20-F 1 d222984d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

 

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

OR

 

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

For the fiscal year ended December 31, 2020

OR

 

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

For the transition period from                      to                     

OR

 

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

Date of event requiring this shell company report                     

Commission file number 001-14660

 

 

中国南方航空股份有限公司

(Exact name of Registrant as specified in its charter)

 

 

CHINA SOUTHERN AIRLINES COMPANY LIMITED

(Translation of Registrant’s name into English)

THE PEOPLE’S REPUBLIC OF CHINA

(Jurisdiction of incorporation or organization)

68 QI XIN ROAD

GUANGZHOU, 510403

PEOPLE’S REPUBLIC OF CHINA

(Address of principal executive offices)

Mr. Xie Bing

Telephone: +86 20 86124462

E-mail: ir@csair.com

Fax: +86 20 86659040

Address: 68 QI XIN ROAD

GUANGZHOU, 510403

PEOPLE’S REPUBLIC OF CHINA

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

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

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Ordinary H Shares of par value
RMB1.00 per share
represented by American
Depositary Shares
  ZNH   New York Stock Exchange

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

None.

(Title of Class)

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: 11,054,157,546 A Shares of par value RMB1.00 per share and 4,275,144,849 H Shares of par value RMB1.00 per share.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☐  Yes    ☒  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.    ☐  Yes    ☒  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒ Yes                ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Emerging growth company  

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

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    ☒  Yes    ☐  No

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

 

U.S. GAAP  ☐

  

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

   Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    ☐ Item  17    ☐ Item  18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒   No

 

 

 


Table of Contents

TABLE OF CONTENTS

 

FORWARD-LOOKING STATEMENTS

     1  

INTRODUCTORY NOTE

     2  

GLOSSARY OF AIRLINE INDUSTRY TERMS

     3  

PART I

     5  

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     5  

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     5  

ITEM 3. KEY INFORMATION

     5  

A.  SELECTED FINANCIAL DATA

     5  

B.  CAPITALIZATION AND INDEBTEDNESS

     7  

C.  REASONS FOR THE OFFER AND USE OF PROCEEDS

     7  

D.  RISK FACTORS

     7  

ITEM 4. INFORMATION ON THE COMPANY

     23  

A.  HISTORY AND DEVELOPMENT OF OUR COMPANY

     23  

B.  BUSINESS OVERVIEW

     26  

C.  ORGANIZATIONAL STRUCTURE

     45  

D.  PROPERTY, PLANT AND EQUIPMENT

     46  

ITEM 4A. UNRESOLVED STAFF COMMENTS

     48  

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     48  

A.  OPERATING RESULTS

     52  

B.  LIQUIDITY AND CAPITAL RESOURCES

     56  

C.  RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

     59  

D.  TREND INFORMATION

     59  

E.   OFF-BALANCE SHEET ARRANGEMENTS

     59  

F.   TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

     59  

G.  SAFE HARBOR

     60  

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     60  

A.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     60  

B.  COMPENSATION

     68  

C.  BOARD PRACTICES

     68  

D.  EMPLOYEES

     70  

E.   SHARE OWNERSHIP

     72  

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     72  

A.  MAJOR SHAREHOLDERS

     72  

B.  RELATED PARTY TRANSACTIONS

     72  

C.  INTERESTS OF EXPERTS AND COUNSEL

     78  

ITEM 8. FINANCIAL INFORMATION

     78  

A.  CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

     78  

B.  SIGNIFICANT CHANGES

     79  

 

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ITEM 9. THE OFFER AND LISTING

     79  

A.  OFFER AND LISTING DETAILS

     79  

B.  PLAN OF DISTRIBUTION

     80  

C.  MARKETS

     80  

D.  SELLING SHAREHOLDERS

     80  

E.   DILUTION

     80  

F.   EXPENSES OF THE ISSUE

     80  

ITEM 10. ADDITIONAL INFORMATION

     80  

A.  SHARE CAPITAL

     80  

B.  MEMORANDUM AND ARTICLES OF ASSOCIATION

     80  

C.  MATERIAL CONTRACTS

     91  

D.  EXCHANGE CONTROLS

     91  

E.   TAXATION

     92  

F.   DIVIDENDS AND PAYING AGENTS

     98  

G.  STATEMENT BY EXPERTS

     98  

H.  DOCUMENTS ON DISPLAY

     98  

I.    SUBSIDIARY INFORMATION

     98  

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     99  

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     100  

A.  DEBT SECURITIES

     100  

B.  WARRANTS AND RIGHTS

     100  

C.  OTHER SECURITIES

     101  

D.  AMERICAN DEPOSITARY SHARES

     101  

PART II

     102  

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     102  

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

     102  

A.  MATERIAL MODIFICATIONS TO THE INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS

     102  

B.  MATERIAL MODIFICATIONS TO THE RIGHTS OF REGISTERED SECURITIES BY ISSUING OR MODIFYING ANY OTHER CLASS OF SECURITIES

     102  

C.  WITHDRAWAL OR SUBSTITUTION OF A MATERIAL AMOUNT OF THE ASSETS SECURING ANY REGISTERED SECURITIES

     102  

D.  CHANGE OF TRUSTEES OR PAYING AGENTS FOR ANY REGISTERED SECURITIES

     102  

E.   USE OF PROCEEDS

     102  

ITEM 15. CONTROLS AND PROCEDURES

     102  

ITEM 16A. AUDIT AND RISK MANAGEMENT COMMITTEE FINANCIAL EXPERT

     104  

ITEM 16B. CODE OF ETHICS

     105  

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     105  

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT AND RISK MANAGEMENT COMMITTEE

     105  

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

     105  

ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT

     105  

ITEM 16G. CORPORATE GOVERNANCE

     105  

ITEM 16H. MINE SAFETY DISCLOSURE

     110  

ITEM 17. FINANCIAL STATEMENTS

     110  

ITEM 18. FINANCIAL STATEMENTS

     110  

ITEM 19. EXHIBITS

     110  

 

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FORWARD-LOOKING STATEMENTS

This Annual Report includes forward-looking statements for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements appear in a number of different places in this Annual Report. A forward-looking statement is usually identified by the use in this Annual Report of certain terminology such as “estimate”, “project”, “expect”, “intend”, “believe”, “plan”, “anticipate”, “may”, or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties. Forward-looking statements include statements regarding the outlook for our future operations, forecasts of future costs and expenditures, evaluation of market conditions, the outcome of legal proceedings (if any), the adequacy of reserves, and other business plans. Forward-looking statements are, by their nature, subject to inherent risks and uncertainties, some of which are beyond our control, and are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. We caution you that a number of risks and assumptions could cause actual outcomes to differ, or differ materially, from those expressed in any forward-looking statements.

These risks and assumptions, in addition to those identified under Item 3, “Key Information—Risk Factors,” include:

 

   

general economic and business conditions in markets where our Company operates, including changes in interest rates;

 

   

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

 

   

natural phenomena;

 

   

the impact of unusual events on our business and operations, including COVID-19 and other pandemics, and the effect of governmental actions taken in response;

 

   

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

 

   

our relationship with China Southern Air Holding Company Limited;

 

   

uncertainties associated with potential legal proceedings;

 

   

technological development;

 

   

our ability to attract key personnel and attract new talent;

 

   

future decisions by management in response to changing conditions;

 

   

the Company’s ability to execute prospective business plans;

 

   

the availability of qualified flight personnel and airport facilities; and

 

   

misjudgments in the course of preparing forward-looking statements.

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

 

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INTRODUCTORY NOTE

In this Annual Report, unless the context indicates otherwise, “we”, “us”, “our”, “the Company” and “our Company” refer to China Southern Airlines Company Limited, a joint stock company incorporated in China on March 25, 1995, our “Group” means our Company and our consolidated subsidiaries, and “CSAH” means China Southern Air Holding Company Limited, our Company’s parent company which directly and indirectly held 60.42% interest in our Company as of April 23, 2021.

References to “China” or the “PRC” are to the People’s Republic of China, excluding, for purpose of this Annual Report, 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 references to “HK$” are to the currency of Hong Kong. References to the “Chinese government” are to the national government of China. References to “Hong Kong” or “Hong Kong SAR” are to the Hong Kong Special Administrative Region of the PRC. References to “Macau” or “Macau SAR” are to the Macau Special Administrative Region of the PRC.

Our Group presents our consolidated financial statements in Renminbi. The consolidated financial statements of our Group have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRSs”), which collective term include all applicable individual IFRSs, International Accounting Standards (“IASs”) and Interpretations issued by the International Accounting Standards Board (the “IASB”).

Solely for the convenience of the readers, this Annual Report contains conversions of certain Renminbi into U.S. dollars at the rate of US$1.00 = RMB6.5249, which was 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, 2020. 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.

 

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GLOSSARY OF AIRLINE INDUSTRY TERMS

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

 

Capacity   
“available seat kilometers” or “ASK”    the number of seats made available for sale multiplied by the kilometers flown
“available ton kilometers” or “ATK”    the tons of capacity available for the transportation of revenue load (passengers and cargo) multiplied by the kilometers flown
Traffic   
“revenue passenger kilometers” or “RPK”    i.e. passenger traffic volume, the number of passengers carried multiplied by the kilometers flown
“revenue ton kilometers” or “RTK”    i.e. total traffic volume, the load (passenger and cargo) in tons multiplied by the kilometers flown
“revenue ton kilometers-cargo” or “RFTK”    i.e. cargo and mail traffic volume, the load for cargo and mail in tonnes multiplied by the kilometers flown
“revenue ton kilometers-passenger”    the load for passenger in tons multiplied by the kilometers flown
“ton”    a metric ton, equivalent to 1,000 kilograms
Yield   
“yield per RFTK”    revenue from cargo operations divided by RFTK
“yield per RPK”    revenue from passenger operations divided by RPK
“yield per RTK”    revenue from airline operations (passenger and cargo) divided by RTK
Cost   
“operating cost per ATK”    operating expenses divided by ATK
Load Factors   
“overall load factor”    RTK expressed as a percentage of ATK
“passenger load factor”    RPK expressed as a percentage of ASK
Utilization   
“utilization rates”    flight hours that aircraft can service during specified time
Equipment   
“expendables”    aircraft parts that are ordinarily used up and replaced with new parts

 

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“rotables”    aircraft parts that are ordinarily repaired and reused
Others   
“ADS”    American Depositary Share
“A Shares”    Shares issued by our Company to investors in the PRC for subscription in RMB, with par value of RMB1.00 each
“Board”    board of directors of the Company
“CAAC”    Civil Aviation Administration of China
“CAOSC”    China Aviation Oil Supplies Company
“CSAH”    China Southern Air Holding Company Limited
“CSRC”    China Securities Regulatory Commission
“Hong Kong Stock Exchange”    The Stock Exchange of Hong Kong Limited
“Hong Kong Listing Rules”    The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited
“H Shares”    Shares issued by our Company, listed on The Stock Exchange of Hong Kong Limited and subscribed for and traded in Hong Kong dollars, with par value of RMB1.00 each
“Nan Lung”    Nan Lung Holding Limited (a wholly-owned subsidiary of CSAH)
“NDRC”    National Development and Reform Commission of China
“SAFE”    State Administration of Foreign Exchange of China
“SA Finance”    Southern Airlines Group Finance Company Limited
“SASAC”    State-owned Assets Supervision and Administration Commission of the State Council
“SEC”    United States Securities and Exchange Commission
“SPVs”    special purpose vehicles exclusively set up by the Company and its subsidiaries for leased aircraft

 

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PART I

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3.

KEY INFORMATION

A.     SELECTED FINANCIAL DATA

The following tables present selected financial data for the five-year period ended December 31, 2020. The selected consolidated income statement data (other than ADS data) for the three-year period ended December 31, 2018, 2019 and 2020 and selected consolidated statement of financial position data as of December 31, 2019 and 2020 are derived from the audited consolidated financial statements of us, included elsewhere in this Annual Report. The selected consolidated income statement data (other than ADS data) for the years ended December 31, 2016 and 2017 and selected consolidated statement of financial position data as of December 31, 2016, 2017 and 2018 are derived from our audited consolidated financial statements that are not included in this Annual Report.

Moreover, the selected financial data should be read in conjunction with the rest of the Annual Report, including our audited consolidated financial statements together with accompanying notes and “Item 5. Operating and Financial Review and Prospects” which are included elsewhere in this Annual Report. Our consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, or IFRSs.

We have initially applied IFRS 16 on January 1, 2019 and IFRS 15 and IFRS 9 on January 1, 2018. According to the adopted transition plan, the comparative data has not been restated.

 

     Year ended December 31,  
    

2020

US$

   

2020

RMB

   

2019

RMB

   

2018

RMB

   

2017

RMB

   

2016

RMB

 
     (in million, except per share and per ADS data)  

Consolidated Income Statement Data

            

Operating revenue

     14,186       92,561       154,322       143,623       127,806       114,981  

Operating expenses

     (16,722     (109,111     (148,608     (140,242     (123,098     (106,204

Operating (loss)/profit

     (1,818     (11,864     10,838       8,819       9,156       12,612  

(Loss)/profit before income tax

     (2,329     (15,195     4,055       4,364       8,874       7,661  

(Loss)/profit for the year

     (1,813     (11,827     3,084       3,364       6,898       5,898  

(Loss)/profit attributable to:

            

Equity shareholders of our Company

     (1,662     (10,847     2,640       2,895       5,961       5,044  

Non-controlling interests

     (150     (980     444       469       937       854  

Basic and diluted (loss)/earnings per share

     (0.12     (0.77     0.22       0.27       0.60       0.51  

Basic and diluted (loss)/earnings per ADS (1)

     (5.91     (38.58     10.76       13.50       30.03       25.69  

Other Financial Data

            

Cash dividends declared per share

     —         —         —         0.05       0.10       0.10  

 

(1)

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

 

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     As of December 31,  
    

2020

US$

    

2020

RMB

    

2019

RMB

    

2018

RMB

    

2017

RMB

    

2016

RMB

 
     (in million, except per share and per ADS data)  

Consolidated Statement of Financial Position Data:

                 

Cash and cash equivalents

     3,896        25,419        1,849        6,928        6,826        4,152  

Total current assets, excluding cash and cash equivalents

     2,079        13,566        14,889        17,144        11,058        9,612  

Property, plant and equipment, net

     13,203        86,146        84,788        170,692        158,926        146,746  

Right-of-use assets

     23,152        151,065        153,211        —          —          —    

Total assets

     50,021        326,383        306,928        246,949        218,718        200,442  

Current borrowings

     6,146        40,099        37,543        38,741        27,568        26,746  

Current portion of obligations under finance leases

     —          —          —          9,555        8,341        8,695  

Non-current borrowings

     5,844        38,134        13,637        15,676        20,719        18,758  

Obligations under finance leases, excluding current portion

     —          —          —          62,666        59,583        53,527  

Lease liabilities

     18,577        121,213        134,074        —          —          —    

Total equity

     13,047        85,131        77,329        78,469        62,543        54,976  

Number of shares (in million)

     15,329        15,329        12,267        12,267        10,088        9,818  

Selected Operating Data

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

 

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     Year ended December 31,  
     2020      2019      2018      2017      2016  

Capacity

              

ASK (million)

     214,722        344,062        314,421        280,646        255,992  

ATK (million)

     33,892        46,434        42,728        38,332        34,980  

Kilometers flown (thousand)

     1,304,667        1,875,520        1,762,920        1,623,014        1,504,310  

Hours flown (thousand)

     2,077        2,951        2,773        2,567        2,375  

Number of landing and take-offs

     822,459        1,117,880        1,069,430        1,010,460        959,110  

Traffic

              

RPK (million)

     153,440        284,921        259,194        230,697        206,106  

RTK (million)

     20,805        32,625        30,334        27,321        24,387  

Passengers carried (thousand)

     96,856        151,632        139,885        126,299        114,619  

Cargo and mail carried (tons)

     1,460,825        1,763,560        1,732,280        1,672,162        1,612,550  

Load Factors

              

Passenger load factor (RPK/ASK) (%)

     71.5        82.8        82.4        82.2        80.5  

Overall load factor (RTK/ATK) (%)

     61.4        70.3        71.0        71.3        69.7  

Yield

              

Yield per RPK (RMB)

     0.46        0.49        0.49        0.49        0.50  

Yield per RFTK (RMB)

     2.27        1.27        1.33        1.30        1.16  

Yield per RTK (RMB)

     4.18        4.54        4.55        4.46        4.50  

Fleet

              

- Boeing

     469        467        460        407        372  

- Airbus

     383        375        354        321        304  

- Others

     15        20        26        26        26  

Total aircraft in service at period end

     867        862        840        754        702  

Average daily utilization rate (hours per day)

     7.02        9.96        9.73        9.79        9.53  

B.     CAPITALIZATION AND INDEBTEDNESS

Not applicable.

C.     REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

D.     RISK FACTORS

Risks Relating to our Business

The outbreak and global spread of COVID-19 and the persistence of the resulting pandemic have had a material adverse effect on our business. The duration and severity of the pandemic, and similar public health threats or a large scale natural disaster we may face in the future, could result in additional adverse effects on our business.

An outbreak of a disease, a similar public health threat or a large-scale natural disaster that affects travel demand, travel behavior, or travel restrictions, could have a material adverse impact on our business, financial condition and operating results. In 2020, the outbreak and rapid spread of COVID-19 in China and worldwide, the persistence of the resulting pandemic, as well as the measures governments and private parties implemented to stem the spread of this pandemic, have had, and will continue to have, a material adverse effect on the demand for air travel in China and worldwide and consequently on our business, results of operations and financial condition.

 

   

The demand in air travel have decreased and may remain depressed due to the COVID-19 pandemic and the measures taken by governments around the world to contain the pandemic.

 

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Following the onset of the COVID-19 pandemic in China in January 2020, the central and local governments of China implemented strict traveling restrictions, quarantines and advisories and “stay at home” orders which dissuaded or restricted air travel. During the first quarter and early second quarter of 2020, a significant number of employees in public and private sectors in China were instructed or advised to work from home and/or were otherwise dissuaded or restricted from air travelling. Business conventions and conferences, concerts and similar entertainment events were cancelled, and many popular tourist destinations were closed. As a result, the demand for domestic air travel declined at a rapid pace in China, which is our primary market. In March 2020, the World Health Organization declared COVID-19 as a global pandemic, and governments around the world started implementing various measures, including enhanced screenings, quarantine requirements, travel restrictions and border controls, in connection with the COVID-19 pandemic. On March 26, 2020, the CAAC placed restrictions on international flights from and to China and limited the number of international routes and flights each airline in China could operate. Governments of many countries that are markets for our business placed similar restrictions, some of which are still effective as of the date of this Annual Report. Due to these measures, the international travel demands reduced significantly from the second quarter of 2020 and remained depressed, which in turn had a significant adverse impact on our international route business. As a result of such reduced demand of domestic and international air travel, our revenues, results of operations and financial condition of 2020 were materially adversely affected.

The Group’s RTK for the year ended December 31, 2020 decreased by 36.23% as compared to 2019. In 2020, total passenger capacity (measured by ASK) and RPK of the Company decreased by 37.59% and 46.15%, respectively, as compared to last year. Passenger capacity and RPK for international routes decreased by 80.63% and 84.88%, respectively, as compared to last year. Revenue per seat kilometer also reduced significantly. As a result, the Company recorded a loss in the operating results for the year of 2020.

 

   

The mitigation measures we implemented or may consider in the future in response to the pandemic may have negative consequences with respect to our business and operations.

In response to the adverse changes in operational environment caused by the outbreak of the COVID-19 pandemic, we have taken steps to mitigate the effects on our business, which themselves may have negative consequences with respect to our business and operations. In 2020, we implemented various measures to adjust our operational capacity, which included negotiating with aircraft manufacturers to explore the possibility of postponing the delivery of new aircraft, seizing market opportunities to adopt various measures to increase passenger and freight revenue, strengthening our cost control and actively seeking policy support from the government. In addition, we intensified our efforts to fully implement precautionary measures, including conducting in-flight checks of passengers’ body temperature and disinfection of aircraft, in accordance with rules and guidelines issued by relevant government authorities, in order to prevent the potential spread of COVID-19 through flights, contact points and passengers. Those precautionary measures increased our operational cost. Furthermore, we have waived air travel booking change fees and cancellation fees chargeable to customers to a broad extent in accordance with government requirements, which have negatively affected our revenues. The mitigation and cost-saving measures that we implemented in 2020, or may consider in the future, have not made up, and may not in the future make up for our revenue loss as a result of the decreased ticket sales due to the pandemic.

 

   

The overall situation of the pandemic remains fluid and it is difficult to predict the duration and development of the pandemic as well as other potential impact it may have on our business.

Since the second quarter of 2020, certain of the abovementioned travel restrictions were eased in some places, especially in China, where the pandemic is under effective control, and the demand for air travel has been gradually increasing but has not returned to the pre-pandemic level. The ongoing pandemic, including resurgences of COVID-19 in various regions and the appearance of new variants of the virus, has resulted, and may continue to result, in the reinstitution of the restrictions that were eased. As of the date of this Annual Report, the pandemic has been effectively controlled in China. With several effective vaccines for COVID-19 approved in China and worldwide and plans for vaccinations rolling out in several countries, the pandemic control overseas has also showed a positive trend. However, at this time, we are not able to predict the exact timing and pace of the recovery of the demand for air travel, as it is uncertain how long conditions related to the pandemic will persist, when effective vaccines will be broadly available and vaccination will be widespread globally, when travel advisories and restrictions will be completely lifted, what additional measures may be introduced by governments or private parties and what effect any such additional measures may have on air travel and our business. The overall situation remains fluid, and it is impossible to predict the timing of future material developments and whether they will occur in the near, medium or long term. Depending on the duration of the pandemic, such negative developments may occur over the entirety of the pandemic.

 

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It is also uncertain the extent to which the COVID-19 pandemic may result in permanent changes to our customers’ behavior and perception of travel, including a permanent reduction in business travel as a result of increased usage of “virtual” meetings and “teleconferencing” products and more broadly, a general reluctance to travel due to the precautionary measures implemented for air traveling, such as body temperature checking, face covering and quarantine requirements. The widespread consumer confidence in air travel may not return until large-scale vaccination has occurred, and a change in customer’s behavior and perception of travel as mentioned above could have a material impact on our business.

As discussed above, the extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments which are highly uncertain and cannot be predicted at this time. In addition, an outbreak of another disease or similar public health threat that affects travel demand, travel behavior or travel restrictions could result in additional adverse impact on our business, financial condition and operating results.

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

CSAH, an entity wholly-owned by the Chinese government, directly and indirectly held and exercised the rights of ownership of 60.42% of our equity stake as of April 23, 2021. The interests of the Chinese government in us and in other Chinese airlines could 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 could also conflict with its indirect ownership interest in us. In addition, subject to the approval of our shareholder, we may accept further capital injections from CSAH through non-public subscriptions from time to time to fulfill capital needs in our business operation or business development, which may dilute the stakes of other holders of ADSs, H Shares and A Shares. On April 15, 2020, a total number of 608,695,652 of H Shares were issued at HK$5.75 per share to Nan Lung, a wholly-owned subsidiary of CSAH, and on June 17, 2020, a total number of 2,453,434,457 A Shares were issued at RMB5.21 per share to CSAH. After these two issuances, CSAH’s interest in our Company, held directly or indirectly through Nan Lung, has been increased from 50.54% to 60.42%.

Due to a high degree of operating leverage and high fixed costs, a decrease in our revenue could result in a disproportionately higher decrease in our profit.

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 revenue generated from a flight are directly related to the number of passengers carried and the fare structure of such flight. Accordingly, a decrease in revenue could result in a disproportionately higher decrease in our profit.

The results of our operations are also significantly exposed to fluctuations in foreign exchange rates.

As we have substantial liabilities denominated in foreign currencies, our results of operations are significantly affected by fluctuations in foreign exchange rates, particularly fluctuations in the Renminbi-U.S. dollar exchange rate. Net exchange gain of RMB3,485 million was recorded in 2020, as compared with a net exchange loss of RMB1,477 million in 2019. Net exchange gain was primarily attributable to the exchange difference arising from the translation of lease liabilities and borrowing balances denominated in USD resulting from the appreciation of RMB against USD.

 

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We have significant committed capital expenditures in the next three years, and may face challenges and difficulties in maintaining our liquidity.

We have, and will continue to have a substantial amount of debt, lease and other liabilities in the future. As of December 31, 2020, our current liabilities exceeded our current assets by RMB56,696 million. We generated net cash inflow from operating activities of RMB31,175 million and RMB2,698 million for the years ended December 31, 2019 and 2020, respectively. However, our substantial indebtedness and other liabilities may negatively impact our liquidity in the future. In addition, we have significant committed capital expenditures in the next three years, mainly due to aircraft acquisition. In 2020 and thereafter, our liquidity is primarily dependent on our ability to maintain adequate cash inflow from operations to meet our debt obligations as they fall due, and our ability to obtain adequate external financing to meet our committed future capital expenditures. If our operating cash flow is materially and adversely affected by factors, such as increased competition, significantly reduced demand for our services, or significantly increased jet fuel prices, our liquidity would be materially and adversely affected. Moreover, we may not be able to meet our debt obligations as they fall due and commit further capital expenditures if certain assumptions about the availability of external financing on acceptable terms are inaccurate. If we are unable to obtain adequate financing for our capital requirements, our liquidity and operations would be materially and adversely affected.

As of December 31, 2020, we had committed banking facilities with several PRC commercial banks for providing loan financing up to approximately RMB315,452 million, of which approximately RMB228,188 million was unutilized. Our directors believe that sufficient financing will be available to our Group when needed. However there can be no assurance that such loan financing will be available on terms acceptable to our Group or at all.

Further, our US dollar-denominated lease liabilities bear interest at fluctuating interest rates, primarily based on the London interbank offered rate (LIBOR). LIBOR tends to fluctuate based on general short-term interest rates, rates set by the U.S. Federal Reserve and other central banks, the supply of and demand for credit in the London interbank market and general economic conditions. We have entered into interest rate swaps and cross currency swaps to mitigate our interest rate risk. However, our interest expense for any particular period may still fluctuate based on LIBOR and other variable interest rates. To the extent the interest rates applicable to our floating rate debt significantly increase, our interest expense may increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected.

On July 27, 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR), or FCA, announced that it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. On March 5, 2021, FCA in an announcement formally confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative after 2021. The announced timeline for the cessation of US dollar LIBOR settings are (i) immediately after December 31, 2021, in the case of the 1-week and 2-month U.S. dollar settings; and (ii) immediately after June 30, 2023, in the case of the remaining U.S. dollar settings. To mitigate the possible impact of this change, various regulators have proposed alternative reference rates. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U.S. dollar LIBOR with a newly created index, calculated based on repurchase agreements backed by treasury securities. On August 16, 2019, the People’s Bank of China announced a plan to improve and reform the loan prime rate (LPR) mechanism, which requires banks to adopt interest rates based on the LPR for the newly issued loans from the date of the announcement. In December 2019, the People’s Bank of China issued another announcement which requires that, starting from March 1, 2020, financial institutions should negotiate with their clients who have outstanding floating interest rate loans to replace the existing interest rates of such loans which are based on the benchmark lending rates to interest rates based on the LPRs. Such negotiation and replacement is required to be completed before August 31, 2020. While the intention of such plan is to reduce borrowing costs by better reflecting market changes on interest rates, it is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the PRC, the United States or elsewhere. See also the discussion of interest rate risk in Part I, Item 11. Quantitative and Qualitative Disclosures About Market Risk –“Interest Rate Risk.”

 

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

CSAH will continue to be our controlling shareholder. CSAH and certain of its affiliates will continue to provide certain important services to us, including advertising services, property management services, leasing of properties and aircraft and financial services. The interests of CSAH may conflict with those of our Group. In addition, any disruption of the provision of services by CSAH’s affiliates or a default of CSAH on its obligations owed to our Group could affect our operations and financial condition. In particular, as part of our cash management system, subject to the approval of our independent shareholders (being shareholders other than CSAH or an affiliate of CSAH), we periodically place certain amount of demand deposits with SA Finance, a PRC authorized financial institution controlled by CSAH. We have taken certain measures to monitor the fund flows between us and SA Finance and the placement of funds by SA Finance. Such monitoring measures may help to keep our deposits with SA Finance safe. In addition, we have received a letter of undertakings from CSAH dated March 31, 2009, in which, among other things, CSAH warranted that our deposits and loans with SA Finance were secure and that SA Finance would continue to operate in strict compliance with the relevant rules and regulations. However, the deposits may be exposed to risks associated with SA Finance’s business over which we do not have control. As of December 31, 2019 and 2020, we had deposits of RMB711 million and RMB9,092 million, respectively, with SA Finance.

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

Our business and results of operations are affected by general factors affecting the industry that we operate in. Such general factors include, but are not limited to, China’s overall economic growth, changing government policies and the demand for air travel. In addition, the airline industry is highly cyclical, and the level of demand for air travel is affected by the global and domestic economic conditions. The Chinese economy has slowed down in recent years compared to the previous decade, and this trend is likely to continue. In particular, the outbreak of the COVID-19 pandemic since January 2020 has adversely affected the economic conditions in China and globally and disrupted air travel. We expect such adverse impact will continue in 2021. See “Item 3. Key Information – Risk Factors – The outbreak and global spread of COVID-19 and the persistence of the resulting pandemic have had a material adverse effect on our business. The duration and severity of the pandemic, and similar public health threats or a large scale natural disaster we may face in the future, could result in additional adverse effects on our business”. During periods of unfavorable or volatile economic conditions, demand for air travel can be impacted as business and leisure travelers choose not to travel, seek alternative forms of transportation for short trips or conduct business through videoconferencing. Long-term unfavorable economic conditions would reduce the demand of air travel and adversely affect our business, financial condition and results of operations. Chinese macroeconomic controls, such as financing adjustments, credit adjustments, taxation policies, price controls and exchange rate policies would also present unexpected changes to the aviation industry, which may in turn adversely affect our business, financial condition and results of operations.

The global macroeconomic environment is also facing challenges. In 2018 and 2019, the global economy generally continued to recover, yet with the emergence of trade protectionism, the growth of the global economy has slowed down. The outbreak of COVID-19 pandemic in 2020 also had an adverse impact on global economic growth. If the global macroeconomic environment worsens, or trade disputes and conflicts continue, the demand of international travel may decrease, and our operations and financial condition may be materially and adversely affected.

Furthermore, the exit of the United Kingdom, or UK, from the Europe Union, or EU, brings uncertainties to the regional economy of Europe and the airline businesses in UK and Europe. On January 31, 2020, UK formally withdrew from the EU, and entered into the transition period commencing on February 1, 2020 and ending on December 31, 2020. On December 24, 2020, UK and EU agreed on the EU-UK Trade and Cooperation Agreement, or the TCA, which has been effective from January 1, 2020 and covers a broad range of subjects, including air transport and aviation safety. As of the date of this Annual Report, because the existing bilateral air service agreement between UK and China governing the traffic rights continues to apply, the implementation of the TCA had not had a material impact on our business, but the long term impact of the TCA remains unclear. We cannot guarantee the exit of the UK from EU will not have a negative impact on our operations, financial condition and results of operations in the future.

 

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Lack of adequate documentation for land use rights and ownership of buildings may subject us to challenges and claims by third parties.

Although China has established a system for registration and transfer of land use rights and real property related rights, some of those rights can not be registered in such system due to historical reasons. We lease certain properties and buildings, which are located in Guangzhou, Wuhan, Haikou and other PRC cities from CSAH. However, CSAH lacks adequate documentation evidencing CSAH’s rights to such land and buildings, and, consequently, the lease agreements between CSAH and us for such land have not been registered with the relevant authorities. As a result, such lease agreements may not be enforceable against a third party. Lack of adequate documentation for land use rights and ownership of buildings may subject us to challenges and claims by third parties with respect to our use of such land and buildings.

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

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

The restrictions on direct flights between Taiwan and Mainland China have been loosened since 2008, but there have been no further negotiations on the expansion of such arrangement between Taiwan and Mainland China since mid-2016. We were the first Chinese carrier to operate non-stop flights between Mainland China and Taiwan and have benefited from the operation of such flights. However, given the cross-Strait flight arrangement is subject to the political relationship between Taiwan and Mainland China, any deterioration in such political relationship may cause the discontinuity or disruption in the flight arrangement, and lead to a material adverse impact on our results of operations.

Furthermore, the travel restrictions and restrictions on regional flights issued by Mainland China and Taiwan to control the spread of the COVID-19 pandemic also resulted in a decrease of the number of cross-Strait direct passenger flights per week, from 28 as of December 31, 2019 to seven as of December 31, 2020. If the impact of the COVID-19 pandemic continues, the direct flight arrangement between Mainland China and Taiwan could be materially and adversely affected.

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

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

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

An accident involving an aircraft that we operate could expose us to additional repair or replacement expenses, temporary or permanent losses from disruption of services and significant tort liabilities. Although we believe that we currently maintain liability insurance in amounts and of the types generally consistent with industry practice, the amounts of such coverage may not be adequate to fully cover the costs related to the accident or incident, which could result in harm to our results of operations and financial condition. In addition, such an aircraft accident could create a public perception that our operations are not as safe or reliable as those of other airlines, which could harm our competitive position and cause a decrease in our operating revenue. Moreover, a major accident involving the aircraft of any of our competitors may reduce demand for air travel in general, which would adversely affect our results of operations and financial condition.

 

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The mandatory grounding of our Boeing 737 Max fleet may have a material adverse effect on our business, operating results and financial condition.

On March 11, 2019, the CAAC issued the notice “CAAC Requesting Domestic Transportation Airlines to Suspend the Commercial Operation of the Boeing 737-8 Aircraft”, requiring domestic airlines to suspend the commercial operations of the Boeing 737-8 Aircraft, which is one of the models of Boeing 737 Max series aircraft. On March 13, 2019, the Federal Aviation Administration of the United States issued an emergency order prohibiting the operation of Boeing 737 Max series aircraft by U.S. certificated operators. By late March 2019, all 737 Max aircraft were grounded worldwide. As of December 31, 2020, we owned 34 Boeing 737 Max aircraft and had suspended their commercial operations in accordance with the requirements of the CAAC. As of the date of this Annual Report, the grounding of Boeing 737 Max fleet was lifted in several countries, including the U.S., EU, Canada, Brazil and Mexico, but was still in effect in China. We have incurred costs in connection with the grounding of our Boeing 737 Max fleet, as well as experienced delayed deliveries of 737 Max aircraft. The long-term operational and financial impact of this grounding is uncertain and could adversely affect our results of operations and financial condition depending on a number of factors, including, among others, the period of time of unavailability, the availability of replacement aircraft, to the extent needed, and the circumstances of any reintroduction of the grounded aircraft to service.

We have filed claims for compensation for our financial damages related to the grounding of our Boeing 737 Max fleet against the Boeing Company. However, as of the date of this Annual Report, we have not agreed to any settlement, and the amount, nature and timing of any settlement with Boeing remains uncertain. If we are unable to pass on the costs or recover the losses incurred in connection with the grounding of Boeing 737 Max fleet, our financial condition and our results of operations may be negatively affected.

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

We are increasingly dependent on technology to operate our business. To enhance our management of flight operations, we have launched and continued optimizing a new computer system to manage the whole flight operation process. The system utilizes advanced computer and telecommunications technology to manage our flights on a centralized, real-time basis. We believe that the system will enhance the efficiency of flight schedule, increase the utilization of aircraft and improve the coordination of our aircraft maintenance and ground servicing functions. Although we have designed and implemented a variety of security measures and backup plans to prevent or limit the effect of failure, the computer and communications systems on which we rely may be vulnerable to substantial or repeated disruptions due to various factors, some of which are beyond our control, including natural disasters, power failures, terrorist attacks, equipment or software failures and computer viruses and hackers. We cannot assure that the measures we have taken to reduce the risk of some of these potential disruptions are adequate to prevent disruptions to or failures of these systems. Any substantial or repeated failure of those systems could adversely affect our operations and customer services, and result in the loss of important data, loss of revenue and increased costs. Moreover, a failure of our vital systems could limit our ability to operate our flights for an extended period of time, which could have a material adverse effect on our operations and business.

Evolving data security and privacy requirements could increase our costs, and any significant data security incident could disrupt our operations, harm our reputation, expose us to legal risks and otherwise materially adversely affect our business, results of operations and financial condition.

Our business requires the secure processing and storage of sensitive information relating to our customers, employees, business partners and others. However, like any global enterprise operating in today’s digital business environment, we are subject to threats to the security of our networks and data, including threats potentially involving criminal hackers, hacktivists, state-sponsored actors, corporate espionage, employee malfeasance, and human or technological error. These threats continue to increase as the frequency, intensity and sophistication of attempted attacks and intrusions increase around the world, and the increase in work-from-home arrangements in general since the onset of the COVID-19 pandemic may also increase these risks. We were the target of cybersecurity attacks in the past and expect that we will continue to be in the future.

 

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Furthermore, in response to these threats, there has been heightened legislative and regulatory focus on data privacy and cybersecurity in China, the U.S. and elsewhere, particularly with respect to critical infrastructure providers, including those in the transportation sector. As a result, we must comply with a growing and fast-evolving set of legal requirements in this area, including substantive cybersecurity standards as well as requirements for notifying regulators and affected individuals in the event of a data security incident. This regulatory environment is increasingly challenging and may present material obligations and risks to our business, including significantly expanded compliance burdens, costs and enforcement risks.

A significant cybersecurity incident could result in a range of potentially material negative consequences for us, including unauthorized access to, disclosure, modification, misuse, loss or destruction of company systems or data; theft of sensitive, regulated or confidential data, such as personal identifying information or our intellectual property; the loss of functionality of critical systems through ransomware, denial of service or other attacks; and business delays, service or system disruptions, damage to equipment and injury to persons or property. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving and may be difficult to anticipate or to detect for long periods of time. The constantly changing nature of the threats means that we may not be able to prevent all data security breaches or misuse of data. Similarly, we depend on the ability of our key commercial partners, including our regional carriers, distribution partners and technology vendors, to conduct their businesses in a manner that complies with applicable security standards and assures their ability to perform on a timely basis.

In addition, the costs and operational consequences of defending against, preparing for, responding to and remediating an incident of cybersecurity breach may be substantial. As cybersecurity threats become more frequent, intense and sophisticated, costs of proactive defense measures may increase. Further, we could be exposed to litigation, regulatory enforcement or other legal action as a result of an incident, carrying the potential for damages, fines, sanctions or other penalties, as well as injunctive relief requiring costly compliance measures. A cybersecurity incident could also impact our brand, harm our reputation and adversely impact our relationship with our customers, employees and stockholders. Failure to appropriately address these issues could also give rise to potential legal risks and liabilities.

U.S. Holders will be subject to adverse tax consequences if we are considered to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes

Depending upon the relative values of our passive assets and income as compared to our total assets and income each taxable year, we could be classified as a passive foreign investment company, or PFIC, by the United States Internal Revenue Service, or IRS, for U.S. federal income tax purposes. We believe that we were not a PFIC for the taxable year 2020. However, there is no assurance that the IRS will not take a contrary position and assert that we are a PFIC, and no assurances can be given that we will not become a PFIC at some point in the future. U.S. Holders are urged to consult their tax advisors regarding the effects of the PFIC rules.

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

 

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If we were a PFIC, we would generally be subject to additional taxes and interest charges on certain “excess distributions” our Company makes regardless of whether we continue to be a PFIC in the year in which you receive an “excess distribution”. An “excess distribution” would be either (1) the excess amount of a distribution with respect to ADSs during a taxable year in which distributions to you exceed 125% of the average annual distributions to you over the preceding three taxable years or, if shorter, your holding period for the ADSs, or (2) 100% of the gain from the disposition of ADSs. For more information on the United States federal income tax consequences to you that would result from our classification as a PFIC, please see Item 10, “Taxation—United States Federal Income Taxation—U.S. Holders—Passive Foreign Investment Company”.

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

We are dependent to a large extent on the experience and industry knowledge of our senior management team and other key employees and we cannot assure that we will be able to retain them. As of the date of this Annual Report, we do not carry key personnel insurance for any of these personnel. We compete to attract and retain these key personnel with other airlines, some of which may offer better compensation arrangements. Furthermore, the negative impact of COVID-19 pandemic on the airline industry has made it more challenging for us to compete to attract and retain these key personnel with companies in other industries. Although we have not had difficulty in attracting and retaining qualified key personnel in the past, we cannot guarantee that this will continue to be the case. Any inability to attract and retain talented and highly qualified senior management team or other key employees, could have a negative impact on us.

Risks Relating to the Chinese Commercial Aviation Industry

Our business is subject to extensive government regulations.

The Chinese commercial aviation industry is subject to extensive regulatory and legal oversight. The CAAC issues and implements several regulations and policies, which encompass substantially all aspects of the Chinese commercial aviation industry, such as the approval of route allocation, the administration of certain airport operations, air traffic control and pilot flight time limitations. In 2020, in order to stem the spread of the COVID-19 pandemic, CAAC issued various guidance, orders and notices with regard to the implementation of precautionary measures in airline operations, including cleaning and sanitizing procedures, face-covering and social distancing requirements and measures for reducing physical touch points. In addition, in response to the challenges faced by the Chinese commercial aviation industry due to the COIVD-19 pandemic, CAAC also issued several policies to support Chinese airlines, including reduction or waiver of certain fees, funding support in respect of infrastructures, and simplification of certain approval procedures. Starting from April 1, 2021, the Ministry of Finance reduced airlines’ contributions to the Civil Aviation Development Fund by 20%, on top of the 50% reduction that was implemented in July 2019. Since December 1, 2020, CAAC and NDRC further expanded the scope of routes to which a market-oriented pricing policy may apply, with an additional 370 routes are covered by such expansion. The CAAC continues to implement extensive legal oversight and supervision on the commercial aviation industry, and as a result, we may face significant constraints on our flexibility and ability to conduct our business or maximize our profitability.

Our results of operations may be negatively impacted by any jet fuel shortages or any fluctuation in domestic prices for jet fuel.

The availability and cost of jet fuel have a significant impact on our financial condition and results of operations. Prior to 1993, jet fuel shortages regularly occurred in China, as a result of which we had to cancel or delay flights. Although we have not experienced jet fuel shortages since 1993, we cannot assure that such shortages would not occur again, and if such a shortage occurs and causes us to delay or cancel flights, our reputation among passengers as well as our operations may suffer.

Domestic price for jet fuel has experienced fluctuations in the past few years and may continue to fluctuate in the future due to various factors. In 2020, our jet fuel cost accounted for 50.07% of our flight operation expenses. Therefore, any fluctuation in the fuel price may affect our financial performance due to our sensitivity to fuel prices. For more information on the jet fuel prices, please see “Item 4, Information on the Company—Business Overview—Jet Fuel” section below for further discussion.

 

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In 2020, a reasonable possible increase or decrease of 10% in average jet fuel prices with the volume of fuel consumed and all other variables held constant, would have increased or decreased our annual fuel costs by approximately RMB1,880 million. Accordingly, even if the jet fuel supply remains stable, increases in jet fuel prices will nevertheless adversely impact our financial results.

Our profit for the year may suffer from unexpected volatility caused by any fluctuation in the level of fuel surcharges.

The level of fuel surcharges, which is regulated by Chinese government, affects domestic customers’ air travel demands as well as our ability to generate profits. On January 14, 2009, the NDRC and the CAAC jointly announced that the collection of passenger fuel surcharges for domestic routes should be suspended from January 15, 2009 and onwards. Subsequently, in response to the increase in international fuel prices, the NDRC and CAAC issued a notice on November 11, 2009 to introduce a new pricing mechanism of fuel surcharges that linked it with airlines’ jet fuel costs, which was further adjusted subsequently. On October 14, 2011, the NDRC and the CAAC issued a notice to adjust such pricing mechanism. As a result of this adjustment, the maximum rates for fuel surcharges can be adjusted according to the pricing mechanism of fuel surcharges, if the aggregated change in jet fuel costs exceeds RMB250 per ton. Due to the decrease in the jet fuel cost, the fuel surcharges were suspended since February 5, 2015. In March 2015, the NDRC and the CAAC issued the “Notice on Adjusting the Base Oil Price of the Passenger Transportation Fuel Addition and Aviation Kerosene Price Linkage Mechanism of Civil Aviation Domestic Routes”, pursuant to which, when the domestic aviation kerosene comprehensive procurement cost exceeds RMB5,000 per ton, an air transport enterprise can collect fuel surcharge according to the linkage mechanism. In accordance with the above regulations, we adjusted the fuel surcharges for domestic routes from June 5, 2018 (the date of issue), and, as a result, each passenger was charged RMB10 for domestic flight segments (including domestic segments of international routes) under 800 kilometers, 800 kilometers and above 800 kilometers. The fuel surcharges for domestic routes were suspended after January 5, 2019. We cannot guarantee that fuel surcharges would not be adjusted further in the future or adjusted in our favor. If fuel surcharges are not adjusted in correspondence to the increase in jet fuel, our profit for the year may be materially adversely affected.

Our results of operations tend to be volatile and fluctuate due to seasonality.

The aviation industry is characterized by annual high and low travel seasons. Our operating revenue is substantially dependent on the passenger and cargo traffic volume carried, which is subject to seasonal and other changes in traffic patterns, the availability of appropriate time slots for our 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, our airline revenue is generally higher in the second half of the year than in the first half of the year due to the greater demand for air travel during the summer months, although such difference is less notable in 2020 as the traditional seasonal travel pattern were affected by the COVID-19 pandemic. As a result, our results tend to be volatile and subject to rapid and unexpected change.

Our operations may be adversely affected by insufficient aviation infrastructure in the Chinese commercial aviation industry.

The rapid increase in air traffic volume in China in recent years has put pressure on many components of the Chinese commercial aviation industry, including China’s air traffic control system, the availability of qualified flight personnel and airport facilities. Airlines, such as our 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 placed increasingly emphasis on the safety of Chinese airline operations and implemented measures aimed at improving the safety record of the industry. Our ability 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, navigation systems and ground control operations at Chinese airports, which are beyond our control.

In 2020, the Company completed the transit of all flights in our previous Beijing hub, Beijing Capital International Airport, or Beijing Airport, to Beijing Daxing International Airport, or Daxing Airport. Because Daxing Airport is farther from the urban area of Beijing than Beijing Airport and longer commute time is therefore required between the airport and the city, we had to lower ticket prices to attract passengers to take our flights from the Daxing Airport in 2020. This measure may have adverse effect on our operating revenue and profits if we have to continue offering lower price in the future.

 

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We face increasingly intense competition in both domestic and international markets, which may materially and adversely affect our business.

Competition has become increasingly intense in recent years in our domestic market, due to relaxation of certain regulations by the CAAC and increase in the capacity, routes and flights of Chinese airlines, as well as other factors. In 2020, the COVID-19 pandemic has intensified such competition in the domestic market as significant amount of international routes capacity were transferred to domestic routes and led to imbalance in the supply-demand in the domestic market.

We face varying degrees of competition on regional routes from certain Chinese airlines as well as Cathay Pacific and Air Macau, and on our international routes, primarily from non-Chinese airlines, most of which have significantly longer operating histories, substantially greater financial and technological resources and greater brand recognition than us. Many of our international competitors have larger sales networks, participate in more comprehensive and convenient reservation systems, or engage in more promotional activities, which may enhance their ability to attract international passengers.

In addition, our business is relatively more focused on the domestic market compared to some of our major Chinese competitors, such as Air China Limited, or Air China. So far, as the COVID-19 pandemic has been better contained in China than in other countries worldwide, our competitiveness among major Chinese airlines has not been significantly impacted due to the pandemic, as compared to those airlines with greater international operations. However, if in the future the domestic market became more negatively impacted due to the pandemic than the international market, our business may be subject to more adverse effects comparing to our competitors, and subsequently our competitiveness may be adversely affected.

We expect to face substantial competition from alternative means of transportation, especially as a result of the rapid development of the Chinese rail network.

For short-distance transportation, airplanes, trains and buses are alternatives to each other. Given the recent rapid development of high-speed trains, the construction of nationwide high-speed railway network and the improvement of inter-city expressway network, the commercial aviation sector as a whole faces increasing competition from those alternative means of transportation.

The PRC government is aggressively expanding its high-speed rail network. The mileage of new railway lines put into operation in 2020 reached about 7,000 kilometers. As of December 31, 2020, China’s railway traffic mileage reached 146,300 kilometers, among which 37,900 kilometers were covered by high-speed railway, accounting for more than 60% of the world’s total high-speed railway traffic mileage. According to the latest development goal of the China Railway, China’s railway traffic mileage will reach 200,000 kilometers by 2025, among which 70,000 kilometers will be covered by high-speed railway. The operating results of our air routes that are overlapping with the high-speed railway corridors (especially air routes with a distance of less than 800 kilometers), will be affected in the future.

Limitations on foreign ownership of Chinese airlines may affect our access to funding in the international equity capital markets.

The current Chinese government policies limit foreign ownership of Chinese airlines. Under these policies, non-PRC, Hong Kong, Macau, Taiwan residents can only hold up to 49% of equity interest in a Chinese airline. As of April 23, 2021, we estimated that no more than 31.39% of our total outstanding ordinary shares were held by non-PRC, Hong Kong, Macau and Taiwan residents. According to The Provisions on Domestic Investment in Civil Aviation Industry, effective on January 19, 2018, Chinese government has loosened restrictions on state ownership of our total outstanding ordinary shares, which allows the percentage of state-owned shares to be under 50%. However, for so long as the limitation on foreign ownership is in force, we will have limited access to funding in the international equity capital markets.

 

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The European Emissions Trading Scheme may increase our operational cost.

Starting on January 1, 2012, aviation sector has been included in the European Emissions Trading Scheme (ETS), EU’s mandatory cap-and-trade system for reduction of greenhouse gas emissions. Airline operators in the EU has received tradable emission permits (aviation allowances) covering a certain level of their CO2 emissions per year for their flights operating to and from EU airports. If an airline fails to obtain free-of-charge emission permits from the EU, it will have to buy around EUR10 million (RMB100 million) worth of CO2 emissions allowances from other greener industries. Pursuant to this policy, Chinese airlines having flight points in Europe undertake the same carbon emission reductions obligation as the European local airlines, which will result in a significant increase in the operating cost of Chinese airlines in Europe, including our Company, and further have an adverse impact on the results of operations and financial condition. In March 2011, a group representing China’s largest airlines sent a formal notice to the EU expressing strong opposition to non-member-state airlines’ inclusion in the EU’s Emissions Trading Scheme. Also, in early February 2012, CAAC issued instructions to various airlines announcing that without approval from the relevant Chinese government authorities, the major airlines are prohibited from joining EU-ETS and the transport airlines are also prohibited from raising the freight price or increasing fee items under this reason. On November 12, 2012, the EU announced it was temporarily suspending the implementation of the ETS in the aviation sector in 2013 in order to forge a positive negotiation environment for all parties. In November 2014, CAAC issued a notification on the ETS. The notification provided that CAAC would not prohibit Chinese airlines to take part in the ETS if the relevant flights take off and land between the airports within the EU during 2012 and 2016. We have operated few flights between airports within the EU since 2012, and expect to operate few flights between airports within the EU in the future. Therefore, we submitted emission reports and paid the quota between 2012 and 2016 for our flights between airports within the EU. In April 2015, our Company completed submission of emissions reports for the years 2012 to 2014 and fulfilled our obligations under the ETS. In 2016, our Company finished year 2015 compliance cycle. On year 2017-2018 compliance cycle, our Company had been in compliance with the requirements of relevant PRC laws and the ETS. During the reporting period, the Company’s efforts on environmental protection included pushing forward the building of an ecological environment protection and energy management system, reducing energy and resource consumption and strengthening carbon trading management. The Company completed the compliance work on 2019 EU carbon trading and Guangdong carbon trading as scheduled, and sold 695,000 tonnes of Guangdong carbon quota accumulated over the years due to the improvement of flight emission efficiency through public auctions. However, there can be no assurance that the ETS will not have negative impact on our financial condition and result of operations.

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

We may hedge a portion of our future fuel requirements through various financial derivative instruments linked to certain fuel commodities to lock in fuel costs within a hedged price range. While we have not entered into any fuel hedging transactions during the year ended December 31, 2019, we entered into fuel hedging contracts in March and April 2020. However, these hedging strategies may not always be effective and high fluctuations in aviation fuel prices exceeding the locked-in price ranges may result in losses. Significant declines in fuel prices may substantially increase the costs associated with our fuel hedging arrangements. In addition, while we seek to manage the risk of fuel price increases by using derivative contracts, we cannot assure that, at any given point in time, our fuel hedging transactions will provide any particular level of protection against increased fuel costs.

Risks Relating to the PRC

We have significant exposure to foreign currency risk as part of our lease liabilities are denominated in foreign currencies. Due to rigid foreign exchange control by Chinese government, we may face difficulties in obtaining sufficient foreign exchange to pay dividends or satisfy our foreign exchange liabilities.

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

 

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

Uncertainties in the interpretation and enforcement of PRC laws and regulations may cause significant uncertainties to our operations.

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

The enactment of the Holding Foreign Companies Accountable Act may result in enhanced disclosure requirements for us and our delisting from the NYSE and deregistration from the SEC.

On December 18, 2020, the Holding Foreign Companies Accountable Act, or HFCAA, was signed into law. The HFCAA requires the SEC to identify each issuer trading on U.S. exchanges that has retained a registered public accounting firm to issue an audit report where the firm has a branch or office located in a foreign jurisdiction, and the PCAOB has determined that it is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction. Registrants so identified, or Identified Issuers, are required to submit documentation to the SEC that establishes that they are not owned or controlled by a governmental entity in that foreign jurisdiction. In addition, if the registrant is determined to be an Identified Issuer for three consecutive years, it will be delisted from U.S. exchanges and its securities will be prohibited from trading in the United States. Identified Issuers that are foreign issuers will also be subject to enhanced disclosure requirements, including disclosure on government ownership or control of the issuer, the name of each official of the Chinese Communist Party who is a member of the issuer’s board of directors, and whether the issuer’s articles of incorporation contain any charter of the Chinese Communist Party.

On March 24, 2021, the SEC adopted interim final amendments to implement the disclosure and submission requirements of the HFCAA. A registrant will not be required to comply with theses interim final amendments until it has been identified by the SEC as an Identified Issuer. As of the date of this annual report, the SEC has not issued rules to establish the process for identifying such an Identified Issuer and to address the implementation of the trading prohibitions in the HFCAA. The SEC is also seeking public comments on the interim final amendments. It remains unclear when the SEC will release rules regarding the identification process and the implementation of the trading prohibitions or whether the SEC will issue any further rules to amend the interim final amendments.

The enactment of the HFCAA and any additional implementation rules may have a material adverse impact on the stock performance of China-based issuers listed in the United States, including causing investor uncertainty for affected issuers, including us, and affecting the market price of our ADSs. In addition, whether the PCAOB will be able to conduct inspections of our auditors in the next three years, or at all, is subject to substantial uncertainty and depends on a number of factors out of our control. If we are unable to meet the PCAOB inspection requirement in time, we could be identified by the SEC pursuant to the HFCAA and if so, we will be subject to enhanced disclosure requirements and may face delisting from the NYSE and deregistration form the SEC.

 

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Holders of H Shares and ADSs generally are required to resolve disputes with us, our senior management and holders of our A Shares only through arbitration in Hong Kong or China.

In accordance with the rules applicable to Chinese overseas listed companies, our articles of association provide that, with certain limited exceptions, all disputes or claims based on our articles of association, PRC company law or other relevant laws or administrative rules, and concerning matters between holders of H Shares and ADSs and holders of A Shares, us, or our directors, supervisors, president, vice presidents or other senior officers, must be submitted for arbitration at either the China International Economic and Trade Arbitration Commission or the Hong Kong International Arbitration Center. If an applicant chooses to have the dispute arbitrated at the Hong Kong International Arbitration Center, either party may request that the venue be changed to Shenzhen, a city in China near Hong Kong. The governing law for any such disputes or claims is Chinese law, unless Chinese law itself provides otherwise. Pursuant to an arrangement of mutual enforcement of arbitration awards between the PRC courts and the Hong Kong courts, Hong Kong arbitration awards are enforceable in China, subject to the satisfaction of certain legal requirements. However, due to the limited number of actions that have been brought in China by holders of shares issued by a Chinese company to enforce an arbitral award, we are uncertain as to the outcome of any action brought in China to enforce a Hong Kong arbitral award made in favor of holders of H Shares and ADSs.

PRC laws differ from the laws in the United States and may afford less protection to our minority shareholders.

Although Chinese company law provides that shareholders of a Chinese company may, under certain circumstances, sue the company’s directors, supervisors and senior management in the interests of the company, limited detailed implementation rules or court interpretations have been issued in this regard. Also, class action lawsuits are generally uncommon in China. In addition, PRC company law imposes limited obligations on a controlling shareholder with respect to protection of the interests of minority shareholders, although overseas listed joint stock companies, such as ourselves, are required to adopt certain provisions in their articles of association that are designed to protect minority shareholder rights. These mandatory provisions provide, among other things, that the rights of any class of shares, including H Shares, may not be varied without a resolution approved by holders of shares in the affected class holding no less than two-thirds of the shares of the affected class entitled to vote, and provide that in connection with a merger or division involving our company, a dissenting shareholder may require us to purchase the dissenters’ shares at a fair price. Disputes arising from these protective provisions would likely have to be resolved by arbitration. See “—Holders of H Shares and ADSs generally are required to resolve disputes with us, our senior management and holders of our A Shares only through arbitration in Hong Kong or China”.

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

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

Caishui Notice [2014] No. 81 provides that for dividends derived by Mainland individual investors from investing in H Shares listed on the Hong Kong Stock Exchange through Shanghai Hong Kong Stock Connect, H-Share companies shall apply to the China Securities Depository and Clearing Corporation Limited (CSDC) to obtain and CSDC shall provide the list of Mainland individual investors to H-Share companies who shall withhold individual income tax at a tax rate of 20%. For Mainland securities investment funds investing in shares listed on the Hong Kong Stock Exchange through Shanghai Hong Kong Stock Connect, the above rules shall also apply and individual income tax shall be levied on dividends derived therefrom.

Caishui Notice [2014] No. 81 further provides that “dividends derived by Mainland enterprise investors from investing in shares listed on the Hong Kong Stock Exchange through Shanghai Hong Kong Stock Connect shall be included in their gross income and subject to enterprise income tax. For dividends derived by Mainland enterprises where the relevant H Shares have been continuously held for no less than 12 months, enterprise income tax may be exempt according to the tax law. H-Share companies listed on the Hong Kong Stock Exchange shall apply to CSDC to obtain the list of Mainland enterprise investors from CSDC. H-Share companies are not required to withhold income tax on dividends to Mainland enterprise investors which shall report the income and make the tax payment by themselves.”

 

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

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

Auditors of companies that are registered with the SEC and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the Public Company Accounting Oversight Board, or the PCAOB, and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards. The PCAOB, however, is currently unable to inspect a registered public accounting firm’s audit work relating to a company’s operations in China where the documentation of such audit work is located in China. Accordingly, our independent registered public accounting firm’s audit of our operations in China is not subject to the PCAOB inspection.

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

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

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

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

 

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You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in the PRC based on U.S. or other foreign laws against us, our management and some of the experts named in the annual report.

We are a company incorporated under the laws of China, and substantially all of our assets are located in China. In addition, most of our directors, supervisors, executive officers and some of the experts named in this Annual Report reside within China, and substantially all of the assets of these persons are located within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon our directors, supervisors or executive officers or some of the experts named in this annual report, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Our PRC legal counsel has advised us that China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom, Japan or many other countries. Our Hong Kong legal adviser has also advised us that Hong Kong has no statutory arrangement for the reciprocal enforcement of judgments with the United States although it may be possible for a civil action to be brought in Hong Kong based on a monetary judgment of the courts of the United States. As a result, recognition and enforcement in China or Hong Kong of judgments of a court in the United States and any of the other jurisdictions mentioned above in relation to any matter may be difficult or impossible. Furthermore, an original action may be brought in the PRC against us, our directors, supervisors, executive officers or the experts named in this annual report only if the actions are not required to be arbitrated by PRC law and our articles of association, and only if the facts alleged in the complaint give rise to a cause of action under PRC law. In connection with any such original action, a PRC court may award civil liability, including monetary damages.

Due to jurisdictional limitations and various other factors, the U.S. Securities and Exchange Commission, the U.S. Department of Justice and other U.S. authorities may also be limited in their ability to pursue companies and individuals in China, in connection with any alleged violation of U.S. securities and other laws.

 

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

Economic conditions in China are sensitive to global economic conditions. The global financial markets have experienced significant disruptions in the past, including international trade disputes and tariff actions announced by the United States, the PRC and certain other countries. The U.S. administration has imposed significant amount of tariffs on Chinese goods, and the PRC government has imposed tariffs on certain goods manufactured in the United States. The United States and China signed the first phase of a trade deal in January 2020 and began the implementation of the phase one trade deal. However, there is no assurance that the trade deal will continue to be successfully implemented, or the list of goods impacted by additional tariffs will not be expanded or the tariffs will not be increased materially in the future. It is also difficult to predict the impacts of PRC or U.S. government policies, in particular, the imposition of additional tariffs on bilateral imports, on economic conditions of both countries. If the list of goods is further expanded or the tariff is further increased, the volume of China-U.S. import and export trade would drop significantly, which will lead to deterioration in economic conditions of both countries and decrease of business and official activities between both countries. If any new tariffs, legislation and/or regulations are implemented, or if existing trade agreements are renegotiated or, in particular, if the U.S. government takes retaliatory trade actions due to the recent U.S.-China trade tensions, such changes could negatively affect the demand for air travel as well as cargo and mail volume, which may in turn have an adverse effect on our business, financial condition and results of operations.

 

ITEM 4.

INFORMATION ON THE COMPANY

A. HISTORY AND DEVELOPMENT OF OUR COMPANY

We were incorporated under the PRC laws on March 25, 1995 as a joint stock company with limited liability under the name of China Southern Airlines Company Limited. The address of our principal place of business is 68 Qi Xin Road, Guangzhou 510403, People’s Republic of China. Our telephone number is +86 20 8611 2480 and our website is www.csair.com.

The information contained on or connected to our website is not incorporated by reference into this Annual Report and should not be considered part of this or any other report filed with the SEC. Our filings with the SEC, including reports, proxy and information statements, and other information regarding us that we file electronically with the SEC are available on the SEC’s websites at www.sec.gov.

Restructuring and Initial Public Offering

As part of China’s economic reforms in the 1980s, the PRC State Council directed the CAAC to separate its governmental, administrative and regulatory role from the commercial airline operations that were being conducted by the CAAC and its regional administrators. As a result, CSAH was established on January 26, 1991 for the purpose of assuming the airline and airline-related commercial operations of the Guangzhou Civil Aviation Administration, one of the then six regional bureaus of the CAAC.

CSAH was restructured in 1994 and 1995 in anticipation of our initial public offering. The restructuring was effective through the establishment of our Company and the execution of the De-merger Agreement on March 25, 1995 by and between CSAH and our Company. Upon the restructuring, our Company assumed substantially the entire airline and airline-related businesses, assets and liabilities of CSAH, and CSAH retained its non-airline-related businesses, assets and liabilities. All interests, rights, duties and obligations of CSAH, whenever created or accrued, were divided between our Company and CSAH based on the businesses, assets and liabilities assumed by each of them under the De-merger Agreement. Under the De-merger Agreement, CSAH agreed not to conduct, participate or hold any interest in, either directly or indirectly, any business, activity or entity in or outside China that competes or is likely to compete with the commercial interests of our Company, although CSAH may continue to hold and control its affiliates existing on the date of the De-merger Agreement and may continue to operate the businesses of such affiliates. Under the De-merger Agreement, CSAH and our Company also agreed to indemnify each other against any losses, claims, damage, debts or expenses arising out of or in connection with the restructuring. As of the date of this Annual Report, no indemnity has been provided by either CSAH or us.

 

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

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

Share Reform Scheme

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

Bonus Shares Issuance by Conversion of Share Premium

On June 25, 2008, our shareholders approved issuance of bonus shares by way of conversion of share premium, and on August 14, 2008, the Ministry of Commerce approved the bonus share issuance. The issuance was effected by conversion of share premium on the basis of five new shares, credited as fully paid, for every ten existing shares. Upon the completion of the bonus share issuance of 2,187,089,000 shares, as of December 31, 2007, the number of paid up shares increased from 4,374,178,000 shares to 6,561,267,000 shares.

Aircraft Acquisitions

On August 3, 2012, Xiamen Airlines entered into an agreement with Boeing to purchase 40 Boeing B737 series aircraft from Boeing. The aggregate catalogue price of the 40 Boeing B737 series aircraft is US$3.36 billion. The aggregate consideration for the acquisition was partly paid in cash and partly through financing arrangements with banking institutions. Among which, 31 Boeing B737 series aircraft were delivered in stages to Xiamen Airlines during the period from 2016 to 2018. Boeing delayed the delivery of certain Boeing B737 series aircraft to Xiamen Airlines in 2019. As of the date of this Annual Report, the delivery schedule of the remaining Boeing B737 series aircraft had not been determined.

On May 16, 2014, we entered into the aircraft acquisition agreement with Airbus S.A.S to purchase 30 Airbus A320 series aircraft and 50 A320neo series aircraft. The catalogue price of one Airbus A320 series aircraft and one A320neo series aircraft differs, ranging from US$85.8 million to US$110.1 million and US$94.4 million to US$120.5 million, respectively. The aggregate consideration for the acquisition will be funded partly by internal resources of our Company and partly through commercial loans by commercial banks. The 30 A320 aircraft were delivered in stages to our Company during the period from 2016 to 2019, and 30 A320neo aircraft were delivered to our Company during the period from 2016 to 2020. The remaining 20 A320neo aircraft were scheduled to be delivered in stages to us from 2021 to 2022.

On December 17, 2015, we entered into the aircraft acquisition agreement with Boeing to purchase 30 B737NG series aircraft and 50 B737 MAX series aircraft. The catalogue price of each B737NG series aircraft and B737 MAX series aircraft is about US$81.2 million and US$96.1 million, respectively. The aggregate consideration for the acquisition will be funded partly payable in cash and partly through financing arrangements with banking institutions. The 30 B737NG aircraft were delivered in stages to our Company in 2017 and the 50 B737 MAX aircraft were scheduled to be delivered in stages to our Company during the period from 2018 to 2021. Boeing delayed the delivery of certain B737 MAX aircraft to our Company in 2019. As of the date of this report, the delivery schedule of the remaining B737 MAX aircraft had not been determined.

 

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On October 12, 2016, we entered into the aircraft acquisition agreement with Boeing to purchase 12 B787-9 series aircraft. The catalogue price of one B787-9 series aircraft is about US$271 million. The aggregate consideration for the acquisition will be funded partly by internal sources of our Company and partly through commercial loans by commercial banks. The Boeing aircraft were scheduled to be delivered in stages to our Company during the period from 2018 to 2020. Five B787-9 series aircraft were delivered in stages to our Company in 2018 and four B787-9 series aircraft were delivered in stages to our Company in 2019. The remaining three B787-9 aircraft were scheduled to be delivered to our Company from June to November in 2021.

On April 26, 2017, we entered into the aircraft acquisition agreement with Airbus S.A.S to purchase 20 A350-900 series aircraft. The catalogue price of one A350 series aircraft is about US$299 million. The aggregate consideration for the acquisition will be funded partly by internal sources of our Company and partly through commercial loans by commercial banks. Six A350-900 series aircraft were delivered to our Company in 2019 and two A350-900 series aircraft were delivered to our Company in 2020. The remaining 12 A350-900 aircraft were scheduled to be delivered to our Company during the period from 2021 to 2023.

On October 20, 2017, we entered into the aircraft acquisition agreement with Boeing to purchase eight B777-300ER and 30 B737-8 series aircraft. The catalogue price of each B777-300ER series aircraft and each B737-8 series aircraft is about US$318 million and US$104 million, respectively. The aggregate consideration for the acquisition will be funded partly by internal sources of our Company and partly through commercial loans by commercial banks. The Boeing aircraft were scheduled to be delivered in stages to our Company during the period from 2019 to 2020. On February 28, 2019, we entered into the supplemental Boeing aircraft acquisition agreement with Boeing to amend the terms of the aforesaid aircraft acquisition agreement to change the two B777-300ER aircraft originally agreed to be acquired by our Company to two B777F aircraft. These two B777F aircraft were delivered to our Company in 2020 on schedule. None of Boeing 737-8 series aircraft was delivered to our Company in 2019 and 2020. As of the date of this Annual Report, the delivery schedule of the remaining Boeing 737-8 series aircraft had not been determined.

On March 21, 2018, Xiamen Airlines entered into the Boeing Aircraft Acquisition Agreement with Boeing to purchase the 20 B737-8 aircraft and ten B737-10 aircraft. The catalogue price of each B737-8 series aircraft and B737-10 series aircraft is about US$104 million and US$116 million, respectively. The aggregate consideration for the acquisition will be funded partly by internal sources of our Company and partly through commercial loans by commercial banks. The Boeing aircraft were scheduled to be delivered in stages to Xiamen Airlines during the period from 2019 to 2022. One Boeing 737-8 was delivered to Xiamen Airlines in 2019 and no Boeing 737-8 series aircraft was delivered to Xiamen Airlines in 2020. As of the date of this Annual Report, the delivery schedule of the remaining Boeing 737 series aircraft had not been determined.

On August 30, 2019, we entered into an aircraft acquisition agreement with Commercial Aircraft Corporation of China Limited (“Comac”), pursuant to which we agreed to purchase 35 ARJ21-700 aircraft. The catalogue price of each ARJ21-700 aircraft is approximately US$38 million. The aggregate consideration for this acquisition will be partially funded by financing arrangements with banks or other institutions. Three ARJ21-700 aircraft were delivered in stages to our Company in 2020, and the remaining 32 ARJ21-700 aircraft were scheduled to be delivered to our Company during the period from 2021 to 2024.

During the reporting period, our Group introduced 32 aircraft (including ten operating leased aircraft, 13 financing leased aircraft and nine self-purchased aircraft), and disposed 27 aircraft (including 14 A320 series aircraft, 11 EMB190 aircraft and two A330 aircraft). As of the end of the reporting period, the fleet size of our Group reached 867 aircraft, an increase of five aircraft compared to the end of 2019.

 

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Capital Expenditure

We expended RMB22,396 million, RMB45,973 million and RMB37,210 million in capital expenditures in 2020, 2019 and 2018, respectively. Of such capital expenditures in 2020, RMB11,335 million was financed by leases, RMB6,707 million was financed by bank borrowings, and RMB3,471 million was financed by proceeds from issuance of shares, while the remaining RMB883 million was financed by internal resources. The capital expenditures were primarily incurred on the additional investments in aircraft and flight equipment under our fleet expansion plans and, to a small extent, additional investments in other facilities and buildings for operations. As of December 31, 2020, we had total capital commitments for aircraft, engines and related equipment of approximately RMB56,547 million.

Non-Public Subscriptions

For detailed information about our non-public subscriptions, please refer to “Item 7—Related Party Transactions—Non-Public Subscriptions”.

B. BUSINESS OVERVIEW

General

We provide commercial airline services throughout Mainland China, Hong Kong, Macau and Taiwan regions, Southeast Asia and other parts of the world. Based on the statistics of the CAAC, we are one of the largest Chinese airlines and, as of December 31, 2020, we ranked the first in terms of number of passengers carried, number of scheduled flights per week, number of hours flown, number of routes and size of aircraft fleet. During the three years ended December 31, 2020, our RPKs changed from 259,194 million in 2018 to 284,921 million in 2019 and 153,440 million in 2020, while our capacity, measured in terms of ASKs, changed from 314,421 million in 2018 to 344,062 million in 2019 and 214,722 million in 2020. In 2020, our Group carried 96.86 million passengers and had passenger revenue of RMB70,534 million (approximately US$10,810 million).

We conduct a portion of our airline operations through our airline subsidiaries, namely Xiamen Airlines, Shantou Airlines Company Limited (“Shantou Airlines”), Zhuhai Airlines Company Limited (“Zhuhai Airlines”), Guizhou Airlines Company Limited (“Guizhou Airlines”), Chongqing Airlines Company Limited (“Chongqing Airlines”) and China Southern Airlines Henan Airlines Company Limited (“Henan Airlines”), (collectively, the “Airline Subsidiaries”). In 2020, the Airline Subsidiaries carried 41.23 million passengers and had passenger revenue of RMB25,662 million (approximately US$3,933 million) and accounted for 42.57% and 36.38% of our passengers carried and passenger revenue, respectively.

We also provide air cargo and mail services. In 2020, in response to the increased demand of freight following the outbreak of the COVID-19 pandemic and to seize the opportunity to increase cargo and mail revenue, we improved the utilization rate of freighters and organized flights by freighters converted from passenger aircraft. Our cargo and mail revenue increased by 71.53% to RMB16,493 million (approximately US$2,528 million) in 2020. Our airline operations are fully integrated with our airline-related businesses, including aircraft maintenance, ground services and air catering operations.

Our operations primarily focus on the domestic market. In addition, we also operate regional routes and international flights. As of December 31, 2020, we operated 1,457 routes, of which 1,195 were domestic, 228 were international and 34 were regional. We operate the most extensive domestic route network among all Chinese airlines. Our route network covers commercial centers and rapidly developing economic regions in Mainland China. Our regional operations include flights between destinations in Mainland China, Hong Kong, Macau and Taiwan. Our international operations include scheduled services to cities in Australia, Bangladesh, Cambodia, Canada, Dutch, France, Indonesia, Japan, Kenya, Malaysia, Nepal, New Zealand, Pakistan, Philippines, Myanmar, Laos, Singapore, South Korea, Thailand, United Kingdom, United States of American (USA), and Vietnam.

 

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We have striven to build “Guangzhou-Beijing Dual Hub” to establish a new profit model and development mode, and gradually to develop a network-based airline. On October 10, 2017, we held the opening ceremony of Beijing Daxing International Airport’s hub project. During 2018, we continued to optimize the Guangzhou hub and completed the transfer operation to T2 terminal of Guangzhou Baiyun International Airport. Meanwhile, we were fully committed to building the Beijing hub, and launched Beijing-Istanbul and other new routes, and Xiong’an Airlines was approved for establishment. In 2019, we commenced the operation of CSA base simultaneously with the opening of Beijing Daxing International Airport, and successfully completed the first flight and the transition of the first 13 routes in 2019. In 2020, we cultivated in the Guangdong-Hong Kong-Macao Greater Bay Area and endeavored to build the Guangzhou hub into a model international aviation hub co-constructed with the province and city. Presently, we have over 50% of the market share in Guangzhou. Our Guangzhou hub has formed its route network featured with Europe and Oceania as its core, Southeast Asia, Southern Asia and Eastern Asia as its hinterlands, and with North America, Middle East and Africa covered. At the same time, we have completed the relocation of all flights in Beijing Airport to Beijing Daxing Airport, with utilized time slots accounting for 45%, becoming the largest main base airline in Beijing Daxing Airport, thus providing favorable conditions and resources for the development of our new Beijing hub. By comprehensively advancing the strategic layout of the “dual hubs”, we have further improved our institutional mechanisms and supporting resources to form a new development layout of CSA with Guangzhou Hub in the south and Beijing Hub in the north.

Our corporate headquarters and principal base of operations are located in Guangzhou, the capital of Guangdong Province and the largest city in southern China. Located in the rapidly developing Pearl River Delta region, Guangzhou is also the transportation hub of southern China and one of China’s major gateway cities. Guangzhou’s significance has increased as the transportation infrastructure of Guangdong Province has developed through the construction and development of expressways, an extensive rail network and the port cities of Guangzhou, Shenzhen, Zhanjiang, Zhuhai and Shantou. In 2020, the Company continued the construction integrating the Guangdong-Hong Kong-Macao Greater Bay Area, which drove the flow of people, logistics, information and capital in Guangdong Province and the entire Guangdong-Hong Kong-Macao Greater Bay Area, and enhanced the connectivity between the Guangdong-Hong Kong-Macao Greater Bay Area city cluster and major global city clusters.

As of December 31, 2020, we had a fleet of 867 aircraft, consisting primarily of Boeing 737, 747, 777, 787 series, Airbus 320, 330, 350, 380 series, EMB 190 series, ARJ 21 series, etc. The average age of our registered aircraft was 7.2 years as of December 31, 2020.

Impact of the COVID-19 Pandemic

The widespread and persistent impact of COVID-19 pandemic and the related travel restrictions and social distancing measures implemented throughout the world have significantly reduced demand for air travel. After initially impacting our business in domestic market significantly beginning in January 2020, the spread of the virus resulted in a global pandemic and had significantly affected our entire route network since March 2020. As a result, our business and results of operations in 2020 were materially affected.

In response to the developments of the pandemic, we strictly discharged the responsibilities for pandemic prevention and control and took numerous steps to ensure the safety of our customers and employees, while at the same time seeking to mitigate the impacts on our business and results of operations and to position our business for recovery, including:

 

   

Establishing a leading group for pandemic prevention and control, initiating the highest level response to public health emergency, formulating a plan to provide full support for transportation related to pandemic prevention and control, and adopting a policy of free transportation for supplies for pandemic prevention and control;

 

   

Adopting various precautionary measures for preventing the spread of COVID-19, including enhancing cleaning and sanitizing procedures on the ground and in the air, taking steps to help employees and customers practice social distancing and reducing physical touch points, and implementing government-mandated face-covering and body temperature checking requirements;

 

   

Making adjustments to our operational capacity by temporarily suspending or reducing the number of flights of certain routes, including those routes to and from high risk countries, exploring with our partners or suppliers the possibility of postponing the delivery of new aircraft, and seizing market opportunities to increase freight revenue; and

 

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Strengthening our cost control by encouraging employees to take voluntary leave with reduced pay during the initial period of the pandemic when our capacity was significantly reduced, and carrying out lean cost control management including implementation of cost-reduction and efficiency-enhancement measures and strict control of the cost of jet fuel and landing fees.

During the reporting period, we operated a total of 19,000 flights to assist the prevention and control of the pandemic, transported 25,000 medical personnel and 29,000 tons of supplies, and brought back 24,000 stranded Chinese citizens and overseas Chinese. We recorded zero infection among passengers on board for both international and domestic flights, and zero infection among all our employees at work. We had a number of meritorious models and were highly praised by government authorities and others.

Route Network

Overview

We operate the most extensive route network among all Chinese airlines. As of December 31, 2020, we operated 1,457 routes consisting of 1,195 domestic routes, 34 regional routes and 228 international routes.

We continually evaluate our network of domestic, regional and international routes in light of our operating profitability and efficiency. We seek to coordinate flight schedules with the Airline Subsidiaries on shared routes to maximize load factors and utilization rates. The operation of domestic, regional and international routes is subject to approval of the CAAC, and the operation of regional and international routes is also subject to agreements between the Chinese government and the government of the Hong Kong SAR, the government of the Macau SAR, the government of Taiwan province and the government of the proposed foreign destination. In 2020, due to the COVID-19 pandemic and its negative impact on the air travel demand in domestic and international market, as well as the various travel restrictions and boarder control measures implemented by government authorities of China and other countries, we had to make certain adjustments to our routes, including temporarily suspending or reducing the number of flights on some routes. Our domestic routes were significantly affected during the first quarter of 2020 and have been gradually recovering since then, while our international routes have been adversely impacted since the second quarter of 2020 and remained affected as of the date of this Annual Report.

In order to expand our route network, we have entered into code-sharing agreements with several international and domestic airlines, including American Airlines, Aeroflot-Russian Airlines, Alitalia-Linee Aeree Italiane, Air France, British Airways, CSA Czech Airlines, Asiana Airlines, China Airlines, China Eastern Airlines, Delta Air Lines, Emirates Airlines, Etihad Airways, Finnair, Japan Airlines International, KLM Royal Dutch Airline, Korean Air, Mandarin Airlines, Pakistan International Airlines, PT Garuda Indonesia (Persero) Tbk., Qantas Airways Limited, Qatar Airways Company Q.C.S.C., Saudi Arabian Airlines, Sichuan Airlines, Vietnam Airlines, WestJet, Xiamen Airlines, and others. Under the code-sharing agreements, the participating airlines are permitted to sell tickets on certain international routes operated by us to passengers using their codes. Similarly, we are permitted to sell tickets for the other participating airlines using CZ code. The code-sharing agreements help increase the number of our international sales outlets. At present, we share codes with 29 international and domestic airlines in 637 routes, including trunk routes and branch routes.

 

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

 

     Passenger carried     Cargo and mail carried
(tons)
    Total traffic (tons
kilometers)
 

Year

   Total (in
millions)
     Increase
(decrease)
over
previous
year (%)
    Total (in
thousand
tons)
     Increase
(decrease)
over
previous
year (%)
    Total (in
millions)
     Increase
(decrease)
over
previous
year (%)
 

2018

     139.89        10.76       1,732        3.6       30,334        11.03  

2019

     151.63        8.4       1,764        1.8       32,625        7.55  

2020

     96.86        (36.12     1,461        (17.17     20,805        (36.23

Route Bases

In addition to our main route bases including Guangzhou and Beijing as core hubs, we maintain regional route bases in Urumqi, Chongqing, Zhengzhou, Wuhan, Changsha, Shenzhen, Shenyang, Changchun, Dalian, Harbin, Haikou, Zhuhai, Xiamen, Shanghai, Xi’an, Fuzhou, Nanning, Guilin, Shantou, Guiyang, Sanya, Chengdu and Kunming. Most of our regional route bases are located in provincial capitals or major commercial centers in the PRC.

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

Domestic Routes

Our domestic routes network serves substantially all provinces and autonomous regions in China, including Guangdong, Fujian, Hubei, Hunan, Hainan, Guangxi, Guizhou, Henan, Heilongjiang, Jilin, Liaoning, Sichuan, Yunnan, Shannxi and Xinjiang and serves all four centrally-administered municipalities in China, namely, Beijing, Shanghai, Tianjin and Chongqing. In 2020, our most profitable domestic routes were: Haikou-Guangzhou, Xinyang-Guangzhou, Guangzhou-Xinyang, Urumqi-Sanya, Hanzhong-Shenzhen, Shenzhen-Wuhan, Shiyan-Guangzhou, Shenzhen-Hanzhong, Guangzhou-Haikou, and Nyingchi-Chongqing-Zhuhai.

Regional Routes

We offer scheduled service between Hong Kong and Beijing, Shenyang, Meixian, Wuhan, Yiwu; and between Taipei and Guangzhou, Zhengzhou, Changchun, Dalian, Zhangjiajie, Changsha, Harbin, Guiyang, Guilin, Nanning, Shanghai, Shenyang, Jieyang, Shenzhen, Wuhan, Shijiazhuang, Yiwu and Urumqi; and between Macau and Chongqing, Changsha, Wuhan. In 2020, the most profitable scheduled regional routes were: Shenzhen-Taipei, Guangzhou-Taipei, Macao-Wuhan, Macao-Changsha, Changsha-Taipei, Taipei-Changsha, Wuhan-Taipei, Taipei-Harbin, Jieyang-Taipei, and Nanning-Taipei.

In 2020, we conducted a total of 2,708 flights on our regional routes.

Previously, direct flights between Taiwan and Mainland China were only available during certain festivals. Other than that, travelers between Taiwan and Mainland China had to make use of intermediate stops in Hong Kong or elsewhere. Since July 2008, however, the ban on direct flights was further liberalized to allow direct charter flights on weekends. We were the first Chinese carrier to fly nonstop to Taiwan. On November 4, 2008, the Mainland China and Taiwan agreed to have regular direct passenger charter flights across the Taiwan Strait. On August 31, 2009, the Mainland China and Taiwan increased the number of regular cross-Strait direct passenger flights from 108 to 270 a week. In 2020, before the outbreak of the COVID-19 pandemic, we planned to operate 16 routes to Taiwan, which were successively reduced to one (Shanghai Pudong-Taipei) due to CAAC’s requirements in response to the COVID-19 pandemic. As of December 31, 2020, only one route (Shanghai Pudong-Taipei) was retained.

 

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International Routes

We are the principal Chinese airline serving Southeast Asian destinations and Australasia, including Singapore and major cities in Australia, Bangladesh, Cambodia, Indonesia, Malaysia, New Zealand, Philippines, Thailand and Vietnam.

In addition, we also provide scheduled services to cities in Australia, Azerbaijan, Bangladesh, Cambodia, Canada, Dutch, France, German, India, Indonesia, Iran, Italy, Japan, Kenya, Kazakhstan, Kyrgyzstan, Malaysia, Maldives, Nepal, New Zealand, Pakistan, Philippines, Russia, Singapore, South Korea, Tajikistan, Thailand, Turkmenistan, United Arab Emirates (UAE), United Kingdom, United States of American (USA), Uzbekistan, and Vietnam.

In 2020, our most profitable international routes were: Los Angeles-Guangzhou, Amsterdam-Guangzhou, London-Guangzhou, Vancouver-Guangzhou, Sydney-Guangzhou, Phnom Penh-Guangzhou, Tokyo-Shenyang, Kuala Lumpur-Guangzhou, Paris-Guangzhou, and Yangon-Guangzhou. In 2020, our international operations were severely affected by the impact of the COVID-19 pandemic. See Item 3. “Key Information – Risk Factors – The outbreak and global spread of COVID-19 and the persistence of the resulting pandemic have had a material adverse effect on our business. The duration and severity of the pandemic, and similar public health threats or a large scale natural disaster we may face in the future, could result in additional adverse effects on our business”.

Aircraft Fleet

Our fleet plan in recent years emphasized expansion and modernization through the acquisition of new aircraft and the retirement of less efficient and old aircraft. As of December 31, 2020, we operated a fleet of 867 aircraft with an average age of 7.2 years. Most aircraft of our Group are Boeing and Airbus aircraft. We have the largest fleet among Chinese airline companies. Please see the table below for an analysis of our aircraft in terms of average age and respective passenger capacity.

 

Model   

Number of

Aircraft

     Passenger Capacity  

Airbus 380 series

     5        506  

Airbus 350 series

     8        314  

Airbus 330 series

     45        218/258/259/260/278/283/284/286  

Airbus 320 series

     325        94/130/138/152/160/166/179/189/195/200/208  

Boeing 787 series

     37        237/266/276/287/297  

Boeing 777 series

     15        361  

Boeing 737 series

     401        128/134/159/161/164/169/170/172/178/184  

EMB190

     9        98  

ARJ21 Series

     6        90  

Boeing 747 series Freighter

     2        N/A  

Boeing 777 series Freighter

     14        N/A  

Total

     867        N/A  

In 2020, in order to reduce the operation loss caused by the COVID-19 pandemic, we postponed our new aircraft delivery and expedited the retiring process of old aircraft models and those whose market value has declined. Meanwhile we continue to modernize our fleet by taking the delivery of some new generation aircraft. We

 

  (i)

took scheduled delivery of 22 aircraft under purchase agreements, including four A320neo aircraft, eight A321neo aircraft, two A350 aircraft, six ARJ21 aircraft and two B777F aircraft;

 

  (ii)

took scheduled delivery of ten A321neo aircraft under operating leases;

 

  (iii)

returned 27 aircraft under operating leases upon expiry, including five A319 aircraft, nine A320 aircraft, two A330-300 aircraft and 11 E190 aircraft; and

 

  (iv)

disposed no aircraft.

During 2020, Xiamen Airlines took scheduled delivery of two ARJ21 aircraft under financing leases and one ARJ21 aircraft purchased by its own funds.

 

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Aircraft Financing Arrangements

Overview

As of December 31, 2020, a significant portion of our aircraft is acquired under long-term leases with remaining terms to maturity mainly ranging from one to twelve years. As of December 31, 2020, of our Group’s 867 aircraft, 571 aircraft were operated under leases and 296 were either owned aircraft financed by long-term loans, or acquired either with cash proceeds or acquired by exercising the purchase options upon expiry of the respective leases. Our planned acquisition of aircraft in the foreseeable future will generally be made through acquisition by bank loans and our own funds or under lease arrangements. Our determination as to our acquisition strategy depends on our evaluation at the time of our capacity requirements, anticipated deliveries of aircraft, our capital structure and cash flow, prevailing interest rates and other general market conditions.

The following table sets forth, as of December 31, 2020, the number of aircraft operated by our Group pursuant to leases and the average remaining terms.

 

     Financing Lease      Operating Lease     

Average

Remaining

Lease Term

 
Model    Number of Aircraft      Number of Aircraft      Year  

Boeing 787 series

     25        8        6.60  

Boeing 777 series

     14        0        6.70  

Boeing 737 series

     76        163        5.03  

Airbus 380 series

     1        0        2.17  

Airbus 350 series

     6        0        8.83  

Airbus 330 series

     29        12        5.43  

Airbus 320 series

     100        124        6.47  

EMB190

     0        3        0.25  

ARJ21

     3        0        5.78  

Boeing 777 series Freighter

     7        0        6.85  

Boeing 747 series Freighter

     0        0        0  

Total

     261        310        5.79  

Pursuant to the terms of the leases, our Group, as the lessee, is responsible during the lease term for the maintenance, service, insurance, repair and overhaul of the aircraft. Certain of our leases cover a significant portion of the relevant aircraft’s useful life and have an option to purchase the aircraft at or near the end of the lease term. For all other leases, we have no option to purchase the aircraft and are required to return the aircraft in the agreed condition at the end of the lease term. In 2020, in response to the reduced air travel demand resulted from the COVID-19 pandemic, we reached agreements with aircraft manufacturers to postpone the delivery of 15 new aircraft, including eight A320 series aircraft, four A350 aircraft, two 787-9 aircraft and one 777-300ER aircraft. Accordingly, our payment obligations under such leases (amounting to US$595 million) were also postponed. Our aggregate future minimum lease payments required under leases were RMB140,776 million as of December 31, 2020.

Aircraft Flight Equipment

The jet engines used in our aircraft fleet are manufactured by General Electric Corporation, Rolls-Royce plc, United Technologies International, Inc., CFM International, Inc. and International Aviation Engines Corporation. We had 94 and 93 spare jet engines for our fleet as of December 31, 2020 and 2019, respectively. We determine our requirements for jet engines based on all relevant considerations, including manufacturers’ recommendations, the performance history of the jet engines and the planned utilization of its aircraft. Acquisition of rotables and certain of the expendables for our aircraft are generally handled by Southern Airlines (Group) Import and Export Trading Company Limited (“SAIETC”), a subsidiary we acquired from CSAH in August 2016, in consideration of an agency fee. We arrange the ordering of aircraft, jet engines and other flight equipment for the Airline Subsidiaries and keep an inventory of rotables and expendables for the Airline Subsidiaries.

 

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Aircraft Maintenance

A major part of the maintenance for our fleet other than overhauls of jet engines is performed by Guangzhou Aircraft Maintenance Engineering Company Limited (“GAMECO”), an entity jointly controlled by our Company, Hutchison Whampoa (“Hutchison”) and South China International Aircraft Engineering Company Limited, consistent with our 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 our fleet other than overhauls of jet engines is performed by service providers in China and overseas. GAMECO performs all types of maintenance services, ranging from maintenance inspections performed on aircraft (“line maintenance services”) to major overhaul performed at specified intervals. GAMECO was the first of three aircraft maintenance facilities in China that has been certified as a repair station by both the CAAC and the Federal Aviation Administration. In March 1998, GAMECO received the Joint Civil Aviation Authorities certificate, which was transferred to European Aviation Safety Agency certification in November 2004, for the repair and maintenance of aircraft.

We believe that GAMECO performs major maintenance checks on our aircraft within time periods generally consistent with those of large international airline maintenance centers. In 2020, more than 44% of the repair and maintenance including overhaul of our Company were performed by GAMECO. Although rotables for our aircraft are generally imported through SAIETC, a portion of expendables and other maintenance materials are directly imported by GAMECO. Our agreement with GAMECO usually has a term of one year.

Overhauls of jet engines are performed by MTU Maintenance Zhuhai Co., Ltd., or Zhuhai MTU, a jointly controlled entity of the Company and MTU Aero Engines GmbH, and also by domestic qualified service providers in Xiamen (TEXL), Hong Kong (HAESL) and Taiwan (EGAT), Beijing (AMECO) and by overseas qualified service providers in USA, Germany, Korea, Singapore, France, Netherlands and Scotland.

The amounts incurred by our Group for comprehensive maintenance services provided by GAMECO and Zhuhai MTU were RMB4,104 million, RMB5,381 million, and RMB4,521 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Safety

We endeavor to maintain strict compliance with all laws and regulations applicable to flight safety. In addition, we have 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 our Company implements safety-related training programs on an on-going basis in all of our operations to raise the safety awareness of all employees. As a result, overall flight safety has gradually improved. For “incidents” which include various events and conditions prescribed by the CAAC that do not involve serious personal injury or material damage to flight equipment, our Group has kept the number consistently below what is prescribed by the CAAC. For example, our “Air Transportation Incidents Per Ten Thousands Hours Ratio” was 0, 0.0088, and 0.0047 in 2020, 2019 and 2018, respectively. In comparison, CAAC’s published maximum acceptable Air Transportation Incidents Per Ten Thousands Hours Ratio was 0.06, 0.06, and 0.06 in 2020, 2019 and 2018, respectively. This ratio is defined as the number of occurrences of air transportation incident for every 10,000 hours of flight time. In 2008, we received the “Five-Star Flight Safety Award” from CAAC, being the first in domestic aviation industry to receive such a great honor. Subsequently in 2012, we were awarded the “Safe Flight Diamond Award” by CAAC for our 10,000,000 safety flight hours record. On June 15, 2018, our Company was honored with the 2-Star Flight Safety Diamond Award by the CAAC, becoming the leading Chinese carrier to maintain the highest safety records in China. By December 31, 2020, our continuous safe flight span were 28.466 million hours.

In 2020, we strictly followed the guidance of the Chinese government authorities on the prevention of the COVID-19 pandemic and implemented various relevant safety measures. Following the outbreak of the pandemic, we immediately established a leading group for pandemic prevention and control, initiated the highest level response to public health emergency, formulated a plan to provide full support for anti-pandemic transportation, reduced flights to high risk countries and regions, and implemented protection measures for employees and control measures for passengers. We recorded zero infection among all passengers on board in international and domestic flights and zero infection among all employees at work.

 

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Jet Fuel

Jet fuel costs typically represent a major component of an airline’s operating expenses. Our jet fuel costs accounted for 17.2%, 28.8%, and 30.6% of our operating expenses for the years ended December 31, 2020, 2019 and 2018, respectively. Like other Chinese airlines, we generally purchase our jet fuel from regional branches of CAOSC and Bluesky Oil Supplies Company, except at Shenzhen, Sanya, Haikou and Shanghai Pudong where jet fuel is supplied by Sino-foreign joint venture in which CAOSC is a joint venture partner. CAOSC is a State-owned organization controlled and supervised by the CAAC that controls the importation and distribution of jet fuel throughout China.

Jet fuel obtained from CAOSC’s regional branches is purchased at a market-adjusted price set within a specified range based on the guidance price issued by CAOSC with the approval of the CAAC and the pricing department of the NDRC. 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, insufficient storage facilities for jet fuel in certain regions of China, and the prevailing fuel prices on the international market. In 2020, due to the complex and evolving global political environment, and the increasing downward pressure on the global economy, there were uncertainties for both supply and demand of international crude oil. In the beginning of 2020, international crude oil prices fell and fluctuated sharply, and then slowly rebounded in a V-shaped trend.

In addition to purchases of jet fuel from CAOSC, we also purchase a portion of our jet fuel requirements for our international flights from foreign fuel suppliers located outside China at prevailing international market prices. Jet fuel purchased from such sources accounted for approximately 17.13% and 11.44% of our total jet fuel consumption in 2019 and 2020, respectively.

Our jet fuel costs decreased from RMB42,814 million in 2019 to RMB18,797 million in 2020, as a result of the decrease in traffic volume due to the impact of COVID-19 pandemic and the decrease in fuel prices.

Fuel Surcharge

Our profit for the year may suffer from an unexpected change in the fuel surcharge collection policies and other factors beyond our control. The level of fuel surcharges, which is regulated by Chinese government, affects domestic customers’ air travel demand as well as our ability to generate profits. On January 14, 2009, the NDRC and the CAAC jointly announced that the collection of passenger fuel surcharge for domestic routes should be suspended from January 15, 2009 onwards. Subsequently, in response to the increase in international fuel prices, the NDRC and CAAC issued a notice on November 11, 2009 to introduce a new pricing mechanism of fuel surcharge that links it with airlines’ jet fuel costs, which was further adjusted subsequently.

From April 1, 2015, the NDRC adjusted the benchmark oil price to RMB5,000 per ton, for every RMB100 by which the cost of jet fuel exceeds that price, the airlines are allowed to charge RMB0.00002566 per kilometer for the flight distance. Based on that rate, for every RMB100 by which the cost of jet fuel exceeds RMB5,000 per ton, the airlines are allowed to charge RMB0.0002566 per kilometer for the flight distance. The NDRC decreased the rate of fuel surcharge from RMB0.00002566 per kilometer to RMB0.00002454 per kilometer, from April 1, 2019.

 

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Flight Operations

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

To enhance our management of flight operations, we have launched and continued optimizing a new system to manage the whole flight operation process, covering flight plan production, aeronautical information processing, meteorological analysis, operation monitoring, flight deployment and other operational activities, which advanced our operation management in a more intelligent and digitalize way and improved our flight operation efficiency. We also established and improved the backup system to enhance our risk-resistance ability. We believe such system will assist us in preventing major operational risks, including from power failure, terrorist attack, hacker attack and equipment or software failure.

Training of Pilots and Flight Attendants

We believe that our pilot training program has significantly improved the quality of the training received by our pilots and has helped maintain the quality of our staff of pilots at a level consistent with the expansion of operations called for by our business strategy.

As part of the pilot training program, trainee pilots receive their initial training in the operation of a specific aircraft with Zhuhai Xiang Yi Aviation Technology Company Limited (“Zhuhai Xiang Yi”), a wholly-owned subsidiary of the Company, which also provides training to pilots from other Chinese airlines. Zhuhai Xiang Yi is equipped with simulators for majority models of aircraft currently operated by us and provides flight simulation training services to us.

Our pilots are required to be licensed by the CAAC, which requires an annual proficiency check. Our pilots attend courses in simulator training twice annually and in emergency survival training once annually. We also conduct 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.

We conduct theoretical and practical training programs for our flight attendants at our 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 us. At the Guangzhou Training Center, our flight attendants receive comprehensive training in in-flight service, emergency evacuation and water rescue.

Ground Services

We make arrangements with airport authorities, other airlines or ground services companies for substantially all ground facilities, including runway, ramp, terminal and support services buildings, at each airport that they serve. We pay landing, parking and other fees to such airports, including Guangzhou Baiyun International Airport. At domestic airports, such fees are generally determined by CAAC.

At Guangzhou Baiyun International Airport, we operate our own passenger check-in, cargo, mail and baggage handling, aircraft maintenance and cleaning services. We also provide such services to our customer airlines that operate in Guangzhou Baiyun International Airport.

 

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Ground services at the airports, such as those in Shenzhen, Changsha, Wuhan, Zhengzhou, Haikou, Zhuhai, Xiamen, Guilin, Jieyang, Guiyang, Shenyang, Harbin, Dalian, Changchun, Sanya, Nanning, Chongqing, Shanghai Hongqiao, Shanghai Pudong and Urumqi, are operated directly by the Group. Ground services at the airport in Beijing have been primarily provided by Beijing China Southern Airlines Ground Services Co., Ltd, which became a wholly-own subsidiary of the Company in June 2009. Ground services at other airports in China are provided to us by local airport authorities or local airlines in accordance with relevant service agreements. Ground services and other services at airports outside China are provided to us by foreign services providers in accordance with relevant service agreements with such parties. All our such agreements are short-term and otherwise on customary terms in the industry.

Air Catering

We own a 70.5% equity interest in Guangzhou Nanland Air Catering Company Limited (“Nanland”). Nanland provides in-flight meals, snacks, drinks and related services for all of our flights originating from airports around China. We also contract 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 customary terms in the industry. Following the onset of the COVID-19 pandemic, we have limited the food and beverage services in certain flights in order to reduce physical touch points.

Cargo and Mail

We also provide air cargo and mail services. A significant portion of these services are combined with passenger flights services. In 2020, we had two Boeing 747 freighters and 14 Boeing 777 freighters, mainly servicing 19 international cargo routes, including:

Guangzhou–Chongqing–Amsterdam–Guangzhou, Guangzhou–Amsterdam–Guangzhou, Guangzhou–London-Frankfurt-Guangzhou, Guangzhou-Frankfurt-Guangzhou, Guangzhou-Anchorage-LosAngeles-Guangzhou, Guangzhou-HoChiMinhCity-Hanoi-Guangzhou, Guangzhou–Chongqing–Frankfurt–Guangzhou, Guangzhou–London-Guangzhou, Guangzhou–London-Shenzhen, Shenzhen-Frankfurt-Guangzhou, Shenzhen-Frankfurt-Shenzhen, Shenzhen-Anchorage-Chicago-Shenzhen, Shenzhen–Frankfurt–ShanghaiPudong, ShanghaiPudong–Anchorage–Chicago–Shenzhen, ShanghaiPudong-Amsterdam-Chongqing-ShanghaiPudong, ShanghaiPudong-Amsterdam-ShanghaiPudong, ShanghaiPudong–Frankfurt–ShanghaiPudong, ShanghaiPudong–Anchorage–Chicago–ShanghaiPudong, and ShanghaiPudong–LosAngeles–ShanghaiPudong.

In 2020, following the onset of the COVID-19 pandemic, the demand for freight was significantly increased. We responded actively to seize the opportunity to increase freight revenue, including improving the utilization rate of freighters, and organized 8,431 flights shifts by freighters converted from passenger aircraft, and achieved positive operating results. Cargo and mail revenue was RMB16,493 million in 2020, representing an increase of 71.53% compared to 2019. We also recorded cargo and mail revenue through freighters converted from passenger aircraft of RMB1,278 million in 2020. We conduct our cargo business primarily through our cargo hubs in Guangzhou and Shanghai.

Sales, Reservations and Marketing

Passenger Ticket Sales and Reservations

Our ticket sales and reservations are conducted by or through independent sales agents and our own network of exclusive sales offices, as well as the CAAC’s sales offices and CSAH’s affiliates. We have sales offices in Guangzhou and our other route bases. In addition, we maintain regional sales offices in other cities in China, including Beijing and Shanghai. We maintain international sales offices in Almaty, Amsterdam, Ashkhabad, Auckland, Astana, Baku, Bangkok, Bishkek, Busan, Chicago, Daegu, Daejeon, Delhi, Dhaka, Dubai (Sharjah), Dushanbe, Frankfurt, Hanoi, Ho Chi Minh City, Irkutsk, Islamabad, Istanbul, Jakarta, Kathmandu, Khabarovsk, Khudzhand, Kuala Lumpur, London, Los Angeles, Manila, Mexico City, Moscow, New York, Novosibirsk, Nairobi, Osh, Paris, Penang, Phnom Penh, Roma, Seoul, Singapore, Sydney, Tashkent, Tehran, Toronto, Tokyo, Tbilisi, Vancouver, Vladivostok, Vienna,Vientiane and Yangon.

 

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We have 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 2020, over 59% of all ticket sales for our scheduled flights were made by our network of sales offices and CSAH’s affiliates. We also sell tickets and accept reservations through an extensive network of non-exclusive independent sales agents. Under the agency agreements with them, we pay commissions based on the value of tickets sold. In 2020, sales by independent sales agents accounted for less than 41% of our ticket sales of our scheduled flights.

Substantially all of our sales offices and agents in China are linked electronically to the TravelSky Technology Limited’s computerized ticketing and reservations system, which is in turn linked to all domestic airlines for flights throughout China. We have 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 our international flights. Since 2016, we have been focusing on improving the digitalization and intelligence level. We have launched the “China Southern e Travel” strategy, which aims to explore the needs of passengers and plan and design products from the perspective of passengers. We have built a number of quality products such as flight dynamics, seat selection and check-in, electronic invoices, face recognition, full-channel self-service refund, and meal service. The grand vision of “a hassle-free journey with one mobile device” has become a reality in technology, and the digitalization of the entire process of passenger travel has been realized. In 2018, we released the “Internet +” strategy centering on “China Southern e Travel”, and formally built a one-stop service mobile application platform to provide passengers with excellent door-to-door service experience. We believe technology has become one of our core competitive advantages.

In 2020, due to the outbreak of the COVID-19 pandemic and several regional resurgence cases, we experienced significant ticket cancellations and waived the relevant cancellation or change fees chargeable to consumers to a substantial extent either based on the change or cancellation policy we voluntarily adopted or in accordance with the orders or notices issued by the Chinese government authorities.

Cargo

Our cargo and mail services are promoted through our own cargo divisions and independent cargo agents both within and outside China that track available space among all airlines. In particular, our Company employs a number of cargo agents in the Pearl River Delta region. In 2020, we generally pay the cargo agents an average commission of 0.15% of the relevant cargo freight rate for domestic and international services, and a commission of 0.29% to cargo agents in the Pearl River Delta region.

Promotional and Marketing Activities

We engage in regular promotional and marketing activities to increase our market share. Our promotional and marketing activities for domestic routes emphasize safety, passenger comfort and the frequency of our flights. Our promotional and marketing activities for international and regional passengers emphasize our quality of service, extensive route network in China and higher frequency of flights compared to other Chinese airlines. We were among the first to launch premium economy class seats. In addition, we also promote and market our regional and international routes on the basis of price competitiveness.

We seek to increase our brand recognition by offering new services to passengers. For example, we were the first Chinese airline to provide off-airport check-in services. We also offered transfer and baggage “through-handling” services to passengers connecting to other airlines, including passengers connecting in Hong Kong for flights to Taiwan. We widened our use of information technology and introduced new services such as cell phone check-in, SMS platforms and online meal booking. In 2017, our Company reached a strategic cooperation agreement with American Airlines. Under this agreement, American Airlines subscribed our Company’s shares in August 2017 in the amount of USD200 million. Our Company and American Airlines also established a code sharing partnership on January 18, 2018 to provide more convenient and diversified trip options for passengers.

As an important strategic decision, we have officially exited from SkyTeam Alliance from January 1, 2020 and focused on establishing cooperation with new strategic partners, while maintaining good relationships with the SkyTeam partners. We have had a Strategic Cooperation Agreement with American Airlines since 2017 and implemented full scope codeshare cooperation, Frequent Flyer Programs cooperation and lounge services since 2019.

 

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We have also entered into a Joint Business Agreement with British Airways and implemented enhanced codeshare cooperation in 2019. Although no longer a member of SkyTeam, CZ continues the codeshare cooperation with SkyTeam partners, including AirFrance-KLM, and other important joint business partners. We will continue to properly carry out the work of exit and fully guarantee the rights and interests of passengers. We will carry out bilateral and multilateral cooperation in a more targeted manner while deepening the cooperation with the existing partners such as France Airlines and KLM Royal Dutch Airlines, expand code sharing and frequent passenger cooperation with American Airlines, and launch strategic cooperation with numbers of internationally renowned airlines such as Finnair and Emirates to provide passengers with more convenient and high-quality travel options. At the same time, we continue to strengthen the coordinated development of the “China Southern Alliance” by gradually integrating with Xiamen Airlines and Sichuan Airlines in terms of capacity layout, route cooperation, resource sharing and customer collaboration. At present, we share codes with 29 international and domestic airlines, such as American Airlines, British Airways, KLM Royal Dutch Airlines and Qantas Airways in 637 routes (including trunk routes and beyond routes). This further enlarged our sales channels and flight route network.

To enhance relationships with our passengers, we have launched two major frequent flyer programs, namely the “China Southern Airlines Sky Pearl Club” and the “Xiamen Airlines’ Egret Card Frequent Flyer Program”. By the end of 2020, we had over 60 million members (including those of Xiamen Airlines) under these programs.

Regulation

The Chinese commercial aviation industry is subject to a high degree of regulation and oversight by the CAAC. Regulations and policies issued or implemented by the CAAC encompass substantially all aspects of airline operations, including route allocation, pricing of domestic airfare, the administration of air traffic control systems and certain airports, air carrier certifications and air operator certification and aircraft, registration and aircraft airworthiness certification. The Civil Aviation Law, which became effective in March 1996, provides a framework for regulation of many of these aspects of commercial aviation activities. Although Chinese airlines operate under the supervision and regulation of the CAAC, they are accorded an increasingly significant degree of operational autonomy in the application for domestic, regional and international routes, the allocation of aircraft among routes, the purchase of flight equipment, the pricing of air fares within a certain range, the training and supervision of personnel and their day-to-day operations.

As an airline providing services on international routes, we are 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. We believe that we, in all material respects, comply 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. We believe that these regulatory parameters benefit airlines, such as our Group, that have a large number of regional route bases. The CAAC also considers other factors that may make a particular airline suitable to operate a domestic route, including the applicant’s general operating authority, compliance with pricing regulations and regulations applicable to safety and service quality, market demand, the ability of the applicant in terms of its existing routes, airport facilities and related support services.

The CAAC considers market conditions for a domestic route in determining whether the route should be allocated to one or more airlines. Generally, the CAAC requires the passenger load factor on certain route should be above the average rate of the whole market in the last flight season before additional flights and participants may be put on that route.

 

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Regional Routes. Hong Kong and Macau routes and landing rights are derived from agreements between the Chinese government and the government of the Hong Kong SAR, and between the Chinese government and the government of Macau SAR. The rights to fly between Beijing and Hong Kong, Beijing and Macau, Shanghai and Hong Kong and Shanghai and Macau are allocated by the CAAC among four different Chinese airlines. We understand 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.

Previously, direct flights between Taiwan and Mainland China were only available during certain festivals. Since July 4, 2008, however, the ban on direct flights has been further liberalized to allow direct charter flights on weekends. On November 4, 2008, the Mainland China and Taiwan agreed to regular direct passenger charter flights across the Taiwan Strait. On August 31, 2009, the Mainland China and Taiwan extended the number of regular cross-Strait direct passenger flights from 108 to 270 a week. Cross-Strait direct passenger flights were further increased in the following years, but were significantly reduced in 2020 due to the COVID-19 pandemic.

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. On March 26, 2020, in response to the outbreak of the COVID-19 pandemic worldwide, CAAC issued a notice regarding the reduction of the number of international routes. The notice requires that each PRC airline may only operate one route for flying to and from each foreign country, and no more than one flight can be operated in each week for each such international route. Some international flights of the Company were canceled and the number of the international flights of the Company was substantially reduced following the notice. The timing and extent of the resumption of the canceled routes and flights will depend on the policy of the CAAC.

Air Fare Pricing Policy

In recent years, there were a series of air fare reform to deregulate the control on the air fare pricing policy step by step. 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 fluctuate freely within a predetermined range. Instead of direct supervision by setting prices of air tickets through a local price bureau, the government provides guidance on domestic flights and domestic civil aviation is controlled by the government indirectly. Market-oriented pricing policy was introduced and pricing system has been adjusted as a result of the above pricing reform. The CAAC and NDRC issued a notice on April 13, 2010, pursuant to which, effective on June 1, 2010, airlines may set first-class and business-class airfares freely in accordance with market prices, subject to relevant PRC laws. The economy-class airfares remain to be subject to the predetermined range. The CAAC and NDRC further issued a notice, pursuant to which, effective on October 20, 2013, airlines are free to set domestic flights airfares not exceeding up to 25% above the bench mark prices where governmental pricing guidance is applicable; and to freely determine the airfares for domestic routes with the market-oriented pricing policy based on the market demand and supply situation.

On September 29, 2016, the CAAC and NDRC further issued the Notice on Deepening the Pricing Reform of Demotic Civil Aviation to further expand the scope of the routes with the market-oriented pricing policy: airfares for the routes below 800 kilometers or the routes above 800 kilometers and in the competing relationship with the high-speed rail EMU trains can be freely determined by airlines. Airlines may raise the non-discounted announced airfares for a certain amount of routes with the market-oriented pricing policy. In principle, such amount shall be no more than 10 per flight season, and the accumulative increase rate of airfares shall be no more than 10 percent per route per flight season. On December 17, 2017, the CAAC and NDRC further issued the Notice on Further Deepening the Pricing Reform of Demotic Civil Aviation, pursuant to which the airlines were allowed to decide their own prices on domestic routes that have at least five carriers competing. Price increases of no more than 10% would be also allowed for each travel season.

 

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For each airline, the total number of the routes which the airline can decide their own price shall be no less than 10 but shall generally not exceed 15% of the total number of the market-oriented routes operated by such airline in one flight season. On April 13, 2018, CAAC issued the Notice on Distributing the Catalog of Domestic Routes adopting Market Regulation Price. The catalog of domestic routes is published together with such notice.

On November 26, 2020, CAAC and NDRC issued the Notice on Further Deepening the Pricing Reform of the Domestic Routes of Demotic Civil Aviation to further expand the scope of routes that may adopt market-oriented pricing policy. Under the Notice, airlines are allowed to decide their own prices on domestic routes that have at least three competing carriers, rather than previous five competing carriers. The catalog of domestic routes that qualify for adopting market-oriented pricing as a result of the new requirement is published together with such notice. The notice became effective on December 1, 2020.

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

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

Acquisition of Aircraft and Flight Equipment

If a Chinese airline plans to acquire an aircraft, the airline must first seek approval from the CAAC and NDRC. The airline must, as a condition of approval, provide specific acquisition plans, which are subject to modification by the CAAC and NDRC. If the CAAC and NDRC approve an aircraft acquisition, the airline negotiates the terms of the acquisition with the manufacturer together with China Aviation Suppliers Holding Company (“CASC”), an entity controlled by CAAC, because CASC possesses the license required to import or export aircraft, and CASC receives a commission in respect thereof. Most Chinese airlines are also required to acquire their aircraft engines, spare parts and other flight equipment through CASC. Our 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 our Company, SAIETC acts as our import agent and receives an agency fee for our services.

Jet Fuel Supply and Pricing

CAOSC and Bluesky Oil Supplies Company, companies supervised by the CAAC, are the only jet fuel supply companies in China, with the exception of the joint venture jet fuel supply companies that supply Shenzhen, Zhuhai, Sanya, Haikou, Shanghai Pudong and other small airports. As a result, all Chinese airlines purchase their domestic jet fuel supply requirements (other than the above mentioned exceptions) from the seven regional branches of CAOSC. Jet fuel obtained from such regional branches is purchased at a market-adjusted price set within a specified range based on the guidance price issued by CAOSC with the approval of the CAAC and the pricing department of the NDRC.

Safety

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

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

 

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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 positions.

Security

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

Noise and Environmental Regulation

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

Chinese Airport Policy

The CAAC supervises and regulates all civilian airports in China. The local government of the PRC manages the administration of most civilian airports in China. Airports in China are also subject to regulation and ongoing review by the CAAC, which determines take-off and landing charges, as well as charges for the use of airports and airport services.

Competition

The CAAC’s extensive regulation of the Chinese commercial aviation industry has had the effect of managing competition among Chinese airlines. Nevertheless, competition has become increasingly intense in recent years due to a number of factors, including relaxation of certain regulations by the CAAC, an increase in the number of Chinese airlines and an increase in the capacity, routes and flights of Chinese airlines.

In the Chinese aviation industry, the three dominant airlines are our Group, Air China and China Eastern Airlines Corporation Limited (the “China Eastern Airlines”). In 2020, these three airlines together controlled approximately 57% of the commercial aviation market in China as measured by the number of passengers carried.

Most major Chinese airlines in recent years significantly expanded their fleets, while at the same time passenger traffic may not increase proportionately. In some years, this resulted in a reduction in our passenger load factors. As a result, we are required to be more competitive with respect to, for example, quality of service, including ticketing and reservations, in-flight services, flight scheduling and timeliness. The development of the COVID-19 pandemic may also have influence on the competition dynamic among us and our Chinese airline competitors, due to our relatively greater focus on the domestic market compared to our competitors, see “Item 3, Key Information – Risk Factors – We face increasingly intense competition in both domestic and international markets, which may materially and adversely affect our business” for more discussion on competition.

 

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We also face competition from the increased use of high-speed railways. We expect that improvements in high-speed railways will continue to erode the aviation market. First, the “eight horizontal and eight vertical” high-speed railway corridors are gradually being perfected. Second, in the future, the railway system will gradually release its own pricing, adopt flexible pricing and market pricing. Passengers will be able to get discounts on more routes. Third, one-third of high-speed railway will speed up, which may attract more passengers. The competition on passengers whose trip distance are from 800 kilometers to 1,000 kilometers is intense, and with increasing speed, high-speed railways may attract passengers who travel longer than 1,000 kilometers. In addition, the operational efficiency of high-speed railways and train capacity will increase. According to data released by China State Railway Group Co., Ltd., by the end of 2020, China’s railway operating mileage had reached 146,300 kilometers, of which high-speed rail mileage reached 37,900 kilometers. By 2035, the national railway network is expected to reach about 200,000 kilometers, including about 70,000 kilometers of high-speed rail. Cities with populations of over 500,000 will be connected with high-speed rail lines so as to form the city connections within travel ranges of one, two and three hours respectively. The operating speed of high-speed rail has continued to increase since 2007, with the maximum operating speed increasing from 250 kilometers per hour to 350 kilometers per hour. Further improvements are expected in the future. The operating results of the Company’s routes that overlap with the high-speed rail network (especially routes with mileage of no more than 800 kilometers) will be impacted in the future to a certain extent.

We believe that our Company possesses certain competitive advantages as compared to other Chinese airlines. We have the most extensive route network and the largest number of regional route bases among Chinese airlines, which we believe places us in a favorable position in the route allocation process. We also have the largest aircraft fleet among all Chinese airlines, which, together with our planned aircraft acquisitions, will permit us to expand our operations and to improve the deployment of the aircraft in our fleet. We also believe that our dominant presence in the populous and economically developed southern and central regions of China provides us with a competitive advantage in attracting new customers, and our fully integrated flight training, aircraft and engine maintenance and air catering operations enable us to achieve and maintain high quality service to our customers. We have also launched the construction of an integrated service, built a first-class international service brand, and continuously improved service quality. Our brand influence has continued to increase at home and abroad. In 2020, we were positioned to offer “affinity and refinement” service, broke down barriers between various systems and departments, have implemented a full-chain, systematic and integrated service management. With a series of new services, products and service measures rolled out, the service quality and flight on-time performance rate of the Company have increased, and are among the strongest in the industry. The Company was re-awarded “National Benchmarking Enterprise of Customer Satisfaction”. In 2020, we comprehensively promoted the “Ecosphere strategy”, reinforced the construction of e-commerce platform, and created a one-stop service platform for mobile users. The concept of “a hassle-free journey with one mobile device” has been fully realized. We have an accumulative number of 56.46 million of APP registrants and an accumulative number of 39.38 million social media followers, ranked first in Asian airlines. Many key indicators, such as the number of APP activations and the number of the social media followers, continue to lead in the industry.

The following table sets forth our market share of passengers carried, cargo and mail carried and total traffic of Chinese airlines for the years indicated based on the CAAC statistics briefing.

 

     Passengers Carried      Cargo and Mail Carried
(tons)
     Total Traffic (tons
kilometers)
 

Year

   Industry
Total (in
millions)
     Group’s
Share (%
of total)
     Industry
Total (in
thousands)
     Group’s
Share
(%

of total)
     Industry
Total (in
billions)
     Group’s
Share (%
of total)
 

2016

     487.8        23.5        6,669        22.7        96.1        25.4  

2017

     551.6        25.2        7,058        23.7        108.3        22.9  

2018

     611.7        22.9        7,385        23.5        120.7        25.1  

2019

     659.9        23.0        7,532        23.4        129.3        25.2  

2020

     417.8        23.2        6,766        21.6        79.9        26.1  

Domestic Routes

We compete against our 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, price. We compete against other major Chinese airlines in our various domestic route markets. Of these competitors, the largest two are Air China and China Eastern Airlines, which are owned or controlled by the Chinese government. We also face competition from other airlines which are not state-owned such as Spring Airlines and Jixiang Airlines.

 

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The following table sets forth our market share in terms of passengers carried, cargo and mail carried on departing flights and total departing flights at the ten busiest airports in China in 2020 according to passenger volume data from CAAC statistics briefing.

 

Airport

   Passengers Carried
(% of total)
     Cargo and Mail
Carried
(% of total)
     Departing Flight
(% of total)
 

Beijing

     8.34        3.75        7.02  

Shanghai Pudong

     14.73        8.08        11.45  

Guangzhou

     47.17        27.92        46.99  

Chengdu

     11.84        9.46        10.50  

Shenzhen

     29.14        10.63        26.19  

Kunming

     12.81        14.92        10.77  

Xi’an

     15.09        9.55        13.98  

Shanghai Hongqiao

     13.52        17.27        13.62  

Chongqing

     22.14        15.92        23.01  

Hangzhou

     30.54        9.76        26.01  

The following table sets forth our market share in terms of passengers carried, cargo and mail carried on departing flights and total departing flights at eight busiest airports in southern and central China (excluding Guangzhou and Shenzhen, which are included in the table above) in 2020 according to passenger volume data from CAAC statistics briefing.

 

Airport

   Passengers Carried
(% of total)
     Cargo and Mail
Carried
(% of total)
     Departing Flight
(% of total)
 

Zhengzhou

     32.21        8.07        30.24  

Wuhan

     40.29        21.29        37.25  

Changsha

     34.52        20.89        34.03  

Haikou

     24.40        32.01        23.52  

Sanya

     27.36        30.36        28.14  

Nanning

     22.58        18.06        21.80  

Zhuhai

     34.24        33.23        32.71  

Guilin

     15.77        13.53        17.34  

Regional Routes

In 2020, we conducted a total of 2,708 flights on our regional routes. We face less competition on regional routes than that on domestic and international routes, and earn a higher operating margin. Air China, China Eastern Airlines, Air Macau, Cathay Pacific, China Airlines and Eva Airways compete with our Group in the regional traffic markets.

International Routes

We compete with a number of Chinese airlines, including Air China and China Eastern Airlines and many well-established foreign airlines on our international routes. Most of these international competitors have significantly longer operating histories, substantially greater financial and technological resources and greater brand recognition than us. Many of our international competitors have larger sales networks and participate in more comprehensive and convenient reservation systems, or engage in promotional activities that may enhance their ability to attract international passengers.

In Southeast Asian routes, our competitors mainly include Thai Airways International, Singapore Airlines, Malaysian Airlines System, Vietnam Airlines, Garuda Indonesia, Philippine Airlines, Air China and China Eastern Airlines. In European routes, our competitors mainly include Air China, China Eastern Airlines, Cathay Pacific, Lufthansa German Airlines and Finnair. In the United States routes, our competitors mainly include Air China, China Eastern Airlines, Cathay Pacific, Delta Airlines and United Airlines. In Australian routes, our competitors include Air China, China Eastern Airlines, Cathay Pacific and Qantas Airways. We compete in the international market primarily on the basis of safety, price, timeliness and convenience of scheduling.

 

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Airline Subsidiaries

Our Airline Subsidiaries are joint ventures established by our Company and local companies in the provinces or special economic zones where our Airline Subsidiaries are based and are engaged in providing airline and related services. As of December 31, 2020, our Company owned a 55% or 60% equity interest in each of our Airline Subsidiaries.

As of December 31, 2020, Xiamen Airlines operated under the “MF” code with a fleet of 209 aircraft. In 2020, Xiamen Airlines carried a total of about 26.91 million passengers, or approximately 27.8% of the passengers carried by our Group in that year, and had RMB20,675 million in traffic revenue.

As of December 31, 2020, Shantou Airlines operated under “CZ” code with a fleet of 15 aircraft. In 2020, under the centralized allocation of flight routes of our Group, Shantou Airlines carried a total of about 2.11 million passengers, or 2.2% of the passengers carried by our Group in that year. Total traffic revenue of Shantou Airlines for the year ended December 31, 2020 was RMB1,167 million.

As of December 31, 2020, Zhuhai Airlines operated under the “CZ” code with a fleet of 16 aircraft. In 2020, under the centralized allocation of flight routes of our Group, Zhuhai Airlines carried a total of about 1.74 million passengers, or approximately 1.8% of the total number of passengers carried by our Group in that year. Total traffic revenue of Zhuhai Airlines for the year ended December 31, 2020 was RMB1,041 million.

As of December 31, 2020, Guizhou Airlines operated under the “CZ” code with a fleet of 20 aircraft. In 2020, under the centralized allocation of flight routes of our Group, Guizhou Airlines carried a total of about 2.80 million passengers, or approximately 2.9% of the total number of passengers carried by our Group in that year. Total traffic revenue of Guizhou Airlines was approximately RMB1,572 million for the year ended December 31, 2020.

As of December 31, 2020, Chongqing Airlines operated under the “OQ” code with a fleet of 30 aircraft. In 2020, under the centralized allocation of flight routes of our Group, Chongqing Airlines carried a total of about 3.33 million passengers, or 3.4% of the total number of passengers carried by our Group in that year. Total traffic revenue of Chongqing Airlines for the year ended December 31, 2020 was RMB2,117 million.

As of December 31, 2020, Henan Airlines operated under the “CZ” code with a fleet of 30 aircraft. In 2020, under the centralized allocation of flight routes of our Group, Henan Airlines carried a total of about 4.34 million passengers, or approximately 4.5% of the total number of passengers carried by our Group in that year. Total traffic revenue of Henan Airlines was approximately RMB2,427 million for the year ended December 31, 2020.

Freight and Logistic Subsidiary

Southern Airlines Freight and Logistic (Guangzhou) Co., Ltd., or Freight and Logistic Company, was established in June 2018 with registered capital of RMB1.8 billion. It mainly conducts logistics operations. In 2020, Freight and Logistic Company had an operating revenue of RMB15,397 million and a net profit of RMB4,013 million, representing an increase of 80.29% and 990.49% from 2019, respectively. As at December 31, 2020, Freight and Logistic Company’s total assets amounted to RMB9,211 million and net assets amounted to RMB6,391 million.

In December 2020, the Company, Freight and Logistic Company and certain third parties investors entered into a capital increase agreement. Pursuant to this agreement, the third party investors made capital contribution of approximately RMB3,355 million into the Freight and Logistic Company. After the capital contribution, the Company’s equity interests in the Freight and Logistic Company decreased from 100% to 55%.

 

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Insurance

The aviation insurance in the name of CHINA SOUTHERN AIRLINES COMPANY LIMITED as a member of CHINA CIVIL AVIATION GROUP INSURANCE FLEET, is placed with the PICC Property & Casualty Company Limited, China Pacific Property Insurance Co., Ltd., Ping An Property & Casualty Insurance Company of China, Ltd. and China Life Property and Casualty Insurance Company Limited as Insurers. We maintain aviation hull all risks, spares and airline liability insurance policy, aircraft hull all risks and spare engines deductible insurance policy, aviation hull war and allied perils policy, aviation war, hijacking and other perils excess liability insurance policy, all of which are in the amount customary in the Chinese aviation industry.

Under the relevant PRC laws, civil liability of Chinese airlines for death or injuries suffered by passengers on domestic flights is limited to RMB400,000 (approximately US$61,304) per passenger. As of July 31, 2005, the Convention for the Unification of Certain Rules for International Carriage by Air of 1999, or Montreal Convention, became effective in China. Under the Montreal Convention, carriers of international flights are strictly liable for proven damages up to 128,821 Special Drawing Rights and beyond that, carriers are only able to exclude liability if they can prove that the damage was not attributable to negligence or other wrongful act of the carrier (and its agents), or the damage arose solely from the negligence or other wrongful act of a third party. We believe that we maintain adequate insurance coverage for the civil liability that can be imposed in respect of death or injuries to passengers under Chinese law, the Montreal Convention and any agreement which we are subject to.

The insurance premiums payable in respect of the CAAC group insurance policy are allocated to each participating airline based on the value of the airline’s insured aircraft and insured spares, airlines traffic RPK, passenger number and cargo revenue.

Intellectual Property

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

We own various trademarks and trade names related to our business. The names “China Southern” and “China Southern Airlines” contain Chinese words of common usage and are therefore not eligible for registration as trade names under current Chinese law. The kapok logo is a trademark registered in China and recorded with the International Air Transport Association (“IATA”), the rights to which are owned by CSAH. Our Company and CSAH have entered into a trademark license agreement (the “Trademark License Agreement”), pursuant to which CSAH has licensed to our Group the right to use the names “China Southern” and “China Southern Airlines” in both English and Chinese and granted our Company a ten-year renewable license from 1997 to use the kapok logo on a world-wide basis. CSAH 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 our Group to use the kapok logo. Unless CSAH gives a written notice of termination three months before the expiration of the agreement, the agreement will be automatically renewed for another ten-year term. In May of 2017, the Trademark License Agreement was automatically renewed by the two parties for another ten-year term ending 2027. Xiamen Airlines owns all rights to its egret logo, which is a trademark registered in China, and recorded with the IATA. Chongqing Airlines also owns all rights to its logo, which is a trademark registered in China, and recorded with the IATA.

Iran Sanctions Disclosure

Pursuant to Section 13(r) of the Securities Exchange Act of 1934, or the Exchange Act, if during 2020, our Company or any of our affiliates have engaged in certain transactions with Iran or with persons or entities designated under certain executive orders, our Company would be required to disclose information regarding such transactions in our Annual Report as required under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, or ITRA. In 2020, our Company operated air services to and from Iran through the specifically designated route of “Beijing—Urumqi—Tehran—Urumqi – Beijing” (the “Iran Route”) and engaged in international traffic in passengers, cargo and mail. At the beginning of 2020, we carried out four round-trip flights per week of the “Iran Route”. However, due to the COVID-19 pandemic, the flights of the “Iran Route” have been suspended since February 2020.

 

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In order to provide our aviation services in Iran, our Company has entered into certain ground service agreement with Iran Air whereby Iran Air provides our Company with ground service, maintenance and other support services in return for certain service fees to be paid by our Company in accordance with the agreement. Our Company does not provide, nor has it ever provided, any equipment, component, or technology to Iran. The services rendered by our Company to Iran are limited to the provision of international traffic for passengers, cargo and mail and those services provided by our local offices and agents to customers. Our Company does not operate flights within Iran.

Our Company’s international route rights, as well as the corresponding landing rights, are derived from air service agreements negotiated between the Chinese government, through the CAAC, and the governments of the relevant foreign countries. With respect to the Iran Route, our Company’s international route rights associated thereto are derived from and based on the bilateral air transport agreement (the “Bilateral Agreement”) entered into by and between the Chinese government and the Iranian government. Both parties are contracting parties to the Convention on International Civil Aviation, opened for signature at Chicago on December 7, 1944, and entered into the Bilateral Agreement with an aim to establish and operate scheduled air services between and beyond the two countries’ respective territories. The Bilateral Agreement, which has been registered with the International Civil Aviation Organization, sets forth general principles and specific rules governing our Company’s aviation services in Iran.

Our Company understands that Iran Air is Iran’s national airline carrier and is designated by the U.S. Department of the Treasury pursuant to Executive Order No. 13382. However, Executive Order No. 13382 only “prohibits all transactions between the designees and any U.S. person.” Our Company is incorporated in the People’s Republic of China and is a foreign issuer in the United States. As our Company is not a U.S. person, our transactions with Iran Air are not prohibited by Executive Order No. 13382. Our Company further understands that it has an obligation to disclose our transactions with Iran Air as described above under Exchange Act Section 13(r)(1)(D)(iii). Iran Air is Iran’s national airline carrier and is controlled or owned by the Government of Iran. Our Company believes that Iran Air can be identified as the Government of Iran under Section 560.304 of title 31, Code of Federal Registration (relating to the definition of the Government of Iran). Our Company has not obtained any specific authorization of a Federal department or agency of the United States concerning our transactions with Iran Air.

Our Company does not anticipate any significant change in our services to Iran, either by way of increasing significantly the size of or altering the nature of our operations in the territory. For the year ended December 31, 2020, the asset of Iran office and revenue generated from the air services to Iran amounted to US$0.99 million and US$0.08 million, representing only 0.0020% and 0.0006% of the total assets and total revenue generated by our Group as of and for the year ended December 31, 2020, respectively. Therefore, our Company believes that our operations in Iran for the year ended December 31, 2020 were inconsequential and quantitatively immaterial to our business, financial condition and results of operations.

C. ORGANIZATIONAL STRUCTURE

The following chart illustrates the corporate structure of our Group as of December 31, 2020 and the aggregate effective equity interest of our Company in each of our principal subsidiaries, associates and jointly controlled entities.

 

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LOGO

The particulars of our principal subsidiaries as of December 31, 2020 are as follows:

 

Name of Company   

Place and Date of

Establishment/Operation

  

Proportion

of

Ownership

Interest

Held by our

Company

 

Xiamen Airlines Company Limited

   PRC August 11, 1984      55

Shantou Airlines Company Limited

   PRC July 20, 1993      60

Zhuhai Airlines Company Limited

   PRC May 8, 1995      60

Guizhou Airlines Company Limited

   PRC June 17, 1998      60

Chongqing Airlines Company Limited

   PRC May 30, 2007      60

China Southern Airlines Henan Airlines Company Limited

   PRC September 27, 2013      60

Southern Airlines Freight and Logistic (Guangzhou) Co., Ltd.

   PRC June 8, 2018      55

The particulars of our principal associates and joint ventures as of December 31, 2020 are as follows:

 

            Proportion of Ownership Interest Held
by
 

Name of Company

   Place and Date of
Establishment/Operation
     Group
Effective
Interest
    Our
Company
    Subsidiaries  

Guangzhou Aircraft Maintenance Engineering Co., Ltd.

     PRC October 28, 1989        50     50     —    

Southern Airlines Group Finance Company Limited

     PRC June 28, 1995        48.59     41.81     6.78

Sichuan Airlines Co., Ltd.

     PRC August 28, 2002        39     39     —    

Southern Airlines Culture and Media Co., Ltd.

     PRC May 13, 2004        40     40     —    

MTU Maintenance Zhuhai Co., Ltd.

     PRC March 1, 2001        50     50     —    

D. PROPERTY, PLANTS AND EQUIPMENT

For a discussion of our aircraft, see Item 4 “Information on our Company-History and development of our Company – Aircraft Acquisitions.”

 

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Our headquarters in Guangzhou occupy an area of approximately 1,526,887 square meters of land and a total gross floor area of approximately 1,016,105 square meters. We lease land in Guangzhou on which our headquarters and other facilities are located from CSAH. We also lease from CSAH certain buildings mainly at Haikou, Wuhan, Nanyang, Shenyang, Dalian, Jilin, Harbin, Xinjiang and other PRC cities.

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

 

     Land (in square meters)      Building (in square meters)  
     Owned      Leased      Owned      Leased  

Guangzhou

     1,437,958        88,929        933,974        82,131  

Shenzhen

     256,280        —          124,505        5,730  

Zhuhai

     151,942        81,413        20,124        3,601  

Changsha

     255,422        6,238        81,293        12,536  

Haikou

     346,820        —          58,443        4,763  

Wuhan

     284,339        32,579        36,429        18,669  

Nanyang

     —          1,140,015        11,936        16,439  

Sanya

     96,343        —          64,698        —    

Shenyang

     142,199        27,082        28,743        42,361  

Dalian

     —          158,240        64,226        27,194  

Jilin

     142,316        46,056        85,274        7,167  

Harbin

     30,969        248,799        68,893        32,372  

Xinjiang

     18,246        540,070        163,225        10,214  

Guangxi

     74,471        —          52,554        —    

Beijing

     7,045,440        —          885,629        —    

Shanghai

     42,292        5,333      95,506        —    

Chengdu

     —          —          1,964        3,944

Qingdao

           763     

Hefei

     —          —          2,321        —    

Sydney

     —          —          1,151        —    

Amsterdam

           555     

Xi’an

     54,277      —          4,364        —    

Yunnan

     —          —          2,003        —    

Hangzhou

     —          —          871        —    

Nanjing

           1,704     

The following table sets forth certain information with respect to the properties of the subsidiaries named below as of the date hereof.

 

     Land (in square meters)      Building (in square meters)  
     Owned      Leased      Owned      Leased  

Xiamen Airlines

     451,233        —          626,871        24,788  

Shantou Airlines

     137,075        —          88,865        —    

Zhuhai Airlines

     120,006        —          72,074        2,390

Guizhou Airlines

     254,871        —          33,646        —    

Chongqing Airlines

     82,449        —          68,242        —    

Henan Airlines

     364,255        —          64,892        —    

Zhuhai Xiang Yi Aviation Technology Co., Ltd.

     132,088        —          52,323        3,570  

We lease certain lands and buildings from CSAH, some of which are lacking adequate documentation evidencing CSAH’s rights to such land and buildings. As a consequence, the relevant lease agreements between CSAH and our Company for such land or building may not be registered with the relevant authorities. Lack of registration may affect the validity of such lease agreements against a third party. There are certain other parcels of land and buildings owned or used by us that lack adequate documentation. Lack of adequate documentation for land use rights and ownership of buildings may impair our ability to dispose of or mortgage such land use rights and buildings. As of the date of this Annual report, the Group was in the process of applying for the land use right certificates and property title certificates in respect of the properties located in several cities in which the Group has interests and for which such certificates have not been granted. Our directors 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 we have not yet obtained the relevant land use right certificates and property title certificates.

 

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On August 14, 2007, we entered into an assets transfer agreement with CSAH, pursuant to which we purchased from CSAH certain assets including 19 buildings with aggregate area of 21,962.25 square meters. These buildings were not with a property title certificate at the time of our purchase. CSAH undertook to obtain the relevant property title certificate for these buildings by December 30, 2019 and obtained the certificates for 12 of these buildings as of December 20, 2019. CSAH was unable to obtain the certificates for the rest of the buildings due to restrictions imposed by PRC laws and regulations. With respect to these buildings which do not have the property title certificates, CSAH undertakes to (i) apply for such certificates at its cost if the restrictions imposed by PRC laws and regulations no longer exist, and (ii) indemnify us if we suffer any losses resulted from third party claims arising from the lack of property title certificates of these buildings or from our ordinary business operation being affected by the defects of title of these buildings.

 

ITEM 4A.

UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis should be read in conjunction with our consolidated financial statements, which have been prepared in accordance with IFRSs, included elsewhere in this Annual Report.

Critical Accounting Policies

The preparation of the consolidated financial statements requires our Group to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the end of each reporting period, and the reported revenue and expenses during each reporting period. 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 critical accounting policies are set forth in Note 3 to the consolidated financial statements. We believe that the following critical accounting policies involve the key accounting judgments and estimates used in the preparation of our financial statements.

Impairment of long-lived assets (other than goodwill)

As discussed in Note 2(l)(iii) to the consolidated financial statements included elsewhere in this Annual Report, at the end of each reporting period, the Group tests for impairment for long-lived assets or cash-generating units (“CGUs”) (a portion of which related to aircraft and other flight equipment including rotables in property, plant and equipment, aircraft and engines in right-of-use assets (“aircraft and related equipment”)) to determine whether the recoverable amounts have declined below the carrying amounts. If circumstances indicate that the carrying amount of long-lived assets or CGUs may not be recoverable, the assets or CGUs may be considered “impaired”, and an impairment loss may be recognized.

The recoverable amount of assets or CGUs is the higher of the fair value less costs of disposal and value in use. As the fair value of certain assets or CGUs may not be publicly available, the Group uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions for projections of traffic revenue and operating costs and discount rates. In particular, in determining the value in use of the Group’s aircraft and related equipment, significant judgments are required on the accounting estimates which are based on the assumptions relating to traffic revenue growth rates, operating costs growth rates and discount rates applied, among which, operating costs consist of jet fuel costs, landing and navigation fees, maintenance expenses, payroll and welfare.

 

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Frequent flyer revenue

According to the frequent flyer award programs, the allocation of stand-alone selling price of the mileage awarded involves the estimation of the expected redemption rate. The expected redemption rate is estimated based on historical experience of mileage redemption, taking into consideration future mileage redemption patterns, which are associated with changes in the terms to mileage programs and customer behavior. Different estimates could significantly affect the estimated contract liabilities and the results of operations.

Income tax

Deferred tax assets are recognized related to operating loss carry forwards that will reduce future taxable income. The Group needs to make judgments and estimates in assessing the realizability of the operating loss carry forwards. Different estimates could significantly affect the deferred income tax assets and income tax expense in the year in which such determination is made.

Depreciation and amortization

As disclosed in Note 2(i) and Note 2(k) to the consolidated financial statements, components related to engine overhaul costs under property, plant and equipment and right-of-use assets were depreciated on the units of production method based on flying hours. The expected flying hours of engines are based on the Group’s historical overhaul experience with similar engine models. Except for components related to engine overhaul costs, other property, plant and equipment and right-of-use assets are depreciated or amortized on a straight-line basis over the estimated useful lives or lease term, which is shorter, after taking into account the estimated residual value. The useful lives are based on the Group’s historical experience with similar assets and take into account anticipated technological changes. The Group reviews the estimated useful lives of assets annually in order to determine the amount of depreciation and amortization expense to be recorded during any financial year. The depreciation and amortization expense for future periods is adjusted if there are significant changes from previous estimates.

Provision for major overhauls

As disclosed in Note 2(k) and Note 2(ab) to the consolidated financial statements, provision for the cost of major overhauls to fulfil the lease return conditions involves estimation of the expected overhaul cycles and overhaul costs, which are based on the historical experience of actual costs incurred for overhauls of airframes and engines of the same or similar types and current economic and airline-related developments. Different estimates could significantly affect the estimated provision and the results of operations.

Ticket breakage revenue

The Group recognizes, in proportion to the pattern of rights exercised by the customer, the breakage amount to which the Group expects to be entitled as ticket breakage revenue. Such portion is estimated based on the Group’s historical experiences, and the estimated revenue is recognized only to the extent that it is highly probable that a significant reversal in cumulative revenue recognized will not occur when the uncertainty is resolved. Different estimates could significantly affect the ticket breakage revenue recognized in the current financial year.

Recently Pronounced International Financial Reporting Standards

Information relating to the recently pronounced IFRSs is presented in Note 58 to the consolidated financial statements.

 

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Key Factors Affecting Results of Operations

Our results of operations are affected by the factors discussed below.

COVID-19 Pandemic

The COVID-19 pandemic, along with the measures governments and private organizations worldwide have implemented in an attempt to contain the spread of this pandemic, resulted in a severe decline in demand for air travel in 2020, which in turn adversely affected our business, results of operations and financial condition. We responded proactively to the pandemic to mitigate its effects on our business by taking various measures, including reducing capacity, slowing down the introduction of new aircraft and implementing expense management to better align our cost with our reduced schedule. Despite these steps, the cost-saving measures we implemented in 2020 have not made up for the loss in revenues as a result of decreased ticket sales due to the pandemic. The Company recorded a loss in the operating results of RMB11,827 million for the year 2020. The continuing impact of the pandemic, and changes in passenger flight use that may result, are likely to have a significant effect on our business and operating results in the future. See Item 3. Key Information – D. Risk Factors – “The outbreak and global spread of COVID-19 and the persistence of the resulting pandemic have had a material adverse effect on our business. The duration and severity of the pandemic, and similar public health threats or a large scale natural disaster we may face in the future, could result in additional adverse effects on our business” and Item 4. Information of the Company – B. Business Overview – “Impact of the COVID-19 Pandemic” for additional discussion regarding the impact of the COVID-19 pandemic on our operation results and financial condition.

Financial and operating leverage

Like most airlines, we are subject to a high degree of financial and operating leverage. A significant percentage of our operating expenses are fixed costs that do not vary proportionally to our 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 costs for flight crew, cabin crew and ground personnel. Thus, a minor change in our yields or load factors could have a material effect on our results of operations. In addition, certain of these expenses, primarily financing costs and labor costs and depreciations do not vary proportionally to the number of flights flown. Thus, even a minor change in aircraft utilization rates may affect our results of operations. We are and will continue to be highly leveraged with substantial liabilities denominated in foreign currencies and, accordingly, the results of our operations are significantly affected by fluctuations in foreign exchange rates, particularly for the U.S. dollar. Our net exchange gain of RMB3,485 million was recorded in 2020, primarily attributable to the exchange difference arising from the lease liabilities denominated in USD along with the appreciation of Renminbi against the U.S. dollar.

Political and economic conditions and regulations

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

Foreign exchange risk

We finance our aircraft acquisitions mainly through leases or bank loans in U.S. dollars, and have a substantial amount of transactions and liabilities denominated in U.S. dollars in relation to our global purchases of jet fuel, lease and purchase of aviation equipment as well as major repairs, in addition to the landing fees of our international flights in the airports of other countries, and, as a result, our business will be affected by the Renminbi depreciation. Renminbi depreciation has caused exchange loss to our Group and increased our operating costs which are denominated in foreign currencies.

 

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Seasonality

Our operating revenue is substantially dependent on the passenger and cargo traffic volume carried, which is subject to seasonal and other changes in traffic patterns, the availability of appropriate time slots for our 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, our airline revenue is generally higher in the second half of the year than in the first half of the year due to the greater demand for air travel during the summer months, although such traditional seasonal trends were disrupted in 2020 due to the significantly reduced travel demand resulting from the COVID-19 pandemic. See “Item 3. Key Information – Risk Factors – Our results of operations tend to be volatile and fluctuate due to seasonality” for additional discussion.

In addition, our future operations will be affected by, among other things, changes in the aviation market, the cost of jet fuel, aircraft acquisition and leasing costs, aircraft maintenance expenses, take-off and landing charges, wages, salaries and benefits and other operating expenses, foreign exchange rates and the rates of income taxes paid.

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, 2020, 2019 and 2018.

 

     Year ended December 31,     

2020 vs.

2019%

increase

   

2019 vs.

2018%

increase

 
Traffic    2020      2019      2018      (decrease)     (decrease)  

RPK (million)

             

Domestic

     140,135.20        195,239.18        178,972.96        (28.22     9.09  

Regional

     239.14        3,258.71        3,304.83        (92.66     (1.40

International

     13,065.60        86,422.92        76,916.01        (84.88     12.36  

Total

     153,440.11        284,920.82        259,193.80        (46.15     9.93  

RTK (million)

             

Domestic

     13,720.92        18,897.97        17,437.56        (27.39     8.38  

Regional

     30.19        312.80        315.39        (90.35     (0.82

International

     7,053.76        13,414.05        12,580.72        (47.42     6.62  

Total

     20,804.88        32,624.82        30,333.67        (36.23     7.55  

Passengers carried (thousand)

             

Domestic

     93,911.34        128,706.50        119,494.01        (27.03     7.71  

Regional

     213.22        2,480.54        2,527.08        (91.40     (1.84

International

     2,731.48        20,445.12        17,863.96        (86.64     14.45  

Total

     96,856.04        151,632.16        139,885.04        (36.12     8.40  

Cargo and mail carried (thousand tons)

             

Domestic

     817.51        1,052.13        1,043.91        (22.30     0.79  

Regional

     9.12        23.27        21.85        (60.80     6.50  

International

     634.19        688.16        666.52        (7.84     3.25  

Total

     1,460.83        1,763.57        1,732.28        (17.17     1.81  
Capacity              

ASK (million)

             

Domestic

     193,935.93        235,216.49        216,160.94        (17.55     8.82  

Regional

     550.91        4,367.53        4,383.59        (87.39     (0.37

International

     20,235.13        104,477.84        93,876.41        (80.63     11.29  

Total

     214,721.97        344,061.86        314,420.95        (37.59     9.43  

ATK (million)

             

Domestic

     22,182.70        26,803.84        24,549.52        (17.24     9.18  

Regional

     70.71        506.71        503.53        (86.04     0.63  

International

     11,638.87        19,123.06        17,674.93        (39.14     8.19  

Total

     33,892.28        46,433.61        42,727.99        (27.01     8.67  

 

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2020 vs.

2019

increase

(decrease)

Percentage

points

   

2019 vs.

2018

increase

(decrease)

Percentage

points

 
Load Factors              

Passenger load factor (RPK/ASK) (%)

             

Domestic

     72.26        83.00        82.80        (10.74     0.20  

Regional

     43.41        74.61        75.39        (31.20     (0.78

International

     64.57        82.72        81.93        (18.15     0.79  

Average

     71.46        82.81        82.44        (11.35     0.37  

Overall load factor (RTK/ATK) (%)

             

Domestic

     61.85        70.50        71.03        (8.65     (0.53

Regional

     42.70        61.73        62.63        (19.03     (0.90

International

     60.61        70.15        71.18        (9.54     (1.03

Average

     61.39        70.26        70.99        (8.88     (0.73
           

2020 vs.

2019%

increase

   

2019 vs.

2018%

increase

 
Yield              

Yield per RPK (RMB)

              (decrease     (decrease

Domestic

     0.41        0.52        0.54        (21.15     (3.70

Regional

     1.05        0.75        0.74        40.00       1.35  

International

     0.96        0.39        0.39        146.15       /  

Average

     0.46        0.49        0.49        (6.12     /  

Yield per RTK (RMB)

             

Domestic

     4.34        5.50        5.60        (21.09     (1.79

Regional

     11.06        8.18        8.13        35.21       0.62  

International

     3.84        3.10        3.00        23.87       3.33  

Average

     4.18        4.54        4.55        (7.93     (0.22
Financial              

Passenger revenue (RMB million)

             

Domestic

     57,793        101,955        95,773        (43.32     6.45  

Regional

     251        2,437        2,446        (89.70     (0.37

International

     12,490        34,110        29,819        (63.38     14.39  

Total

     70,534        138,502        128,038        (49.07     8.17  

Cargo and mail revenue (RMB million)

     16,493        9,615        10,026        71.53       (4.10

A. OPERATING RESULTS

The following discussion is based on our historical results of operations. As a result of the factors discussed above, such results of operations may not be indicative of our future operating performance.

 

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2020 compared with 2019

Net loss attributable to equity shareholders of the Company of RMB10,847 million was recorded in 2020 as compared to net profit attributable to equity shareholders of the Company of RMB2,640 million in 2019. The Group’s total operating revenue decreased by RMB61,761 million or 40.02% from RMB154,322 million in 2019 to RMB92,561 million in 2020. Passenger load factor decreased by 11.35 percentage points from 82.81% in 2019 to 71.46% in 2020. Yield per RPK decreased by 6.12% from RMB0.49 in 2019 to RMB0.46 in 2020. Yield per RTK decreased by 7.93% from RMB4.54 in 2019 to RMB4.18 in 2020. Operating expenses decreased by RMB39,497 million or 26.58% from RMB148,608 million in 2019 to RMB109,111 million in 2020. Mainly affected by the impact of the COVID-19 pandemic on the aviation industry, operating loss of RMB11,864 million was recorded in 2020 as compared to operating profit of RMB10,838 million in 2019.

Operating Revenue

The following table sets forth operating revenue for the years indicated:

 

     2020      2019         
     Operating
revenue
RMB
million
     Percentage
%
     Operating
revenue
RMB
million
     Percentage
%
     Change
in
revenue
%
 

Traffic revenue

     87,027        94.02        148,117        95.98        (41.24

Including: Passenger revenue

     70,534           138,502           (49.07

– Domestic

     57,793           101,955           (43.32

– Hong Kong, Macau and Taiwan

     251           2,437           (89.70

– International

     12,490           34,110           (63.38

Cargo and mail revenue

     16,493           9,615           71.53  

Other operating revenue

     5,534        5.98        6,205        4.02        (10.81

Mainly including:

              

Commission income

     2,771           2,952           (6.13

Cargo handling income

     507           359           41.23  

Ground services income

     210           409           (48.66

General aviation income

     508           564           (9.93

Hotel and tour operation income

     390           712           (45.22

Total operating revenue

     92,561        100.00        154,322        100.00        (40.02
     2020      2019         
     Traffic
revenue
RMB
million
     Percentage
%
     Traffic
revenue
RMB
million
     Percentage
%
     Change
in traffic
revenue
%
 

Passenger revenue

     70,534        81.05        138,502        93.51        (49.07

Cargo and mail revenue

     16,493        18.95        9,615        6.49        71.53  

Traffic revenue

     87,027        100.00        148,117        100.00        (41.24

 

     2020      2019         
     Passenger
revenue
RMB
million
     Percentage
%
     Passenger
revenue
RMB
million
     Percentage
%
     Change in
passenger
revenue
%
 

Domestic

     57,793        81.94        101,955        73.61        (43.32

Hong Kong, Macau and Taiwan

     251        0.36        2,437        1.76        (89.70

International

     12,490        17.70        34,110        24.63        (63.38

Total

     70,534        100.00        138,502        100.00        (49.07

 

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Substantially all of the Group’s operating revenue is attributable to airlines transport operations. Traffic revenue accounted for 95.98% and 94.02% of the total operating revenue in 2019 and 2020, respectively. Passenger revenue and cargo and mail revenue accounted for 81.05% and 18.95%, respectively, of the total traffic revenue in 2020. During the reporting period, the Group’s total traffic revenue was RMB87,027 million, representing a decrease of RMB61,090 million or 41.24% from prior year, because of the decrease in passenger revenue which is partially offset by the increase in cargo revenue.

The decrease in operating revenue was primarily due to a decrease in passenger revenue by 49.07% from RMB138,502 million in 2019 to RMB70,534 million in 2020. The total number of passengers carried decreased by 36.12% to 96.86 million passengers in 2020. RPKs decreased by 46.15% from 284,921 million in 2019 to 153,440 million in 2020, primarily due to the decrease in number of passengers carried resulting from insufficient passenger confidence for travel due to the impact of COVID-19 pandemic.

Domestic passenger revenue, which accounted for 81.94% of the total passenger revenue in 2020, decreased by 43.32% from RMB101,955 million in 2019 to RMB57,793 million in 2020. Domestic passenger traffic in RPKs decreased by 28.22%, while passenger capacity in ASKs decreased by 17.55%, resulting in a decrease in passenger load factor by 10.74 percentage points from 83.00% in 2019 to 72.26% in 2020. Yield per RPK decreased by 21.15% from RMB0.52 in 2019 to RMB0.41 in 2020.

Hong Kong, Macau and Taiwan passenger revenue, which accounted for 0.36% of total passenger revenue, decreased by 89.70% from RMB2,437 million in 2019 to RMB251 million in 2020. For Hong Kong, Macau and Taiwan flights, passenger traffic in RPKs decreased by 92.66%, while passenger capacity in ASKs decreased by 87.39%, resulting in a decrease in passenger load factor by 31.20 percentage points from 74.61% in 2019 to 43.41% in 2020. Passenger yield per RPK increased by 40.00% from RMB0.75 in 2019 to RMB1.05 in 2020.

International passenger revenue, which accounted for 17.70% of total passenger revenue, decreased by 63.38% from RMB34,110 million in 2019 to RMB12,490 million in 2020. For international flights, passenger traffic in RPKs decreased by 84.88%, while passenger capacity in ASKs decreased by 80.63%, resulting in a decrease in passenger load factor by 18.15 percentage points from 82.72% in 2019 to 64.57% in 2020. Passenger yield per RPK increased by 146.15% from RMB0.39 in 2019 to RMB0.96 in 2020.

Cargo and mail revenue, which accounted for 18.95% of the Group’s total traffic revenue and 17.82% of total operating revenue, increased by 71.53% from RMB9,615 million in 2019 to RMB16,493 million in 2020. The increase was mainly attributable to the significant increase of demand for freight, especially international freight, due to the impact of COVID-19 pandemic.

Other operating revenue decreased by 10.81% from RMB6,205 million in 2019 to RMB5,534 million in 2020. The decrease was primarily due to the decrease of commission income, ground services income, general aviation income, and hotel and tour operation income.

Operating Expenses

Total operating expenses in 2020 amounted to RMB109,111 million, representing a decrease of RMB39,497 million or 26.58% compared to that of 2019, as a result of the decrease of various traffic expenses due to the impact of COVID-19 pandemic. Total operating expenses as a percentage of total operating revenue increased from 96.30% in 2019 to 117.88% in 2020.

 

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The table below sets forth our operating expenses for the years indicated:

 

     2020      2019         
     Operating
expenses
RMB
million
     Percentage
%
     Operating
expenses
RMB
     Percentage
%
     Change
in
Operating
expenses
%
 

Flight operation expenses

     37,545        34.41        70,566        47.48        (46.79

Mainly including:

              

Jet fuel costs

     18,797           42,814           (56.10

Aircraft operating lease charges

     977           1,412           (30.81

Flight personnel payroll and welfare

     10,232           12,709           (19.49

Maintenance expenses

     13,375        12.26        13,057        8.79        2.44  

Aircraft and transportation service expenses

     18,743        17.18        26,591        17.89        (29.51

Promotion and selling expenses

     5,007        4.59        7,755        5.22        (35.44

General and administrative expenses

     4,088        3.75        4,073        2.74        0.37  

Depreciation and amortization

     24,590        22.53        24,620        16.57        (0.12

Impairment losses on property, plant and equipment and right-of-use assets

     3,961        3.63        18        0.01        21,906  

Hotel and tour operation expenses

     317        0.29        587        0.39        (46.00

External air catering service expenses

     333        0.31        336        0.23        (0.89

Financial institution charges

     84        0.08        217        0.15        (61.29

Cargo handling expenses

     400        0.36        311        0.21        28.62  

Others

     668        0.61        477        0.32        (40.04

Total operating expenses

     109,111        100.00        148,608        100.00        (26.58

Flight operation expenses, which accounted for 34.41% of total operating expenses, decreased by 46.79% from RMB70,566 million in 2019 to RMB37,545 million in 2020, mainly resulting from the decrease of traffic volume due to the impact of COVID-19 pandemic and the decrease of employee emolument.

Maintenance expenses, which accounted for 12.26% of total operating expenses, stayed at the same level in amounts as compared to 2019.

Aircraft and transportation service expenses, which accounted for 17.18% of total operating expenses, decreased by 29.51% from RMB26,591 million in 2019 to RMB18,743 million in 2020. The decrease was primarily due to a decrease in the amounts of take-off and landing fees and navigation fees, from RMB17,658 million in 2019 to RMB10,857million in 2020, resulting from the decrease of the number of flights due to the impact of COVID-19 pandemic.

Promotion and selling expenses, which accounted for 4.59% of total operating expenses, decreased by 35.44% from RMB7,755 million in 2019 to RMB5,007 million in 2020, mainly due to the decrease in sales commission and computer reservation services charges due to the impact of COVID-19 pandemic.

General and administrative expenses, which accounted for 3.75% of the total operating expenses, stayed at the same level in amounts as compared to 2019.

Depreciation and amortization expenses, which accounted for 22.53% of the total operating expenses, remained at the same level in amounts as compared to 2019. It was mainly due to the net effect of the increase in depreciation and amortization expenses along with the expansion of fleet, and the decrease in depreciation and amortization expenses as a result of the change in depreciation method of components related to engine overhaul costs under property, plant and equipment and right-of-use assets since April 1, 2020.

Impairment losses on property, plant and equipment and right-of-use assets, which accounted for 3.63% of the total operating expenses, increased from RMB18 million in 2019 to RMB3,961 million in 2020, mainly due to the increase of impairment provision for aircraft and related equipment.

Operating (Loss)/Profit

Operating loss of RMB11,864 million was recorded in 2020 (2019: Operating profit of RMB10,838 million). The decrease in operating profit was mainly resulting from the decrease in traffic revenue due to the impact of the COVID-19 pandemic on the aviation industry.

Other Net Income

Other net income decreased by RMB438 million from RMB5,124 million in 2019 to RMB4,686 million in 2020, mainly resulted from the decrease in penalty income from group tickets along with the decreased number of international flights, and the decrease in non-refundable airport construction fees and overseas airport taxes, both due to the impact of the COVID-19 pandemic.

 

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Table of Contents

Interest Expense and Net Exchange Gain/(Loss)

Interest expense increased by RMB871 million from RMB5,845 million in 2019 to RMB6,716 million in 2020, mainly due to the decrease in capitalized interest.

Net exchange gain of RMB3,485 million was recorded in 2020, as compared with a net exchange loss of RMB1,477 million in 2019. Net exchange gain was primarily attributable to exchange difference arising from the lease liabilities denominated in USD, along with the appreciation of Renminbi against the U.S. dollar.

Income Tax

Income tax gains of RMB3,368 million was recorded in 2020 (2019: income tax expenses of RMB971 million was recorded). The effective tax rate in 2020 was 22.17% (2019: 23.95%).

2019 compared with 2018

For a discussion of the comparison of our results of operation between 2018 and 2019, please see the section headed “Item 5. Operating and Financial Review and Prospects: A. Operating Results” in the Annual Report for the fiscal year ended December 31, 2019 on the Form 20-F filed with the Securities and Exchange Commission on April 28, 2020.

B. LIQUIDITY AND CAPITAL RESOURCES

Generally, we meet our working capital and capital expenditure requirements through cash from our operations, the proceeds from issuance of bonds, the proceeds of certain long-term and short-term bank loans and lease financing.

As of December 31, 2020, we had banking facilities with several PRC commercial banks for providing loan financing up to approximately RMB315,452 million to our Group. As of December 31, 2020, approximately RMB228,188 million was unutilized. As of December 31, 2020 and 2019, our cash and cash equivalents were RMB25,419 million and RMB1,849 million, respectively.

Net cash generated from operating activities in 2020, 2019 and 2018 amounted to RMB2,698 million, RMB31,175 million and RMB15,388 million, respectively. Our Group’s operating cash inflows are primarily derived from the provision of air transportation and related services to customers. Operating cash outflows primarily are related to the recurring operating expenses, including flight operation, maintenance, aircraft and transportation services, and others. Net cash generated from operating activities decreased from RMB31,175 million in 2019 to RMB2,698 million in 2020, primarily due to the decrease of cash inflow from air transportation and related services to customers affected by the COVID-19 in the reporting period.

Net cash used in investing activities in 2020, 2019 and 2018 were RMB8,049 million, RMB14,427 million, and RMB20,517 million, respectively. Cash capital expenditures in 2020, 2019 and 2018 were RMB11,061 million, RMB15,622 million, and RMB24,033 million, respectively, primarily representing less investments in aircraft and flight equipment under our fleet introduction plans and less investments in other facilities and buildings used in operations.

Net cash generated from financing activities were RMB28,945 million in 2020, as compared to net cash used in financing activities of RMB21,833 million in 2019. Net cash inflow from borrowings and repayments of borrowings amounted to RMB30,085 million in 2020, while net cash outflow from borrowings and repayments of borrowings amounted to RMB3,354 million in 2019. The borrowings were used for capital expenditures and general working capital. Capital element of lease rentals paid was RMB20,670 million in 2020, while repayment of capital leases in 2019 were RMB17,784 million, resulting from the increase of aircraft acquisitions.

Net cash generated from financing activities amounted to RMB5,220 million in 2018. Net cash inflow from borrowings and repayments of borrowings amounted to RMB5,780 million in 2018. The borrowings were used for capital expenditures and general working capital. Repayment of capital leases amounted to RMB10,433 million in 2018, resulting from the increase of aircraft acquisitions under capital leases.

 

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On September 27, 2018, we issued 1,578,073,089 A shares in total to CSAH at issue price of RMB6.02 per A Share pursuant to the subscription agreement dated June 26, 2017 entered into between CSAH and us (as amended by the supplemental agreement dated September 19, 2017). The gross proceeds and net proceeds raised from such issuance are approximately RMB9,500 million and RMB9,488 million respectively, which were used for introducing aircraft and installation of lightweight seats for aircraft. As of December 31, 2020, the proceeds from this issuance have been utilized.

On February 21, 2019, we issued the first tranche of 2019 corporate bonds with an aggregate nominal value of RMB3,000 million at an interest rate of 3.45% per annum. On May 16, 2019, we issued the second tranche of 2019 corporate bonds with an aggregate nominal value of RMB2,000 million at an interest rate of 3.72% per annum. On November 20, 2019, Xiamen Airlines issued the first tranche of 2019 corporate bonds with an aggregate nominal value of RMB1,500 million at an interest rate of 3.58% per annum. On March 16, 2020, Xiamen Airlines issued the first tranche of 2020 corporate bonds with an aggregate nominal value of RMB1,000 million at an interest rate of 2.95% per annum. The 2019 and 2020 corporate bonds mature in three years. The proceeds from the issuance of the corporate bonds will be used to replenish working capital and repay corporate debts.

In November 2020, we received CSRC approval on our proposed public issuance of short-term corporate bonds to professional investors having a gross minimal value not exceeding RMB10,000 million. The short-term corporate bonds will be issued in multiple tranches. The issuance of the first tranche must be completed within 12 months from the date of the approval and the issuance of the remaining tranches must be completed within 24 months from the date of the approval. The proceeds from the issuance of the short-term corporate bonds will be used to replenish working capital and repay corporate debts.

In October 2020, we issued a total of 160,000,000 bonds convertible to A Shares, with a nominal value of RMB100 each and an aggregate value amounting to RMB16,000 million. The convertible bonds were issued at nominal value and the initial conversion price was RMB6.24 per share. The bonds have a term of six years from the date of the issuance, which commences from October 15, 2020 and ends on October 14, 2026. The bonds will bear an interest at the rate of 0.2% in the first year, 0.4% in the second year, 0.6% in the third year, 0.8% in the fourth year, 1.5% in the fifth year and 2.0% in the sixth year. If the conversion rights have not been exercised in five transaction days after maturity, the bond will be redeemed at 106.5% of par value (including the interest for the sixth year). The proceeds from the issuance of the convertible bonds will be used for purchase of aircraft and aviation equipment and maintenance projects, introduction of our spare engine project and supplement of working capital.

On 15 April 2020, the Company issued 608,695,652 H Shares in total to Nan Lung at the issue price of HK$5.75 per H Share pursuant to the subscription agreement dated 30 October 2019 entered into between the Company and Nan Lung. The net price of each new H Share issued was HK$5.74 per H Share. The proceeds from this issuance will be utilized to supplement the general working capital of the Company.

On 18 June 2020, the Company issued 2,453,434,457 A Shares in total to CSAH at the issue price of RMB5.21 per A Share pursuant to the subscription agreement dated 30 October 2019 entered into between the Company and CSAH. The net price of each new A Share issued was RMB5.21 per A Share. The proceeds from this issuance will be utilized in the procurement of aircraft and the repayment of the Company’s borrowings.

As of December 31, 2020, our aggregate long-term borrowings and lease liabilities (including borrowings and lease liabilities due within one year) were RMB163,161 million, among which RMB24,744 million, RMB27,707 million, RMB31,571 million, RMB15,655 million and RMB63,484 million, respectively, is due in 2021, 2022, 2023, 2024 and thereafter. Lease liabilities were mainly denominated in U.S. dollars, Euro and Japanese Yen. In the normal course of business, we are exposed to fluctuations in foreign currency exchange. Our exposure to foreign currency exchange primarily resulted from our foreign currency liabilities. Depreciation or appreciation of the Renminbi against foreign currencies affects our results significantly because our foreign currency liabilities generally exceed our foreign currency assets. We are not able to hedge our foreign currency exposure effectively other than by retaining our foreign currency denominated earnings and receipts to the extent permitted by the SAFE, or subject to certain restrictive conditions, entering into forward foreign exchange contracts with authorized banks.

 

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As of December 31, 2020, our short-term bank loans amounted to RMB25,286 million, and our weighted average interest rate on short-term bank loans was 2.23% per annum. As of December 31, 2020, our outstanding ultra-short-term financing bills were RMB10,999 million. The primary use of the proceeds of our short-term bank loans and ultra-short-term financing bills is to finance working capital and capital expenditure needs. We have generally been able to arrange short-term borrowings with domestic banks in China as necessary and believe we can continue to obtain them based on our well-established relationships with various lenders.

As of December 31, 2020, the amounts of our lease liabilities were RMB121,213 million, predominately for aircraft, among which RMB20,930 million, RMB20,045 million, RMB18,765 million, RMB15,102 million and RMB46,371 million, respectively, is due in 2021, 2022, 2023, 2024 and thereafter.

As of December 31, 2020, we had a working capital deficit of RMB56,696 million, as compared to a working capital deficit of RMB78,752 million as of December 31, 2019. Historically, we operated in a negative working capital position, relying on cash inflow from operating activities, proceeds from ultra short-term financing bills and short-term bank loans to meet our short-term liquidity and working capital needs. In 2020 and thereafter, our liquidity is primarily dependent on our ability to maintain adequate cash inflows from operations to meet our debt obligations as they fall due, and our ability to obtain adequate external financing to meet our committed future capital expenditure. As of December 31, 2020, we had banking facilities with several PRC commercial banks for providing loan financing up to approximately RMB315,452 million, of which approximately RMB228,188 million was unutilized, whereas in 2019, we received loan financing up to approximately RMB308,343 million, of which RMB251,165 million was unutilized.

As we are subject to a high degree of operating leverage, a minor decrease in our yield and/or load factor could result in a significant decrease in our operating revenue and hence our operating cash flows. This could occur when competition among Chinese airlines increases or where PRC aviation demand decreases. Similarly, a minor increase in the jet fuel prices, particularly in the domestic market, could result in a significant increase in our operating expenses and hence a significant decrease in our operating cash flows. This could be caused by fluctuations in supply and demand in international oil market. We currently comply with the financial covenants attached to certain of our borrowings. Nevertheless, as we are subject to a high degree of financial leverage, an adverse change in our operating cash flows could adversely affect our financial health and hence weaken our ability to obtain additional loans and lease facilities and to renew our short-term bank loans facilities as they fall due.

As of December 31, 2020, we had capital commitments as follows:

 

     2021      2022      2023      2024      2025 and
onwards
     Total  
     RMB
million
     RMB
million
     RMB
million
     RMB
million
     RMB
million
     RMB
million
 

Acquisition of aircraft and related equipment

     28,382        15,033        11,910        1,222        —          56,547  

Others

     4,130        2,254        1,429        1,359        1,277        10,449  

Total capital commitments

     32,512        17,287        13,339        2,581        1,277        66,996  

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

As of December 31, 2020, our cash and cash equivalents amounted to RMB25,419 million, and 1.86% of which were denominated in U.S. Dollars, Hong Kong Dollars, Euro, Japanese Yen and other foreign currencies.

In view of the unutilized bank facilities of RMB228,188 million, we expect that we will have sufficient funding sources to meet our cash requirements in the foreseeable future.

 

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C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

None.

D. TREND INFORMATION

Other than as disclosed in the foregoing disclosures and elsewhere in this Annual Report, we are not aware of any other trends, uncertainties, demands, commitments or events for the year ended December 31, 2020, that are reasonably likely to have a material adverse effect on our net revenue, income, profitability, liquidity or capital resources, or that would cause our disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E. OFF-BALANCE SHEET ARRANGEMENTS

We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition that is material to investors. In particular, we (i) have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any unconsolidated entity; (ii) have not entered into any derivative contracts that are both indexed to our own stock and classified in stockholders’ equity, or not reflected in our statement of financial position; and (iii) do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity; that have or are reasonably likely to have a current or future effect on our financial condition that is material to investors.

For a detailed description of the guarantees that we provided for pilot trainees’ personal bank loans related to their respective flight training expenses, please refer to Note 52(c) to the consolidated financial statements.

F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table sets forth our obligations and commitments to make future payments under contracts and under commitments (excluding share of commitments of a joint venture) as of December 31, 2020.

 

     As of December 31, 2020
Payment due by period
 
     Total      Less
than 1
year
     1 - 3
years
     3 - 5
years
     After 5
years
 
     RMB million      RMB million      RMB million      RMB million      RMB million  

Short-term bank loans and ultra-short-term bills (Note 1)

     36,631        36,631        —          —          —    

Long-term bank and other loans (Note 1)

     49,707        4,747        8,350        15,420        21,190  

Lease liabilities

     140,776        25,752        23,989        54,653        36,382  

Aircraft purchase commitments (Note 2)

     56,547        28,382        26,943        1,222        —    

Other capital commitments

     10,449        4,130        5,042        1,277        —    

Total

     294,110        99,642        64,324        72,572        57,572  

Note 1 Interest on variable rate loans was estimated based on the current rate in effect at December 31, 2020.

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

 

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G. SAFE HARBOR

See the section headed “Forward-looking Statements” at the beginning of this Annual Report.

 

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. DIRECTORS AND SENIOR MANAGEMENT

The following table sets forth certain information concerning our directors, senior management and supervisors. There were certain changes in our directors, senior management and supervisors as of April 23, 2021, details of which are set forth below.

 

Name    Position        Gender            Age    

*Wang Changshun

   Chairman of the Board, Executive Director    Male    63

Ma Xulun

Han Wensheng

  

Chairman of the Board, Executive Director, President

Executive Director

  

Male

Male

   56

54

Zheng Fan

   Independent Non-executive Director    Male    65

Gu Huizhong

   Independent Non-executive Director    Male    64

Tan Jinsong

   Independent Non-executive Director    Male    56

Jiao Shuge

   Independent Non-executive Director    Male    55

Li Jiashi

   Chairman of the Supervisory Committee, Supervisor    Male    59

Lin Xiaochun

   Supervisor    Male    49

Mao Juan

   Supervisor    Female    48

*Xiao Lixin

   Executive Vice President, Chief Accountant and Chief Financial Officer    Male    54

Yao Yong

   Executive Vice President, Chief Accountant and Chief Financial Officer    Male    51

Zhang Zhengrong

   Executive Vice President    Male    58

Luo Laijun

   Executive Vice President    Male    49

Wu Yingxiang

   Executive Vice President    Female    47

Ren Jidong

   Executive Vice President    Male    56

Cheng Yong

   Executive Vice President    Male    59

Wang Zhixue

   Executive Vice President    Male    60

Li Tongbin

   Executive Vice President and Chief Engineer    Male    59

Su Liang

   Chief Economist    Male    59

Chen Weihua

Li Shaobin

  

Chief Legal Adviser

Chief Training Officer

  

Male

Male

   54

57

Xie Bing

   Company Secretary, Secretary to the Board    Male    47

Feng Huanan

   COO Flight Safety    Male    58

*Guo Jianye

   Chief Customer Officer    Male    58

Luo Minghao

   Chief Pilot    Male    58

Zhu Hailong

   Chief Operation Officer    Male    57

Notes: * represents the personnel has already resigned as at the end of the reporting period.

 

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Directors

Ma Xulun, male, born in July 1964 (aged 56), graduated from the School of Mechanical Science & Engineering of Huazhong University of Science & Technology, majoring in industrial engineering. He has a master’s degree of engineering and is a certified public accountant. He started his career in August 1984, and joined the Chinese Communist Party in October 1990. He has been the Vice President of China National Materials Storage and Transportation Corporation, the Deputy Director General of the Finance Department of the CAAC, the Vice President and Standing Member of Party Committee of Air China Corporation Limited. He was appointed as the Vice President of general affairs and the Deputy Party Secretary of Air China Corporation Limited in October 2002; and served as a director, the President and the Deputy Party Secretary of Air China Limited in September 2004. He served as a Party Member of China National Aviation Holding Company and a Director, the President and the Deputy Party Secretary of Air China Limited in December 2004, and the Vice President and a Party Member of China National Aviation Holding Company from February 2007. In December 2008, he was appointed as the Deputy Party Secretary of China Eastern Air Holding Company and the President and the Deputy Party Secretary of China Eastern Airlines Corporation Limited. He served as the Secretary to the Party Committee and the Vice President of China Eastern Air Holding Company and the President of China Eastern Airlines Corporation Limited in October 2011. In November 2016, he served as a Director, the President and the Deputy Party Secretary of China Eastern Air Holding Company, and the Vice Chairman, the President and the Deputy Party Secretary of China Eastern Airlines Corporation Limited in December 2016. In February 2019, he served as the Director, the President and the Deputy Party Secretary of CSAH. In March 2019, he acted as the President of the Company. In May 2019, he acted as the Vice Chairman of the Company. In December 2020, he served as the President and Party Secretary of CSAH and Chairman and President of the Company.

Han Wensheng, male, born in January 1967 (aged 54), graduated from the Management Department of Tianjin University, majoring in engineering management, with qualification of a master’s degree. He obtained a master’s degree of Engineering and is an economist. He began his career in August 1987 and joined in the Chinese Communist Party in May 1985. He served as the Deputy Director General of Cadre Training Center of the Company, the Director of the Research Bureau of the Company, the General Manager of the Labour Department and the Secretary of the CPC General Committee of the Company, the Deputy Director General and a member of Party Committee of the Commercial Steering Committee, the General Manager as well as the Deputy Party Secretary of the Sales and Marketing Department of the Company, and the General Manager and Deputy Party Secretary of Shanghai base. He acted as the Deputy Party Secretary and the Deputy Director General of the Commercial Steering Committee of the Company since December 2009 and the Party Secretary and the Deputy Director General of the Commercial Steering Committee of the Company since October 2011. He served as the Vice President and the Party Member of CSAH from October 2016. From November 2017, he served as the Vice President and the Party Member of CSAH and the Vice President and Party Member of the Company. He was appointed as a Director and the Deputy Party Secretary of CSAH and the Vice President of the Company in November 2018. From December 2018, he served as the Deputy Party Secretary of the Company. In January 2019, he served as a Director and Deputy Party Secretary of CSAH. In May 2019, he served as a Director of the Company. Currently, he also acts as the Vice Chairman of Sichuan Airlines Corporation Limited and the Standing Committee Member of the 12th session of Guangdong Provincial Committee of Chinese People’s Political Consultative Conference.

Zheng Fan, male, born in November 1955 (aged 65), graduated with a bachelor’s degree from Beijing Normal University majoring in School Education and is a senior expert of political science. Mr. Zheng is a CPC member and began his career in 1974. He served as a teacher of Faculty of Education at Beijing Normal University from February 1982. He worked as a cadre at public relationship department of the Chinese Communist Party Central Committee and was a Deputy Director level investigator from January 1986, Deputy Director-general (temporary post) of public relationship department of CBRC Shenzhen Municipality Luohu District Committee and Deputy Director General (temporary post) of public relationship department of Shenzhen Committee of Communist Party of China from March 1988, Deputy Director of public relationship department of CBRC Shenzhen Municipality Futian District Committee and Office Director of working committee under the CBRC Shenzhen Municipality Committee from March 1991. Since August 1994, he has been appointed as General Manager of general administration office of Overseas Chinese Town Economic Development Company, General Manager’s assistant of OCT Group and Managing Director of Overseas Chinese Town (HK) Company Limited since December 1997, Deputy Secretary of the Party Committee, Secretary of Discipline Inspection Commission and Chief Cultural Officer of Overseas Chinese Group Company since August 2000, Secretary of the Party Committee and Vice-President of Overseas Chinese Group Company since March 2008, Secretary of the Party Committee and Vice-Chairman of Overseas Chinese Town Company Limited since January 2010. He acted as Council Member of China Overseas Exchange Association, Director of relation of the Two Shores Across the Strait Association, Vice President of Council for the Promotion of Guangdong-Hong Kong-Macao Corporation and Vice-Chairman of Guangdong Province Association of Entrepreneurs. He was also a Congressman of the 4th term and 5th term of the People’s Congress for Shenzhen Municipality and a member of the 11th session of Guangdong Provincial Committee of Political Consultative Conference. Mr. Zheng has been an Independent Non-executive Director of the company since 20 December 2017.

 

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Gu Huizhong, male, born in November 1956 (aged 64), graduated with a master’s degree from Zhengzhou Aviation Industry Institute and Beihang University majoring in International Finance and is a senior accountant at a professor level. Mr. Gu is a CPC member and began his career in 1974. He served as Deputy Chief and Chief of the General Office of Financial Division of Aviation Industry Department, Director of International Affairs Financial Division of Aviation Industry Corporation of China, General Manager of Zhongzhen Accounting Consultative Corporation, Vice Director General of Financial Department of Aviation Industry Corporation of China and Deputy Director-General of Financial Department of State Commission of Science, Technology and Industry for National Defence. From June 1999 to February 2005, he acted as a member of the Communist Party and Vice President of Aviation Industry Corporation of China I. From February 2005 to August 2008, he acted as a member of Party Leadership Group, Vice President and Chief Accountant of Aviation Industry Corporation of China I. From August 2008 to January 2017, he acted as a member of Party Leadership Group, Vice President and Chief Accountant of Aviation Industry Corporation of China. He previously served as Chairman of AVIC I International Leasing Co., Ltd., Chairman of AVIC I Financial Co., Ltd., Chairman of CATIC International Holdings Limited, Chairman of AVIC Capital Co., Ltd. and Chairman of AVIC International Vanke Company Limited. Currently, he is serving as an external director of Ansteel Group Co., Ltd. and Vice Chairman of the Accounting Society of China. Mr. Gu has been an Independent Non-executive Director of the Company since December 2017.

Tan Jinsong, male, born in January 1965 (aged 56), graduated from Renmin University of China with an on-job doctor’s degree in Accounting. Mr. Tan is a Chinese Certified Public Accountant and a CPC member. Mr. Tan began his career in 1985 and was a teacher in Shaoyang School of Finance and Accounting of Hunan Province and the Deputy Dean of the School of Management of Sun Yat-sen University. Mr. Tan is currently a professor and a doctorate-tutor of the School of Management of Sun Yat-sen University. He is also a member of the China National MPAcc Education Steering Committee, a member of China Institute of Internal Audit, Vice President of Guangdong Institute of Certified Public Accountants and a Council Member of China Audit Society. Currently, Mr. Tan also serves as the Independent Director of COSCO SHIPPING Specialized Carriers Co., Ltd., Shanghai RAAS Blood Products Co., Ltd., Zhuhai Huafa Industrial Company Limited and Media Real Estate Holding Limited. Mr. Tan has been an Independent Non-executive Director of the Company since December 26, 2013.

Jiao Shuge, male, born in February 1966 (aged 55), with a master’s degree, first graduated from the Control Theory Faculty of the Department of Mathematics of Shandong University with a bachelor’s degree, and then graduated from the Systems Engineering Faculty of No. 2 Research Institute of the Ministry of Aerospace Industry with a master’s degree in Engineering. Mr. Jiao has extensive experience in funds management and equity investment. Currently, Mr. Jiao is the Director and President of CDH China Management Company Limited (“CDH Investments”) and is the founder of CDH Investments. He was a computer researcher of 710 Research Institute of the former Ministry of Aerospace Industry of China, the Deputy General Manager of Direct Investment Department of China International Capital Corporation Ltd. (“CICC”). Mr. Jiao was the Non-executive Director of China Yurun Food Group Limited and China Shanshui Cement Group Limited. He is also the President of Fujian Nanping Nanfu Battery Company Limited, Inner Mongolia Hetao Spirit Group Company Limited, Wuhu Zhengding Investment Management Co., Ltd. and other companies; He acted as a director of a number of companies including WH Group Limited, Henan Shuanghui Investment & Development Co., Ltd., Joyoung Co., Ltd. and Chery Automobile Co., Ltd.; and also acted as an Independent Director of China Mengniu Dairy Company Limited, the Chairman and Non-executive Director of Mabpharm Limited and Director of associated companies of CDH Investments. Mr. Jiao has been an independent Non-executive Director of the Company since June 30, 2015.

Supervisors

Li Jiashi, male, born in May 1961 (aged 59), graduated from Party School of the Communist Party of China majoring in Economics Management and has a bachelor’s degree. He has an Executive Master of Business Administration (EMBA) degree from Tsinghua University and is a qualified expert of political science. Mr. Li began his career in August 1976 and joined the Chinese Communist Party in June 1986. In February 1998, he served as the Party Secretary of Guangzhou Nanland Air Catering Company Limited and the Deputy Head (work as Chair) of the Organization Division of the Party Committee of the CSAH in April 1999. Mr. Li served as the Head of the Organization Division of the Party Committee of CSAH in December 1999 and served as the Deputy Secretary of the Disciplinary Committee and the Director of the Disciplinary Committee Office of the Company in December 2003. Mr. Li served as the Secretary of the Disciplinary Committee, Standing Member of the Party Committee and the Director of the Disciplinary Committee Office of the Company in December 2007. Mr. Li has been a Supervisor of the Company since June 2009. He has been the Deputy Team Leader of the Discipline Inspection Commission of CSAH, member of Secretary of the Disciplinary Committee, the Director of the Disciplinary Committee Office and the Standing Member of the Party Committee of the Company in February 2012. He has acted as the Chairman of the Labour Union and the Standing Member of Party Committee of the Company in November 2017. He has acted as the Chairman of the Labour Union of CSAH and the Chairman of the Labour Union and the Standing Member of Party Committee of the Company from January 2018. He has served as the Chairman of the Labour Union of CSAH and the Chairman of the Labour Union of the Company since July 2018. He has served as the Chairman of the Supervisory Committee of the Company since May 2019 and the employees’ representative Director of CSAH since August 2019.

 

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Lin Xiaochun, male, born in May 1971 (aged 49), graduated from the Peking University Law School with a bachelor’s degree of laws, majoring in international law. He obtained his Master of Business Administration from the Beijing University of Technology and the City University of the United States and his Executive Master of Business Administration (EMBA) from the Tsinghua University School of Economics and Management. He obtained qualifications as an Enterprise Legal Adviser and a corporate lawyer. He started his career in July 1995, and joined the Chinese Communist Party in June 1995. He served as the Deputy Director of the legal department of the Company in October 2006, the Deputy General Manager of the legal department of the Company in January 2009, the Deputy Director of the legal department of CSAH and the Deputy General Manager of the legal department of the Company in December 2009, the Director of the legal department of CSAH in May 2013, and the General Manager of the Laws & Standards Division of CSAH and the General Manager of the Laws & Standards Division of the Company in April 2017. He has served as a Supervisor of the Company since May 2019.

Mao Juan, female, born in December 1972 (aged 48), obtained a bachelor’s degree in accounting from Harbin University of Science and Technology. Ms. Mao began her career in July 1993, and joined the Chinese Communist Party in April 1992. She served as Deputy General Manager of Hainan Branch Comprehensive Trading Company, Deputy Manager of Finance Department in Hainan Branch of the Company and Manager of Audit and System Office of Finance Department in the Company. From August 2011, she acted as Deputy General Manager of Audit Department in the Company and acted as General Manager of Audit Department in the Company since June 2016. She has been the Standing Deputy General Manager of Audit Department in CSAH and the Company from April 2017. She has served as the General Manager of Audit Department of CSAH and the Company since November 2017, and concurrently served as the Supervisor of the Company since December 2017. Currently, she is also the Chairman of the Supervisory Committee of Southern Airlines Group Finance Company Limited and Nan Lung International Freight Limited, as well as the supervisor of Xiamen Airlines Company Limited and Guangzhou China Southern Airlines CDFG Duty Free Co., Ltd.

Senior Management

Yao Yong, male, born in November 1969 (aged 51), graduated with a bachelor’s degree of economics from the Department of National Economic Management of Sichuan University, majoring in National Economic Management. He obtained his master’s degree of Business Administration from the University of Electronic Science and Technology of China-Webster University. He is a senior accountant, a senior auditor and an ACCA member. He began his career in July 1991, and joined the Chinese Communist Party in June 2004. He served as a Staff Member of the Capital Construction Audit Division of Sichuan Provincial Audit Department, the Senior Staff Member and the Principal Staff Member of the Fixed Assets Investment Audit Division of Sichuan Provincial Audit Department. He served as the Director of the Financial Management Department of Ertan Hydropower Development Co., Ltd. beginning in March 2003; Deputy Chief Accountant and Director of Finance Department of Ertan Hydropower Development Co., Ltd. beginning in July 2007; Chief Accountant and Director of Financial Management Department of Ertan Hydropower Development Co., Ltd. beginning in October 2010; Chief Accountant of Ertan Hydropower Development Co., Ltd. beginning in December 2011; Chief Accountant of Yalong River Hydropower Development Co., Ltd. beginning in November 2012; Director of the Finance Department of State Development & Investment Corporation (renamed as State Development & Investment Corp., Ltd. in December 2017) beginning in June 2017; and Chief Accountant and Party Member of CSAH beginning in March 2021.

Zhang Zhengrong, male, born in September 1962 (aged 58), has a college degree from Civil Aviation Flight University of China majoring in Aircraft Piloting. He was graduated from Party School of the Central Committee of CPC majoring in economic management with a bachelor’s degree. He also obtained an Executive Master of Business Administration (EMBA) degree from Tsinghua University. He began his career in February 1982, and joined the Chinese Communist Party in April 1988. He served as Vice Captain of Third Flight Corps of Civil Aviation Administration, Vice Captain of Fourth Flight Corps and Captain of First Flight Corps of CSAH. From May 2002, he has been the Deputy General Manager of Civil Aviation Administration of the Company and Captain of First Flight Corps of the Company. From November 2002, he has been General Manager of Department of Security Supervision of the Company, as well as General Manager and Deputy Party Secretary of Guangzhou Flight Division of the Company in May 2004. In August 2007, he was appointed as Chief Pilot of the Company and General Manager and Deputy Party Secretary of Guangzhou Flight Division of the Company. From March 2009, he has been Chief Pilot and Director of Aviation Security Department of the Company. Since April 2012, he served as the Chief Pilot, COO Flight Safety and Director of Aviation Security Department of the Company and in July 2012, he served as the Chief Pilot and Aviation Security Minister of CSAH. Since April 2014, he has acted as Chief Pilot, COO Flight Safety and Director of Aviation Security Department of CSAH. Since December 2016, he has been Chief Pilot of CSAH. He has served as Chief Operation Officer of the Company since January 2017. Since November 2017, he has been the President Assistant of CSAH and Chief Operation Officer of the Company. From June 2018, he has been the Vice President, Party Member of CSAH and Chief Operation Officer of the Company. In August 2018, he served as the Executive Vice President of the Company. Since November 2018, he acted as the Executive Vice President, Party Member of CSAH and the Executive Vice President of the Company. Currently, he also serves as the chairman of Guizhou Airlines Company Limited.

 

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Luo Laijun, male, born in October 1971 (aged 49), graduated from Nanjing University of Aeronautics and Astronautics, majoring in Accounting and also obtained an Executive Master of Business Administration (EMBA) degree from Tsinghua University. He began his career in July 1993 and joined the Communist Party of China in September 1992. He served as the Manager of Finance Department in Shanghai Branch of the Company, Deputy Director of the Purchasing Office in Finance Department of the Company, Deputy Manager and Manager of Finance Department of Guizhou Airlines Company Limited. He has acted as a member of the party committee, Chief Financial Officer and manager of Finance Department of Guizhou Airlines Company Limited in June 2003; Director of Business Assessment Office of the Company in June 2005; Deputy Director of Commercial Steering Committee and General Manager and Party Member of Financing Plan Department of the Company in November 2005; General Manager and Deputy Party Secretary of Freight Department of the Company in February 2009; the General Manager and the Deputy Party Secretary of Dalian Branch of the Company in July 2012; Executive Deputy Director General and the Deputy Party Secretary of Commercial Steering Committee of the Company in November 2016; Director General and the Deputy Party Secretary of Commercial Steering Committee of the Company in August 2017; Executive Vice President and the Party Member of CSAH and Executive Vice President of the Company in March 2019. Currently, he also serves as the Chairman of China Southern Airlines Henan Airlines Company Limited and Shantou Airlines Company Limited.

Wu Yingxiang, female, born in November 1973 (aged 47), graduated from Business Administration Department of Central South University of Technology with a bachelor’s degree, majoring in International Accounting and obtained an Executive Master of Business Administration (EMBA) degree from Tsinghua University, and she is a Senior Accountant, a Certified Public Accountant and a Chartered Global Management Accountant. Ms. Wu began her career in July 1994, and joined the Chinese Communist Party in November 1992. She served as Assistant Minister of Finance Department of China Southern Airlines (Group) Company beginning in March 2001; Vice Minister of Finance Department of CSAH beginning in September 2005; Minister of Finance Department of CSAH beginning in September 2012; the Head of Performance Appraisal Management Department of CSAH beginning in February 2017; the General Manager of Comprehensive Performance Appraisal Department of CSAH and the Company beginning in April 2017; the General Manager and Deputy Party Secretary of Shantou Airlines Company Limited beginning in September 2018; Party Secretary and Deputy Director General of the Marketing Management Committee of the Company beginning in October 2019; Party Member of CSAH beginning in May 2020; the Executive Vice President and Party Member of CSAH as well as the Executive Vice President of the Company beginning in June 2020.

Ren Jidong, male, born in January 1965 (aged 56), Bachelor of Engineering, graduated from Power Engineering Department of Nanjing University of Aeronautics and Astronautics with a bachelor’s degree, majoring in Aircraft Engine Design and obtained an Executive Master of Business Administration (EMBA) degree from Tsinghua University, and he is a senior engineer. Mr. Ren began his career in August 1986 and joined the Chinese Communist Party in June 1986. He served as the Deputy Director (deputy general manager) and a member of the Standing Committee of the CPC of Urumqi Civil Aviation Administration (Xinjiang Airlines) and the Deputy General Manager and a member of the Standing Committee of the CPC of Xinjiang Airlines. He acted as the Party Secretary and Deputy General Manager of CSAH Xinjiang Company from June 2004, the Party Secretary and Deputy General Manager of Xinjiang Branch of the Company from January 2005, a member of the Standing Committee of the CPC of the Company from February 2005, Deputy General Manager and a member of the Standing Committee of the CPC of the Company from March 2005, a member of the Standing Committee of the CPC of the Company and the General Manager and Deputy Party Secretary of Xinjiang Branch from January 2007, a member of the Standing Committee of the CPC of the Company from April 2009, Deputy General Manager and a member of the Standing Committee of the CPC of the Company from May 2009 and the Executive Vice President of the Company from July 2018.

 

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Cheng Yong, male, born in April 1962 (aged 59), graduated from Civil Aviation Flight College of China majoring in Aircraft Piloting and Civil Aviation Flight University of China majoring in Wingmanship, with a bachelor’s degree. He obtained an Executive Master of Business Administration (EMBA) degree from Tsinghua University and is a command pilot. He began his career in January 1982, and joined the Chinese Communist Party in August 1984. He has been the Deputy Head of Shenyang Chief Flight Corps Team of China Northern Airlines Company, Vice President of China Northern Airlines Company Tian’e LLC and President of China Northern Airlines Company Sanya Co., Ltd. He served as the General Manager of CSAH Northern Division beginning in November 2004; President and Deputy Party Secretary of Northern Branch of the Company beginning in January 2005; deputy leader of steering group for reorganization of Liaoning Airport Management Group Company, President and Deputy Party Secretary of Northern Branch of the Company beginning in October 2008; Deputy Leader of the steering group for reorganization of Liaoning Airport Management Group Company beginning in January 2009; President and deputy party secretary of Beijing Branch of the Company beginning in April 2009; a member of the Standing Member of Party Committee of the Company and General Manager and Deputy Party Secretary of Beijing Branch of the Company from April 2010; a Standing Member of Party Committee of the Company beginning in July 2017; and the Executive Vice President of the Company beginning in August 2018.

Wang Zhixue, male, born in January 1961 (aged 60), has a college degree from Civil Aviation Flight University of China majoring in Aircraft Piloting, and obtained a degree from Civil Aviation Flight University of China majoring in Wingmanship, and is a command pilot. Mr. Wang began his career in February 1981, and joined the Chinese Communist Party in December 1980. Mr. Wang successively served as the Deputy Chief Pilot and Director of the Flight Safety Technology Department of Shantou Airlines Company Limited of CSAH, Deputy Chief Pilot and Manager of the Flight Safety Technology Division of Shantou Airlines Company Limited of CSAH. He also acted as the Deputy General Manager of Shantou Airlines Company Limited of CSAH from June 2002, and the General Manager of the Flight Management Division of the Company from October 2004, and the General Manager and Deputy Party Secretary of Guangzhou Flight Division of the Company from February 2009. Mr. Wang has been Chief Pilot and a member of the Standing Committee of the CPC of the Company from July 2012, and Executive Vice President, Chief Pilot and a member of the Standing Committee of the CPC of the Company from August 2012. He has been Executive Vice President and a member of the Standing Committee of the CPC of the Company from December 2016. He has been Executive Vice President of the Company from July 2018, and was appointed as legal representative, vice chairman, President and Deputy Secretary of CPC of Xiamen Airlines Company Limited in February 2019.

Li Tongbin, male, born in December 1961 (aged 59), graduated with a bachelor’s degree from Northeastern University majoring in Industrial Electric Automation, and Business Administration (MBA) from School of Economics and Management of Hainan University. He obtained an Executive Master of Business Administration (EMBA) Degree from Tsinghua University, and is a senior engineer. Mr. Li began his career in August 1983, and joined the Chinese Communist Party in May 1983. He successively served as the Director of Aircraft Engineering Department and the Director of aircraft maintenance base of China Northern Airlines Company, the General Manager of Jilin Branch of China Northern Airlines Company. He also acted as the Deputy General Manager and Deputy Party Secretary of Zhuhai Airlines Company Limited from September 2004, the General Manager and Deputy Party Secretary of Zhuhai Airlines Company Limited from January 2005, and the Party Secretary and Deputy General Manager of Northern Branch of the Company from April 2012. Mr. Li was the Chief Engineer, General Manager of Aircraft Engineering Department and Deputy Party Secretary of the Company from April 2014. He has been the Chief Engineer, a member of the Standing Committee of the CPC, General Manager of Aircraft Engineering Department and Deputy Party Secretary of the Company from August 2015. Mr. Li has been the Executive Vice President, Chief Engineer, a member of the Standing Committee of the CPC, as well as General Manager of Aircraft Engineering Department and Deputy Party Secretary of the Company since September 2015. From December 2016, he has been Executive Vice President, Chief Engineer and a member of the Standing Committee of the CPC. In July 2018, he was appointed as the Executive Vice President and Chief Engineer of the Company. For now, Mr. Li also serves as Chairman of Guangzhou Aircraft Maintenance Engineering Co., Ltd. and MTU Maintenance Zhuhai Co., Ltd.

 

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Su Liang, male, born in April 1962 (aged 59), graduated from the University of Cranfield, United Kingdom with a master’s degree majoring in Air Transport Management, and is an engineer. Mr. Su began his career in December 1981, and joined the Chinese Communist Party in May 1996. He successively served as Deputy General Manager of the Flight Operations Division, Deputy General Manager and Manager of Planning and Management Division of CSAH Shenzhen Company. Mr. Su was the Secretary to the Board of the Company from July 2000, the Secretary to the Board and Director General of Company Secretary Office of the Company from December 2003, the Secretary to the Board, Deputy Director General and Party Member of Commercial Steering Committee of the Company from November 2005, the Secretary to the Board and Director General of Company Secretary Office and Deputy Director General and Party Member of Commercial Steering Committee of the Company from February 2006. Mr. Su has been the Chief Economist of the Company since December 2007. For now, he also serves as Director of the Board of Sichuan Airlines Company Limited, Chairman of Southern Airlines Culture and Media Co., Ltd. and China Southern West Australian Flying College Pty Ltd.

Chen Weihua, male, born in October 1966 (aged 54), graduated from the School of Law of Peking University with a bachelor’s degree, majoring in Law and obtained an Executive Master of Business Administration (EMBA) degree from Tsinghua University, and is an economist, a qualified lawyer in the PRC and a qualified corporate legal counselor. Mr. Chen began his career in July 1988, and joined the Chinese Communist Party in February 2001. He successively served as Deputy Director of Legal Department of China Southern Airlines (Group) Corporation, Deputy Director of the Office (Director of the Legal Division) of the Company and China Southern Airlines (Group) Corporation. Mr. Chen was the Chief Legal Adviser of the Company and Director of the Legal Division of the Company from June 2004. Mr. Chen has been the Chief Legal Adviser and General Manager of the Legal Division of the Company since October 2008. He has served as Chief Legal Adviser of the Company since April 2017. For now, he also acts as Director of the Board of Xiamen Airlines Company Limited.

Li Shaobin, male, born in April 1964 (aged 57), graduated with a college degree from Chinese Language and Literature of Xiangtan Teachers’ College, and obtained a university degree from the Party School of the Central Committee of CPC majoring in economics and management. He is an expert of political science. He began his career in July 1984, and joined the Communist Party of China in February 1988. He was an officer of Public Relationship Section of Political Department of the Hunan Bureau of Civil Aviation Administration, the Senior Staff Member of Publicity Division of Political Department of the Guangzhou Bureau of Civil Aviation Administration and the Principal Staff Member of Publicity Department of the Company. He served as the Deputy Director of Publicity Department of the China Southern Airlines (Group) Company in September 1994. He had been the Director of Political Division of Flight Department of the Company from December 1999. Mr. Li was the Deputy Party Secretary of Flight Department and Director of Political Division of the Company from May 2002. Subsequently, he was appointed as the Party Secretary of Guangzhou Flight Operations Division of the Company from May 2004. Mr. Li served as the Party Secretary and Vice President of Guangzhou Flight Operations Division of the Company from March 2006. Mr. Li has been the Chairman of the Labour Union of the Company since August 2012 and the Executive Director of the Company since January 2013. Mr. Li served as the President and Deputy Party Secretary of the Training Centre of the Company since April 2017. Mr. Li also has been the Chief Training Officer of the Company since June 2019.

Xie Bing, male, born in September 1973 (aged 47), graduated from Nanjing University of Aeronautics and Astronautics, majoring in Civil Aviation Management. He subsequently received a master’s degree of business administration from the Management School of Jinan University, a master’s degree of business administration (international banking and finance) from the University of Birmingham, Britain and an MBA, an Executive Master of Business Administration (EMBA) degree from Tsinghua University, respectively. Mr. Xie is a Senior Economist, fellow member and FCS of The Hong Kong Institute of Chartered Secretaries, and has the qualification for the Secretary to the Board of companies listed on the Shanghai Stock Exchange and also has the qualification for Company Secretary of companies listed on the Stock Exchange. Mr. Xie began his career in July 1995, and joined the Chinese Communist Party in January 1994. He successively served as the Assistant of the Secretary to the Board of the Company, and the Executive Secretary of the General Office of CSAH. Mr. Xie has been the Secretary to the Board and Deputy Director of the Company Secretary Office of the Company from November 2007. From December 2009, Mr. Xie has been the Secretary to the Board and Director of the Company Secretary Office of the Company. From April 2017, he has been the Secretary to the Board of the Company, Director of the Company Secretary Office of the Company. For now, he also acts as Chairman and Party Secretary of China Southern Airlines Group Capital Holding Limited and Chairman of CSA International Finance Leasing Co., Ltd., Deputy President of Central Enterprises Overseas Students Sodality and a Council Member of The Hong Kong Institute of Chartered Secretaries.

 

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Feng Huanan, male, born in November 1962 (aged 58), graduated with a college degree from China Civil Aviation Flying College, majoring in Aircraft Piloting, and obtained a master’s degree in Aeronautical Engineering from School of Automation Science and Electrical Engineering of Beijing University of Aeronautics and Astronautics and an Executive Master of Business Administration (EMBA) from Tsinghua University. He is a commanding pilot. Mr. Feng began his career in January 1983, and joined the Chinese Communist Party in October 1986. He successively served as the Director of Zhuhai Flight Training Centre of China Southern Airlines (Group) Company and the Deputy General Manager of Flight Operation Division of the Company. He was the General Manager of Flight Safety Technology Department from December 1999, and the General Manager of Flight Technology Management Department of the Company from November 2002. Mr. Feng also served as the Party Secretary and Deputy General Manager of Guizhou Airlines Company Limited from September 2004, and then served as the General Manager and Deputy Party Secretary of Guizhou Airlines Company Limited from February 2006. He has been the COO Flight Safety of the Company since August 2014.

Luo Minghao, male, born in September 1962 (aged 58), graduated from the Civil Aviation Flight College of China majoring in Aircraft Piloting. He graduated with a master’s degree from the Party School of Hunan Provincial Committee majoring in economics. He obtained an Executive Master of Business Administration (EMBA) degree from Tsinghua University. He is Second Class Pilot. He began his career in July 1982, and joined the Communist Party of China in December 1984. He served as the Deputy General Manager of the flight division of Hunan Branch of CSAH, Deputy General Manager of Bei Hai Sales Department of Hunan Branch of CSAH, and General Manager of Bei Hai Sales Department in Hunan Branch of the Company. He served as the Deputy General Manager of Hunan Branch of the Company in May 2002, General Manager and Deputy Party Secretary of the Cabin Department of the Company in December 2006. He acted as General Manager and Deputy Party Secretary of Dalian Branch of the Company in December 2010, General Manager and Deputy Party Secretary of Guangzhou Flight Department of the Company in July 2012 and Chief Pilot of the Company in March 2018.

Zhu Hailong, male, born in December 1963 (aged 57), graduated from Civil Aviation Flight College of China majoring in Aircraft Piloting and possesses post-secondary qualifications. He graduated from the Flight College of Civil Aviation Flight University of China, majoring in aviation transportation with an on-job bachelor’s degree. Mr. Zhu holds the title of First Class Pilot. He began his career in January 1983, and joined the Chinese Communist Party in August 1984. He was a pilot of the 15th Fleet of CAAC, a pilot in the Flight Department of the Hainan Branch of the Company, Vice-Captain of the Second Squadron, the Captain of the B737 Squadron, the Deputy General Manager and General Manager of the Flight Department. He served as General Manager’s assistant and General Manager of Haikou Flight Department in the Hainan Branch of the Company. He served as Deputy General Manager and a member of the Party Committee of Shantou Airlines Company Limited beginning in June 2007; the Deputy General Manager, the Manager of the Flight Department and a member of the Party Committee in Hubei Branch of the Company beginning in March 2013; the Deputy General Manager and a member of the Party Committee in Shenzhen Branch of the Company beginning in September 2015; and the Deputy General Manager and Deputy Party Secretary of Guangzhou Flight Division of the Company beginning in February 2018; the Head of Chief Flight Corps Team and Deputy Party Secretary of the Company beginning in May 2018. In December 2020, he was appointed as the Chief Operation Officer of the Company.

None of our Directors, supervisors or members of our senior management was selected or chosen as a result of any arrangement or understanding with any major shareholders, customers or suppliers. None of the above Directors or Supervisors, senior management of our Company has any family relationship with any Directors, Supervisors, senior management, substantial shareholders of our Company. None of our directors or senior management owns any shares or options in our Group as of April 23, 2021.

 

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B. COMPENSATION

The aggregate compensation paid to all Directors, Supervisors and Senior Management for 2020 was RMB12.6 million. For the year ended December 31, 2020, we paid an aggregate of approximately RMB1.5 million on behalf of our executive Directors, Supervisors and Senior Management pursuant to the pension scheme and the retirement plans operated by various municipal and provincial governments in which we participate.

Details of the remuneration of Directors and Supervisors for the year ended December 31, 2020 are set out below:

 

     Directors’
fees
RMB’000
     Salaries,
allowances
and benefits
in kind
RMB’000
     Retirement
scheme
contributions
RMB’000
     Total
RMB’000
 

Executive Directors

           

Ma Xulun

     —          —          —          —    

Han Wensheng

     —          —          —          —    

Wang Changshun

     —          —          —          —    

Independent Non-executive Directors

           

Zheng Fan

     60        —          —          60  

Gu Huizhong

     60        —          —          60  

Tan Jinsong

     150        —          —          150  

Jiao Shuge

     150        —          —          150  

Supervisors

           

Li Jiashi

     —          —          —          —    

Mao Juan

     —          706        126        832  

Lin Xiaochun

     —          633        125        758  

Total

     420        1,339        251        2,010  

C. BOARD PRACTICES

Each director’s service contract with our Company or any of its subsidiaries provides prorated monthly salary upon termination of employment in accordance with his contract. The director is entitled to paid leave under his contract. The term of office of a director is three years. The term of the ninth session of our Board will expire on April 29, 2024. A director may serve consecutive terms upon re-election.

Strategic and Investment Committee

The Strategic and Investment Committee comprises two members, Mr. Gu Huizhong as an independent non-executive Director and Mr. Jiao Shuge as an independent non-executive Director.

The Strategic and Investment Committee held one meeting in 2020 in accordance with its rules and procedures, and considered a report on the “14th Five-Year” Plan of the Company.

Audit and Risk Management Committee

The Audit and Risk Management Committee is appointed by our Board and consists of three independent non-executive directors. The current members of the Audit and Risk Management Committee are Tan Jinsong, Gu Huizhong and Jiao Shuge. Tan Jinsong is the Chairman of the Audit and Risk Management Committee. A member may serve consecutive terms upon re-election. At least once a year, the committee is required to meet with our Company’s external auditors without any executive members of our Board in attendance. The Audit and Risk Management Committee held nine meetings in 2020, which were attended by all members.

 

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The primary responsibilities of the Audit and Risk Management Committee are to consider the appointment of auditors, review the Company’s periodical reports, related party transactions, and hedging and debt financing plans, review the efficiency of risk management and internal control system of the Company and review the internal audit plan. In addition, the Audit and Risk Management Committee also examines the effectiveness of our Company’s risk management internal control system, which involves regular reviews of the internal controls of various corporate structures and business processes on a continuous basis, and takes into account their respective potential risks and severity, in order to ensure the effectiveness of our Company’s business operations and the realization of our corporate objectives and strategies. The scope of such examinations and reviews includes finance, operations, regulatory compliance and risk management. The Audit and Risk Management Committee also reviews our Company’s internal audit plan, and submits relevant reports and concrete recommendations to our Board on a regular basis.

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

Remuneration and Assessment Committee

The Remuneration and Assessment Committee is comprised of three members. Currently, the Remuneration and Assessment Committee is chaired by independent non-executive director Gu Huizhong with the executive director Han Wensheng and the non-executive director Zheng Fan as members. The term of office of each member is three years. A member may serve consecutive terms upon re-election. The Remuneration and Assessment Committee held three meetings in 2020, which were attended by all members. The Remuneration and Assessment Committee reviewed the resolutions including the remuneration of senior management, performance contracts for senior management, and the remuneration for independent non-executive directors of the ninth session of our Board.

The responsibilities of the Remuneration and Assessment Committee are to make recommendations on the remuneration policy and structure for directors and senior management of our Company, to establish regular and transparent procedures on remuneration policy development and improvement and submit our Company’s “Administrative Measures on Remuneration of Directors” and “Administrative Measures on Remuneration of Senior Management”. In particular, the Remuneration and Assessment Committee has the duty to ensure that the directors or any of their associates shall not be involved in the determination of their own remuneration packages.

The Remuneration and Assessment Committee consults, when appropriate, the Chairman and/or the President about its proposals relating to the remuneration of other executive directors. The Remuneration and Assessment Committee is provided with sufficient resources to discharge its duties and professional advice is available if necessary. The Remuneration and Assessment Committee is also responsible for assessing performance of executive directors and approving the terms of executive directors’ service contracts. The Remuneration and Evaluation Committee performed all its responsibilities under its terms of reference in 2020.

Nomination Committee

The Nomination Committee was established on June 28, 2007. Before that, nomination of directors and other senior management was mainly undertaken by our Board. According to the Articles of Association, our Board has the authority to appoint from time to time any person as director to fill a vacancy or as additional director. In selecting candidate directors, our Board focuses on their qualifications, technical skills, experiences (in particular, the experience in the industry in which we operate in case of candidates of executive directors) and expected contributions to us.

As of December 31, 2020, the Nomination Committee consists of two members, including Zheng Fan, an independent non-executive director, as the chairman of the committee and Jiao Shuge, an independent non-executive director, as a member. The responsibilities of the Nomination Committee are to make recommendations to our Board in respect of the size and composition of our Board based on the operational activities, assets and shareholding structure of our Company; study the selection criteria and procedures of directors and executives and give advice to our Board; identify qualified candidates for directors and executives; and investigate and propose candidates for directors and managers and other senior management members to our Board.

 

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

The Nomination Committee held three meetings in 2020 and nominated persons including the members of the ninth session of the Board, Ms. Wu Yingxiang as Executive Vice President of the Company and Mr. Zhu Hai Long as Chief Operating Officer of the Company. The Nomination Committee has performed all its obligations under their terms of reference in 2020.

Aviation Safety Committee

The Aviation Safety Committee comprises three members and is chaired by Mr. Ma Xulun. The other two members are Mr. Zheng Fan as an independent non-executive director and Mr. Tan Jinsong as an independent non-executive director.

The Aviation Safety Committee held two meetings in 2020, which were held in accordance with its rules and procedures, and considered a report on the safety production and operation of the Company and work plan in 2020.

D. EMPLOYEES

As of December 31, 2018, 2019 and 2020, we had 100,831, 103,876 and 100,431 employees, respectively. The table below sets forth the number of our employees by activity as of December 31, 2020. During 2020, we employed 738 temporary employees.

 

     Employees      % of Total  

Pilots

     10,827        10.78  

Flight attendants

     22,674        22.58  

Maintenance personnel

     16,295        16.23  

Passenger transportation personnel

     8,625        8.59  

Cargo transportation personnel

     5,468        5.44  

Ground service personnel

     11,802        11.75  

Flight operation officers

     2,479        2.47  

Flight security guards

     3,528        3.51  

Information system personnel

     1,860        1.85  

Financial personnel

     1,912        1.90  

Others

     14,961        14.90  

Total

     100,431        100.00  

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

All employees of our Group receive cash remuneration and certain non-cash benefits. Cash remuneration consists of salaries, bonuses and cash subsidies provided by our Group. Salaries are determined in accordance with the national basic wage standards. The total amount of wages payable by our Group to our employees is subject to a maximum limit based on the profitability of our Group and other factors. Bonuses are based on the profitability of our Group. Cash subsidies are intended as a form of cost-of-living adjustment. In addition to cash compensation, our contract employees receive certain non-cash benefits, including housing, education and health services, and our temporary employees also receive certain health services, housing fund and education.

 

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Employee benefits

Employee benefits are all forms of considerations given and other related expenditures incurred in exchange for services rendered by employees. Except for termination benefits, employee benefits are recognized as a liability in the period in which the associated services are rendered by employees, with a corresponding increase in cost of relevant assets or expenses in the current period.

Retirement benefits

Our employees participate in several defined contribution retirement schemes organized separately by the PRC municipal and provincial governments in regions where our major operations are located. We are required to contribute to these schemes at rates ranging from 14% to 16% of salary costs, including certain allowances, in 2020, and from 12% to 16% in 2019. A member of the retirement schemes is entitled to pension benefits from the Local Labor and Social Security Bureau upon his/her retirement. The retirement benefit obligations of all retired staff of our Group are assumed by these schemes. We, at our sole discretion, have made certain welfare subsidy payments to these retirees.

In 2014, our Company and our major subsidiaries joined a newly defined contribution retirement scheme that was implemented by CSAH. The annual contribution to the Pension Scheme is based on a fixed specified percentage of prior year’s annual wage. There will be no further obligation beyond the annual contribution according to the Pension Scheme. The total contribution into the Pension Scheme in 2020 was approximately RMB1,043 million.

Housing fund and other social insurances

We contribute on a monthly basis to housing funds organized by municipal and provincial governments based on certain percentages of the salaries of employees. Our liability in respect of these funds is limited to the contributions payable in each year.

We also pay cash housing subsidies on a monthly basis to eligible employees. The monthly cash housing subsidies are reflected in the consolidated income statement.

Termination benefits

When we terminate the employment relationship with employees before the employment contracts expire, or provide compensation as an offer to encourage employees to accept voluntary redundancy, a provision for the termination benefits provided is recognized in the consolidated income statement when both of the following conditions are satisfied:

 

   

We have a formal plan for the termination of employment or made an offer to employees for voluntary redundancy, which will be implemented shortly; and

 

   

We are not allowed to withdraw from termination plan or redundancy offer unilaterally.

Workers’ Compensation

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

 

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E. SHARE OWNERSHIP

None of our directors or senior management owns any shares or options in our Company as of April 23, 2021.

 

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. MAJOR SHAREHOLDERS

The table below sets forth information regarding the ownership of our share capital as of April 23, 2021 by all persons who are known to us to be the beneficial owners of 5.0% or more of each class of our voting securities.

 

Title of Shares

  

Identity of Person or Group

   Beneficially
Owned (1)
     Percentage
of the
Respective
Class of
Shares (2)
     Percentage
of Total
Shares (2)
 

A shares

   CSAH      6,981,865,780        63.16 %      45.55

A shares convertible from A share convertible bonds

   CSAH (3)      1,619,031,730        12.78      9.55

H shares

   HKSCC Nominees Limited      1,750,449,857        40.94 %      11.42

H shares

   CSAH (4)      2,279,983,577        53.33 %      14.87

H shares

   Nan Lung Holding Limited      2,279,983,577        53.33 %      14.87

A shares

   China National Aviation Fuel Group Corporation      457,147,480        4.14 %      2.98

H shares

   Hong Kong Securities Clearing Company Limited      696,157,473        16.28 %      4.54

H shares

   American Airlines Group Inc. (5)      270,606,272        6.33 %      1.77

 

(1)

Beneficial ownership is determined in accordance with the rules of the SEC.

(2)

Except for the relevant percentage of the A shares convertible from A share convertible bonds that held by CSAH (see details in note (3) below), percentage of A Shares and percentage of H Shares is based on 11,054,193,246 A Shares and 4,275,144,849 H Shares, respectively, issued as of April 23, 2021. Percentage of total shares is based on 15,329,338,095 shares issued as of April 23, 2021.

(3)

CSAH subscribed for 101,027,580 A Share convertible bonds that were issued by the Company on October 15, 2020. Such A Share convertible bonds are with a nominal value of RMB100 each and the initial conversion price shall be RMB6.24 per share, subject to adjustments under certain circumstances pursuant to the terms of the issuance of such A Share convertible bonds. The conversion rights of such A Share convertible bonds are exercisable from April 21, 2021 to October 14, 2026.

Based on the conversion price of RMB6.24 per share, which is subject to adjustment, 1,619,031,730 may be issued upon conversion of the A share convertible bonds held by CSAH. The percentage of A shares and percentage of total shares of the A Shares convertible from A share convertible bonds held by CSAH is based on 12,673,224,976 A Shares and 16,948,369,825 shares, respectively, which in each case included the 1,619,031,730 A shares that may be issued upon conversion. If all the A Share convertible bonds held by CSAH are converted, the percentage of A Shares of CSAH would be 67.87% and the percentage of total shares of CSAH would be 50.75% based on 12,673,224,976 A Shares and 16,948,369,825 shares, respectively. As of April 23, 2021, no A Share convertible bonds held by CSAH have been converted.

(4)

CSAH was deemed to be interested in an aggregate of 2,279,983,577 H Shares through its direct and indirect wholly-owned subsidiaries in Hong Kong, of which 31,150,000 H Shares were directly held by Perfect Lines (Hong Kong) Limited (representing approximately 0.73% of its then total issued H Shares) and 2,248,833,577 H Shares were directly held by Nan Lung (representing approximately 52.60% of its then total issued H Shares). As Perfect Lines (Hong Kong) Limited is a wholly-owned subsidiary of Nan Lung, Nan Lung was also deemed to be interested in the 31,150,000 H Shares held by Perfect Lines (Hong Kong) Limited.

(5)

American Airlines Group Inc. was deemed to be interested in 270,606,272 H Shares by virtue of its 100% control over American Airlines.

Shareholders of H Shares and A Shares enjoy the same voting rights with respect to each share. None of our major shareholders has voting rights that differ from the voting rights of other shareholders. We are not aware of any arrangement which may at a subsequent date result in a change of control of our Company.

As of December 31, 2020, there were 59 registered holders of 1,878,565 American Depositary Shares in the U.S., consisting of 2.20% of our outstanding H shares. Since certain of the ADSs are held by nominees, the above number may not be representative of the actual number of U.S. beneficial holders of ADSs or the number of ADSs beneficially held by U.S. persons.

Our Company is currently a majority-owned subsidiary of CSAH, which is an entity wholly-owned by the Chinese government.

B. RELATED PARTY TRANSACTIONS

CSAH is our controlling shareholder. We entered into certain transactions with CSAH and its affiliates in the year ended December 31, 2020 and up to the latest practicable date. We also continued to carry out existing continuing transactions with CSAH and its affiliates in the year ended December 31, 2020. In particular, we believe the following arrangements are material to our operations. We believe that these arrangements have been entered into by us in the ordinary course of business and in accordance with the agreements governing such transactions. For a detailed description of our related party transactions, please see Note 49 to the consolidated financial statements.

 

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Arrangements with CSAH

Trademark License Agreement

We entered into a ten-year trademark license agreement with CSAH on May 22, 1997, pursuant to which CSAH acknowledged that we have the right to use the name “南方航空(China Southern)” and “中国南方航空(China Southern Airlines)” in both Chinese and English, and grants us a renewable and royalty free license to use the kapok logo on a worldwide basis in connection with our airline and airline-related businesses. Unless CSAH gives a written notice of termination three months before the expiration of the agreement, the agreement will be automatically renewed for another ten-year term. In May 2017, the trademark license agreement entered into between us and CSAH was automatically renewed for ten years.

Leases

We (as lessee) and CSAH or its subsidiaries (as lessor) entered into lease agreements as follows:

 

  (1)

We and CSAH entered into an indemnification agreement dated May 22, 1997 in which CSAH agreed to indemnify us against any loss or damage caused by or arising from any challenge of, or interference with, our right to use certain lands and buildings.

 

  (2)

We and CSAH entered into an asset lease framework agreement on January 26, 2018 for a term of three years commencing from January 1, 2018 to December 31, 2020 to renew lease transactions originally covered under the asset lease framework agreement dated December 29, 2014. Pursuant to such asset lease framework agreement, CSAH agreed to continue to lease to our Group certain buildings, land and equipment assets at existing locations in Guangzhou, Wuhan, Changsha, Haikou, Zhanjiang and Nanyang. The annual cap for rent payable to CSAH under such asset lease framework agreement is approximately RMB116.20 million for each of the three years ending December 31, 2020. For the year ended December 31, 2020, the rent incurred by the Group amounted to RMB85 million pursuant to such asset lease framework agreement. The agreement expired on December 31, 2020. On December 21, 2020, we entered into a new asset lease framework agreement for a term from January 1, 2021 to December 31, 2023 to renew the transactions contemplated under the existing asset lease framework agreement and the existing building asset lease agreement between us and GSAC. The annual cap for the aggregate amount of rent payable by our Group to CSAH under the new asset lease framework agreement for each of the three years ending December 31, 2023 is RMB346.29 million.

 

  (3)

On December 30, 2019, we entered into a property and land lease framework agreement with CSAH to renew the property and land lease framework agreement dated December 16, 2016 for a term of three years commencing from January 1, 2020 to December 31, 2022. Pursuant to such property and land lease framework agreement, CSAH agreed to (i) lease to us certain properties, facilities and other infrastructure located in various cities such as Beijing, Shenyang, Chaoyang, Dalian, Changchun, Harbin, Jilin, Urumqi and overseas locations held by CSAH or its subsidiaries, (ii) lease certain lands located in Shenyang, Chaoyang, Dalian, Changchun, Harbin and Urumqi by leasing the land use rights of such land to us. The annual rental will be payable on a quarterly basis. The amount of aggregate annual rental payable by us to CSAH under the new property and land lease framework agreement for each of the three years ending December 31, 2022 is RMB96.78 million. For the year ended December 31, 2020, the rents for property lease and land lease incurred by us under the property and land lease framework agreement amounted to RMB83 million.

 

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

On December 27, 2018, we entered into a media services framework agreement with SACM to renew the media services framework agreement dated December 30, 2015 for an additional term of three years, commencing from January 1, 2019 to December 31, 2021. Pursuant to this agreement, we have appointed SACM to provide exclusive advertising agency services, plotting, purchase and production of in-flight TV and movie program agency services, channel publicity and production services, public relations services relating to recruitments of airhostess, services relating to the distribution of newspapers and magazines and printing, production and procurement services in relation to media. The annual caps for the media services framework agreement are RMB150 million, RMB170 million and RMB190 million for each of the three years ending December 31, 2021, respectively. On November 29, 2019, we entered into a supplemental agreement with SACM to change the annual cap for the year ended December 31, 2019 from RMB150 million to RMB200.9 million. Annual caps for the two years ending December 31, 2021 remain unchanged.

For the year ended December 31, 2020, the media fees incurred by our Group for the media services amounted to RMB169 million.

Southern Airlines Group Finance Company Limited (“SA Finance”), which is 51.42% owned by CSAH and 48.59% owned by the Group

On August 27, 2019, we entered into a financial services framework agreement with SA Finance to renew the financial services framework agreement dated August 29, 2016 for a term of three years commencing from January 1, 2020 to December 31, 2022. Pursuant to this financial services framework agreement, SA Finance will provide to our Group, among other things, deposit services and loan services. Each of the maximum daily balance of deposits (including the corresponding interests accrued thereon) placed by our Group as well as the maximum amount of the outstanding loans provided by SA Finance to our Group (including the corresponding interests payable accrued thereon) for each of the three years ending December 31, 2022 shall not exceed the cap which is set at RMB13.0 billion, RMB14.5 billion and RMB16.0 billion, respectively, on any given day. As of December 31, 2020, our Group’s deposits placed with SA Finance amounted to RMB9,092 million. For the year ended December 31, 2020, the service fee paid by us was nil.

On July 8, 2019, we entered into an entrusted loan agreement with SA Finance and CSAH. Pursuant to this loan agreement, CSAH, as the lender, entrusted SA Finance to provide to us a loan of RMB500 million with a term of three years at the interest rate of 3.915% per annum. All amounts of the loan will be used to build our base in Beijing Daxing Airport. This loan was settled in advance on June 9, 2020 according to the fund utilization plan of the Company.

On September 3, 2019, we entered into another entrusted loan agreement with SA Finance and CSAH. Pursuant to this loan agreement, CSAH, as the lender, entrusted SA Finance to provide to us a loan of RMB4.72 billion with a term of one year at the interest rate of 3.915% per annum. The amounts of the loan will be used to repay outstanding amounts of loans with higher interest rate to CSAH and to supplement our working capital. This loan was settled in advance on May 27, 2020 according to the fund utilization plan of the Company.

China Southern Airlines Group Property Management Company Limited (“CSAGPMC”), a wholly-owned subsidiary of CSAH

On December 19, 2017, we entered into a property management framework agreement with CSAGPMC to renew the appointment of CSAGPMC for the provision of property management and maintenance services for our properties at the old Baiyun Airport and the new Baiyun International Airport and surrounding in Guangzhou, our leased properties in the airport terminal at new Baiyun International Airport, the base and the 110KV transformer substation at the new Baiyun International Airport, and for the provision of the property management and maintenance services for the power transformation and distribution equipment at Guangzhou cargo terminal, and the provision of the electricity charge agency services for a term of three years commencing from January 1, 2018 to December 31, 2020. The annual cap for the property management framework agreement is set at RMB155 million for each of the three years ended December 31, 2020, respectively.

For the year ended December 31, 2020, the property management and maintenance fee incurred by our Group amounted to RMB129 million pursuant to the property management framework agreement.

 

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We entered into a new property management framework agreement with CSAGPMC on December 21, 2020 for a term of three years from January 1, 2021 to December 31, 2023 to renew the property management and maintenance transactions originally covered under the property management framework agreement and to enter into property management and maintenance transactions in relation to our additional properties. The annual cap for the management and maintenance services fee payable pursuant to the new property management framework agreement is set at RMB167 million for each of the three years ending December 31, 2023.

CSA International Finance Leasing Co., Ltd. (the “CSA International”)

CSA International was previously wholly owned by CSAH, and became a joint venture of CSAH in 2019.

 

  (1)

We entered into a finance lease agreement with Guangzhou Nansha CSA Tianru Leasing Co., Ltd. (the “CSA Leasing Company”), which is wholly owned by CSA International, in relation to one Airbus A321 aircraft (“A321 Finance Lease Agreement”) and a finance lease agreement in relation to one Airbus A330-300 aircraft (“A330 Finance Lease Agreement”) on April 27, 2017, pursuant to which CSA Leasing Company agreed to provide finance leasing to us in relation to one Airbus A321 aircraft and one Airbus A330-300 aircraft, respectively.

Under each of the A321 Finance Lease Agreement and the A330 Finance Lease Agreement, (1) the lease term is 12 years, commencing on the delivery date of the relevant aircraft, (2) the principal amount shall not exceed 100% of the purchase price of the relevant aircraft, (3) the applicable interest rate is 21.6% float down of the interest rate for RMB loan for above 5 years set by the People’s Bank of China, (4) the handling fee for the aircraft shall be paid to CSA Leasing Company in one lump sum prior to the delivery date of the relevant aircraft, and (5) upon the expiry of the lease term, we are entitled to purchase the relevant aircraft back from CSA Leasing Company at a price of RMB10,000. The total rental fee and handling fee may not exceed US$250.93 million.

 

  (2)

We entered into a 2020-2022 finance and lease service framework agreement (the “Finance and Lease Service Framework Agreement”) with CSA International on October 10, 2019 for a term of three years commencing from January 1, 2020 to December 31, 2022, pursuant to which CSA International agreed to provide to us finance leasing service in relation to the leased aircraft, leased aircraft related assets and leased aviation related equipment and operating lease service in relation to certain aircraft, helicopters and engines.

The total rental fee (including principal and interest) and handling fee under the finance lease service related transactions are US$5,140 million, US$5,039 million and US$4,434 million for the three years ending December 31, 2022, respectively. Pursuant to IFRS 16, the finance lease transactions by us (including our wholly-owned or controlled subsidiaries or their wholly-owned or controlled subsidiaries) as lessee under the Finance and Lease Service Framework Agreement will be recognized as right-of-use assets, and the annual caps for the finance lease for the three years ending December 31, 2022 under the Finance and Lease Service Framework Agreement are US$3,922 million, US$3,833 million and US$3,385 million, respectively.

The total rental fee and handling fee paid by us for finance lease service related transactions under the Finance and Lease Service Framework Agreement was RMB6,485 million for the year ended December 31, 2020. The value of right-of-use assets recognized for finance lease transaction was RMB24,348 million on January 1, 2020.

The maximum annual rental fee under the operating lease service related transactions are US$135 million, US$255 million and US$368 million for the three years ending December 31, 2022 respectively, and the maximum total rental fee under the operating lease transactions are US$1,385 million, US$1,213 million and US$1,201 million for the three years ending December 31, 2022 respectively. Pursuant to IFRS 16, the operating lease service related transactions by us as lessee under the Finance and Lease Service Framework Agreement will be recognized as right-of-use assets, and the annual caps for the operating lease for the years ending December 31, 2022 under the Finance and Lease Service Framework Agreement are approximately US$1,116 million, US$961 million and US$949 million, respectively.

 

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We have paid the rental fees (namely actual amount of rental fees payable to CSA International by us every year, including twelve-month rental fees for current aircraft, helicopters and engines as well as newly added aircraft, helicopters and engines during the year) of RMB105 million for the operating lease service related transactions under the Finance and Lease Service Framework Agreement for the year ended 31 December 2020. The total amount of rental fees of newly added aircraft, helicopters and engines (leased from CSA International by the way of operating lease by us every year with lease term ranging from two to twelve years) was nil. The value of right-of-use assets recognized for operating lease transaction was RMB84 million on 1 January 2020.

For the year ended December 31, 2020, the amount of fees paid by us to CSA International and its subsidiaries for leasing services were RMB38 million.

Shenzhen Air Catering Co., Ltd. (the “SACC”), which is 50.1% owned by CSAH

We entered into a catering services framework agreement with SACC on December 27, 2018 to renew the catering services framework agreement dated December 30, 2015 for a term of three years commencing from January 1, 2019 to December 31, 2021. Pursuant to the agreement dated December 27, 2018, SACC agreed to provide the in-flight meal boxes, and order, supply, allot, recycle, store and install the in-flight supply with their respective services for the arrival and departure flights designated by our Group at the airport where SACC is located at. The annual caps for the catering services framework agreement are RMB231 million, RMB266 million and RMB306 million for each of the three financial years ending December 31, 2021, respectively.

For the year ended December 31, 2020, the services fee incurred by our Group to SACC for the catering services amounted to RMB88 million.

Guangzhou Southern Airlines Construction Company Limited (the “GSAC”), which is wholly owned by CSAH

We entered into a building asset lease agreement with GSAC on January 19, 2018, pursuant to which GSAC agreed to lease to us (i) certain offices at floors 1-10, 12 and 17-36 in CSA Building located at West Side of Yuncheng East Road, Baiyun Xincheng, Baiyun District, Guangzhou with an aggregate gross floor area of not exceeding 88,396 square meters at an annual rental of not exceeding RMB159,112,800; and (ii) 550 parking lots in CSA Building at an annual rental of not exceeding RMB5,520,000 for a term of three years commencing from January 19, 2018 to January 18, 2021. During the period from January 19, 2018 to December 31, 2018, the year ended December 31, 2019, the year ended December 31, 2020 and the period from January 1, 2021 to January 18, 2021, our maximum rental payable to GSAC under the agreement will be no more than RMB156,513,922, RMB164,632,800, RMB164,632,800 and RMB8,118,878, respectively. For the year ended December 31, 2020, rental paid to GSAC by us was RMB165 million. On December 21, 2020, we and CSAH entered into a new asset lease framework agreement for a term from January 1, 2021 to December 31, 2023 to renew the transactions contemplated under the existing asset lease framework agreement with CSAH and this building asset lease agreement. See “—Arrangements with CSAH”. The building asset agreement with GSAC has expired.

Disposal of Equity Interests in SAGA

On November 25, 2020, we entered into a capital increase and equity transfer agreement with SAGA and four investors, including China Southern Power Grid Industry Investment Group Co., Ltd., or CSP Investment Group, Guoxin Shuangbai No. 1 (Hangzhou) Equity Investment Partnership (Limited Partnership), or Shuangbai No. 1, China Southern Airlines Group Capital Holding Limited, or Southern Airlines Capital which is a wholly-owned subsidiary of CSAH, and Zhuhai General Aviation Investment Partnership (Limited Partnership), or ZGA. Pursuant to this agreement, the registered capital of SAGA will be increased from RMB1,000 million to RMB1,342.28 million through the capital contribution to be made by these investors. The Company also agreed to transfer part of its equity interests in SAGA to CSP Investment Group, Shuangbai No. 1 and Southern Airlines Capital.

 

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According to the capital increase and equity transfer agreement, the amounts of capital contribution of CSP Investment Group, Shuangbai No. 1, Southern Airlines Capital and ZGA were RMB102.58 million, RMB144.66 million, RMB102.58 million and RMB159.91 million, respectively. Meanwhile, the Company will transfer approximately 6.54%, 9.23% and 6.54% of the equity interest in SAGA held by the Company to CSP Investment Group, Shanghai No.1 and Southern Airlines Capital, respectively, for consideration of RMB97.42 million, RMB137.42 million and RMB97.42 million, respectively.

SAGA was a wholly-owned subsidiary of the Company. After completion of the capital contribution and the equity transfer contemplated under the capital increase and equity transfer agreement, SAGA will be owned approximately 57.9%, 10.0%, 14.1%, 10.0% and 8.0% by the Company, CSP Investment Group, Shuangbai No. 1, Southern Airlines Capital and ZGA, respectively, and continue to be a subsidiary of the Company. As of the date of this Annual Report, the registration with relevant government authority with respect to the capital increase and equity transfer has been completed, and all the investors, except for ZGA, have fully paid their respective capital contributions into SAGA and their respective considerations to the Company in respect of the transfer of relevant equity interests in SAGA.

Capital Contribution to Xiamen Airlines

On 21 December 2020, the Company, Xiamen C&D and Fujian Province Investment agreed to make capital contributions, pursuant to which, the Company, Xiamen C&D and Fujian Investment will contribute the amount of RMB2.2 billion, RMB1.36 billion and RMB440 million, respectively to Xiamen Airlines according to the proportion of their respective shareholdings. As of the date of this Annual Report, the capital contribution is still in progress.

Non-Public Subscriptions for Shares

 

  (1)

On September 27, 2018, we issued 1,578,073,089 A shares in total to CSAH at issue price of RMB6.02 per A Share pursuant to the subscription agreement dated June 26, 2017 entered into between CSAH and us (as amended by the supplemental agreement I dated September 19, 2017). The gross proceeds and net proceeds raised from such issuance are approximately RMB9,500 million and RMB9,488 million respectively. The parties agreed that the proceeds from such issuance shall be used for the procurement of aircraft and the project for selection and installation of lightweight seats for A320 series aircraft. As of December 31, 2020, the proceeds from this issuance have been utilized.

 

  (2)

On October 30, 2019, we entered into a subscription agreement with CSAH pursuant to which CSAH agreed to subscribe for in cash not more than 2,453,434,457 new A Shares (including 2,453,434,457 A shares) of us. On the same day, we entered into a subscription agreement with Nan Lung, pursuant to which Nan Lung agreed to subscribe in cash for not more than 613,358,614 new H Shares (including 613,358,614 H shares) of us. These subscription agreements were approved in our extraordinary general meeting and the respective class meetings of shareholders of A and H Shares on December 27, 2019. The issuance of such A Shares and H Shares is subject to the approval of the CSRC. On April 8, 2020, the CSRC approved the issuance of H Shares to Nan Lung. On April 15, 2020, we issued 608,695,652 H Shares at a price of HK$5.75 per H Share. Immediately after completion of such issuance of H Shares, the total amount of our outstanding shares is 12,875,867,938 Shares, comprised of 4,275,144,849 issued H Shares and 8,600,723,089 issued A Shares. We received the “Acceptance Notice of the Application for Administration Permission” issued by the CSRC for the A Share Issuance on January 6, 2020. On April 24, 2020, the Issuance Examination Committee of the CSRC reviewed the application for the A Share Issuance and informed us that our application for the A Share issuance was approved. On May 27, 2020, we received the written approval for A Share issuance from the CSRC. On June 17, 2020, we completed the issuance of 2,453,434,457 A Shares to CSAH at a price of RMB5.21 per A Share. These new A Shares are subject to a 36 month lock up period from the date of the completion of such issuance. Immediately after completion of such issuance of A Shares, the total amount of our outstanding shares is 15,329,302,395 Shares, comprised of 11,054,157,546 issued A Shares and 4,275,144,849 issued H Shares.

 

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Subscription for A Share Convertible Bonds

On May 14, 2020, the Board considered and approved, among others, the relevant resolutions on the issuance plan of the convertible corporate bonds in the total amount of not more than RMB16 billion (including RMB16 billion) which are convertible into new A Shares and proposed to be issued by us within the PRC (the “A Share Convertible Bonds”) and the possible subscription for the A Share Convertible Bonds by CSAH. CSAH, being our controlling Shareholder, is entitled to the pre-emptive rights to subscribe for the A Share Convertible Bonds under the issuance plan of the A Share Convertible Bonds, which is compliant with the relevant laws, regulations, normative documents and the Articles of Association. The terms of the subscription for A Share Convertible Bonds by CSAH are the same as the terms and conditions which are set out in the issuance plan of the A Share Convertible Bonds. On June 30, 2020, the aforesaid proposed issuance of A Share Convertible Bonds and possible subscription for the A Share Convertible Bonds by CSAH were considered and approved at the 2019 annual general meeting, 2020 first class meeting for holders of A Shares and 2020 first class meeting for holders of H Shares. On October 15, 2020, we completed the public issuance of 160 million A Share Convertible Bonds in the total amount of RMB16 billion with a nominal value of RMB100 each and the initial conversion price of RMB6.24 per share, out of which CSAH subscribed for 101,027,580 A Share Convertible Bonds. As of April 23, 2021, 35,700 A Share convertible bonds were converted to A Shares and no A Share convertible bonds held by CSAH have been converted.

Sichuan Airlines Co., Ltd. (“Sichuan Airline”), which is 39% owned by us

On August 30, 2019, we entered into a framework agreement on the use of facility with Sichuan Airline, pursuant to which Sichuan Airline will construct a multi-used building. Upon construction completion, Sichuan Airline will lease the building to us for a term of twenty years. The building is expected to be delivered to us by June 30, 2022.

Provision of Guarantees to SPV established by us

As of December 31, 2020, we and our subsidiaries, Xiamen Airlines and Chongqing Airlines, provided guarantees to 44 SPVs that were controlled and consolidated by us, which was approved at our general meeting. The total amount of such guarantee is US$ 5.12 billion.

C. INTERESTS OF EXPERTS AND COUNSEL

Not applicable.

 

ITEM 8.

FINANCIAL INFORMATION

A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

Our audited consolidated financial statements are set forth beginning on page F-1, which can be found after Item 19.

Legal Proceedings

We are currently not a party to any legal, arbitration, or administrative proceedings that our management believes could have a material adverse effect on our business, financial position or results of operations. We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business or otherwise. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.

Dividend Information

As the Company suffered an operating loss for year of 2020, which does not meet the conditions for profit

 

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distribution as required under the Articles of Association of the Company, the Board did not recommend any payment of cash dividend or conversion of capital reserve into share capital or other profit distribution of the Company for the year of 2020. The abovementioned proposal is still subject to the approval of the 2020 annual general meeting of the Company.

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

During the three years of 2018 to 2020, the aggregate cash dividends the Company distributed exceed the annual average profit distributable to shareholders as shown on the Company’s consolidated financial statements. This complies with the Articles of Association, which requires that the aggregate cash dividends distributed in the last three years shall not be less than 30% of the annual average distributable profit of the Company in the last three years.

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

 

   

our financial results;

 

   

capital requirements;

 

   

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

 

   

our shareholders’ interests;

 

   

the effect on our creditworthiness;

 

   

general business and economic conditions; and

 

   

other factors our Board may deem relevant.

Pursuant to PRC laws and regulations and our Articles of Association, dividends may only be distributed after allowance has been made for: (i) recovery of losses, if any, and (ii) allocations to the statutory surplus reserve. The allocation to the statutory surplus reserve is 10% of our net profit determined in accordance with PRC GAAP. Our distributable profits for the current fiscal year will be equal to our net profits determined in accordance with IFRSs, less allocations to the statutory surplus reserve.

B. SIGNIFICANT CHANGES

No significant changes have occurred since the date of the consolidated financial statements.

 

ITEM 9.

THE OFFER AND LISTING

A. OFFER AND LISTING DETAILS

 

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The principal trading market for our Company’s H Shares is the Hong Kong Stock Exchange, and our Company’s trading code is “1055”. Our Company completed our initial public offering of H Shares on July 30, 1997. The ADS, each representing 50 H Shares, have been listed for trading on the New York Stock Exchange since July 31, 1997, under the symbol “ZNH”.

The principal trading market for our Company’s A Shares is the Shanghai Stock Exchange with trading code of “600029”. On July 25, 2003, our Company completed our initial public offering of A Shares.

No significant trading suspension occurred in the prior three years.

B. PLAN OF DISTRIBUTION

Not applicable.

C. MARKETS

See “Offer and Listing Details” above.

D. SELLING SHAREHOLDERS

Not applicable.

E. DILUTION

Not applicable.

F. EXPENSES OF THE ISSUE

Not applicable.

 

ITEM 10.

ADDITIONAL INFORMATION

A. SHARE CAPITAL

Not applicable

B. MEMORANDUM AND ARTICLES OF ASSOCIATION

On 29 June 2020, the Company convened the extraordinary meeting of the 8th session of the Board, which considered and passed unanimously the amendments to the relevant clauses of the Articles of Association in accordance with the authorization from the 2019 second extraordinary general meeting of the Company and the results of the non-public issuance, so as to reflect the increase in the registered capital of the Company.

 

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To meet the needs of business operation, the Company proposed to expand the scope of business of the Company to include aviation medical examination services. Accordingly, the Articles of Association of the Company had to be amended to reflect such change to the scope of business. On 21 December 2020, the Company convened the 15th meeting of the 8th session of the Board, which considered and approved, among other matters, the resolution in relation to the proposed amendments to the relevant clauses of the Articles of Association of the Company. Such proposed amendments are subject to the approval of the shareholders by way of a special resolution at the extraordinary general meeting, and the completion of relevant filings or registrations (as applicable) with the relevant government authorities in the People’s Republic of China.

Save as disclosed above, no amendments were made to the Articles of Association in 2020.

The following is a summary of certain provisions of our Articles of Association. As this is a summary, it does not contain all the information that may be important to you. You and your advisors should read the text of our most updated Articles of Association for further information, which is filed as an exhibit to this Annual Report.

General

Our Company is registered with and has obtained a business license from the State Administration Bureau of Industry and Commerce of the People’s Republic of China on March 25, 1995. On March 13, 2003, our Company obtained an approval certificate from the Ministry of Commerce to change to a permanent limited company with foreign investments.

Other Senior Administrative Officers

Pursuant to the Article 17 of the Articles of Association, other senior administrative officers of our Company refer to the Executive Vice President, Chief Financial Officer, Chief Pilot, COO Flight Safety, Chief Information Officer, Chief Economist, Chief Legal Adviser, Chief Engineer, COO Flight Operations, Company Secretary and other senior management appointed by the Board.

Objects and Purposes

Pursuant to the Article 19 of the Articles of Association, the scope of business of our Company includes: (1) provision of scheduled and non-scheduled domestic, regional and international air transportation services for passengers, cargo, mail and luggage; (2) undertaking general aviation services; (3) provision of aircraft repair and maintenance services; (4) acting as agent for other domestic and international airlines; (5) provision of air catering services; (6) engaging in other airline or airline related business, (limited to insurance agency business personal accident insurance); (7) provision of airline ground services; (8) aviation training; (9) asset leasing services; (10) project management and technical consultancy services; (11) sales of aviation equipment; (12) travel agency business; (13) merchandise retail and wholesale; all subject to approval by company registration authorities.

Directors

Pursuant to Article 175 of the Articles of Association, where a director is interested in any resolution proposed at a board meeting, such director shall abstain from voting and shall not have a right to vote. Such director shall not be counted in the quorum of the relevant meeting. Such directors also shall not vote on behalf of other directors. Board meetings may be convened by more than half of the directors who are not interested in the proposal. Resolutions of board meetings shall be passed by more than half of directors who are not interested in the proposal.

Pursuant to Article 245 of the Articles of Association, where a director of our 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 at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal therefor is otherwise subject to the approval of the Board. For the purposes of the Articles of Association, a director is deemed to be interested in a contract, transaction or agreement in which an associate of him is interested.

Pursuant to Article 253 of the Articles of Association, our Company shall, with the prior approval of shareholders in shareholders’ 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 our Company or any subsidiary of our Company, emoluments in respect of the provision of other services in connection with the management of the affairs of our 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.

 

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Pursuant to Article 248 of the Articles of Association, our Company shall not directly or indirectly make a loan to or provide any guarantee in connect with the making of a loan to a director of the Company. However, the following transactions are not subject to such prohibition: (1) the provision by the Company of a loan or a guarantee in connection with the making of a loan or any other funds to any of its directors to meet expenditure incurred or to be incurred by him for the purposes of the Company or for the purpose of enabling him to perform his duties properly, in accordance with the terms of a service contract approved by the shareholders in shareholders’ general meeting; (2) the Company may make a loan to or provide a guarantee in connection with the making of a loan to any of the relevant directors or their respective associates in the ordinary course of its business on normal commercial terms, provided that the ordinary course of business of the Company includes the lending of money or the giving of guarantees.

There is no specific provisions concerning a director’s power, in the absence of an independent quorum, to vote compensation to themselves or any members of their body, other than the above Article 175 with respect to a director’s voting power in matters he is materially interested. Directors are not required to hold shares of our Company. Our Articles do not contain any share requirements for the directors to retire by a specified age.

Ordinary Shares

Pursuant to Article 27 of the Articles of Association, subject to the approval of the securities authority of the State Council, our 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 our 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 our Company.

Pursuant to Article 28 of the Articles of Association, shares issued by our Company to domestic investors for subscription in RMB shall be referred to as “Domestic Shares”. Shares issued by our Company to foreign investors for subscription in foreign currencies shall be referred to as “Foreign Shares”. Foreign Shares which are listed overseas are called “Overseas Listed Foreign Shares”. The foreign currencies mean the legal currencies (apart from RMB) of other countries or regions which are recognized by the foreign exchange control authority of the state and can be used to pay our Company for the share price.

Pursuant to Article 29 of the Articles of Association, Domestic Shares issued by our Company shall be called “A Shares”. Overseas Listed Foreign Shares issued by our 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 RMB 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 ADS. Shares issued by our Company, including Domestic Shares and Foreign Shares, are all ordinary shares.

Pursuant to Article 63 of the Articles of Association, the ordinary shareholders of our Company shall enjoy the following rights:

 

  (1)

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

 

  (2)

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

 

  (3)

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

 

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  (4)

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

 

  (5)

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

 

  (6)

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

 

  (i).

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

 

  (ii).

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

 

  (iii).

all parts of the register of shareholders;

 

  (a).

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

 

  (aa)

present name and alias and any former name or alias;

 

  (bb)

principal address (residence);

 

  (cc)

nationality;

 

  (dd)

primary and all other part-time occupations and duties;

 

  (ee)

identification documents and their relevant numbers;

 

  (b).

state of the Company’s share capital;

 

  (c).

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

 

  (d).

minutes of shareholders’ general meetings and accountants’ report; and

 

  (e).

interim and annual reports of the Company.

 

  (7)

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

 

  (8)

the right to request the company to repurchase their shares as a result of disagreement on the resolutions passed by the shareholders’ general meeting on the merger or division of the Company; and

 

  (9)

other rights conferred by laws, administrative regulations and these Articles of Association. According to Article 270, dividends shall be distributed in accordance with the proportion of shares held by shareholders.

According to Article 38 of the Articles of Association, our Company may repurchase its issued shares under the following circumstances: (1) cancellation of shares for the reduction of its capital; (2) merging with another company that holds shares in our Company; (3) awarding its employees with shares; (4) at the request of the dissenting shareholders; and (5) other circumstances permitted by laws and administrative regulations.

 

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According to Article 42 of the Articles of Association, unless our Company is in the course of liquidation, it must comply with the following provisions in relation to repurchase of its issued shares: (1) where our Company repurchases shares of our Company at par value, payment shall be made out of book surplus distributable profits of our Company or out of proceeds of a fresh issue of shares made for that purpose; (2) where our Company repurchases shares of our Company at a premium to its par value, payment up to the par value may be made out of the book surplus distributable profits of our Company or out of the proceeds of a fresh issue of shares made for that purpose: (i) If the shares being repurchased were issued at par value, payment shall be made out of the book surplus distributable profits of the Company; (ii) If the shares being repurchased were issued at a premium to its par value, payment shall be made out of the book surplus distributable profits of the Company or out of the proceeds of a fresh issue of shares made for that purpose, provided that the amount paid out of the proceeds of the fresh issue shall not exceed the aggregate of premiums received by the Company on the issue of the shares repurchased or the current amount (including the premiums on the fresh issue) of the Company’s premium account (or capital common reserve fund account) at the time of the repurchase; (3) payment by our Company in consideration of the following shall be made out of our Company’s distributable profits: (i) acquisition of rights to repurchase shares of our Company; (ii) variation of any contract to repurchase shares of our Company; and (iii) release of any of our Company’s obligation under any contract to repurchase shares of our Company; and (4) After our Company’s registered capital has been reduced by the total par value of the cancelled shares in accordance with the relevant provisions, the amount deducted from the distributable profits of our Company for paying up the par-value portion of the shares repurchased shall be transferred to our Company’s premium account (or capital common reserve fund account).

According to Article 68 of the Articles of Association, shareholders of our company have the obligation not to withdraw their shares unless required by laws and regulations; 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.

According to Article 267 of the Articles of Association, when distributing each year’s after-tax profits, our Company shall set aside 10% of such profits for our Company’s statutory common reserve fund, except where the accumulated balance of the said fund has reached 50% of our Company’s registered capital. After our Company has allocated its after-tax profits to the statutory common reserve fund, we may, with the approval of the shareholders by way of resolution in a shareholders’ general meeting, further allocate its after-tax profits to the discretionary common reserve fund.

The Articles of Association does not have specific provisions discriminating against any existing or prospective holder of such securities as a result of other shareholders owning a substantial number of shares.

Action Necessary to Change Rights of Shareholders

Pursuant to Article 152 of the Articles of Association, shareholders who hold different classes of shares are shareholders of different classes. The holders of the Domestic Shares and holders of Overseas Listed Foreign Shares are deemed to be shareholders of different classes.

Pursuant to Article 153 of the Articles of Association, rights conferred on any class of shareholders in the capacity of shareholders (“class rights”) may not be varied or abrogated unless approved by a special resolution of shareholders in general meeting and by holders of shares of that class at a separate meeting.

Pursuant to Article 155 of the Articles of Association, shareholders of the affected class, whether or not otherwise having the right to vote at shareholders’ general meetings, shall nevertheless have the right to vote at class meetings in respect of the following matters: (i) to effect an exchange of all or part of the shares of such class into shares of another class or to effect an exchange or create a right of exchange of all or part of the shares of another class into the shares of such class; (ii) to restrict the transfer or ownership of the shares of such class or add to such restriction; (iii) to restructure our Company where the proposed restructuring will result in different classes of shareholders bearing a disproportionate burden of such proposed restructuring; and (iv) to vary or abrogate the provisions of these Articles of Association. However, interested shareholder(s) shall not be entitled to vote at class meetings.

 

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Pursuant to Article 156 of the Articles of Association, resolutions of a class of shareholders shall be passed by votes representing more than two-thirds of the voting rights of shareholders of that class represented at the relevant meeting who are entitled to vote at class meetings.

Pursuant to Article 157 of the Articles of Association, written notice of a class meeting shall be given forty-five days before the date of the class meeting to notify all of the shareholders in the share register of the class of the matters to be considered, the date and the place of the class meeting. A shareholder who intends to attend the class meeting shall deliver his written reply concerning attendance at the class meeting to our Company twenty days before the date of the class meeting. If the number of shares carrying voting rights at the meeting represented by the shareholders who intend to attend the class meeting reaches more than one half of the voting shares at the class meeting, our Company may hold the class meeting; if not, our 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. Our Company may then hold the class meeting after such publication of notice.

Pursuant to Article 158 of the Articles of Association, notice of class meetings need only be served on shareholders entitled to vote thereat. Meeting of any class of shareholders shall be conducted in a manner as similar as possible to that of general meetings of shareholders. The provisions of these Articles of Association relating to the manner to conduct any shareholders’ general meeting shall apply to any meeting of a class of shareholders.

Meetings of Shareholders

According to Article 79, shareholders’ general meetings are divided into annual general meetings and extraordinary general meetings. Shareholders’ general meetings shall be convened by our Board. Annual general meetings are held once every year and within six months from the end of the preceding financial year.

According to Article 80, under any of the following circumstances, our Board shall convene an extraordinary general meeting within two months: (1) the number of directors is less than that is required by the Company Law or two thirds of the number of directors specified in these Articles of Association; (2) the accrued losses of our Company amount to one third of the total amount of its share capital; (3) shareholder(s) individually or jointly holding 10% or more of our Company’s issued and outstanding shares carrying voting rights request(s) in writing the convening of an extraordinary general meeting; (4) it is deemed necessary by the Board or requested by the supervisory committee to convene an extraordinary general meeting; (5) more than one half of the independent directors propose to convene the meeting.

According to Article 92 of the Articles of Association, notice of a shareholders’ general meeting shall be given by way of announcement or by any other manner as provided in these Articles of Association (if necessary), not less than forty-five days (including forty-five days) before the date of the meeting to notify all of the shareholders in the share register of the matters to be considered, the date and the place of the meeting.

According to Article 93 of the Articles of Association, our Company shall, based on the written replies received twenty days before the date of the shareholders’ general meeting from the shareholders, calculate the number of voting shares represented by the shareholders who intend to attend the meeting. If the number of voting shares represented by the shareholders who intend to attend the meeting reaches one half or more of our Company’s total voting shares, our Company may hold the meeting; if not, then our Company shall within five days notify the shareholders again by public notice of the matters to be considered, the place and date for, the meeting. Our Company may then hold the meeting after such publication of notice.

Limitation on Right to Own Securities

The Articles of Association does not specifically provide for the limitations on the rights to own securities by certain shareholders, however, the PRC Special Regulations on Overseas Offering and the Listing of Shares by Companies Limited by Share (the “Special Regulations”) and the Mandatory Provisions for Articles of Association of Companies to be Listed Overseas (the “Mandatory Provisions”) provide for different classes of shares to be subscribed for and traded by local and overseas investors respectively. Shares which can be traded by overseas investors must be in registered form and while denominated in Renminbi, they are traded in foreign currency with dividends payable in foreign currency. Local investors are prohibited from dealing in such shares.

 

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Merger, Acquisition or Corporate Restructuring

Pursuant to Article 295 of the Articles of Association, in the event of the merger or division of our Company, a plan shall be presented by our Company’s Board 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 our 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 our Company shall be made into special documents for shareholders’ inspection. Such special documents shall be sent by mail to holders of Overseas-Listed Foreign Shares.

Ownership to Be Disclosed

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

Certain Differences between PRC Company Law and Delaware Corporate Law

The PRC company law and other laws applicable to us differ in a number of respects from laws generally applicable to United States corporations and their shareholders. The description set forth below includes a summary of certain provisions of the PRC company law, Special Rules, Mandatory Provisions and the Guidelines applicable to companies listed both in the PRC and overseas, such as us, which differ from provisions of the corporate law of the State of Delaware.

General

We are a PRC joint stock company, which is a corporate entity organized under the PRC company law. Under the PRC company law, the registered capital of a joint stock company is divided into shares of equal par value. These shares are commonly called domestic ordinary shares. Each share of a joint stock company ranks equally with all other shares in its class as to voting rights (except for specified class voting rights) and rights to dividends and other distributions. Upon receiving approval from the relevant authorities, a joint stock company may offer its shares for sale to the public and seek to be listed on a stock exchange. The State Council may formulate separate regulations for the issuance of other classes of shares, including H shares. All of our issued shares are fully paid and nonassessable. Holders of H shares may transfer their shares without the approval of other shareholders. Among other things, a joint stock company must have (1) a board of directors of not fewer than five and not more than 19 members, and (2) a board of supervisors of not fewer than three members.

The shareholders’ meeting of a joint stock company is the highest authority of the company and exercises the powers of the company with respect to significant matters, subject to applicable law and the articles of association of the company. The business of a joint stock company is under the overall management of a board of directors, subject to the PRC company law, other applicable laws and regulations (which in our case include the PRC aviation law and regulations), the company’s articles of association and duly adopted resolutions of its shareholders. The day-to-day operations of a joint stock company are under the direction of its general manager or president, subject to applicable laws and regulations, the company’s articles of association and duly adopted resolutions of the directors and shareholders. In addition, the PRC company law provides for the establishment of a board of supervisors for each joint stock company. The supervisors perform and exercise the functions and powers described below, including examination of the joint stock company’s affairs and monitoring the actions of the directors and officers of the company. The directors, supervisors and officers are not required to hold any qualifying shares in the joint stock company.

A joint stock company may be liquidated involuntarily due to insolvency or voluntarily in accordance with the terms of its articles of association or duly adopted shareholders’ resolutions. The property of a joint stock company remaining after full payment of its liquidation expenses, wages, labor insurance premiums of its employees and statutory compensations, outstanding taxes and debts, is distributed in proportion to the holdings of its shareholders.

 

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Meetings of shareholders

Under PRC law, shareholders are given the power to approve specified matters. In addition, the Mandatory Provisions provide that at shareholders’ meetings shareholders are entitled to consider any proposals made by shareholders holding in the aggregate at least 3% of voting power over the company’s shares. These proposals must fall within the scope of powers of the shareholder’s meeting, have a clear agenda and specific matters and comply with laws, administrative regulations and articles of association of the company.

Under Delaware law, the business and affairs of a Delaware corporation are, in general, managed by or under the direction of its board of directors. Only certain fundamental matters regarding the corporation are reserved by statute to be exercised by the shareholders. These matters include, in general, election or removal of directors, retention or dismissal of the corporation’s independent auditors, mergers or other business combinations involving the corporation, amendment of the corporation’s certificate of incorporation and liquidation or dissolution of the corporation.

Shareholders’ approval by written consent

PRC law does not provide shareholders of overseas listed joint stock companies with rights to approve corporate matters by written consent. Under Delaware law, unless otherwise provided in the certificate of incorporation, any action which is required or permitted to be taken at any shareholders’ meeting may be taken without a meeting, subject to various conditions.

Amendments of articles of association

Under PRC law, an amendment of the articles of association must be approved by an affirmative vote of two-thirds of shareholders attending a shareholders’ meeting. Amendments with respect to the Mandatory Provisions only become effective after approval by the relevant governmental department authorized by the State Council and the China Securities Regulatory Commission.

Under Delaware law, with certain exceptions, shareholder approvals must be obtained for any amendment to the certificate of incorporation. Board approvals are also required for any amendment to the certificate of incorporation, but no governmental approval is generally required.

Powers and responsibilities of directors

Under PRC law, the board of directors is responsible for specified actions, including the following functions and powers of a joint stock company:

 

   

convening shareholders’ meetings and reporting its work to shareholders at these meetings;

 

   

implementing shareholders’ resolutions;

 

   

determining the company’s business plans and investment proposals;

 

   

formulating the company’s annual financial budgets and final accounts;

 

   

formulating the company’s profit distribution plans and loss recovery plans;

 

   

formulating proposals for the increase or decrease in the company’s registered capital and the issue of debentures;

 

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formulating major acquisition and disposal plans and plans for the merger, division or dissolution of the company;

 

   

to the extent authorized by the shareholders’ meeting, deciding on such matters as external investments, purchase or sale of assets, assets pledge and connected transactions of the company;

 

   

deciding on the company’s internal management structure and formulating its basic management system; and

 

   

appointing or removing the company’s principal executive officers; appointing and removing other senior officers based on the recommendation of the principal executive officer and deciding on the remuneration of the senior officers.

In addition, the Mandatory Provisions provide that the board of directors has the authority to formulate any proposal to amend the articles of association and to exercise any other power conferred by a decision of the shareholders’ meeting.

Under Delaware law, the business and affairs of a Delaware corporation are managed by or under the direction of its board of directors. Their powers include fixing the remuneration of directors, except as otherwise provided by statute or in the certificate of incorporation or by-laws of the corporation.

Powers and responsibilities of supervisors

Under PRC law, a PRC joint stock company must have a board of supervisors consisting of shareholder representatives and one or more employee representatives. Supervisors attend board meetings as non-voting observers. Directors and officers may not serve as supervisors. The supervisors perform and exercise the following functions and powers:

 

   

examining the company’s financial affairs;

 

   

monitoring compliance with laws, regulations, the articles of association of the company and the shareholders resolutions by the directors and officers of the company; and suggesting removing the directors and officers who violate these laws and regulations;

 

   

requiring corrective action from directors and officers whose actions are contrary to the interests of the company;

 

   

examining the financial information, including financial statements, operation reports and plans for profit distribution, to be submitted by the board of directors to the shareholders’ meetings; and authorizing, in the company’s name, public certified accountants or licensed auditors to assist in the re-examination of such information, should any doubt arise in respect thereof;

 

   

proposing the holding of extraordinary shareholders’ meetings;

 

   

proposing new items to be inserted in the agenda of the shareholders’ meeting;

 

   

bringing lawsuits against directors or members of senior management, if they violate laws, regulations or articles of association of the company; and

 

   

exercising and performing other powers and functions provided for in the company’s articles of association.

 

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In addition, the Mandatory Provisions provide that supervisors of overseas listed joint stock companies are entitled to retain auditors in the name of the company to examine any financial or business reports or profit distribution proposals to be submitted by the directors to a meeting of the shareholders which the supervisors consider questionable, and negotiate or take legal action against any director or the directors in the name of the company. The fees and expenses of attorneys and other professionals incurred by the supervisors in connection with the discharge of their duties are to be paid by the company.

Delaware law makes no provision for a comparable corporate institution.

Duties of directors, supervisors and officers

Under PRC law, directors, supervisors and officers of a joint stock company are required to comply with relevant laws and regulations and the company’s articles of association. A director, supervisor or officer who contravenes any law, regulation or the company’s articles of association in the performance of his duties shall be personally liable to the company for any loss incurred by the company. Directors, supervisors and officers are required to carry out their duties honestly and diligently, and protect the interests of the company. They are also under a duty of confidentiality to the company and prohibited from divulging confidential information concerning the company, except as permitted by relevant laws and regulations or by a decision of a shareholders’ meeting. They may not use their position and authority in the company to seek personal gain. Directors and officers may not directly or indirectly engage in the same business as the company or in any other business detrimental to the interests of the company, and they are required to forfeit any profits from these activities to the company.

Under Delaware law, the business and affairs of a corporation are managed by or under the direction of its board of directors. In exercising their powers, directors are charged with a fiduciary duty of care to protect the interests of the corporation and a fiduciary duty of loyalty to act in the best interests of its shareholders.

Limitations on transactions with interested directors, supervisors and officers

Under PRC law, directors and officers of a joint stock company may not enter into any contracts or transactions with the company unless permitted by the articles of association or approved by the shareholders. A company may not provide any guarantees to shareholders or any de facto control person of the company unless such guarantees are approved by a majority of shareholders present at the shareholders’ meeting, excluding the shareholder who will be provided such guarantees. Under the Mandatory Provisions, a director, supervisor or officer is required to disclose to the board any transaction with the company in which he has a direct or indirect interest or in which there is a material conflict of interest between the company and himself. A director is not entitled to vote or be counted for quorum purposes in any board decision on any such transaction. A company may set aside any interested transaction which did not comply with these requirements, unless the other party to such transaction was honestly unaware of the breach of obligations by the interested director, supervisor or officer. A company may not loan or provide any guarantees to directors, supervisors or officers (including persons related to them), except for the loans made in accordance with employment contracts approved by the shareholders, or unless the company’s business scope allows for the provision of loans and guarantees and such loans or guarantees are made under regular commercial terms.

Under Delaware law, an interested transaction is not voidable if (1) the material facts as to the interested director’s relationship or interests are disclosed or are known to the board of directors and the board in good faith authorizes the transaction by the affirmative vote of a majority of the disinterested directors, (2) such material facts are disclosed or are known to the shareholders entitled to vote on such transaction and the transaction is specifically approved in good faith by vote of the majority of shares entitled to vote thereon or (3) the transaction is fair as to the corporation as of the time it is authorized, approved or ratified. Under Delaware law, the interested director could be held liable for a transaction in which such a director derived an improper personal benefit.

Election and removal of directors

Under PRC law, the term of office of directors of a joint stock company must be specified in the articles of association, but may not exceed three years. Directors may be re-elected. No director may be removed from office without cause by shareholders prior to the expiration of the director’s term. PRC law does not contemplate a classified board of directors.

 

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Under Delaware law, directors of a Delaware corporation can be removed from office with or without cause by the holders of a majority of shares then entitled to vote at an election of directors, provided that except where the certificate of incorporation of the Delaware corporation otherwise provides, a member of a classified board may be removed by shareholders only for cause, and in a corporation with cumulative voting, if less than all of the directors are removed, no director may be removed if the votes cast against the director’s removal is sufficient to elect the director if cumulatively voted at an election of directors. The Court of Chancery may remove a director who has been convicted of a felony or found by a court to have committed a breach of the duty of loyalty in connection with his or her duties to the corporation following application by the corporation or derivatively in the right of the corporation by any shareholder. The court may order the removal only if it determines that the director did not act in good faith in performing the acts resulting in the prior conviction or judgment and that removal is necessary to avoid irreparable harm to the corporation.

Dividend payments

Under PRC law, proposals for distribution of profits are formulated by the board of directors and submitted for shareholder approval at a shareholders’ meeting. Dividends may be distributed in the form of cash or shares.

Under Delaware law, the board of directors of a Delaware corporation may declare dividends out of distributable earnings and profits without the approval of the shareholders.

Amalgamations and business combinations; appraisal rights

Under PRC law, amalgamations and divisions involving joint stock companies are required to be approved by shareholders voting at a shareholders’ meeting. The Mandatory Provisions require an amalgamation or division involving the company to be approved by an affirmative vote of two-thirds of the votes present at the shareholders’ meeting called to consider the transaction. Any opposing shareholder may request the company or the consenting shareholders to purchase its shares at a fair price. In addition, a sale of fixed assets having a value exceeding 33% of the fixed assets as shown on the company’s latest balance sheet most recently reviewed by the shareholders’ meeting requires the approval of at least one third of the shareholders’ meeting.

Under Delaware law, with certain exceptions, a merger, consolidation or sale of all or substantially all the assets of a corporation must be approved by the board of directors and holders of a majority of the outstanding shares entitled to vote. A shareholder objecting to the merger is entitled to appraisal rights pursuant to which the shareholder may receive cash in the amount of the fair value of the shares held by such shareholder (as determined by a court) in lieu of the consideration the shareholder would otherwise receive in the transaction.

Transactions with significant shareholders

Under Delaware law, a business combination between a Delaware corporation and an interested shareholder which takes place at any time during a period of three years commencing with the date the interested shareholder became an interested shareholder would need prior approval from the board of directors or a supermajority of the shareholders of the corporation, unless the corporation opted out of the relevant Delaware business combination statute. Under Delaware law, an interested shareholder of a corporation is someone who, together with its affiliates and associates, owns more than 15% of the outstanding common shares of the corporation. No such business combination statute or regulation applies to PRC joint stock companies.

Shareholders’ lawsuits

The PRC law provides that most disputes involving an H shareholder are to be resolved by final and binding arbitration.

Class actions and derivative actions generally are available to shareholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law.

 

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Limitations on liability and indemnification of directors and officers

PRC law does not provide for any specific limitations on liability or indemnification of directors and officers.

Under Delaware law, a corporation may indemnify a current director or officer of the corporation against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in defense of an action, suit or proceeding by reason of such position if (1) the director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and (2) with respect to any criminal action or proceeding, the director or officer had no reasonable cause to believe that his conduct was unlawful. Persons serving at the request of the corporation as directors, officers, employees or agents of another entity such as a subsidiary or an employee stock trust may receive advancement of expenses from the corporation. A corporation may not retroactively impair or eliminate indemnification or advancement rights by amending the corporation’s certificate of incorporation or bylaws after the occurrence of the act or omission that gives rise to indemnification or advancement rights, unless the provision contains, at the time of the act or omission, an explicit authorization of such elimination or limitation.

Shareholders’ rights of inspection of corporate records

Under PRC law, shareholders are entitled to inspect the articles of association, register of shareholders, corporate bond counter foils, minutes of shareholders’ meetings and board meetings and reports of the financial accounts of the company. In addition, the Mandatory Provisions provide that, after paying reasonable fees, shareholders are entitled to inspect the company’s shareholder list, certain personal information on the directors, supervisors and officers, the company’s capital position and certain information regarding share repurchases conducted by the company during the most recent fiscal year.

Delaware law permits any shareholder of a Delaware corporation to examine or obtain copies of or extracts from the corporation’s shareholder list and its other books and records for any purpose reasonably related to such person’s interest as a shareholder.

C. MATERIAL CONTRACTS

Other than contracts that are described under Item 4 “Information on the Company” and Item 7 “Major Shareholders and Related Party Transactions”, we have not entered into any material contracts outside the ordinary course of our business within the two years immediately preceding the date of this annual report.

D. EXCHANGE CONTROLS

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

Our Company is generally required by law to sell all its foreign currency revenue to Chinese banks. Our Company may purchase foreign currency directly from Chinese banks for any current account transactions, such as trade transactions in our 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 our Company to holders of our 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 currency for the purpose of paying dividends to such holders of H Shares and ADSs. In addition, our Company’s Articles of Association require our Company to pay dividends to holders of our Company’s H Shares and ADSs in foreign currency.

 

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The People’s Bank of China has decided to improve quotation of the central parity of RMB against US dollar. Effective from August 11, 2015, the quotes of central parity that market makers report to the China Foreign Exchange Trade System daily before market opens should refer to the closing rate of the inter-bank foreign exchange market on the previous day, in conjunction with demand and supply condition in the foreign exchange market and exchange rate movement of the major currencies. As a result, the RMB central parity entered a more market-oriented stage.

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 our Company’s financial performance, and the value of, and any dividends payable on, our 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 our Company. However, under current Chinese law, foreign ownership of our Company may not exceed 49%.

E. TAXATION

Chinese Taxation

The following is a general summary of certain Chinese tax consequences of the acquisition, ownership and disposition of A Shares, H Shares and 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 A Shares, 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 A shares, H Shares or ADSs.

Dividends

The new corporate income tax law and its relevant regulations generally provide for the imposition of a withholding tax on dividends paid by a Chinese company to a non-resident enterprise at a rate of 10%.

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

For individuals, Chinese tax law generally provides that an individual who receives dividends from Chinese companies is subject to a 20% individual income tax. A 50% reduction of taxable income is granted by Chinese tax law for an individual receiving dividends from a listed company on Shanghai Stock Exchange or Shenzhen Stock Exchange. As a result, the effective tax rate for dividends received by A share individual holder is 10% in 2019. Dividend income received by any foreign individual that holds overseas shares in Chinese enterprise is generally subject to individual income tax at a flat rate of 20%, subject to exemption or reduction by an applicable double-taxation treaty.

 

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Where an individual acquires the stocks of a listed company from public offering of the company or from the stock market, if the stock holding period is one month or less, the incomes from dividends and bonuses shall be included into the taxable incomes in full amount and be taxed at a rate of 20%; if the stock holding period is more than one month up to one year, the incomes from dividends and bonuses shall be included into the taxable incomes at the reduced rate of 50% for the time being, namely, individual income tax shall be calculated at the tax rate of 20% ; and if the stock holding period is more than one year, the incomes from dividends and bonuses shall be temporarily exempted from individual income tax.

Capital Gains from Transfer or Disposition of Shares

The new corporate income tax law and its relevant regulations generally provides that a non-resident enterprise is subject to a 10% capital gains tax for the transfer or disposition of shares of a Chinese company.

For individual shareholders, Chinese tax law generally provide that an individual who transfers or otherwise disposes of a company’s shares of capital stock is subject to a 20% individual income tax on the capital gain, if any. Currently, all individuals are temporarily exempt from individual income tax on transfers of shares of joint stock companies listed on Shanghai Stock Exchange or Shenzhen Stock Exchange, such as our Company. Should such temporary exemption be discontinued, such holders may be subject to a 20% individual income tax on the capital gain, if any, unless reduced by an applicable double-taxation treaty.

Hong Kong Taxation

The following is a discussion of the material Hong Kong tax provisions relating to the ownership and disposition of H shares or ADSs held by the investors as capital assets. This discussion does not address all of the tax considerations that may be relevant to specific investors in light of their particular circumstances or to investors subject to special treatment under the tax laws of Hong Kong. This discussion is based on the tax laws of Hong Kong as in effect on the date of this annual report, which are subject to change (or changes in interpretation), possibly with retroactive effect. This discussion does not address any aspects of Hong Kong taxation other than income taxation, capital taxation, stamp taxation and estate taxation. Prospective investors are urged to consult their tax advisers regarding Hong Kong and other tax consequences of owning and disposing of H shares.

Tax on Dividends

Under current practice, no tax is payable in Hong Kong in respect of dividends paid by us.

Tax on Gains from Sale

No tax is imposed in Hong Kong in respect of capital gains from the sale of property. However, trading gains from the sale of property by persons carrying on a trade, profession or business in Hong Kong where the gains are derived from or arise in Hong Kong from such trade, profession or business will be chargeable to Hong Kong profits tax, which is imposed at the rate of 16.5% on corporations and at a rate of 15% on unincorporated businesses for the year of assessment 2008/09 onwards. Commencing from the year of assessment 2018/19 (i.e. on or after 1 April 2018), the profits tax rate for the first HK$2,000,000 of profits of corporations will be lowered to 8.25% while the remaining profits will continue to be taxed at the rate of 16.5%; and the profits tax rate for the first HK$2,000,000 of profits of unincorporated businesses will be lowered to 7.5%, while the remaining profits will continue to be taxed at the rate of 15%.

Trading gains from sales of H shares effected on the Hong Kong Stock Exchange will be considered to be derived from or arise in Hong Kong. Liability for Hong Kong profits tax would thus arise in respect of trading gains from sales of H shares effected on the Hong Kong Stock Exchange realized by persons carrying on a business of trading or dealing in securities in Hong Kong.

There will be no liability for Hong Kong profits tax in respect of profits from the sale of ADSs, where purchases and sales of ADSs are effected outside Hong Kong, for example, on the New York Stock Exchange.

 

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Stamp Duty

Hong Kong stamp duty, currently charged at the ad valorem rate of 0.1% on the higher of the consideration for, or the market value of, the H shares, will be payable by the purchaser on every purchase and by the seller on every sale of H shares (in other words, a total of 0.2% is currently payable on a typical sale and purchase transaction involving H shares). In addition, a fixed duty of HK$ 5.00 is currently payable on any instrument of transfer of H shares. If stamp duty is not paid on or before the due date, a penalty of up to ten times the duty payable may be imposed.

The withdrawal of H shares upon the surrender of ADRs, and the issuance of ADRs upon the deposit of H shares, will also attract stamp duty at the rate described above for sale and purchase transactions unless such withdrawal or deposit does not result in a passing of the beneficial interest in the H shares under Hong Kong law. The issuance of the ADRs upon the deposit of H shares issued directly to the depositary of the ADSs, or for the account of the depositary, will not be subject to any stamp duty. No Hong Kong stamp duty is payable upon the transfer of ADSs outside Hong Kong.

Estate Duty

The Revenue (Abolition of Estate Duty) Ordinance 2005 came into effect on February 11, 2006 in Hong Kong. No Hong Kong estate duty is payable and no estate duty clearance papers are needed for an application for a grant of representation in respect of holders of H shares whose deaths occur on or after February 11, 2006.

United States Federal Income Taxation

This discussion describes general U.S. federal income tax consequences of the purchase, ownership and disposition of our Company’s ADSs for U.S. Holders. This discussion does not address any aspect of U.S. federal gift or estate tax (or tax consequences for any beneficiary receiving the Company’s ADSs from a deceased holder or by gift), or the state, local or foreign tax consequences of an investment in our Company’s ADSs. This discussion applies to you only if you hold and beneficially own our 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, retirement plans, individual retirement accounts or tax deferred accounts;

 

   

partnerships or other pass-through entities (including entities treated as partnerships for U.S. federal income tax purposes) or persons holding ADSs through any such entities;

 

   

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

 

   

persons whose functional currency for tax purposes is not the U.S. dollar;

 

   

persons who are U.S. expatriates;

 

   

persons liable for alternative minimum tax; or

 

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persons who directly, indirectly or constructively own 10% or more by vote or value of our Company’s shares including ADSs.

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 our Company’s shares and the nature of our 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.

The discussions and comments included herein are only a general description of the tax aspects and they do not constitute a tax advice or opinion. Therefore, you should consult your own tax advisor concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of our 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.

U.S. Holders

Dividends on ADSs

Subject to the Passive Foreign Investment Company (“PFIC”) discussion below, if our Company makes distributions and you are a U.S. Holder, the gross amount of any distributions you receive on your ADSs (without reduction for any non-U.S. tax withheld from such distribution) will generally be treated as dividend income if the distributions are made from our 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 our Company’s ADSs will generally constitute qualified dividend income taxed at a preferential rate as long as our Company is not treated as a PFIC, our Company’s ADSs continue to be readily tradable on the New York Stock Exchange and certain 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.

 

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Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your adjusted tax basis in the ADSs and thereafter as capital gain. However, our Company does not intend to maintain calculations of our earnings and profits in accordance with U.S. federal income tax principles, so each U.S. Holder should therefore assume that any distribution by our Company with respect to the ADSs will constitute dividend income. If you are a corporation, you will not be entitled to claim a dividends-received deduction with respect to distributions you receive from our Company. Dividends generally will constitute foreign source passive income for U.S. foreign tax credit limitation purposes. You should consult your own tax advisor to determine the foreign tax credit implications of owning ADSs.

Sales and other dispositions of ADSs

Subject to the PFIC discussion below, when you sell or otherwise dispose of our 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 is long-term capital gain or loss if your holding period in our Company’s ADSs is more than one year at the time of disposition. If you are an individual, any such long-term capital gain is eligible for preferential rates. Your ability to deduct capital losses is subject to various limitations.

Passive Foreign Investment Company

If our Company is currently or were to become a PFIC, as a U.S. Holder, you would generally be subject to adverse U.S. tax consequences, in the form of increased tax liabilities and special U.S. tax reporting requirements.

Our Company will be classified as a PFIC in any taxable year if either: (1) the average value during the taxable year of our assets that produce passive income, or are held for the production of passive income, is at least 50% of the average value of our total assets for such taxable year (the “Asset Test”); or (2) 75% or more of our gross income for the taxable year is passive income (such as certain dividends, interest or royalties) (the “Income Test”). For purposes of the Asset Test: (1) any cash, cash equivalents, and cash invested in short-term, interest bearing, debt instruments, or bank deposits that is readily convertible into cash, will generally count as producing passive income or as being held for the production of passive income; and (2) the average values of our Company’s passive and total assets is calculated based on our market capitalization. In the case of publicly traded corporations, fair market value must be used for purposes of applying the Asset Test. In addition, regarding the above two tests, there are complex look-through rules to consider with respect to the assets and activities of related corporations from which our Company either receives income or in which it holds an interest. More specifically, certain adjustments are made to exclude certain income received from a related party or to include income earned and assets held by a 25% or more owned subsidiary in determining whether our Company qualifies as a PFIC under the two tests.

Our Company believes that we were not a PFIC for the taxable year 2020. However, there is no assurance that the IRS will not take a contrary position and assert that we are a PFIC, and no assurances can be given that we will not become a PFIC at some point in the future. For example, our Company would be a PFIC for the taxable year 2021 if the sum of our average market capitalization, which is our share price multiplied by the total amount of our outstanding shares, and our liabilities over that taxable year is not more than twice the value of our cash, cash equivalents, and other assets that are readily converted into cash. U.S. Holders are urged to consult their tax advisors regarding the effects of the PFIC rules.

If our Company were a PFIC, you would generally be subject to additional taxes and interest charges on certain “excess distributions” our Company makes regardless of whether our Company continues to be a PFIC in the year in which you receive an “excess distribution”. An “excess distribution” would be either (1) the excess amount of a distribution with respect to ADSs during a taxable year in which distributions to you exceed 125% of the average annual distributions to you over the preceding three taxable years or, if shorter, your holding period for the ADSs, or (2) 100% of the gain from the disposition of ADSs.

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

 

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If our Company were a PFIC in any year, as a U.S. Holder, you would be required to make an annual return on IRS Form 8621 “Information Return by a Shareholder of a Passive Foreign Investment Company or a Qualified Electing Fund.” However, our 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 our 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 our Company’s ADSs are “marketable”. Our 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 as of the beginning of your holding period, 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. Any gains recognized on the sale or other disposition of the ADSs would be treated as ordinary income and any losses would be treated as ordinary losses (but only to the extent of the net amount of previously included income as a result of the mark-to-market election, if any), and thereafter as capital losses. 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 our 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 our Company’s ordinary earnings for the taxable year, and (2) as long-term capital gain, your pro rata share of our Company’s net capital gain for the taxable year. However, our 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.

If the Company is a PFIC in any taxable year during which a U.S. Holder owns an ADS, such U.S. Holder (i) may also suffer adverse tax consequences under the PFIC rules described above with respect to any other PFIC in which the Company has a direct or indirect equity interest and (ii) generally will be required to file annually a statement setting forth certain information with its U.S. federal income tax returns. Currently, the effects of a mark-to-market election on, and the application of such an election to, lower-tier PFICs are not clear.

Medicare Tax

In addition to regular U.S. federal income tax, certain U.S. Holders that are individuals, estates or trusts are subject to a 3.8% tax on all or a portion of their “net investment income,” which may include all or a portion of their income arising from a distribution with respect to an ADS and net gain from the sale, exchange or other disposition of an ADS.

Disclosure Requirements for Specified Foreign Financial Assets

Individual U.S. Holders (and certain U.S. entities specified in U.S. Treasury regulations) who, during any taxable year, hold any interest in any “specified foreign financial asset” generally will be required to file with their U.S. federal income tax returns certain information on IRS Form 8938 if the aggregate value of all such assets exceeds certain specified amounts. “Specified foreign financial asset” generally includes any financial account maintained with a non-U.S. financial institution and may also include an ADS if it is not held in an account maintained with a financial institution. Substantial penalties may be imposed, and the period of limitations on assessment and collection of U.S. federal income taxes may be extended, in the event of a failure to comply. U.S. Holders should consult their own tax advisors as to the possible application to them of this filing requirement.

 

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Information Reporting and Backup Withholding

Under certain circumstances, information reporting and/or backup withholding may apply to U.S. Holders with respect to payments made on or proceeds from the sale, exchange or other disposition of an ADS, unless an applicable exemption is satisfied. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against a U.S. Holder’s U.S. federal income tax liability if the required information is furnished by the U.S. Holder on a timely basis to the IRS.

HOLDERS OF OUR 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.

F. DIVIDENDS AND PAYING AGENTS

Not applicable.

G. STATEMENT BY EXPERTS

Not applicable.

H. DOCUMENTS ON DISPLAY

Our 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.

Our 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 our 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 100 F Street, NE, 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, 100 F Street, NE, Washington, D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the Securities and Exchange Commission’s Internet site at http://www.sec.gov . The Commission’s telephone number is 1-800-SEC-0330 . Copies of this material may also be obtained for our Company’s website at http:// www.csair.com .

I. SUBSIDIARY INFORMATION

Not applicable.

 

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ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Fuel Price Fluctuation Risk

Our earnings are affected by changes in the price and availability of jet fuel. There are currently no effective means available to manage our exposure to the fluctuations in jet fuel prices. Our results of operations may be significantly affected by fluctuations in fuel prices which is a significant expense for our Group. A reasonable possible increase or decrease of 10% in jet fuel price, with volume of fuel consumed and all other variables held constant, would have increased or decreased the fuel costs by approximately RMB1,880 million. The sensitivity analysis of jet fuel price risk is disclosed in Note 4(e) to the consolidated financial statements.

Interest Rate Risk

We are subject to market risks due to fluctuations in interest rates. The majority of our borrowings and lease liabilities are in the form of long-term fixed-rate and variable-rate. Fluctuations in interest rates can lead to significant fluctuations in the fair value of such debt instruments.

Interest rate swaps, denominated in United States Dollars (“USD”), have been entered into to mitigate our cash flow interest rate risk. The interest rate swaps allow our Company to pay at fixed rate from 1.64% to 1.72% to receive LIBOR. The notional principal of the outstanding interest rate swap contracts as at December 31, 2020 amounted to USD258 million (December 31, 2019: USD325 million), and the fair value of the interest rate swaps was RMB53 million recognized in liabilities as of December 31, 2020 (December 31, 2019: RMB3 million recognized in assets).

Cross currency swaps have been entered into mitigate interest rate risk and foreign currency risk. The cross currency swaps allow our Company to exchange the floating interest rate and principal payments in USD for fixed interest rate from 3.39% to 3.67% and principal payments in Renminbi. At 31 December 2019, the fair value of the cross currency swaps amounted to RMB187 million was recognized in assets. The notional principal of the outstanding cross currency swaps as at 31 December 2019 amounted to USD620 million. As at 31 December 2020, all cross currency swaps had been settled.

The sensitivity analysis of interest rate risk is disclosed in Note 4(b) to the consolidated financial statements.

The following table provides information regarding our other financial instruments (excluding lease contracts in accordance with Item 305 of Regulation S-K) that are sensitive to changes in interest rate as of December 31, 2020 and 2019:

 

     As of December 31, 2020
Expected Maturity Date
(RMB Equivalent in million)
    

As of December 31,

2019

(RMB Equivalent in million)

 
     2021     2022     2023     2024     2025     Thereafter     Total
recorded
amount
    Fair
Value(2)
     Total
Recorded
amount
    Fair
Value(2)
 

Bank and other loans

                     

Fixed rate bank and other loans in US$

     —         —         —         —         —         —         —         —          32       32  

Average interest rate

     N/A       N/A       N/A       N/A       N/A       N/A       N/A          2.42  

Variable rate bank and other loans in US$

     —         —         —         —         —         —         —         —          4,325       4,325  

Average interest rate(1)

     N/A       N/A       N/A       N/A       N/A       N/A       N/A          3.42  

Fixed rate bank and other loans in RMB

     38,578       7,662       12,807       553       1,034       15,228       75,862       75,862        42,989       42,989  

Average interest rate

     2.15     3.52     2.72     2.73     3.28     6.02     3.18        2.96  

Variable rate bank and other loans in RMB

     1,521       —         —         —         —         850       2,371       2,371        3,834       3,834  

Average interest rate(1)

     3.01     N/A       N/A       N/A       N/A       4.41     3.51        4.06  

 

(1)

Variable 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, 2020 and 2019.

 

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Foreign Currency Exchange Risk

We are also exposed to foreign currency risk as a result of our aircraft and flight equipment being sourced from overseas suppliers. Specifically, our foreign currency exposure relates primarily to our foreign currency lease liabilities and long-term bank and other loans used to finance such capital expenditures and our capital commitments. Subject to certain restrictive conditions imposed by the SAFE, we may, from time to time, enter into foreign exchange forward option contracts to mitigate our foreign currency exposures. The sensitivity analysis of foreign currency risk is disclosed in Note 4(c) to the consolidated Financial Statements.

In 2020, we entered into forward foreign exchange and foreign exchange options contracts to mitigate foreign currency exchange risk. As of December 31, 2020, the notional principal of the outstanding forward foreign exchange and foreign exchange options contracts amounted to USD400 million (December 31, 2019: USD1,035 million), and the fair value of the forward foreign exchange and foreign exchange options contracts amounted to RMB56 million was recognized in liabilities (December 31, 2019: RMB31 million was recognized in assets).

As of December 31, 2020, we operated a total of 571 aircraft under leases. Certain of the leases are at rates that are substantially fixed. Such leases expose us to market risks. However, in accordance with Item 305 of Regulation S-K, such leases have been excluded from the following market risk tables.

The following table provides information regarding our material foreign currency sensitive financial instruments and capital commitments as of December 31, 2020 and 2019:

 

    

As of December 31, 2020

Expected Maturity Date or Transaction Date

(RMB Equivalent in million)

    

As of December 31, 2019

(RMB Equivalent in million)

 
     2021      2022      2023      2024      2025      Thereafter     

Total

Recorded

Amount

    

Fair

Value

    

Total

Recorded

Amount

    

Fair

Value

 

Variable rate bank and other loans in US$

     —          —          —          —          —          —          —          —          4,325        4,325  

Capital commitment in US$

     28,382        15,033        11,910        1,222        —          —          56,547        56,547        71,224        71,224  

 

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

For description of the rights of each class of securities that is registered under Section 12 of the Exchange Act as of December 31, 2020, please refer to Exhibit 2.3 of this Annual Report.

A. DEBT SECURITIES

None

B. WARRANTS AND RIGHTS

None

 

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C. OTHER SECURITIES

None

D. AMERICAN DEPOSITARY SHARES

The Bank of New York Mellon collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The Bank of New York Mellon collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The Bank of New York Mellon may collect its annual fee for depositary services by deductions from cash distributions, by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The Bank of New York Mellon may generally refuse to provide fee-attracting services until its fees for those services are paid.

 

Persons depositing or withdrawing shares must pay:

  

For:

$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)   

•  Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property

 

•  Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates

$.02 (or less) per ADS   

•  Any cash distribution to ADS registered holders

A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs   

•  Distribution of securities to holders of deposited securities which are distributed by the depositary to ADS registered holders

$.02 (or less) per ADSs per calendar year   

•  Depositary services

 

Registration or transfer fees   

•  Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares

Expenses of the depositary   

•  Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)

 

•  Converting foreign currency to U.S. dollars

Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes   

•  As necessary

Any charges incurred by the depositary or its agents for servicing the deposited securities   

•  As necessary

 

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Fees and Payments from the Depositary to Us

In 2020, we received from the depositary a reimbursement of US$43,601.14 net of withholding tax, for continuing annual stock exchange listing fees and expenses incurred by our Company in connection with the administration and maintenance of the depositary receipt facility.

Indirect payments

As part of the service to our Company, the Bank of New York Mellon waived a total amount of US$115,438.08 for the standard costs associated with the administration of the ADS program in 2020.

PART II

 

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

 

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

A. MATERIAL MODIFICATIONS TO THE INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS

None.

B. MATERIAL MODIFICATIONS TO THE RIGHTS OF REGISTERED SECURITIES BY ISSUING OR MODIFYING ANY OTHER CLASS OF SECURITIES

None.

C. WITHDRAWAL OR SUBSTITUTION OF A MATERIAL AMOUNT OF THE ASSETS SECURING ANY REGISTERED SECURITIES

Not applicable.

D. CHANGE OF TRUSTEES OR PAYING AGENTS FOR ANY REGISTERED SECURITIES

Not applicable.

E. USE OF PROCEEDS

Not applicable.

 

ITEM 15.

CONTROLS AND PROCEDURES

Disclosure controls and procedures

 

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