UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM20-F

OR

For the fiscal year ended December 31, 2015

2018

OR

For the transition period from _________ to

OR

Date of event requiring this shell company report _____________

Commission file number1-14660

中国南方航空股份有限公司

(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)

68 QI XIN ROAD

278 JI CHANG ROAD
GUANGZHOU, 510405510403

PEOPLE’S REPUBLIC OF CHINA

(Address of principal executive offices)

Mr. Xie Bing

Telephone: +86 20 86124462

E-mail:ir@csair.com

Fax: +86 20 86659040

Address: 278 JI CHANG68 QI XIN ROAD

GUANGZHOU, 510405
510403

PEOPLE’S REPUBLIC OF CHINA

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

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

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

None

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

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 7,022,650,0008,600,723,089 A Shares of par value RMB1.00 per share and 2,794,917,0003,666,449,197 H Shares of par value RMB1.00 per share.

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

¨    ☐  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

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

o    ☒  Yes    þ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of "accelerated“accelerated filer and large accelerated filer"filer” in Rule12b-2 of the Exchange Act. (Check one):

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

If "Other"“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 Rule12b-2 of the Exchange Act).    ☐  Yes    ☒  No

o Yes   þ No

TABLE OF CONTENTS

i

ii

FORWARD-LOOKING STATEMENTS

This Annual Report containsincludes forward-looking statements.statements for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements appear in a number of different places in this Annual Report. A forward-looking statement is usually identified by the use in this Annual Report of certain terminology such as "estimate"“estimate”, "project"“project”, "expect"“expect”, "intend"“intend”, "believe"“believe”, "plan"“plan”, "anticipate"“anticipate”, "may"“may”, or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties. Forward-looking statements include statements regarding the outlook for our future operations, forecasts of future costs and expenditures, evaluation of market conditions, the outcome of legal proceedings (if any), the adequacy of reserves, orand other business plans. You are cautioned that such forward-lookingForward-looking statements are, not guaranteesby their nature, subject to inherent risks and involve risks,uncertainties, some of which are beyond our control, and are based on assumptions and uncertainties. Ouranalyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. We caution you that a number of risks and assumptions could cause actual results mayoutcomes to differ, or differ materially, from those expressed in the forward-looking statements due to risks facing the Company or due to actual facts differing from the assumptions underlying thoseany forward-looking statements.

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

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

INTRODUCTORY NOTE

In this Annual Report, unless the context indicates otherwise, the "Company"“we”, "we"“us”, "us"“our”, “the Company” and "our" means“our Company” refer to China Southern Airlines Company Limited, a joint stock company incorporated in China on March 25, 1995, the "Group"our “Group” means theour Company and itsour consolidated subsidiaries, and "CSAHC"“CSAH” means China Southern Air Holding Limited Company, theour Company’s parent company which directly and indirectly holds a 51.99%50.54% interest in theour Company as of April 18, 2016.  26, 2019.

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

The CompanyOur Group presents itsour consolidated financial statements in Renminbi. The consolidated financial statements of the Company for the year ended December 31, 2015 (the "Financial Statements")our Group have been prepared in accordance with all applicable International Financial Reporting Standards ("IFRSs"(“IFRSs”), which collective term includesinclude all applicable individual IFRSs, International Accounting Standards ("IASs"(“IASs”) and Interpretations issued by the International Accounting Standards Board (the "IASB"“IASB”).

Solely for the convenience of the readers, this Annual Report contains translationsconversions of certain Renminbi amounts into U.S. dollars at the rate of US$1.00 = RMB6.4936,RMB6.8632, 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, 2015.28, 2018. No representation is made that the Renminbi amounts or U.S. dollar amounts included in this Annual Report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. Any discrepancies in the tables included herein between the amounts listed and the totals are due to rounding.

GLOSSARY OF AIRLINE INDUSTRY TERMS

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

“Hong Kong Stock Exchange”		Stock Exchange of Hong Kong Limited
"
“H Shares"Shares”		Shares issued by theour Company, listed on The Stock Exchange of Hong Kong Limited and subscribed for and traded in Hong Kong dollars, with par value of RMB1.00 each
"“Nan Lung"Lung”		Nan Lung Holding Limited (a wholly-owned subsidiary of CSAHC)CSAH)
"NDRC"“NDRC”		National Development and Reform Commission of China
"SA Finance"		Southern Airlines Group Finance Company Limited
"SAFE"“SAFE”		State Administration of Foreign Exchange of China
“SA Finance”		Southern Airlines Group Finance Company Limited
"SEC"
“SASAC”		State-owned Assets Supervision and Administration Commission of the State Council
“SEC”		United States Securities and Exchange Commission
“SPVs”		special purpose vehicles exclusively set up by China Southern Airlines and its subsidiaries for leased aircraft
“ton”		a metric ton, equivalent to 2,204.6 pounds

PART I

Not applicable.

Not applicable.

The following tables present selected financial data for the five-year period ended December 31, 2015.2018. The selected consolidated income statement data (other than ADS data) for the three-year period ended December 31, 2013,2016, 2017 and 2018 and selected consolidated statement of financial position data as of December 31, 2017 and 2018 are derived from the audited consolidated financial statements of us, included elsewhere in this Annual Report. The selected consolidated income statement data (other than ADS data) for the years ended December 31, 2014 and 2015 and selected consolidated statement of financial position data as of December 31, 2014, 2015 and 2015 excluding basic and diluted earnings per ADR,2016 are derived from the audited consolidated financial statements of the Company, including the related notes, included elsewhere in this Annual Report. The selected consolidated income statement data for the years ended December 31, 2011 and 2012 and selected consolidated statement of financial position data as of December 31, 2011, 2012 and 2013 are derived from the Company’sour 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“Item 5. Operating and Financial Review and Prospects"Prospects” which are included elsewhere in this Annual Report. Our consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, or IFRSs.

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

(1)

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

Selected Operating Data

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

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“Noon Buying Rate"Rate”), between Renminbi and U.S. dollars for the five most recent financial years.

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.

B.	CAPITALIZATION AND INDEBTEDNESS

Not applicable.

Not applicable.

Risks Relating to our Business

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

Major Chinese airlines are wholly-wholly or majority-ownedmajority owned by either by the Chinese government or by provincial or municipal governments in China. CSAHC,CSAH, an entity wholly-owned by the Chinese government, directly and indirectly holds and exercises the rights of ownership of 51.99%50.54 % of theour equity of the Company.Thestake. The interests of the Chinese government in the Companyus and in other Chinese airlines maycould conflict with the interests of the holders of the ADRs,ADSs, H Shares and A Shares. The public policy considerations of the Chinese government in regulating the Chinese commercial aviation industry maycould also conflict with its indirect ownership interest in the Company.us. In addition, the Companywe may accept further capital injectioninjections from CSAHCCSAH throughnon-public subscriptions, which may have dilutive impact fordilute the stakes of other holders of ADRs,ADSs, H Shares and A Shares.

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

The airline industry is generally characterized by a high degree of operating leverage. In addition, due to high fixed costs, the expenses relating to the operation of any flight do not vary proportionately with the number of passengers carried, while revenues generated from a flight are directly related to the number of passengers carried and the fare structure of such flight. Accordingly, a decrease in revenuesrevenue could result in a disproportionately higher decrease in its profit for the year.our profit. Moreover, as the Group haswe have substantial obligations denominated in foreign currencies, itsour results of operations are significantly affected by fluctuations in foreign exchange rates, particularly by fluctuations in theRenminbi-U.S. dollar exchange rate. NetOur net foreign exchange gains were RMB1,801 million in 2017, whereas our net foreign exchange losses of RMB292were RMB1,853 million was recorded in 2014 mainly2018, primarily due to Renminbi depreciated slightly against U.S. dollarthe translation of balances of borrowings and obligations under finance leases which are denominated in 2014. Our net exchange losses of RMB5,953 million was recorded in 2015 as Renminbi depreciated significantly against U.S. dollar in 2015.

USD.

The Group hasWe have significant committed capital expenditures in the next three years, butand may face challenges and difficulties as it seeks to maintainin maintaining our liquidity.

We have, a substantial amount of debt, lease and other obligations, and will continue to have a substantial amount of debt, lease and other obligations in the future. As of December 31, 2015, the Group’s2018, our current liabilities exceeded itsour current assets by RMB51,422RMB59,615 million. The Group generally maintains soundWe generated net cash inflow from operating cash flow.activities of RMB17,732 million and RMB15,388 million for the years ended December 31, 2017 and 2018, respectively. However, our substantial indebtedness and other obligations may in the future negatively impact our liquidity.liquidity in the future. In addition, the Group haswe have significant committed capital expenditures in the next three years, mainly due to aircraft acquisitions.acquisition. In 20152018 and thereafter, theour liquidity of the Group is primarily dependent on itsour ability to maintain adequate cash inflow from operations to meet itsour debt obligations as they fall due, and itsour ability to obtain adequate external financing to meet itsour committed future capital expenditures. If our operating cash flow is materially and adversely affected by factors, such as increased competition, a significant decrease insignificantly reduced demand for our services, or a significant increase insignificantly increased jet fuel prices, our liquidity would be materially and adversely affected. Moreover, the Groupwe may not be able to meet itsour debt obligations as they fall due and commit futurefurther capital expenditures if certain assumptions about the availability of external financing on acceptable terms are inaccurate. If we are unable to obtain adequate financing for our capital requirements, our liquidity and operations would be materially and adversely affected.

As of December 31, 2015, the Group2018, we had committed banking facilities with several PRC commercial banks for providing loan financefinancing up to approximately RMB173,739RMB243,910 million, of which approximately RMB131,021RMB193,871 million was unutilized. Our directors believe that sufficient financing will be available to theour Group in 2016.2019. However there can be no assurance that such loan financing will be available on terms acceptable to theour Group or at all.

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

CSAHCCSAH will continue to be theour controlling shareholder of the Company. CSAHCshareholder. CSAH and certain of its affiliates will continue to provide certain important services to the Group,us, including the import and export of aircraft spare parts and other flight equipment, advertising services, provision of air ticket sellingsales services, property management services, leasing of properties and financial services, and repair, overhaul and maintenance services on jet engines.services. The interests of CSAHCCSAH may conflict with those of theour Group. In addition, any disruption of the provision of services by CSAHC’sCSAH’s affiliates or a default by CSAHC of CSAH on its obligations owed to theour Group could affect the Group’sour operations and financial conditions.condition. In particular, as part of itsour cash management system, the Groupwe periodically placesplace certain amount of demand deposits after independent shareholders’ approval with SA Finance, a PRC authorized financial institution controlled by CSAHCCSAH and an associateone of the Company. The Group hasour associates. We have taken certain measures to monitor the fund flows between itselfus and SA Finance and the placement of funds by SA Finance. Such monitoring measures may help to enhance the safety of the Group’skeep our deposits with SA Finance.Finance safe. In addition, we have received a letter of undertakings from CSAHCCSAH dated March 31, 2009, in which, among other things, CSAHCCSAH warranted that the Group’sour deposits and loans with SA Finance were definitely secure and that SA Finance would continue to operate in strict compliance with the relevant rules and regulations. However, the deposits may be exposed to risks associated with theSA Finance’s business of SA Finance over which the Group doeswe do not have control. As of December 31, 20142017 and 2015, the Group2018, we had deposits of RMB4,264RMB6,095 million and RMB2,934,RMB5,583 million, respectively, with SA Finance.

Unfavorable economic conditions, in China and globally, could affect the demand for air travel.

We have experienced incidentsThe airline industry is highly cyclical, and the level of employee misconduct indemand for air travel is correlated to the past,strength of domestic and mayglobal economies. During periods of unfavorable or volatile economic conditions, demand for air travel can be unable to prevent similar incidents in the future, which could adversely impact our reputation, ourimpacted as business and the trading priceleisure travelers choose not to travel, seek alternative forms of transportation for short trips or conduct business through videoconferencing. If unfavorable economic conditions occur, particularly for an extended period, our securities.

On January 5, 2015, we were informed that Mr. Xu Jie Bo, then Executive Director, Executive Vice President, Chief Financial Officer and Chief Accountant of the Company and Mr. Zhou Yue Hai, then Executive Vice President of the Company were under investigation for suspicion of job-related crimes. On October 17, 2015, we were informed by PRC authorities that Mr. Liu Qian, then Executive Vice President of the Company was under investigation due to the suspicion of bribery crime. We responded immediately to this information in accordance with our internal policies, and removed each of the affected employees from office. We were informed by PRC authorities on November 5, 2015 that Mr. Si Xian Min, Chairman of the Board was under investigation for suspected severe disciplinary violations.We had no prior knowledge of the incidents that led to the investigation by the PRC authorities. On November 5, 2015, the Board passed resolutions to authorize Mr. Tan Wan Geng, Vice Chairman of the Board to assume the role and duties of the Chairman of the Board. On 15 January 2016, the Board received resignation from Mr. Si Xian Min as the Chairman of the Board. As of the date of this Annual Report, the investigation of Mr. Si Xian Min by the government authorities is on-going. Legal proceedings are subject to many uncertainties and we cannot predict the outcome of individual matters with absolute assurance. However, after due inquiry and to the best of our knowledge, neither we nor any of our current senior management or controlling shareholders is subject to any investigation by PRC authorities involved in these incidents or otherwise, and based on current information, we do not, believe there will be any material impact on our financial condition or results of operations or impact on the internal control over financial reporting caused by the incident.

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

Both internationalFollowing a referendum in June 2016 in which voters in the U.K. approved an exit from the EU, the U.K. government has initiated a process to leave the EU (often referred to as Brexit) and domesticbegun negotiating the terms of the U.K.’s future relationship with the EU. Currently, the new deadline for the proposed exit is October 31, 2019. The airline industry faces substantial uncertainty regarding the impact of the exit of the U.K. from the EU. Adverse consequences such as deterioration in economic fluctuations and Chinese government’s macroeconomic controls affectconditions, volatility in currency exchange rates, or adverse changes in regulation of the demand forairline industry or bilateral agreements governing air travel which will in turn cause volatility to the Group’s businesscould have a negative impact on our operations, financial condition and results of our operations.

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

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

The GroupWe could be adversely affected by an outbreak of a disease, a similar public health threat or large scalea large-scale natural disasters that affect travel behavior.disaster.

An outbreak of a disease, a similar public health threat or a large-scale natural disaster that affects travel demand, travel behavior, or travel restrictions could have a material adverse impact on our business, financial condition and operating results.

The outbreak of the H1N1 swine flu in March 2009 has had an adverse impact on the aviation industry globally (includingand our international routes operations in 2009 were adversely affected by the Group). The spread of the swine flu adversely affected the Group’s international routes operations in 2009. Recently, there have been a number of outbreaks of H7N9 bird flu in several provinces in the PRC. A further spread of H7N9 bird flu may have a negative impact on the economic and business activities in China and thereby adversely affect our results of operation. A future outbreak of an infectious disease or any other serious public health concerns in Asia and elsewhere could have a material adverse effect on our business, financial condition and results of operations.

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

industry.

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

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 GroupWe leased certain properties and buildings, from CSAHC which are located in Guangzhou, Wuhan, Haikou and other PRC cities.cities from CSAH. However, CSAHCCSAH lacks adequate documentation evidencing CSAHC’sCSAH’s rights to such land and buildings, and, as a result, the lease agreements between CSAHCCSAH and the Companyus for such land hashave 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 Companymay subject us to challenges and claims by third parties with respect to the Company’sour use of such land and buildings.

As of the date of this Annual Report, we had been occupyingoccupied all of the land and buildings describedmentioned above without any challenge or claim by third parties. However, ifwe cannot assure you that we would not be subject to any challenges in the future. If any challenges to the property ownership or other claims are successful, our operation and business may be materially adversely affected. CSAHCCSAH has agreed to indemnify us against any loss or damage caused by or arising from any challenge of, or interference with, the Company’sour right to use certainsuch land and buildings.

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

The policy restraintrestrictions on direct flights between Taiwan and Mainland China has been further loosened in the past few years.years, but there has been no further negotiations on the expansion of such arrangement between Taiwan and Mainland China sincemid-2016. As of April 18, 2016,26, 2019, there were 69880 cross-Strait direct passenger flights per week. The Company wasWe were the first Chinese carrier to operatenon-stop flights frombetween Mainland China toand Taiwan and as a result hashave benefited from the operation of such flights. However, given the cross-Strait flight arrangement is subject to the political relationship between Taiwan and Mainland China, any deterioration in such political relationship may cause the discontinuity or disruption in the flight arrangement, and therefore may havelead to a material adverse impact on the Group's results.

our results of operations.

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

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

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

An accident involving one of ouran aircraft that we operate could requireexpose us to additional repair or replacement of a damaged aircraft, and result in its consequentialexpenses, temporary or permanent losslosses from service and/ordisruption of services and significant liability to injured passengers and others.tort liabilities. Although we believe that we currently maintain liability insurance in amounts and of the types generally consistent with industry practice, the amounts of such coverage may not be adequate to fully cover the costs related to the accident or incident, which could result in harm to our results of operations and financial condition. In addition, anysuch an aircraft accident even if fully insured, could causecreate a public perception that weour operations are not as safe or reliable as those of other airlines, which wouldcould harm our competitive position and result incause a decrease in our operating revenues.revenue. Moreover, a major accident involving the aircraft of any of our competitors may causereduce demand for air travel to decrease in general, which would adversely affect our results of operations and financial condition.

On March 11, 2019, the CAAC issued the notice “CAAC Request Domestic Transportation Airlines to Suspend the Commercial Operation of the Boeing737-8 Aircraft”, requiring domestic transportation airlines to suspend the commercial operation of the Boeing737-8 aircraft. As of December 31, 2018, we owned some Boeing737-8 aircraft and currently suspend commercial operations in accordance with the requirements of the CAAC. At this point, the effects of such suspension on us still remain unclear, and our operations may be affected.

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

The Group isWe are increasingly dependent on technology to operate itsour business. In particular, to enhance itsour management of flight operations, the Groupwe launched the computerized flight operations control system in May 1999. The system utilizes advanced computer and telecommunications technology to manage the Group’sour flights on a centralized, real-time basis. The Group believesWe believe that the system will enhance the efficiency of flight schedule, increase the utilization of aircraft and improve the coordination of the Group’sour aircraft maintenance and ground servicing functions. However, the computer and communications systems on which we rely could be disruptedsuffer substantial or repeated disruptions due to various factors, some of which are beyond our control, including natural disasters, power failures, terrorist attacks, equipment failures,or software failures and computer viruses and hackers. The Group hasWe cannot assure you that the measures we have taken certain steps to reduce the risk of some of these potential disruptions. There can be no assurance, however, that the measures we have takendisruptions are adequate to prevent or remedy disruptions to or failures of thosethese systems. Any substantial or repeated failure of those systems could adversely affect our operations and customer services, and result in the loss of important data, loss of revenues,revenue, and increased costs, and generally harm our business.costs. Moreover, a failure of certain of our vital systems could limit our ability to operate our flights for an extended period of time, which wouldcould have a material adverse effect on our operations and our business.

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

The United States Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company, including us, 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’sour independent registered public accounting firm is required to report on the effectiveness of the Company’sour internal control over financial reporting.

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

However, our independent registered public accounting firm or PRC Auditor may not be satisfied with our internal controls, the level at which our controls are documented, designed, operated and reviewed. Our independent registered public accounting firm or PRC Auditor may also interpret the requirements, rules and regulations differently, and reach a different conclusion regarding the effectiveness of our internal control over financial reporting. Although our management have concluded that our internal control over financial reporting as of December 31, 20152018 was effective, we may discover deficiencies in the course of our future evaluation of our internal control over financial reporting and may be unable to remediate such deficiencies in a timely manner. If we fail to maintain the adequacy of our internal control over financial reporting, we may not be able to conclude that we have effective internal control over financial reporting on an ongoing basis, as required under the above mentioned rules and regulations. Moreover, effective internal control is necessary for us to produce reliable financial reports and is important to prevent fraud. As a result, our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading prices of our ADRs,ADSs, H Shares or A Shares.

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

Depending upon the relative values of our passive assets and income as compared to our total assets and income each taxable year, we could be classified as a passive foreign investment company, or PFIC, by the United States Internal Revenue Service, or IRS, for U.S. federal income tax purposes. The Company believesWe believe that it waswe were not a PFIC for the taxable year 2015.2018. However, there can be no assurance that we will not be a PFIC for the taxable year 20162019 and/or later taxable years, as PFIC status isre-tested each year and depends on the facts in such year.

The Company

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

If we were a PFIC, youwe would generally be subject to additional taxes and interest charges on certain "excess distributions" the“excess distributions” our Company makes regardless of whether we continue to be a PFIC in the year in which you receive an "excess distribution"“excess distribution”. An "excess distribution"“excess distribution” would be either (1) the excess amount of a distribution with respect to ADRsADSs during a taxable year in which distributions to you exceed 125% of the average annual distributions to you over the preceding three taxable years or, if shorter, your holding period for the ADRs,ADSs, or (2) 100% of the gain from the disposition of ADRs.ADSs. 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“Taxation - United States Federal Income Taxation - U.S. Holders - Passive Foreign Investment Company"Company”.

We may be unable to retain senior management team or other key management personnel.employees.

We are dependent on the experience and industry knowledge of our senior management team and other key management employees, and there can be no assurancewe cannot assure you that we will be able to retain them. Any inability to retain our key management employees, or attract and retain additionaltalented and highly qualified senior management team or other key employees, could have a negative impact on us.

Our exit from Sky Team Alliance may result in claims against us during the transition period, due to lack of detailed implementation rules regarding member passenger’s rights and interests .

During the reporting period, given the requirements from our own development strategy and the new trend of cooperation model in the global air transport industry, we decided not to renew the Sky Team Alliance Agreement from January 1, 2019. We and Sky Team Alliance will continue to work closely during the transition period (January 1, 2019 - December 31, 2019) to ensure a smooth transition for passengers and partners. At this point, we and Sky Team Alliance have reached some agreements on the member passenger’s rights and interests during the transition period. However, due to lack of detailed implementation rules regarding member passenger’s rights and interests, claims may arise against us during the transition period.

Risks Relating to the Chinese Commercial Aviation Industry

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

The Group’s abilityChinese commercial aviation industry is subject to implement its business strategy will continue to be affected byextensive regulatory and legal oversight. The CAAC issues and implements several regulations and policies issued or implemented by relevant government agencies, particularly CAAC,polices, which encompassesencompass substantially all aspects of the Chinese commercial aviation industry, such as the approval of route allocation, the administration of certain airport operations and air traffic control. Such regulationsAs a result, we may face significant constraints on our flexibility and policies limit the flexibility of the Groupability to respond to market conditions, competitionconduct our business or changes in the Group’s cost structure. The implementation of specific government policies could from time to time adversely affect the Group’s operations.maximize our profitability.

The Group’sOur results of operations may be negatively impacted by theany jet fuel shortages or any fluctuation in domestic prices for jet fuel, and we would be adversely affected by disruptions in the supply of fuel.

The availability and cost of jet fuel have a significant impact on the Group’sour financial condition and results of operations. The Group’sPrior to 1993, jet fuel cost for 2015 accounted for 52.12% of its flight operations expenses. All of the domestic jet fuel requirements of Chinese airlines (other than at the Shenzhen, Zhuhai, Sanya, Haikou, Shanghai Pudong and other small airports) must be purchased from the exclusive providers, CAOSC and Bluesky Oil Supplies Company, which are supervised by the CAAC. Chinese airlines may also purchase jet fuel at the Shenzhen, Zhuhai, Sanya, Haikou, Shanghai Pudong and other small airports from joint venturesshortages occurred in which the CAOSC is a partner. Jet fuel obtained from the CAOSC’s regional branches is purchased at uniform prices throughout China, that are determined and adjusted by the CAOSC from time to time with the approval of the CAAC and the pricing department of the NDRC based on market conditions and other factors. Asas a result the costs of transportationwhich we had to cancel or delay flights. We cannot assure you that such shortages would not occur again, and storage of jet fuel in all regions of China are spreadif such a shortage occurs and causes us to delay or cancel flights, our reputation among all domestic airlines.

passengers as well as our operations may suffer.

Domestic price for jet fuel has experienced fluctuations in the past few years. The Group’s profityears and may continue to fluctuate in the future due to various factors including changes of fuel surcharge. In 2018, our jet fuel cost for the year may suffer from an unexpected change2018 accounted for 56.32% of our flight operation expenses. Therefore, any foregoing fluctuation in the fuel surcharge collection policies and other factors beyondprice may affect our control.financial performance due to our sensitivity to fuel prices. For more information on the jet fuel prices, please see "Item“Item 4, Information on the Company - Business Overview - Jet Fuel"Fuel” section below for further discussion.

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

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

In 2015,2018, a reasonable possible increase or decrease of 10% in average jet fuel price (VAT inclusive) with volume of fuel consumed and all other variables held constant, would have increased or decreased the Group’sour annual fuel costs by approximately RMB2,627RMB4,292 million. Accordingly, even if the jet fuel supply remains stable, increases in jet fuel prices will nevertheless adversely impact our financial results.

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

The level of fuel surcharges, which is regulated by Chinese government, affects domestic customers’ air travel demanddemands as well as the Group’sour ability to generate profits. On January 14, 2009, the NDRC and the CAAC jointly announced that the collection of passenger fuel surcharge for domestic routes should be suspended from January 15, 2009 onwards. Subsequently, in response to the increase in international fuel prices, the NDRC and CAAC issued a notice on November 11, 2009 to introduce a new pricing mechanism of fuel surcharge that links it with airlines’ jet fuel costs, which was further adjusted subsequently. On October 14, 2011, the NDRC and the CAAC issued a notice to adjust such pricing mechanism. As a result of this adjustment, the maximum rates for fuel surcharge can be adjusted according to the pricing mechanism of fuel surcharge, if the aggregated change in jet fuel costs exceeds RMB250 per ton. Due to the decrease in the jet fuel cost, the fuel surcharge has been suspended since February 5, 2015. In March 2015, the NDRC and the CAAC issued the “Notice on Adjusting the Base Oil Price of the Passenger Transportation Fuel Addition and Aviation Kerosene Price Linkage Mechanism of Civil Aviation Domestic Routes”, pursuant to which, when the domestic aviation kerosene comprehensive procurement cost exceeds RMB5,000 per ton, an air transport enterprise can collect fuel surcharge according to the linkage mechanism. In accordance with the above regulations, we adjusted the fuel surcharges for domestic routes from June 5, 2018 (the date of issue), and, as a result, each passenger is charged RMB10 for domestic flight segments (including domestic segments of international routes) under 800 kilometers, 800 kilometers and above 800 kilometers. We cannot guarantee that fuel surcharges would not be adjusted further in the future or adjusted in our favor. If fuel surcharges are not adjusted in correspondence to the increase in jet fuel, our profit for the year may be materially adversely affected.

The Group’sOur results of operations are subjecttend to be volatile and fluctuate due to seasonality.

The Group’saviation industry is characterized by annual high and low travel seasons. Our 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’sour 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’sour airline revenue is generally higher in the second and third quartershalf of the year than in the first and fourth quarters.half of the year due to the greater demand for air travel during the summer months. As a result, the Group’sour results may fluctuate from seasontend to season.be volatile and subject to rapid and unexpected change.

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

The rapid increase in air traffic volume in China in recent years has put pressure on many components of the Chinese commercial aviation industry, including China’s air traffic control system, the availability of qualified flight personnel and airport facilities. Airlines, such as the Group,our Company, which have route networks that emphasize short- to medium-haul routes, are generally more affected by insufficient aviation infrastructure in terms ofon-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 increasingincreasingly 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 Groupus to increase utilization rates and to provide safe and efficient air transportation in the future will depend in part on factors, such as the improvement of national air traffic control, and navigation systems and ground control operations at Chinese airports, factors which are beyond the control of the Group.our control.

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

The CAAC’s extensive regulation of the Chinese commercial aviation industry has had the effect of managing competition among Chinese airlines. Nevertheless, competitionCompetition has become increasingly intense in recent years in domestic market, 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 industryairlines, etc. Such intense competition has led to widespread price-cutting practices, thatwhich do not comply with applicable regulations in all respects comply with applicable regulations.. Until CAAC finalizes and strictly enforces the interpretation of CAACrelevant regulations limiting such price-cutting, has been finalized and strictly enforced, discounted tickets from competitors will continue to have an adverse effect on the Group’sour sales.

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

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

aforementioned.

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

The PRC government is aggressively implementing the expansion ofexpanding its high-speed rail network, which provides train services at a speednetwork. The mileage of up to 300 kilometers per hour connecting major cities such as Beijing, Shanghai, Wuhan, Zhengzhou, Xi'an, Qingdao, Guangzhou, Harbinnew railway lines put into operation in 2018 reached 4,600 kilometers. In 2018, the Harbin-Jiamusi Rapid Railway, Jianmeng-Zhanjiang, and Dalian. In December 2012, the Beijing-Guangzhou and Harbin-Dalian High-Speed RailwaysKunming Chuxiong Dali Intercity Railway commenced operation, the expansion of the coverage of this network and improvements in railway service quality, increased passenger capacity and stations located closer to urban centers than competing airports could enhance the relative competitiveness of the railway service and affect our market share on some of our key routes, in particular routes below 800 kilometers. The aggregate high-speed railway mileage in China reached over 19,000 kilometers asoperation. As of December 31, 2015. The construction of all railways in2018, China’s "Four Longitudinal and Four Horizontal"railway traffic mileage reached 131,000 kilometers, among which 29,000 kilometers are covered by high-speed railway, network is expectedaccounting for more than 60% of the world’s total high-speed railway traffic mileage. According to completethe latest development goal of the China Railway, China’s railway traffic mileage will reach 175,000 kilometers by the end of 2020. We expect it will bring further negative impact on the domestic aviation industry. Increased competition and pricing pressures from railway service may have a material adverse effect on our financial condition and2025, among which 38,000 kilometers are covered by high-speed railway. The operating results of operations.our air routes, which overlap with the high-speed railway corridors (especially air routes with a distance of less than 800 kilometers), will be affected in the future.

Due to limitationLimitations on foreign ownership imposed byof Chinese government policies, the Companyairlines may have limitedaffect our access to funding in the international equity capital markets.

The current Chinese government policies limit foreign ownership inof Chinese airlines. Under these policies, the percentagenon-PRC, Hong Kong, Macau, Taiwan residents can only hold up to 49% of equity interest in a Chinese airline. As of December 31, 2018, we estimate that 29.89% of our total outstanding ordinary shares were held bynon-PRC, Hong Kong, Macau, Taiwan residents. According to The Provisions on Domestic Investment in Civil Aviation Industry, effective on January 19, 2018, Chinese government has loosen up restrictions on state ownership of our total outstanding ordinary shares, held by investors in Hong Kong and any country outside China ("Foreign Investors") may not inwhich allows the aggregate exceed 49%percentage of state-owned shares to be under 50%. Currently, we estimate that 28.47% of the total outstanding ordinary shares of the Company are held by Foreign Investors. ForHowever, for so long as the limitation on foreign ownership is in force, we will have limited access to funding in the international equity capital markets.

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

Starting on January 1, 2012, aviation sector will behas been included in the European Emissions Trading Scheme (ETS), EU’s mandatorycap-and-trade system for reduction of greenhouse gas emissions. Airline operators in the EU will receive tradable emission permits (aviation allowances) covering a certain level of their CO2 emissions per year for their flights operating to and from EU airports. If an airline fails to obtainfree-of-charge emission permits from the EU, it will have to buy around EUR10 million (RMB100 million) worth of CO2 emissions allowances from other greener industries. Pursuant to this policy, the domesticChinese airlines having flight points in Europe undertake the same carbon emission reductions obligation as the European local airlines, which will result in a significant increase in the operating cost of domesticChinese airlines in Europe, including our Company, and further have an adverse impact on the results of operations and financial condition. In March 2011, a group representing China’s largest airlines sent a formal notice to the EU expressing strong opposition tonon-member-state airlines’ inclusion in the EU’s Emissions Trading Scheme. Also, in early February 2012, the CAAC issued instructions to various airlines announcing that without approval from the relevant government authorities, the major airlines are prohibited from joining the ETS and the transport airlines are also prohibited from raising the freight price or increasing fee items by adducing this reason. On November 12, 2012, EU announced to temporarily suspend the implementation of the ETS in the aviation sector in 2013 in order to forge a positive negotiation environment for all parties. In November 2014,2016, our Company had finished 2015 compliance cycle and in 2017, our Company had finished 2016 compliance cycle. In March 2018, the CAAC issued aanother notification on the ETS. The notification provided that the CAAC would not prohibit Chinese airlines to take part in the ETS if the relevant flights take off and land between the airports within the EU during 20122017 and 2016. We operated few flights between airports within2018. By the EU since 2012. We expect we would operate few flights between airports within the EU in the future. Therefore, we will submit emissions reportend of reporting period, our Company has finished 2017 compliance cycle and pay the quota between 2012 and 2016 fornow is performing 2018 compliance cycle. On 2019-2020 compliance cycle, our flights between airports within the EU. In April 2015, the Company had completed submission of emissions reports for the years 2012 to 2014 and fulfilled our obligations under the ETS. Going forward, the Company will be in strict compliance withsubject to the requirements of relevant PRC laws and the ETS, and continue to implement our respective obligations of EU carbon emissions trading in 2015 and 2016.ETS. There can be no assurance that the new implementation proposal will not have negative impact on our financial condition and resultresults of operation.operations.

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

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

Risks Relating to the PRC

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

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

The Group hasWe have significant exposure to foreign currency risk as substantially all of the Group’sour obligations under leases, certain bank and other loans and operating lease commitment are denominated in foreign currencies, principally U.S. dollars, Euros and Japanese Yen. Depreciation or appreciation of the Renminbi against foreign currencies affects the Group’sour results significantly because the Group’sour foreign currency liabilities generally exceed itsour foreign currency assets. The Group isWe are not able to hedge itsour foreign currency exposure effectively other than by retaining itsour foreign currency denominated earnings and receipts to the extent permitted by SAFE, or subject to certain restrictive conditions, entering into foreign exchange forward option contracts with authorized banks. However, SAFE may limit or eliminate the Group’sour ability to purchase and retain foreign currencies in the future. In addition, foreign currency transactions under the capital account are still subject to limitations and require approvals from SAFE. This may affect our ability to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions. No assurance can be given that the Groupwe will be able to obtain sufficient foreign exchange to pay dividends or satisfy our foreign exchange liabilities.

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

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

Our Company and the Group’s operations.

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

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

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

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

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

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

For individuals, the PRC tax law generallyCaishui Notice [2014] No. 81 provides that, an“for dividends derived by Mainland individual who receives dividendsinvestors from investing in H Shares listed on the Company is subject to a 20% income tax. However, certain reduction of taxable income is granted by Chinese tax law for an individual receiving dividends from a listed company on ShanghaiHong Kong Stock Exchange or Shenzhenthrough Shanghai Hong Kong Stock Exchange. UnderConnect,H-Share companies shall apply to the current PRC tax law, dividends received by any foreignChina Securities Depository and Clearing Corporation Limited (CSDC). CSDC shall provide the list of Mainland individual that holds overseas shares in Chinese enterprise is generally subjectinvestors toH-Share companies who shall withhold individual income tax at a tax rate rangingof 20%. For Mainland securities investment funds investing in shares listed on the Hong Kong Stock Exchange through Shanghai Hong Kong Stock Connect, the above rules shall also apply and individual income tax shall be levied on dividends derived therefrom.”

Caishui Notice [2014] No. 81 further provides that, “dividends derived by Mainland enterprise investors from 5%investing in shares listed on the Hong Kong Stock Exchange through Shanghai Hong Kong Stock Connect shall be included in their gross income and subject to 20% (usually 10%), whichenterprise income tax. For dividends derived by Mainland enterprises where the relevant H Shares have been continuously held for no less than 12 months, enterprise income tax may be entitled to tax reductions or exemptions,exempt according to the applicable tax implementation regulations or applicablelaw.H-Share companies listed on the Hong Kong Stock Exchange shall apply to CSDC to obtain the list of Mainland enterprise investors from CSDC.H-Share companies are not required to withhold income tax treaties betweenon dividends to Mainland enterprise investors which shall report the home country ofincome and make the individual and the PRC.

tax payment by themselves.”

In addition, to date, relevant tax authorities have not collected capital gains tax on the gains realized upon the sale or other disposition of overseas shares in Chinese enterprise held by foreign individuals. If relevant tax authorities promulgate implementation rules on the taxation of capital gains realized by individuals upon the sale or other disposition of the shares, individual holders of the shares may be required to pay capital gains tax.

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

UnderAuditors of companies that are registered with the Sarbanes-Oxley Act of 2002,SEC and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the Public Company Accounting Oversight Board, or PCAOB, has the authority and is required to conduct continuing inspections of registered public accounting firms that provide audit services to public companies subject to the reporting requirements of the SEC. Our external auditor is registered with the PCAOB, and is subjectare required by the laws of the United States to undergo regular inspections by the PCAOB. However,PCAOB to assess their compliance with the laws of the United States and professional standards. The PCAOB, however, is currently unable to inspect a registered public accounting firm’s audit work relating to a company’s operations in China where the documentation of such audit work is located in China, such asChina. Accordingly, our independent registered public accounting firm’s audit work relating toof our operations in China. As a result,China is not subject to the PCAOB inspection.

The PCAOB has conducted inspections of independent registered public accounting firms outside of China and has at times identified deficiencies in the audit procedures and quality control procedures of those accounting firms. Such deficiencies may be addressed in those accounting firms’ future inspection process to improve their audit quality. Due to the lack of PCAOB inspections of audit work undertaken in China, our investors may be depriveddo not have the benefit of the benefitsregular evaluation by PCAOB of PCAOB’s oversightthe audit works, audit procedures and quality control procedures of our independent registered public accounting firm through such inspections.

firm.

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

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

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

Recent international trade tensions could materially and adversely affect our business, financial condition, and results of operations.

Economic conditions in China are sensitive to global economic conditions. The global financial markets have experienced significant disruptions in the past, including the recent international trade disputes and tariff actions announced by the United States, the PRC and certain other countries. The U.S. administration has imposed significant amount of tariffs on Chinese goods, and the PRC government has imposed tariffs on certain goods manufactured in the United States. There is no assurance that the list of goods impacted by additional tariffs will not be expanded or the tariffs will not be increased materially. It is difficult to predict how PRC or U.S. government policy, in particular, the outbreak of a trade war between the PRC and the United States and the imposition in 2018 of additional tariffs on bilateral imports, may continue to impact the PRC. If the list of goods is further expanded or the tariff is further increased, the volume ofChina-U.S. import and export trade would drop significantly, which will lead to deterioration in economic conditions of both countries and decrease of business and official activities between both countries. Demand for air travel as well as cargo and mail volume may also be impacted.

We were incorporated under the PRC laws on March 25, 1995 as a joint stock company with limited liability under the name of China Southern Airlines Company Limited. The address of our principal place of business is 278 Ji Chang68 Qi Xin Road, Guangzhou 510403, People’s Republic of China 510405.China. Our telephone number is +86 20 8612 4462 and our website iswww.csair.com.

www.csair.com.

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

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

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

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

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

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

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

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

On September 28, 2009, we entered into an agreement with CSAHCCSAH to sell our 50% equity interest in MTU Maintenance Zhuhai Co., Ltd ("(“Zhuhai MTU"MTU”), a jointly controlled entity of theour Company, to CSAHCCSAH at a consideration of RMB 1,607,850,000. The transfer was completed in February 2010.

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

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

On June 29, 2012, Xiamen Airlines, a subsidiary of theour Company and Southern Airlines Culture and Media Co., Ltd. ("SACM"(“SACM”) entered into an agreement, pursuant to which Xiamen Airlines agreed to sell and SACM agreed to purchase a 51% equity interestsinterest in Xiamen Airlines Media Co., Ltd.("XAMC"(“XAMC”), at a consideration of approximately RMB43.12 million. Immediate prior to the transaction, XAMC was wholly owned by Xiamen Airlines and primarily engaged in providing advertising, corporate branding, publicity and exhibition services and was responsible for the overall brand building and publicity of Xiamen Airlines.

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

On October 13, 2014, Xiamen Airlines and Hebei Airlines Investment Group Company Limited (the "Hebei“Hebei Airlines Investment"Investment”) entered into an agreement, pursuant to which Hebei Airlines Investment agreed to sell and Xiamen Airlines agreed to purchase a 95.4% equity interestsinterest in Hebei Airlines at the consideration of RMB680 million.

The acquisition was completed in December 2014.

On July 14, 2015, we and Xiamen Jianfa entered into an agreement, pursuant to which Xiamen Jianfa agreed to sell and we agreed to purchase a 4% equity interestsinterest in Xiamen Airlines at the consideration of RMB586,666,670. The acquisition was completed in December 2015.

On February 2, 2016, we and CSAH entered into an agreement, pursuant to which CSAH agreed to sell and we agreed to purchase a 100% equity interest in Southern Airlines (Group) Import And Export Trading Co. Ltd. at the consideration of RMB400,570,400. The acquisition was completed in August 2016.

On March 27, 2017, according to the authorization under the general mandate approved by the 2015 annual general meeting and as approved by the Board, we entered into a share subscription agreement with American Airlines, pursuant to which American Airlines agreed to subscribe for 270,606,272 new H Shares of us, at the consideration of HK$1,553.28 million, representing a subscription price of HK$5.74 per share. The closing price of the H Shares as at the date of the share subscription agreement was HK$5.49. The subscription was completed on August 10, 2017.

On May 18, 2017, we entered into a joint venture agreement regarding Guangzhou Nanland Air Catering Company Limited with Hong Kong Sharpland Investments Ltd., Servair S.A and Hong Kong Ginkgo Group Company Limited, pursuant to which we contributed RMB76,206,300 cash and the equity interests in a subsidiary with a valuation of RMB513,727,300 into Guangzhou Nanland Air Catering Co., Ltd.. After the capital contribution, we held 70.5% equity interest in Guangzhou Nanland Air Catering Co., Ltd..

On July 10, 2017, we entered into a share transfer agreement with CAE International Holdings Limited for an acquisition of 49% equity interest in Zhuhai Xiang Yi Aviation Technology Company Limited held by CAE with an amount of US$99.52 million (equivalent to approximately RMB678 million). After the completion of this acquisition, Zhuhai Xiang Yi Aviation Technology Company Limited became our wholly-owned subsidiary.

On October 13, 2017, Xiamen Airlines entered into a share transfer agreement with SACM for an acquisition of 51% equity interest in Xiamen Airlines Media Co., Ltd. held by SACM with an amount of RMB47 million. After the completion of this acquisition, Xiamen Airlines Media Co., Ltd. became a wholly-owned subsidiary of Xiamen Airlines.

On June 29, 2018, we established a wholly-owned subsidiary, Xiongan Airlines in Xiong’an New Area. We intend to make a total contribution of RMB10 billion by stages, among which RMB2.5 billion will be made in cash, and RMB7.5 billion will be made in kind. This investment is conducive to promoting the development of the Company’s main aviation industry and enhancing our competitiveness in the aviation market.

On September 29, 2018, we completed thenon-public issuance of A shares, and CSAH participated in thenon-public issuance of A shares subscription with its 50.00% equity interest in Zhuhai MTU and part of cash. The appraisal value of 50% equity interest in Zhuhai MTU assessed and filed by the SASAC is the benchmark, and the asset consideration is determined to be RMB1,741,080,000 after the adjustment of 2016 annual dividend of Zhuhai MTU. As of the end of the reporting period, transfer of all 50.00% of equity interest of Zhuhai MTU and the procedures and the registration with Administration for Industry and Commerce had been completed, and we hold 50.00% of equity interest in Zhuhai MTU.

On September 11, 2018, we issued 600,925,925 H shares to Nan Lung with the proceeds of approximately HK$3.626 billion. On September 27, 2018, we, by way ofnon-public issuance, issued 1,578,073,089 A shares to seven investors including CSAH. The proceeds is approximately RMB9.5 billion. After the completion of ournon-public issuance, our total share capital increased to 12,267,172,286 shares.

Aircraft Acquisitions

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

Pursuant to an A320 Series Aircraft Purchase Agreementseries aircraft purchase agreement dated January 20, 2010 between theour Company and Airbus SNC, we will acquire 20 Airbus 320 series aircraft from Airbus SNC. According to the information provided by Airbus SNC, the catalogue price of an Airbus 320 aircraft, including airframe and engines, is around US$76.9 million. The aggregate consideration for the acquisition will bewas partly payablepaid in cash and partly through financing arrangements with banking institutions. The Airbus aircraft have beenwere delivered in stages to our Company during the Company.

period from 2011 to 2013.

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

On November 4, 2010, we entered into an A320 series aircraft purchase agreement and anA330-300 aircraft purchase agreement with Airbus S.A.S. to purchase 30 Airbus A320 series aircraft and six Airbus A330 series aircraft. According to the information provided by Airbus S.A.S., the catalogue price of six Airbus A330 series aircraft and 30 Airbus A320 series aircraft, including airframe and engines, is US$1.205 billion and US$2.575 billion, respectively. The aggregate consideration for the acquisition will bewas partly payable bypaid in cash and partly bythrough financing arrangements with banking institutions. The six Airbus A330 aircraft will bewere delivered in stages to theour Company during the period commencing from 2013 to 2014 and the 30 Airbus A320 series aircraft will bewere delivered in stages to theour Company during the period commencing from 2012 to 2015.

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

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

On February 28, 2012, we entered into an agreement with the Boeing Company to purchase 10 Boeing777-300ER aircraft. According to the information provided by Boeing, the catalogue price of one Boeing B777-300ER aircraft, including airframe and engines, is around US$298 million. The aggregate consideration for the acquisition will bewas partly payablepaid in cash and partly through financing arrangements with banking institutions. The Boeing aircraft will bewere delivered in stages to theour Company during the period from 2014 to 2016.

On August 3, 2012, Xiamen Airlines entered into an agreement with Boeing to purchase 40 Boeing B737 series aircraft from Boeing. The aggregate catalogue price of the 40 Boeing B737 series aircraft is US$3.36 billion. The aggregate consideration for the acquisition will bewas partly payable bypaid in cash and partly bythrough financing arrangements with banking institutions. The Boeing27 Boeing737 series aircraft were delivered in stages to Xiamen Airlines during the period from 2016 to 2017 and the 13 Boeing737 series aircraft will be delivered in stages to Xiamen Airlines during the period commencing from 20162018 to 2019.

On December 5, 2012, we entered into the Airbus aircraft acquisition agreement with Airbus S.A.S. to purchase 10 AirbusA330-300 aircraft. The catalogue price of one AirbusA330-300 aircraft is US$188 million. The aggregate consideration for the acquisition will bewas partly payable bypaid in cash and partly bythrough financing arrangements with banking institutions. The Airbus aircraft will bewere delivered in stages to theour Company during the period commencing from 2014 to 2016.

On May 16, 2014, we entered into the aircraft acquisition agreement with Airbus S.A.S to purchase 30 Airbus A320 series aircraft and 50 A320 NEO series aircraft. The catalogue price of one Airbus A320 series aircraft is priced differently in the range of US$85.8 million and US$110.1 million and one A320 NEO series aircraft is priced differently in the range ofdiffers, ranging from US$85.8 million to US$110.1 million and US$94.4 million to US$120.5 million.million, respectively. The aggregate consideration for the acquisition will be funded partly by internal resources of theour Company and partly through commercial loans by commercial banks. The Airbus30 Airbus320 aircraft were delivered in stages to our Company during the period from 2016 to 2017 and the 50 Airbus320 NEO aircraft will be delivered in stages to theour Company during the period commencing from 20162018 to 2020.

On December 17, December 2015, we entered into the aircraft acquisition agreement with Boeing to purchase 30 B737NG series aircraft and 50 B737 MAX series aircraft. The catalogue price of each B737NG series aircraft and B737 MAX series aircraft is priced about US$81.2 million and US$96.1 million, respectively. The aggregate consideration for the acquisition will be funded partly payable byin cash and partly bythrough financing arrangements with banking institutions. The Boeing30 Boeing737NG aircraft were delivered in stages to our Company in 2017 and the 50 Boeing737 MAX aircraft will be delivered in stages to theour Company during the period commencing from 20172018 to 2021.

On December 23, December 2015, we entered into the aircraft acquisition agreement with Airbus S.A.S to purchase 10 AirbusA330-300 series aircraft. The catalogue price of one AirbusA330-300 series aircraft is priced about US$227.4 million. The aggregate consideration for the acquisition will be funded partly payable byin cash and partly bythrough financing arrangements with banking institutions. The Airbus aircraft will be delivered in stages to theour Company during the period commencing from 2017 to 2019. The 3 AirbusA330-300 aircraft were delivered in stages to our Company in 2017 and the 7 AirbusA330-300 aircraft will be delivered in stages to our Company during the period from 2018 to 2019.

On April 26, 2016, Xiamen Airlines entered into the aircraft acquisition agreement with Boeing to purchase 10B737-800 series aircraft. The catalogue price of oneB737-800 series aircraft is about US$85.06 million. The aggregate consideration for the acquisition will be funded partly by internal sources of our Company and partly through commercial loans by commercial banks. The fourBoeing787-800 series aircraft were delivered in stages to Xiamen Airlines g in 2017 and the sixBoeing787-800 series aircraft were delivered in stages to Xiamen Airlines in 2018.

On July 27, 2016, Xiamen Airlines entered into the aircraft acquisition agreement with Boeing to purchase sixB787-9 series aircraft. The catalogue price of one is about US$230 million. The aggregate consideration for the acquisition will be funded partly by internal sources of our Company and partly through commercial loans by commercial banks. The Boeing787-9 series aircraft were delivered in stages to Xiamen Airlines during the period from 2016 to 2018.

On October 12, 2016, we entered into the aircraft acquisition agreement with Boeing to purchase 12B787-9 series aircraft. The catalogue price of one is about US$271 million. The aggregate consideration for the acquisition will be funded partly by internal sources of our Company and partly through commercial loans by commercial banks. The Boeing aircraft will be delivered in stages to our Company during the period from 2018 to 2020.

On April 26, 2017, we entered into the aircraft acquisition agreement with Airbus S.A.S to purchase 20A350-900 series aircraft. The catalogue price of one A350 series aircraft is about US$299 million. The aggregate consideration for the acquisition will be funded partly by internal sources of our Company and partly through commercial loans by commercial banks. The Airbus aircraft will be delivered in stages to us during the period from 2019 to 2022.

On October 20, 2017, we entered into the aircraft acquisition agreement with Boeing to purchase 8 B777-300ER and 30B737-8 series aircraft. The catalogue price of each B777-300ER series aircraft andB737-8 series aircraft is about US$318 million and US$104 million, respectively. The aggregate consideration for the acquisition will be funded partly by internal sources of our Company and partly through commercial loans by commercial banks. The Boeing aircraft will be delivered in stages to our Company during the period from 2019 to 2020. On February 28, 2019, we entered into the supplemental Boeing aircraft acquisition agreement with Boeing to amend the terms of the aforesaid aircraft acquisition agreement to change the 2 B777-300ER aircraft originally agreed to be acquired by the Company to 2 B777F aircraft.

On March 21, 2018, Xiamen Airlines entered into the Boeing Aircraft Acquisition Agreement with Boeing to purchase the 20B737-8 aircraft and 10B737-10 aircraft. The catalogue price of eachB737-8 series aircraft andB737-10 series aircraft is about US$104 million and US$116 million, respectively. The aggregate consideration for the acquisition will be funded partly by internal sources of our Company and partly through commercial loans by commercial banks. The Boeing aircraft will be delivered in stages to Xiamen Airlines during the period from 2019 to 2022.

Capital Expenditure

The Group had RMB23,390We expended RMB37,210 million, RMB26,481RMB31,129 million and RMB29,576RMB29,454 million in capital expenditures in 2015, 20142018, 2017 and 20132016, respectively. Of such capital expenditures in 2015, RMB11,2512018, RMB13,290 million was financed by capital leases, RMB11,258RMB22,499 million was financed by bank borrowings while the remaining RMB881RMB1,421 million was financed by internal resources. The capital expenditures were primarily incurred on the additional investments in aircraft and flight equipment under the Group’sour fleet expansion plans and, to a small extent, additional investments in other facilities and buildings for operations. As of December 31, 2015,2018, we had total capital commitments for aircraft, engines and related equipment of approximately RMB83,427RMB82,199 million.

General

The Group provides commercial airline services throughout Mainland China, Hong Kong, Macau and Taiwan regions, Southeast Asia and other parts of the world. Based on the statistics from the CAAC, the Group is one of the largest Chinese airlines and, as of the year end of 2015, ranked first in terms of number of passengers carried, number of scheduled flights per week, number of hours flown, number of routes and size of aircraft fleet. During the three years ended December 31, 2015, the Group’s RPKs increased at a compound annual growth rate of 6.31% from 148,417 million in 2013 to 166,629 million in 2014 and 189,588 million in 2015 while its capacity, measured in terms of ASKs, increased at a compound annual growth rate of 5.97%, from 186,800 million in 2013 to 209,807 million in 2014 and 235,616 million in 2015. In 2015, the Group carried 109 million passengers and had passenger revenue of RMB100,238 million (approximately US$15,436 million).

The Group conducts a portion of its airline operations through its airline subsidiaries namely Xiamen Airlines, Shantou Airlines Company Limited ("Shantou Airlines"), Zhuhai Airlines Company Limited ("Zhuhai Airlines"), Guizhou Airlines Company Limited ("Guizhou Airlines"), Chongqing Airlines Company Limited ("Chongqing Airlines") and Henan Airlines Company Limited (“Henan Airlines”), (collectively, the "Airline Subsidiaries"). In 2015, the Airline Subsidiaries carried 39.6 million passengers and had passenger revenue of RMB29,636 million (approximately US$4,564 million) and accounted for 36.3% and 29.6% 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 decreased by 4.5% to RMB6,861 million (approximately US$1,057 million) in 2015 as compared with that of 2014. The Group’s airline operations are fully integrated with its airline-related businesses, including aircraft and engine maintenance, flight simulation and air catering operations.

As of December 31, 2015, the Group operated 1,032 routes, of which 775 were domestic, 214 were international and 43 were regional. The Group operates the most extensive domestic route network among all Chinese airlines. Its route network covers commercial centers and rapidly developing economic regions in Mainland China.

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

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

The Group’s operations primarily focus on the domestic market. In addition, the Group also operates regional routes and international flights. As of December 31, 2015, the Group had 43 regional routes and 214 international routes.The Group’s regional operations include flights between destinations in Mainland China, Hong Kong, Macau and Taiwan. The Group’s international operations include scheduled services to cities in Australia, Azerbaijan, Bangladesh, United Kingdom, Burma, Cambodia, Canada, Dutch, France, Georgia, German, India, Indonesia, Japan, Kenya, Kazakhstan, Kyrgyzstan, Malaysia, Maldives, Nepal, New Zealand, Pakistan, Philippines, Russia, Singapore, South Korea, Tajikistan, Thailand, Turkey, Turkmenistan, United Arab Emirates (UAE), United States of American (USA), Vietnam, Mauritius, Uzbekistan, Iran, Italy .

After joining Skyteam Alliance, the Group has established a network reaching over 73 destinations globally, connecting 41 countries and regions and covering major cities around the world.

As of December 31, 2015, the Group had a fleet of 667 aircraft, consisting primarily of Boeing 737 series, 747, 757, 777, 787, Airbus 320 series, 330, 380 etc. The average age of the Group’s registered aircraft was 6.3 years as of December 31, 2015.

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, CSAHCCSAH was established on January 26, 1991 for the purpose of assuming the airline and airline-related commercial operations of the Guangzhou Civil Aviation Administration, one of the then six regional bureaus of the CAAC. CSAHCCSAH was one of the 55 large-scale enterprises designated by the Chinese government to play a leading role in their respective industries.

CSAHCCSAH was restructured in 1994 and 1995 in anticipation of our initial public offering. The restructuring was effective through the establishment of theour Company and the execution of theDe-merger Agreement on March 25, 1995 by and between CSAHCCSAH and theour Company. Upon the restructuring, theour Company assumed substantially the entire airline and airline-related businesses, assets and liabilities of CSAHC,CSAH, and CSAHCCSAH retained itsnon-airline-related businesses, assets and liabilities. All interests, rights, duties and obligations of CSAHC,CSAH, whenever created or accrued, were divided between theour Company and CSAHCCSAH based on the businesses, assets and liabilities assumed by each of them under theDe-merger Agreement. Under theDe-merger Agreement, CSAHCCSAH 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 theour Group, although CSAHCCSAH may continue to hold and control its affiliates existing on the date of theDe-merger Agreement and may continue to operate the businesses of such associates. Under theDe-merger Agreement, CSAHCCSAH and theour Company also agreed to indemnify each other against any losses, claims, damage, debts or expenses arising out of or in connection with the restructuring. As of the date of this Annual Report, no indemnity has been provided by either CSAHCCSAH or us.

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

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

Share Reform Scheme

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