional loan
      financing agreements to obtain financing up to RMB1,033 million during 2008.
      The
      directors of the Company believe that sufficient financing will be available
      to
      the Group.




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 cashflows. 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 cashflows. 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 cashflows 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, 2007, the Group had capital commitments as follows:





**2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **2012**
              **and**
              **afterwards**
            
            **Total****(RMB million)**Acquisition
                of aircraft and related equipment
            
            
            19,125
            
            
            20,767
            
            
            20,065
            
            
            12,747
            
            
            16,038
            
            
            88,742Others
            
            
            1,211
            
            
            694
            
            
            335
            
            
            196
            
            
            22
            
            
            2,45820,336
            
            
            21,461
            
            
            20,400
            
            
            12,943
            
            
            16,060
            
            
            91,200





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




As
      of
      December 31, 2007, the Group undertook to make a capital contribution of
      approximately RMB133 million to a subsidiary.


45


As
      of
      December 31, 2007, the cash and cash equivalents of the Group totaled RMB3,824
      million. Of such balance, 14.3% was denominated in.US Dollars, Hong Kong
      Dollars, Australian Dollars, Japanese Yen and other foreign currencies.




The
      Group
      expects that the cash from operations and short-term and long-term bank
      borrowings will be sufficient to meet its cash requirements in the foreseeable
      future.




**Contractual
      Obligations and Commercial Commitments** ****




The
      following table sets forth the Group’s obligations and commitments to make
      future payments under contracts and under commitments as of December 31, 2007.





**As of December 31, 2007**
              **Payment due by period**
            
            **As of**
              **December**
              **31,****2006****Total**
            
            **Less than**
              **1 year**
            
            **1-3**
              **years**
            
            **3-5**
              **years**
            
            **After 5**
              **years**
            
            **Total****(RMB million)****Contractual obligations (Note 1)**Short-term
                bank loans
            
            
            22,003
            
            
            22,003
            
            
            —
            
            
            —
            
            
            —
            
            
            **20,536**Long-term
                bank and other loans
            
            
            14,501
            
            
            4,230
            
            
            5,449
            
            
            2,607
            
            
            2,215
            
            
            **16,378**Obligations
                under finance leases
            
            
            19,499
            
            
            3,588
            
            
            4,214
            
            
            3,445
            
            
            8,252
            
            
            **18,773****Total
                contractual obligations**
            
            
            56,003
            
            
            29,821
            
            
            9,663
            
            
            6,052
            
            
            10,467
            
            
            **55,687****Other commercial commitments**Operating
                lease commitments
            
            
            28,179
            
            
            3,512
            
            
            7,099
            
            
            6,737
            
            
            10,831
            
            
            **21,969**Aircraft
                purchase commitments (Note 2)
            
            
            88,742
            
            
            19,125
            
            
            40,832
            
            
            28,785
            
            
            —
            
            
            **66,881**Other
                capital commitments
            
            
            2,458
            
            
            1,211
            
            
            1,029
            
            
            218
            
            
            —
            
            
            **1,824**Investing
                commitments
            
            
            133
            
            
            133
            
            
            —
            
            
            —
            
            
            —
            
            
            **83****Total
                commercial obligations**
            
            
            119,512
            
            
            23,981
            
            
            48,960
            
            
            35,740
            
            
            10,831
            
            
            **90,757**





Note
      1 Interest
      on variable rate loans was estimated based on the current rate in effect at
      December 31, 2007 .





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





**ITEM
      6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.** ****




**Directors,
      Senior Management and Employees** ****





The
      following table sets forth certain information concerning directors
      (“Directors”), senior management (“Senior Management”) and supervisors
      (“Supervisors”) of the Company in 2007. There were certain changes in the
      Company’s Directors, Senior Management and Supervisors subsequent to December
      31, 2007, details of which are set forth below.


46





**Name**
            
            **Position**
            
            **Gender**
            
            **Age**Liu
                Shao Yong
            
            Chairman
              of the Board
            
            
            Male
            
            
            50Li
                Wen Xin
            
            Director
            
            
            Male
            
            
            58Wang
                Quan Hua
            
            Director
            
            
            Male
            
            
            54Zhao
                Liu An
            
            Director
            
            
            Male
            
            
            60Si
                Xian Min
            
            Director,
              President
            
            
            Male
            
            
            51Tan
                Wan Geng
            
            Director,
              Executive Vice President
            
            
            Male
            
            
            44Xu
                Jie Bo
            
            Director,
              Executive Vice President, Chief Financial Officer
            
            
            Male
            
            
            43Chen
                Zhen You
            
            Director
            
            
            Male
            
            
            56Peter
                Lok (retired on June 28, 2007)
            
            Independent
              Non-executive Director
            
            
            Male
            
            
            71Wei
                Ming Hai
              (retired
                on June 28, 2007)
            
            Independent
              Non-executive Director
            
            
            Male
            
            
            43Wang
                Zhi
            
            Independent
              Non-executive Director
            
            
            Male
            
            
            66Sui
                Guang Jun
            
            Independent
              Non-executive Director
            
            
            Male
            
            
            47Gong
                Hua Zhang
              (appointed
                on June 28, 2007)
            
            Independent
              Non-executive Director
            
            
            Male
            
            
            62Lam
                Kwong Yu
              (appointed
                on June 28, 2007)
            
            Independent
              Non-executive Director
            
            
            Male
            
            
            64Sun
                Xiao Yi
            
            Chairman
              of the Supervisory Committee
            
            
            Male
            
            
            54Yang
                Guang Hua
            
            Supervisor
            
            
            Male
            
            
            55Yang
                Yi Hua
            
            Supervisor
            
            
            Female
            
            
            48Liang
                Zhong Gao
            
            Supervisor
            
            
            Male
            
            
            52Liu
                Biao (resigned on January 18, 2008)
            
            Supervisor
            
            
            Male
            
            
            42He
                Zong Kai
            
            Executive
              Vice President
            
            
            Male
            
            
            57Liu
                Qian
            
            Executive
              Vice President
            
            
            Male
            
            
            42Zhang
                Zi Fang
            
            Executive
              Vice President
            
            
            Male
            
            
            49Dong
                Su Guang
            
            Executive
              Vice President
            
            
            Male
            
            
            54Zhang
                Zheng Rong
            
            Chief
              pilot
            
            
            Male
            
            
            45Hu
                Chen Jie
            
            Chief
              Information Officer
            
            
            Male
            
            
            39Tang
                Bing
            
            Chief
              Engineer
            
            
            Male
            
            
            41Su
                Liang
            
            Chief
              Economist
            
            
            Male
            
            
            46Xie
                Bing
            
            Company
              Secretary
            
            
            Male
            
            
            35Chen
                Wei Hua
            
            Chief
              Legal Adviser
            
            
            Male
            
            
            42




47





On
      June
      28, 2007, the annual general meeting for the year 2006 of the Company reviewed
      and approved:





(1)
            the
                appointment of Mr. Liu Shao Yong, Mr. Li Wen Xin, Mr. Wang Quan Hua,
                Mr.
                Zhao Liu An, Mr. Si Xian Min, Mr. Tan Wan Geng, Mr. Xu Jie Bo, and
                Mr.
                Chen Zhen You as Directors, and Mr. Wang Zhi, Mr. Sui Guang Jun,
                Mr. Gong
                Hua Zhang and Mr. Lam Kwong Yu as Independent non-executive Directors
                of
                the fifth session of the Board.





(2)
            the
                retirement of Mr. Wei Ming Hai and Mr. Peter Lok as the Company’s
                Independent non-executive Directors of the Board according to relevant
                regulations, due to their acting as the Company’s Independent
                non-executive Directors of the Board for six consecutive
                years.





(3)
            the
                appointment of Mr. Sun Xiao Yi, Mr. Yang Guang Hua, Ms. Yang Yi Hua,
                Mr.
                Liang Zhong Gao and Mr. Liu Biao as the Supervisors of the fifth
                session
                of the Supervisory Committee.





Except
      that Mr. Liu Biao has officially resigned as a Supervisor in the general meeting
      held on January 18, 2008, since January 1, 2008 and up to the date of this
      Annual Report, there has been no change to the Directors and
      Supervisors.





**BOARD
      OF DIRECTORS**




**Mr.
      Liu Shao Yong** is
      the
      chairman of the Board. He is a qualified class one pilot. He joined the Company
      since November 2004. Mr. Liu graduated from China Civil Aviation Flying College
      and obtained an EMBA from Tsinghua University in 2005. He joined the civil
      aviation industry in 1978. He held the positions of Captain of the Flying
      Squadron of China General Aviation Corporation and was appointed as the Deputy
      General Manager of China General Aviation Corporation, Deputy Director of Shanxi
      Provincial Civil Aviation Administration, General Manager of the Shanxi branch
      of China Eastern Airlines Corporation Limited and the Chief of the Flying Model
      Division of the Civil Aviation Administration of China. He served as the
      President of China Eastern Airlines Corporation Limited and was appointed as
      the
      Vice Minister of Civil Aviation Administration of China. Since August 2004,
      Mr.
      Liu has served as the President of CSAHC. Mr. Liu has become the chairman of
      the
      Board since November 2004. Save as disclosed above, Mr. Liu is not connected
      with any Directors, senior management, substantial shareholders or Supervisors
      of the Company.





**Mr.
      Li Wen Xin** is
      currently a Director of the Company. Mr. Li was a graduate majoring in economic
      management. He is a senior expert of Political Science. Mr. Li joined the civil
      aviation industry in 1969. He was the secretary to the disciplinary committee,
      deputy secretary of the party committee and vice general manager of China
      General Aviation Corporation successively between 1991 and 1998. He was
      appointed the party secretary and vice general manager of the Shanxi branch
      of
      China Eastern Airlines Corporation Limited in February 1998. He became the
      vice
      party secretary and secretary to the disciplinary committee of China Eastern
      Air
      Holding Company in June 2000. In September 2002, he was appointed the party
      secretary and vice president of China Eastern Air Holding Company. Between
      June
      2000 and September 2006, he was the chairman of the supervisory committee of
      China Eastern Airlines Corporation Limited. He has been the party secretary
      and
      Executive Vice President of CSAHC since September 2006. Save as disclosed above,
      Mr. Li is not connected with any Directors, senior management, substantial
      shareholders or Supervisors of the Company.





**Mr.
      Wang Quan Hua** is
      currently a Director of the Company and Executive Vice President of CSAHC and
      became the employee of the Company since March 1995 after the establishment
      of
      the Company. Mr. Wang graduated from the Economic Management Department of
      Central Communist Party College. Mr. Wang began his career in civil aviation
      in
      1972, and successively served as the Director of Planning Department of
      Guangzhou Civil Aviation Administration, the Office Director of China Southern
      Airlines Shenzhen Co., the Director of the Planning and Operation Division
      of
      the Company, General Manager of Strategy and Development Department of the
      Company and the Executive Vice President of CSAHC. Save as disclosed above,
      Mr.
      Wang is not connected with any Directors, senior management, substantial
      shareholders or Supervisors of the Company.





**Mr.
      Zhao Liu An** is
      a
      Director of the Company and the Executive Vice President of CSAHC. Mr. Zhao
      joined the Company since May 2003. Mr. Zhao began his career in civil aviation
      in 1966, and successively served as the Director of Flight Meteorology and
      Flight Safety Monitoring Division, Director of Science Education Division,
      the
      Director of Flying Model Division of Urumqi Civil Aviation Administration,
      Captain of the Ninth Squadron of the Civil Aviation Administration, the Vice
      President and President of Urumqi Civil Aviation Administration and Xinjiang
      Airlines. Save as disclosed above, Mr. Zhao is not connected with any Directors,
      senior management, substantial shareholders or Supervisors of the Company.


48


**Mr.
      Si Xian Min** is
      a
      Director and President of the Company. Mr. Si graduated from No. 14 Aviation
      College as an aircraft piloting major with an associate degree. Mr. Si, a
      professional political tutor, began his career in civil aviation in 1975. He
      held positions as Director of the political division of China Southern Airlines
      Henan Branch, Party Secretary and Vice President of Guizhou Airlines, Deputy
      Party Secretary and the Secretary of the Disciplinary Department of the Company
      and Party Secretary of China Northern Airlines and has been the President of
      the
      Company since October 2004. Save as disclosed above, Mr. Si is not connected
      with any Directors, senior management, substantial shareholders or Supervisors
      of the Company.





**Mr.
      Tan Wan Geng** is
      a
      Director, Secretary of the CPC Committee and Executive Vice President. Mr.
      Tan
      is an engineer graduated from Economic Geography Department in Sun Yat-sen
      University, with major in Regional Economy, with qualification of post graduate
      degree, and a master degree in economics. Mr. Tan has previously served as
      the
      Head of the Infrastructure Department and Director of Human Resources Department
      of the Beijing Aircraft Maintenance and Engineering Corporation from 1990 to
      1996, the Deputy Director of Human Resources Division (Personnel and Education
      Division) in the General Administration of Civil Aviation of China from 1996
      to
      2000, and has been the Director General and Secretary of Chinese Communist
      Party
      Committee of Northeastern Regional Civil Aviation Administration from December
      2000 to January 2006. He has been an Executive Vice President of the Company
      since February 2006. Save as disclosed above, Mr. Tan is not connected with
      any
      of the Directors, senior management, substantial shareholders or Supervisors
      of
      the Company.





**Mr.
      Xu Jie Bo** is
      a
      Director, Executive Vice President and Chief Financial Officer of the Company.
      Mr. Xu joined the Company in July 1998. He graduated from the Management
      Department of Tianjin University and was subsequently awarded with a master
      degree in business administration from Hong Kong Baptist University. A qualified
      senior accountant by profession, Mr. Xu started his career in August 1986.
      In
      December 1992, he took up the posts of Deputy Director and Director of the
      Financial Department of Central and Southern China Civil Aviation
      Administration. In July 1998, he became General Manager of the Financial
      Department and Chief Financial Officer of the Company. Currently, he is a
      Director, Executive Vice President and Chief Financial Officer of the Company.
      He is also Vice Chairman of Sichuan Airlines Corporation Limited and Vice
      Chairman of Xiamen Airlines. Save as disclosed above, Mr. Xu is not connected
      with any of the Directors, senior management, substantial shareholders or
      Supervisors of the Company.





**Mr.
      Chen Zhen You** is
      a
      Director and Chairman of the Labour Union of the Company, graduated from South
      China Normal University with a bachelor’s degree in English. Mr. Chen, an
      economist, holds an MBA from Murdoch University in Australia. He worked as
      the
      Vice Director of the Office of International Affairs of Guangzhou Civil Aviation
      Administration, Vice Director of the Office of Overseas Business of the Company
      and General Manager of the Department of Foreign Affairs of the Company. From
      2001 to 2005, he was the Office Director of CSAHC and the Director of the
      Planning and Investment Department of CSAHC. He has been a member of the Party
      Committee and Chairman of the Labour Union of the Company since June 2005.
      Save
      as disclosed above, Mr. Chen is not connected with any of the Directors, senior
      management, substantial shareholders or Supervisors of the Company.





**Mr.
      Wang Zhi** has
      been
      an Independent Non-Executive Director of the Company since May 2003. Mr. Wang
      graduated from the Aircraft Design Department of Harbin Institute of Technology.
      Mr. Wang began his career in 1965, and has successively served as the Director
      and Senior Engineer of Aeronautics Research Institute of China, the Vice
      Director and Vice secretary of the First Research Institute of Civil Aviation,
      the Vice Director and Director of the Planning Bureau of CAAC and the Director
      of the Planning Technology System Reform Department and the Planning Technology
      Department of CAAC. Mr. Wang is also a professor in several universities. Save
      as disclosed above, Mr. Wang is not connected with any Directors, senior
      management or substantial shareholders or Supervisors of the Company.





**Mr.
      Sui Guang Jun** has
      been
      an Independent Non-Executive Director of the Company since May 2003. Mr. Sui
      graduated from the Economic Department of Jinan University in 1986 and obtained
      a master degree in 1989. Mr. Sui obtained a doctor degree in the Management
      of
      Organizations of Jinan University in 1996. He has successively served as the
      Vice Director of the Research Institute of Hong Kong and Macau Economies, the
      Dean of corporate administration department of Jinan University and the Chief
      of
      the Post-doc Committee of Applied Economics and the Dean of Management College
      in Jinan University. Mr. Sui is currently the Deputy Vice Chancellor of
      Guangdong University of Foreign Studies. Save as disclosed above, Mr. Sui is
      not
      connected with any Directors, senior management or substantial shareholders
      or
      Supervisors of the Company.


49


**Mr.
      Gong Hua Zhang** ,
      an
      Independent Non-Executive Director of the Company, used to be the chief
      accountant, vice director and director of the financial bureau of China National
      Petroleum Corporation as well as the chief accountant of China National
      Petroleum Corporation. He has been serving as a director of PetroChina Company
      Limited since October 1999. Mr. Gong also acts as a part-time professor in
      Tsinghua University, Nankai University, Xiamen University and China University
      of Petroleum, and is a professor in National Accounting Institute (Beijing).
      Save as disclosed above, Mr. Gong is not connected with any Directors, senior
      management or substantial shareholders or Supervisors of the Company.





**Mr.
      Lam Kwong Yu** an
      Independent Non-Executive Director of the Company, is an expert in the field
      of
      civil aviation. Mr. Lam used to serve as the general manager of the Hong Kong
      Airport, the Vice Director and Director of the Civil Aviation Department of
      Hong
      Kong, a director of the Airport Authority Hong Kong and the chairman of the
      Aviation Advisory Board of Hong Kong. Mr. Lam is currently a member of the
      Selection Committee for the Hong Kong Special Administrative Region. Save as
      disclosed above, Mr. Lam is not connected with any Directors, senior management
      or substantial shareholders or Supervisors of the Company.





**SUPERVISORY
      COMMITTEE**





As
      required by the Company Law of the PRC and the Articles of Association of the
      Company, the Company has 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 four Supervisors. Two of the Supervisors
      are
      shareholder representatives appointed by shareholders, and the other two
      Supervisors are representatives of the Company’s employees. The Supervisors
      serve terms of three years and may serve consecutive terms.





**Mr.
      Sun Xiao Yi** ,
      the
      chairman of the Supervisory Committee of the Company, is a member of Party
      Committee and head of Discipline Supervision Team of CSAHC. Mr. Sun graduated
      from the Civil Aviation University of China with a degree in Economics and
      Administration and is currently a postgraduate law student of Central Communist
      Party College. Mr. Sun is a senior expert of Political Science and Economics
      with an associate degree. Mr. Sun has successively served as Vice Party
      Secretary of the Hubei branch of the Company, Party Secretary of the Flight
      Operations Department of the Company, and Vice Party Secretary of CSAHC. Save
      as
      disclosed above, Mr. Sun is not connected with any Directors, senior management,
      substantial shareholders or Supervisors of the Company.





**Mr.
      Yang Guang Hua** ,
      a
      Supervisor of the Company. Mr. Yang is an engineer with university
      qualification. Mr. Yang has successively served as Deputy General Manager of
      the
      Hunan branch of the Company, General Manager of Southern Airlines (Group) Zhuhai
      Helicopters Company Limited, General Manager of the Hunan branch of the Company,
      and Deputy General Manager of the Company. He has been the President of Xiamen
      Airlines since September 2005. Save as disclosed above, Mr. Yang is not
      connected with any Directors, senior management, substantial shareholders or
      Supervisors of the Company.





**Ms.
      Yang Yi Hua** ,
      a
      Supervisor of the Company, is the General Manager of the Audit Department of
      the
      Company. Ms. Yang is a Certified Internal Auditor. She has successively served
      as Deputy Manager of the Clearance and Settlement Office of the Financial
      Division of the Guangzhou Civil Aviation Administration, Manager of the
      Financial Office of the Company’s Financial Division, and Deputy General Manager
      of the Company’s Audit Department. Save as disclosed above, Ms. Yang is not
      connected with any Directors, senior management, substantial shareholders or
      Supervisors of the Company.





**Mr.
      Liang Zhong Gao** ,
      a
      Supervisor of the Company, serves as the Director of the Supervisory Department
      of the Company. Mr. Liang once served as the Party Secretary and 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. Save as disclosed above, Mr. Liang is not connected with any Directors,
      senior management, substantial shareholders or Supervisors of the Company.


50





**SENIOR
      MANAGEMENT**





**Mr.
      He Zong Kai** is
      an
      Executive Vice President of the Company who graduated from Beijing Foreign
      Language Institute with a major degree in French, and 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. He assumed the offices of the President
      and
      Deputy Party Secretary of Hubei branch of the Company and became an Executive
      Vice President of the Company since March 2005.





**Mr.
      Liu Qian** is
      currently an Executive Vice President of the Company who graduated from China
      Civil Aviation Flying College with specialty in aircraft piloting. Mr. Liu
      served the Civil Aviation Administration of China as assistant researcher of
      the
      piloting skills supervision division of the piloting standards department,
      as
      assistant researcher of the operation supervision division of the piloting
      standards department, as assistant researcher of the freight transportation
      piloting standards division of the piloting standards department, and as the
      Deputy Head of the Piloting Standards Division of the Piloting Standards
      Department. He has assumed the offices of the Deputy Chief Pilot and Chief
      Pilot
      of the Company since November 2004. He has been an Executive Vice President
      of
      the Company since August 2007.





**Mr.
      Zhang Zi Fang** is
      an
      Executive Vice President of the Company. Mr. Zhang served as the Deputy
      Commissar and subsequently the Commissar of the Pilot Corps of China Northern
      Airlines Company, and later on the Party Secretary of the Jilin Branch. He
      served as General Manager of Dalian Branch of CSAHC Northern Division and
      Director of Political Works Department of CSAHC. He also served as the Vice
      Party Secretary and Secretary of the Disciplinary Committee of the Company.
      He
      has been an Executive Vice President of the Company since 27 December 2007.





**Mr.
      Dong Su Guang** is
      an
      Executive Vice President of the Company. Mr. Dong used to be a Deputy General
      Manager of Guangzhou Aircraft Maintaining and Engineering Co., Ltd, as well
      as
      Chief Engineer and the General Manager of Aircraft Engineering Department of
      the
      Company. He has been an Executive Vice President of the Company since 27
      December 2007.





**Mr.
      Zhang Zheng Rong** is
      the
      chief pilot of the Company. Mr. Zhang used to serve as the Captain of the First
      Squadron of CAAC, 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 of the Company. He has been the General
      Manager and Party Secretary of the Guangzhou Flight Operations Division of
      the
      Company since May 2004. He has been the chief pilot of the Company since August
      2007.





**Mr.
      Hu Chen Jie** ,
      the
      Chief Information Officer of the Company. 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.
      Tang Bing** ,
      the
      Chief Engineer of the Company. Mr. Tang served as a deputy manager and vice
      engineering director of the Engineering Technology Division under the Aircraft
      Engineering Department of the Company, and as a vice director of the Business
      Development and Accessories Centre of Guangzhou Aircraft Maintenance Engineering
      Co., Ltd. He also served as Vice President of MTU Maintenance Zhuhai Co., Ltd.,
      Office Director of CSAHC as well as the President and Vice Party Secretary
      of
      Chongqing Airlines. He has been the Chief Engineer of the Company since 27
      December 2007.





**Mr.
      Su Liang** ,
      the
      chief economist of the Company, was a graduate of the University of Cranfield,
      United Kingdom with a master degree in Air Transport Management Engineering.
      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.


51


**Mr.
      Xie Bing** ,
      the
      Secretary of the Board of Directors of the Company, graduated from Nanjing
      University of Aeronautics and Astronautics, majoring in civil aviation
      management. He subsequently received a master degree of business administration
      and a master degree of international finance from Jinan University and the
      University of Birmingham, Britain respectively. Mr. Xie used to work in the
      Planning and Development Department and Secretariat of the Board of Directors
      of
      the Company. He has been the Company Secretary of the Company since November
      2007.





**Mr.
      Chen Wei Hua** ,
      the
      Chief Legal Adviser to the Company. Mr. Chen graduated from the school of law
      of
      Peking University. He is a qualified solicitor in the PRC and a qualified
      corporate legal counsellor. Mr. Chen joined the Civil Aviation Administration
      of
      China in 1988. He then joined the CSAHC in January 1991. From 1997 to 2003,
      he
      served as Vice Director and Director of the Legal Affairs Office of the Company.
      Currently, he is President of the Legal Department of the Company. Since January
      2004, Mr. Chen has been the Chief Legal Adviser to the Company. He is also
      a
      Director of Xiamen Airlines.





**Compensation** ****




The
      aggregate compensation paid to all Directors, Supervisors and Senior Management
      for 2007 was RMB12,501,000. For the year ended December 31, 2007, the Company
      paid an aggregate of approximately RMB275,000 on behalf of its executive
      Directors, Supervisors and Senior Management pursuant to the SA Pension Scheme
      and the retirement plans operated by various municipal governments in which
      the
      Company participates.




Details
      of Directors’ and Supervisors’ emoluments for the year ended December 31, 2007
      are set out below:








**Note**
            
            **Directors’**
              **fees**
              **RMB’000**
            
            **Salaries,
                allowances**
              **and benefits**
              **in kind**
              **RMB’000**
            
            **Discretionary
                bonus**
              **RMB’000**
            
            **Retirement**
              **scheme
                contributions**
              **RMB’000**
            
            **Total**
              **RMB’000***Executive
                directors*Liu
                Shao Yong
            
            
            (i)
            
            
            —
            
            
            737
            
            
            —
            
            
            14
            
            
            751Li
                Wen Xin
            
            
            
            
            
            —
            
            
            329
            
            
            —
            
            
            14
            
            
            343Wang
                Quan Hua
            
            
            
            
            
            —
            
            
            597
            
            
            —
            
            
            14
            
            
            611Zhao
                Liu An
            
            
            (i)
            
            
            —
            
            
            576
            
            
            —
            
            
            14
            
            
            590Si
                Xian Min
            
            
            
            
            
            —
            
            
            670
            
            
            —
            
            
            13
            
            
            683Tan
                Wan Geng
            
            
            
            
            
            —
            
            
            542
            
            
            —
            
            
            13
            
            
            555Xu
                Jie Bo
            
            
            
            
            
            —
            
            
            529
            
            
            —
            
            
            13
            
            
            542Chen
                Zhen You
            
            
            
            
            
            —
            
            
            513
            
            
            —
            
            
            16
            
            
            529*Supervisors*Sun
                Xiao Yi
            
            
            
            
            
            —
            
            
            597
            
            
            —
            
            
            14
            
            
            611Yang
                Guang Hua
            
            
            
            
            
            —
            
            
            565
            
            
            —
            
            
            8
            
            
            573Yang
                Yi Hua
            
            
            
            
            
            —
            
            
            209
            
            
            —
            
            
            16
            
            
            225Liang
                Zhong Gao
            
            
            (iii)
            
            
            —
            
            
            232
            
            
            —
            
            
            12
            
            
            244Liu
                Biao
            
            
            (iv)
            
            
            —
            
            
            134
            
            
            —
            
            
            2
            
            
            136*Independent
                non-executive directors*Peter
                Lok
            
            
            (ii)
            
            
            49
            
            
            —
            
            
            —
            
            
            —
            
            
            49Wei
                Ming Hai
            
            
            (ii)
            
            
            50
            
            
            —
            
            
            —
            
            
            —
            
            
            50Gong
                Hua Zhang
            
            
            (iii)
            
            
            50
            
            
            —
            
            
            —
            
            
            —
            
            
            50Wang
                Zhi
            
            
            
            
            
            100
            
            
            —
            
            
            —
            
            
            —
            
            
            100Sui
                Guang Jun
            
            
            
            
            
            100
            
            
            —
            
            
            —
            
            
            —
            
            
            100Lam
                Kwong Yu
            
            
            (iii)
            
            
            48
            
            
            —
            
            
            —
            
            
            —
            
            
            48Total
            
            
            
            
            
            397
            
            
            6,230
            
            
            —
            
            
            163
            
            
            6,790




52


Notes:





(i) The
      above
      amounts included the salaries paid to these Directors as pilots of the
      Company.





(ii)
      Retired on June 28, 2007.





(iii)
      Appointed on June 28, 2007.





(iv)
      Appointed on June 28, 2007 and resigned on January 18, 2008.





**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 2010. A Director may serve consecutive terms
      upon re-election.




Audit
      Committee




The
      audit
      committee is appointed by the Board of Directors and consists of three
      independent non-executive Directors. The current members of the audit committee
      are Gong Hua Zhang, Wang Zhi and Sui Guang Jun. Gong Hua Zhang is the chairman
      of the audit committee. The term of office of each member is three years. The
      term for Messrs Wang Zhi and Sui Guang Jun will end in 2009, The term of Mr.
      Gong Hua Zhang will end in 2010. 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 nine meetings in 2007, 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.


53





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 Sui Guang Jun with independent
      non-executive Director Gong Hua Zhang and 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 2010. A member may serve consecutive terms
      upon
      re-election. The Remuneration and Assessment Committee met twice in 2007, 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 “preliminary proposals on annual emoluments of the directors and
      senior management of the Group”. 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
      2007.





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
      at
      December 31, 2007, the Nomination Committee consists of three members, Messers
      Liu Shao Yong, Wang Zhi and Gong Hua Zhang. Most of them are independent
      non-executive Directors of the Company (“INEDs”) and
      Mr.
      Liu Shao Yong acts as the chairman. 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 engage intermediate agencies to provide professional
      advice on its proposals if necessary.





The
      Nomination Committee held three meetings in 2007. which were attended by all
      members.





**Employees** ****




As
      of
      December 31, 2007, the Group had 45,474 employees, including 3,931 pilots,
      7,159
      flight attendants, 5,721 maintenance personnel, 5,303 sales and marketing
      personnel, 2,401 ground service personnel, 1,349 flight operation officers,
      1,399 financial personnel and 8,961 administrative and other personnel. All
      of
      the Group’s pilots, flight attendants, maintenance personnel, administrative
      personnel and sales and marketing personnel are contract employees, and most
      of
      the Group’s ancillary service workers are temporary employees. Contract
      employees are hired by the Group pursuant to renewable employment contracts
      with
      terms ranging from three to five years. Temporary employees generally are hired
      by the Group pursuant to at-will employment contracts or employment contracts
      with a term of one year.




54


The
      Company’s employees are members of a trade union organized under the auspices of
      the All-China’s 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 recognised 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*





Pursuant
      to the relevant laws and regulations of the PRC, the Group has joined a defined
      contribution basic retirement scheme for the employees arranged by local Labour
      and Social Security Bureaus. The Group makes contributions to the retirement
      scheme at the applicable rates based on the amounts stipulated by the government
      organization. The contributions are charged to profit or loss on an accrual
      basis. When employees retire, the local Labour and Social Security Bureaus
      are
      responsible for the payment of the basic retirement benefits to the retired
      employees.





*(b)
      Housing fund and other social insurances*





Besides
      the retirement benefits, pursuant to the relevant laws and regulations of the
      PRC, the Group has joined defined social security contributions for employees,
      such as a housing fund, basic medical insurance, unemployment insurance, injury
      insurance and maternity insurance. The Group makes contributions to the housing
      fund and other social insurances mentioned above at the applicable rates based
      on the employees’ salaries. The contributions are recognized as cost of assets
      or charged to profit or loss on an accrual basis.





*(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 profit or loss 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.


55


**Share
      Ownership** ****




As
      of the
      date of this Annual Report, no Director, Senior Management or Supervisor of
      the
      Company is a beneficial owner of any shares of the Company’s capital stock. As
      of the date of this Annual Report, no arrangement has been put in place
      involving issue or grant of options or shares or securities of the Company
      to
      any of the Director, Senior Management, Supervisor or employees of the Company.




**ITEM
      7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.** ****




**Major
      Shareholders** ****




Share
      Capital Structure




As
      of May
      31, 2008, the total share capital of the Company was divided into 4,374,178,000
      shares, of which approximately 50.3% (2,200,000,000 domestic shares) was held
      by
      CSAHC, approximately 26.84% (1,174,178,000 H shares) was held by Hong Kong
      and
      overseas shareholders and approximately 22.86% (1,000,000,000 A shares) was
      held
      by domestic shareholders. CSAHC owns 50.30% 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 May
      31, 2008, 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
            
            
            2,200,000,000
                domestic shares
            
            
            50.30
            %HKSCC
                Nominees Limited
            
            
            1,162,215,598
                H shares
            
            
            26.57
            %





The
      table
      below sets forth, as of May 31, 2008, the following entities hold 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 H**
              **Shares**HKSCC
                Nominees Limited
            
            
            1,162,215,598
            
            
            98.98
            %





Domestic
      shares and H shares have identical voting rights.




**Related
      Party Transactions**




The
      Company enters into transactions from time to time with CSAHC and its
      associates. For a description of such transactions, see Note 39 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 associates. The Company believes that these arrangements have
      been
      entered into by the Group in the ordinary course of business and in accordance
      with the agreements governing such transactions.


56


Arrangements
      with CSAHC




*Trademark
      License Agreement*




The
      Company and CSAHC entered into a ten year trademark license agreement dated
      May
      22, 1997 pursuant to which CSAHC acknowledges that the Company has the right
      to
      use the name “China Southern” and “China Southern Airlines” in both Chinese and
      English, and grants the Company a renewable royalty free license to use the
      kapok logo on a worldwide basis in connection with the Company’s airline and
      airline-related businesses. As CSAHC did not give a written notice of
      termination three months before the expiration of the agreement, the agreement
      is automatically renewed for another ten year term.





*Leases*




The
      Company as lessee and CSAHC as lessor have entered into the following lease
      agreements:




(1)
            On
                May 22, 1997, the Company and CSAHC entered into a Lease Agreement
                pursuant to which CSAHC leased to the Company certain land and properties
                at various locations in Guangzhou, Haikou and Wuhan for a term of
                five
                years, which was renewable by agreement between both parties thereto.





On
      May
      15, 2001, the Company and CSAHC entered into a lease agreement pursuant to
      which
      CSAHC leased to the Company certain parcels of land, properties, and buildings
      at various locations at Hengyang, Jingzhou (previously known as “Shashi”) and
      Nanyang for a term of five years, and the rents were calculated on the basis
      of
      annual depreciation method. Such Lease Agreement was renewable by agreement
      between both parties thereto.





In
      order
      to comply with the relevant provisions of the Hong Kong Listing Rules regarding
      connected transactions, the Company and CSAHC have entered into a general lease
      agreement based on the above agreements through determination and negotiation
      regarding the actual situation of the lands, properties and buildings located
      in
      above areas. This Lease Agreement takes effect retrospectively on January 1,
      2006, and is valid for a term of three years. Under this Lease Agreement, the
      total rent payable is RMB86,029,619.01, of which, the annual rents payable
      for
      the years 2006, 2007 and 2008 are RMB27,543,606.01, RMB28,657,966.99 and
      RMB29,828,046.01 respectively. However, the total rents in the original several
      lease agreements are RMB92,452,479.48 for the term of five years.




(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 land and buildings.




(3)
            The
                Company and CSAHC entered into a lease agreement dated November 12,
                2004,
                under which CSAHC leases to the Company certain lands by leasing
                the land
                use rights of such lands to the Company. These lands had been
                administratively allocated to XJA and CNA for the purposes of their
                civil
                aviation and related businesses. Subsequently, CSAHC was authorized
                to
                deal with the land use rights of such lands, including leasing, but
                not
                transferring, such land use rights. Total area of the lands leased
                is
                1,182,297 square meters, and the locations of such lands are in Urumqi,
                Shenyang, Dalian and Harbin. The lease is for a fixed term of three
                years,
                commencing from the effective date of the lease, and is renewable,
                subject
                to compliance with the relevant requirements of the Hong Kong Listing
                Rules by the Company, by an application in writing by the Company
                to the
                lessor three months before the end of the fixed term. The rent for
                the
                land use rights of the designated lands under lease agreement is
                RMB22,298,000 per year, payable in arrear by cheque, in cash or by
                bank
                transfer on or before the 10th day of each calendar month, and was
                determined after arm’s length negotiations between the parties. The
                maximum aggregate annual limit (“Cap”) for the lease agreement is set at
                RMB22,298,000 per year. This lease agreement expired on December
                31, 2007
                and the Company and CSAHC had entered into a new agreement regarding
                the
                said lease. For details, please refer to item (6)
                below.


57


(4)
            The
                Company, CSAHC and CNA entered into a lease agreement dated November
                12,
                2004, under which CSAHC and CNA lease to the Company certain buildings,
                facilities and other infrastructure related to the civil aviation
                businesses of CNA situated at various locations in Shenyang, Dalian,
                Jilin, Harbin, Chaoyang and Russia. The lease is for a fixed term
                of three
                years, commencing from the date of the lease, and is renewable, subject
                to
                compliance with the relevant requirements of the Hong Kong Listing
                Rules
                by the Company, by an application in writing by the Company to the
                lessor
                three months before the end of the fixed term. The consideration
                for the
                lease agreement is RMB43,758,000 per year, payable in arrear by cheque,
                in
                cash or by bank transfer on or before the 10th day of each calendar
                month,
                and is determined after arm’s length negotiation between the parties. The
                Cap for the lease agreement is set at RMB43,758,000 per year. This
                lease
                agreement expired on December 31, 2007 and the Company and CSAHC
                had
                entered into a new agreement regarding the said lease. For details,
                please
                refer to item (6) below.




(5)
            The
                Company, CSAHC and XJA entered into a lease agreement dated November
                12,
                2004, under which CSAHC and XJA lease to the Company certain buildings,
                facilities and other infrastructure related to the civil aviation
                businesses of XJA situated in Xinjiang and Russia. The lease is for
                a
                fixed term of three years, commencing from the effective date of
                the
                lease, and is renewable, subject to compliance with the relevant
                requirements of the Hong Kong Listing Rules by the Company, by an
                application in writing by the Company to the lessor three months
                before
                the end of the fixed term. The consideration for the lease agreement
                is
                RMB5,798,000 per year, payable in arrear by cheque, in cash or by
                bank
                transfer on or before the 10th day of each calendar month, and is
                determined after arm’s length negotiation between the parties. The Cap for
                the lease agreement is set at RMB5,798,000 per year. This lease agreement
                expired on December 31, 2007 and the Company and CSAHC had entered
                into a
                new agreement regarding the said lease. For details, please refer
                to item
                (6) below.




(6)
            Due
                to the expiration on December 31, 2007 of the Land Use Rights Lease
                Agreement, the Property Lease Agreement between the Company and CSAHC,
                and
                CNA, as well as the Property Lease Agreement between the Company
                and
                CSAHC, and XJA as disclosed in items (3), (4) and (5) above, and
                in order
                to ensure normal operation of the Company, the Company, based on
                the
                current actual leasing conditions of both parties, consolidate the
                three
                agreements into two agreements by the type of the leased properties,
                namely the Land Lease Agreement and the Property Lease Agreement.
                Those
                two agreements were entered into between the Company and CSAHC on
                January
                10, 2008 and effective for a period from January 1, 2008 to December
                31,
                2010. As provided for in the Land Lease Agreement and the Property
                Lease
                Agreement, the leased areas of the related lands and properties were
                changed to 1,104,209.69 square metres and 197,010.37 square metres
                respectively, and their annual rentals were adjusted to RMB21,817,145.00
                and RMB48,474,632.77, or an aggregate of RMB70,291,777.77 for each
                of the
                years from 2008 to 2010. The rentals were determined by reference
                to the
                market rents of the same district and on the basis that unit rental
                and
                payment terms remained unchanged. The independent non-executive Directors
                of the Company have approved the above two
                agreements.





Acquisition/Disposal
      of Assets





The
      Company entered into an agreement on August 14, 2007 with CSAHC for the
      acquisition from CSAHC of the entire equity interests in SAG Air Catering
      Company, the assets of Guangzhou BiHuaYuan Training Centre, certain physical
      assets of Nan Lung Travel & Express (Hong Kong) Limited (“Nan Lung”) and the
      51% equity interest in Nan Lung International Freight Company Limited held
      by
      Nan Lung for a total consideration of RMB270,000,000, and for the sale to CSAHC
      of a 90% interest in Guangzhou Aviation Hotel at a consideration of
      RMB75,000,000. The resolutions relating to the above transactions were
      unanimously approved by the independent non-executive Directors.





Arrangements
      with CSAHC’s Associates





*Southern
      Airlines (Groups) Import and Export Trading Company ("SAIETC"), a wholly owned
      subsidiary of CSAHC*





The
      Company and SAIETC entered into an Import and Export Agency Framework Agreement
      dated January 1, 2006 for the import and export of aircraft, flight equipment,
      special vehicles for airline use, communication and navigation facilities,
      and
      training facilities. The Import and Export Agency Framework Agreement is valid
      for a term of three years, commencing from the date of agreement, subject to
      compliance with the relevant provisions of the Hong Kong Listing Rules by the
      Company. Both parties agreed that the agency fee for import and export shall
      be
      determined after arm’s length negotiation and shall not be higher than the
      market rate. The annual cap for such agreement shall be RMB80,000,000 per annum.
      The independent non-executive Directors of the Company have approved the Import
      and Export Agency Framework Agreement.


58


On
      January 10, 2008, the Company entered into a new Import and Export Agency
      Framework Agreement with SAIETC, pursuant to which the parties shall cooperate
      on the following business domains: import and export, customs clearance,
      declaration and examination, tendering and agency, etc.. The Agreement is valid
      from January 1, 2008 to December 31, 2010, and the annual cap for the commission
      should not exceed RMB90,000,000. The INEDs have approved this new Import and
      Export Agency Framework Agreement.





For
      the
      year ended December 31, 2007, the commission expense incurred by the Group
      in
      respect of the import and export of the above equipment was
      RMB46,205,000.




*Southern
      Airlines Culture and Media Co., Ltd. (“SACM”), which is 50% owned by the Company
      and 50% owned by CSAHC*





The
      Company and Southern Airlines Advertising Company (“SAAC”) entered into a new
      Advertising Agency Agreement dated January 1, 2006. SAAC and SACM entered
      into an acquisition agreement in 2006 whereby SACM acquired and merged with
      SAAC
      and assumed the rights, obligations and business of SAAC.





Advertising
      Agency Agreement is valid for a term of three years commencing from the date
      of
      the agreement. Under the agreement, SACM will produce advertisement script,
      graphic and music to the Company with the copyright of such products belonging
      to the Company, subject to compliance with the relevant provisions of the
      Listing Rules. The parties have determined the various rates for providing
      advertising services after negotiations on a fair and equitable basis, which
      are
      not higher than the market rates for similar advertising services. The
      independent non-executive Directors of the Company have approved such
      Advertising Agency Agreement.




On
      April
      12, 2007, the Company and SACM entered into an Advertising Agency Framework
      Agreement for a term of three years commencing from the date of the agreement.
      Under the agreement, SACM will produce advertisement script, graphic and music
      for the Company with the copyrights of such products belonging to the Company,
      subject to compliance with the relevant provisions of the Hong Kong Listing
      Rules. The parties have agreed to determine the various rates for providing
      advertising agency services through negotiations on arms length basis, SACM
      has
      undertaken to charge the Company on the basis of the market rates for similar
      advertising agency services as accepted by the Company. Pursuant to the
      agreement, the annual caps for 2007, 2008 and 2009 shall be RMB16,000,000,
      RMB20,500,000 and RMB25,500,000 respectively. The INEDs have approved the
      agreement.





For
      the
      year ended December 31, 2007, payments made by the Group to SACM for advertising
      services amounted to RMB8,669,000.





*China
      Southern Airlines Group Finance Company Limited (“SA Finance”) which is 66%
      owned by CSAHC, 21.1% owned by the Company and 12.9% owned in aggregate by
      subsidiaries of the Company*





The
      Company entered into a Financial Services Agreement (“Financial Services
      Agreement”) dated May 22, 1997 with SA Finance for the provision of financial
      services such as deposit and loan facilities, credit facilities, financial
      guarantees and credit references. The agreement was extended to May 22, 2006.
      In
      order to comply with the new requirements under the Listing Rules, the Company
      and SA Finance entered into a new Financial Services Agreement on December
      31,
      2004. On November 15, 2007, the Group renewed the Financial Services Framework
      Agreement with SA Finance, commencing from January 1, 2008 for a period of
      three
      years, and is renewable upon request by the Company by written notice of not
      less than 30 days before the end of the fixed term, subject to compliance with
      the requirements of the listing rules applicable in the places of listing of
      the
      Company.


As
      the
      Financial Services Agreement constitutes a discloseable and non-exempt
      continuing connected transaction within the meaning of Rule 14A.35 of the Hong
      Kong Listing Rules, it is subject to requirements under Rule 14A.48 of the
      Hong
      Kong Listing Rules regarding the reporting, announcement and independent
      shareholders’ approval. The independent shareholders of the Company approved the
      Financial Services Framework Agreement at the first extraordinary general
      meeting of the Company held on January 18, 2008.


59


Under
      such agreement, SA Finance agrees to provide to the Company the following
      financial services:





SA
      Finance shall pay interests to the Group 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, including the
      Industrial and Commercial Bank of China, China Construction Bank, Agricultural
      Bank of China, Bank of Communications, Bank of China, China Merchants Bank
      and
      Standard Chartered Bank (China), etc.. In order to ensure the implementation
      of
      the Agreement, SA Finance has agreed that the loans it provided to CSAHC and
      its
      subsidiaries other than the Group should not exceed the aggregate of share
      capital, reserves and total deposits of other companies (excluding the Group).
      The rates should be determined on arm’s length basis and based on fair market
      rate, and should not be higher than those available from independent third
      parties. The parties hereby agreed that the balance of the Group’s deposits
      placed with SA Finance (including accrued interests) should not at any time
      exceed RMB2.6 billion, nor should the balance of loans provided to 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 million. The
      agreement is valid for a term of three years.





As
      of
      December 31, 2007, the Group’s deposits placed with SA Finance amounted to
      RMB906 million. The applicable interest rates are determined in accordance
      with
      the rates published by the People’s Bank of China.





As
      of
      December 31, 2007, loans from SA Finance to the Group amounted up to RMB329
      million which bore interest at rates ranging from 5.10% to 6.16% per annum
      during the year.




*Shenzhen
      Air Catering Company Limited, which is 33% owned by CSAHC, and 67% owned by
      two
      independent third parties*





The
      Company and Shenzhen Air Catering Company Limited entered into an agreement
      dated May 23, 1997 for the sale and purchase of in-flight meals for flights
      originating or stopping at the airport in Shenzhen. Pursuant to such agreement,
      Shenzhen Air Catering Company Limited will supply in-flight meals to the Group
      from time to time during the term from May 23, 1997 to May 23, 1998. The parties
      have mutually agreed that the agreement can be renewed automatically.





For
      the
      year ended December 31, 2007, the amount payable by the Group to Shenzhen Air
      Catering Company Limited for the provision of in-flight meals was approximately
      RMB55,857,000.




*China
      Southern West Australian Flying College Pty Ltd (the “Australian Pilot
      College”), which is 65% owned by the Company and 35% owned by
      CSAHC*





CSAHC
      and
      the Australian Pilot College entered into an agreement dated October 7, 1993
      for
      the provision of pilot training in Australia to the cadet pilots of CSAHC (the
      “Training Agreement”). The Training Agreement will remain in force unless
      terminated by either party upon 90 days’ prior written notice to the other
      party. Pursuant to the Demerger Agreement, the Company has assumed all the
      interests, rights and obligations of CSAHC under the Training Agreement.





For
      the
      year ended December 31, 2007, the amount payable by the Group to the Australian
      Pilot College for training services was RMB109,847,000.





*Southern
      Airlines (Group) Economic Development Company, which is 61% owned by CSAHC
      and
      39% owned by an independent third party*





The
      Company and Southern Airlines (Group) Economic Development Company entered
      into
      an agreement dated May 22, 1997 for the provision of drinks, snacks, liquor,
      souvenirs and other products for a term extending from May 22, 1997 to May
      22,
      2007. Since May 23, 2007, Southern Airlines (Group) Economic Development Company
      has not carried out any continuing connected transactions for the provision
      of
      drinks, snacks, liquor, souvenirs and other products to the Company.





For
      the
      year ended December 31, 2007, the amount paid by the Group to Southern Airlines
      (Group) Economic Development Company for the provision of drinks, snacks,
      liquor, souvenirs and other products was RMB72,205,000.


60


*Sales
      arrangements*





The
      Group
      has entered into Ticket Agency Agreements for the sale of the Group’s air
      tickets with several subsidiaries of CSAHC (the “Agents”). The Agents charge
      commission on the basis of the rates stipulated by the CAAC and International
      Air Transport Association (“IATA”). The Group has other air ticket sales agents
      in China who also charge commission at the same rates. The Agents also act
      as
      air ticket sales agents for other Chinese airlines and charge the same rates
      of
      commission to such other airlines as those charged to the Group.





The
      Company and China Southern Airlines Group Passenger and Cargo Agent Company
      Limited (“PCACL”), a wholly-owned subsidiary of CSAHC, have entered into a new
      ticket agency framework agreement and a new airfreight forwarding agency
      framework dated January 1, 2006 (“Two Sales Agency Framework
      Agreements”).





The
      Two
      Sales Agency Framework Agreements are valid for a term of three years commencing
      from the date of the agreements, subject to the compliance of relevant
      provisions under the Hong Kong Listing Rules. The parties agreed that the agency
      fee shall be determined after arm’s length negotiation and shall not be higher
      than the market rate. The annual cap under each of the Two Sales Agency
      Framework Agreements is set at RMB10,000,000 per annum.





The
      Company and PCACL have entered into the Framework Agreement on Expanded
      Businesses Including the Sale of Air Tickets, the Airfreight Forwarding
      Services, Chartered Flight and Pallets Agency Services, Delivery Services For
      the Outside Storage Area and the relevant Internal Operation Services For the
      Inside Storage Area of China Southern Airlines Company Limited dated January
      10,
      2008 (“New Sales Agreement”), which is valid from January 1, 2008 to December
      31, 2010. 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, internal operation
      services for the inside storage area, and delivery services for the outside
      storage area and chartered flight and pallets sales agency business. The annual
      transaction cap of the sales value shall not exceed RMB250 million.





For
      the
      year ended December 31, 2007, the aggregate amount of ticket and cargo sales
      of
      the Group conducted through the above sales arrangement was
      RMB151,822,000.




*SAG
      Air Catering Company*





The
      Company and the SAG Air Catering Company entered into a catering agreement
      dated
      November 12, 2004 (“Catering Agreement”) under which the SAG Air Catering
      Company would supply: (1) in-flight meals in accordance with the menus of
      in-flight meals to be agreed with the Company from time to time, and in such
      quantity as the Company shall advise the Catering Company in advance; and (2)
      catering services for different flights of the Company (including normal,
      additional, chartered and temporary flights) originating or stopping at the
      domestic airports, mainly in northern China and the Xinjiang
      regions.





The
      Catering Agreement is for a fixed term of three years, commencing from the
      date
      of the agreement. The parties have agreed, after arm’s length negotiation, on
      the price of each type of in-flight meal and the service charges for each type
      of aircraft. The prices of in-flight meals and the service charges are not
      higher than the market rate of comparable in-flight meals and service charges.
      The SAG Air Catering Company would issue an invoice listing out the quantity
      of
      in-flight meals supplied, the agreed unit price and the total price payable
      for
      each of the Company flights it provides service for. The cap for the Catering
      Agreement is set at RMB220,000,000 per year. The Company and CSAHC entered
      into
      an acquisition agreement dated August 14, 2007 to acquire 100% equity interest
      of the SAG Air Catering Company.





For
      the
      year ended December 31, 2007, the Group has paid the in-flight meals charge
      in
      the sum of RMB101,338,000 pursuant to the Catering Agreement.





*Guangzhou
      China Southern Airlines Property Management Company Limited (the “GCSAPMC”),
      which is 90% owned by CSAHC and 10% owned by the Company’s
      Union*





The
      Company and GCSAPMC entered into a Framework Agreement for the Engagement of
      Property Management (“Property Management Framework Agreement”) dated January 1,
      2006 in respect of engaging GCSAPMC to provide property management and
      improvement service with a term of three years from the date of this agreement.
      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
      at
      an arm’s length between both parties, and will not be higher than the fee
      charging schedule of independent third parties in similar industry. The annual
      cap for the Property Management Framework Agreement Framework Agreement is
      set
      at RMB47,010,000 per annum. The Property Management Framework Agreement has
      been
      approved by the independent non-executive Directors of the Company.


61


For
      the
      year ended December 31, 2007, the Company paid the property management and
      maintenance fee of RMB31 million pursuant to the Property Management Framework
      Agreement.




Please
      also see note 37 to our consolidated financial statements included elsewhere
      in
      this Form 20-F.




**Interests
      of Experts and Counsel** ****




Not
      applicable.




**ITEM
      8. FINANCIAL INFORMATION.******




**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.





**Significant
      Changes******




No
      significant changes have occurred since the date of the financial statements
      provided in Item 18 below.





**Legal
      Proceedings**





From
      time
      to time, we may be subject to various claims and legal actions arising in the
      ordinary course of business. In May 2007, we received the court summons from
      the
      High People’s Court of Guangdong Province with respect to the contractual
      dispute lawsuit filed against us by Taiwan J & P International Tours Co.,
      Ltd. and Taiwan China Southern Aviation Travel Co., Ltd. (the
      "Plaintiffs").




In
      August
      2004, we entered into a cooperation agreement with the Plaintiffs and, in
      September 2004, Nan Lung Travel & Express (H.K.) Ltd., our Hong Kong sales
      agent, entered into an air ticket sales agency agreement with the Plaintiffs.
      The performance of both agreements has been completed. The Plaintiffs, however,
      have filed a lawsuit against us for liquidated damages for breach of the
      provisions on air ticket sales commissions and other payments under those two
      agreements. The amount of the claim is approximately HKD107 million. We are
      currently in the process of retaining legal counsel and will actively defend
      ourselves.





Although
      the proceeding is still at an early stage, we believe it will not have any
      material effect on the business operations and financial position of the
      Company.





**Dividend
      Information** ****




No
      interim dividend was paid during the year ended December 31, 2007. The Board
      of
      Directors does not recommend the payment of a final dividend in respect of
      the
      year ended December 31, 2007.




**ITEM
      9. THE OFFER AND LISTING.******




**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 ADRs, each representing
      50 H Shares, are evidenced by ADRs issued by The Bank of New York as the
      Depositary for the ADRs, and are listed on the New York Stock Exchange under
      the
      symbol “ZNH”.




In
      July
      2003, the Company issued and listed 1,000,000,000 A shares on the Shanghai
      Stock
      Exchange with trading code of “600029”. The 2,200,000,000 Domestic Shares held
      by CSAHC are not listed on any stock exchange and are essentially not
      transferable by CSAHC.


62


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





**The Hong Kong**
              **Stock Exchange**
              **Price per H Share**
              **(HK$)**
            
            **The New York**
              **Stock Exchange**
              **Price per ADR**
              **(US$)**
            
            **The Shanghai**
              **Stock Exchange**
              **Price per A Share**
              **(RMB)****High**
            
            **Low**
            
            **High**
            
            **Low**
            
            **High**
            
            **Low***Annual
                Market Prices**Fiscal
                Year ended December 31, 2003*
            
            
            3.50
            
            
            1.46
            
            
            22.78
            
            
            9.53
            
            
            5.34
            
            
            3.75*Fiscal
                Year ended December 31, 2004*
            
            
            4.68
            
            
            2.47
            
            
            29.73
            
            
            15.95
            
            
            6.87
            
            
            3.96*Fiscal
                Year ended December 31, 2005*
            
            
            3.10
            
            
            1.83
            
            
            19.93
            
            
            11.68
            
            
            5.30
            
            
            2.23*Fiscal
                Year ended December 31, 2006*
            
            
            3.42
            
            
            1.60
            
            
            22.43
            
            
            10.51
            
            
            4.09
            
            
            2.24*Fiscal
                Year ended December 31, 2007*
            
            
            13.90
            
            
            3.25
            
            
            94.48
            
            
            20.81
            
            
            28.73
            
            
            4.26*Quarterly
                Market Prices**Fiscal
                Year ended December 31, 2006**First
                Quarter*
            
            
            2.45
            
            
            2.18
            
            
            15.82
            
            
            14.00
            
            
            2.97
            
            
            2.48Second
                Quarter
            
            
            2.30
            
            
            1.66
            
            
            14.96
            
            
            10.82
            
            
            2.92
            
            
            2.24Third
                Quarter
            
            
            2.25
            
            
            1.60
            
            
            14.86
            
            
            10.51
            
            
            2.94
            
            
            2.27Fourth
                Quarter
            
            
            3.42
            
            
            2.29
            
            
            22.43
            
            
            14.06
            
            
            4.09
            
            
            2.95*Fiscal
                Year ended December 31, 2007**First
                Quarter*
            
            
            4.22
            
            
            3.25
            
            
            26.82
            
            
            20.81
            
            
            7.43
            
            
            4.26Second
                Quarter
            
            
            5.59
            
            
            3.37
            
            
            35.64
            
            
            21.80
            
            
            9.48
            
            
            7.80Third
                Quarter
            
            
            13.90
            
            
            5.01
            
            
            94.48
            
            
            32.37
            
            
            28.73
            
            
            8.42Fourth
                Quarter
            
            
            12.08
            
            
            7.97
            
            
            77.97
            
            
            49.45
            
            
            27.95
            
            
            19.08Monthly
                Market PricesDecember
                2007
            
            
            10.28
            
            
            8.47
            
            
            65.45
            
            
            54.55
            
            
            27.95
            
            
            23.98January
                2008
            
            
            10.44
            
            
            6.70
            
            
            65.31
            
            
            43.99
            
            
            28.68
            
            
            20.06February
                2008
            
            
            8.08
            
            
            7.18
            
            
            50.63
            
            
            45.74
            
            
            22.74
            
            
            18.94March
                2008
            
            
            7.92
            
            
            5.13
            
            
            50.76
            
            
            33.96
            
            
            21.58
            
            
            12.98April
                2008
            
            
            6.16
            
            
            4.50
            
            
            41.48
            
            
            29.77
            
            
            16.61
            
            
            10.27May
                2008
            
            
            5.70
            
            
            4.40
            
            
            36.00
            
            
            28.24
            
            
            13.92
            
            
            10.28June
                2008 (up to June 19, 2008)
            
            
            5.02
            
            
            3.67
            
            
            31.34
            
            
            23.42
            
            
            10.99
            
            
            7.06




63





**Plan
      of Distribution** ****




Not
      applicable.




**Markets** ****




See
      “Offer and Listing Details” above.




**Selling
      Shareholders** ****




Not
      applicable.




**Dilution** ****




Not
      applicable.





**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 Articles of
      Association for further information, which was filed as an exhibit to our Annual
      Report on Form 20-F for fiscal year 2006 filed with the Securities and Exchange
      Commission (File Number: 001-14660 )
      dated
      on June 29, 2007.





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. The Company’s business license number is 1000001001760.




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
      and
      obtained the business license (Qi Gu Guo Zi Di No. 000995) on October 17, 2003
      issued by the State Administration of Industry and Commerce of the People’s
      Republic of China.




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; and (VIII) engaging in other airline
      or
      airline-related business, including advertising for such
      services.


64


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 shall be called “A Shares”. Overseas-Listed
      Foreign-Invested Shares issued by the Company and listed in Hong Kong shall
      be
      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.




The
      Company has issued a total of 4,374,178,000 ordinary shares, of which (a)
      2,200,000,000 are Domestic Shares held by CSAHC, (b) 1,174,178,000 are H Shares
      held by Hong Kong and overseas shareholders and (c) 1,000,000,000 are A Shares
      held by PRC shareholders.




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


65





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





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





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





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





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





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





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




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




(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 55 of the Articles of Association, the ordinary shareholders of
      the
      Company shall assume the following obligations:


66





(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 112 of the Articles of Association, shareholders who hold different
      classes of shares are shareholders of different classes.




The
      holders of the Domestic-Invested Shares and holders of Overseas-Listed
      Foreign-Invested Shares shall be deemed to be shareholders of different classes.




Pursuant
      to Article 113 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 conducted
      in accordance with Articles 115 to 119.




Pursuant
      to Article 115 of the Articles of Association, **s** hareholders
      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 matters concerning sub-paragraphs (2) to (8),
      (11)
      and (12) of Article 114, but interested shareholder(s) shall not be entitled
      to
      vote at class meetings. “Interested shareholder(s)” is:





(1)
            in
                the case of a repurchase of shares by offers to all shareholders
                or public
                dealing on a stock exchange under Article 31, a “controlling shareholder”
                within the meaning of Article 57;




(2)
            in
                the case of a repurchase of share by an off-market contract under
                Article
                31, a holder of the shares to which the proposed contract relates;
                and





(3)
            in
                the case of a restructuring of the Company, a shareholder within
                a class
                who bears less than a proportionate obligation imposed on that class
                under
                the proposed restructuring or who has an interest in the proposed
                restructuring different from the interest of shareholders of that
                class.





Pursuant
      to Article 116 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, according to Article 115, are entitled to vote at class meetings.




Pursuant
      to Article 117 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 118 of the Articles of Association, notice of class meetings need
      only be served on shareholders entitled to vote thereat.


67


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 119 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-Invested Shares and Overseas-Listed Foreign-Invested
                Shares; and





(2)
            where
                the Company’s plan to issue Domestic-Invested Shares and Overseas-Listed
                Foreign-Invested Shares at the time of its establishment is carried
                out
                within fifteen months from the date of approval of the Securities
                Committee 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 shall be convened
      by the Board of Directors. Annual general meetings are held once every year
      and
      within six months from the end of the preceding financial year.




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 unrecovered 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.





When
      the
      Company convenes a shareholders’ general meeting, written notice of the meeting
      shall be 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.


68





Merger,
      acquisition or corporate restructuring




Pursuant
      to Article 221 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 the Airbus Aircraft Acquisition Agreement dated July 6, 2006 between
                the Company and Airbus, the Company would acquire 50 Airbus A320
                series
                aircraft from Airbus. The aggregate catalogue price for the Airbus
                Aircraft is approximately US$3.316 billion. The aggregate consideration
                for the acquisition of the Airbus Aircraft is payable by cash in
                installments and the Airbus Aircraft will be delivered in stages
                to the
                Company during the period commencing from 2009 to 2010. The Board
                has
                passed resolutions with regard to the change in method of procuring
                eight
                A320 series out of the abovementioned 50 Airbus A320 series aircraft
                from
                purchase to operating lease.





(b)
            Pursuant
                to the Boeing Aircraft Acquisition Agreement dated October 13, 2006
                between the Company and Boeing, the Company would purchase 6 Boeing
                B777F
                freighters from Boeing. The catalogue price of a Boeing B777F freighter
                is
                US$232 million. The aggregate consideration for the acquisition of
                the
                B777F Freighters is partly payable by cash of the Company, and partly
                by
                financing arrangements with banking institutions and the Boeing Aircraft
                will be delivered in stages to the Company during the period commencing
                from November 2008 to July 2010.





(c)
            Pursuant
                to the Xiamen Aircraft Acquisition Agreement dated October 13, 2006
                between Xiamen Airlines and Boeing, Xiamen Airlines would acquire
                six
                Boeing B737 aircraft from Boeing. The catalogue price of a Boeing
                B737
                aircraft is US$66-US$75 million. Such catalogue price includes price
                for
                airframe and engine. The aggregate consideration for the acquisition
                of
                the B737 Aircraft is payable by cash in installments and the B737
                Aircraft
                will be delivered to Xiamen Airlines in
                2010.





(d)
            Pursuant
                to the Aircraft Acquisition Agreement dated July 16, 2007 between
                the
                Company and Airbus SNC, the Company will acquire****20
                Airbus A320 series aircraft from Airbus SNC. The catalogue price
                for each
                of the Airbus A320 series aircraft is in the range from US$66.5 to
                US$85.9
                million. Such catalogue price includes the price for airframe and
                engines.
                The aggregate consideration for the acquisition of the A320 aircraft
                will
                be partly payable by cash of the Company, and partly by financing
                arrangements with banking institutions. The A320 aircraft will be
                delivered in stages to the Company during the period commencing from
                March
                2009 to August 2010.





(e)
            Pursuant
                to the Xiamen Aircraft Acquisition Agreement dated July 16, 2007
                between
                Xiamen Airlines and Boeing, Xiamen Airlines will acquire 25 Boeing
                B737
                aircraft from Boeing. The catalogue price for each of the Boeing
                B737
                aircraft is in the range from US$70.5 to US$79 million. Such catalogue
                price includes the price for airframe and engines. The aggregate
                consideration for the acquisition of the B737 aircraft will be partly
                payable by cash of Xiamen Airlines, and partly by financing arrangements
                with banking institutions. The B737 aircraft will be delivered in
                stages
                to Xiamen Airlines during the period commencing from July 2011 to
                November
                2013.


69


(f)
            Pursuant
                to the Aircraft Acquisition Agreement dated August 20, 2007 between
                the
                Company and Boeing, the Company will acquire 55 Boeing B737 series
                aircraft from Boeing, the catalogue price of a Boeing B737 series
                aircraft
                is in the range of US$57 -US$79 million. Such catalogue price includes
                price for airframe and engines. The aggregate consideration for the
                acquisition of the Boeing aircraft will be partly payable by cash
                of the
                Company, and partly by financing arrangements with banking institutions.
                The Boeing aircraft will be delivered in stages to the Company during
                the
                period commencing from May 2011 to October
                2013.





(g)
            Pursuant
                to the Aircraft Acquisition Agreement dated October 23, 2007 between
                the
                Company and Airbus SNC, the Company will acquire 10 Airbus A330-200
                aircraft from Airbus SNC, the catalogue price of an Airbus A330-200
                aircraft is in the range of US$167.7-176.7 million. Such catalogue
                price
                includes price for airframe and engines. The aggregate consideration
                for
                the acquisition will be partly payable by cash of the Company, and
                partly
                by financing arrangements with banking institutions. The Airbus aircraft
                will be delivered in stages to the Company during the period commencing
                from March 2010 to August 2012.





(h)
            Pursuant
                to the Xiamen Aircraft Acquisition Agreement dated April 18, 2008
                between
                Xiamen Airlines and Boeing, Xiamen Airlines will acquire 20 Boeing
                B737
                series aircraft from Boeing. According the information provided by
                Boeing,
                the aggregate catalogue price for the 20 Boeing B737 series aircraft
                is
                around US$1,500 million. Such catalogue price includes price for
                airframe
                and engines. The aggregate consideration for the acquisition of the
                Boeing
                aircraft will be partly payable by cash of 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 April 2014 to October 2015.





**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 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.


70


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 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 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 H Shares or ADRs.





As
      a
      result of the new tax law, the statutory income tax rate currently adopted
      by
      the Company and its subsidiaries has changed from 33% to 25% with effect from
      January 1, 2008. Pursuant to 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
      respectively.





Dividends





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%.





For
      individuals, Chinese tax law generally provides that an individual who receive
      dividends from the Company is subject to a 20% income tax. Currently, dividend
      income received by any foreign individual that holds overseas shares in any
      Chinese domestic enterprise is temporarily exempt from income tax. In the event
      that the exemption is discontinued, such payments will be subject to individual
      income tax at the 20% rate unless the holder is entitled to a tax waiver or
      a
      lower tax rate under an applicable double-taxation treaty.




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




Capital
      Gains from Transfer or Disposition of Shares





The
      new
      tax law generally provides that a non-resident enterprise is subject to a 10%
      capital gains tax for the transfer or disposition of Shares.





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





Under
      the
      U.S.-PRC Tax Treaty, for example, China may only impose a 20% capital gains
      tax
      from the sale or other disposition by a U.S. holder of H Shares or ADRs
      representing an interest in the Company of 25% or more.


71


Stamp
      Duty





Transfers
      of shares of capital stock of a company are not subject to Chinese stamp duty
      if
      the stock transfer documents are not executed or received within China
      (excluding Hong Kong, Macau and Taiwan).




**United
      States Federal Income Taxation**




This
      discussion describes the material 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.




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




72


·
            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 “Passive Foreign Investment Company” 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 “Passive Foreign Investment Company” discussion below, when you sell or
      otherwise dispose of the Company’s ADRs, you will generally recognize capital
      gain or loss in an amount equal to the difference between the amount realized
      on
      the sale or other disposition and your adjusted tax basis in the ADRs, both
      as
      determined in U.S. dollars. Your adjusted tax basis will generally equal the
      amount you paid for the ADRs. Any gain or loss you recognize 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
      Company were a Passive Foreign Investment Company (“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.




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; or (2) 75% or more of its
      gross income for the taxable year is passive income (such as certain dividends,
      interest or royalties). For purposes of the first 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.


73





The
      Company believes that it was not a PFIC for the taxable year 2007. However,
      there can be no assurance that the Company will not be a PFIC for the taxable
      year 2008 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 2007 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 and on any
      gain realized on the disposition or deemed disposition of your ADRs, 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.
      Distributions in respect of your ADRs during a taxable year would generally
      constitute “excess” distributions if, in the aggregate, they exceed 125% of the
      average amount of distributions in respect of your ADRs over the three preceding
      taxable years or, if shorter, the portion of your holding period before such
      taxable year.




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 regarding your ADRs. However, the Company
      does
      not intend to generate, or share with you, information that you might need
      to
      properly complete IRS Form 8621. You should consult with your own tax adviser
      regarding reporting requirements with regard to your ADRs.




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




If
      you
      beneficially own ADRs and are not a U.S. Holder for U.S. federal income tax
      purposes (a “Non-U.S. Holder”), you generally will not be subject to U.S.
      federal income tax or 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:


74





·
            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.


75





**I.**  **Subsidiary
      Information** ****




Not
      applicable.





**Comparison
      of New York Stock Exchange Corporate Governance Rules and China Corporate
      Governance Rules for Listed Companies** ****





Under
      the
      amended Corporate Governance Rules of New York Stock Exchange (NYSE), foreign
      issuers (including the Company) listed on the NYSE are required to disclose
      a
      summary of the significant differences between their domestic corporate
      governance rules and NYSE corporate governance rules that would apply to a
      U.S.
      domestic issuer. A summary of such differences is listed below:





**NYSE
                corporate governance rules**
            
            **Corporate
                governance rules applicable to the domestically listed companies
                in China
                and 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$100,000 in direct compensation
                from the listed company.
            
            **Director
                Independence**
              Any
                listed company must establish an independent director system and
                set forth
                specific requirements for the qualification of independent directors.
                An
                independent director shall not hold any other position in the listed
                company other than being a director and shall not be influenced by
                the
                main shareholders or the controlling persons of the listed company,
                or by
                any other entities or persons with whom the listed company has a
                significant relationship.
              
              *The
                Company’s governance practices*
              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.The
                non-management directors of each listed company must meet at regularly
                scheduled executive sessions without management.
            
            No
                similar requirements.**Nominating/Corporate
                Governance Committee**
              Listed
                companies must have a nominating/corporate governance committee composed
                entirely of independent directors.
              
              The
                nominating/corporate governance committee must have a written charter
                that
                addresses the committee’s purposes and responsibilities which, at minimum,
                must be to: search for eligible people for the board of directors,
                select
                and nominate directors for the next session of the shareholders’ annual
                meeting, study and propose corporate governance guidelines, supervise
                the
                evaluation of the board of directors and management, and evaluate
                the
                performance of the committee every year.
            
            **Nominating/Corporate
                Governance Committee**
              The
                board of directors of a listed company may, through the resolution
                of the
                shareholders’ meeting, establish a nominating committee composed entirely
                of directors, of which the independent directors shall be the majority
                and
                the convener.
              
              *The
                Company’s governance practices*
              The
                Company has established a nominating committee. As at December 31,
                2007, the Nomination Committee consists of three members, Messrs
                Liu Shao
                Yong, Wang Zhi and Gong Hua Zhang. Most of them are independent directors
                and Mr. Liu Shao Yong acts as the chairman. 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.




76





**Compensation
                Committee**
              Listed
                companies must have a compensation committee composed entirely of
                independent directors.
            
            **Compensation
                Committee**
              The
                board of directors of a listed company can, through the resolution
                of
                shareholders’ meeting, have a compensation and evaluation committee
                composed entirely of directors, of whom the independent directors
                are the
                majority and act as the convener.*The
                Company’s governance practices*
              The
                Company has established a remuneration committee consisting of three
                members. The remuneration committee is chaired by independent
                non-executive Director Sui Guang Jun with independent non-executive
                Director Gong Hua Zhang and 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.**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 a listed company can, through the resolution
                of the
                shareholders’ meeting, establish an audit committee composed entirely of
                directors, of which the independent directors are the majority and
                act as
                the convener, and, at minimum, one independent director is an accounting
                professional.


77





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.
              
              *The
                Company’s governance practices*
              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.Each
                listed company must have an internal audit department.
            
            China
                has a similar regulatory provision, and the Company has an internal
                audit
                department.Shareholders
                must be given the opportunity to vote on equity-compensation plans
                and
                material revisions thereto, except for employment incentive plans,
                certain
                awards and plans in the context of mergers and acquisitions.
            
            The
                relevant regulations of China require the board of directors to propose
                plans and types of director compensation for the shareholders’ meeting to
                approve. The compensation plan of executive officers is subject to
                approval by the board and announced at the shareholders’ meeting 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 compensation,
                director continuing education, annual performance evaluation of the
                board
                of directors, etc.
            
            **Corporate
                Governance Guidelines**
              China
                Securities Regulatory Commission (“CSRC”) has issued the Corporate
                Governance Rules, with which the Company has complied.**Code
                of Ethics for Directors, Officers and Employees**
              Listed
                companies must adopt and disclose a code of business conduct and
                ethics
                for directors, officers and employees, and promptly disclose any
                waivers
                of the code for directors or executive officers.
            
            **Code
                of Ethics for Directors, Officers and Employees**
              China
                does not have such requirement for a code for ethics. But, the directors
                and officers must perform their legal responsibilities in accordance
                with
                the Company Law of PRC, relative requirements of CSRC and Mandatory
                Provisions to the Charter of Companies Listed Overseas.*The
                Company’s governance practices*
              The
                Company does not have, in form, a code of ethics that applies to
                the
                president, chief financial officer and principal accounting officer,
                or
                collectively, the senior corporate officers. The senior executive
                officers, all of whom currently serve as our directors, are subject
                to the
                director service contracts that they have with the Company. Under
                the
                director service contracts, the directors, including the senior corporate
                officers, agree that each director owes a fiduciary and diligence
                obligation to the Company and that no director shall engage in any
                activities in competition with the Company’s business or carry any
                activities detrimental to the interests of the Company. Each of the
                directors, including the senior corporate officers, also agreed to
                perform
                their respective duties as directors and senior officers in accordance
                with the Company Law of the PRC, relevant rules and regulations
                promulgated by China Securities Regulatory Commission and the Mandatory
                Provisions of Articles of Association of Overseas Listed
                Companies.


78





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 on
                writing
                of any material non-compliance with any applicable provisions of
                Section
                303A.
            
            No
                similar requirements.




**ITEM
      11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK.** ****




The
      Group’s earnings are affected by changes
      in the price and availability of jet fuel. The
      Group
      enters into fuel option contracts to manage its price risk exposure to jet
      fuel.
      These contracts are designed to provide protection against sharp increases
      in
      the price of jet fuel. The fair value of the Group's fuel related
      derivatives was RMB2 million at December 31, 2007. These instruments will expire
      between 2008 and 2009.





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 two to fifteen 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, 2007.




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 State
      Administration of Foreign Exchange, the Group may, from time to time, enter
      into
      forward foreign exchange contracts to mitigate its foreign currency exposures.
      The Group entered into certain foreign exchange forward option contracts to
      manage this foreign currency risk. Under the contracts, the Group will buy
      US$1
      million by selling Japanese Yen at certain specified rates on each of the 35
      settlement dates until the maturity of the contracts in 2010. For the year
      ended
      December 31, 2007, a net loss of approximately RMB5 million arising from changes
      in the fair value of these foreign currency forward option contracts has been
      recognised in profit or loss. At December 31, 2007, the fair value of these
      currency forward option contracts was financial liabilities of approximately
      RMB5 million.





As
      of
      December 31, 2007, the Group operated a total of 199 aircraft under operating
      and finance 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 finance leases and operating leases are disclosed in Note
      30
      and Note 44 to the Financial Statements, respectively.


79





The
      following table provides information regarding the Group’s material interest
      rate sensitive financial instruments as of December 31, 2007 and 2006:


**As of December 31, 2007**
                
                **As of December 31,**
                  **2006****Expected maturity date****2008**
                
                **2009**
                
                **2010**
                
                **2011**
                
                **2012**
                
                **Thereafter**
                
                **Total**
                  **recorded**
                  **amount**
                
                **Fair**
                  **value(2)**
                
                **Total**
                  **recorded**
                  **amount**
                
                **Fair**
                  **value(2)**Fixed-rate
                    bank and other loans In US$
                
                
                **274**
                
                
                **237**
                
                
                **195**
                
                
                **84**
                
                
                **64**
                
                
                **483**
                
                
                **1,337**
                
                
                **1,355**
                
                
                **1,863**
                
                
                **1,861**Average
                    interest rate
                
                
                **5.83**
                **%**
                
                **5.85**
                **%**
                
                **5.88**
                **%**
                
                **5.74**
                **%**
                
                **5.74**
                **%**
                
                **5.74**
                **%**Variable-rate
                    bank and other loans In US$
                
                
                **24,327**
                
                
                **2,457**
                
                
                **1,618**
                
                
                **1,447**
                
                
                **590**
                
                
                **1,559**
                
                
                **31,998**
                
                
                **31,998**
                
                
                **29,500**
                
                
                **29,500**Average
                    interest rate
                
                
                **5.12**
                **%**
                
                **5.12**
                **%**
                
                **5.12**
                **%**
                
                **5.12**
                **%**
                
                **5.11**
                **%**
                
                **5.11**
                **%**In
                    HKD
                
                
                **1**
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                **1**
                
                
                **1**
                
                
                **1,667**
                
                
                **1,667**Average
                    interest rate
                
                
                **4.75**
                **%**In
                    RMB
                
                
                **346**
                
                
                **46**
                
                
                **203**
                
                
                **44**
                
                
                **44**
                
                
                **3**
                
                
                **686**
                
                
                **686**
                
                
                **809**
                
                
                **809**Average
                    interest rate
                
                
                **6.17**
                **%**
                
                **6.24**
                **%**
                
                **6.26**
                **%**
                
                **6.24**
                **%**
                
                **6.24**
                **%**
                
                —




(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, 2007 and
                2006.





The
      following table provides information regarding the Group’s material foreign
      currency sensitive financial instruments and capital commitments as of December
      31, 2007 and 2006:





**As of December 31, 2007**
            
            **As of December 31,**
              **2006****Expected
                maturity date****2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **2012**
            
            **Thereafter**
            
            **Total**
              **recorded**
              **amount**
            
            **Fair**
              **value(1)**
            
            **Total**
              **recorded**
              **amount**
            
            **Fair**
              **value(1)**Fixed-rate
                bank and other loans In US$
            
            
            **274**
            
            
            **237**
            
            
            **195**
            
            
            **84**
            
            
            **64**
            
            
            **483**
            
            
            **1,337**
            
            
            **1,355**
            
            
            **1,863**
            
            
            **1,861**Variable-rate
                bank and other loans In US$
            
            
            **24,327**
            
            
            **2,457**
            
            
            **1,618**
            
            
            **1,447**
            
            
            **590**
            
            
            **1,559**
            
            
            **31,998**
            
            
            **31,998**
            
            
            **29,500**
            
            
            **29,500**In
                HKD
            
            
            **1**
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            **1**
            
            
            **1**
            
            
            **1,667**
            
            
            **1,667**Capital
                commitment in US$
            
            
            **19,125**
            
            
            **20,767**
            
            
            **20,065**
            
            
            **12,747**
            
            
            **15,466**
            
            
            **572**
            
            
            **88,742**
            
            
            **88,742**
            
            
            **66,881**
            
            
            **66,881**





(1)
            Fair
                value of debt instruments was estimated based on the floating interest
                rates applicable to similar debt instruments as of December 31, 2007
                and
                2006.


80




**ITEM
      12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.** ****




Not
      applicable.




**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 material information required
      to be
      included in this Annual Report would be made known to them by others on a timely
      basis.




*(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. Our 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 International Financial Reporting Standards as
      issued by the International Accounting Standards Board. 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, 2007.





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.




81


*(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”) and its subsidiaries (the “Group”) as of
      December 31, 2007, based on criteria established in *Internal
      Control – Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      China Southern Airlines Company Limited’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 and its subsidiaries
      maintained, in all material respects, effective internal control over financial
      reporting as of December 31, 2007, based on criteria established in *Internal
      Control – Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of The Treadway Commission.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of China
      Southern Airlines Company Limited and its subsidiaries as of December 31, 2007
      and 2006, and the related consolidated statements of operations, consolidated
      statements of changes in equity, and consolidated cash flow statements for
      each
      of the years in the three-year period ended December 31, 2007, and our report
      dated April 18, 2008, except for Note 46(e), which is as of 28 May, 2008,
      expressed an unqualified opinion on those consolidated financial
      statements.





/s/
      KPMG





Hong
      Kong, China


April
      18,
      2008




82


*(d)*  *Changes
      in internal control over financial reporting*




During
      the year ended December 31, 2007, 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
      16. RESERVED** ****




**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-3under the Exchange Act. See “Item 6
      Directors, Senior Management and Employees — Directors and Senior Management”.





**ITEM
      16B. CODE OF ETHICS.** ****




As
      of the
      date of this Annual Report, the Company does not have, in form, a code of ethics
      that applies to the president, chief financial officer and principal accounting
      officer, or collectively, the senior corporate officers. The senior executive
      officers, all of whom currently serve as our Directors, are subject to the
      director service contracts that they have with the Company. Under the director
      service contracts, the Directors, including the senior corporate officers,
      agree
      that each Director owes a fiduciary and diligence obligation to the Company
      and
      that no such Director shall engage in any activities in competition with the
      Company’s business or carry out any activities detrimental to the interests of
      the Company. Each of the Directors, including the senior corporate officers,
      also agreed to perform their respective duties as directors and senior officers
      in accordance with the Company Law of the PRC, relevant rules and regulations
      promulgated by China Securities Regulatory Commission and the Mandatory
      Provisions of Articles of Association of Overseas Listed Companies.





**ITEM
      16C. PRINCIPAL ACCOUNTING FEES AND SERVICES.******




The
      following table sets forth the aggregate audit fees, audit-related fees, tax
      fees of the Company’s principal accountants and all other fees billed for
      products and services provided by the Company’s principal accountants other than
      the audit fees, audit-related fees and tax fees for each of the fiscal years
      2006 and 2007:





**Audit Fees**
            
            **Audit-Related**
              **Fees**
            
            **Tax Fees**
            
            **Other Fees**2006
            
            
            RMB11 million
            
            
            RMB4.0
                million
            
            
            RMB0.47
                million
            
            
            RMB3.7
                million2007
            
            
            RMB12.4 million
            
            
            RMB4.5 million
            
            
            RMB0.25 million
            
            
            RMB2.8 million





*Audit-related
      fees*





Review
      of
      the Group’s 2006 interim financial report prepared under IFRSs and 2007 interim
      financial report prepared under IFRSs.





*Tax
      fees*




Services
      provided primarily consist of tax compliance services.




*Other
      fees*





Provision
      of Sarbanes Oxley Act of 2002 advisory services.





Before
      our principal accountant were engaged by the Company or our subsidiaries to
      render the audit or non audit services, the engagements have been approved
      by
      our audit committee.




83




**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 2007 and up to the date of this Annual Report.




**PART
      III**




**ITEM
      17. FINANCIAL STATEMENTS.******




Not
      applicable.




**ITEM
      18. FINANCIAL STATEMENTS.******





Not
      applicable.




84


**ITEM
      19. EXHIBITS.******





**Exhibit
                No.**
            
            **Description
                of Exhibit**1.1
            
            Amended
                Articles of Association of China Southern Airlines Company Limited
                (incorporated by reference to Exhibit 1.1 to our Annual Report on
                Form
                20-F for fiscal year 2006 filed with the Securities and Exchange
                Commission (File Number:001-14660)
                for the year ended December 31, 2006 with the Securities and Exchange
                Commission on June 29, 2007)4.1
            
            Form
                of Director’s Service Agreement (Incorporated by reference to the Exhibit
                4.1 to our Form 20-F (File No. 001-14660) for the year ended December
                31,
                2005 filed with the Securities and Exchange Commission on June 30,
                2006)4.2
            
            Form
                of Non-Executive Director’s Service Agreement (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)8.1
            
            Subsidiaries
                of China Southern Airlines Company Limited10.1
            
            Airbus
                Aircraft Acquisition Agreement entered into between China Southern
                Airlines Company Limited and Airbus dated July 6, 2006 (Incorporated
                by
                reference to the Exhibit 99.1 to our Form 6-K (File No. 001-14660)
                filed
                with the Securities and Exchange Commission on July 11, 2006)10.2
            
            Boeing
                Aircraft Acquisition Agreement entered into between China Southern
                Airlines Company Limited and Boeing dated October 13, 2006 (Incorporated
                by reference to the Exhibit 99.1 to our Form 6-K (File No. 001-14660)
                filed with the Securities and Exchange Commission on October 17,
                2006)10.3
            
            Xiamen
                Aircraft Acquisition Agreement entered into between Xiamen Airlines
                and
                Boeing dated October 13, 2006 (Incorporated by reference to the Exhibit
                99.1 to our Form 6-K (File No. 001-14660) filed with the Securities
                and
                Exchange Commission on October 17, 2006)10.4
            
            Airbus
                Aircraft Acquisition Agreement entered into between the Company and
                Airbus
                dated on July 16, 2007 (Incorporated by reference to our Form 6-K
                (File
                No. 001-14660) filed with the Securities and Exchange Commission
                on July
                17, 2007)10.5
            
            Xiamen
                Aircraft Acquisition Agreement entered into between Xiamen Airlines
                and
                Boeing dated on July 16, 2007 (Incorporated by reference to our Form
                6-K
                (File No. 001-14660) filed with the Securities and Exchange Commission
                on
                July 17, 2007)10.6
            
            Boeing
                Aircraft Acquisition Agreement entered into between the Company and
                Boeing
                dated on August 20, 2007 (Incorporated by reference to our Form 6-K
                (File
                No. 001-14660) filed with the Securities and Exchange Commission
                on August
                21, 2007)10.7
            
            Airbus
                Aircraft Acquisition Agreement entered into between the Company and
                Airbus
                dated on October 23, 2007 (Incorporated by reference to the Exhibit
                99.1
                to our Form 6-K (File No. 001-14660) filed with the Securities and
                Exchange Commission on October 23, 2007)10.8
            
            Boeing
                Aircraft Acquisition Agreement between Xiamen Airlines and Boeing
                dated
                April 18, 2008 (Incorporated by reference to the Exhibit 99.1 to
                our Form
                6-K (File No. 001-14660) filed with the Securities and Exchange Commission
                on April 22, 2008)12.1
            
            Section
                302 Certification of President




85




12.2
            
            Section
                302 Certification of Chief Financial Officer13.1
            
            Section
                906 Certification of President13.2
            
            Section
                906 Certification of Chief Financial
                Officer




86




CHINA
      SOUTHERN AIRLINES COMPANY
      LIMITED


**AND
      SUBSIDIARIES**


****


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**







PageReport
                of Independent Registered Public Accounting Firm
            
            F-1Consolidated
                Statements of Operations for the years ended December 31, 2007, 2006
                and
                2005
            
            F-2Consolidated
                Balance Sheets at December 31, 2007 and 2006
            
            F-4Consolidated
                Statements of Changes in Shareholders’ Equity for the years ended December
                31, 2007, 2006 and 2005
            
            F-6Consolidated
                Cash Flow Statements for the years ended December 31, 2007, 2006
                and 2005
            
            F-7Notes
                to Consolidated Financial Statements
            
            F-10




87




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 balance sheets of China Southern Airlines
      Company Limited (the “Company”) and its subsidiaries (the “Group”) as of
      December 31, 2006 and 2007, and the related consolidated statements of
      operations, consolidated statements of changes in equity, and consolidated
      cash
      flow statements for each of the years in the three-year period ended December
      31, 2007. 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
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall consolidated financial statement
      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, 2006 and 2007, and
      the
      results of their operations and their cash flows for each of the years in the
      three-year period ended December 31, 2007 in conformity with International
      Financial Reporting Standards issued by the International Accounting Standards
      Board.





We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of the Group’s internal
      control over financial reporting as of December 31, 2007, based on criteria
      established in Internal Control-Integrated Framework issued by the Committee
      of
      Sponsoring Organizations of the Treadway Commission (COSO), and our report
      dated
      April 18, 2008 expressed an unqualified opinion on the effectiveness of the
      Group’s internal control over financial reporting.





/s/
      KPMG


Hong
      Kong, China


April
      18,
      2008, except for Note 46(e), which is as of May 28, 2008




F-1




Consolidated
      Statements of Operations for the years ended December 31, 2007, 2006 and
      2005


*(Prepared
      in accordance with International Financial Reporting
      Standards)*


*(Expressed
      in Renminbi)*


*Note*
              
              *2007*
              
              *2006*
              
              *2005*RMB million
              
              RMB million
              
              RMB millionOperating
                  revenueTraffic
                  revenue
              
              
              3
              
              
              53,297
              
              
              45,087
              
              
              37,419Other
                  operating revenue
              
              
              3
              
              
              1,205
              
              
              1,132
              
              
              874Total
                  operating revenue
              
              
              
              
              
              54,502
              
              
              46,219
              
              
              38,293Operating
                  expensesFlight
                  operations
              
              
              4
              
              
              29,082
              
              
              25,022
              
              
              19,761Maintenance
              
              
              5
              
              
              4,643
              
              
              3,999
              
              
              4,589Aircraft
                  and traffic servicing
              
              
              6
              
              
              8,160
              
              
              7,063
              
              
              6,534Promotion
                  and sales
              
              
              7
              
              
              3,478
              
              
              2,811
              
              
              2,780General
                  and administrative
              
              
              8
              
              
              1,983
              
              
              1,941
              
              
              1,315Depreciation
                  and amortisation
              
              
              9
              
              
              5,554
              
              
              4,971
              
              
              4,440Others
              
              
              
              
              
              113
              
              
              100
              
              
              179Total
                  operating expenses
              
              
              
              
              
              53,013
              
              
              45,907
              
              
              39,598Other
                  income / (expenses), net
              
              
              12
              
              
              130
              
              
              333
              
              
              (32
              )Operating
                  profit / (loss)
              
              
              
              
              
              1,619
              
              
              645
              
              
              (1,337
              )Non-operating
                  income / (expenses)Interest
                  income
              
              
              
              
              
              73
              
              
              41
              
              
              55Interest
                  expense
              
              
              11
              
              
              (2,291
              )
              
              (2,070
              )
              
              (1,616
              )Share
                  of associates’ results
              
              
              19
              
              
              57
              
              
              5
              
              
              (285
              )Share
                  of jointly controlled entities’ results
              
              
              20
              
              
              123
              
              
              115
              
              
              36Gain
                  / (loss) on derivative financial instruments, net
              
              
              
              
              
              90
              
              
              (19
              )
              
              —Exchange
                  gain, net
              
              
              
              
              
              2,832
              
              
              1,492
              
              
              1,220Gain
                  on sale of other investments in equity securities
              
              
              
              
              
              107
              
              
              —
              
              
              —Gain
                  on disposal of a subsidiary
              
              
              42(c)
              
              
              7
              
              
              —
              
              
              —Others,
                  net
              
              
              
              
              
              306
              
              
              148
              
              
              74Total
                  net non-operating income / (expenses)
              
              
              
              
              
              1,304
              
              
              (288
              )
              
              (516
              )Profit
                    / (loss) before taxation
              
              
              
              
              
              2,923
              
              
              357
              
              
              (1,853
              )Income
                  tax (expense) /benefit
              
              
              14
              
              
              (858
              )
              
              (153
              )
              
              7Profit
                  / (loss) for the year
              
              
              
              
              
              2,065
              
              
              204
              
              
              (1,846
              )





F-2


Consolidated
      Statements of Operations for the years ended December 31, 2007, 2006 and 2005
      (continued)


*(Prepared
      in accordance with International Financial Reporting
      Standards)*


*(Expressed
      in Renminbi)*





*Note*
            
            *2007*
            
            *2006*
            
            *2005*RMB million
            
            RMB million
            
            RMB millionAttributable
                toEquity
                shareholders of the Company
            
            
            
            
            
            1,871
            
            
            188
            
            
            (1,848
            )Minority
                interests
            
            
            
            
            
            194
            
            
            16
            
            
            2Profit
                / (loss) for the year
            
            
            
            
            
            2,065
            
            
            204
            
            
            (1,846
            )Earnings
                per share
            
            
            16Basic
            
            
            
            
            
            RMB
                0.43
            
            
            RMB
                0.04
            
            
            RMB
                (0.42
            )Diluted
            
            
            
            
            
            RMB
                0.43
            
            
            RMB
                0.04
            
            
            RMB
                (0.42
            )





The
      notes
      on pages F-10 to F-82 form part of these consolidated financial
      statements.




F-3




Consolidated
      Balance Sheets at December 31, 2007 and 2006


*(Prepared
      in accordance with International Financial Reporting
      Standards)*


*(Expressed
      in Renminbi)*





*Note*
            
            *2007*
            
            *2006*RMB million
            
            RMB million**Non-current
                assets**Property,
                plant and equipment, net
            
            
            17
            
            
            58,441
            
            
            56,335Construction
                in progress
            
            
            18
            
            
            11,385
            
            
            9,587Lease
                prepayments
            
            
            
            
            
            556
            
            
            493Interest
                in associates
            
            
            19
            
            
            219
            
            
            149Interest
                in jointly controlled entities
            
            
            20
            
            
            873
            
            
            870Other
                investments in equity securities
            
            
            21
            
            
            168
            
            
            261Lease
                deposits
            
            
            
            
            
            659
            
            
            782Available-for-sale
                equity securities
            
            
            22
            
            
            362
            
            
            69Deferred
                tax assets
            
            
            23
            
            
            11
            
            
            95Other
                assets
            
            
            24
            
            
            469
            
            
            26073,143
            
            
            68,901**Current
                assets**Financial
                assets
            
            
            25
            
            
            2
            
            
            —Inventories
            
            
            26
            
            
            1,213
            
            
            1,315Trade
                receivables
            
            
            27
            
            
            1,966
            
            
            1,512Other
                receivables
            
            
            
            
            
            1,075
            
            
            879Prepaid
                expenses and other current assets
            
            
            
            
            
            592
            
            
            585Amounts
                due from related companies
            
            
            32
            
            
            118
            
            
            128Cash
                and cash equivalents
            
            
            28
            
            
            3,824
            
            
            2,2648,790
            
            
            6,683**Current
                liabilities**Financial
                liabilities
            
            
            25
            
            
            5
            
            
            26Bank
                and other loans
            
            
            29
            
            
            24,948
            
            
            23,822Obligations
                under finance leases
            
            
            30
            
            
            2,877
            
            
            3,091Trade
                payables
            
            
            31
            
            
            1,844
            
            
            1,909Sales
                in advance of carriage
            
            
            
            
            
            1,885
            
            
            1,436Taxes
                payable
            
            
            
            
            
            500
            
            
            126Amounts
                due to related companies
            
            
            32
            
            
            194
            
            
            254Accrued
                expenses
            
            
            33
            
            
            7,354
            
            
            5,463Other
                liabilities
            
            
            34
            
            
            2,994
            
            
            2,73642,601
            
            
            38,863Net
                current liabilities
            
            
            43(a)
            
            
            (33,811
            )
            
            (32,180
            )Total
                assets less current liabilities
            
            
            
            
            
            39,332
            
            
            36,721




F-4




Consolidated
      Balance Sheets at December 31, 2007 and 2006 (continued)


*(Prepared
      in accordance with International Financial Reporting
      Standards)*


*(Expressed
      in Renminbi)*





*Note*
            
            *2007*
            
            *2006*RMB million
            
            RMB million**Non-current
                liabilities and deferred items**Bank
                and other loans
            
            
            29
            
            
            9,074
            
            
            10,018Obligations
                under finance leases
            
            
            30
            
            
            12,858
            
            
            12,307Provision
                for major overhauls
            
            
            35
            
            
            683
            
            
            805Provision
                for early retirement benefits
            
            
            36
            
            
            230
            
            
            306Deferred
                credits
            
            
            
            
            
            1,027
            
            
            792Deferred
                tax liabilities
            
            
            23
            
            
            748
            
            
            37224,620
            
            
            24,600**Net
                assets**
            
            
            
            
            
            14,712
            
            
            12,121**Capital
                and reserves**Share
                capital
            
            
            37
            
            
            4,374
            
            
            4,374Reserves
            
            
            38
            
            
            7,872
            
            
            5,814**Total
                equity attributable to equity shareholders of the
                Company**
            
            
            
            
            
            12,246
            
            
            10,188**Minority
                interests**
            
            
            
            
            
            2,466
            
            
            1,933**Total
                equity**
            
            
            
            
            
            14,712
            
            
            12,121





The
      notes
      on pages F-10 to F-82 form part of these consolidated financial
      statements.




F-5




Consolidated
      Statements of Changes in Equity for the years ended December 31, 2007, 2006
      and
      2005


*(Prepared
      in accordance with International Financial Reporting
      Standards)*


*(Expressed
      in Renminbi)*


*Attributable
                  to equity shareholders of the Company**Retained**earnings
                  /**Share*
              
              *Share*
              
              *Fair
                  value*
              
              *Other*
              
              *(accumulated*
              
              
              
              *Minority*
              
              *Total**capital*
              
              *premium*
              
              *reserves*
              
              *reserves*
              
              *losses)*
              
              *Total*
              
              *interests*
              
              *equity**RMB*
              
              *RMB*
              
              *RMB*
              
              *RMB*
              
              *RMB*
              
              *RMB*
              
              *RMB*
              
              *RMB**million*
              
              *million*
              
              *million*
              
              *million*
              
              *million*
              
              *million*
              
              *million*
              
              *million**(Note)*At
                  January 1, 2005
              
              
              4,374
              
              
              5,325
              
              
              -
              
              
              603
              
              
              1,546
              
              
              11,848
              
              
              2,055
              
              
              13,903Loss
                  for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,848
              )
              
              (1,848
              )
              
              2
              
              
              (1,846
              )Capital
                  contribution by minority shareholders
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              17
              
              
              17Acquisition
                  of equity interest held by minority shareholders
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (118
              )
              
              (118
              )Distributions
                  to minority shareholders
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (20
              )
              
              (20
              )At
                  December 31, 2005
              
              
              4,374
              
              
              5,325
              
              
              -
              
              
              603
              
              
              (302
              )
              
              10,000
              
              
              1,936
              
              
              11,936At
                  January 1, 2006
              
              
              4,374
              
              
              5,325
              
              
              -
              
              
              603
              
              
              (302
              )
              
              10,000
              
              
              1,936
              
              
              11,936Profit
                  for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              188
              
              
              188
              
              
              16
              
              
              204Acquisition
                  of equity interest held by minority shareholders
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (12
              )
              
              (12
              )Distributions
                  to minority shareholders
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (7
              )
              
              (7
              )At
                  December 31, 2006
              
              
              4,374
              
              
              5,325
              
              
              -
              
              
              603
              
              
              (114
              )
              
              10,188
              
              
              1,933
              
              
              12,121At
                  January 1, 2007
              
              
              4,374
              
              
              5,325
              
              
              -
              
              
              603
              
              
              (114
              )
              
              10,188
              
              
              1,933
              
              
              12,121Profit
                  for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,871
              
              
              1,871
              
              
              194
              
              
              2,065Capital
                  contribution by minority shareholders
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              240
              
              
              240Acquisition
                  of Nan Lung Freight and Air Catering (Note 42(b))
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              80
              
              
              80Disposal
                  of equity interest to minority shareholders (Note 42(c))
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (8
              )
              
              (8
              )Changes
                  in fair value of available-for-sale securities, net (Note
                  22)
              
              
              -
              
              
              -
              
              
              183
              
              
              -
              
              
              -
              
              
              183
              
              
              35
              
              
              218Distributions
                  to minority shareholders
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (8
              )
              
              (8
              )Share
                  of an associate’s reserves movement
              
              
              -
              
              
              -
              
              
              -
              
              
              4
              
              
              -
              
              
              4
              
              
              -
              
              
              4At
                  December 31, 2007
              
              
              4,374
              
              
              5,325
              
              
              183
              
              
              607
              
              
              1,757
              
              
              12,246
              
              
              2,466
              
              
              14,712




Note:
            Other
                reserves represent statutory surplus reserve, discretionary surplus
                reserve and others. Details are set out in Note
                38.





The
      notes
      on pages F-10 to F-82 form part of these consolidated financial
      statements.




F-6




Consolidated
      Cash Flow Statements for the years ended December 31, 2007, 2006 and
      2005


*(Prepared
      in accordance with International Financial Reporting
      Standards)*


*(Expressed
      in Renminbi)*




*2007*
              
              *2006*
              
              *2005*RMB million
              
              RMB million
              
              RMB millionProfit
                  / (loss) before taxation
              
              
              
              
              
              2,923
              
              
              357
              
              
              (1,853
              )Depreciation
                  of property, plant and equipment
              
              
              
              
              
              5,597
              
              
              4,999
              
              
              4,420Other
                  amortisation
              
              
              
              
              
              28
              
              
              33
              
              
              40Amortisation
                  of deferred credits
              
              
              
              
              
              (71
              )
              
              (61
              )
              
              (78
              )Impairment
                  loss
              
              
              
              
              
              109
              
              
              —
              
              
              —Share
                  of associates’ results
              
              
              
              
              
              (57
              )
              
              (5
              )
              
              285Share
                  of jointly controlled entities’ results
              
              
              
              
              
              (123
              )
              
              (115
              )
              
              (36
              )(Gain)
                  / loss on sale of property, plant and equipment, net
              
              
              
              
              
              (130
              )
              
              (333
              )
              
              32Gain
                  on sale of other investments in equity securities
              
              
              
              
              
              (107
              )
              
              —
              
              
              —Gain
                  on sale of subsidiary
              
              
              
              
              
              (7
              )
              
              —
              
              
              —Interest
                  income
              
              
              
              
              
              (73
              )
              
              (41
              )
              
              (55
              )Interest
                  expense
              
              
              
              
              
              2,291
              
              
              2,070
              
              
              1,616(Gain)
                  / loss on derivative financial instruments, net
              
              
              
              
              
              (90
              )
              
              19
              
              
              —Net
                  realised and unrealised gain on equity securities held for
                  trading
              
              
              
              
              
              —
              
              
              —
              
              
              (6
              )Dividend
                  income from other investments in equity securities
              
              
              
              
              
              (12
              )
              
              (7
              )
              
              -Unrealised
                  exchange gain, net
              
              
              
              
              
              (2,832
              )
              
              (1,492
              )
              
              (1,164
              )Decrease
                  in inventories
              
              
              
              
              
              108
              
              
              95
              
              
              46(Increase)
                  / decrease in trade receivables
              
              
              
              
              
              (349
              )
              
              36
              
              
              (315
              )Decrease
                  / (increase) in other receivables
              
              
              
              
              
              304
              
              
              152
              
              
              (236
              )Increase
                  in prepaid expenses and other current assets
              
              
              
              
              
              (8
              )
              
              (205
              )
              
              (2
              )(Decrease)
                  / increase in net amounts due to related companies
              
              
              
              
              
              (50
              )
              
              113
              
              
              (493
              )(Decrease)
                  / increase in trade payables
              
              
              
              
              
              (95
              )
              
              (2,048
              )
              
              2,239Increase
                  in sales in advance of carriage
              
              
              
              
              
              449
              
              
              23
              
              
              539Increase
                  / (decrease) in accrued expenses
              
              
              
              
              
              1,846
              
              
              568
              
              
              (399
              )Increase/
                  (decrease) in other liabilities
              
              
              
              
              
              245
              
              
              (247
              )
              
              822(Decrease)
                  / increase in provision for major overhauls
              
              
              
              
              
              (122
              )
              
              504
              
              
              17(Decrease)
                  / increase in provision for early retirement benefits
              
              
              
              
              
              (76
              )
              
              306
              
              
              —Cash
                  inflows from operations
              
              
              
              
              
              9,698
              
              
              4,721
              
              
              5,419Interest
                  received
              
              
              
              
              
              73
              
              
              41
              
              
              55Interest
                  paid
              
              
              
              
              
              (2,814
              )
              
              (2,419
              )
              
              (1,616
              )Income
                  tax paid
              
              
              
              
              
              (88
              )
              
              (46
              )
              
              (23
              )Net
                  cash inflows from operating activities
              
              
              
              
              
              6,869
              
              
              2,297
              
              
              3,835




F-7
 
  Consolidated
        Cash Flow Statements for the years ended December 31, 2007, 2006 and 2005
        (continued)


*(Prepared
      in accordance with International Financial Reporting
      Standards)*


*(Expressed
      in Renminbi)*


*2007*
              
              *2006*
              
              *2005*RMB million
              
              RMB million
              
              RMB millionInvesting
                  activitiesProceeds
                  from sale of property, plant and equipment
              
              
              
              
              
              288
              
              
              490
              
              
              238Proceeds
                  from sale of other investments in equity securities
              
              
              
              
              
              127
              
              
              —
              
              
              689Net
                  cash settlement of derivative financial instruments
              
              
              
              
              
              67
              
              
              7
              
              
              —Increase
                  in deferred credits
              
              
              
              
              
              —
              
              
              —
              
              
              57Dividends
                  received from associates
              
              
              
              
              
              —
              
              
              33
              
              
              2Dividends
                  received from jointly controlled entities
              
              
              
              
              
              79
              
              
              50
              
              
              39Dividends
                  received from other investments
              
              
              
              
              
              12
              
              
              7
              
              
              4Decrease
                  in other non-current assets
              
              
              
              
              
              —
              
              
              16
              
              
              4Payment
                  for the CNA/XJA Acquisitions (Note 42(e))
              
              
              
              
              
              —
              
              
              —
              
              
              (1,959
              )Payment
                  of acquisition of equity interest held by minority
                  shareholders
              
              
              
              
              
              —
              
              
              (12
              )
              
              (118
              )Payment
                  of lease deposits
              
              
              
              
              
              (86
              )
              
              (136
              )
              
              (206
              )Refund
                  of lease deposits
              
              
              
              
              
              165
              
              
              103
              
              
              16Capital
                  expenditures
              
              
              
              
              
              (5,502
              )
              
              (6,044
              )
              
              (6,775
              )Payment
                  for the investment in associate and other investments
              
              
              
              
              
              (10
              )
              
              (31
              )
              
              —Through
                  the acquisition of CSAHC Hainan (Note 42(d))
              
              
              
              
              
              —
              
              
              33
              
              
              —Payment
                  for acquisition of Nan Lung Freight and Air Catering (Note
                  42(b))
              
              
              
              
              
              (58
              )
              
              —
              
              
              —Proceeds
                  from disposal of GZ Aviation Hotel (Note 42(c))
              
              
              
              
              
              74
              
              
              —
              
              
              —Net
                  cash used in investing activities
              
              
              
              
              
              (4,844
              )
              
              (5,484
              )
              
              (8,009
              )Net
                  cash inflows / (outflows) before financing activities
              
              
              
              
              
              2,025
              
              
              (3,187
              )
              
              (4,174
              )




F-8


Consolidated
      Cash Flow Statements for the years ended December 31, 2007, 2006 and 2005
      (continued)


*(Prepared
      in accordance with International Financial Reporting
      Standards)*


*(Expressed
      in Renminbi)*





*Note*
            
            *2007*
            
            *2006*
            
            *2005*RMB million
            
            RMB million
            
            RMB millionFinancing
              activitiesProceeds
                from bank and other loans
            
            
            
            
            
            30,984
            
            
            24,983
            
            
            18,238Repayment
                of bank and other loans
            
            
            
            
            
            (28,660
            )
            
            (19,113
            )
            
            (12,193
            )Repayment
                of principal under finance lease obligations
            
            
            
            
            
            (3,021
            )
            
            (3,313
            )
            
            (2,050
            )Capital
                contribution received from minority shareholders
            
            
            
            
            
            240
            
            
            —
            
            
            17Dividends
                paid to minority shareholders
            
            
            
            
            
            (8
            )
            
            (7
            )
            
            (20
            )Net
                cash (outflow) / inflows from financing activities
            
            
            
            
            
            (465
            )
            
            2,550
            
            
            3,992Increase
                / (decrease) in cash and cash equivalents
            
            
            
            
            
            1,560
            
            
            (637
            )
            
            (182
            )Cash
                and cash equivalents at January 1
            
            
            
            
            
            2,264
            
            
            2,901
            
            
            3,083Cash
                and cash equivalents at December 31
            
            
            
            
            
            3,824
            
            
            2,264
            
            
            2,901





The
      notes
      on pages F-10 to F-82 form part of these consolidated financial
      statements.




F-9




Notes
        to
        the Consolidated Financial Statements
 *(Prepared
        in accordance with International Financial Reporting
        Standards)*
 *(Expressed
        in Renminbi)*
  **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 and
        Macau 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 reorganisation
        (the “Reorganisation”) 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.
  **2**
              **Principal
                  accounting policies**
  ***(a)***
              ***Statement
                  of compliance***
  These
        consolidated 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 (“IASs”) and
        interpretations issued by the International Accounting Standards Board (the
        “IASB”).
  The
        IASB
        has issued certain new and revised IFRSs and interpretations that are first
        effective or available for early adoption for the current accounting period
        of
        the Group. There have been no significant changes to the accounting policies
        applied in these consolidated financial statements for the years presented
        as a
        result of these developments. A summary of the principal accounting policies
        adopted by the Group is set out below.
  However,
        as a result of the adoption of IFRS 7, *Financial
        instruments: Disclosures* and the
        amendment to IAS 1, *Presentation
        of financial statements: Capital disclosures* ,
        there
        have been some additional disclosures provided as follows:
  ·
              As
                  a result of the adoption of IFRS 7, the consolidated financial
                  statements
                  include expanded disclosure about the significance of the Group’s
                  financial instruments and the nature and extent of risks arising
                  from
                  those instruments, compared with the information previously required
                  to be
                  disclosed by IAS 32,*Financial
                  instruments: Disclosure and presentation*.
                  These disclosures are provided throughout these consolidated financial
                  statements, in particular in note
                  43.
  ·
              The
                  amendment to IAS 1 introduces additional disclosure requirements
                  to
                  provide information about the level of capital and the Group’s objectives,
                  policies and processes for managing capital. These new disclosures
                  are set
                  out in note 37.
  F-10
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(a)***
              ***Statement
                  of compliance
                  (continued)***
  Both
        IFRS
        7 and the amendment to IAS 1 do not have any material impact on the
        classification, recognition and measurement of the amounts recognised in
        the
        consolidated financial statements.
  The
        Group
        has not applied any new standard or interpretation that is not yet effective
        for
        the current accounting period (see Note 50).
  ***(b)***
              ***Basis
                  of preparation of the consolidated financial
                  statements***
  At
        December 31, 2007, the Group’s current liabilities exceeded its current assets
        by RMB33,811 million, which includes bank and other loans repayable within
        one
        year of RMB24,948 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 fulfil the Group’s short-term obligations and
        capital expenditure requirements. Accordingly, the consolidated financial
        statements have been prepared on a basis that the Group will be able to continue
        as a going concern. Further details are set out in Note 43(a).
  The
        consolidated financial statements for the year ended December 31, 2007 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:
  - Certain
        property, plant and equipment (Note 2(h));
  - Certain
        assets held under finance leases (Note 2(j));
  - Derivative
        financial instruments (Note 2(g)); and
  - Available-for-sale
        securities (Note 2(f)).
  The
        preparation of consolidated financial statements in conformity with IFRSs
        requires management to make judgements, estimates and assumptions that affect
        the application of policies and reported amounts of assets and 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 judgements about carrying values of assets and liabilities that
        are
        not readily apparent from other sources. Actual results may differ from these
        estimates.
  The
        estimates and underlying assumptions are reviewed on an ongoing basis. Revisions
        to accounting estimates are recognised in the period in which the estimate
        is
        revised if the revision affects only that period, or in the period of the
        revision and future periods if the revision affects both current and future
        periods.
  Judgements
        made by management in the application of IFRSs that have significant effect
        on
        the consolidated financial statements and estimates with a significant risk
        of
        material adjustment in the next year are discussed in Note 48.
  F-11
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(c)***
              ***Subsidiaries
                  and minority
                  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 unrealised profits
        arising
        from intra-group transactions are eliminated in full in preparing the
        consolidated financial statements. Unrealised losses resulting from intra-group
        transactions are eliminated in the same way as unrealised gains but only
        to the
        extent that there is no evidence of impairment.
  Minority
        interests represent the portion of the net assets of subsidiaries attributable
        to interests that are not owned by the Company, whether directly or indirectly
        through subsidiaries, 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. Minority interests are
        presented in the consolidated balance sheet within equity, separately from
        equity attributable to the equity shareholders of the Company. Minority
        interests in the results of the Group are presented on the face of the
        consolidated statements of operations as an allocation of the total profit
        or
        loss for the year between minority interests and the equity shareholders
        of the
        Company.
  Where
        losses applicable to the minority exceed the minority’s interest in the equity
        of a subsidiary, the excess, and any further losses applicable to the minority,
        are charged against the Group’s interest except to the extent that the minority
        has a binding obligation to, and is able to, make additional investment to
        cover
        the losses. If the subsidiary subsequently reports profits, the Group’s interest
        is allocated all such profits until the minority’s share of losses previously
        absorbed by the Group has been recovered.
  Loans
        from holders of minority interests and other contractual obligations towards
        these holders are presented as financial liabilities in the consolidated
        balance
        sheet in accordance with Notes 2(o) or (p) depending on the nature of the
        liability.
  ***(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 policies.
  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.
  F-12
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(d)***
              ***Associates
                  and jointly controlled entities
                  (continued)***
  An
        investment in an associate or a jointly controlled entity is accounted for
        in
        the consolidated financial statements under the equity method and is initially
        recorded at cost and adjusted thereafter for the post acquisition change
        in the
        Group’s share of the associate’s or the jointly controlled entity’s net assets.
        The consolidated statements of operations includes the Group’s share of the
        post-acquisition, post-tax results of the associates and jointly controlled
        entities for the year, including any impairment loss on goodwill relating
        to the
        investment in associates and jointly controlled entities recognised for the
        year
        (Notes 2(e) and (l)).
  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 associate
        or
        the jointly controlled entity. For this purpose, the Group’s interest in the
        associate or the jointly controlled entity 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.
  Unrealised
        profits and losses arising from transactions between the Group and its
        associates and jointly controlled entities are eliminated to the extent of
        the
        Group’s interest in the associate or jointly controlled entity, except where
        unrealised losses provide evidence of an impairment of the asset transferred,
        in
        which case they are recognised immediately in profit or loss.
  ***(e)***
              ***Goodwill***
  Goodwill
        represents the excess of the cost of a business combination or an investment
        in
        an associate or a jointly controlled entity over the Group’s interest in the net
        fair value of the acquiree’s identifiable assets, liabilities and contingent
        liabilities.
  Goodwill
        is stated at cost less accumulated impairment losses. Goodwill is allocated
        to
        cash-generating units and is tested annually for impairment (Note 2(l)).
        In
        respect of associates or jointly controlled entities, the carrying amount
        of
        goodwill is included in the carrying amount of the interest in the associate
        or
        jointly controlled entity.
  Any
        excess of the Group’s interest in the net fair value of the acquiree’s
        identifiable assets, liabilities and contingent liabilities over the cost
        of a
        business combination or an investment in an associate or a jointly controlled
        entity is recognised immediately in profit or loss.
  On
        disposal of a cash-generating unit, an associate or a jointly controlled
        entity
        during the year, any attributable amount of purchased goodwill is included
        in
        the calculation of the profit or loss on disposal.
  F-13
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(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 cost, 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
        securities are those non-derivative financial assets that are designated
        as
        available for sale. At each balance sheet date the fair value is remeasured,
        with any resultant gain or loss being recognised directly in equity, except
        foreign exchange gains and losses resulting from changes in the amortised
        cost
        of monetary items which are recognised directly in profit or loss. Dividend
        income from these investments is recognised in accordance with the policy
        set
        out in Note 2 (v)(iii). When these investments are derecognised or impaired
        (Note 2(l)), the cumulative gain or loss previously recognised directly in
        equity is recognised in profit or loss.
  The
        Group’s other investments in equity securities represent unlisted equity
        securities of companies established in the PRC. They do not have a quoted
        market
        price in an active market and whose fair value cannot be reliably measured.
        Accordingly, they are recognised in the consolidated balance sheet at cost
        less
        impairment losses (Note 2(1)).
  Investments
        are recognised / derecognised on the date the Group commits to purchase /
        sell
        the investments or they expire.
  ***(g)***
              ***Derivative
                  financial instruments***
  Derivative
        financial instruments are recognised at fair value. At each balance sheet
        date
        the fair value is remeasured. The gain or loss on remeasurement to fair value
        is
        charged immediately to profit or loss.
  ***(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 in the consolidated balance sheet 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)(ii).
  F-14
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(h)***
              ***Property,
                  plant and equipment
                  (continued)***
  (ii)
              Other
                  property, plant and equipment
  Items
        of
        property, plant and equipment are initially stated at cost, less accumulated
        depreciation and impairment losses (Note 2(l)). The cost of an item of property,
        plant and equipment comprises its purchase price and any directly attributable
        costs of bringing the asset to working condition and location for its intended
        use and the initial estimate, where relevant, of the costs of dismantling
        and
        removing the items and restoring the site on which they are located.
  Subsequent
        to the revaluation of the Group’s property, plant and equipment as at December
        31, 1996 (Note 17(b)), which was based on depreciated replacement costs,
        certain
        of the Group’s property, plant and equipment are carried at revalued amount,
        being the fair value at the date of the revaluation less any subsequent
        accumulated depreciation.
  Revaluations
        are performed with sufficient regularity to ensure that the carrying amount
        of
        these assets does not differ materially from that which would be determined
        using fair value at the balance sheet date.
  Changes
        arising on the revaluation of property, plant and equipment are generally
        dealt
        with in reserves. The only exceptions are as follows:
  -
              When
                  a deficit arises on revaluation, it will be charged to profit or
                  loss to
                  the extent that it exceeds the amount held in the reserve in respect
                  of
                  that same asset immediately prior to the revaluation;
                  and
  -
              When
                  a surplus arises on revaluation, it will be credited to profit
                  or loss to
                  the extent that a deficit on revaluation in respect of that same
                  asset had
                  previously been charged to profit or
                  loss.
  The
        cost
        of self-constructed items of property, plant and equipment includes the cost
        of
        materials, 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 recognised in profit or loss on the
        date
        of retirement or disposal. Any related revaluation surplus is transferred
        from
        the revaluation reserve to retained profits.
  F-15
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(h)***
              ***Property,
                  plant and equipment
                  (continued)***
  (ii)
              Other
                  property, plant and equipment
                  (continued)
  Depreciation
        is calculated to write off the cost or valuation 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 yearsOwned
                  and leased aircraft
              15
                  to 20 yearsOther
                  flight equipment-
                  Jet engines
              15
                  to 20 years-
                  Others, including rotable spares
              2.5 to 15 yearsMachinery
                  and equipment
              4
                  to 10 yearsVehicles
              6
                  to 8 years
  Where
        parts of an item of property, plant and equipment have different useful lives,
        the cost or valuation 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.
  ***(i)***
              ***Construction
                  in progress***
  Construction
        in progress represents office buildings, various infrastructure projects
        under
        construction and equipment pending installation, and is stated at cost less
        impairment losses (Note 2(l)). Capitalisation of these costs ceases and the
        construction in progress is transferred to property, plant and equipment
        when
        the asset is substantially ready for its intended use, notwithstanding any
        delay
        in the issue of the relevant commissioning certificates by the relevant PRC
        authorities.
  No
        depreciation is provided in respect of construction in
        progress.
  F-16
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(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 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). 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 profit or loss
        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.
  (iii)
              Operating
                  lease charges
  Where
        the
        Group has the use of assets held under operating leases, payments made under
        the
        leases are charged to profit or loss in equal instalments over the accounting
        periods covered by the lease term, except where an alternative basis is more
        representative of the pattern of benefits to be derived from the leased asset.
        Lease incentives received are recognised in profit or loss as an integral
        part
        of the aggregate net lease payments made.
  The
        cost
        of acquiring land held under operating lease is amortised on a straight-line
        basis over the respective periods of lease terms which ranged from 30 to
        70
        years.
  F-17
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(j)***
              ***Leased
                  assets (continued)***
  (iv)
              Sale
                  and leaseback transactions
  Gains
        or
        losses on sale and leaseback transactions which result in finance leases
        are
        deferred and amortised over the terms of the related leases. Gains or losses
        on
        other aircraft sale and leaseback transactions which result in operating
        leases
        are recognised immediately if the transactions are established at fair value.
        Any difference between the sales price and the fair value is deferred and
        amortised over the period the assets are expected to be used.
  ***(k)***
              ***Deferred
                  expenditure***
  Lump
        sum
        housing benefits payable to employees of the Group are deferred and amortised
        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 (other than investments in subsidiaries, associates
        and
        jointly controlled entities: Notes 2(c) and 2(d)) and other current and
        non-current receivables that are stated at cost or amortised cost or are
        classified as available-for-sale equity securities are reviewed at each balance
        sheet date to determine whether there is objective evidence of impairment.
        Objective evidence of impairment includes observable data that comes to the
        attention of the Group about one or more of the following loss
        events:
  -
              significant
                  financial difficulty of the debtor;
  -
              a
                  breach of contract, such as a default or delinquency in interest
                  or
                  principal payments;
  -
              it
                  becoming probable that the debtor will enter bankruptcy or other
                  financial
                  reorganisation;
  -
              significant
                  changes in the technological, market, economic or legal environment
                  that
                  have an adverse effect on the debtor; and
  -
              a
                  significant or prolonged declined in the fair value of an investment
                  in an
                  equity instrument below its
                  cost.
  F-18
  **2**
              **Principal
                  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 recognised as
        follows:
  -
              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
                  are not
                  reversed.
  -
              For
                  trade and other current receivables and other financial assets
                  carried at
                  amortised cost, the impairment loss is measured as the difference
                  between
                  the asset’s carrying amount and the present value of estimated future cash
                  flows, discounted at the financial asset’s original effective interest
                  rate (i.e. the effective interest rate computed at initial recognition
                  of
                  these assets), where the effect of discounting is material. This
                  assessment is made collectively where financial assets carried
                  at
                  amortised cost 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
        recognised, 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 recognised
        in
        prior years.
  -
              For
                  available-for-sale securities, the cumulative loss that has been
                  recognised directly in equity is removed from equity and is recognised
                  in
                  profit or loss. The amount of the cumulative loss that is recognised
                  in
                  profit or loss is the difference between the acquisition cost (net
                  of any
                  principal repayment and amortisation) and current fair value, less
                  any
                  impairment loss on that asset previously recognised in profit or
                  loss.
  Impairment
        losses recognised in profit or loss 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 recognised directly in equity.
  Impairment
        losses are written off against the corresponding asset directly, except for
        impairment losses recognised 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 recognised
        in profit or loss.
  F-19
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(l)***
              ***Impairment
                  of assets (continued)***
  (ii)
              Impairment
                  of other assets
  Internal
        and external sources of information are reviewed at each balance sheet date
        to
        identify indications that the following assets may be impaired or, except
        in the
        case of goodwill, an impairment loss previously recognised no longer exists
        or
        may have decreased:
  -
              Property,
                  plant and equipment carried at cost less accumulated
                  depreciation;
  - Construction
        in progress;
  - Lease
        deposits;
  - Lease
        prepayments;
  - Deferred
        expenditure;
  -
              Investments
                  in associates and jointly controlled entities;
                  and
  -
              Goodwill.
  If
        any
        such indication exists, the asset’s recoverable amount is estimated. For
        goodwill, the recoverable amount 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 net selling price and
        the
        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 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 recognised in profit or loss whenever the carrying amount
        of
        an asset, or the cash-generating unit to which it belongs, exceeds its
        recoverable amount. Impairment losses recognised 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.
  F-20
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(l)***
              ***Impairment
                  of assets (continued)***
  (ii)
              Impairment
                  of other assets (continued)
  -
              Reversals
                  of impairment losses
  In
        respect of assets other than goodwill, an impairment loss is reversed if
        there
        has been a favourable change in the estimates used to determine the recoverable
        amount. An impairment loss in respect of goodwill is not reversed.
  A
        reversal of an impairment loss is limited to the asset’s carrying amount that
        would have been determined had no impairment loss been recognised in prior
        years. Reversals of impairment losses are credited to profit or loss in the
        year
        in which the reversals are recognised.
  (iii)
              Interim
                  financial reporting and impairment
  Impairment
        losses recognised 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 recognised had the impairment been assessed
        only at the end of the financial year to which the interim period
        relates.
  ***(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 profit
        or loss when used in operations. Cost represents the average unit
        cost.
  Inventories
        held for disposal are carried at the lower of cost and net realisable value.
        Net
        realisable value is the estimated selling price in the ordinary course of
        business less the estimated costs of completion and the estimated costs
        necessary to make the sale.
  ***(n)***
              ***Trade
                  and other receivables***
  Trade
        and
        other receivables are initially recognised at fair value and thereafter stated
        at amortised cost less allowance for impairment of bad and 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 recognised initially at fair value less attributable transaction
        costs. Subsequent to initial recognition, interest-bearing borrowings are
        stated
        at amortised cost with any difference between the amount initially recognised
        and redemption value being recognised in profit or loss over the period of
        the
        borrowings, together with any interest and fees payable, using the effective
        interest method.
  F-21
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(p)***
              ***Trade
                  and other payables***
  Trade
        and
        other payables are initially recognised at fair value and are subsequently
        stated at amortised cost unless the effect of discounting would be immaterial,
        in which case they are stated at cost.
  ***(q)***
              ***Cash
                  and cash equivalents***
  Cash
        and
        cash equivalents comprise cash at bank and on hand, demand deposits with
        banks
        and other financial institutions having been 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 recognised as deferred income within trade and other payables.
        Where
        consideration is received or receivable for the issuance of the guarantee,
        the
        consideration is recognised in accordance with the Group’s policies applicable
        to that category of asset. Where no such consideration is received or
        receivable, an immediate expense is recognised in profit or loss on initial
        recognition of any deferred income.
  The
        amount of the guarantee initially recognised as deferred income is amortised
        in
        profit or loss over the term of the guarantee as income from financial
        guarantees issued. In addition, provisions are recognised 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
        recognised, less accumulated amortisation.
  F-22
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(r)***
              ***Financial
                  guarantees issued, provisions and contingent liabilities
                  (continued)***
  (ii)
              Provision
                  and contingent liabilities
  Provisions
        are recognised for other liabilities of uncertain timing or amount when the
        Group has a present legal or constructive obligation as a result of a past
        event, and it is probable that an outflow of economic benefits will be required
        to settle the obligations and a reliable estimate can be made. Where the
        time
        value of money is material, provisions are stated at the present value of
        the
        expenditures expected to settle the obligation.
  Where
        it
        is not probable that an outflow of economic benefits will be required, or
        the
        amount cannot be estimated reliably, the obligation is disclosed as a contingent
        liability, unless the probability of outflow of economic benefits is remote.
        Possible obligations, whose existence will only be confirmed by the occurrence
        or non-occurrence of one or more future events are also disclosed as contingent
        liabilities unless the probability of outflow of economic benefits is
        remote.
  ***(s)***
              ***Defeasance
                  of long-term
                  liabilities***
  Where
        long-term liabilities have been defeased by the placement of security deposits,
        those liabilities and deposits (and income and charge arising therefrom)
        are
        netted off in order to reflect the overall commercial effect of the
        arrangements. Such netting off has been effected where a right is held by
        the
        Group to insist on net settlement of the liability and deposit including
        in all
        situations of default and where that right is assured beyond doubt.
  ***(t)***
              ***Deferred
                  credits***
  In
        connection with the acquisitions or operating leases of certain aircraft
        and
        engines, the Group receives various credits. Such credits are deferred until
        the
        aircraft and engines are delivered, at which time they are either applied
        as a
        reduction of the cost of acquiring the aircraft and engines, resulting in
        a
        reduction of future depreciation, or amortised as a reduction of rental expense
        for aircraft and engines under operating leases.
  ***(u)***
              ***Income
                  tax***
  Income
        tax for the year comprises current and movements in deferred tax assets and
        liabilities. Current tax and movements in deferred tax assets and liabilities
        are recognised in profit or loss except to the extent that they relate to
        items
        recognised directly in equity, in which case they are recognised in
        equity.
  Current
        tax is the expected tax payable on the taxable income for the year, using
        tax
        rates enacted or substantively enacted at the balance sheet date, 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.
  F-23
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(u)***
              ***Income
                  tax (continued)***
  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 utilised, are recognised. 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
        utilised.
  The
        limited exception to the recognition of deferred tax assets and liabilities
        are
        those temporary differences arising from goodwill not deductible for tax
        purposes, the initial recognition of assets or liabilities that affect neither
        accounting nor taxable profit (provided they are not part of a business
        combination), and temporary differences relating to investments in subsidiaries
        to the extent that, in the case of taxable differences, the Group controls
        the
        timing of the reversal and it is probable that the differences will not reverse
        in the foreseeable future, or in the case of deductible differences, unless
        it
        is probable that they will reverse in the future.
  The
        amount of deferred tax recognised is measured based on the expected manner
        of
        realisation or settlement of the carrying amount of the assets and liabilities,
        using tax rates enacted or substantively enacted at the balance sheet date.
        Deferred tax assets and liabilities are not discounted.
  The
        carrying amount of a deferred tax asset is reviewed at each balance sheet
        date
        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
        utilised. Any such reduction is reversed to the extent that it becomes probable
        that sufficient taxable profits will be available.
  F-24
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(u)***
              ***Income
                  tax (continued)***
  Current
        tax balances and deferred tax balances, and movements therein, are presented
        separately from each other and are not offset. Current tax assets are offset
        against current tax liabilities, and deferred tax assets against deferred
        tax
        liabilities, if the Group has the legally enforceable right to set off current
        tax assets against current tax liabilities and the following additional
        conditions are met:
  -
              in
                  the case of current tax assets and liabilities, the Group intends
                  either
                  to settle on a net basis, or to realise 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 realise the current tax assets and settle
                  the
                  current tax liabilities on a net basis or realise and settle
                  simultaneously.
  ***(v)***
              ***Revenue
                  recognition***
  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 recognised
        in
        profit or loss as follows:
  (i)
              Passenger,
                  cargo and mail revenues are recognised when the transportation
                  is
                  provided. Ticket sales for transportation not yet provided are
                  included in
                  current liabilities as sales in advance of carriage. Revenues from
                  airline-related business are recognised when services are rendered.
                  Revenue is stated net of sales tax.
  (ii)
              Rental
                  income receivable under operating leases is recognised in profit
                  or loss
                  in equal instalments over the periods covered by the lease term,
                  except
                  where an alternative basis is more representative of the pattern
                  of
                  benefits to be derived from the use of the leased asset. Lease
                  incentives
                  granted are recognised in profit or loss as an integral part of
                  the
                  aggregate net lease payments receivables.
  (iii)
              Dividend
                  income is recognised when the shareholder’s right to receive payment is
                  established.
  (iv)
              Government
                  grants are recognised in the consolidated balance sheet initially
                  when
                  there is reasonable assurance that they will be received and that
                  the
                  Group will comply with the conditions attaching to them. Grants
                  that
                  compensate the Group for expenses incurred are recognised as revenue
                  in
                  profit or loss 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 in arriving at the carrying amount of the asset
                  and
                  consequently are recognised in profit or loss over the useful life
                  of the
                  asset.
  (v)
              Interest
                  income is recognised as it accrues using the effective interest
                  method.
  F-25
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(w)***
              ***Traffic
                  commissions***
  Traffic
        commissions are expensed in profit or loss when the transportation is provided
        and the related revenue is recognised. Traffic commissions for transportation
        not yet provided are recorded on the consolidated balance sheet as a prepaid
        expense.
  ***(x)***
              ***Maintenance
                  and overhaul costs***
  Routine
        maintenance, repairs and overhauls are charged to profit or loss 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 recognised 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 derecognised
        and
        charged to profit or loss.
  In
        respect of aircraft held under operating leases, the Group has responsibility
        to
        fulfil certain return conditions under relevant lease agreements. In order
        to
        fulfil these return conditions, major overhauls are required to be conducted
        on
        a regular basis. Accordingly, estimated costs of major overhauls are accrued
        and
        charged to profit or loss 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 profit or loss in the period
        when the overhaul is performed.
  ***(y)***
              ***Borrowing
                  costs***
  Borrowing
        costs are expensed in profit or loss in the period in which they are incurred,
        except to the extent that they are capitalised as being directly attributable
        to
        the acquisition or construction of an asset which necessarily takes a
        substantial period of time to get ready for its intended use.
  The
        capitalisation 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. Capitalisation 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)***
              ***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.
  F-26
  **2**
              **Principal
                  accounting policies
                  (continued)**
  ***(aa)***
              ***Termination
                  benefits***
  Termination
        benefits are recognised 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.
  ***(bb)***
              ***Frequent
                  flyer award
                  programmes***
  The
        Group
        maintains two frequent flyer award programmes, namely, the China Southern
        Airlines Sky Pearl Club and the Egret Mileage Plus, which provide travel
        awards
        to members based on accumulated mileage. The estimated incremental cost to
        provide free travel is recognised as an expense and accrued as a current
        liability as members accumulate mileage. As members redeem awards or their
        entitlements expire, the incremental cost liability is reduced accordingly
        to
        reflect the acquittal of the outstanding obligations.
  Revenue
        from mileage sales to third parties under the frequent flyer award programmes
        is
        recognised when the related transportation services are provided.
  ***(cc)***
              ***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 on the transaction dates. Monetary assets and liabilities denominated
        in foreign currencies are translated into Renminbi at the PBOC exchange rates
        prevailing on the balance sheet date. Exchange gains and losses are recognised
        in non-operating income/(expenses) in the consolidated statements of operations.
  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 on 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 on the dates the fair
        value
        was determined.
  F-27
  **2**
                **Principal
                    accounting policies
                    (continued)**
  ***(dd)***
              ***Related
                  parties***
  For
        the
        purposes of these consolidated financial statements, a party is considered
        to be
        related to the Group if:
  (i)
              the
                  party has the ability, directly or indirectly through one or more
                  intermediaries, to control the Group or exercise significant influence
                  over the Group in making financial and operating policy decisions,
                  or has
                  joint control over the Group;
  (ii)
              the
                  Group and the party are subject to common
                  control;
  (iii)
              the
                  party is an associate of the Group or a joint venture in which
                  the Group
                  is a venturer;
  (iv)
              the
                  party is a member of key management personnel of the Group or the
                  Group’s
                  parent, or a close family member of such an individual, or is an
                  entity
                  under the control, joint control or significant influence of such
                  individuals;
  (v)
              the
                  party is a close family member of a party referred in (i) or is
                  an entity
                  under the control, joint control or significant influence of such
                  individuals; or
  (vi)
              the
                  party is a post-employment benefit plan which is for the benefit
                  of
                  employees of the Group or of any entity that is a related party
                  of the
                  Group.
  Close
        family members of an individual are those family members who may be expected
        to
        influence, or be influenced by, that individual in their dealings with the
        entity.
  ***(ee)***
              ***Segmental
                  reporting***
  A
        segment
        is a distinguishable component of the Group that is engaged either in providing
        products or services (business segment), or in providing products or services
        within a particular economic environment (geographical segment), which is
        subject to risks and rewards that are different from those of other
        segments.
  In
        accordance with the Group’s internal financial reporting system, the Group has
        chosen business segment information as the primary reporting format and
        geographical segment information as the secondary reporting format for the
        purposes of these consolidated financial statements.
  F-28
  **3**
              **Turnover**
  Turnover
        comprises revenues from airline and airline-related business and is stated
        net
        of sales tax. An analysis of turnover is as follows:
 
 *2007*
                RMB
                  million
              
              *2006*
                RMB
                  million
              
              *2005*
                RMB
                  millionTraffic
                  revenuePassenger
              
              
              49,600
              
              
              41,549
              
              
              34,328Cargo
                  and mail
              
              
              3,697
              
              
              3,538
              
              
              3,09153,297
              
              
              45,087
              
              
              37,419Other
                  operating revenueCommission
                  income
              
              
              281
              
              
              238
              
              
              237General
                  aviation income
              
              
              108
              
              
              91
              
              
              77Ground
                  services income
              
              
              241
              
              
              184
              
              
              195Air
                  catering income
              
              
              81
              
              
              50
              
              
              25Rental
                  income
              
              
              119
              
              
              107
              
              
              69Others
              
              
              375
              
              
              462
              
              
              2711,205
              
              
              1,132
              
              
              87454,502
              
              
              46,219
              
              
              38,293
  Pursuant
        to various sales tax rules and regulations, the Group is required to pay
        sales
        tax to national and local tax authorities at the rate of approximately 3%
        of the
        traffic revenue in respect of domestic flights and outbound international,
        Hong
        Kong and Macau flights. Sales tax incurred by the Group during the year ended
        December 31, 2007, netted off against revenue, amounted to RMB1,574 million
        (2006: RMB1,300 million; 2005: RMB1,111 million).
  **4**
              **Flight
                  operations expenses**
  *2007*
                RMB
                  million
              
              *2006*
                RMB
                  million
              
              *2005*
                RMB
                  millionJet
                  fuel costs
              
              
              18,316
              
              
              16,193
              
              
              11,929Operating
                  lease charges-
                  Aircraft and flight equipment
              
              
              3,735
              
              
              3,027
              
              
              2,497-
                  Land and buildings
              
              
              320
              
              
              249
              
              
              302Air
                  catering expenses
              
              
              1,350
              
              
              1,170
              
              
              1,150Aircraft
                  insurance
              
              
              207
              
              
              274
              
              
              283Flight
                  personnel payroll and welfare
              
              
              2,226
              
              
              1,697
              
              
              1,599Training
                  expenses
              
              
              517
              
              
              389
              
              
              373CAAC
                      Infrastructure Development Fund contributions
              
              
              1,250
              
              
              1,127
              
              
              978Others
              
              
              1,161
              
              
              896
              
              
              65029,082
              
              
              25,022
              
              
              19,761
  F-29
  **5**
              **Maintenance
                  expenses**
  *2007*
                RMB
                  million
              
              *2006*
                RMB
                  million
              
              *2005*
                RMB
                  millionRepairing
                  and maintenance charges
              
              
              4,111
              
              
              3,585
              
              
              4,153Maintenance
                  materials
              
              
              532
              
              
              414
              
              
              4364,643
              
              
              3,999
              
              
              4,589
  **6**
              **Aircraft
                  and traffic servicing
                  expenses**
  *2007*
                RMB
                  million
              
              *2006*
                RMB
                  million
              
              *2005*
                RMB
                  millionLanding
                  and navigation fees
              
              
              6,030
              
              
              5,343
              
              
              4,977Ground
                  service and other charges
              
              
              2,130
              
              
              1,720
              
              
              1,5578,160
              
              
              7,063
              
              
              6,534
  **7**
              **Promotion
                  and sales expenses**
  *2007*
                RMB
                  million
              
              *2006*
                RMB
                  million
              
              *2005*
                RMB
                  millionSales
                  commissions
              
              
              1,789
              
              
              1,489
              
              
              1,503Ticket
                  office expenses
              
              
              1,016
              
              
              824
              
              
              784Computer
                  reservation services
              
              
              385
              
              
              307
              
              
              292Advertising
                  and promotion
              
              
              108
              
              
              43
              
              
              32Others
              
              
              180
              
              
              148
              
              
              1693,478
              
              
              2,811
              
              
              2,780
  **8**
              **General
                  and administrative
                  expenses**
  *2007*
                RMB
                  million
              
              *2006*
                RMB
                  million
              
              *2005*
                RMB
                  millionGeneral
                  corporate expenses
              
              
              1,811
              
              
              1,897
              
              
              1,266Auditors’
                  remuneration
              
              
              16
              
              
              15
              
              
              12Impairment
                  on aircraft (Note 17(h))
              
              
              109
              
              
              —
              
              
              —Other
                  taxes and levies
              
              
              47
              
              
              29
              
              
              371,983
              
              
              1,941
              
              
              1,315
  F-30
  **9**
              **Depreciation
                  and amortisation**
  *2007*
                RMB
                  million
              
              *2006*
                RMB
                  million
              
              *2005*
                RMB
                  millionDepreciation-
                  Owned assets
              
              
              4,232
              
              
              3,678
              
              
              3,292-
                  Assets acquired under finance leases
              
              
              1,365
              
              
              1,321
              
              
              1,128Amortisation
                  of deferred credits
              
              
              (71
              )
              
              (61
              )
              
              (20
              )Other
                  amortisation
              
              
              28
              
              
              33
              
              
              405,554
              
              
              4,971
              
              
              4,440
  **10**
              **Staff
                  costs**
  *2007*
                RMB
                  million
              
              *2006*
                RMB
                  million
              
              *2005*
                RMB
                  millionSalaries,
                  wages and welfare
              
              
              5,130
              
              
              3,854
              
              
              3,515Retirement
                  scheme contributions
              
              
              614
              
              
              584
              
              
              472Early
                  retirement benefits (Note 36)
              
              
              12
              
              
              392
              
              
              —5,756
              
              
              4,830
              
              
              3,987
  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 4
        to 8
        above.
  **11**
              **Interest
                  expense**
  *2007*
                RMB
                  million
              
              *2006*
                RMB
                  million
              
              *2005*
                RMB
                  millionInterest
                  on bank and other loans whollyrepayable
                  within five years
              
              
              1,986
              
              
              1,675
              
              
              995Interest
                  on other loans
              
              
              105
              
              
              138
              
              
              93Finance
                  charges on obligationsunder
                  finance leases
              
              
              743
              
              
              716
              
              
              626Other
                  interest expense (Note 36)
              
              
              15
              
              
              —
              
              
              —Less:
                  borrowing costs capitalised
              
              
              558
              
              
              (459
              )
              
              (98
              )2,291
              
              
              2,070
              
              
              1,616
  The
        borrowing costs have been capitalised at rates ranging from 5.30% to 5.84%
        per
        annum in 2007 (2006: 5.29% to 5.61% per annum; 2005: 4.14% to 5.27% per
        annum).
  F-31
   **12**
              **Other
                  income / (expenses), net**
  2007
                RMB
                  million
              
              2006
                RMB
                  million
              
              2005
                RMB
                  millionGain
                  / (loss) on sale of property, plantand
                  equipment, net-
                  Aircraft and spare engines
              
              
              106
              
              
              329
              
              
              —-
                  Other property, plant and equipment
              
              
              24
              
              
              4
              
              
              (32
              )130
              
              
              333
              
              
              (32
              )
  In
        2007,
        the Group recognised a gain on disposal of property, plant and equipment
        of
        RMB106 million on selling of 11 MD82 aircraft, three MD82 spare engines and
        one
        Boeing 737-500 spare engine to certain independent third parties, being the
        excess of the sale proceeds over the carrying amounts of the assets and related
        disposal costs.
  In
        2006,
        the Group recognised a gain on disposal of property, plant and equipment
        of
        RMB329 million on selling of three Boeing 757-200 aircraft to certain
        independent third parties, being the excess of the sale proceeds over the
        carrying amounts of the assets and related disposal costs.
  F-32




**13**
            **Emoluments
                of directors, supervisors and senior
                management**




***(a)***
            ***Directors’
                and supervisors’
emoluments***




Details
      of directors’ and supervisors’ emoluments for the year ended December 31, 2007
      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**Liu
                Shao Yong (Note (i))
            
            
            —
            
            
            737
            
            
            —
            
            
            14
            
            
            751Li
                Wen Xin
            
            
            —
            
            
            329
            
            
            —
            
            
            14
            
            
            343Wang
                Quan Hua
            
            
            —
            
            
            597
            
            
            —
            
            
            14
            
            
            611Zhao
                Liu An (Note (i))
            
            
            —
            
            
            576
            
            
            —
            
            
            14
            
            
            590Si
                Xian Min
            
            
            —
            
            
            670
            
            
            —
            
            
            13
            
            
            683Tan
                Wan Geng
            
            
            —
            
            
            542
            
            
            —
            
            
            13
            
            
            555Xu
                Jie Bo
            
            
            —
            
            
            529
            
            
            —
            
            
            13
            
            
            542Chen
                Zhen You
            
            
            —
            
            
            513
            
            
            —
            
            
            16
            
            
            529**Supervisors**Sun
                Xiao Yi
            
            
            —
            
            
            597
            
            
            —
            
            
            14
            
            
            611Yang
                Guang Hua
            
            
            —
            
            
            565
            
            
            —
            
            
            8
            
            
            573Yang
                Yi Hua
            
            
            —
            
            
            209
            
            
            —
            
            
            16
            
            
            225Liang
                Zhong Gao (Note (iii))
            
            
            —
            
            
            232
            
            
            —
            
            
            12
            
            
            244Liu
                Biao (Note (iv))
            
            
            —
            
            
            134
            
            
            —
            
            
            2
            
            
            136**Independent****non-executive
                directors**Peter
                Lok (Note (ii))
            
            
            49
            
            
            —
            
            
            —
            
            
            —
            
            
            49Wei
                Ming Hai (Note (ii))
            
            
            50
            
            
            —
            
            
            —
            
            
            —
            
            
            50Gong
                Hua Zhang (Note (iii))
            
            
            50
            
            
            —
            
            
            —
            
            
            —
            
            
            50Wang
                Zhi
            
            
            100
            
            
            —
            
            
            —
            
            
            —
            
            
            100Sui
                Guang Jun
            
            
            100
            
            
            —
            
            
            —
            
            
            —
            
            
            100Lam
                Kwong Yu, Albert (Note (iii))
            
            
            48
            
            
            —
            
            
            —
            
            
            —
            
            
            48397
            
            
            6,230
            
            
            —
            
            
            163
            
            
            6,790


F-33




**13**
            **Emoluments
                of directors, supervisors and senior management
                (continued)**




***(a)***
            ***Directors’
                and supervisors’ emoluments
                (continued)***




Details
      of directors’ and supervisors’ emoluments for the year ended December 31, 2006
      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**Liu
                Shao Yong (Note (i))
            
            
            —
            
            
            472
            
            
            —
            
            
            14
            
            
            486Li
                Wen Xin
            
            
            —
            
            
            87
            
            
            —
            
            
            3
            
            
            90Wang
                Quan Hua
            
            
            —
            
            
            374
            
            
            —
            
            
            14
            
            
            388Zhao
                Liu An (Note (i))
            
            
            —
            
            
            374
            
            
            —
            
            
            14
            
            
            388Si
                Xian Min
            
            
            —
            
            
            442
            
            
            —
            
            
            13
            
            
            455Tan
                Wan Geng
            
            
            —
            
            
            271
            
            
            —
            
            
            11
            
            
            282Xu
                Jie Bo
            
            
            —
            
            
            357
            
            
            —
            
            
            13
            
            
            370Chen
                Zhen You
            
            
            —
            
            
            253
            
            
            —
            
            
            13
            
            
            266Zhou
                Yong Qian
            
            
            —
            
            
            146
            
            
            —
            
            
            3
            
            
            149**Supervisors**Sun
                Xiao Yi
            
            
            —
            
            
            374
            
            
            —
            
            
            14
            
            
            388Yang
                Guang Hua
            
            
            —
            
            
            374
            
            
            50
            
            
            13
            
            
            437Yang
                Yi Hua
            
            
            —
            
            
            220
            
            
            —
            
            
            13
            
            
            233**Independent****non-executive
                directors**Peter
                Lok
            
            
            102
            
            
            —
            
            
            —
            
            
            —
            
            
            102Wei
                Ming Hai
            
            
            100
            
            
            —
            
            
            —
            
            
            —
            
            
            100Wang
                Zhi
            
            
            100
            
            
            —
            
            
            —
            
            
            —
            
            
            100Sui
                Guang Jun
            
            
            100
            
            
            —
            
            
            —
            
            
            —
            
            
            100402
            
            
            3,744
            
            
            50
            
            
            138
            
            
            4,334


F-34




**13**
            **Emoluments
                of directors, supervisors and senior management
                (continued)**




***(a)***
            ***Directors’
                and supervisors’ emoluments
                (continued)***




Details
      of directors’ and supervisors’ emoluments for the year ended December 31, 2005
      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**Liu
                Shao Yong (Note (i))
            
            
            —
            
            
            299
            
            
            —
            
            
            12
            
            
            311Liu
                Ming Qi
            
            
            —
            
            
            242
            
            
            —
            
            
            10
            
            
            252Peng
                An Fa
            
            
            —
            
            
            101
            
            
            —
            
            
            6
            
            
            107Wang
                Quan Hua
            
            
            —
            
            
            237
            
            
            —
            
            
            12
            
            
            249Zhao
                Liu An (Note (i))
            
            
            —
            
            
            237
            
            
            —
            
            
            12
            
            
            249Zhou
                Yong Qian
            
            
            —
            
            
            237
            
            
            —
            
            
            12
            
            
            249Si
                Xian Min
            
            
            —
            
            
            281
            
            
            —
            
            
            12
            
            
            293Zhou
                Yong Jin
            
            
            —
            
            
            127
            
            
            —
            
            
            2
            
            
            129Xu
                Jie Bo
            
            
            —
            
            
            226
            
            
            —
            
            
            12
            
            
            238Wu
                Rong Nan
            
            
            —
            
            
            368
            
            
            162
            
            
            7
            
            
            537**Supervisors**Sun
                Xiao Yi
            
            
            —
            
            
            237
            
            
            —
            
            
            12
            
            
            249Yang
                Guang Hua
            
            
            —
            
            
            225
            
            
            —
            
            
            12
            
            
            237Yang
                Yi Hua
            
            
            —
            
            
            48
            
            
            70
            
            
            11
            
            
            129**Independent****non-executive
                directors**Simon
                To (Note (v))
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Peter
                Lok
            
            
            58
            
            
            —
            
            
            —
            
            
            —
            
            
            58Wei
                Ming Hai
            
            
            58
            
            
            —
            
            
            —
            
            
            —
            
            
            58Wang
                Zhi
            
            
            58
            
            
            —
            
            
            —
            
            
            —
            
            
            58Sui
                Guang Jun
            
            
            58
            
            
            —
            
            
            —
            
            
            —
            
            
            58232
            
            
            2,865
            
            
            232
            
            
            132
            
            
            3,461




Notes:




(i)
            The
                above amounts included salaries paid to these directors as pliots
                of the
                Company.




(ii)
            Retired
                on June 28, 2007.




(iii)
            Appointed
                on June 28, 2007.




(iv)
            Appointed
                on June 28, 2007 and resigned on January 18,
                2008.




(v)
            Simon
                To received director’s fee of RMB1 during the year ended December 31,
                2005.


F-35




**13**
            **Emoluments
                of directors, supervisors and senior management
                (continued)**




***(b)***
            ***Individuals
                with highest
                emoluments***




In
      2007
      and 2006, one of the five individuals (2006: none) with the highest emoluments
      are directors. The aggregate of the emoluments in respect of four (2006: five)
      individuals during the year are as follows:




*2007*
            
            *2006*RMB’000
            
            RMB’000Salaries,
                allowances and benefits in kind
            
            
            3,162
            
            
            2,680Retirement
                scheme contributions
            
            
            50
            
            
            583,212
            
            
            2,738




The
      emoluments of the four (2006: five) individuals with the highest emoluments
      are
      within the following band:




*2007*
            
            *2006**Number*
            
            *Number**of
                individuals*
            
            *of
                individuals*Nil
                to HK$1,000,000 (RMB972,700 equivalent(2006:
                RMB1,025,000 equivalent))
            
            
            4
            
            
            5




**14**
            **Income
                tax expense**




***(a)***
            ***Income
                tax expense in the consolidated statements of
                operations***





*2007*
            
            *2006*
            
            *2005*RMB
                million
            
            RMB
                million
            
            RMB
                millionPRC
                income taxProvision
                for the year
            
            
            408
            
            
            160
            
            
            12Over-provision
                in prior year
            
            
            (58
            )
            
            (16
            )
            
            —350
            
            
            144
            
            
            12Deferred
                tax (Note 23)
            
            
            508
            
            
            9
            
            
            (19
            )Income
                tax expense / (benefit)
            
            
            858
            
            
            153
            
            
            (7
            )




In
      respect 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 both the current and prior years.


F-36




**14**
            **Income
                tax expense (continued)**






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






*2007*
            
            *2006*
            
            *2005*RMB
                million
            
            RMB
                million
            
            RMB
                millionProfit
                / (loss) before taxation
            
            
            2,923
            
            
            357
            
            
            (1,853
            )Tax
                on profit before taxation, calculatedat
                the rates applicable to profit inthe
                tax jurisdiction concerned (Note i)
            
            
            482
            
            
            50
            
            
            (271
            )Adjustments
                for tax effect of:Non-deductible
                expenses
            
            
            250
            
            
            127
            
            
            82Non-taxable
                income
            
            
            —
            
            
            —
            
            
            (8
            )Share
                of results of associatesand
                jointly controlled entities
            
            
            (36
            )
            
            (22
            )
            
            37Tax
                losses not recognised
            
            
            28
            
            
            39
            
            
            135Effect
                of change of tax rate (Note (ii))
            
            
            196
            
            
            (21
            )
            
            —Over-provision
                in prior year
            
            
            (58
            )
            
            (16
            )
            
            —Others
            
            
            (4
            )
            
            (4
            )
            
            18Actual
                tax expense / (benefit)
            
            
            858
            
            
            153
            
            
            (7
            )




Notes:




(i)
            The
                statutory income tax rate in the PRC is 33%. Headquarter of the Company
                is
                taxed at a preferential rate of 18% (2006: 18%; 2005: 15%), and its
                certain branches are taxed at rates ranging from 15% to 33%. The
                subsidiaries of the Group are taxed at rates ranging from 7.5% to
                33%
                (2006: 15% to 33%; 2005: 15% to
                33%).




(ii)
            On
                March 16, 2007, the Fifth Plenary Session of the Tenth National People’s
                Congress passed the Corporate Income Tax Law of the PRC (“new tax law”)
                which has taken effect from January 1, 2008. As a result of the new
                tax
                law, the statutory income tax rate currently adopted by the Company
                and
                its subsidiaries has changed from 33% to 25% with effect from January
                1,
                2008. Pursuant to 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
                respectively.




The
      deferred tax assets and liabilities as at December 31, 2007 have been remeasured
      for the change in applicable tax rates as a result of the new tax law.




**15**
            **Dividends**




The
      board
      of directors of the Company does not recommend the payment of a dividend in
      respect of the year ended December 31, 2007.




No
      dividend was paid in respect of the years ended December 31, 2006 and 2005.


F-37




**16**
            **Earnings
                per share**




The
      calculation of basic earnings per share for the year ended December 31, 2007
      is
      based on the profit / (loss) attributable to equity shareholders of the Company
      of RMB1,871 million (2006: RMB188 million; 2005: RMB (1,848) million) and the
      weighted average number of shares in issue during the year of 4,374 million
      (2006: 4,374 million; 2005: 4,374 million).




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.




**17**
            **Property,
                plant and equipment, net**




*Aircraft*
              
              *Other**Acquired*
              
              *flight*
              
              *Machinery,**under*
              
              *equipment,*
              
              *equipment**Investment*
              
              
              
              
              
              *finance*
              
              *including*
              
              *and**properties*
              
              *Buildings*
              
              *Owned*
              
              *leases*
              
              *rotables*
              
              *vehicles*
              
              *Total*RMB
              
              RMB
              
              RMB
              
              RMB
              
              RMB
              
              RMB
              
              RMBmillion
              
              million
              
              million
              
              million
              
              million
              
              million
              
              million**Cost
                  or valuation:**At
                  January 1, 2006
              
              
              264
              
              
              7,023
              
              
              28,961
              
              
              22,675
              
              
              10,047
              
              
              2,867
              
              
              71,837Additions
              
              
              -
              
              
              -
              
              
              843
              
              
              4,037
              
              
              769
              
              
              339
              
              
              5,988Transfer
                  from constructionin
                  progress
              
              
              -
              
              
              516
              
              
              677
              
              
              580
              
              
              12
              
              
              46
              
              
              1,831Through
                  the acquisition ofCSAHC
                  Hainan(Note
                  42(d))
              
              
              -
              
              
              34
              
              
              39
              
              
              -
              
              
              41
              
              
              17
              
              
              131Reclassification
                  on exerciseof
                  purchase options
              
              
              -
              
              
              -
              
              
              3,273
              
              
              (3,273
              )
              
              -
              
              
              -
              
              
              -Reclassification
              
              
              -
              
              
              (172
              )
              
              -
              
              
              -
              
              
              -
              
              
              172
              
              
              -Disposals
              
              
              -
              
              
              (780
              )
              
              (580
              )
              
              (204
              )
              
              (575
              )
              
              (133
              )
              
              (2,272
              )At
                  December 31, 2006
              
              
              264
              
              
              6,621
              
              
              33,213
              
              
              23,815
              
              
              10,294
              
              
              3,308
              
              
              77,515Representing:Cost
              
              
              264
              
              
              6,266
              
              
              27,420
              
              
              19,475
              
              
              8,120
              
              
              2,824
              
              
              64,369Valuation
                  – 1996 (Note (b))
              
              
              -
              
              
              355
              
              
              5,793
              
              
              4,340
              
              
              2,174
              
              
              484
              
              
              13,146264
              
              
              6,621
              
              
              33,213
              
              
              23,815
              
              
              10,294
              
              
              3,308
              
              
              77,515At
                  January 1, 2007
              
              
              264
              
              
              6,621
              
              
              33,213
              
              
              23,815
              
              
              10,294
              
              
              3,308
              
              
              77,515Additions
              
              
              2
              
              
              159
              
              
              1,149
              
              
              4,340
              
              
              698
              
              
              282
              
              
              6,630Transfer
                  from constructionin
                  progress
              
              
              -
              
              
              129
              
              
              681
              
              
              396
              
              
              73
              
              
              5
              
              
              1,284Through
                  the acquisition ofNan
                  Lung Freightand
                  Air Catering(Note
                  42(b))
              
              
              -
              
              
              24
              
              
              -
              
              
              -
              
              
              -
              
              
              53
              
              
              77Reclassification
                  on exerciseof
                  purchase options
              
              
              -
              
              
              -
              
              
              2,705
              
              
              (2,705
              )
              
              -
              
              
              -
              
              
              -Disposals
              
              
              -
              
              
              (141
              )
              
              (359
              )
              
              (63
              )
              
              (376
              )
              
              (200
              )
              
              (1,139
              )At
                  December 31, 2007
              
              
              266
              
              
              6,792
              
              
              37,389
              
              
              25,783
              
              
              10,689
              
              
              3,448
              
              
              84,367Representing:Cost
              
              
              266
              
              
              6,440
              
              
              32,016
              
              
              21,496
              
              
              8,540
              
              
              3,039
              
              
              71,797Valuation –
                  1996 (Note (b))
              
              
              -
              
              
              352
              
              
              5,373
              
              
              4,287
              
              
              2,149
              
              
              409
              
              
              12,570266
              
              
              6,792
              
              
              37,389
              
              
              25,783
              
              
              10,689
              
              
              3,448
              
              
              84,367


F-38




**17**
            **Property,
                plant and equipment, net
                (continued)**





*Aircraft*
            
            *Other**Acquired*
            
            *flight*
            
            *Machinery,**under*
            
            *equipment,*
            
            *equipment**Investment*
            
            
            
            
            
            *finance*
            
            *including*
            
            *and**properties*
            
            *Buildings*
            
            *Owned*
            
            *leases*
            
            *rotables*
            
            *vehicles*
            
            *Total*RMB
            
            RMB
            
            RMB
            
            RMB
            
            RMB
            
            RMB
            
            RMBmillion
            
            million
            
            million
            
            million
            
            million
            
            million
            
            million**Accumulated****depreciation
                and****impairment
                losses:**At
                January 1, 2006
            
            
            47
            
            
            858
            
            
            5,877
            
            
            4,002
            
            
            5,113
            
            
            1,686
            
            
            17,583Charge
                for the year
            
            
            11
            
            
            237
            
            
            1,984
            
            
            1,321
            
            
            995
            
            
            451
            
            
            4,999Reclassification
                on exerciseof
                purchase options
            
            
            -
            
            
            -
            
            
            1,034
            
            
            (1,034
            )
            
            -
            
            
            -
            
            
            -Reclassification
            
            
            -
            
            
            (41
            )
            
            -
            
            
            -
            
            
            -
            
            
            41
            
            
            -Disposals
            
            
            -
            
            
            (56
            )
            
            (510
            )
            
            (204
            )
            
            (513
            )
            
            (119
            )
            
            (1,402
            )At
                December 31, 2006
            
            
            58
            
            
            998
            
            
            8,385
            
            
            4,085
            
            
            5,595
            
            
            2,059
            
            
            21,180At
                January 1, 2007
            
            
            58
            
            
            998
            
            
            8,385
            
            
            4,085
            
            
            5,595
            
            
            2,059
            
            
            21,180Charge
                for the year
            
            
            11
            
            
            286
            
            
            2,554
            
            
            1,365
            
            
            1,037
            
            
            344
            
            
            5,597Reclassification
                on exerciseof
                purchase options
            
            
            -
            
            
            -
            
            
            878
            
            
            (878
            )
            
            -
            
            
            -
            
            
            -Disposals
            
            
            -
            
            
            (27
            )
            
            (359
            )
            
            (63
            )
            
            (343
            )
            
            (168
            )
            
            (960
            )Impairment
                loss for the year(Note
                (h))
            
            
            -
            
            
            -
            
            
            109
            
            
            -
            
            
            -
            
            
            -
            
            
            109At
                December 31, 2007
            
            
            69
            
            
            1,257
            
            
            11,567
            
            
            4,509
            
            
            6,289
            
            
            2,235
            
            
            25,926**Net
                book value:**At
                December 31, 2007
            
            
            197
            
            
            5,535
            
            
            25,822
            
            
            21,274
            
            
            4,400
            
            
            1,213
            
            
            58,441At
                December 31, 2006
            
            
            206
            
            
            5,623
            
            
            24,828
            
            
            19,730
            
            
            4,699
            
            
            1,249
            
            
            56,335




***(a)***
            Most
                of the Group’s buildings are located in the PRC. The Group was formally
                granted the rights to use the thirty parcels of land in Guangzhou,
                Shenzhen, Zhuhai, Beihai, Changsha, Shantou, Haikou, Zhengzhou, Guiyang
                and Wuhan by the relevant PRC authorities for periods of 30 to 70
                years,
                which expire between 2020 and 2068. 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 one to three years pursuant to various
                lease agreements between the Company and CSAHC. In this connection,
                rental
                payments totalling RMB22 million were paid to CSAHC during 2007 (2006:
                RMB22 million; 2005: RMB24 million) in respect of these
                leases.


F-39




**17**
            **Property,
                plant and equipment, net
                (continued)**




***(b)***
            In
                compliance with the PRC rules and regulations governing initial public
                offering of shares by PRC joint stock limited companies, the property,
                plant and equipment of the Group as at December 31, 1996 were revalued.
                This revaluation was conducted by Guangzhou Assets Appraisal Corp.
                (“GAAC”), a firm of independent valuers registered in the PRC, on a
                depreciated replacement cost basis, and approved by the China State-owned
                Assets Administration Bureau.******




Subsequent
      to the 1996 revaluation, the property, plant and equipment of the Group are
      carried at revalued amount, being the fair value at the date of the revaluation
      less any subsequent accumulated depreciation. Revaluation is performed
      periodically to ensure that the carrying amount does not differ materially
      from
      that which would be determined using fair value at the balance sheet date.
      Based
      on a revaluation performed as of September 30, 2005, by Savills Valuation &
Professional Services Limited, a firm of independent valuers, on a depreciated
      replacement cost basis, the carrying value of property, plant and equipment
      did
      not differ materially from their fair value.




At
      December 31, 2007 and 2006, the carrying amount of such revalued property,
      plant
      and equipment approximated the historical carrying value of such assets had
      they
      been stated at cost less accumulated depreciation and impairment
      losses.




***(c)***
              As
                  at December 31, 2007, certain aircraft of the Group with an aggregate
                  carrying value of approximately RMB32,976 million (2006: RMB30,075
                  million) were mortgaged under certain loan and lease agreements
                  (Notes 29
                  and 30).




***(d)***
            The
                Group leased out investment properties and certain flight training
                facilities under operating leases. The leases typically run for an
                initial
                period of five to fifteen 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 totalling
                RMB49 million (2006: RMB49 million; 2005: RMB46 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:




*2007*
            
            *2006*RMB
                million
            
            RMB
                millionWithin
                1 year
            
            
            49
            
            
            49After
                1 year but within 5 years
            
            
            191
            
            
            193After
                5 years
            
            
            198
            
            
            245438
            
            
            487




As
      at
      December 31, 2007, the cost and accumulated depreciation of the flight training
      facilities leased out by the Group under the operating leases amounted to RMB160
      million (2006: RMB160 million). Depreciation of the relevant facilities
      recognised during the year totalled RMB14 million (2006: RMB28 million; 2005:
      RMB 20 million).


F-40




**17**
              **Property,
                  plant and equipment, net
                  (continued)**




***(e)***
              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)***
            The
                Company entered into two separate arrangements (the “Arrangements”) with
                certain independent third parties during each of 2002 and 2003. Under
                each
                of the Arrangements, the Company sold an aircraft and then immediately
                leased back the aircraft for an agreed period. The Company has an
                option
                to purchase the aircraft at a pre-determined date. In the event that
                the
                lease agreement is early terminated by the Company, the Company is
                liable
                to pay a pre-determined penalty to the lessor. Provided that the
                Company
                complies with the lease agreements, the Company is entitled to the
                continued possession and operation of the aircraft. Since the Company
                retains substantially all risks and rewards incidental to ownership
                of the
                aircraft and enjoys substantially the same rights to their use as
                before
                the Arrangements, no adjustment has been made to the property, plant
                and
                equipment.




***(g)***
            As
                at December 31, 2007 and up to the date of approval of these consolidated
                financial statements, the Group is in the process of applying for
                the land
                use right certificates and property title certificates in respect
                of the
                properties located in Guangzhou Baiyun International Airport, Xiamen,
                Heilongjiang, Hainan, Jilin and Xinjiang, in which the Group has
                interests
                and for which such certificates have not been granted. As at December
                31,
                2007, carrying value of such properties of the Group amounted to
                RMB2,471
                million (2006: RMB1,800 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.




***(h)***
            In
                view of the age of the Group’s fleet of MD82 aircraft, the Group has
                disposed of 11 MD82 aircraft during the year and plans to dispose
                of its
                remaining fleet of MD82 aircraft. The Group has commenced its process
                of
                seeking buyers for its remaining 12 MD82 aircraft. As a result, the
                Group
                assessed the recoverable amounts of these aircraft. Based on this
                assessment, the carrying amount of the aircraft was written down
                by RMB109
                million (Note 8). The estimates of recoverable amount were based
                on the
                aircraft's fair value less costs to sell, determined by reference
                to the
                recent observable market prices for MD82
                aircraft.




**18**
            **Construction
                in progress**




*2007*
            
            *2006*RMB
                million
            
            RMB
                millionAt
                1 January
            
            
            9,587
            
            
            6,895Additions
            
            
            6,004
            
            
            4,563Transferred
                to property,plant
                and equipment
            
            
            (1,284
            )
            
            (1,831
            )Other
                decrease (Note)
            
            
            (2,922
            )
            
            (40
            )At
                December 31
            
            
            11,385
            
            
            9,587


F-41




**18**
              **Construction
                  in progress
                  (continued)**




The
      construction in progress as at December 31, 2007 mainly related to advance
      payments for acquisition of aircraft and flight equipment and progress payments
      for other construction projects at the Guangzhou, Hainan, Shenzhen and Fuzhou
      airports, Shanghai Pudong Base and Beijing Branch.




Note:




Certain
      software systems to be used in the Group’s operation were transferred to other
      assets upon completion of the development of relevant systems.




During
      the year, the Company entered into agreements with certain third parties to
      sell
      nine aircraft to third parties prior to the deliveries of these aircraft and
      then lease back the aircraft from the then lessors in the form of operating
      leases. The advance payments paid to aircraft manufacturers and the related
      interest costs capitalised as construction in progress in respect of the nine
      aircraft accumulated immediately prior to the deliveries of aircraft were
      transferred to calculate the gain or loss on sales and leaseback.




**19**
            **Interest
                in associates**




*2007*
            
            *2006*RMB
                million
            
            RMB
                millionShare
                of net assets
            
            
            219
            
            
            149




Details
      of the Group’s principal associates are set out in Note 52, all of which are
      unlisted corporate entities.




Summary
      of financial information on associates:





*100
                  Percent*
              
              *Group’s
                  effective interest**2007*
              
              *2006*
              
              *2005*
              
              *2007*
              
              *2006*
              
              *2005**RMB*
              
              *RMB*
              
              *RMB*
              
              *RMB*
              
              *RMB*
              
              *RMB*million
              
              million
              
              million
              
              million
              
              million
              
              millionNon-current
                  assets
              
              
              7,713
              
              
              6,042
              
              
              
              
              
              2,946
              
              
              2,319Current
                  assets
              
              
              3,116
              
              
              2,281
              
              
              
              
              
              633
              
              
              502Non-current
                  liabilities
              
              
              (4,597
              )
              
              (3,525
              )
              
              
              
              
              (1,789
              )
              
              (1,372
              )Current
                  liabilities
              
              
              (5,366
              )
              
              (4,110
              )
              
              
              
              
              (1,571
              )
              
              (1,300
              )Net
                  assets
              
              
              866
              
              
              688
              
              
              
              
              
              219
              
              
              149Revenue
              
              
              5,635
              
              
              4,485
              
              
              3,314
              
              
              2,184
              
              
              1,727
              
              
              1,318Expenses
              
              
              (5,471
              )
              
              (4,487
              )
              
              (3,837
              )
              
              (2,127
              )
              
              (1,722
              )
              
              (1603
              )Profit
                  / (loss) for the year
              
              
              164
              
              
              (2
              )
              
              (523
              )
              
              57
              
              
              5
              
              
              (285
              )




**20**
            **Interest
                in jointly controlled
                entities**




*2007*
            
            *2006*RMB
                million
            
            RMB
                millionShare
                of net assets
            
            
            873
            
            
            870


F-42




**20**
            **Interest
                in jointly controlled entities
                (continued)**




Details
      of the Group’s principal jointly controlled entities are set out in Note 52, all
      of which are unlisted corporate entities.




Summary
      of financial information on jointly controlled entities:





*Group’s
                effective interest**2007*
            
            *2006*
            
            *2005*RMB
                million
            
            RMB
                million
            
            RMB
                millionNon-current
                assets
            
            
            1,140
            
            
            925Current
                assets
            
            
            1,186
            
            
            1,111Non-current
                liabilities
            
            
            (1,185
            )
            
            (335
            )Current
                liabilities
            
            
            (268
            )
            
            (831
            )Net
                assets
            
            
            873
            
            
            870Revenue
            
            
            1,885
            
            
            1,464
            
            
            1,115Expenses
            
            
            (1,762
            )
            
            (1,349
            )
            
            (1,079
            )Profit
                for the year
            
            
            123
            
            
            115
            
            
            36




**21**
            **Other
                investments in equity
                securities**




*2007*
            
            *2006*RMB
                million
            
            RMB
                millionUnlisted
                equitysecurities,
                at cost
            
            
            168
            
            
            261






Dividend
      income from unlisted securities of the Group amounted to RMB10 million during
      the year ended December 31, 2007 (2006: RMB7 million; 2005: RMB 4
      million).




**22**
                  **Available-for-sale
                      equity
                      securities**




*2007*
            
            *2006*RMB
                million
            
            RMB
                millionAvailable-for-sale
                securities-Listed
                in the PRC
            
            
            362
            
            
            69Market
                value oflisted
                securities
            
            
            362
            
            
            69




During
      the year, a gain on re-measurement of the fair value, net of tax, of the Group’s
      available-for-sale securities was recognised directly in equity amounted to
      RMB183 million.




Dividend
      income from listed securities of the Group amounted to RMB2 million during
      the
      year ended December 31, 2007 (2006: RMB1 million; 2005: RMB
      Nil).


F-43




**23**
            **Deferred
                tax assets / (liabilities)**




Movements
      of net deferred tax assets / (liabilities) are as follows:





*2007*
            
            *2006*RMB
                million
            
            RMB
                millionAt
                January 1
            
            
            (277
            )
            
            (268
            )(Charged)
                / credited to consolidatedstatements
                of operations (Note 14(a))
            
            
            (508
            )
            
            (9
            )Charged
                to equity
            
            
            (64
            )
            
            —Transfer
                to income tax payable
            
            
            112
            
            
            —At
                December 31
            
            
            (737
            )
            
            (277
            )




The
      deferred tax assets / (liabilities) at December 31, 2007 were made up of the
      following tax effects:




*2007*
            
            *2006*RMB
                million
            
            RMB
                millionDeferred
                tax assets:Repair
                charges capitalised
            
            
            —
            
            
            203Accrued
                expenses
            
            
            506
            
            
            465Others
            
            
            46
            
            
            38Total
                deferred tax assets
            
            
            552
            
            
            706Deferred
                tax liabilities:Accrued
                expenses
            
            
            (177
            )
            
            (105
            )Depreciation
                allowances in excess of therelated
                depreciation
            
            
            (1,048
            )
            
            (878
            )Change
                in fair value of available-for-sale securities
            
            
            (64
            )
            
            —Total
                deferred tax liabilities
            
            
            (1,289
            )
            
            (983
            )(737
            )
            
            (277
            )





*2007*
            
            *2006*RMB
                million
            
            RMB
                millionNet
                deferred tax asset recognised onthe
                consolidated balance sheet
            
            
            11
            
            
            95Net
                deferred tax liability recognisedon
                the consolidated balance sheet
            
            
            (748
            )
            
            (372
            )(737
            )
            
            (277
            )




At
      December 31, 2007, the Group’s gross amount of unused tax losses not expected to
      be utilised was RMB401 million (2006: RMB423 million).


F-44




**23**
            **Deferred
                tax assets / (liabilities)
                (continued)**




Tax
      losses in the PRC are available for carry forward to set off future PRC
      assessable income for a maximum period of five years. Of the RMB401 million
      tax
      losses at December 31, 2007, approximately RMB309 million, and RMB92 million
      will expire in 2011 and 2012 respectively. In accordance with accounting policy
      set out in Note 2(u), the Group had not recognised deferred tax asset in respect
      of these unused tax losses as it was determined by management that it is not
      probable that future taxable profits against which the losses can be utilised
      will be available before they expire.




**24**
            **Other
                assets**




Other
      assets of the Group mainly include lump sum housing benefits (Note 40), software
      systems used for airline operation and prepayment for exclusive use right of
      an
      airport terminal.




Movements
      of lump sum housing benefit, software and prepayment for exclusive use right
      of
      an airport terminal are as follows:




*Prepayment**for
                exclusive**Lump
                sum*
            
            
            
            *use
                right of**housing*
            
            
            
            *an
                airport**benefit*
            
            *Software*
            
            *terminal*RMB
                million
            
            RMB
                million
            
            RMB
                millionAt
                January 1, 2006
            
            
            171
            
            
            92
            
            
            —Additions
            
            
            —
            
            
            2
            
            
            —Amortisation
            
            
            (26
            )
            
            (27
            )
            
            —At
                December 31, 2006
            
            
            145
            
            
            67
            
            
            —At
                January 1, 2007
            
            
            145
            
            
            67
            
            
            —Additions
            
            
            —
            
            
            101
            
            
            150Amortisation
            
            
            (26
            )
            
            (19
            )
            
            —At
                December 31, 2007
            
            
            119
            
            
            149
            
            
            150




**25**
            **Financial
                assets / liabilities**




***(a)***
              ***Financial
                  assets***




*2007*
            
            *2006*RMB
                million
            
            RMB
                millionFuel
                option
            
            
            2
            
            
            —


F-45




**25**
            **Financial
                assets / liabilities
                (continued)**




***(b)***
            ***Financial
                liabilities***




*2007*
            
            *2006*RMB million
            
            RMB millionFuel
                option
            
            
            —
            
            
            26Foreign
                exchange forward option
            
            
            5
            
            
            —5
            
            
            26




The
      above
      financial derivative instruments are held for trading.




**26**
            **Inventories**




*2007*
            
            *2006*RMB million
            
            RMB millionExpendable
                spare parts and maintenance materials
            
            
            1,087
            
            
            1,236Other
                supplies
            
            
            126
            
            
            791,213
            
            
            1,315




The
      analysis of the amount of inventories recognised as an expense is as
      follows:





*2007*
            
            *2006*
            
            *2005*RMB million
            
            RMB million
            
            RMB millionConsumption
            
            
            836
            
            
            694
            
            
            720Write-down
                of inventories
            
            
            101
            
            
            161
            
            
            209937
            
            
            855
            
            
            929




Inventories
      had been written down as a result of fleet adjustment during the current and
      prior years.




**27**
            **Trade
                receivables**




*2007*
            
            *2006*RMB million
            
            RMB millionTrade
                receivables
            
            
            1,999
            
            
            1,552Allowance
                for doubtful debts
            
            
            (33
            )
            
            (40
            )1,966
            
            
            1,512


F-46




**27**
            **Trade
                receivables (continued)**




***(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:




*2007*
            
            *2006*RMB
                million
            
            RMB
                millionWithin
                1 month
            
            
            1,803
            
            
            1,355More
                than 1 month but less than 3 months
            
            
            144
            
            
            131More
                than 3 months but less than 12 months
            
            
            18
            
            
            24More
                than 12 months
            
            
            1
            
            
            21,966
            
            
            1,512




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.




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





*2007*
            
            *2006*RMB
                million
            
            RMB
                millionAt
                January 1
            
            
            40
            
            
            42Impairment
                loss recognised
            
            
            2
            
            
            7Uncollectible
                amounts written off
            
            
            (9
            )
            
            (9
            )At
                December 31
            
            
            33
            
            
            40




***(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:




*2007*
            
            *2006*RMB
                million
            
            RMB
                millionNeither
                past due nor impaired
            
            
            1,947
            
            
            1,486




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


F-47




**28**
            **Cash
                and cash equivalents**




*2007*
            
            *2006*RMB
                million
            
            RMB
                millionDeposits
                with banks
            
            
            1,111
            
            
            26Cash
                at bank and on hand
            
            
            2,713
            
            
            2,238Cash
                and cash equivalents
            
            
            3,824
            
            
            2,264




Southern
      Airlines Group Finance Company Limited (“SA Finance”) is a PRC authorised
      financial institution controlled by CSAHC and is an associate of the Group.
      In
      accordance with the financial agreement dated May 22, 1997, as revised on
      December 31, 2004 and November 15, 2007 between the Company and SA Finance,
      all
      of the Group’s deposits accepted by SA Finance were simultaneously placed with
      several designated major PRC banks by SA Finance. As at December 31, 2007,
      the
      Group’s deposits with SA Finance amounted to RMB906 million (2006: RMB629
      million) (Note 39(d)).




**29**
            **Bank
                and other loans**




***(a)***
            ***At
                December 31, 2007, bank and other loans were repayable as
                follows:***





*2007*
            
            *2006*RMB
                million
            
            RMB
                millionWithin
                1 year or on demand
            
            
            24,948
            
            
            23,822After
                1 year but within 2 years
            
            
            2,740
            
            
            2,986After
                2 years but within 5 years
            
            
            4,289
            
            
            4,533After
                5 years
            
            
            2,045
            
            
            2,4999,074
            
            
            10,01834,022
            
            
            33,840


F-48




**29**
              **Bank
                  and other loans
                  (continued)**




***(b)***
            ***At
                December 31, 2007, bank and other loans are as
                follows:***





*2007*
            
            *2006*RMB million
            
            RMB millionShort-term
                bank loans
            
            
            21,313
            
            
            19,908Long-term
                bank and other loans due withinone
                year (classified as current liabilities)
            
            
            3,635
            
            
            3,91424,948
            
            
            23,822Long-term
                bank and other loans due after oneyear
                (classified as non-current liabilities)
            
            
            9,074
            
            
            10,01834,022
            
            
            33,840**Representing:**Bank
                loans
            
            
            34,019
            
            
            33,818Other
                loans
            
            
            3
            
            
            2234,022
            
            
            33,840




***(c)***
            ***As
                at December 31, 2007, the Group’s weighted average interest rates on
                short-term borrowings were 5.14% per annum (2006: 5.77% per
                annum).***




Subsequent
      to December 31, 2007 through March 31, 2008, the Group renewed certain
      short-term bank loans of RMB3,179 million. The renewed bank loans are unsecured,
      bear interest at floating rates ranging from 6-month LIBOR + 0.50% to 1.80%
      per
      annum and are repayable within one year from their respective renewal
      dates.


F-49




**29**
            **Bank
                and other loans
                (continued)**




***(d)***
            ***Details
                of bank and other loans with original maturity over one year are
                as
                follows:***





*2007*
            
            *2006*RMB million
            
            RMB million**Renminbi
                denominated loans**
              Non-interest
                bearing loan from a municipal government authority
            
            
            3
            
            
            3Floating
                interest rates ranging from 5.58% to 6.72% per annum as at December
                31,
                2007, with maturities through 2012
            
            
            383
            
            
            325**United
                States Dollars denominated loans**
              Fixed
                interest rates ranging from 4.43% to 7.48% per annum as at December
                31,
                2007, with maturities through 2015
            
            
            1,337
            
            
            1,863Floating
                interest rates ranging from 3-month LIBOR + 0.50% to 0.75% per annum
                as at
                December 31, 2007, with maturities through 2010
            
            
            1,527
            
            
            1,727Floating
                interest rates ranging from 6-month LIBOR + 0.28% to 1.20% per annum
                as at
                December 31, 2007, with maturities through 2017
            
            
            9,459
            
            
            9,995**Hong
                Kong Dollarsdenominated
                loans**
              Non-interest
                bearing loan from a minority shareholder repayable within five years
                (Note
                39(g))
            
            
            —
            
            
            1912,709
            
            
            13,932Less:
                loans due within one year classified as current
                liabilities
            
            
            (3,635
            )
            
            (3,914
            )9,074
            
            
            10,018


F-50




**29**
              **Bank
                  and other loans
                  (continued)**




***(e)***
            The
                remaining contractual maturities at the balance sheet date 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 balance sheet date) and the
                earliest date the Group can be required to pay, are as follows:





*2007*
            
            *2006*RMB million
            
            RMB millionWithin
                1 year
            
            
            26,233
            
            
            25,248After
                1 year but within 2 years
            
            
            3,157
            
            
            3,513After
                2 years but within 5 years
            
            
            4,899
            
            
            5,348After
                5 years
            
            
            2,215
            
            
            2,77936,504
            
            
            36,888




***(f)***
            As
                at December 31, 2007, bank and other loans of the Group totalling
                RMB8,583
                million (2006: RMB8,726 million) were secured by mortgages over certain
                of
                the Group’s aircraft with carrying amount of RMB11,703 million (2006:
                RMB10,345 million).




***(g)***
            As
                at December 31, 2007, certain bank and other loans were guaranteed
                by the
                following parties:




*2007*
            
            *2006*RMB million
            
            RMB million**Guarantors**Industrial
                Commercial Bank of China
            
            
            46
            
            
            79Export-Import
                Bank of the United States
            
            
            516
            
            
            828Bank
                of China
            
            
            —
            
            
            74CSAHC
            
            
            1,176
            
            
            1,484Shenzhen
                Yingshun InvestmentDevelopment
                Company Ltd.
            
            
            22
            
            
            22SA
                Finance
            
            
            3
            
            
            5Industrial
                Bank Co., Ltd.
            
            
            —
            
            
            48Huaxia
                Bank Co., Ltd.
            
            
            657
            
            
            —2,420
            
            
            2,540




***(h)***
            As
                at December 31, 2007, loans to the Group from SA Finance amounted
                to
                RMB329 million (2006: RMB300 million) (Note
                39(d)).




***(i)***
            As
                at December 31, 2007, the Group had banking facilities with several
                PRC
                commercial banks for providing loan finance up to approximately RMB50,262
                million (2006: RMB49,041 million), of which approximately RMB29,338
                million (2006: RMB28,295 million) was
                utilised.


F-51




**29**
            **Bank
                and other loans
                (continued)**




**(j)**
            The
                exchange rate of Renminbi to US dollar was set by the PBOC and had
                fluctuated within a narrow band prior to July 21, 2005. Since July
                21,
                2005, a managed floating exchange rate regime based on market supply
                and
                demand with reference to a basket of foreign currencies has been
                used and
                US dollar exchange rate has declined against the Renminbi since then.
                The
                Group has significant bank and other loans balances as well as obligations
                under finance leases (Note 30) which are denominated in US dollars.
                The
                net exchange gain of RMB2,832 million (2006: RMB1,492 million; 2005:
                RMB1,220 million) recorded by the Group was mainly attributable to
                the
                exchange gain arising from retranslating bank and other loans balances
                and
                finance lease obligations denominated in US dollars. The foreign
                currency
                risk is further discussed in Note
                43(c).




**30**
            **Obligations
                under finance leases**




The
      Group
      have commitments under finance lease agreements in respect of aircraft and
      related equipment. The majority of these leases have terms of 10 to 15 years
      expiring during the years 2008 to 2022. As at December 31, 2007, future payments
      under these finance leases are as follows:





*2007*
            
            *2006**Obligations*
            
            *Payments*
            
            *Interest*
            
            *Obligations*
            
            *Payments*
            
            *Interest*RMB
            
            RMB
            
            RMB
            
            RMB
            
            RMB
            
            RMBmillion
            
            million
            
            million
            
            million
            
            million
            
            millionWithin
                1 year
            
            
            2,877
            
            
            3,588
            
            
            711
            
            
            3,091
            
            
            3,769
            
            
            678After
                1 year butwithin
                2 years
            
            
            1,835
            
            
            2,422
            
            
            587
            
            
            2,800
            
            
            3,330
            
            
            530After
                2 years butwithin
                5 years
            
            
            3,906
            
            
            5,237
            
            
            1,331
            
            
            3,873
            
            
            4,926
            
            
            1,053After
                5 years
            
            
            7,117
            
            
            8,252
            
            
            1,135
            
            
            5,634
            
            
            6,378
            
            
            74415,735
            
            
            19,499
            
            
            3,764
            
            
            15,398
            
            
            18,403
            
            
            3,005Less:  
                balance due
              within
                one year classified as current liabilities
            
            
            (2,877
            )
            
            
            
            
            
            
            
            (3,091
            )12,858
            
            
            
            
            
            
            
            
            12,307


F-52




**30**
              **Obligations
                  under finance leases
                  (continued)**




Details
      of obligations under finance leases are as follows:





*2007*
            
            *2006*RMB million
            
            RMB million**United
                States Dollars denominated obligations**
              Fixed
                interest rates ranging from 4.24% to 7.53% per annum as at December
                31,
                2007
            
            
            6,587
            
            
            8,314Floating
                interest rates ranging 6 month LIBOR + 0.03% to 0.80% per annum as
                at
                December 31, 2007
            
            
            7,626
            
            
            4,761**Japanese
                Yen denominated obligations**
              Fixed
                interest rates ranging from 2.20% to 3.95% per annum as at December
                31,
                2007
            
            
            1,522
            
            
            2,32315,735
            
            
            15,398




Under
      the
      terms of the leases, the Group has an option to purchase, at or near the end
      of
      the lease term, certain aircraft and related equipment at either fair market
      value or a percentage of the respective lessor’s defined cost.




Security,
      including charges over the assets concerned and relevant insurance policies,
      is
      provided to the lessors. As at December 31, 2007, certain of the Group’s
      aircraft with carrying amount of RMB21,273 million (2006: RMB19,730 million)
      were mortgaged to secure finance lease obligations totalling RMB15,735 million
      (2006: RMB15,398 million).


F-53




**31**
            **Trade
                payables**




*2007*
            
            *2006*RMB million
            
            RMB millionTrade
                payables
            
            
            1,844
            
            
            1,909




The
      following is the ageing analysis of trade payables:





*2007*
            
            *2006*RMB million
            
            RMB millionWithin
                1 month
            
            
            1,180
            
            
            1,125More
                than 1 month but less than 3 months
            
            
            347
            
            
            448More
                than 3 months but less than 6 months
            
            
            317
            
            
            3361,844
            
            
            1,909




As
      at
      December 31, 2007, the Group had an amount due to a fellow subsidiary of RMB
      Nil
      million (2006: RMB11 million) which was included in trade payables.




All
      of
      the trade payables are expected to be settled within one year.




**32**
            **Amounts
                due from / to related
                companies**




***(a)***
            ***Amounts
                due from related
                companies***




*2007*
            
            *2006*RMB million
            
            RMB millionCSAHC
                and its affiliates
            
            
            6
            
            
            4An
                associate
            
            
            1
            
            
            2Jointly
                controlled entities
            
            
            111
            
            
            122118
            
            
            128




The
      amounts due from related companies were 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***




*2007*
            
            *2006*RMB
                million
            
            RMB
                millionCSAHC
                and its affiliates
            
            
            76
            
            
            167Jointly
                controlled entities
            
            
            118
            
            
            87194
            
            
            254




The
      amounts due to related companies were unsecured, interest free and have no
      fixed
      terms of repayment.


F-54




**33**
            **Accrued
                expenses**




*2007*
            
            *2006*RMB million
            
            RMB millionJet
                fuel costs
            
            
            1,210
            
            
            1,020Air
                catering expenses
            
            
            161
            
            
            153Salaries
                and welfare
            
            
            1,517
            
            
            868Repairs
                and maintenance
            
            
            1,642
            
            
            1,281Provision
                for major overhauls (Note 35)
            
            
            450
            
            
            255Provision
                for early retirement benefits (Note 36)
            
            
            77
            
            
            86Landing
                and navigation fees
            
            
            1,209
            
            
            1,168Computer
                reservation services
            
            
            398
            
            
            66Interest
                expense
            
            
            483
            
            
            448Others
            
            
            207
            
            
            1187,354
            
            
            5,463




**34**
            **Other
                liabilities**




*2007*
            
            *2006*RMB million
            
            RMB millionCAAC
                Infrastructure Development Fund
            
            
            96
            
            
            189Airport
                construction surcharge
            
            
            257
            
            
            404Airport
                tax
            
            
            414
            
            
            288Construction
                cost payable
            
            
            110
            
            
            130Advance
                payments on chartered flights
            
            
            63
            
            
            100Sales
                agent deposits
            
            
            239
            
            
            221Other
                taxes payable
            
            
            827
            
            
            494Others
            
            
            988
            
            
            9102,994
            
            
            2,736




**35**
            **Provision
                for major overhauls**




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




*2007*
            
            *2006*RMB
                million
            
            RMB
                millionAt
                January 1
            
            
            1,060
            
            
            452Provision
                for the year
            
            
            376
            
            
            683Provision
                utilised during the year
            
            
            (303
            )
            
            (75
            )At
                December 31
            
            
            1,133
            
            
            1,060Less:  
                Current
                portion included in accruedexpenses
                (Note 33)
            
            
            (450
            )
            
            (255
            )683
            
            
            805


F-55




**36**
            **Provision
                for early retirement benefits****




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




*2007*
            
            *2006*RMB million
            
            RMB millionAt
                January 1
            
            
            392
            
            
            —Provision
                for the year (Note 10)
            
            
            12
            
            
            392Financial
                cost (Note 11)
            
            
            15
            
            
            —Less:  
                Payment
            
            
            (98
            )
            
            —Actuarial
                gain onthe
                  obligations
            
            
            (14
            )
            
            —At
                December 31
            
            
            307
            
            
            392Less:
                Current portion included in accrued expenses (Note 33)
            
            
            (77
            )
            
            (86
            )230
            
            
            306




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 services 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 recognised as provision for early
      retirement benefits.




**37**
            **Share
                capital**




*2007*
            
            *2006*RMB million
            
            RMB millionRegistered,
                issued and paid up capital:2,200,000,000
                domestic state-ownedshares
                of RMB 1.00 each
            
            
            2,200
            
            
            2,2001,174,178,000
                H shares of RMB 1.00 each
            
            
            1,174
            
            
            1,1741,000,000,000
                A shares of RMB 1.00 each
            
            
            1,000
            
            
            1,0004,374
            
            
            4,374




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




***Capital
      Management***




The
      Group’s primary objectives in managing capital are to safeguard its 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.


F-56




**37**
            **Share
                capital (continued)**




***Capital
      Management (continued)***




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
      on net debt as a percentage of the total equity where net debt are 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. The
      Group’s debt to equity ratios over the past five years have been trending upward
      towards 484% at December 31, 2006 because of the acquisitions of aircraft and
      businesses during 2006.




There
      was
      no change in the Group’s approach to capital management during 2007 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
      stood at 409% at December 31, 2007.




**38**
            **Reserves**




*2007*
            
            *2006*RMB
                million
            
            RMB
                million**Share
                premium**At
                January 1 and at December 31
            
            
            5,325
            
            
            5,325**Fair
                value reserve**At
                January 1
            
            
            —
            
            
            —Change
                in fair value of available-for-sale securities
            
            
            183
            
            
            —At
                December 31
            
            
            183
            
            
            —**Statutory
                surplus reserve** (Note a)At
                January 1
            
            
            526
            
            
            349Transfer
                from statutory public welfare fund (Note b)
            
            
            —
            
            
            177At
                December 31
            
            
            526
            
            
            526**Statutory
                public welfare fund**(Note b)At
                January 1
            
            
            —
            
            
            177Transfer
                to statutory surplus reserve
            
            
            —
            
            
            (177
            )At
                December 31
            
            
            —
            
            
            —


F-57




**38**
            **Reserves
                (continued)**




*2007*
            
            *2006*RMB
                million
            
            RMB
                million**Discretionary
                surplus reserve**(Note c)At
                January 1 at December 31
            
            
            77
            
            
            77**Other
                reserve**At
                January 1
            
            
            —
            
            
            —Share
                of an associate’s reserves movement
            
            
            4
            
            
            —At
                December 31
            
            
            4
            
            
            —**Retained
                earnings / (accumulated losses)**At
                January 1
            
            
            (114
            )
            
            (240
            )Profit
                for the year
            
            
            1,871
            
            
            126At
                December 31
            
            
            1,757
            
            
            (114
            )**Total**
            
            
            7,872
            
            
            5,814




***(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 earnings at
                the
                financial year end.




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)***
            According
                to the revised PRC Company Law effective on January 1, 2006, appropriation
                to the statutory public welfare fund is no longer required and the
                balance
                of statutory public welfare fund at December 31, 2005 was transferred
                to
                statutory surplus reserve.




***(c)***
            The
                appropriation to this reserve is subject to shareholders’ approval. The
                usage of this reserve is similar to that of statutory surplus
                reserve.




***(d)***
            Dividend
                distributions may be proposed at the discretion of the Company’s board of
                directors, after consideration of the transfers referred to above
                and
                making up cumulative prior years’ losses. 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, 2007, the Company did not have any distributable reserves
                (2006: Nil).


F-58






**39**
            **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 and certain of the highest paid employees as disclosed in
      Note 13, is as follows:




*2007*
            
            *2006*
            
            *2005*RMB’000
            
            RMB’000
            
            RMB’000Short-term
                employees benefits
            
            
            12,226
            
            
            6,638
            
            
            5,926Post-employment
                benefits
            
            
            275
            
            
            220
            
            
            22112,501
            
            
            6,858
            
            
            6,147





*2007*
            
            *2006*
            
            *2005*RMB’000
            
            RMB’000
            
            RMB’000Directors
                and supervisors (Note 13)
            
            
            6,790
            
            
            4,334
            
            
            3,461Senior
                management
            
            
            5,711
            
            
            2,524
            
            
            2,68612,501
            
            
            6,858
            
            
            6,147




Total
      remuneration is included in “staff costs” (Note 10).




***(b)***
            ***Contributions
                to post-employment benefit
                plans***




The
      Group
      participates in various defined contribution retirement plans organised by
      municipal and provincial governments for its staff. Details of the Group’s
      employee benefits plan are disclosed in Note 40.




F-59




**39**
            **Material
                related party transactions
                (continued)**




***(c)***
            ***Transactions
                with CSAHC and its affiliates (the “CSAHC Group”), and the associates and
                jointly controlled entities of the
                Group***




The
      Group
      obtained various operational services provided by the CSAHC Group and the
      associates and jointly controlled entities of the Group during the normal course
      of its business.




Details
      of the significant transactions carried out by the Group are as
      follows:





*2007*
            
            *2006*
            
            *2005**Note*
            
            RMB million
            
            RMB million
            
            RMB million**Expenses
                paid to the CSAHC Group**Handling
                charges
            
            
            (i)
            
            
            46
            
            
            29
            
            
            32Air
                catering supplies
            
            
            (ii)
            
            
            157
            
            
            194
            
            
            173Commission
                expense
            
            
            (iii)
            
            
            7
            
            
            43
            
            
            26Sundry
                aviation supplies
            
            
            (iv)
            
            
            72
            
            
            86
            
            
            88Lease
                charges for aircraft
            
            
            (v)
            
            
            —
            
            
            3
            
            
            10Lease
                charges for land and buildings
            
            
            (vi)
            
            
            101
            
            
            99
            
            
            90Property
                management fee
            
            
            (vii)
            
            
            31
            
            
            26
            
            
            28**Expenses
                paid to jointly controlled entities**Ground
                service expenses
            
            
            (viii)
            
            
            37
            
            
            43
            
            
            32Repairing
                charges
            
            
            (ix)
            
            
            1,047
            
            
            1,183
            
            
            1,118Flight
                simulation service charges
            
            
            (x)
            
            
            120
            
            
            133
            
            
            126**Income
                received from a jointly controlled entity**Rental
                income
            
            
            (x)
            
            
            31
            
            
            35
            
            
            31**Acquisition
                of CSAHC Hainan**
            
            
            (xi)
            
            
            —
            
            
            5
            
            
            —**Disposal
                of properties to the CSAHC Group**
            
            
            (xii)
            
            
            —
            
            
            23
            
            
            —**Acquisition
                of assets from CSAHC Group**
            
            
            (xiii)
            
            
            270
            
            
            —
            
            
            —**Disposal
                of GZ Aviation Hotel to CSAHC Group**
            
            
            (xiv)
            
            
            75
            
            
            —
            
            
            —




F-60




**39**
            **Material
                related party transactions
                (continued)**




***(c)***
            ***Transactions
                with CSAHC and its affiliates (the “CSAHC Group”), and the associates and
                jointly controlled entities of the Group
                (continued)***




(i)
            The
                Group acquires aircraft, flight equipment and other airline-related
                facilities through Southern Airlines (Group) Import and Export Trading
                Company (“SAIETC”), a wholly-owned subsidiary of CSAHC.




(ii)
            The
                Group purchases certain inflight meals and related services from
                Shenzhen
                Air Catering Company Limited and Southern Airlines Group Air Catering
                Company Ltd (“Air Catering”), which are an associate and a wholly-owned
                subsidiary of CSAHC respectively. Air Catering was acquired by the
                Company
                on August 14, 2007 (Note 39(c)
                (xiii)).




(iii)
            Commission
                is earned by certain subsidiaries of CSAHC in connection with the
                air
                tickets sold by them on behalf of the Group. Commission is calculated
                based on the rates stipulated by the CAAC and International Air
                Transportation Association.




(iv)
            Certain
                sundry aviation supplies are purchased from Southern Airlines (Group)
                Economic Development Company (“SAGEDC”), a subsidiary of
                CSAHC.




(v)
            The
                Group leased an aircraft from CSAHC Hainan Co., Ltd. (“CSAHC Hainan”), a
                wholly-owned subsidiary of CSAHC. The lease was terminated on April
                30,
                2006.




(vi)
            The
                Group leases certain land and buildings in the PRC from
                CSAHC.




(vii)
            Guangzhou
                China Southern Airlines Property Management Co., Ltd., a subsidiary
                of
                CSAHC, provides property management services to the
                Group.




(viii)
            Beijing
                Ground Service Co., Ltd., a jointly controlled entity of the Group,
                provides airport ground service to the
                Group.




(ix)
            Guangzhou
                Aircraft Maintenance Engineering Company Limited and MTU Maintenance
                Zhuhai Co., Ltd., jointly controlled entities of the Group, provide
                comprehensive maintenance services to the Group.




(x)
            Zhuhai
                Xiang Yi, a jointly controlled entity of the Group, provides flight
                simulation services to the Group. In addition, the Group entered
                into
                operating lease agreements to lease certain flight training facilities
                and
                buildings to Zhuhai Xiang Yi.




(xi)
            On
                April 30, 2006, the Company acquired certain assets of CSAHC Hainan
                at a
                total consideration of RMB294 million, which was partly satisfied
                by
                assumption of debts and liabilities of CSAHC Hainan totalling RMB289
                million outstanding as at that date. The remaining balance of RMB5
                million
                had been settled in cash during the year ended December 31, 2007
                (Note
                42(d)).




(xii)
            On
                December 28, 2006, the Company disposed of certain properties to
                CSAHC at
                a consideration of RMB23 million.




F-61




**39**
            **Material
                related party transactions
                (continued)**




***(c)***
            ***Transactions
                with CSAHC and its affiliates (the “CSAHC Group”), and the associates and
                jointly controlled entities of the Group
                (continued)***




(xiii)
            On
                August 14, 2007, the Company signed an agreement to acquire (1) the
                entire
                equity interest in Air Catering; (2) certain assets of Guangzhou
                BiHuaYuan
                Training Centre including certain properties and office facilities;
                and
                (3) certain assets of Nan Lung Travel & Express (Hong Kong) Limited,
                including certain properties and office facilities and the 51% equity
                interest in Nan Lung International Freight Company Limited (“Nan Lung
                Freight”), from CSAHC for a total consideration of RMB270 million (Note
                42(b)).




(xiv)
            On
                August 14, 2007, the Company signed an agreement to dispose of equity
                interests in GZ Aviation Hotel Co., Ltd. to CSAHC at a consideration
                of
                RMB75 million (Note 42(c)).




In
      addition to the above, certain subsidiaries of CSAHC also provided hotel and
      other services to the Group. The total amount involved is not material to the
      results of the Group for the current and prior years.




Details
      of amounts due from/to the CSAHC Group, and the associates and jointly
      controlled entities of the Group:




*2007*
            
            *2006*RMB million
            
            RMB millionReceivables:The
                CSAHC Group
            
            
            6
            
            
            4An
                associate
            
            
            1
            
            
            2Jointly
                controlled entities
            
            
            111
            
            
            122Payables:The
                CSAHC Group
            
            
            76
            
            
            167Jointly
                controlled entities
            
            
            118
            
            
            87




The
      amounts due from/to the CSAHC Group, the associate and jointly controlled
      entities of the Group are unsecured, interest free and have no fixed terms
      of
      repayment.




***(d)***
            ***Loans
                from and deposits placed with SA
                Finance***




(i)
            Loans
                from SA Finance




At
      December 31, 2007, loans from SA Finance to the Group amounted to RMB329 million
      (2006: RMB300 million). The loans are unsecured and repayable within one
      year.




During
      the year ended December 31, 2007, interest expense paid on such loans amounted
      to RMB17 million (2006: RMB16 million; 2005: RMB37 million) and the interest
      rates ranged from 5.10% to 6.16% per annum (2006: 5.02% to 5.26% per annum;
      2005: 3.30% to 5.02% per annum).




The
      loans
      are guaranteed by CSAHC (included in the amount as disclosed in (e)
      below).




F-62




**39**
            **Material
                related party transactions
                (continued)**




***(d)***
            ***Loans
                from and deposits placed with SA Finance
                (continued)***




(ii)
            Deposits
                placed with SA Finance




At December
        31, 2007, the Group’s deposits with SA Finance amounted to RMB906 million (2006:
        RMB629 million). The applicable interest rates are determined in accordance
        with
        the rates published by the PBOC.




During
      the year ended December 31, 2007, interest income received on such deposits
      amounted to RMB20 million (2006: RMB5 million; 2005 RMB3 million).




***(e)***
            ***Guarantees
                from CSAHC and SA
                Finance***




Certain
      bank loans of the Group were guaranteed by the following related
      parties:





*2007*
            
            *2006*RMB million
            
            RMB millionCSAHC
            
            
            1,176
            
            
            1,484SA
                Finance
            
            
            3
            
            
            5




***(f)***
            ***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 organisations.




Other
      than those transactions with the CSAHC Group, and the associates and jointly
      controlled entities of the Group as disclosed in Notes 39(c), (d) and (e) 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 the counterparties are
      state-controlled entities or not.




F-63




**39**
            **Material
                related party transactions
                (continued)**




***(f)***
            ***Transactions
                with other state-controlled entities
                (continued)***




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 consolidated 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




*2007*
            
            *2006*
            
            *2005*RMB million
            
            RMB million
            
            RMB millionJet
                fuel cost
            
            
            14,814
            
            
            13,054
            
            
            9,592Interest
                income
            
            
            47
            
            
            33
            
            
            48Interest
                expense
            
            
            1,751
            
            
            1,405
            
            
            694




(ii)
            The
                Group’s balances with other state-controlled entities, including
                state-controlled banks in the PRC




*2007*
            
            *2006*RMB million
            
            RMB millionCash
                and deposits at bank
            
            
            2,624
            
            
            1,434Short-term
                bank loans and current portion of long-term bank loans
            
            
            23,004
            
            
            21,209Long-term
                bank loans, less current portion
            
            
            6,772
            
            
            8,223




(iii)
            Guarantees
                from other state-controlled entities, including state-controlled
                banks in
                the PRC




*2007*
            
            *2006*RMB million
            
            RMB millionGuarantees
                on certain bank loans of the Group
            
            
            703
            
            
            201




***(g)***
            ***Loan
                from minority
                shareholders***




A
      loan of
      RMB19 million from a minority shareholder was outstanding at December 31, 2006.
      The loan was unsecured, interest free and repayable within five years. The
      loan
      was fully repaid during 2007.




**40**
            **Retirement
                and housing benefits**




Employees
      of the Group participate in several defined contribution retirement schemes
      organised separately by PRC municipal governments in regions where the major
      operations of the Group are located. During the year ended December 31, 2007,
      the Group is required to contribute to these schemes at the rates ranging from
      9% to 24% (2006: 10% to 23%; 2005: 9% to 20%) of salary costs including certain
      allowances. A member of the retirement schemes is entitled to pension benefits
      from the Local Labour and Social Security Bureaus at the retirement date. The
      retirement benefit obligations of all retired staff of the Group are assumed
      by
      these schemes.




F-64




**40**
            **Retirement
                and housing benefits
                (continued)**




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.
        In this connection, 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.




The
      Group
      has no obligation for the payment of pension benefits beyond the contributions
      described above.




The
      Group
      contributes on a monthly basis to housing funds organised by municipal and
      provincial governments based on certain percentages of the salaries of the
      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 the comprehensive services agreement (the “Service Agreement”) dated
                May 22, 1997 between the Company and CSAHC, CSAHC provided quarters
                to
                eligible employees of the Group. In return, the Group paid a fixed
                annual
                fee of RMB85 million to CSAHC for a ten-year period from 1995 to
                2004. The
                agreement expired by December 31,
                2004.




(ii)
            Pursuant
                to a staff housing benefit scheme effective 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, for subsidising their purchases of houses.
                An
                employee who quits 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 selling the house in the event of default in repayment. Any
                shortfall in repayment would be charged against income. As at December
                31,
                2007, the Group had made payments totalling RMB173 million (2006:
                RMB170
                million) under the scheme and recorded its remaining contractual
                liabilities totalling RMB87 million (2006: RMB90 million) on the
                consolidated balance sheets. Housing allowances are payable when
                applications are received from eligible employees.




(iii)
            The
                Group pays cash housing subsidies on a monthly basis to eligible
                employees. The monthly cash housing subsidies are charged to the
                consolidated statements of operations as incurred.




**41**
            **Segmental
                information**




The
      Group
      operates principally as a single business segment for the provision of air
      transportation services. The analysis of turnover and operating profit/(loss)
      by
      geographical segment is based on the following criteria:




(i)
            Traffic
                revenue from domestic services within the PRC (excluding Hong Kong
                and
                Macau) is attributed to the domestic operation. Traffic revenue from
                inbound/outbound services between the PRC and Hong Kong/Macau, and
                the PRC
                and overseas destinations is attributed to the Hong Kong and Macau
                operation and international operation
                respectively.




F-65




**41**
            **Segmental
                information (continued)**




(ii)
            Other
                revenue from ticket selling, general aviation services, ground services,
                air catering and other miscellaneous services is attributed on the
                basis
                of where the services are
                performed.




*Hong
                Kong**Domestic*
            
            *and
                Macau*
            
            *International**
            
            *Total*RMB
                million
            
            RMB
                million
            
            RMB
                million
            
            RMB
                million**2007**Traffic
                revenue
            
            
            42,526
            
            
            1,140
            
            
            9,631
            
            
            53,297Other
                operating revenue
            
            
            1,188
            
            
            17
            
            
            —
            
            
            1,205Total
                operating revenue
            
            
            43,714
            
            
            1,157
            
            
            9,631
            
            
            54,502Operating
                profit / (loss)
            
            
            2,435
            
            
            58
            
            
            (874
            )
            
            1,619**2006**Traffic
                revenue
            
            
            35,707
            
            
            1,329
            
            
            8,051
            
            
            45,087Other
                operating revenue
            
            
            1,132
            
            
            —
            
            
            —
            
            
            1,132Total
                operating revenue
            
            
            36,839
            
            
            1,329
            
            
            8,051
            
            
            46,219Operating
                profit / (loss)
            
            
            1,258
            
            
            (4
            )
            
            (617
            )
            
            645**2005**Traffic
                revenue
            
            
            29,533
            
            
            1,298
            
            
            6,588
            
            
            37,419Other
                operating revenue
            
            
            874
            
            
            —
            
            
            —
            
            
            874Total
                operating revenue
            
            
            30,407
            
            
            1,298
            
            
            6,588
            
            
            38,293Operating
                loss
            
            
            (314
            )
            
            (97
            )
            
            (926
            )
            
            (1,337
            )




*
            For
                the year ended December 31, 2007, Asian market accounted for approximately
                68% (2006: 64%; 2005: 74%) of the Group’s total international traffic
                revenue. The remaining portion was mainly derived from the Group’s flights
                to / from European, North American and Australian
                regions.




The
      major
      revenue-earning assets of the Group are its aircraft fleet, all are registered
      in the PRC. Since the Group’s aircraft fleet is employed flexibly across its
      route network, there is no suitable basis of allocating such assets to
      geographic segments. Most of the Group’s non-aircraft assets are located in the
      PRC.




F-66




**42**
            **Supplementary
                information to the consolidated cash flow
                statement**




***(a)***
            ***Non
                cash transactions - acquisitions of
                aircraft***




During
      the year ended December 31, 2007, aircraft acquired under finance leases
      amounted to RMB4,330 million (2006: RMB3,402 million; 2005: RMB6,938
      million).




***(b)***
            ***Effect
                of the acquisition of Nan Lung Freight and Air Catering***




The
      Group
      acquired a 51% equity interest in Nan Lung Freight and a 100% equity interest
      in
      Air Catering on August 31, 2007. Details are as follows:




RMB millionAssets
                acquired:Property,
                plant and equipment, net
            
            
            77Inventories
            
            
            6Trade
                receivables
            
            
            106Other
                receivables
            
            
            7Cash
                and cash equivalents
            
            
            54250Liabilities
                assumed:Trade
                payables
            
            
            30Accrued
                expenses
            
            
            10Other
                liabilities
            
            
            1858Minority
                interest
            
            
            80Net
                identifiable assets and liabilities
            
            
            112Satisfied
                by:Cash
            
            
            112Analysis
                of the net outflow of cash and cash equivalents in respect of the
                acquisition:Cash
                consideration paid
            
            
            (112
            )Cash
                and cash equivalents acquired
            
            
            54Net
                outflow of cash and cash equivalents in respect of the
                acquisition
            
            
            (58
            )




F-67




**42**
            **Supplementary
                information to the consolidated cash flow statement
                (continued)**




***(c)***
            ***Effect
                of the disposal of GZ Aviation
                Hotel***




The
      Group
      disposed of its 90% equity interest in GZ Aviation Hotel to CSAHC on August
      31,
      2007. Details are as follows:




RMB millionAssets
                disposed of:Property,
                plant and equipment, net
            
            
            72Trade
                receivables
            
            
            1Other
                receivables
            
            
            6Cash
                and cash equivalents
            
            
            180Liabilities
                disposed of:Other
                liabilities
            
            
            4Minority
                interest
            
            
            8Net
                identifiable assets and liabilities
            
            
            68Gain
                on disposal
            
            
            775Satisfied
                by:Cash
            
            
            75Analysis
                of the net inflow of cash and cash equivalents in respect of the
                disposal:Cash
                consideration received
            
            
            75Cash
                and cash equivalents disposed of
            
            
            (1
            )Net
                inflow of cash and cash equivalents in respect of the
                disposal
            
            
            74




F-68




**42**
            **Supplementary
                information to the consolidated cash flow statement
                (continued)**




***(d)***
            ***Effect
                of the acquisition of CSAHC
                Hainan***




The
      Group
      acquired certain assets of CSAHC Hainan on April 30, 2006. Details are as
      follows:




RMB millionAssets
                acquired:Property,
                plant and equipment, net
            
            
            131Lease
                prepayment
            
            
            35Inventories
            
            
            28Trade
                receivables
            
            
            30Other
                receivables
            
            
            32Cash
                and cash equivalents
            
            
            38294Liabilities
                assumed:Trade
                payables
            
            
            28Accrued
                expenses
            
            
            14Other
                liabilities
            
            
            247289Net
                identifiable assets and liabilities
            
            
            5Satisfied
                by:Cash
            
            
            5Analysis
                of the net inflow of cash and cash equivalents in respect of the
                acquisition:Cash
                consideration paid
            
            
            (5
            )Cash
                and cash equivalents acquired
            
            
            38Net
                inflow of cash and cash equivalents in respect of the
                acquisition
            
            
            33





F-69




**42**
            **Supplementary
                information to the consolidated cash flow statement
                (continued)**




***(e)***
            ***Effect
                of the acquisitions of China Northern Airlines Company (“CNA”) and
                Xinjiang Airlines Company
                (“XJA”)***




The
      Group
      acquired the airline operations and certain related assets of CNA and XJA from
      its parent company, CSAHC, with effect from 31 December 2004 at a consideration
      of RMB1,959 million. The consideration payable was settled in 2005.




**43**
            **Financial
                instruments**




Exposure
      to liquidity, interest rate, currency, jet fuel price risk and credit risks
      arises in the normal course of the Group’s business. These risks are limited by
      the Group’s financial management policies and practices described
      below.




***(a)***
              ***Liquidity
                  risk***




As
      at
      December 31, 2007, the Group’s current liabilities exceeded its current assets
      by RMB33,811 million. For the year ended December 31, 2007, the Group recorded
      a
      net cash inflow from operating activities of RMB6,869 million, a net cash
      outflow from investing activities of RMB4,844 million and a net cash outflow
      from financing activities of RMB465 million, and resulted in a net increase
      in
      cash and cash equivalents of RMB1,560 million.




In
      2008
      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, the renewal of its short-term bank loans and on its ability
      to
      obtain adequate external financing to meet its committed future capital
      expenditures. The Group has obtained firm commitments from its principal bankers
      to renew its short-term bank loans outstanding at December 31, 2007 when they
      fall due during 2008. Subsequent to December 31, 2007 through March 31, 2008,
      the Group renewed short-term loans outstanding of RMB3,179 million (Note 29).
      The directors of the Company believe that sufficient financing will be available
      to the Group.




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, 2008. 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
      realised.




As
      at
      December 31, 2007, the Group’s recognised bank and other loans, finance lease
      obligations, trade payables and amounts due to related companies as disclosed
      in
      Notes 29, 30, 31 and 32 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 balance sheet date).




F-70




**43**
            **Financial
                instruments (continued)**




***(b)***
            ***Interest
                rate risk***




The
      interest rates and maturity information of the Group’s bank and other loans, and
      finance lease obligations are disclosed in Notes 29 and 30 respectively.




At
      December 31, 2007, it is estimated that a general increase of 100 basis points
      in interest rates, with all other variables held constant, would decrease the
      Group’s profit after tax by approximately RMB279 million (2006: RMB254
      million).




The
      sensitivity analysis above has been determined assuming that the change in
      interest rates had occurred at the balance sheet date. The 100 basis point
      increase or decrease represents management’s assessment of a reasonably possible
      change in interest rates over the period until the next annual balance sheet
      date. The analysis is performed on the same basis for 2006.




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




The
      Group
      has significant exposure to foreign currency risk as substantially all of the
      Group’s obligations under finance lease (Note 30) and bank and other loans (Note
      29) are denominated in foreign currencies, principally US dollars and Japanese
      Yen. Depreciation or appreciation of the Renminbi against foreign currencies
      affects the Group’s results significantly because the Group’s foreign currency
      payments generally exceed its foreign currency receipts. The Group is not able
      to hedge its foreign currency exposure effectively other than by retaining
      its
      foreign currency denominated earnings and receipts to the extent permitted
      by
      the State Administration of Foreign Exchange, or subject to certain restrictive
      conditions, entering into forward foreign exchange contracts with authorised
      banks.




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 to manage this foreign currency risk. Under the contracts,
      the
      Group will buy US$1 million by selling Japanese Yen at certain specified rates
      on each of the 35 settlement dates until the maturity of the contracts in 2010.
      For the year ended December 31, 2007, a net loss of approximately RMB5 million
      arising from changes in the fair value of these foreign currency forward option
      contracts has been recognised in profit or loss. At December 31, 2007, the
      fair
      value of these currency forward option contracts was financial liabilities
      of
      approximately RMB5 million.




The
      exchange rate of Renminbi to US dollar was 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 US dollar exchange rate has
      gradually declined against the Renminbi.




F-71




**43**
            **Financial
                instruments (continued)**




***(c)***
            ***Foreign
                currency risk
                (continued)***




The
      following table indicates the approximate change in Group’s profit after tax in
      response to reasonably possible changes in the foreign exchange rates to which
      the Group has significant exposure at the balance sheet date.





*2007*
            
            *2006**Increase*
            
            *Effect on profit*
            
            *Increase*
            
            *Effect on profit**in foreign*
            
            *after tax and*
            
            *in foreign*
            
            *after tax and**exchange*
            
            *retained profits*
            
            *exchange*
            
            *retained profits**rates*
            
            *RMB million*
            
            *rate*
            
            *RMB million*United
                States Dollars
            
            
            5
            %
            
            1,815
            
            
            5
            %
            
            1,649Japanese
                Yen
            
            
            2
            %
            
            24
            
            
            2
            %
            
            37




The
      sensitivity analysis has been determined assuming that the change in foreign
      exchange rates had occurred at the balance sheet date and had been applied
      to
      each of the Group entities’ exposure to currency risk for both derivative and
      non-derivative financial instruments in existence at that date, and that all
      other variables, in particular interest rates, remain constant.




The
      stated changes represent management’s assessment of reasonably possible changes
      in foreign exchange rates over the period until the next annual balance sheet
      date. The analysis is performed on the same basis for 2006.




***(d)***
            ***Jet
                fuel price risk***




The
      Group
      allows for the judicious use of approved derivative instruments such as swaps
      and options with approved counter-parties and within approved limits to manage
      the risk of surge of jet fuel price. In addition, counter-party credit risk
      is
      generally restricted to any gains on changes in fair value at any time, and
      not
      the principal amount of the instrument. Therefore, the possibility of material
      loss arising in the event of non-performance by counter-party is considered
      to
      be unlikely.




The
      fair
      values of derivative financial instruments of the Group at the balance sheet
      date are as follows:




*2007*
            
            *2006**Assets*
            
            *Liabilities*
            
            *Assets*
            
            *Liabilities*RMB million
            
            RMB million
            
            RMB million
            
            RMB millionFuel
                option contracts
            
            
            2
            
            
            —
            
            
            —
            
            
            26




F-72




**43**
            **Financial
                instruments (continued)**




***(c)***
            ***Jet
                fuel price risk
                (continued)***




At
      December 31, 2007, the Group had outstanding fuel option contracts to buy
      approximately 3,300,000 barrels (2006: approximately 6,150,000 barrels) of
      crude
      oil at prices ranging from US$42 to US$64 per barrel (2006: US$55 to US$79
      per
      barrel). However, if the prevailing market price of crude oil is above the price
      as stipulated in the contracts at settlement date of a fuel option, that fuel
      option at the particular settlement date will be invalidated. On the other
      hand,
      the Group sold fuel put options to approved counter-party and had outstanding
      options at December 31, 2007 of approximately 7,800,000 barrels (2006:
      12,300,000 barrels) of crude oil at prices ranging from US$40 to US$54 per
      barrel (2006: US$43 to US$60 per barrel). All contracts will expire between
      2008
      and 2009.




A
      change
      in price of US$1 per tonne of jet fuel affects the Group’s annual fuel costs by
      RMB22 million, assuming no change in volume of fuel consumed.




***(e)***
            ***Credit
                risk***




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 organised by International Air Transportation Association
      which
      has insignificant credit risk to the Group. As at December 31, 2007, the balance
      due from BSP agents amounted to RMB1,238 million (2006: RMB863 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.




F-73




**43**
            **Financial
                instruments (continued)**




***(f)***
            ***Fair
                value***




(i)
            All
                financial instruments are carried at amounts not materially different
                from
                their fair values as at December 31, 2007 and 2006.




The
      following methods and assumptions were used to estimate the fair value for
      each
      class of financial instruments:




-
            Cash
                and cash equivalents, trade receivables, other receivables and other
                current assets, trade payables, taxes payable and other
                liabilities




The
      carrying values approximate their fair values because of the short maturities
      of
      these instruments.




-
            Financial
                assets/ liabilities




The
      fair
      values of fuel option contracts and foreign exchange forward option contracts
      are determined based on dealer price quotations and options pricing model
      without any deduction for transaction costs.




-
            Available-for-sale
                equity securities




The
      fair
      value is determined based on quoted market prices without any deduction for
      transaction costs.




-
            Bank
                and other loans




The
      fair
      value has been estimated by applying a discounted cash flow approach using
      interest rates available to the Group for similar indebtedness.




-
            Fair
                value estimates are made at a specific point in time and are based
                on
                relevant market information about the financial instruments. These
                estimates are subjective in nature and involve uncertainties and
                matters
                of significant judgement and therefore cannot be determined with
                precision. Changes in assumptions could significantly affect the
                estimates.




(ii)
            The
                economic characteristics of the Group’s finance leases vary from lease to
                lease. It is impractical to compare such leases with those prevailing
                in
                the market within the constraints of timeliness and cost for the
                purpose
                of estimating the fair value of such leases.




(iii)
            Other
                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.




(iv)
            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 this
                balance.




F-74




**44**
            **Commitments**




***(a)***
            ***Capital
                commitments***




As
      at
      December 31, 2007, the Group had capital commitments as follows:





*2007*
            
            *2006*RMB million
            
            RMB millionCommitments
                in respect of aircraft and flight equipment-
                authorised and contracted for
            
            
            88,742
            
            
            66,881Other
                commitments-
                authorised and contracted for
            
            
            772
            
            
            420-
                authorised but not contracted for
            
            
            1,686
            
            
            1,4042,458
            
            
            1,82491,200
            
            
            68,705




As
      at
      December 31, 2007, the Group had on order 212 aircraft and certain flight
      equipment, scheduled for deliveries in 2008 to 2013. Deposits of RMB15,366
      million have been made towards the purchase of these aircraft and related
      equipment. As at December 31, 2007, the approximate total future payments,
      including estimated amounts for price escalation through anticipated delivery
      dates for these aircraft and flight equipment are as follows:





**
            *2007*
            **
            *2006*RMB million
            
            RMB million2007
            
            
            —
            
            
            12,2992008
            
            
            19,125
            
            
            22,5722009
            
            
            20,767
            
            
            17,4832010
            
            
            20,065
            
            
            14,2322011
            
            
            12,747
            
            
            2952012
                and afterwards
            
            
            16,038
            
            
            —88,742
            
            
            66,881




As
      at
      December 31, 2007, the Group’s attributable share of the capital commitments of
      jointly controlled entities was as follows:




*2007*
            **
            *2006*RMB million
            
            RMB millionAuthorised
                and contracted for
            
            
            1
            
            
            11Authorised
                but not contracted for
            
            
            32
            
            
            20833
            
            
            219




F-75




**44**
            **Commitments
                (continued)**




***(b)***
            ***Operating
                lease commitments***




As
      at
      December 31, 2007, the total future minimum lease payments under non-cancellable
      aircraft and flight equipment operating leases were payable as
      follows:





*2007*
            
            *2006*RMB million
            
            RMB millionPayments
                dueWithin
                1 year
            
            
            3,512
            
            
            3,077After
                1 year but within 5 years
            
            
            13,836
            
            
            10,846After
                5 years
            
            
            10,831
            
            
            8,04628,179
            
            
            21,969




***(c)***
                ***Investing
                    commitments***




As
      at
      December 31, 2007, the Group committed to make capital contributions in respect
      of:





*2007*
            
            *2006*RMB million
            
            RMB millionA
                jointly controlled entity
            
            
            —
            
            
            83A
                subsidiary
            
            
            133
            
            
            —133
            
            
            83




**45**
            **Contingent
                liabilities**




***(a)***
            The
                Group leases from CSAHC certain land in Guangzhou and certain land
                and
                buildings in Wuhan, Haikou and Zhengzhou cities. The Group has a
                significant investment in buildings and other leasehold improvements
                located on such land. However, such land in Guangzhou and such land
                and
                buildings in Wuhan, Haikou and Zhengzhou lack adequate documentation
                evidencing CSAHC’s rights thereto.




Pursuant
      to an indemnification agreement dated May 22, 1997, CSAHC has agreed to
      indemnify the Group against any loss or damage caused by any challenge or
      interference with the Group’s use of any of its land and buildings.




F-76




**45**
            **Contingent
                liabilities (continued)**




***(b)***
            A
                writ of summons was issued on May 30, 2007 by certain sales agents
                in
                Taiwan (the “plaintiffs”) against the Company for the alleged breach of
                certain terms and conditions of a cooperative agreement (the “cooperative
                agreement”). The plaintiffs have made a claim against the Company or a
                total sum of approximately HKD107 million in respect of the alleged
                non-payment of sales commission on air tickets sold in Taiwan, annual
                bonus and interest on late payment during the period from September
                1,
                2004 to August 31, 2006. The plaintiffs have also claimed against
                the
                Company for an unspecified compensation for early termination of
                the
                cooperative agreement.




The
      directors consider that given the nature of the claims and the preliminary
      status of the proceedings, it is not possible to estimate the eventual outcome
      of the claims, with reasonable certainty at this stage. However, the directors
      are of the opinion that the claims are without merit and have instructed its
      legal advisor to defend the claims vigorously. The directors consider that
      the
      outstanding claim should have no material adverse effect on the financial
      position of the Group.




***(c)***
            During
                the year, the Company entered into agreements with its pilot trainees
                and
                certain banks to provide guarantees to personal bank loans amounting
                to
                RMB90,858,000 to be granted to its pilot trainees to finance their
                respective flight training expenses. As at December 31, 2007, none
                of the
                personal bank loans were drawn down from the banks.




**46**
            **Non-adjusting
                post balance sheet events**




***(a)***
            On
                April 18, 2008, Xiamen Airlines Company Limited, a subsidiary of
                the
                Company, entered into a purchase agreement with Boeing Company for
                the
                purchase of 20 Boeing B737-800 series aircraft scheduled for delivery
                from
                2014 to 2015. According the information provided by Boeing Company,
                the
                total catalogue price for the 20 Boeing B737-800 series aircraft
                is around
                US$1,500 million.




***(b)***
            On
                April 18, 2008, the Board proposed to the shareholders of the Company
                for
                their consideration and approval a bonus share issue (the “Bonus Share
                Issue”) by the conversion of share premium to share capital. Pursuant to
                the Bonus Share Issue, which is based on 4,374,178,000 Shares in
                issue as
                at December 31, 2007, the number of paid up shares will be increased
                by
                2,187,089,000 shares to 6,561,267,000 shares. The Bonus Share Issue
                is
                conditional upon (i) the passing of the special resolution to approve
                the
                Bonus Share Issue at the Annual General Meeting and the class meeting
                of
                holders of H shares of the Company; (ii) approval from the Ministry
                of
                Commerce of the PRC being obtained; and (iii) in respect of the new
                H
                Shares, the Listing Committee of the Stock Exchange granting or agreeing
                to grant the listing of, and permission to deal in, the new H
                Shares.




***(c)***
            During
                the year, the shareholders of the Company authorised the Board to
                approve
                guarantees on personal bank loans of its pilot trainees of no more
                than
                RMB100 million in each fiscal year (Note 45(c)). On April 18, 2008,
                the
                Board further proposed to the shareholders of the Company for their
                consideration and approval the increase of the amount of such guarantee
                to
                no more than RMB400 million in each of the fiscal
                year.




F-77




**46**
            **Non-adjusting
                post balance sheet events
                (continued)**




***(d)***
            On
                April 18, 2008, the Board approved the proposal of issuance of short-term
                financing bills in the PRC in the principal amount of up to RMB4
                billion
                and the submission of this proposal to the shareholders’ approval. The
                short-term financing bills are to be used to fund the operating activities
                of the Company.




***(e)***
            On
                May 28, 2008, the Board approved the proposal of issuance of medium
                term
                notes in the PRC in the principal amount of up to RMB1.5 billion
                and the
                submission of this proposal to the shareholders for their approval.
                The
                medium term notes are to be used as the working capital of the Company
                and
                fund the capital expenditure of the
                Company.




**47**
            **Immediate
                and ultimate controlling
                party**




As
      at
      December 31, 2007, 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.




**48**
            **Accounting
                estimates and judgements**




The
      Groups’ financial position and results of operations are sensitive to accounting
      methods, assumptions and estimates that underlie the preparation of the
      consolidated financial statements. The Group bases the assumptions and estimates
      on historical experience and on various other assumptions that the Group
      believes to be reasonable and which form the basis for making judgements about
      matters that are not readily apparent from other sources. On an on-going basis,
      management evaluates its estimates. Actual results may differ from those
      estimates as facts, circumstances and conditions change.




The
      selection of critical accounting policies, the judgements and other
      uncertainties affecting application of those policies and the sensitivity of
      reported results to changes in condition and assumptions are factors to be
      considered when reviewing the consolidated financial statements. The principal
      accounting policies are set forth in Note 2. The Group believes the following
      critical accounting policies involve the most significant judgements and
      estimates used in the preparation of the consolidated financial
      statements.




***Impairment
      of long-lived assets***




If
      circumstances indicate that the net book value of a long-lived asset may not
      be
      recoverable, this asset may be considered “impaired”, and an impairment loss may
      be recognised 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
      recoverable amount. The recoverable amount is the greater of the net selling
      price and the value in use. In determining the value in use, expected cash
      flows
      generated by the asset are discounted to their present value, which requires
      significant judgement relating to the level of traffic revenue and the amount
      of
      operating costs. The Group uses all readily available information in determining
      an amount that is a reasonable approximation of recoverable amount, including
      estimates based on a reasonable and supportable assumptions and projections
      of
      traffic revenue and amount of operating costs.




F-78




**48**
            **Accounting
                estimates and judgements
                (continued)**




***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 the assets regularly in order to determine
        the
        amount of depreciation expense to be recorded during any reporting period.
        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.




***Impairment
      of trade receivables***




The
      Group
      maintains an allowance for impairment of bad and doubtful debts for estimated
      losses resulting from the inability of the debtors to make required payments.
      The Group bases the estimates of future cash flows on the ageing of the trade
      receivables balance, debtors’ credit-worthiness, and historical write-off
      experience. If the financial condition of the debtors were to deteriorate,
      actual write-offs would be higher than estimated.




**49**
            **Comparative
                figures**




The
      comparative figures represent figures for the years ended December 31, 2006
      and
      2005. Certain items in these comparative figures have been reclassified to
      conform with the current year’s presentation to facilitate
      comparison.




F-79




**50**
            **Possible
                impact of amendments, new standards and interpretations issued but
                not yet
                effective for the year ended December 31,
                2007**




Up
      to the
      date of issue of these consolidated financial statements, the IASB has issued
      a
      number of amendments, new standards and interpretations which are not yet
      effective for the year ended December 31, 2007 and which have not been adopted
      in these consolidated financial statements:





*Effective for accounting*
              *period beginning on or after*IFRS
                8, *Operating Segments*
            
            January
                1, 2009IFRIC
                11, *IFRS 2 – Group and Treasury Share
                Transactions*
            
            March
                1, 2007IFRIC
                12, *Service Concession Agreements*
            
            January
                1, 2008IFRIC
                13, *Customer Loyalty Programmes*
            
            July
                1, 2008IFRIC
                14, *IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding
                Requirements and their Interaction*
            
            January
                1, 2008IAS
                1 (Revised),*Presentation
                of Financial Statement*
            
            January
                1, 2009IAS
                23 (Revised),*Borrowing
                Costs*
            
            January
                1, 2009Amendment
                to IFRS 2,*Share-Based
                Payment – Vesting Conditions and Cancellations*
            
            January
                1, 2009Amendments
                to IAS 32,*Financial
                instruments:*
              *Presentation*and IAS 1,*Presentation
                of Financial Statements - Puttable Financial Instruments and Obligations
                Arising on Liquidation*
            
            January
                1, 2009IFRS
                3 (Revised),*Business
                Combinations*
            
            Applied
                to business combinations for which the acquisition date is on or
                after the
                beginning of the first annual reporting period beginning on or after
                July
                1, 2009Amendments
                to IAS 27,*Consolidated
                and Separate Financial Statements*
            
            July
                1, 2009




The
      Group
      is in the process of making an assessment of what the impact of these
      amendments, new standards and new interpretations is expected to be in the
      period of initial application. So far the Group believes that the adoption
      of
      measurement of the above amendments, new standards and new interpretations
      is
      unlikely to have a significant impact on the Group’s results of operations and
      financial position except for IFRIC 13. IFRIC 13 is effective for the Group’s
      accounting period beginning on or after January 1, 2009 and may result in
      changes to revenue recognition in respect of mileages granted under the Group’s
      frequent flyer programmes.




F-80




**51**
            **Subsidiaries**




The
      particulars of the Group’s principal subsidiaries as of December 31, 2007 are as
      follows:





*Name of company*
            
            *Place of*
              *establishment*
              */ operation*
            
            *Registered capital*
            
            *Proportion of*
              *ownership*
              *interest held*
              *by the*
              *Company*
            
            *Principal*
              *activities*Southern
                Airlines (Group) Shantou Airlines Company Limited (a)
            
            PRC
            
            RMB280,000,000
            
            
            60
            %
            AirlineChongqing
                Airlines Company Limited (a)
            
            PRC
            
            RMB1,200,000,000
            
            
            60
            %
            AirlineZhuhai
                Airlines Company Limited (a)
            
            PRC
            
            RMB250,000,000
            
            
            60
            %
            AirlineXiamen
                Airlines Company Limited (a)
            
            PRC
            
            RMB700,000,000
            
            
            60
            %
            AirlineGuizhou
                Airlines Company Limited (a)
            
            PRC
            
            RMB80,000,000
            
            
            60
            %
            AirlineNan
                Lung International Freight Comapny Limited
            
            HK
            
            HKD3,270,000
            
            
            51
            %
            Freight
              servicesGuangzhou
                Air Cargo Company Limited (a)
            
            PRC
            
            RMB238,000,000
            
            
            70
            %
            Cargo
              servicesGuangzhou
                Baiyun International Logistics Company Limited (a)
            
            PRC
            
            RMB50,000,000
            
            
            61
            %
            Logistics
              operationsSouthern
                Airlines Group Air Catering Company Limited (a)
            
            PRC
            
            RMB10,200,000
            
            
            100
            %
            Air
              cateringGuangzhou
                Nanland Air Catering Company Limited (b)
            
            PRC
            
            RMB120,000,000
            
            
            75
            %
            Air
              cateringChina
                Southern West Australian Flying College Pty Limited
            
            Australia
            
            AUD100,000
            
            
            65
            %
            Pilot
              training servicesXinjiang
                Civil Aviation Property Management Limited (a)
            
            PRC
            
            RMB251,332,832
            
            
            51.8
            %
            Property
              management




(a)
            These
                subsidiaries are PRC limited liability
                companies.




(b)
            This
                subsidiary is Sino-foreign equity joint venture company established
                in the
                PRC.




(c)
            Certain
                of the Group’s subsidiaries are PRC joint ventures which have limited
                lives pursuant to the PRC law.




F-81




**52**
            **Associates
                and jointly controlled
                entities**




The
      particulars of the Group’s principal associates and jointly controlled entities
      as of December 31, 2007 are as follows:


*Proportion of ownership interest*
                *held by**Name of company*
              
              *Place of*
                *establishment/*
                *operation*
              
              *Group’s*
                *effective*
                *interest*
              
              *The*
                *Company*
              
              *subsidiaries*
              
              *Principal activities*Guangzhou
                  Aircraft Maintenance Engineering Company Limited (a)
              
              PRC
              
              
              50
              %
              
              50
              %
              
              -
              
              Provision
                of aircraft repair and maintenance servicesChina
                  Southern Airlines Group Finance Company Limited
              
              PRC
              
              
              34
              %
              
              21.1
              %
              
              12.9
              %
              Provision
                of financial servicesSichuan
                  Airlines Corporation Limited
              
              PRC
              
              
              39
              %
              
              39
              %
              
              -
              
              AirlineMTU
                  Maintenance Zhuhai Co., Limited (a)
              
              PRC
              
              
              50
              %
              
              50
              %
              
              -
              
              Provision
                of engine repair and maintenance servicesChina
                  Postal Cargo Airlines Limited (a)
              
              PRC
              
              
              49
              %
              
              49
              %
              
              -
              
              AirlineZhuhai
                  Xiang Yi Aviation Technology Company Limited (a)
              
              PRC
              
              
              51
              %
              
              51
              %
              
              -
              
              Provision
                of flight simulation servicesBeijing
                  Southern Airlines Ground Services Company Limited (a)
              
              PRC
              
              
              50
              %
              
              50
              %
              
              -
              
              Provision
                of airport ground servicesGuangzhou
                  China Southern Zhongmian Dutyfee Store Co., Limited
              
              PRC
              
              
              50
              %
              
              50
              %
              
              -
              
              Sales
                of duty free goods in flight




(a)
            These
                are jointly controlled entities.




(b)
            Certain
                of the Group’s jointly controlled entities are PRC joint ventures which
                have limited lives pursuant to the PRC law.




F-82


**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/
                Liu Shao YongName:
                Liu Shao YongTitle:
                Chairman of the Board of Directors




Date:
      June 23, 2008







**EXHIBIT
      INDEX**




**Exhibit No.**
            
            **Description
                of Exhibit**1.1
            
            Amended
                Articles of Association of China Southern Airlines Company Limited
                (incorporated by reference to Exhibit 1.1 to our Annual Report on
                Form
                20-F for fiscal year 2006 filed with the Securities and Exchange
                Commission (File Number: 001-14660) for the year ended December 31,
                2006
                with the Securities and Exchange Commission on June 29, 2007)4.1
            
            Form
                of Director’s Service Agreement (Incorporated by reference to the Exhibit
                4.1 to our Form 20-F (File No. 001-14660) for the year ended December
                31,
                2005 filed with the Securities and Exchange Commission on June 30,
                2006)4.2
            
            Form
                of Non-Executive Director’s Service Agreement (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)8.1
            
            Subsidiaries
                of China Southern Airlines Company Limited10.1
            
            Airbus
                Aircraft Acquisition Agreement entered into between China Southern
                Airlines Company Limited and Airbus dated July 6, 2006 (Incorporated
                by
                reference to the Exhibit 99.1 to our Form 6-K (File No. 001-14660)
                filed
                with the Securities and Exchange Commission on July 11,
                2006)10.2
            
            Boeing
                Aircraft Acquisition Agreement entered into between China Southern
                Airlines Company Limited and Boeing dated October 13, 2006 (Incorporated
                by reference to the Exhibit 99.1 to our Form 6-K (File No. 001-14660)
                filed with the Securities and Exchange Commission on October 17,
                2006)10.3
            
            Xiamen
                Aircraft Acquisition Agreement entered into between Xiamen Airlines
                and
                Boeing dated October 13, 2006 (Incorporated by reference to the Exhibit
                99.1 to our Form 6-K (File No. 001-14660) filed with the Securities
                and
                Exchange Commission on October 17, 2006)10.4
            
            Airbus
                Aircraft Acquisition Agreement entered into between the Company and
                Airbus
                dated on July 16, 2007 (Incorporated by reference to our Form 6-K
                (File
                No. 001-14660) filed with the Securities and Exchange Commission
                on July
                17, 2007)10.5
            
            Xiamen
                Aircraft Acquisition Agreement entered into between Xiamen Airlines
                and
                Boeing dated on July 16, 2007 (Incorporated by reference to our Form
                6-K
                (File No. 001-14660) filed with the Securities and Exchange Commission
                on
                July 17, 2007)10.6
            
            Boeing
                Aircraft Acquisition Agreement entered into between the Company and
                Boeing
                dated on August 20, 2007 (Incorporated by reference to our Form 6-K
                (File
                No. 001-14660) filed with the Securities and Exchange Commission
                on August
                21, 2007)10.7
            
            Airbus
                Aircraft Acquisition Agreement entered into between the Company and
                Airbus
                dated on October 23, 2007 (Incorporated by reference to the Exhibit
                99.1
                to our Form 6-K (File No. 001-14660) filed with the Securities and
                Exchange Commission on October 23, 2007)10.8
            
            Boeing
                Aircraft Acquisition Agreement between Xiamen Airlines and Boeing
                dated
                April 18, 2008 (Incorporated by reference to the Exhibit 99.1 to
                our Form
                6-K (File No. 001-14660) filed with the Securities and Exchange Commission
                on April 22, 2008)12.1
            
            Section
                302 Certification of President









12.2
            
            Section
                302 Certification of Chief Financial Officer13.1
            
            Section
                906 Certification of President13.2
            
            Section
                906 Certification of Chief Financial
                Officer