As filed with the Securities and Exchange Commission on June 29, 2007

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)


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


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

For the fiscal year ended December 31, ~~2005~~2006


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


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

Date of event requiring this shell company ~~report.....................~~report _____________

For the transition period from _________to

Commission file number 1-14660

(Exact name of Registrant as specified in its charter)

CHINA SOUTHERN AIRLINES COMPANY LIMITED

(Translation of Registrant’s name into English)

THE PEOPLE’S REPUBLIC OF CHINA

(Jurisdiction of incorporation or organization)

278 JI CHANG ROAD

GUANGZHOU

PEOPLE’S REPUBLIC OF CHINA, 510405

(Address of principal executive offices)

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


Title of each class		Name of each exchange on which registered

Ordinary H Shares of par value		New York Stock Exchange, Inc.
RMB 1.00 per share
represented by American
Depositary Shares

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

None

(Title of Class)


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

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

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 2,200,000,000 ordinary Domestic Shares of par value RMB 1.00 per share and 1,174,178,000 ordinary H Shares of par value RMB 1.00 per share and 1,000,000 ordinary A Shares of par value RMB 1.00 per share were issued and outstanding as of December 31, ~~2005.~~2006.

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

o Yesþ 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 Yesþ No

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

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

þ Yeso No

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


Large accelerated filero		Accelerated filerþ		Non-accelerated filero

Indicate by check mark which financial statement item the Registrant has elected to follow.

o Item 17 þ Item 18

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

o Yesþ No

TABLE OF CONTENTS

China Southern Airlines Company Limited

				Page
Forward-Looking Statements		~~Page~~2
~~Forward-Looking Statements~~ Introductory Note			4	2
~~Introductory Note~~			4
Glossary of Airline Industry Terms	2
		5 PART I
~~PART I~~
Item 1. Identity of Directors, Senior Management and Advisers			6	4
Item 2. Offer Statistics and Expected Timetable			6	4
Item 3. Key Information			6	4
Selected Financial Data			6	4
Capitalization and Indebtedness			9	8
Reasons for the Offer and Use of Proceeds			10	8
Risk Factors			10	8
Item 4. Information on the Company			13	12
History and Development of the Company			13	12
~~CNA/XJA Acquisitions~~ Capital Expendition			15	13
Business Overview			15	13
Organizational Structure			31	28
Property, Plant and Equipment			32	29
Item 5. Operating and Financial Review and Prospects			33	30
Critical Accounting Policies			34	31
Overview			35	32
Certain Financial Information and Operating Data by Geographic Region			36	33
Operating Results			37	34
Additional Information under U.S. GAAP			42	38
Liquidity and Capital Resources			47	42
Contractual Obligations and Commercial Commitments			49	44
Item 6. Directors, Senior Management and Employees			49	44
Directors and Senior Management			49	44
Compensation			54	48
Board Practices	49

Remuneration Committee	54	50
~~Remuneration Committee~~ Employees		54	50
~~Employees~~ Share Ownership		54	51
~~Share Ownership~~		56
Item 7. Major Shareholders and Related Party Transactions		56	51
Major Shareholders		56	51
Related Party Transactions		56	51
Interests of Experts and Counsel		60	56
Item 8. Financial Information		60	56
Consolidated Statements and Other Financial Information		60	56
Significant Changes		60	56
Dividend Information		60	57
Item 9. The Offer and Listing		61	57
Offer and Listing Details		61	57
Plan of Distribution		61	58
Markets		62	58
Selling Shareholders		62	58
Dilution		62	58
Expenses of the Issue		62	59
Item 10. Additional Information		62	59
Share Capital		62	59
Memorandum and Articles of Association		62	59
Material Contracts		66	62
Exchange Controls		67	64
Taxation		67	65

				Page
		~~Page~~
Dividends and Paying Agents			68
Statement by Experts			68
Documents on Display			68
Subsidiary Information			68
Comparison of New York Stock Exchange Corporate Governance Rules and China Corporate Governance Rules for Listed Companies	69			68

Item 11. Quantitative and Qualitative Disclosures About Market Risk			69	72
Item 12. Description of Securities other than Equity Securities	73
		70 PART II
~~PART II~~
Item 13. Defaults, Dividend Arrearages and Delinquencies			70	73
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds	73
Use of Proceeds	73
70 PART III
~~Use of Proceeds~~
~~PART III~~
Item 15. Controls and Procedures			71	75
Item 16. [Reserved]			72	75
Item 16 A. Audit Committee Financial Expert			73	75
Item 16 B. Code of Ethics			73	76
Item 16 C. Principal Accounting Fees and Services			73	76
Item 16 D. Exemptions from the Listing Standards for Audit Committee			74	76
Item 16 E. Purchases of Equity Securities By the Issuer and Affiliated Purchasers	76
		74 PART IV
~~PART IV~~
Item 17. Financial Statements			74	76
Item 18. Financial Statements			74	76
Index to Financial Statements			74	77
Item 19. Exhibits			75	78
Signatures	~~Signatures~~ 79

	76	EX-1.1 AMENDED ARTICLES OF ASSOCIATION OF CHINA SOUTHERN AIRLINES COMPANY LIMITED
EX-4.1 FORM OF DIRECTOR'S SERVICE AGREEMENT
EX-4.2 FORM OF NON-EXECUTIVE DIRECTOR'S SERVICE AGREEMENT
~~EX-8~~ EX-8.1 SUBSIDIARIES OF THE COMPANY
EX-12.1 SECTION 302 CERTIFICATION OF CHAIRMAN
EX-12.2 SECTION 302 CERTIFICATION OF PRESIDENT
EX-12.3 SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER
EX-13.1 SECTION 906 CERTIFICATION OF CHAIRMAN
EX-13.2 SECTION 906 CERTIFICATION OF PRESIDENT
EX-13.3 SECTION 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER

FORWARD-LOOKING STATEMENTS

~~FORWARD-LOOKING STATEMENTS~~

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

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

	• ·		general economic and business conditions, including changes in interest rates;

	• ·		prices and other economic conditions;

	• ·		natural phenomena;

	• ·		actions by government authorities, including changes in government ~~regulation;~~regulations;

	• ·		the Company’s relationship with CSAHC;

	• ·		uncertainties associated with legal proceedings;

	• ·		technological development;

	• ·		future decisions by management in response to changing conditions;

	• ·		the Company’s ability to execute prospective business plans; and

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

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

INTRODUCTORY NOTE

~~INTRODUCTORY NOTE~~

In this Annual Report, unless the context indicates otherwise, the “Company” means China Southern Airlines Company Limited, a joint stock company incorporated in China on March 25, 1995, the “Group” means the Company and its consolidated subsidiaries, and “CSAHC” means China Southern Air Holding Company, the Company’s parent company which holds a 50.3% controlling interest in the Company.

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

The Company presents its consolidated financial statements in Renminbi. The consolidated financial statements of the Company ~~as of~~for the year ended December 31, ~~2004 and 2005~~2006 (the “Financial Statements”) have been prepared in accordance with International Financial Reporting Standards (“IFRS”) promulgated by the International Accounting Standards Board. IFRS includes International Accounting Standards (“IAS”) and related interpretations. IFRS differs in certain significant respects from accounting principles generally accepted in the United States of

America (“U.S. GAAP”). Information relating to the nature and effect of such differences is presented in Note 5051 to the Financial Statements.

Solely for the convenience of the readers, this Annual Report contains translations of certain Renminbi amounts into U.S. dollars at the rate of US$1.00 = ~~RMB8.0694,~~RMB 7.8087, 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, ~~2005.~~2006. No representation is made that the Renminbi amounts or U.S. dollar amounts included in this Annual Report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. Any discrepancies in the tables included herein between the amounts listed and the totals are due to rounding.

GLOSSARY OF AIRLINE INDUSTRY TERMS

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


Capacity Measurements

“available seat kilometers” or “ASKs”		the number of seats made available for sale multiplied by the kilometers flown

“available ton kilometers” or “ATKs”		the number of tons of capacity available for the transportation of revenue load (passengers and cargo) multiplied by the kilometers flown

Traffic Measurements

“revenue passenger kilometers” or “RPKs”		the number of revenue passengers carried multiplied by the kilometers flown

“cargo ton kilometers”		the cargo load in tons multiplied by the kilometers flown

“revenue ton kilometers” or “RTKs”		the load (passenger and cargo) in tons multiplied by the kilometers flown

Yield Measurements

“passenger yield”		revenue from passenger operations divided by RPKs

“cargo yield”		revenue from cargo operations divided by cargo ton kilometers

“average yield”		revenue from airline operations (passenger and cargo) divided by RTKs

“ton”		a metric ton, equivalent to 2,204.6 pounds

Load Factors

“passenger load factor”		RPKs expressed as a percentage of ASKs

“overall load factor”		RTKs expressed as a percentage of ATKs

“breakeven load factor”		the load factor required to equate scheduled traffic revenue with operating costs assuming that total operating surplus is attributable to scheduled traffic operations

Utilization

“utilization rate”		the actual number of flight hours per aircraft per operating day

Equipment

“rotables”		aircraft parts that are ordinarily repaired and reused

“expendables”		aircraft parts that are ordinarily used up and replaced with new parts

PART I

~~PART I~~

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

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.

Not applicable.

ITEM 3. KEY INFORMATION.

Selected Financial Data

The following tables present selected financial data of the Company as of and for each of the years in the five-year period ended December 31, ~~2005.~~2006. The selected data of consolidated statements of operations for each of the years in the three-year period ended December 31, ~~2005~~2006 and consolidated balance sheets as of December 31, ~~2004~~2005 and ~~2005~~2006, presented in IFRS section, have been derived from the consolidated financial statements of the Company, including the related notes, included elsewhere in this Annual Report. The selected IFRS data of consolidated statements of operations for the years ended December 31, ~~2001~~2002 and ~~2002~~2003 and IFRS consolidated balance sheets of December 31, ~~2001,~~ 2002, 2003 and ~~2003~~2004 are derived from the Company’s audited consolidated financial statements that are not included in this Annual Report.The selected U.S. GAAP data of consolidated statements of operations for each of the years in the five-year period ended December 31, 2006 and consolidated balance sheets as of December 31, 2002, 2003, 2004, 2005 and 2006 are derived from the Company’s unaudited consolidated financial statements that are not included in this Annual Report.

The consolidated financial statements of the Company are prepared and presented in accordance with IFRS.

With effect from January 1, 2005, in order to comply with IAS1 and IAS27, the Group has changed its accounting policy relating to the presentation of minority interests. In prior years, minority interests at the balance sheet date were presented separately from liabilities and equity in the consolidated balance sheet. Minority interests in the results of the Group for the year were also separately presented in the consolidated statements of operations as a deduction before arriving at the profit attributable to shareholders (the equity shareholders of the Company). Under the new policy, minority interests are presented as part of equity, separately from interests attributable to the equity shareholders of the Company. Minority interests in the results of the Group for the period are presented on the face of the consolidated statements of operations as an allocation of the total profit or loss for the period between the minority interests and the equity shareholders of the Company. These changes in presentation have been applied retrospectively with comparatives restated.

In addition, with effect from January 1, 2005, the Group has changed its presentation of shares of affiliated companies and jointly controlled entities’ taxation in order to comply with IAS 1. In prior years, the Group’s share of taxation of affiliated companies and jointly controlled entities accounted for using the equity method was included as part of the Group’s income tax in the consolidated statements of operations. In accordance with the implementation guidance in IAS 1, the Group has changed the presentation and includes the share of taxation of affiliated companies and jointly controlled entities accounted for using the equity method in the respective shares of profit or loss reported in the consolidated statements of operations before arriving at the Group’s profit or loss before tax. These changes in presentation have been applied retrospectively with comparatives restated.

Under IFRS, the purchase method of accounting was applied to account for the acquisition of the airline operations and certain related assets of China Northern Airlines Company (“CNA”) and Xinjiang Airlines Company (“XJA”) (“CNA/XJA Acquisitions”) (details of which are disclosed in “Item 4. Information on the Company — History and Development of the Company”) such that at December 31, 2004 only the acquired assets and liabilities are included ~~inthe~~in the consolidated financial statements. The results of the acquired operations and their related cash flows was included in the consolidated financial statements of the Group beginning January 1, 2005. Under U.S. GAAP, such transaction is considered to be “a combination of entities under common control”. A combination of entities under common control is accounted for in a manner similar to a “pooling-of-interests”. Consequently, the assets and liabilities of CNA and XJA are reflected at their U.S. GAAP carrying values and the U.S. GAAP consolidated financial statements are restated to include the assets and liabilities of CNA and XJA, and their results of operations and cash flows for ~~all periods presented.~~ the years ended December 31, 2002, 2003 and 2004.

In addition, the consolidated financial statements for the year ended December 31, 2005 have been revised to reflect the adoption of IAS 16 (amended 2004) Property, Plant and Equipment effective January 1, 2005. Please refer to Note 45 to the consolidated financial statements for details.

See Note 5051 to the consolidated financial statements for the nature and effect of such differences and other significant differences related to the Group between IFRS and U.S. GAAP as of December 31, ~~2004~~2005 and ~~2005~~2006 and for each of the years in the three-year period ended December 31, ~~2005~~2006 and the condensed consolidated financial statements prepared and presented in accordance with U.S. GAAP for the relevant periods. The following information should be read in conjunction with, and is qualified in its entirety by, the Financial Statements of the Group.

Year ended December 31,
2001 2002 2003 2004 2005 2005
RMB RMB RMB RMB RMB US$

(in million, except per share data)
Income Statement Data:

IFRS: (Restated) (Restated) (Restated) (Restated)
Operating revenue 16,880 18,019 17,470 23,974 38,293 4,745
Operating expenses 15,479 15,993 17,014 23,065 39,598 4,907
Operating income/(loss) 1,401 2,026 456 909 (1,305 ) (162 )
Interest expense (934 ) (959 ) (824 ) (691 ) (1,616 ) (200 )
Exchange gain/(loss), net 297 (176 ) (164 ) (59 ) 1,220 151
Income/(loss) before taxation 788 1,130 (521 ) 220 (1,853 ) (230 )
Taxation (expense)/benefit (313 ) (389 ) 334 (65 ) 7 1
Income/ (loss) for the year 475 741 (187 ) 155 (1,846 ) (229 )
Income/(loss) attributable to :
Equity shareholders of the Company 340 576 (358 ) (48 ) (1,848 ) (229 )
Minority interests 135 165 171 203 2 —
Basic earnings/(loss) per share 0.10 0.17 (0.09 ) (0.01 ) (0.42 ) (0.052 )
Basic earnings/(loss) per ADS 5.04 8.53 (4.68 ) (0.55 ) (21.12 ) (2.62 )

Year ended December 31,
2001 2002 2003 2004 2005 2005
RMB RMB RMB RMB RMB US$
(in million, except per share data)
Cash dividends declared per share — 0.02 — — — —
U.S. GAAP:
Traffic revenue 23,615 24,854 24,897 33,235 37,419 4,637
Other operating revenue 657 904 586 930 874 108
Operating income/(loss) 1,584 1,948 366 1,877 (1,092 ) (135 )
Interest expense (1,800 ) (1,820 ) (1,604 ) (1,184 ) (1,589 ) (197 )
Foreign currency exchange gain/(loss), net 532 (327 ) (381 ) (124 ) 1,220 151
Income/(loss) before income taxes and minority interests 468 (145 ) (1,549 ) 693 (1,574 ) (193 )
Income tax (expense)/benefit (401 ) (356 ) 536 (261 ) 46 4
Minority interests (97 ) (154 ) (127 ) (193 ) (2 ) —
Net (loss)/income (30 ) (655 ) (1,140 ) 239 (1,530 ) (189 )
Basic (loss)/earnings per share (0.009 ) (0.194 ) (0.298 ) 0.055 (0.350 ) (0.043 )
Basic (loss)/earnings per ADS (0.432 ) (9.706 ) (14.876 ) 2.732 (17.489 ) (2.172 )
Cash dividend declared per share — 0.02 — — — —

December 31,
2001 2002 2003 2004 2005 2005
RMB RMB RMB RMB RMB US$
(in million)
Balance Sheet Data:

IFRS: (Restated) (Restated) (Restated) (Restated)
Cash and cash equivalents 2,818 3,771 2,080 3,083 2,901 360
Other current assets 1,561 1,835 1,922 4,286 4,320 535
Property, plant and equipment, net 22,352 26,921 28,536 46,841 54,266 6,725
Total assets 30,653 37,188 39,062 62,383 71,402 8,848
Notes payable, including current installments of long term notes payable 2,178 5,241 7,097 11,518 16,223 2,010
Current installments of obligations under capital leases 1,452 1,567 1,298 2,144 3,373 418
Notes payable, excluding current installments 3,628 5,835 4,522 11,935 12,740 1,579
Obligations under capital leases, excluding current installments 7,692 6,632 5,543 9,599 12,459 1,544
Total equity 10,600 11,130 13,569 13,903 11,936 1,479
U.S. GAAP:
Cash and cash equivalents 4,384 4,772 2,999 3,083 2,901 360
Other current assets 3,065 3,391 3,034 4,505 4,551 561
Property, plant and equipment, net 35,676 40,277 41,012 46,202 53,759 6,662
Total assets 48,456 54,860 58,610 65,144 74,906 9,283
Notes payable, including current portion of long term notes payable 5,359 10,304 8,600 11,518 16,223 2,010
Current installments of obligations under capital leases 2,428 2,591 2,368 2,106 3,401 421
Notes payable, excluding current portion 8,856 9,179 8,634 11,935 12,740 1,579
Obligations under capital leases, excluding current installments 14,167 13,333 13,849 11,975 14,807 1,835
Net shareholders’ equity 7,315 6,796 13,098 11,169 9,639 1,194

	Year ended December 31,
	2002			2003			2004			2005			2006			2006
	RMB			RMB			RMB			RMB			RMB			US$
										(revised)
	(in million, except per share data)
Income Statement Data:
IFRS:
Operating revenue		18,019			17,470			23,974			38,293			46,219			5,919
Operating expenses		15,993			17,014			23,065			39,525			45,980			5,888
Operating income/(loss)		2,026			456			909			(1,232	)		239			31
Interest expense		(959	)		(824	)		(691	)		(1,616	)		(2,070	)		(265	)
Exchange (loss)/gain, net		(176	)		(164	)		(59	)		1,220			1,492			191
Income/(loss) before taxation		1,130			(521	)		220			(1,780	)		284			36
Taxation (expense)/credit		(389	)		334			(65	)		(4	)		(142	)		(18	)
Income/(loss) for the year		741			(187	)		155			(1,784	)		142			18
Income/(loss) attributable to :
Equity shareholders of the company		576			(358	)		(48	)		(1,786	)		126			16
Minority interests		165			171			203			2			16			2
Basic and diluted earnings/(loss) per share		0.17			(0.09	)		(0.01	)		(0.41	)		0.03			0.004
Basic and diluted earnings/(loss) per ADS		8.53			(4.68	)		(0.55	)		(20.42	)		1.44			0.18
Cash dividends declared per share		0.02			—			—			—			—			—
U.S. GAAP:
Traffic revenue		24,854			24,897			33,235			37,419			45,087			5,774
Other operating revenue		904			586			930			874			1,132			145
Operating income/(loss)		1,948			366			1,877			(1,019	)		706			90
Interest expense		(1,820	)		(1,604	)		(1,184	)		(1,589	)		(2,070	)		(265	)
Exchange (loss)/gain, net		(327	)		(381	)		(124	)		1,220			1,492			191
Income/(loss) before income taxes and minority interests		(145	)		(1,549	)		693			(1,501	)		402			51
Income tax (expense)/benefit		(356	)		536			(261	)		35			(170	)		(22	)
Minority interests		(154	)		(127	)		(193	)		(2	)		(16	)		(2	)
Net (loss)/income		(655	)		(1,140	)		239			(1,468	)		216			28
Basic and diluted (loss)/earnings per share		(0.19	)		(0.30	)		0.05			(0.34	)		0.05			0.006
Basic and diluted (loss)/earnings per ADS		(9.71	)		(14.88	)		2.50			(17.00	)		2.50			0.30
Cash dividend declared per share		0.02			—			—			—			—			—

	As of December 31,
	2002		2003		2004		2005		2006		2006
	RMB		RMB		RMB		RMB		RMB		US$
							(revised)
	(in million)
Balance Sheet Data:
IFRS:
Cash and cash equivalents		3,771		2,080		3,083		2,901		2,264		290
Other current assets		1,835		1,922		4,286		4,320		4,419		566
Property, plant and equipment, net		26,921		28,536		46,841		54,339		56,347		7,216
Total assets		37,188		39,062		62,383		71,464		75,584		9,679
Notes payable, including current installments of long term notes payable		5,241		7,097		11,518		16,223		23,822		3,051
Current installments of obligations under capital leases		1,567		1,298		2,144		3,373		3,091		396
Notes payable, excluding current installments		5,835		4,522		11,935		12,740		10,018		1,283
Obligations under capital leases, excluding current installments		6,632		5,543		9,599		12,459		12,307		1,576
Total equity		11,130		13,569		13,903		11,998		12,121		1,304
U.S. GAAP:
Cash and cash equivalents		4,772		2,999		3,083		2,901		2,264		290
Other current assets		3,391		3,034		4,505		4,551		4,681		599
Property, plant and equipment, net		40,277		41,012		46,202		53,832		55,928		7,162
Total assets		54,860		58,610		65,144		74,479		77,877		9.973
Notes payable, including current portion of long term notes payable		10,304		8,600		11,518		13,612		19,652		2,517
Current installments of obligations under capital leases		2,591		2,368		2,106		3,401		3,119		399
Notes payable, excluding current portion		9,179		8,634		11,935		15,351		14,188		1,817
Obligations under capital leases, excluding current installments		13,333		13,849		11,975		14,807		14,551		1,863
Shareholders’ equity		6,796		13,098		11,169		9,701		9,917		1,270

Selected Operating Data

The following selected operating data of the Group for the five years ended December 31, ~~2005~~2006 have been derived from consolidated financial statements prepared in accordance with IFRS and other data provided by the Group and have not been audited.

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

Year ended December 31,
2001 2002 2003 2004 2005
Capacity

ASK (million)
— Domestic 31,393 33,753 32,590 41,330 72,107
— Hong Kong and Macau 1,690 1,746 1,347 1,896 2,656
— International 6,981 8,746 6,930 10,543 13,598
Total 40,064 44,245 40,867 53,769 88,361
ATK (million)
— Domestic 3,622 3,924 3,772 4,773 8,352
— Hong Kong and Macau 185 193 150 211 315
— International 1,317 1,798 1,999 2,462 2,842
Total 5,124 5,915 5,921 7,446 11,509
Kilometers flown (thousand) 234,051 258,379 249,068 324,827 539,844
Hours flown (thousand) 365 405 385 501 846
Number of landing and take-offs
— Domestic 183,651 194,776 191,460 243,410 394,069
— Hong Kong and Macau 13,712 13,891 11,400 15,380 17,807
— International 10,698 13,990 11,330 15,790 26,798
Total 208,061 222,657 214,190 274,580 438,674
Traffic

RPK (million)
— Domestic 19,447 22,092 21,294 29,121 51,472
— Hong Kong and Macau 1,060 1,081 778 1,203 1,549
— International 4,550 5,767 4,315 6,872 8,902
Total 25,057 28,940 26,387 37,196 61,923
RTK (million)
— Domestic 2,217 2,532 2,424 3,206 5,571
— Hong Kong and Macau 105 108 78 120 159
— International 712 974 1,059 1,337 1,554
Total 3,034 3,614 3,561 4,663 7,284
Passengers carried (thousand)
— Domestic 16,499 18,535 18,259 25,002 39,545
— Hong Kong and Macau 1,409 1,369 1,019 1,394 1,556
— International 1,213 1,589 1,192 1,811 3,018
Total 19,121 21,493 20,470 28,207 44,119
Cargo and mail carried (tons) 398,000 470,000 464,000 545,000 775,000
Load Factors

Passenger load factor (RPK/ASK) (%)
— Domestic 61.9 65.5 65.3 70.5 71.4
— Hong Kong and Macau 62.7 61.9 57.8 63.4 58.3
— International 65.2 65.9 62.3 65.2 65.5
Total 62.5 65.4 64.6 69.2 70.1
Overall load factor (RTK/ATK) (%)
— Domestic 61.2 64.5 64.2 67.2 66.7
— Hong Kong and Macau 56.8 55.8 52.2 56.9 50.4
— International 54.1 54.2 53.0 54.3 54.7
Total 59.2 61.1 60.1 62.6 63.3
Breakeven load factor (%) 55.6 55.9 61.6 61.9 67.0

Year ended December 31,
2001 2002 2003 2004 2005
Yield

Yield per RPK (RMB)
— Domestic 0.62 0.55 0.57 0.58 0.55
— Hong Kong and Macau 1.06 0.98 0.96 0.92 0.77
— International 0.41 0.42 0.47 0.46 0.56
Total 0.60 0.54 0.57 0.57 0.55
Yield per cargo and mail ton kilometers (RMB) 1.76 1.73 1.62 1.67 1.75

Year ended December 31,
2001 2002 2003 2004 2005
Yield per RTK (RMB)
— Domestic 5.83 5.21 5.40 5.53 5.30
— Hong Kong and Macau 11.26 10.36 10.35 9.83 8.18
— International 3.31 3.25 2.90 3.31 4.24
Total 5.43 4.84 4.76 5.01 5.14
Fleet

— Boeing 91 102 108 137 140
— Airbus 20 20 24 46 71
— McDonnell Douglas — — — 35 36
— Others — — — 13 14
Total aircraft in service at period end 111 122 132 231 261
Overall utilization rate (hours per day) 9.1 9.8 8.5 9.9 9.6
Financial

Operating cost per ASK (RMB) 0.39 0.36 0.42 0.43 0.45
Operating cost per ATK (RMB) 3.02 2.70 2.87 3.10 3.44

	Year ended December 31,
	2002		2003		2004		2005		2006
Capacity
ASK (million)		44,245		40,867		53,769		88,361		97,059
ATK (million)		5,915		5,921		7,446		11,509		12,656
Kilometers flown (thousand)		258,379		249,068		324,827		539,844		594,957
Hours flown (thousand)		405		385		501		846		931
Number of landing and take-offs		222,657		214,190		274,580		438,674		481,810
Traffic
RPK (million)		28,940		26,387		37,196		61,923		69,582
RTK (million)		3,614		3,561		4,663		7,284		8,071
Passengers carried (thousand)		21,493		20,470		28,207		44,119		49,206
Cargo and mail carried (tons)		470,000		464,000		545,000		775,000		819,000
Load Factors
Passenger load factor (RPK/ASK) (%)		65.4		64.6		69.2		70.1		71.7
Overall load factor (RTK/ATK) (%)		61.1		60.1		62.6		63.3		63.8
Breakeven load factor (%)		55.9		61.6		61.9		67.0		65.0

	Year ended December 31,
	2002		2003		2004		2005		2006
Yield
Yield per RPK (RMB)		0.54		0.57		0.57		0.55		0.60
Yield per cargo and mail ton kilometers (RMB)		1.73		1.62		1.67		1.75		1.89

Yield per RTK (RMB)	4.84	4.76	5.01	5.14	5.59
Fleet
— Boeing	102	108	137	140	159
— Airbus	20	24	46	71	103
— McDonnell Douglas	—	—	35	36	36
— Others	—	—	13	14	11
Total aircraft in service at period end	122	132	231	261	309
Overall utilization rate (hours per day)	9.8	8.5	9.9	9.6	9.5
Financial
Operating cost per ASK (RMB)	0.36	0.42	0.43	0.45	0.47
Operating cost per ATK (RMB)	2.70	2.87	3.10	3.44	3.63

Exchange Rate Information

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

Average(1)
Period Period End (RMB per US$) High Low
Annual Exchange Rate

2001 8.2766 8.2766 8.2910 8.2642
2002 8.2773 8.2773 8.2897 8.2152
2003 8.2767 8.2772 8.2800 8.2769
2004 8.2765 8.2765 8.2889 8.2641
2005 8.0694 8.1825 8.2767 8.0702

Period	Period End	Average(1) (RMB per US$)	High	Low
Annual Exchange Rate
2002	8.2773	8.2773	8.2897	8.2152
2003	8.2767	8.2772	8.2800	8.2769
2004	8.2765	8.2765	8.2889	8.2641
2005	8.0694	8.1825	8.2767	8.0702
2006	7.8041	7.9723	8.0702	7.8041

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

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

Period High Low
Monthly Exchange Rate

December 2005 8.0808 8.0702
January 2006 8.0702 8.0601
February 2006 8.0616 8.0402
March 2006 8.0505 8.0172
April 2006 8.0240 8.0050
May 2006 8.0265 8.0025
June 2006 (up to June 28, 2006) 8.0230 7.9964

Period	High		Low
Monthly Exchange Rate
December 2006		7.8350		7.8041
January 2007		7.8127		7.7705
February 2007		7.7632		7.7410
March 2007		7.7454		7.7232
April 2007		7.7345		7.7090
May 2007		7.7065		7.6463
June 2007 (up to June 27, 2007)		7.6680		7.6175


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

Dividend Payments

No interim dividends were paid during the year ended December 31, ~~2005.~~2006. The Board of Directors of the Company (“Board of Directors”) has not recommended payment of a final dividend in respect of the year ended December 31, ~~2005.~~2006.

Capitalization and Indebtedness

Not applicable.

Reasons for the Offer and Use of Proceeds

Not applicable.

Risk Factors

~~Risk Factors~~

Risks Relating to the Company

Government ownership and control of the Company

~~All~~

Major Chinese airlines are wholly- or majority-owned either by the Chinese Government or by provincial or municipal governments in China. CSAHC, an entity wholly-owned by the Chinese Government, holds and exercises the rights of ownership of all of the Domestic Shares or 50.3% of the equity of the Company. The interests of the Chinese Government in the Company and in other Chinese airlines may conflict with the interests of the holders of the ADSs, H Shares and A Shares. The public policy considerations of the Chinese Government in regulating the Chinese commercial aviation industry may also conflict with its indirect ownership interest in the Company.

High operating leverage and foreign exchange exposure

The airline industry is generally characterized by a high degree of operating leverage. In addition, due to high fixed costs, the expenses relating to the operation of any flight do not vary proportionately with the number of passengers carried, while revenues generated from a flight are directly related to the number of passengers carried and the fare structure of such flight. Accordingly, a decrease in revenues could result in a proportionately higher decrease in net income. Moreover, as the Group has substantial obligations denominated in foreign currencies, its results of operations are significantly affected by fluctuations in foreign exchange rates, particularly for the U.S. dollar and the Japanese ~~Yen.~~yen. The Company incurred ~~a net exchange loss of RMB59 million for 2004 and~~ a net exchange gain of RMB1,220 million and RMB1,492 million for 2005 and 2006, respectively, mainly as a result of ~~Japanese Yen fluctuation in 2004 and Renminbi appreciation in July 2005, respectively.~~Reminbi appreciation. A majority of this exchange ~~loss or~~ gain was unrealized in nature.

Liquidity
As of December 31, 2006, the Group had net current liabiliies position of RMB32,180 million which was due to the use of short-term notes payable for the aircraft acquisitions and other capital expenditures. The Group’s short-term notes payable amounted to RMB23,822 million as at December 31, 2006. The liquiditiy of the Group primarily depends on its ability to maintain adequate cash inflows from operations and to obtain adequate external finance. The Group may not be able to meet its debt obligations as they fall due and committed future capital expenditures.

Potential conflicts of interest

CSAHC will continue to be the controlling shareholder of the Company. CSAHC and certain of its affiliated companies will continue to provide certain important services to the Company, including the import and export of aircraft spare parts and other flight equipment, ~~housing~~advertising services, provision of air catering and cabin supplies, pilot training services, air ticket selling services, cleaning services, leasing of properties and financial services. In addition, Mr. Liu Shao Yong, the Chairman of the Board of Directors, also serves as the General Manager of CSAHC. The interests of CSAHC may conflict with those of the Company. In addition, any disruption of the provision of services by CSAHC’s affiliated companies or a default by CSAHC of its obligations owed to the Company could affect the Company’s operations and financial conditions. In particular, as part of its cash management system, the Company periodically places significant amount of demand deposits with China Southern Airlines Group Finance Company Limited (“SA Finance”), a PRC authorized financial institution controlled by CSAHC and an affiliated company of the Company. As a result, the Company’s deposits with SA Finance are subject to the risks associated with the business of SA Finance over which the Company does not exercise control. As of December 31, ~~2004~~2005 and ~~2005,~~2006, the Group had short-term deposits of ~~RMB406~~RMB 544 million and ~~RMB544~~RMB 629 million, respectively, with SA Finance.

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

Risks relating to certain real property

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

The Company has been occupying all of the land and buildings described above without challenge or claim by third parties. CSAHC has received written assurance from the General Administration of Civil Aviation of China (“CAAC”) to the effect that CSAHC is entitled to continued use and occupancy of the land and certain related buildings and facilities. However, such assurance does not constitute formal evidence of CSAHC’s right to occupy such lands, buildings and facilities or the right to transfer, mortgage or lease such real property interests. The Company cannot predict the magnitude of the adverse effect on its operations if its use of any one or more of these parcels of land or buildings were successfully challenged. CSAHC has agreed to indemnify the Company and Guangzhou Aircraft Maintenance Engineering Company Limited (“GAMECO”), the Company’s jointly controlled entity, against any loss or damage caused by any challenge of, or interference with, the use by the Company and GAMECO of any of their respective land and buildings.

Risks associated with Hong Kong and Macau routes

The Company’s Hong Kong regional routes benefit from traffic originating in Taiwan. The Company’s Hong Kong regional routes might be materially adversely affected if direct flights between Taiwan and Mainland China were permitted in the future. In such event, Xiamen Airlines Company Limited (“Xiamen Airlines”), the Company’s subsidiary, might apply for route rights for direct flights between Taiwan and Mainland China, due partly to the proximity to Taiwan of Fujian province, where Xiamen Airlines is based. However, there can be no assurance that sufficient routes and flights between destinations in Taiwan and Mainland China could be obtained by Xiamen Airlines, if at all, or that adequate yields will be generated on these routes and flights.

~~Internal controls and management system~~

The Company will become subject to Section 404 of the Sarbanes-Oxley Act of 2002 in the fiscal year ending December 31, 2006, which requires the Company to set out a management report containing an assessment on its internal controls over financial reporting in its annual report. It also requires an independent registered public accounting firm attest to and report on management’s assessment of the effectiveness of the Company’s internal controls over financial reporting. If the Company cannot implement

Risks associated with increased costs from the requirements of Section 404 of the ~~Sarbanes-Oxley~~Sarbanes Oxley Act of 2002 ~~in a timely manner or with adequate compliance, its independent auditors may not be able~~ to ~~provide a written attestation as to~~evaluate internal controls over financial reporting

Section 404 of the Sarbanes Oxley Act of 2002 requires that the Company evaluates and reports on the effectiveness of ~~its~~internal controls in providing reasonable assurance regarding the reliability of Financial Reporting. The initial compliance date for management to evaluate and report on internal control over financial reporting under Section 404 of the Sarbanes Oxley Act of 2002 for Foreign Accelerated Filers is for the financial year ending on or after July 15, 2006. The Company has prepared and implemented an internal plan for compliance and has completed the process of documenting and testing the system of internal controls over financial reporting to provide the basis for this report for the year ending December 31, 2006, which is set out in Item 15. The requirement to provide an auditors’ report on internal controls over financial reporting of the Group will apply for the financial year ending December 31, 2007.

Due to ongoing evaluation and testing of the Company’s internal controls and the uncertainties of the interpretation of these new requirements, the Company cannot assure that there will not be significant deficiencies or material weaknesses that would be required to be reported. In the event that significant deficiencies or material weaknesses are reported, investor perceptions may be adversely affected and may cause a decline in the market price of our stock.

The Company has incurred increased costs and has dedicated an increased amount of management time and external resources in order to comply with the above legislation by the end of 2006 and may continue to do so in years to come. The process of documenting and testing the Company’s internal controls over financial reporting and considering improvements has required the Company to hire additional personnel and outside advisory services, resulting in additional accounting and consultancy expenses.

Passive Foreign Investment Company

Depending upon the value of our shares and ADSs and the nature of our assets and income over time, we could be classified as a passive foreign investment company, or PFIC, by the United States Internal Revenue Service, or IRS, for U.S. federal income tax purposes. The Company believes that it ~~may~~was not a PFIC for the taxable year 2006. However, there can be no assurance that the Company will not be a PFIC for the taxable year 2007 and/or later taxable years, as PFIC status is re-tested each year and depends on the facts in such year.

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

If the Company were a PFIC, you would generally be subject to ~~sanctions~~additional taxes and interest charges on certain “excess” distributions the Company makes and on any gain realized on the disposition or ~~investigation by regulatory authorities, such as~~deemed disposition of your ADSs, regardless of whether the ~~Securities and Exchange Commission. It could also result~~Company continues to be a PFIC in the ~~loss~~year in which you receive an “excess” distribution or dispose of ~~investor confidence~~or are deemed to dispose of your ADSs. Distributions in respect of your ADSs during a taxable year would generally constitute “excess” distributions if, in the ~~Company, in particular the reliability of financial statements, which in turn could harm the Company’s business and negatively affect the market price~~aggregate, they exceed 125% of the ~~Company’s~~average amount of distributions in respect of your ADSs over the three preceding taxable years or, ~~H Shares. Furthermore,~~if shorter, the ~~Company may be required~~portion of your holding period before such taxable year. For more information on the United States federal income tax consequences to ~~incur significant costs for compliance with Section 404, and thereby increasing its costs relative to its revenues and decreasing its operating margins.~~you that would result from our classification as a PFIC, please see Item 10, “Taxation — United States Federal Income Taxation — U.S. Holders — Passive Foreign Investment Company”.

Risks Relating to the Chinese Commercial Aviation Industry

Government regulation

The Company’s ability to implement its business strategy will continue to be affected by regulations and policies issued or implemented by the CAAC, which encompasses substantially all aspects of the Chinese commercial aviation industry, including the approval of domestic, Hong Kong regional and international route allocation, air fares, aircraft acquisition, jet fuel prices and standards for aircraft maintenance, airport operations and air traffic control. Such regulations and policies limit the flexibility of the Company to respond to market conditions, competition or changes in the Company’s cost structure. The implementation of specific CAAC policies could from time to time adversely affect the Company’s operations. The CAAC has confirmed in writing that the Company will be treated equally with other Chinese airlines with respect to certain matters regulated by the CAAC. Nevertheless, there can be no assurance that the CAAC will, in all circumstances, apply its regulations and policies in a manner that results in equal treatment of all airlines.

Jet fuel supply and costs

The availability and cost of jet fuel have a significant impact on the Group’s results of operations. The Group’s jet fuel costs for ~~2005~~2006 accounted for ~~30.1%~~35.2% of its operating expenses. All of the domestic jet fuel requirements of Chinese airlines (other than at the Shenzhen, Zhuhai and Sanya airports) must be purchased from the exclusive providers, China Aviation Oil Supplies Company (“CAOSC”) and Bluesky Oil Supplies Company, companies controlled and supervised by the CAAC. Chinese airlines may also purchase their jet fuel requirements at the Shenzhen, Zhuhai and Sanya airports from joint ventures in which the CAOSC is a partner. Jet fuel obtained from the CAOSC’s regional branches is purchased at uniform prices throughout China that are determined and adjusted by the CAOSC from time to time with the approval of the CAAC and the pricing department of the State Planning Commission based on market conditions and other factors. As a result, the costs of transportation and storage of jet fuel in all regions of China are spread among all domestic airlines. Prior to 1994, domestic jet fuel prices were generally below international jet fuel prices. Since then, however, the domestic jet fuel price from CAOSC has always been higher than international jet fuel prices, sometimes creating tension in fuel supply. In addition, jet fuel shortages have occurred in China and, on limited occasions before 1993, required the Company to delay or cancel flights. Although such shortages have not materially affected the Company’s results of operations since 1993, there can be no assurance that such shortage will not occur in the future. If such shortage occurs in the future and the Company is forced to delay or cancel flights due to fuel shortage, its operational reputation among passengers and results of operations may suffer.

Infrastructure limitations

The rapid increase in air traffic volume in China in recent years has put pressure on many components of the Chinese commercial aviation industry, including China’s air traffic control system, the availability of qualified flight personnel and airport facilities. Airlines, such as the Company, which have route networks that emphasize short- to medium-haul routes are generally more affected by insufficient aviation

infrastructure in terms of on-time performance and high operating costs due to fuel inefficiencies resulting from the relatively short segments flown, as well as the relatively high proportion of time on the ground during turnaround. All of these factors may adversely affect the perception of the service provided by an airline and, consequently, the airline’s operating results. In recent years, the CAAC has placed increasing emphasis on the safety of Chinese airline operations and has implemented measures aimed at improving the safety record of the industry. The ability of the Company to increase utilization rates and to provide safe and efficient air transportation in the future will depend in part on factors such as the improvement of national air traffic control and navigation systems and ground control operations at Chinese airports, factors which ~~factors~~ are beyond the control of the Company.

Competition

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

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

Limitation on foreign ownership

Chinese Government policies limit foreign ownership in Chinese airlines. Under these policies, the percentage ownership of the Company’s total outstanding ordinary shares held by investors in Hong Kong and any country outside China (“Foreign Investors”) may not in the aggregate exceed 49%. Currently, 26.8% of the total outstanding ordinary shares of the Company isare held by Foreign Investors. For so long as the limitation on foreign ownership is in force, the Company will have no meaningful access to the international equity capital markets.

Consolidation and Restructuring

In 2000, the CAAC announced a restructuring plan with respect to the PRC aviation industry. Pursuant to such restructuring plan, each domestic airline iswas directed to consolidate into one of the three major airline groups in China: CSAHC, China National Aviation Holding Company and China Eastern Air Holding Group. As approved by the Company’s shareholders in an extraordinary general meeting on December 31, 2004, the Company acquired the airline operations and certain related assets of CNA and XJA. ~~These~~This consolidation and restructuring pursuant to the CAAC restructuring plan may involve uncertainties and risks over a long period of time, including the following:

	• ·		failure to achieve the anticipated synergies, cost savings or revenue enhancing opportunities resulting from the restructuring activities;

	• ·		diversion of management’s attention from existing business concerns and other business opportunities of the Group;

	• ·		difficulty in integrating the assets and business of other airlines, including its employees, corporate culture, managerial systems and processes, business information systems and services;

	• ·		difficulty in exercising control and supervision over various new operations within the Group;

	• ·		failure to retain key personnel; and

	• ·		increase in financial pressure due to assumption of recorded / unrecorded liabilities of the acquired businesses.

The inability to manage additional businesses or integrate successfully the acquired businesses without substantial expense, delay or other operational or financial problems, or the occurrence of one or more of the events enumerated above, could materially adversely affect the Group’s financial condition and results of operations.

Risks relating to the PRC

Foreign exchange risks

Under current Chinese foreign exchange regulations, Renminbi is fully convertible for current account transactions, but is not freely convertible for capital account transactions. Current account foreign exchange transactions can be undertaken without prior approval from the relevant Chinese Government agencies by producing commercial documents evidencing such transactions, provided that they are processed through Chinese banks licensed to engage in foreign exchange transactions. Conversion from Renminbi into a foreign currency or vice versa for purposes of capital account transactions requires the prior ~~approvals~~approval of relevant Chinese Government agencies. This restriction on capital account transactions could affect the ability of the Company to acquire foreign currency for capital expenditures. It could also have a material adverse effect on the Company's operations and financial ~~conditions,~~condition, given the Company's substantial foreign currency obligations.

The value of the Renminbi against the US dollar and other foreign currencies may fluctuate and is affected by, among other things, changes in China's political and economic conditions. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar so that the Renminbi is now permitted to fluctuate within a band against a basket of certain foreign currencies. ~~As a result,~~On May 18, 2007, the ~~value~~People’s Bank of China announced that the ~~Renminbi against the U.S. dollar has appreciated by approximately 2%. Under the new policy, the value~~floating band of Renminbi ~~against the U.S. dollar has fluctuated on a daily basis within narrow ranges, but overall has further strengthened against the U.S. dollar.~~would be permitted to rise or fall by as much as 0.5%. The PRC government has stated publicly that it intends to further liberalize its currency policy, which could result in a further and more significant change in the value of the Renminbi against the U.S. dollar. As the Company is not able to hedge effectively against the revaluation of the ~~Reminbi~~Renminbi other than by retaining its foreign currencies which it receives from its business and operational activities to the extent permitted by applicable law, any significant revaluation of the Renminbi may have a material adverse effect on the Company's financial performance, and the value of, and any dividends payable on, the Company's H Shares and ADSs in foreign currency terms.

Developing legal system

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. In 1979, China began to promulgate a more comprehensive system of laws. On December 29, 1993, the Chinese National People’s Congress promulgated the Company Law, which became effective on July 1, 1994. In August 1994, pursuant to the Company Law, the PRC State Council issued the PRC Special Regulations on Overseas Offering and Listing of Shares by Companies Limited by Shares to regulate joint stock companies that offer and list their shares overseas. 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.

New tax law
On March 16, 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of the People’s Republic of China (“new tax law”) which will take effect on January 1, 2008. The Company and certain subsidiaries of the Group are entitled to preferential income tax rates in the range of 15% to 27%. From January 1, 2008, the income tax rate of companies who are currently enjoying preferential income tax rates lower than 25% is expected to increase to the standard rate of 25% over a five-year transition period. However, the new tax law has not set out the details as to how the existing preferential tax rate will increase to the standard rate of 25%. It is uncertain whether the Group will be required to pay higher enterprise income tax when the implementation guidance of the new tax law is issued.

Taxation of holders of H Shares or ADS by China

Chinese tax law generally provides for the imposition of a withholding tax on dividends paid by a Chinese company to a non-Chinese shareholder at a rate of 20%. In a notice and a letter issued by the State Taxation Bureau of the PRC, however, the Chinese tax authorities confirmed that the imposition of this withholding tax on dividends paid by joint stock companies, such as the Company, had been suspended. Accordingly, for so long as this imposition is suspended and not replaced or supplemented with similar requirements, any future dividends to be paid by the Company to holders of H Shares or ADS who are foreign individuals not resident in China or which are foreign enterprises with no permanent establishment in China will not be subject to a Chinese withholding tax. In the event that the suspension of the withholding tax is lifted, such payments will be subject to withholding tax at the 20% rate unless the holder is entitled to a tax waiver or a lower tax rate under an applicable double-taxation treaty. See Item 10 “Additional Information — Taxation”.

ITEM 4. INFORMATION ON THE COMPANY.

History and Development of the Company

The Company is a joint stock company incorporated in China on March 25, 1995, and is 50.3% owned by CSAHC. The registered address of the Company is Guangzhou Economic & Technology Development Zone, People’s Republic of China (telephone no: (86)20-8612-4738, website: www.cs-air.com).

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

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

On October 17, 2003, the Company’s registered address was moved to Guangzhou Economic & Technology Development Zone. In accordance with the Rules and Regulations for Implementation of Income Tax for Foreign Investment Enterprises and Foreign Enterprises of the PRC and a taxation approval document “Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que 020043”, the Company is entitled to enjoy the preferential tax policy implemented in the Guangzhou Economic & Technology Development Zone effective October 1, 2003. As a result, the Company’s income tax rate has been changed from 33% to 15% beginning from that date.

Flight safety is a perennial concern to airlines. In this regard, the Group is committed to flight safety by strengthening internal safety checks, pilot training and aircraft maintenance. As a result, the Group was awarded the Golden Roc Cup, the highest award for flight safety in the Chinese civil aviation industry, for the fourth time in 2004.

The acquisition of the airline operations of CNA and XJA was approved at the general meeting of the Company held on December 31, 2004. Such acquisition provides a robust platform for the Group to consolidate its market leadership and financial results. It also brought in various benefits to the Group by expanding its flight service network, fleet size and transport capacity, as well as lowering costs and improving overall efficiency. Given the investment incentive policies such as “Go West” and “Revitalising the Old Industrial Bases in the North-eastern Region” promulgated by the Chinese government, the economy in the western and north-eastern regions of China is expected to grow at a rapid pace in the coming decades, which in turn provides substantial growth potential for the Group. Ultimately, the acquisition will strengthen the Group’s position as the largest airline in China and will create positive value to its investors. At present, the management of the Group focuses on harnessing the expanded business capacity and operation scale of the Group, and on enhancing its overall management standards through an integration of corporate culture, innovation and development, thereby realizing the ultimate goal of the Group’s reorganization.

Pursuant to “Pricing Reform of Domestic Civil Aviation” as approved by the State Council of China effective on April 20, 2004, prices on domestic routes now fluctuate freely within a predetermined range. Instead of direct supervision by setting prices of air tickets through local price bureau, the government now provides guidance on domestic flights and domestic civil aviation is controlled by the government indirectly. Market-oriented pricing policy was introduced and pricing system has been adjusted as a result of the above pricing reform.

During 2005, the economy of the PRC maintained its rapid growth, which in turn gave the civil aviation industry a powerful boost. In particular, the fast expansion of the fleet capacity of the industry encouraged market demand through a number of factors, including improvement of civil aviation facilities and service quality as well as favorable price offers, which in turn drove up the passenger and cargo carried volume, the passenger load factor and overall load factor. On the other hand, as the PRC government expedited the process of ‘open sky’ policy and relaxed restrictions for investment in domestic airlines, the fleet capacity and number of flights provided have significantly increased, which in turn intensified the competition in domestic and international routes. Together with the soaring jet fuel prices, these have exerted strong pressure on the operating costs for domestic airlines.

In 2005, with the persistent joint efforts of the Company’s management and staff, the Group secured an exceptional safe flight operation record, and the enlarged operations after the joint recombination had undergone a smooth transition and gradually began to achieve the benefits from economies of scale. To cope with the increasing competition and the ever-changing demands of the aviation market, the Company is taking advantage of its own economies of scale and the potential market demands to stage a strategic transition from a city-pair operation model to a hubbing network operation model, so as to enhance the operational efficiency of the overall service network, and to maintain and increase its competitive edge in the market.

With the approval of the Board, the Company established a branch company in Beijing and will add wide-body airplanes to the operation base in Beijing from the summer of 2006, with the view to expanding its Beijing aviation business and building another main hub there in addition to its Guangzhou base. The Board believes that the establishment of Guangzhou and Beijing hubs will facilitate the Group’s strategic refinement and enhancement of its route network operations in order to better position the Group to explore and seize the opportunities in the regional aviation market to be brought about by the 2008 Beijing Olympic Games.

The Group had RMB4,707 million, RMB6,631 million and RMB11,873 million capital expenditures in 2003, 2004 and 2005 respectively. Of such capital expenditures in 2005, RMB6,938 were financed by capital lease, RMB4,325 million were financed by bank borrowings while the remaining RMB610 million were financed by internal resources. The capital expenditures were primarily incurred on the additional investments in aircraft and flight equipment under the Group’s fleet expansion plans and Guangzhou new airport, and, to a small extent, additional investments in other facilities and buildings for operations.

~~CNA/XJA Acquisitions~~

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

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

Aircraft Acquisitions ~~have significantly expanded~~

Pursuant to the ~~fleet size~~Airbus Aircraft Acquisition Agreement dated July 6, 2006 between the Company and Airbus, the Company will acquire 50 Airbus A320 series aircraft from Airbus. The aggregate catalogue price for the Airbus Aircraft is RMB26.526 billion (approximately US$3.316 billion). The aggregate consideration for the acquisition of the Airbus Aircraft is payable by cash in installments and the Airbus Aircraft will be delivered in stages to the Company during the period commencing from 2009 to 2010.

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

Pursuant to the Xiamen Aircraft Acquisition Agreement dated October 13, 2006 between Xiamen Airlines and Boeing, Xiamen Airlines will acquire 6 Boeing B737-800 aircraft from Boeing. The catalogue price of a Boeing B737-800 aircraft is US$66-US$75 million. Such catalogue price includes price for airframe and engine. The aggregate consideration for the acquisition of the B737-800 Aircraft is payable by cash in instalments and the B737-800 Aircraft will be delivered to Xiamen Airlines in 2010.

The acquisition of the Airbus Aircraft, the B777F Freighters and the B737-800 Aircraft is beneficial to implementation of the Company’s development strategy, improvement of the Company’s operating capacity, especially the expansion of freight services, It is also believed that the acquisitions will better serve the passenger with premium services and enhance the core competence of the Company.

Capital Expenditure

The Group had RMB6,631million, RMB11,873 million and RMB 6,403 million capital expenditures in 2004, 2005 and 2006, respectively. Of such capital expenditures in 2006, RMB 3,759 was financed by capital leases, RMB 2,076 million was financed by bank borrowings while the remaining RMB 568 million was financed by internal resources. The capital expenditures were primarily incurred on the additional investments in aircraft and flight ~~service network as well as~~equipment under the ~~market share of the Group. Presently, the Group is implementing various measures~~Group’s fleet expansion plans and Guangzhou new airport, and, to ~~harnessing the expanded flight capacity~~a small extent, additional investments in other facilities and ~~operations and integrating the business cultures and goals of the acquired operations with those of the Group.~~buildings for operations.

Business Overview

General

The Group provides commercial airline services throughout China, Hong Kong and Macau regions, Southeast Asia and other parts of the world. The Group is one of the three largest Chinese airlines and, as of year end ~~2005,~~2006, ranked first in terms of passengers carried, number of scheduled flights per week, number of hours flown and size of route network and aircraft fleet. During the three years ended December 31, ~~2005,~~2006, the Group’s RPKs increased at a compound annual rate of ~~53.2%~~36.8%, from ~~26,387~~37,196 million in ~~2003~~2004 to 61,923 million in 2005, and to 69,582 million in 2006, while its capacity, measured in terms of ASKs, increased at a compound annual rate of ~~47.1%~~34.4%, from ~~40,867~~53,769 million in ~~2003~~2004 to 88,361 million in ~~2005.~~2005, and to 97,059 million in 2006. In ~~2005,~~2006, the Group carried ~~44.12~~49.21 million passengers and had passenger revenue of ~~RMB34,328~~RMB 41,549 million (US$~~4,254 million). The loss for 2005 attributable to equity shareholders of the Company was RMB1,848 million (US$229~~5,321 million).

The Group conducts a portion of its airline operations through its airline subsidiaries namely Xiamen Airlines, Southern Airlines (Group) Shantou Airlines Company Limited (“Shantou Airlines”), Guangxi Airlines Company Limited (“Guangxi Airlines”), Zhuhai Airlines Company Limited (“Zhuhai Airlines”) and Guizhou Airlines Company Limited (“Guizhou Airlines”) (collectively, the “Airline Subsidiaries”). In ~~2005,~~2006, the Airline Subsidiaries carried ~~11.30~~12.90 million passengers, ~~and~~ had ~~operating~~traffic revenue of ~~RMB8,019~~RMB 8,726 million (US$~~994~~ 1,118 million) and accounted for ~~25.6%~~26.2% and ~~20.9%~~19.4 % of the Group’s passengers carried and ~~operating~~traffic revenue, respectively. Guangxi Airlines become a wholly-owned subsidiary of the Group in 2006. All the assets and liabilities of Guangxi Airlines were transferred to the Company on December 31, 2006.

The Group also provides air cargo and mail services. The cargo and mail revenue of the Group increased by ~~37.7%~~14.5% to ~~RMB3,091~~RMB3,538 million (US$~~383~~ 453 million) in ~~2005~~2006 as compared with ~~2004.~~2005. The Group’s airline operations are fully integrated with its airline-related businesses, including aircraft and engine maintenance, flight simulation and air catering operations.

As of the year end ~~of 2005,~~2006, the Group operated ~~559~~616 routes, of which ~~452~~501 were domestic, 7890 were international and 2925 were to/from Hong Kong and Macau. The Group operates the most extensive domestic route network among all Chinese airlines. In ~~2005,~~2006, the Group operated an average of ~~8,436~~9,308 landings and take-offs per week, serving ~~142~~152 destinations. Its route network covers commercial centres orand rapidly developing economic regions in Mainland China.

The Group’s corporate headquarters and principal base of operations are located in Guangzhou, ~~which is~~ 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 Yantian, Shekou, Chiwan, Mawan, Huangpu and Zhuhai.

In December 2005, the Company established a branch company in Beijing and has added wide-body airplanes to its operation base in Beijing, with the view to expanding its Beijing aviation business and building another main hub there in addition to its ~~main route base in~~ Guangzhou ~~the Group also maintains certain regional route bases in~~base. The establishment of Guangzhou and Beijing ~~Zhengzhou, Wuhan, Changsha, Shenzhen, Shenyang, Changchun, Dalian, Harbin, Urumqi, Haikou, Zhuhai, Xiamen, Fuzhou, Guilin, Shantou, Guiyang, Sanya~~hubs will facilitate strategic refinement and ~~Beihai. Most~~enhancement of its route network operations putting the Company in a better position to explore and seize the opportunities in the regional ~~route bases are located in provincial capitals or major commercial centers in China.~~aviation market expected to be brought about by the 2008 Beijing Olympic Games.

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

Passenger carried

Cargo and Mail Carried (tons)

Total traffic (tons kilometers)

The Chinese Government approved a new Guangzhou airport project, which commenced construction in 2000 and completed in August 2004. The commencement of operation of the new Guangzhou Baiyun International Airport which is the main hub of the Group, provides a wider platform of development for the operations of the Company.

Domestic Routes

The Group’s domestic routes network serves substantially all provinces and autonomous regions in China, including Guangdong, Fujian, Hubei, Hunan, Hainan, Guangxi, Guizhou, Henan, Heilongjiang, Jilin, Liaoning and Xinjiang, and serves all four centrally-administered municipalities in China, namely, Beijing, Shanghai, Tianjin, and Chongqing. In ~~2005,~~2006, the Group’s most profitable domestic routes were ~~the routes between~~between: Guangzhou and Beijing, Guangzhou and Shanghai, ~~Shenzhen~~Shanghai and Guangzhou, Beijing ~~Shanghai~~ and Guangzhou, Shenzhen and ~~Shanghai,~~ Beijing, Shenzhen and ~~Guangzhou,~~Shanghai, Urumqi and Beijing, Beijing and ~~Urumqi, Shanghai and~~ Shenzhen, Beijing and ~~Changchun.~~Urumqi, and Beijing and Dalian.

Hong Kong and Macau Routes

The Group offers scheduled service between Hong Kong and Guangzhou, Kunming, Xiamen, Shantou, Beijing, Guilin, Meixian, Haikou, Wuhan, Zhengzhou, Nanning, Changsha, Quanzhou and Sanya; and between Macau and Fuzhou, Hangzhou and Xiamen. The Group’s Hong Kong and Macau regional routes also include routes between Hong Kong and Zhanjiang and Macau and other destinations in China, including Zhang Jia Jie and Wu Yi Shan, which the Group operates on a “charter” flight basis, as explained below. The Group believes that the routes on which it operates these “charter” flights are among its highest yielding routes, primarily because the Group faces limited competition on such routes and is consequently less subject to downward pricing pressures. In ~~2005,~~2006, the most profitable Hong Kong ~~regional~~and Macau routes (other than these “charter” flights) were ~~those between~~between: Hong Kong and ~~each of~~ Wuhan, Hong Kong and Guangzhou, Guangzhou and Hong Kong, Hong Kong and Beijing, ~~Shantou, Guilin, Kunming~~Wuhan and ~~Zhengzhou.~~Hong Kong and Hong Kong and Shantou.

The Group’s “charter” flights are regularly scheduled flights, but permission to operate these flights is subject to monthly review by the CAAC and the Civil Aviation Department of the Hong Kong SAR. The CAAC has informally indicated that it primarily considers market demand and airline capability in granting permission for such flights. The Group has been able to maintain all of the Hong Kong regional routes which it operates on a “charter” flight basis and believes that demand on such routes will continue. In ~~2005,~~2006, the Group conducted a total of ~~17,807~~16,949 flights on its Hong Kong and Macau routes, accounting for approximately ~~34.4%~~28.8% of all passengers carried by Chinese airlines on routes between Hong Kong or Macau and destinations in China.

International Routes

The Group is the principal Chinese airline connecting the rapidly developing Pearl River Delta region of China to Southeast Asia, with 2923 routes serving 11 Southeast Asian destinations, including Singapore and major cities in Indonesia, Thailand, Malaysia, the Philippines, Vietnam and ~~Laos.~~Cambodia. In ~~2005,~~2006, the Group’s most profitable international routes ~~were those between Seoul and Dalian, Guangzhou and Tokyo.~~were: Shenyang-Seoul, Guangzhou-Tokyo, Seoul-Dalian, Guangzhou-Los Angeles. The Group believes that, among Chinese airlines, it is well-positioned to benefit from the business opportunities arising out of increased air traffic and the growing economic relationships between China and Southeast Asian countries.

In addition to the 2923 routes serving 11 Southeast Asian destinations, the Group operates 4567 other international routes providing scheduled services to Almaty, Amsterdam, ~~Sharjah, Osaka, Tokyo,~~Baku, Bishkek, Cheju, Cheong Ju City, Dubai, Dushanbe, Fukuoka, ~~Seoul,~~Hiroshima, Islamabad, Irkutsk, Khabarovsk, Kita Kyushu, Kwangju, Lagos, Los Angeles, Melbourne, Moscow, Nagoya, Nigata, Novosibirsk, Osaka, Paris, Pusan, Pyongyang, Sapporo, Sendai, Seoul, Sharjah, Sydney, ~~Melbourne, Dubai~~Taegu, Tashkent, Teheran, Tokyo and ~~Paris.~~Toyama.

Aircraft Fleet

The Group’s fleet plan in recent years has emphasized expansion and modernization through the acquisition of new aircraft, the acquisition of existing aircraft in conjunction with our acquisition of CNA and XJA, and the retirement of less efficient, older aircraft. As of December 31, ~~2005,~~2006, the Group operated a fleet of ~~261~~309 aircraft with an average age of ~~7.19~~6.37 years. Most aircraft of the Group are Boeing and Airbus aircraft. The Group has the largest fleet among Chinese airline companies. Most of the aircraft operated by the Group are leased pursuant to various types of leasing arrangements.

The following table sets forth certain information regarding the Group’s fleet of ~~261~~309 aircraft as of December 31, ~~2005.~~

Average
Number of Average age Passenger
Model Aircraft (years) Capacity
Boeing 777-200 4 9.53 380
Boeing 777-21B 6 7.20 292
Boeing 757-200 38 11.12 200
Boeing 747F 2 3.42 n/a
Boeing 737-800 15 2.32 167
Boeing 737-700 29 2.85 138
Boeing 737-500 15 12.80 130
Boeing 737-300 31 11.89 145
Airbus 300-600 6 10.96 272
Airbus 319-100 21 1.05 128
Airbus 320-200 30 5.38 158
Airbus 321-100 10 2.50 182
Airbus 330-200 4 0.72 264
McDonnell Douglas 82 23 14.63 144
McDonnell Douglas 90 13 7.85 157
Embraer 145 Jet 6 1.23 50
Cessna 208B 3 3.50 14
ATR-72 5 7.95 72

261

2006.

Model	Number of Aircraft		Average age (years)		Average Passenger Capacity
Boeing 777-200		4		10.53		380
Boeing 777-21B		6		8.20		292
Boeing 757-200		34		11.58		200
Boeing 747F		2		4.42		n/a
Boeing 737-800		38		2.86		167
Boeing 737-700		38		3.01		138
Boeing 737-500		8		12.57		130
Boeing 737-300		29		12.72		145
Airbus 300-600		6		11.96		272
Airbus 319-100		27		1.66		128
Airbus 320-200		49		4.09		158
Airbus 321-200		17		2.24		182
Airbus 330-200		4		1.72		264
McDonnell Douglas 82		23		21.54		144
McDonnell Douglas 90		13		8.85		157
Embraer 145 Jet		6		2.23		50
ATR-72		5		8.95		72
		309

During ~~2005,~~2006, the Group continued to expand and modernize its aircraft fleet. ~~In 2005, the~~The Group’s major aircraft transactions included:

~~The addition~~

In 2006, the Company exercised purchase options of ten Boeing 737-300, three McDonnell Douglas 90, seven McDonnell Douglas 82 and three Airbus 300-600 upon expiry of the respective lease terms.

Six Airbus 319-100, ten Airbus 320-200, seven Airbus ~~319-100,~~321-200, five Boeing 737-700, ninteen 737-800 aircraft were acquired under operating lease, and two Boeing ~~737-700 and three~~737-300, nine Boeing ~~737-800~~737-500, one Boeing 757-200 aircraft under operating lease ~~and~~were returned during 2006. In addition, ~~of one McDonnell Douglas 82 aircraft under wet lease agreement and the return of two Boeing 737-300, three Boeing 737-500 and two Boeing 737-300 QC under operating lease ; and~~

~~The acquisition of five Boeing 737-700 aircraft, six~~nine Airbus 320-200, four ~~Airbus 330-200, six Airbus 319-100, two Airbus 321-200~~Boeing 737-700 and ~~one Embraer 145 Jet~~four Boeing 737-800 aircraft acquired in 2006 were financed by a combination of internal funds, long-term bank loans and ~~long term bank loans.~~finance lease agreements.

~~In January 2005,~~

On April 30, 2006, the Company asacquired one McDonnell Douglas 82 aircraft through the acquisition of the assets from CSAHC Hainan, originally operated by the Company under a ~~lessee, entered into an~~wet lease agreement. The wet lease agreement with an independent lessor for operating leases of nine Boeing 737-800 aircraft for a term of seven years with total future lease payments totalling approximately RMB1,721 million, scheduled for deliveries in 2005 andwas discontinued on April 30, 2006.

In ~~January 2005, China Aviation Supplies Import and Export Corporation, as a sole importing agent, entered into, on behalf of several PRC airlines including~~August 2006, the Group ~~a general purchase agreement with the~~exercised its option to change an order from three Boeing ~~Company for the import of Boeing B7E7 aircraft. The Company, being one of the ultimate users for thirteen of the Boeing B7E7~~787 aircraft ~~endorsed the general purchase agreement. The Company is currently in negotiation with the Boeing Company regarding the purchase agreements on such aircraft.~~

~~In March 2005, the Company, as a lessee, entered into another agreement with an independent lessor for operating leases of a total of twenty-five aircraft comprising five~~to six Boeing 737-700 aircraft ~~five Boeing 737-800 aircraft, five Airbus 320-200 aircraft and ten Airbus 321-200 aircraft with scheduled deliveries~~ in ~~2006 and 2007. The terms~~respect of ~~the leases range from ten to twelve years with total future lease payments totalling approximately RMB8,243 million.~~an agreement signed on August 8, 2005.

In ~~April 2005,~~July 2006, the Company entered into a purchase agreement with Airbus SNC ~~for the purchase of five~~to acquire ten Airbus ~~A380~~319-100, fifteen Airbus 320-200 and twenty-five Airbus 321-200 aircraft, scheduled for deliveries in ~~2007~~2009 to 2010.

In ~~August 2005, CSA as a lessee, entered into an agreement with an independent lessor~~October 2006, the Company executed the Boeing Aircraft Acquisition Agreement for ~~operating leases~~the purchase of ~~three~~six Boeing 777F freighters. The freighters will be delivered in stages to the Company in 2008 to 2010.

In October 2006, the Group executed the Boeing Aircraft Acquisition Agreement for the purchase of six Boeing 737-800 aircraft, ~~for a term of 138 months, with total future lease payments totalling approximately Rmb986 million,~~ scheduled for deliveries in ~~2006.~~2010.

In ~~November 2005, CSA, as a lessee, entered into an agreement with an independent lessor for operating leases~~2006, the Company disposed of ~~five A320-200 aircraft for a term of 140 months with total future lease payments totalling approximately Rmb1,694 million, scheduled for deliveries in 2006;~~three Boeing 757-200 and three Cessna 208B aircraft.

In August 2005, CSA entered into two separate purchase agreements with Boeing and Airbus SNC respectively for the purchase of ten B787 aircraft, which are scheduled for deliveries in 2008 to 2010, and ten A330 aircraft, which are scheduled for deliveries in 2007 and 2008.

Aircraft Financing Arrangements

Overview

A significant portion of the Group’s aircraft is acquired under long-term capital or operating leases or long-term mortgage loans with remaining terms to maturity ranging from one to ~~fifteen~~twelve years. As of December 31, ~~2005, 65~~2006, 81 of the Group’s ~~261~~309 aircraft were operated under capital leases, 86123 were operated under operating leases, 5119 were financed by long-term mortgage loans, while the remaining were acquired either with cash proceeds or acquired by exercising the purchase options upon expiry of the respective capital leases. The Group’s planned acquisition of aircraft in the foreseeable future will generally be made pursuant to operating leases or capital leases. The Group’s determination as to its acquisition strategy depends on the Group’s evaluation at the time of its capacity requirements, anticipated deliveries of aircraft, the Group’s capital structure and cash flow, prevailing interest rates and other general market conditions.

The following table sets forth, as of December 31, ~~2005,~~2006, the number of aircraft operated by the Group pursuant to capital and operating leases and the remaining terms, expressed in years, of such leases.

Average
Capital Operating Remaining
Model Lease Lease Lease Term
Boeing 777-200 and 777-21B 5 4 4.48
Boeing 757-200 — 15 3.10
Boeing 737-700 — 10 5.60
Boeing 737-800 — 3 8.17
Boeing 737-500 — 15 0.99
Boeing 737-300 4 10 1.32
Airbus 300-600 6 — 1.20
Airbus 319-100 6 15 9.05
Airbus 320-200 24 6 4.35
Airbus 321-100 6 — 8.02
Airbus 330-200 4 — 11.28
McDonnell Douglas 82 — 8 2.17
McDonnell Douglas 90 10 — 1.69

65 86

Model

Capital
Lease

Operating
Lease

Average
Remaining
Lease Term

Boeing 777-200 and 777-21B 6 4 3.48
Boeing 757-200 2 14 2.29
Boeing 737-700 11 15 6.37
Boeing 737-800 — 22 7.45
Boeing 737-500 — 8 1.81
Boeing 737-300 5 8 1.31
Airbus 300-600 — 3 0.77
Airbus 319-100 6 21 8.42
Airbus 320-200 33 16 6.16
Airbus 321-100 6 7 9.47
Airbus 330-200 4 — 10.28
McDonnell Douglas 82 — 5 —
McDonnell Douglas 90
8

—
1.09
81 123

Capital Leases

As of December 31, ~~2005,~~2006, the Group’s aggregate future minimum lease payments (including future finance charges) required under its capital leases were ~~RMB18,615~~RMB 18,403 million (US$~~2,307~~ 2,357 million). As of year end ~~2005,~~2006, a majority of the Group’s capital leases had original terms ranging from ten to fifteen years from the date of delivery of the relevant aircraft, and the remaining terms of these leases ranged from one to ~~twelve~~ten years. The Group’s capital leases typically cover a significant portion of the relevant aircraft’s useful life and transfer the benefits and risks of ownership to the Group. Under its capital leases, the Group generally has an option to purchase the aircraft at or near the end of the lease term. As ais customary in the case of capital leases, the Group’s obligations are secured by the related aircraft, as well as other collateral.

Operating Leases

As of December 31, ~~2005,~~2006, the Group’s aggregate future minimum lease payments required under its operating leases were ~~RMB24,594~~RMB 21,969 million (US$~~3,048~~ 2,813 million). As of year end ~~2005,~~2006, the Group’s operating leases had original terms generally ranging from ~~eight~~five to ~~ten~~fifteen years from the date of delivery of the relevant aircraft, and the remaining terms of these leases generally ranged from one to ~~ten~~twelve years. Pursuant to the terms of the operating leases, the Group is obligated to make rental payments based on the lease term, with no termination payment obligations or purchase option, and the lessor bears the economic benefits and risks of ownership. Under its operating leases, the Group has no option to purchase the aircraft and is required to return the aircraft in the agreed condition at the end of the lease term. Although title to the aircraft remains with the lessor, the Group is responsible during the lease term for the maintenance, servicing, insurance, repair and overhaul of the aircraft.

Pursuant to capital or operating leases, the Group is obligated to indemnify the lessors against any withholding or similar taxes that may be imposed on the lessors by taxing authorities in China with regard to payments made pursuant to such leases. In accordance with relevant PRC tax regulations, a PRC lessee is liable to pay PRC withholding tax in respect of any lease payments regularly made to an overseas lessor. Depending on the circumstances, this tax is generally imposed at a fixed rate ranging from 10% to 20% of the lease payments, or in certain cases, the interest components of such payments. Pursuant to an approval document from the State Taxation Bureau, lease arrangements executed prior to September 1, 1999 are exempt from PRC withholding tax. The PRC withholding tax payable in respect of the operating leases executed after September 1, 1999 of ~~RMB8 million,~~ RMB23 million, ~~and~~ RMB55 million and RMB60 million during ~~2003,~~ 2004, 2005 and ~~2005~~2006 respectively, have been included as part of the operating lease charges.

Aircraft Flight Equipment

The jet engines used in the Group’s aircraft fleet are manufactured by General Electric Corporation, Rolls-Royce plc, United Technologies International, Inc., CFM International, Inc. and International Aviation Engines Corporation. As of year end ~~2005,~~2006, the Group had 6769 spare jet engines for its fleet. The Group determines its requirements for jet engines based on all relevant considerations, including manufacturers’ recommendations, the performance history of the jet engines and the planned utilization of its aircraft. ~~Rotables~~Acquisition of rotables and certain of the expendables for the Group’s aircraft are generally ~~purchased~~handled by Southern Airlines (Group) Import & Export Trading Corporation (“SAIETC”), a subsidiary of CSAHC acting as agent for the Group, in consideration of an agency fee. The Group arranges the ordering of aircraft, jet engines and other flight equipment for the Airline Subsidiaries and keeps an inventory of rotables and expendables for the Airline Subsidiaries.

Aircraft Maintenance

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

The Group believes that GAMECO performs major maintenance checks on the Group’s aircraft within time periods generally consistent with those of large international airline maintenance centers. GAMECO’s repair and maintenance capabilities include overhaul of more than 90% of the Group’s aircraft. Although rotables for the Group’s aircraft are generally imported through SAIETC, a portion of expendables and other maintenance materials are directly imported by GAMECO. GAMECO also provides line maintenance services to 7eight other Chinese airlines and 1917 international airlines. GAMECO provides heavy maintenance services to 5four other Chinese airlines and 11nine international airlines.

The Company and GAMECO had entered into an Aircraft Maintenance and Engineering Agreement for the provision of aircraft repair and maintenance services. On May 17, 1996, the Company and GAMECO entered into an agreement regarding the fee arrangement for the provision of such repair and maintenance services (the “Fee Agreement”). Pursuant to the Fee Agreement and subsequent agreements, GAMECO charged the Company for expendables at cost plus 16%, and labour costs at US$30 per hour during ~~2005.~~2006. For the year ended December 31, ~~2005,~~2006, the amount incurred by the Group for such repair and maintenance services was ~~RMB535~~RMB 686 million.

Overhauls of jet engines are performed by MTU Maintenance Zhuhai Co., Ltd., (“MTU Zhuhai”), a jointly controlled entity of the Company and MTU Aero Engines Gmbh, and also by overseas qualified service providers in Germany, Malaysia, Canada and England. Starting from 2003, MTU Maintenance Zhuhai Co., Ltd., (“MTU Zhuhai”) a jointly controlled entity of the Company and MTU Aero Engines Gmbh., also performed overhauls of certain jet engines for the Group. For the year ended December 31, ~~2005,~~2006, repair fees amounting to ~~RMB583~~RMB497 million were paid to MTU Zhuhai.

Safety

The Group endeavors to maintain strict compliance with all laws and regulations applicable to flight safety. In addition, the Group has adopted measures to eliminate or minimize factors that may impair flight safety, including specialized training programs and safety manuals. The Air Safety Management Department of the Company implements safety-related training programs on an ongoing basis in all of the Group’s operations to raise the safety awareness of all employees. As a result, overall flight safety has gradually improved. There were no serious incidents involving casualty or flight damage throughout the three years ended December 31, ~~2005.~~2006. For minor “incidents” which include various events and conditions prescribed by the CAAC which do not involve serious personal injury or material damage to flight equipment, the Group has kept the number consistently below the standard prescribed by the CAAC. For example, the Company’s “flight incident” ratio was 0.13, 0.13 and ~~0.13~~0.065 in ~~2003,~~ 2004, 2005 and ~~2005,~~2006, respectively. In comparison, CAAC’s published maximum acceptable flight incident ratio was ~~1.3 in 2003 and~~ 0.9 in 2004 and 0.29 in ~~2005.~~2005 and 0.7 in 2006. This ratio is defined as the occurrence of one incident for every 10,000 hours of flight time.

Jet Fuel

Jet fuel costs typically represent a major component of an airline’s operating expenses. The Group’s jet fuel costs for ~~2005~~2006 accounted for ~~30.1%~~35.2% of the Group’s operating expenses. Like all Chinese airlines, the Group is generally required by the Chinese Government to purchase its jet fuel requirements from regional branches of CAOSC and Bluesky Oil Supplies Company, except at the Shenzhen, Zhuhai and Sanya airports which are supplied by Sino-foreign joint ventures in which CAOSC is a joint venture partner. CAOSC is a State-owned organization controlled and supervised by the CAAC that controls the importation and distribution of jet fuel throughout China.

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

Prior to 1994, domestic jet fuel prices were generally below international jet fuel prices. The Chinese Government had gradually increased domestic jet fuel prices in order to reflect more accurately the costs of supplying jet fuel in China. As a result, domestic jet fuel prices have become higher than those in the international market since the beginning of 1994. ~~With the WTO entry, the jet fuel price in China will probably be trimmed by the market force to be in line with the international market.~~

CAOSC’s maximum fuel price in ~~2005~~2006 was ~~RMB5,220~~RMB6,850 per ton. The average price paid by the Group in ~~2005~~2006 was ~~RMB4,846~~RMB 5,838 per ton, which represents a ~~28.47%~~20.5% increase from that of ~~2004.~~2005.

According to the Notice of the National Development and Reform Commission (“NDRC”) and the Civil Aviation Administration of China (“CAAC”) on Issues Relating to Introduction of the Fuel Surcharge for Domestic Routes, domestic airlines imposed fuel surcharges for all the domestic routes (excluding those from the mainland PRC to Hong Kong and Macau) with effect from August 1, 2005 (based on flight time). On February 16, 2006, the NDRC and CAAC released a supplementary document on Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes, stating that due to the rising jet fuel price, the period of imposition of fuel surcharge by airlines was extended. The NDRC and CAAC released separate supplementary documents on Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes on March 28 and September 1, respectively, thereby adjusting the amount of fuel surcharges in a range of RMB20 to RMB60 per passenger for distance, flown less than 800 kilometers, and in a range of RMB40 to RMB100 for distance, exceeding 800 kilometers, during the period temporarily from April 10, 2006 to October 10, 2006. On ~~28 March 2006,~~January 21, 2007, the NDRC and CAAC released ~~another~~additional supplementary ~~document~~documents on Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes, thereby adjusting the amount of fuel surcharges from ~~RMB20~~RMB60 to ~~RMB30~~RMB50 per passenger for distance, flown ~~being~~ less than 800 ~~kilometres,~~kilometers, and from ~~RMB40~~RMB100 to ~~RMB60~~RMB80 for distance exceeding 800 ~~kilometres, during the period temporarily from April 10, 2006 to October 10, 2006. The~~kilometers.The introduction of fuel surcharge, and the extension of the duration of the same will help relieve, to a certain extent, the burden of high jet fuel cost, on the Group.

In addition to purchases of jet fuel from CAOSC, the Group is also permitted by the Chinese Government to purchase a portion of its jet fuel requirements for its international flights from foreign fuel suppliers located outside China at prevailing international market prices. Jet fuel purchased from such sources outside China accounted for approximately 20% of the Group’s total jet fuel consumption in ~~2005.~~2006.

Flight Operations

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

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

Training of Pilots and Flight Attendants

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

In the Group’s pilot training program, trainees have two years of theoretical training at the BAAU. After successful completion of academic and physical examinations, ~~students~~the trainees receive flight training for a period of approximately 20 months at China Southern West Australian Flying College Pty Ltd. (the “Australian Pilot College”), a company that is 65% owned by the Company and 35% owned by CSAHC. Each ~~student~~trainee at the Australian Pilot College is required to fly at least 230 hours before being awarded a flight certificate. Graduates of the BAAU and the Australian Pilot College are hired by the Group as trainee pilots after passing a CAAC-administered examination to obtain a pilot license. The total training period for the Group’s trainee pilots is approximately five years. About 110 trainee pilots graduated from the Australian Pilot College each year.

~~Prior to January 2003, as~~

As part of the pilot training program, the Group also operated a flight simulator training center in Zhuhai, Guangdong Province (the “Zhuhai Training Center”), which was equipped with simulators for all models of aircraft currently operated by the Group. Traineetrainee pilots ~~received~~receive their initial training in the operation of a specific aircraft ~~at the Zhuhai Training Center, which also provided training to pilots from other Chinese airlines. Such flight simulation training has been shifted to~~with Zhuhai Xiang Yi Aviation Technology Company Limited (“Zhuhai Xiang Yi), a jointly controlled entity between the Company and CAE International Holdings Limited, ~~since January 2003.~~which also provides training to pilots from other Chinese airlines. Zhuhai Xiang Yi is equipped with simulators for all models of aircraft currently ~~leases the flight simulation facilities of Zhuhai Training Center from~~operated by the Group and provides flight simulation training services to the Group.

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

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

Ground Services

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

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

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

Air Catering

The Company owns a 75% equity interest in Guangzhou Nanland Air Catering Company Limited (“Nanland”). Nanland provides in-flight meals, snacks, drinks and related services for all of the Group’s flights originating in Guangzhou and substantially all other flights departing from ~~new~~Guangzhou Baiyun ~~International~~ Airport. The Group contracts with various air catering suppliers with respect to in-flight catering services for flights originating from other airports, generally on an annual basis and otherwise on terms that are customary in the industry.

Cargo and Mail

The Group also provides air cargo and mail services. A significant portion of these services isare combined with passenger flights services. Currently, the Group ~~also~~ has two Boeing 747-400 freighters mainly servicing ~~three~~four international cargo routes, Shenzhen to Shanghai to Anchorage to Chicago, Shenzhen to Anchorage to Chicago, Shanghai to Anchorage to Chicago and Shenzhen to Shanghai to ~~Belgium and Shanghai to~~ Amsterdam.

Currently, the Group conducts its cargo business primarily through its cargo division in Shenzhen. ~~To further tap into the growing cargo market, the Group has commenced the construction of a cargo centre in the Guangzhou new airport in 2004 and the construction was completed in 2005.~~

Sales, Reservations and Marketing

Passenger Ticket Sales and Reservations

The Group’s ticket sales and reservations are conducted by or through independent sales agents and the Group’s own network of exclusive sales offices as well as the CAAC’s sales offices and CSAHC’s affiliates. The Group has sales offices in Guangzhou and its other route bases. In addition, the Group maintains regional sales offices in other cities in China, including Beijing and Shanghai. The Group maintains international sales offices in Almaty, Amsterdam, Baku, Bangkok, ~~Manila,~~Bishkek, Cheju, Cheong Ju City, Daejeon, Dubai, Dushanbe, Fukuoka, Hanoi, Hiroshima, Ho Chi Minh City, ~~Singapore,~~Islamabad, Irkutsk, Jakarta, Khabarovsk, Kita Kyushu, Kuala Lumpur, Kwangju, Lagos, Los Angeles, Manila, Melbourne, Moscow, Nagoya, Nigata, Novosibirsk, Osaka, Paris, Penang, ~~Jakarta and~~ Phnom Penh, ~~in Southeast Asia, as well as in~~Pusan, Pyongyang, Sapporo, Sendai, ~~Toyame, Hiroshima, Nagoya, Niigata, Osaka, Fukuoka,~~Seoul, Sharjah, Singapore, Sydney, Taegu, Tashkent, Teheran, Tokyo, ~~Seoul, Daejeon, Daegu, Busan Amsterdam, Los Angeles, Sydney, Paris, Melbourne~~Toyama and ~~Sharjah.~~Vladivostok.

In Hong Kong, ticket sales and reservations services are provided to the Group by China National Aviation Corporation and Nanlung Travel Agency Limited (a subsidiary of CSAHC) for a commission of ~~3% – 9%~~6% of the ticket price. The Group also has agency agreements with airlines in the Asia-Pacific region, Europe, the United States and Africa for the processing of ticket sales and reservations on a reciprocal basis. In ~~2005,~~2006, approximately 30% of all ticket sales for the Group’s scheduled flights were made by the Group’s and CAAC’s network of sales offices and CSAHC’s affiliates. The Group also sells tickets and accepts reservations through an extensive network of non-exclusive independent sales agents, substantially all of whom operate in cities throughout China, with the remainder operating principally in Hong Kong and other Southeast Asian destinations served by the Group. Under the agency agreements with these sales agents, the Group pays commissions based on the value of tickets sold. The Group pays independent sales agents in China a commission of 3%1.5%-9.0% of the ticket price, and pays independent sales agents outside China a commission ranging from ~~5% –~~3% - 9% of the ticket price. Sales agents are typically permitted to withhold their commission from the proceeds of ticket sales that are remitted to the Group. In ~~2005,~~2006, independent sales agents accounted for approximately 70% of the Group’s ticket sales for its scheduled flights.

Substantially all of the Group’s sales offices and agents in China are linked electronically to the CAAC’s computerized ticketing and reservations system, which is in turn linked to all domestic airlines for flights throughout China. The Group has also entered into membership agreements with several international reservation systems, including ABACUS in Southeast Asia, SABRE and GALILEO in the United States, AMADEUS in Europe and INFINI in Japan. These systems facilitate reservations and sales of tickets for the Group’s international flights.

~~Cargo~~

Cargo

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

Promotional and Marketing Activities

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

The Group has been seeking to increase its name recognition by offering new services to passengers. For example, the Group was the first Chinese airline to provide off-airport check-in services. The Group also offers transfer and baggage “through-handling” services to passengers connecting to other airlines, including passengers connecting in Hong Kong for flights to Taiwan.

To enhance relationships with its passengers, the Group has launched two frequent flyer programs, namely the “China Southern Airlines Sky Pearl Club”, and the “Egret Mileage Plus”. By the end of ~~2005,~~2006, the Group had approximately ~~4,055,600~~4,608,000 members under these programs.

Regulation

The Chinese commercial aviation industry is subject to a high degree of regulation and oversight by the CAAC. Regulations and policies issued or implemented by the CAAC encompass substantially all aspects of airline operations, including the approval of domestic, Hong Kong and Macau and international route allocation, published ~~airfares,~~air fares, aircraft acquisition, jet fuel prices and standards for aircraft maintenance, airport operations and air traffic control. The Civil Aviation Law, which became effective in March 1996, provides a framework for regulation of many of these aspects of commercial aviation activities. Although China’s airlines operate under the supervision and regulation of the CAAC, they are accorded an increasingly significant degree of operational autonomy, including with respect to the application for domestic, Hong Kong and Macau and international routes, the allocation of aircraft among routes, the purchase of flight equipment, the pricing of air fares within a certain range, the training and supervision of personnel and their day-to-day operations.

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

Route Rights

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

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

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

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

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

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

In addition, if the relevant bilateral civil aviation agreement permits more than one Chinese airline to operate a particular international route, the CAAC will only permit a second airline to operate on such route if the number of passengers carried annually exceeds 100,000 and if there is a minimum average load factor of 68% for routes with at least five weekly flights by Chinese airlines, or 80% for routes with four or fewer weekly flights by Chinese airlines.

Air Fare Pricing Policy

Pursuant to “Pricing Reform of Domestic Civil Aviation” as approved by the State Council of the PRC effective on April 20, 2004, prices on domestic routes now fluctuate freely within a predetermined range. Instead of direct supervision by setting prices of air tickets through a local price bureau, the government now provides guidance on domestic flights and domestic civil aviation is controlled by the government indirectly. Market-oriented pricing policy was introduced and pricing system has been adjusted as a result of the above pricing reform.

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

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

Acquisition of Aircraft and Flight Equipment

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

Jet Fuel Supply and Pricing

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

~~Safety~~

Safety

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

The CAAC oversees the standards of all Chinese airline pilots through its operation of the CAAC Aviation College. The CAAC Aviation College is a monitoring unit located in Tianjin which implements a uniform pilot certification process applicable to all Chinese airline pilots and is responsible for the issuance, renewal, suspension and cancellation of pilot licenses. Every pilot is required to pass CAAC-administered examinations before obtaining a pilot license and is subject to an annual recertification examination.

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

~~Security~~

Security

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

Noise and Environmental Regulation

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

Chinese Airport Policy

The CAAC supervises and regulates all civilian airports in China. The local government of the PRC manages the administration of most civilian airports in China, including the ~~new~~Guangzhou Baiyun ~~International~~ Airport as of ~~2005,~~2006, with limited exceptions. Airports in China are also subject to regulation and ongoing review by the CAAC, which determines take-off and landing charges, as well as charges for the use of airports and airport services.

~~Competition~~

Competition

In the Chinese aviation industry, the three dominant airlines are the Group, Air China and China Eastern Airlines (“China Eastern”). In ~~2005,~~2006, these three airlines together controlled approximately ~~74.84%~~72.48% of the commercial aviation market in China as measured by passengers carried.

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

The Group expects that competition in China’s commercial aviation industry will continue to be intense. The Group will also face increasing competition from alternative means of transport, such as highway and rail, as China’s transportation infrastructure improves.

Relative to other Chinese airlines, however, the Group believes that it possesses certain competitive advantages. The Group has the most extensive route network and the largest number of regional route bases among Chinese airlines, which the Group believes places it in a favorable position in the route allocation process. The Group also has the largest aircraft fleet of any Chinese airline, which, together with the Group’s planned aircraft acquisitions, will permit the Group to expand its operations and to improve the deployment of the aircraft in its fleet. The Group also believes that its dominant presence in the populous and economically developed southern and central regions of China provides it with a competitive advantage in attracting new customers and that its fully integrated flight training, aircraft and engine maintenance, and air catering operations enable it to achieve and maintain high quality service to its customers.

The following table sets forth the Group’s market share of passengers carried, cargo and mail carried and total traffic of Chinese airlines for the years indicated.

Total traffic
Passenger carried Cargo and Mail Carried (tons) (ton kilometers)
Industry Group’s Industry Group’s Industry Group’s
Year Total Share Total Share Total Share
(in million) (% of total) (in thousand) (% of total) (in billion) (% of total)
1999 60.9 24.8 1,704 22.9 10.6 18.9
2000 67.2 24.9 1,967 22.5 12.3 20.0
2001 75.2 25.4 1,709 23.3 14.1 21.5
2002 85.9 25.0 2,021 23.3 16.5 21.9
2003 87.6 23.4 2,190 21.2 17.1 20.8
2004 121.2 23.3 2,770 19.7 23.1 20.2
2005 138.3 31.8 3,067 25.3 26.1 27.9

	Passenger carried				Cargo and Mail Carried (tons)				Total traffic (ton kilometers)
	Industry		Group’s		Industry		Group’s		Industry		Group’s
	Total		Share		Total		Share		Total		Share
Year	(in million)		(% of total)		(in thousand)		(% of total)		(in billion)		(% of total)
2000		67.2		24.9		1,967		22.5		12.3		20.0
2001		75.2		25.4		1,709		23.3		14.1		21.5
2002		85.9		25.0		2,021		23.3		16.5		21.9
2003		87.6		23.4		2,190		21.2		17.1		20.8
2004		121.2		23.3		2,770		19.7		23.1		20.2
2005		138.3		31.8		3,067		25.3		26.1		27.9
2006		159.7		30.8		3,494		23.4		30.6		26.4

Domestic Routes

The Group competes against its domestic competitors primarily on the basis of flight schedule, route network, quality of service, safety, type and age of aircraft and, to a lesser extent and until recently, price. The Group competes against 10 other Chinese airlines in its various domestic route markets. Of these competitors, the largest are two airlines owned or controlled by the Chinese Government, and the remaining eight airlines are operated by or under the control of various Chinese provincial or municipal governments.

The following table sets forth the Group’s market share of the passengers carried, cargo and mail carried on departing flights and total departing flights at the ten busiest airports in China, based on passenger volume, in ~~2005.~~2006.

Cargo and Mail
Passenger carried Carried Departing flight
Airport (% of total) (% of total) (% of total)
Beijing 19.14 % 19.06 % 17.95 %
Shanghai Pudong 9.86 % 5.13 % 10.38 %
Guangzhou 54.71 % 45.10 % 53.75 %
Shanghai Hongqiao 18.18 % 18.41 % 16.95 %
Shenzhen 33.08 % 31.59 % 29.98 %
Chengdu 13.99 % 17.07 % 10.72 %
Kunming 21.71 % 18.27 % 18.24 %
Hangzhou 38.31 % 32.91 % 35.00 %
Xian 14.75 % 19.69 % 10.18 %
Haikou 30.26 % 33.19 % 23.73 %

			Cargo and Mail
	Passenger carried		Carried		Departing flight
Airport	(% of total)		(% of total)		(% of total)
Beijing		18.6%		13.2%		17.6%
Shanghai Pudong		9.2%		4.4%		9.6%
Guangzhou		53.1%		42.1%		53.6%
Shanghai Hongqiao		18.7%		19.9%		17.7%
Shenzhen		30.8%		26.3%		29.9%
Chengdu		13.7%		15.8%		11.7%
Kunming		18.4%		18.9%		17.3%
Hangzhou		37.5%		32.9%		35.6%
Xian		15.3%		18.0%		13.8%
Chongqing		21.3%		24.9%		19.0%

The following table sets forth the Group’s market share of the passengers carried, cargo and mail carried on departing flights and total departing flights at 8eight busiest airports in southern and central China (excluding Guangzhou ~~Shenzhen~~ and ~~Haikou,~~Shenzhen, which are included in the table above), based on passenger volume, in ~~2005.~~2006.

Cargo and Mail
Passenger carried Carried Departing flight
Airport (% of total ) (% of total) (% of total)
Changsha 51.60 % 71.54 % 47.39 %
Wuhan Tianhe 39.60 % 43.56 % 33.79 %
Guilin 38.90 % 38.26 % 38.69 %
Sanya 43.45 % 29.70 % 40.33 %
Zhengzhou 71.79 % 61.78 % 59.17 %
Nanning 43.60 % 40.67 % 35.27 %
Zhang Jia Jie 40.45 % 80.56 % 38.33 %
Shantou 81.64 % 80.67 % 69.55 %

			Cargo and Mail
	Passenger carried		Carried		Departing flight
Airport	(% of total )		(% of total)		(% of total)
Changsha		29.1%		33.6%		25.2%
Wuhan Tianhe		51.4%		68.9%		50.7%
Guilin		38.3%		41.1%		35.2%
Sanya		41.1%		41.1%		40.7%
Zhengzhou		41.2%		31.1%		41.9%
Nanning		65.2%		67.1%		56.1%
Zhang Jia Jie		38.4%		40.4%		33.2%
Shantou		30.7%		35.5%		33.5%

Hong Kong and Macau Routes

The Group dominates the routes operated by Chinese airlines between Hong Kong and Macau and China. In ~~2005,~~2006, the Group operated an average of more than ~~17,807~~16,949 “charter” and other scheduled flights per week between China and Hong Kong or Macau, accounting for approximately ~~34.4%~~28.8% of the total number of passengers carried by all Chinese airlines on the Hong Kong and Macau routes. The Group believes that the routes on which it operates “charter” flights are among its highest yielding routes, primarily because the Group faces limited competition on such routes and is consequently less subject to downward pricing pressures. Dragon Air, which is a Hong Kong-based airline, competes with the Group on many of the Group’s Hong Kong and Macau routes.

Air Macau Group Ltd. (“Air Macau”), a Macau-based airline, started to operate routes in 1996 between Macau and China, ~~including~~to destinations such as Beijing, Shanghai, Xiamen and Wuhan. Air Macau also operates routes between Macau and Taiwan, including flights which allow passengers to travel between Taiwan and China through Macau. The air fares on some of Air Macau’s routes are significantly less than air fares on comparable routes of the Group. Air Macau’s routes provide an alternative to, and compete with, the Group’s Hong Kong and Macau routes for passengers travelling between Taiwan and China.

International Routes

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

Air China has the most extensive international route network among Chinese airlines. Beijing, the hub of Air China’s operations, has been the destination for most international flights to China. The Group competes against, among other airlines, Thai Airways International, Singapore Airlines, Malaysian Airlines System, Air China and China Eastern on flights to Southeast Asian destinations. In the case of its European routes, the Group’s competitors include Air France — KLM. The Group faces competition on its international ~~route~~routes from Air China and China Eastern, each of which operates several routes between destinations in China and the United States, as well as international airlines that fly to Los Angeles from Hong Kong. The Group competes in the international market primarily on the basis of safety, price, timeliness and convenience of scheduling.

Airline Subsidiaries

The Airline Subsidiaries are joint ventures established by the Company and local companies in the provinces or special economic zones where the Airline Subsidiaries are based and are engaged in providing airline and related services. Except for Guangxi Airlines, of which the Company ~~has 95%~~owns a 100% equity interest, the Company owns a 60% equity interest in each of the remaining Airline Subsidiaries.

As of December 31, ~~2005,~~2006, Xiamen Airlines operated under its own “MF” code a fleet of 3441 aircraft on 9685 domestic routes, 911 international route and 7six Hong Kong and Macau routes. In ~~2005,~~2006, Xiamen Airlines carried a total of about ~~6.92~~7.78 million passengers, or approximately ~~15.7%~~15.8% of the passengers carried by the Group in that year, and had ~~RMB4,852~~RMB5,982 million in ~~operating~~traffic revenue.

As of December 31, ~~2005,~~2006, Shantou Airlines operated under the Group’s “CZ” code 6eight aircraft on 12 domestic routes, 1one international route and 1one Hong Kong and Macau route. In ~~2005,~~2006, Shantou Airlines carried a total of about ~~1.17~~1.39 million passengers, or ~~2.7%~~2.8% of the passengers carried by the Group in that year. Total ~~operating~~traffic revenue of Shantou Airlines for the year ended December 31, ~~2005~~2006 was ~~RMB844~~RMB1,042 million.

As of December 31, ~~2005,~~2006, routes previously operated by Guangxi Airlines ~~operated~~ under the “CZ” code 5nine aircraft on 1533 domestic routes, 4one international routes and 2two Hong Kong and Macau ~~routes.~~routes were transferred to the Company. In ~~2005,~~2006, Guangxi Airlines carried a total of about ~~1.03~~1.55 million passengers, or ~~2.3%~~3.1% of the total number of passengers carried by the Group in that year. Total ~~operating~~traffic revenue of Guangxi Airlines for the year ended December 31, ~~2005~~2006 was ~~RMB722~~RMB706 million.

As of December 31, ~~2005,~~2006, Zhuhai Airlines operated under the “CZ” code 5five aircraft on 10nine domestic routes. In ~~2005,~~2006, Zhuhai Airlines carried a total of about ~~834,000~~868,700 passengers, or approximately ~~1.9%~~1.8% of the total number of passengers carried by the Group in that year. Total ~~operating~~traffic revenue of Zhuhai Airlines for the year ended December 31, ~~2005~~2006 was ~~RMB719~~RMB780 million.

As of December 31, ~~2005,~~2006, Guizhou Airlines operated under the “CZ” code 6seven aircraft on 1420 domestic routes. In ~~2005,~~2006, Guizhou Airlines carried a total of about ~~1.34~~1.35 million passengers, or approximately ~~3.0%~~2.7% of the total number of passengers carried by the Group in ~~2005.~~2006. Total ~~operating~~traffic revenue of Guizhou Airlines was approximately ~~RMB882~~RMB982 million for the year ended December 31, ~~2005.~~2006.

Insurance

The CAAC maintains fleet and legal liability insurance on behalf of the Group and all other Chinese airlines with the People’s Insurance Company of China (“PICC”) under the PICC master policy. The Group maintains aviation hull all risks, spares and airline liability insurance, aircraft hull all risks and spare engines deductible insurance, aviation hull war and allied perils policy of the type and in the amount customary in the Chinese aviation industry.

Under Chinese law, civil liability of Chinese airlines for injuries suffered by passengers on domestic flights is limited to ~~RMB70,000~~RMB400,000 (approximately US$~~8,455)~~51,225) per passenger. Under the Convention for the Unification of Certain Rules Relating to International Transportation by Air of 1929 (as amended by the protocol of 1955, the “Warsaw Convention”), unless a separate agreement has been entered into between China and a specific country, civil liability for injuries suffered by passengers on international flights is limited to US$~~135,000~~122,000 per passenger. The Group believes that it maintains adequate insurance coverage for the maximum civil liability that can be imposed in respect of injuries to passengers under Chinese law, the Warsaw Convention or any separate agreement applicable to the Group.

The CAAC allocates insurance premiums payable in respect of the PICC master policy to each participating airline based on the value of the airline’s insured aircraft or, in the case of leased aircraft, based on the amount required by the terms of the lease. Insurance claims made by any participating airline may cause the premiums paid by the Group under the PICC master policy to increase. PICC’s practice has been to reinsure a substantial portion of its aircraft insurance business through reinsurance brokers on the London reinsurance market.

Intellectual Property

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

The names “China Southern” and ~~��China~~“China Southern Airlines” contain Chinese words of common usage and are therefore not eligible for registration as tradenames under current Chinese law. The kapok logo is a trademark registered in China and recorded with the International Air Transport Association (“IATA”), the rights to which are owned by CSAHC. The Company and CSAHC have entered into a trademark license agreement (the “Trademark License Agreement”), pursuant to which CSAHC has licensed to the Group the right to use the names “China Southern” and “China Southern Airlines” in both English and Chinese and granted the Company a 10-year renewable license from 1997 to use the kapok logo on a world-wide basis. CSAHC has retained the right to use the kapok logo in connection with its non-airline related businesses conducted as of the date of the Trademark License Agreement and to permit its affiliates that do not compete, directly or indirectly, with the Group to use the kapok logo. Xiamen Airlines owns all rights to its egret logo, which is a trademark registered in China, and recorded with the IATA.

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

Organizational Structure

~~Organizational Structure~~

The following chart illustrates the corporate structure of the Group as of year end ~~2005~~2006 and the aggregate effective equity interest of the Company in each of its principal subsidiaries, affiliated companies and jointly controlled entities.

Note a: Another 26% ownership interest is held by CSA’s subsidiaries.

The particulars of the Company’s principal subsidiaries as of December 31, ~~2005~~2006 are as follows:

Name of company
	Place and date of establishment /operation
	~~establishment~~	Proportion of ownership
~~Name of company~~	~~/operation~~	interest held by the Company
Guangxi Airlines Company Limited	PRC April 28, 1994		95	100
Southern Airlines (Group) Shantou Airlines Company Limited	PRC July 20, 1993		60
Zhuhai Airlines Company Limited	PRC May 8, 1995		60
Xiamen Airlines Company Limited	PRC August 11, 1984		60
Guizhou Airlines Company Limited	PRC November 12, 1991		60
Guangzhou Air Cargo Company Limited	PRC March 31, 2004		70
Guangzhou Nanland Air Catering Company Limited	PRC November 21, 1989		75
China Southern West Australian Flying College Pty Ltd.	Australia January 26, 1971		65
Guangzhou Baiyun International Logistic Company Ltd	PRC July 23, 2002		61
Xinjiang Civil Aviation Property Management Limited	PRC February 12, 2002		51.8

~~Affiliated Companies and Jointly Controlled Entities~~

The particulars of the Group’s principal affiliated companies and jointly controlled entity as of December 31, ~~2005~~2006 are as follows:

Proportion of ownership
Place and date of interest held by
establishment Group
Name of company /operation effective interest The Company Subsidiaries
Guangzhou Aircraft Maintenance Engineering Company Limited PRC
October 28, 1989 50 50 —
China Southern Airlines Group Finance Company Limited PRC
June 28, 1995 49.3 32 26
Sichuan Airlines Corporation Limited PRC
August 28, 2002 39 39 —
China Postal Airlines Limited PRC
November 25, 1996 49 49 —
MTU Maintenance Zhuhai Co. Ltd PRC
April 6, 2001 50 50 —
Zhuhai Xiang Yi Aviation Technology Company Limited PRC
July 10, 2002 51 51 —
Beijing Southern Airlines Ground Service Company Limited PRC
April 1, 2004 50 50

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

~~Certain of the Company’s subsidiaries, affiliated companies and jointly controlled entities are PRC joint ventures which have limited duration pursuant to PRC law.~~

Property, Plant and Equipment

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

The Group’s headquarters in Guangzhou occupy an area of approximately ~~149,000~~90,606 square meters of land and a total gross floor area of approximately ~~149,000~~516,712 square meters. The Group leases from CSAHC the land in Guangzhou on which the Group’s headquarters and other facilities are located. The Group also leases from CSAHC certain buildings at the Wuhan and Haikou and Zengzhou airports.

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

Land Buildings
(in square meters) (in square meters)
Owned Leased Owned Leased
Guangzhou 9,797 80,809 514,957 1,755
Shenzhen 208,740 — 54,093 —
Zhuhai 170,062 — 18,791 —
Changsha 138,949 — 47,190 —
Zhengzhou 290,841 — 60,582 —
Haikou 5,265 — 63,570 19,633
Wuhan — 31,061 17,335 —
Nanyang — — 12,156 —

	Land (in square meters)		Buildings (in square meters)
	Owned	Leased	Owned	Leased
Guangzhou	9,797	80,809	514,957	1,755
Shenzhen	208,740	—	54,093	—
Zhuhai	170,062	—	18,791	—
Changsha	138,949	—	47,190	—
Zhengzhou	290,841	—	60,582	—
Haikou	5,265	—	63,570	19,633
Wuhan	—	31,061	17,335	22,831
Nanyang	—	—	12,156	60,003
Sanya	106,680	—	16,968	—
Shenyang	—	134,356	79,626	94,661
Dalian	—	14,403	17,250	37,134
Jilin	—	160,106	33,656	25,220
Harbin	—	293,648	36,925	3,457
Xinjiang	—	548,556	177,710	13,829

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

Land Buildings
(in square meters) (in square meters)
Owned Leased Owned Leased
Xiamen 451,121 — 355,038 12,509
Shantou 36,931 55,407 40,624 —
Zhuhai 68,186 — 54,398 2,135
Guilin 72,563 — 73,379 139
Guizhou 259,879 — 93,390 3,533

	Land (in square meters)		Buildings (in square meters)
	Owned	Leased	Owned	Leased
Xiamen	451,121	—	355,038	12,509
Shantou	36,931	55,407	40,624	—
Zhuhai	68,186	—	54,398	2,135
Guilin	72,563	—	73,379	139
Guizhou	259,879	—	93,390	3,533

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

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

The following discussion and analysis should be read in conjunction with the Financial Statements of the Group contained elsewhere in this Annual Report. The Group maintains its books and accounts in accordance with PRC Accounting Rules and Regulations (“PRC GAAP”) and prepares its financial statements in accordance with both PRC GAAP and IFRS. The Financial Statements contained elsewhere in this Annual Report have been prepared in accordance with IFRS. IFRS differs in certain significant respects from U.S. GAAP. Information relating to the nature and effect of such differences is presented in Note 51 to the Financial Statements.

~~Certain IFRS comparative figures~~

The consolidated financial statements for the year ended December 31, 2005 have been ~~restated as a result~~revised to reflect the adoption of IAS 16 (amended 2004) Property, Plant and Equipment (“revised policy”) effective January 1, 2005. The effect of adoption of the ~~changes~~revised policy was not reflected in ~~accounting policies. For~~the 2005 Annual Report as management determined the impact to the 2005 consolidated financial statements was immaterial. Further details ~~please refer~~are set out in Note 45 to ~~item 3.~~

the consolidated financial statements.

Critical Accounting Policies

The discussion and analysis of the Group’s financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with IFRS. The preparation of such consolidated financial statements requires the Group to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Our principal accounting policies are set forth in Note 2 to the consolidated financial statements. The Group believes that ~~its~~the following critical accounting policies ~~are limited to those described below. For a detailed discussion on~~involve the ~~application of these~~most significant judgments and ~~other accounting policies, see Note 2 to the Financial Statements.~~

~~Revenue Recognition~~

The Group records sales of passenger, cargo and mail tickets as “Sales in advance of carriage”, a current liability, on the consolidated balance sheet. Passenger, cargo and mail revenues are recognized and the related current liability is reduced when the transportation is provided. Sales in advance of carriage therefore represents ticket sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates. The Group’s balance of sales in advance of carriage as of December 31, 2005 was RMB1,413 million.

~~Property, plant and equipment~~

The Group has approximately RMB54,266 million fixed assets as of December 31, 2005. In addition to the original cost of these assets, their recorded value is impacted by a number of policy elections, including the estimation of useful lives and residual values and when necessary, impairment charges.

There were no significant changes to the original estimated useful lives or residual values of the property, plant and equipment of the Group during 2003, 2004 and 2005. The Group records aircraft at acquisition cost. Depreciable life is determined through economic analysis, reviewing existing fleet plans, recommendations from manufacturers and comparing estimated lives to other airlines that operate similar fleets. Residual values are estimated based on our historical experience with regards to the sale of aircraft and are established in conjunction with the estimated useful lives of the aircraft. Residual values are based on current dollars when the aircraft are acquired and typically reflect asset values that have not reached the end of their physical life. Both depreciable lives and residual values are reviewed periodically to recognize changes in our fleet plan and changes in conditions.

~~In addition, the Group evaluates fixed assets~~estimates used in ~~operations~~the preparation of our financial statements.

Impairment for ~~impairment. Under IFRS, if~~long-lived assets

If circumstances indicate that the net book value of ana long-lived asset may not be recoverable, this asset may be considered “impaired”, and an impairment loss may be recognized in accordance with IAS 36 “Impairment of Assets”. The ~~amount~~carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment ~~loss is the difference between~~whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount ~~of the asset and its~~is reduced to recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. In determining the value in use, ~~the Group utilizes certain assumptions, including, but not limited to: (i) estimated fair market value of the assets, and (ii) estimated future~~expected cash flows ~~expected to be~~ generated by ~~these assets, which are based on additional assumptions such as asset utilization, length of service~~ the asset ~~will be used in the Group’s operations~~are discounted to their present value, which requires significant judgment relating to level of traffic revenue and ~~estimated residual values.~~amount of operating costs. The Group ~~will use~~uses all readily available information in determining an amount that is a reasonable approximation of recoverable ~~amounts,~~amount, including estimates based on ~~industry trends~~reasonable and ~~reference~~supportable assumptions and projections of traffic revenue and amount of operating costs.

Depreciation

Property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives, after taking into account the estimated residual value. The Group reviews the estimated useful lives of the assets regularly in order to ~~market rates and transactions. Changes~~determine the amount of depreciation expense to ~~the above estimates may have a material effect~~be recorded during any reporting period. The useful lives are based on the Group’s ~~Financial Statements. As~~historical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

Impairment of December 31, 2005, based on the result of evaluation, the Group considered that no impairment is required. Under U.S. GAAP, property, plant, and equipment of the Group are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. During 2003, the impairment losses of RMB510 million was recognized on certain aircraft of CNA.trade receivables

~~Impairment loss for doubtful accounts~~

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

~~Movements in impairment losses for doubtful accounts are as follows:~~

Year ended December 31,
2004 2005
RMB RMB
At January 1 70 92
Impairment losses for bad and doubtful accounts 27 —
Through the CNA/XJA Acquistions 44 —
Bad and doubtful accounts written off (49 ) (48 )
At December 31 92 44

Overview

~~Overview~~

As a result of the continuous growth in demand in the airline market and ~~acquisition~~acquisitions, of ~~the~~ airline operations, ~~and related assets of China Northern Airlines Company (“CNA”) and Xinjiang Airlines Company (“XJA”),~~ the Group’s business benefited from ~~the~~an increase of transport capacity, passenger volume and cargo and mail carried. On the other hand, the Group has also strengthened its cost control strategy, particularly on saving jet fuel cost and repairs and maintenance expenses. Together with improving allocation of transport capacity between peak and non peak season, expanding the profitable routes and enhancing the ticket revenue management system, the revenue and the operation efficiency of the Group improved in 2006.

Nevertheless, the Group is facing pressure on its ~~operation~~operations due to continuing ~~increase~~increases of jet fuel ~~cost~~costs and intensified competition.

~~With effect from~~

Since July 21, 2005, ~~China began~~the PRC Government has begun to adopt a managed floating exchange rate system based on market supply and demand of currencies, which is subject to adjustments with reference to a basket of currencies. The exchange rate of Renminbi ~~(“RMB”)~~ would no longer be pegged to the USU.S. dollar only and a more flexible exchange rate system was established. The exchange rate of U.S. dollar and RMB was at USD1.00: RMB8.11. Because the Group finances its aircraft acquisitions mainly through ~~finance~~capital leases or bank loans in U.S. dollars, and there are a substantial amount of transactions and obligations denominated in U.S. dollars in relation to its global ~~purchase~~purchases of jet fuel, lease and purchase of aviation equipment as well as major repairs, in addition to the landing fees of its international flights in the airports of other countries, the Group benefited from the RMB appreciation. RMB appreciation has brought a one-off exchange gain to the Group and reduced its operating costs which are denominated in foreign currencies. ~~On the other hand,~~However, RMB appreciation ~~will~~ also ~~present~~presents the Group with a challenge in price competition in international route operations.

According to the Notice of ~~the National Development~~NDRC and ~~Reform Commission (“NDRC”) and the Civil Aviation Administration of China (“CAAC”)~~CAAC on Issues Relating to Introduction of the Fuel Surcharge for Domestic Routes, domestic airlines imposed fuel surcharges for all the domestic routes (excluding those from the mainland PRC to Hong Kong and Macau) with effect from August 1, 2005 (based on flight time). On February 16, 2006, the NDRC and CAAC released a supplementary document on Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes, stating that due to the rising jet fuel price, the period of imposition of fuel surcharge by airlines was extended. On March 28, 2006, the NDRC and CAAC released another supplementary document on Issues Relating to the Introduction of Fuel Surcharge for Domestic Routes, thereby adjusting the amount of fuel surcharges from RMB20 to RMB30 per passenger for ~~distance~~distances flown ~~being~~ less than 800 ~~kilometres,~~kilometers, and from RMB40 to RMB60 for ~~distance~~distances exceeding 800 ~~kilometres,~~kilometers, during the period temporarily from April 10, 2006 to October 10, 2006. The introduction of fuel surcharge and the extension of the duration of the same ~~will help~~helped relieve, to a certain extent, the burden of high jet fuel cost on the Group. NDRC and CAAC approved of the raise to the passenger fuel surcharge for domestic routes to help relieve the soaring jet fuel cost for the period in 2006.

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

Like most airlines, the Group is subject to a high degree of financial and operating leverage. A significant percentage of the Group’s operating expenses isare fixed costs that do not vary proportionally based on the Group’s yields or the load factors. These fixed costs include depreciation expense, jet fuel costs, landing and navigation fees, financing costs, operating lease payments, aircraft maintenance costs and labor for flight crew, cabin crew and ground personnel. Thus, a minor change in the Group’s yields or load factors would have a material effect on the Group’s results of operations. In addition, certain of these expenses, primarily financing costs and operating lease payments, labor costs and depreciation do not vary based on the number of flights flown. Thus, the Group’s operating results can also be substantially affected by minor changes in aircraft utilization rates. The Group is and will continue to be highly leveraged with substantial obligations denominated in foreign currencies and, accordingly, the results of its operations are significantly affected by fluctuations in foreign exchange rates, particularly for the U.S. dollar and the Japanese yen. The Group recognized a net exchange ~~loss of RMB59 million and net exchange~~ gain of RMB1,220 million and RMB1,492 million in ~~2004~~2005 and ~~2005,~~2006, respectively. These amounts represented mainly unrealized exchange differences resulting from the retranslation of the foreign currency borrowings.

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

over route allocations. Any changes in the PRC government’s regulatory policies, or any implementation of such policies could have a significant impact on the Group’s future operations and its ability to implement its operating strategy.

Certain Financial Information and Operating Data by Geographic Region

The following table sets forth certain financial information and operating data by geographic region for the years ended December 31, ~~2003,~~ 2004, 2005 and ~~2005:~~2006:

Year ended 2004 vs. 2003 2005 vs. 2004
December 31, % increase/ % increase/
2003 2004 2005 (decrease) (decrease)
Traffic

RPK (million)
Domestic 21,294 29,121 51,472 36.8 76.8
Hong Kong and Macau 778 1,203 1,549 54.6 28.8
International 4,315 6,872 8,902 59.3 29.5
Total 26,387 37,196 61,923 41.0 66.5
RTK (million)
Domestic 2,424 3,206 5,571 32.3 73.8
Hong Kong and Macau 78 120 159 53.8 32.5
International 1,059 1,337 1,554 26.3 16.2
Total 3,561 4,663 7,284 30.9 56.2
Passengers carried (thousand)
Domestic 18,259 25,002 39,545 36.9 58.2
Hong Kong and Macau 1,019 1,394 1,556 36.8 11.6
International 1,192 1,811 3,018 51.9 66.6
Total 20,470 28,207 44,119 37.8 56.4
Cargo and mail carried (thousand tons)
Domestic 379 442 639 16.6 44.6
Hong Kong and Macau 12 15 19 25.0 26.7
International 73 88 117 20.5 33.0
Total 464 545 775 17.5 42.2

												Year ended December 31,						2005 vs. 2004 % increase/		2006 vs. 2005 % increase/
	Year ended						2004 vs. 2003		2005 vs. 2004			2004		2005		2006		(decrease)		(decrease)
	December 31,						% increase/		% increase/
	2003		2004		2005		(decrease)		(decrease)
Capacity
ASK (million)
Traffic
RPK (million) Domestic													29,121		51,472		58,128		76.8		12.9
Hong Kong and Macau													1,203		1,549		1,541		28.8		(0.5	)
International													6,872		8,902		9,913		29.5		11.4
Total													37,196		61,923		69,582		66.5		12.4
RTK (million)
Domestic		32,590		41,330		72,107		26.8		74.5			3,206		5,571		6,226		73.8		11.8
Hong Kong and Macau		1,347		1,896		2,656		40.8		40.1			120		159		156		32.5		(1.9	)
International		6,930		10,543		13,598		52.1		29.0			1,337		1,554		1,689		16.2		8.7
Total		40,867		53,769		88,361		31.6		64.3			4,663		7,284		8,071		56.2		10.8
ATK (million)
Passengers carried (thousand)
Domestic		3,772		4,773		8,352		26.5		75.0			25,002		39,545		44,225		58.2		11.8
Hong Kong and Macau		150		211		315		40.7		49.3			1,394		1,556		1,545		11.6		(0.7	)
International		1,999		2,462		2,842		23.2		15.4			1,811		3,018		3,436		66.6		13.9
Total		5,921		7,446		11,509		25.8		54.6			28,207		44,119		49,206		56.4		11.5
Load Factors
Passenger load factor (RPK/ASK) (%)
Cargo and mail carried (thousand tons)
Domestic		65.3		70.5		71.4		8.0		1.3			442		639		674		44.6		5.5
Hong Kong and Macau		57.8		63.4		58.3		9.7		(8.0	)		15		19		16		26.7		(15.7	)
International		62.3		65.2		65.5		4.7		0.5			88		117		129		33.0		10.4
Overall		64.6		69.2		70.1		7.1		1.3
Overall load factor (RTK/ATK) (%)
Domestic		64.2		67.2		66.7		4.7		(0.7	)
Hong Kong and Macau		52.2		56.9		50.4		9.0		(11.4	)
International		53.0		54.3		54.7		2.5		0.7
Overall		60.1		62.6		63.3		4.2		1.1
Yield
Yield per RPK (RMB)
Domestic		0.57		0.58		0.55		1.8		(5.2	)
Total													545		775		819		42.2		5.7

	Year ended December 31,						2005 vs. 2004 % increase/			2006 vs. 2005 % increase/
	2004		2005		2006		(decrease)			(decrease)
Capacity
ASK (million) Domestic		41,330		72,107		79,773		74.5			10.6
Hong Kong and Macau		1,896		2,656		2,459		40.1			(7.4	)
International		10,543		13,598		14,827		29.0			9.0
Total		53,769		88,361		97,059		64.3			9.8
ATK (million) Domestic		4,773		8,352		9,311		75.0			11.5
Hong Kong and Macau		211		315		289		49.3			(8.3	)
International		2,462		2,842		3,056		15.4			7.5
Total		7,446		11,509		12,656		54.6			10.0
Load Factors
Passenger load factor (RPK/ASK) (%)
Domestic		70.5		71.4		72.9		1.3			2.1
Hong Kong and Macau		63.4		58.3		62.7		(8.0	)		7.5
International		65.2		65.5		66.9		0.5			2.1
Overall		69.2		70.1		71.7		1.3			2.3
Overall load factor (RTK/ATK) (%)
Domestic		67.2		66.7		66.9		(0.7	)		0.3
Hong Kong and Macau		56.9		50.4		53.8		(11.4	)		7.1
International		54.3		54.7		55.3		0.7			1.1
Overall		62.6		63.3		63.8		1.1			0.8
Yield
Yield per RPK (RMB)
Domestic		0.58		0.55		0.59		(5.2	)		7.8
Hong Kong and Macau		0.92		0.77		0.80		(16.3	)		3.8
International		0.46		0.56		0.62		21.7			10.7
Overall		0.57		0.55		0.60		(3.5	)		9.1
Yield per RTK (RMB)
Domestic		5.53		5.30		5.74		(4.2	)		8.3
Hong Kong and Macau		9.83		8.18		8.52		(16.8	)		4.2
International		3.31		4.24		4.77		28.1			12.5
Overall		5.01		5.14		5.59		2.6			8.8
Financial-IFRS
Passenger revenue (RMB million)
Domestic		16,869		28,182		34,174		67.1			21.3
Hong Kong and Macau		1,104		1,194		1,230		8.2			3.0
International		3,127		4,952		6,145		58.4			24.1
Total		21,100		34,328		41,549		62.7			21.0
Cargo and mail revenue (RMB million)		2,244		3,091		3,538		37.7			14.5
Financial-U.S. GAAP
Passenger revenue (RMB million)
Domestic		24,773		28,182		34,174		13.8			21.3
Hong Kong and Macau		1,151		1,194		1,230		3.7			3.0
International		4,519		4,952		6,145		9.6			24.1
Total		30,443		34,328		41,549		12.8			21.0
Cargo and mail revenue (RMB million)		2,792		3,091		3,538		10.7			14.5

Year ended 2004 vs. 2003 2005 vs. 2004
December 31, % increase/ % increase/
2003 2004 2005 (decrease) (decrease)
Hong Kong and Macau 0.96 0.92 0.77 (4.2 ) (16.3 )
International 0.47 0.46 0.56 (2.1 ) 21.7
Overall 0.57 0.57 0.55 — (3.5 )
Yield per RTK (RMB)
Domestic 5.40 5.53 5.30 2.4 (4.2 )
Hong Kong and Macau 10.35 9.83 8.18 (5.0 ) (16.8 )
International 2.90 3.31 4.24 14.1 28.1
Overall 4.76 5.01 5.14 5.3 2.6
Financial IFRS

Passenger revenue (RMB million)
Domestic 12,242 16,869 28,182 37.8 67.1
Hong Kong and Macau 750 1,104 1,194 47.2 8.2
International 2,018 3,127 4,952 55.0 58.4
Total 15,010 21,100 34,328 40.6 62.7
Cargo and mail revenue (RMB million) 1,955 2,244 3,091 14.8 37.7
U.S. GAAP

Passenger revenue (RMB million)
Domestic 18,679 24,773 28,182 32.6 13.8
Hong Kong and Macau 781 1,151 1,194 47.4 3.7
International 2,978 4,519 4,952 51.7 9.6
Total 22,438 30,443 34,328 35.7 12.8
Cargo and mail revenue (RMB million) 2,459 2,792 3,091 13.5 10.7

~~Operating Results~~

The ~~loss~~profit for ~~2005~~2006 attributable to equity shareholders of the Company ~~is RMB1,848~~was RMB126 million, as compared to a loss of ~~RMB48~~RMB1,786 million for ~~2004.~~2005. The scale of operations increased as a result of continued growth in China’s economy and strong demand in air transportation. The Group’s operating revenue increased by RMB7,926 million or 20.7% from RMB38,293 million in 2005 to RMB46,219 million in 2006. Passenger load factor increased by 1.6 percentage points from 70.1% in 2005 to 71.7% in 2006. Passenger yield (in passenger revenue per RPK) increased by 9.1% to RMB 0.60. Average yield (in traffic revenue per RTK) increased by 8.8% from RMB 5.14 in 2005 to RMB 5.59 in 2006. Operating expenses increased by RMB 6,455 million or 16.3% from RMB39,525 million in 2005 to RMB45,980 million in 2006. As a result of improved passenger load factor and average yield, operating profit was RMB239 million in 2006 as compared to an operating loss of RMB1,232 million in 2005. The Group’s net non-operating income was RMB45 million in 2006 as compared to a net non-operating expense of RMB548 million in 2005. The improvement in non-operating results was mainly attributable to the increase in exchange gain of RMB272 million, an increase in share of results of associates and jointly controlled entities of RMB369 million and an increase in gain on disposal of property, plant and equipment of RMB367 million. The increase in net operating income was partly offset by the increase in interest expense of RMB 454 million.

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

Operating expenses

Aircraft and traffic servicing expenses, which accounted for 13.5% of total operating expenses, increased by 8.0% from RMB 5,759 million in 2005 to RMB6,219 million in 2006. The increase primarily resulted from a 6.7 % rise in landing and navigation fees from RMB4,891 million in 2005 to RMB5,220 million in 2006, due to an increase in the number of landings and takeoffs.

Operating profit/(loss)

Non-operating income/(expenses)

Income tax expense increased from RMB4 million in 2005 to RMB142 million in 2006. This is mainly attributable to the improved financial performance of the Group and the increase in non-deductible salaries and welfare.

Passenger yield decreased slightly by RMB0.02. RPKs increased by 66.5% from ~~37,196~~RMB37,196 million in 2004 to ~~61,923~~RMB61,923 million in 2005, primarily as a result of ~~the~~an increase in passengers carried.

Domestic passenger revenue, which accounted for 82.1% of the total passenger revenue in 2005, increased by 67.1% from RMB16,869 million in 2004 to RMB28,182 million in 2005. Domestic passenger traffic in RPKs increased by 76.8%, mainly due to an increase in passengers carried. ~~Domestic passenger~~Passenger yield decreased slightly by ~~RMB0.03~~RMB0.02 to RMB0.55 in 2005.

Hong Kong and Macau passenger revenue, which accounted for 3.5% of total passenger revenue, increased by 8.2% from RMB1,104 million in 2004 to RMB1,194 million in 2005. For Hong Kong and Macau flights, passenger traffic in RPKs increased by 28.8%, while passenger capacity in ASKs increased by 40.1%, resulting in a 5.1 percentage point decrease in passenger load factor from 2004. Passenger yield decreased from RMB0.92 in 2004 to RMB0.77 in 2005 mainly due to intensified competition among airlines.

International passenger revenue, which accounted for 14.4% of total passenger revenue, increased by 58.4% from ~~RMB3,127~~RMB 3,127 million in 2004 to RMB4,952 million in 2005. For international flights, passenger traffic in RPKs increased by 29.5%, while passenger capacity in ASKs increased by 29.0%, resulting in a 0.3 percentage point ~~rise~~increase in passenger load factor from 2004. Passenger yield increased by 21.7% from RMB0.46 in 2004 to RMB0.56 in 2005 mainly resulted from higher ticket price and the ~~increases~~increase in traffic derived from short haul routes which generally had a higher yield than long haul routes.

Cargo and mail revenue, which accounted for 8.3% of the Group’s total traffic revenue and 8.1% of total operating revenue, increased by 37.7% from ~~RMB2,244~~RMB2,224 million in 2004 to RMB3,091 million in 2005. The increase was attributable to the ~~increasing~~increased in traffic demand.

Other operating revenue increased by 38.7% from RMB630 million in 2004 to RMB874 million in 2005. The increase was primarily due to the general growth in income from various auxiliary operations.

Operating expenses

Total operating expenses in 2005 amounted to ~~RMB39,598~~RMB39,525 million, representing an increase of ~~71.7%~~71.4% or ~~RMB16,533~~RMB16,460 million over 2004, primarily due to the ~~total~~combined effect of increases in jet fuel costs, maintenance expenses and aircraft and traffic servicing expenses. Total operating expenses as a percentage of total operating revenue increased from 96.2% in 2004 to ~~103.4%~~103.2% in 2005.

Flight operations expenses, which accounted for ~~49.0%~~49.1% of total operating expenses, increased by 86.2% from RMB10,418 million in 2004 to RMB19,394 million in 2005, primarily as a result of increases in jet fuel costs, operating lease payments, catering expenses, ~~and~~ labour costs for flight personnel. Jet fuel costs, which accounted for 61.5% of flight operations expenses, increased by 97.2% from ~~RMB6,050~~RMB 6,050 million in 2004 to RMB11,929 million in 2005 mainly as a result of increased fuel prices and fuel consumption. Operating lease payments increased by 50.0% from RMB1,665 million in 2004 to RMB2,497 million in 2005, primarily due to the additional rental payments for new aircraft under operating leases. Catering expenses increased by 69.6% from RMB705 million in 2004 to RMB1,196 million in 2005, primarily due to ~~the increase in number of passengers~~increased passenger carried. Aircraft insurance costs decreased by 43.2% from RMB185 million in 2004 to RMB105 million in 2005, ~~mainly~~primarily because of ~~the~~a decrease in insurance premiums in 2005. Labour costs for flight personnel increased by 57.8% from RMB1,026 million in 2004 to RMB1,619 million in 2005, largely due to the increase in flying hours and allowance standard.

Maintenance expenses which accounted for ~~11.6%~~10.2% of total operating expenses, increased by ~~32.7%~~17.1% from RMB3,459 million in 2004 to ~~RMB4,589~~RMB4,051 million in 2005. The increase was ~~mainly~~primarily attributable to the fleet expansion in recent years.

Aircraft and traffic servicing expenses, which accounted for ~~14.5%~~14.6% of total operating expenses, increased by 64.4% from RMB3,503 million in 2004 to RMB5,759 million in 2005. The increase primarily resulted from a 51.8% ~~rise~~increase in landing and navigation fees from RMB3,222 million in 2004 to RMB4,891 million in 2005, due to an increase in number of landing and takeoffs.

Promotional and marketing expenses, which accounted for 7.0% of total operating expenses, increased by 43.3% from RMB1,940 million in 2004 to RMB2,780 million in 2005. The increase was mainly resulted from the increase in sales volume, resulting in a 41.5% increase in sales commission expenses from RMB1,062 million in 2004 to RMB1,503 million in 2005.

General and administrative expenses, which accounted for 6.2% of the total operating expenses, increased by 85.7% from RMB1,323 million in 2004 to RMB2,457 million in 2005. This was mainly attributable to increased scale of operations.

Depreciation and amortisation, which accounted for ~~11.2%~~12.4% of total operating expenses, increased by ~~84.0%~~103.3% from ~~RMB2,413~~RMB 2,413 million in 2004 to ~~RMB4,440~~RMB4,905 million in ~~2005, mainly resulting from~~2005. This increase was primarily as a result of the additional depreciation charge on aircraft delivered in 2004 and 2005.

~~Operating(loss))/Profit~~

~~There is~~

Operating (loss) / profit

The Group recored an operating loss of ~~RMB1,305~~RMB1,232 million in 2005 as compared to an operating profit of RMB909 million in 2004. This was mainly because an increase in operating revenue ~~increased~~ by RMB14,319 million or 59.7% in 2005 while operating expenses increased by ~~RMB16,533~~RMB16,460 million or ~~71.7%~~71.4% in the same period.

Non-operating income/(expenses)

Interest expense increased by 133.9% from RMB691 million in 2004 to RMB1,616 million in 2005, mainly due to the increase in loans, ~~and~~ lease obligations and interest rate.

Interest income increased by 150.0% from RMB22 million in 2004 to RMB55 million in ~~2005,~~2005. It was mainly attributable to ~~the~~an increase ofin interest rate.

During 2005, the Group recorded a net exchange gain of RMB1,220 million (2004: Net exchange loss of RMB59 million) mainly resulted from Renminbi appreciation insince July 2005. Such amount represents mainly unrealised translation exchange gain, resulting from exchange gains on translated year end foreign currency denominated liabilities, rather than foreign exchange transactions incurred during the year.

~~Taxation~~

The statutory income tax rate in the PRC is 33%. Except for certain branches and subsidiaries, the Company and its subsidiaries are entitled to enjoy a preferential tax rate of 15% pursuant to approval documents issued by the relevant tax authorities.Taxation

In 2005, the Group recorded an income tax ~~benefit~~expenses of ~~RMB7~~RMB4 million ~~and actual effective~~resulting from recognition of RMB159 million deferred tax ~~rate was 0.4% while the Group’s enacted tax rate is 15%. The difference is mainly due to the fact that~~assets in respect of a portion of tax ~~loss is not recognized, the deferred tax effect of which is RMB135 million.~~losses. In 2004, income tax ~~expense~~expenses of RMB65 million was recorded and actual effective tax rate was 30% while the Group’s enacted tax rate in 2004 was 15%. The difference is mainly due to the tax effect of non-deductible expenses of RMB29 million.miilion were recorded.

~~2004~~

Additional information under U.S. GAAP

2006 Compared with ~~2003~~2005

The ~~Group recorded a~~ net ~~loss of RMB48~~income for 2006 is RMB216 million, ~~attributable to equity shareholder for 2004,~~ as compared to a ~~net~~ loss of ~~RMB358~~RMB1,468 million ~~attributable to equity shareholder~~ for ~~2003.~~2005. The scale of operations increased as a result of continued growth in China’s economy and strong demand in air transportation. The Group’s operating revenue increased by ~~RMB6,504~~RMB7,926 million or ~~37.2%~~20.7% from ~~RMB17,470~~RMB38,293 million in ~~2003~~2005 to ~~RMB23,974~~RMB46,219 million in ~~2004.~~2006. Passenger load factor increased by ~~4.6~~1.6 percentage ~~point~~points from ~~64.6%~~70.1% in ~~2003~~2005 to ~~69.2%~~71.7% in ~~2004.~~2006. Passenger yield (in passenger revenue per RPK) ~~remain steady and at RMB0.57 in both years.~~increased by 9.1% to RMB0.60. Average yield (in traffic revenue per RTK) increased by ~~5.3%~~8.8% from ~~RMB4.76~~RMB5.14 in ~~2003~~2005 to ~~RMB5.01~~RMB5.59 in ~~2004.~~2006. Operating expenses increased by ~~RMB6,051~~RMB 6,201 million or ~~35.6%~~15.8% from ~~RMB17,014~~RMB39,312 million in ~~2003~~2005 to ~~RMB23,065~~RMB45,513 million in ~~2004.~~2006. As ~~operating revenue increased more than operating expenses,~~a result of improved passenger load factor and average yield, operating profit ~~increased by 99.3% from RMB456~~was RMB706 million in ~~2003~~2006 as compared to ~~RMB909~~an operating loss of RMB1,019 million in ~~2004.~~2005. The Group’s net non-operating ~~expenses~~expense decreased by ~~30.1%,~~RMB178 million or 36.9% from ~~RMB967~~RMB482 million in ~~2003~~2005 to ~~RMB676~~RMB304 million in ~~2004,~~2006. The decrease was mainly attributable to ~~a decrease~~the combined effect of increase in ~~unfavourable movement in foreign~~ exchange ~~differences~~gain of ~~RMB105~~RMB272 million, ~~and a decrease~~increase in interest expense of ~~RMB133~~RMB481 million, increase in share of results of affiliated companies and jointly controlled entities of RMB348 million. ~~Overall, the Group recorded a net loss of RMB48 million in 2004, as compared to a net loss of RMB358 million in 2003.~~

Operating revenue

Substantially all of the Group’s operating revenue is attributable to airline and airline related operations. Traffic revenue ~~in 2004 and 2003~~ accounted for ~~97.4%~~97.6 % and ~~97.1% respectively~~97.7 % of total operating ~~revenue.~~revenue in 2006 and 2005 respectively. Passenger revenue and, cargo and mail revenue accounted for ~~90.4%~~92.2% and ~~9.6% respectively~~7.8% of total traffic revenue in ~~2004.~~2006 respectively. The ~~balance of the Group’s~~other operating revenue is mainly derived

from commission income, income from general aviation operations, fees charged for ground services rendered to other Chinese airlines and air catering services.

~~Operating~~

The increase in opearating revenue ~~increased by 37.2% from RMB17,470 million in 2003 to RMB23,974 million in 2004. This increase~~ was primarily due to a ~~40.6%~~21.0% rise in passenger revenue from ~~RMB15,010~~RMB 34,328 million in ~~2003~~2005 to ~~RMB21,100~~RMB41,549 million in ~~2004~~2006 resulting from increased traffic volume. The PRC airline industry has fully recovered from the outbreak of severe acute respiratory syndrome (“SARS”) in China since August 2003. Coupling with the continued growth in domestic economic conditions, the aviation traffic volume in China attained a new highest record in 2004. The total number of passengers carried increased by ~~37.8%~~11.5% to ~~28.2~~49.21 million passengers in 2004. The increase in 2004 compared to 2003 was attributable to the general increasing traffic demand in the PRC airline market and deliveries of 20 aircraft (excluding effect of CNA/XJA Acquisitions) during 2004 which caused an increase in passenger capacity of 31.6%.passengers. RPKs increased by ~~41.0%~~12.4% from ~~26,387~~RMB61,923 million in ~~2003~~2005 to ~~RMB37,196~~RMB69,582 million in ~~2004,~~2006, primarily as a result of anthe increase in passengers carried. Passenger yield ~~remained constant at RMB0.57.~~increased by RMB0.05.

Domestic passenger revenue, which accounted for ~~79.9%~~82.2% of the total passenger revenue in ~~2004,~~2006, increased by ~~37.8%~~21.3% from ~~RMB12,242~~RMB28,182 million in ~~2003~~2005 to ~~RMB16,869~~RMB34,174 million in ~~2004.~~2006. Domestic passenger traffic in RPKs increased by ~~36.8%~~12.9%, mainly due to an increase in passengers carried. Passenger yield remained steady in 2004 and at RMB0.58. Included in the 2004 domestic passenger revenue was fuel surcharge imposed on domestic flights of approximately RMB281 million (2003: RMB716 million). Excluding the effect of fuel surcharge revenue, theDomestic passenger yield increased from ~~RMB0.54~~RMB0.55 to RMB0.59 in ~~2003 to RMB0.57 in 2004 as a combined result of the growth in traffic demand~~2006.

Hong Kong and ~~fleet expansion during 2004.~~

~~Hong Kong~~Macau passenger revenue, which accounted for ~~5.3%~~3.0% of total passenger revenue, increased by ~~47.2%~~3.0% from ~~RMB750~~RMB1,194 million in ~~2003~~2005 to ~~RMB1,104~~RMB1,230 million in ~~2004.~~2006. For Hong Kong ~~regional~~and Macau flights, passenger traffic in RPKs ~~increased~~decreased slightly by ~~54.6%~~0.5%, while passenger capacity in ASKs ~~increased~~decreased by ~~40.8%~~7.4%, resulting in a ~~5.6~~4.4 percentage point increase in passenger load factor from ~~2003.~~2005. Passenger yield ~~decreased~~increased from ~~RMB0.96~~RMB0.77 in ~~2003~~2005 to ~~RMB0.92~~RMB0.80 in ~~2004~~2006 mainly due to ~~intensified competition among airlines. Included in 2004 Hong Kong passenger revenue was~~higher ticket price as a result of soaring jet fuel surcharge imposed on Hong Kong regional flights of approximately RMB67 million (2003: RMB24 million). Excluding the effect of fuel surcharge revenue, the passenger yield decreased from RMB0.93 in 2003 to RMB0.86 in 2004.cost.

International passenger revenue, which accounted for 14.8% of total passenger revenue, increased by ~~55.0%~~24.1% from ~~RMB2,018~~RMB4,952 million in ~~2003~~2005 to ~~RMB3,127~~RMB6,145 million in ~~2004.~~2006. For international flights, passenger traffic in RPKs increased by ~~59.3%~~11.4%, while passenger capacity in ASKs increased by ~~52.1%~~9.0%, resulting in a ~~2.9~~1.4 percentage point rise in passenger load factor from ~~2003.~~2005. Passenger yield ~~decreased~~increased by ~~2.1%~~10.7% from ~~RMB0.47~~RMB0.56 in ~~2003~~2005 to ~~RMB0.46~~RMB0.62 in ~~2004~~2006 mainly ~~resulted~~resulting from the ~~increases~~continued growth in ~~traffic derived from long haul routes which generally had a lower yield than short haul routes.~~demand for international flights in PRC.

Cargo and mail revenue, which accounted for ~~9.6%~~7.8% of the Group’s total traffic revenue and ~~9.4%~~7.7% of total operating revenue, increased by ~~14.8%~~14.5% from ~~RMB1,955~~RMB3,091 million in ~~2003~~2005 to ~~RMB2,244~~RMB3,538 million in ~~2004.~~2006. The increase was attributable to the ~~increasing~~increased in traffic demand.

Other operating revenue increased by ~~24.8%~~29.5% from ~~RMB505~~RMB874 million in ~~2003~~2005 to ~~RMB630~~RMB1,132 million in ~~2004.~~2006. The increase was primarily due to the general growth in income from various auxiliary operations.

Operating expenses

Substantially all of the Group’s operating expenses result from its airline operations. The vast majority of such expenses relate directly to flight operations, aircraft and traffic servicing, aircraft repair and maintenance and to depreciation and amortisation in respect of aircraft and flight equipment. Expenses associated directly with the Group’s flight operations (collectively, “flight operations expenses”) include fuel costs, operating lease payments, catering expenses, aircraft insurance, flight personnel payroll and welfare and training expenses. Expenses associated directly with repairs and maintenance in respect of the Group’s aircraft (collectively, “repairs and maintenance expenses”) include repairs and maintenance and overhaul charges, the costs of consumables and other maintenance materials and labour costs for maintenance personnel. Expenses associated directly with the Group’s aircraft and traffic servicing operations (collectively “aircraft and traffic servicing expenses”) include landing and navigation fees, rental payments and charges in respect of terminal and other ground facilities and labour costs for ground personnel. The balance of the Group’s operating expenses result from promotional and marketing activities (collectively, “promotional and marketing expenses”) such as sales commissions, fees for use of the CAAC’s reservation system, ticket-printing and sales office expenses, advertising and promotional expenses, and from general and administrative expenses, such as administrative salaries and welfare and other personnel benefits and office expenses.

Flight operations expenses, which accounted for ~~45.2%~~54.0% of total operating expenses, increased by ~~47.4%~~28.1% from ~~RMB7,070~~RMB19,183 million in ~~2003~~2005 to ~~RMB10,418~~RMB24,574 million in ~~2004,~~2006, primarily as a result of increases in jet fuel costs, operating lease payments, catering expenses and labour costs for flight personnel and inclusion of CAAC Infrastructure Development Fund of RMB466 million in operating expenses which is an usage charge since 2004 but was a turnover-based levy and deducted against the traffic revenue in 2003.personnel. Jet fuel costs, which accounted for ~~58.1%~~65.9% of flight operations expenses, increased by ~~56.5%~~35.7% from ~~RMB3,867~~RMB11,929 million in ~~2003~~2005 to ~~RMB6,050~~RMB16,193 million in ~~2004~~2006 mainly as a result of increased fuel prices and fuel consumption. Operating lease payments increased by ~~8.4%~~34.5% from ~~RMB1,536~~RMB2,375 million in ~~2003~~2005 to ~~RMB1,665~~RMB3,194 million in ~~2004,~~2006 primarily due to the additional rental payments for new aircraft under operating leases. Catering expenses increased by ~~38.2%~~4.0% from ~~RMB510~~RMB1,196 million in ~~2003~~2005 to ~~RMB705~~RMB1,244 million in ~~2004, primarily~~2006 due to ~~increased passenger~~the increase in number of passengers carried. ~~Aircraft insurance costs decreased by 5.6% from RMB196 million in 2003 to RMB185 million in 2004, primarily because of a decrease in insurance premiums prescribed by the PRC insurance company.~~ Labour costs for flight personnel increased by ~~40.9%~~5.9% from ~~RMB728~~RMB1,619 million in ~~2003~~2005 to ~~RMB1,026~~RMB1,714 million in ~~2004,~~2006, largely due to the increase in flying ~~hours.~~hours and allowance standard. CAAC Infrastructure Development Fund Contributions increased by 15.2% from RMB978 million in 2005 to RMB1,127 million in 2006.

Operating income/(loss)

Non-operating income/(expenses)

On October 17, 2003, the Company’s registered address was moved to Guangzhou Economic & Technology Development Zone, Guangzhou, China. In accordance with the Rules and Regulations for Implementation of Income Tax for Foreign Investment Enterprises and Foreign Enterprises of the PRC and a taxation approval document “Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que 020043”, the Company is entitled to enjoy the preferential tax policy implemented in the Guangzhou Economic & Technology Development Zone effective from October 1, 2003. As a result, the Company’s income tax rate has been changed from 33% to 15% beginning from that date.

~~In 2003, the Group recorded an income tax benefit of RMB334 million resulting from reduction in net deferred taxation liability balance of RMB392 million. In 2004, income~~

~~Additional information under U.S. GAAP~~

Domestic passenger revenue, which accounted for 82.1% of the total passenger revenue in 2005, increased by 13.8% from RMB24,773 million in 2004 to RMB28,182 million in 2005. Domestic passenger traffic in RPKs increased by 17.8%, mainly due to an increase in passengers carried. Domestic passenger yield decreased ~~slightly~~ by RMB0.02 to RMB0.55 in 2005.

Hong Kong and Macau passenger revenue, which accounted for 3.5% of total passenger revenue, increased by 3.7% from RMB1,151 million in 2004 to RMB1,194 million in 2005. For Hong Kong and Macau regional flights, passenger traffic in RPKs increased by 18.5%, while passenger capacity in ASKs increased by 26.5%, resulting in a 4.0 percentage point decrease in passenger load factor from 2004. Passenger yield decreased from RMB0.88 in 2004 to RMB0.77 in 2005 mainly due to intensified competition among airlines.

International passenger revenue, which accounted for 14.4% of total passenger revenue, increased by 9.6% from RMB4,519 million in 2004 to RMB4,952 million in 2005. For international flights, passenger traffic in RPKs increased by 8.3%, while passenger capacity in ASKs increased by 5.4%, resulting in a 1.8 percentage point rise in passenger load factor from 2004. Passenger yield increased by 1.1% from RMB0.55 in 2004 to RMB0.56 in ~~2005.~~2005 mainly resulted from higher ticket price and the increases in traffic derived from short haul routes which generally had a higher yield than long haul routes.

Cargo and mail revenue, which accounted for 8.3% of the Group’s total traffic revenue and 8.1% of total operating revenue, increased by 10.7% from RMB2,792 million in 2004 to RMB3,091 million in 2005. The increase was attributable to the increasing traffic demand.

Other operating revenue decreased by 6.0% from RMB930 million in 2004 to RMB874 million in 2005. The decrease was primarily due to the reduced scale of other ~~operation.~~

~~Operating expenses~~

Total operating expenses in 2005 amounted to RMB39,385 million, representing an increase of 22.0% or RMB7,097 million over 2004, primarily due to the total effect of increases in jet fuel costs, maintenance expenses and aircraft and traffic servicing expenses. Total operating expenses as a percentage of total operating revenue increased from 94.5% in 2004 to 102.9% in 2005.

Flight operations expenses, which accounted for 48.7% of total operating expenses, increased by 27.8% from RMB15,016 million in 2004 to RMB19,183 million in 2005, primarily as a result of increases in jet fuel costs, operating lease payments, catering expenses and labour costs for flight personnel. Jet fuel costs, which accounted for 62.2% of flight operations expenses, increased by 39.4% from RMB8,555 million in 2004 to RMB11,929 million in 2005 mainly as a result of increased fuel prices and fuel consumption. Operating lease payments increased by 12.6% from RMB2,109 million in 2004 to RMB2,375 million in 2005 primarily due to the additional rental payments for new aircraft under operating leases. Catering expenses increased by 21.2% from RMB987 million in 2004 to RMB1,196 million in 2005 due to the increase in number of passengers carried. Aircraft insurance costs decreased by 60.8% from RMB268 million in 2004 to RMB105 million in 2005, mainly because of the decrease in insurance premiums in 2005. Labour costs for flight personnel increased by 4.8% from RMB1,545 million in 2004 to RMB1,619 million in 2005, largely due to the increase in flying hours and allowance standard.

~~Maintenance expenses which accounted for 11.7% of total operating expenses, increased by 0.2% from RMB4,578 million in 2004 to RMB4,589 million in 2005.~~

Aircraft and traffic servicing expenses, which accounted for 14.6% of total operating expenses, increased by 20.3% from RMB4,789 million in 2004 to RMB5,759 million in 2005. The increase primarily resulted from a 10.0% rise in landing and navigation fees from RMB4,447 million in 2004 to RMB4,891 million in 2005, due to an increase in number of landing and takeoffs.

Promotional and marketing expenses, which accounted for 7.1% of total operating expenses, increased by 6.7% from RMB2,606 million in 2004 to RMB2,780 million in 2005. The increase was mainly resulted from the increase in sales volume, resulting in a 17.0% increase in sales commission expenses from RMB1,285 million in 2004 to RMB1,503 million in 2005.

General and administrative expenses, which accounted for 6.2% of the total operating expenses, increased by 39.7% from RMB1,759 million in 2004 to RMB2,457 million in 2005. This was mainly attributable to increased scale of operations.

~~Depreciation and amortisation, which accounted for 11.2% of total operating~~

Operating expenses ~~increased by 25.1% from RMB3,523 million in 2004 to RMB4,406 million in 2005, mainly resulting from the additional depreciation charge on aircraft delivered in 2004 and 2005.~~

~~Operating (loss)/income~~

There is an operating loss of RMB1,092 million in 2005 as compared to an operating profit of RMB1,877 million in 2004. This was mainly because operating revenue increased by RMB4,128 million or 12.1% in 2005 while operating expenses increased by RMB7,097 million or 22.0% in the same period.

~~Non-operating income/(expenses)~~

Interest expense increased by 34.2% from RMB1,184 million in 2004 to RMB1,589 million in 2005, mainly due to the increase in loans and lease obligations and interest rate. Interest income increased by 66.7% from RMB33 million in 2004 to RMB55 million in 2005, mainly attributable to the increase of interest rate.

During 2005, the Group recorded a net exchange gain of RMB1,220 million (2004: net exchange loss of RMB124 million) mainly resulted from Renminbi appreciation in July 2005. Such amount represented mainly unrealised translation exchange gain, resulting from exchange gains on translated year end foreign currency denominated liabilities, rather than foreign exchange transactions incurred during the year.

~~Taxation~~

Income tax benefit for the year amounted to RMB46 million and actual effective tax rate was 3% in 2005 while the Group’s enacted tax rate is 15%. The difference is mainly due to a portion of tax loss with a deferred tax effect of RMB135 million not recognized as well as the effect of change in enacted income tax rate applicable to airline operations of CNA and XJA of RMB79 million. In 2004, income tax expense of RMB261 million was recorded and actual effective tax rate was 38% while the Group’s enacted tax rate in 2004 was 15%. The difference is mainly due to the effect of change in enacted income tax rate applicable to airline operations of CNA and XJA of RMB99 million, rate differential on airline operations of CNA and XJA of RMB43 million and non-deductible expenses of RMB37 million.

~~2004 Compared with 2003~~

The Group’s operating revenue increased by RMB8,682 million or 34.1% from RMB25,483 million in 2003 to RMB34,165 million in 2004. Such growth was primarily attributable to growth in volume of passenger traffic carried by the Group as a result of the recovery of the Group’s traffic operations from SARS and flight capacity. Operating expenses increased by RMB7,171 million or 28.6% from RMB25,117 million in 2003 to RMB32,288 million in 2004. As operating revenue increased more than operating expenses, operating profit increased by 412.8% from RMB366 million in 2003 to RMB1,877 million in 2004. The Group’s net non-operating expenses decreased by 38.5%, from RMB1,905 million in 2003 to RMB1,171 million in 2004, primarily attributable to a decrease in unfavourable movement in foreign exchange differences of RMB257 million and a decrease in interest expense of RMB420 million. Overall, the Group recorded a net income of RMB239 million in 2004, as compared to a net loss of RMB1,140 million in 2003.

~~Operating revenue~~

Substantially all of the Group’s operating revenue is attributable to airline and airline related operations. Traffic revenue in 2004 and 2003 accounted for 97.3% and 97.7% respectively of total operating revenue. Passenger revenue and, cargo and mail revenue accounted for 91.6% and 8.4% respectively of total traffic revenue in 2004. The balance of the Group’s operating revenue is derived from commission income, income from general aviation operations, fees charged for ground services rendered to other Chinese airlines and air catering services.

Operating revenue increased by 34.1% from RMB25,483 million in 2003 to RMB34,165 million in 2004. This increase was primarily due to a 35.7% rise in passenger revenue from RMB22,438 million in 2003 to RMB30,443 million in 2004 resulting from increased traffic volume. The total number of passengers carried increased by 33.0% to 38.7 million passengers in 2004. RPKs increased by 34.3% from 39,626 million in 2003 to RMB53,233 million in 2004, primarily as a result of an increase in passengers carried. Passenger yield increased to RMB0.57.

Domestic passenger revenue, which accounted for 81.4% of the total passenger revenue in 2004, increased by 32.6% from RMB18,679 million in 2003 to RMB24,773 million in 2004. Domestic passenger traffic in RPKs increased by 30.6%, mainly due to an increase in passengers carried. Passenger yield increased to RMB0.57 in 2004.

Hong Kong passenger revenue, which accounted for 3.8% of total passenger revenue, increased by 47.4% from RMB781 million in 2003 to RMB1,151 million in 2004. For Hong Kong regional flights, passenger traffic in RPKs increased by 68.0%, while passenger capacity in ASKs increased by 55.8%, resulting in a 4.5 percentage point increase in passenger load factor from 2003. Passenger yield decreased from RMB1.00 in 2003 to RMB0.88 in 2004 mainly due to intensified competition among airlines.

International passenger revenue, which accounted for 14.8% of total passenger revenue, increased by 51.7% from RMB2,978 million in 2003 to RMB4,519 million in 2004. For international flights, passenger traffic in RPKs increased by 52.8%, while passenger capacity in ASKs increased by 44.1%, resulting in a 3.6 percentage point rise in passenger load factor from 2003. Passenger yield remain steady in 2004 and at RMB0.55.

Cargo and mail revenue, which accounted for 8.4% of the Group’s total traffic revenue and 8.2% of total operating revenue, increased by 13.5% from RMB2,459 million in 2003 to RMB2,792 million in 2004. The increase was attributable to the increasing traffic demand.

~~Other operating revenue increased by 58.7% from RMB586 million in 2003 to RMB930 million in 2004. The increase was primarily due to the general growth in income from various auxiliary operations.~~

~~Operating expenses~~

Total operating expenses in ~~2004~~2005 amounted to ~~RMB32,288~~RMB39,312 million, representing an increase of ~~28.6%~~21.8% or ~~RMB7,171~~RMB7,024 million over ~~2003,~~2004, primarily due to the combined effect of increases in jet fuel costs, maintenance expenses and aircraft and traffic servicing expenses. ~~In addition, in 2003, the Group recorded an asset impairment charge of RMB510 million on certain aircraft of CNA. The Group did not incur any asset impairment charges on its aircraft in 2004.~~ Total operating expenses as a percentage of total operating revenue ~~decreased~~increased from ~~98.6% in 2003 to~~ 94.5% in ~~2004.~~2004 to 102.7% in 2005.

Flight operations expenses, which accounted for ~~46.5%~~48.8% of total operating expenses, increased by ~~45.1%~~27.8% from ~~RMB10,351 million in 2003 to~~ RMB15,016 million in 2004 to RMB19,183 million in 2005, primarily as a result of increases in jet fuel costs, operating lease payments, catering expenses and labour costs for flight personnel and inclusion of CAAC Infrastructure Development Fund of RMB632 million in operating expenses which is an usage charge since 2004 but was a turnover-based levy and deducted against the traffic revenue in 2003.personnel. Jet fuel costs, which accounted for ~~57.0%~~62.2% of flight operations expenses, increased by ~~51.1%~~39.4% from ~~RMB5,662 million in 2003 to~~ RMB8,555 million in 2004 to RMB11,929 million in 2005 mainly as a result of increased fuel prices and fuel consumption. Operating lease payments increased by ~~16.6%~~12.4% from ~~RMB1,808 million in 2003 to~~ RMB2,109 million in 2004 to RMB2,375 million in 2005, primarily due to the additional rental payments for new aircraft under operating leases. Catering expenses increased by ~~30.9%~~21.2% from ~~RMB754 million in 2003 to~~ RMB987 million in 2004 to RMB1,196 million in 2005, primarily due to an increase in number of passengers carried. Aircraft insurance costs decreased by ~~7.9%~~60.8% from ~~RMB291 million in 2003 to~~ RMB268 million in 2004 to RMB105 million in 2005, primarily because of a decrease in insurance premiums ~~prescribed by the PRC insurance company.~~in 2005. Labour costs for flight personnel increased by ~~37.2%~~4.8% from ~~RMB1,126 million in 2003 to~~ RMB1,545 million in 2004 to RMB1,619 million in 2005, largely due to the increase in flying ~~hours.~~hours and allowance standard.

Maintenance expenses which accounted for ~~14.2%~~10.3% of total operating expenses, ~~increased~~decreased by ~~18.1%~~11.5% from ~~RMB3,878 million in 2003 to~~ RMB4,578 million in ~~2004. The increase was primarily attributable~~2004 to ~~an 16.7% increase in aircraft overhaul charges from RMB2,913~~RMB4,051 million in ~~2003~~2005. The decrease was mainly due to ~~RMB3,399 million in 2004, which was resulted from fleet expansion in recent years.~~certain major overhaul costs capitalized during the year.

Aircraft and traffic servicing expenses, which accounted for ~~14.8%~~14.6% of total operating expenses, increased by ~~25.9%~~20.3% from ~~RMB3,803 million in 2003 to~~ RMB4,789 million in ~~2004.~~2004 to RMB5,759 million in 2005. The increase primarily resulted from ~~an 25.7%~~a 10.0% rise in landing and navigation fees from ~~RMB3,539 million in 2003 to~~ RMB4,447 million in 2004 ~~and~~to RMB4,891 million in 2005, as a result of an increase in number of landing and takeoffs.

Promotional and marketing expenses, which accounted for ~~8.1%~~7.1% of total operating expenses, increased by ~~27.6%~~6.7% from ~~RMB2,043 million in 2003 to~~ RMB2,606 million in ~~2004.~~2004 to RMB2,780 million in 2005. The increase was mainly due to ~~40.0%~~the increase in ~~labour costs~~sales volume, resulting in a 17.0% increase in sales commission expenses from ~~RMB305 million in 2003 to RMB427~~RMB1,285 million in 2004 ~~as more payments of performance bonus were made because of the increased traffic volume.~~to RMB1,503 million in 2005.

General and administrative expenses, which accounted for ~~5.4%~~6.3% of the total operating expenses, increased by ~~25.9%~~39.7% from ~~RMB1,397 million in 2003 to~~ RMB1,759 million in ~~2004.~~2004 to RMB2,457 million in 2005. This was mainly attributable to increased scale of operations.

Depreciation and amortisation, which accounted for ~~11.0%~~12.4% of total operating expenses, increased by ~~15.8%~~38.3% from ~~RMB3,042 million in 2003 to~~ RMB3,523 million in ~~2004.~~2004 to RMB4,871 million in 2005. This increase was primarily as a result of the ~~additions~~the additional depreciation charge on aircraft delivered in 2004 and 2005 and depreciation charge on capitalized major overhaul costs.

Operating (loss)/income

The Group recorded an operating loss of ~~aircraft during 2004.~~

~~Operating income~~

~~Operating income increased by 412.8% from RMB366~~RMB1,019 million in ~~2003~~2005 as compared to an operating profit of RMB1,877 million in 2004. ~~This~~The loss was mainly ~~because~~due to an operating revenue ~~increased by RMB8,682~~increase of RMB4,128 million or ~~34.1% from 2003~~12.1% in 2005 and an operating ~~expenses increased by RMB7,171~~expense increase of RMB7,024 million or ~~28.6% over~~21.8% in the same period.

Non-operating income/(expenses)

Interest expense ~~decreased~~increased by ~~26.2%~~34.2% from ~~RMB1,604 million in 2003 to~~ RMB1,184 million in 2004 to RMB1,589 million in 2005, mainly ~~reflecting~~due to the ~~combined effect of scheduled debt repayments~~increase in loans and ~~the replacement of certain RMB denominated bank loans of higher~~lease obligations and interest ~~rates with US$ denominated bank loans of lower interest rates.~~rate.

Interest income increased by ~~22.2%~~66.7% from ~~RMB27 million in 2003 to~~ RMB33 million in ~~2004. This was~~2004 to RMB55 million in 2005, mainly attributable to anthe increase ~~in average cash balances.~~of interest rate.

~~During 2004, the~~

The Group recorded a net exchange gain of RMB1,220 million in 2005, compared to a net exchange loss of RMB124 million ~~(2003: RMB381 million)~~in 2004, mainly resulting from ~~its Japanese yen denominated borrowings as a result of the Japanese yen appreciation.~~Renminbi appreciation in July 2005. Such amount ~~comprised mostly~~represents mainly unrealised ~~translational~~translation exchange ~~loss.~~gain, resulting from exchange gains on translated year end foreign currency denominated liabilities, rather than foreign exchange transactions incurred during the year.

~~Taxation~~

~~On 17 October, 2003,~~Taxation

Income tax benefit for the ~~Company’s registered address~~year amounted to RMB35 million and the actual effective tax rate was ~~moved~~3% in 2005 while the Group’s enacted tax rate was 15%. The difference is mainly due to ~~Guangzhou Economic & Technology Development Zone, Guangzhou, China. In accordance~~a portion of tax loss with a deferred tax effect of RMB135 million not recognized, as well as the ~~Rules and Regulations for Implementation~~effect of Income Tax for Foreign Investment Enterprises and Foreign Enterprises of the PRC and a taxation approval document “Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que 020043”, the Company is entitled to enjoy the preferential tax policy implementedchange in the ~~Guangzhou Economic & Technology Development Zone effective from 1 October, 2003. As a result, the Company’s~~enacted income tax rate ~~has been changed from 33%~~applicable to ~~15% beginning from that date. In 2003, the Group recorded an income tax benefit of RMB536 million resulting from a reduction in net deferred taxation liability balance of RMB341 million.~~

~~The~~ airline operations of CNA and XJA ~~were subject to PRC~~of RMB79 million. In 2004, income tax ~~at 33% during 2003~~expense of RMB261 million was recorded and upactual effective tax rate was 38% while the Group’s enacted tax rate in 2004 was 15%. The difference is mainly due to ~~December 30, 2004. As a result~~the effect of the ~~CNA/XJA Acquisitions having been effective December 31, 2004, the~~change in enacted income tax rate applicable to airline operations of CNA and XJA ~~have become divisions~~ of ~~the Company and are subject to PRC income tax at the applicable~~RMB99 million, rate ~~of 15% beginning that date. Consequently, the~~differential on airline operations of CNA and XJA ~~recorded an income tax benefit~~ of ~~RMB99 million. Overall, net income tax~~RMB43 million and non-deductible expenses of ~~the airline operations of CNA and XJA amounted to RMB274 million for 2004.~~RMB37 million.

~~Minority interests~~

Minority interests increased by 52.0% from RMB127 million in 2003 to RMB193 million in 2004, primarily reflecting the increased net profits earned by certain of the Group’s airline subsidiaries for the year.

Liquidity and Capital Resources

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

In July 1997, the Company received net proceeds of RMB5,459 million from its initial public offering.

A majority part of these net proceeds was utilized to finance the Group’s working capital and capital expenditure requirements. In July 2003, the Company issued 1,000,000,000 A Shares with a par value of RMB1.00 each at issue price of RMB2.70 by way of a public offering to natural persons and institutional investors in the PRC. The proceeds received by the Company of RMB2,641 million, net of the issuance costs of RMB59,233, ~~amounted to RMB2,641 million and~~ have been used for the purchase of Boeing 737-800 aircraft in accordance with the disclosure in the Prospectus for Offering of the A Shares.

As of December 31, ~~2005,~~2006, the Group had banking facilities with several PRC commercial banks for providing loan finance up to an approximate amount of ~~RMB39,294~~RMB49,041 million to the Group. As of December 31, ~~2005,~~2006, an approximate amount of ~~RMB28,242~~RMB28,295 million was utilized. As of December 31, ~~2004~~2005 and ~~2005,~~2006, the Group’s cash and cash equivalents totaled ~~RMB3,083~~RMB2,901 million and ~~RMB2,901~~RMB2,264 million, respectively.

Net cash inflows from operating activities in ~~2003,~~ 2004, 2005 and ~~2005~~2006 were ~~RMB2,129~~RMB3,574 million, ~~RMB3,596~~RMB4,417 million and ~~RMB3,835~~RMB2,217 million, respectively.Cash from operations was RMB4,533 million, RMB6,001 million and RMB4,641 million in 2004, 2005 and 2006 respectively. The increase in cash from operations in 2005 was due to the delay in payment of liabilitieis. Interest expense increasd from RMB754 million in 2004, to RMB1,616 million in 2005 and further to RMB2,419 million in 2006 as a result of the increased borrowings during the years.

Net cash used in investing activities in ~~2003,~~ 2004, 2005 and ~~2005~~2006 was ~~RMB5,434 million,~~ RMB8,824 million, RMB8,547 million and ~~RMB8,009~~RMB5,404 million, respectively. Cash capital expenditures in ~~2003,~~ 2004, 2005 and ~~2005~~2006 were ~~RMB4,707 million,~~ RMB6,631 million, RMB5,473 million and ~~RMB4,935~~RMB2,566 million, respectively, reflecting predominantly additional investments in aircraft and flight equipment under the Group’s fleet expansion plans and Guangzhou new airport, and, to a small extent, additional investments in other facilities and buildings for operations.

Financing activities resulted in net cash inflows of ~~RMB1,615 million,~~ RMB6,231 million, ~~and~~ RMB3,992 million and RMB2,550 million in ~~2003,~~ 2004, 2005 and 2006, respectively. Net cash from new notes payable and repayments amounted to RMB7,447 million, RMB6,045 million and RMB5,870 in 2004, 2005 and 2006, respectively. The additional cash is for capital expenditures and general working capital. Repayment of capital leases in 2004, 2005 and 2006 was RMB1,272 million, RMB2,050 million and RMB3,313 milion, respectively, resulting from the aircraft acquisitions under capital leases.

As of December 31, ~~2005,~~2006, the Group’s aggregate long-term debt and obligations under capital leases totaled ~~RMB30,449~~RMB29,330 million. ~~Based on such amount, in 2006,~~In 2007, 2008, 2009, 2010, 2011 and thereafter, amounts payable under such debt and obligations will be ~~RMB5,250~~RMB7,005 million, ~~RMB7,246~~RMB5,786 million, ~~RMB4,764~~RMB3,853 million, ~~RMB2,812~~RMB1,831 million, ~~RMB1,472~~RMB6,474 million and ~~RMB8,905 million.~~RMB4,381 million respectively. Such borrowings were denominated, to a larger extent, in United States dollars and, to a smaller extent, in Japanese yen and Hong Kong dollars, with a significant portion being fixed interest rate borrowings. In the normal course of business, the Group is exposed to fluctuations in foreign currencies. The Group’s exposure to foreign currencies ~~was~~ primarily ~~as a result of~~results from its foreign currency debts. Depreciation or appreciation of the Renminbi against foreign currencies affects the Group’s results significantly because the Group’s foreign currency payments generally exceed its foreign currency receipts. The Group is not able to hedge its foreign currency exposure effectively other than by retaining its foreign currency denominated earnings and receipts to the extent permitted by the State Administration of Foreign Exchange, or subject to certain restrictive conditions, entering into forward foreign exchange contracts with authorised PRC banks.

As of December 31, ~~2005,~~2006, the Group’s short term bank debt was ~~RMB14,346 million with interest rates ranging from 3.15% to 5.34% per annum.~~RMB19,908 million. The Group’s weighted average interest rate on short-term bank notes payable was ~~4.83%~~5.77% per annum as of December 31, ~~2005.~~2006. The primary use of the proceeds of the Group’s short-term debt is to finance working capital needs. The Group has generally been able to arrange short-term bank loans with domestic banks in China as necessary and believes it can continue to obtain them based on its well-established relationships with various lenders.

Through ~~April 19, 2006,~~May 31, 2007, the Group ~~renewed~~refinanced certain short-term bank debts of ~~RMB2,611~~RMB4,170 million. The ~~renewed~~refinanced bank debts are unsecured, bear interest at floating rates ranging from 3-month ~~HIBOR/~~LIBOR/6-month LIBOR ++0.50% to 0.55% ~~to 0.60%~~ per annum and are repayable one year from their respective ~~renewal~~refinanced dates. In addition, the Group entered into new short term bank debts agreement totalling ~~RMB2,671~~RMB6,435 million subsequent to December 31, ~~2005.~~2006. These new ~~short term~~short-term bank debts are unsecured and bear interest at floating rates ranging from ~~6-month~~3-month/6-month/12-month LIBOR + ~~0.55% to 0.70% per annum with maturities through 2008.~~

From April 20, 2006 to May 31, 2006, the Group entered into additional new bank debts agreements totalling RMB3,808 million. These additional bank debts are unsecured, bear interest at floating rates ranging from 6-month LIBOR + 0.53%0.45% to 0.55% per annum ~~and~~with are repayable from five months to one year from ~~these~~their respective origination dates.

As of December 31, ~~2005,~~2006, the Group had obligations under operating leases totaling ~~RMB24,594~~RMB21,969 million, predominately for aircraft. Of such amount, ~~RMB3,340~~RMB3,077 million, ~~RMB2,881~~RMB2,965 million, ~~RMB2,785~~RMB2,775 million, ~~RMB2,609~~RMB2,613 million, ~~RMB2,523~~RMB2,493 million and ~~RMB10,456~~RMB8,046 million, respectively, ~~was~~is due in ~~2006,~~ 2007, 2008, 2009, 2010, 2011 and thereafter.

As of December 31, ~~2005,~~2006, the Group had a working capital deficit of ~~RMB25,907~~RMB32,180 million, as compared to a working capital deficit of ~~RMB18,855~~RMB25,907 million as of December 31, ~~2004.~~2005. Historically, the Group operated in a negative working capital position, relying on cash inflow from operating activities and short-term bank debt refinancings to meet its short-term liquidity and working capital needs. The increase in the Group’s working capital deficit from ~~2004~~2005 to ~~2005~~2006 was mainly because the Group sought increased ~~short term~~short-term debts to finance its aircraft acquisitions. Upon deliveries of the aircraft, the Group continued to seek renewal of its short-term debts instead of replacing such debts with long-term debts, as the interest rates for short-term debts are lower. ~~The~~In 2007 and thereafter, the liquidity of the Group ~~in the future will~~is primarily be dependent on its ability to maintain adequate cash ~~inflow~~inflows from operations ~~to meet its debt obligations as they become due~~ and ~~on its ability~~ to obtain adequate external financing to meet both its debt obligations as they fall due and committed future capital expenditures. ~~The Group has obtained firm commitments from its principal bankers to renew its short-term bank loans outstanding at~~At December 31, ~~2005 when they fall due~~2006, the Group entered into loan financing agreements with several PRC banks to provide financing up to RMB49,041 million during ~~2006.~~2007, of which approximately RMB28,295 million was utilized. Subsequent to December 31, ~~2005,~~2006 and up to May 31, 2007, the Group ~~renewed short-term debts~~entered into additional loan financing agreements to obtain financing up to RMB5,045 million during 2007. The directors of ~~RMB2,611 million.~~the Company believe that sufficient financing will be available to the Group.

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

As of December 31, ~~2005,~~2006, the Group had capital commitments in 2006, 2007, 2008, 2009 and 2010 of approximately RMB8,933 million, RMB9,445 million, RMB14,437 million, RMB5,300 and RMB9,688 respectively. Of such amounts, RMB7,341 million in 2006, RMB8,945 million in 2007 and RMB14,354 million in 2008, RMB5,300 million in 2009 and RMB9,688 million in 2010 are related to the acquisition of aircraft and related flight equipment, and RMB840 million in 2006 is related to the Group’s facilities and equipment to be constructed and installed at the Guangzhou new airport. The remaining amounts of RMB752 million in 2006, RMB500 million in 2007 and RMB83 million in 2008 are related to the Group’s otheras follows:

	2007		2008		2009		2010		2011		Total
	(RMB million)

Acquision of aircraft and related equipment		12,299		22,572		17,483		14,232		295		66,881
Others		945		328		261		145		145		1,824

		13,244		22,900		17,744		14,377		440		68,705

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

As of December 31, ~~2005,~~2006, the Group undertook to make a capital contribution of approximately RMB83 million to a jointly controlled ~~entities.~~entity.

As of December 31, ~~2005,~~2006, the cash and cash equivalents of the Group totaled ~~RMB2,901~~RMB2,264 million. Of such balance, ~~20.4%~~15.0% was denominated in foreign currencies.

~~No interim dividend was paid during the year ended December 31, 2005. The Board of Directors does not recommend the payment of a final dividend in respect of the year ended December 31, 2005.~~

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

Contractual Obligations and Commercial Commitments

The following table sets forth the Group’s obligations and commitments to make future payments under contracts and under contingent commitments as of December 31, ~~2005.~~2006.

As of December 31, 2005 As of December
Payment due by period 31, 2004
less than
Total 1 year 1-3 years 4-5 years After 5 years Total
(RMB million)
Contractual obligations

Short-term debt (Note 2) 14,346 11,735 2,611 — — 9,925
Long-term debt 14,617 1,877 6,472 2,095 4,173 13,528
Capital lease obligations 15,832 3,373 5,538 2,189 4,732 11,743

Cash payable for CNA/ XJA Acquisitions — — — — — 1,959

Total contractual obligations
44,795 16,985 14,621 4,284 8,905 37,155

Other commercial commitments

Operating lease commitments 24,594 3,340 5,666 5,132 10,456 12,750
Aircraft purchase commitments (Note 1) 45,628 7,341 23,299 14,988 — 11,776
Capital commitments in respect of investments in the Guangzhou new airport 840 840 — — — 824
Other capital commitments 1,335 752 583 — — 700
Investing commitments 83 83 — — — 83

Total commercial obligations
72,480 12,356 29,548 20,120 10,456 26,133

Estimated future interest payments on short term debt and long term debt

Fixed rates 3,285 785 1,071 640 789 2,388
Variable rates 2,171 935 635 369 232 939

5,456 1,720 1,706 1,009 1,021 3,327

~~Note 1 Amounts shown are net of previously paid purchase deposits.~~

Note 2 Short term bank debts included certain debts of RMB2,611 million which were renewed subsequent to December 31, 2005. The renewed debts are unsecured, bear interest at floating rates ranging from 3-month HIBOR/6-month LIBOR + 0.55% to 0.60% per annum and are repayable one year from their respective renewal dates.

	As of December 31, 2006 Payment due by period										As of December 31, 2005
	Total		less than 1 year		1-3 years		3-5 years		After 5 years		Total
	(RMB million)
Contractual obligations
Short-term debt		19,908		19,908		—		—		—		14,346
Long-term debt		13,932		3,914		5,205		2,314		2,499		14,617
Capital lease obligations		15,398		3,091		4,434		5,991		1,882		15,832
Total contractual obligations		49,238		26,913		9,639		8,305		4,381		44,795
Other commercial commitments
Operating lease commitments		21,969		3,077		5,740		5,106		8,046		24,594
Aircraft purchase commitments (Note 1)		66,881		12,299		40,055		14,527		—		45,628
Capital committments in respect of investments in the Guangzhou new airport		—		—		—		—		—		840
Other capital commitments		1,824		945		589		290		—		1,335
Investing commitments		83		83		—		—		—		83
Total commercial obligations		90,757		16,404		46,384		19,923		8,046		72,480

Estimated future interest payments on short term debt and long term debt
Fixed rates		3,374		774		1,071		1,184		345		3,056
Variable rates		3,075		1,230		829		545		471		2,171
		6,449		2,004		1,900		1,729		816		5,227

Note 1 Amounts shown are net of previously paid purchase deposits.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

Directors, Senior Management and Employees

The following table sets forth certain information concerning directors (“Directors”), senior management (“Senior Management”) and supervisors (“Supervisors”) of the Company in ~~2005.~~2006. There were certain changes in the Company’s Directors, Senior Management and Supervisors subsequent to December 31, ~~2005,~~2006, details of which are set forth below.

Name	Position	Gender
~~Name~~	~~Position~~	~~Gender~~	Age

Liu Shao Yong	Chairman of the Board	Male		48	49
~~Liu Ming Qi(1)~~	~~Vice Chairman of the Board~~	~~Male~~		62
~~Peng An Fa(2)~~Li Wen Xin (1)	Director	Male		58	57
Wang Quan Hua	Director	Male		52	53
Zhao Liu An	Director	Male		58
~~Zhou Yong Qian(3)~~	~~Director~~	~~Male~~		61	59
Si Xian Min	Director, President	Male		49	50
~~Zhou Yong Jin(1)~~Tan Wan Geng (2)	Director, Vice President	Male		63	43
Xu Jie Bo	Director, Chief Financial Officer and Vice President	Male		41	42
~~Wu Rong Nan(1)~~Chen Zhen You (2)	Director	Male		64
~~Simon To(4)~~	~~Independent Non-executive Director~~	~~Male~~		55
Peter Lok	Independent Non-executive Director	Male		70	71
Wei Ming Hai	Independent Non-executive Director	Male		42


~~Name~~	~~Position~~	~~Gender~~	~~Age~~
43
Wang Zhi	Independent Non-executive Director	Male		64	65
Sui Guang Jun	Independent Non-executive Director	Male		45	46
Sun Xiao Yi	Chairman of the Supervisory Committee	Male		52	53
Yang Guang Hua	Supervisor	Male		53	54
Yang Yi Hua	Supervisor	Female		46
~~Li Kun(5)~~	~~Vice President~~	~~Male~~		46	47
Yuan Xin An	Vice President	Male		49
~~Zheng En Ren(6)~~	~~Vice President~~	~~Male~~		61	50
Hao Jian Hua	Vice President	Male		55	56
~~Ren Ji Dong(7)~~He Zong Kai	Vice President	Male		41
~~He Zong Kai(7)~~	~~Vice President~~	~~Male~~		55	56
Liu Qian	Chief Pilot	Male	41
40Dong Su Guang(3)	Chief Engineer	Male	53
Su Liang	Company Secretary	Male		44	45
Chen Wei Hua	General Counsel	Male		40	41


(1)		The ~~resignation~~appointment of ~~Liu Ming Qi, Zhou Yong Jin and Wu Rong Nan~~Li Wen Xin as ~~Directors due to their retirement was approved at~~ the ~~first and second extraordinary general meetings of the Company on December 16, 2005.~~

~~(2)~~		~~The removal of Peng An Fa as~~ Director of the Company ~~owing to suspicion that he had committed a crime~~ was ~~discussed and~~ approved at the first extraordinary general meeting 2006 of the Company held on December ~~16, 2005.~~28, 2006.

~~(3)~~	(2)	The ~~resignation~~appointments of ~~Zhou Yong Qian~~Tan Wan Geng and Chen Zhen You as ~~Director~~the Directors of the Company ~~due to his retirement was~~were approved at ~~the~~ 2005 annual general meeting of the Company held on June 15, 2006.


~~(4)~~	(3)	The ~~resignation~~appointment of ~~Simon To~~Dong Su Guang as ~~independent non-executive Director upon~~ the ~~expiry of his six years’ term was approved at the second extraordinary general meeting of the Company on December 16, 2005.~~

~~(5)~~		~~Li Kun was relocated to another position and his resignation as Vice President~~chief engineer of the Company was approved ~~by the Board of the Company on December 13, 2005.~~

~~(6)~~		~~The resignation of Zheng En Ren as Vice President of the Company due to his retirement was approved by the Board of the Company~~ on April ~~19,~~8, 2006.

~~(7)~~		~~The appointment of Ren Ji Dong and He Zong Kai as Vice Presidents of the Company were approved by the Board on March 29, 2005.~~

BOARD OF DIRECTORS

Mr. Liu Shao Yongis the chairman of the Board. He is a qualified class one pilot. He joined the Company in November 2004. Mr. Liu graduated from China Civil Aviation Flying College and obtained an EMBA from Tsinghua University in 2005. He joined the civil aviation industry in 1978. He held the positions of Captain of the Flying Squadron of China General Aviation Corporation and was appointed as the Deputy General Manager of China General Aviation Corporation, Deputy Director of Shanxi Provincial Civil Aviation Administration, General Manager of the Shanxi branch of China Eastern Airlines Corporation Limited and the Chief of the Flying Model Division of the Civil Aviation Administration of China. He served as the General Manager of China Eastern Airlines Corporation Limited and was appointed as the Vice Minister of Civil Aviation Administration of China. Since August 2004, Mr. Liu has served as the General Manager of China Southern Air Holding Company. Mr. Liu became the chairman of the Board on November 29, 2004.

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

Mr. Wang Quan Huais currently a Director of the Company and Vice President of CSAHC and became the employee of the Company in March 1995 after the establishment of the Company. Mr. Wang graduated from the Economic Management Department of Central Communist Party College. Mr. Wang began his career in civil aviation in 1972, and successively served as the Director of Planning Department of Guangzhou Civil Aviation Administration, the Office Director of China Southern Airlines Shenzhen Co., the Director of the Planning and Operation Division of CSAHC, the President of Strategy and Development Department of China Southern Airlines

Company Limited and the Vice President of CSAHC. Mr. Wang became a Director of the Company on May 13, 2003.

Mr. Zhao Liu Anis a Director of the Company and the Vice President of CSAHC. Mr. Zhao joined the Company in May 2003. Mr. Zhao began his career in civil aviation in 1966, and successively served as the Director of Flight Meteorology and Flight Safety Monitoring Division, Director of Science Education Division, the Director of Flying Model Division of Urumqi Civil Aviation Administration, Captain of the Ninth Squadron of the Civil Aviation Administration, the Vice President and President of Urumqi Civil Aviation Administration and Xinjiang Airlines. Mr. Zhao became a Director of the Company on May 13, 2003.

Mr. Si Xian Minis a Director and President of the Company. Mr. Si graduated from No. 14 Aviation College as an aircraft piloting major with an associate degree. Mr. Si, a professional political tutor, he began his career in civil aviation in 1975. He held positions as Director of the political division of China Southern Airlines Henan Branch, Party Secretary and Vice President of Guizhou Airlines, Deputy Party Secretary of China Southern Airlines Company Limited, Secretary of the Disciplinary Department of China Southern Airlines Company Limited and Party Secretary of China Northern Airlines and has been the President of the Company since October 2004. Mr. Si became a Director of the Company on December 31, 2004.

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

Mr. Xu Jie Bois a Director, Vice President and Chief Financial Officer of the Company. Mr. Xu joined the Company in July 1998. He graduated from the Management Department of Tianjin University and was subsequently awarded ~~with~~ a ~~master~~master's degree in business administration from Hong Kong Baptist University. A qualified senior accountant by profession, Mr. Xu started his career in August 1986 and worked as Supervisor of the Financial Management Office for Infrastructure Projects of Guangzhou Civil Aviation Administration. In December 1992, he took up the posts of Deputy Director and Director of the Financial Department of Central and Southern China Civil Aviation Administration. In July 1998, he became General Manager of the Financial Department and Chief Financial Officer of the Company. Currently, he is a Director and the Vice President and Chief Financial Officer of the Company. He is also a Director of Guizhou Airlines Company Limited, Vice Chairman of Sichuan Airlines Corporation Limited, and Vice Chairman of Xiamen Airlines Company Limited. Mr. Xu became a Director of the Company on April 16, 2001.

Mr. Chen Zhen You is a Director and Chairman of the Labour Union of the Company, graduated from South China Normal University with a bachelor’s degree in English. Mr. Chen, an economist, holds an MBA from Murdoch University in Australia. He worked as the Vice Director of the Office of International Affairs of Guangzhou Civil Aviation Administration, Vice Director of the Office of Overseas Business of the Company and General Manager of the Department of Foreign Affairs of the Company from 1991 to 2001. From 2001 to 2005, he was the Office Director of CSAHC and the Director of the Planning and Investment Department of China Southern Air Holding Company. He has been a member of the Party Committee and Chairman of the Labour Union of the Company since February 2005. Save as disclosed above, Mr. Chen is not connected with any of the Directors, Senior Management, substantial shareholders or Supervisors of the Company.

Mr. Peter Lokhas been an Independent Non-Executive Director of the Company since April 16, 2001. He is also a veteran in the civil aviation industry. Mr. Lok joined the Civil Aviation Department of Hong Kong in 1956 and became its Assistant Director in 1982, Deputy Director in 1988, and Director from 1990 to 1996. From 1997 to 2000, Mr. Lok was an advisor and president of Hong Kong Commercial Airlines Center. Mr. Lok has sat on various Committees such as the Evaluation Committees for the Design of Shanghai’s Pudong Airport, Committee for China’s Zhuhai Aviation and Spaceflight Fair, Evaluation Committees for the IATA Eagle Award. He is also independent director of several listed airline companies.

Mr. Wei Ming Haihas been an Independent Non-Executive Director of the Company since April 16, 2001. Professor Wei has worked in Jiangxi Provincial Accounting Association, and he started working in Zhongshan University from 1991. In 1993 he became the chairman of the Accounting Department in the School of Management of Zhongshan University. In 1996 he became the Deputy Dean of the School of Management in Zhongshan University. In January 2000, he became Dean of the School of Management in Zhongshan University. Since 1998, Professor Wei has been a doctorate advisor for Accounting Information and Investment Analysis. Professor Wei is also on the board of directors of China Accountants Association, Vice Chairman of Accountants Association of Guangdong Province, Vice Chairman of Auditors Association of Guangzhou, , Executive Member of the Research Institute of Financial Costs for Young and Middle-aged Accountants and member of American Accounting Association. Professor Wei holds a Ph.D degree in economics and has an MBA degree from Tulane University in the United States of America. He has published over 7seven academic books or textbooks, and over 80 academic papers.

Mr. Wang Zhihas been an Independent Non-Executive Director of the Company since May 2003. Mr. Wang graduated from the Aircraft Design Department of Harbin Institute of Technology. Mr. Wang began his career in 1965, and has successively served as the Director and Senior Engineer of Aeronautics Research Institute of China, the Vice Director and Vice secretary of the First Research Institute of Civil Aviation, the Vice Director and Director of the Planning Bureau of CAAC and the Director of the Planning Technology System Reform Department and the Planning Technology Department of CAAC. Mr. Wang is also a professor inat several universities.

Mr. Sui Guang Junhas been an Independent Non-Executive Director of the Company since May 2003. Mr. Sui graduated from the Economic Department of Jinan University and obtained a ~~master~~master's degree. Mr. Sui obtained a doctor degree in the Management of Organizations of Jinan University. He has successively served as the Vice Director of the Research Institute of Hong Kong and Macao Economies, the Dean of corporate administration department of Jinan University and the Chief of the Post-doc Committee of Applied Economics and the Dean of Management College in Jinan University. Mr. Sui is currently the Deputy Vice Chancellor of Guangdong University of Foreign Studies.

The independent non-executive Directors of the Company are nominated by the Board of Directors, and their appointment must be approved by the shareholders of the Company in a general meeting. The executive Directors of the Company are nominated by CSAHC, the controlling shareholder of the Company, and their appointment must be approved by the shareholders of the Company in a general meeting.

SUPERVISORY COMMITTEE

As required by the Company Law and the Articles of Association, the Company has a supervisory committee (the “Supervisory Committee”) which is primarily responsible for the supervision of ~~senior management~~Senior Management of the Company, including the Board of Directors, executive officers and other senior management personnel, to ensure that they act in the interests of the Company, its shareholders and employees, as well as in compliance with applicable law. The Supervisory Committee consists of three Supervisors. Two of the Supervisors are shareholder representatives appointed by shareholders, and one Supervisor is a representative of the Company’s employees. The Supervisors serve terms of three years and may serve consecutive terms.

Mr. Sun Xiao Yiis a member of Party Committee and head of Discipline Supervision Team of China Southern Air Holding Company. Mr. Sun graduated from the Civil Aviation University of China with a degree in Economics and Administration and is currently a postgraduate law student of Central Communist Party College. Mr. Sun is a senior expert of Political Science and Economics with an associate degree. Mr. Sun has successively served as Vice Party Secretary of the Hubei branch of the Company, Party Secretary of the Flight Operations Department of the Company, and Vice Party Secretary of China Southern Air Holding Company. Mr. Sun became a Supervisor on June 16, 2004.

Mr. Yang Guang Huais the Vice Party Secretary and Discipline Supervision Secretary of the Company. Mr. Yang is an engineer with university qualification. Mr. Yang has successively served as Deputy General Manager of the Hunan branch of the Company, General Manager of Southern Airlines (Group) Zhuhai Helicopters Company Limited, General Manager of the Hunan branch of the Company, and Deputy General Manager of the Company. Mr. Yang became a Supervisor on June 16, 2004.

Ms. Yang Yi Huais the General Manager of the Audit Department of the Company. Ms. Yang is an internationally qualified internal auditor. She has successively served as Deputy Manager of the Clearance and Settlement Office of the Financial Division of the Guangzhou Civil Aviation Administration, Manager of the Financial Office of the Company’s Financial Division, and Deputy General Manager of the Company’s Audit Department. She has been the President of Xiamen Airlines since September 2005. Ms. Yang became a Supervisor on June 16, 2004.

SENIOR ADMINISTRATIVE OFFICERS

Mr. Yuan Xin Anis a Vice President of the Company. He graduated from the Air Engineering College. Mr. Yuan has over 25 years of experience in the Chinese aviation industry. He has been the Manager of Quality Assurance and Deputy Controller of Quality Control of Guangzhou Aircraft Maintenance Engineering Company Limited, Deputy General Manager of the Aircraft Engineering Department of the Company, and Vice President of Guangzhou Aircraft Maintenance Engineering Company Limited. Mr. Yuan became the Chief Engineer of the Company in 2000, and a Vice President of the Company in April 2002.

Mr. Hao Jian Huais currently the Vice President of the Company. He completed his pilot training at the CAAC Advanced Flying College. Mr. Hao has held positions as Captain, then Deputy Chief Captain, and subsequently Chief Captain of the Sixth Squadron of the Civil Aviation Administration during the period from 1989 to 1994. He then became a Deputy General Manager, from 1994 to 1998, and the General Manager, from 1998 to 1999, of the Flying Aviation Department of the Company. He became a Vice President of the Company in July 2003.

~~Mr. Ren Ji Dong~~is a Vice President of the Company who graduated from the College of Energy and Power Engineering Department of Nanjing University of Aeronautics and Astronautics with a major degree in motor design, is a senior engineer. Mr. Ren assumed various offices in the aircraft maintenance workshop of Xinjiang Airlines Company, including Head of Workshop, Deputy Director of Workshop and President of the Engineering Department. Mr. Ren served as the Deputy Director of Urumqi Civil Aviation Administration and Vice President of Xinjiang Airlines Company. He was the Vice President of Xinjiang Airlines from 2002 to 2004. Mr. Ren became a Vice President of the Company in March 2005.

Mr. He Zong Kaiis a Vice President of the Company who graduated from Bejing Foreign Language Institute with a major degree in French, is a senior economist. Mr. He served as the Deputy Manager of the Operation Department of the Company, Manager of Passenger Transportation Department, Head of Seats Arrangement Department, Vice General Manager of the Marketing Department and General Manager of the Ground Services Department. He assumed the offices of the President and Deputy Party Secretary of Hubei branch of the Company since 2003 and became a Vice President of the Company in March 2005.

Mr. Liu Qianis the Chief Pilot of the Company who graduated from China Civil Aviation Flying College with specialty in aircraft piloting. Mr. Liu served the Civil Aviation Administration of China as assistant researcher of the piloting skills supervision division of the piloting standards department, as assistant researcher of the operation supervision division of the piloting standards department, as assistant researcher of the freight transportation piloting standards division of the piloting standards department, and as the Deputy Head of the Piloting Standards Division of the Piloting Standards Department. He assumed the offices of the Deputy Chief Pilot and Chief Pilot of the Company in November 2004.

Mr. Dong Su Guang is the Chief Engineer of the Company. Mr. Dong graduated from Northwestern Industry University major in aircraft design. He is an engineer with University qualification. He served as General Manager of Aircraft Engineering Department of the Company from May 2002 and Deputy General Manager of Guangzhou Aircraft Maintaining and Engineering Co., Ltd. Since April 2006, Mr. Dong has been the General Manager of Aircraft Engineering Department and Chief Engineer of the Company.

Mr. Su Liangis currently holding the position as Company Secretary. He was a graduate of the Cranfield College of Aeronautics, University of Cranfield, United Kingdom, specialising in Air Transport Management Engineering. Mr. Su is a holder of ~~master~~a master's degree. During the period from 1998 to 1999, Mr. Su held the position as Deputy Manager of the Flight Operations Department, China Southern Airlines Shenzhen Co. and from 1999 to 2000, he was the Manager of the Planning and Administration Department of China Southern Airlines Shenzhen ~~Co..~~Co. Mr. Su was in charge of the international cargo project of the Company, responsible for the planning and development of the Company’s North American cargo business. Mr. Su became the Company Secretary on June 26, 2000.

Mr. Chen Wei Huais the Chief Legal Adviser to the Company. Mr. Chen graduated from the school of law of Peking University. He is a qualified solicitor and a qualified corporate legal counsellor. Mr. Chen joined the Civil Aviation Administration of China in 1998. He then joined the CSAHC in January 1991. From 1997 to 2003, he served as Vice Director and Director of the Legal Affairs Office of the Company. Currently, he is President of the Legal Department of the Company. Since December 2003, Mr. Chen has been the Chief Legal Adviser to the Company. He is also a Director of Xiamen Airlines Company Limited.

~~Compensation~~

Compensation

A total of ~~RMB232,000~~RMB402,000 has been paid to independent non-executive Directors for the year ended December 31, ~~2005.~~2006. The aggregate compensation paid by the Company to all Directors (excluding non-executive Directors), Supervisors and Senior Management for ~~2005~~2006 was ~~RMB5.9 million.~~RMB6,638,000. For the year ended December 31, ~~2005,~~2006, the Company ~~accrued~~paid an aggregate of approximately ~~RMB132,000~~RMB220,000 on behalf of its executive Directors, Supervisors and Senior Management pursuant to the SA Pension Scheme and the retirement plans operated by various municipal governments in which the Company participates.

Details of Directors’ and Supervisors’ emoluments for the year ended December 31, ~~2005~~2006 are set out below:


						Salaries,
						allowances				Retirement
				Directors’		and benefits		Discretionary		scheme
Name				fees		in kind		bonuses		contributions		Total
	Note			RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
														Note			Directors’ fees		Salaries, allowances and benefits in kind		Discretionary bonus		Retirement scheme contributions		Total
																	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
Executive directors
Liu Shao Yong		(i	)		—		299		—		12		311		(i	)		-		472		-		14		486
Liu Ming Qi					—		242		—		10		252
Peng An Fa					—		101		—		6		107
Li Wen Xin																		-		87		-		3		90
Wang Quan Hua					—		237		—		12		249					-		374		-		14		388
Zhao Liu An		(i	)		—		237		—		12		249		(i	)		-		374		-		14		388
Si Xian Min																		-		442		-		13		455
Tan Wan Geng																		-		271		-		11		282
Xu Jie Bo																		-		357		-		13		370
Chen Zhen You																		-		253		-		13		266
Zhou Yong Qian					—		237		—		12		249					-		146		-		3		149
Si Xian Min					—		281		—		12		293
Zhou Yong Jin					—		127		—		2		129
Xu Jie Bo					—		226		—		12		238
Wu Rong Nan					—		368		162		7		537

Supervisors
Sun Xiao Yi					—		237		—		12		249					-		374		-		14		388
Yang Guang Hua					—		225		—		12		237					-		374		50		13		437
Yang Yi Hua					—		48		70		11		129					-		220		-		13		233

Independent non-executive directors
Simon To		(ii	)		—		—		—		—		—
Peter Lok					58		—		—		—		58					102		-		-		-		102
Wei Ming Hai					58		—		—		—		58					100		-		-		-		100
Wang Zhi					58		—		—		—		58					100		-		-		-		100
Sui Guang Jun					58		—		—		—		58					100		-		-		-		100
																		402		3,744		50		138		4,334

					232		2,865		232		132		3,461


Notes:

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

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

Board Practices

~~Board Practices~~

Each Directors’ service contract with the Company or any of its subsidiaries ~~provide~~provides prorated monthly salary upon termination of employment in accordance with his contract. The Director is entitled to paid leave in accordance with his contract. The term of office of a Director is three years. The term of office of the current Directors will end in 2007. A Director may serve consecutive terms upon re-election.

Audit Committee

The audit committee is appointed by the Board of Directors and consists of three independent non-executive Directors. The current members of the audit committee are Wei Ming Hai, Wang Zhi and Sui Guang Jun. Wei Ming Hai is the chairman of the audit committee. The term of office of each member is three years. The term of office of the current members will end in 2007. A member may serve consecutive terms upon re-election. At least once a year, the committee is required to meet with the Company’s external auditors without any executive members of the Board in attendance. The quorum necessary for the transaction of any business is two committee members. The Audit Committee held nine meetings in ~~2005,~~2006, which were attended by all members. The external auditors or the Chief Financial Officer of the Company may request a meeting of the audit committee.

The audit committee selects and engages, on behalf of the Company, external auditors to audit the Company’s annual financial statements and considers questions regarding the audit fees and the resignation or dismissal of the external auditors. The audit committee also reviews and approves the planned scope of the Company’s annual audit. In addition, the audit committee reviews the annual and interim financial statements, the preliminary announcement of results and any other announcement regarding the Company’s results or other financial information to be made public, before submission to the Board of Directors. Moreover, the committee discusses problems arising from the audit and reviews the external auditors’ management letter and management’s response. Furthermore, the audit committee reviews the effectiveness of the system of internal financial controls from information provided by the Executive Directorate and management of the Company and ensures adherence to the Company’s control policies so that the Company’s assets are safeguarded and financial records are complete and accurate. The audit committee meets regularly with the Company’s senior ~~positions~~officers from the finance department, ~~and~~the internal audit department and the external auditors to consider the Company’s financial reporting, the nature and scope of audit review and the effectiveness of the systems of internal control. The audit committee also reviews any significant transactions that are not in the ordinary course of business.

The Company has an internal audit department which reviews procedures in all major financial and operational activities. This department is led by the head of internal audit who is directly responsible to the Chairman of the Board and submits regular reports to the audit committee.

Remuneration Committee

~~Remuneration Committee~~

The remuneration committee ~~comprises~~is comprised of three members. Currently, the remuneration committee is chaired by independent non-executive Director Sui Guang Jun with independent non-executive Director Wei Ming Hai and executive Director Wang Quan Hua as members. The term of office of each member is three years. The term of office of the current members will end in 2007. A member may serve consecutive terms upon re-election. The remuneration committee met once in ~~2005,~~2006, which meeting was attended by all members. In addition, the remuneration committee also meets as and when required to consider remuneration related matters.

The responsibilities of the remuneration committee are to approve the remuneration packages of Directors and Senior Management of the Group, and the Company’s “preliminary proposals on annual emoluments of the directors and senior management of the ~~Group��~~Group”. The remuneration committee is also responsible for assessing performance of executive Directors and approving the terms of executive Directors’ service contracts.

Employees

~~Employees~~

As of December 31, ~~2005,~~2006, the Group had ~~34,417~~45,575 employees, including ~~2,567~~3,480 pilots, ~~4,539~~6,644 flight attendants, ~~5,076~~5,912 maintenance personnel, ~~10,445~~4,706 sales and marketing personnel, ~~3,243~~14,686 administrative and other personnel and ~~8,547~~10,147 temporary employees. All of the Group’s pilots, flight attendants, maintenance personnel, administrative personnel and sales and marketing personnel are contract employees, and most of the Group’s ancillary service workers are temporary employees. Contract employees are hired by the Group pursuant to renewable employment contracts with terms ranging from

three to five years. Temporary employees generally are hired by the Group pursuant to at-will employment contracts or employment contracts with a term of one year.

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

All employees of the Group receive cash remuneration and certain non-cash benefits. Cash remuneration consists of salaries, bonuses and cash subsidies provided by the Group. Salaries are determined in accordance with the national basic wage standards. The total amount of wages payable by the Group to its employees is subject to a maximum limit based on the profitability of the Group and other factors. Bonuses are based on the profitability of the Group. Cash subsidies are intended as a form of cost-of-living adjustment. In addition to cash compensation, the Group’s contract employees receive certain non-cash benefits, including housing, education and health services, and the Group’s temporary employees receive limited health services, but not housing or education. ~~CSAHC provides certain services in respect of these benefits to the Group’s employees in consideration of certain fees and other charges.~~

Retirement And Housing Benefits

Employees of the Group participate in several defined contribution retirement schemes organised separately by PRC municipal governments in regions where the major operations of the Group are located. The Group is required to contribute to these schemes at the rates ranging from 9%10% to ~~20%~~23% of salary costs including certain allowances. A member of the retirement schemes is entitled to pension benefits equal to a fixed proportion of the salary at the retirement date. The retirement benefit obligations of all existing and future retired staff of the Group are assumed by these schemes.

In addition, the Group ~~was selected as one of the pilot enterprises to establish~~has established a supplementary defined contribution retirement scheme ~~for~~in accordance with relevant regulations in the ~~benefit of employees.~~PRC. In this connection, employees of the Group participate in a supplementary defined contribution retirement scheme whereby the Group is required to make ~~defined~~ contributions ~~at rates ranging from 3% to 5%~~not exceeding one-twelfth of the prior year’s total salaries. ~~The~~

In 2006, the Group ~~has no obligation~~implemented an early retirement plan for eligible employees. Employees at certain positions reaching a predetermined age are eligible for the ~~payment~~plan. The approved employees are entitled to a fixed percentage of ~~pension benefits beyond~~salaries and bonus on a monthly or yearly basis from the ~~contributions described above.~~early retirement date to the normal retirement age.

Furthermore, pursuant to the comprehensive services agreement (the “Services Agreement”) dated May 22, 1997 between the Company and CSAHC, CSAHC provided quarters to eligible employees of the Group. In return, the Group paid a fixed annual fee of RMB85 million to CSAHC for a ~~ten-year~~ten year period from 1995 to 2004. The agreement expired by December 31, 2004 and no further payment was made in 2005.

Pursuant to an additional staff housing benefit scheme effective September 2002, the Group agreed to pay lump sum housing allowances to certain employees who have not received quarters from CSAHC or the Group according to the relevant PRC housing reform policy, for subsidising their purchases of houses. An employee who quits prior to the end of the vesting benefit period is required to pay back a portion of the lump sum housing benefits determined on a pro-rata basis of the vesting benefit period. The Group has the right to effect a charge on the employee’s house and to enforce repayment through selling the house in the event of default in repayment. Any shortfall in repayment would be charged against income statement. As of December 31, ~~2005,~~2006, the Company and the Group had made payments totalling ~~RMB168~~RMB170 million under the scheme and recorded its remaining contractual liabilities totalling ~~RMB92~~RMB90 million as accrued expenses on the balance ~~sheets.~~sheet. Housing allowances are payable when applications are received from eligible employees.

Workers’ Compensation

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

Share Ownership

~~Share Ownership~~

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

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

Major Shareholders

~~Major Shareholders~~

Share Capital Structure

As of May 31, ~~2006,~~2007, the total share capital of the Company was divided into 4,374,178,000 shares, of which approximately ~~50.3%~~50.30% (2,200,000,000 domestic shares) was held by CSAHC, approximately 26.84% (1,174,178,000 H shares) was held by Hong Kong and overseas shareholders and approximately 22.86% (1,000,000,000 A shares) was held by domestic shareholders. CSAHC owns 50.30% of the total share capital of the Company, therefore it is entitled to exercise all the rights of a controlling shareholder, including the election of executive Directors.

Substantial Shareholders

As of May 31, ~~2006,~~2007, the following shareholders had an interest of 5% or more in the Company’s shares:

Name	Number of Shares					Approximate Percentage of the Total Number of Shares
CSAHC				~~Approximate~~
				~~Percentage~~
				~~of the Total~~
~~Name~~	~~Number of Shares~~			~~Number of Shares~~
~~CSAHC~~	2,200,000,000 domestic shares		~~50.30%~~50.30	%
HKSCC Nominees Limited	~~1,150,854,998~~	1,156,215,998 H shares		~~26.31%~~26.43	%

The table below sets forth, as of May 31, ~~2006,~~2007, the following entities hold 5% or more of the total number of H shares issued by the Company.

Approximate

Percentage of

the Total

Number of H

Name

Number of H Shares

Number of H Shares

Approximate

Percentage of

the Total

Number of H

Shares

HKSCC Nominees Limited

1,150,854,998

98.01%

1,156,215,998

98.47

Domestic shares and H shares have identical voting rights.

Related Party Transactions

The Company enters into transactions from time to time with CSAHC and its affiliates. For a description of such transactions, see Note 3637 to the Financial Statements. In particular, the following arrangements, which the Company believes are material to its operations, have been made between the Company and CSAHC and its affiliates. The Company believes that these arrangements have been entered into by the Group in the ordinary course of business and in accordance with the agreements governing such transactions.

Arrangements with CSAHC

Trademark License Agreement

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

~~Leases~~

Leases

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

The Company and CSAHC entered into a land lease agreement dated May 22, 1997, in respect of the land used by the Company within Guangzhou Baiyun International Airport. The rental payment is RMB2,651,000 per year. The term of the lease is five years commencing April 1, 1997, renewable by both parties thereafter (subject to mutual agreement with respect to rental terms).

The Company and CSAHC separately entered into four lease agreements dated May 22, 1997, in respect of office premises located at the east wing of the Guangzhou Railway Station on Guangzhou Huanshi Dong Road, office premises at Haikou Airport, office premises in Haikou City, and office premises at Tianhe Airport in Wuhan, Hubei Province. The aggregate rental payment under the four leases is RMB15,745,000 per year. The term of each lease is one year, renewable by the parties thereafter (subject to mutual agreement with respect to rental terms).

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

The Company and CSAHC entered into a lease agreement dated November 12, 2004, under which CSAHC leases to the Company certain lands by leasing the land use rights of such lands to the Company. These lands had been administratively allocated to ~~Xinjiang Airlines~~XJA and ~~Northern Airlines~~CNA for the purposes of their civil aviation and related businesses. Subsequently, CSAHC was authorised to deal with the land use rights of such lands, including leasing, but not transferring, such land use rights. Total area of the lands leased is 1,182,297 square ~~metres,~~meters, and the locations of such lands are in Urumqi, Shenyang, Dalian and Harbin. The lease is for a fixed term of three years, commencing from the effective date of the lease, and is renewable, subject to compliance with the relevant requirements of the Hong Kong Listing Rules by the Company, by an application in writing by the Company to the lessor three months before the end of the fixed term. The rent for the land use rights of the designated lands under lease agreement is RMB22,298,000 per year, payable in arrear by cheque, in cash or by bank transfer on or before the 10th day of each calendar month, and iswas determined after arm’s length ~~negotiation~~negotiations between the parties. The maximum aggregate annual limit (“Cap”) for the lease agreement is set at RMB22,298,000 per year. The lease agreement was approved by the shareholders of the Company at the ~~2nd~~second extraordinary general meeting on December 31, 2004.

~~Arrangements with CSAHC and CSAHC’s Affiliates~~

~~Leases~~

The Company, CSAHC and CNA entered into a lease agreement dated November 12, 2004, under which CSAHC and CNA lease to the Company certain buildings, facilities and other infrastructure related to the civil aviation businesses of CNA situated at various locations in Shenyang, Dalian, Jilin, Harbin, Chaoyang and Russia. The lease is for a fixed term of three years, commencing from the date of the lease, and is renewable, subject to compliance with the relevant requirements of the Hong Kong Listing Rules by the Company, by an application in writing by the Company to the lessor three months before the end of the fixed term. The consideration for the lease agreement is RMB43,758,000 per year, payable in arrear by cheque, in cash or by bank transfer on or before the 10th day of each calendar month, and is determined after arm’s length negotiation between the parties. The Cap for the lease agreement is set at RMB43,758,000 per year. The lease agreement was approved by the shareholders of the Company at the 2nd extraordinary general meeting on December 31, 2004.

The Company, CSAHC and XJA entered into a lease agreement dated November 12, 2004, under which CSAHC and XJA lease to the Company certain buildings, facilities and other infrastructure related to the civil aviation businesses of XJA situated in Xinjiang and Russia. The lease is for a fixed term of three years, commencing from the effective date of the lease, and is renewable, subject to compliance with the relevant requirements of the Hong Kong Listing Rules by the Company, by an application in writing by the Company to the lessor three months before the end of the fixed term. The consideration for the lease agreement is RMB5,798,000 per year, payable in arrear by cheque, in cash or by bank transfer on or before the 10th day of each calendar month, and is determined after arm’s length negotiation between the parties. The Cap for the lease agreement is set at RMB5,798,000 per year. The lease agreement was approved by the shareholders of the Company at the 2nd extraordinary general meeting on December 31, 2004.

The Company and CSAHC entered into a lease agreement dated December 19, 2006 (“Lease Agreement”). The Lease Agreement supersedes and replaces the lease agreements entered into between the Company and CSAHC dated May 22, 1997, in which CSAHC leased to the Company certain parcels of land and office premises used at Guangzhou Baiyun Airport, Haikou Airport and Tianhe Airport, and the lease agreement entered into between the Company and CSAHC dated May 15, 2001, in which CSAHC leased to the Company certain parcels of land, properties, and civil aviation structures and facilities at various locations at Hengyang, Jingzhou (previously known as “Shashi”) and Nanyang for a term of 5 years.

The Lease Agreement takes effect retrospectively on January 1, 2006, and is valid for a term of three years. Under the Lease Agreement, the annual rents payable for the years 2006, 2007 and 2008 are RMB27,543,606.01, RMB28,657,966.99 and RMB29,828,046.01, respectively. The rent is payable in advance semiannually by the Company wholly out of its internal funds.

Sale of Properties

The Company and CSAHC entered into a properties sale agreement (the “Properties Sale Agreement”), dated December 28, 2006, according to which the Company would sell to CSAHC the properties with a total area of 12,008.09 square meters including the 757 aircraft supplies depot, 737 aircraftsupplies depot, 777 aircraft supplies depot, Building no. 143 aircraft supplies depot, Building No. 144 aircraft supplies depot and a new engine depot located within the vicinity of old Guangzhou Baiyun Airport (the “Properties”).

The consideration payable under the Properties Sale Agreement is RMB23,347,170.60. The net book value of the Properties is RMB19,886,352.67 as of June 30, 2006. The consideration was determined after arm’s length negotiations by the Company and CSAHC, with consideration given also to the existing conditions of the Properties and relevant assets valuation report. The Properties, situated at the old Guangzhou Baiyun Airport, are not used by the Company since the moving of the Company’s business and operations to the new Guangzhou Baiyun Airport. The Properties are part of the assets transferred by CSAHC to the Company pursuant to the Demerger agreement dated March 25, 1995 (as amended). Under the De-merger Agreement, CSAHC has agreed to indemnify the Company against claims, liabilities and expenses incurred by it relating to the business, assets held or assumed by the Company pursuant to the Demerger Agreement, including the Properties.

Arrangements with CSAHC’s Affiliates

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

The Company and SAIETC entered into an ~~agreement~~Import and Export Agency Framework Agreement dated ~~May 22, 1997~~January 1, 2006 for the import and export of aircraft, flight equipment, special vehicles for airline use, communication and navigation facilities, and training facilities for a term from May 22, 1997 to May 22, 2000 which was subsequently extended to May 22, 2006 by mutual agreement between the parties. The parties have determined the various rates for import and export services provided by SAIETC after negotiations on a fair and equitable basis, which are not higher than the market rates for similar services.

~~For the year ended December 31, 2005, the amount incurred by the Group for the import and export of the above equipment was RMB31,714,000.~~

In order to comply with the requirements under Rule 14A.35 of the Hong Kong Listing Rules so that SAIETC can continue to provide import and export services and custom clearing service after the expiry of the original agreement, the Company and SAIETC entered into a new import and export agency framework agreement (the “Import and Export Agency Framework Agreement”) on 1 January, 2006, which became effective on April 25, 2006, having been approved by the Board of Directors of the Company.facilities. The Import and Export Agency Framework Agreement is valid for a term of three years, commencing from the date of ~~the~~ agreement, subject to compliance with the relevant provisions of the Hong Kong Listing Rules by the Company. Both parties agreed that the agency fee for import and export shall be determined after arm’s length negotiation and shall not be higher than the market rate. The annual cap for such agreement shall be RMB80,000,000 per annum. The independent non-executive Directors of the Company have approved the Import and Export Agency Framework Agreement.

For the year ended December 31, 2006, the commission expense paid by the Group in respect of the import and export of the above equipment was RMB28,872,000.

Southern Airlines ~~Advertising Company,~~Culture and Media Co., Ltd. (“SACM”), which is ~~45%~~50% owned by the Company and ~~55%~~50% owned by CSAHC ~~(“SAAC”)~~

The Company and SAAC entered into an agreement dated May 22, 1997 for the provision of advertising services for a term extending from May 22, 1997 to May 22, 2000. After extension of three years, the parties have mutually agreed to extend the agreement for another three years to May 22, 2006.

~~In order to comply with the requirements under Rule 14A.35 of the Hong Kong Listing Rules, so that SAAC can continue to provide advertising service after the expiry of the original agreement, the~~Southern Airlines Advertising Company ~~and SAAC~~(“SAAC”) entered into a new ~~advertising agency agreement (��~~Advertising Agency ~~Agreement”) on~~Agreement dated January 1, 2006. SAAC and SACM entered into an acquisition agreement in 2006 whereby SACM acquired and merged with SAAC and assumed the rights, obligations and business of SAAC.

The Advertising Agency Agreement is valid for a term of three years commencing from the date of the ~~agreement, which became effective on 25 April, 2006, having been approved by the Board of Directors of the Company.~~

agreement. Under the agreement, ~~SAAC~~SACM will produce advertisement script, graphic and music tofor the Company with the copyright of such products belonging to the Company, ~~products belonging~~subject to ~~the Company, provided that the Company shall comply~~compliance with ~~all~~the relevant provisions ~~under~~of the Hong Kong Listing Rules. ~~Both~~The parties ~~agreed that~~have determined the ~~agency rate~~various rates for providing advertising ~~under the Advertising Agency Agreement shall be determined~~services after ~~arm’s length negotiation~~negotiations on a fair and ~~shall~~equitable basis, which are not higher than the market ~~rate.~~ rates for similar advertising services. The cap for the advertising agency fee shall be RMB30,000,000 for 2006. The independent non-executive Directors of the Company have approved such Advertising Agency Agreement.

For the year ended December 31, ~~December 2005,~~2006, the amount incurred by the Group to ~~SAAC for advertising services~~SACM was ~~RMB3,062,000.~~RMB3,707,000.

China Southern Airlines Group Finance Company Limited (“SA Finance”) which is ~~42%~~66% owned by CSAHC, ~~32%~~21% owned by the Company and ~~26%~~13% owned in aggregate by ~~five~~four subsidiaries of the Company

The Company entered into a ~~financial agreement~~Financial Agreement (“Financial Agreement”) dated May 22, 1997 with SA Finance for the provision of financial services such as deposit and loan facilities, credit facilities, financial guarantees and credit references for a term commencing from May 22, 1997 to May ~~21,~~22, 2000. ~~As agreed by the parties, the~~The agreement was extended for six years to May 22, 2006. In order to comply with the new requirements under the ~~Hong Kong~~Listing Rules, the Company was required to enter into separate agreement with SA Finance and comply with other provisions of the Listing Rules, so that SA Finance ~~can~~could continue to provide deposit of money service and other financial services ~~(subject~~ to ~~execution of separate agreements and further compliance with~~ the ~~Hong Kong Listing Rules),~~Company. Therefore, the Company and SA Finance entered into a new ~~financial agreement~~Financial Agreement on ~~November 12,~~December 31, 2004, commencing from that date for a period of three years, and is renewable, subject to compliance with the relevant requirements of the ~~relevant~~ Hong Kong Listing Rules by the Company, by an application in writing by the Company not less than 30 days before the end of the fixed term.

As ~~SA Finance is a connected person of~~ the ~~Company under the Hong Kong Listing Rules, the financial agreement~~new Financial Agreement constitutes a discloseable and non-exempt continuing connected transaction under Rule 14A.35 of the ~~Hong Kong~~ Listing Rules and requires the Company to comply with the reporting and announcement requirement and the independent shareholders’ approval requirement under Rule 14A.48 of the ~~Hong Kong~~ Listing Rules. The independent shareholders of the Company approved the ~~financial agreement~~Financial Agreement at the second extraordinary general meeting of the Company held on December 31, 2004.

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

accept deposit of money from the Company at interest rates not lower than those set by the People’s Bank of China for the same term of deposit. SA Finance will in turn deposit the whole of such sums of money with certain banks including Bank of Agriculture, Bank of Communications, China Construction Bank and Industrial and Commercial Bank of ~~China;~~ China. The maximum limit for amount of money deposit under the Financial Agreement is RMB1 billion;

make loans to the Company subject to the entering into of separate loan agreements, which will set out the ~~Cap,~~maximum cap and terms and conditions of the loans, upon application by the Company during the term of the ~~financial agreement. The maximum limit for amount of money deposit under the financial agreement is RMB1 billion.~~Financial Agreement. The Company will comply with the Hong Kong Listing Rules when entering into such separate written agreements. SA Finance shall not charge interest rates higher than those set by the People’s Bank of China for similar loans. The total amount of outstanding loans extended by SA Finance to the Company must not exceed the sum of SA Finance’s shareholders’ equity, capital reserves and money deposit received from other parties (except the Company); and

provide credit facilities, financial guarantees, credit references, and other financial services subject to the entering into of separate agreements, which will set out the ~~cap,~~Cap and terms and conditions of such services, upon request by the Company during the term of the ~~financial agreement.~~new Financial Agreement. The Company will comply with the Hong Kong, Listing Rules when entering into such separate written agreements.

As of December 31, ~~2005,~~2006, the Group’s deposits placed with SA Finance amounted to ~~RMB543,825,000,~~RMB629,366,000, which bore interest at the rate of 0.72% ~~per annum;~~during the ~~balance~~year.

As of ~~the~~December 31, 2006, loans ~~extended~~from SA Finance to the Group ~~by SA Finance~~ amounted up to ~~RMB300,000,000.~~RMB300,000,000 which bore interest at rates ranging from 5.02% to 5.26% per annum during the year.

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

The Company and Shenzhen Air Catering Company Limited entered into an agreement dated May 23, 1997 for the sale and purchase of in-flight meals for flights originating or stopping at the airport in Shenzhen. Pursuant to such agreement, Shenzhen Air Catering Company Limited will supply in-flight meals to the Group from time to time during the term from May 23, 1997 to May 23, 1998. The parties have mutually agreed that the agreement can be renewed automatically. In order to comply with the various requirements under the Hong Kong Listing Rules, the Company intends to enter into negotiation with Shenzhen Air Catering Company Limited to revise the agreement. The Company will comply with its obligations under the Hong Kong Listing Rules upon execution of the revised agreement.

For the year ended December 31, ~~2005,~~2006, the amount incurred by the Group to Shenzhen Air Catering Company Limited for the provision of in-flight meals was approximately ~~RMB60,542,000.~~RMB56,204,000.

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

CSAHC and the Australian Pilot College entered into an agreement dated October 7, 1993 for the provision of pilot training in Australia to the cadet pilots of CSAHC (the “Training Agreement”). The Training Agreement will remain in force unless terminated by either party upon 90 days’ prior written notice to the other party. Pursuant to the ~~De-merger~~Demerger Agreement, the Company has assumed all the interests, rights and obligations of CSAHC under the Training Agreement. In order to comply with the various requirements under the Hong Kong Listing Rules, the Company intends to enter into negotiation with Australian Pilot College to revise the Training Agreement. The Company will comply with its obligations under the Listing Rules upon execution of the revised agreement.

For the year ended December 31, ~~2005,~~2006, the amount paid by the Group to the Australian Pilot College for training services was ~~RMB81,471,000.~~RMB95,124,000.

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

The Company and Southern Airlines (Group) Economic Development Company entered into an agreement dated May 22, 1997 for the provision of drinks, snacks, liquor, souvenirs and other products for a term extending from May 22, 1997 to May 22, 2007.

For the year ended December 31, ~~2005,~~2006, the amount paid by the Group to Southern Airlines (Group) Economic Development Company for the provision of drinks, snacks, liquor, souvenirs and other products was ~~RMB87,521,000.~~RMB85,849,000.

Ticket sales arrangements

The Group has entered into ~~ticket agency agreements~~Ticket Agency Agreements for the sale of the Group’s air tickets with several subsidiaries of CSAHC (the “Agents”). The Agents charge commission on the basis of the rates stipulated by the CAAC and International Air Transport Association (“IATA”). The Agents charge a commission in the amount of 3% of the ticket price for domestic tickets and 5%3% to ~~12%~~6% of the ticket price for Hong Kong and ~~Macau regional/~~Macau/international tickets. The Group has other air ticket sales agents in China who also charge commission at the same rates. The Agents also act as air ticket sales agents for other Chinese airlines and charge the same rates of commission to such other airlines as those charged to the Group.

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

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

For the year ended December 31, ~~2005,~~2006, the aggregate amount of ticket sales of the ~~Group~~Company conducted through the Agents was ~~RMB451,121,000.~~RMB701,441,000.

China Southern Airlines Group Air Catering Company Limited (the “Catering Company”), a wholly owned subsidiary of CSAHC

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

The ~~catering agreement~~Catering Agreement is for a fixed term of three years, commencing from the date of the agreement. The parties have agreed, after arm’s length negotiation, on the price of each type of in-flight ~~meals~~meal and the service charges for each type of aircraft. The prices of in-flight meals and the service charges are not higher than the market rate of comparable in-flight meals and service charges. The Catering Company will issue an invoice listing out the quantity of in-flight meals supplied, the agreed unit price and the total price payable for each of the Company ~~flight~~flights it provides ~~service.~~service for. The ~~Cap~~cap for the Catering Agreement is set at RMB220,000,000 per year.

For the year ended December 31, ~~2005,~~2006, the Company paid ~~the~~an in-flight meals charge of ~~RMB112,136,000~~RMB138,084,000 pursuant to the ~~catering agreement.~~Catering Agreement.

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

In order to comply with the requirements under Rule 14A.35 of the Hong Kong Listing Rules so that PCACL can continue to provide ticket agency services, the Company and PCACL, a whollyowned subsidiary of CSAHC whose principal business activity is that of acting as an air ticket agent and airfreight forwarding agent, entered into a new ticket agency framework agreement (the “New Ticket Agreement”) and a new airfreight forwarding agency framework agreement (the “New Airfreight Agreement”, together with New Ticket Agreement, the “Two Sales Agency Framework Agreements”) on January 1, 2006, which became effective on April 25, 2006, having been approved by the Board of Directors of the Company.

The Two Sales Agency Framework Agreements are valid for a term of three years commencing from January 1, 2006, subject to the compliance of relevant requirements of the Hong Kong Listing Rules by the Company. The parties agreed that the agency fee shall be determined after arm’s length negotiation and shall not be higher than the market rate.

China Southern Airlines Group Travel Development Company Limited (“CSA Travel”), a wholly owned subsidiary of CSAHC

The Company and CSA Travel ~~whose principal business activity is that of operating tourism related business,~~ entered into a ~~framework agreement~~Framework Agreement on Lease, Operation and Management (“Framework Agreement on Lease and Operation”) ondated January 1, 2006 ~~in order~~regarding hotel leasing and providing relevant service for a fixed term of three years. According to ~~allow~~this agreement, the Company towill lease certain hotels ~~belonging to it~~or certain divisions of these hotels to CSA Travel for it to operate, and the Company is entitled to employ CSA Travel to provide ~~certain relevant services in compliance with~~property cleaning or ticket agent service according to business development, which is subject to separate agreement according to the ~~requirements under Rule 14A.35 of the Hong Kong Listing Rules for a term of three years, commencing from the date of the agreement. The~~ Framework Agreement on Lease and ~~Operation became effective on April 25, 2006, having been approved by~~Operation. The relevant fee was determined at an arm’s length between both parties and the ~~Board of Directors of~~price shall not be higher than the Company. Pursuant to the agreement, the Company shall lease Guangzhou Airlines Hotel, Zhuhai Pilot Mansion and certain portions of CSA Guangzhou Hotel and Beijing CSA Hotel to the CSA Travel for operation and management of such hotels. With regard to the amount of rent payable under the agreement, themarket rate. The annual cap for the Framework Agreement on Lease and Operation is set at RMB6,000,000 per ~~annum for~~annum. The Framework Agreement on Lease and Operation has been approved by the ~~entire term~~independent non-executive Directors of the ~~agreement.~~Company.

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

The Company and GCSAPMC ~~whose principal business activity is that of management of real property,~~ entered into a ~~framework agreement~~Framework Agreement for the Engagement of Property Management (“Property Management Framework Agreement”) ondated January 1, 2006 in respect of engaging GCSAPMC to provide property management and improvement ~~services in compliance~~service with ~~the requirements under Rule 14A.35 of the Hong Kong Listing Rules for~~ a term of three years ~~commencing~~ from the date of ~~the~~this agreement. The Property Management Framework Agreement became effective on April 25, 2006, having been approved by the Board of Directors of the Company. The Property Management Framework Agreement would become effective upon approval by the Board of Directors of the Company. Pursuant to the agreement, the Company has appointed GCSAPMC to provide management and maintenance services for the Company’s headquarters in Guangzhou and to provide maintenance and management services for the 110KV transformer substation ~~at the new Baiyun International Airport~~ to ensure the ideal working conditions of the Company’s production and office facilities and physical environment, and the normal operation of equipment. The fee charging schedule (or charge standard) shall be determined at an arm’s length between both ~~parties.~~parties, and will not be higher than the fee charging schedule of independent third parties in similar industry. The ~~agency fee is payable within the time period set out in the invoice to be delivered to the Company. The Company will fund the agency fee wholly by its internal resources.~~

~~With regard to the approximate amount of agency fee payable for property management and improvement services under the agreement likely to be incurred each year during the term of the agreement, the~~ annual cap for the Property Management Framework Agreement Framework Agreement is set at RMB47,010,000 per ~~annum for the entire term of the agreement.~~

~~CSAHC Hainan Co., Ltd., (“Hainan Co., Ltd.”), a subsidiary of CSAHC from Hainan Co., Ltd.~~

In order to expand the assets size and competitive advantage of the Company’s airline operations and completely remove competition with CSAHC in the airline industry, the Board of Directors reviewed and approved the acquisition (the “Acquisition”) by the Company of the assets (“Core Assets”) and liabilities (“Core Liabilities”) in relation to the airline operations of CSAHC Hainan Co., Ltd. (“Hainan Co., Ltd.”), a subsidiary of CSAHC from Hainan Co., Ltd., whose main business is that of civil aviation, on April 18, 2006.

As agreed by the parties, the value of the Core Assets to be acquired and the Core Liabilities to be assumed by the Company is determined in accordance with the valuation reports (Zhongqihuapingbaozi (2006) Report No. 024) on the transfer of business and assets of Hainan Co., Ltd. dated June 30, 2005 which was issued by China Enterprise Appraisal Co., Ltd., which sets out the estimated value of the Core Assets as RMB355,150,000, consisting mainly of RMB103,020,000 in cash, RMB55,110,000 for bill and trade receivables, RMB160,970,000 for airplanes, aviation equipment and productionrelated buildings and equipment, as well as RMB35,480,000 of land; and the Core Liabilities, which include airplane repair expenses, jet fuel and takeoff and landing fees, amount to RMB350,000,000.annum. The Core Liabilities will be paid directly by the Company to the creditors in accordance with the terms and period as agreed by relevant parties. After deducting the above-mentioned liabilities, the Company shall pay RMB5,150,000 in cash, being the difference in the estimated values of the Core Assets and Core Liabilities, into the bank account designated by Hainan Co., Ltd. The Company will fund the consideration for the Acquisition wholly by its internal resources.

~~Nan Lung Travel & Express (Hong Kong) Ltd. (the “Nanlung”), a subsidiary wholly owned by CSAHC~~

~~As China Airlines (Hong Kong) Co., Ltd.~~Property Management Framework Agreement has ceased to act as agent of the Company in respect of its ticket sales, account settlement and the ground operations of its flights in Hong Kong region, for the purpose of maintaining the sales and operations of the Company in Hong Kong region, the Company entered into a new General Agency Agreement for Sale of Freight and Passenger Services (the “Agency Agreement”) with Nanlung on May 16, 2006, having been approved by the ~~Board of~~independent non-executive Directors of the Company.

~~The Agency Agreement is valid for a term~~

For the year ended December 31, 2006, the Company paid the property management and maintenance fee of ~~one year, commencing from January 1, 2006, subject to compliance with the relevant provisions of the Hong Kong Listing Rules by the Company. Both parties agreed that prior~~RMB26,402,000 pursuant to the ~~establishment of any relevant entity~~Property Management Framework Agreement.

Please also see note 37 to our consolidated financial statements included elsewhere in Hong Kong region by the Company, the Company authorizes Nanlung to act as agent in its sales and account settlement and the ground operations of its flights in Hong Kong region, and that the rates of the various agency fees shall be determined after arm’s length negotiation and shall not exceed those of the same category that prevail in the market, with a ceiling set at 6% of the revenue of the Company that is derived from freight and passenger services sold through the agency of Nanlung (the total amount shall not exceed HK$60 million). The agency fee is payable within the time period set out in the invoice to be delivered to the Company. The Company will fund the agency fee wholly by its internal resources.this Form 20-F.

Interests of Experts and Counsel

Not applicable.

ITEM 8. FINANCIAL INFORMATION.

Consolidated Statements and Other Financial Information

See “Item 18. Financial Statements” for financial statements filed as part of this Annual Report.

Significant Changes

~~Significant Changes~~

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

Legal Proceedings

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

In August 2004, we entered into a cooperation agreement with the Plaintiffs and, in September 2004, Nan Lung Travel & Express (H.K.) Ltd., our Hong Kong sales agent, entered into an air ticket sales agency agreement with the Plaintiffs. The performance of both agreements has been completed. The Plaintiffs, however, have filed a lawsuit against us for liquidated damages for breach of the provisions on air ticket sales commissions and other payments under those two agreements. The amount of the claim is approximately RMB107 million. We are currently in the process of retaining legal counsel and will actively defend ourselves.

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

Dividend Information

~~Dividend Information~~

No interim dividend was paid during the year ended December 31, ~~2005.~~2006. The Board of Directors does not recommend the payment of a final dividend in respect of the year ended December 31, ~~2005.~~2006.

ITEM 9. THE OFFER AND LISTING.

Offer and Listing Details

The principal trading market for the Company’s H Shares is the Hong Kong Stock Exchange, and the Company’s trading code is “1055”. The ADSs, each representing 50 H Shares, are evidenced by ADRs issued by The Bank of New York as the Depositary for the ADRs, and are listed on the New York Stock Exchange under the symbol “ZNH”.

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

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

The Stock Exchange The New York The Shanghai
of Hong Kong Stock Exchange Stock Exchange
Price per H Share Price per ADS Price per A Share
(HK$) (US$) (RMB)
High Low High Low High Low
Annual Market Prices

Fiscal Year ended December 31, 2000
2.93 1.02 18.38 6.06 N/A N/A
Fiscal Year ended December 31, 2001
2.95 1.35 18.10 8.00 N/A N/A
Fiscal Year ended December 31, 2002
3.60 1.50 22.25 10.35 N/A N/A
Fiscal Year ended December 31, 2003
3.50 1.46 22.78 9.53 5.34 3.75
Fiscal Year ended December 31, 2004
4.68 2.47 29.73 15.95 6.87 3.96
Fiscal Year ended December 31, 2005
2.22 2.17 14.25 14.20 2.68 2.62

Quarterly Market Prices

Fiscal Year ended December 31, 2002

First Quarter
2.83 2.22 17.63 14.80 N/A N/A
Second Quarter
3.42 2.33 21.74 14.95 N/A N/A
Third Quarter
3.60 1.89 22.25 12.00 N/A N/A
Fourth Quarter
2.42 1.50 15.00 10.35 N/A N/A
Fiscal Year ended December 31, 2003

First Quarter
2.62 1.71 16.50 11.75 N/A N/A
Second Quarter
2.40 1.46 14.85 9.53 N/A N/A
Third Quarter
2.88 2.03 18.59 13.25 4.15 3.75
Fourth Quarter
3.50 2.50 22.78 16.76 5.34 3.86
Fiscal Year ended December 31, 2004

First Quarter
4.68 3.20 29.73 20.91 6.87 4.95
Second Quarter 3.90 2.47 24.89 15.95 6.24 4.14
Third Quarter 3.17 2.47 20.17 16.00 5.19 4.16
Fourth Quarter 3.53 2.55 22.74 16.71 5.40 3.96
Fiscal Year ended December 31, 2005

First Quarter
3.10 2.47 19.93 16.10 5.30 3.56
Second Quarter 2.72 2.20 17.33 14.72 4.02 2.95
Third Quarter 2.20 2.03 16.86 13.50 3.00 2.35
Fourth Quarter 2.40 1.83 15.45 11.68 2.77 2.23
Monthly Market Prices
December 2005 2.40 2.10 15.45 13.68 2.74 2.52
January 2006 2.40 2.12 15.50 13.91 3.03 2.53
February 2006 2.53 2.17 15.88 14.05 2.85 2.55
March 2006 2.47 2.20 15.78 14.16 2.84 2.45
April 2006 2.30 1.96 15.03 13.06 2.59 2.19
May 2006 2.08 1.86 13.59 12.01 2.75 2.25
June 19, 2006 1.94 1.68 12.65 10.76 2.97 2.53

	The Hong Kong Stock Exchange Price per H Share (HK$)				The New York Stock Exchange Price per ADS (US$)				The Shanghai Stock Exchange Price per A Share (RMB)
	High		Low		High		Low		High		Low
Annual Market Prices
Fiscal Year ended December 31, 2002		3.60		1.50		22.25		10.35		N/A		N/A
Fiscal Year ended December 31, 2003		3.50		1.46		22.78		9.53		5.34		3.75
Fiscal Year ended December 31, 2004		4.68		2.47		29.73		15.95		6.87		3.96
Fiscal Year ended December 31, 2005		2.22		2.17		14.25		14.20		2.68		2.62
Fiscal Year ended December 31, 2006		3.42		1.60		22.43		14.00		4.09		2.24

Quarterly Market Prices

Fiscal Year ended December 31, 2005
First Quarter		3.10		2.47		19.93		16.10		5.30		3.56
Second Quarter		2.72		2.20		17.33		14.72		4.02		2.95
Third Quarter		2.20		2.03		16.86		13.50		3.00		2.35
Fourth Quarter		2.40		1.83		15.45		11.68		2.77		2.23
Fiscal Year ended December 31, 2006
First Quarter		2.45		2.18		15.82		14.00		2.97		2.48
Second Quarter		2.30		1.66		14.96		10.82		2.92		2.24
Third Quarter		2.25		1.60		14.86		10.51		2.94		2.27
Fourth Quarter		3.42		2.29		22.43		14.06		4.09		2.95
Monthly Market Prices
December 2006		3.16		2.83		20.45		18.31		4.09		3.66
January 2007		4.22		3.25		26.82		21.48		6.26		4.26
February 2007		4.02		3.48		25.86		21.70		6.12		4.93
March 2007		3.74		3.29		23.83		20.81		7.43		5.43
April 2007		3.72		3.44		23.98		22.10		9.03		7.80
May 2007		4.98		3.37		31.29		21.94		9.48		9.48
June 2007 (up to June 27, 2007)		5.59		4.20		35.64		27.53		9.48		8.31

Plan of Distribution

Not applicable.

Markets

~~Markets~~

See “Offer and Listing Details” above.

Selling Shareholders

~~Selling Shareholders~~

Not applicable.

Dilution

~~Dilution~~

Not applicable.

Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION.

Share Capital

~~Share Capital~~

Not applicable.

Memorandum and Articles of Association

The following is a summary of certain provisions of our articles of association. As this is a summary, it does not contain all the information that may be important to you. You and your advisors should read the text of our articles of association for further information.

The Company is registered with and has obtained a business license from the State Administration Bureau of Industry and Commerce of the People’s Republic of China on March 25, 1995. The Company’s business license number is 1000001001760.

On March 13, 2003, the Company obtained an approval certificate from the Ministry of Commerce to change to a permanent limited company with foreign investments and obtained the business license (Qi Gu Guo Zi Di No. 000995) on October 17, 2003 issued by the State Administration of Industry and Commerce of the People’s Republic of China.

~~Objects and Purpose~~

Other Senior Administrative Officers

Pursuant to the Article 1316 of the Articles of Association, ~~the business purposes~~other senior administrative officers of the Company ~~are: (i)~~refer to ~~absorb domestic~~vice president, chief financial officer, the board secretary, general economist, chief engineer, chief pilot, and foreign capital; (ii) to assist in developing the aviation industry of China; (iii) to promote the development of the national economy of China; (iv) to utilize corporate incentive mechanisms of privatization; (v) to draw on the advanced management expertise of other domesticgeneral legal counsel and ~~foreign companies; (vi) to continuously improve the management of the Company; (vii) to enhance the market competitiveness of the Company; (viii) to generate economic~~chief information officer.

Objects and ~~social benefits for the Company; and (ix) to generate steady income for the Company’s shareholders.~~ Purpose

Pursuant to the Article 1418 of the Articles of Association, the scope of business of the Company ~~shall be consistent with and subject to the scope of business approved by the relevant supervisory department of the State. The scope of business of the Company~~ includes: ~~(i)~~(I) provision of scheduled and non-scheduled domestic, regional and international air transportation services for passengers, cargo, mail and luggage; ~~(ii)~~(II) undertaking general aviation services; ~~(iii)~~(III) provision of aircraft repair and maintenance services; ~~(iv)~~(IV) acting as agent for other domestic and international airlines; ~~(v)~~(V) provision of air catering ~~services~~services; (VI) provision of hotel business; (VII) acting as sale agent for aircraft leasing and ~~(vi)~~aviation accident insurance; and (VIII) engaging in other airline or airline-related business, including advertising for such services. (subject to approved of State Administration of Industry and Commerce).

Directors

Pursuant to Article ~~179~~244 of the Articles of Association, where a Director of the Company is in any way, directly or indirectly, materially interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with the Company, (other than his contract of service with the Company), he shall declare the nature and extent of his interests to the Board of Directors at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal ~~therefor~~ is otherwise subject to the approval of the Board of Directors.

Pursuant to Article ~~130~~174 of the Articles of Association, where a Director is interested in any resolution proposed at a board meeting, such Director shall not be present and shall not have a right to vote. Such Director shall not be counted in the quorum of the relevant meeting.

Pursuant to Article ~~187~~252 of the Articles of Association, the Company shall, with the prior approval of shareholders in general meeting, enter into a contract in writing with a Director wherein his emoluments are stipulated. The aforesaid emoluments include, emoluments in respect of his service as Director, Supervisor or senior administrative officer of the Company or any subsidiary of the Company; emoluments in respect of the provision of other services in connection with the management of the affairs of the Company and any of its subsidiaries; and payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office.

Pursuant to Article ~~124(6)~~162(6) of the Articles of Association, the Board of Directors has the power to formulate proposals for increases or reductions in the Company’s registered capital and the issue of debentures of the Company; such resolutions must be passed by more than two-thirds of all the Directors.

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

Ordinary Shares

Pursuant to Article 1926 of the Articles of Association,subject to the approval of the securities authority of the State Council, the Company may issue and offer shares to domestic investors or foreign investors for subscription. Foreign investors are those investors of foreign countries and regions of Hong Kong, Macau and Taiwan who subscribe for shares issued by the Company. Domestic investors are those investors within the territory of the PRC (excluding investors of the regions referred to in the preceding sentence) who subscribe for shares issued by the Company.

Pursuant to Article 2027 of the Articles of Association,~~Shares~~shares issued by the Company to domestic investors for subscription in Renminbi shall be referred to as “Domestic-Invested Shares”. Shares issued by the Company to foreign investors for subscription in foreign currencies shall be referred to as “Foreign-Invested Shares”. Foreign-Invested Shares which are listed overseas are called “Overseas-Listed Foreign-Invested Shares”. The foreign currencies mean the legal currencies (apart from Renminbi) of other countries or districts which are recognized by the foreign exchange control authority of the state and can be used to pay the Company for the share price.

Pursuant to Article 2128 of the Articles of Association,Domestic-Invested Shares issued by the Company shall be called “A Shares”. Overseas-Listed Foreign-Invested Shares issued by the Company and listed in Hong Kong shall be called “H Shares”. H Shares are shares which have been admitted for listing on The Stock Exchange of Hong Kong Limited, the par value of which is denominated in Renminbi and which are subscribed for and traded in Hong Kong dollars. H Shares can also be listed on a stock exchange in the United States of America in the form of American depositary receipts.

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

Pursuant to Article 5462 of the Articles of Association, the ordinary shareholders of the Company shall enjoy the following rights:

(1)

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

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

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

(4)

the right to transfer, donate or pledge his shares in accordance with laws, administrative regulations and provisions of these ~~articles~~Articles of ~~association;~~Association;

(5)

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

(6)

the right to obtain relevant information in accordance with the provisions of these ~~articles~~Articles of ~~association,~~Association, including:

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

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

(a) all parts of the register of shareholders;

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

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

(bb) principal address (residence);

(cc) nationality;

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

(ee) identification documents and their relevant numbers;

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

(e) minutes of shareholders’ general meetings; and

(f) interim and annual reports of the Company.

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

(8)		other rights conferred by laws, administrative regulations and these articles of association.

Pursuant to Article 55 of the Articles of Association, the ordinary shareholders of the Company shall assume the following obligations:

(1)

to abide by these ~~articles~~Articles of ~~association;~~Association;

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

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

(4)

other obligations imposed by laws, administrative regulations and these articles of association.

Shareholders are not liable to make any further contribution to the share capital other than as agreed by the subscriber of the relevant shares on subscription.

Action necessary to change rights of shareholders

Pursuant to Article 112 of the Articles of Association, shareholders who hold different classes of shares are shareholders of different classes.

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

Pursuant to Article 113 of the Articles of Association, rights conferred on any class of shareholders in the capacity of shareholders (“class rights”) may not be varied or abrogated unless approved by a special resolution of shareholders in general meeting and by holders of shares of that class at a separate meeting conducted in accordance with Articles 115 to 119.

Pursuant to Article 115 of the Articles of Association,shareholders of the affected class, whether or not otherwise having the right to vote at shareholders’ general meetings, shall nevertheless have the right to vote at class meetings in respect of matters concerning sub-paragraphs (2) to (8), (11) and (12) of Article 114, but interested shareholder(s) shall not be entitled to vote at class meetings. “Interested shareholder(s)” is:

(1)

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

(2)

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

(3)

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

Pursuant to Article 116 of the Articles of Association, resolutions of a class of shareholders shall be passed by votes representing more than two-thirds of the voting rights of shareholders of that class represented at the relevant meeting who, according to Article 115, are entitled to vote at class meetings.

Pursuant to Article 117 of the Articles of Association, written notice of a class meeting shall be given forty-five ~~(45)~~ days before the date of the class meeting to notify all of the shareholders in the share register of the class of the matters to be considered, the date and the place of the class meeting. A shareholder who intends to attend the class meeting shall deliver his written reply concerning attendance at the class meeting to the Company twenty ~~(20)~~ days before the date of the class meeting.

If the number of shares carrying voting rights at the meeting represented by the shareholders who intend to attend the class meeting reaches more than one half of the voting shares at the class meeting, the Company may hold the class meeting; if not, the Company shall within five (5) days notify the shareholders again by public notice of the matters to be considered, the date and the place for the class meeting. The Company may then hold the class meeting after such publication of notice.

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

Meeting of any class of shareholders shall be conducted in a manner as similar as possible to that of general meetings of shareholders. The provisions of these ~~articles~~Articles of ~~association~~Association relating to the manner to conduct any shareholders’ general meeting shall apply to any meeting of a class of shareholders.

Pursuant to Article 119 of the Articles of Association, the special procedures for voting at any meeting of a class of shareholders shall not apply to the following circumstances:

(1)

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

(2)

where the Company’s plan to issue Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares at the time of its establishment is carried out within fifteen ~~(15)~~ months from the date of approval of the Securities Committee of the State Council.

Meetings of shareholders

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

There are two types of shareholders’ general meetings: annual general meetings and extraordinary general meetings. Shareholders’ general meetings shall be convened by the ~~board~~Board of ~~directors.~~Directors. Annual general meetings are held once every year and within six ~~(6)~~ months from the end of the preceding financial year.

Under any of the following circumstances, the Board of Directors shall convene an extraordinary general meeting within two ~~(2)~~ months:

(1)

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

(2)

when the unrecovered losses of the Company amount to one third of the total amount of its share capital;

(3)		when shareholder(s) holding 10 ~~per cent~~percent or more of the Company’s issued and outstanding shares carrying voting rights request(s) in writing the convening of an extraordinary general meeting;

(4)		when deemed necessary by the Board of Directors or as requested by the ~~supervisory committee.~~Supervisory Committee.

When the Company convenes a shareholders’ general meeting, written notice of the meeting shall be given forty five ~~(45)~~ days before the date of the meeting to notify all of the shareholders in the share register of the matters to be considered and the date and the place of the meeting. A shareholder who intends to attend the meeting shall deliver his written reply concerning the attendance of the meeting to the Company twenty ~~(20)~~ days before the date of the meeting.

The Company shall, based on the written replies received twenty ~~(20)~~ days before the date of the shareholders’ general meeting from the shareholders, calculate the number of voting shares represented by the shareholders who intend to attend the meeting. If the number of voting shares represented by the shareholders who intend to attend the meeting reaches one half or more of the Company’s total voting shares, the Company may hold the meeting; if not, then the Company shall within five ~~(5)~~ days notify the shareholders again by public notice of the matters to be considered, the place and date for, the meeting. The Company may then hold the meeting after such publication of notice.

Limitation on right to own securities

The PRC Special Regulations on Overseas Offering and the Listing of Shares by Companies Limited by Share (the “Special Regulations”) and the Mandatory Provisions for Articles of Association of Companies to be Listed Overseas (the “Mandatory Provisions”) provide for different classes of shares to be subscribed for and traded by local and overseas investors respectively. Shares which can be traded by overseas investors must be in registered form and while denominated in Renminbi, they are traded in foreign currency with dividends payable in foreign currency. Local investors are prohibited from dealing in such shares.

Merger, acquisition or corporate restructuring

Pursuant to Article 221 of the Articles of Association, in the event of the merger or division of the Company, a plan shall be presented by the Company’s ~~board~~Board of ~~directors~~Directors and shall be approved in shareholders’ general meeting and the relevant examining and approving formalities shall be processed as required by law. A shareholder who objects to the plan of merger or division shall have the right to demand the Company or the shareholders who consent to the plan of merger or division to acquire that dissenting shareholder’s shareholding at a fair price. The contents of the resolution of merger or division of the Company shall be made into special documents for shareholders’ inspection. Such special documents shall be sent by mail to holders of Overseas-Listed Foreign-Invested Shares.

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

Material Contracts

~~Material Contracts~~

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

(a)		A sale and purchase agreement (the “Sale and Purchase Agreement”) dated November 12, 2004 between the Company, CSAHC, CNA, a wholly owned subsidiary of CSAHC, and XJA, a wholly owned subsidiary of CSAHC, pursuant to which the Company agreed to acquire, and CSAHC, CNA and XJA agreed to sell certain airlines and airlines-related operations, assets and properties of CNA, XJA and their respective subsidiaries, which included aircraft, engines, spare parts, aviation equipment and facilities, properties, office facilities, and other fixed, current and intangible assets. In addition, the Company will also assume all indebtedness in the aggregate sum of RMB13,438,191,000 owed by XJA, CNA and their respective subsidiaries in connection with their civil aviation business. The total consideration, including the assumption of the debts under the Sale and Purchase Agreement was RMB15,397,524,000. It became effective upon approval by the shareholders of the Company on December 31, 2004.

~~(b)~~		A lease agreement (the “Lease Agreement 1”) dated November 12, 2004 between the Company, CSAHC and CNA, pursuant to which CSAHC and CNA lease to the Company certain buildings, facilities and other infrastructure related to the civil aviation business of CNA situated at various locations in Shenyang, Dalian, Jilin, Harbin, Chaoyang and Russia for a period of three years. The consideration for Lease Agreement 1 is RMB41,993,318.44 per year. It became effective upon approval by the shareholders of the Company on December 31, 2004.

~~(c)~~		A lease agreement (the “Lease Agreement 2”) dated November 12, 2004 between the Company, CSAHC and XJA, pursuant to which CSAHC and XJA lease to the Company certain buildings, facilities and other infrastructure related to the civil aviation business of XJA situated at Xinjiang and Russia for a period of three years. The consideration for Lease Agreement 2 is RMB5,797,908.61 per year. It became effective upon approval by the shareholders of the Company on December 31, 2004.

~~(d)~~		A lease agreement (the “Lease Agreement 3”) dated November 12, 2004 between the Company and CSAHC, pursuant to which CSAHC leases to the Company certain lands situated in Urumqi, Shenyang, Dalian and Harbin, by leasing the land use rights of such lands to the Company for a period of three years. The consideration for Lease Agreement 3 is RMB22,298,033 per year. It became effective upon approval by the shareholders of the Company on December 31, 2004.

~~(e)~~		A catering agreement (the “Catering Agreement”) dated November 12, 2004 between the Company and China Southern Airlines Group Air Catering Company Limited (the “Catering Company”), a wholly owned subsidiary of CSAHC, pursuant to which the Catering Company supplies in-flight meal and catering services to the flights of the Company originating or stopping at the domestic airports, mainly in Northern China and Xinjiang regions where the Catering Company provides catering services for a period of three years. The consideration for the catering agreement is based on the price of each type of in-flight meals and the service price for each type of aircraft, and is capped at RMB220 million per year. It became effective upon approval by the shareholders of the Company on December 31, 2004.

~~(f)~~		A financial agreement (the “Financial Agreement”) dated November 12, 2004, between the Company and Southern Airlines Group Finance Company Limited (“SA Finance”), a connected person of the Company which is 42% owned by CSAHC, 32% owned by the Company and 26% owned in aggregate by five subsidiaries of the Company. The Financial Agreement commenced from November 12, 2004 for a period of three years, and is renewable, subject to compliance with the requirements of the relevant Hong Kong Listing Rules by the Company, by an application in writing by the Company not less than 30 days before the end of the fixed term. Under the Financial Agreement, SA Finance provides deposit of money service and, subject to the execution of further agreements with the Company, other financial services like loan facilities, credit facilities, financial guarantees and credit references to the Company. The Company is not subject to any extra charges for depositing money with SA Finance. For the other financial services provided by SA Finance under the financial agreement, the Company is liable to pay SA Finance the standard charging rates set by the People’s Bank of China. The PRC commercial banks also charge similar charging rates set by the People’s Bank of China. The Company will make payment for such interest, fees and commissions in accordance with the payment terms of the separate agreements for the provision of loans or other financial services as might be entered into between the Company and SA Finance. It became effective upon approval by the shareholders of the Company on December 31, 2004.

~~(g)~~		A framework agreement on lease and operation dated January 1, 2006 between the Company and China Southern Airlines Group Travel Development Company Limited (the “CSA Travel”), a wholly owned subsidiary of CSAHC, pursuant to which the Company leases certain hotels belonging to it to CSA Travel for operation and management for a period of three years. The consideration for the framework agreement on lease and operation is based on the rent payable and fees for operation and management of the hotels, and is capped at RMB6 million per year. It became effective on April 25, 2006 and has been approved by the ~~directors~~Directors of the Company.

~~(h)~~(b)		An advertising agency agreement dated January 1, 2006 between the Company and ~~Southern Airlines Advertising Company (the “SAAC”),~~SAAC, a related party that is 45% owned by the Company and 55% owned by CSAHC, pursuant to which the SAAC produces advertisement script, graphic and music for the Company with the copyright of such products belonging to the Company for a period of three years. The consideration for the advertising agency agreement is based on the fees payable for advertising services to be provided, and is capped at RMB30 million per year. It became effective on April 25, 2006 has been approved by the ~~directors~~Directors of the Company.

~~(i)~~(c)		A property management framework agreement dated January 1, 2006 between the Company and Guangzhou China Southern Airlines Property Management Company Limited (the “GCSAPMC”), a related party that is 90% owned by CSAHC and 10% owned by the Company’s union, pursuant to which the GCSAPMC provides property management and improvement services for certain properties of the Company for a period of three years. The consideration for the property management framework agreement is based on the fees payable for management and maintenance services to be provided, and is capped at RMB47,010,000 per year. It became effective on April 25, 2006 has been approved by the ~~directors~~Directors of the Company.


~~(j)~~(d)		An acquisition agreement dated April 1, 2006 between the Company and CSAHC Hainan Co., Ltd. (the “Hainan Co., Ltd.”), a subsidiary of CSAHC, pursuant to which the Company has agreed to acquire and Hainan Co., Ltd. has agreed to sell the assets and liabilities in relation to the airline operations of Hainan Co., Ltd. The total consideration payable by the Company, including the assets to be acquired and the liabilities to be assumed by the Company, was RMB5,150,000. It became effective upon approval by the ~~directors~~Directors of the Company on April 18, 2006.

~~(k)~~(e)		An agency agreement for sale of freight and passenger services dated May 16, 2006 between the Company and Nan Lung Travel & Express (Hong Kong) Ltd. ~~(the “Nanlung”~~(“Nanlung”), a wholly owned subsidiary of CSAHC, pursuant to which ~~the~~ Nanlung acts as agent in the Company’s sales and account settlement and the ground operations of the Company’s flights in Hong Kong region for a period of one year. The consideration for the agency agreement is based on the fees payable for ticket sale and other services to be provided, and is capped at RMB60 million for the entire term of the agency agreement. It became effective on May 16, 2006 and was approved by the ~~directors~~Directors of the Company on December 24, 2005.

(f)		An Airbus Aircraft Acquisition Agreement dated July 6, 2006 between the Company and Airbus, the Company would acquire 50 Airbus A320 series aircraft from Airbus. The aggregate catalogue price for the Airbus Aircraft is RMB26.526 billion (approximately US$3.316 billion). The aggregate consideration for the acquisition of the Airbus Aircraft is payable by cash in installments and the Airbus Aircraft will be delivered in stages to the Company during the period commencing from 2009 to 2010.

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

(h)

A Xiamen Aircraft Acquisition Agreement dated October 13, 2006 between Xiamen Airlines and Boeing, Xiamen Airlines would acquire six Boeing B737-800 aircraft from Boeing. The catalogue price of a Boeing B737-800 aircraft is US$66-US$75 million. Such catalogue price includes price for airframe and engine. The aggregate consideration for the acquisition of the B737-800 Aircraft is payable by cash in installments and the B737-800 Aircraft will be delivered to Xiamen Airlines in 2010.

(i)

A lease agreement dated December 19, 2006 entered into between the Company and CSAHC (“Lease Agreement”). The Lease Agreement takes effect retrospectively on January 1, 2006, and is valid for a term of 3 years. Under the Lease Agreement, the annual rents payable for the year 2006, 2007 and 2008 are RMB27,543,606.01, RMB28,657,966.99 and RMB29,828,046.01 respectively. Each year, the rent is payable in advance semiannually by the Company wholly out of its internal funds.

Exchange Controls

~~Exchange Controls~~

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

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

On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar so that the Renminbi is now permitted to fluctuate within a band against a basket of certain foreign currencies. ~~As a result,~~On May 18, 2007, the ~~value~~People’s Bank of China announced that the ~~Renminbi against the U.S. dollar has appreciated by approximately 2%. Under the new policy, the value~~floating band of Renminbi ~~against the U.S. dollar has fluctuated on a daily basis within narrow ranges, but overall has further strengthened against the U.S. dollar.~~would be permitted to rise or fall by as much as 0.5%. The PRC government has stated publicly that it intends to further liberalize its currency policy, which could result in a further and more significant change in the value of the Renminbi against the U.S. dollar. Any significant revaluation of the Renminbi may have a material adverse effect on the ~~Company’s~~Company's financial performance, and the value of, and any dividends payable on, the ~~Company’s~~Company's H Shares and ADSs in foreign currency terms.

Other Limitations

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

Taxation

~~Taxation~~

Chinese Taxation

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

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

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

In March 2007, the National People’s Congress of China enacted a new Enterprise Income Tax Law, which will become effective on January 1, 2008. The new tax law would impose a unified income tax rate of 25.0% on all domestic enterprises and foreign-invested enterprise unless they qualify under certain limited exceptions. The new tax law provides for a five-year transition period for FIEs, during which they are permitted to continue to enjoy their existing preferential tax treatment until such treatment expires in accordance with its current terms. The implementation guidance as to how the existing preferential tax rate will increase to the standard rate of 25% is not yet issued.

Dividends

Chinese tax law generally provides for the imposition of a withholding tax on dividends paid by a Chinese company to a non-Chinese shareholder at a rate of 20%. However, the Chinese tax authorities have temporarily suspended imposition of this withholding tax. Accordingly, dividends paid by the Company to holders of H Shares or ADSs who are foreign individuals not resident in China or which are foreign enterprises with no permanent establishment in China will currently not be subject to Chinese withholding tax. In the event that the suspension of the withholding tax is lifted, such payments will be subject to withholding tax at the 20% rate unless the holder is entitled to a tax waiver or a lower tax rate under an applicable double-taxation treaty.

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

Capital Gains from Transfer or Disposition of Shares

Chinese tax law generally provides that an individual who transfers or otherwise disposes of a company’s shares of capital stock is subject to a 20% capital gains tax. Currently, foreign enterprises and all individuals are temporarily exempt from capital gains tax on transfers of shares of capital stock of joint stock companies, such as the Company. Should such temporary exemption be discontinued, such holders may be

subject to a 20% capital gains tax unless reduced by an applicable double-taxation treaty. Under the U.S.-PRC Tax Treaty, for example, China may only impose a 20% capital gains tax from the sale or other disposition by a U.S. holder of H Shares or ADSs representing an interest in the Company of 25% or more.

Stamp Duty

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

United States Federal Income Taxation

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

	•		dealers in securities or currencies;

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

	•		banks or other financial institutions;

	•		insurance companies;

	•		tax-exempt organizations;

	•		partnerships and other entities treated as partnerships for U.S. federal income tax purposes or persons holding ADSs through any such entities;

	•		persons that hold ADSs as part of a hedge, straddle, constructive sale, conversion transaction or other integrated investment;

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

	•		persons liable for alternative minimum tax; or

	•		persons who actually or constructively own 10% or more of the total combined voting power of all classes of the Company’s shares (including ADSs) entitled to vote.

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

You should consult your own tax advisor concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of the Company’s ADSs, as well as the consequences to you arising under the laws of any other taxing jurisdiction.

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

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

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

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

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

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

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

U.S. Holders

Dividends on ADSs

Subject to the “Passive Foreign Investment Company” discussion below, if the Company makes distributions and you are a U.S. Holder, the gross amount of any distributions you receive on your ADSs will generally be treated as dividend income if the distributions are made from the Company’s current or accumulated earnings and profits, calculated according to U.S. federal income tax principles. Dividends will generally be subject to U.S. federal income tax as ordinary income on the day you actually or constructively receive such income. However, if you are an individual and have held your ADSs for a sufficient period of time, dividend distributions on the Company’s ADSs will generally constitute qualified dividend income taxed at a preferential rate (generally 15% for dividend distributions before January 1, 2009) as long as the Company’s ADSs continue to be readily tradable on the New York Stock Exchange and certain other conditions apply. You should consult your own tax adviser as to the rate of tax that will apply to you with respect to dividend distributions, if any, you receive from us.

Distributions on the Company’s ADSs, if any, will generally be taxed to you as dividend distributions for U.S. tax purposes. Even if you are a corporation, you will not be entitled to claim a dividends-received deduction with respect to distributions you receive from the Company. Dividends generally will constitute foreign source passive income for U.S. foreign tax credit limitation purposes.

Sales and other dispositions of ADSs

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

Passive Foreign Investment Company

If the Company were a Passive Foreign Investment Company ~~or “PFIC”~~(“PFIC”) in any taxable year in which you hold the Company’s ADSs, as a U.S. Holder, you would generally be subject to adverse U.S. tax consequences, in the form of increased tax liabilities and special U.S. tax reporting requirements.

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

The Company believes that it was not a PFIC for the taxable year ~~2004.~~2006. However, there can be no assurance that the Company will not be a PFIC for the taxable year ~~2005~~2007 and/or later taxable years, as PFIC status is re-tested each year and depends on the facts in such year. For example, the Company would be a PFIC for the taxable year ~~2005~~2006 if the sum of its average market capitalization, which is its share price multiplied by the total amount of its outstanding shares, and its liabilities over that taxable year is not more than twice the value of its cash, cash equivalents, and other assets that are readily converted into cash.

If the Company were a PFIC, you would generally be subject to additional taxes and interest charges on certain “excess” distributions the Company makes and on any gain realized on the disposition or deemed disposition of your ADSs, regardless of whether the Company continues to be a PFIC in the year in which you receive an “excess” distribution or dispose of or are deemed to dispose of your ADSs. Distributions in respect of your ADSs during a taxable year would generally constitute “excess” distributions if, in the aggregate, they exceed 125% of the average amount of distributions in respect of your ADSs over the three preceding taxable years or, if shorter, the portion of your holding period before such taxable year.

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

If the Company were a PFIC in any year, as a U.S. Holder, you would be required to make an annual return on IRS Form 8621 regarding your ADSs. However, the Company does not intend to generate, or share with you, information that you might need to properly complete IRS Form 8621. You should consult with your own tax adviser regarding reporting requirements with regard to your ADSs.

If the Company were a PFIC in any year, you would generally be able to avoid the “excess” distribution rules described above by making a timely so-called “mark-to-market” election with respect to your ADSs provided the Company’s ADSs are “marketable”. The Company’s ADSs will be “marketable” as long as they remain regularly traded on a national securities exchange, such as the New York Stock Exchange. If you made this election in a timely fashion, you would generally recognize as ordinary income or ordinary loss the difference between the fair market value of your ADSs on the first day of any taxable year and their value on the last day of that taxable year. Any ordinary income resulting from this election would generally be taxed at ordinary income rates and would not be eligible for the reduced rate of tax applicable to qualified dividend income. Any ordinary losses would be limited to the extent of the net amount of previously included income as a result of the mark-to-market election, if any. Your basis in the ADSs would be adjusted to reflect any such income or loss. You should consult with your own tax adviser regarding potential advantages and disadvantages to you of making a “mark-to-market” election with respect to your ADSs. Separately, if the Company were a PFIC in any year, you would be able to avoid the “excess” distribution rules by making a timely election to treat us as a so-called “Qualified Electing Fund” or “QEF.” You would then generally be required to include in gross income for any taxable year (1) as ordinary income, your pro rata share of the Company’s ordinary earnings for the taxable year, and (2) as long-term capital gain, your pro rata share of the Company’s net capital gain for the taxable year. However, the Company does not intend to provide you with the information you would need to make or maintain a “QEF” election and you will, therefore, not be able to make or maintain such an election with respect to your ADSs.

Non-U.S. Holders

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

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

	•		you are a nonresident alien individual and are present in the United States for at least 183 days in the taxable year of the sale or other disposition and either (1) your gain is attributable to an office or other fixed place of business that you maintain in the United States or (2) you have a tax home in the United States.

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

U.S. information reporting and backup withholding rules

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

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

Dividends and Paying Agents

Not applicable.

Statement by Experts

Not applicable.

Documents on Display

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

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

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

Subsidiary Information

~~Subsidiary Information~~

Not applicable.

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

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


NYSE corporate governance rules		Corporate governance rules applicable to the domestically listed companies in China and the Company’s governance practices

Director Independence A listed company must have a majority of independent directors on its board of directors. No director qualifies as “independent” unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company). In addition, a director must meet certain standards to be deemed independent. For example, a director is not independent if the director is, or has been within the last three years, an employee of the listed company, or if the director has received, during any twelve-month period within the last three years, more than US$100,000 in direct compensation from the listed company.		Director Independence Any listed company must establish an independent director system and set forth specific requirements for the qualification of independent directors. An independent director shall not hold any other position in the listed company other than being a director and shall not be influenced by the main shareholders or the controlling persons of the listed company, or by any other entities or persons with whom the listed company has a significant relationship. The Company’s governance practices The Company has complied with the relevant Chinese corporate governance rules and has implemented internal rules governing the independence and responsibilities of independent directors. The Company determines the independence of independent directors every year.

The non-management directors of each listed company must meet at regularly scheduled executive sessions without management.		No similar requirements.


Nominating/Corporate Governance Committee Listed companies must have a nominating/corporate governance committee composed entirely of independent directors. The nominating/corporate governance committee must have a written charter that addresses the committee’s purposes and responsibilities which, at minimum, must be to: search for eligible people for the board of directors, select and nominate directors for the next session of the shareholders’ annual meeting, study and propose corporate governance guidelines, supervise the evaluation of the board of directors and management, and evaluate the performance of the committee every year.		Nominating/Corporate Governance Committee The board of directors of a listed company may, through the resolution of the shareholders’ meeting, establish a nominating committee composed entirely of directors, of which the independent directors shall be the majority and the convener. The Company’s governance practices The Company has not established a nominating committee. The independent non-executive Directors of the Company are nominated by the Board of Directors, and their appointment must be approved by the shareholders of the Company in a general meeting. The executive Directors of the Company are nominated by CSAHC, the controlling shareholder of the Company, and their appointment must be approved by the shareholders of the Company in a general meeting.

Compensation Committee Listed companies must have a compensation committee composed entirely of independent directors.		Compensation Committee The board of directors of a listed company can, through the resolution of shareholders’ meeting, have a compensation and evaluation committee composed entirely of directors, of whom the independent directors are the majority and act as the convener.

The Company’s governance practices

The Company has established a remuneration committee consisting of three members. The remuneration committee is chaired by independent non-executive Director Sui Guang Jun with independent non-executive Director Wei Ming Hai and executive Director Wang Quan Hua as members.


The written charter of the compensation committee must state, at least, the following purposes and responsibilities: (1) review and approve the corporate goals associated with CEO’s compensation, evaluate the performance of the CEO in fulfilling these goals, and based on such evaluation determine and approve the CEO’s compensation level; (2) make recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval; (3) produce a committee report on executive compensation as required by the SEC to be included in the annual proxy statement or annual report filed with the SEC. The charter must also include the requirement for an annual performance evaluation of the compensation committee.		The responsibilities are similar to those stipulated by the NYSE rules, but the committee is not required to produce a report on the executive compensation or make an annual performance evaluation of the committee. The responsibilities of the remuneration committee are to approve the remuneration packages of Directors and senior management of the Group, and the Company’s “preliminary proposals on annual emoluments of the directors and senior management of the Group”. The remuneration committee is also responsible for assessing performance of executive director and approving the terms of executive directors’ service contracts.

Audit Committee Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 of Exchange Act. It must have a minimum of three members, and all audit committee members must satisfy the requirements for independence set forth in Section 303A.02 of NYSE Corporate Governance Rules as well as the requirements of Rule 10A-3b (1) of the Exchange Act.		Audit Committee The board of directors of a listed company can, through the resolution of the shareholders’ meeting, establish an audit committee composed entirely of directors, of which the independent directors are the majority and act as the convener, and, at minimum, one independent director is an accounting professional.


The written charter of the audit committee must specify that the purpose of the audit committee is to assist the board oversight of the integrity of financial statements, the company’s compliance with legal and regulatory requirements, qualifications and independence of independent auditors and the performance of the listed company’s internal audit function and independent auditors. The written charter must also require the audit committee to prepare an audit committee report as required by the SEC to be included in the listed company’s annual proxy statement as well as an annual performance evaluation of the audit committee.		The responsibilities of the audit committee are similar to those stipulated by the NYSE rules, but according to the domestic practices, the Company is not required to make an annual performance evaluation of the audit committee and the audit committee is not required to prepare an audit report to be included in the Company’s annual proxy statement. The Company’s governance practices The Board of Directors of the Company has established an audit committee that satisfies relevant domestic requirements and the audit committee has a written charter.

Each listed company must have an internal audit department.		China has a similar regulatory provision, and the Company has an internal audit department.

Shareholders must be given the opportunity to vote on equity-compensation plans and material revisions thereto, except for employment incentive plans, certain awards and plans in the context of mergers and acquisitions.		The relevant regulations of China require the board of directors to propose plans and types of director compensation for the shareholders’ meeting to approve. The compensation plan of executive officers is subject to approval by the board and announced at the shareholders’ meeting and disclosed to the public upon the approval of the board of directors. The approval of director compensation and compensation plan of executive officers of the Company satisfies relevant domestic requirements.

Corporate Governance Guidelines Listed companies must adopt and disclose corporate governance guidelines, involving director qualification standards, director compensation, director continuing education, annual performance evaluation of the board of directors, etc.		Corporate Governance Guidelines China Securities Regulatory Commission (“CSRC”) has issued the Corporate Governance Rules, with which the Company has complied.

Code of Ethics for Directors, Officers and Employees Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.		Code of Ethics for Directors, Officers and Employees China does not have such requirement for a code for ethics. But, the directors and officers must perform their legal responsibilities in accordance with the Company Law of PRC, relative requirements of CSRC and Mandatory Provisions to the Charter of Companies Listed Overseas.


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

Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards and he or she must promptly notify the NYSE on writing of any material non-compliance with any applicable provisions of Section 303A.		No similar requirements.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Group is subject to market risks due to fluctuations in interest rates. The majority of the Group’s ~~borrowings~~borrowing is in the form of long-term ~~fixed-~~fixed-rate and variable-rate debts with original maturities ranging from two to fifteen years. Fluctuations in interest rates can lead to significant fluctuations in the fair value of such debt instruments. From time to time, the Group may enter into interest rate swaps designed to mitigate exposure relating to interest rate risks. No such contract was outstanding as of December 31, ~~2005.~~2006.

The Group is also exposed to foreign currency risk as a result of its aircraft and flight equipment being sourced from overseas suppliers. Specifically, the Group’s foreign currency exposure relates primarily to its foreign currency long-term debts used to finance such capital expenditures and its capital commitments. Subject to certain restrictive conditions imposed by the State Administration of Foreign Exchange, the Group may, from time to time, enter into forward foreign exchange contracts to mitigate its foreign currency exposures. No such contract was outstanding as of December 31, ~~2005.~~2006.

As of December 31, ~~2005,~~2006, the Group operated a total of 151 aircraft under operating and capital leases at rates that are substantially fixed. Such leases expose the Group to market risks; however, in accordance with Item 305 of Regulation S-K, such leases have been excluded from the following market risk tables. Commitments under operating and capital leases are disclosed in Note 28 to the Financial Statements.

The following table provides information regarding the Group’s material interest rate sensitive financial instruments as of December 31, ~~2005~~2006 and ~~2004:~~2005:


	As of December 31, 2005																							As of December 31, 2004
	Expected maturity date
																			Total					Total					As of December 31, 2006																						As of December 31, 2005
																			recorded					recorded					Expected maturity date
	2006			2007			2008			2009			2010			Thereafter			amount			Fair value(2)		amount			Fair value(2)		2007			2008			2009			2010			2011			Thereafter			Total recorded amount		Fair value(2)		Total recorded amount		Fair value(2)
Debt
Fixed-rate notes payable In US$		484			449			303			266			215			697			2,414			2,440		2,252			2,464
Fixed-rate notes payable
In US$																														430			293			257			208			90			585			1,863		1,861		2,252		2,464
Average interest rate		6.47	%		6.47	%		6.47	%		6.62	%		6.47	%		6.47	%		6.47	%				6.09	%				5.94	%		5.91	%		5.95	%		6.01	%		5.74	%		5.74	%
Variable-rate notes payable In US$(3)		12,169			5,188			1,801			1,047			345			2,924			23,474			23,474		15,327			15,327
Variable-rate notes payable
In US$																														17,442			6,414			1,841			432			1,485			1,886			29,500		29,500		15,327		15,327
Average interest rate		4.57	%		4.52	%		4.44	%		4.44	%		4.46	%		4.46	%		4.57	%				2.40	%				5.85	%		5.77	%		5.70	%		5.11	%		5.71	%		5.53	%
In HKD(3)		657			1,238			—			—			—			—			1,895			1,895		3,327			3,327
In HKD																														1,651			4			4			4			4			-			1,667		1,667		3,327		3,327
Average interest rate		4.11	%		4.83			—			—			—			—			4.11	%				1.42	%				4.34	%		-			-			-			-			-
In RMB		302			52			52			122			100			552			1,180			1,180		2,547			2,547		532			52			122			100			-			3			809		809		2,547		2,547
Average interest rate		5.06	%		5.12	%		5.12	%		5.12	%		5.12	%		2.75	%		4.15	%				5.04	%				5.22	%		5.50	%		5.50	%		5.51	%		-			-


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

(2)		Fair value of debt instruments was estimated based on the interest rates applicable to similar debt instruments as of December 31, ~~2005~~2006 and ~~2004.~~

~~(3)~~		~~Short term bank debts included certain debts of RMB2,611 million which were renewed subsequent to December 31,~~ 2005. ~~The renewed debts are unsecured, bear interest at floating rates ranging from 3-month HIBOR/6-month LIBOR + 0.55% to 0.60% per annum and are repayable one year from their respective renewal dates.~~

The following table provides information regarding the Group’s material foreign currency sensitive financial instruments and capital commitments as of December 31, ~~2005~~2006 and ~~2004:~~2005:

As of December 31, 2005 As of December 31, 2004
Expected maturity date
Total Total
recorded recorded
2006 2007 2008 2009 2010 Thereafter amount Fair value(2) amount Fair value(2)
Debt
Fixed-rate notes payable In US$ 484 449 303 266 215 697 2,414 2,440 2,252 2,464
Average interest rate 6.47 % 6.47 % 6.47 % 6.62 % 6.47 % 6.47 % 6.47 % 6.09 %
Variable-rate notes payable in US$(3) 12,169 5,188 1,801 1,047 345 2,924 23,474 23,474 15,327 15,327
Average interest rate 4.57 % 4.52 % 4.44 % 4.44 % 4.46 % 4.46 % 4.57 % 2.40 %
In HKD(3) 657 1,238 — — — — 1,895 1,895 3,327 3,327
Average interest rate 4.11 % 4.83 — — — — 4.11 % 1.42 %
Capital commitment in US$ 7,341 8,945 14,354 5,300 9,688 — 45,628 45,628 11,776 11,776

As of December 31, 2006

As of December 31, 2005

Expected maturity date

2007

2008

2009

2010

2011

Thereafter

Total

recorded

amount

Fair
value(2)

Total

recorded

amount

Fair
value(2)

Debt

Fixed-rate notes payable In US$

430

293

257

208

585

1,863

1,861

2,414

2,440

Average interest rate

5.94

5.91

5.95

6.01

5.74

Variable-rate notes payable in US$

17,442

6,414

1,841

432

1,485

1,886

29,500

23,474

Average interest rate

5.85

5.77

5.70

5.11

5.71

5.22

In HKD

1,651

1,667

1,895

Average interest rate

4.34

Capital commitment in US$

12,299

22,572

17,483

14,232

295

—

66,881

45,628


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

(2)		Fair value of debt instruments was estimated based on the floating interest rates applicable to similar debt instruments as of December 31, ~~2005~~2006 and ~~2004.~~
~~(3)~~		~~Short term bank debts included certain debts of RMB2,611 million which were renewed subsequent to December 31,~~ 2005. ~~The renewed debts are unsecured, bear interest at floating rates ranging from 3-month HIBOR/6-month LIBOR + 0.55% to 0.60% per annum and are repayable one year from their respective renewal dates.~~

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

Not applicable.

PART II

~~PART II~~

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

None.

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

There were no material modifications affecting the rights of securities holders made during the fiscal year ended December 31, ~~2005.~~2006.

Use of Proceeds

(1)		Effective date of the Securities Act registration statement for which the use of proceeds information is being disclosed:

		July 23, 1997. SEC file number assigned to such registration statement: 333-7114.

(2)		The offering commenced on July 23, 1997.

(3)		The offering was not terminated prior to the sale of any securities registered under the registration statement.

(4)

(i) The offering was not terminated prior to the sale of all securities registered under the registration statement.

	(ii)		Name of the managing underwriter: Goldman Sachs (Asia) L.L.C. (global coordinator).

	(iii)		and (iv)

Aggregate Aggregate
Title of each price of offering
class of offering price of
securities Amount amount Amount amount
registered registered(1) registered(2) sold(3) sold(4)
Ordinary H Shares of par value RMB 1.00 per share represented by American Depositary Shares 861,823,000 shares US$ 528,469,864 851,501,000 shares US$ 522,140,413

Title of each class of securities registered

Amount

registered(1)

Aggregate

price of

offering

amount

registered(2)

Amount

sold(3)

Aggregate

offering

price of

amount

sold(4)

Ordinary H Shares of par value RMB 1.00 per share represented by American Depositary Shares

861,823,000 shares

US$528,469,864

851,501,000 shares

US$522,140,413

Notes:


(1)		The amount does not include 322,677,000 H Shares (some of which in the form of ADSs) which have not been registered with the SEC, of which 290,477,000 H Shares were sold to certain corporate investors in Hong Kong as part of the global offering of the Company in July 1997 and 32,200,000 H Shares were sold to certain limited partnership investment funds affiliated with Goldman, Sachs & Co. in a private placement in June 1997 prior to the Company’s global offering.


(2)		Assumes that all H Shares were sold in the form of ADSs. The price to public for each ADS is US$30.66. Each ADS represents 50 H Shares.

(3)		The amount does not include 322,677,000 H Shares referred to in note (1) above.

(4)		The amount does not include US$197,865,536 which represents the proceeds from the sale of 322,677,000 H Shares referred to in note (1) above. If the latter amount is included, the aggregate amount of proceeds to the Company would be US$720,005,950. In addition, the aggregate amount is calculated on the assumption that all H Shares were sold in the form of ADSs. Based on the actual sale of H Shares and ADSs, the aggregate amount of proceeds to the Company was US$719,494,700. The issue price per H Share was HK$4.70.

(v)


Underwriting discounts and commissions	US$	36,593,000
Finder’s fees		—
Expenses paid to or for underwriters	US$	2,958,000
Other expenses	US$	21,411,000
Total expenses	US$	60,962,000


Note:		No direct or indirect payments were made to directors, officers, general partners of the Company or their associates, or to persons owning ten percent or more of any class of equity securities of the Company, or to affiliates of the Company. All payments were made to third parties.

(vi) Net offering proceeds to the Company after deducting the total expenses in item (4)(v) above:

US$658,532,700


Note:		The amount is calculated on the basis of the actual aggregate amount of proceeds to the Company, and includes the proceeds from the sale of 322,677,000 H Shares referred to in note (1) of item (4)(iv) above.

(vii) As of December 31, ~~2005,~~2006, the net offering proceeds to the Company was used up as follows:


Construction of plant, building and facilities	US$	41.9 million
Purchase and installation of machinery and equipment	US$	394.6 million
Purchase of real estate		—
Acquisition of other business(es)		—
Repayment of indebtedness	US$	192.4 million
Working Capital	US$	29.6 million


Note:		No direct or indirect payments were made to directors, officers, general partners of the Company or their associates, or to persons owning ten percent or more of any class of equity securities of the Company, or to affiliates of the Company. All payments were made to third parties.

(viii) The uses of proceeds do not represent a material change in the use of proceeds described in the prospectus.

PART III

ITEM 15. CONTROLS AND PROCEDURES.

Disclosure controls and procedures

Our president and chief financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)), and concluded that, based on their evaluation, our disclosure controls and procedures are effective as of the end of the period covered by this Annual Report to ensure that material information required to be included in this Annual Report would be made known to them by others on a timely basis.

~~There~~

Management’s annual report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The management of the Company has ~~been no significant change in~~assessed the effectiveness of internal control over financial reporting based on the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").

The major existing internal control deficiencies are (1) lack of independent risk management department; (2) lack of employee’s code of conduct handbook , and (3) lack of valuation standard for work performed by the Audit Committee and its members as of December 31, 2006. Our management, however, believes that none of these internal control deficiencies are identified as material weakness or has had a material effect on our financial condition or results of operations or caused our financial statements as of and for the year ended December 31, 2006 to contain a material misstatement.

The management’s assessment of internal controls over financial reporting ~~during~~was not subject to auditor attestation as of December, 31 2006 pursuant to temporary rules of the ~~period covered by~~Securities and Exchange Commission. Accordingly, this Annual Report does not include an attestation report by our independent registered public accounting firm regarding internal control over financial reporting.

Changes in internal control over financial reporting

During the year ended December 31, 2006, there have been no changes in our internal control over financial reporting that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.

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

ITEM 16B. CODE OF ETHICS.

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

ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The following table sets forth the aggregate audit fees, audit-related fees, tax fees of the Company’s principal accountants and all other fees billed for products and services provided by the Company’s principal accountants other than the audit fees, audit-related fees and tax fees for each of the fiscal years ~~2004~~2005 and ~~2005:~~2006:

Audit Fees

Audit-Related Fees

Tax Fees

Other Fees

2005

~~Audit Fees~~

~~Audit-Related Fees~~

~~Tax Fees~~

~~2004~~

~~RMB8.9 million~~

~~RMB6.6 million~~

~~RMB0.11 million~~

~~2005~~

RMB13.9 million

RMB5.8 million

RMB0.11 million

2006

RMB8.5 million

RMB4.0 million

RMB0.47 million

RMB3.7 million

Audit-related fees

~~Services provided primarily consist of the following:~~

Review of the Group’s ~~2005~~2006 interim financial report prepared under ~~IFRS; and~~IFRS.

~~In connection with the Company’s acquisition of the airline operations and related assets of China Northern Airlines Company and Xinjiang Airlines Company;~~

	–		~~Audit of the financial statements of China Northern Airlines Company and Xinjiang Airlines Company;~~

	–		~~Issuance of comfort letter on profit forecast;~~

	–		~~Issuance of comfort letter on working capital forecast; and~~

	–		~~Issuance of report on statement of indebtedness.~~

Tax fees

Services provided primarily consist of tax compliance services.

Other fees

Provison of Sarbanes Oxley Act of 2002 advisory services.

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

ITEM 16D. Exemptions from the Listing Standards for Audit Committee

Not applicable.

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

The Company and its affiliated companies have not purchased any issued common shares of the Company during ~~2005~~2006 and up to the date of this Annual Report.

PART IV

~~PART IV~~

ITEM 17. FINANCIAL STATEMENTS.

Not applicable.

ITEM 18. FINANCIAL STATEMENTS.

~~Index to Financial Statements~~

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

				Page
			~~Page~~
~~CONSOLIDATED FINANCIAL STATEMENTS OF CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
Report of Independent Registered Public Accounting Firm		F-1
	~~F-1~~
Consolidated Statements of Operations
for the years ended December 31, ~~2003,~~ 2004, 2005 and ~~2005~~	2006		F-2

Consolidated Balance Sheets as of December 31, ~~2004~~2005 and ~~2005~~	2006		F-3

Consolidated Statements of Changes in Shareholders’ Equity
for the years ended December 31, ~~2003,~~ 2004, 2005 and ~~2005~~	2006		F-5

Consolidated Statements of Cash Flows
for the years ended December 31, ~~2003,~~ 2004, 2005 and ~~2005~~2006			~~F-7~~
~~Notes to Consolidated Financial Statements~~			~~F-9~~

~~ITEM 19. EXHIBITS.~~


~~Exhibit No.~~		~~Description of Exhibit~~
~~4.1~~		~~Form of Director’s Service Agreement is incorporated by reference in Exhibit 4(c).1 of Form 20-F for the year of 2005.~~F-6

~~4.2~~		~~Form of Non-Executive Director’s Service Agreement is incorporated by reference in Exhibit 4(c).2 of Form 20-F for the year of 2005.~~

8		~~Subsidiaries of the Company~~

~~12.1~~		~~Section 302 Certification of Chairman~~

~~12.2~~		~~Section 302 Certification of President~~

~~12.3~~		~~Section 302 Certification of Chief Financial Officer~~

~~13.1~~		~~Section 906 Certification of Chairman~~

~~13.2~~		~~Section 906 Certification of President~~

~~13.3~~		~~Section 906 Certification of Chief Financial Officer~~

~~SIGNATURES~~

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


		~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~

		~~/s/ Liu Shao Yong~~

		~~Name: Liu Shao Yong~~
		~~Title: Chairman of the Board of Directors~~

~~Date: June 30, 2006~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~INDEX TO CONSOLIDATED FINANCIAL STATEMENTS~~


	~~Page~~
~~Report of Independent Registered Public Accounting Firm~~	~~F-1~~
~~Consolidated Statements of Operations for the years ended December 31, 2003, 2004 and 2005~~	~~F-2~~
~~Consolidated Balance Sheets as of December 31, 2004 and 2005~~	~~F-3~~
~~Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2003, 2004 and 2005~~	~~F-5~~
~~Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005~~	~~F-7~~
Notes to Consolidated Financial Statements	~~F-9~~	F-8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

China Southern Airlines Company ~~Limited:~~Limited

We have audited the accompanying consolidated balance sheets of China Southern Airlines Company Limited (the “Company”) and its subsidiaries (the “Group”) as of December 31, ~~2004~~2005 and ~~2005,~~2006, and the related consolidated statements of operations, ~~cash flows and~~ changes in shareholders’ equity and cash flows for each of the ~~three~~ years in the three-year period ended December 31, ~~2005,~~2006, all expressed in Renminbi. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Southern Airlines Company Limited and its subsidiaries as of December 31, ~~2004~~2005 and ~~2005,~~2006, and the results of their operations and their cash flows for each of the ~~three~~ years in the three-year period ended December 31, ~~2005~~2006 in conformity with International Financial Reporting Standards promulgated by the International Accounting Standards Board.

As more fully described in Note 3 to the consolidated financial statements, the Group changed the presentation of share of affiliated companies’ and jointly controlled entities’ taxation in the consolidated statements of operations in order to comply with IAS 1, “Presentation of financial statements”. In addition, the Group changed the manner in which it presents minority interests in the consolidated balance sheets and consolidated statements of operations in order to comply with IAS 1 and IAS 27, “Consolidated and separate financial statements”.

International Financial Reporting Standards vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 51 to the consolidated financial statements.

The accompanying consolidated financial statements as of and for the year ended December 31, 2005 have been translated into United States dollars solely for the convenience of readers. We have audited the translation, and in our opinion, the consolidated financial statements expressed in Renminbi have been translated into United States dollars on the basis set forth in Note 1 to the consolidated financial statements.

/s/ KPMG

Hong Kong, China

April ~~19, 2006,~~16, 2007, except as to Note ~~44,~~44(a)(ii), (c) and (d), which isare as of May 31, ~~2006.~~2007

~~F-1~~

F-1

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, ~~2003,~~ 2004, 2005 and ~~2005~~2006

(Amounts in millions, except per share data)

															Note		2004			2005			2006
	Note		2003			2004			2005			2005					RMB			RMB			RMB
			RMB			RMB			RMB			U.S. dollars								(Note 45)
			(restated,			(restated,
			Note 3)			Note 3)
Operating revenue:
Operating revenue
Traffic revenue		4		16,965			23,344			37,419			4,637			3		23,344			37,419			45,087
Other operating revenue		4		505			630			874			108			3		630			874			1,132


Total operating revenue				17,470			23,974			38,293			4,745					23,974			38,293			46,219


Operating expenses:
Operating expenses
Flight operations		5		7,070			10,418			19,394			2,403			4		10,418			19,394			24,667
Maintenance		6		2,589			3,459			4,589			569			5		3,459			4,051			4,077
Aircraft and traffic servicing		7		2,767			3,503			5,759			714			6		3,503			5,759			6,219
Promotion and sales		8		1,480			1,940			2,780			345			7		1,940			2,780			2,811
General and administrative		9		1,053			1,323			2,457			304			8		1,323			2,457			3,140
Depreciation and amortization		10		2,038			2,413			4,440			550			9		2,413			4,905			4,966
Others				17			9			179			22					9			179			100


Total operating expenses				17,014			23,065			39,598			4,907					23,065			39,525			45,980


Operating income/(loss)				456			909			(1,305	)		(162	)				909			(1,232	)		239


Non-operating income/(expenses):
Non-operating income/(expenses)
Interest income				13			22			55			7					22			55			41
Interest expense		12		(824	)		(691	)		(1,616	)		(200	)		11		(691	)		(1,616	)		(2,070	)
Equity income/(loss) of affiliated companies		23		45			10			(285	)		(35	)		22		10			(285	)		5
Equity (loss)/income of jointly controlled entities		24		(46	)		(16	)		36			4
Loss on sale of property, plant and equipment				(22	)		(1	)		(32	)		(4	)
Equity (loss)/income of jointly
controlled entities																23		(16	)		36			115
Loss on derivative financial instruments, net																		-			-			(19	)
(Loss)/gain on sale of property,
plant and equipment																12		(1	)		(32	)		335
Exchange (loss)/gain, net				(164	)		(59	)		1,220			151					(59	)		1,220			1,492
Others, net				21			46			74			9					46			74			146
Total net non-operating (expenses)/income																		(689	)		(548	)		45

Income/(loss) before taxation																		220			(1,780	)		284
Income tax expense																13		(65	)		(4	)		(142	)
Income/(loss) for the year																		155			(1,784	)		142

Total net non-operating expenses				(977	)		(689	)		(548	)		(68	)


Loss/(income) before taxation				(521	)		220			(1,853	)		(230	)

Income tax benefit/(expense)		13		334			(65	)		7			1


(Loss)/income for the year				(187	)		155			(1,846	)		(229	)


Attributable to:
Attributable to
Equity shareholders of the Company				(358	)		(48	)		(1,848	)		(229	)				(48	)		(1,786	)		126
Minority interests				171			203			2			—					203			2			16
Net income/(loss)																		155			(1,784	)		142


Net (loss)/income				(187	)		155			(1,846	)		(229	)


Basic loss per share		15		(0.09	)		(0.01	)		(0.42	)		(0.052	)

(Loss)/earnings per share
Basic																15		(0.01	)		(0.41	)		0.03
Diluted																15		(0.01	)		(0.41	)		0.03

~~See accompanying notes to consolidated financial statements.~~

~~F-2~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~CONSOLIDATED BALANCE SHEETS~~
~~As of December 31, 2004 and 2005~~

~~(Amounts in millions)~~

Note 2004 2005 2005
RMB RMB U.S. dollars
(restated,
Note 3)
ASSETS

CURRENT ASSETS
Cash and cash equivalents 16 3,083 2,901 360
Trade receivables 17 1,203 1,518 188
Inventories 18 1,302 1,382 171
Short term investments 19 683 — —
Other receivables 20 720 956 119
Prepaid expenses and other current assets 378 380 47
Amounts due from related companies 30 — 84 10

Total current assets 7,369 7,221 895

NON-CURRENT ASSETS
Property, plant and equipment, net 21 46,841 54,266 6,725
Construction in progress 22 565 674 84
Other investments 19 272 320 40
Interest in affiliated companies 23 429 142 18
Interest in jointly controlled entities 24 782 805 99
Lease prepayments 346 333 41
Lease and equipment deposits 5,397 7,265 900
Deferred tax assets 25 51 74 9
Other assets 26 331 302 37

Total non-current assets 55,014 64,181 7,953

TOTAL ASSETS 62,383 71,402 8,848

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES
Notes payable, including current installments of long-term notes payable 27 11,518 16,223 2,010
Current installments of obligations under capital leases 28 2,144 3,373 418
Trade and bills payables 29 1,690 3,929 487
Sales in advance of carriage 874 1,413 175
Amounts due to related companies 30 2,434 116 14
Accrued expenses 31 4,551 4,250 527
Other liabilities 32 2,974 3,796 471
Taxes payable 39 28 3

Total current liabilities 26,224 33,128 4,105

~~See accompanying notes to consolidated financial statements.~~

~~F-3~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~CONSOLIDATED BALANCE SHEETS~~
~~As of December 31, 2004 and 2005~~

~~(Amounts in millions)~~

Note 2004 2005 2005
RMB RMB U.S. dollars
(restated,
Note 3)
NON-CURRENT LIABILITIES
Notes payable, excluding current installments 27 11,935 12,740 1,579
Obligations under capital leases, excluding current installments 28 9,599 12,459 1,544
Provision for major overhauls 33 284 301 37
Deferred tax liabilities 25 338 342 42
Deferred credits 100 496 62

Total non-current liabilities 22,256 26,338 3,264

TOTAL LIABILITIES 48,480 59,466 7,369

SHAREHOLDERS’ EQUITY
Equity attributable to equity shareholders of the Company 34,35 11,848 10,000 1,239
Minority interests 2,055 1,936 240

TOTAL SHAREHOLDERS’ EQUITY 13,903 11,936 1,479

TOTAL LIABILITIES AND TOTAL SHAREHOLDERS’ EQUITY 62,383 71,402 8,848

~~F-4~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS~~
~~OF CHANGES IN SHAREHOLDERS’ EQUITY~~
~~For the years ended December 31, 2003, 2004 and 2005~~

~~(Amounts in millions)~~

Attributable to equity shareholders of the company
Retained
earnings/
Share Share Other (accumulated Minority Total
capital premium reserves loss) Total interests equity
RMB RMB RMB RMB RMB RMB RMB
(Note (i)) (Note (ii))
At December 31, 2002 3,374 3,684 586 1,969 9,613 1,516 11,129

Issue of A Shares 1,000 1,641 — — 2,641 — 2,641
(Loss)/income for the year — — — (358 ) (358 ) 171 (187 )
Appropriations to reserves — — 25 (25 ) — — —
Capital contributions from minority shareholders — — — — — 1 1
Distributions to minority shareholders — — — — — (15 ) (15 )

At December 31, 2003 4,374 5,325 611 1,586 11,896 1,673 13,569

(Loss)/income for the year — — — (48 ) (48 ) 203 155
Appropriations to reserves — — 61 (61 ) — — —
Capital contributions from minority shareholders — — — — — 71 71
Distributions to minority shareholders — — — — — (15 ) (15 )
Through the CNA/XJA Acquisitions — — — — — 123 123

At December 31, 2004 4,374 5,325 672 1,477 11,848 2,055 13,903

~~F-5~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS~~
~~OF CHANGES IN SHAREHOLDERS’ EQUITY~~
~~For the years ended December 31, 2003, 2004 and 2005~~

~~(Amounts in millions)~~

Attributable to equity shareholders of the company
Retained
earnings/
Share Share Other (accumulated Minority Total
capital premium reserves loss) Total interests equity
RMB RMB RMB RMB RMB RMB RMB
(Note (i)) (Note (ii))
At December 31, 2004 4,374 5,325 672 1,477 11,848 2,055 13,903

(Loss)/income for the year — — — (1,848 ) (1,848 ) 2 (1,846 )
Appropriations to reserves — — 19 (19 ) — — —
Capital contributions from minority shareholders — — — — — 17 17
Acquisition of equity interest held by minority shareholders — — — — — (118 ) (118 )
Distributions to minority shareholders — — — — — (20 ) (20 )

At December 31, 2005 4,374 5,325 691 (390 ) 10,000 1,936 11,936

Total equity at December 31, 2005 in U.S. dollars 542 660 85 (48 ) 1,239 240 1,479

See accompanying notes to consolidated financial statements.

~~Notes:~~

F-2

~~(i) Other reserves represent statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve. Details are set out in Note 35.~~

(ii) Minority interests were presented separately from liabilities and equity at December 31, 2003 and 2004. Minority interests are presented within the equity with effect from January 1, 2005 and the presentation of minority interests for the comparative years has been restated accordingly. Details are set out in Note 3.

~~F-6~~

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

CONSOLIDATED ~~STATEMENTS OF CASH FLOWS~~
~~For the years ended~~BALANCE SHEETS

As of December 31, ~~2003, 2004~~2005 and ~~2005~~2006

(Amounts in millions)

Note 2003 2004 2005 2005
RMB RMB RMB U.S. dollars
(restated, (restated,
Note 3) Note 3)
(Loss)/income before taxation (521 ) 220 (1,853 ) (230 )
Adjustments to reconcile (loss)/income before taxation to cash inflows from operations
Depreciation of property, plant and equipment 1,998 2,363 4,420 548
Other amortization 40 50 40 5
Amortization of deferred credits (2 ) (4 ) (78 ) (10 )
Equity (loss)/income of affiliated companies (45 ) (10 ) 285 36
Equity income/(loss) of jointly controlled entities 46 16 (36 ) (5 )
Loss on sale of property, plant and equipment 22 1 32 4
Interest income (13 ) (22 ) (55 ) (7 )
Interest expense 824 691 1,616 200
Net realised and unrealised gain on equity securities held for trading — (15 ) (6 ) (1 )
Non-cash exchange loss/(gain), net 177 42 (1,164 ) (144 )
Decrease/(increase) in inventories 2 (29 ) 46 6
Increase in trade receivables (162 ) (218 ) (315 ) (39 )
Decrease/(increase) in other receivables 77 (166 ) (236 ) (29 )
Increase in prepaid expenses and other current assets (6 ) (31 ) (2 ) —
Increase in deferred expenditure — (2 ) — —
Increase/(decrease) in net amounts due from/(to) related companies 404 (586 ) (493 ) (61 )
(Decrease)/increase in trade and bills payables (466 ) (30 ) 2,239 277
Increase in sales in advance of carriage 76 408 539 67
Increase/(decrease) in accrued expenses 203 541 (399 ) (49 )
Increase in other liabilities 373 1,223 822 102
Increase in provision for major overhauls 48 113 17 2

Cash inflows from operations 3,075 4,555 5,419 672
Interest received 13 22 55 7
Interest paid (924 ) (754 ) (1,616 ) (200 )
Income tax paid (35 ) (227 ) (23 ) (3 )

Net cash inflows from operating activities 2,129 3,596 3,835 476

	Note		2005		2006
			RMB		RMB
			(Note 45)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		16		2,901		2,264
Trade receivables		17		1,518		1,512
Inventories		18		1,382		1,315
Other receivables		19		956		879
Prepaid expenses and other current assets				380		585
Amounts due from related companies		30		84		128
Total current assets				7,221		6,683

NON-CURRENT ASSETS
Property, plant and equipment, net		20		54,339		56,347
Construction in progress		21		674		951
Lease prepayments				333		441
Interest in affiliated companies		22		142		149
Interest in jointly controlled entities		23		805		870
Other investments in equity securities		24		320		330
Lease and equipment deposits				7,265		9,458
Deferred tax assets		25		63		95
Other assets		26		302		260
Total non-current assets				64,243		68,901
TOTAL ASSETS				71,464		75,584

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Financial liabilities				-		26
Notes payable, including current installments of long-term
notes payable		27		16,223		23,822
Current installments of obligations under capital leases		28		3,373		3,091
Trade and bills payables		29		3,929		1,909
Sales in advance of carriage				1,413		1,436
Taxes payable				28		126
Amounts due to related companies		30		116		254
Accrued expenses		31		4,250		4,942
Other liabilities		32		3,796		3,257
Total current liabilities				33,128		38,863

F-3

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - (Continued)

As of December 31, 2005 and 2006

(Amounts in millions)

	Note		2005		2006
			RMB		RMB
			(Note 45)
NON-CURRENT LIABILITIES
Notes payable, excluding current installments		27		12,740		10,018
Obligations under capital leases, excluding
current installments		28		12,459		12,307
Provision for major overhauls		33		301		805
Provision for early retirement benefits		34		-		306
Deferred tax liabilities		25		342		372
Deferred credits				496		792
Total non-current liabilities				26,338		24,600
TOTAL LIABILITIES				59,466		63,463

SHAREHOLDERS' EQUITY
Equity attributable to equity shareholders of the Company		35, 36		10,062		10,188
Minority interests				1,936		1,933
Total shareholders' equity				11,998		12,121
TOTAL LIABILITIES AND TOTAL SHAREHOLDERS' EQUITY				71,464		75,584

See accompanying notes to consolidated financial statements.

~~F-7~~

F-4

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS

OF ~~CASH FLOWS~~
CHANGES IN SHAREHOLDERS’ EQUITY

For the years ended December 31, ~~2003,~~ 2004, 2005 and ~~2005~~2006

(Amounts in millions)

Note 2003 2004 2005 2005
RMB RMB RMB U.S. dollars
(restated, (restated,
Note 3) Note 3)
Investing activities:
Proceeds from sale of property, plant and equipment 57 47 238 30
Proceeds from sale of other investments — — 689 85
Increase in deferred credits — — 57 7
Dividends received from affiliated companies — 12 2 —
Dividends received from jointly controlled entities — 5 39 5
Dividends received from other non-current assets — — 4 1
Dividends received from equity securities held for trading — 13 — —
Decrease/(increase) in other non-current assets 6 (9 ) 4 1
Payment for the CNA/XJA Acquisitions — — (1,959 ) (243 )
Payment for acquisition of equity interest held by minority shareholders — — (118 ) (15 )
Payment of lease and equipment deposits (1,852 ) (3,151 ) (6,649 ) (824 )
Refund of lease and equipment deposits 1,066 1,253 4,619 572
Capital expenditures (4,707 ) (6,631 ) (4,935 ) (612 )
Purchase of other investments (1 ) (680 ) — —
Investments in an affiliated company — (9 ) — —
Investments in jointly controlled entities (3 ) (72 ) — —
Effect of the CNA/XJA Acquisitions 40 (a) — 398 — —

Net cash used in investing activities (5,434 ) (8,824 ) (8,009 ) (993 )

Net cash outflows before financing activities (3,305 ) (5,228 ) (4,174 ) (517 )

Financing activities:
Proceeds from A Shares issue, net of issuance costs 2,641 — — —
Proceeds from notes payable 8,914 14,555 18,238 2,260
Repayment of notes payable (8,371 ) (7,108 ) (12,193 ) (1,511 )
Repayment of principal under capital lease obligations (1,555 ) (1,272 ) (2,050 ) (254 )
Capital contributions received from minority shareholders 1 71 17 2
Dividends paid to minority shareholders (15 ) (15 ) (20 ) (2 )

Net cash inflows from financing activities 1,615 6,231 3,992 495

Decrease/(increase) in cash and cash equivalents (1,690 ) 1,003 (182 ) (22 )
Cash and cash equivalents at January 1 3,770 2,080 3,083 382

Cash and cash equivalents at December 31 2,080 3,083 2,901 360

	Attributable to equity shareholders of the Company
							Retained
							earnings/
	Share		Share		Other		(accumulated						Minority			Total
	capital		premium		reserves		losses)			Total			interests			equity
	RMB		RMB		RMB		RMB			RMB			RMB			RMB
					(Note)

At January 1, 2004		4,374		5,325		611		1,586			11,896			1,673			13,569

(Loss)/income for the year		-		-		-		(48	)		(48	)		203			155
Appropriations to reserves		-		-		61		(61	)		-			-			-
Capital contributions																	-
from minority shareholders		-		-		-		-			-			71			71
Distributions to minority																	-
shareholders		-		-		-		-			-			(15	)		(15	)
Through the CNA/XJA
Acquisitions		-		-		-		-			-			123			123

At December 31, 2004		4,374		5,325		672		1,477			11,848			2,055			13,903

(Loss)/income for the year (Note 45)		-		-		-		(1,786	)		(1,786	)		2			(1,784	)
Appropriations to reserves		-		-		19		(19	)		-			-			-
Capital contributions
from minority shareholders		-		-		-		-			-			17			17
Acquisition of equity interest
held by minority shareholders		-		-		-		-			-			(118	)		(118	)
Distributions to minority
shareholders		-		-		-		-			-			(20	)		(20	)
At December 31, 2005		4,374		5,325		691		(328	)		10,062			1,936			11,998

Income for the year		-		-		-		126			126			16			142
Appropriations to reserves		-		-		41		(41	)		-			-			-
Acquisition of equity interest
held by minority shareholders		-		-		-		-			-			(12	)		(12	)
Distributions to minority
shareholders		-		-		-		-			-			(7	)		(7	)

At December 31, 2006		4,374		5,325		732		(243	)		10,188			1,933			12,121

See accompanying notes to consolidated financial statements.

~~F-8~~

Note:

Other reserves represent statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve. Details are set out in Note 36.

F-5

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2004, 2005 and 2006

(Amounts in millions)

Note

2004

2005

2006

RMB

RMB

RMB

(Note 45)
Income/(loss) before taxation 220 (1,780 ) 284
Adjustments to reconcile income/(loss) before taxation
to cash inflows from operations
Depreciation of property, plant and equipment 2,363 4,885 4,994
Other amortization 50 40 33
Amortization of deferred credits (4 ) (78 ) (61 )
Equity (loss)/income of affiliated companies (10 ) 285 (5 )
Equity income/(loss) of jointly controlled entities 16 (36 ) (115 )
Loss/(gain) on sale of property, plant and equipment 1 32 (335 )
Interest income (22 ) (55 ) (41 )
Interest expense 691 1,616 2,070
Loss on derivative financial instruments, net - - 19
Net realized and unrealized gain on equity securities
held for trading (15 ) (6 ) -
Dividend income from other investments in equity securities - - (7 )
Non-cash exchange loss/(gain), net 20 (1,120 ) (1,492 )
(Increase)/decrease in inventories (29 ) 46 95
(Increase)/decrease in trade receivables (218 ) (315 ) 36
(Increase)/decrease in other receivables (166 ) (236 ) 152
Increase in prepaid expenses and other current assets (31 ) (2 ) (205 )
Increase in deferred expenditure (2 ) - -
(Decrease)/increase in net amounts due from/(to)
related companies (586 ) (493 ) 113
(Decrease)/increase in trade and bills payables (30 ) 2,239 (2,048 )
Increase in sales in advance of carriage 408 539 23
Increase/(decrease) in accrued expenses 541 (399 ) 568
Increase/(decrease) in other liabilities 1,223 822 (247 )
Increase in provision for major overhauls 113 17 504
Increase in provision for early retirement benefits - - 306
Cash in flows from operations 4,533 6,001 4,641
Interest received 22 55 41
Interest paid (754 ) (1,616 ) (2,419 )
Income tax paid (227 ) (23 ) (46 )
Net cash inflows from operating activities 3,574 4,417 2,217

F-6

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
For the years ended December 31, 2004, 2005 and 2006

(Amounts in millions)

Note

2004

2005

2006

RMB

RMB

RMB

(Note 45)
Investing activities
Proceeds from sale of property, plant and equipment 47 238 492
Proceeds from sale of other investments - 689 -
Net cash settlement of derivative financial instruments - - 7
Increase in deferred credits - 57 -
Dividends received from affiliated companies 12 2 33
Dividends received from jointly controlled entities 5 39 50
Dividends received from other non-current assets - 4 7
Dividends received from equity securities held for trading 13 - -
Decrease/(increase) in other non-current assets (9 ) 4 16
Payment for the CNA/XJA Acquisitions - (1,959 ) -
Payment for acquisition of equity interest held by
minority shareholders - (118 ) (12 )
Payment of lease and equipment deposits (3,151 ) (6,649 ) (5,464 )
Refund of lease and equipment deposits 1,253 4,619 2,031
Capital expenditures (6,631 ) (5,473 ) (2,566 )
Purchase of other investments (680 ) - -
Investments in affiliated companies (9 ) - (31 )
Investments in jointly controlled entities (72 ) - -
Effect of the CNA/XJA Acquisitions
40(b)
398 - -
Effect of acquisition of CSAHC Hainan
40(c)
- - 33

Net cash used in investing activities (8,824 ) (8,547 ) (5,404 )
Net cash outflows before financing activities (5,250 ) (4,130 ) (3,187 )

Financing activities:
Proceeds from notes payable 14,555 18,238 24,983
Repayment of notes payable (7,108 ) (12,193 ) (19,113 )
Repayment of principal under capital lease obligations (1,272 ) (2,050 ) (3,313 )
Capital contributions received from minority shareholders 71 17 -
Dividends paid to minority shareholders (15 ) (20 ) (7 )

Net cash inflows from financing activities 6,231 3,992 2,550
Increase/(decrease) in cash and cash equivalents 981 (138 ) (637 )
Cash and cash equivalents at January 1 2,080 3,083 2,901
Effect of foreign exchange rate changes 22 (44 ) -
Cash and cash equivalents at December 31 3,083 2,901 2,264
See accompanying notes to consolidated financial statements.

F-7
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- (Continued)

(Amounts in millions, except share data)

1. BASIS OF PRESENTATION

China Southern Airlines Company Limited (the “Company”) and its subsidiaries (the “Group”) are principally engaged in the provision of domestic, Hong Kong and Macau and international passenger, cargo and mail airline ~~services, with flights operating primarily from the Guangzhou Baiyun International Airport, which is both the main hub of the Group’s route network and the location of its corporate headquarters.~~services.

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

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

The Company acquired the airline operations and certain related assets of China Northern Airlines Company (“CNA”) and Xinjiang Airlines Company (“XJA”) from its parent company, CSAHC, on December 31, 2004 (the “CNA/XJA Acquisitions”) (Note 40).

The consolidated financial statements have been prepared in Renminbi (“RMB”), the national currency of the PRC. Translation of amounts from RMB into United States dollar (“US$”) solely for the convenience of readers has been made at the rate of US$1.00 to RMB8.0694, being the average of the buying and selling rates as quoted by the People’s Bank of China (the “PBOC”) at the close of business on December 31, 2005. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate or at any other certain rate on December 31, 2005 or at any other certain date.

2. PRINCIPAL ACCOUNTING POLICIES

(a) Statement of compliance

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

The IASB has issued ~~a number of~~certain new and revised IFRSs that are first effective or available for ~~accounting periods beginning on or after January 1, 2005. Information on the changes in accounting policies resulting from initial application of these new and revised IFRSs~~early adoption for the current accounting period of the Group and ~~prior~~the Company. The following summarizes the accounting ~~periods reflected in~~policies of the Group after these ~~financial statements is provided in Note 3.~~developments to the extent that they are relevant to the Group.

Information relating to the nature and effect of the significant differences between IFRSs and accounting principles generally accepted in the United States of America ~~(''U.S.~~(‘‘U.S. GAAP’’) are set forth in Note 51.

~~F-9~~

F-8

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

(b) Basis of preparation of the consolidated financial statements

~~As of~~

At December 31, ~~2005,~~2006, the Group’s current liabilities exceeded its current assets by ~~RMB25,907,~~RMB32,180, which includes current ~~instalments~~installments of notes payable of ~~RMB16,223.~~RMB23,822. In preparing the consolidated financial statements, the directors have considered the Group’s sources of liquidity and believe that adequate funding is available to ~~fulfil~~fulfill the Group’s short term obligations and capital expenditure requirements. Accordingly, the consolidated financial statements have been prepared on ~~the~~a basis that the Group will be able to continue as a going concern. Further details are set out in Note ~~41.~~41(a).

The consolidated financial statements for the year ended December 31, 2006 comprise the Company and its subsidiaries and the Group’s interest in affiliated companies and jointly controlled entities.

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

–

Certain property, plant and equipment (Note ~~2(d)~~2(h));

Certain assets held under capital leases (Note 2(j)); and


–	·	~~Short term investments~~Derivative financial instruments (Note ~~2(h)~~2(g)).

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

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

~~Judgements~~

Judgments made by management in the application of IFRSs that have significant effect on the consolidated financial statements and estimates with a significant risk of material adjustment in the next year are ~~disclosed~~discussed in Note 47.

~~(c) Basis of consolidation~~

~~(i) Subsidiaries~~

~~F-10~~

F-9

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

(c) Subsidiaries and minority interests

~~A subsidiary is an entity~~

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

An investment in a subsidiary is consolidated into the consolidated financial statements from the date that control ~~effectively~~ commences until the date that control ceases.

Intra-group balances and transactions and any unrealized income arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealized losses resulting from intra-group transactions are eliminated in the same way as unrealized ~~income,~~gains but only to the extent that there is no evidence of impairment.

Minority interests ~~at the balance sheet date, being~~represent the portion of the net assets of subsidiaries attributable to ~~equity~~ interests that are not owned by the Company, whether directly or indirectly through subsidiaries, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. Minority interests are ~~prepared~~presented in the consolidated balance sheet ~~and statement of changes in shareholders’ equity~~ within equity, separately from equity attributable to the equity shareholders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated statement of operations as an allocation of the total income or loss for the year between minority ~~interest~~interests and the equity shareholders of the Company.

Where losses applicable to the minority exceed the minority’s interest in the equity of a subsidiary, the excess, and any further losses applicable to the minority, are charged against the Group’s interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently reports income, the Group’s interest is allocated all such income until the minority’s share of losses previously absorbed by the Group has been recovered.

~~(ii)~~

Loans from holders of minority interests and other contractual obligations towards these holders are presented as financial liabilities in the consolidated balance sheet in accordance with Notes 2(o) or (p) depending on the nature of the liability.

(d) Affiliated companies and jointly controlled entities

An affiliated company is an entity in which the Group or the Company has significant influence, but not control or joint control, over its management, including participation in the financial and operating policies. ~~The~~

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

F-10

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

An investment in an affiliated company or a jointly controlled entity is accounted for in the consolidated financial statements ~~include~~under the equity method and is initially recorded at cost and adjusted thereafter for the post acquisition change in the Group’s share of the ~~total recognized gains and losses~~affiliated company’s or the jointly controlled entity’s net assets. The consolidated statement of operations includes the Group’s share of the post-acquisition, post-tax results of the affiliated companies and jointly controlled entities for the year, including any impairment loss on ~~an equity accounted basis, from~~goodwill relating to the ~~date that significant influence commences until~~investment in affiliated companies and jointly controlled entities recognized for the ~~date that significant influence ceases.~~ year (Notes 2(e) and (l)).

When the Group’s share of losses exceeds its interest in anthe affiliated company or the jointly controlled entity, the Group’s ~~carrying amount~~interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of anthe affiliated ~~company.~~

Acompany or the jointly controlled entity. For this purpose, the Group’s interest in the affiliated company or the jointly controlled entity is ~~an entity over whose activities~~ the ~~Group has joint control, established by contractual agreement. The consolidated financial statements include~~carrying amount of the investment under the equity method together with the Group’s ~~share~~long-term interests that in substance form part of the ~~total recognized gains and losses of jointly controlled entities on an equity accounted basis, from~~Group’s net investment in the ~~date that joint control commences until~~affiliated company or the date that joint control ceases. When the Group’s share of losses exceeds its interest in a jointly controlled entity, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of a jointly controlled entity.

~~F-11~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

Unrealized income and losses arising from transactions ~~with~~between the Group and its affiliated ~~companies~~company and jointly controlled entities are eliminated to the extent of the Group’s interest in the ~~entity. Unrealized~~affiliated company or jointly controlled entity, except where unrealized losses ~~are eliminated in the same way as unrealized income, but only to the extent that there is no~~provide evidence of ~~impairment.~~

~~F-12~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts~~an impairment of the asset transferred, in ~~millions, except share data)~~

~~(iii) Goodwill~~which case they are recognized immediately in income or loss.

(e) Goodwill

Goodwill represents the excess of the cost of a business combination or an investment in an affiliated company or a jointly controlled entity over the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities.

Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment (Note 2(l)). In respect of affiliated companies or jointly controlled entities, the carrying amount of goodwill is included in the carrying amount of the interest in the affiliated company or jointly controlled entity.

Any excess of the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination or an investment in an affiliated company or a jointly controlled entity is recognized immediately in income or loss.

On disposal of a cash generating unit, an affiliated company or a jointly controlled entity during the year, any attributable amount of purchased goodwill is included in the calculation of the gain or loss on disposal.

~~(d)~~

F-11

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in millions, except share data)

(f) Other investments in equity securities

The policy for investments in equity securities, other than investments in subsidiaries, affiliated companies and jointly controlled entities, are as follows:

Investments in equity securities are initially stated at cost, which is their transaction price unless fair value can be more reliably estimated using valuation techniques whose variables include only data from observable markets. Cost includes attributable transaction costs.

The Group’s other investments in equity securities represent unlisted equity securities of companies established in the PRC. They do not have a quoted market price in an active market and whose fair value cannot be reliably measured. Accordingly, they are recognized in the balance sheet at cost less impairment losses (Note 2(l)).

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

(g) Derivative financial instruments

Derivative financial instruments are recognized at fair value. At each balance sheet date the fair value is remeasured. The gain or loss on remeasurement to fair value is charged immediately to income or loss.

(h) Property, plant and equipment ~~and depreciation~~

~~(i) Owned assets~~

~~An item~~Items of property, plant and equipment isare initially ~~recorded~~stated at cost, less accumulated depreciation ~~(see (iv) below)~~ and impairment losses (Note 2(l)). The cost of an ~~asset~~item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to working condition and location for its intended use and the initial estimate, where relevant, of the costs of dismantling and removing the ~~item~~items and restoring the site on which ~~it is~~they are located.

Subsequent to the revaluation of the Group’s property, plant and equipment as at December 31, 1996 (Note ~~21)~~20(b)), which was based on depreciated replacement costs, certain of the Group’s property, plant and equipment are carried at revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated ~~depreciation and impairment losses.~~ depreciation.

Revaluations are performed with sufficient regularity to ensure that the carrying amount of these assets does not differ materially from that which would be determined using fair value at the balance sheet date.

F-12

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

Changes arising on the revaluation of property, plant and equipment are generally dealt with in reserves. The only exceptions are as follows:

·When a deficit arises on revaluation, it will be charged to income or loss to the extent that it exceeds the amount held in the reserve in respect of that same asset immediately prior to the revaluation; and

·When a surplus arises on revaluation, it will be credited to income or loss to the extent that a deficit on revaluation in respect of that same asset had previously been charged to income or loss.

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

Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the ~~estimated~~ net disposal proceeds and the carrying amount of the item and are recognized in ~~the statement of operations~~income or loss on the date of retirement or disposal. Any related revaluation surplus is transferred from the revaluation reserve to retained earnings.

~~F-13~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

~~(ii) Leased assets~~

~~Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as capital leases.~~

Flight equipment acquired by way of capital leases is stated at an amount equal to lower of its fair value and the present value of minimum lease payments at inception of the lease, less accumulated depreciation (see (iv) below) and impairment losses (Note 2(l)) and the corresponding liabilities, net of finance charges are recorded as obligations under capital leases. Subsequent to the revaluation (Note 21), which was based on depreciated replacement costs, leased assets are carried at revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses. Revaluations are performed with sufficient regularity to ensure that the carrying amount of these assets does not differ materially from that which would be determined using fair value at the balance sheet date.

The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rentals are written off as an expense of the period in which they are incurred.

Gains or losses on aircraft sale and leaseback transactions which result in capital leases are deferred and amortized over the terms of the related leases. Gains or losses on other aircraft sale and leaseback transactions are recognized immediately if the transactions are established at fair value. Any difference between the sales price over fair value is deferred and amortized over the period the assets are expected to be used.

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

~~(iii) Subsequent costs~~

The Group recognizes in the carrying amounts of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognized in the statement of operations as an expense as incurred.

~~F-14~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

~~(iv) Depreciation~~

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


Buildings		15 to 40 years
Owned and leased aircraft		15 to 20 years
Other flight equipment
Jet engines		815 to 1520 years
Others, including rotable spares		8 to 15 years
Machinery and equipment		5 to 10 years
Vehicles		6 years

Depreciation for assets acquired under capital leases is calculated to write off the cost of the assets in equal annual amounts over the term of the relevant lease or, where it is likely the Group will obtain ownership of the asset, the life of the asset, as set out above.

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

~~(e)~~

F-13

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in millions, except share data)

(i) Construction in progress

Construction in progress represents office buildings, various infrastructure projects under construction and equipment pending installation, and is stated at cost less impairment losses (Note 2(l)). Cost comprises direct costs of construction and the initial estimate, where relevant, of the costs of dismantling and removing the item and restoring the site on which it is located as well as interest charges during the periods of construction and installation. CapitalizationCapitalisation of these costs ceases and the construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use, notwithstanding any delay in the issue of the relevant commissioning certificates by the relevant PRC authorities.

No depreciation is provided in respect of construction in progress.

(f)~~Lease prepayments~~

~~Lease prepayments represent land~~(j) Leased assets

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

(i) Classification of assets leased to the ~~PRC’s governmental authorities. Land~~Group

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

(ii) Assets acquired under capital leases

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

F-14

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

(iii) Operating lease charges

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

The cost of acquiring land held under operating lease is amortized on a straight-line basis over the respective periods of ~~the rights~~lease terms which ~~range~~ranged from 30 to 5070 years.

~~F-15~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~(iv) Sale and leaseback transactions

~~(Amounts~~

Gains or losses on sale and leaseback transactions which result in ~~millions, except share data)~~capital leases are deferred and amortized over the terms of the related leases. Gains or losses on other aircraft sale and leaseback transactions which result in operating leases are recognized immediately if the transactions are established at fair value. Any difference between the sales price and the fair value is deferred and amortized over the period the assets are expected to be used.

~~(g)~~

(k) Deferred expenditure

Custom duties and other direct costs in relation to modifying, introducing and certifying certain operating leased aircraft are deferred and amortized over the terms of the related leases.

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

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

~~(h) Other~~

(l) Impairment of assets

(i) Impairment of investments in ~~debt and equity securities~~

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

Investments in securities held for trading are classified as current assets and are initially stated at fair value. At the balance sheet date the fair value is remeasured, with any resultant gain or loss recognized in the statement of operations.

Dated debt securities that the Group has the positive ability and intention to hold to maturity are classified as held-to-maturity securities. Held-to-maturity securities are initially recognized in the balance sheet at fair value plus transaction costs. Subsequently, they are stated in the balance sheet at amortized cost less impairment losses (Note 2(l)).

Other financial instruments are stated at cost less impairment losses (Note 2(l)). Other financial instruments represent unquoted available-for-sale equity securities of companies established in the PRC. There is no quoted market price for such equity securities and ~~accordingly a reasonable estimate of the fair value could not be measured reliably.~~

~~(i) Inventories~~

Inventories, which consist primarily of expendable spare parts and supplies, are stated at cost less any applicable provision for obsolescence, and are expensed when used in operations. Cost represents the average unit cost. Inventories held for disposal are stated at the lower of cost and net realizable value. Net realizable value represents estimated resale price.

~~(j) Trade and~~ other receivables

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

~~F-16~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

~~(k) Cash and cash equivalents~~

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions having been within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are also included as a component of cash and cash equivalents for the purposes of the consolidated statement of cash flows.

~~(l)~~		~~Impairment of assets~~

~~(i)~~		~~Impairment of investments in debt and equity securities and other receivables~~

Investments in ~~debt and~~ equity securities and other current and non-current receivables that are stated at cost or amortized cost are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, any impairment loss is determined and recognized as follows:

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

–		For financial assets carried at amortized cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets).

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

F-15

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

· For trade and other current receivables and other financial assets carried at amortized cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets), where the effect of discounting is material.

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

~~F-17~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

(ii) Impairment of other assets

Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognized no longer exists or may have decreased:

–

Property, plant and ~~equipment;~~equipment carried at cost less accumulated depreciation;


–	·	Construction in progress;


–	·	Lease and equipment deposits;


–	·	Lease prepayments;


–	·	Deferred expenditure; ~~and~~


–	·	~~Interests~~Investments in subsidiaries, affiliated companies and jointly controlled ~~entities.~~entities; and

Goodwill.

If any such indication exists, the asset’s recoverable amount is estimated. For goodwill, the recoverable amount is estimated annually whether or not there is any indication of impairment.

–

Calculation of recoverable amount

The recoverable amount of an asset is the greater of its net selling price and the value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

F-16

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

–

Recognition of impairment losses

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

–

Reversals of impairment losses

~~F-18~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

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

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

~~F-19~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~(m) Inventories

~~(Amounts~~

Inventories, which consist primarily of expendable spare parts and supplies, are stated at cost less any applicable provision for obsolescence, and are charged to income or loss when used in ~~millions, except share data)~~operations. Cost represents the average unit cost.

~~(m) Interest- bearing borrowings~~

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

(n) Trade and other receivables

(o) Interest-bearing borrowings

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

~~(n)~~

F-17

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in millions, except share data)

(p) Trade and other payables

Trade and other payables are initially recognized at fair value and thereafter stated at amortized cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

~~(o)~~

(q) Cash and cash equivalents

(r) Financial guarantees issued, provisions and contingent liabilities

(i) Financial guarantees issued

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

Where the Group issues a financial guarantee, the fair value of the guarantee (being the transaction price, unless the fair value can otherwise be reliably estimated) is initially recognized as deferred income within trade and other payables. Where consideration is received or receivable for the issuance of the guarantee, the consideration is recognized in accordance with the Group’s policies applicable to that category of asset. Where no such consideration is received or receivable, an immediate expense is recognized in income or loss on initial recognition of any deferred income.

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

(ii) Provisions and contingent liabilities

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

F-18

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

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

~~(p)~~

(s) Defeasance of long-term liabilities

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

~~(q)~~

(t) Deferred credits

~~F-20~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

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

~~F-21~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

~~(r)~~(u) Income tax

Income tax for the year comprises current and ~~movement~~movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognized in ~~the statement of operations~~income or loss except to the extent that they relate to items recognized directly in equity, in which case they are recognized in equity.

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

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

F-19

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

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

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

The amount of deferred tax recognized is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable income will be available to

~~F-22~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable income will be available.

~~Additional income taxes that arise from the distribution of dividends are recognized when the liability to pay the related dividends is recognized.~~

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

–	·	in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to ~~realize~~realise the asset and settle the liability simultaneously; or

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

F-20

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

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

	•	-	the same taxable entity; or

•

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

~~(s)~~

(v) Revenue recognition

Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognized in income or loss as follows:

(i) Passenger, cargo and mail revenues are recognized when the transportation is provided. Ticket sales for transportation not yet provided are included in current liabilities as sales in advance of carriage. Revenues from airline-related business are recognized when services are rendered. Revenue is stated net of sales tax.

~~(ii)~~		~~Interest income is recognized as it accrues using the effective interest method.~~

~~(iii)~~		~~Dividend income is recognized when the Group’s right to receive dividend is established.~~

~~(iv)~~		~~Operating lease income is recognized on a straight line basis over the terms of the respective leases.~~

~~(t)~~(ii) Rental income receivable under operating leases is recognized in income or loss in equal instalments over the periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the use of the leased asset. Lease incentives granted are recognized in income or loss as an integral part of the aggregate net lease payments receivables.

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

(iv) Government grants are recognized in the balance sheet initially when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognized as revenue in income or loss on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are deducted in arriving at the carrying amount of the asset and consequently are recognized in income or loss over the useful life of the asset.

(v) Interest income is recognized as it accrues using the effective interest method.

(w) Traffic commissions

Traffic commissions are expensed in income or loss when the transportation is provided and the related revenue is recognized. Traffic commissions for transportation not yet provided are recorded on the balance sheet as a prepaid expense.

~~F-23~~

F-21

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

~~(u)~~(x) Maintenance and overhaul costs

Routine maintenance, repairs and overhauls are ~~expensed in the statement of operations~~charged to income or loss as and when incurred.

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

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

~~(v)~~

(y) Borrowing costs

Borrowing costs are expensed in income or loss in the ~~statement of operations as and when~~period in which they are incurred, except to the extent that they are capitalized as being directly attributable to the acquisition or construction of an asset which necessarily takes a substantial period of time to get ready for its intended use.

~~(w) Retirement~~

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

(z) Short term employee benefits

~~Contributions~~ and contributions to defined contribution retirement schemes

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

~~(x)~~

F-22

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in millions, except share data)

(aa) Termination benefits

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

(bb) Frequent flyer award ~~programs~~programmes

The Group maintains two frequent flyer award ~~programs,~~programmes, namely, the China Southern Airlines Sky Pearl Club and the Egret Mileage Plus, which provide travel awards to members based on accumulated mileage. The estimated incremental cost to provide free travel is recognized as an expense and accrued as a current liability as members accumulate mileage. As members redeem awards or their entitlements expire, the incremental cost liability is reduced accordingly to reflect the acquittal of the outstanding obligations.

Revenue from mileage sales to third parties under the frequent flyer award ~~programs~~programmes is recognized when the related transportation services are provided.

~~F-24~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

~~(y)~~(cc) Translation of foreign currencies

~~Transactions in foreign~~

Foreign currencies transactions during the year are translated into Renminbi at the applicable rates of exchange quoted by the PBOC prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies ~~at the balance sheet date~~ are translated into Renminbi at the PBOC exchange rates atprevailing on the balance sheet date. ~~Foreign exchange differences arising on translation~~Exchange gains and losses are recognized in ~~the statement of operations.~~ income or loss.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated into Renminbi at the PBOC exchange rates prevailing on the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated into Renminbi at the PBOC exchange rates atprevailing on the dates the fair value was determined.

~~(z)~~

(dd) Related parties

For the purposes of these consolidated financial statements, ~~parties are~~a party is considered to be related to the Group ifif:

(i) the ~~Group~~party has the ability, directly or indirectly through one or more intermediaries, to control the ~~party~~Group or exercise significant influence over the ~~party~~Group in making financial and operating policy decisions, or ~~vice versa, or where~~has joint control over the Group;

(ii) the Group and the party are subject to common ~~control~~control;

(iii) the party is an affiliated company of the Group or ~~common significant influence. Related parties may be individuals (being members~~a joint venture in which the Group is a venturer;

F-23

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

(iv) the party is a member of key management personnel ~~significant shareholders and/~~of the Group or ~~their~~the Group’s parent, or a close family ~~members)~~member of such an individual, or ~~other entities and include entities which are~~is an entity under the control, joint control or significant influence of ~~related parties~~such individuals;

(v) the party is a close family member of a party referred in (i) or is an entity under the ~~Group where those parties are individuals, and~~control, joint control or significant influence of such individuals; or

(vi) the party is a post-employment benefit ~~plans~~plan which ~~are~~is for the benefit of employees of the Group or of any entity that is a related party of the Group.

~~(aa)~~

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

(ee) Segmental reporting

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

~~3. NEW AND REVISED IFRSs~~

~~The IASB has issued a number of new and revised IFRSs that are effective for accounting periods beginning on or after January 1, 2005.~~

~~The accounting policies of~~In accordance with the Group’s internal financial reporting system, the Group ~~after~~has chosen business segment information as the ~~adoption~~primary reporting format and geographical segment information as the secondary reporting format for the purposes of these new and revised IFRSs have been summarized in Note 2. The following sets out information on the significant changes in accounting policies for the current and prior accounting periods reflected in theseconsolidated financial statements.

~~F-25~~

F-24

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

3. TURNOVER

~~The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period (Note 48).~~

~~F-26~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

~~(a) Changes in presentation of share of affiliated companies’ and jointly controlled entities’ taxation (IAS 1, Presentation of Financial Statements)~~

In prior years, the Group’s share of taxation of affiliated companies and jointly controlled entities accounted for using the equity method was included as part of the Group’s income tax in the consolidated statement of operations. With effect from January 1, 2005, in accordance with the implementation guidance in IAS 1, the Group has changed the presentation and includes the share of taxation of affiliated companies and jointly controlled entities accounted for using the equity method in the respective shares of income or loss reported in the consolidated statement of operations before arriving at the Group’s income or loss before tax. These changes in presentation have been applied retrospectively with comparatives restated.

As a result of these changes in presentation, the Group’s share of results of affiliated companies and jointly controlled entities and income tax expense/benefit have been adjusted. Share of income of affiliated companies for the years ended December 31, 2003 and 2004 decreased by RMB3 and RMB2, respectively. Share of losses of affiliated companies for the year ended December 31, 2005 decreased by RMB15. Share of losses of jointly controlled entities increased by RMB7 and RMB11 for the years ended December 31, 2003 and 2004, respectively, and decreased by RMB3 for the year ended December 31, 2005. The Group’s income tax expense has decreased by RMB10 and RMB13 during the years ended December 31, 2003 and 2004, respectively and income tax benefit has decreased by RMB18 during the year ended December 31, 2005. Accordingly, there is no effect on the net results and net assets of the Group in periods presented.

~~(b)~~

~~Changes in presentation of minority interests (IAS 1, Presentation of financial statements and IAS 27, Consolidated and separate financial statements)~~

In prior years, minority interests at the balance sheet date were presented separately from liabilities and equity in the consolidated balance sheet. Minority interests in the results of the Group for the year were also separately presented in the consolidated statement of operations as a deduction before arriving at the results attributable to shareholders (the equity shareholders of the Company).

With effect from January 1, 2005, in order to comply with IAS 1 and IAS 27, the Group has changed its accounting policy relating to presentation of minority interests. Under the new policy, minority interests are presented as part of equity, separately from interests attributable to the equity shareholders of the Company. Further details of the new policy are set out in Note 2(c). These changes in presentation have been applied retrospectively with comparatives restated.

~~F-27~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

As a result of these changes in presentation, the Group’s loss for the years ended December 31, 2003, 2004 and 2005 have decreased by RMB171, RMB203 and RMB2, respectively and the Group’s total equity as of December 31, 2004 and 2005 have increased by RMB2,055 and RMB1,936, respectively.

~~F-28~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

~~(c) Scope of related parties (IAS 24, Related party disclosures)~~

As a result of the adoption of revised IAS 24, the definition of related parties as disclosed in Note 2(z) has been expanded such that state-controlled entities are included. The revised IAS 24 also requires the compensation of key management personnel to be disclosed. The Group has included these additional disclosures in these consolidated financial statements.

~~4. TURNOVER~~

Turnover comprises revenues from airline and airline-related business and is stated net of sales tax. An analysis of turnover is as follows:

							Year ended December 31,
	Year ended December 31,						2004		2005		2006
	2003		2004		2005		RMB		RMB		RMB
	RMB		RMB		RMB
Traffic revenue
Passenger		15,010		21,100		34,328		21,100		34,328		41,549
Cargo and mail		1,955		2,244		3,091		2,244		3,091		3,538
								23,344		37,419		45,087
		16,965		23,344		37,419

Other operating revenue
Commission income		140		203		237		203		237		238
General aviation income		40		55		77		55		77		91
Ground services income		99		146		195		146		195		184
Air catering income		31		53		25		53		25		50
Net income from lease arrangements (Note 21)		69		—		—
Rental income		40		45		69		45		69		107
Aircraft lease income		—		11		1		11		1		-
Others		86		117		270		117		270		462
								630		874		1,132
		505		630		874		23,974		38,293		46,219

		17,470		23,974		38,293

Pursuant to various sales tax rules and regulations, the Group is required to pay sales tax to national and local tax authorities at the rate of approximately 3% of the traffic revenue in respect of domestic flights and outbound ~~international/~~international, Hong Kong and Macau flights. Sales tax incurred by the Group ~~for~~during the years ended December 31, ~~2003,~~ 2004, 2005 and ~~2005,~~2006, netted off against revenue, amounted to ~~RMB206, RMB716,~~RMB 716, RMB1,111 and ~~RMB1,111,~~RMB1,300, respectively.

~~F-29~~

F-25

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

4. FLIGHT OPERATIONS EXPENSES

	Year ended December 31,
	2004		2005		2006
	RMB		RMB		RMB

Jet fuel costs		6,050		11,929		16,193
Operating lease rentals
- Aircraft and flight equipment		1,665		2,497		3,027
- Land and buildings		109		302		260
Air catering expenses		705		1,196		1,244
Aircraft insurance		185		283		274
Flight personnel payroll and welfare		1,026		1,619		1,714
Training expenses		183		373		419
CAAC Infrastructure Development
Fund contributions		466		978		1,127
Others		29		217		409
		10,418		19,394		24,667

In addition, the Group is required to pay contributions to the CAAC Infrastructure Development Fund. Prior to May 1, 2003, contributions to CAAC Infrastructure Development Fund were payable at 5% and 2%, respectively, of the domestic and international/ Hong Kong and Macau traffic revenue. For the period from May 1, 2003 to March 31, 2004, the Group was exempted from paying any contributions. Effective from April 1, 2004, contributions to the CAAC Infrastructure Development Fund are payable based on the traffic capacity deployed by the Group on its routes. The contributions now form part of the flight operations expenses and amounted to RMB466 and RMB978 for the years ended December 31, 2004 and 2005, respectively (Note 5). The contributions for the year ended December 31, 2003 amounted to RMB251 were netted off against traffic revenue.

~~F-30~~

5. MAINTENANCE EXPENSES

	Year ended December 31,
	2004		2005		2006
	RMB		RMB		RMB

Repairing and maintenance charges (Note 45)		3,247		3,615		3,663
Maintenance materials		212		436		414
		3,459		4,051		4,077

6. AIRCRAFT AND TRAFFIC SERVICING EXPENSES

	Year ended December 31,
	2004		2005		2006
	RMB		RMB		RMB

Landing and navigation fees		3,222		4,891		5,220
Ground service charges		281		868		999
		3,503		5,759		6,219

F-26

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

7. PROMOTION AND SALES EXPENSES

~~5. FLIGHT OPERATIONS~~

Year ended December 31,

2004

2005

2006

RMB

RMB

RMB

Sales commissions 1,062 1,503 1,489
Ticket office expenses 552 659 689
Computer reservation services 233 417 439
Advertising and promotion 36 32 43
Others 57 169 151
1,940 2,780 2,811

8. GENERAL AND ADMINISTRATIVE EXPENSES

Year ended December 31,
2003 2004 2005
RMB RMB RMB
Jet fuel costs 3,867 6,050 11,929
Operating lease rentals
- Aircraft and flight equipment 1,536 1,665 2,497
- Land and buildings 136 109 302
Air catering expenses 474 705 1,196
Aircraft insurance 196 185 105
Flight personnel payroll and welfare 728 1,026 1,619
Training expenses 123 183 373
CAAC Infrastructure Development Fund contributions (Note 4) — 466 978
Others 10 29 395

7,070 10,418 19,394

~~6. MAINTENANCE EXPENSES~~

	Year ended December 31,
	2004		2005		2006
	RMB		RMB		RMB

General corporate expenses		1,260		2,408		3,098
Impairment losses for trade and other receivables		27		-		-
Auditors' remuneration		11		12		13
Other taxes and levies		25		37		29
		1,323		2,457		3,140

Year ended December 31,
2003 2004 2005
RMB RMB RMB
Repairing and maintenance charges 2,289 3,247 4,153
Maintenance materials 300 212 436

2,589 3,459 4,589

~~F-31~~

F-27

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

~~7. AIRCRAFT AND TRAFFIC SERVICING EXPENSES~~

Year ended December 31,
2003 2004 2005
RMB RMB RMB
Landing and navigation fees 2,562 3,222 4,891
Ground service charges 205 281 868

2,767 3,503 5,759

~~8. PROMOTION AND SALES EXPENSES~~

Year ended December 31,
2003 2004 2005
RMB RMB RMB
Sales commissions 757 1,062 1,503
Ticket office expenses 504 552 659
Computer reservation services 175 233 417
Advertising and promotion 24 36 32
Others 20 57 169

1,480 1,940 2,780

9. ~~GENERAL AND ADMINISTRATIVE EXPENSES~~

Year ended December 31,
2003 2004 2005
RMB RMB RMB
General corporate expenses 1,011 1,260 2,408
Impairment losses for trade and other receivables (Note 17) 12 27 —
Auditors’ remuneration 8 11 12
Other taxes and levies 22 25 37

1,053 1,323 2,457

~~F-32~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

~~10.~~ DEPRECIATION AND AMORTIZATION

Year ended December 31,
2003 2004 2005
RMB RMB RMB
Depreciation
- Owned assets 1,502 1,891 3,292
- Assets acquired under capital leases 496 472 1,128
Amortization of deferred credits — — (20 )
Other amortization 40 50 40

2,038 2,413 4,440

	Year ended December 31,
	2004		2005			2006
	RMB		RMB			RMB

Depreciation (Note 45)
- Owned assets		1,891		3,459			3,657
- Assets acquired under capital leases		472		1,426			1,337
Amortization of deferred credits		-		(20	)		(61	)
Other amortization		50		40			33
		2,413		4,905			4,966

~~Depreciation of property, plant and equipment leased out under operating leases amounted to RMB55, RMB55 and RMB35 for the years ended December 31, 2003, 2004 and 2005, respectively.~~

~~11.~~10. STAFF COSTS

							Year ended December 31,
	Year ended December 31,						2004		2005		2006
	2003		2004		2005		RMB		RMB		RMB
	RMB		RMB		RMB
Salaries, wages and welfare		1,496		2,260		3,515		2,260		3,515		3,854
Retirement schemes contributions		150		168		472		168		472		584
Early retirement benefits (Note 34)								-		-		392
								2,428		3,987		4,830
		1,646		2,428		3,987

Staff costs relating to flight operations, maintenance, aircraft and traffic servicing, promotion and sales and general and administrative expenses are also included in the respective total amounts disclosed separately in Notes 54 to 98 above.

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

~~12.~~11. INTEREST EXPENSE

Year ended December 31,
2003 2004 2005
RMB RMB RMB
Interest on bank and other notes payable wholly repayable within five years 288 221 211
Interest on other notes payable 176 156 877
Finance charges on obligations under capital leases 443 348 626
Less: borrowing costs capitalized (83 ) (34 ) (98 )

824 691 1,616

	Year ended December 31,
	2004			2005			2006
	RMB			RMB			RMB

Interest on bank and other notes payable wholly
repayable within five years		221			995			1,675
Interest on other notes payable		156			93			138
Finance charges on obligations under capital leases		348			626			716
Less: borrowing costs capitalized		(34	)		(98	)		(459	)
		691			1,616			2,070

The borrowing costs have been capitalized at rates ranging from ~~1.62% to 5.46% per annum,~~ 1.51% to 3.48% per annum, ~~and~~ 4.14% to 5.27% per annum and 5.29% to 5.61% per annum for the years ended December 31, ~~2003,~~ 2004, 2005 and ~~2005,~~2006, respectively.

~~13. INCOME TAX (BENEFIT)/EXPENSE~~

~~a) Income tax (benefit)~~12. (LOSS)/~~expense in~~GAIN ON SALE OF PROPERTY, PLANT AND EQUIPMENT, NET

	Year ended December 31,
	2004			2005			2006
	RMB			RMB			RMB

Aircraft and spare engines		-			-			329
Other property, plant and equipment		(1	)		(32	)		6
		(1	)		(32	)		335

During the ~~consolidated statements~~year, the Group recognized a RMB329 gain on sale of ~~operations~~

Year ended December 31,
2003 2004 2005
RMB RMB RMB
(restated, (restated,
Note 3) Note 3)
PRC income tax 47 176 12

Deferred tax (Note 25)
- current year 11 (111 ) (19 )
- adjustment for change in enacted tax rate (392 ) — —

(334 ) 65 (7 )

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

13. INCOME TAX EXPENSE

~~As a result of the reduction in income~~

(a) Income tax ~~rate, the Company’s net deferred tax liability balance at January 1, 2003 of RMB507 was reduced by RMB392. Accordingly, a net deferred tax credit of RMB392 was recognized~~expense in the consolidated statement of operations ~~for the year ended December 31, 2003.~~

	Year ended December 31,
	2004			2005			2006
	RMB			RMB			RMB

PRC income tax
- provision for the year		176			12			160
- over-provision in prior year		-			-			(16	)
		176			12			144


Deferred tax (Notes 25, 45)		(111	)		(8	)		(2	)
		65			4			142

In respect of the Group’s overseas airline activities, the Group has either obtained exemptions from overseas taxation pursuant to the bilateral aviation agreements between the overseas governments and

The statutory income tax rate in the PRC ~~government, or has sustained tax losses in these overseas jurisdictions. Accordingly, no provision for overseas tax has been made for~~is 33%.

The Company is taxed at the preferential rate of 15%, 15% and 18% during the years ended December 31, ~~2003,~~ 2004, 2005 and ~~2005.~~2006, except for certain branches which are taxed at following rates:

2006			15% or 33%
2005			33%
2004			33%

The subsidiaries of the Group are taxed at rates ranging from 15% to 33%.

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

Year ended December 31,
2003 2004 2005
RMB RMB RMB
(restated, (restated,
Note 3) Note 3)
(Loss)/income before tax (521 ) 220 (1,853 )

Expected tax on (loss)/income before tax calculated at 15% for the years ended December 31, 2003, 2004 and 2005 (78 ) 33 (278 )
Adjustments:
Effect on change in income tax rate on deferred taxation (392 ) — —
Rate differential on subsidiaries/branches 5 3 7
Tax effect of non-deductible expenses 80 29 82
Tax effect of non-taxable income — — (8 )
Tax effect of share of results of affiliated companies and jointly controlled entities (9 ) (1 ) 37
Tax effect of unused tax losses not recognized 22 — 135
Expired tax losses 34 — —
Others 4 1 18

Actual tax (benefit)/expense (334 ) 65 (7 )

	Year ended December 31,
	2004			2005			2006
	RMB			RMB			RMB

Income/(loss) before tax	220			(1,780)			284

Expected tax on income/(loss) before tax, calculated
at 15%, 15% and 18% for the years ended
December 2004, 2005 and 2006 respectively		33			(267	)		51
Adjustments for tax effect of:
Rate differential on subsidiaries/branches		3			7			(20	)
Non-deductible expenses
Salaries and welfare		25			71			114
Other		4			11			17
Non-taxable income		-			(8	)		-
Change in tax rate of the Company and its
certain branches from 15% to 18%		-			-			(21	)
Share of results of affiliated companies
and jointly controlled entities		(1	)		37			(22	)
Unutilised tax losses		-			135			39
Over-provision in prior year		-			-			(16	)
Others		1			18			-
Actual tax expense		65			4			142

All but an insignificant amount of income/(loss)~~/income~~ before taxation is from domestic sources.

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

In accordance with relevant PRC tax regulations, a PRC lessee is liable to pay PRC withholding tax in respect of any lease payments regularly made to an overseas lessor. Depending on the circumstances, this tax is generally imposed at a fixed rate ranging from 10% to 20% of the lease payments, or in certain cases, the interest components of such payments. Pursuant to an approval document from the State Tax Bureau, lease arrangements executed prior to September 1, 1999 were exempted from PRC withholding tax.

The PRC withholding tax payable by the Group for the years ended December 31, 2003, 2004 and 2005 of RMB8, RMB23 and RMB55, respectively, in respect of the operating leases executed after September 1, 1999 has been included as part of the operating lease rentals.

14. DIVIDENDS

No interim dividend was paid during the years ended December 31, ~~2003,~~ 2004, 2005 and ~~2005.~~2006.

The board of directors of the Company does not recommend the payment of a final dividend in respect of the year ended December 31, ~~2005.~~2006. No final dividend was paid in respect of the years ended December 31, ~~2003~~2004 and ~~2004.~~2005.

15. ~~BASIC LOSS~~(LOSS)/EARNINGS PER SHARE

The calculation of basic ~~loss~~(loss)/earnings per share for the years ended December 31, ~~2003,~~ 2004, 2005 and ~~2005~~2006 is based on the ~~loss~~(loss)/earnings attributable to equity shareholders of the Company of ~~RMB358, RMB48,~~RMB(48), RMB(1,786) and ~~RMB1,848,~~RMB126, respectively, and the weighted average number of shares in issue of ~~3,831,712,000, 4,374,178,000, and 4,374,178,000, respectively.~~4,374,000,000 in each of the three years.

The ~~amount~~amounts of diluted ~~loss~~(loss)/earnings per share ~~is not presented~~are the same as basic (loss)/earnings per share as there were no dilutive potential ordinary shares in existence during the years ended December 31, ~~2003,~~ 2004, 2005 and ~~2005.~~2006.

F-31

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in millions, except share data)

16. CASH AND CASH EQUIVALENTS

	December 31,
	2005		2006
	RMB		RMB

Deposits with banks		23		26
Cash at bank and in hand		2,878		2,238
		2,901		2,264

~~As of December 31, 2004 and 2005, cash and cash equivalents comprise cash at bank and in hand and deposits with China~~

Southern Airlines Group Finance Company Limited (“SA Finance”), is a PRC authorized financial institution controlled by CSAHC and is an affiliated company of the Group. In accordance with the financial agreement dated May 22, 1997 and subsequently revised on December 31, 2004 between the Company and SA Finance, all the Group’s deposits accepted by SA Finance were simultaneously placed with several designated major PRC banks by SA Finance. As of December 31, ~~2004~~2005 and ~~2005,~~2006, the Group’s deposits with SA Finance amounted to ~~RMB406~~RMB544 and ~~RMB544, respectively.~~

~~F-36~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~RMB629, respectively (Note 37(d)).

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

Included in cash and cash equivalents are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:

December 31,
2004 2005
United States Dollars US$ 37 US$ 24
Japanese Yen JPY1, 272 JPY1, 161

~~F-37~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

	December 31,
	2005	2006

United States Dollars	US$24	US$16
Japanese Yen	JPY1,161	JPY1,006

17. TRADE RECEIVABLES

December 31,
2004 2005
RMB RMB
Trade receivables, principally traffic 1,295 1,562
Less: Impairment losses for bad and doubtful accounts (92 ) (44 )

1,203 1,518

	December 31,
	2005			2006
	RMB			RMB

Trade receivables		1,562			1,552
Less: Impairment losses for bad and doubtful accounts		(44	)		(40	)
		1,518			1,512

Credit terms granted by the Group to sales agents and other customers generally range from one to three months. An ageing analysis of trade receivables, net of impairment losses for bad and doubtful accounts, is set out below:

December 31,
2004 2005
RMB RMB
Within 1 month 998 1,366
More than 1 month but less than 3 months 163 137
More than 3 months but less than 12 months 42 14
More than 12 months — 1

1,203 1,518

	December 31,
	2005		2006
	RMB		RMB

Within 1 month		1,366		1,355
More than 1 month but less than 3 months		137		131
More than 3 months but less than 12 months		14		24
More than 12 months		1		2
		1,518		1,512

F-32

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

As of December 31, ~~2004~~2005 and ~~2005,~~2006, the Group had an amount due from a fellow subsidiary of ~~RMB52~~RMB42 and ~~RMB42,~~RMBNil, respectively, which was included in trade receivables.

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

Included in trade receivables are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:

December 31,
2004 2005
United States Dollars US$ 11 US$ 15

~~F-38~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

	December 31,
	2005	2006

United States Dollars	US$15	US$19

Movements in impairment losses for bad and doubtful accounts comprise:

Year ended December 31,
2004 2005
RMB RMB
At January 1 70 92
Impairment losses for bad and doubtful accounts (Note 9) 27 —
Through the CNA/XJA Acquisitions 44 —
Bad and doubtful accounts written off (49 ) (48 )

At December 31 92 44

December 31,

2005

2006

RMB

RMB

At January 1 92 44
Bad and doubtful accounts written off (48 ) (4 )
At December 31 44 40

F-33

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in millions, except share data)

18. INVENTORIES

December 31,
2004 2005
RMB RMB
Expendable spare parts and maintenance materials 1,175 1,241
Other supplies 127 141

1,302 1,382

	December 31,
	2005		2006
	RMB		RMB

Expendable spare parts and maintenance materials		1,241		1,236
Other supplies		141		79
		1,382		1,315

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

December 31,
2004 2005
RMB RMB
Consumption 596 720
Write-down of inventories — 209

596 929

	December 31,
	2005		2006
	RMB		RMB

Consumption		720		694
Write-down of inventories		209		161
		929		855

Inventories were written down as a result of ~~fleet adjustment, inventories have been written down by RMB209~~a plan to phase out certain old model aircraft in the coming years.

19. OTHER RECEIVABLES

	December 31,
	2005		2006
	RMB		RMB

Manufacturers' credit		417		448
Amount due from Zhangyuan Airlines Company Limited ("Zhongyuan Airlines")		98		-
Deposit and prepayment		65		85
Others		376		346
		956		879

The amount due from Zhongyuan Airlines of RMB98 at December 31, ~~2005.~~2005 was fully settled during 2006 by a transfer of certain properties of Zhongyuan Airlines to the Group.

~~F-39~~

F-34

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

~~19. OTHER INVESTMENTS~~

December 31,
2004 2005
RMB RMB
Non-current investments

Unlisted equity securities available for sale, at cost 272 320

Current investments

Listed equity securities held for trading 523 —
Listed debt securities held-to-maturity 160 —

683 —

Market value of listed securities 683 —

20. PROPERTY, PLANT AND EQUIPMENT, NET

~~The current investments at December 31, 2004 were listed outside Hong Kong.~~

				Aircraft
							Held under capital			Other flight equipment, including rotable			Machinery, equipment and
	Buildings			Owned			leases			spares			vehicles			Total
	RMB			RMB			RMB			RMB			RMB			RMB
Cost or valuation:

At January 1, 2005		6,988			27,134			14,529			9,044			2,599			60,294
Exchange adjustments		(6	)		-			-			-			(14	)		(20	)
Additions		64			1,937			8,494			1,416			307			12,218
Transfer from construction in progress		513			-			-			-			56			569
Transfer to inventories		-			-			-			(126	)		-			(126	)
Disposals		(256	)		(66	)		(314	)		(287	)		(81	)		(1,004	)
At December 31, 2005		7,303			29,005			22,709			10,047			2,867			71,931

Representing:
Cost		6,948			22,776			18,369			7,873			2,383			58,349
Valuation - 1996 (Note (b))		355			6,229			4,340			2,174			484			13,582
		7,303			29,005			22,709			10,047			2,867			71,931

At January 1, 2006		7,303			29,005			22,709			10,047			2,867			71,931
Additions		-			1,476			4,487			769			339			7,071
Transfer from construction in progress		516			-			96			12			46			670
Acquired from CSAHC Hainan (Note 40(c))		34			39			-			41			17			131
Reclassification on exercise of purchase option		-			3,273			(3,273	)		-			-			-
Reclassification		(172	)		-			-			-			172			-
Disposals		(780	)		(580	)		(204	)		(575	)		(133	)		(2,272	)
At December 31, 2006		6,901			33,213			23,815			10,294			3,308			77,531

Representing:
Cost		6,546			27,420			19,475			8,120			2,824			64,385
Valuation - 1996 (Note (b))		355			5,793			4,340			2,174			484			13,146
		6,901			33,213			23,815			10,294			3,308			77,531

~~Net realized and unrealized gain on trading securities of the Group amounted to RMBNil, RMB15 and RMB6 during the years ended December 31, 2003, 2004 and 2005, respectively.~~

~~Dividend income from unlisted securities of the Group amounted to RMBNil, RMB14 and RMB4 during the years ended December 31, 2003, 2004 and 2005, respectively.~~

~~The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value of debt security held-to-maturity as of December 31, 2004 and 2005 were as follows:~~

F-35

Gross Gross
unrealized unrealized
Amortized holding holding
cost gains losses Fair value
RMB RMB RMB RMB
As of December 31, 2004

Debt securities held-to-maturity 160 — — 160

As of December 31, 2005

Debt securities held-to-maturity — — — —

~~F-40~~

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

~~20. OTHER RECEIVABLES~~

				Aircraft
	Buildings			Owned			Held under capital leases			Other flight equipment, including rotable spares			Machinery, equipment and vehicles			Total
	RMB			RMB			RMB			RMB			RMB			RMB
Accumulated depreciation:

At January 1, 2005		757			4,331			2,894			4,137			1,334			13,453
Exchange adjustments		(1	)		-			-			-			(11	)		(12	)
Charge for the year		227			1,679			1,406			1,155			418			4,885
Disposals		(74	)		(66	)		(314	)		(225	)		(55	)		(734	)
At December 31, 2005		909			5,944			3,986			5,067			1,686			17,592

At January 1, 2006		909			5,944			3,986			5,067			1,686			17,592
Charge for the year		248			1,917			1,337			1,041			451			4,994
Reclassification on exercise of purchase option		-			1,034			(1,034	)		-			-			-
Reclassification		(41	)		-			-			-			41			-
Disposals		(56	)		(510	)		(204	)		(513	)		(119	)		(1,402	)
At December 31, 2006		1,060			8,385			4,085			5,595			2,059			21,184

Net book value:

At December 31, 2005		6,394			23,061			18,723			4,980			1,181			54,339

At December 31, 2006		5,841			24,828			19,730			4,699			1,249			56,347

As of December 31, 2004 and 2005, other receivables of the Group included an amount due from Zhongyuan Airlines Company Limited (“Zhongyuan Airlines”) of RMB104 and RMB98, respectively. As of December 31, 2005 and up to date of approval of these consolidated financial statements, the Group is in the process of applying for transfer of certain properties held by Zhongyuan Airlines for settlement of the balance.

~~21. PROPERTY, PLANT AND EQUIPMENT, NET~~

Other flight
Aircraft equipment, Machinery,
Held including equipment
under capital rotable and
Buildings Owned leases spares vehicles Total
Cost or valuation:

At January 1, 2004 3,288 17,222 10,463 6,842 1,930 39,745
Exchange adjustments 5 — — — 12 17
Reclassification on exercise of purchase options — 550 (550 ) — — —
Additions 336 4,156 — 525 5 5,022
Transfer from construction in progress 2,472 — — — 235 2,707
Through the CNA/XJA Acquisitions 915 5,206 4,616 1,753 490 12,980
Disposals (28 ) — — (76 ) (73 ) (177 )

At December 31, 2004 6,988 27,134 14,529 9,044 2,599 60,294

Representing:
Cost 6,633 20,905 10,189 6,870 2,115 46,712
Valuation - 1996 (Note (b)) 355 6,229 4,340 2,174 484 13,582

6,988 27,134 14,529 9,044 2,599 60,294

At January 1, 2005 6,988 27,134 14,529 9,044 2,599 60,294
Exchange adjustments (6 ) — — — (14 ) (20 )
Additions 64 1,827 8,146 1,336 307 11,680
Transfer from construction in progress 513 — — — 56 569
Transfer to inventories — — — (126 ) — (126 )
Disposals (256 ) — — (207 ) (81 ) (544 )

At December 31, 2005 7,303 28,961 22,675 10,047 2,867 71,853

Representing:
Cost 6,948 22,732 18,335 7,873 2,383 58,271
Valuation - 1996 (Note (b)) 355 6,229 4,340 2,174 484 13,582

7,303 28,961 22,675 10,047 2,867 71,853

~~F-41~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

Other flight
Aircraft equipment, Machinery,
Held including equipment
under capital rotable and
Buildings Owned leases spares vehicles Total
Accumulated depreciation:

At January 1, 2004 594 3,192 2,605 3,644 1,174 11,209
Exchange adjustments 1 — — — 9 10
Reclassification on exercise of purchase options — 183 (183 ) — — —
Charge for the year 179 956 472 544 212 2,363
Disposals (17 ) — — (51 ) (61 ) (129 )

At December 31, 2004 757 4,331 2,894 4,137 1,334 13,453

At January 1, 2005 757 4,331 2,894 4,137 1,334 13,453
Exchange adjustments (1 ) — — — (11 ) (12 )
Charge for the year 227 1,546 1,108 1,121 418 4,420
Disposals (74 ) — — (145 ) (55 ) (274 )

At December 31, 2005 909 5,877 4,002 5,113 1,686 17,587

Net book value:

At December 31, 2004 6,231 22,803 11,635 4,907 1,265 46,841

At December 31, 2005 6,394 23,084 18,673 4,934 1,181 54,266

(a) Substantially all of the Group’s buildings are located in the PRC. The Group was formally granted the rights to use the ~~twenty one~~twenty-one parcels of land in Guangzhou, Shenzhen, Zhuhai, Beihai, Changsha, Shantou, Haikou, Zhengzhou, Guiyang and Wuhan by the relevant PRC authorities for periods of 30 to 70 years, which expire between 2020 and 2068. For other land in the PRC on which the Group’s buildings are erected, the Group was formally granted the rights to use such land for periods of one to ~~five~~three years pursuant to various lease agreements between the Company and CSAHC. In this connection, rental payments ~~totaling~~totalling RMB2, ~~RMB2~~RMB24 and ~~RMB24~~RMB22 were paid to CSAHC for each of the years ended December 31, ~~2003,~~ 2004, 2005 and ~~2005,~~2006, respectively in respect of these ~~leases (Note 36).~~leases.

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

~~F-42~~

F-36

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

Subsequent to the 1996 revaluation, the property, plant and equipment of the Group are carried at revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated ~~depreciation and impairment losses.~~depreciation. Revaluation is performed ~~with sufficient regularity~~periodically to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date. Based on a revaluation performed as of September 30, 2005, by Savills Valuation & Professional Services Limited, a firm of independent valuers, on a depreciated replacement cost basis, the carrying value of property, plant and equipment did not differ materially from their fair value. ~~Consequently, no additional fair value adjustment was recorded during the year ended December 31, 2005.~~

At December 31, ~~2005,~~2006, the carrying amount of such revalued property, plant and equipment approximated the historical carrying value of such assets had they been stated at cost less accumulated depreciation and impairment losses.

(c) As of December 31, ~~2004~~2005 and ~~2005,~~2006, certain aircraft of the Group with an aggregate carrying amount of approximately ~~RMB23,562~~RMB30,408 and ~~RMB30,408,~~RMB30,075, respectively, were mortgaged under certain notes payable and lease agreements (Notes 27 and 28).

(d) ~~In 2003, the~~The Group ~~entered into operating lease arrangements to lease~~leased out certain flight training facilities and buildings to ~~Zhuhai Xiang Yi Aviation Technology Company Limited (“Zhuhai Xiang Yi”),~~ a jointly controlled ~~entity~~entity. The leases typically run for an initial period of one to three years, with an option to renew the lease after that date at which time all terms are renegotiated. None of the ~~Group. The~~ leases ~~with initial one-year term are automatically renewable for additional subsequent one year unless either party gives appropriate notice of termination.~~includes contingent rentals. In this connection, rental income totaling RMB31, RMB31 and ~~RMB31~~RMB35, respectively, was received by the Group ~~for each~~in respect of the leases during the years ended December 31, ~~2003,~~ 2004, 2005 and ~~2005 in respect of the leases~~2006 (Note ~~36)~~37(c)(xi)).

The carrying amount and accumulated depreciation of the relevant property, plant and equipment totaled RMB787 and RMB514 at December 31, 2004, and RMB862 and RMB664 at December 31, 2005, respectively. Depreciation of relevant property, plant and equipment recognized for each of the years ended December 31, 2003, 2004 and 2005 amounted to RMB55, RMB55 and RMB35, respectively. As of December 31, 2005, the Group’s total future minimum lease payments under non-cancellable operating leases were receivable within one year and amounted to ~~RMB31.~~RMB35.

~~F-43~~

The cost and accumulated depreciation of the relevant properties leased out by the Group under the operating leases amounted to RMB237 and RMB84 as of December 31, 2005, and RMB221 and RMB94 as of December 31, 2006, respectively. Depreciation of the relevant properties recognized during each of the years ended December 31, 2004, 2005 and 2006 totaled RMB15, RMB15 and RMB21, respectively.

F-37

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

(e) The Group entered into two separate arrangements (the “Arrangements”) with certain independent third parties during each of 2002 and 2003. Under each of the Arrangements, the Group sold an aircraft and then immediately leased back the aircraft for an agreed period. The lease payment obligations, with pre-determined net present value, are to be satisfied solely out of the sale proceeds and such amount has been placed irrevocably by the Group in form of deposits and debt securities in favor of the lessor. The Group has an option to purchase the aircraft at a pre-determined date and an agreed purchase price to be satisfied by the balances of the deposits and debt securities outstanding at that date. In the event that the lease agreement is early terminated by the Group, the Group is liable to pay a pre-determined penalty to the lessor. Provided that the Group complies with the lease agreements, the Group is entitled to the continued possession and operation of the aircraft. Since the Group retains substantially all risks and rewards incident to ownership of the aircraft and enjoys substantially the same rights to their use as before the Arrangements, no adjustment has been made to the property, plant and equipment. As of December 31, ~~2004~~2005 and ~~2005,~~2006, the net present value of the lease commitments and the corresponding defeased deposits and debt securities amounted to ~~RMB2,462~~RMB2,376 and ~~RMB2,376,~~RMB2,272, respectively.

(f) As agreed with the companies having operations at Guangzhou Baiyun International Airport, the allocation of common facilities at the airport was revised during 2006. As a result, certain property, plant and equipment of the ~~Arrangements,~~Group at Guangzhou Baiyun International Airport with a carrying amount of RMB539 were transferred out during the ~~Group received net cash benefit of RMB69 in 2003, which was recognized as income for 2003.~~year.

~~(f)~~

(g) As of December 31, ~~2005~~2006 and up to the date of approval of these consolidated financial statements, the Group is in the process of applying for the land use right certificates and property title certificates in respect of the properties located in the Guangzhou Baiyun International Airport, in which the Group has interests and for which such certificates have not been granted. As of December 31, ~~2004~~2005 and ~~2005,~~2006, carrying value of such properties of the Group amounted to ~~RMB2,319~~RMB2,316 and ~~RMB2,316,~~RMB1,586, respectively. The directors of the Company are of the opinion that the use of and the conduct of operating activities at the properties referred to above are not affected by the fact that the Group has not yet obtained the relevant land use right certificates and property title certificates.

~~22.~~

21. CONSTRUCTION IN PROGRESS

December 31,
2004 2005
RMB RMB
At January 1 1,630 565
Additions 1,616 678
Through the CNA/XJA Acquisitions 26 —
Transfer to property, plant and equipment (2,707 ) (569 )

At December 31 565 674

	December 31,
	2005			2006
	RMB			RMB

At January 1		565			674
Additions		678			947
Transfer to property, plant and equipment		(569	)		(670	)
At December 31		674			951

The construction in progress as of December 31, ~~2005~~2006 mainly related to projects at the Guangzhou, Jilin and Fuzhou airports, Shenzhen cargo centre and Beijing branch.

~~F-44~~

F-38

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

~~23.~~22. INTEREST IN AFFILIATED COMPANIES

December 31,
2004 2005
RMB RMB
Share of net assets 429 142

	December 31,
	2005		2006
	RMB		RMB

Share of net assets		142		149

Details of the Group’s principal affiliated companies are set out in Note 50, all of which are unlisted corporate entities.

Summary of financial information on affiliated companies:

100% Group’s effective interest
December 31, December 31,
2003 2004 2005 2003 2004 2005
RMB RMB RMB RMB RMB RMB
Non-current assets 4,254 5,334 1,672 2,081
Current assets 2,165 2,275 1,049 455
Non-current liabilities (2,918 ) (3,897 ) (1,290 ) (1,520 )
Current liabilities (2,568 ) (3,318 ) (1,002 ) (874 )

Net assets 933 394 429 142

Revenues 1,756 2,676 3,314 682 1,042 1,318
Expenses (1,637 ) (2,633 ) (3,798 ) (634 ) (1,030 ) (1,618 )
Taxation (6 ) (5 ) (39 ) (3 ) (2 ) 15

Income/(loss) for the year 113 38 (523 ) 45 10 (285 )

~~24.~~

100 Percent

Group’s effective interest

December 31,

December 31,

2004

2005

2006

2004

2005

2006

RMB

RMB

RMB

RMB

RMB

RMB

Non-current assets 5,334 6,042 2,081 2,319
Current assets 2,275 2,281 455 502
Non-current liabilities (3,897 ) (3,525 ) (1,520 ) (1,372 )
Current liabilities (3,318 ) (4,110 ) (874 ) (1,300 )
Net assets 394 688 142 149

Revenues 2,676 3,314 4,485 1,042 1,318 1,727
Expenses (2,638 ) (3,837 ) (4,487 ) (1,032 ) (1,603 ) (1,722 )
Income/(loss) for the year 38 (523 ) (2 ) 10 (285 ) 5

F-39

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in millions, except share data)

23. INTEREST IN JOINTLY CONTROLLED ENTITIES

December 31,
2004 2005
RMB RMB
Share of net assets 782 805

	December 31,
	2005		2006
	RMB		RMB

Share of net assets		805		870

Details of the Group’s principal jointly controlled entities are set out in Note ~~50,~~49, all of which are unlisted corporate entities.

~~F-45~~

Summary of financial information on jointly controlled entities:

	Group's effective interest
	December 31,
	2004			2005			2006
	RMB			RMB			RMB

Non-current assets					920			925
Current assets					877			1,111
Non-current liabilities					(369	)		(335	)
Current liabilities					(623	)		(831	)
Net assets					805			870

Revenues		762			1,115			1,464
Expenses		(778	)		(1,079	)		(1,349	)
(Loss)/income for the year		(16	)		36			115

24. OTHER INVESTMENTS IN EQUITY SECURITIES

	December 31,
	2005		2006
	RMB		RMB

Unlisted equity securities, at cost		320		330

Net realized and unrealized gain on trading securities of the Group amounted to RMB15, RMB6 and RMBNil during the years ended December 31, 2004, 2005 and 2006, respectively.

Dividend income from unlisted securities of the Group amounted to RMB14, RMB4 and RMB7 during the years ended December 31, 2004, 2005 and 2006, respectively.

F-40

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

~~Summary financial information on jointly controlled entities:~~

Group’s effective interest
December 31,
2003 2004 2005
RMB RMB RMB
Non-current assets 845 920
Current assets 794 877
Non-current liabilities (389 ) (524 )
Current liabilities (468 ) (468 )

Net assets 782 805

Revenues 545 762 1,115
Expenses (585 ) (767 ) (1,082 )
Taxation (6 ) (11 ) 3

(Loss)/income for the year (46 ) (16 ) 36

25. DEFERRED TAX ASSETS/~~LIABILITIES~~(LIABILITIES)

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

December 31,
2004 2005
RMB RMB
At January 1 (398 ) (287 )
Credited to consolidated statements of operations (Note 13) 111 19

At December 31 (287 ) (268 )

~~F-46~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

	December 31,
	2005			2006
	RMB			RMB
	(Note 45)

At January 1		(287	)		(279	)
Credited to consolidated statement of operations (Note 13)		8			2
At December 31		(279	)		(277	)

The deferred tax assets/(liabilities)~~/assets~~ as of December 31, ~~2004~~2005 and ~~2005~~2006 were made up of the following tax effects:

							December 31,
	December 31,						2005			2006
	2004			2005			RMB			RMB
	RMB			RMB			(Note 45)
Deferred tax assets:
Tax losses		39			159			159			-
Repair charges capitalized		254			275			275			203
Accrued expenses		275			175			175			465
Others		21			29			29			38


Total deferred tax assets		589			638			638			706



Deferred tax liabilities:
Accrued expenses		75			58			(58	)		(105	)
Depreciation allowances in excess of the related depreciation		752			832			(843	)		(878	)
Others		49			16			(16	)		-


Total deferred tax liabilities		876			906			(917	)		(983	)
								(279	)		(277	)

		(287	)		(268	)


Net deferred tax asset recognized on the consolidated balance sheet		51			74			63			95

Net deferred tax liability recognized on the consolidated balance sheet		(338	)		(342	)		(342	)		(372	)
								(279	)		(277	)

		(287	)		(268	)

~~F-47~~

F-41

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

	December 31,
	2005		2006
	RMB		RMB

Gross amount of unused tax losses
Expected to be utilized		891		-
Not expected to be utilized		710		423
		1,601		423

~~As of December 31, 2004 and 2005,~~

Tax losses in the ~~Group had tax losses for~~ PRC ~~income tax purposes totaling approximately RMB260 and RMB1,601. Such tax losses~~ are available for carry forward to set off ~~against~~ future PRC assessable income for a maximum period of five ~~years~~years. Of the RMB423 tax losses as of December 31, 2006, approximately RMB33, RMB44, RMB87, RMB130 and RMB129 will expire in ~~2011.~~2007, 2008, 2009, 2010 and 2011 respectively. In accordance with accounting policy set out in Note ~~2(r)~~2(u), ~~as of December 31, 2004 and 2005,~~ the Group ~~has~~had not recognized deferred tax ~~assets~~asset in respect of these unused tax losses ~~to the extent of approximately Nil and RMB710~~ as it was determined by management that it is not probable that future taxable income against which the losses can be utilized will be available before they expire.

26. OTHER ASSETS

As of December 31, ~~2004~~2005 and 2005, the Group has also not recognized deferred tax assets in respect of cumulative tax losses from operations in Hong Kong of approximately RMB303, as it is not probable that future taxable income against which the losses can be utilized will be available. The tax losses do not expire under current tax legislation.

~~26. OTHER ASSETS~~

~~As of December 31, 2004 and 2005,~~2006, other assets of the Group include lump sum housing benefits of ~~RMB197~~RMB171 and ~~RMB171,~~RMB145, respectively. Further details are set out in Note ~~37.~~38.

Movements of lump sum housing benefits are as follows:

December 31,
2004 2005
RMB RMB
At January 1 223 197
Amortization for the year (26 ) (26 )

At December 31 197 171

~~27.~~		~~DEBT~~

		~~Short-term notes payable~~

December 31,
2004 2005
RMB RMB
Short-term notes payable 9,925 14,346
Current installments of long-term notes payable 1,593 1,877

11,518 16,223

	December 31,
	2005			2006
	RMB			RMB

At January 1		197			171
Amortization for the year		(26	)		(26	)
At December 31		171			145

Borrowings under short-term notes payable are used primarily to finance working capital needs and are repayable in full on the respective due dates with interest rates ranging from 3.15% to 5.34% per annum. The Group’s weighted average interest rate on short-term notes payable was 1.60% and 4.83% per annum, respectively, as of December 31, 2004 and 2005.

F-42

Short-term notes payable include certain notes payable of RMB2,611 which were renewed subsequent to December 31, 2005. The renewed notes payable are unsecured, bear interest at floating rates ranging from 3-month HIBOR/6-month LIBOR + 0.55% to 0.60% per annum and are repayable within one year from their respective renewal dates.

In addition, the Group entered into new notes payable agreements totalling RMB2,671 subsequent to December 31, 2005. These new notes payable are unsecured and bear interest at floating rates ranging from 6-month LIBOR + 0.55% to 0.70% per annum with maturities through 2008.

~~F-48~~

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

27. DEBT

~~Long-term notes payable~~

December 31,
Interest rate and final maturity 2004 2005
RMB RMB
Renminbi denominated notes payable

Non-interest bearing loan from a municipal government authority repayable on demand 3 3

Floating interest rates ranging from 5.02% to 5.51% per annum as of December 31, 2005, with maturities through 2011 1,217 877

United States Dollars denominated notes payable

Fixed interest rates ranging from 4.43% to 7.73% per annum as of December 31, 2005, with maturities through 2015 2,676 2,414

Floating interest rates ranging from 3 months LIBOR + 0.70% to 0.90% per annum as of December 31, 2005, with maturities through 2012 1,426 3,610

Floating interest rates ranging from 6 months LIBOR + 0.3% to 1.20% per annum as of December 31, 2005, with maturities through 2013 8,206 7,713

13,528 14,617

Less: current installments (1,593 ) (1,877 )

11,935 12,740

(a) As of December 31, ~~2004~~2006, bank and other notes payable are analyzed as follows:

	December 31,
	2005		2006
	RMB		RMB

Short-term notes payable		14,346		19,908
Current installments of long-term notes payable		1,877		3,914
		16,223		23,822
Non-current installments of long-term notes payable		12,740		10,018
		28,963		33,840

Representing:

Bank notes payable		28,960		33,818
Other notes payable		3		22
		28,963		33,840

(b) As of December 31, 2005 and 2006, the Group’s weighted average interest rates on short-term notes payable were 4.83% per annum and 5.77% per annum, respectively.

F-43

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

	December 31,
	2005			2006
	RMB			RMB
Renminbi denominated notes payable

Non-interest bearing loan from a municipal government authority		3			3

Floating interest rates ranging from 5.10% to 5.51% per annum
as of December 31, 2006, with maturities through 2010		877			325

United States Dollars denominated notes payable

Fixed interest rates ranging from 4.43% to 7.48% per annum
as of December 31, 2006, with maturities through 2015		2,414			1,863

Floating interest rates ranging from 3-month LIBOR
+ 0.65% to 0.90% per annum as of December 31, 2006,
with maturities through 2009		3,610			1,727

Floating interest rates ranging from 6-month LIBOR
+ 0.30% to 1.20% per annum as of December 31, 2006,
with maturities through 2016		7,713			9,995

Hong Kong Dollars denominated notes payable

Non-interest bearing loan from a minority shareholder repayable
within five years (Note 37(g))		-			19
		14,617			13,932
Less: current installments classified as current liabilities		(1,877	)		(3,914	)
		12,740			10,018

(d) As of December 31, 2005 and 2006, bank and other notes payable of the Group totaling ~~RMB8,620~~RMB8,116 and ~~RMB8,116,~~RMB8,726, respectively, were secured by mortgages over certain of the Group’s aircraft with carrying amount of ~~RMB11,927~~RMB11,735 and ~~RMB11,735,~~RMB10,345, respectively.

~~F-49~~

F-44

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

(e) As of December 31, ~~2004~~2005 and ~~2005,~~2006, certain bank and other notes payable were guaranteed by the following parties:

December 31,
2004 2005
RMB RMB
Guarantors

Short-term notes payable

CSAHC 411 300

Long-term notes payable

Industrial Commercial Bank of China 149 111
Export-Import Bank of the United States 1,732 1,171
Bank of China 291 155
CSAHC 2,041 1,608
Shenzhen Yingshun Investment Development Company Limited — 22
SA Finance 9 7

4,633 3,374

	December 31,
	2005		2006
	RMB		RMB

Guarantors

Industrial Commercial Bank of China		111		79
Export-Import Bank of the United States		1,171		828
Bank of China		155		74
CSAHC		1,908		1,484
Shenzhen Yingshun Investment Development Company Limited		22		22
SA Finance		7		5
Industrial Bank Co.,Ltd		-		48
		3,374		2,540

(f) As of December 31, 2005 and 2006, loans to the Group from SA Finance amounted to RMB300 (Note 37(d)).

(g) As of December 31, 2006, the Group had banking facilities with several PRC commercial banks for providing ~~loan finance~~financing up to ~~an approximate amount~~approximately RMB49,041, of ~~RMB39,294. As of December 31, 2005, an approximate amount of RMB28,242~~which approximately RMB28,295 was utilized.

~~As of December 31, 2004 and 2005, loans to the Group from SA Finance amounted to RMB256 and RMB300, respectively (Note 36(b)).~~

~~F-50~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

(h) The aggregate annual maturities of long-term notes payable for each of the five years subsequent to December 31, ~~2005~~2006 and thereafter are as follows:

			December 31,
			2005		2006
	RMB		RMB		RMB
Year ending December 31,
2006		1,877		1,877		-
2007		4,316		4,316		3,914
2008		2,156		2,156		2,986
2009		1,435		1,435		2,219
2010		660		660		740
2011				-		1,574
Thereafter		4,173		4,173		2,499
				14,617		13,932
		14,617

F-45

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

(i) Included in bank and other ~~loans~~notes payable are the following amounts denominated in a currency other than the functional currency of the entity to which they ~~related:~~relate:

December 31,
2004 2005
United States Dollars US$1,969 US$3,208
Hong Kong Dollars HK$2,678 HK$1,821

~~F-51~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

	December 31,
	2005	2006

United States Dollars	US$3,208	US$4,016
Hong Kong Dollars	HK$1,821	HK$1,659

28.LEASE OBLIGATIONS

(a) Capital leases

The Group has commitments under capital lease agreements in respect of aircraft and related equipment. The majority of these leases have terms of 10 to 15 years expiring during the years ~~2006~~2007 to ~~2017.~~

2016. As of December 31, ~~2005,~~2006, future payments under these capital leases are as follows:

Payments *Interest Obligations
RMB RMB RMB
Year ending December 31,

2006 4,030 657 3,373
2007 3,423 493 2,930
2008 3,016 408 2,608
2009 1,684 307 1,377
2010 1,050 238 812
Thereafter 5,412 680 4,732

18,615 2,783 15,832

Less: current installments of obligations under capital leases (3,373 )

12,459

	December 31, 2005								December 31, 2006
	Payments			*Interest		Obligations			Payments		*Interest		Obligations
	RMB			RMB		RMB			RMB		RMB		RMB

Year ending December 31,
2006		4,030			657		3,373			—		—		—
2007		3,423			493		2,930			3,769		678		3,091
2008		3,016			408		2,608			3,330		530		2,800
2009		1,684			307		1,377			2,049		415		1,634
2010		1,050			238		812			1,442		351		1,091
2011		-			-		-			5,663		763		4,900
Thereafter		5,412			680		4,732			2,150		268		1,882
		18,615			2,783		15,832			18,403		3,005		15,398
Less: current instalments of obligations
under capital leases							(3,373	)						(3,091	)
							12,459							12,307

Average interest rates		1.44% to 8.01	%		per annum					2.21% to 8.01%		per annum


*		~~Interest rates ranging from 1.44% to 8.01% per annum~~

~~As of December 31, 2004, future payments under these capital leases are as follows:~~

Payments *Interest Obligations
RMB RMB RMB
Year ending December 31,

2005 2,580 436 2,144
2006 3,213 350 2,863
2007 2,844 279 2,565
2008 2,699 146 2,553
2009 997 71 926
Thereafter 722 30 692

13,055 1,312 11,743

Less: current installments of obligations under capital leases (2,144 )

9,599


*		~~Interest rates ranging from 1.92% to 8.48% per annum~~

~~F-52~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

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

F-46

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

Security, including charges over the assets concerned and relevant insurance policies, is provided to the lessors. As of December 31, ~~2004~~2005 and ~~2005,~~2006, certain of the Group’s aircraft with carrying amount of ~~RMB11,635~~RMB18,723 and ~~RMB18,673,~~RMB19,730, respectively were mortgaged to secure finance lease obligations ~~RMB11,743~~RMB15,832 and ~~RMB15,832,~~RMB15,398, respectively.

Included in obligations under capital leases are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:

December 31,
2004 2005
United States Dollars US$958 US$1,556
Japanese Yen JPY47,840 JPY47,795

	December 31,
	2005	2006

United States Dollars	US$1,556	US$1,674
Japanese Yen	JPY47,795	JPY35,400

(b) Operating leases

As of December 31, ~~2005,~~2006, the total future minimum lease payments under non-cancellable aircraft and flight equipment operating leases ~~were~~are as ~~follows (principally denominated in U.S. dollars):~~follows:

			December 31,
			2005		2006
	RMB		RMB		RMB
Year ending December 31,
2006		3,340		3,340		-
2007		2,881		2,881		3,077
2008		2,785		2,785		2,965
2009		2,609		2,609		2,775
2010		2,523		2,523		2,613
2011				-		2,493
Thereafter		10,456		10,456		8,046


Total minimum lease payments		24,594		24,594		21,969

~~F-53~~

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

~~As of December 31, 2004, future minimum lease payments under non-cancellable aircraft and flight equipment operating leases were as follows (principally denominated in U.S. dollars):~~

RMB
Year ending December 31,

2005 1,761
2006 1,622
2007 1,562
2008 5,259
2009 764
Thereafter 1,782

Total minimum lease payments 12,750

29. TRADE AND BILLS PAYABLES

~~29.~~

~~TRADE AND BILLS PAYABLES~~

The following is the ageing analysis of trade and bills payables:

December 31,
2004 2005
RMB RMB
Within 1 month 735 2,000
More than 1 month but less than 3 months 431 1,225
More than 3 months but less than 6 months 524 704

1,690 3,929

	December 31,
	2005		2006
	RMB		RMB

Within 1 month or on demand		2,000		1,125
More than 1 month but less than 3 months		1,225		448
More than 3 months but less than 6 months		704		336
		3,929		1,909

As of December 31, ~~2004~~2005 and ~~2005,~~2006, the Group had an amount due to a fellow subsidiary of ~~RMB838~~RMB859 and ~~RMB859,~~RMB11, respectively, which was included in trade and bills payables.

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

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

Included in trade and bills payables are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:

December 31,
2004 2005
United States Dollars US$ 108 US$ 147

~~30.~~		~~AMOUNTS DUE FROM/TO RELATED COMPANIES~~ December 31,

~~(a)~~	2005		~~Amounts due from related companies~~ 2006

United States Dollars		US$147		US$61

December 31,
2004 2005
RMB RMB
Jointly controlled entities — 84

F-48

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

30. AMOUNTS DUE FROM/TO RELATED COMPANIES

(a) Amounts due from related companies

	December 31,
	2005		2006
	RMB		RMB

CSAHC and its affiliates		-		4
An affiliated company		-		2
Jointly controlled entities		84		122
		84		128

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

~~(b)~~

~~Amounts due to related companies~~

December 31,
2004 2005
RMB RMB
CSAHC and its subsidiaries 2,094 12
An affiliated company — 5
Jointly controlled entities 340 99

2,434 116

All of the amounts due from related companies are expected to be recovered within one year.

(b) Amounts due to related companies

	December 31,
	2005		2006
	RMB		RMB

CSAHC and its affiliates		12		167
An affiliated company		5		-
Jointly controlled entities		99		87
		116		254

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

~~F-55~~

F-49

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

~~31.~~

~~ACCRUED EXPENSES~~

December 31,
2004 2005
RMB RMB
Jet fuel costs 743 686
Operating lease charges 29 86
Air catering expenses 192 132
Salaries and welfare 349 193
Lump sum housing benefits payable 108 92
Repairs and maintenance 976 996
Provision for major overhauls (Note 33) 75 151
Landing and navigation fees 1,331 1,129
Computer reservation services 195 190
Interest expense 240 338
Duties and levies 71 12
Property management fee — 37
Others 242 208

4,551 4,250

31. ACCRUED EXPENSES

~~32.~~

~~OTHER LIABILITIES~~

December 31,
2004 2005
RMB RMB
CAAC Infrastructure Development fund 161 177
Airport construction surcharge 316 542
Airport tax 112 198
Construction cost payable 864 793
Advance payment on chartered flights 119 104
Sales agent deposits 182 198
Other tax payable 332 441
Others 888 1,343

2,974 3,796

	December 31,
	2005		2006
	RMB		RMB

Jet fuel costs		686		1,020
Operating lease charges		86		-
Air catering expenses		132		153
Salaries and welfare		193		346
Lump sum housing benefits payable		92		-
Repairs and maintenance		996		1,281
Provision for major overhauls (Note 33)		151		255
Provision for early retirement benefits (Note 34)		-		86
Landing and navigation fees		1,129		1,168
Computer reservation services		190		66
Interest expense		338		448
Duties and levies		12		-
Property management fee		37		-
Others		208		119
		4,250		4,942

~~F-56~~

F-50

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

32. OTHER LIABILITIES

	December 31,
	2005		2006
	RMB		RMB

CAAC Infrastructure Development fund		177		189
Airport construction surcharge		542		404
Airport tax		198		288
Construction cost payable		793		130
Advance payment on chartered flights		104		100
Sales agent deposits		198		221
Other tax payable		441		494
Lump sum housing benefits payable		-		90
Others		1,343		1,341
		3,796		3,257

33. PROVISION FOR MAJOR OVERHAULS

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

	December 31,
	2005			2006
	RMB			RMB

At January 1		359			452
Provision for the year		129			683
Provision utilized during the year		(36	)		(75	)
At December 31		452			1,060
Less: current portion included in accrued expenses (Note 31)		(151	)		(255	)
		301			805

F-51

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

34. PROVISION FOR EARLY RETIREMENT BENEFITS

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

~~33.~~	~~PROVISION FOR MAJOR OVERHAULS~~ December 31,

	~~Details of provision~~ 2006
	RMB

At January 1		-
Provision for ~~major overhauls~~the year (Note 10)		392
At December 31		392
Less: current portion included in ~~respect of aircraft held under operating leases are as follows:~~accrued expenses (Note 31)		(86	)
		306

Year ended December 31,
2004 2005
RMB RMB
At January 1 200 359
Provision for the year 89 129
Through the CNA/XJA Acquisitions 70 —
Amount utilized — (36 )

At December 31 359 452
Less: current portion included in accrued expenses (Note 31) (75 ) (151 )

284 301

~~34.~~

~~SHARE CAPITAL~~

December 31,
2004 2005
RMB RMB
Registered, issued and paid up capital:
2,200,000,000 domestic state-owned shares of RMB1.00 each 2,200 2,200
1,174,178,000 H shares of RMB1.00 each 1,174 1,174
1,000,000,000 A shares of RMB1.00 each 1,000 1,000

4,374 4,374

During 2006, the Group implemented an early retirement plan for certain employees. The benefits of the early retirement plan are calculated based on factors including the remaining number of years of services from the date of early retirement to the normal retirement date and the salary amount on the date of early retirement of the employees. The present value of the future cash flows expected to be required to settle the obligations is recognized as provision for early retirement benefits.

35. SHARE CAPITAL

	December 31,
	2005		2006
	RMB		RMB
Registered, issued and paid up capital:
2,200,000,000 domestic state-owned shares of RMB1.00 each		2,200		2,200
1,174,178,000 H shares of RMB1.00 each		1,174		1,174
1,000,000,000 A shares of RMB1.00 each		1,000		1,000
		4,374		4,374

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

As of December 31, 2004 and 2005, the retained earnings/accumulated loss of the Group included RMB81 and RMB(200), respectively, of undistributed earnings/losses of companies which are 50% or less owned by the Group and accounted for under the equity method.

~~F-57~~

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

~~35. RESERVES~~

Statutory surplus reserve (Note (a))

Statutory public welfare fund (Note (b))

Discretionary surplus reserve (Note (c))

Retained earnings/(accumulated loss)

Retained earnings/(accumulated losses) (Note (d))

(a) According to the PRC Company Law and the Articles of Association of the Company and certain of its subsidiaries, the Company and the relevant subsidiaries are required to transfer 10% of their annual net income after taxation, as determined under relevant PRC accounting rules and regulations, to a statutory surplus reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribution of a dividend to ~~shareholders.~~shareholders when there are retained earnings at the financial year end.

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

Statutory surplus reserve can be used to offset prior years’ losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholding or by increasing the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital.

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

(b) According to the PRC Company Law and the Articles of Association of the Company and certain of its subsidiaries, the Company and the relevant subsidiaries are required to transfer between 5% to 10% of their annual net income after taxation, as determined under PRC accounting rules and regulations, to the statutory public welfare fund. This fund can only be utilized on capital items for the collective benefits of the Company’s and the relevant subsidiaries’ employees such as the construction of dormitories, canteen and other staff welfare facilities. This fund is non-distributable other than in liquidation. The transfer to this fund must be made before distribution of a dividend to shareholders and is subject to respective shareholders’ approval.

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

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

(d) Dividend distributions may be proposed at the discretion of the Company’s board of directors, after consideration of the transfers referred to above and making up cumulative prior years’ losses. Pursuant to the Articles of Association of the Company, the net income of the Company for the purpose of dividend distribution is deemed to be the lesser of (i) net income determined in accordance with the PRC accounting rules and regulations, and (ii) the net income determined in accordance with IFRSs; or if the financial statements of the Company are not prepared in accordance with IFRSs, the accounting standards of one of the countries in which its shares are listed. As of December 31, 2005 and 2006, the Company did not have any distributable reserves.

~~36.~~

As of December 31, 2005 and 2006, the accumulated losses of the Group included RMB243 and RMB251, respectively, of undistributed earnings of companies which are 50% or less owned by the Group and accounted for under the equity method.

F-54

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in millions, except share data)

37. RELATED PARTY TRANSACTIONS

~~In addition to the balances discussed in Notes 16, 17, 21, 27, 29 and 30 to these consolidated financial statements,~~

(a) Key management personnel remuneration

Remuneration for key management personnel of the Group ~~entered into the following material related party transactions.~~is as follows:

~~(a) Significant transactions with related companies~~

	December 31,
	2004		2005		2006
	RMB		RMB		RMB

Short-term employees benefits		6.75		5.93		6.64
Post-employment benefits		0.18		0.22		0.22
		6.93		6.15		6.86

Directors and supervisors		4.68		3.46		4.34
Senior management		2.25		2.69		2.52
		6.93		6.15		6.86

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

(b) Contribution to post-employment benefit plans

The Group ~~obtained~~participates in various ~~operational~~defined contribution retirement plans organized by municipal and ~~financial services provided by~~provincial governments for its staff. Details of the Group’s employee benefits plan are disclosed in Note 38.

F-55

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

(c) Transactions with CSAHC and its affiliates (the “CSAHC Group”), and the ~~Group’s~~ affiliated companies and jointly controlled entities of the Group

The Group obtained various operational services provided by the CSAHC Group and the affiliated companies and jointly controlled entities of the Group during the normal course of its business. In the past, CSAHC was under the direct control of the Civil Aviation Administration of China (the “CAAC”). However, such control has been shifted to the China State-owned Assets Administration Bureau since early 2003. Consequently, transactions with the CAAC and its affiliates beginning from 2003 are no longer presented as related party transactions of the Group.

~~F-59~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

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

2003 2004 2005
Note RMB RMB RMB
Expenses paid to CSAHC and its affiliates

Handling charges (i) 27 33 32
Air catering supplies (ii) 90 170 173
Wet lease rentals (iii) 36 — —
Commission expense (iv) 5 2 26
Sundry aviation supplies (v) 43 66 88
Lease charges for aircraft (vi) — — 10
Lease charges for land and buildings (vii) 15 18 90
Property management fee (viii) — — 28
Housing benefits (ix) 85 85 —

Expenses paid to affiliated companies and jointly controlled entities

Ground service expenses (x) — — 32
Repairing charges (xi) 693 1,159 1,118
Flight simulation service charges (xii) 101 100 126
Interest expense (xiii) — 3 37

Income received from affiliated companies and jointly controlled entities

Rental income (xii) 31 31 31
Interest income (xiii) 3 4 3

Others

CNA/XJA Acquisitions (xiv) — 15,522 —
Operating expenses recharged to related companies (xv) — 65 —
Short term advances from CSAHC (xvi) 166 — —
Refund of medical benefit payments (xvii) 58 — —

			December 31,
	Note		2004		2005		2006
			RMB		RMB		RMB

Expenses paid to the CSAHC Group

Handling charges		(i)		33		32		29
Air catering supplies		(ii)		170		173		194
Commission expense		(iii)		2		26		43
Sundry aviation supplies		(iv)		66		88		86
Lease charges for aircraft		(v)		-		10		3
Lease charges for land and buildings		(vi)		18		90		99
Property management fee		(vii)		-		28		26
Housing benefits		(viii)		85		-		-

Expenses paid to jointly controlled entities

Ground service expenses		(ix)		-		32		43
Repairing charges		(x)		1,159		1,118		1,183
Flight simulation service charges		(xi)		100		126		133

Income received from jointly controlled entities

Rental income		(xi)		31		31		35

Others

CNA/XJA Acquisitions		(xii)		15,522		-		-
Operating expenses recharged to related
companies		(xiii)		65		-		-
Acquisition of CSAHC Hainan		(xiv)		-		-		5
Disposal of properties to the CSAHC Group		(xv)		-		-		23


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

~~F-60~~

F-56

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

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

(ii) The Group purchases certain inflight meals and related services from Shenzhen Air Catering Company Limited, and Southern Airlines (Group) Catering Co., Ltd which are an affiliated company and a wholly owned subsidiary of CSAHC, respectively.

(iii) Commission is earned by certain subsidiaries of CSAHC in connection with the air tickets sold by them on behalf of the Group. Commission is calculated based on a fixed rates ranging from 3% to 6% on the ticket value.

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

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

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

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

(viii) The Group paid a fixed annual fee of RMB85 to CSAHC from 1995 to 2004 in respect of the provision of quarters to the eligible employees of the Group (Note 38). No such payment was made in 2005 and 2006.

(ix) Beijing Ground Services Co., Ltd, a jointly controlled entity of the Group, provides airport ground services to the Group.

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

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

(xii) On December 31, 2004, the Group acquired the airline operations and certain related assets of China Northern Airlines Company (“CNA”) and Xinjiang Airlines Company (“XJA”) at a total consideration of RMB15,522 (the “CNA/XJA Acquisitions”). CNA and XJA are wholly owned subsidiaries of CSAHC. The consideration was partly satisfied by assumption of debts and liabilities of CNA and XJA totalling RMB13,563 outstanding as of that date. The remaining consideration of RMB1,959 was fully paid in cash during 2005.

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

(xiii) In 2004, the Group provided administrative services to CNA and XJA. Operating expenses amounted to RMB65 were recharged to CNA and XJA on a cost basis.

(xiv) On April 30, 2006, the Company acquired certain assets of CSAHC Hainan at a total consideration of RMB294, which was partly satisfied by assumption of liabilities of CSAHC Hainan totaling RMB289 outstanding as at that date. The remaining balance of RMB5 had been settled in cash during the year (Note 40(c)).

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

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

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

December 31,

2005

2006

RMB

RMB

Receivables:

The CSAHC Group 42 4
An affiliated company - 2
Jointly controlled entities 84 122

Payables:

The CSAHC Group 871 178
An affiliated company 5 -
Jointly controlled entities 99 87

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

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

(d) Notes payable to and deposits placed with SA Finance

~~(b)~~		~~Loans from SA Finance~~

		~~Loans from SA Finance are unsecured and have the following terms:~~

December 31,
2004 2005
Interest rate Guarantee RMB RMB
Floating interest rate at 90% of interest rates as published by the PBOC, repayable within 1 year No guarantee 76 —

Floating interest rate at 90% of interest rates as published by the PBOC, repayable within 1 year Guaranteed by CSAHC 180 300

256 300

(i) Notes payable to SA Finance

~~(c)~~		~~Key management personnel remuneration~~

		~~Remuneration for key management personnel is as follows:~~

December 31,
2004 2005
RMB RMB
Short-term employees benefits 6,748 5,926
Post-employment benefits 182 221

6,930 6,147

Directors and supervisors 4,684 3,461
Senior management 2,246 2,686

6,930 6,147

As of December 31, 2005 and 2006, notes payable to SA Finance by the Group amounted to RMB300. The notes payable are unsecured and repayable within one year.

~~Total remuneration is included~~

Interest expense paid on such notes payable amounted to RMB3, RMB37 and RMB16 during the years ended December 31, 2004, 2005 and 2006, respectively. The interest rates of the notes payable was at 4.78% per annum during the year ended December 31, 2004, ranged from 3.30% to 5.02% per annum during the year ended December 31, 2005, and 5.02% to 5.26% per annum during the ended December 31, 2006, respectively.

The loans are guaranteed by CSAHC (included in ~~“staff costs” (Note 11)~~the amount as disclosed in Note 37 (e) below).

~~(d)~~

The Group participates in various defined contribution retirement plans organized by municipal and provincial governments for its staff. Details of the Group’s employee benefits plan are disclosed in Note 37.

(ii) Deposits placed with SA Finance

As of December 31, 2005 and 2006, the Group’s deposits with SA Finance amounted to RMB544 and RMB629, respectively. The applicable interest rates are determined in accordance with the rates published by the PBOC.

Interest income received on such deposits amounted to RMB4, RMB3 and RMB5 during the years ended December 31, 2004, 2005 and 2006, respectively.

(e) Guarantees from CSAHC and SA Finance

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

	December 31,
	2005		2006
	RMB		RMB

CSAHC		1,908		1,484
SA Finance		7		5

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

~~(e)~~(f) Transactions with other ~~state-owned~~state-controlled enterprises

The ~~Group~~Company is a ~~state-owned~~state-controlled entity and operates in an economic regime currently ~~predominated~~dominated by ~~state-owned entities. Apart from transactions with CSAHC and its affiliates, the Group conducts a majority of its business activities with~~ entities directly or indirectly ~~owned or~~ controlled by the PRC government ~~and numerous~~(“state-controlled entities”) through its government authorities, agencies, affiliations and ~~agencies (collectively referred~~other organizations.

Other than those transactions with the CSAHC Group, and the affiliated companies and jointly controlled entities of the Group as disclosed in Notes 37(c), (d) and (e) above, the Group conducts transactions with other state-controlled entities which include but are not limited to ~~as “state-owned entities”)~~the following:

Transportation services

Leasing arrangements

Purchase of equipment, materials and spare parts

Ancillary and social services; and

Financial services arrangement.

These transactions are conducted in the ordinary course of business. These transactions, which include sales and purchase of goods and ancillary materials, rendering and receiving services, lease of assets, purchase of property, plant and equipment and obtaining finance, are carried out atthe Group’s business on terms ~~similar~~comparable to those with other entities that are not state-controlled. The Group has established its pricing strategy, buying and approval process for purchases and sales of products and services. Such buying, pricing strategy and approval processes do not depend on whether the counterparties are state-controlled entities or not.

Having considered the potential for transactions to be impacted by related party relationships, the Group’s pricing strategy, buying and approval processes, and what information would be ~~entered into~~necessary for an understanding of the potential effect of the relationship on the consolidated financial statements, the directors of the Company are of the opinion that the following transactions with ~~non-state-owned~~other state-controlled entities require disclosure:

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

	December 31,
	2005		2006
	RMB		RMB

Jet fuel cost		9,592		13,054
Interest income		48		33
Interest expenses		694		1,405

F-60

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

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

	December 31,
	2005		2006
	RMB		RMB

Cash and deposits at bank		2,001		1,434
Short-term bank notes payable and
current installments of long-term bank notes payable		14,319		21,209
Non-current instalments of long-term bank notes payable		10,175		8,223

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

	December 31,
	2005		2006
	RMB		RMB

Guarantees on certain bank notes payable of the Group		266		201

(g) Loan from a minority shareholder

During 2006, the Group obtained a loan from a minority shareholder amounting to RMB19. The loan is unsecured, interest free and ~~have been reflected in these financial statements. The management believes that it has provided meaningful disclosure of related party transactions as summarized above.~~repayable within five years.

38.RETIREMENT AND HOUSING BENEFITS

Employees of the Group participate in several defined contribution retirement schemes organized separately by PRC municipal governments in regions where the major operations of the Group are located. The Group is required to contribute to these schemes at the rates ranging from 14% to 20% during the year ended December 31, 2004, ~~and~~ 9% to 20% during the year ended December 31, 2005, and 10% to 23% during the year ended December 31, 2006, respectively, of salary costs including certain allowances. A member of the retirement schemes is entitled to pension benefits equal to a fixed proportion of the salary at the retirement date. The retirement benefit obligations of all existing and future retired staff of the Group are assumed by these schemes.

In addition, the Group ~~was selected as one of the pilot enterprises to establish~~has established a supplementary defined contribution retirement scheme for the benefit of ~~employees.~~employees in accordance with relevant regulations in the PRC. In this connection, employees of the Group participate in a supplementary defined contribution retirement scheme whereby the Group is required to make ~~defined~~ contributions ~~at rates ranging from 3% to 5%~~not exceeding one-twelfth of the prior year’s total salaries. ~~The Group has no obligation for the payment of pension benefits beyond the contributions described above.~~

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

Furthermore, pursuant to the comprehensive services agreement ~~(the “Services Agreement”)~~ dated May 22, 1997 between the Company and CSAHC, CSAHC provided quarters to eligible employees of the Group. In return, the Group paid a fixed annual fee of RMB85 to CSAHC for a ten-year period from 1995 to 2004. The agreement expired by December 31, 2004 and no further payment was made in ~~2005.~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~2005 and 2006.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

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

Pursuant to an additional staff housing benefit scheme effective September 2002, the Group agreed to pay lump sum housing allowances to certain employees who have not received quarters from CSAHC or the Group according to the relevant PRC housing reform policy, for subsidizing their purchases of houses. An employee who quits prior to the end of the vesting benefit period is required to pay back a portion of the lump sum housing benefits determined on a pro-rata basis of the benefit vesting period. The Group has the right to effect a charge on the employee’s house and to enforce repayment through selling the house in the event of default in repayment. Any shortfall in repayment would be charged against ~~consolidated statements of operations. As at~~income or loss. During the years ended December 31, 2004, 2005 and ~~2005,~~2006, the Group had made payments totaling ~~RMB152~~RMB22, RMB16 and ~~RMB168,~~RMB2, respectively, under the scheme and recorded its remaining contractual liabilities totaling RMB108, RMB92 and ~~RMB92,~~RMB90, respectively, as ~~accrued expenses on~~at the respective consolidated balance ~~sheets.~~sheet. Housing allowances are payable when applications are received from eligible employees.

~~38.~~

39. SEGMENTAL INFORMATION

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

~~(i)~~

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

~~(ii)~~

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

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

Hong Kong
Domestic and Macau International* Total
RMB RMB RMB RMB
2003

Traffic revenue 13,087 808 3,070 16,965
Other operating revenue 436 — 69 505

Turnover 13,523 808 3,139 17,470

Operating income/(loss) 440 (29 ) 45 456
Depreciation and amortization 1,581 85 372 2,038

Significant non-cash items other than depreciation and amortization:

Impairment losses for trade and other receivables 12 — — 12

~~F-65~~

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

F-62

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

	Domestic			Hong Kong and Macau			International*			Total
	RMB			RMB			RMB			RMB

2004
Traffic revenue		17,742			1,180			4,422			23,344
Other operating revenue		630			-			-			630
Turnover		18,372			1,180			4,422			23,974

Operating income/(loss)		650			67			192			909

Depreciation and amortization		1,876			99			438			2,413

Significant non-cash items other than depreciation and amortization:
Impairment losses for trade and other receivables		27			-			-			27

2005
Traffic revenue		29,533			1,298			6,588			37,419
Other operating revenue		874			-			-			874
Turnover		30,407			1,298			6,588			38,293

Operating loss		(282	)		(97	)		(926	)		(1,305	)

Depreciation and amortization		4,128			139			638			4,905

Significant non-cash items other than depreciation and amortization:
Write-down of inventories		209			-			-			209

2006
Traffic revenue		35,707			1,329			8,051			45,087
Other operating revenue		1,132			-			-			1,132
Turnover		36,839			1,329			8,051			46,219

Operating income/(loss)		925			4			(617	)		312

Depreciation and amortization		4,138			132			696			4,966

Significant non-cash items other than depreciation and amortization:
Write-down of inventories		161			-			-			161

Hong Kong
Domestic and Macau International* Total
RMB RMB RMB RMB
2004

Traffic revenue 17,742 1,180 4,422 23,344
Other operating revenue 630 — — 630

Turnover 18,372 1,180 4,422 23,974

Operating income 650 67 192 909

Depreciation and amortization 1,876 99 438 2,413

Significant non-cash items other than depreciation and amortization:

Impairment losses for trade and other receivables 27 — — 27

2005

Traffic revenue 29,533 1,298 6,588 37,419
Other operating revenue 874 — — 874

Turnover 30,407 1,298 6,588 38,293

Operating loss (282 ) (97 ) (926 ) (1,305 )

Depreciation and amortization 3,663 139 638 4,440

Significant non-cash items other than depreciation and amortization:

Write-down of inventories — — 209 209

*Asian market accounted for approximately 67%, 74% and 64% of the Group’s total international traffic revenue for the years ended December 31, 2004, 2005 and 2006, respectively. The remaining portion was mainly derived from the Group’s flights to/from European, North American and Australian regions.


*		Asian market accounted for approximately 70%, 67% and 74%, respectively, of the Group’s total international traffic revenue for the years ended December 31, 2003, 2004 and 2005. The remaining portion was mainly derived from the Group’s flights to/from European, North American and Australian regions.

F-63

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

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

~~39. MATERIAL~~

40. NON-CASH TRANSACTIONS

(a) Acquisitions of aircraft

During ~~2004,~~ the Group acquired the airline operation and related assets of CNA and XJA at a total consideration of RMB15,522, which was partially satisfied by assumption of debts and liabilities of CNA and XJA totalling RMB13,563 outstanding as ofyear ended December 31, ~~2004. Details are set out in Note 40.~~

~~During~~2004, 2005 and 2006, aircraft acquired under capital leases amounted to ~~RMB6,938.~~RMBNil, RMB6,938 and RMB3,759, respectively.

~~F-66~~

(b) Effect of the CNA/XJA Acquisitions

	Year ended
	December 31,
	2004
	RMB
Assets acquired:
Property, plant and equipment, net		12,980
Inventories		729
Trade receivables		314
Cash and cash equivalents		398
Other assets		1,101
		15,522
Liabilities assumed:
Notes payable		4,587
Obligations under capital leases		6,125
Trade payables		343
Accrued expenses		1,475
Other liabilities		1,033

		13,563

Net identifiable assets and liabilities		1,959

Cash consideration payable and not yet settled at December 31, 2004		1,959

Net cash inflow from acquisitions - cash and cash equivalents acquired		398

F-64

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

~~40. EFFECT OF THE CNA/XJA ACQUISITIONS~~

~~(a) Supplementary information for consolidated statements of cash flows~~

Year ended December 31,
2003 2004 2005
RMB RMB RMB
Assets acquired:

Property, plant and equipment, net — 12,980 —
Inventories — 729 —
Trade receivables — 314 —
Cash and cash equivalents — 398 —
Other assets — 1,101 —

— 15,522 —

Liabilities assumed:

Notes payable — 4,587 —
Obligations under capital leases — 6,125 —
Trade payables — 343 —
Accrued expenses — 1,475 —
Other liabilities — 1,033 —

— 13,563 —

Net identifiable assets and liabilities — 1,959 —

Cash consideration payable and not yet settled at December 31, 2004 — 1,959 —

Net cash inflow from acquisitions - - cash and cash equivalents acquired — 398 —

~~F-67~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

~~(b)~~ Had the CNA/XJA Acquisitions been effected on January 1, 2004, results of operations of the Group for the year ended December 31, 2004 would have been as follows:

	The Group		Results of
	(without effect		airline
	of CNA/XJA		operations
	Acquisitions)		of CNA/XJA		Combined
	RMB		RMB		RMB

Turnover		23,974		10,057		34,031
Income for the year		155		170		325

(c) Effect of the acquisition of CSAHC Hainan

On April 30, 2006, the Group acquired certain assets of CSAHC Hainan at a total consideration of RMB294, which was partly satisfied by assumption of liabilities of CSAHC Hainan totaling RMB289 outstanding as at that date. Details are as follows:

The Group Results of
(without effect airline
of CNA/XJA operations
Acquisitions) of CNA/XJA Combined
RMB RMB RMB
Turnover 23,974 10,057 34,031

Income for the year 155 170 325

~~41.~~	~~FINANCIAL INSTRUMENTS~~ Year ended
	December 31,
	2006
	RMB
Assets acquired:
Property, plant and equipment, net		131
Lease prepayment		35
Inventories		28
Trade receivables		30
Cash and cash equivalents		38
Other receivables		32
		294
Liabilities assumed:
Trade payables		28
Accrued expenses		14
Other liabilities		247
		289

~~Financial~~

F-65

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

	Year ended
	December 31,
	2006
	RMB

Net identifiable assets and liabilities		5

Satisfied by:
Cash		5

Analysis of the net inflow of cash and cash equivalents in respect of the acquisition:

Cash consideration		(5	)
Cash and cash equivalents acquired		38
Cash and cash equivalents acquired		33

41. FINANCIAL INSTRUMENTS

Exposure to liquidity, interest rate, currency, jet fuel price risk credit risks arises in the normal course of the ~~Group include cash~~Group’s business. These risks are limited by the Group’s financial management policies and cash equivalents, other investments, trade receivables, other receivables, other current assets and amounts due from related companies. Financial liabilities of the Group include notes payable, obligations under capital leases, trade and bills payables, amounts due to related companies, taxes payable and other liabilities.practices described below.

(a) Liquidity risk

As atof December 31, ~~2005,~~2006, the Group’s current liabilities exceeded its current assets by ~~RMB25,907.~~RMB32,180. For the year ended December 31, ~~2005,~~2006, the Group recorded a net cash inflow from operating activities of ~~RMB3,835,~~RMB2,217, a net cash outflow from investing activities of RMB5,404 and a net cash inflow from financing activities of ~~RMB4,017, and~~RMB2,550, resulting in a net decrease in cash and cash equivalents of ~~RMB182.~~RMB637.

In ~~2006~~2007 and thereafter, the liquidity of the Group is primarily dependent on its ability to maintain adequate cash ~~inflow~~inflows from operations and to obtain adequate external finance to meet its debt obligations as they fall due and ~~on its ability to obtain adequate external finance to meet its~~ committed future capital expenditures. ~~The Group has obtained firm commitments from its principal bankers to renew its short-term notes payable outstanding at~~At December 31, ~~2005 when they fall due~~2006, the Group entered into loan financing agreements with several PRC banks to provide financing up to RMB49,041 during ~~2006.~~2007, of which approximately RMB28,295 was utilized. Subsequent to December 31, ~~2005,~~2006, the Group ~~renewed short-term notes payable outstanding of RMB2,611 (Notes 27).~~entered into additional loan financing agreements to obtain financing up to RMB5,045 during 2007. The directors of the Company believe that sufficient financing will be available to the Group.

F-66

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

The directors of the Company have carried out a detailed review of the cash flow forecast of the Group for the twelve months ending December 31, ~~2006.~~2007. Based on such forecast, the directors have determined that adequate liquidity exists to finance the working capital and capital expenditure requirements of the Group during that period. In preparing the cash flow forecast, the directors have considered historical cash requirements of the Group as well as other key factors, including the availability of the above-mentioned ~~loan~~notes payable finance which may impact the operations of the Group during the next twelve-month period. The directors are of the opinion that the assumptions and sensitivities which are included in the cash flow forecast are reasonable. However, as with all assumptions in regard to future events, these are subject to inherent limitations and uncertainties and some or all of these assumptions may not be realized.

~~F-68~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

(b) Interest rate risk

The interest rates and maturity information of the Group’s bank and other notes payable, and maturity information of the Group’s capital leases obligations are disclosed in Notes 27 and 28, respectively.

(c) Foreign currency risk

The Renminbi is not freely convertible into foreign currencies. All foreign exchange transactions involving Renminbi must take place either through the PBOC or other institutions authorized to buy and sell foreign exchange or at a swap center.

The Group currently maintains bank accounts in currencies other than the Renminbi to engage in foreign exchange transactions. The amount of foreign exchange that can be retained by the Group under this system is determined by the State Administration of Foreign Exchange (“SAFE”) based on the Group’s expected payment obligations in foreign currencies for lease and debt payments and for dividends. Any amounts of foreign exchange that the Group receives in excess of such amount must be converted into Renminbi at the rate prevailing in the PRC inter-bank market. The Group will have access to foreign currency through the inter-bank system, subject to the approval of the SAFE, to satisfy its foreign exchange requirements where these exceed the amount of foreign exchange that the Group has retained.

The Group has significant exposure to foreign currency as substantially all of the Group’s lease obligations and notes payable are denominated in foreign currencies, principally US dollars, and to a lesser extent, Japanese Yen. Depreciation or appreciation of the Renminbi against foreign currencies affects the Group’s results significantly because the Group’s foreign currency payments generally exceed its foreign currency receipts. The Group is not able to hedge its foreign currency exposure effectively other than by retaining its foreign currency denominated earnings and receipts to the extent permitted by the ~~SAFE,~~State Administration of Foreign Exchange, or subject to certain restrictive conditions, entering into forward foreign exchange contracts with authorized PRC banks.

The exchange rate of Renminbi to US dollar was set by the PBOC and had fluctuated within a narrow band prior to July 21, ~~2005, the PBOC announced that the PRC government reformed the exchange rate regime by moving into~~2005. Since then, a managed floating exchange rate regime based on market supply and demand with reference to a basket of foreign ~~currencies. In particular, the~~currencies has been used and US dollar exchange rate has gradually declined against the Renminbi.

F-67

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

(d) Jet fuel price risk

The Group allows for the judicious use of ~~US dollar against Renminbi was adjusted upward~~approved derivative instruments such as swaps and options with approved counter-parties and within approved limits to ~~8.11 yuan~~manage the risk of surge of jet fuel price. In addition, counter-party credit risk is generally restricted to any gains on changes in fair value at any time, and not the principal amount of the instrument. Therefore, the possibility of material loss arising in the event of non-performance by counter-party is considered to be unlikely.

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

December 31,

2005

2006

Assets

Liabilities

Assets

Liabilities

RMB

Fuel option contracts

As of December 31, 2006, the Group had outstanding fuel option contracts to buy approximately 6,150,000 barrels of crude oil at prices ranging from US$55 to US$79 per ~~US dollar with effect~~barrel. On the other hand, the Group sold fuel put option contracts to approved counter-parties and had outstanding option contracts at December 31, 2006 of approximately 12,300,000 barrels of crude oil at prices ranging from ~~the close of business on July 21, 2005.~~US$43 to US$60 per barrel. All contracts will expire between 2007 and 2008.

(e) Credit risk

Substantially all of the Group’s cash and cash equivalents are deposited with PRC financial institutions, which management believes are of high credit quality.

~~F-69~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

A significant portion of the Group’s air tickets are sold by agents participating in the Billing and Settlement Plan (“BSP”), a clearing scheme between airlines and sales agents organized by International Air Transportation Association which has insignificant credit risk to the Group. As of December 31, ~~2004~~2005 and ~~2005,~~2006, the balance due from BSP agents amounted to ~~RMB411~~RMB782 and ~~RMB782,~~RMB863, respectively. The credit risk exposure to BSP and the remaining trade receivables balance has been monitored by the Group on an ongoing basis and the impairment losses for bad and doubtful ~~accounts~~debts have been within management’s expectations.

F-68

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

(f) Fair value

~~(a)~~

(i) All financial instruments are carried at amounts not materially different from their fair values as of December 31, ~~2004~~2005 and ~~2005 except the following:~~2006.

December 31,
2004 2005
Carrying Fair Carrying Fair
amount value amount value
RMB RMB RMB RMB
Notes payable 23,453 23,665 28,963 28,989

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

~~(i)~~

Cash and cash equivalents, ~~short term investments,~~ trade receivables, other receivables and other current ~~assets. Obligation under capital leases,~~assets, trade and bills payables, taxes payable and other liabilities.

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

~~(ii) Notes payable~~

Financial liabilities

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

Bank and other notes payable

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

~~(iii)~~

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

~~(b)~~

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

~~F-70~~

(iii) Other non-current investments represent unlisted equity securities of companies established in the PRC. There is no quoted market price for such equity securities and accordingly a reasonable estimate of the fair value could not be measured reliably.

(iv) Amounts due from/to related companies are unsecured, interest-free and have no fixed terms of repayment. Given these terms, it is not meaningful to disclose fair values of these balances.

F-69

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —- (Continued)

(Amounts in millions, except share data)

~~42.~~		~~COMMITMENTS~~

~~(a)~~		~~Capital commitments~~

42. COMMITMENTS

(a) Capital commitments

At December 31, ~~2005,~~2006, the Group had capital commitments as follows:

2004 2005
RMB RMB
Commitments in respect of aircraft and flight equipment
— authorized and contracted for 11,776 45,628
— authorized but not contracted for 13,571 —

25,347 45,628

Commitments in respect of investments in the Guangzhou new airport
— authorized and contracted for 110 79
— authorized but not contracted for 714 761

824 840

Other commitments
— authorized and contracted for 132 11
— authorized but not contracted for 568 1,324

700 1,335

26,871 47,803

~~F-71~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

	December 31,
	2005		2006
	RMB		RMB

Commitments in respect of aircraft and flight equipment
- authorized and contracted for		45,628		66,881

Other commitments
- authorized and contracted for		90		420
- authorized but not contracted for		2,085		1,404
		2,175		1,824
		47,803		68,705

As of December 31, ~~2005,~~2006, the Group had on order 82130 aircraft and certain flight equipment, scheduled for deliveries in ~~2006~~2007 to ~~2010.~~2011. Deposits of ~~RMB6,351 million~~RMB8,692 have been made towards the purchase of these aircraft and related equipment. As of December 31, ~~2005,~~2006, the approximate total future payments, including estimated amounts for price escalation through anticipated delivery dates for these aircraft and flight equipment are as follows:

2004 2005
RMB RMB
2005 8,748 —
2006 2,996 7,341
2007 32 8,945
2008 — 14,354
2009 — 5,300
2010 — 9,688

11,776 45,628

	December 31,
	2005		2006
	RMB		RMB

2006		7,341		-
2007		8,945		12,299
2008		14,354		22,572
2009		5,300		17,483
2010		9,688		14,232
2011		-		295
		45,628		66,881

F-70

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

As of December 31, ~~2005,~~2006, the Group’s attributable share of the capital commitments of jointly controlled entities was as follows:

2004 2005
RMB RMB
Authorized and contracted for — —
Authorized but not contracted for 156 74

156 74

December 31,

2005

2006

RMB

RMB

Authorized but not contracted for 74 1

(b) Investing commitments

At December 31, ~~2005,~~2006, the Group committed to make capital contributions in respect of:

2004 2005
RMB RMB
Subsidiaries 181 —
Jointly controlled entities 83 83

264 83

~~F-72~~

~~CHINA SOUTHERN AIRLINES COMPANY LIMITED~~
~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(Amounts in millions, except share data)~~

~~43.~~

~~CONTINGENCIES~~

	December 31,
	2005		2006
	RMB		RMB

A jointly controlled entity		83		83

(a) Pursuant to the Reorganization of CSAHC effected in 1995 (Note 1), the Company assumed the airline and airline-related businesses together with the relevant assets and liabilities from CSAHC. The Company has been advised by its PRC lawyers that, except for liabilities constituting or arising out of or relating to the businesses assumed by the Company in the Reorganization, no other liabilities were assumed by the Company, and the Company is not jointly and severally liable for other debts and obligations incurred by CSAHC prior to the Reorganization. There are not, however, any definitive PRC regulations or other pronouncements confirming such conclusion.

43. CONTINGENCIES

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

The Group cannot predict the magnitude of the effect on its financial condition or results of operations to the extent that their uses of one or more of the above parcels of land or the related facilities were successfully challenged. Pursuant to an indemnification agreement dated May 22, 1997 entered into between CSAHC and the Company, ~~and CSAHC,~~ CSAHC has agreed to indemnify the Group against any loss or damage caused by any challenge or interference with the Group’s use of any of its land and buildings.

~~44.~~

~~SUBSEQUENT EVENT~~

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

44. NON-ADJUSTING POST BALANCE SHEET EVENTS

(a) Notes payable refinanced/obtained subsequent to December 31, 2006

(i) During January 1, 2007 to April 16, 2007

From January 1, 2007 to April ~~20,~~16, 2007, the Group refinanced certain short-term notes payable of RMB4,170. The refinanced bank notes payable are unsecured, bear interest at floating rates ranging from 3-month/6-month LIBOR +0.50% to 0.55% per annum and are repayable within one year from their respective refinanced dates.

In addition, the Group entered into new notes payable totaling RMB3,234 subsequent to December 31, 2006 and up to April 16, 2007. These new notes payable are unsecured and bear interest at floating rates ranging from 3-month/6-month/12-month LIBOR +0.45% to 0.55% per annum and are repayable within five months to one year from their respective origination dates.

(ii) During April 17, 2007 to May 31, ~~2006,~~2007

From April 17, 2007 to May 31, 2007, the Group entered into additional new notes payable ~~agreements totalling RMB3,808.~~totaling RMB3,201. These additional new notes payable are unsecured, bear interest at floating ~~rates ranging from~~rate of 6-month LIBOR + ~~53%~~0.45% to ~~55%~~0.55% per annum and repayable within six months to one year from their respective origination dates.

~~45.~~

~~COMPARATIVE FIGURES~~

On March 16, 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of the People’s Republic of China (“new tax law”) which will take effect on January 1, 2008. The Company and certain subsidiaries of the Group are entitled to preferential income tax rates in the range of 15% to 27%. From January 1, 2008, the income tax rate of companies who are currently enjoying preferential income tax rates lower than 25% is expected to increase to the standard rate of 25% over a five-year transition period. However, the new tax law has not set out the details as to how the existing preferential tax rate will increase to the standard rate of 25%. Consequently, the Group is not able to make an estimate of the expected financial effect of the new tax law on its deferred tax assets and liabilities. The expected financial effect of the new tax law, if any, will be reflected in the Company’s 2007 consolidated financial statements. The enactment of the new tax law is not expected to have any financial effect on the amounts accrued in the consolidated balance sheet in respect of current tax payable.

CHINA SOUTHERN AIRLINES COMPANY LIMITED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Amounts in millions, except share data)

(c) Share reform

On April 13, 2007, the Company issued a notice to holders of the listed and circulating A Shares (“Circulating A Shares”) to convene a relevant shareholders’ meeting on May 17, 2007 (“Relevant Shareholders’ Meeting”) for the purpose of seeking shareholders’ approval of the proposal for converting all the Company’s unlisted and non-circulating shares (“Non-circulating Shares”) to Circulating A Shares (“Share Reform Proposal”). CSAHC is the only holder of the Non-circulating Shares.

As disclosed in the announcement dated April 13, 2007 and subsequently revised on 23 April, 2007, the consideration payable as proposed by CSAHC to the holders of Circulating A Shares in connection with the Share Reform Proposal is a total of 1,400,000,000 put warrants of the Company’s shares (“Put Warrants”). The holders of the Circulating A Shares registered on the shareholders’ register on May 8, 2007 will be granted 14 Put Warrants for every 10 A Shares held by such shareholders, equivalent to 1.5970 shares for every 10 A Shares. The exercise ratio is two warrants to one share and the initial exercise price of the Put Warrant is RMB7.43. The rights of the Put Warrants (European style) are exercisable by the holders during the last five trading days of the warrant period which is twelve months. CSAHC will announce the exercise method of rights under the Put Warrants within six months after the listing of the Put Warrants.

CSAHC undertakes that it will not trade or transfer any of the Company’s shares it holds for a thirty-six-month period commencing from the effective date of the Share Reform Proposal (“Lock-up Period”). After expiration of the Lock-up Period, CSAHC may sell the Non-circulating Shares through trading on the Shanghai Stock Exchange, and the number of shares it will sell within the 12-month period and 24-month period will not exceed 5% and 10%, respectively, of the total number of shares held by CSAHC. The shares subject to restriction as mentioned above do not include those shares purchased by CSAHC upon the exercise of rights under the Put Warrants after the implementation of the share reform plan.

In accordance with the provisions of “Provisional Measures of the Shanghai Stock Exchange for Warrants” and the relevant requirements of the Shanghai Stock Exchange, CSAHC will place deposits to China Securities Depository and Clearing Corporation Limited Shanghai Branch as a performance bond for the Put Warrants.

CSAHC also undertakes that at the annual shareholders meetings of the Company in respect of 2007 through 2009, CSAHC will propose that the dividends of the Company be distributed in cash and will vote in favor of such distribution plan so that the average annual percentage of dividend to be distributed in cash in respect of 2007 through 2009 will not be lower than 50% of the total income distributable to the equity shareholders in these three years.


			Average(1)
Period	Period End		(RMB per US$)		High		Low
Annual Exchange Rate
2001		8.2766		8.2766		8.2910		8.2642
2002		8.2773		8.2773		8.2897		8.2152
2003		8.2767		8.2772		8.2800		8.2769
2004		8.2765		8.2765		8.2889		8.2641
2005		8.0694		8.1825		8.2767		8.0702


					Average
	Number of		Average age		Passenger
Model	Aircraft		(years)		Capacity
Boeing 777-200		4		9.53		380
Boeing 777-21B		6		7.20		292
Boeing 757-200		38		11.12		200
Boeing 747F		2		3.42		n/a
Boeing 737-800		15		2.32		167
Boeing 737-700		29		2.85		138
Boeing 737-500		15		12.80		130
Boeing 737-300		31		11.89		145
Airbus 300-600		6		10.96		272
Airbus 319-100		21		1.05		128
Airbus 320-200		30		5.38		158
Airbus 321-100		10		2.50		182
Airbus 330-200		4		0.72		264
McDonnell Douglas 82		23		14.63		144
McDonnell Douglas 90		13		7.85		157
Embraer 145 Jet		6		1.23		50
Cessna 208B		3		3.50		14
ATR-72		5		7.95		72

		261


					Average
	Capital		Operating		Remaining
Model	Lease		Lease		Lease Term
Boeing 777-200 and 777-21B		5		4		4.48
Boeing 757-200		—		15		3.10
Boeing 737-700		—		10		5.60
Boeing 737-800		—		3		8.17
Boeing 737-500		—		15		0.99
Boeing 737-300		4		10		1.32
Airbus 300-600		6		—		1.20
Airbus 319-100		6		15		9.05
Airbus 320-200		24		6		4.35
Airbus 321-100		6		—		8.02
Airbus 330-200		4		—		11.28
McDonnell Douglas 82		—		8		2.17
McDonnell Douglas 90		10		—		1.69

		65		86

Model	Capital Lease		Operating Lease		Average Remaining Lease Term
Boeing 777-200 and 777-21B		6		4		3.48
Boeing 757-200		2		14		2.29
Boeing 737-700		11		15		6.37
Boeing 737-800		—		22		7.45
Boeing 737-500		—		8		1.81
Boeing 737-300		5		8		1.31
Airbus 300-600		—		3		0.77
Airbus 319-100		6		21		8.42
Airbus 320-200		33		16		6.16
Airbus 321-100		6		7		9.47
Airbus 330-200		4		—		10.28
McDonnell Douglas 82		—		5		—
McDonnell Douglas 90		8		—		1.09
		81		123


									Total traffic
	Passenger carried				Cargo and Mail Carried (tons)				(ton kilometers)
	Industry		Group’s		Industry		Group’s		Industry		Group’s
Year	Total		Share		Total		Share		Total		Share
	(in million)		(% of total)		(in thousand)		(% of total)		(in billion)		(% of total)
1999		60.9		24.8		1,704		22.9		10.6		18.9
2000		67.2		24.9		1,967		22.5		12.3		20.0
2001		75.2		25.4		1,709		23.3		14.1		21.5
2002		85.9		25.0		2,021		23.3		16.5		21.9
2003		87.6		23.4		2,190		21.2		17.1		20.8
2004		121.2		23.3		2,770		19.7		23.1		20.2
2005	138.3		31.8		3,067		25.3		26.1		27.9


				Cargo and Mail
	Passenger carried			Carried			Departing flight
Airport	(% of total)			(% of total)			(% of total)
Beijing		19.14	%		19.06	%		17.95	%
Shanghai Pudong		9.86	%		5.13	%		10.38	%
Guangzhou		54.71	%		45.10	%		53.75	%
Shanghai Hongqiao		18.18	%		18.41	%		16.95	%
Shenzhen		33.08	%		31.59	%		29.98	%
Chengdu		13.99	%		17.07	%		10.72	%
Kunming		21.71	%		18.27	%		18.24	%
Hangzhou		38.31	%		32.91	%		35.00	%
Xian		14.75	%		19.69	%		10.18	%
Haikou		30.26	%		33.19	%		23.73	%


		Proportion of ownership
	Place and date of	interest held by
	establishment	Group
Name of company	/operation	effective interest		The Company		Subsidiaries
Guangzhou Aircraft Maintenance Engineering Company Limited	PRC October 28, 1989		50		50		—
China Southern Airlines Group Finance Company Limited	PRC June 28, 1995		49.3		32		26
Sichuan Airlines Corporation Limited	PRC August 28, 2002		39		39		—
China Postal Airlines Limited	PRC November 25, 1996		49		49		—
MTU Maintenance Zhuhai Co. Ltd	PRC April 6, 2001		50		50		—
Zhuhai Xiang Yi Aviation Technology Company Limited	PRC July 10, 2002		51		51		—
Beijing Southern Airlines Ground Service Company Limited	PRC April 1, 2004		50		50


	Land				Buildings
	(in square meters)				(in square meters)
	Owned		Leased		Owned		Leased
Guangzhou		9,797		80,809		514,957		1,755
Shenzhen		208,740		—		54,093		—
Zhuhai		170,062		—		18,791		—
Changsha		138,949		—		47,190		—
Zhengzhou		290,841		—		60,582		—
Haikou		5,265		—		63,570		19,633
Wuhan		—		31,061		17,335		—
Nanyang		—		—		12,156		—


	As of December 31, 2005										As of December
	Payment due by period										31, 2004
			less than
	Total		1 year		1-3 years		4-5 years		After 5 years		Total
	(RMB million)
Contractual obligations
Short-term debt (Note 2)		14,346		11,735		2,611		—		—		9,925
Long-term debt		14,617		1,877		6,472		2,095		4,173		13,528
Capital lease obligations		15,832		3,373		5,538		2,189		4,732		11,743

Cash payable for CNA/ XJA Acquisitions		—		—		—		—		—		1,959

Total contractual obligations		44,795		16,985		14,621		4,284		8,905		37,155

Other commercial commitments
Operating lease commitments		24,594		3,340		5,666		5,132		10,456		12,750
Aircraft purchase commitments (Note 1)		45,628		7,341		23,299		14,988		—		11,776
Capital commitments in respect of investments in the Guangzhou new airport		840		840		—		—		—		824
Other capital commitments		1,335		752		583		—		—		700
Investing commitments		83		83		—		—		—		83

Total commercial obligations		72,480		12,356		29,548		20,120		10,456		26,133


Estimated future interest payments on short term debt and long term debt
Fixed rates		3,285		785		1,071		640		789		2,388
Variable rates		2,171		935		635		369		232		939

		5,456		1,720		1,706		1,009		1,021		3,327


	The Stock Exchange				The New York				The Shanghai
	of Hong Kong				Stock Exchange				Stock Exchange
	Price per H Share				Price per ADS				Price per A Share
	(HK$)				(US$)				(RMB)
	High		Low		High		Low		High		Low
Annual Market Prices
Fiscal Year ended December 31, 2000		2.93		1.02		18.38		6.06		N/A		N/A
Fiscal Year ended December 31, 2001		2.95		1.35		18.10		8.00		N/A		N/A
Fiscal Year ended December 31, 2002		3.60		1.50		22.25		10.35		N/A		N/A
Fiscal Year ended December 31, 2003		3.50		1.46		22.78		9.53		5.34		3.75
Fiscal Year ended December 31, 2004		4.68		2.47		29.73		15.95		6.87		3.96
Fiscal Year ended December 31, 2005		2.22		2.17		14.25		14.20		2.68		2.62

Quarterly Market Prices

Fiscal Year ended December 31, 2002
First Quarter		2.83		2.22		17.63		14.80		N/A		N/A
Second Quarter		3.42		2.33		21.74		14.95		N/A		N/A
Third Quarter		3.60		1.89		22.25		12.00		N/A		N/A
Fourth Quarter		2.42		1.50		15.00		10.35		N/A		N/A
Fiscal Year ended December 31, 2003
First Quarter		2.62		1.71		16.50		11.75		N/A		N/A
Second Quarter		2.40		1.46		14.85		9.53		N/A		N/A
Third Quarter		2.88		2.03		18.59		13.25		4.15		3.75
Fourth Quarter		3.50		2.50		22.78		16.76		5.34		3.86
Fiscal Year ended December 31, 2004
First Quarter		4.68		3.20		29.73		20.91		6.87		4.95
Second Quarter		3.90		2.47		24.89		15.95		6.24		4.14
Third Quarter		3.17		2.47		20.17		16.00		5.19		4.16
Fourth Quarter		3.53		2.55		22.74		16.71		5.40		3.96
Fiscal Year ended December 31, 2005
First Quarter		3.10		2.47		19.93		16.10		5.30		3.56
Second Quarter		2.72		2.20		17.33		14.72		4.02		2.95
Third Quarter		2.20		2.03		16.86		13.50		3.00		2.35
Fourth Quarter		2.40		1.83		15.45		11.68		2.77		2.23
Monthly Market Prices
December 2005		2.40		2.10		15.45		13.68		2.74		2.52
January 2006		2.40		2.12		15.50		13.91		3.03		2.53
February 2006		2.53		2.17		15.88		14.05		2.85		2.55
March 2006		2.47		2.20		15.78		14.16		2.84		2.45
April 2006		2.30		1.96		15.03		13.06		2.59		2.19
May 2006		2.08		1.86		13.59		12.01		2.75		2.25
June 19, 2006		1.94		1.68		12.65		10.76		2.97		2.53


	Attributable to equity shareholders of the company
							Retained
							earnings/
	Share		Share		Other		(accumulated						Minority			Total
	capital		premium		reserves		loss)			Total			interests			equity
	RMB		RMB		RMB		RMB			RMB			RMB			RMB
					(Note (i))								(Note (ii))
At December 31, 2002		3,374		3,684		586		1,969			9,613			1,516			11,129

Issue of A Shares		1,000		1,641		—		—			2,641			—			2,641
(Loss)/income for the year		—		—		—		(358	)		(358	)		171			(187	)
Appropriations to reserves		—		—		25		(25	)		—			—			—
Capital contributions from minority shareholders		—		—		—		—			—			1			1
Distributions to minority shareholders		—		—		—		—			—			(15	)		(15	)


At December 31, 2003		4,374		5,325		611		1,586			11,896			1,673			13,569

(Loss)/income for the year		—		—		—		(48	)		(48	)		203			155
Appropriations to reserves		—		—		61		(61	)		—			—			—
Capital contributions from minority shareholders		—		—		—		—			—			71			71
Distributions to minority shareholders		—		—		—		—			—			(15	)		(15	)
Through the CNA/XJA Acquisitions		—		—		—		—			—			123			123


At December 31, 2004		4,374		5,325		672		1,477			11,848			2,055			13,903


									Other flight
				Aircraft					equipment,			Machinery,
						Held			including			equipment
						under capital			rotable			and
	Buildings			Owned		leases			spares			vehicles			Total
Cost or valuation:
At January 1, 2004		3,288			17,222		10,463			6,842			1,930			39,745
Exchange adjustments		5			—		—			—			12			17
Reclassification on exercise of purchase options		—			550		(550	)		—			—			—
Additions		336			4,156		—			525			5			5,022
Transfer from construction in progress		2,472			—		—			—			235			2,707
Through the CNA/XJA Acquisitions		915			5,206		4,616			1,753			490			12,980
Disposals		(28	)		—		—			(76	)		(73	)		(177	)


At December 31, 2004		6,988			27,134		14,529			9,044			2,599			60,294


Representing:
Cost		6,633			20,905		10,189			6,870			2,115			46,712
Valuation - 1996 (Note (b))		355			6,229		4,340			2,174			484			13,582


		6,988			27,134		14,529			9,044			2,599			60,294


At January 1, 2005		6,988			27,134		14,529			9,044			2,599			60,294
Exchange adjustments		(6	)		—		—			—			(14	)		(20	)
Additions		64			1,827		8,146			1,336			307			11,680
Transfer from construction in progress		513			—		—			—			56			569
Transfer to inventories		—			—		—			(126	)		—			(126	)
Disposals		(256	)		—		—			(207	)		(81	)		(544	)


At December 31, 2005		7,303			28,961		22,675			10,047			2,867			71,853


Representing:
Cost		6,948			22,732		18,335			7,873			2,383			58,271
Valuation - 1996 (Note (b))		355			6,229		4,340			2,174			484			13,582

		7,303			28,961		22,675			10,047			2,867			71,853


	100%									Group’s effective interest
	December 31,									December 31,
	2003			2004			2005			2003			2004			2005
	RMB			RMB			RMB			RMB			RMB			RMB
Non-current assets					4,254			5,334						1,672			2,081
Current assets					2,165			2,275						1,049			455
Non-current liabilities					(2,918	)		(3,897	)					(1,290	)		(1,520	)
Current liabilities					(2,568	)		(3,318	)					(1,002	)		(874	)

Net assets					933			394						429			142


Revenues		1,756			2,676			3,314			682			1,042			1,318
Expenses		(1,637	)		(2,633	)		(3,798	)		(634	)		(1,030	)		(1,618	)
Taxation		(6	)		(5	)		(39	)		(3	)		(2	)		15

Income/(loss) for the year		113			38			(523	)		45			10			(285	)

	100 Percent									Group’s effective interest
	December 31,									December 31,
	2004			2005			2006			2004			2005			2006
	RMB			RMB			RMB			RMB			RMB			RMB

Non-current assets					5,334			6,042						2,081			2,319
Current assets					2,275			2,281						455			502
Non-current liabilities					(3,897	)		(3,525	)					(1,520	)		(1,372	)
Current liabilities					(3,318	)		(4,110	)					(874	)		(1,300	)
Net assets					394			688						142			149

Revenues		2,676			3,314			4,485			1,042			1,318			1,727
Expenses		(2,638	)		(3,837	)		(4,487	)		(1,032	)		(1,603	)		(1,722	)
Income/(loss) for the year		38			(523	)		(2	)		10			(285	)		5


	December 31,
Interest rate and final maturity	2004			2005
	RMB			RMB
Renminbi denominated notes payable

Non-interest bearing loan from a municipal government authority repayable on demand		3			3

Floating interest rates ranging from 5.02% to 5.51% per annum as of December 31, 2005, with maturities through 2011		1,217			877

United States Dollars denominated notes payable

Fixed interest rates ranging from 4.43% to 7.73% per annum as of December 31, 2005, with maturities through 2015		2,676			2,414

Floating interest rates ranging from 3 months LIBOR + 0.70% to 0.90% per annum as of December 31, 2005, with maturities through 2012		1,426			3,610

Floating interest rates ranging from 6 months LIBOR + 0.3% to 1.20% per annum as of December 31, 2005, with maturities through 2013		8,206			7,713

		13,528			14,617

Less: current installments		(1,593	)		(1,877	)

		11,935			12,740


	Payments		*Interest		Obligations
	RMB		RMB		RMB
Year ending December 31,
2006		4,030		657		3,373
2007		3,423		493		2,930
2008		3,016		408		2,608
2009		1,684		307		1,377
2010		1,050		238		812
Thereafter		5,412		680		4,732

		18,615		2,783		15,832


Less: current installments of obligations under capital leases						(3,373	)

						12,459


	RMB
Year ending December 31,
2005		1,761
2006		1,622
2007		1,562
2008		5,259
2009		764
Thereafter		1,782


Total minimum lease payments		12,750


~~(ii)~~		The Group purchases certain inflight meals and related services from Shenzhen Air Catering Company Limited, a co-operative joint venture established in the PRC, in respect of which CSAHC is entitled to 33% of its income after tax, and Southern Airlines (Group) Catering Co., Ltd, a wholly owned subsidiary of CSAHC.

~~(iii)~~		During 2003, wet lease rentals totaling RMB36, were paid to XJA, pursuant to a wet lease agreement in respect of a Boeing 757-200 aircraft effective October 2002. The wet lease agreement was terminated in April 2003.

~~(iv)~~		Commission is earned by certain subsidiaries of CSAHC in connection with the air tickets sold by them on behalf of the Group. Commission is calculated based on a fixed rate ranging from 1.5% to 12% on the ticket value.

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

~~(vi)~~		~~The Group leases an aircraft from China Southern Airlines (Group) Hainan Co., Ltd, a subsidiary of CSAHC.~~

~~(vii)~~		The Group leases certain land and buildings in the PRC from CSAHC. Rental payments for land and buildings amounted to RMB2 (Note 21(a)) and RMB13, respectively, RMB2 (Note 21(a)) and RMB16, respectively, and RMB24 (Note 21(a)) and RMB66, respectively were paid to CSAHC in 2003, 2004 and 2005, respectively.

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

~~(ix)~~		~~The Group paid a fixed annual fee of RMB85 to CSAHC from 1995 to 2004 in respect of the provision of quarters to the eligible employees of the Group (Note 37). No such payment was made in 2005.~~

~~(x)~~		~~Airport ground service was provided by Beijing Southern Airlines Ground Services Company Limited, a jointly controlled entity of the Company.~~

~~(xi)~~		The Group has a 50% equity interest in both Guangzhou Aircraft Maintenance Engineering Company Limited (“GAMECO”) and MTU Maintenance Zhuhai Co., Ltd (“MTU Zhuhai”), which provide comprehensive maintenance services to the Group.

~~(xii)~~		The Group has a 51% equity interest in Zhuhai Xiang Yi, which provides flight simulation services to the Group. In addition, the Group entered into operating lease agreements to lease certain flight training facilities and buildings to Zhuhai Xiang Yi (Note 21(d)).


~~(xiii)~~		~~Interest income was received from deposits with SA Finance. The applicable interest rates are determined in accordance with the deposit rates published by the PBOC (Note 16).~~

		~~The Group obtained loans from SA Finance. The interest rates ranged from 3.30% to 5.02% per annum during the year ended December 31, 2005.~~

~~(xiv)~~		On December 31, 2004, the Group acquired the airline operations and certain related assets of CNA and XJA at a total consideration of RMB15,522, which was partly satisfied by assumption of debts and liabilities of CNA and XJA totalling RMB13,563 outstanding as of that date. The remaining consideration of RMB1,959 was fully paid in cash during 2005.

~~(xv)~~		~~In 2004, the Group provided administrative services to CNA and XJA. Operating expenses amounted to RMB65 million were recharged to CNA and XJA on a cost basis.~~

~~(xvi)~~		~~In 2003, CSAHC made short term advances to the Group. These advances were unsecured, interest free and fully repaid in 2004.~~

~~(xvii)~~		Prior to January 1, 2002, the Group paid a fixed annual fee to CSAHC in return for CSAHC providing medical benefit, transportation subsidies and other welfare facilities to the retirees of the Group. Such arrangement was terminated on January 1, 2002. In 2003, CSAHC refunded RMB58 to the Group which represented the difference between the aggregate fixed annual fees received from the Group and the aggregate cost of services incurred by CSAHC under the above agreement.


			Hong Kong
	Domestic		and Macau			International*		Total
	RMB		RMB			RMB		RMB
2003
Traffic revenue		13,087		808			3,070		16,965
Other operating revenue		436		—			69		505

Turnover		13,523		808			3,139		17,470

Operating income/(loss)		440		(29	)		45		456
Depreciation and amortization		1,581		85			372		2,038

Significant non-cash items other than depreciation and amortization:

Impairment losses for trade and other receivables		12		—			—		12


	2004		2005
	RMB		RMB
Authorized and contracted for		—		—
Authorized but not contracted for		156		74

		156		74

	As originally reported			Adjustments			As adjusted
	RMB			RMB			RMB

Statement of operations line items:
Maintenance		4,589			(538	)		4,051
Depreciation and amortization		4,440			465			4,905
Income tax expense		7			(11	)		(4	)
Loss for the year		(1,846	)		62			(1,784	)
Basic and diluted loss per share		(0.42	)		0.01			(0.41	)

Balance sheet line items:
Property, plant and equipment, net		54,266			73			54,339
Deferred tax assets		74			(11	)		63
Total assets		71,402			62			71,464
Accumulated losses		(390	)		62			(328	)
Total equity		11,936			62			11,998


		~~Effective for~~
		~~accounting periods~~
		~~beginning on or after~~
~~IFRS 6, Exploration for and evaluation of mineral resources~~		~~January 1, 2006~~

~~IFRS 7, Financial instruments: disclosure~~		~~January 1, 2007~~

~~IFRIC 4, Determining whether an arrangement contains a lease~~		~~January 1, 2006~~

~~IFRIC 5, Rights to interests arising from decommissioning, restoration environmental rehabilitation funds~~		~~January 1, 2006~~

~~IFRIC 6, Liabilities arising from participating in a specific market – Waste electrical and electronic equipment~~		~~December 1, 2005~~

~~IFRIC 7, Applying the restatement approach under IAS 29, Financial reporting in hyperinflationary economies~~		~~March 1, 2006~~

~~IFRIC 8, Scope of IFRS 2~~		~~May 1, 2006~~

~~IFRIC 9, Reassessment of embedded derivatives~~		~~June 1, 2006~~

		Effective for accounting periods beginning on or after

IFRS 7, Financial instruments: disclosure		January 1, 2007
Amendments to IAS 1, Presentation of financial statements - capital disclosures		January 1, 2007


~~(a)~~		~~These subsidiaries are PRC limited liabilities companies.~~

~~(b)~~		~~This subsidiary is a Sino-foreign equity joint venture company established in the PRC.~~

~~(c)~~		~~Certain of the Group’s subsidiaries are PRC joint ventures which have limited lives pursuant to the PRC law.~~


		Proportion of
		ownership interest held by
	Place of	Group’s
	establishment	effective			The						Principal
Name of company	/operation	interest			Company			subsidiaries			activities
Guangzhou Aircraft Maintenance Engineering Company Limited (a)	PRC		50	%		50	%		—		Provision of aircraft repair and maintenance services

China Southern Airlines Group Finance Company Limited	PRC		49.3	%		32	%		26	%	Provision of financial services

Sichuan Airlines Corporation Limited	PRC		39	%		39	%		—		Airline

MTU Maintenance Zhuhai Co. Ltd. (a)	PRC		50	%		50	%		—		Provision of engine repair and maintenance services

China Postal Airlines Limited (a)	PRC		49	%		49	%		—		Airline

Zhuhai Xiang Yi Aviation Technology Company Limited (a)	PRC		51	%		51	%		—		Provision of flight simulation services

Beijing Southern Airlines Ground Services Company Limited (a)	PRC		50	%		50	%		—		Provision of airport ground services


~~(a)~~		~~These are jointly controlled entities.~~

~~(b)~~		~~Certain of the Group’s jointly controlled entities are PRC joint ventures which have limited lives pursuant to the PRC law.~~

		Proportion of ownership interest held by
Name of company	Place of establishment/ operation	Group’s effective interest	The Company	subsidiaries	Principal activities

Guangzhou Aircraft Maintenance Engineering Company Limited (a),(b)	PRC	50%	50%	-	Provision of aircraft repair and maintenance services

China Southern Airlines Group Finance Company Limited	PRC	34%	21.1%	12.9%	Provision of financial services

Sichuan Airlines Corporation Limited	PRC	39%	39%	-	Airline

MTU Maintenance Zhuhai Co. Ltd (a)	PRC	50%	50%	-	Provision of engine repair and maintenance services

China Postal Cargo Airlines Limited (a)	PRC	49%	49%	-	Airline

Zhuhai Xiang Yi Aviation Technology Company Limited (a)	PRC	51%	51%	-	Provision of flight simulation services

Beijing Southern Airlines Ground Services Company Limited (a)	PRC	50%	50%	-	Provision of airport ground services


	2003			2004
	RMB			RMB
Income tax (benefit)/expense as previously reported under U.S. GAAP		(526	)		274
Reclassification for share of taxation of affiliated companies and jointly controlled entities		(10	)		(13	)

Income tax (benefit)/expense as restated under U.S. GAAP		(536	)		261


	Reference	Year ended December 31,
	in Note	2003			2004			2005			2005
	above	RMB			RMB			RMB			U.S. dollars
Loss attributable to equity shareholders of the Company under IFRSs			(358	)		(48	)		(1,848	)		(229	)
U.S. GAAP adjustments:
Net (loss)/income before tax attributable to airline operations of CNA and XJA	(a)		(1,042	)		354			159			19
Sale and leaseback accounting	(b)		115			115			115			14
Lease arrangements	(c)		(64	)		7			7			1
Capitalized interest	(d)		(33	)		(13	)		(9	)		(1	)
Reversal of additional depreciation arising from revaluation of property, plant and equipment	(e)		33			13			—			—
Investments in affiliated company and jointly controlled entity	(f)		7			7			7			1
Deferred tax effects
— current year			(8	)		(16	)		(17	)		(2	)
— effect on change in the Company’s income tax rate			(51	)		—			—			—
— tax effect of acquisitions of airline operations of CNA and XJA			261			(81	)		(23	)		(3	)
— effect on change in income tax rate applicable to airline operations of CNA and XJA			—			(99	)		79			10


Net (loss)/income under U.S. GAAP			(1,140	)		239			(1,530	)		(190	)


Basic (loss)/earnings per share under U.S. GAAP			(0.298	)		0.055			(0.350	)		(0.043	)


Basic (loss)/earnings per ADS under U.S. GAAP*			(14.876	)		2.732			(17.489	)		(2.172	)