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, 2016
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 1-14660
(Exact name of Registrant as specified in its charter)
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(Translation of Registrant’s name into English)
THE PEOPLE’S REPUBLIC OF CHINA
(Jurisdiction of incorporation or organization)
278 JI CHANG ROAD GUANGZHOU, 510405
PEOPLE’S REPUBLIC OF CHINA
(Address of principal executive offices)
Mr. Xie Bing Telephone: +86 20 86124462 E-mail: [email protected] Fax: +86 20 86659040 Address: 278 JI CHANG ROAD GUANGZHOU, 510405 PEOPLE’S REPUBLIC OF CHINA
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Ordinary H Shares of par value New York Stock Exchange RMB1.00 per share represented by American Depositary Receipts
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 7,022,650,000 A Shares of par value RMB1.00 per share and 2,794,917,000 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes _ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer _ Accelerated filer Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP International Financial Reporting Standards _ Other as issued by the International Accounting Standards Board
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement Item the registrant has elected to follow. Item 17 Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes _ No TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS 1
INTRODUCTORY NOTE 2
GLOSSARY OF AIRLINE INDUSTRY TERMS 3
PART I 4
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 4
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 17
A. History and Development of our Company 17
B. Business Overview 20
C. Organizational Structure 43
D. Property, Plant and Equipment 44
ITEM 4A. UNRESOLVED STAFF COMMENTS 45
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 45
A. Operating Results 52
B. Liquidity and Capital Resources 60
C. Research and Development, Patents and Licenses, etc. 61
D. Trend Information 61
E. Off-Balance Sheet Arrangements 62
F. Tabular Disclosure of Contractual Obligations 62
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 63
A. Directors, Senior Management and Employees 63
B. Compensation 71
C. Board Practices 72
D. Employees 73
E. Share Ownership 74
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 75
A. Major Shareholders 75
B. Related Party Transactions 75
C. Interests of Experts and Counsel 84
ITEM 8. FINANCIAL INFORMATION 85
A. Consolidated Statements and Other Financial Information 85
B. Significant Changes 86
ITEM 9. THE OFFER AND LISTING 86 A. Offer and Listing Details 86
B. Plan of Distribution 87
C. Markets 87
D. Selling Shareholders 87
E. Dilution 87
F. Expenses of the Issue 87
ITEM 10. ADDITIONAL INFORMATION 87
A. Share Capital 87
B. Memorandum and Articles of Association 87
C. Material Contracts 92
D. Exchange Controls 92
E. Taxation 93
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 98
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 101
A. Debt Securities 101
B. Warrants and Rights 101
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 COMMITTEE FINANCIAL EXPERT 104
ITEM 16B. CODE OF ETHICS 104
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 105
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT 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 106
ITEM 16. MINE SAFETY DISCLOSURE 108
ITEM 17. FINANCIAL STATEMENTS 109
ITEM 18. FINANCIAL STATEMENTS 109
ITEM 19. EXHIBITS 109
INDEX TO EXHIBITS 109
SIGNATURES 114 FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements. These statements appear in a number of different places in this Annual Report. A forward-looking statement is usually identified by the use in this Annual Report of certain terminology such as "estimate", "project", "expect", "intend", "believe", "plan", "anticipate", "may", or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties. Forward-looking statements include statements regarding the outlook for our future operations, forecasts of future costs and expenditures, evaluation of market conditions, the outcome of legal proceedings (if any), the adequacy of reserves, or other business plans. You are cautioned that such forward-looking statements are not guarantees and involve risks, assumptions and uncertainties. Our actual results may differ materially from those in the forward-looking statements due to risks facing our Company or due to actual facts differing from the assumptions underlying those forward-looking statements.
Some of these risks and assumptions, in addition to those identified under Item 3, "Key Information - Risk Factors," include:
x general economic and business conditions in markets where our Company operates, including changes in interest rates;
x the effects of competition on the demand for and price of our services;
x natural phenomena;
x the impact of unusual events on our business and operations;
x actions by government authorities, including changes in government regulations, and changes in the CAAC’s regulatory policies;
x our relationship with China Southern Air Holding Company (the "CSAHC");
x uncertainties associated with legal proceedings;
x technological development;
x our ability to attract key personnel and attract new talent;
x future decisions by management in response to changing conditions;
x the Company’s ability to execute prospective business plans;
x the availability of qualified flight personnel and airport facilities; and
x 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.
1 INTRODUCTORY NOTE
In this Annual Report, unless the context indicates otherwise, the "Company", "we", "us" and "our" means China Southern Airlines Company Limited, a joint stock company incorporated in China on March 25, 1995, our "Group" means our Company and our consolidated subsidiaries, and "CSAHC" means China Southern Air Holding Company, our Company’s parent company which holds a 51.99% interest in our Company as of April 21, 2017.
References to "China" or the "PRC" are to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan. References to "Renminbi" or "RMB" are to the currency of China, references to "U.S. dollars", "$" or "US$" are to the currency of the United States of America (the "U.S." or "United States"), and reference to "HK$" is to the currency of Hong Kong. Reference to the "Chinese government" is to the national government of China. References to "Hong Kong" or "Hong Kong SAR" are to the Hong Kong Special Administrative Region of the PRC. References to "Macau" or "Macau SAR" are to the Macau Special Administrative Region of the PRC.
Our Company presents our consolidated financial statements in Renminbi. The consolidated financial statements of our Company have been prepared in accordance with all applicable International Financial Reporting Standards ("IFRSs"), which collective term includes all applicable individual IFRSs, International Accounting Standards ("IASs") and Interpretations issued by the International Accounting Standards Board (the "IASB").
Solely for the convenience of the readers, this Annual Report contains translations of certain Renminbi amounts into U.S. dollars at the rate of US$1.00 = RMB6.9370, which is the average of the buying and selling rates as quoted by the People’s Bank of China at the close of business on December 30, 2016. 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.
2 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 or revenue ton kilometers for cargo, the load (cargo) in tons multiplied by the kilometers flown
"revenue ton kilometers-passenger" the load (passenger) in tons multiplied by the kilometers flown
"ton" a metric ton, equivalent to 2,204.6 pounds
Yield
"yield per RPK" revenue from passenger operations divided by RPK
"yield per RFTK" revenue from cargo operations divided by RFTK
"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
3 Equipment
"expendables" aircraft parts that are ordinarily used up and replaced with new parts
"rotables" aircraft parts that are ordinarily repaired and reused
Others
"ADR" American Depositary Receipt
"A Shares" Shares issued by our Company to investors in the PRC for subscription in RMB, with par value of RMB1.00 each
"CAAC" Civil Aviation Administration of China
"CAOSC" China Aviation Oil Supplies Company
"CSRC" China Securities Regulatory Commission
"H Shares" Shares issued by 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 CSAHC)
"NDRC" National Development and Reform Commission of China
"SA Finance" Southern Airlines Group Finance Company Limited
"SAFE" State Administration of Foreign Exchange of China
"SEC" United States Securities and Exchange Commission
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
4 ITEM 3. KEY INFORMATION
A. Selected Financial Data.
The following tables present selected financial data for the five-year period ended December 31, 2016. The selected consolidated income statement data (other than ADR data) for the three-year period ended December 31, 2014, 2015 and 2016 and selected consolidated statement of financial position data as of December 31, 2015 and 2016 are derived from the audited consolidated financial statements of our Company, including the related notes, included elsewhere in this Annual Report. The selected consolidated income statement data (other than ADR data) for the years ended December 31, 2012 and 2013 and selected consolidated statement of financial position data as of December 31, 2012, 2013 and 2014 are derived from our Company’s audited consolidated financial statements that are not included in this Annual Report.
Moreover, the selected financial data should be read in conjunction with our consolidated financial statements together with accompanying notes and "Item 5. Operating and Financial Review and Prospects" 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.
Year ended December 31, 2016 2016 2015 2014 2013 2012 US$ RMB RMB RMB RMB RMB (in million, except per share and per ADR data) Consolidated Income Statement Data
Operating revenue 16,575 114,981 111,652 108,584 98,547 99,514 Operating expenses (15,310) (106,204) (101,492) (106,026) (98,280) (95,877) Operating profit 1,818 12,612 13,438 4,748 1,510 5,099 Profit before income tax 1,104 7,661 6,118 3,066 3,484 4,738 Profit for the year 850 5,898 4,818 2,398 2,750 3,784 Profit attributable to: Equity shareholders of our Company 727 5,044 3,736 1,777 1,986 2,619 Non-controlling interests 123 854 1,082 621 764 1,165 Basic and diluted earnings per share 0.07 0.51 0.38 0.18 0.20 0.27 Basic and diluted earnings per ADR(1) 3.70 25.69 19.03 9.05 10.11 13.34
Other Financial Data
Cash dividends declared per share 0.01 0.10 0.08 0.04 0.04 0.05
(1) Basic and diluted earnings per share have been computed by dividing profit attributable to equity shareholders of our Company by the weighted average number of shares in issue. Basic and diluted earnings per ADR have been computed as if all of our issued or potential ordinary shares, including domestic shares and H shares, are represented by ADRs during each of the years presented. Each ADR represents 50 shares.
5 Year ended December 31, 2016 2016 2015 2014 2013 2012 US$ RMB RMB RMB RMB RMB (in million, except per share and per ADR data) Consolidated Statement of Financial Position Data:
Cash and cash equivalents 599 4,152 4,560 15,414 11,748 10,082 Total current assets, excluding cash and cash equivalents 1,386 9,612 9,553 12,127 8,825 6,705 Property, plant and equipment, net 21,154 146,746 142,870 134,453 119,777 100,040 Total assets 28,895 200,442 185,989 189,688 165,207 142,454 Current borrowings 3,856 26,746 30,002 20,979 20,242 21,899 Current portion of obligations under finance leases 1,253 8,695 6,416 5,992 3,636 2,494 Non-current borrowings 2,704 18,758 15,884 42,066 37,246 30,196 Obligations under finance leases, excluding current portion 7,716 53,527 49,408 43,919 31,373 19,371 Total equity 7,925 54,976 49,624 44,493 42,451 39,734 Number of shares (in million) 9,818 9,818 9,818 9,818 9,818 9,818
Selected Operating Data
The operating data and the profit analysis 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.
Year ended December 31, 2016 2015 2014 2013 2012
Capacity ASK (million) 255,992 235,616 209,807 186,800 169,569 ATK (million) 34,980 32,205 28,454 24,952 23,065 Kilometers flown (thousand) 1,504,310 1,408,500 1,275,570 1,147,070 1,052,495 Hours flown (thousand) 2,375 2,238 2,026 1,829 1,681 Number of landing and take-offs 959,110 936,750 884,070 809,870 757,022 Traffic RPK (million) 206,106 189,588 166,629 148,417 135,535 RTK (million) 24,387 22,388 19,780 17,469 16,160 Passengers carried (thousand) 114,619 109,422 100,919 91,791 86,485 Cargo and mail carried (tons) 1,612,550 1,511,550 1,433,250 1,276,350 1,232,000 Load Factors Passenger load factor (RPK/ASK) (%) 80.5 80.5 79.4 79.4 79.9 Overall load factor (RTK/ATK) (%) 69.7 69.5 69.5 70.0 70.1 Yield Yield per RPK (RMB) 0.50 0.53 0.58 0.59 0.66 Yield per RFTK (RMB) 1.16 1.21 1.42 1.48 1.59 Yield per RTK (RMB) 4.50 4.78 5.27 5.42 5.95 Fleet - Boeing 372 351 311 282 243 - Airbus 304 290 276 253 225 - Others 26 26 25 26 23 Total aircraft in service at period end 702 667 612 561 491 Average daily utilization rate (hours per day) 9.53 9.6 9.6 9.6 9.8
6 Exchange Rate Information
The following table sets forth certain information concerning exchange rates, based on the noon buying rates in New York City for cable transfers in foreign currencies, as certified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate"), between Renminbi and U.S. dollars for the five most recent financial years.
Reminbi per U.S. Exchange Rate(1) Period Average(2) Low High Period-end Exchange Rate 2012 6.3088 6.2221 6.3879 6.2301 2013 6.1412 6.0537 6.2213 6.0537 2014 6.1704 6.0402 6.2591 6.2046 2015 6.2869 6.1870 6.4896 6.4778 2016 October 6.7303 6.6685 6.7819 6.7735 November 6.8402 6.7534 6.9195 6.8837 December 6.9198 6.8771 6.9580 6.9430 2017 January 6.8907 6.8360 6.9575 6.8768 February 6.8694 6.8517 6.8821 6.8665 March 6.8940 6.8687 6.9132 6.8832 April (through April 21, 2017) 6.8871 6.8778 6.8988 6.8845
(1) Source: The source of the exchange rate is the H.10 statistical release of the Federal Reserve Board.
(2) Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Relating to our Business
We are indirectly majority owned by the Chinese government, which may exert influence in a manner that may conflict with the interests of holders of ADRs, H Shares and A Shares.
Major Chinese airlines are wholly- or majority-owned either by the Chinese government or by provincial or municipal governments in China. CSAHC, an entity wholly-owned by the Chinese government, holds and exercises the rights of ownership of 51.99% of the equity of our Company. The interests of the Chinese government in our Company and in other Chinese airlines may conflict with the interests of the holders of the ADRs, H Shares and A Shares. The public policy considerations of the Chinese government in regulating the Chinese commercial aviation industry may also conflict with its indirect ownership interest in our Company. In addition, our Company may accept further capital injection from CSAHC through non-public subscriptions, which may have dilutive impact for other holders of ADRs, H Shares and A Shares.
7 Due to high degree of operating leverage and high fixed costs, a decrease in revenue of our Group could result in a disproportionately higher decrease in our profit for the year. The results of our operations are also significantly exposed to fluctuations in foreign exchange rates.
The airline industry is generally characterized by a high degree of operating leverage. In addition, due to high fixed costs, the expenses relating to the operation of any flight do not vary proportionately with the number of passengers carried, while revenues generated from a flight are directly related to the number of passengers carried and the fare structure of such flight. Accordingly, a decrease in revenues could result in a disproportionately higher decrease in our profit for the year. Moreover, as we have substantial obligations denominated in foreign currencies, our results of operations are significantly affected by fluctuations in foreign exchange rates, particularly by fluctuations in the Renminbi-U.S. dollar exchange rate. Our net exchange losses of RMB5,953 million and RMB3,276 million were recorded in 2015 and 2016, respectively, because Renminbi depreciated significantly against U.S. dollar in 2015 and 2016.
We have significant committed capital expenditures in the next three years, but may face challenges and difficulties as it seeks to maintain liquidity.
We have a substantial amount of debt, lease and other obligations, and will continue to have a substantial amount of debt, lease and other obligations in the future. As of December 31, 2016, our current liabilities exceeded our current assets by RMB54,168 million. We generated net cash inflow from operating activities of RMB23,734 million and RMB23,764 million for the years ended December 31, 2015 and 2016, respectively. However, our substantial indebtedness and other obligations may in the future negatively impact our liquidity. In addition, we have significant committed capital expenditures in the next three years, due to aircraft acquisitions. In 2016 and thereafter, the liquidity of our Group 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, a significant decrease in demand for our services, or a significant increase in jet fuel prices, our liquidity would be materially and adversely affected. Moreover, we may not be able to meet our debt obligations as they fall due and commit future capital expenditures if certain assumptions about the availability of external financing on acceptable terms are inaccurate. 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, 2016, we had banking facilities with several PRC commercial banks for providing loan finance up to approximately RMB139,274 million, of which approximately RMB110,199 million was unutilized. Our directors believe that sufficient financing will be available to our Group in 2017. However there can be no assurance that such loan financing will be available on terms acceptable to our Group or at all.
CSAHC will continue to be our controlling shareholder, and our interests may conflict with those of our Group. CSAHC and certain of its affiliates will continue to provide certain important services to our Group. Any disruption of the provision of services by CSAHC or its affiliates could affect our operations and financial conditions.
CSAHC will continue to be the controlling shareholder of our Company. CSAHC and certain of its affiliates will continue to provide certain important services to our Group, including advertising services, provision of air ticket selling services, property management services, leasing of properties and financial services, and repair, overhaul and maintenance services on jet engines. The interests of CSAHC may conflict with those of our Group. In addition, any disruption of the provision of services by CSAHC’s affiliates or a default by CSAHC of its obligations owed to our Group could affect our operations and financial conditions. In particular, as part of our cash management system, our Group periodically places certain amount of demand deposits after independent shareholders’ approval with SA Finance, a PRC authorized financial institution controlled by CSAHC and an associate of our Company. 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 enhance the safety of our deposits with SA Finance. In addition, we have received a letter of undertakings from CSAHC dated March 31, 2009, in which, among other things, CSAHC warranted that 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 the business of SA Finance over which our Group does not have control. As of December 31, 2015 and 2016, we had deposits of RMB2,934 million and RMB3,759 million, respectively, with SA Finance.
8 Both international and domestic economic fluctuations and Chinese government’s macroeconomic controls affect the demand for air travel, which will in turn cause volatility to our business and results of our operations.
Both international and domestic economic fluctuations and Chinese macroeconomic controls affect the demand for air travel. For example, the demand for air travel significantly decreased during the few years after the U.S. subprime crisis and European debt crisis. In addition, the continuing global economic slowdown may have a negative effect on the growth rate of the Chinese economy. Chinese macroeconomic controls, taken to counteract such slowdown, such as financing adjustments, credit adjustments, price controls and exchange rate policies, would present unexpected changes to the aviation industry. As a result, the changing economic situation and Chinese macroeconomic controls may cause volatility to our business and results of our operations.
The financial crisis and other global events may reduce consumer spending or cause shifts in spending. A general reduction or shift in discretionary spending can result in decreased demand for leisure and business travel and can also impact our ability to raise fares to counteract increased fuel and labor costs. No assurance can be given that capacity reductions or other steps we may take will be adequate to offset the effects of reduced demand.
We could be adversely affected by an outbreak of a disease or large scale natural disasters that affect travel behavior.
The outbreak of the H1N1 swine flu in March 2009 has had an adverse impact on the aviation industry globally (including our Group). The spread of the swine flu adversely affected our international routes operations in 2009. Recently, there have been a number of outbreaks of H7N9 bird flu in several provinces in the PRC. A further spread of H7N9 bird flu may have a negative impact on the economic and business activities in China and thereby adversely affect our results of operation. A future outbreak of an infectious disease or any other serious public health concerns in Asia and elsewhere could have a material adverse effect on our business, financial condition and results of operations.
In 2011, a number of large-scale natural disasters occurred globally, such as the nuclear meltdown in Japan caused by earthquakes and subsequent tsunami, the hurricane on the East Coast of the United States, the flooding in Thailand and the typhoon in the Philippines. Disasters such as these can affect the aviation industry and our Group by reducing revenues and impacting travel behavior.
Lack of adequate documentation for land use rights and ownership of buildings subjects us to challenges and claims by third parties with respect to our Company’s use of such land and buildings.
Although systems for registration and transfer of land use rights and related real property interests in China have been implemented, such systems do not yet comprehensively account for all land and related property interests. We leased certain properties and buildings from CSAHC which are located in Guangzhou, Wuhan, Haikou and other PRC cities. However, CSAHC lacks adequate documentation evidencing CSAHC’s rights to such land and buildings, and, as a result, the lease agreements between CSAHC and our Company for such land has not been registered with the relevant authorities. As a result, such lease agreements may not be enforceable. Lack of adequate documentation for land use rights and ownership of buildings subjects our Company to challenges and claims by third parties with respect to our Company’s use of such land and buildings.
As of the date of this Annual Report, we had been occupying all of the land and buildings described above without challenge or claim by third parties. However, if any challenges to the property ownership or other claims are successful, our operation and business may be materially adversely affected. CSAHC has agreed to indemnify us against any loss or damage caused by or arising from any challenge of, or interference with, our Company’s right to use certain land and buildings.
Any discontinuity or disruption in the direct flight arrangement between Taiwan and Mainland China may negatively affect our results.
The policy restraint on direct flights between Taiwan and Mainland China has been further loosened in the past few years but there has been no further negotiation on the expansion of such arrangement between Taiwan and Mainland China since mid-2016. As of April 21, 2017, there were 208 cross-Strait direct passenger flights per week. Our Company was the first Chinese carrier to operate non-stop flights from Mainland China to Taiwan and as a result has benefited from the operation of such flights. However, given the cross-Strait flight arrangement is subject to the political relationship between Taiwan and Mainland China, any deterioration in such political relationship may cause the discontinuity or disruption in the flight arrangement, and therefore may have a material adverse impact on our results.
9 Terrorist attacks or the fear of such attacks, even if not made directly on the airline industry, could adversely affect our Company and the airline industry as a whole. The travel industry continues to face on- going security concerns and cost burdens.
The aviation industry as a whole has been beset with high-profile terrorist attacks, most notably the attack on September 11, 2001 in the United States. Terrorist attacks could also affect the aviation industry in China. Airlines in China have experienced several incidents of terrorist attacks or threats recently. 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, but the effectiveness of such measures cannot be ascertained. Additional terrorist attacks, even if not made directly on the airline industry, or the fear of or the precautions taken in anticipation of such attacks (including elevated threat warnings or selective cancellation or redirection of flights) could materially and adversely affect our Company and the aviation industry. Potential impacts that terrorist attacks could have on our Company include substantial flight disruption costs caused by grounding of fleet, significant increase in security costs and associated passenger inconvenience, increased insurance costs, substantially higher ticket refunds and significant decrease in traffic measured in revenue passenger kilometers. Additionally, increasingly strict security measures make air travel a hassle in the eyes of some consumers. These factors can have an uncertain impact on the development of the aviation industry.
We may suffer losses in the event of an accident involving our aircraft or the aircraft of any other airline.
An accident involving one of our aircraft could require repair or replacement of a damaged aircraft, and result in our consequential temporary or permanent loss from service and/or significant liability to injured passengers and others. Although we believe that we currently maintain liability insurance in amounts and of the types generally consistent with industry practice, the amounts of such coverage may not be adequate to fully cover the costs related to the accident or incident, which could result in harm to our results of operations and financial condition. In addition, any aircraft accident, even if fully insured, could cause a public perception that we are not as safe or reliable as other airlines, which would harm our competitive position and result in a decrease in our operating revenues. Moreover, a major accident involving the aircraft of any of our competitors may cause demand for air travel to decrease in general, which would adversely affect our results of operations and financial condition.
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. In particular, to enhance our management of flight operations, our Group launched the computerized flight operations control system in May 1999. 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. However, the computer and communications systems on which we rely could be disrupted due to various factors, some of which are beyond our control, including natural disasters, power failures, terrorist attacks, equipment failures, software failures and computer viruses and hackers. We have taken certain steps to reduce the risk of some of these potential disruptions. There can be no assurance, however, that the measures we have taken are adequate to prevent or remedy disruptions or failures of those systems. Any substantial or repeated failure of those systems could adversely affect our operations and customer services, result in the loss of important data, loss of revenues, and increased costs, and generally harm our business. Moreover, a failure of certain of our vital systems could limit our ability to operate our flights for an extended period of time, which would have a material adverse effect on our operations and our business.
10 We may lose investor confidence in the reliability of our financial statements if we fail to achieve and maintain effective internal control over financial reporting, which in turn could harm our business and negatively impact the trading prices of our ADRs, H Shares or A Shares.
The United States Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company in the United States to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, our Company’s independent registered public accounting firm is required to report on the effectiveness of our Company’s internal control over financial reporting.
Since 2011, pursuant to the Basic Standard for Enterprise Internal Control jointly issued by the Ministry of Finance, China Securities Regulatory Commission ("CSRC") and other three PRC authorities on May 22, 2008, and its application guidelines and other relevant regulations issued subsequently (collectively, "PRC internal control requirements") , our Company has carried out a self-assessment of the effectiveness of its internal control and issue a self-assessment report annually in accordance with the PRC internal control requirements, and our Company’s auditor for our PRC GAAP financial statements (the "PRC Auditor") is required to report on the effectiveness of our Company’s internal control over financial reporting.
However, our independent registered public accounting firm or PRC Auditor may not be satisfied with our internal controls, the level at which our controls are documented, designed, operated and reviewed. Our independent registered public accounting firm or PRC Auditor may also interpret the requirements, rules and regulations differently, and reach a different conclusion regarding the effectiveness of our internal control over financial reporting. Although our management have concluded that our internal control over financial reporting as of December 31, 2016 was effective, we may discover deficiencies in the course of our future evaluation of our internal control over financial reporting and may be unable to remediate such deficiencies in a timely manner. If we fail to maintain the adequacy of our internal control over financial reporting, we may not be able to conclude that we have effective internal control over financial reporting on an ongoing basis, as required under the above mentioned rules and regulations. Moreover, effective internal control is necessary for us to produce reliable financial reports and is important to prevent fraud. As a result, our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading prices of our ADRs, H Shares or A Shares.
Our Company could be classified as a passive foreign investment company by the United States Internal Revenue Service and may therefore be subject to adverse tax impact.
Depending upon the 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. Our Company believes that we were not a PFIC for the taxable year 2016. However, there can be no assurance that we will not be a PFIC for the taxable year 2017 and/or later taxable years, as PFIC status is re-tested each year and depends on the facts in such year.
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.
If we were a PFIC, you 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 ADRs during a taxable year in which distributions to you exceed 125% of the average annual distributions to you over the preceding three taxable years or, if shorter, your holding period for the ADRs, or (2) 100% of the gain from the disposition of ADRs. For more information on the United States federal income tax consequences to you that would result from our classification as a PFIC, please see Item 10, "Taxation - United States Federal Income Taxation - U.S. Holders - Passive Foreign Investment Company".
11 We may be unable to retain key management personnel.
We are dependent on the experience and industry knowledge of our key management employees, and there can be no assurance that we will be able to retain them. Any inability to retain our key management employees, or attract and retain additional qualified management employees, could have a negative impact on us.
Risks Relating to the Chinese Commercial Aviation Industry
Our business is subject to extensive government regulations, and there can be no assurance as to the equal treatment of all airlines under those regulations.
Our ability to implement our business strategy will continue to be affected by regulations and policies issued or implemented by relevant government agencies, particularly CAAC, which encompasses substantially all aspects of the Chinese commercial aviation industry, such as the approval of route allocation, the administration of certain airport operations and air traffic control. Such regulations and policies limit the flexibility of our Group to respond to market conditions, competition or changes in our cost structure. The implementation of specific government policies could from time to time adversely affect our operations.
Our results may be negatively impacted by the fluctuation in domestic prices for jet fuel, and we would be adversely affected by disruptions in the supply of fuel.
The availability and cost of jet fuel have a significant impact on our results of operations. Our jet fuel cost for 2016 accounted for 46.25% of our flight operations expenses. All of the domestic jet fuel requirements of Chinese airlines (other than at the Shenzhen, Sanya, Haikou, Shanghai Pudong) must be purchased from the exclusive providers, CAOSC and Bluesky Oil Supplies Company, which are supervised by the CAAC. Chinese airlines may also purchase jet fuel at the Shenzhen, Sanya, Haikou, Shanghai Pudong from Sino-foreign joint venture in which CAOSC is a joint venture partner. Jet fuel obtained from the CAOSC’s regional branches is purchased at uniform prices throughout China that are determined and adjusted by the CAOSC from time to time with the approval of the CAAC and the pricing department of the NDRC based on market conditions and other factors. As a result, the costs of transportation and storage of jet fuel in all regions of China are spread among all domestic airlines.
Domestic price for jet fuel has experienced fluctuations in the past few years. Our profit for the year may suffer from an unexpected change in the fuel surcharge collection policies and other factors beyond our control. For more information on the jet fuel prices, please see "Item 4, Information on our Company - Business Overview - Jet Fuel" section below for further discussion.
In summary, given the constant fluctuation of volatile fuel price, no assurance can be given that our operation and financial results will not be negatively impacted by the fluctuation in domestic prices for jet fuel.
In addition, China has experienced jet fuel shortages. On some rare occasions prior to 1993, our Group had to delay or even cancel flights. Although such shortages have not materially affected our operations since 1993, there can be no assurance that such a shortage will not occur in the future. If such a shortage occurs in the future to the extent that our Group has to delay or cancel flights due to fuel shortage, our operational reputation among passengers as well as our operations may suffer.
In 2016, a reasonable possible increase or decrease of 10% in average jet fuel price with volume of fuel consumed and all other variables held constant, would have increased or decreased our annual fuel costs by approximately RMB2,380 million. Accordingly, even if the jet fuel supply remains stable, increases in jet fuel prices will nevertheless adversely impact our financial results.
12 Our profit for the year may suffer from an unexpected volatility caused by any fluctuation in the level of fuel surcharges.
The level of fuel surcharges, which is regulated by Chinese government, affects domestic customers’ air travel 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. 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 are subject to 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. As a result, our results may fluctuate from season to season.
Our operations may be adversely affected by insufficient aviation infrastructure in Chinese commercial aviation industry.
The rapid increase in air traffic volume in China in recent years has put pressure on many components of the Chinese commercial aviation industry, including China’s air traffic control system, the availability of qualified flight personnel and airport facilities. Airlines, such as our Group, which have route networks that emphasize short- to medium-haul routes, are generally more affected by insufficient aviation infrastructure in terms of on-time performance and high operating costs due to fuel inefficiencies resulting from the relatively short segments flown, as well as the relatively high proportion of time on the ground during turnaround. All of these factors may adversely affect the perception of the service provided by an airline and, consequently, the airline’s operating results. In recent years, the CAAC has placed increasing emphasis on the safety of Chinese airline operations and has implemented measures aimed at improving the safety record of the industry. The ability of our Group to increase utilization rates and to provide safe and efficient air transportation in the future will depend in part on factors such as the improvement of national air traffic control and navigation systems and ground control operations at Chinese airports, factors which are beyond the control of our Group.
We face increasingly intense competition both in domestic aviation industry and in the international market, as well as from alternative means of transportation.
The CAAC’s extensive regulation of the Chinese commercial aviation industry has had the effect of managing competition among Chinese airlines. Nevertheless, competition has become increasingly intense in recent years due to a number of factors, including relaxation of certain regulations by the CAAC and an increase in the capacity, routes and flights of Chinese airlines. Competition in the Chinese commercial aviation industry has led to widespread price-cutting practices that do not in all respects comply with applicable regulations. Until the interpretation of CAAC regulations limiting such price-cutting has been finalized and strictly enforced, discounted tickets from competitors will continue to have an adverse effect on our sales.
We face varying degrees of competition on our regional routes from certain Chinese airlines and Cathay Pacific, Cathay Dragon 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 name recognition than our Group. In addition, the public’s perception of the safety and service records of Chinese airlines could adversely affect our ability to compete against our regional and international competitors. Many of our international competitors have larger sales networks and participate in reservation systems that are more comprehensive and convenient than those of our Group, or engage in promotional activities, which may enhance their ability to attract international passengers.
Furthermore, for short-distance transportation, airplanes, trains and buses are alternatives to each other. Given the recent development of high-speed trains (as discussed below) , the construction of nationwide high- speed railway network and the improvement of inter-city expressway network, the commercial aviation sector as a whole faces increasing competition from the alternative means of transportation such as railways and highways.
13 We expect to face substantial competition from the rapid development of the Chinese rail network.
The PRC government is aggressively implementing the expansion of its high-speed rail network, which provides train services at a speed of up to 300 kilometers per hour connecting major cities such as Beijing, Shanghai, Wuhan, Zhengzhou, Xi'an, Qingdao, Guangzhou, Harbin and Dalian. In December 2012, the Beijing-Guangzhou and Harbin-Dalian High-Speed Railways commenced operation, the expansion of the coverage of this network and improvements in railway service quality, increased passenger capacity and stations located closer to urban centers than competing airports could enhance the relative competitiveness of the railway service and affect our market share on some of our key routes, in particular routes below 800 kilometers. China’s high-speed railway traffic mileage has reached 22,000 kilometers as of December 31, 2016, and the impact of high- speed railway on the aviation market has expanded into China’s western regions from the central and eastern regions. It is anticipated that China will build “eight horizontal and eight vertical” high speed railway corridors by 2020 and the improving high speed railway network will have further impact on the growth rate of passengers carried by airplanes. The operating results of the Company’s air routes which overlap with the high speed railway corridors (especially air routes with a distance of less than 800 kilometers) will be affected in the future.
Due to limitation on foreign ownership imposed by Chinese government policies, our Company may have limited access to the international equity capital markets.
Chinese government policies limit foreign ownership in Chinese airlines. Under these policies, the percentage ownership of our total outstanding ordinary shares held by investors in Hong Kong and any country outside China ("Foreign Investors") may not in the aggregate exceed 49%. Currently, we estimate that 28.47% of the total outstanding ordinary shares of our Company are held by Foreign Investors. For so long as the limitation on foreign ownership is in force, we will have limited access to the international equity capital markets.
The European Emissions Trading Scheme may increase operational cost of our Group.
Starting on January 1, 2012, aviation sector will be included in the European Emissions Trading Scheme (ETS), EU’s mandatory cap-and-trade system for reduction of greenhouse gas emissions. Airline operators in the EU will receive tradable emission permits (aviation allowances) covering a certain level of their CO2 emissions per year for their flights operating to and from EU airports. If an airline fails to 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, the 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 government authorities, the major airlines are prohibited from joining the ETS and the transport airlines are also prohibited from raising the freight price or increasing fee items by adducing this reason. On November 12, 2012, EU announced to temporarily suspend the implementation of the ETS in the aviation sector in 2013 in order to forge a positive negotiation environment for all parties. In November 2014, 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 operated few flights between airports within the EU since 2012. We expect we would operate few flights between airports within the EU in the future. Therefore, we will submit emissions report and pay the quota between 2012 and 2016 for our flights between airports within the EU. In April 2015, our Company had completed submission of emissions reports for the years 2012 to 2014 and fulfilled our obligations under the ETS. In 2016, our Company had finished year 2015 compliance cycle and now is performing year 2016 compliance cycle. On year 2017-2020 compliance cycle, our Company will be in compliance with the requirements of relevant PRC laws and the ETS. There can be no assurance that the new implementation proposal will not have negative impact on our financial condition and result of operation.
14 We may utilize fuel hedging arrangements which may result in losses.
While we have not entered into any fuel hedging transactions since the fourth quarter of 2008, we may in the future consider to hedge a portion of our future fuel requirements through various financial derivative instruments linked to certain fuel commodities to lock in fuel costs within a hedged price range. However, these hedging strategies may not always be effective and high fluctuations in aviation fuel prices exceeding the locked-in price ranges may result in losses. Significant declines in fuel prices may substantially increase the costs associated with our fuel hedging arrangements. In addition, where we seek to manage the risk of fuel price increases by using derivative contracts, we cannot assure you that, at any given point in time, our fuel hedging transactions will provide any particular level of protection against increased fuel costs.
Risks Relating to the PRC
We have significant exposure to foreign currency risk as majority of our lease obligations and certain bank and other loans 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 centre.
We have significant exposure to foreign currency risk as substantially all of our obligations under leases, certain bank and other loans and operating lease commitment are denominated in foreign currencies, principally U.S. dollars, Euros and Japanese Yen. Depreciation or appreciation of the Renminbi against foreign currencies affects 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 our Group will be able to obtain sufficient foreign exchange to pay dividends or satisfy our foreign exchange liabilities.
Our operations are subject to immature development of legal system in China. Lack of uniform interpretation and effective enforcement of laws and regulations may cause significant uncertainties to our operations.
Our Company and the major subsidiaries of our Group are organized under the laws of China. The Chinese legal system is based on written statutes and is a system, unlike common law systems, in which decided legal cases have little precedential value. Since 1979, the Chinese government has been developing a comprehensive system of commercial laws and considerable progress has been made in the promulgation of laws and regulations dealing with economic matters, such as corporate organization and governance, foreign investments, commerce, taxation and trade. These laws, regulations and legal requirements are relatively recent, and, like other laws, regulations and legal requirements applicable in China (including with respect to the commercial aviation industry), their interpretation and enforcement involve significant uncertainties.
The PRC tax law may have negative tax impact on holders of H Shares or ADRs of our Company, 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%.
15 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). 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 themselvers."
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.
As a company registered with the U.S. Securities and Exchange Commission, or the SEC, and traded publicly in the United States, our independent registered public accounting firm is required by the laws of the United States to be registered with the Public Company Accounting Oversight Board, or the PCAOB, and undergo regular inspections by the PCAOB to assess its 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 these firms had violated U.S. securities laws and the SEC's rules and regulations thereunder by failing to provide to the SEC the firms' work papers related to their audits 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 are unable to find timely another registered public accounting firm which can audit and issue a report on our financial statements, our financial statements could be determined to not be in compliance with the requirements for financial statements of public companies registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such a determination could ultimately lead to the delisting of our common stock from the NYSE for CSA's case or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our common stock in the United States.
16 ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of our Company
We were incorporated under PRC laws on March 25, 1995 as a joint stock company with limited liability under the name of China Southern Airlines Company Limited. The address of our principal place of business is 278 Ji Chang Road, Guangzhou, People’s Republic of China 510405. Our telephone number is +86 20 8612 4462 and our website is www.csair.com.
In July 1997, we issued 1,174,178,000 H Shares, par value RMB1.00 per share, and completed the listing of the H Shares on the Stock Exchange of Hong Kong Limited (the "Hong Kong Stock Exchange") and the ADRs representing our H shares on the New York Stock Exchange.
On March 13, 2003, we obtained an approval certificate from the Ministry of Commerce to change to a permanent limited company with foreign investments and on October 17, 2003 obtained a business license for our new status, as a permanent limited company with foreign investments issued by the State Administration of Industry and Commerce of the People’s Republic of China.
In July 2003, we issued 1,000,000,000 A Shares, par value RMB1.00 per share, and completed the listing of the A shares on the Shanghai Stock Exchange.
Pursuant to a sale and purchase agreement dated November 12, 2004 between our Company, CSAHC, China Northern Airlines ("CNA") and Xinjiang Airlines ("XJA"), which was approved by our shareholders in an extraordinary general meeting held on December 31, 2004, we acquired the airline operations and certain related assets of CNA and XJA with effect from December 31, 2004 at a total consideration of RMB1,959 million.
On May 30, 2007, we, together with an independent third party, established Chongqing Airlines Company Limited ("Chongqing Airlines"). As of December 31, 2012, our Company had transferred four aircraft to Chongqing Airlines as capital contribution. We own a total of 60% equity interest in Chongqing Airlines.
On August 14, 2007, we acquired a 51% equity interest in Nan Lung International Freight Limited beneficially owned by and registered in the name of Nan Lung Travel & Express (Hong Kong) Limited, and a 100% equity interest in China Southern Airlines Group Air Catering Company Limited, both a wholly owned subsidiary of CSAHC, for a total consideration of RMB112 million.
In December 2008, we acquired a 26% equity interest in China Southern West Australian Flying College Pty Ltd. ("Flying College") from CSAHC, and Flying College became a 91% owned subsidiary of our Company.
In June 2009, we acquired a 50% equity interest in Beijing Southern Airlines Ground Services Company Limited ("Beijing Ground Service") from the other shareholder, and Beijing Ground Service became a wholly-owned subsidiary of our Company.
On September 28, 2009, we entered into an agreement with CSAHC to sell our 50% equity interest in MTU Maintenance Zhuhai Co., Ltd ("Zhuhai MTU"), a jointly controlled entity of our Company, to CSAHC at a consideration of RMB 1,607,850,000. The transfer was completed in February 2010.
On June 2, 2010, a third party company injected capital to Flying College, which diluted our Company’s interest in Flying College from 91% to 48.12%. Flying College became a jointly controlled entity of our Company since then. The retained non-controlling equity interest in Flying College is re-measured to our fair value at the date when control was lost and a gain on deemed disposal of a subsidiary of RMB17 million was recorded in 2010.
17 In December 2010, we entered into an agreement with Xiamen Jianfa Group Co., Ltd. and Hebei Aviation Investment Group Corporation Limited ("Hebei Investment"), pursuant to which Hebei Investment agreed to inject a cash capital of RMB1,460 million into Xiamen Airlines Company Limited ("Xiamen Airlines"). In March 2011, the capital injection was received in full and our Company’s equity interest in Xiamen Airlines was diluted from 60% to 51%. Xiamen Airlines remains a subsidiary of our Company.
On June 29, 2012, Xiamen Airlines, a subsidiary of our Company and Southern Airlines Culture and Media Co., Ltd. ("SACM") entered into an agreement, pursuant to which Xiamen Airlines agreed to sell and SACM agreed to purchase 51% equity interests in Xiamen Airlines Media Co., Ltd.("XAMC"), at a consideration of approximately RMB43.12 million. Immediate prior to the transaction, XAMC was wholly owned by Xiamen Airlines and primarily engaged in providing advertising, corporate branding, publicity and exhibition services and was responsible for the overall brand building and publicity of Xiamen Airlines.
On September 24, 2012, we entered into a joint venture agreement with Henan Civil Aviation Development and Investment Co., Ltd. ("Henan Aviation Investment") for the establishment of China Southern Airlines Henan Airlines Company Limited ("Henan Airlines"), a joint venture company with a total registered capital of RMB6 billion, which will be owned as 60% and 40% by our Company and Henan Aviation Investment, respectively. On September 28, 2013, Henan Airlines was established.
On October 13, 2014, Xiamen Airlines and Hebei Airlines Investment Group Company Limited (the "Hebei Airlines Investment") entered into an agreement, pursuant to which Hebei Airlines Investment agreed to sell and Xiamen Airlines agreed to purchase 95.4% equity interests in Hebei Airlines at the consideration of RMB680 million. The acquisition was completed in December 2014.
On July 14, 2015, we and Xiamen Jianfa entered into an agreement, pursuant to which Xiamen Jianfa agreed to sell and we agreed to purchase 4% equity interests in Xiamen Airlines at the consideration of RMB586,666,670. The acquisition was completed in December 2015.
On February 2, 2016, we and CSAHC entered into an agreement, pursuant to which CSAHC agreed to sell and we agreed to purchase 100% equity interests in Southern Airlines (Group) Import And Export Trading Co. Ltd. at the consideration of RMB400,570,400. The acquisition was completed in August 2016.
Aircraft Acquisitions
Pursuant to an aircraft acquisition agreement dated April 18, 2008 between Xiamen Airlines and the Boeing Company ("Boeing"), Xiamen Airlines will acquire 20 Boeing B737 series aircraft from Boeing. According to the information provided by Boeing, the aggregate catalogue price for those aircraft including the airframe and engines is around US$1.5 billion. The aggregate consideration for the acquisition was partly paid in cash by Xiamen Airlines, and partly through financing arrangements with banking institutions. The Boeing aircraft were delivered in stages to Xiamen Airlines during the period commencing from April 2014 to October 2015.
Pursuant to an A320 Series Aircraft Purchase Agreement dated January 20, 2010 between our Company and Airbus SNC, we will acquire 20 Airbus 320 series aircraft from Airbus SNC. According to the information provided by Airbus SNC, the catalogue price of an Airbus 320 aircraft, including airframe and engines, is around US$76.9 million. The aggregate consideration for the acquisition was partly paid in cash and partly through financing arrangements with banking institutions. The Airbus aircraft have been delivered in stages to our Company.
On September 30, 2010, Xiamen Airlines entered into a supplemental agreement with Boeing to purchase additional 10 Boeing B737 series aircraft. The aggregate catalogue price for those aircraft, including airframe and engines, is around US$699 million. According to the information provided by Boeing, the aggregate consideration for the acquisition was partly paid in cash by Xiamen Airlines, and partly through financing arrangements with banking institutions. The Boeing aircraft were delivered in stages to Xiamen Airlines during the period commencing from 2015 to October 2016.
On November 4, 2010, we entered into an A320 series aircraft purchase agreement and an A330-300 aircraft purchase agreement with Airbus S.A.S. to purchase 30 Airbus A320 series aircraft and six Airbus A330 series aircraft. According to the information provided by Airbus S.A.S., the catalogue price of six Airbus A330 series aircraft and 30 Airbus A320 series aircraft, including airframe and engines, is US$1.205 billion and US$2.575 billion, respectively. The aggregate consideration for the acquisition was partly paid by cash and partly by financing arrangements with banking institutions. The six Airbus A330 aircraft were delivered in stages to our Company during the period commencing from 2013 to 2014 and the 30 Airbus A320 series aircraft will be delivered in stages to our Company during the period commencing from 2012 to 2015.
18 On May 31, 2011, we entered into an aircraft acquisition agreement with Boeing to purchase six Boeing B777F freighters. According to the information provided by Boeing, the catalogue price of six Boeing B777F aircraft, including airframe and engines, is US$1,584 million. The aggregate consideration for the Acquisition was partly paid by cash and partly by financing arrangements with banking institutions. The six Boeing B777F freighters were delivered in stages to us during the period commencing from 2013 to 2015.
On May 9, 2011, Xiamen Airlines entered into an aircraft acquisition agreement to purchase six Boeing B787 series aircraft. According to the information provided by Boeing, the aggregate catalogue price, including airframe and engines, for the six Boeing B787 series aircraft is US$1,098 million. The aggregate consideration for the acquisition was partly paid in cash and partly through financing arrangements with banking institutions. The Boeing aircraft were delivered in stages to Xiamen Airlines during the period commencing from 2014 to 2015.
On February 28, 2012, we entered into an agreement with the Boeing Company to purchase 10 Boeing 777-300ER aircraft. According to the information provided by Boeing, the catalogue price of one Boeing B777-300ER aircraft, including airframe and engines, is around US$298 million. The aggregate consideration for the acquisition was partly paid in cash and partly through financing arrangements with banking institutions. The Boeing aircraft were delivered in stages to our Company during the period from 2014 to 2016.
On August 3, 2012, Xiamen Airlines entered into an agreement with Boeing to purchase 40 Boeing B737 series aircraft from Boeing. The aggregate catalogue price of the 40 Boeing B737 series aircraft is US$3.36 billion. The aggregate consideration for the acquisition was partly paid by cash and partly by financing arrangements with banking institutions. The Boeing aircraft will be delivered in stages to Xiamen Airlines during the period commencing from 2016 to 2019.
On December 5, 2012, we entered into the Airbus aircraft acquisition agreement with Airbus S.A.S. to purchase 10 Airbus A330-300 aircraft. The catalogue price of one Airbus A330-300 aircraft is US$188 million. The aggregate consideration for the acquisition was partly paid by cash and partly by financing arrangements with banking institutions. The Airbus aircraft were delivered in stages to our Company during the period commencing from 2014 to 2016.
On May 16, 2014, we entered into the aircraft acquisition agreement with Airbus S.A.S to purchase 30 Airbus A320 series aircraft and 50 A320 NEO series aircraft. The catalogue price of one Airbus A320 series aircraft is priced differently in the range of US$85.8 million and US$110.1 million and one A320 NEO series aircraft is priced differently in the range of US$94.4 million to US$120.5 million. 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 Airbus aircraft will be delivered in stages to our Company during the period commencing from 2016 to 2020.
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 priced about US$81.2 million and US$96.1 million, respectively. The aggregate consideration for the acquisition will be funded partly payable by cash and partly by financing arrangements with banking institutions. The Boeing aircraft will be delivered in stages to our Company during the period commencing from 2017 to 2021.
On December 23, 2015, we entered into the aircraft acquisition agreement with Airbus S.A.S to purchase 10 Airbus A330-300 series aircraft. The catalogue price of one Airbus A330-300 series aircraft is priced about US$227.4 million. The aggregate consideration for the acquisition will be funded partly payable by cash and partly by financing arrangements with banking institutions. The Airbus aircraft will be delivered in stages to our Company during the period commencing from 2017 to 2019.
On April 26, 2016, Xiamen Airlines entered into the aircraft acquisition agreement with Boeing to purchase 10 B737-800 series aircrafts. The catalogue price of one B737-800 series aircraft is priced about US$85.06 million. The aggregate consideration for the acquisition will be funded partly by internal sources of our Company and partly through commercial loans by commercial banks. The Boeing aircrafts will be delivered in stages to our Company during the period commencing from 2017 to 2018.
19 On 27 July 2016, Xiamen Airlines entered into the aircraft acquisition agreement with Boeing to purchase six B787-9 series aircraft. The catalogue price of one is priced about US$230 million. The aggregate consideration for the acquisition will be funded partly by internal sources of our Company and partly through commercial loans by commercial banks. The Boeing aircrafts will be delivered in stages to our Company during the period commencing from 2016 to 2018.
On 12 October 2016, we entered into the aircraft acquisition agreement with Boeing to purchase 12 B787-9 series aircraft. The catalogue price of one is priced 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 aircrafts will be delivered in stages to our Company during the period commencing from 2018 to 2020.
Capital Expenditure
We had RMB29,454 million, RMB23,390 million and RMB26,481 million capital expenditures in 2016, 2015 and 2014 respectively. Of such capital expenditures in 2016, RMB10,487 million was financed by capital leases, RMB17,779 million was financed by bank borrowings while the remaining RMB1,188 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, 2016, we had total capital commitments for aircraft, engines and related equipment of approximately RMB83,532 million.
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 from the CAAC, we are one of the largest Chinese airlines and, as of the year end of 2016, ranked first in terms of number of passengers carried, number of scheduled flights per week, number of hours flown, number of routes and size of aircraft fleet. During the three years ended December 31, 2016, our RPKs increased at a compound annual growth rate of 11.2% from 166,629 million in 2014 to 189,588 million in 2015 and 206,106 million in 2016 while its capacity, measured in terms of ASKs, increased at a compound annual growth rate of 10.5%, from 209,807 million in 2014 to 235,616 million in 2015 and 255,992 million in 2016. In 2016, our Group carried 115 million passengers and had passenger revenue of RMB102,502 million (approximately US$14,776 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 2016, the Airline Subsidiaries carried 42.32 million passengers and had passenger revenue of RMB29,006 million (approximately US$4,181 million) and accounted for 36.93% and 28.30% of our passengers carried and passenger revenue, respectively.
We also provide air cargo and mail services. Our cargo and mail revenue increased by 4.81% to RMB7,191 million (approximately US$1,037 million) in 2016 as compared with that of 2015. Our airline operations are fully integrated with our airline-related businesses, including aircraft maintenance, ground services and air catering operations.
As of December 31, 2016, we operated 1,060 routes, of which 787 were domestic, 232 were international and 41 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 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.
20 In December 2005, we established a branch company in Beijing and have added wide-body airplanes to our operation base in Beijing, with the view to expanding our Beijing aviation business and building another main hub there in addition to our Guangzhou base. The establishment of Guangzhou and Beijing hubs will facilitate strategic refinement and enhancement of our route network operations, putting us in a better position to explore and seize the opportunities in the aviation market.
Our operations primarily focus on the domestic market. In addition, our Group also operates regional routes and international flights. As of December 31, 2016, we had 41 regional routes and 232 international routes. 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, 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.
After joining Skyteam Alliance, we have established a network reaching over 1,062 destinations globally, connecting 177 countries and regions and covering major cities around the world.
As of December 31, 2016, we had a fleet of 702 aircraft, consisting primarily of Boeing 737 series, 747, 757, 777, 787, Airbus 320 series, 330, 380 etc. The average age of our registered aircraft was 6.6 years as of December 31, 2016.
Restructuring and Initial Public Offering
As part of China’s economic reforms in the 1980’s, the PRC State Council directed the CAAC to separate its governmental, administrative and regulatory role from the commercial airline operations that were being conducted by the CAAC and its regional administrators. As a result, CSAHC was established on January 26, 1991 for the purpose of assuming the airline and airline-related commercial operations of the Guangzhou Civil Aviation Administration, one of the then six regional bureaus of the CAAC. CSAHC was one of the 55 large-scale enterprises designated by the Chinese government to play a leading role in their respective industries.
CSAHC 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 CSAHC and our Company. Upon the restructuring, our Company assumed substantially the entire airline and airline-related businesses, assets and liabilities of CSAHC, and CSAHC retained its non-airline-related businesses, assets and liabilities. All interests, rights, duties and obligations of CSAHC, whenever created or accrued, were divided between our Company and CSAHC based on the businesses, assets and liabilities assumed by each of them under the De-merger Agreement. Under the De-merger Agreement, CSAHC agreed not to conduct or participate or hold any interest in, either directly or indirectly, any business, activity or entity in or outside China that competes or is likely to compete with the commercial interests of our Group, although CSAHC may continue to hold and control its affiliates existing on the date of the De- merger Agreement and may continue to operate the businesses of such associates. Under the De-merger Agreement, CSAHC and 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 CSAHC or us.
In July 1997, we completed a private placement of 32,200,000 H Shares to certain limited partnership investment funds affiliated with Goldman Sachs & Co. and an initial public offering of 1,141,978,000 H Shares, par value RMB1.00 per share, and the listing of the H Shares on the Hong Kong Stock Exchange and ADRs on the New York Stock Exchange. Prior to the private placement and the initial public offering, all of our issued and outstanding shares of capital stock, consisting of 2,200,000,000 non-tradable domestic shares ("Domestic Shares"), par value RMB1.00 per share, were owned by CSAHC, which owned and exercised, on behalf of the Chinese government and under the supervision of the CAAC, the rights of ownership of such Domestic Shares. After giving effect to the private placement and the initial public offering, CSAHC maintained its ownership of the 2,200,000,000 Domestic Shares (representing approximately 65.2% of the total share capital of 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.
21 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 CSAHC 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 CSAHC 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 that CSAHC shall not transfer or trade these shares within 36 months after the commencement date of the share reform scheme (which is June 18, 2007).
Bonus Shares Issue by Conversion of Share Premium
On June 25, 2008, our shareholders approved issuance of bonus shares by way of conversion of share premium, and on August 14, 2008, the Ministry of Commerce approved the bonus share issue. The issue has been effected by conversion of share premium on the basis of five new shares, credited as fully paid, for every ten existing shares. Upon the completion of the bonus share issue, which is based on 4,374,178,000 shares in issue as of December 31, 2007, the number of paid up shares has increased by 2,187,089,000 shares to 6,561,267,000 shares.
Non-Public Subscriptions
On December 10, 2008, we entered into an A Shares subscription agreement with CSAHC, pursuant to which CSAHC conditionally agreed to subscribe and our Company conditionally agreed to allot and issue 721,150,000 new A Shares for a consideration of RMB2,278,834,000, equivalent to the subscription price of RMB3.16 per new A Share. Separately and on the same date, our Company and Nan Lung (a wholly-owned subsidiary of CSAHC) entered into an H Shares subscription agreement, pursuant to which Nan Lung conditionally agreed to subscribe and our Company conditionally agreed to allot and issue 721,150,000 new H Shares for a consideration of RMB721,150,000, equivalent to the subscription price of RMB1.00 (equivalent to approximately HK$1.13) per new H Share. The subscription agreements were approved in the extraordinary general meeting and the respective class meetings of shareholders of A and H Shares on February 26, 2009. On June 3, 2009, we received the formal approval from CSRC for the proposed non-public issue of H Shares. On August 14, 2009, we received the formal approval from CSRC for the proposed non-public issue of A Shares. The issuance of 721,150,000 new A Shares to CSAHC and 721,150,000 new H Shares to Nan Lung were completed on August 20, 2009 and August 21, 2009, respectively.
On March 8, 2010, our board approved the placement of up to 1,766,780,000 new A shares to not more than 10 specific investors including CSAHC and the placement of not more than 312,500,000 new H shares to Nan Lung, a wholly-owned subsidiary of CSAHC. On the same date, our Company entered into the A shares subscription agreement with CSAHC, pursuant to which CSAHC conditionally agreed to subscribe and our Company conditionally agreed to allot and issue new A shares of not more than 132,510,000 at the subscription price of not less than RMB5.66 per A share. In addition, our Company and Nan Lung entered into the H shares subscription agreement, pursuant to which Nan Lung conditionally agreed to subscribe and our Company conditionally agreed to allot and issue new H shares of not more than 312,500,000 at the subscription price of not less than HK$2.73 per H share. The above placement and subscription agreements were approved in the extraordinary general meeting and the respective class meetings of shareholders of A and H shares on April 30, 2010. On September 8, 2010, we received the formal approval from CSRC for the proposed non-public issuance of H Shares. On September 15, 2010, we received the formal approval from CSRC for the proposed non-public issue of A Shares. In November 2010, we completed the placements of 1,501,500,000 new A shares and 312,500,000 H shares, among which 123,900,000 new A shares were issued to CSAHC at the subscription price of RMB6.66 per share, and 312,500,000 H shares were issued to Nan Lung at the subscription price of HK$2.73 per share.
On June 11, 2012, we entered into an A Shares subscription agreement with CSAHC, pursuant to which CSAHC conditionally agreed to subscribe and we conditionally agreed to allot and issue up to 487,804,878 A Shares for a consideration of not more than RMB2 billion, equivalent to the subscription price of approximately RMB4.1 per new A Share. The subscription agreement was approved in the extraordinary general meeting on August 10, 2012, which remained effective for a period of twelve months from the date of approval of the resolution at the general meeting. As of August 9, 2013, the relevant work regarding the 2012 Non-public A Share Issue of our Company had not been completed. The proposal for the 2012 Non-public A Share Issue of our Company and A Shares subscription agreement therefore were lapsed automatically due to the expiration of the resolution passed at the general meeting.
22 On March 27, 2017, we entered into an H Shares subscription agreement with American Airlines, Inc. (“American Airlines”), pursuant to which American Airlines conditionally agreed to subscribe and we conditionally agreed to issue 270,606,272 H Shares for a consideration of HK$1,553.28 million, equivalent to the subscription price of HK$5.74 per new H Share. The completion of the subscription agreement is upon the satisfaction or waiver (if applicable) of the following conditions on or before July 1, 2017 (or such other date as the parties may mutually agree in writing): (i) the listing of, and the permission to deal in, the subscription shares having been granted by the Listing Committee of the Hong Kong Stock Exchange and such listing and permission not having been revoked on or prior to the completion; (ii) our holding or having obtained a General Mandate to issue the subscription shares; (iii) approvals from SASAC and CSRC in connection with the transactions contemplated hereunder having been obtained; (iv) receipt of written confirmation from CAAC with respect to the commercial arrangement between the parties envisaged by the Framework Agreement by and between American Airlines and us dated March 27, 2017, and the agreement in relation to the commercial arrangement having not been terminated on or before the completion date; and (v) other usual and customary conditions. Key principles of the above mentioned Framework Agreement include: (i) except for certain permitted transfers, American Airlines shall not dispose of any of the subscription shares for a period of three years (the “Lock-up Period”) following the purchase of the subscription shares unless any Lock-up termination event occurs; (ii) after the expiry of Lock-up Period, American Airlines shall have the right to dispose of the subscription shares, and we shall have a right of first refusal to purchase such subscription shares; after the Lock- Up Period, American Airlines shall notify us of its first disposal of subscription shares within three business days following the consummation of such sale, and shall announce any subsequent disposals as and if required by applicable law; (iii) whilst the Framework Agreement is in effect, in the event we or any of our subsidiaries intends to sell or issue, or enter into any agreement to sell or issue, equity or equity linked securities or any such subsidiary to any airline that is then a member of or is participating in an airline alliance as agreed by American Airlines and us (other than a PRC Mainland airline company), or any affiliate of any such airline, American Airlines shall have a right of first refusal to purchase such securities; and (iv) subject to applicable laws (including the Hong Kong Listing Rules), our Board will appoint one person to serve as an observer to our Board at the request of American Airlines (the “Board Observer”), and the Board Observer is allowed to attend all meetings of our Board whether in-person or by telephone or video-conference but will not be entitled to vote as a director; the Board Observer will be subject to the same non-disclosure, insider trading restrictions and conflicts of interest policies and procedures as and to the extent the same apply to the members of our Board from time to time, and the Board Observer will no longer serve as the observer to our Board if any Board Observer termination event occurs.
Issuance of Ultra-short-term and Short-term Financing Bills and Medium-term Notes
On April 18, 2008, our board approved the proposed issuance of short-term financing bills in the principal amount of up to RMB4 billion in the PRC, and the submission of this proposal to the annual general meeting for the shareholders’ approval. On June 25, 2008, our shareholders approved such proposed bill issuance at the annual general meeting for the year 2007. We believed that the bill issuance would provide a further source of funding at an interest rate which was expected to be lower than that for loans from commercial banks, lower the financing cost of borrowings for us, and was in the interests of us and our shareholders as a whole. Our Company received the acceptance from National Association of Financial Market Institutional Investors to register our Company’s short-term financing bills in the amount of RMB3.5 billion for a period up to September 10, 2010. The bills were jointly underwritten by China CITIC Bank Cooperation Limited and Bank of China Limited. In October 2008, we issued short-term financing bills with total face value of RMB2 billion with a bearing coupon interest rate at 4.7% and a maturity period of one year for funding of the business activities of our Company.
On May 28, 2008, our board approved the proposed issuance of medium term notes by our Company in the principal amount of up to RMB1.5 billion and the submission of such proposal to the shareholders for their consideration and approval. On June 25, 2008, shareholders of our Company approved such notes issuance at the annual general meeting for the year 2007. Our Company believed that the notes issue would provide a further source of medium to long term funding at an interest rate lower than the best lending rate for loans from commercial banks, lower the finance costs of borrowings for us and improve our debt structure. As of the date of this Annual Report, we have not issued any medium term notes, even though it has been approved by our board and shareholders.
23 In order to capitalize on opportunities in the market and improve the flexibility and efficiency of financing, on June 25, 2012, our Board resolved to obtain a general and unconditional mandate from shareholders to issue potential debt financing instruments, in one or multiple tranches, within the permissible size for debt issuance in accordance with the provisions of the applicable laws and regulations. On the extraordinary general meeting held on August 10, 2012, shareholders approved the authorization given to our Board, generally and unconditionally, to determine the specific debt financing instruments and issuance plan, and to issue, in one or multiple tranches, debt financing instruments within the permissible size for debt issuance in accordance with the provisions of the applicable laws and regulations. According to the resolution, on October 31, 2012, our Board approved to apply to National Association of Financial Market Institutional Investors for registration to issue, in one or multiple tranches, ultra-short-term financing bills with an aggregate principal amount of to RMB10 billion, according to our capital needs and the market conditions. Our Company has completed the issuance of the first tranche of ultra-short-term financing bills on February 8, 2013. The total issuance amount of the first tranche financing bills was RMB0.5 billion, with a maturity period of 180 days, a par value per unit of RMB100 and a nominal interest rate of 3.9%.
On March 21, 2014, our Company completed the issuance of the first tranche of ultra-short-term financing bills for the year 2014 of China Southern Airlines Company Limited (the "2014 First Tranche Financing Bills"). The total issuance amount of the 2014 First Tranche Financing Bills was RMB3 billion, with a maturity period of 180 days, a par value per unit of RMB100 and a nominal interest rate of 5.1%.
On April 17, 2014, our Company completed the issuance of the second tranche of ultra-short-term financing bills for the year 2014 of China Southern Airlines Company Limited (the "2014 Second Tranche Financing Bills"). The total issuance amount of the 2014 Second Tranche Financing Bills was RMB3 billion, with a maturity period of 270 days, a par value per unit of RMB100 and a nominal interest rate of 5.1%.
On August 14, 2014, our Board approved to make an application to National Association of Financial Market Institutional Investors for the registration and issuance of medium-term notes with an aggregate maximum principal amount of RMB10 billion for the purpose of replenishing the working capital and optimizing the debt structure of our Company. The annual general meeting for the year 2014 of our Company held on June 30, 2015 approved to make an application to the National Association of Financial Market Institutional Investors for the registration of ultra-short-term financing bills with the aggregate maximum principal amount of RMB14 billion (the "Ultra-short-term Financing Bills"), and the Ultra-short-term Financing Bills within the mentioned issuance size will be issued in one tranche or multiple tranches according to the funding needs and the market conditions. As of the date of this Annual Report, we have not issued any medium term notes.
On November 19, 2015, our Company completed the issuance of the first tranche of ultra-short-term financing bills for the year 2015 (the "2015 First Tranche Financing Bills"). The total issuance amount of the 2015 First Tranche Financing Bills was RMB3 billion, with a maturity period of 270 days, a par value per unit of RMB 100 and a nominal interest rate of 3.20%.
On November 24, 2015, our Company completed the issuance of the second tranche of ultra-short-term financing bills for the year 2015 (the "2015 Second Tranche Financing Bills"). The total issuance amount of the 2015 Second Tranche Financing Bills was RMB2 billion, with a maturity period of 180 days, a par value per unit of RMB 100 and a nominal interest rate of 3.04%.
On November 30, 2015, our Company completed the issuance of the third tranche of ultra-short-term financing bills for the year 2015 (the "2015 Third Tranche Financing Bills"). The total issuance amount of the 2015 Third Tranche Financing Bills was RMB3 billion, with a maturity period of 268 days, a par value per unit of RMB 100 and a nominal interest rate of 3.16%.
On March 8, 2016, our Board approved to make an application to National Association of Financial Market Institutional Investors for the registration and issuance of medium-term notes and ultra-short-term financing bills with an aggregate maximum principal amount of RMB5 billion and RMB10 billion respectively and the ultra-short-term financing bills within the mentioned issuance size will be issued in one tranche or multiple tranches according to the funding needs and the market conditions for the purpose of replenishing the working capital and optimizing the debt structure of our Company. The National Association of Financial Market Institutional Investors has approved the registration both the medium-term notes and ultra-short-term financing bills.
24 Xiamen Airlines issued medium-term notes with aggregate nominal value of RMB1,300 million on August 15, 2016 and August 16, 2016 at an interest rate of 2.97%. The medium-term notes mature in three years.
Xiamen Airlines issued medium-term notes with aggregate nominal value of RMB1,600 million on October 20, 2016 at an interestrate of 3.11%. The medium-term notes mature in five years.
Xiamen Airlines issued medium-term notes with aggregate nominal value of RMB1,800 million on November 21, 2016 at an interest rate of 3.38%. The medium-term notes mature in three years.
In 2016, the Group completed the issuance of ultra-short-term financing bills as below:
Issuance Maturity amount Nominal Par Issuance Period (RMB Interest Financing Bills Value(RMB) Date (Days) million) Rate 2016 First Tranche Financing Bills 100 February 25, 2016 270 2,000 2.66% 2016 Second Tranche Financing Bills 100 March 17, 2016 179 2,000 2.60% 2016 Third Tranche Financing Bills 100 April 25, 2016 90 2,000 2.90% 2016 Fourth Tranche Financing Bills 100 June 22, 2016 92 2,000 2.79% 2016 Fifth Tranche Financing Bills 100 August 12, 2016 270 2,000 2.53% 2016 Sixth Tranche Financing Bills 100 August 15, 2016 182 2,000 2.49% 2016 Seventh Tranche Financing Bills 100 August 22, 2016 240 2,000 2.57% 2016 Eighth Tranche Financing Bills 100 September 9, 2016 269 2,000 2.60% 2016 Nineth Tranche Financing Bills 100 September 19, 2016 268 2,000 2.70% 2016 Tenth Tranche Financing Bills 100 October 18, 2016 268 2,000 2.68% 2016 Eleventh Tranche Financing Bills 100 November 15, 2016 267 2,000 3.05% 2016 Twelfth Tranche Financing Bills 100 December 8, 2016 88 2,000 3.71% 2016 Xiamen Airlines First Tranche Financing Bills 100 April 25, 2016 270 2,000 3.02% 2016 Xiamen Airlines Second Tranche Financing Bills 100 April 27, 2016 90 1,300 2.90% 2016 Xiamen Airlines Third Tranche Financing Bills 100 May 12, 2016 90 1,300 2.86% 2016 Xiamen Airlines Fourth Tranche Financing Bills 100 May 16, 2016 120 800 2.92% 2016 Xiamen Airlines Fifth Tranche Financing Bills 100 May 20, 2016 150 500 2.95% 2016 Xiamen Airlines Sixth Tranche Financing Bills 100 June 3, 2016 270 500 3.00% 2016 Xiamen Airlines Seventh Tranche Financing Bills 100 July 20, 2016 270 700 2.71% 2016 Xiamen Airlines Eighth Tranche Financing Bills 100 July 25, 2016 240 700 2.70% 2016 Xiamen Airlines Nineth Tranche Financing Bills 100 September 9, 2016 255 600 2.75% 2016 Xiamen Airlines Tenth Tranche Financing Bills 100 September 21, 2016 270 1,500 2.79%
25 Issuance of Corporate Bonds
On November 13, 2015, our Company was approved by the CSRC to publicly issue corporate bonds (the "Corporate Bonds") in the amount of not more than RMB19 billion to qualified investors. The issuance of the Corporate Bonds shall be conducted 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. On November 20, 2015, our Company issued the first tranche of 2015 corporate bonds of RMB3,000 million with an interest rate of 3.63% per annum due 2020. On March 3, 2016, our Company issued the first tranche of 2016 corporate bonds of RMB5,000 million with an interest rate of 2.97% per annum due 2019. On May 25, 2016, our Company issued the second tranche of 2016 corporate bonds of RMB5,000 million with an interest rate of 3.12% per annum due 2021.
Route Network
Overview
We operate the most extensive route network among all Chinese airlines. As of December 31, 2016, we operated 1,060 routes consisting of 787 domestic routes, 41 regional routes and 232 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 acquisition of domestic, regional and international routes is subject to approval of the CAAC, and the acquisition of regional and international routes is also subject to the existence and the terms of agreements between the Chinese government and the government of the Hong Kong SAR, the government of the Macau SAR, the government of Taiwan province and the government of the proposed foreign destination.
In order to expand our international route network, we have entered into code-sharing agreements with several international airlines, including Aeroflot-Russian Airlines, Air France, CSA Czech Airlines, Asiana Airlines, China Airlines, China Eastern Airlines, Delta Air Lines, Japan Airlines International, Kenya Airways, KLM Royal Dutch Airline, Korean Air, Mandarin Airlines, Pakistan International Airlines, PT Garuda Indonesia (Persero) Tbk., Qantas Airways Limited, Vietnam Airlines, WestJet, Alitalia-Linee Aeree Italiane, and Virgin America. Under the code-sharing agreements, the participating airlines are permitted to sell tickets on certain international routes operated by us to passengers using our codes. Similarly, we are permitted to sell tickets for the other participating airlines using our "CZ" code. The code-sharing agreements help increase the number of our international sales outlets. After joining Skyteam Alliance, we have further established a network reaching 1,062 destinations globally, connecting 177 countries and regions and covering major cities around the world.
The following table sets forth certain statistical information with respect to our passenger, cargo and mail traffic for the years indicated.
Cargo and Mail arrived Total traffic (tons Passenger carried (tons) kilometers) Increase Increase Increase (decrease) (decrease) (decrease) over over over Total (in previous Total (in previous Total (in previous Year millions) year (%) thousands) year (%) millions) year (%) 2014 100.91 9.9 1,433 12.3 19,780 13.2 2015 109.42 8.4 1,511 5.4 22,388 13.2 2016 114.62 4.8 1,613 6.7 24,387 8.9
Route Bases
In addition to our main route bases including Guangzhou as core hub, Beijing as major hub, Urumqi as regional hub and Chongqing as seasonal hub, we maintain regional route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Shenyang, Changchun, Dalian, Harbin, Haikou, Zhuhai, Xiamen, Shanghai, Xi’an, Fuzhou, Nanning, Guilin, Shantou, Guiyang and Sanya. Most of its regional route bases are located in provincial capitals or major commercial centers in the PRC.
26 We believe that our extensive network of route bases enable it 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 and Xinjiang, and serves all four centrally-administered municipalities in China, namely, Beijing, Shanghai, Tianjin, and Chongqing. In 2016, our most profitable domestic routes were between: Shenzhen-Beijing, Guangzhou- Beijing, Beijing-Shenzhen; Shanghai-Shenzhen; Shanghai-Guangzhou; Beijing- Guangzhou; Urumqi-Beijing.
Regional Routes
We offer scheduled service between Hong Kong and Beijing, Shenyang, Meixian, Wuhan, Yiwu, Shantou, Xiamen, Wuyishan, Quanzhou; and between Taipei and Guangzhou, Shanghai, Fuzhou, Hangzhou, Xiamen, Shenyang, Changsha, Wuhan, Dalian, Guilin, Harbin, Guiyang, Zhengzhou, Changchun, Zhangjiajie, Nanning, Shantou, Yiwu, Quanzhou, Yanji and Shenzhen. In 2016, the most profitable scheduled regional routes were between: Taipei-Guangzhou; Shenzhen-Taipei; Taipei-Shenzhen; Guangzhou-Taipei; Shanghai-Taipei; Taipei-Shanghai; Taipei-Harbin; Taipei-Changchun; Hong Kong-Taipei.
In 2016, we conducted a total of 34,515 flights on our regional routes, accounting for approximately 12% of all passengers carried by Chinese airlines on routes between Hong Kong, Macau or Taiwan and destinations in Mainland China according to CAAC statistics briefing.
Previously, direct flights between Taiwan and Mainland China were only available during certain festivals. Other than that, travellers 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. Cross-Strait direct passenger flights were further increased in the following years. As of April 16, 2016, there were 364 cross-Strait direct passenger flights a week.
International Routes
We are the principal Chinese airline serving southeast Asian destinations and Australasia, including Singapore and major cities in Australia, New Zealand, Bangladesh, Indonesia, Thailand, Malaysia, Philippines, Vietnam, Myanmar and Cambodia.
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. Since joining Skyteam Alliance, we have established a network reaching over 1,062 destinations globally, connecting 177 countries and regions and covering major cities around the world.
In 2016, our most profitable international routes were: Seoul-Shenyang, Seoul-Dalian, Dalian-Seoul, Guangzhou-Wuhan-San Francisco; Shenyang-Seoul, Seoul-Yanji, Beijing-Guangzhou-Phnom Penh, Phnom Penh-Guangzhou-Beijing.
27 Aircraft Fleet
Our fleet plan in recent years has emphasized expansion and modernization through the acquisition of new aircraft and the retirement of less efficient and old aircraft. As of December 31, 2016, we operated a fleet of 702 aircraft with an average age of 6.6 years. Most aircraft of our Group are Boeing and Airbus aircraft. We have the largest fleet among Chinese airline companies. Among all the aircraft, 448 aircraft operated by our Group are leased pursuant to various types of leasing arrangements. Please see the table below for an analysis of our aircraft in terms of average age and respective passenger capacity.
Number of Model Aircraft Passenger Capacity Boeing 787-8 16 228/237 Boeing 787-9 1 287 Boeing 777-300ER 10 309 Boeing 777-200 4 360 Boeing 757-200 10 174/180/192/196/197 Boeing 737-800 269 159/161/164/170 Boeing 737-700 45 120/128 Boeing 737-300 3 126 Boeing 747-400F 2 N/A Boeing 777-200F 12 N/A Airbus 380-800 5 506 Airbus 330-300 22 275/284 Airbus 330-200 16 218/258 Airbus 321 89 179/195 Airbus 320 133 152/166 Airbus 319 37 122/138 Airbus 320-200NEO 2 166 EMB190 26 98 Total 702 N/A
In 2016, we continued to expand and modernize our aircraft fleet. During 2016, we (i) took scheduled delivery of 21 aircraft under purchase agreements, including 5 A320-300, 10 A321-200, 3 A330-300, 3 B777- 300ER; (ii) took scheduled delivery of 9 B737-800 and 2 A320-200neo under operating leases; (iii) returned 6 A319-100 and 5 B737-700 under operating leases upon expiry; and (iv) disposed of 7 B757-200.
During 2016, Xiamen Airlines (i) took scheduled delivery of 18 B737-800 aircraft under operating leases; (ii) took scheduled delivery of 1 B787-9 under financing leases; and (iii) took scheduled delivery of 2 B737-800 with own funds.
In April and July 2016, Xiamen Airlines entered into the aircraft acquisition agreement with Boeing for the acquisition of 10 B737-800 series and six B787-9 series aircraft, respectively, to be delivered from 2017 to 2018 and from 2016 to 2018, respectively.
In October 2016, we entered into the aircraft acquisition agreement with Boeing for the acquisition of 12 B787-9 series aircraft to be delivered from 2018 to 2020.
Aircraft Financing Arrangements
Overview
A significant portion of our aircraft is acquired under long-term capital or operating leases or long-term mortgage loans with remaining terms to maturity mainly ranging from one to fourteen years. As of December 31, 2016, of the Group’s 702 aircraft, 204 aircraft were operated under capital leases, 244 were operated under operating leases, 254 were either owned aircraft financed by long-term mortgage loans, or acquired either with cash proceeds or acquired by exercising the purchase options upon expiry of the respective capital leases. Our planned acquisition of aircraft in the foreseeable future will generally be made through acquisition by bank loans and our own funds, and pursuant to operating leases or capital leases. 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.
28 The following table sets forth, as of December 31, 2016, the number of aircraft operated by our Group pursuant to capital and operating leases and the average remaining terms, of such leases.
Average Remaining Capital Lease Operating Lease Lease Term Model Number of Aircraft Number of Aircraft Year Boeing 787-8 14 2 8.02 Boeing 787-9 1 0 10.00 Boeing 737-800 63 121 6.23 Boeing 737-700 7 4 0.70 Boeing 777-200F 5 0 9.82 Boeing 777-300ER 9 0 9.64 Airbus 380-800 2 0 6.67 Airbus 330-300 13 8 6.96 Airbus 330-200 11 2 3.95 Airbus 321-200 35 22 6.16 Airbus 320-200 39 40 6.67 Airbus 319-100 1 23 2.76 Airbus 320-200NEO 0 2 10.00 EMB190 4 20 3.33 Total 204 244 5.99
Capital leases
The majority of the capital leases in respect to aircraft and related equipment have terms of 10 to 15 years expiring during the years 2017 to 2030. As of December 31, 2016, our aggregate future minimum lease payments (including future finance charges) required under its capital leases were RMB71,388 million. Our capital leases typically cover a significant portion of the relevant aircraft’s useful life and transfer the benefits and risks of ownership to our Group. Under its capital leases, we generally have an option to purchase the aircraft at or near the end of the lease term. As is customary in the case of capital leases, our obligations are secured by the related aircraft, as well as other collateral.
Operating Leases
As of December 31, 2016, our aggregate future minimum lease payments required under its operating leases were RMB61,215 million. As of the year end of 2016, our operating leases had original terms generally ranging from five to fifthteen years from the date of delivery of the relevant aircraft, and the remaining terms of these leases ranged from one to twelve years. Pursuant to the terms of the operating leases, our Group is obligated to make rental payments based on the lease term, with no termination payment obligations or purchase option, and the lessor bears the economic benefits and risks of ownership. Under our operating leases, our Group has no option to purchase the aircraft and is required to return the aircraft in the agreed condition at the end of the lease term. Although title to the aircraft remains with the lessor, our Group is responsible during the lease term for the maintenance, servicing, insurance, repair and overhaul of the aircraft.
For capital leases or operating leases, we are obligated to indemnify the lessors against any withholding or similar taxes that may be imposed on the lessors by taxing authorities in China with regard to payments made pursuant to such leases. In accordance with relevant PRC tax regulations, a PRC lessee is liable to withhold PRC withholding tax in respect of any lease payments regularly made to an overseas lessor. Depending on the circumstances, this tax is generally imposed at a fixed rate ranging from 6.0% to 10.0% of the lease payments, or in certain cases, the interest components of such payments for capital lease. The PRC withholding tax payable in respect of the lease arrangements amounting RMB237 million, RMB291 million and RMB257 million during 2016, 2015 and 2014 respectively, has been included as part of the lease charges.
29 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 spare jet engines for our fleet as of the year end of 2016 and 2015, 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 CSAHC 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 keeps an inventory of rotables and expendables for the Airline Subsidiaries.
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 having 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 and aircraft engines.
We believe that GAMECO performs major maintenance checks on our aircraft within time periods generally consistent with those of large international airline maintenance centers. GAMECO’s repair and maintenance capacity include overhaul of more than 47.9% of our aircraft. 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 Zhuhai MTU, a former jointly controlled entity of our Company and MTU Aero Engines GmbH, and also by domestic qualified service providers in Xiamen (TEXL), Hong Kong (HAESL) and Taiwan (EGAT), and by overseas qualified service providers in USA, Germany, Korea, Singapore, France, New Zealand, Poland, and Thailand. On September 28, 2009, our Company entered into an agreement with CSAHC to sell its 50% equity interest in Zhuhai MTU to CSAHC at a consideration of RMB1,607,850,000. The transfer was completed in February 2010.
The amounts incurred by our Group for comprehensive maintenance services provided by GAMECO and Zhuhai MTU were RMB3,897 million, RMB3,028 million and RMB2,095 million for the years ended December 31, 2016, 2015 and 2014, 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 ongoing 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 which 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 Company’s "Air Transportation Incidents Per Ten Thousands Hours Ratio" was 0.005, 0.034 and 0.012 in 2016, 2015 and 2014, respectively. In comparison, CAAC’s published maximum acceptable Air Transportation Incidents Per Ten Thousands Hours Ratio was 0.14, 0.5 and 0.5 in 2016, 2015 and 2014, respectively. This ratio is defined as the number of occurrences of air transportation incident for every 10,000 hours of flight time. In 2013, we strengthened our flight safety management on the internal and external safety requirements. 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, also being the first in domestic aviation industry to receive such a great honor. By December 31, 2016, our Company’s continuous safe flight span totaled to 1.809 million hours.
30 Jet Fuel
Jet fuel costs typically represent a major component of an airline’s operating expenses. Our jet fuel costs accounted for 22.4%, 25.9% and 35.6% of our operating expenses for the years ended December 31, 2016, 2015 and 2014, respectively. Like all Chinese airlines, we are generally required by the Chinese government to purchase our jet fuel requirements from regional branches of CAOSC and Bluesky Oil Supplies Company, except at the Shenzhen, Sanya, Haikou, 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 uniform prices throughout China that are determined and adjusted by CAOSC from time to time with the approval of the CAAC and the pricing department of the NDRC based on market conditions and other factors. As a result, the costs of transportation and storage of jet fuel in all regions of China are spread among all domestic airlines. Jet fuel costs in China are influenced by costs at state-owned oil refineries and limitations in the transportation infrastructure, as well as by insufficient storage facilities for jet fuel in certain regions of China.
Prior to 1994, domestic jet fuel prices were generally below international jet fuel prices. The Chinese government had gradually increased domestic jet fuel prices in order to reflect more accurately the costs of supplying jet fuel in China. As a result, domestic jet fuel prices have become higher than those in the international market since the beginning of 1994. In 2007 through the first half of 2008, the crude oil prices in the international market reached historic highs. In response to the pressure imposed by such soaring prices, on November 1, 2007 and June 20, 2008, respectively, NDRC increased the domestic price for jet fuel. Thereafter, in order to reduce fuel cost pressure faced by Chinese airlines, NDRC approved reductions in domestic prices for jet fuel in 2008 and 2009. However, starting from February 2009, the crude oil price in the international market continued to increase and maintained at a high level in 2013. However, influenced by excessive oil supply, global economic weakness and the strong US$, the international oil prices have been trending downward since 2014. Our jet fuel costs decreased from RMB26,274 million in 2015 to RMB 23,799 million in 2016 as a result of the decrease in average jet fuel prices from 2015 to 2016.
In addition to purchases of jet fuel from CAOSC, we are also permitted by the Chinese government to 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 outside China accounted for approximately 15.96% and 16.44% of our total jet fuel consumption in 2016 and 2015, respectively.
Fuel Surcharge
The NDRC has increased the rate of fuel surcharge from RMB 0.00002543 per kilometer to RMB 0.00002641 per kilometer, starting from April 1, 2016 and ending on March 31, 2017. 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 RMB0.00002641 per kilometer for the flight distance. From April 1, 2015, The NDRC has 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 RMB0.00002543 per kilometer for the flight distance. Our profit for the year may suffer from an unexpected change in the fuel surcharge collection policies and other factors beyond our control.
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 Company’s flight operations center in Guangzhou is responsible for the on-site administration of flights, including the dispatch and coordination of flights, deployment of aircraft, ground services and crew staffing. In addition, each of the Airline Subsidiaries maintains flight operations centers at all servicing airports for on-site administration of their flights. Our general dispatch offices are responsible for monitoring conditions of our route network, administering our flight plans, collecting and monitoring navigation data and analyzing and monitoring airport conditions.
31 To enhance our management of flight operations, our computerized flight operations control system (SOC) began operation in May 1999. The system utilizes advanced computer and telecommunications technology to manage our flights on a centralized, real-time basis. We believe that the system will assist us to (i) compile flight schedules more efficiently; (ii) increase the utilization of aircraft; (iii) allow real-time tracking of all of our flights; and (iv) improve coordination of our aircraft maintenance and ground servicing functions.
Training of Pilots and Flight Attendants
We believe that our pilot training program, which was established in cooperation with the CAAC affiliated Beijing University of Aeronautics and Astronautics (the "BUAA"), 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.
In our pilot training program, trainees have two years of theoretical training at the BUAA. After successful completion of academic and physical examinations, the trainees receive flight training for a period of approximately 20 months at the Flying College, a company that is 48.12% owned by our Company, 4.76% owned by CSAHC and 47.12% owned by a third party shareholder. Each trainee at the Flying College is required to fly at least 250 hours before being awarded a flight certificate. Graduates of the BUAA and the Flying College are hired by our Group as trainee pilots after passing a CAAC-administered examination to obtain a pilot license. The total training period for our trainee pilots is approximately four years. We had about 3,165 trainees as of April 21, 2017. Approximately 650 trainees are expected to graduate by the end of 2017.
As part of the pilot training program, trainee pilots receive their initial training in the operation of a specific aircraft with Zhuhai Xiang Yi Aviation Technology Company Limited ("Zhuhai Xiang Yi"), a jointly controlled entity between our Company and CAE International Holdings Limited, which also provides training to pilots from other Chinese airlines. Zhuhai Xiang Yi is equipped with simulators for majority models of aircraft currently operated by our Group and provides flight simulation training services to our Group.
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 funded the training of our recruited pilots in previous years and, as a result, incurred significant costs over the years. Recently, there has been a trend in the financing of pilot training worldwide from employer- sponsored to self-sponsored scheme. Such a change will not only cut down our training expenses significantly, but also ensures the long-term dedicated service of the pilots. Starting from 2007, we began to recruit pilots under the self-sponsored training arrangement. On December 5, 2007, August 27, 2008, August 27, 2009, August 26, 2010 and September 9, 2011, our Board approved our Company to provide a guarantee with joint liability for the loans incurred under the self-sponsored pilot training program in an aggregate amount of RMB90,858,000, not more than RMB213,600,000, not more than RMB184,750,000, not more than RMB179,269,600 and not more than RMB83,850,000, respectively. On December 29, 2009, Xiamen Airlines, 51% owned subsidiary of our Company agreed to provide a guarantee with joint liability for the loans incurred under the partial self-sponsored pilot training program in an aggregate amount of not more than RMB100 million up to December 31, 2013. As of December 31, 2016, we have provided guarantees with joint liability for the loans of such self-sponsored pilots in an aggregate amount of RMB696 million under which an aggregate of personal bank loans of RMB409 million were drawn down from the banks. For the year ended December 31, 2016, we made repayments of RMB4 million due to the default of payments of certain pilot trainees.
Under the program, the self-sponsored pilots are bound to enter into service contracts with our Group when they finish their training courses. They have the choice to repay their loans in advance or in installments.
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 our Group. At the Guangzhou Training Center, flight attendants of our Group receive comprehensive training in areas such as in-flight service, emergency evacuation and water rescue.
32 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 it serves. We pay landing, parking and other fees to such airports, including Guangzhou Baiyun International Airport (the "Guangzhou Baiyun Airport"). At domestic airports, such fees are generally determined by the CAAC.
At Guangzhou Baiyun Airport, 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 Airport.
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 the Group by local airport authorities or local airlines pursuant to various service agreements. Ground services and other services at airports outside China are provided to the Group by foreign services providers pursuant to various service agreements with such parties. All such agreements of the Group are short-term and otherwise on terms that are customary in the industry.
Air Catering
We own a 55% 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 in Guangzhou and substantially all other flights departing from Guangzhou Baiyun Airport. We 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 terms that are customary in the industry.
In order to optimize assets structure, tighten cost control, reduce the number of connected transactions and enhance the independence of operations in the long-run, our Company acquired a 100% equity interest in China Southern Airlines Group Air Catering Company Limited ("SAG Air Catering") on August 31, 2007 from CSAHC. SAG Air Catering provides in-flight meals for flights of our Group originating or stopping at domestic airports, mainly in northern China and Xinjiang regions.
Cargo and Mail
We also provide air cargo and mail services. A significant portion of these services are combined with passenger flights services. In 2016, we had two Boeing 747 freighters and twelve Boeing 777 freighters, mainly servicing 12 international cargo routes, including Guangzhou–Chongqing–Amsterdam–Guangzhou, Guangzhou–Amsterdam–Guangzhou, Guangzhou–London-Frankfurt-Guangzhou, Guangzhou-Frankfurt- Guangzhou, Guangzhou-Anchorage-Los Angeles-Guangzhou, Guangzhou-Hefei-Anchorage-Los Angeles-Hefei-Guangzhou, Guangzhou-Ho Chi Minh City-Hanoi-Guangzhou, ShanghaiPudong-Amsterdam-Chongqing- ShanghaiPudong, ShanghaiPudong-Amsterdam-ShanghaiPudong, ShanghaiPudong–Frankfurt–ShanghaiPudong, ShanghaiPudong–Anchorage–Chicago–ShanghaiPudong, ShanghaiPudong–Los Angeles–ShanghaiPudong. 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 CSAHC’s affiliates. We have sales offices in Guangzhou and our other route bases. In addition, we maintains regional sales offices in other cities in China, including Beijing and Shanghai. We maintain international sales offices in Almaty, Amsterdam, Ashkhabad, Auckland, Baku, Bangkok, Bishkek, Brisbane, Busan, Chicago, Christchurch, Daegu, Daejeon, Delhi, Dhaka, Dubai (Sharjah), Dushanbe, Frankfurt, Fukuoka, Hanoi, Hiroshima, Ho Chi Minh City, Irkutsk, Islamabad, Istanbul, Jakarta, Jeddah, Kathmandu, Khabarovsk, Khudzhand, Kitakyushu, Kuala Lumpur, London, Los Angeles, Manila, Melbourne, Moscow, Nagoga, New York, Niigata, Novosibirsk, Nairobi, Oakland, Osaka, Osh, Paris, Penang, Perth, Phnom Penh, Phuket, San Francisco, Sapporo, Sendai, Seoul, Siem Reap, Singapore, Sydney, Tashkent, Tehran, Tokyo, Toyama, Tbilisi, Vancouver, Vladivostok, Vienna and Yangon.
33 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 2016, over 42% of all ticket sales for our scheduled flights were made by our network of sales offices and CSAHC’s affiliates. We also sell tickets and accepts reservations through an extensive network of non-exclusive independent sales agents. Under the agency agreements with these sales agents, we pay commissions based on the value of tickets sold. We pay independent sales agents a commission of 1.58% of the ticket price. Sales agents are typically permitted to withhold their commission from the proceeds of ticket sales that are remitted to our Group. In 2016, sales by independent sales agents accounted for less than 58% 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. In 2008, we further improved and optimized our online sales network, and launched Tencent sales counters in cooperation with Tencent Technology Limited, thus expanded the consumer sales network of our Group. Meanwhile, our Group upgraded and reconstructed the SMS platform, which provided SMS information services on mileage, flight schedule, flight status and air ticket price, and launched the "95539" services hotlines.
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 Group employs a number of cargo agents in the Pearl River Delta region. In 2016, we generally pays the cargo agents an average commission of 0.42% of the relevant cargo freight rate for domestic and international services, of which the commission of cargo agents in the Pearl River Delta region is 0.72%.
Promotional and Marketing Activities
We engage in regular promotional and marketing activities in an effort 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 greater frequency of flights relative to other Chinese airlines. We were among the first to launch premium economy class of seating. In addition, we also promote and markets our regional and international routes on the basis of price competitiveness.
We seek to increase our name recognition by offering new services to passengers. For example, our Group was 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 2016, we strengthened the cooperation with Air France-KLM by co-promotion, agent and corporate joint visits and workshops, further integrating resources to benefit to both parties. Along with new route launches of Guangzhou - Nairobi, Guangzhou - Christchurch and Guangzhou - San Francisco, our Group held workshops in the origin and destination cities, announcing our new flights to local agents and clients. Besides, our Group cooperated with government agencies, Tourism Australasia and Tourism New Zealand, to promote and attract people to Australia and New Zealand. In addition, we broadcast the first micro film “Dream from the Heart”, successfully expressed our brand, social responsibility and customer-oriented services.
We engage in regular promotional and marketing activities in an effort 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 greater frequency of flights relative to other Chinese airlines. We were among the first to launch premium economy class of seating. In addition, we also promote and market our regional and international routes on the basis of price competitiveness.
34 On the wake of permitted direct flights on weekends between Taiwan and Mainland China starting from July 4, 2008, our Company became the first Chinese carrier to fly nonstop to Taiwan. By taking advantage of such further liberalized air travel policy between Taiwan and Mainland China, our Company has taken measures to explore opportunities presented by and increase our name recognition in Taiwan market. On June 23, 2008, our Company entered into a memorandum of cooperation with China Airlines, which is the largest carrier in Taiwan by route network. Based on the memorandum, the scope of cooperation between the parties will cover passenger, cargo, maintenance and ground handling services. We believe that our strategic collaboration with China Airlines will be beneficial to both parties, expand their route network worldwide, increase their freight load factors, reduce labor and operating costs, and enhance the competitiveness of both airlines in the global air travel market.
To enhance relationships with 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 2016, we had approximately 37.6 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 China’s airlines operate under the supervision and regulation of the CAAC, they are accorded an increasingly significant degree of operational autonomy, including with respect to the application for domestic, regional and international routes, the allocation of aircraft among routes, the purchase of flight equipment, the pricing of air fares within a certain range, the training and supervision of personnel and their day-to-day operations.
As an airline providing services on international routes, 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.
Regional Routes. Hong Kong and Macau routes and landing rights are derived from agreements between the Chinese government and the government of the Hong Kong SAR, and between the Chinese government and the government of Macau SAR. The rights to fly between Beijing and Hong Kong, Beijing and Macau, Shanghai and Hong Kong and Shanghai and Macau are allocated by the CAAC among the four Chinese airlines. 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.
35 A number of Hong Kong routes are operated by Chinese airlines on a "charter" flight basis. Permission to operate these flights is in theory subject to monthly review by the CAAC and the Hong Kong Civil Aviation Department. The CAAC has informally indicated that it primarily considers market demand and airline capability in granting permission for such flights.
Previously, direct flights between Taiwan and Mainland China 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. As of April 21, 2017, there were 208 cross-Strait direct passenger flights a week.
International Routes. International route rights, as well as the corresponding landing rights, are derived from air services agreements negotiated between the Chinese government, through the CAAC, and the government of the relevant foreign country. Each government grants to the other the right to designate one or more domestic airlines to operate scheduled service between certain destinations within each of such countries. Upon entering into an air services agreement, the CAAC determines the airline to be awarded such routes based on various criteria, including the availability of appropriate aircraft, flight and management personnel, safety record, the overall size of the airline, financial condition and sufficiency of assets to bear civil liabilities in international air services. These route rights may be terminated by the CAAC under special circumstances.
The criteria for determining whether an international route will be allocated to a second airline generally include (i) the terms of the relevant bilateral civil aviation agreement; (ii) consistency with overall national plans and the national interest and the enhancement of reasonable competition; and (iii) whether the international airports to be used are sufficient for the aircraft flown and employ security measures consistent with international standards.
In addition, if the relevant bilateral civil aviation agreement permits more than one Chinese airline to operate a particular international route, the CAAC will only permit a second airline to operate on such route if during a specific season, the average load factor is more than 75%, or for a particular international route, if the flight capacity provided by Chinese airlines is 50% less than that provided by foreign airlines.
Air Fare Pricing Policy
Pursuant to "Pricing Reform of Domestic Civil Aviation" as approved by the State Council of the PRC effective on April 20, 2004, prices on domestic routes now fluctuate freely within a predetermined range. Instead of direct supervision by setting prices of air tickets through a local price bureau, the government now provides guidance on domestic flights and domestic civil aviation is controlled by the government indirectly. Market- oriented pricing policy was introduced and pricing system has been adjusted as a result of the above pricing reform. 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. In recent years, there were a series of air fare reform to deregulate the control on the air fare pricing policy step by step.
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.
36 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 Import and Export Corporation ("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. Airlines are generally not permitted to buy jet fuel from other suppliers in their domestic operations, since the direct import of jet fuel for domestic purposes is prohibited. As a result, all Chinese airlines purchase their domestic jet fuel supply requirements (other than the above mentioned exceptions) from the seven regional branches of CAOSC. Jet fuel obtained from such regional branches is purchased at uniform prices throughout China that are determined and adjusted by CAOSC from time to time with the approval of the CAAC and the pricing department of the NDRC based on market conditions and other factors.
Safety
The CAAC has made the improvement of air traffic safety in China a high priority and is responsible for the establishment of operational safety, maintenance and training standards for all Chinese airlines. The Chinese airlines are required to provide monthly flight safety reports to the CAAC, including reports of flight or other incidents or accidents and other safety related problems involving such airline’s aircraft occurring during the relevant reporting period. The CAAC periodically conducts safety inspections on individual airlines.
Every pilot is required to pass CAAC-administered examinations before obtaining a pilot license and is subject to an annual recertification examination.
All aircraft operated by Chinese airlines, other than a limited number of leased aircraft registered in foreign countries, are required to be registered with the CAAC. All aircraft operated by Chinese airlines must have a valid certificate of airworthiness, which is issued annually by the CAAC. In addition, maintenance permits are issued to a Chinese airline only after its maintenance capabilities have been examined and assessed by the CAAC. Such maintenance permits are renewed annually. All aircraft operated by Chinese airlines may be maintained and repaired only by CAAC-certified maintenance facilities, whether located within or outside China. Aircraft maintenance personnel must be certified by the CAAC before assuming aircraft maintenance posts.
Security
The CAAC establishes and supervises the implementation of security standards and regulations for the Chinese commercial aviation industry. Such standards and regulations are based on Chinese laws, as well as standards developed by international commercial aviation organizations. Each airline and airport in China is required to submit to the CAAC an aviation security handbook describing specific security procedures established by such airline or airport for the day-to-day operations of commercial aviation and procedures for staff training on security. Such security procedures must be based on relevant CAAC regulations and international commercial aviation treaties. Chinese airports and airlines that operate international routes must also adopt security measures in accordance with the requirements of the relevant international agreements.
37 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 Limited (the "Air China") and China Eastern Airlines Corporation Limited (the "China Eastern Airlines"). In 2016, these three airlines together controlled approximately 55% of the commercial aviation market in China as measured by passengers carried.
Most major Chinese airlines have in recent years significantly expanded their fleets, while at the same time passenger traffic may not increase proportionately. In some years, this has resulted in a reduction in our passenger load factors. As a result, we are required to be more competitive with respect to, for example, quality of service, including ticketing and reservations, in-flight services, flight scheduling and timeliness.
We expect that competition in China’s commercial aviation industry will continue to be intense. We will also face increasing competition from alternative means of transport, such as highway and rail, as China’s transportation infrastructure improves. In particular, the so-called "Four Longitudinal and One Horizontal" high-speed railways have brought negative impact to the domestic commercial aviation sector.
In December 2012, the Beijing-Guangzhou and Harbin-Dalian High-Speed Railways commenced operation. Currently, the Four Longitudinal High-Speed Railways, including Beijing-Shanghai, Beijing- Guangzhou-Shenzhen, Harbin-Dalian, Shanghai-Hangzhou-Shenzhen High-Speed Railways, have commenced operation. the Four Horizontal High-Speed Railways, including Shijiazhuang-Taiyuan, Jinan-Qingdao, Zhengzhou-Xi'an-Baoji, Nanjing-Wuhan-Chongqing, Hangzhou-Nanchang-Changsha High-Speed Railways, have partly commenced operation, and the rest will be finished at the end of 2016. The expansion of the coverage of this network, improvements in the railway service quality, increased passenger capacity and stations located closer to urban centers than competing airports could enhance the relative competitiveness of the railway service and affect our market share on some of our key routes, in particular routes below 800 kilometers. China’s high-speed railway traffic mileage has reached 22,000 kilometers as of December 31, 2016, and the impact of high-speed railway on the aviation market has expanded into China’s western regions from the central and eastern regions. It is anticipated that China will build “eight horizontal and eight vertical” high speed railway corridors by 2020 and the improving high speed railway network will have further impact on the growth rate of passengers carried by airplanes. The operating results of the Company’s air routes which overlap with the high speed railway corridors (especially air routes with a distance of less than 800 kilometers) will be affected in the future.
From the perspective of long term development, with the continuous improvement in the high-speed railway lines and services, the domestic flights of the airlines will face competition from all sides, which spurs the airlines to constantly improve its network of aviation routes while stepping up efforts to upgrade service quality and brand influence for the enhancement of its competitiveness as a whole.
38 We believe that it 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 our Group believes places it 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 our Group 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 it with a competitive advantage in attracting new customers and that our fully integrated flight training, aircraft and engine maintenance and air catering operations enable it to achieve and maintain high quality service to our customers. In light of increasing competition from high speed trains, we intend to place more flight fleet to the international routes, where we will make an effort for a stronger market position. We also believe that our optimized route network, increased operational efficiency and improved service quality will attract more customers. The proposed cooperation between our Company and the high speed trains operators will also enable us to render a seamless air-ground service to customers which will bring a win-win situation for both our Group and the high speed trains operators.
According to CAAC statistics briefing, 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.
Cargo and Mail Carried Total Traffic (tons Passenger Carried (tons) kilometres) Industry Group's Industry Group's Industry Group's Total (in Share (% Total (in Share (% Total (in Share (% Year millions) of total) thousands) of total) billions) of total) 2012 319.4 27.1 5,450 22.6 61.0 26.6 2013 354.0 25.9 5,613 22.7 67.2 26.0 2014 391.7 25.8 5,933 24.2 74.9 26.4 2015 435.6 25.1 6,253 24.2 85.0 26.3 2016 487.8 23.5 6,669 22.7 96.1 25.4
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 are two airlines owned or controlled by the Chinese government, and the remaining airlines are operated by or under the control of various Chinese provincial or municipal governments.
The following table sets forth our market share in terms of passengers carried, cargo and mail carried on departing flights and total departing flights at the 10 busiest airports in China in 2016 according to passenger volume data from CAAC statistics briefing.
Cargo and Passenger Carried Mail Carried Departing Flight Airport (% of total) (% of total) (% of total) Beijing 16.9 11.4 16.8 Shanghai Pudong 8.8 6.3 9.9 Guangzhou 48.2 35.0 50.1 Shenzhen 26.9 16.0 25.3 Shanghai Hongqiao 13.8 24.9 13.6 Xi’an 11.8 12.6 12.4 Chongqing 22.0 20.9 24.0 Changsha 24.7 32.0 26.3 Wuhan 35.8 32.9 36.8 Urumqi 40.9 45.6 44.4
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 8 busiest airports in southern and central China (excluding Guangzhou and Shenzhen, which are included in the table above) in 2016 according to passenger volume data from CAAC statistics briefing.
39 Cargo and Passenger Carried Mail Carried Departing Flight Airport (% of total) (% of total) (% of total) Changsha 24.7 32.0 26.3 Wuhan 35.8 32.9 36.8 Zhengzhou 32.3 11.6 33.3 Haikou 22.3 31.3 22.2 Sanya 24.3 33.6 25.4 Nanning 25.0 29.0 26.0 Guilin 20.7 26.4 22.4 Zhuhai 33.5 46.2 28.4
Regional Routes
In 2016, we conducted a total of 34515 flights on our regional routes, accounting for approximately 12% of all passengers carried by Chinese airlines on routes between Hong Kong, Macau or Taiwan and destinations in China. We faces less competition on regional routes than that on domestic and international, and earns higher operating margin. Air China, China Eastern Airlines, Air Macau, Cathay Dragon, Cathay Pacific, China Airlines and Eva Airways compete with our Group in the regional traffic markets.
International Routes
We compete with Air China, 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 name recognition than our Group. In addition, the public’s perception of the safety and service records of Chinese airlines may adversely affect our ability to compete against our regional and international competitors. Many of our international competitors have larger sales networks and participate in reservation systems that are more comprehensive and convenient than those of our Group, 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 and Lufthansa German Airlines. In the United States routes, our competitors mainly include Air China, China Eastern Airlines, Cathay Pacific 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.
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, 2016, our Company owns a 55% or 60% equity interest in each of our Airline Subsidiaries.
As of December 31, 2016, Xiamen Airlines operated under the "MF" code with a fleet of 167 aircraft. In 2016, Xiamen Airlines carried a total of about 26.96 million passengers, or approximately 23.52% of the passengers carried by our Group in that year, and had RMB20,795 million in traffic revenue.
As of December 31, 2016, Shantou Airlines operated under "CZ" code with a fleet of 14 aircraft. In 2016, under the centralized allocation of flight routes of our Group, Shantou Airlines carried a total of about 2.9 million passengers, or 2.53% of the passengers carried by our Group in that year. Total traffic revenue of Shantou Airlines for the year ended December 31, 2016 was RMB2,067 million.
As of December 31, 2016, Chongqing Airlines operated under the "OQ" code with a fleet of 14 aircraft. In 2016, under the centralized allocation of flight routes of our Group, Chongqing Airlines carried a total of about 2.84 million passengers, or 2.48% 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, 2016 was RMB1,892 million.
40 As of December 31, 2016, Zhuhai Airlines operated under the "CZ" code with a fleet of 10 aircraft. In 2016, under the centralized allocation of flight routes of our Group, Zhuhai Airlines carried a total of about 1.76 million passengers, or approximately 1.53% 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, 2016 was RMB1,474 million.
As of December 31, 2016, Guizhou Airlines operated under the "CZ" code with a fleet of 18 aircraft. In 2016, under the centralized allocation of flight routes of our Group, Guizhou Airlines carried a total of about 3.09 million passengers, or approximately 2.7% of the total number of passengers carried by our Group in that year. Total traffic revenue of Guizhou Airlines was approximately RMB2,535 million for the year ended December 31, 2016.
As of December 31, 2016, Henan Airlines operated under the "CZ" code with a fleet of 28 aircraft. In 2016, under the centralized allocation of flight routes of our Group, Henan Airlines carried a total of about 4.79 million passengers, or approximately 4.17% of the total number of passengers carried by our Group in that year. Total traffic revenue of Henan Airlines was approximately RMB3,500 million for the year ended December 31, 2016.
Insurance
The CAAC maintains fleet and legal liability insurance on behalf of our Group and all other Chinese airlines with PICC Property and Casualty Company Limited, or PICCP&C, and China Pacific Property Insurance Company Ltd., Ping An Property and Casualty Insurance Company of China, Ltd. under the PICCP&C master policy. We maintain aviation hull all risks, spares and airline liability insurance, aircraft hull all risks and spare engines deductible insurance, aviation hull war and allied perils policy of the type and in the amount customary in the Chinese aviation industry.
Under the relevant PRC laws, civil liability of Chinese airlines for death or injuries suffered by passengers on domestic flights is limited to RMB400,000 (approximately US$57,662) per passenger. As of July 31, 2006, the Convention for the Unification of Certain Rules for International Carriage by Air of 1999, or Montreal Convention, became effective in China. Under the Montreal Convention, carriers of international flights are strictly liable for proven damages up to 100,000 Special Drawing Rights and beyond that, carriers are only able to exclude liability if they can prove that the damage was not due to negligence or other wrongful act of the carrier (and its agents), or the damage arose solely from the negligence or other wrongful act of a third party. We believe that our Group maintains adequate insurance coverage for the civil liability that can be imposed in respect of death or injuries to passengers under Chinese law, the Montreal Convention and any agreement which our Group is subject to.
The CAAC allocates insurance premiums payable in respect of the PICCP&C master policy to each participating airline based on the value of the airline’s insured aircraft or, in the case of leased aircraft, based on the amount required by the terms of the lease. Insurance claims made by any participating airline may cause the premiums paid by our Group under the PICCP&C master policy to increase. PICCP&C’s practice has been to reinsure a substantial portion of its aircraft insurance business through reinsurance brokers on the London reinsurance market.
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 as our logo a stylized rendition of a kapok plant. Xiamen Airlines conducts its businesses and operations under the name of "Xiamen Airlines" in English and Chinese and uses its own logo depicting a stylized rendition of an egret. Chongqing Airlines conducts its business and operations under the name of "Chongqing Airlines" in English and Chinese and uses its own logo depicting a cross of two rivers.
We own various trademarks and 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 CSAHC. Our Company and CSAHC have entered into a trademark license agreement (the "Trademark License Agreement"), pursuant to which CSAHC 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. CSAHC has retained the right to use the kapok logo in connection with its non-airline related businesses conducted as of the date of the Trademark License Agreement and to permit its affiliates that do not compete, directly or indirectly, with our Group to use the kapok logo. Unless CSAHC gives a written notice of termination three months before the expiration of the agreement, the agreement will be automatically renewed for another ten-year term. In May of 2007, the Trademark License Agreement has been automatically renewed by the two parties for another ten-year term ending 2017. Xiamen Airlines owns all rights to its egret logo, which is a trademark registered in China, and recorded with the IATA. Chongqing Airlines also owns all rights to its logo, which is a trademark registered in China, and recorded with the IATA.
41 Iran Sanctions Disclosure
Pursuant to Section 13(r) of the Securities Exchange Act of 1934, or the Exchange Act, if during 2016, 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. During 2016, our Company operated air services to and from Iran through the specifically designated route of "Beijing - Urumqi - Tehran - Urumqi - Beijing" (the “Iran Route”) and engages in international traffic in passengers, cargo and mail.
In order to provide our aviation service in Iran, our Company has entered into certain grounding service agreement with Iran Air whereby Iran Air provides our Company with grounding 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 service rendered by our Company to Iran is limited to the provision of international traffic in 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 services 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 service 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, 2016, the asset of Iran office and revenue generated from the air services to Iran amounted to US$14,605.48 and US$3.2 million, representing only 0.0001% and 0.0193% of the total asset and total revenue generated by our Group for the year ended December 31, 2016, respectively. Therefore, our Company believes that our operations in Iran for the year ended December 31, 2016 are inconsequential and quantitatively immaterial to our business, financial condition and results of operations.
42 C. Organizational Structure
The following chart illustrates the corporate structure of our Group as of December 31, 2016 and the aggregate effective equity interest of our Company in each of our principal subsidiaries, associates and jointly controlled entities.
The particulars of our principal subsidiaries as of December 31, 2016 are as follows:
Proportion of Place and Date of Ownership Interest Name of Company Establishment/Operation Held by our Company Shantou Airlines Company Limited PRC July 20, 1993 60% Zhuhai Airlines Company Limited PRC May 8, 1995 60% Xiamen Airlines Company Limited PRC August 11, 1984 55% Guizhou Airlines Company Limited PRC June 17, 1998 60% Chongqing Airlines Company Limited PRC May 30, 2007 60% Guangzhou Nanland Air Catering Company Limited PRC November 21, 1989 55% Guangzhou Baiyun International Logistic Company Limited PRC July 23, 2002 61% China Southern Airlines Group Air Catering Company Limited PRC December 25, 2003 100% Nan Lung International Freight Limited Hong Kong October 1, 1996 51% Beijing Southern Airlines Ground Services Company Limited PRC April 1, 2004 100% China Southern Airlines Henan Airlines Company Limited PRC September 28, 2013 60% Southern Airlines Group Import and Export Trading Company PRC June 8, 1993 100% Southern Airlines General Aviation Company Limited PRC November 17, 2014 100%
43 The particulars of our principal associates and joint ventures as of December 31, 2016 are as follows:
Proportion of Ownership Interest Held by Group Place and Date of Effective Our Name of Company Establishment/Operation Interest Company Subsidiaries Guangzhou Aircraft Maintenance Engineering Co., Ltd. PRC October 28, 1989 50% 50% — Southern Airlines Group Finance Company Limited PRC June 28, 1995 33.98% 21.09% 12.89% Sichuan Airlines Co., Ltd. PRC August 28, 2002 39% 39% — Zhuhai Xiang Yi Aviation Technology Company Limited PRC July 10, 2002 51% 51% — Southern Airlines Culture and Media Co., Ltd. PRC May 13, 2004 40% 40% — China Southern West Australian Flying College Pty Limited Australia October 1,1993 48.12% 48.12% — Guangzhou China Southern Zhongmian Dutyfree Store Co., Limited PRC March 1, 2001 50% 50% — Xinjiang Civil Aviation Property Management Limited PRC December 12, 2002 42.80% 42.80% —
D. Property, Plant and Equipment
For a discussion of our aircraft, see Item 4 "Information on our Company — History and development of our Company — Aircraft Acquisitions."
Our headquarters in Guangzhou occupy an area of approximately 1,261,460 square meters of land and a total gross floor area of approximately 738,895 square meters. We lease from CSAHC the land in Guangzhou on which our headquarters and other facilities are located. We also lease from CSAHC certain buildings mainly at the 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 1,172,531 88,929 691,355 47,540 Shenzhen 256,280 — 101,502 5,730 Zhuhai 179,415 30,000 61,973 3,047 Changsha 255,422 45,568 86,092 12,836 Haikou 332,961 12,497 65,231 1,288 Wuhan 16,712 38,082 36,429 35,406 Nanyang — 3,800,994 12,156 24,323 Sanya 106,680 — 38,513 5,421 Shenyang 142,199 70,808 29,078 62,330 Dalian — — 64,226 16,869 Jilin 134,488 65,076 78,536 7,767 Harbin 5,381 267,872 40,599 39,693 Xinjiang 2,143 540,493 137,932 2,758 Guangxi 112,246 — 61,093 2,892 Beijing 85,453 — 91,124 26,924 Shanghai 42,292 — 35,512 7,253 Chengdu — — 1,964 209 Sydney — — 1,151 2,449 Xi’an — — 4,367 1,707
44 The following table sets forth certain information with respect to the properties of the Airline Subsidiaries as of the date hereof.
Land (in square meters) Building (in square meters) Owned Leased Owned Leased Xiamen Airlines 1,534,087 — 723,851 51,290 Shantou Airlines 260,639 1,605 73,499 3,544 Zhuhai Airlines 99,306 — 52,793 1,252 Guizhou Airlines 259,879 — 20,783 15,371 Chongqing Airlines 82,449 — 8,943 12,343 Henan Airlines 388,209 217,253
As systems for registration and transfer of land use rights and related real property interests in China have been implemented relatively recently, such systems do not yet comprehensively account for all land and related property interests. The land in Guangzhou on which our headquarters and other facilities are located and the buildings that our Company uses at our route bases in Wuhan and Haikou are leased by our Company from CSAHC. However, CSAHC lacks adequate documentation evidencing CSAHC’s rights to such land and buildings, and, as a consequence, the lease agreements between CSAHC and our Company for such land may not be registered with the relevant authorities. Lack of registration may affect the validity of such lease agreements. There are certain other parcels of land and buildings owned or used by 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 February 2017, the Group was in the process of applying for the land use right certificates and property title certificates in respect of the properties located in Guangzhou (including Guangzhou Baiyun International Airport), Xiamen, Heilongjiang, Jilin, Dalian, Guangxi, Hunan, Beijing, Shanghai, Hainan, Zhuhai, Shenzhen, Shenyang, Xinjiang, Henan, Chengdu, Hubei and Shantou 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.
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 revenues 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 principal 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.
45 Impairment of long-lived assets (other than goodwill)
If circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the asset may be considered “impaired”, and an impairment loss may be recognised in accordance with IAS 36, Impairment of Assets. The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount. The recoverable amount is the higher of the fair value less costs of disposal and value in use. In particular, in determining the value in use of the Group’s aircraft fleet, expected future cash flows to be generated by the asset are discounted to their present value, which requires significant judgement relating to forecast traffic revenue, forecast operating costs and discount rate applied. 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 application of discount rate.
Provision for major overhauls
Provision for the cost of major overhauls to fulfil the lease return conditions for airframes and engines held under operating leases are accrued and charged to the income statement over the estimated overhaul period. This requires 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.
Frequent flyer revenue
The amount of revenue attributable to the mileage earned by the members of the Group’s frequent flyer award programmes is estimated based on the fair value of the mileage awarded and the expected redemption rate. The fair value of mileage awarded is estimated by reference to external sales. The expected redemption rate is estimated based on historical experience, anticipated redemption patterns and the frequent flyer programmes’ design. Different estimates could significantly affect the estimated deferred revenue and the results of operations.
Depreciation
Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives, after taking into account the estimated residual value. The Group reviews the estimated useful lives of assets annually in order to determine the amount of depreciation expense to be recorded during any financial year. The useful lives are based on the Group’s historical experience with similar assets and take into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.
Provision for consumable spare parts and maintenance materials
Provision for consumable spare parts and maintenance materials is made based on the difference between the carrying amount and the net realisable value. The net realisable value is estimated based on current market condition, historical experience and Company’s future operation plan for the consumable spare parts and maintenance materials. The net realisable value may be adjusted due to the change of market condition and the future plan for the consumable spare parts and maintenance materials.
Income tax
There are certain transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional tax will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the year in which such determination is made.
46 Impairment of trade receivables
When there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables, a provision for impairment of trade receivables is established based on the difference between the receivable’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.
Retirement benefits
According to IAS 19, Employee Benefits, an entity shall account not only for its legal obligation under the formal terms of a defined benefit plan, but also for any constructive obligation that arises from the entity’s informal practices where the entity has no realistic alternative but to pay the employee benefits. The Company believes the payments of welfare subsidy to those retirees who retired before the establishment of Pension Scheme (as defined in Note 50(a) to the consolidated financial statements) are discretionary and have not created a legal or constructive obligation. Such payments are made according to the Group’s business performance, and can be suspended at any time.
Recently Pronounced International Financial Reporting Standards
Information relating to the recently pronounced IFRSs is presented in Note 57 to the consolidated financial statements.
Business Overview
In 2016, as the global economy struggled to recover, the economic growth of China slowed down, but had showed a trend of “moderate but stable and sound momentum of development”. The global civil aviation industry was in strong demand, and continued to benefit from the positive effects brought about by the global low oil prices, but was also faced with various challenges, including the slow recovery in oil prices and the escalation of geopolitical risks. The civil aviation industry in China maintained a double-digit fast growth but was also faced with the challenges, such as increased market competition, impact brought by the operations of high-speed railways on the civil aviation industry in China, exchange losses and etc. Adhering to the strategy of steady development, the Group proactively establishes a “Sunshine China Southern Airlines” and conducts every work with a criteria featured with “strict, practice, prudent, accurate, incorrupt”, such that the “cohesiveness, combat power, executive power, creativity and immunity” of staff of the Group strengthened to a further extent. We reinforced deeply the construction of safety management system, made more clear the strategy and direction of the development of the Company, initiatively propelled the integration of resources and coordination of strategies and spared no efforts on enhancing its brand influence and, as a result of which, its comprehensive competitive strength increased significantly.
Safety Operation
We have firmly established the concept of sustainable safety and constantly strengthened the development of safety responsibility system to further refine the preventive and controlling measures for safety incidents so that the risk management has become more effective. During the reporting period, the Group realized 2,375,000 safe flight hours, accumulated 18,095,000 safe flight hours and 12,312 hours of general aviation service, and maintained over 17 years of aviation safety and 22 years of aviation security. The Group continued to keep the best safety records among Chinese airlines.
We seized the incremental resources of time slots in the key domestic market and fully mobilized the transport capacity, to effectively improve the utilization rate of flight crew; strengthened the internal and external cooperation for more efficient allocation of resources and enhanced operational efficiency. The operating data of the Company has been at the best level in the recent five years. In addition, we had launched a total of 156 flight delay warnings during the year, and successfully managed the extensive delays resulting from severe weather, including thunderstorms and typhoons, achieving an industry-leading flight on-time rate.
Fleet Development
We conducted an in-depth research on market demands and integrated with the Company’s strategies to optimize the fleet structure. During the reporting period, the Group introduced 53 aircraft and retired 18 aircraft. The Company entered into an agreement with Boeing Company to purchase 12 787-9 aircraft from Boeing Company. Moreover, Xiamen Airlines entered into an agreement with Boeing Company to purchase 6 787-9 aircraft and 10 737-800 aircraft from Boeing Company. As at the end of the reporting period, the Group became the first domestic airline which owned over 700 aircraft, and continued to rank first in Asia.
47 Fully integrating the fleet development plan, the Group actively expanded its flight team. During the year, the Group recruited 661 pilots (including 88 foreign pilots), 1,672 cabin attendants.
Network Hub
We continued to optimize the route network and reinforce the construction of the hub, so as to propel the strategic transformation. In the domestic market, we focused on increasing the number of main flight routes, and both the number of core flight routes and capacity concentration kept a steady upward trend in the international market, we fully grasped the growth opportunities and further improved the international route network. During the reporting period, the Company launched new flight routes of Guangzhou – Toronto, Guangzhou – Adelaide, Shenzhen – Sydney, Shenzhen – Wuhan – Dubai and etc., consolidating its position as the largest air carrier of Chinese Mainland to Australia and New Zealand, Southeast Asia and Central Asia regions. As Xiamen Airlines launched new flight routes of Xiamen– Melbourne, Xiamen – Vancouver, Xiamen – Shenzhen – Seattle and etc., the internationalization process accelerated at the same time.
We grasped the opportunities arising from the release of time slots in Guangzhou hub to improve the layout of key routes network and focused on increasing the number of main lines in Beijing hub and the investment into highly profitable routes; and launched Urumchi hub by leveraging the “One Belt One Road” strategy to increase investments into domestic base market, with a view to consolidating our position in the domestic main lines. During the reporting period, the Company’s construction of hubs had achieved remarkable results. During the year, the number of transit passengers in hubs reached 4,650,000, representing an increase of 11% as compared with the same period of the previous year; of which, the number of international transit passengers was 3,450,000, representing an increase of 19% as compared with the same period of the previous year, and the number of transit passengers through the traffic under the Sixth Freedom Traffic Right reached 782,000, representing an increase of 50% as compared with the same period of the previous year. During the reporting period, the international (including Hong Kong, Macau and Taiwan) revenue passenger kilometers percentage of the Company reached 32.4%, representing an increase of 2.8 percentage points as compared with the same period of the previous year.
Marketing
We continued to optimize and adjust the flight schedules and gave priority to those routes with economy effectiveness when allocating transportation capacity and hot time slots resources, in an effort to match capacity with market, continue to improve passenger load factor and record consecutive profits for the international routes. We utilized the advantage of scale and grasped the peak demand, thus the revenue of the peak seasons, including the Spring Festival and summer holidays, recorded an increase of 3.45% as compared with the same period of the previous year. Furthermore, we participated in important domestic and overseas exhibitions to enhance cooperation with governments and organizations in overseas key markets and continuously expanded the high-end channels, and the international brand awareness of the Company had been further enhanced. At last, we optimized freighter operation and network layout, and the freighter operation had recorded profits for three consecutive years.
We vigorously promoted the value-added products, such as onboard upgrade in the flight and prepayment for seat selection, as a result of which, the auxiliary revenue of the Company amounted to RMB550 million, representing an increase of 179.1% as compared with the same period of the previous year. The number of members maintained rapid growth and the total number of Sky Pearl Club membership amounted to 30.10 million, growing by 19.9% as compared with the same period of the previous year; of which, the frequent flyers contributed nearly 40% of our total revenue, and the “Member’s Day” theme activities had attracted over 2.12 million new members. We expanded the key client accounts business in a steady manner and had 355 designated client accounts and 45 global client accounts. We had established the concept of “Excellent Service is the Best Marketing Strategy” in our Customer Service Center of “95539”, and the sales through it exceeded RMB3 billion and the customer satisfaction rate reached 97.47%.
48 E-commerce
During the reporting period, the Company actively promoted the “Internet Plus” strategy and spared no effort to build the “China Southern e-Travel”, so as to facilitate extensive integration between the Internet and 306 passenger service contact points and increase the passengers’ loyalties through improving service convenience, and thus accelerating the intelligent strategy of the Company. At present, there are 71 functions in the China Southern Airlines App, including class upgrade at the gate, airport navigation and refund insurance and etc.; and such App has been downloaded and activated for 13.78 million times and has over 13.35 million followers in social media, ranking first in the civil aviation industry in China. Meanwhile, the Company was among the first to take part in “the Open Cloud Platform for Big Data of Integrated Transport Travel” organized by the Ministry of Transport and also entered into a strategic cooperation agreement with Baidu Company to facilitate the construction of the “China Southern e-Travel”.
We innovated our marketing activities and put much effort into social media marketing, and our e-commerce marketing capability had been enhanced significantly. During 2016, the Company recorded an electronic direct sales of RMB28.84 billion, representing an increase of 57.6% as compared with the same period of the previous year. In addition, the sales generated from mobile application and social media amounted to RMB4.86 billion and RMB0.55 billion, respectively, representing an increase of 142.3% and 262.3%, respectively, as compared with the same period of the previous year. The “Official Account” in WeChat of the Company has been awarded “the Most Influential New Media Account for Central Enterprise in 2016”, leading the industry in terms of traffic volume, number of users and user engagement.
Product Service
During the reporting period, the Group continued to increase efforts input into the research and development of product and service control, and its overall service level was elevated in a steady way. The Company was ranked 13th in the Most Loved Airlines on SKYTRAX website, which was the highest ranking among the Chinese airlines. Moreover, Xiamen Airlines won the “China Quality Award”, the highest recognition of quality conferred by the government, becoming the first service enterprise to win such award, as well as the only Chinese airline to do so. Adhering to the concept of “people-oriented, life above all”, the Company took the lead in opening a green passage for transportation of human donated organs in the civil aviation industry. During the year, it successfully transported living donor organs for 248 times with a success rate of 100%, and launched a flight medical volunteer project with the number of medical volunteers reaching2,419, providing medical assistance to 3,027 flights.
With the goal of providing intelligent and convenient services, the Company introduced in-flight WIFI service in some flights and some value-added products, such as self-service return and re-scheduling, pre-order excess baggage fees and payment for seat selection and etc., and continued to promote online ordering products for the first- and business-class. The Company has been able to deliver online booking of transit hotels, and has completed nearly 15,000 bookings during the year. In addition, it designed and developed 45 new meals with local flavors and increased significantly the number of Hollywood movies to more than 130 movies in total per month. Xiamen Airlines completed a full-scale upgrade of its intercontinental routes service and carefully tailored its special service products, such as providing special Chinese white tableware for the first- and business-class under the theme activity of “Up in the Air with Egret, Chinese White”, creating “six exquisite meals” together with international brands and creating themed flights, including the “Girl’s Heart, Princess’s Dream”-themed flights for the International Women’s Day and “Magical Kingdom”-themed flights for the International Children’s Day.
Cost Control
During the reporting period, the Group took the initiative to manage the risk of fluctuations in oil price and exchange rate. As such, its overall budget management system is becoming more mature and its risk control ability has been improved constantly.
The Company strictly implemented the “Income Less, Cost Less” linkage adjustment mechanism to effectively mitigate the impact of the rising trend of the oil prices, hence its costs and expenses had been limited within the annual targets. It actively adjusted the debt structure to mitigate the challenge of RMB depreciation, repaid a debt of 1.837 billion US dollars ahead of schedule and its RMB financing ratio had increased from 30.69% to 51.16%. Additionally, the Company continued to increase direct sales while cutting agency activities, and its direct sales percentage increased to over 40% with a decrease of RMB1.224 billion in agency fees as compared with the same period of the previous year. The Company carried out various forms of low interest rates financing, such as issuing corporate bonds and ultra-short-term financing bills and etc., and the direct financing (excluding obligations under finance leases) ratio increased from 29.5% to 88.9%.
49 Xiamen Airlines adopted cost control in all aspects during the whole process and among all crews, lowering strategic cost of aircraft fleet, management cost, finance cost and flight operating cost through the streamlining of fleet, comprehensive management of budget, refined financial management and precise operation, respectively. Such long-term fine cost mechanism has further reinforced its low cost advantage.
General
Because we finance our aircraft acquisitions mainly through capital leases or bank loans in U.S. dollars, and there are a substantial amount of transactions and obligations denominated in U.S. dollars in relation to 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, our business was affected by the Renminbi depreciation. Renminbi depreciation has brought exchange loss to our Group and increased our operating costs which are denominated in foreign currencies. However, Renminbi depreciation also presents our Group with a challenge in price competition in international route operations.
A number of other external variables, 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 revenues and expenses are directly affected by the PRC government’s policies with respect to domestic air fares, jet fuel prices and landing and navigation fees, among others. The nature and extent of airline competition and the ability of Chinese airlines to expand are also affected by CAAC’s control over route allocations. Any changes in the PRC government’s regulatory policies or any implementation of such policies could have a significant impact on our future operations and our ability to implement our operating strategy.
In addition, 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.
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 based on 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 for flight crew, cabin crew and ground personnel. Thus, a minor change in our yields or load factors would have a material effect on our results of operations. In addition, certain of these expenses, primarily financing costs and operating lease payments, labor costs and depreciation do not vary based on the number of flights flown. Thus, our operating results can also be substantially affected by minor changes in aircraft utilization rates. We are and will continue to be highly leveraged with substantial obligations 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 losses of RMB3,276 million was recorded in 2016 mainly due to Renminbi depreciated significantly against U.S. dollar in 2016.
50 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, 2016, 2015 and 2014:
2016 vs. 2015 vs. 2015 % 2014 % Year ended December 31, increase increase Traffic 2016 2015 2014 (decrease) (decrease) RPK (million) Domestic 144,979.57 138,769.05 127,681.88 4.48 8.68 Regional 3,083.71 3,526.99 3,214.52 (12.57) 9.72 International 58,042.36 47,291.67 35,732.78 22.73 32.35 Total 206,105.64 189,587.71 166,629.18 8.71 13.78 RTK (million) Domestic 14,551.20 13,916.26 12,916.60 4.56 7.74 Regional 292.46 331.50 300.65 (11.78) 10.26 International 9,542.90 8,140.24 6,562.71 17.23 24.04 Total 24,386.56 22,388.00 19,779.96 8.93 13.19 Passengers carried (thousand) Domestic 98,463.43 95,121.91 89,363.18 3.51 6.44 Regional 2,340.68 2,571.15 2,385.37 (8.96) 7.79 International 13,814.52 11,728.96 9,170.47 17.78 27.90 Total 114,618.63 109,422.02 100,919.02 4.75 8.43 Cargo and mail carried (thousand tons) Domestic 1,083.68 1,030.10 1,014.90 5.20 1.50 Regional 19.73 19.18 16.40 2.87 16.95 International 509.14 462.27 401.95 10.14 15.01 Total 1,612.55 1,511.55 1,433.25 6.68 5.46 Capacity ASK (million) Domestic 179,655.46 172,104.99 160,482.40 4.39 7.24 Regional 4,193.19 4,762.25 4,379.07 (11.95) 8.75 International 72,143.29 58,749.02 44,945.99 22.80 30.71 Total 255,991.94 235,616.26 209,807.46 8.65 12.30 ATK (million) Domestic 20,740.93 20,055.09 18,640.00 3.42 7.59 Regional 491.23 562.65 497.79 (12.69) 13.03 International 13,748.02 11,586.92 9,315.94 18.65 24.38 Total 34,980.18 32,204.66 28,453.73 8.62 13.18 Load Factors Passenger load factor (RPK/ASK) (%) Domestic 80.7 80.6 79.6 0.12 1.26 Regional 73.5 74.1 73.4 (0.81) 0.95 International 80.5 80.5 79.5 / 1.26 Overall 80.5 80.5 79.4 / 1.39 Overall load factor (RTK/ATK) (%) Domestic 70.2 69.4 69.3 1.15 0.14 Regional 59.5 58.9 60.4 1.02 (2.48) International 69.4 70.3 70.4 (1.28) (0.14) Overall 69.7 69.5 69.5 0.29 - Yield Yield per RPK (RMB) Domestic 0.53 0.55 0.60 (3.64) (8.33) Regional 0.72 0.71 0.78 1.41 (8.97) International 0.40 0.45 0.50 (11.11) (10.00) Overall 0.50 0.53 0.58 (5.66) (8.62) Yield per RTK (RMB) Domestic 5.45 5.65 6.10 (3.54) (7.38) Regional 7.92 7.89 8.64 0.38 (8.68) International 2.94 3.18 3.50 (7.55) (9.14) Overall 4.50 4.78 5.27 (5.86) (9.30) Financial Passenger revenue (RMB million) Domestic 77,257 76,570 76,647 0.90 (0.10) Regional 2,230 2,517 2,497 (11.40) 0.80 International 23,015 21,151 18,001 8.81 17.50 Total 102,502 100,238 97,145 2.26 3.18 Cargo and mail revenue (RMB million) 7,191 6,861 7,183 4.81 (4.48)
51 A. Operating Results
The historical results of operations discussed below may not be indicative of our future operating performance. In addition to the factors discussed under "Overview" above, 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.
2016 compared with 2015
The profit attributable to equity shareholders of our Company of RMB5,044 million was recorded in 2016 as compared to the profit attributable to equity shareholders of our Company of RMB3,736 million in 2015. Our operating revenue increased by RMB3,329 million or 3.0% from RMB111,652 million in 2015 to RMB114,981 million in 2016. Passenger load factor was 80.5% in 2016 and 2015. Passenger yield (in passenger revenue per RPK) decreased by 5.66% from RMB0.53 in 2015 to RMB0.50 in 2016. Average yield (in traffic revenue per RTK) decreased by 5.86% from RMB4.78 in 2015 to RMB4.50 in 2016. Operating expenses increased by RMB4,712 million or 4.6% from RMB101,492 million in 2015 to RMB106,204 million in 2016. Operating profit of RMB12,612 million was recorded in 2016 as compared to operating profit of RMB13,438 million in 2015, decreased by RMB826 million.
52 Operating Revenue
2016 2015 Operating Operating Change revenue revenue in RMB Percentage RMB Percentage revenue million % million % % Traffic revenue 109,693 95.4 107,099 95.9 2.4 Including: Passenger revenue 102,502 100,238 2.3 – Domestic 77,257 76,570 0.9 – Hong Kong, Macau and Taiwan 2,230 2,517 (11.4) – International 23,015 21,151 8.8 Cargo and mail revenue 7,191 6,861 4.8 Other operating revenue 5,288 4.6 4,553 4.1 16.1 Mainly including: Commission income 2,518 1,545 63.0 Hotel and tour operation income 625 621 0.6 General aviation income 461 490 (5.9) Ground services income 384 345 11.3 Expired sales in advance of carriage 376 459 (18.1) Total operating revenue 114,981 100.0 111,652 100.0 3.0 Less: fuel surcharges income (5,798) (6,300) (8.0) Total operating revenue excluding fuel surcharges 109,183 105,352 3.6
Traffic revenue composition
2016 2015 Traffic Traffic Change revenue revenue in traffic RMB Percentage RMB Percentage revenue million % million % % Passenger Revenue 102,502 93.4 100,238 93.6 2.3 Cargo and Mail Revenue 7,191 6.6 6,861 6.4 4.8 Traffic revenue 109,693 100.0 107,099 100.0 2.4
Passenger revenue composition
2016 2015 Passenger Passenger revenue revenue Change in RMB Percentage RMB Percentage passenger million % million % revenue % Domestic 77,257 75.4 76,570 76.4 0.9 Hong Kong, Macau and Taiwan 2,230 2.2 2,517 2.5 (11.4) International 23,015 22.4 21,151 21.1 8.8
Passenger revenue 102,502 100.0 100,238 100.0 2.3
53 Substantially all of our operating revenue is attributable to airlines transport operations. Traffic revenue accounted for 95.4% and 95.9% of total operating revenue in 2016 and 2015 respectively. Passenger revenue and cargo and mail revenue accounted for 93.4% and 6.6% respectively of the total traffic revenue in 2016. During the reporting period, our total traffic revenue was RMB109,693 million, representing an increase of RMB2,594 million or 2.4% from prior year, mainly due to the increase in traffic capacity and traffic volume. The other operating revenue is mainly derived from commission income, hotel and tour operation income, general aviation income, ground services income and expired sales in advance of carriage.
The increase in operating revenue was primarily due to a 2.3% increase in passenger revenue from RMB100,238 million in 2015 to RMB102,502 million in 2016. The total number of passengers carried increased by 4.75% to 114.62 million passengers in 2016. RPKs increased by 8.71% from 189,588 million in 2015 to 206,106 million in 2016, primarily as a result of the increase in number of passengers carried. Passenger yield per RPK decreased from RMB0.53 in 2015 to RMB0.50 in 2016, which is mainly due to the drop of average ticket price.
Domestic passenger revenue, which accounted for 75.4% of the total passenger revenue in 2016, increased by 0.9% from RMB76,570 million in 2015 to RMB77,257 million in 2016. Domestic capacity in ASKs increased by 4.39%, while passenger traffic in RPKs increased by 4.48%, resulting in an increase in passenger load factor by 0.1 percentage points from 80.6% in 2015 to 80.7% in 2016. Domestic passenger yield per RPK decreased from RMB0.55 in 2015 to RMB0.53 in 2016.
Hong Kong, Macau and Taiwan passenger revenue, which accounted for 2.2% of total passenger revenue, decreased by 11.4% from RMB2,517 million in 2015 to RMB2,230 million in 2016. For Hong Kong, Macau and Taiwan flights, passenger traffic in RPKs decreased by 12.57%, while passenger capacity in ASKs decreased by 11.95%, resulting in an decrease in passenger load factor by 0.6 percentage points from 74.1% in 2015 to 73.5% in 2016. Passenger yield per RPK increased from RMB0.71 in 2015 to RMB0.72 in 2016.
International passenger revenue, which accounted for 22.4% of total passenger revenue, increased by 8.8% from RMB21,151 million in 2015 to RMB23,015 million in 2016. For international flights, passenger traffic in RPKs increased by 22.73%, while passenger capacity in ASKs increased by 22.80%. Passenger load factor was 80.5% in 2015 and 2016. Passenger yield per RPK decreased from RMB0.45 in 2015 to RMB0.40 in 2016.
Cargo and mail revenue, which accounted for 6.6% of our total traffic revenue and 6.3% of total operating revenue, increased by 4.8% from RMB6,861 million in 2015 to RMB7,191 million in 2016. The increase was attributable to the increase in cargo and mail carried.
Other operating revenue increased by 16.1% from RMB4,553 million in 2015 to RMB5,288 million in 2016. The increase was primarily due to the increase of commission income.
Operating Expenses
Total operating expenses in 2016 amounted to RMB106,204 million, representing a increase of RMB4,712 million or 4.6% over 2015, primarily due to the increase in payroll, landing and navigation fees, depreciation and amortization and aircraft operating lease charges partially offset by the decrease in jet fuel costs. Total operating expenses as a percentage of total operating revenue was 92.4% in 2016 and 90.9% in 2015.
2016 2015 Operating Operating Change in expense expense Operating RMB Percentage RMB Percentage expenses million % million % % Flight operation expenses 51,461 48.4 50,412 49.7 2.1 Mainly including: Jet fuel costs 23,799 26,274 (9.4) Aircraft operating lease charges 7,330 6,153 19.1 Flight personnel payroll and welfare 9,215 8,070 14.2 Maintenance expenses 11,318 10.7 10,407 10.3 8.8 Aircraft and transportation service expenses 20,215 19.0 17,908 17.6 12.9 Promotion and selling expenses 6,304 5.9 6,976 6.9 (9.6) General and administrative expenses 2,815 2.7 2,464 2.4 14.2 Depreciation and amortization 12,619 11.9 11,845 11.7 6.5 Impairment on property, plant and equipment 71 0.1 90 0.1 (21.1) Others 1,401 1.3 1,390 1.4 0.8 Total operating expenses 106,204 100.0 101,492 100.0 4.6
54 Flight operations expenses, which accounted for 48.4% of total operating expenses, increased by 2.1% from RMB50,412 million in 2015 to RMB51,461 million in 2016, primarily as a result of increase in RTK due to the increase of capacity netted off by the decrease in jet fuel costs because of decrease in average fuel prices. Jet fuel costs, which accounted for 46.2% of flight operations expenses in 2016, decreased by 9.42% from RMB26,274 million in 2015 to RMB23,799 million in 2016.
Maintenance expenses, which accounted for 10.7% of total operating expenses, increased by 8.8% from RMB10,407 million in 2015 to RMB11,318 million in 2016. The increase was mainly due to fleet expansion.
Aircraft and transportation service expenses, which accounted for 19.0% of total operating expenses, increase by 12.9% from RMB17,908 million in 2015 to RMB20,215 million in 2016. The increase was primarily due to a 13.9% rise in landing and navigation fees from RMB11,510 million in 2015 to RMB13,109 million in 2016, resulted from the increase in the number of take-off and landings for international flights.
Promotion and selling expenses, which accounted for 5.9% of total operating expenses, decreased by 9.6% from RMB6,976 million in 2015 to RMB6,304 million in 2016, mainly due to the decrease in sales commissions expenses.
General and administrative expenses, which accounted for 2.7% of the total operating expenses, increased by 14.2% from RMB2,464 million in 2015 to RMB2,815 million in 2016, mainly due to the increase in general corporate expenses.
Depreciation and amortization, which accounted for 11.9% of total operating expenses, increased by 6.5% from RMB11,845 million in 2015 to RMB12,619 million in 2016, mainly due to fleet expansion.
Operating Profit
Operating profit of RMB12,612 million was recorded in 2016 (2015: RMB13,438 million). The decrease in operating profit was mainly due to the net effect of increase in operating revenue by RMB3,329 million or 3.0% and increase in operating expenses by RMB4,712 million or 4.6% compared with 2015.
Other Income or Expenses
Other net income increased by RMB557 million from RMB3,278 million in 2015 to RMB3,835 million in 2016, mainly due to the increase of government grants.
Interest expense increased by RMB277 million from RMB2,188 million in 2015 to RMB2,465 million in 2016 was mainly due to the increase in the interest rate and the weighted average balance of obligations under finance leases during the year.
55 Net exchange loss of RMB3,276 million was recorded in 2016, a decrease of RMB2,677 million from RMB5,953 million in 2015, mainly due to the decrease in USD dominated borrowings during the reporting period.
Income Tax
Income tax expense of RMB1,763 million was recorded in 2016, increased by RMB463 million from RMB1,300 million in 2015, mainly due to the increase of profit before income tax in the reporting period.
2015 compared with 2014
The profit attributable to equity shareholders of our Company of RMB3,736 million was recorded in 2015 as compared to the profit attributable to equity shareholders of our Company of RMB1,777 million in 2014. Our operating revenue increased by RMB3,068 million or 2.83% from RMB108,584 million in 2014 to RMB111,652 million in 2015. Passenger load factor was 80.5% in 2015 compared to 79.4% in 2014. Passenger yield (in passenger revenue per RPK) decreased by 8.62% from RMB0.58 in 2014 to RMB0.53 in 2015. Average yield (in traffic revenue per RTK) decreased by 9.30% from RMB5.27 in 2014 to RMB4.78 in 2015. Operating expenses decreased by RMB4,534 million or 4.28% from RMB106,026 million in 2014 to RMB101,492 million in 2015. Operating profit of RMB13,438 million was recorded in 2015 as compared to operating profit of RMB4,748 million in 2014, increased by RMB8,690 million.
Operating Revenue
2015 2014 Operating Operating Change revenue revenue in RMB Percentage RMB Percentage revenue million % million % % Traffic revenue 107,099 95.9 104,328 96.1 2.7 Including: Passenger revenue 100,238 97,145 3.2 – Domestic 76,570 76,647 (0.1) – Hong Kong, Macau and Taiwan 2,517 2,497 0.8 – International 21,151 18,001 17.5 Cargo and mail revenue 6,861 7,183 (4.5) Other operating revenue 4,553 4.1 4,256 3.9 7.0 Mainly including: Commission income 1,545 1,335 15.7 Ground services income 345 293 17.7 Expired sales in advance of carriage 459 459 - General aviation income 490 576 (14.9) Hotel and tour operation income 621 508 22.2 Total operating revenue 111,652 100.0 108,584 100.0 2.8 Less: fuel surcharges income (6,300) (13,746) (54.2)
Total operating revenue excluding fuel surcharges 105,352 94,838 11.1
56 Traffic revenue composition
2015 2014 Traffic Traffic Change revenue revenue in traffic RMB Percentage RMB Percentage revenue million % million % % Passenger Revenue 100,238 93.6 97,145 93.1 3.2 Cargo and Mail Revenue 6,861 6.4 7,183 6.9 (4.5) Traffic revenue 107,099 100.0 104,328 100.0 2.7
Passenger revenue composition
2015 2014 Passenger Passenger revenue revenue Change in RMB Percentage RMB Percentage passenger million % million % revenue % Domestic 76,570 76.4 76,647 78.9 (0.1) Hong Kong, Macau and Taiwan 2,517 2.5 2,497 2.6 0.8 International 21,151 21.1 18,001 18.5 17.5
Passenger revenue 100,238 100.0 97,145 100.0 3.2
57 Substantially all of our operating revenue is attributable to airline and airline-related operations. Traffic revenue accounted for 95.9% and 96.1% of total operating revenue in 2015 and 2014 respectively. Passenger revenue and cargo and mail revenue accounted for 93.6% and 6.4% respectively of the total traffic revenue in 2015. During the reporting period, our total traffic revenues was RMB107,099 million, representing an increase of RMB2,771 million or 2.7% from prior year, mainly due to the increase of RPK by 13.78% which leads to the increase of passenger revenues. The other operating revenue is mainly derived from commission income, expired sales in advance of carriage hotel and tour operation income, general aviation income and ground services income.
The increase in operating revenue was primarily due to a 3.2% increase in passenger revenue from RMB97,145 million in 2014 to RMB100,238 million in 2015. The total number of passengers carried increased by 8.43% to 109.42 million passengers in 2015. RPKs increased by 13.78% from 166,629 million in 2014 to 189,588 million in 2015, primarily as a result of the increase in number of passengers carried. Passenger yield per RPK decreased from RMB0.58 in 2014 to RMB0.53 in 2015, which is mainly due to a slightly fell of domestic passenger ticket prices.
Domestic passenger revenue, which accounted for 76.4% of the total passenger revenue in 2015, decreased by 0.1% from RMB76,647 million in 2014 to RMB76,570 million in 2015. Domestic passenger traffic in RPKs increased by 8.68%, while passenger capacity in ASKs increased by 7.24%, resulting in a increase in passenger load factor by 1 percentage points from 79.6% in 2014 to 80.6% in 2015. Domestic passenger yield per RPK decreased from RMB0.60 in 2014 to RMB0.55 in 2015.
Hong Kong, Macau and Taiwan passenger revenue, which accounted for 2.5% of total passenger revenue, increased by 0.8% from RMB2,497 million in 2014 to RMB2,517 million in 2015. For Hong Kong, Macau and Taiwan flights, passenger traffic in RPKs increased by 9.72%, while passenger capacity in ASKs increased by 8.75%, resulting in an increase in passenger load factor by 0.7 percentage points from 73.4% in 2014 to 74.1% in 2015. Passenger yield per RPK decreased from RMB0.78 in 2014 to RMB0.71 in 2015.
International passenger revenue, which accounted for 21.1% of total passenger revenue, increased by 17.5% from RMB18,001 million in 2014 to RMB21,151 million in 2015. For international flights, passenger traffic in RPKs increased by 32.25%, while passenger capacity in ASKs increased by 30.71%, resulting in a 1 percentage points increase in passenger load factor from 79.5% in 2014 to 80.5% in 2015. Passenger yield per RPK decreased from RMB0.50 in 2014 to RMB0.45 in 2015.
Cargo and mail revenue, which accounted for 6.41% of our total traffic revenue and 6.14% of total operating revenue, decreased by 4.5% from RMB7,183 million in 2014 to RMB6,861 million in 2015. The decrease was attributable to the depression of freight market and drop of freight rates.
Other operating revenue increased by 7.0% from RMB4,256 million in 2014 to RMB4,553 million in 2015. The increase was primarily due to the rise of commission income, hotel and tour operation income.
Operating Expenses
Total operating expenses in 2015 amounted to RMB101,492 million, representing a decrease of RMB4,534 million or 4.28% over 2014, primarily due to the decrease of jet fuel cost. Total operating expenses as a percentage of total operating revenue was 90.9% in 2015 and 97.6% in 2014.
2015 2014 Operating Operating Change in expense expense Operating RMB Percentage RMB Percentage expenses million % million % % Flight operations 50,412 49.7 58,901 55.6 (14.4) Mainly including: Jet fuel costs 26,274 37,728 (30.4) Aircraft operating lease charges 6,153 5,383 14.3 Flight personnel payroll and welfare 8,070 6,803 18.6 Maintenance expenses 10,407 10.3 8,304 7.8 25.3 Aircraft and transportation service expenses 17,908 17.6 16,402 15.5 9.2 Promotion and selling expenses 6,976 6.9 7,841 7.4 (11.0) General and administrative expenses 2,464 2.4 2,337 2.2 5.4 Depreciation and amortization 11,845 11.7 10,828 10.2 9.4 Impairment on property, plant and equipment 90 0.1 215 0.2 (58.1) Others 1,390 1.4 1,198 1.1 16.0 Total operating expenses 101,492 100.0 106,026 100.0 4.3
58 Flight operations expenses, which accounted for 49.7% of total operating expenses, decreased by 14.4% from RMB58,901 million in 2014 to RMB50,412 million in 2015, primarily as a result of decrease in jet fuel costs because of decrease in average fuel prices. Jet fuel costs, which accounted for 52.12% of flight operations expenses in 2015, decreased by 30.4% from to RMB37,728 million in 2014 to RMB26,274 million in 2015.
Maintenance expenses, which accounted for 10.2% of total operating expenses, increased by 25.3% from RMB8,304 million in 2014 to RMB10,407 million in 2015. The increase was mainly due to fleet expansion.
Aircraft and transportation service expenses, which accounted for 17.6% of total operating expenses, increase by 9.2% from RMB16,402 million in 2014 to RMB17,908 million in 2015. The increase was primarily due to a 9.7% rise in landing and navigation fees from RMB10,496 million in 2014 to RMB11,510 million in 2015, resulted from the increase in number of flights due to the increase of capacity.
Promotion and selling expenses, which accounted for 6.9% of total operating expenses, decreased by 11.0% from RMB7,841 million in 2014 to RMB6,976 million in 2015.
General and administrative expenses, which accounted for 2.4% of the total operating expenses, increased by 5.4% from RMB2,337 million in 2014 to RMB2,464 million in 2015.
Depreciation and amortization, which accounted for 11.7% of total operating expenses, increased by 9.4% from RMB10,828 million in 2014 to RMB11,845 million in 2015, mainly due to the increase of fixed assets.
Operating Profit
Operating profit of RMB13,438 million and RMB4,748 was recorded in 2015 and 2014 respectively. The increase in profit was mainly due to the net effect of increase in operating revenue by RMB3,068 million or 2.8% in 2015 and decrease in operating expenses by RMB4,534 million or 4.3%.
Other Income or Expenses
Other net income increased by RMB1,088 million from RMB2,190 million in 2014 to RMB3,278 million in 2015, mainly due to the increase of government grants and gain on disposal of aircrafts.
Interest expense decreased by RMB5 million from RMB2,193 million in 2014 to RMB2,188 million in 2015 was mainly due to the increase in number of aircraft held through a finance lease and the increase of interest payment of borrowings.
Net exchange losses of RMB5,953 million was recorded in 2015 as RMB depreciated against US dollar in 2015. Net exchange losses of RMB292 million was recorded in 2014 as RMB depreciated slightly against US dollar in 2014.
59 Income Tax
Income tax expense of RMB1,300 million was recorded in 2015, increased by RMB632 million from RMB668 million in 2014, mainly due to the decrease of profit before income tax.
B. Liquidity and Capital Resources
Generally, we meet our working capital and capital expenditure requirements through cash from our operations, the proceeds of certain long-term and short-term bank loans, capital lease financing and rebates available under certain of our aircraft leases.
As of December 31, 2016, we had banking facilities with several PRC commercial banks for providing loan finance up to an approximate amount of RMB139,274 million to our Group. As of December 31, 2016, an approximate amount of RMB110,199 billion was unutilized. As of December 31, 2016 and 2015, our cash and cash equivalents totaled RMB4,152 million and RMB4,560 million, respectively.
Net cash generated from operating activities in 2016, 2015 and 2014 were RMB23,764 million, RMB23,734 million and RMB13,570 million, respectively. Our operating cash inflows are primarily derived from the provision of air transportation and related service for customers. The increase of operating cash inflows of our Group was mainly due to the increase of passenger revenue. The vast majority of tickets are purchased prior to the day on which transportation is provided. Operating cash outflows primarily are related to the recurring operating expenses, including flight operation, maintenance, aircraft and transportation service, etc.
Net cash used in investing activities in 2016, 2015 and 2014 was RMB15,750 million, RMB6,931 million and RMB9,760 million, respectively. Cash capital expenditures in 2016, 2015 and 2014 were RMB18,967 million, RMB12,139 million and RMB8,649 million, respectively, reflecting predominantly additional investments in aircraft and flight equipment under our fleet expansion plans and additional investments in other facilities and buildings used in operations.
Net cash used in financing activities was RMB8,459 million, RMB27,695 million and RMB131 million in 2016, 2015 and 2014, respectively. Net cash (outflows)/inflow from borrowings and repayments of borrowings amounted to RMB(481) million, RMB(20,042) million and RMB4,362 million in 2016, 2015 and 2014, respectively. The borrowings were used for capital expenditures and general working capital. Repayment of capital leases in 2016, 2015 and 2014 was RMB6,994 million, RMB8,209 million and RMB4,072 million, respectively, resulting from the increase of aircraft acquisitions under capital leases.
As of December 31, 2016, our aggregate long-term borrowings and obligations under capital leases (including borrowings and capital leases obligations due within one year) totaled RMB81,545 million. In 2017, 2018, 2019, 2020 and thereafter, amounts payable under such loans and obligations will be RMB9,260 million, RMB7,413 million, RMB15,076 million, RMB10,086 million and RMB39,710 million respectively. Such borrowings and obligations were mainly denominated in U.S. dollars, Euro and Japanese Yen. In the normal course of business, we are exposed to fluctuations in foreign currencies. Our exposure to foreign currencies primarily results 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.
As of December 31, 2016, our short-term bank loans were RMB4,195 million. Our weighted average interest rate on short-term bank loans was 3.92% per annum as of December 31, 2016. As at December 31, 2016, our outstanding ultra-short-term financing bills were RMB21,986 million with interest rates ranging from 2.49% to 3.71% per annum. 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 believes it can continue to obtain them based on our well-established relationships with various lenders.
As of December 31, 2016, we had obligations under operating leases totaling RMB61,215 million, predominately for aircraft. Of such amount, RMB7,948 million, RMB7,427 million, RMB7,390 million, RMB6,635 million, RMB5,688 million and RMB26,127 million, respectively, is due in 2017, 2018, 2019, 2020, 2021 and 2022 and thereafter.
60 As of December 31, 2016, we had a working capital deficit of RMB54,168 million, as compared to a working capital deficit of RMB51,422 million as of December 31, 2015. Historically, we operated in a negative working capital position, relying on cash inflow from operating activities and renewal of short-term bank loans to meet our short-term liquidity and working capital needs. In 2017 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, 2016, we had banking facilities with several PRC commercial banks for providing loan finance up to approximately RMB139,274 million (2015: RMB173,739 million), of which approximately RMB 110,199 million (2015: RMB131,021 million) was unutilized.
The directors of our Company have carried out a detailed review of our cash flow forecast for the twelve months ending December 31, 2017. Based on such forecast, our directors have determined that adequate liquidity exists to finance the working capital, capital expenditure requirements and dividend payments of our Group during that period. In preparing the cash flow forecast, our directors have considered historical cash requirements of our Group as well as other key factors, including the availability of the above-mentioned bank financing which may impact our operations during the next twelve-month period. The directors of our Company are of the opinion that the assumptions and sensitivities which are included in the cash flow forecast are reasonable. However, as with all assumptions in regard to future events, these are subject to inherent limitations and uncertainties and some or all of these assumptions may not be realized.
As 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 arise in such circumstances as where competition between Chinese airlines increases or where PRC aviation demand decreases. Similarly, a minor increase in the jet fuel prices, particularly in the domestic market, could result in a significant increase in 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 complied 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, 2016, we had capital commitments as follows:
2021 and 2017 2018 2019 2020 afterwards Total (RMB million) Acquisition of aircraft and related equipment 25,971 24,355 17,878 13,871 1,457 83,532 Others 5,037 4,912 4,147 3,842 3,671 21,609 Total capital commitments 31,008 29,267 22,025 17,713 5,128 105,141
Others mainly represent airport and office facilities and equipment, overhaul and maintenance bases and training facilities.
As of December 31, 2016, our cash and cash equivalents totaled RMB4,152 million. Of such balance, 15.85% was denominated in U.S. Dollars, Hong Kong Dollars, Euro, Japanese Yen and other foreign currencies.
In view of the unutilized bank facilities of RMB110,199 million, we expect that we will have sufficient funding sources to meet our cash requirements in the foreseeable future.
C. Research and Development, Patents and Licenses, etc.
None.
D. Trend Information
Other than as disclosed in the foregoing disclosures and elsewhere in this Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2017 to December 31, 2017 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause our disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
61 E. Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition that is material to investors. In particular, we (i) have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any unconsolidated entity; (ii) have not entered into any derivative contracts that are both indexed to our own stock and classified in stockholders’ equity, or not reflected in our statement of financial position; and (iii) do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth 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, 2016.
As of As of December 31, 2016 December Payment due by period 31, 2015 Less than 1 1 - 3 3 - 5 After 5 Total year years years years Total Short-term bank loans and ultra-short-term bills (Note 1) 26,467 26,467 - - - 27,783 Long-term bank and other loans (Note 1) 21,411 1,187 9,813 10,350 61 19,560 Obligations under capital leases 71,388 10,663 16,911 16,567 27,247 62,723 Operating lease commitments 61,215 7,948 14,817 12,323 26,127 36,109 Aircraft purchase commitments (Note 2) 83,532 25,971 42,233 15,328 - 83,427 Other capital commitments 21,609 5,037 9,059 7,513 - 6,733 Investment commitments 170 170 - - - 34 Total 285,792 77,443 92,833 62,081 53,435 236,369
Note 1 Interest on variable rate loans was estimated based on the current rate in effect at December 31, 2016.
Note 2 Amounts shown are net of previously paid purchase deposits.
62 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors, Senior Management and Employees
The following table sets forth certain information concerning directors, senior management and supervisors of our Company. There were certain changes in our Company’s directors, senior management and supervisors as of April 21, 2017, details of which are set forth below.
Name Position Gender Age Wang Chang Shun Non-executive Director, Chairman of our Board Male 59 Tan Wan Geng Executive Director, Vice Chairman of our Board and President Male 52 Yuan Xin An Non-executive Director Male 60 Yang Li Hua Non-executive Director Female 61 Zhang Zi Fang Executive Director and Executive Vice President Male 58 Li Shao Bin Executive Director Male 52 Ning Xiang Dong Independent Non-executive Director Male 51 Liu Chang Le Independent Non-executive Director Male 65 Tan Jin Song Independent Non-executive Director Male 52 Guo Wei Independent Non-executive Director Male 54 Jiao Shu Ge Independent Non-executive Director Male 51 Pan Fu Chairman of the Supervisory Committee Male 54 Li Jia Shi Supervisor Male 55 Zhang Wei Supervisor Female 50 Yang Yi Hua Supervisor Female 56 Wu De Ming Supervisor Male 58 Xiao Li Xin Chief Accountant and Chief Financial Officer Male 50 Ren Ji Dong Executive Vice President Male 52 Guo Zhi Qiang COO Marketing & Sales Male 53 Wang Zhi Xue Executive Vice President Male 56 Li Tong Bin Executive Vice President and Chief Engineer Male 55 Su Liang Chief Economist Male 54 Chen Wei Hua Chief Legal Adviser Male 50 Xie Bing Company Secretary Male 43 Feng Hua Nan COO Flight Safety Male 54 Zhang Zheng Rong COO Flight Operations Male 54 Yang Ben Sen Chief Pilot Male 58 Guo Jian Ye Chief Service Officer Male 54
Directors
Wang Chang Shun, male, aged 59, graduated from University of Science and Technology of China majoring in management science and engineering with PHD degree and is a member of Communist Party of China (“CPC”). He began his career in February 1976. He has acted as Vice Director and Director of aeronautical meteorology supervision department of CAAC Urumqi Administration, Vice President and a member of standing committee of Xinjiang Airlines (Vice Chairman of CAAC Urumqi Administration) and then as Party Secretary and Vice President of Xinjiang Airlines (Vice Chairman of CAAC Urumqi Administration). In November 2000, he acted as general manager and Deputy Party Secretary of the Company. In April 2001, he also acted as the Vice Chairman of the Company; in September 2002, he acted as Vice President and Party member of CSAHC and also as Vice Chairman, President and Deputy Party Secretary of the Company. In August 2004, he served as Deputy Director and Party member of Civil Aviation Administration of China. In March 2008, he acted as Deputy Director and Party member (at the level of deputy director) of Civil Aviation Administration of China. In October 2011, he was appointed as general manager and Deputy Party Secretary of CSAHC and in January 2012 he also was appointed as the Chairman of Air China International Corporation. He was appointed as Vice Minister and Party Leadership Group Member of Ministry of Transport in January 2014, general manager and Deputy Party Secretary of CSAHC from February 2016 to May 2016, general manager and Deputy Party Secretary of CSAHC and Chairman of the Company from May 2016 to December 2016. Since December 2016, he has been Chairman, Party Secretary of CSAHC and Chairman of the Company. He is also a deputy to the 12th National People’s Congress.
63 Tan Wan Geng, male, aged 52, graduated from Zhongshan University, majoring in regional geography, with qualification of a Master’s; degree. He is an economist and a member of CPC. Mr. Tan began his career in August 1990 and served as the head of the Infrastructure Department and Director of Human Resources and Administration Department of the Beijing Aircraft Maintenance and Engineering Corporation from 1992 to 1996. He served as the Deputy Director General of Human Resources Division of the CAAC from May 1996 to September 1998. Mr. Tan served as the Deputy Director General of Personnel and Education Division of the CAAC from September 1998 to December 2000. He had been the Director General and Party Secretary of the CAAC Northeastern Region from December 2000 to January 2006, and became the Party Secretary and Executive Vice President of the Company from January 2006 to February 2007. He has been the Director of the Company since June 2006. He had been the Party Member of CSAHC and the Party Secretary and Executive Vice President and Director of the Company from February 2007 to January 2009. He had been the Party Member of CSAHC and the President, the Party Secretary and the Director of the Company from January 2009 to February 2009. He had been the Party Member of CSAHC and the President, the Deputy Party Secretary and the Director of the Company from February 2009 to May 2011. He had been the Party Secretary of CSAHC and the President, the Deputy Party Secretary and the Director of the Company from May 2011 to January 2013. He was the Party Secretary of CSAHC and the President, the Deputy Party Secretary and the Vice Chairman of the Board of the Company from January 2013 to December 2016. Since December 2016 to date, Mr. Tan has been the President, Director and Deputy Party Secretary of CSAHC and the President, the Deputy Party Secretary and the Vice Chairman of the Board of the Company. Mr. Tan has been a member of the 11th CPC Guangdong Provincial Committee since January 2016.
Yuan Xin An, male, aged 60, graduated from Air Force Engineer University in Xi’an, majoring in Aeronautical Machinery, and is a senior engineer. Mr. Yuan is a CPC member and began his career in December 1976. He served as the Chief Inspector of Quality Supervision Division of Maintenance Factory of Guangzhou Bureau of the Civil Aviation Administration, the Manager of Inspection and Vice Director of Guangzhou Aircraft Maintenance Engineering Co., Ltd. from 1987 to 1997. He was the Vice President of Engineering Department of the Company from April 1997 to October 1998. Mr. Yuan then served as the Vice President of the Guangzhou Aircraft Maintenance Engineering Co., Ltd. From October 1998 to November 2000. He became the Chief Engineer and the General Manager of Engineering Department of the Company from November 2000 to April 2002. He was then the Standing Member of Party Committee and the Vice President of the Company from April 2002 to February 2007. He served as the Assistant of President of CSAHC and was also the Standing member of Party Committee and the Executive Vice President of the Company from February 2007 to December 2007. He has been the Party Member and the Executive Vice President of CSAHC since September 2007, and has held a concurrent post of Chief Legal Adviser of CSAHC since July 2008. Since November 2011, Mr. Yuan has been the Director of the Company. For now, he is also appointed as the Chairman of Guangzhou Southern Airlines Construction Company Limited, Chairman of MTU Maintenance Zhuhai Co., Ltd., and Chairman of Shenzhen Air Catering Co., Ltd., and also non-executive Director of TravelSky Technology Limited and Director of China Aircraft Services Limited. Mr. Yuan has been a standing member of the 13th CPPCC Guangdong Provincial Committee since December 2016.
Yang Li Hua, female, aged 61, graduated with a Master degree from the Party School of the Central Committee of CPC majoring in economics. Ms. Yang is a CPC member who began her career in February 1973. She served as the Deputy Head of In-flight Service Team of the Chief Flight Corps Team of the Beijing Bureau of Civil Aviation Administration and the Head of the In-flight Service Team, Manager of In-flight Service Division of Air China International Corporation from 1984 to 1995. She served as the Deputy Head of the Chief Flight Team of Air China International Corporation from July 1995 to September 2000. Subsequently, she was appointed as the General Manager of the Passenger Cabin Service Division and Party Secretary of Air China International Corporation from September 2000 to October 2002. She was the Vice President of Air China International Corporation from October 2002 to September 2004. After that, she served as Standing Member of Party Committee and the Vice President of Air China Limited from September 2004 to May 2009. From May 2009 to July 2016, Ms. Yang had been the Party Member and Vice President of CSAHC. From July 2010 to August 2012, Ms. Yang also acted as the Chairman of the Labour Union of CSAHC. Since January 2013, Ms. Yang has been the Director of the Company. For now, she also acts as Chairman of GSC, Chairman of SACM and Chairman of China Southern Airlines Group Property Management Company Limited.
64 Zhang Zi Fang, male, aged 58, graduated with a college degree from foundation science profession for Party administrative cadres of Liaoning University. While Mr. Zhang was at work, he obtained an Executive Master of Business Administration (EMBA) degree from Tsinghua University and is a senior expert of political science. Mr. Zhang is a CPC member and began his career in February 1976. He served as Deputy Commissar of the China Northern Airlines Company as well as the Deputy Commissar of the Office, Deputy Commissar of Shenyang Flight Team from 1993 to 2000. He served as the Party Secretary of the Jilin Branch of China Northern Airlines Company and the General Manager of Dalian Branch from 2000 to 2003. He had been the Director of Political Works Department of CSAHC from October 2003 to February 2005. Subsequently, Mr. Zhang was appointed as the Deputy Party Secretary and Secretary of the Commission for Discipline of the Company from February 2005 to December 2007. He had been the Vice President and the Deputy Party Secretary of the Company from December 2007 to February 2009. He was the Party Secretary and the Vice President of the Company from February 2009 to August 2011. Mr. Zhang has been the Director of the Company since June 2009. He had been the Party member of CSAHC and the Party Secretary, the Vice President and the Director of the Company from August 2011 to April 2016. He had acted as the Party Member of the CSAHC and the Director, Party Secretary, the Vice President of the Company as well as the Director and Chairman of Henan Airlines from April 2016 to August 2016. Mr. Zhang has been Deputy Party Secretary, Vice President of CSAHC and Director, Party Secretary, the Vice President of the Company as well as the Director and Chairman of Henan Airlines since August 2016. For now, he also serves as Vice Director General of China Air Transport Association and Guangdong Lingnan Culture Development Foundation.
Li Shao Bin, male, aged 52, graduated with a college degree from Chinese Language and Literature of Xiangtan Teachers’ College. While Mr. Li was at work, he obtained a university degree from the Party School of the Central Committee of CPC majoring in economics and management and is an expert of political science. Mr. Li is a CPC member and began his career in July 1984. He served as the Deputy Director of Promotion Division of Political Department of the Guangzhou Bureau of Civil Aviation Administration, the Director of Promotion Department of the Company and the Deputy Director of Promotion Department of the China Southern Airlines (Group) Company from 1992 to 1999. He had been the Director of Political Division of Flight Department of the Company from December 1999 to May 2002. Mr. Li was the Deputy Party Secretary of Flight Department and Director of Political Division of the Company from May 2002 to May 2004. Subsequently, he was appointed as the Party Secretary of Guangzhou Flight Operations Division of the Company from May 2004 to March 2006. Mr. Li served as the Party Secretary and Deputy General Manager of Guangzhou Flight Operations Division of the Company from March 2006 to July 2012. Mr. Li has been the Chairman of the Labour Union of the Company since July 2012 and the Director of the Company since January 2013. For now, Mr. Li also serves as the Chairman of Guangzhou Southern Airlines Project Supervision Co., Ltd. and Guangdong Southern Airlines Pearl Service Co., Ltd.
Ning Xiang Dong, male, aged 51, graduated from the Quantitative Economics Faculty of the School of Economics and Management of Tsinghua University with a doctor degree. Mr. Ning began his career in 1990 and served as the assistant, lecturer and associate professor at Tsinghua University and the executive deputy director of the National Center for Economic Research (NCER) at Tsinghua University. He was also a visiting scholar at Harvard Business School, University of Illinois, University of New South Wales, University of Sydney and the Chinese University of Hong Kong, and the independent director of a number of listed companies including Datang Telecom Technology Co., Ltd., Shantui Construction Machine Co., Ltd., Hong Yuan Securities Co., Ltd. and Goer Tek Inc. Currently, he serves as the professor and the doctorate-tutor of the School of Economics and Management of Tsinghua University and the executive director of Centre for Corporate Governance of Tsinghua University. Mr. Ning has been the independent non-executive director of the Company since 29 December 2010. He is also the independent director of a number of listed companies including Aerospace Hi-Tech Holding Group Co., Ltd., Sichuan Changhong Electric Company Limited, Yango Group Co., Ltd. and Weichai Power Co., Ltd as well as the independent director of China Petroleum & Chemical Corporation.
Liu Chang Le, male, aged 65, was conferred an honorary doctoral degree in literature by the City University of Hong Kong and an honorary fellow by the United International College, and is a founder of Phoenix Satellite Television. Mr. Liu has been the Chairman and Chief Executive Officer of Phoenix Satellite Television Company Limited since 1996 and the Chairman and Chief Executive Officer of Phoenix Satellite Television Holdings Limited, a company listed on the Stock Exchange since 2000. Mr. Liu gained widespread recognition both locally and overseas for his enthusiasm for and achievements in the media industry. Mr. Liu is the recipient of numerous titles and awards, among which include “Wiseman of the Media Industry”, “the Most Innovative Chinese Business Leaders in the Asia Pacific Region”, “the Most Entrepreneurial Chinese Business Leaders”, and has been awarded the “Robert Mundell Successful World CEO Award”, the “Man of Year for Asia Brand Innovation Award”, the “Person of the Year” award of the Chinese Business Leaders Annual Meeting, the “Business Person of the Year” award of DHL/SCMP Hong Kong Business Awards 2012, the “Outstanding Contribution Award” by 2015 Singapore Asian Television Awards. Since 2005, Mr. Liu has been the Chairman of the iEMMYs Festival. In 2008, Mr. Liu received the International Emmy Directorate Award granted by International Academy of Television Arts & Sciences. Mr. Liu was appointed as honorary chairman of World Chinese- language Media Cooperation Alliance in 2009 and appointed as special consultant to the 8th Council of the Buddhist Association of China in 2010. In 2014, he was appointed as Vice President of the 6th council of The Buddha’s Light International Association, Board of Directors of Headquarters. Mr. Liu was a member of the Tenth and the Eleventh National Committee of the Chinese People’s Political Consultative Conference, served as the Vice Chairman of the subcommittee on Education, Science, Culture, Health and Sport of the Eleventh National Committee of the Chinese People’s Political Consultative Conference, and is serving as a member of standing committee of the Twelfth National Committee of the Chinese People’s Political Consultative Conference. Mr. Liu has been appointed a Justice of the Peace by the government of the Hong Kong Special Administrative Region. Mr. Liu was awarded the Silver Bauhinia Star Medal in 2010 and Gold Bauhinia Star Medal in 2016 by the government of the Hong Kong Special Administrative Region. Mr. Liu has been the independent non-executive director of the Company since 30 November 2011.
65 Tan Jin Song, male, aged 52, graduated from Renmin University of China with an on-job doctor degree in Accounting. Mr. Tan is a Chinese Certified Public Accountant. 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 Zhongshan University. Mr. Tan is currently a professor and a doctorate-tutor of the School of Management of Zhongshan University. He is also a member of the MPAcc Education Instruction Committee, a member of China Institute of Internal Audit, Vice President of Guangdong Institute of Certified Public Accountants and a member of China Audit Society. Currently, Mr. Tan also serves as the independent director of Poly Real Estate Company Limited, Guangzhou Hengyun Enterprises Holdings Limited, Shanghai RAAS Blood Products Co., Ltd. and Zhuhai Huafa Industrial Company Limited. In addition, Mr. Tan also acts as the independent non-executive director of Welling Holding Limited. Mr. Tan has been the independent non- executive director of the Company since 26 December 2013.
Guo Wei, male, aged 54, graduated from the Management Faculty of the Management Department of Graduate School of Chinese Academy of Social Sciences (formerly known as the Graduate School of University of Science and Technology of China) with a master degree in Engineering. Mr. Guo has extensive experience in business strategy development and business management. Mr. Guo was an executive director and Senior Vice President of Lenovo Group, Vice Chairman, President and the Chief Executive Officer of Digital China Holdings Limited (Digital China), director of Digiwin Software Co., Ltd. Currently, Mr. Guo serves as chairman of the board of Digital China and directors of a number of subsidiaries and associated companies of Digital China. Mr. Guo also acts as the president of Digital China Group Co., Ltd., Chairman of Digital China Information Service Company Ltd., Director of Kosalaki Investments Limited and Director of Beijing Shougang Fund Co.,Ltd. In addition, Mr. Guo was also a member of the Twelfth National Committee of the Chinese People’s Political Consultative Conference, a member of the Fourth Committee of the Advisory Committee for State Informatization and the president of the Sixth Council of Chinese Private Technology Entrepreneur Association. Mr. Guo was the recipient of numerous titles and important awards, among which include Top Ten Outstanding Youths in China (2002), the Future Economic Leaders in China (2003) and the First Session of China Youth Entrepreneurs Management Innovation award (2005), and was rated as one of the TOP 50 Most Influential Business Leaders in China consecutively for 2011, 2012 and 2013 by Fortune
Jiao Shu Ge, male, aged 51, with a Master degree, first graduated from the Control Theory Faculty of the Department of Mathematics of Shangdong University with a bachelor 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 management. Currently, Mr. Jiao is the Director and President of CDH China Management Company Limited (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) and is the founder of CDH Investments. Mr. Jiao was the nonexecutive directors of China Yurun Food Group Limited and China Shanshui Cement Group Limited. Currently, he is also the Director of the associated companies of CDH Investments, the independent non-executive director of China Mengniu Dairy Company Limited, the independent non-executive director and Vice Chairman of WH Group Limited, the director of Joyoung Co., Ltd., the Vice President of Henan Shuanghui Investment & Development Co.,Ltd. and the directors of a number of companies including Beijing TaiYang Pharmaceutical Industry Company Limited, Chery Automobile Co., Ltd., Inner Mongolia Hetao Spirit Group Co., Ltd., Fujian Nanping Nanfu Battery Co.,Ltd. and Shanghai Qingchen Real Estate Development Co., Ltd. Mr Jiao has been the independent non-executive director of the Company since 30 June 2015.
66 Supervisors
Pan Fu, male, aged 54, graduated with a master degree from Chongqing University majoring in Power Systems and Automation, and is a senior engineer. Mr. Pan is a CPC member and began his career in July 1986, and served successively as the Deputy Head of the Planning Department of Electric Power Industry Bureau of Yunnan Province, the Deputy Director of the Planning & Development Department of Yunnan Electric Power Group Co., Ltd., the Deputy Director and director of Kunming Power Plant, the Deputy Chief Engineer and chief engineer of Yunnan Electric Power Corporation from 1994 to 2003. He served as the deputy director (work as chair) and Director of the Department of Security Supervision of China Southern Power Grid Company Ltd. from February 2003 to April 2004; served as the Director of the China Southern Power Grid Technology and Research Center from April 2004 to January 2005, and served as the General Manager (legal representative) and Deputy Party Secretary of the Guizhou Power Grid Corporation from January 2005 to November 2007. Mr. Pan served as the Director of the Planning Development Department of China Southern Power Grid Company Ltd. from November 2007 to November 2010. Mr. Pan has been the party member and team leader of the Discipline Inspection Commission of CSAHC since November 2010 and the supervisor & chairman of the Supervisory Committee of the Company since December 2010.
Li Jia Shi, male, aged 55, graduated from Guangdong Polytechnic Normal University majoring in Economics and Mathematics, and obtained an Economic Administration bachelor degree from Correspondence School under the Party School of the CPC Central Committee and an Executive Master of Business Administration (EMBA) degree from Tsinghua University and is an expert of political science. Mr. Li is a CPC member and began his career in August 1976. He served as the Deputy Head (work as chair) of the Organization Division of the Party Committee of the China Southern Airlines (Group) Company, the party secretary of Guangzhou Nanland Air Catering Company Limited from 1994 to 1999. Mr. Li served as the head of the Organization Division of the Party Committee of CSAHC from December 1999 to December 2003; and served as the Deputy Secretary of the Disciplinary Committee and the Director of the Disciplinary Committee Office of the Company from December 2003 to December 2007. Mr. Li served as a member of the Standing Committee of the CPC, the Secretary of the Disciplinary Committee and the Director of the Disciplinary Committee Office of the Company from December 2007 to February 2012. Mr. Li has been the supervisor of the Company since June 2009. He has been the team deputy leader of the Discipline Inspection Commission of CSAHC, and member of the Standing Committee of the CPC, Secretary of the Disciplinary Committee and Director of the Disciplinary Committee Office, and supervisor of the Company since February 2012. He also serves as the Vice Chairman of Southern Airlines Culture and Media Co., Ltd.
Zhang Wei, female, aged 50, has a master degree. She graduated from Tianjin University majoring in Investment Skills and Economics and is a senior accountant. Ms. Zhang is a CPC member and began her career in September 1988. She successively served as the General Manager Assistant of China Southern Airlines (Group) Company, the Deputy General Manager of the Finance Department of the Company, and the Deputy Director of the Supervisory Bureau and the Director of the Audit Division of CSAHC from 1999 to 2006. Ms. Zhang served as the General Manager and the Secretary of CPC General Branch of Southern Airlines Group Finance Company Limited from August 2006 to October 2007; served as the Deputy Director of the Supervisory Bureau and the Director of the Audit Division of CSAHC from October 2007 to October 2008. She has been appointed as Supervisor of the Company since June 2008; Since October 2008 till now, she has been the Director of the Audit Division of CSAHC and the Supervisor of the Company. Ms. Zhang has been a part-time Supervisor of the Board of Supervisors of Stated-owned Enterprises dispatched by SASAC on behalf of the State Council to CSAHC since January 2010, and has been a member of the Discipline Inspection Commission of CSAHC since February 2012. For now, she also acts as the Chairman of the Board of Supervisors of Southern Airlines Group Finance Company Limited, Southern Airlines Culture and Media Co., Ltd., Supervisor of MTU Maintenance Zhuhai Co., Ltd. and the Director of Guangzhou Southern Airlines Construction Co., Ltd.
Yang Yi Hua, female, aged 56, has an Economic Administration bachelor degree from Correspondence School under the Party School of the CPC Central Committee. She is an accountant and also a CPC member who began her career in August 1977. From 1996 to 2002, she first acted as Financial Manager of the Company and then Deputy General Manager of CSAHC’s Audit Department. Ms. Yang has been the General Manager of the Company’s Audit Department from May 2002 to September 2015, and the Supervisor of the Company since June 2004. For now, she is also appointed as Chairman of the Board of Supervisors of Guangzhou Air Cargo Terminals Company Limited and Supervisor of Guangzhou Southern Airlines Supervision of Construction Company Limited.
67 Wu De Ming, male, aged 58, obtained a university bachelor degree from South China Normal University College of Continuing Education majoring in Political Administration, and is an Administration Engineer. He is a CPC member and began his career in February 1976. From 1991 to 2001, he was first appointed as political section’s deputy director of the operation department of the Company, then member of the Party Committee, Deputy Secretary of the Party Committee and secretary of Committee for Discipline Inspection of Guangzhou ticket office of the Company, then Deputy Secretary and Secretary of Party General Branch of the ticket office at the Transportation Department of the Company, and then Secretary of Party General Branch at Passenger Traffic Department of the Transportation Department of the Company. He was appointed as Director of the Disciplinary Supervision Department of CSAHC from March 2001 to December 2003, and General Director of the Supervision Bureau and Chief Officer of Disciplinary Committee Office of CSAHC from December 2003 to April 2009. He has been a member of Party Committee of the Marketing Management Committee of the Company, secretary to the Disciplinary Committee and Chairman of the Labour Union from April 2009 to November 2015, a member of Party Committee of the Marketing Management Committee of the Company, secretary to the Disciplinary Committee since November 2015 and has been the Supervisor of the Company since December 2013.
Senior Management
Xiao Li Xin, male, aged 50, graduated from Guangdong Academy of Social Sciences with a master degree in Economics and then obtained an on-job Executive Master of Business Administration (EMBA) degree from Tsinghua University. He is a qualified senior accountant and a certified public accountant. Mr. Xiao is a CPC member and began his career in July 1991. He served as the General Manager Assistant and Deputy General Manager of the Finance Department of the Company from 1999 to 2002, and served as the General Manager and Deputy Secretary of the General Party Branch of the Finance Department of the Company from January 2002 to February 2007. Mr. Xiao served as the deputy chief accountant and general manager of the Finance Department of the Company from February 2007 to October 2007, and served as the General Manager and Secretary of the General Party Branch of Southern Airlines Group Finance Company Limited from October 2007 to February 2008. He served as the General Manager and Party Secretary of Southern Airlines Group Finance Company Limited from February 2008 to March 2015. Mr. Xiao has been the Chief Accountant and Chief Financial Officer of the Company since March 2015 to October 2016. From October 2016 till now, he has served as Party member and Chief Accountant of CSAHC and Chief Accountant and Chief Financial Officer of the Company. For now, he also serves as director of Guangzhou Air Cargo Terminals Company Limited, Chiarman of Guizhou Airlines, Chiarman of Xiamen Airlines, Director of Shantou Airlines as well as Director of China Southern Airlines Overseas (Hong Kong) Co. Ltd.
Ren Ji Dong, male, aged 52, graduated from Nanjing University of Aeronautics and Astronautics, 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 is a CPC member and began his career in August 1986. Mr. Ren served as the No. 2 Workshop Manager, Deputy Plant Manager and Deputy General Manager of Engineering Department of the aircraft maintenance factory of Urumqi Civil Aviation Administration (Xinjiang Airlines) from 1995 to 2000. 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) from January 2000 to December 2001, and a member of the party committee and the Deputy General Manager of Xinjiang Airlines from December 2001 to June 2004, and the Party Secretary and Deputy General Manager of CSAHC Xinjiang Company from June 2004 to December 2004, the Party Secretary and Deputy General Manager of Xinjiang Branch of the Company from January 2005 to February 2015, a member of the Standing Committee of the CPC and the Executive Vice President of the Company from March 2005 to February 2007; 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 to April 2009. Mr. Ren has been a member of the Standing Committee of the CPC of the Company and the Executive Vice President of the Company since May 2009.
Zhang Zheng Rong, male, aged 54, has a college degree from Civil Aviation Flight University of China majoring in Aircraft Piloting, and obtained an on-job Executive Master of Business Administration (EMBA) degree from Jinan University. He is a CPC member and began his career in February 1982. He serviced as Vice Captain of the Fifth Sub-Flight Corps under Sixth Flight Corps of Civil Aviation Administration, Sub-Captain, Vice Captain and Captain of China Southern Airlines Flight Corps, Vice President of Flight Corps of the Company, Vice Manager of Department of Security Supervision of the Company, as well as General Manager of Guangzhou Flight Division of the Company. 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 June to July 2012, he serviced as the Chief Pilot and Director of Aviation Security Department of CSAHC and in July 2012, he serviced as the chief pilot and Aviation Security Minister of China Southern Airlines (Group) Company. From April 2014 to January 2017, he acted as Chief Pilot, Chief Safety Officer and Director of Aviation Security Department of CSAHC. Since January 2017, he has been the Chief Pilot of CSAHC and COO and Director of Duty Office of the Company.
68 Guo Zhi Qiang, male, aged 53, is an economist who graduated with a master degree from Party School of Xinjiang Uyghur Autonomous Region majoring in Business Administration. Mr. Guo is a CPC member and began his career in January 1981. He successively served as the Xi’an Office manager, Beijing Office manager and General Manager of Transportation Department of Xinjiang Airlines Manager; the Deputy General Manager of Xinjiang Airlines; the Beijing Office Director of CSAHC, the General Manager and the Party Secretary of China Southern Airlines Beijing Office from 1995 to 2004. He served as a member of the Standing Committee of the CPC and the Deputy General Manager of CSAHC Xinjiang Branch from June 2004 to December 2004, a member of the Standing Committee of the CPC and the Deputy General Manager of China Southern Airlines Xinjiang Branch from January 2005 to December 2005. Mr. Guo served as a member of Party Committee and the Deputy General Manager of the Shenzhen Branch of the Company from December 2005 to February 2008 and the President and Chief Executive Officer as well as Deputy Party Secretary of Chongqing Airlines Company Limited from February 2008 to May 2009. He served as a member of Party Committee and the Deputy Director of the Commercial Steering Committee of the Company from May 2009 to September 2009, the Director and Deputy Party Secretary of the Commercial Steering Committee of the Company from September 2009 to September 2012. Mr. Guo acted as the COO Marketing and Sales of the Company, the Director and the Deputy Party Secretary of the Commercial Steering Committee of the Company from September 2012 to July 2014. Mr. Guo has been the COO Marketing and Sales of the Company since July 2014. For now, he also serves as Chairman of China Southern Jia Yuan (Guangzhou) Air Products Co., Ltd., Guangzhou Nanland Air Catering Co., Ltd., Guangzhou Baiyun International Logistics Co., Ltd. and Guangzhou China Southern PRC Zhongmian Dutyfree Store Co., Limited.
Wang Zhi Xue, male, aged 56, has a college degree from Civil Aviation Flight University of China majoring in Aircraft Piloting, and obtained an on-job university degree from Civil Aviation Flight University of China majoring in Wingmanship, and is a command pilot. Mr. Wang is a CPC member, and began his career in February 1981. Mr. Wang successively served as the Deputy General Manager and Manager of the Flight Safety Technology Division of Zhuhai Airlines Company Limited, the Senior Flight Instructor of Model B737, Deputy Chief Pilot and Director of the Flight Safety Technology Division as well as the Deputy Chief Pilot and Manager of the Flight Safety Technology Management Division from 1995 to 2002 of Shantou Airlines Company Limited of CSAHC. He also acted as the Deputy General Manager of Shantou Airlines Company Limited from June 2002 to October 2004, and the General Manager of the Flight Management Division of the Company from October 2004 to February 2009, and the General Manager and Deputy Party Secretary of Guangzhou Flight Division of the Company from February 2009 to July 2012. Mr. Wang has been a member of the Standing Committee of the CPC, Executive Vice President and chief pilot of the Company from August 2012 to December 2016. He has been a member of the Standing Committee of the CPC and Executive Vice President of the Company from December 2016 until now. For now, he also serves as Chairman of Zhuhai Airlines.
Li Tong Bin, male, aged 55, has college qualification and graduated from Civil Aviation Institute of China majoring in Maintenance of Aircraft Electrical Equipment. He obtained on-job Master of Business Administration (MBA) from Hainan University and Executive Master of Business Administration (EMBA) form Tsinghua University, and is a senior engineer. Mr. Li is a CPC member and began his career in August 1983, and successively served as the Deputy Head of Technical Division of Aircraft Maintenance Plant, the head of Maintenance Plant and the deputy director of Aircraft Engineering Department (aircraft maintenance base), the Director of Aircraft Engineering Department (aircraft maintenance base) of China Northern Airlines Company, the General Manager of Jilin branch of China Northern Airlines Company from 1994 to 2003. He also acted as the Deputy General Manager and Deputy Party Secretary of Zhuhai Airlines Company Limited from September 2004 to January 2005, the General Manager and Deputy Party Secretary of Zhuhai Airlines Company Limited from January 2005 to April 2012, and the party secretary and Deputy General Manager of Northern Branch of the Company from April 2012 to April 2014. Mr. Li was the Chief Engineer, General Manager and Deputy Party Secretary of Aircraft Engineering Department of the Company from April 2014 to August 2015. Mr. Li has been a member of the Standing Committee of the CPC, Executive Vice President and Chief Manager, as well as General Manager and Deputy Party Secretary of Aircraft Engineering Department of the Company since September 2015 to December 2016. From December 2016 till now, he has been a member of the Standing Committee of the CPC, Executive Vice President and Chief Manager. For now, Mr. Li also serves as Chairman of Shenyang Northern Aircraft Maintenance Co., Ltd., Southern Airlines Group Import and Export Trading Company and Guangzhou Aircraft Maintenance Engineering Co., Ltd.
69 Yang Ben Sen, male, aged 59, has a college degree from Civil Aviation Flight University of China majoring in Aircraft Piloting. He is a CPC member and began his career in December 1978. He was appointed as Secondary Captain of Sixth Flight Corps of Civil Aviation Administration, Director of Technology Division, Vice Captain and Captain of Flight Corps of Urumqi Civil Aviation Administration as well as General Manager, Deputy Party Secretary of Flight Corps Urumqi Civil Aviation Administration. In January 2002, he serviced as General Manager and Deputy Party Secretary of Flight Department of Xinjiang Airlines and acted as Vice General Manager of CSAHC Xinjiang Company in December 2002. In January 2005, he acted as Party member and Deputy General Manager of Xinjiang Branch of the Company. From July 2005 to January 2017, he was appointed as Party member, Party Secretary and Deputy General Manager of Xinjiang Branch of the Company. Since January 2017, he has been Chief Pilot of the Company.
Su Liang, male, aged 54, graduated from the University of Cranfield, United Kingdom with a master degree majoring in Air Transport Management, and is an engineer. Mr. Su is a CPC member and began his career in December 1981. From 1998 to 2000, he successively served as Deputy General Manager of the Flight Operations Division, Deputy General Manager and Manager of Planning and Management Division of CSAHC Shenzhen Company. Mr. Su was the Secretary to the Board of the Company from July 2000 to December 2003, the Secretary to the Board and Director of Board Secretariat of the Company from December 2003 to November 2005, the Secretary to the Board and Vice Director of Commercial Steering Committee of the Company from November 2005 to February 2006, the Company Secretary and director of Company Secretary Office and Vice Director of Commercial Steering Committee of the Company from February 2006 to January 2007, and the Secretary to the Board and Director of Company Secretary Office from January 2007 to December 2007. Mr. Su has been the Chief Economist of the Company since December 2007. For now, he also serves as Director of Sichuan Airlines.
Chen Wei Hua, male, aged 50, graduated from the School of Law of Peking University with a bachelor degree, who is an economist, a qualified lawyer in the PRC and a qualified corporate legal counselor. Mr. Chen is a CPC member and joined the aviation industry in July 1988. He successively served as Deputy Director of CSAHC, Deputy Director of the Office (director of the Legal Department) of the Company and CSAHC from 1997 to 2004. Mr. Chen was the Chief Legal Adviser of the Company and Director of the Legal Department of the Company from June 2004 to October 2008. Mr. Chen has been the General Counsel and General Manager of the Legal Department of the Company since October 2008. For now, he also acts as Director of Xiamen Airlines.
Xie Bing, male, aged 43, with a university degree, graduated from Nanjing University of Aeronautics and Astronautics, majoring in Civil Aviation Management. He subsequently received a master degree of business administration, a master degree of business administration (international banking and finance) and an Executive Master of Business Administration (EMBA) degree from Jinan University, the University of Birmingham, Britain and Tsinghua University, respectively. Mr. Xie is a Senior Economist, fellow member of The Hong Kong Institute of Chartered Secretaries, and has the qualification for Company Secretary of companies listed on Shanghai Stock Exchange and also has the qualification for Company Secretary of companies listed on Stock Exchange. Mr. Xie is a CPC member and began his career in July 1995. He successively served as the Assistant of Company Secretary of the Company, and the Executive Secretary of the General Office of CSAHC from 2003 to 2007. Mr. Xie has been the Company Secretary and Deputy Director of the Company Secretary Office from November 2007 to December 2009. Mr. Xie has been the Company Secretary and Director of the Company Secretary Office since December 2009.
Feng Hua Nan, male, aged 54, graduated with a college degree from China Civil Aviation Flying College, majoring in Aircraft Piloting, and obtained an on-job master degree in Aeronautical Engineering from Beijing University of Aeronautics and Astronautics and an Executive Master of Business Administration (EMBA) from the School of Economics and Management of Tsinghua University. He is a commanding pilot. Mr. Feng is a CPC member and began his career in January 1983. 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 from 1994 to 1999. He was the General Manager of Flight Safety Technology Department from December 1999 to October 2002, and the General Manager of Flight Technology Management Department of the Company from November 2002 to September 2004. Mr. Feng also served as the Party Secretary and Deputy General Manager of Guizhou Airlines Company Limited from September 2004 to February 2006, and then served as the General Manager and Deputy Party Secretary of Guizhou Airlines Company Limited from February 2006 to July 2014. He has been the COO Flight Safety of the Company since August 2014. For now, he also serves as President of Zhuhai Xiang Yi Aviation Technology Co., Ltd., China Southern Airlines General Aviation Limited and China Southern West Australia Flight College.
70 Guo Jian Ye, male, aged 54, graduated with a master degree from Party School of Civil Aviation Flight University of China majoring in Aircraft Piloting. He got the at-job university defree from South China Normal University majoring in Political Education in Education Management Department. He also obtained a master’s degree from the Party School of the Central Committee of CPC majoring in economics and management He is a CPC member and began his career in May 1980. He was appointed as Committee Secretary, Director of Advertising and Promotion Department of CAAC Central and Southern Regional Administration, Director of Air Transportation Administration Political Office of CAAC Central and Southern Regional Administration, Vice Director of Air Transportation Administration under CAAC Central and Southern Regional Administration and General Manager, Vice Director of Guangdong CAAC Central and Southern Industrial Co., Ltd., Head of CAAC Henan Safety Supervision Office, Director of Safety Supervision Administration, Secretary of standing committee and the member of standing committee of CAAC Central and Southern Regional Administration, as well as the Vice Director. In July 2012, he serviced as a member of standing committee, General Manager and Deputy Party Secretary of Heilongjiang Branch of the Company. From July 2014 to January 2017, he acted as a Party member, Director and Deputy Party Secretary of marketing management committee of the Company. Since January 2017, he has been the Chief Customer Officer of the Company.
Save as disclosed above, none of the above Directors or Supervisors, senior management of our Company has any relationship with any Directors, Supervisors, senior management, substantial shareholders of our Company.
B. Compensation
The aggregate compensation paid to all Directors, Supervisors and Senior Management for 2016 was RMB10.56 million. For the year ended December 31, 2016, we paid an aggregate of approximately RMB1.59 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’ remuneration for the year ended December 31, 2016 are set out below:
Salaries, Retirement Directors’ allowances scheme fees and benefits in contributions Total RMB’000 kind RMB’000 RMB’000 RMB’000 Non-executive Directors Wang Chang Shun - - - - Yuan Xin An - - - - Yang Li Hua - - - -
Independent Non-executive Directors Ning Xiang Dong 150 - - 150 Liu Chang Le 150 - - 150 Tan Jin Song 150 - - 150 Guo Wei 150 - - 150 Jiao Shu Ge 150 - - 150
Executive Directors Tan Wan Geng - - - - Zhang Zi Fang - - - - Li Shao Bin - 639 130 769
Supervisors Pan Fu - - - - Li Jia Shi - 711 133 844 Zhang Wei - - - - Yang Yi Hua - - - - Wu De Ming - 413 133 546 Total 750 1,763 396 2,909
71 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 terms of the seventh session of our board of directors were expired on December 26, 2016. All members of the existing session of our board will continue to fulfill their respective duties of care and diligence and responsibilities in accordance with the laws, administrative rules, and the articles of association of our Company until the work for re-election and appointment of members of our board is completed. We will promptly push forward the process of the re-election and appointment of members of our board after the confirmation of all relevant matters and fulfill respective disclosure obligations in a timely manner. Based on the PRC Company Law and our Articles of Association and as advised by our PRC legal adviser, we comply with the home country law and our Articles of Association with respect to the postponement of the re-election and appointment of new members of our board. A director may serve consecutive terms upon re-election.
Audit Committee
The Audit Committee is appointed by our board of Directors and consists of three independent non-executive directors. The current members of the Audit Committee are Tan Jing Song, Ning Xiang Dong and Jiao Shu Ge. Tan Jing Song is the Chairman of the Audit 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 quorum necessary for the transaction of any business is two committee members. The Audit Committee held 18 meetings in 2016, which were attended by all members.
The Audit Committee is required, amongst other things, to oversee the relationship with the external auditors, to review our interim results and annual financial statements, to monitor compliance with statutory and listing requirements, to review the scope, if necessary, to engage independent legal or other advisers as it determines is necessary and to perform investigations. In addition, the Audit Committee also examines the effectiveness of our Company’s internal controls, which involves regular reviews of the internal controls of various corporate structures and business processes on a continuous basis, and takes into account their respective potential risks and severity, in order to ensure the effectiveness of 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 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 Ning Xiang Dong with independent non-executive director Guo Wei and non-executive director Yuan Xin An 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 one meeting in 2016, which were attended by all members.
The responsibilities of the Remuneration and Assessment Committee are to make recommendations on the remuneration policy and structure for directors and senior management of 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.
72 The Remuneration and Assessment Committee consulted, when appropriate, the Chairman and/or the President about its proposals relating to the remuneration of other executive directors. The Remuneration and Assessment Committee is provided with sufficient resources to discharge its duties and professional advice is available if necessary. The Remuneration and Assessment Committee is also responsible for assessing performance of executive directors and approving the terms of executive directors’ service contracts. The Remuneration and Assessment Committee has performed all its responsibilities under its terms of reference in 2016.
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 our Group operates in case of candidates of executive directors) and expected contributions to our Group.
As of December 31, 2016, the Nomination Committee consists of three members, including Wang Chang Shun as Chairman and Tan Jing Song (independent non-executive director) and Jiao Shu Ge (independent non- executive director) as members. 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; investigate and propose candidates for directors and managers and other senior management members to our board.
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 resolve on 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 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 two meetings in 2016, which was attended by all members.
D. Employees
As of December 31, 2016, we had 93,132 employees, including 8,126 pilots, 18,177 flight attendants, 15,078 maintenance personnel, 9,354 passenger transportation personnel, 6,683 cargo transportation personnel, 9,738 ground service personnel, 2,397 flight operation officers, 2,040 flight security guards, 1,330 information system personnel, 2,429 financial personnel, and 17,780 other personnel. All of our pilots, flight attendants, maintenance personnel, administrative personnel and sales and marketing personnel are contract employees.
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. Two representatives of our Company labor union currently serve 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.
73 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 13% to 20% (2015: 13% to 21%) of salary costs including certain allowances. A member of the retirement schemes is entitled to pension benefits from the Local Labour 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, had made certain welfare subsidy payments to these retirees.
In 2014, our Company and our major subsidiaries joined a new defined contribution retirement scheme that was implemented by CSAHC. 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 2016 was approximately RMB486 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 provides compensation as an offer to encourage employees to accept voluntary redundancy, a provision for the termination benefits provided is recognized in the consolidated income statement when both of the following conditions are satisfied:
x We have a formal plan for the termination of employment or has made an offer to employees for voluntary redundancy, which will be implemented shortly; and
x 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 suffer a work-related illness, injury or disability, and continues to pay the full salary of, and provides all standard cash subsidies to, such employee during the term of such illness, injury or disability. We also pay for certain medical expenses of our temporary employees.
E. Share Ownership
None of our directors and senior management owns any shares or options in our Group as of April 21, 2017.
74 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 21, 2017 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.
Percentage of the Percentage Respective of Title of Beneficially Class of Total Shares Identity of Person or Group Owned (1) Shares (2) Shares (2 A shares CSAHC 4,039,228,665 57.52% 41.14% H shares HKSCC Nominees Limited 1,749,221,988 62.59% 17.82% H shares CSAHC (3) 1,064,770,000 38.10% 10.85% H shares Nan Lung Holding Limited 1,033,650,000 36.98% 10.53%
(1) Beneficial ownership is determined in accordance with the rules of the SEC.
(2) Percentage of A Shares and percentage of H Shares is based on 7,022,650,000 A Shares and 2,794,917,000 H Shares, respectively, issued as of April 21, 2017. Percentage of total shares is based on 9,817,567,000 shares issued as of April 21, 2017.
(3) Includes 31,120,000 H Shares held by Yazhou Travel Investment Company Limited, representing 1.11% of the total number of H Shares and 0.32% of the total number of all outstanding shares, and 1,033,650,000 H Shares held by Nan Lung, representing 36.98% of the total number of H shares and 10.53% of the total number of all outstanding shares.
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, 2016, there were 46 registered holders of 1,792,150 American Depositary Shares in the U.S., consisting of 3.21% 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 CSAHC, which is an entity wholly-owned by the Chinese government.
B. Related Party Transactions
For a detailed description of our related party transactions, please see Note 49 to the consolidated financial statements. In particular, the following arrangements, which our Company believes are material to our operations, have been made between our Company and CSAHC and its affiliates during the year ended December 31, 2016 and up to the latest practicable date. Our Company believes that these arrangements have been entered into by our Company in the ordinary course of business and in accordance with the agreements governing such transactions.
Arrangements with CSAHC
De-merger Agreement
The De-merger Agreement dated March 25, 1995 (such agreement was amended by the Amendment Agreement No.1 dated May 22, 1997) was entered into between CSAHC and our Company for the purpose of defining and allocating the assets and liabilities between CSAHC and our Company. Under the De-merger Agreement, CSAHC and our Company have agreed to indemnify the other party against claims, liabilities and expenses incurred by such other party relating to the businesses, assets and liabilities held or assumed by CSAHC or our Company pursuant to the De-merger Agreement.
75 Neither our Company nor CSAHC has made any payments in respect of such indemnification obligations from the date of the De-merger Agreement up to the date of this Annual Report.
Trademark License Agreement
Our Company and CSAHC entered into a ten-year trademark license agreement dated May 22, 1997. Pursuant to which CSAHC acknowledges that our Company has the right to use the name "China Southern" and "China Southern Airlines" in both Chinese and English, and grants our Company a renewable and royalty free license to use the kapok logo on a worldwide basis in connection with our Company’s airline and airline-related businesses. Unless CSAHC gives a written notice of termination three months before the expiration of the agreement, the agreement will be automatically renewed for another ten-year term. In May 2007, the trademark license agreement entered into by our Company and CSAHC was automatically renewed for ten years.
Leases
We (as lessee) and CSAHC (as lessor) entered into lease agreements as follows:
(1) Our Company and CSAHC entered into the Asset Lease Agreement (the "Asset Lease Agreement") on September 25, 2012 to renew the leases transactions for a term of three years from January 1, 2012 to December 31, 2014. Pursuant to the Asset Lease Agreement, CSAHC agrees to continue to lease to our Company certain parcels of land, properties, and civil aviation structures and facilities at existing locations in Guangzhou, Haikou, Wuhan, Hengyang, Jingzhou (previously known as "Shashi"), Zhanjiang and Changsha. The annual rents payable to CSAHC under the Asset Lease Agreement is RMB36 million for the three years ending December 31, 2014.
Our Company further entered into the 2013 Nanyang Asset Lease Agreement (the "2013 Nanyang Asset Lease Agreement") with CSAHC on April 19, 2013, pursuant to which CSAHC agreed to lease to our Company certain lands, properties, facilities and structures at Nanyang Jiangying Airport for a term of two years, commencing from January 1, 2013 to December 31, 2014. The rent payable under the Nanyang Asset Lease Agreement was RMB30 million for the year ended December 31, 2014.
For the year ended December 31, 2014, the rent incurred by our Group amounted to approximately RMB66 million pursuant to the Asset Lease Agreement and Nanyang Asset Lease Agreement.
As the lease transactions contemplated under the Asset Lease Agreement and the 2013 Nanyang Asset Lease Agreement would continue to be entered into on a recurring basis, our Company and CSAHC entered into the new Asset Lease Agreement (the "New Asset Lease Agreement") on December 29, 2014 for a term of three years from January 1, 2015 to December 31, 2017 to renew lease transactions originally covered under the Asset Lease Agreement and the 2013 Nanyang Asset Lease Agreement. The annual rents payable to CSAHC under the New Asset Lease Agreement is RMB86,268,700 for the three years ending December 31, 2017.
For the years ended December 31, 2015 and 2016, the rent incurred by our Group amounted to RMB86million pursuant to the New Asset Lease Agreement, respectively.
(2) Our Company and CSAHC entered into an indemnification agreement dated May 22, 1997 in which CSAHC has agreed to indemnify our Company against any loss or damage caused by or arising from any challenge of, or interference with, our Company’s right to use certain lands and buildings.
76 (3) On January 9, 2014, our Company and CSAHC have entered into two new lease agreements (the "Lease Agreements"), namely, the property lease agreement (the "Property Lease Agreement") and the land lease agreement (the "Land Lease Agreement") to renew the land and property leases transactions contemplated thereunder for the period from January 1, 2014 to December 31, 2016. Pursuant to the Property Lease Agreement, CSAHC agreed to lease certain properties, facilities and other infrastructure located in various cities such as Guangzhou, Shenyang, Dalian, Harbin, Xinjiang, Changchun, Beijing and Shanghai held by CSAHC or its subsidiaries to our Company for office use related to the civil aviation business development. Pursuant to the Land Lease Agreement, CSAHC agreed to lease certain lands located in Xinjiang, Harbin, Changchun, Dalian and Shenyang by leasing the land use rights of such lands to our Company for the purposes of civil aviation and related businesses of our Company. The annual rental is determined after arm’s length negotiation between the parties and adjusted with reference to the rental assessment report prepared by Guangdong Yangcheng Land and Property Appraisal Co., Ltd. taking into account the prevailing market rental for properties located at similar locations and historical figures. The maximum annual aggregate amount of rent payable by our Company to CSAHC under the Property Lease Agreement and the Land Lease Agreement for each of the three years ending December 31, 2016 shall not exceed RMB40,114,700 and RMB63,582,200, respectively, and such payment shall be made quarterly. On August 13, 2015, our Company and CSAHC entered into a supplemental agreement to the Property Lease Agreement, pursuant to which our Company and CSAHC agreed that the maximum annual aggregate amount of rent payable by our Company to CSAHC under the Property Lease Agreement for the two years ending December 31, 2016 shall be slightly adjusted to not more than RMB40,270,700 (original cap of RMB 40,114,700) and RMB40,348,700 (original cap of RMB 40,114,700), respectively. Save as the said revision, all other terms of the Property Lease Agreement shall remain unchanged.
On December16, 2016, our Company and CSAHC have entered into the new Property Lease Agreement and Land Lease Agreement to renew the land and property leases transactions contemplated thereunder for the period from January 1, 2017 to December 31, 2019. Pursuant to this new Property Lease Agreement and Land Lease Agreement, CSAHC further agreed to lease the property and land in Shenyang, Chaoyang, Dalian, Changchun, Harbin, Xinjiang, Beijing, Shanghai and foreign offices to our Company. The maximum annual aggregate amount of rent payable by our Company to CSAHC under the Property Lease Agreement and the Land Lease Agreement for each of the three years ending December 31, 2019 shall not exceed RMB130 million. Pursuant to this new Property Lease Agreement and Land Lease Agreement, our Company and CSAHC shall further discuss and agree on the scope and details of specific leasing and sign separate contracts.
For the year ended December 31, 2014, the rents for land lease and property lease incurred by our Group amounted to approximately RMB40 million and RMB64 million, respectively pursuant to the Lease Agreements.
For the year ended December 31, 2015, the rents for property lease and land lease incurred by our Group amounted to RMB40 million and RMB64 million, respectively pursuant to the Lease Agreements.
For the year ended December 31, 2016, the rents for land lease and property lease incurred by our Group amounted to RMB40 million and RMB64 million, respectively pursuant to the Lease Agreements.
77 SAIETC, a former wholly-owned subsidiary of CSAHC
On January 9, 2014, our Company and SAIETC entered into a new import and export agency framework agreement (the “Import and Export Agency Framework Agreement”) to renew the continuing connected transactions contemplated therein for a fixed term of three years commencing from January 1, 2014 to December 31, 2016. Pursuant to the Import and Export Agency Framework Agreement, SAIETC agreed to provide import and export services and the relevant lease services, customs clearance services, customs declaration and inspection services, and the relevant storage, transportation and insurance agency services, and tendering and agency services to our Group. In relation to the service fee charged for import and export services, both parties agreed that such fee shall not be higher than the prevailing market rate charged by several trading companies of certain airlines companies in the PRC for similar services. In relation to the service fee charged for custom clearing, custom declaration and inspection, and the relevant storage, transportation and insurance services, both parties agreed that such fee charged shall not be higher than the prevailing market rate charged for similar services provided by independent third party service providers in the flight equipment logistics transportation market in the PRC. In relation to the service fee charged for the tendering and agency services, it is required to be determined in accordance with the fee standard prescribed by the State for this kind of tendering and agency services from time to time. During the period of the Import and Export Agency Framework Agreement, the annual cap are set at RMB160 million per annum.
For the year ended December 31, 2014, the agency fee incurred by our Group in respect of the above import and export services was approximately RMB119 million.
For the year ended December 31, 2015, the agency fee incurred by our Group in respect of the above import and export services was RMB114 million.
SAIETC was a former wholly-owned subsidiary of CSAHC. In August 2016, since SAIETC has become a wholly-owned subsidiary of our Company, the transactions between our Company and SAIETC under Import and Export Agency Framework Agreement are not considered as the connected transactions of our Company. Prior to that, the agency fee incurred by our Group in respect of the above import and export services was RMB60 million in 2016.
Southern Airlines Culture and Media Co., Ltd. ("SACM"), which is 40% owned by our Company and 60% owned by CSAHC
On April 19, 2013, our Company entered into a new Media Services Framework Agreement with SACM to renew the annual cap, expand the services scope and extend the term for an additional term of three years, commencing from January 1, 2013 to December 31, 2015. Pursuant to the agreement, our Company has appointed SACM to provide 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, and services relating to the distribution of newspapers and magazines. The service fees for the media services to be provided to members of our Group by SACM and its subsidiaries (the “SACM Group”) are determined, among others, the prevailing market price. Pricing are based on prevailing market price and agreed upon between the parties for each transaction on arm’s length negotiations in accordance with the following pricing mechanism: (a) if there are prevailing market prices for same or similar types of services in the same or similar locations of the services being provided, the pricing of the services shall follow such prevailing market price; or (b) if there are no such prevailing market price in the same or similar locations, the services to be provided by SACM Group shall be on terms which are no less favourable than the terms which can be obtained by our Group from independent third parties within the PRC market.The annual cap under the agreement for each year is RMB98 million, RMB105 million and RMB113 million for each of years ended December 31, 2013, 2014 and 2015, respectively.
Our Company and SACM entered into the Supplemental Agreement to the Media Services Framework Agreement on 29 December 2014 to revise the annual cap for services provided by the SACM Group for the period from January 1, 2015 to December 31, 2015 from RMB113 million to RMB118.5 million. In addition, the following revisions to the Media Services Framework Agreement were also made and set out in the Supplemental Agreement to the Media Services Framework Agreement as follows: (a) to clarify the parties referred in the Media Services Framework Agreement shall include itself and its wholly-owned or controlled subsidiaries; and (b) to clarify the rights and obligations of the SACM Group, i.e. clarifying the SACM Group will have full discretion for the whole process of the selection of media or media agent, negotiation, purchase, execution and supervision, and the SACM Group should take the responsibility to monitor the advertisement, submit the monitoring report and strengthen the supervision on the advertising effect. Save as the aforesaid revision, all other terms of the Media Services Framework Agreement remain unchanged.
On December 30, 2015, our Company entered into a new Media Services Framework Agreement with SACM to renew the media services transaction and extend for an additional term of three years, commencing from January 1, 2016 to December 31, 2018. The annual cap under the new agreement will remain unchanged at RMB118.5 million.
78 For the years ended December 31, 2014, 2015, 2016, the media fees incurred by our Group for the media services amounted to RMB75 million, RMB67 million and RMB71 million, respectively.
Southern Airlines Group Finance Company Limited ("SA Finance"), which is 66% owned by CSAHC, 21% owned by our Company and 13% owned in aggregate by four subsidiaries of our Company
(1) On November 8, 2013, our Company renewed the financial services framework agreement (the “Financial Services Framework Agreement”) with the SA Finance for a term of three years starting from January 1, 2014 to December 31, 2016. Under such agreement, the SA Finance agrees to provide to our Company deposit (the “Provision of Deposit Services”) and loan services (the “Provision of Loan Services”). The SA Finance shall pay interests to our Company regularly at a rate not lower than the current deposit rates set by the People’s Bank of China. The Group’s deposits placed with the SA Finance were re-deposited in a number of banks. The SA Finance has agreed that the loans it provided to CSAHC and its subsidiaries other than our Group should not exceed the sum of the SA Finance’s shareholders’ equity, capital reserves and total deposits received from other companies (excluding our Group). The rates should be determined on an arm’s length basis and based on fair market rate, and should not be higher than those available from independent third parties. Each of the maximum daily balance of deposits (including the corresponding interests accrued thereon) placed by our Company as well as the maximum amount of the outstanding loan provided by the SA Finance to our Company (including the corresponding interests payable accrued thereon) at any time during the term of the Financial Services Framework Agreement shall not exceed the Cap which is set at RMB6 billion on any given day. The annual cap of fees payable to the SA Finance by our Group for the other financial services should not exceed RMB5 million. On 26 December 2013, the second extraordinary general meeting of 2013 considered and approved the Financial Services Framework Agreement.
Our Company and the SA Finance entered into the Supplemental Agreement to the Financial Services Framework Agreement on May 4, 2015 to revise each of the annual cap in relation to the Provision of Deposit Services and the Provision of the Loan Services for the period from the effective date of Supplemental Agreement to December 31, 2016 from RMB6 billion to RMB8 billion. On June 30, 2015, 2014 annual general meeting of our Company considered and approved the Supplemental Agreement to the Financial Services Framework Agreement.
As of December 31, 2014, our deposits placed with SA Fiance amounted to RMB4,264 million.
As of December 31, 2015, our deposits placed with SA Fiance amounted to RMB2,934 million.
As of December 31, 2016, our deposits placed with SA Fiance amounted to RMB3,759 million.
(2) On November 21, 2014, the Board approved Guangdong CSA E-commerce Co., Ltd. (the “E-commerce Company”, a wholly-owned subsidiary of our Company), to enter into the four electronic aviation passenger comprehensive insurance four parties cooperation agreements (the “Cooperation Agreements”) with the SA Finance, Insurance Brokers (Beijing) Co., Ltd. (the “Air Union”) and each of the four insurance companies, respectively, for a period of three years commencing from June 12, 2014 to May 31, 2017.
Pursuant to the Cooperation Agreements, the E-commerce Company agreed to authorize other parties to use the B2C website, the mobile terminal air tickets sale platform and VOS sale system of our Company for sales of online insurances in consideration for a fixed service fees for each policy sold through its electronic platform.
Our Group will charge a fixed service fee of RMB5 for each insurance policy sold through its electronic platforms. There has not been any comparative market prices due to the specific nature of such transaction and the above pricing model has been agreed on an arm’s length basis among the parties and has been adopted since the commencement of cooperation in 2008.
The annual caps in relation to the service fees to be charged by our Group are RMB14.24 million, RMB30.27 million, RMB42.38 million and RMB24.72 million for the seven months ended December 31, 2014, for the two years ended December 31, 2016 and the five months ending May 31, 2017.
As a result of the increase in aviation insurance purchase demand from travellers and the various cooperation between our Company and the SA Finance on the sale of aviation insurance, on November 19, 2015, our Company and the SA Finance entered into the cooperation framework agreement (the “Cooperation Framework Agreement”) for two years commencing from January 1, 2015 to December 31, 2016.
79 Pursuant to the insurance business platform cooperation arrangements under the Cooperation Framework Agreement, our Company as the platform service provider, agreed to cooperate with the SA Finance, and authorize SA Finance to use the various platforms of our Group including online channels and ground service counter channels as the sales platforms for sale of various insurances relating to aviation transportation including baggage insurance and aviation passenger accident insurance. The scope of the Cooperation Framework Agreement shall also cover the electronic platform as contemplated under the Cooperation Agreements. In addition, our Company agreed to further authorize the SA Finance to use our Group’s ground service counter channels as the sales platform for sale of baggage insurance and aviation passenger accident insurance.
For the sale of insurance policies through our Group’s ground service counter channels and its electronic platforms, our Group is currently charging a fixed ratio of the insurance premium of each of the different kinds of insurance policies. The pricing model has been agreed on an arm’s length basis by our Company and the SA Finance with reference to the determination basis as set out in a table disclosed in the announcement of our Company dated November 19, 2015.
The annual caps in relation to the service fees to be charged by our Group under the Cooperation Framework Agreement are RMB40 million and RMB60 million for the two years ended December 31, 2016, respectively.
On August 29, 2016, our Company and SA Fiance entered into the new Insurance Business Platform Services Agreement under the new Financial Services Framework Agreement for a term of three years starting from January 1, 2017 to December 31, 2019 to renew the provision of the services contemplated under the Insurance Business Platform Services Agreement. The annual caps for the insurance business platform services arrangement under the new Financial Services Framework Agreement for each year are RMB68.60 million, RMB79.35 million and RMB91.67 million respectively. Pursuant to the new Financial Services Framework Agreement, our Company shall be only liable for providing insurance sales platforms and shall not be liable for any disputes arising among the insurers, insurance agents, policy holders, the insured and other parties. SA Fiance shall ensure that it has the agency authority to sell the insurance in the place where the insurance is sold while our Company shall not bear any obligations or liabilities arising therefrom.
For the year ended December 31, 2014, the service fee charged by our Group were approximately RMB20.87 million (including the service fee of approximately RMB7.05 million for the five months ended May 31, 2014 and approximately RMB13.82 million for the seven months ended December 31, 2014).
For the year ended December 31, 2015 and 2016, the service fee charged by our Group were RMB16 million and RMB26 million, respectively.
China Southern Air Holding Ground Services Company Limited ("GSC"), a wholly-owned subsidiary of CSAHC
On November 8, 2013, our Company and GSC renewed the Passenger and Cargo Sales Agency Services Framework Agreement (the “Passenger and Cargo Sales Agency Services Framework Agreement”) to renew the continuing connected transactions contemplated therein for a fixed term of three years commencing from January 1, 2014 to December 31, 2016. Pursuant to the New Passenger and Cargo Sales Agency Services Framework Agreement, GSC agrees to provide the following services to our Group: domestic and international air ticket sales agency services; domestic and international airfreight forwarding sales agency services; chartered flight and pallets sales agency services; internal operation services for the inside storage area (these services include the areas in Guangzhou, Beijing and Shanghai, etc); and delivery services for the outside storage area. The agency fee for sales agency services is determined by reference to the agency ratio paid to the agency companies by the airlines companies of the same types of the industry in the same regions; the service fee for internal operation services is determined by the fee standard prescribed by the local government. The annual cap shall maintain RMB250 million per annum for the entire term of the New Passenger and Cargo Sales Agency Services Framework Agreement.
80 In view of the sudden increase of the sales agency services as a result of the peak season market demand for our Group exceeds the original projection, the annual cap under the Passenger and Cargo Sales Agency Services Framework Agreement in respect of the year ended December 31, 2016 would become insufficient. Accordingly, on December 16, 2016, our Company and GSC entered into the Supplemental Agreement to revise the annual cap under Passenger and Cargo Sales Agency Services Framework Agreement from RMB250 million to RMB260 for the year ended December 31, 2016.
For the year ended December 31, 2014, the commission expense and goods handling fee paid to GSC were approximately RMB8 million and RMB46 million, respectively, and the income relating to other services was approximately RMB32 million.
For the year ended December 31, 2015, the commission expense and goods handling fee paid to GSC were RMB98 million and RMB109 million, respectively, and the income relating to other services was RMB20 million.
For the year ended December 31, 2016, the commission expense and goods handling fee paid to GSC were RMB99 million and RMB117 million, respectively, and the income relating to other services was RMB6 million.
On December 16, 2016, our Company entered into a new Passenger and Cargo Sales and Ground Services Framework Agreement (the “Passenger and Cargo Sales and Ground Services Framework Agreement”) for a term of three years starting from January 1, 2017 to December 31, 2019. Under Passenger and Cargo Sales and Ground Services Framework Agreement, GSC agreed to provide certain services and charge agent service fees while our Company agreed to lease certain assets including transportation tools and equipment and workplace and charge rental thereon. GSC agrees to provide the following services to our Group: (i) domestic and international air ticket sales agency services; (ii) domestic and international airfreight forwarding sales agency services; (iii) chartered flight and pallets sales agency services; (iv) Import and export port and transfer services related to cargo operations; (v) ground services, including aircraft maintenance, cabin cleaning, cleaning, collecting and issuing of towels, entertaining equipment maintenance within aircraft, surface cleaning of aircraft and comprehensive ground services; and (vi) support to sales and services oriented to major direct customers of our Company. In respect of the services provided by GSC to our Group, the agency fee for sales agency services is determined by reference to the agency ratio paid to the agency companies by the airlines companies of the same types of the industry in the same regions (including domestic and foreign market). The service fee for internal operation services is determined by the fee standard prescribed by the local government. The service fee for other maintenance and ground services is mainly determined based on related costs (mainly including labor costs, operation costs, management costs and taxes) in addition to 10% profit ratio. With respect to the rentals to be received by our Company, rentals are determined with reference to the valuation prepared by valuation agency (independent third party). Our Company expect the annual fees payable to our Company under Passenger and Cargo Sales and Ground Services Framework Agreement will not exceed RMB10 million. Under Passenger and Cargo Sales and Ground Services Framework Agreement, the annual caps for the services provided to our Group by GCS for each of the three years ending December 31, 2019 will be RMB270 million, RMB330 million and RMB400 million, respectively.
China Southern Airlines Group Property Management Company Limited (the "CSAPMC"), a wholly-owned subsidiary of CSAHC
Our Company has entered into a New Framework Agreement for Engagement of Property Management (the "New Property Management Framework Agreement") on December 28, 2012 to renew the property management transactions for a term of three years from January 1, 2012 to December 31, 2014. Pursuant to the New Property Management Framework Agreement, our Company has renewed the appointment of CSAPMC for provision of property management and maintenance services for our Company’s leased properties in the airport terminal, the base and the 110KV transformer substation at the new Baiyun International Airport (other than certain properties in our Company’s headquarter located in the old Baiyun Airport which were covered in the existing Property Management Framework Agreement) to ensure the ideal working conditions of our Company’s production and office facilities and physical environment, and the normal operation of equipment.
Our Company has further entered into the airport property management framework agreement (the "Airport Property Management Framework Agreement") on January 11, 2013 to renew the property management at the old Baiyun Airport for a term of three years from January 1, 2012 to December 31, 2014. Pursuant to the Airport Property Management Framework Agreement, our Company has renewed the appointment of CSAPMC for the provision of property management and maintenance services for our Company’s properties at the old Baiyun Airport and surrounding in Guangzhou.
81 The fee charging schedule (or charge standard) under the New Property Management Framework Agreement and the Airport Property Management Framework Agreement shall be determined on an arm’s length basis between both parties, and shall not be higher than the one charged by any independent third parties in the similar industry. The annual cap for the New Property Management Framework Agreement and the Airport Property Management Framework Agreement are set at RMB32,750,000 and RMB22,250,000, respectively.
On December 31, 2013, our Company further entered into an agreement supplemental to the New Property Management Framework Agreement (the "New Property Management Supplemental Agreement") and an agreement supplemental to the Airport Property Management Framework Agreement (the "Airport Property Management Supplemental Agreement"). Pursuant to the New Property Management Supplemental Agreement, the parties have agreed to revise the services fee in relation to the provision of property management and maintenance services by CSAPMC for our Company’s leased properties at the airport terminal, the base and the 110KV transformer substation at the new Baiyun International Airport from RMB32,750,000 per annum to RMB42,700,000 per annum for the year ended December 31, 2014. Pursuant to the Airport Property Management Supplemental Agreement, the parties have agreed to revise the services fee in relation to provision of property management and maintenance services by CSAPMC for our Company’s several properties at the old Baiyun Airport and surrounding in Guangzhou from RMB22,250,000 per annum to RMB27,300,000 per annum for the year ended December 31, 2014.
As the transactions contemplated under the New Property Management Framework Agreement and the Airport Property Management Framework Agreement will continue to be entered into on a recurring basis, our Company entered into the new Property Management Framework Agreement (the "Property Management Framework Agreement") with ise the services fee in relation to the provision of property management and maintenance services by CSAPMC on December 29, 2014 to renew the property management transactions originally covered under the New Property Management Framework Agreement and the Airport Property Management Framework Agreement for a term of three years from January 1, 2015 to December 31, 2017. In addition, CSAGPMC has also been appointed 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 to our Group, which are newly added services to be provided by CSAGPMC to our Group. The annual cap for the Property Management Framework Agreement is set at RMB90 million, RMB92 million and RMB96 million for the three years ending December 31, 2015, 2016 and 2017, respectively.
For the years ended December 31, 2014, 2015 and 2016, the property management and maintenance fee incurred by our Group respectively amounted to RMB61 million, RMB73 million and RMB70 million pursuant to the New Property Management Framework Agreement, the Airport Property Management Framework Agreement and the Property Management Framework Agreement.
Shenzhen Air Catering Co., Ltd. (the "SACC"), which is 50.1% owned by CSAHC
Our Company entered into a Catering Services Framework Agreement with SACC, a non-wholly-owned subsidiary of CSAHC on April 19, 2013 for a term of three years, commencing from January 1, 2013 to December 31, 2015, pursuant to which SACC agrees to provide the in-flight lunch box, 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 located at. The maximum annual aggregate amount of the services fee payable by our Company to SACC shall not exceed RMB100 million, RMB115 million and RMB132.5 million for each of the years ended December 31, 2013, 2014 and 2015, respectively.
Our Company entered into a new Catering Services Framework Agreement with SACC on December 30, 2015 for an additional term of three years, commencing from January 1, 2016 to December 31, 2018. The annual cap under the new agreement is set at RMB152 million, RMB175 million and RMB201 million for each of the years ending December 31, 2016, 2017 and 2018, respectively.
For the years ended December 31, 2014, 2015 and 2016, the services fee incurred by our Group for the catering services amounted to RMB89 million, RMB100 million and RMB124 million, respectively.
82 Zhuhai MTU, which is 50% owned by CSAHC
Our Company entered into an agreement relating to continuing connected transactions with CSAHC, MTU Aero Engines GmbH ("MTU GmbH") and Zhuhai MTU on September 28, 2009, by which Zhuhai MTU shall continue to provide our Company with engine repair and maintenance services subject to the international competitiveness and at the net most favorable terms, while our Company shall make relevant payment to Zhuhai MTU according to related charging standard. The agreement is effective from its date to April 5, 2031.
For the year ended December 31, 2014, 2015 and 2016, our engine repair and maintenance service fees incurred under the agreement amounted to RMB780 million, RMB1,324 million and RMB1,877 million, respectively.
Acquisition of 95.4% Equity Interests in Hebei Airlines by Xiamen Airlines
On October 13, 2014, Xiamen Airlines (a subsidiary of our Company) and Hebei Airlines Investment Group Company Limited (“Hebei Airlines Investment”) entered into the equity transfer agreement, pursuant to which Xiamen Airlines agreed to purchase and Hebei Airlines Investment agreed to sell the 95.40% equity interests in Hebei Airlines at the consideration of RMB680 million (the “Acquisition”). The consideration of RMB680 million is determined after an arm’s length negotiation between the parties in accordance with prevailing market conditions and after taking into account, inter alia, the net asset value of Hebei Airlines and the appraisal value of the 95.40% equity interests in Hebei Airlines as of April 30, 2014.
Our Company believes that the Acquisition can help our Group to further develop the aviation market in Hebei, facilitate the integration of the North China market by Xiamen Airlines and improve its domestic route network. The Acquisition will also achieve the synergies of Xiamen Airlines and Hebei Airlines to strengthen their market positions, so as to further enhance the competitiveness of the Company, Xiamen Airlines and Hebei Airlines as a whole.
The Acquisition was completed in December 2014.
Acquisition of 4% Equity Interests in Xiamen Airlines from Xiamen Jianfa
On July 14, 2015, our board announced that our Company and Xiamen Jianfa entered into an agreement (the “Share Transfer Agreement”), pursuant to which Xiamen Jianfa agreed to sell and our Company agreed to purchase 4% equity interests (the "Targeted Equity Interests") in Xiamen Airlines at the consideration of RMB586,666,670 (the "Acquisition"). Our Company believes that the increase of 4% equity interests in Xiamen Airlines held by our Company can help our Group to further enhance our control over the Xiamen Airlines, help the Xiamen Airlines to maintain a stable shareholding structure, further improve the strategic synergy effect of our Company and Xiamen Airlines and improve the overall operating results of our Company.
On December 8, 2015, our Company and Xiamen Jianfa entered into a supplemental agreement to the Share Transfer Agreement, pursuant to which the parties agreed to adjust the consideration from RMB586,666,667 to RMB626,666,667 so as to reflect the profit attribution arrangement. The acquisition was completed in December 2015.
Acquisition of 100% equity interests in SAIETC
On 2 February 2016, our Company and CSAHC entered into the share transfer agreement (the “Share Transfer Agreement”), pursuant to which our Company agreed to purchase and CSAHC agreed to sell 100% equity interests in SAIETC at the consideration of RMB400,570,400. The consideration of RMB400,570,400 is determined after an arm’s length negotiation between the parties in accordance with prevailing market conditions and after taking into account, inter alia, the net asset value of SAIETC and the appraisal value of 100% equity interests in SAIETC as of June 30, 2015, net of decrease of net asset resulting from events after balance sheet date (including profit distribution and long-term equity investment).
Our Company believes that the acquisition can assist our Group to strengthen procurement management of aircraft, flight equipment and other airlines-related facilities, lower management risk; assist our Company to streamline its relationship with trading companies so as to reduce connected transactions. With SAIETC’s experience in tendering and agency services, SAIETC will be developed into a centralised platform for procurement activities of our Group, that enhances concentration and efficiency of procurement activities.
83 Capital Increase Agreement
On December 23, 2016, our Company entered into the Capital Increase Agreement (the “Capital Increase Agreement”) with CSAHC, Xiamen Airlines, Shantou Airlines, Zhuhai Airlines and Guangzhou Nanland Air Catering Company Limited (“Nanland Company”), under which each party agreed that each of our Company and CSAHC can increase the capital of SA Finance, up to RMB500 million in total. RMB348,597,550 of such capital increase will be used to increase the registered capital from RMB724,329,500 to RMB1,072,927,050, while RMB151,402,450 will be used to increase the capital reserve of SA Finance. Xiamen Airlines, Shantou Airlines, Zhuhai Airlines and Nanland Company (non-wholly owned subsidiary of our Company) agreed to waive their rights to make capital contributions. The amounts of capital increase to the SA Finance were determined by each party through fair negotiation with reference to (among other things) the net assets of SA Finance on May 31, 2016 and current shareholding ratio of each party in SA Finance.
Upon the completion of capital increase, the equity interest held by CSAHC in the SA Finance would remain at 66.022% while the equity interest held by our Company in the SA Finance would increase from 21.089% to 25.277%.
Our Company considers that the entering into the Capital Increase Agreement and the capital increase will enhance the finance conditions and therefore the development of the SA Finance and allow the SA Finance to further expand its business. Our Company would also be able to share the benefit from the SA Finance’s profits by holding 25.277% equity interest directly, and 8.701% equity interest indirectly through its four subsidiaries, in the SA Finance. All related party transactions have been approved by independent non-executive directors.
Acquisition of Property in the PRC
On December 15, 2016, Hainan Branch of our Company (as the purchaser) entered into the Sale and Purchase Agreement with China Southern Air Sanya Property Development Co., Ltd (the “Vendor”), under which our Company agreed to purchase a property at the total consideration of RMB56,089,800 (equivalent to HK$64,953,591). The property includes whole 4th floor of China Southern Air Sanya Headquarter Building located at No.360-2 Yingbin Road, Kedong District, Sanya, Hainan Province, the PRC with a gross floor area of approximately 2,123.5 square meters (the “Property”).
The consideration for the Property acquisition was determined after arm’s length negotiations between our Company and the Vendor, with reference to (i) the prevailing selling prices of other presale units of the development in which the Property forms part of, in the open market of Sanya; (ii) the similar types (for office purpose) of properties located in the same areas in Sanya; and (iii) the agreed 15% discount provided by the Vendor to our Company. The consideration also included the taxes and renovation costs.
The Vendor is a wholly-owned subsidiary of CITIC China Southern Air Construction Development Co., Ltd. which is owned as to 49% by CSAHC. CSAHC is the controlling shareholder of our Company and therefore the Vendor is a connected person of our Company under the Listing Rules.
Since the Property is situated at the city centre of Sanya and a new commercial business district established by the Sanya municipal government, our Company believes that acquiring the Property with such geographical advantages as its office can not only meet the needs of future production development, but also realign its office premises with our Company’s brand and image. The Property Acquisition will also strengthen our Company’s strategic cooperation with the Sanya municipal government.
All the above related party transactions have been approved by independent non-executive directors.
C. Interests of Experts and Counsel
Not applicable.
84 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
Our Company is engaged in International Court of Arbitration proceedings (“ICC arbitration proceedings”) in London against a lessor SASOF TR-81 AVIATION IRELAND LIMITED, arising out of the redelivery of two Boeing 737 aircraft. The lessor has made various claims of approximately USD13 million in the arbitration proceedings relating to the redelivery condition of the aircraft, and our Company has counterclaimed against the lessor for the recovery of approximately USD9.8 million. As of the issuance date of this report, a further hearing before the Arbitral Tribunal in the ICC arbitration proceedings has not yet commenced. The directors are of the opinion that our Company cannot reasonably predict the result and potential financial impact of this pending arbitration, if any. Therefore, no provision has been made against this pending arbitration.
A claim was raised by a construction company in the Hainan Province of the PRC (the “claimant”) in 2016 against a wholly-owned subsidiary of CSAHC, our Company and our Sanya Branch for the alleged non- payment of construction fees of RMB45 million and the relating interests. The directors are of the opinion that the claims and the civil judgment of the first trial are without merit and have instructed its legal advisor to defend the claims vigorously. As of the issuance date of this report, the directors consider that given the preliminary status of the second trial, our Company cannot reasonably predict the result and potential financial impact of this pending claim, if any. Therefore, no provision has been made against this pending claim.
Our Company received a claim dated October 18, 2016 from two PRC sales agents located in Guangzhou and Guangxi respectively (the “claimants”) against our Company for the alleged breach of certain terms and conditions of a flight routes cooperative agreement (the “cooperative agreement”). The claimants have made a claim against our Company for a total sum of approximately RMB141 million in respect of the alleged non- payment relating to cooperative sales, the refund of the down payments of RMB5.8 million and the relating interests on the above late payment. The directors are of the opinion that the claims are without merit and have instructed our legal advisor to defend the claims vigorously. As of the issuance date of this report, the directors consider that given the nature of the claims and the preliminary status of the proceedings, our Company cannot reasonably predict the result and potential financial impact of this pending claim, if any. Therefore, no provision has been made against this pending claim.
Dividend Information
A dividend in respect of the year ended December 31, 2016 of RMB1 (inclusive of applicable tax) per ten shares, amounting to a total dividend of RMB982 million was proposed by the directors on March 30, 2017. The final dividend proposed after the end of the financial year has not been recognized as a liability at the end of the financial year.
Our Board declares dividends, if any, in Renminbi with respect to H Shares on a per share basis and pays such dividends in 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.
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:
x our financial results;
85 x capital requirements;
x contractual restrictions on the payment of dividends by us to our shareholders or by our subsidiaries to us;
x our shareholders interests;
x the effect on our creditworthiness;
x general business and economic conditions; and
x other factors our Board may deem relevant.
Pursuant to PRC laws and regulations and the Articles of Association of our Company, dividends may only be distributed after allowance has been made for: (i) recovery of losses, if any, and (ii) allocations to the statutory surplus reserve. The allocation to the statutory surplus reserve is 10% of our net profit determined in accordance with PRC GAAP. Our distributable profits for the current fiscal year will be equal to our net profits determined in accordance with IFRSs, less allocations to the statutory surplus reserve.
B. Significant Changes
No significant changes have occurred since the date of the consolidated financial statements.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
The principal trading market for 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 ADRs, 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.
Set forth below for the periods indicated are the high and low market prices of H Shares on the Hong Kong Stock Exchange, ADRs on the New York Stock Exchange and A Shares on the Shanghai Stock Exchange.
86 The Hong Kong The Shanghai Stock Stock Exchange The New York Stock Exchange Price per Price per H Share Exchange Price per A Share (HK$) ADR (US$) (RMB) High Low High Low High Low Annual Market Prices Fiscal Year ended December 31, 2012 4.54 3.22 29.72 20.20 5.48 3.28 Fiscal Year ended December 31, 2013 4.43 2.61 30.04 17.09 4.30 2.54 Fiscal Year ended December 31, 2014 3.90 2.23 25.17 14.53 5.93 2.26 Fiscal Year ended December 31, 2015 9.84 3.53 63.29 22.52 15.98 4.48 Fiscal Year ended December 31, 2016 5.50 4.00 36.29 25.44 8.62 5.86
Quarterly Market Prices Fiscal Year ended December 31, 2015 First Quarter 5.45 3.53 36.04 22.52 8.51 4.48 Second Quarter 9.84 5.99 63.29 38.37 15.98 8.13 Third Quarter 9.00 4.32 57.50 27.46 14.27 7.12 Fourth Quarter 6.73 5.17 42.40 32.62 9.35 7.68 Fiscal Year ended December 31, 2016 First Quarter 5.48 4.13 35.23 25.44 8.04 5.86 Second Quarter 5.30 4.20 34.18 26.96 7.56 6.06 Third Quarter 5.50 4.35 36.29 28.13 8.62 6.97 Fourth Quarter 4.59 4.00 29.47 25.71 7.76 6.79
Monthly Market Prices October 2016 4.59 4.24 29.47 27.70 7.35 7.06 November 2016 4.49 4.26 28.90 27.50 7.76 7.08 December 2016 4.48 4.00 28.98 25.71 7.76 6.79 January 2017 4.58 4.09 29.59 26.21 7.71 7.03 February 2017 5.12 4.32 33.18 27.91 7.92 7.20 March 2017 5.49 4.76 35.68 30.57 8.20 7.70 April 2017 (up to April 21, 2017) 5.68 5.13 36.42 33.00 8.45 8.06
B. Plan of Distribution
Not applicable.
C. Markets
See "Offer and Listing Details" above.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following is a summary of certain provisions of our Articles of Association. As this is a summary, it does not contain all the information that may be important to you. You and your advisors should read the text of our most updated Articles of Association for further information, which is filed as an exhibit to this Annual Report.
87 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 16 of the Articles of Association, other senior administrative officers of our Company refer to executive vice president, chief financial officer, the company secretary, chief economist, chief engineer, chief pilot, and chief legal adviser and chief information officer, COO Flight Safety, COO Flight Operations and other senior management appointed by our board of directors.
Objects and Purposes
Pursuant to the Article 18 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 arline-related business, including advertising for such services; (7) insurance agency business (personal accident insurance); (8) provision of airline ground services; (9) aviation training; (10) asset leasing services; (11) project management and technical consultancy services; (12) sales of aviation equipment; (13) travel agency business; (14) reservation agency business; (15) merchandise retail and wholesale; (16) mobile operation agency business; (17) e-commerce business, all subject to approval by company registration authorities .
Directors
Pursuant to Article 243 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 our Company, other than his contract of service with our Company, he shall declare the nature and extent of his interests to the board of directors at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal is otherwise subject to the approval of the board of directors. For the purposes of this Article, a director is deemed to be interested in a contract, transaction or agreement in which an associate of him is interested.
Pursuant to Article 173 of the Articles of Association, where a director is interested in any resolution proposed at a board meeting, such director shall not be present and shall not have a right to vote. Such director shall not be counted in the quorum of the relevant meeting. 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 251 of the Articles of Association, our Company shall, with the prior approval of shareholders in general meeting, enter into a contract in writing with a director wherein his emoluments are stipulated. The aforesaid emoluments include, emoluments in respect of his service as director, Supervisor or senior administrative officer of 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. 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 173 with respect to a director’s voting power in matters he is materially interested.
Ordinary Shares
Pursuant to Article 26 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.
88 Pursuant to Article 27 of the Articles of Association, shares issued by our Company to domestic investors for subscription in Renminbi shall be referred to as "Domestic-Invested Shares". Shares issued by our Company to foreign investors for subscription in foreign currencies shall be referred to as "Foreign-Invested Shares". Foreign-Invested Shares which are listed overseas are called "Overseas-Listed Foreign-Invested Shares". The foreign currencies mean the legal currencies (apart from Renminbi) of other countries or districts which are recognised by the foreign exchange control authority of the state and can be used to pay our Company for the share price.
Pursuant to Article 28 of the Articles of Association, Domestic-Invested Shares issued by our Company are called "A Shares". Overseas-Listed Foreign-Invested Shares issued by our Company and listed in Hong Kong are called "H Shares". H Shares are shares which have been admitted for listing on the Stock Exchange of Hong Kong Limited, the par value of which is denominated in Renminbi and which are subscribed for and traded in Hong Kong dollars. H Shares can also be listed on a stock exchange in the United States of America in the form of ADR. Shares issued by our Company, including A Shares and H Shares, are all ordinary shares.
Pursuant to Article 62 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;
(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;
89 (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
(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; and
(8) other rights conferred by laws, administrative regulations and these Articles of Association.
According to Article 266, dividends shall be distributed in accordance with the proportion of shares held by shareholders.
According to Article 67 of the Articles of Association, shareholders of our company have the obligation not to withdraw their shares unless required by laws and regulations.
According to Article 37 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.
According to Article 41 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; and (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.
According to Article 263 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.
According to Article 67 of the Articles of Association, shareholders are not liable to make any further contribution to the share capital other than as agreed by the subscriber of the relevant shares on subscription.
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 151 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 152 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.
90 Pursuant to Article 154 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.
Pursuant to Article 155 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 156 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 157 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 78, shareholders’ general meetings are divided into annual general meetings and extraordinary general meetings. Shareholders’ general meetings shall be convened by our board of directors. Annual general meetings are held once every year and within six months from the end of the preceding financial year.
According to Article 79, under any of the following circumstances, our board of directors 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 of directors 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 91 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 92 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.
91 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.
Merger, Acquisition or Corporate Restructuring
Pursuant to Article 291 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 of directors and shall be approved in shareholders’ general meeting and the relevant examining and approving formalities shall be processed as required by law. A shareholder who objects to the plan of merger or division shall have the right to demand 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-Invested 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.
C. Material Contracts
Other than such contracts as are described in our disclosure in 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 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 revenues 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 ADRs is also considered a current account transaction under Chinese law. Therefore, there is no legal restriction on the conversion of Renminbi into foreign currency for the purpose of paying dividends to such holders of H Shares and ADRs. In addition, our Company’s Articles of Association require our Company to pay dividends to holders of our Company’s H Shares and ADRs in foreign currency.
On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar so that the Renminbi is now permitted to fluctuate within a band against a basket of certain foreign currencies. On May 18, 2007, the People’s Bank of China announced that the floating band of Renminbi trading prices against U.S. dollar in the inter-bank spot foreign exchange market would be permitted to rise or fall by as much as 0.5%. The floating band was subsequently expanded to 1% by the People’s Bank of China, effective from April 16, 2012, and further expanded to 2% by the People’s Bank of China, effective from March 15, 2014.
92 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 ADRs in foreign currency terms.
Other Limitations
There are no limitations on the right of non-resident or foreign owners to hold or vote H Shares or ADRs imposed by Chinese law or by the Articles of Association or other constituent documents of 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 ADRs. This summary is based upon tax laws of China as in effect on the date of this Annual Report, including the income tax treaty between the United States and China (the "U.S.-PRC Tax Treaty"), all of which are subject to change or different interpretation.
In general, for Chinese tax purposes, holders of ADRs will be treated as the owners of the H Shares represented by those ADRs, and exchanges of H Shares for ADRs, and ADRs for H Shares, will not be subject to taxation under the laws of China.
This summary does not purport to address all material tax consequences for holders or prospective purchasers of A Shares, H Shares or ADRs, and does not take into account the specific circumstances of such investors. Investors should consult their own tax advisors as to Chinese or other tax consequences of the acquisition, ownership and disposition of A shares, H Shares or ADRs.
As a result of the new corporate income tax law, the statutory corporate income tax rate adopted by our Company and our subsidiaries has been changed from 33% to 25% with effect from January 1, 2008. Pursuant to new corporate income tax law, the corporate income tax rates of entities that previously enjoyed preferential tax rates of 15% have been revised to 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012 onwards, respectively.
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 2012. Dividend income received by any foreign individual that holds overseas shares in Chinese enterprise is generally subject to individual income tax at a flat rate of 20%, subject to exemption or reduction by an applicable double-taxation treaty.
Capital Gains from Transfer or Disposition of Shares
The new corporate income tax law and its relevant regulations generally provides that a non-resident enterprise is subject to a 10% capital gains tax for the transfer or disposition of shares of a Chinese company.
93 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.
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 ADRs. This discussion does not address any aspect of U.S. federal gift or estate tax, or the state, local or foreign tax consequences of an investment in our Company’s ADRs. This discussion applies to you only if you hold and beneficially own our Company’s ADRs as capital assets for tax purposes. This discussion does not apply to you if you are a member of a class of holders subject to special rules, such as:
x dealers in securities or currencies;
x traders in securities that elect to use a mark-to-market method of accounting for securities holdings;
x banks or other financial institutions;
x insurance companies;
x tax-exempt organizations, retirement plans, individual retirement accounts or tax deferred accounts;
x partnerships or other pass-through entities (including entities treated as partnerships for U.S. federal income tax purposes) or persons holding ADRs through any such entities;
x persons that hold ADRs as part of a hedge, straddle, constructive sale, conversion transaction or other integrated investment;
x persons whose functional currency for tax purposes is not the U.S. dollar;
x persons who are U.S. expatriates;
x persons liable for alternative minimum tax; or
x persons who directly, indirectly or constructively own 10% or more of the total combined voting power of all classes of our Company’s shares (including ADRs) entitled to vote.
This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, which is referred to in this discussion as the Code, its legislative history, existing and proposed regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. In addition, this discussion relies on the assumptions regarding the value of 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 ADRs, you are treated as the owner of the underlying ordinary shares represented by such ADRs.
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 ADRs, as well as the consequences to you arising under the laws of any other taxing jurisdiction.
For purposes of the U.S. federal income tax discussion below, you are a "U.S. Holder" if you beneficially own ADRs and are:
94 x a citizen or resident of the United States for U.S. federal income tax purposes;
x 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;
x an estate the income of which is subject to U.S. federal income tax regardless of its source; or
x a trust if (a) a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election in effect to be treated as a U.S. person.
If you are not a U.S. person, please refer to the discussion below under "Non-U.S. Holders."
U.S. Holders
Dividends on ADRs
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 ADRs 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 ADRs for a sufficient period of time, dividend distributions on our Company’s ADRs 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 ADRs continue to be readily tradable on the New York Stock Exchange and certain other conditions apply. You should consult your own tax adviser as to the rate of tax that will apply to you with respect to dividend distributions, if any, you receive from us.
Distributions 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 ADRs 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 ADRs will constitute ordinary dividend income. Even 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 ADRs.
Sales and other dispositions of ADRs
Subject to the PFIC discussion below, when you sell or otherwise dispose of our Company’s ADRs, you will generally recognise capital gain or loss in an amount equal to the difference between the amount realized on the sale or other disposition and your adjusted tax basis in the ADRs, both as determined in U.S. dollars. Your adjusted tax basis will generally equal the amount you paid for the ADRs. Any gain or loss you recognise is long-term capital gain or loss if your holding period in our Company’s ADRs 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.
95 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. In particular: 1) passive income received from a related party is excluded if it is properly allocable to the non-passive income of the related party, and 2) if our Company owns directly or indirectly 25% or more of the stock of another corporation, our Company is treated as if we owned directly a proportionate share of that corporation’s assets and income.
Our Company believes that we were not a PFIC for the taxable year 2016. However, there can be no assurance that our Company will not be a PFIC for the taxable year 2016 and/or later taxable years, as PFIC status is re-tested each year and depends on the facts in such year. For example, our Company would be a PFIC for the taxable year 2016 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.
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 ADRs during a taxable year in which distributions to you exceed 125% of the average annual distributions to you over the preceding three taxable years or, if shorter, your holding period for the ADRs, or (2) 100% of the gain from the disposition of ADRs.
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 ADRs" section above.
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 ADRs.
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 ADRs provided our Company’s ADRs are "marketable". Our Company’s ADRs will be "marketable" as long as they remain regularly traded on a national securities exchange, such as the New York Stock Exchange. If you made this election in a timely fashion, you would generally recognise as ordinary income or ordinary loss the difference between the fair market value of your ADRs on the first day of any taxable year and their value on the last day of that taxable year. Any ordinary income resulting from this election would generally be taxed at ordinary income rates and would not be eligible for the reduced rate of tax applicable to qualified dividend income. Any ordinary losses would be limited to the extent of the net amount of previously included income as a result of the mark-to-market election, if any. Your basis in the ADRs would be adjusted to reflect any such income or loss. Any gains recognised on the sale or other disposition of the ADRs 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). You should consult with your own tax adviser regarding potential advantages and disadvantages to you of making a "mark-to-market" election with respect to your ADRs.
96 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 ADRs.
Medicare Tax
Recently enacted legislation requires certain U.S. Holders who are individuals, estates or trusts to pay up to an additional 3.8% tax on, among other things, dividends and capital gains for tax years beginning after December 12, 2012.
Non-U.S. Holders
If you beneficially own ADRs and are not a U.S. Holder for U.S. federal income tax purposes (a "Non-U.S. Holder"), you generally will not be subject to U.S. federal income tax or U.S. withholding tax on dividends received from our Company with respect to ADRs unless that income is considered effectively connected with your conduct of a U.S. trade or business and, if an applicable income tax treaty so requires as a condition for you to be subject to U.S. federal income tax with respect to income from your ADRs, such dividends are attributable to a permanent establishment that you maintain in the United States.
You generally will not be subject to U.S. federal income tax, including withholding tax, on any gain realized upon the sale or exchange of ADRs, unless:
x that gain is effectively connected with the conduct of a U.S. trade or business and, if an applicable income tax treaty so requires as a condition for you to be subject to U.S. federal income tax with respect to income from your ADRs, such gain is attributable to a permanent establishment that you maintain in the United States; or
x you are a non-resident alien individual and are present in the United States for at least 183 days in the taxable year of the sale or other disposition and certain other conditions are met.
If you are engaged in a U.S. trade or business, unless an applicable tax treaty provides otherwise, the income from your ADRs, including dividends and the gain from the disposition of our Company’s ADRs, that is effectively connected with the conduct of that trade or business will generally be subject to the rules applicable to U.S. Holders discussed above. In addition, if you are a corporation, you may be subject to an additional branch profits tax at a rate of 30% or any lower rate under an applicable tax treaty.
U.S. information reporting and backup withholding rules
In general, dividend payments with respect to the ADRs and the proceeds received on the sale or other disposition of those ADRs may be subject to information reporting to the IRS and to backup withholding (currently imposed at a rate of 28%). Backup withholding will not apply, however, if you (1) are a corporation or come within certain other exempt categories and, when required, can demonstrate that fact or (2) provide a taxpayer identification number, certify as to no loss of exemption from backup withholding and otherwise comply with the applicable backup withholding rules. To establish your status as an exempt person, you will generally be required to provide certification on IRS Form W-9, W-8BEN or W-8ECI, or an appropriate substitute, as applicable. Any amounts withheld from payments to you under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability, provided that you furnish the required information to the IRS.
HOLDERS OF OUR COMPANY’S ADRS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF THE ADRS, INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION AND INCLUDING ESTATE, GIFT, AND INHERITANCE LAWS.
97 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 450 Fifth Street N.W. Washington D.C. 20549.
You can also obtain copies of this Annual Report on Form 20-F by mail from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the Securities and Exchange Commission’s Internet site at http://www.sec.gov. The Commission’s telephone number is 1-800-SEC-0330. Copies of this material may also be obtained for our Company’s website at http:// www.csair.com.
I. Subsidiary Information
Not applicable.
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 RMB2,380 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 obligations under capital leases 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, 2016 amounted to USD527 million.
The sensitivity analysis of interest rate risk is disclosed in Note 4(b) to the consolidated financial statements.
98 The following table provides information regarding our financial instruments that are sensitive to changes in interest rate as of December 31, 2016 and 2015:
As of December 31, 2016 As of December 31, Expected Maturity Date 2015 Total Total Recorded Fair Recorded Fair 2017 2018 2019 2020 2021 Thereafter Amount Value(2) Amount Value(2)
Variable-rate bank and other loans in US$ 139 69 - - - - 208 208 15,110 15,110 Average interest rate 2.75% 2.75% - - - - 2.75%
Variable-rate bank and other loans in Euro ------631 - Average interest rate ------
Fixed-rate bank and other loans in RMB 21,986 1 8,089 3,001 6,600 18 39,695 - 12,240 - Average interest rate 2.81% 1.20% 3.06% 3.63% 3.12% 1.20% 2.97%
Variable-rate bank and other loans in RMB 4,621 370 235 295 40 40 5,601 5,601 17,905 17,905 Average interest rate 3.95% 4.35% 4.35% 4.38% 4.41% 4.41% 4.02%
(1) These interest rates are calculated based on the year end indices.
(2) Fair value of debt instruments was estimated based on the interest rates applicable to similar debt instruments as of December 31, 2016 and 2015.
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 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.
As of December 31, 2016, we operated a total of 448 aircraft under operating leases and capital 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. Commitments under capital leases and operating leases are disclosed in Note 37 and Note 48(b) to the consolidated financial statements, respectively.
99 The following table provides information regarding our material foreign currency sensitive financial instruments and capital commitments as of December 31, 2016 and 2015:
As of December 31, 2016 Expected Maturity Date As of December 31, 2015 Total Total Recorded Fair Recorded Fair 2017 2018 2019 2020 2021 Thereafter Amount Value(1) Amount Value(1) Variable-rate bank and other loans in US$ 139 69 - - - - 208 208 15,110 15,110 Capital commitment in US$ 25,971 24,355 17,878 13,871 1,457 - 83,532 83,532 83,427 83,427
(1) Fair value of debt instruments was estimated based on the floating interest rates applicable to similar debt instruments as of December 31, 2016 and 2015.
100 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
The Bank of New York Mellon collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The Bank of New York Mellon collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The Bank of New York Mellon may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The Bank of New York Mellon may generally refuse to provide fee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares must pay: For: $5.00 (or less) per 100 ADSs (or portion of 100 ADSs) x Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property x Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates $.02 (or less) per ADS x 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 x Distribution of securities distributed to holders of deposited securities which are distributed by the had been deposited for issuance of ADSs depositary to ADS registered holders
$.02 (or less) per ADSs per calendar year x Depositary services
Registration or transfer fees x 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 x Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement) x 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 x As necessary underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes
Any charges incurred by the depositary or its agents for servicing the deposited securities x As necessary
101 Fees and Payments from the Depositary to Us
In 2016, we received from the depositary a reimbursement of US$49,246.54, 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$130,388.56 for the standard costs associated with the administration of the ADS program in 2016.
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
Our President and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)), and concluded that, based on their evaluation, our disclosure controls and procedures are effective as of the end of the period covered by this Annual Report to ensure that information required to be disclosed by our Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and were also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our President and Chief Financial Officer, to allow timely decisions regarding required disclosure.
102 Management’s annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the consolidated financial statements. Our management has assessed the effectiveness of internal control over financial reporting based on the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has concluded that our internal control over financial reporting was effective as of December 31, 2016.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
KPMG Huazhen LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report, and, as part of the audit, has issued a report, included herein, on the effectiveness of our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of China Southern Airlines Company Limited:
We have audited China Southern Airlines Company Limited’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). China Southern Airlines Company Limited’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on China Southern Airlines Company Limited’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
103 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, China Southern Airlines Company Limited maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of China Southern Airlines Company Limited and its subsidiaries as of December 31, 2016, and the related consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, and consolidated cash flow statement for the year then ended, and our report dated April 27, 2017 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG Huazhen LLP
Beijing, China
April 27, 2017
Changes in internal control over financial reporting
During the year ended December 31, 2016, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Tan Jing Song qualifies as an audit committee financial expert in accordance with the terms of Item 16A of Form 20-F. Mr. Tan Jing Song satisfies as an "independent director" within the meaning of NYSE Manual Section 303A and meets the criteria for independence set forth in Section 10A(m)(3) of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, and Rule 10A-3 under the Exchange Act. See "Item 6 Directors, Senior Management and Employees — Directors and Senior Management".
ITEM 16B. CODE OF ETHICS
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer. Such code is included in the director service agreements, a form of which is incorporated by reference in this Annual Report in Exhibit 4.1. Each of the aforementioned senior corporate officers currently serves as a director and all of our directors are subject to the director service contracts with our Company. Pursuant to the director service agreements, among other things, directors (i) owe fiduciary duties to our Company and shall perform their duties in compliance with applicable governmental laws, rules and regulations; (ii) shall not engage in any activities in competition with our Company’s business or carry out any activities detrimental to the interests of our Company; and (iii) shall be held liable for any loss or injury incurred to our Company as a result of such director’s violation of applicable laws and regulations.
104 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PricewaterhouseCoopers Zhong Tian LLP, an independent registered public accounting firm, served as our principal accountant for the fiscal year ended December 31, 2014 and 2015. KPMG Huazhen LLP, an independent registered public accounting firm, served as our principal accountant for the fiscal year ended December 31, 2016. The following table sets forth the aggregate audit fees, audit-related fees, tax fees and other fees of our principal accountants for each of the fiscal years of 2015 and 2016:
Audit-Related Audit Fees Fees Tax Fees Other Fees RMB (in million) 2015 14.9 - - - 2016 13.0 - 0.4 -
Audit fees include the aggregate fees in each of the fiscal years listed for professional services rendered by our independent registered public accounting firm for the audit of our annual financial statements or services that are normally provided by the auditors in connection with and regulatory filing or engagements.
Tax fees consisted of fees for tax consultation and tax compliance services.
Our audit committee pre-approved all audit and non-audit services performed by our principal accountant for the fiscal years ended December 31, 2015 and 2016.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
On March 30, 2016, our board of the directors resolved, as recommended by our audit committee, to propose to dismiss our independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, or PwC, effective upon the completion of their audit of our consolidated financial statements as of and for the year ended December 31, 2015 and the effectiveness of internal control over financial reporting as of December 31, 2015 and to appoint KPMG Huazhen LLP, or KPMG, as our new independent registered public accounting firm effective upon the approval by our shareholders at the forthcoming annual general meeting. In this connection, our Company, a listed company controlled by a stated-owned enterprise, did not reappoint PwC as our independent registered public accounting firm at the forthcoming annual general meeting. On May 27, 2016, our shareholders approved the appointment of KPMG as our new independent registered public accounting firm for the year ending December 31, 2016.
The audit reports of PwC on our consolidated financial statements as of and for the fiscal years ended December 31, 2014 and 2015 contain no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles.
During the two fiscal years ended December 31, 2014 and 2015 and through April 28, 2016, there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PwC, would have caused them to make reference to the subject matter of the disagreements in connection with their report, nor were there any reportable events (as defined in Item 16F(a)(1)(v) of Form 20-F). We have provided a copy of the foregoing disclosure to PwC and requested that PwC furnish a letter addressed to the SEC stating whether or not PwC agrees with such disclosure. A copy of the letter from PwC addressed to SEC, dated April 27, 2017, is filed as Exhibit 15.1 to this Form 20-F.
During the fiscal years ended December 31, 2014 and 2015 and the subsequent interim period through May 27, 2016, neither we, nor anyone on our behalf, had consulted KPMG regarding (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, and neither a written report nor oral advice was provided to us that KPMG concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).
105 ITEM 16G. CORPORATE GOVERNANCE
Set out below is a summary of any significant ways in which our corporate governance practices differ from those followed by domestic companies under the listing standards of the New York Stock Exchange ("NYSE"):
NYSE corporate governance rules Our Company’s governance practices
Director Independence A listed company must have a majority of independent directors on its board of directors. No director Our Company has complied with the relevant Chinese corporate governance rules and has implemented qualifies as "independent" unless the board of directors affirmatively determines that the director has no internal rules governing the independence and responsibilities of independent directors. Our Company material relationship with the listed company (either directly or as a partner, shareholder or officer of an determines the independence of independent directors every year. organization that has a relationship with the company). In addition, a director must meet certain standards to be deemed independent. For example, a director is not independent if the director is, or has been within the last three years, an employee of the listed company, or if the director has received, during any twelve-month period within the last three years, more than US$120,000 in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service).
Executive Sessions The non-management directors of each listed company must meet at regularly scheduled executive sessions No similar requirements. without management.
Nominating/Corporate Governance Committee Listed companies must have a nominating/corporate governance committee composed entirely of Our Company has established a nominating committee. As of December 31, 2016, the Nomination independent directors. Committee consists of three members, Wang Chang Shun, Jiao Shu Ge (independent non-executive director) and Tan Jing Song (independent non-executive director). Mr. Wang Chang Shun was appointed as the chairman of the Nomination Committee on May 27, 2016. 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; investigate and propose candidates for directors and managers and other senior management members to our board.
106 NYSE corporate governance rules Our Company’s governance practices
The nominating/corporate governance committee must have a written charter that addresses the committee’s purposes and responsibilities which, at minimum, must be to: identify individuals qualified to become board members, consistent with criteria approved by the board, and to select, or to recommend that the board select, the director nominees for the next annual meeting of shareholders; develop and recommend to the board a set of corporate governance guidelines applicable to the corporation; and oversee the evaluation of the board and management, and evaluate the performance of the committee every year.
Compensation Committee Listed companies must have a compensation committee composed entirely of independent directors. Our Company has established a remuneration and assessment committee consisting of three members. As of December 31, 2016, the remuneration and assessment committee is chaired by independent non-executive director Ning Xiang Dong with independent non-executive director Guo Wei and non-executive director Yuan Xin An as members.
The written charter of the compensation committee must state, at least, the following purposes and responsibilities: (1) review and approve the corporate goals associated with CEO’s compensation, evaluate the performance The responsibilities are similar to those stipulated by the NYSE rules, but the committee is not required to of the CEO in fulfilling these goals, and based on such evaluation determine and approve the CEO’s produce a report on the executive compensation or make an annual performance evaluation of the compensation level; committee. The responsibilities of the remuneration and assessment committee are to approve the remuneration packages of directors and senior management of our Group, and our Company’s "preliminary proposals on annual emoluments of the directors and senior management of our Group". The remuneration and assessment committee is also responsible for assessing performance of executive director and approving the terms of executive directors’ service contracts. (2) make recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval; (3) produce a committee report on executive compensation as required by the SEC to be included in the annual proxy statement or annual report filed with the SEC.
The charter must also include the requirement for an annual performance evaluation of the compensation committee.
Audit Committee Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 of Exchange Our board of directors of our Company has established an audit committee that satisfies relevant domestic Act. It must have a minimum of three members, and all audit committee members must satisfy the requirements and the audit committee has a written charter. As of December 31, 2016, the Audit Committee requirements for independence set forth in Section 303A.02 of NYSE Corporate Governance Rules as well consists of three members, Mr. Ning Xiang Dong, Jiao Shu Ge and Tan Jing Song, with Tan Jing Song as the requirements of Rule 10A-3b (1) of the Exchange Act. being the Chairman of the Audit Committee.
107 NYSE corporate governance rules Our Company’s governance practices
The written charter of the audit committee must specify that the purpose of the audit committee is to assist The responsibilities of the audit committee are similar to those stipulated by the NYSE rules, but according the board oversight of the integrity of financial statements, the company’s compliance with legal and to the domestic practices, our Company is not required to make an annual performance evaluation of the regulatory requirements, qualifications and independence of independent auditors and the performance of the audit committee and the audit committee is not required to prepare an audit report to be included in our listed company’s internal audit function and independent auditors. Company’s annual proxy statement.
The written charter must also require the audit committee to prepare an audit committee report as required by the SEC to be included in the listed company’s annual proxy statement as well as an annual performance evaluation of the audit committee.
Shareholder Approval of Equity Compensation Plans Shareholders must be given the opportunity to vote on equity-compensation plans and material revisions The relevant regulations of China require our board of directors to propose plans and types of director thereto, except for employment incentive plans, certain awards and plans in the context of mergers and compensation for the shareholders’ meeting to approve. The compensation plan of executive officers is acquisitions. subject to approval by our board and disclosed to the public upon the approval of our board of directors. The approval of director compensation and compensation plan of executive officers of our Company satisfies relevant domestic requirements.
Corporate Governance Guidelines Listed companies must adopt and disclose corporate governance guidelines, involving director qualification CSRC has issued the Corporate Governance Rules, with which our Company has complied. standards, director responsibilities, director access to management and , as necessary and appropriate, independent advisors, director compensation, director orientation continuing education, management succession and annual performance evaluation of the board of directors, etc.
Certification Requirements Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by There are no similar requirements under the domestic corporate governance rules in China. the company of NYSE corporate governance listing standards and he or she must promptly notify the NYSE in writing of any material non-compliance with any applicable provisions of Section 303A.
Each listed company must submit an executed Written Affirmation annually to the NYSE. In addition, each listed company must submit an interim Written Affirmation as and when required by the interim Written Affirmation form specified by the NYSE.
ITEM 16. MINE SAFETY DISCLOSURE
Not applicable.
108 ITEM 17. FINANCIAL STATEMENTS
We have elected to provide the financial statements and related information specified in Item 18 in lieu of Item 17.
ITEM 18. FINANCIAL STATEMENTS
See F-pages following Item 19.
ITEM 19. EXHIBITS
Index to Exhibits
Exhibit No. Description of Exhibit
1.1 Restated and Amended Articles of Association of China Southern Airlines Company Limited (as amended) (English translation) (1)
2.1 Specimen Certificate for the H Shares (2)
2.2 Form of Deposit Agreement among the Registrant, The Bank of New York, as depositary, and Owners and Beneficial Owners from time to time of American Depositary Shares evidenced by American Depositary Receipt issued thereunder, including the form of American Depositary Receipt (3)
4.1 Form of Director’s Service Agreement (4)
4.2 Form of Non-executive Director’s Service Agreement (5)
4.3 Aircraft Acquisition Agreement entered into by and between our Company and Boeing on February 28, 2012* (6)
4.4 Aircraft Acquisition Agreement entered into by and between Xiamen Airlines and Boeing on August 8, 2012*(7)
4.5 Aircraft Acquisition Agreement entered into by and between our Company and Airbus S.A.S. on December 5, 2012*(8)
4.6 Aircraft Acquisition Agreement entered into by and between Xiamen Airlines and Boeing on December 17, 2015*(9)
4.7 Aircraft Acquisition Agreement entered into by and between our Company and Boeing on December 17, 2015 *(10)
4.8 Aircraft Acquisition Agreement entered into by and between our Company and Boeing on December 17, 2015 *(11)
4.9 Aircraft Acquisition Agreement entered into by and between our Company and Airbus S.A.S. on December 23, 2015*(12)
4.10 Import and Export Agency Framework Agreement entered into by and between our Company and Southern Airlines (Group) Import and Export Trading Company Limited on January 9, 2014(13)
4.11 Media Services Framework Agreement entered into by and between our Company and Southern Airlines Culture and Media Co., Ltd. on April 19, 2013(14)
109 Exhibit No. Description of Exhibit
4.12 Financial Services Framework Agreement entered into by and between our Company and Southern Airlines Group Finance Company Limited on November 8, 2013(15)
4.13 Passenger and Cargo Sales Agency Services Framework Agreement entered into by and between our Company and China Southern Airlines Group Passenger and Cargo Agent Company Limited on November 8, 2013(16)
4.14 Catering Service Framework Agreement entered into by and between our Company and Shenzhen Air Catering Co., Ltd. on April 19, 2013(17)
4.15 Property Lease Agreement entered into by and between our Company and CSAHC on January 9, 2014(18)
4.16 Land Lease Agreement entered into by and between our Company and CSAHC on January 9, 2014(19)
4.17 Trademark License Agreement entered into by and between our Company and CSAHC on May 22, 1997 (20)
4.18 A Share subscription agreement entered into by and between our Company and CSAHC on June 11, 2012(21)
4.19 Aircraft Acquisition Agreement entered into by and between our Company and Airbus S.A.S. on May 16, 2014*(22)
4.20 English translation of Asset Lease Agreement entered into by and between our Company and CSAHC on December 29, 2014(23)
4.21 English translation of Supplemental Agreement to the Media Services Framework Agreement entered into by and between our Company and Southern Airlines Culture and Media Co., Ltd. on December 29, 2014(24)
4.22 English translation of Property Management Framework Agreement entered into by and between our Company and Guangzhou China Southern Airlines Property Management Company Limited on December 29, 2014(25)
4.23 English translation of Electronic aviation passenger comprehensive insurance four-parties cooperation agreement entered into by and among Guangdong CSA E-commerce Co., Ltd. SA Finance, Air Union Insurance Brokers (Beijing) Co., Ltd. and Ping An Property & Casualty Insurance Company of China, Ltd. Guangdong Branch on November 21, 2014(26)
4.24 English translation of Electronic aviation passenger comprehensive insurance four-parties cooperation agreement entered into by and among Guangdong CSA E-commerce Co., Ltd. SA Finance, Air Union Insurance Brokers (Beijing) Co., Ltd. and Sunshine Property and Casualty Insurance Company Limited on November 21, 2014(27)
4.25 English translation of Electronic aviation passenger comprehensive insurance four-parties cooperation agreement entered into by and among Guangdong CSA E-commerce Co., Ltd. SA Finance, Air Union Insurance Brokers (Beijing) Co., Ltd. and PICC Property and Casualty Company Limited Guangzhou Branch on November 21, 2014(28)
4.26 English translation of Electronic aviation passenger comprehensive insurance four-parties cooperation agreement entered into by and among Guangdong CSA E-commerce Co., Ltd. SA Finance, Air Union Insurance Brokers (Beijing) Co., Ltd. and Taiping Pension Co., Ltd. on November 21, 2014(29)
110 Exhibit No. Description of Exhibit
4.27 English translation of Equity Transfer Agreement entered into by and between Xiamen Airlines Company Limited and Hebei Airlines Investment Group Company Limited on October 13, 2014(30)
4.28 English translation of Supplemental Agreement to the financial service framework agreement entered into by and between our Company and Southern Airlines Group Finance Company Limited regarding revising each of the Cap in relation to the Provision of Deposit Services and the annual cap for the Provision of the Loan Services on May 4, 2015(31)
4.29 English translation of Equity Transfer Agreement entered into by and between our Company and Xiamen Jiafa Group Co., Ltd. on July 14, 2015(32)
4.30 English translation of Insurance Business Platform Cooperation Framework Agreement entered into by and between our Company and Southern Airlines Group Finance Company Limited on November 19, 2015(33)
4.31 English translation of Supplemental Agreement to Equity Transfer Agreement entered into by and between our Company and Xiamen Jiafa Group Co., Ltd. on December 8, 2015(34)
4.32 English translation of Catering Service Framework Agreement entered into by and between our Company and Shenzhen Air Catering Co., Ltd. on December 30, 2015(35)
4.33 English translation of Supplemental Agreement to the property lease agreement entered into by and between our Company and CSAHC on August 13, 2015(36)
4.34 English translation of Media Services Framework Agreement entered into by and between our Company and Southern Airlines Culture and Media Co., Ltd. on December 30, 2015(37)
4.35 English translation of Financial Services Framework Agreement entered into by and between our Company and Southern Airlines Group Finance Company Limited on August 29, 2016
4.36 English translation of Insurance Business Platform Services Agreement entered into by and between our Company and Southern Airlines Group Finance Company Limited on August 29, 2016
4.37 English translation of Property Lease and Land Lease Agreement entered into by and between our Company and CSAHC on December 16, 2016
4.38 English translation of Passenger and Cargo Sales and Ground Services Framework Agreement entered into by and between our Company and China Southern Air Holding Ground Services Company Limited on December 16, 2016
4.39 Supplemental Agreement No. 3 to Purchase Agreement No. 03586 Relating to Boeing Model 787 Aircraft entered into by and between Xiamen Airlines and Boeing on July 27, 2016*
4.40 Supplemental Agreement No. 4 to Purchase Agreement No. 03586 Relating to Boeing Model 787 Aircraft entered into by and between Xiamen Airlines and Boeing on July 27, 2016*
4.41 Supplemental Agreement No. 3 to Purchase Agreement No. 03757 Relating to Boeing Model 737-800 Aircraft entered into by and between Xiamen Airlines and Boeing on April 26, 2016*
4.42 Purchase Agreement No. GUN-PA-04455 Relating to Boeing Model 787-9 Aircraft entered into by and between our Company and Boeing on October 12, 2016*
8.1 Subsidiaries of China Southern Airlines Company Limited
111 Exhibit No. Description of Exhibit
11.1 Code of Ethics (included in Exhibit 4.1)
12.1 Section 302 Certification of President
12.2 Section 302 Certification of Chief Financial Officer
13.1 Section 906 Certification of President
13.2 Section 906 Certification of Chief Financial Officer
15.1 Letter from PwC addressed to SEC dated April 27, 2017
* Portions of this document have been omitted pursuant to a confidential treatment request, and the full, unredacted document has been separately submitted to the Securities and Exchange Commission with a confidential treatment request.
(1) Incorporated by reference to the Exhibit 99.5 to our Form 6-K (File No. 001-14600) filed with the Securities and Exchange Commission on December 27, 2013.
(2) Incorporated by reference to the Exhibit 2.1 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2012 filed with the Securities and Exchange Commission on April 26, 2013.
(3) Incorporated by reference to our Registration Statement on Form F-6 (File No. 333-07116), filed with the Securities and Exchange Commission on August 7, 2012.
(4) Incorporated by reference to the Exhibit 4.1 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2005 filed with the Securities and Exchange Commission on June 30, 2006.
(5) Incorporated by reference to the Exhibit 4.2 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2005 filed with the Securities and Exchange Commission on June 30, 2006.
(6) Incorporated by reference to the Exhibit 4.5 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2011 filed with the Securities and Exchange Commission on April 27, 2012.
(7) Incorporated by reference to the Exhibit 4.4 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2012 filed with the Securities and Exchange Commission on April 26, 2013.
(8) Incorporated by reference to the Exhibit 4.5 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2012 filed with the Securities and Exchange Commission on April 26, 2013.
(9) Incorporated by reference to the Exhibit 4.6 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2015 filed with the Securities and Exchange Commission on April 28, 2016.
(10) Incorporated by reference to the Exhibit 4.7 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2015 filed with the Securities and Exchange Commission on April 28, 2016.
(11) Incorporated by reference to the Exhibit 4.8 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2015 filed with the Securities and Exchange Commission on April 28, 2016.
(12) Incorporated by reference to the Exhibit 4.9 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2015 filed with the Securities and Exchange Commission on April 28, 2016.
(13) Incorporated by reference to the Exhibit 4.11 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
(14) Incorporated by reference to the Exhibit 4.12 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
(15) Incorporated by reference to the Exhibit 4.13 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
(16) Incorporated by reference to the Exhibit 4.14 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
(17) Incorporated by reference to the Exhibit 4.17 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
112 (18) Incorporated by reference to the Exhibit 4.18 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
(19) Incorporated by reference to the Exhibit 4.19 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2013 filed with the Securities and Exchange Commission on April 25, 2014.
(20) Incorporated by reference to the Exhibit 4.10 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2008 filed with the Securities and Exchange Commission on June 25, 2009.
(21) Incorporated by reference to the Exhibit 4.11 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2012 filed with the Securities and Exchange Commission on April 26, 2013.
(22) Incorporated by reference to the Exhibit 4.23 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2014 filed with the Securities and Exchange Commission on April 30, 2015.
(23) Incorporated by reference to the Exhibit 4.24 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2014 filed with the Securities and Exchange Commission on April 30, 2015.
(24) Incorporated by reference to the Exhibit 4.25 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2014 filed with the Securities and Exchange Commission on April 30, 2015.
(25) Incorporated by reference to the Exhibit 4.26 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2014 filed with the Securities and Exchange Commission on April 30, 2015.
(26) Incorporated by reference to the Exhibit 4.27 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2014 filed with the Securities and Exchange Commission on April 30, 2015.
(27) Incorporated by reference to the Exhibit 4.28 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2014 filed with the Securities and Exchange Commission on April 30, 2015.
(28) Incorporated by reference to the Exhibit 4.29 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2014 filed with the Securities and Exchange Commission on April 30, 2015.
(29) Incorporated by reference to the Exhibit 4.30 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2014 filed with the Securities and Exchange Commission on April 30, 2015.
(30) Incorporated by reference to the Exhibit 4.31 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2014 filed with the Securities and Exchange Commission on April 30, 2015.
(31) Incorporated by reference to the Exhibit 4.28 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2015 filed with the Securities and Exchange Commission on April 28, 2016.
(32) Incorporated by reference to the Exhibit 4.29 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2015 filed with the Securities and Exchange Commission on April 28, 2016.
(33) Incorporated by reference to the Exhibit 4.30 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2015 filed with the Securities and Exchange Commission on April 28, 2016.
(34) Incorporated by reference to the Exhibit 4.31 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2015 filed with the Securities and Exchange Commission on April 28, 2016.
(35) Incorporated by reference to the Exhibit 4.32 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2015 filed with the Securities and Exchange Commission on April 28, 2016.
(36) Incorporated by reference to the Exhibit 4.33 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2015 filed with the Securities and Exchange Commission on April 28, 2016.
(37) Incorporated by reference to the Exhibit 4.34 to our Form 20-F (File No. 001-14660) for the year ended December 31, 2015 filed with the Securities and Exchange Commission on April 28, 2016.
113 SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
CHINA SOUTHERN AIRLINES COMPANY LIMITED
/s/ Wang Chang Shun Name: Wang Chang Shun Title: Chairman of our board of directors
Date: April 27, 2017
114 CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firm F-1 Consolidated Income Statements for the years ended December 31, 2016, 2015 and 2014 F-3 Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014 F-4 Consolidated Statements of Financial Position at December 31, 2016 and 2015 F-5 Consolidated Statements of Changes in Equity for the years ended December 31, 2016, 2015 and 2014 F-7 Consolidated Cash Flow Statements for the years ended December 31, 2016, 2015 and 2014 F-8 Notes to the Consolidated Financial Statements F-9
115 Report of Independent Registered Public Accounting Firm
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CHINA SOUTHERN AIRLINES COMPANY LIMITED:
We have audited the accompanying consolidated statement of financial position of China Southern Airlines Company Limited (the “Company”) and its subsidiaries as of December 31, 2016, and the related consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, and consolidated cash flow statement for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Southern Airlines Company Limited and its subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), China Southern Airlines Company Limited’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 27, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG Huazhen LLP
Beijing, China April 27, 2017
F-1 Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of China Southern Airlines Company Limited
In our opinion, the consolidated statement of financial position and the related consolidated income statements, the consolidated statements of comprehensive income, the consolidated statements of changes in equity and the consolidated cash flow statements present fairly, in all material respects, the financial position of China Southern Airlines Company Limited and its subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers Zhong Tian LLP
Shanghai, China
April 28, 2016
F-2 CONSOLIDATED INCOME STATEMENTS For the years ended December 31, 2016, 2015 and 2014
2016 2015 2014 RMB RMB RMB Note million million million Operating revenue Traffic revenue 5 109,693 107,099 104,328 Other operating revenue 7 5,288 4,553 4,256 Total operating revenue 114,981 111,652 108,584
Operating expenses Flight operation expenses 8 51,461 50,412 58,901 Maintenance expenses 9 11,318 10,407 8,304 Aircraft and transportation service expenses 10 20,215 17,908 16,402 Promotion and selling expenses 11 6,304 6,976 7,841 General and administrative expenses 12 2,815 2,464 2,337 Depreciation and amortization 13 12,619 11,845 10,828 Impairment on property, plant and equipment 20 71 90 215 Others 1,401 1,390 1,198 Total operating expenses 106,204 101,492 106,026
Other net income 15 3,835 3,278 2,190
Operating profit 12,612 13,438 4,748
Interest income 89 253 376 Interest expense 16 (2,465) (2,188) (2,193) Share of associates’ results 25 509 460 261 Share of joint ventures’ results 26 102 108 140 Exchange loss, net 36(d) (3,276) (5,953) (292) Gain on deemed disposal of a subsidiary 24(a)(vi) 90 - - Other non-operating income - - 26 Profit before income tax 7,661 6,118 3,066 Income tax 17 (1,763) (1,300) (668) Profit for the year 5,898 4,818 2,398
Profit attributable to: Equity shareholders of the Company 19 5,044 3,736 1,777 Non-controlling interests 854 1,082 621 Profit for the year 5,898 4,818 2,398
Earnings per share Basic and diluted 19 RMB 0.51 RMB 0.38 RMB 0.18
The accompanying notes form part of these financial statements.
F-3 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, 2016, 2015 and 2014
2016 2015 2014 RMB RMB RMB Note million million million
Profit for the year 5,898 4,818 2,398
Other comprehensive income: Items that may be reclassified subsequently to profit or loss - Cash flow hedge: fair value movement of derivative financial instruments 18 8 13 - - Fair value movement of available-for-sale financial assets 18 362 - 43 - Share of other comprehensive income (loss) of associates 25 (2) (7) 21 - Deferred tax relating to above items 18 (92) (3) (11) Other comprehensive income for the year 276 3 53
Total comprehensive income for the year 6,174 4,821 2,451
Total comprehensive income attributable to: Equity shareholders of the Company 5,196 3,742 1,813 Non-controlling interests 978 1,079 638 Total comprehensive income for the year 6,174 4,821 2,451
The accompanying notes form part of these financial statements.
F-4 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION At December 31, 2016 and 2015
2016 2015 Note RMB million RMB million Non-current assets Property, plant and equipment, net 20 146,746 142,870 Construction in progress 21 28,910 19,433 Lease prepayments 22 2,687 2,637 Goodwill 23 182 - Interest in associates 25 2,590 1,995 Interest in joint ventures 26 1,522 1,440 Other investments in equity securities 27 103 136 Aircraft lease deposits 725 669 Available-for-sale financial assets 28 499 104 Derivative financial instruments 29 21 13 Deferred tax assets 30 1,685 1,387 Other receivables 34 - 304 Other assets 31 1,008 888 186,678 171,876 Current assets Inventories 32 1,588 1,606 Trade receivables 33 2,989 2,580 Other receivables 34 3,387 3,720 Cash and cash equivalents 35 4,152 4,560 Restricted bank deposits 135 123 Prepaid expenses and other current assets 1,415 1,191 Amounts due from related companies 40 98 333 13,764 14,113 Current liabilities Borrowings 36 26,746 30,002 Current portion of obligations under finance leases 37 8,695 6,416 Trade payables 38 1,903 2,500 Sales in advance of carriage 8,420 7,131 Deferred revenue 39 1,299 1,029 Current income tax 647 66 Amounts due to related companies 40 103 152 Accrued expenses 41 15,147 13,081 Other liabilities 42 4,972 5,158 67,932 65,535
The accompanying notes form part of these financial statements.
F-5 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (CONTINUED) At December 31, 2016 and 2015
2016 2015 Note RMB million RMB million Non-current liabilities Borrowings 36 18,758 15,884 Obligations under finance leases 37 53,527 49,408 Deferred revenue 39 1,622 1,806 Provision for major overhauls 43 2,089 1,895 Provision for early retirement benefits 44 6 13 Deferred benefits and gains 45 691 886 Deferred tax liabilities 30 841 938 77,534 70,830
Net assets 54,976 49,624
Capital and reserves Share capital 46 9,818 9,818 Reserves 47 33,638 29,227 Total equity attributable to equity shareholders of the Company 43,456 39,045 Non-controlling interests 11,520 10,579 Total equity 54,976 49,624
The accompanying notes form part of these financial statements.
F-6 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the years ended December 31, 2016, 2015 and 2014
Attributable to equity shareholders of the Company Share Share Fair value Other Retained Non-controlling Total capital premium reserve reserves earnings Total interests equity RMB RMB RMB RMB RMB RMB RMB RMB million million million million million million million million Balance at January 1, 2014 9,818 14,131 22 1,336 9,022 34,329 8,122 42,451
Changes in equity for 2014: Profit for the year - - - - 1,777 1,777 621 2,398 Other comprehensive income - - 22 14 - 36 17 53 Total comprehensive income - - 22 14 1,777 1,813 638 2,451 Appropriations to reserves - - - 137 (137) - - - Dividends relating to 2013 - - - - (393) (393) - (393) Capital injection of non- controlling interests in a subsidiary ------108 108 Acquisition of non-controlling interests in a subsidiary - - - (1) - (1) (1) (2) Non-controlling interest arising on business combination ------6 6 Distributions to non-controlling interests ------(128) (128) Balance at December 31, 2014 and January 1, 2015 9,818 14,131 44 1,486 10,269 35,748 8,745 44,493
Changes in equity for 2015: Profit for the year - - - - 3,736 3,736 1,082 4,818 Other comprehensive income - - 11 (5) - 6 (3) 3 Total comprehensive income - - 11 (5) 3,736 3,742 1,079 4,821 Appropriations to reserves - - - 246 (246) - - - Dividends relating to 2014 - - - - (393) (393) - (393) Capital injection of non- controlling interests in a subsidiary ------1,360 1,360 Acquisition of non-controlling interests in a subsidiary - - - (52) - (52) (574) (626) Distributions to non-controlling interests ------(31) (31) Balance at December 31, 2015 and January 1, 2016 9,818 14,131 55 1,675 13,366 39,045 10,579 49,624
Changes in equity for 2016: Profit for the year - - - - 5,044 5,044 854 5,898 Other comprehensive income - - 154 (2) - 152 124 276 Total comprehensive income - - 154 (2) 5,044 5,196 978 6,174 Appropriations to reserves - - - 405 (405) - - - Dividends relating to 2015 (Note 47(b)) - - - - (785) (785) - (785) Capital injection of non-controlling interests in a subsidiary ------260 260 Decrease in non-controlling interests as a result of loss of control of a subsidiary (Note 24(a)(vi)) ------(83) (83) Distributions to non-controlling interests ------(214) (214) Balance at December 31, 2016 9,818 14,131 209 2,078 17,220 43,456 11,520 54,976
The accompanying notes form part of these financial statements.
F-7 CONSOLIDATED CASH FLOW STATEMENTS For the years ended December 31, 2016, 2015 and 2014
2016 2015 2014 RMB RMB RMB Note million million million
Operating activities Cash generated from operating activities 35(b) 27,681 27,857 15,826 Interest received 118 313 360 Interest paid (2,629) (2,274) (1,991) Income tax paid (1,406) (2,162) (625) Net cash generated from operating activities 23,764 23,734 13,570
Investing activities Acquisition of subsidiaries, net of cash acquired 24(a)(v) (189) (69) (657) Deemed disposal of a subsidiary 24(a)(vi) (67) - - Proceeds from disposal of property, plant and equipment and lease prepayments 3,111 3,196 1,611 Proceeds from sale of a joint venture 2 - - Dividends received from associates 143 67 86 Dividends received from joint ventures 18 6 - Dividends received from other investments in equity securities and available-for-sale financial assets 14 13 13 Acquisition of term deposits (263) (278) (3,286) Proceeds from maturity of term deposits 456 1,971 1,254 Additions of property, plant and equipment, lease prepayments and other assets (18,967) (12,139) (8,649) Capital injection into associates (34) (40) - Payment for aircraft lease deposits (55) (123) (172) Refund of aircraft lease deposits 81 141 87 Placement of pledged bank deposits - - (1,656) Withdrawal of pledged bank deposits - 324 1,609 Net cash used in investing activities (15,750) (6,931) (9,760)
Financing activities Dividends paid to equity shareholders of the Company (785) (393) (393) Proceeds from borrowings 17,539 34,170 32,488 Proceeds from ultra-short-term financing bills 33,886 8,000 6,000 Proceeds from corporate bond 10,000 3,000 - Proceeds from medium-term notes 4,689 - - Repayment of bank borrowings (46,695) (62,212) (31,126) Repayment of principal under finance lease obligations (6,994) (8,209) (4,072) Repayment of ultra-short-term financing bills (19,900) (3,000) (3,000) Capital injection from the non-controlling interests of subsidiaries 260 1,360 108 Dividends paid to non-controlling interests (221) (23) (128) Payment for purchase of non-controlling interests (238) (388) (8) Net cash used in financing activities (8,459) (27,695) (131)
Net (decrease)/increase in cash and cash equivalents (445) (10,892) 3,679 Cash and cash equivalents at January 1 4,560 15,414 11,748 Exchange gain/(loss) on cash and cash equivalents 37 38 (13) Cash and cash equivalents at December 31 4,152 4,560 15,414
The accompanying notes form part of these financial statements.
F-8 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
1 Corporate information
China Southern Airlines Company Limited (the “Company”), a joint stock limited company, was incorporated in the People’s Republic of China (the “PRC”) on March 25, 1995. The address of the Company’s registered office is Unit 301, 3/F, Office Tower, Guanhao Science Park Phase I, 12 Yuyan Street, Huangpu District, Guangzhou, Guangdong Province, the PRC. The Company and its subsidiaries (the “Group”) are principally engaged in the operation of civil aviation, including the provision of passenger, cargo, mail delivery and other extended transportation services.
The Company’s majority interest is owned by China Southern Air Holding Company (“CSAHC”), a state-owned enterprise incorporated in the PRC.
The Company’s shares are traded on the Shanghai Stock Exchange, the Stock Exchange of Hong Kong Limited and the New York Stock Exchange.
2Significant accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
(a) Basis of preparation
The consolidated financial statements have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRSs”), which collective term includes all applicable individual IFRSs, International Accounting Standards (“IASs”) and Interpretations issued by the International Accounting Standards Board (the “IASB”). The measurement basis used in the preparation of the financial statements is the historical cost basis, except that available-for-sale equity securities and derivative financial instruments are stated at their fair value as explained in the accounting policies set out in Note 2(f) and Note 2(g).
The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Judgments made by management in the application of IFRSs that have significant effect on the financial statements and major sources of estimation uncertainty are discussed in Note 3.
The consolidated financial statements comprise the Company and its subsidiaries and the Group’s interest in associates and joint ventures.
F-9 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(b) Changes in accounting policies
The IASB has issued a number of amendments to IFRSs that are first effective for the current accounting period of the Group. None of these developments have had a material effect on how the Group’s results and financial position for the current or prior periods have been prepared or presented.
The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period. Note 57 provides information on the possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended December 31, 2016.
(c) Subsidiaries and non-controlling interests
Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. When assessing whether the Group has power, only substantive rights (held by the Group and other parties) are considered. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
An investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group transactions, balances and cash flows and any unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group’s accounting policies.
Non-controlling interests represent the equity in a subsidiary not attributable directly or indirectly to the Company, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. With regards to each business combination, the Group recognized non-controlling interests based on the proportion of the net identifiable assets of the subsidiary owned by the non-controlling interests.
Non-controlling interests are presented in the consolidated statement of financial position within equity, separately from equity attributable to the equity shareholders of the Company. Non-controlling interests in the results of the Group are presented on the face of the consolidated income statement and the consolidated statement of comprehensive income as an allocation of the total profit or loss and total comprehensive income for the year between non-controlling interests and the equity shareholders of the Company. Loans from holders of non-controlling interests and other contractual obligations towards these holders are presented as financial liabilities in the consolidated statement of financial position in accordance with Note 2(o) or Note 2(p) depending on the nature of the liability.
Changes in the Group’s interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby adjustments are made to the amounts of controlling and non-controlling interests within consolidated equity to reflect the change in relative interests, but no adjustments are made to goodwill and no gain or loss is recognized.
When the Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognized in consolidated income statement. Any interest retained in that former subsidiary at the date when control is lost is recognized at fair value and this amount is regarded as the fair value on initial recognition of a financial asset (Note 2(f)) or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture (Note 2(d)).
F-10 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(c) Subsidiaries and non-controlling interests (continued)
The Group applies the acquisition method to account for business combinations. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Transaction costs are expensed as incurred.
The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in profit or loss.
Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, other contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.
(d) Associates and joint arrangements
An associate is an entity in which the Group has significant influence, but not control or joint control, over its management, including participation in the financial and operating policy decisions.
The Group has applied IFRS 11, Joint Arrangements (“IFRS 11”) to all joint arrangements. Under IFRS 11, investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures.
An investment in an associate or a joint venture is accounted for in the consolidated financial statements under the equity method and is initially recorded at cost, adjusted for any excess of the Group’s share of the acquisition-date fair values of the investee’s identifiable net assets over the cost of the investment (if any). Thereafter, the investment is adjusted for the post acquisition change in the Group’s share of the investee’s net assets and any impairment loss relating to the investment (Notes 2(e) and 2(l)). The Group’s share of the post-acquisition, post-tax results of the investees, adjusted for any acquisition-date excess over cost and any impairment losses for the year are recognized in the consolidated income statement, whereas the Group’s share of the post-acquisition post-tax items of the investees’ other comprehensive income is recognized in the consolidated statement of comprehensive income.
When the Group’s share of losses exceeds its interest in the associate or the joint venture, the Group’s interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee. For this purpose, the Group’s interest is the carrying amount of the investment under the equity method together with the Group’s long-term interests that in substance form part of the Group’s net investment in the associate or the joint venture.
Unrealized profits and losses resulting from transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in the investee, except where unrealized losses provide evidence of an impairment of the asset transferred, in which case they are recognized immediately in the consolidated income statement.
F-11 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(e) Goodwill
Goodwill represents the excess of
(i) the aggregate of the fair value of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the Group’s previously held equity interest in the acquiree; over
(ii) the net fair value of the acquiree’s identifiable assets and liabilities measured as at the acquisition date.
When (ii) is greater than (i), then this excess is recognized immediately in the consolidated income statement as a gain on a bargain purchase.
Goodwill is stated at cost less accumulated impairment losses. Goodwill arising on a business combination is allocated to each cash-generating unit, or groups of cash generating units, that is expected to benefit from the synergies of the combination and is tested annually for impairment (Note 2(l)).
(f) Other investments in equity securities
The Group’s policies for investments in equity securities, other than investments in subsidiaries, associates and joint ventures, are as follows:
Investments in equity securities are initially stated at fair value, which is their transaction price unless fair value can be more reliably estimated using valuation techniques whose variables include only data from observable markets. Cost includes attributable transaction costs, except where indicated otherwise below. These investments are subsequently accounted for as follows, depending on their classification:
Available-for-sale equity securities are those non-derivative financial assets that are designated as available for sale. At the end of each reporting period the fair value is remeasured, with any resultant gain or loss being recognized in other comprehensive income and accumulated separately in equity in the fair value reserve. Dividend income from these investments is recognized in the consolidated income statement in accordance with the policy set out in Note 2(x)(iv). When these investments are derecognized or impaired (Note 2(l)), the cumulative gain or loss is reclassified from equity to profit or loss.
The Group’s other investments in equity securities represent investments in equity securities that do not have a quoted price in an active market for an identical instrument and whose fair value cannot otherwise be reliably measured. Accordingly, they are recognized in the consolidated statement of financial position at cost less impairment losses (Note 2(l)).
Investments are recognized/derecognized on the date the Group commits to purchase/sell the investments or the Group’s rights to the cash flows from the investments expired.
(g) Derivative financial instruments
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged.
The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
Derivative financial instruments that do not qualify for hedge accounting are accounted for as trading instruments and any unrealized gains or losses, being changes in fair value of the derivatives, are recognized in the profit or loss immediately.
F-12 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(g) Derivative financial instruments (continued)
Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective, are recorded in the profit or loss, along with any changes in the fair value of the hedged assets or liabilities that are attributable to the hedged risk.
Derivative financial instruments that qualify for hedge accounting and which are designated as a specific hedge of the variability in cash flows of a highly probable forecast transaction, are accounted for as follows:
(i) The effective portion of any gains or losses on remeasurement of the derivative financial instrument to fair value are recognized in other comprehensive income and accumulated separately in equity in the fair value reserve. The cumulative gain or loss on the derivative financial instrument recognized in other comprehensive income is reclassified from equity to profit or loss in the same period during which the hedged forecast cash flows affects profit or loss; and
(ii) The ineffective portion of any gains or losses on remeasurement of the derivative financial instrument to fair value is recognized in the profit or loss immediately.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gains or losses existing in equity at that time remains in equity and is recognized in the profit or loss when the committed or forecast transaction ultimately occurs. When a committed or forecast transaction is no longer expected to occur, the cumulative gains or losses that was recorded in equity is immediately transferred to the profit or loss.
(h) Investment properties
Investment properties are land and/or buildings which are owned to earn rental income and/or for capital appreciation.
Investment properties are stated at cost, less accumulated depreciation and impairment losses (Note 2(l)). Depreciation is calculated to write off the cost of items of investment properties, less their estimated residual value, if any, using the straight line method over their estimated useful lives. Rental income from investment properties is accounted for as described in Note 2(x)(iii).
(i) Other property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses (Note 2(l)).
The cost of self-constructed items of property, plant and equipment includes the cost of materials, direct labor, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads and borrowing costs (Note 2(aa)).
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
When each major aircraft overhaul is performed, its cost is recognized in the carrying amount of the component of aircraft and is depreciated over the appropriate maintenance cycles. Components related to overhaul cost, are depreciated on a straight-line basis over 3 to 12 years. Upon completion of an overhaul, any remaining carrying amount of the cost of the previous overhaul is derecognized and charged to the income statement.
F-13 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(i) Other property, plant and equipment (continued)
Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognized in income statement on the date of retirement or disposal.
Except for components related to overhaul costs, the depreciation of other property, plant and equipment is calculated to write off the cost of items, less their estimated residual value, if any, using the straight line method over their estimated useful lives as follows:
Buildings 5 to 35 years Owned and finance leased aircraft 15 to 20 years Other flight equipment –Jet engines 15 to 20 years –Others, including rotables 3 to 15 years Machinery and equipment 4 to 10 years Vehicles 6 to 8 years
Where parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually.
(j) Construction in progress
Construction in progress represents advance payments for the acquisition of aircraft and flight equipment, office buildings, various infrastructure projects under construction and equipment pending for installation, and is stated at cost less impairment losses (Note 2(l)). Capitalization of these costs ceases and the construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use, notwithstanding any delay in the issue of the relevant commissioning certificates by the relevant PRC authorities.
No depreciation is provided in respect of construction in progress.
(k) Leased assets
An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.
(i) Classification of assets leased to the Group
Assets that are held by the Group under leases which transfer to the Group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases, except for land held for own use under an operating lease, the fair value of which cannot be measured separately from the fair value of a building situated thereon at the inception of the lease, is accounted for as being held under a finance lease, unless the building is also clearly held under an operating lease. For these purposes, the inception of the lease is the time that the lease was first entered into by the Group, or taken over from the previous lessee.
F-14 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(k) Leased assets (continued)
(ii) Assets acquired under finance leases
Where the Group acquires the use of assets under finance leases, the amounts representing the fair value of the leased asset, or, if lower, the present value of the minimum lease payments, of such assets are included in property, plant and equipment and the corresponding liabilities, net of finance charges, are recorded as obligations under finance leases. Depreciation is provided at rates which write off the cost or valuation of the assets over the term of the relevant lease or, where it is likely the Group will obtain ownership of the asset, the life of the asset, as set out in Note2(i). Impairment losses are accounted for in accordance with the accounting policy as set out in Note 2(l). Finance charges implicit in the lease payments are charged to income statement over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period. Contingent rentals are charged to income statement in the accounting period in which they are incurred.
(iii) Operating lease charges
Where the Group has the use of assets held under operating leases, payments made under the leases are charged to income statement in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognized in income statement as an integral part of the aggregate net lease payments made. Contingent rentals are charged to income statement in the accounting period in which they are incurred.
The cost of acquiring land held under an operating lease is amortized on a straight-line basis over the respective periods of lease terms which range from 30 to 70 years.
(iv) Sale and leaseback transactions
Gains or losses on aircraft sale and leaseback transactions which result in finance leases are deferred and amortized over the terms of the related leases.
Gains or losses on aircraft sale and leaseback transactions which result in operating leases are recognized immediately if the transactions are established at fair value. If the sale price is below fair value then the gain or loss is recognized immediately. However, if a loss is compensated for by future rentals at a below-market price, then the loss is deferred and amortized over the period that the aircraft is expected to be used. If the sale price is above fair value, then any gain is deferred and amortized over the useful life of the assets.
F-15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(l) Impairment of assets
(i) Impairment of investments in equity securities and receivables
Investments in equity securities and current and non-current receivables that are stated at cost or amortized cost or are classified as available-for-sale equity securities are reviewed at the end of each reporting period to determine whether there is objective evidence of impairment. Objective evidence of impairment includes observable data that comes to the attention of the Group about one or more of the following loss events:
–significant financial difficulty of the debtor;
– a breach of contract, such as a default or delinquency in interest or principal payments;
– it becoming probable that the debtor will enter bankruptcy or other financial reorganization;
– significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor; and
– a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost.
If any such evidence exists, any impairment loss is determined and recognized as follows:
– For investments in subsidiaries, associates and joint ventures (including those recognized using the equity method (Note 2(d)), the impairment loss is measured by comparing the recoverable amount of the investment with its carrying amount in accordance with Note 2(l(ii)). The impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount in accordance with Note 2(l(ii)).
– For unquoted equity securities carried at cost, the impairment loss is measured as the difference between the carrying amount of the financial asset and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Impairment losses for equity securities carried at cost are not reversed.
– For trade and other current receivables and other financial assets carried at amortized cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets), where the effect of discounting is material. This assessment is made collectively where these financial assets share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.
If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years.
F-16 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(l) Impairment of assets (continued)
(i) Impairment of investments in equity securities and receivables (continued)
– For available-for-sale securities, the cumulative loss that has been recognized in the fair value reserve is reclassified to profit or loss. The amount of the cumulative loss that is recognized in income statement is the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that asset previously recognized in income statement.
Impairment losses recognized in income statement in respect of available-for-sale equity securities are not reversed through profit or loss. Any subsequent increase in the fair value of such assets is recognized directly in other comprehensive income.
Impairment losses are written off against the corresponding asset directly, except for impairment losses recognized in respect of trade and other receivables, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When the Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against trade and other receivables directly and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognized in income statement.
(ii) Impairment of other assets
Internal and external sources of information are reviewed at the end of each reporting period to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognized no longer exists or may have decreased:
– Investment properties; –Other property, plant and equipment; – Construction in progress; – Lease prepayments; – Goodwill; – Aircraft lease deposits; and – Other assets
If any such indication exists, the asset’s recoverable amount is estimated. The recoverable amount of goodwill is estimated annually whether or not there is any indication of impairment.
– Calculation of recoverable amount
The recoverable amount of an asset is the higher of its fair value less costs of disposal and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).
F-17 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(l) Impairment of assets (continued)
(ii) Impairment of other assets (continued)
– Recognition of impairment losses
An impairment loss is recognized in income statement if the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs of disposal, or value in use, if determinable.
– Reversals of impairment losses
In respect of assets other than goodwill, an impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.
A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment losses are credited to income statement in the year in which the reversals are recognized.
(iii) Interim financial reporting and impairment
Under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, the Group is required to prepare an interim financial report in compliance with IAS 34, Interim financial reporting, in respect of the first six months of the financial year. At the end of the interim period, the Group applies the same impairment testing, recognition, and reversal criteria as it would at the end of the financial year (Notes 2(l)(i) and (ii)).
Impairment losses recognized in an interim period in respect of goodwill, available-for-sale equity securities and unquoted equity securities carried at cost are not reversed in a subsequent period. This is the case even if no loss, or a smaller loss, would have been recognized had the impairment been assessed only at the end of the financial year to which the interim period relates. Consequently, if the fair value of an available-for-sale equity security increases in the remainder of the annual period, or in any other period subsequently, the increase is recognized in other comprehensive income and not profit or loss.
(m) Inventories
Inventories, which consist primarily of consumable spare parts and supplies, are stated at cost less any applicable provision for obsolescence, and are charged to income statement when used in operations. Cost represents the average unit cost.
Inventories held for sale or disposal are carried at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
When inventories are sold, the carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs.
F-18 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(n) Trade and other receivables
Trade and other receivables are initially recognized at fair value and thereafter stated at amortized cost less allowance for impairment of doubtful debts (Note 2(l)), except where the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less allowance for impairment of bad and doubtful debts.
(o) Interest-bearing borrowings
Interest-bearing borrowings are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between the amount initially recognized and redemption value being recognized in income statement over the period of the borrowings, together with any interest and fees payable, using the effective interest method.
(p) Trade and other payables
Trade and other payables are initially recognized at fair value. Except for financial guarantee liabilities measured in accordance with (Note 2(r)(i)), trade and other payables are subsequently stated at amortized cost unless the effect of discounting would be immaterial, in which case they are stated at cost.
(q) Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been generally within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.
(r) Financial guarantees issued, provisions and contingent liabilities
(i) Financial guarantees issued
Financial guarantees are contracts that require the issuer (i.e. the guarantor) to make specified payments to reimburse the beneficiary of the guarantee (the “holder”) for a loss the holder incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument.
Where the Group issues a financial guarantee, the fair value of the guarantee (being the transaction price, unless the fair value can otherwise be reliably estimated) is initially recognized.
The amount of the guarantee initially recognized is amortized in income statement over the term of the guarantee as income from financial guarantees issued. In addition, provisions are recognized in accordance with Note 2(r)(ii) if and when (i) it becomes probable that the holder of the guarantee will call upon the Group under the guarantee, and (ii) the amount of that claim on the Group is expected to exceed the amount currently carried in trade and other payables in respect of that guarantee i.e. the amount initially recognized, less accumulated amortization.
F-19 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(r) Financial guarantees issued, provisions and contingent liabilities (continued)
(ii) Provisions and contingent liabilities
Provisions are recognized for other liabilities of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.
(s) Dividend distribution
Dividend distribution to the Company’s shareholders is recognized as a liability in the Group’s consolidated financial statements in the period in which the dividends are approved by the Company’s shareholders.
(t) Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
(u) Defeasance of long-term liabilities
Where long-term liabilities have been defeased by the placement of security deposits, those liabilities and deposits (and income and charge arising therefrom) are netted off in order to reflect the overall commercial effect of the arrangements. Such netting off has been effected where a right is held by the Group to insist on net settlement of the liability and deposit including in all situations of default and where that right is assured beyond doubt; and when the Group intends to settle the liability and deposit on a net basis.
(v) Deferred benefits and gains
In connection with the acquisitions or leases of certain aircraft and engines, the Group receives various credits. Such credits are deferred until the aircraft and engines are delivered, at which time they are either applied as a reduction of the cost of acquiring the aircraft and engines, resulting in a reduction of future depreciation, or amortized as a reduction of rental expense for aircraft and engines under leases.
(w) Income tax
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting year, and any adjustment to tax payable in respect of previous years.
Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.
F-20 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(w) Income tax (continued)
Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilized, are recognized. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilized.
The limited exception to the recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries, associates and joint ventures to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future and it is probable that future taxable profit will be available against which the temporary difference can be utilized.
The amount of deferred tax recognized is measured based on the expected manner of realization or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the end of the reporting period and are expected to apply when related deferred tax asset is realized or the deferred tax liability is settled. Deferred tax assets and liabilities are not discounted.
The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.
Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:
– in the case of current tax assets and liabilities, the Group intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously; or
– in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
– the same taxable entity; or
– different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realize the current tax assets and settle the current tax liabilities on a net basis or realize and settle simultaneously.
F-21 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(x) Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable. Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognized in income statement as follows:
(i) Passenger, cargo and mail revenues
Passenger revenue is recognized at the fair value of the consideration received when the transportation service is provided. Unearned passenger revenue at the reporting date is included within sales in advance of carriage in the consolidated statement of financial position.
Cargo and mail revenues are recognized when the transportation is provided.
Revenues from airline-related business are recognized when services are rendered.
(ii) Frequent flyer revenue
The Group maintains two major frequent flyer award programs, namely, the China Southern Airlines Sky Pearl Club and the Xiamen Airlines’ Egret Card Frequent Flyer Program, which provide travel and other awards to members based on accumulated mileages.
The amount received in relation to mileage earning flights is allocated, based on fair value, between the flight and mileage earned by members of the Group’s frequent flyer award programs. The value attributed to the awarded mileage is deferred as a liability, within deferred revenue, until the mileage is redeemed and the related benefits are received or used or they expire.
The amount received from third parties for the issue of mileage under the Group’s frequent flyer award programs is also deferred as a liability, within deferred revenue.
As members of the frequent flyer award programs redeem mileages for an award, revenue in relation to flight awards is recognized when the transportation is provided; revenue in relation to non-flight rewards is recognized at the point of redemption where non-flight rewards are selected.
(iii) Operating rental income
Receivable under operating leases is recognized in income statement in equal instalments over the periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the use of the leased asset. Lease incentives granted are recognized in income statement as an integral part of the aggregate net lease payments receivable. Contingent rentals are recognized as income in the accounting period in which they are earned.
(iv) Dividends
– Dividend income from unlisted investments is recognized when the shareholder’s right to receive payment is established.
– Dividend income from listed investments is recognized when the share price of the investment goes ex-dividend.
F-22 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(x) Revenue recognition (continued)
(v) Government grants
Government grants are recognized in consolidated statement of financial position initially when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognized as other net income in income statement on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are deducted from the carrying amount of the asset and consequently are effectively recognized in income statement over the useful life of the asset by way of reduced depreciation expense.
(vi) Interest income
Interest income is recognized as it accrues using the effective interest method.
(y) Traffic commissions
Traffic commissions are expensed in income statement when the transportation is provided and the related revenue is recognized. Traffic commissions for transportation not yet provided are recorded on the consolidated statement of financial position as prepaid expense.
(z) Maintenance and overhaul costs
Routine maintenance, repairs and overhauls are charged to income statement as and when incurred.
In respect of owned and finance leased aircraft, components within the aircraft subject to replacement during major overhauls are depreciated over the average expected life between major overhauls. When each major overhaul is performed, its cost is recognized in the carrying amount of property, plant and equipment and is depreciated over the estimated period between major overhauls. Any remaining carrying amount of cost of previous major overhaul is derecognized and charged to income statement.
In respect of aircraft held under operating leases, the Group has responsibility to fulfil certain return conditions under relevant lease agreements. In order to fulfil these return conditions, major overhauls are required to be conducted. Accordingly, estimated costs of major overhauls are accrued and charged to the income statement over the estimated overhaul period. Differences between the estimated costs and the actual costs of overhauls are charged to income statement in the period when the overhaul is performed.
(aa) Borrowing costs
General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization.
All other borrowing costs are recognized in profit or loss in the period in which they are incurred.
Borrowing costs include interest expense, finance charges in respect of finance leases and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
F-23 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(ab) Employee benefits
(i) Short term employee benefits and contributions to defined contribution retirement schemes
Salaries, annual bonuses and contributions to defined contribution retirement schemes are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.
(ii) Termination benefits
Termination benefits are recognized when, and only when, the Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.
(iii) Share-based payment
The fair value of the amount payable to employee in respect of share appreciation rights (“SARs”), which are settled in cash, is recognized as an expense with a corresponding increase in liabilities, over the vesting period. The liability is remeasured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognized as staff cost in the consolidated income statement.
(ac) Translation of foreign currencies
Items included in the financial statements of each of the group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Renminbi, which is the Company’s functional and the Group’s presentation currency.
Foreign currencies transactions during the year are translated into Renminbi at the applicable rates of exchange quoted by the People’s Bank of China (“PBOC”) prevailing at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into Renminbi at the PBOC exchange rates prevailing at the end of the reporting period. Exchange gains and losses are recognized in income statement.
Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated into Renminbi at the PBOC exchange rates prevailing at the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated into Renminbi at the PBOC exchange rates prevailing at the dates the fair value was determined.
(ad) Related parties
(a) A person, or a close member of that person’s family, is related to the Group if that person:
(i) has control or joint control over the Group;
(ii) has significant influence over the Group; or
(iii) is a member of the key management personnel of the Group or the Group’s parent.
F-24 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
2Significant accounting policies (continued)
(ad) Related parties (continued)
(b) An entity is related to the Group if any of the following conditions applies:
(i) The entity and the Group are members of the same Group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
(v) The entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group.
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.
(ae) Segment reporting
Operating segments, and the amounts of each segment item reported in the financial statements, are identified from the financial information provided regularly to the Group’s most senior executive management, who is the chief operating decision maker, for the purposes of allocating resources to, and assessing the performance of, the Group’s various lines of business and geographical locations.
Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of the nature of products and services, the nature of production processes, the type or class of customers, the methods used to distribute the products or provide the services, and the nature of the regulatory environment. Operating segments which are not individually material may be aggregated if they share a majority of these criteria.
F-25 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
3 Accounting estimates and judgments
The Groups’ financial position and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the financial statements. The Group bases the assumptions and estimates on historical experience and on various other assumptions that the Group believes to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. On an ongoing basis, management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.
The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in condition and assumptions are factors to be considered when reviewing the financial statements. In addition to the assumptions and estimates regarding fair value measurements of financial instruments disclosed in Note 4(g), the Group believes the following also involve key accounting estimates and judgments used in the preparation of the financial statements.
(a) Accounting estimates
(i) Impairment of long-lived assets (other than goodwill)
If circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the asset may be considered “impaired”, and an impairment loss may be recognized in accordance with IAS 36, Impairment of Assets. The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount. The recoverable amount is the higher of the fair value less costs of disposal and value in use. In particular, in determining the value in use of the Group’s aircraft fleet, expected future cash flows to be generated by the asset are discounted to their present value, which requires significant judgment relating to forecast traffic revenue, forecast operating costs and discount rate applied. 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 application of discount rate.
(ii) Provision for major overhauls
Provision for the cost of major overhauls to fulfil the lease return conditions for airframes and engines held under operating leases are accrued and charged to the income statement over the estimated overhaul period. This requires 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.
(iii) Frequent flyer revenue
The amount of revenue attributable to the mileage earned by the members of the Group’s frequent flyer award programs is estimated based on the fair value of the mileage awarded and the expected redemption rate. The fair value of mileage awarded is estimated by reference to external sales. The expected redemption rate is estimated based on historical experience, anticipated redemption patterns and the frequent flyer programs’ design. Different estimates could significantly affect the estimated deferred revenue and the results of operations.
F-26 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
3 Accounting estimates and judgments (continued)
(a) Accounting estimates (continued)
(iv) Depreciation
Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives, after taking into account the estimated residual value. The Group reviews the estimated useful lives of assets annually in order to determine the amount of depreciation expense to be recorded during any financial year. The useful lives are based on the Group’s historical experience with similar assets and take into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.
(v) Provision for consumable spare parts and maintenance materials
Provision for consumable spare parts and maintenance materials is made based on the difference between the carrying amount and the net realizable value. The net realizable value is estimated based on current market condition, historical experience and the Group’s future operation plan for the consumable spare parts and maintenance materials. The net realizable value may be adjusted due to the change of market condition and the future plan for the consumable spare parts and maintenance materials.
(vi) Income tax
There are certain transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional tax will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the year in which such determination is made.
(vii) Impairment of trade receivables
When there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables, a provision for impairment of trade receivables is established based on the difference between the receivable’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.
F-27 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
3 Accounting estimates and judgments (continued)
(b) Accounting judgments
Retirement benefits
According to IAS 19, Employee Benefits, an entity shall account not only for its legal obligation under the formal terms of a defined benefit plan, but also for any constructive obligation that arises from the entity’s informal practices where the entity has no realistic alternative but to pay the employee benefits. The Group believes the payments of welfare subsidy to those retirees who retired before the establishment of Pension Scheme (as defined in Note 50(a)) are discretionary and have not created a legal or constructive obligation. Such payments are made according to the Group’s business performance, and can be suspended at any time (Note 14).
4 Financial risk management and fair values
The Group is exposed to liquidity, interest rate, currency, credit risks and commodity jet fuel price risk in the normal course of business. The Group’s overall risk management program focuses on the unpredictability of financial market and seeks to minimize the adverse effects on the Group’s financial performance. The Group’s exposure to these risks and the financial risk management policies and practices used by the Group to manage these risks are described below.
(a) Liquidity risk
As at December 31, 2016, the Group’s current liabilities exceeded its current assets by RMB54,168 million. For the year ended December 31, 2016, the Group recorded a net cash inflow from operating activities of RMB23,764 million, a net cash outflow from investing activities of RMB15,750 million and a net cash outflow from financing activities of RMB8,459 million, which in total resulted in a net decrease in cash and cash equivalents of RMB445 million.
The Group is dependent on its ability to maintain adequate cash inflow from operations, its ability to maintain existing external financing, and its ability to obtain new external financing to meet its debt obligations as they fall due and to meet its committed future capital expenditures. The Group’s policy is to regularly monitor its liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term. As at December 31, 2016, the Group had banking facilities with several PRC banks and financial institutions for providing bank financing up to approximately RMB139,274 million (2015: RMB173,739 million), of which approximately RMB110,199 million (2015: RMB131,021 million) was unutilized. The Directors of the Company believe that sufficient financing will be available to the Group when and where needed.
The Directors of the Company have carried out a review of the cash flow forecast of the Group for the twelve months ending December 31, 2017. Based on such forecast, the Directors have determined that adequate liquidity exists to finance the working capital, capital expenditure requirements and dividend payments of the Group during that period. In preparing the cash flow forecast, the Directors have considered historical cash requirements of the Group as well as other key factors, including the availability of the above-mentioned bank facilities, which may impact the operations of the Group during the next twelve-month period. The Directors of the Company are of the opinion that the assumptions and sensitivities which are included in the cash flow forecast are reasonable. However, as with all assumptions in regard to future events, these are subject to inherent limitations and uncertainties and some or all of these assumptions may not be realized.
F-28 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
4 Financial risk management and fair values (continued)
(a) Liquidity risk (continued)
The following tables show the remaining contractual maturities at the end of the reporting period of the Group’s non-derivative financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at the end of the reporting period) and the earliest date the Group can be required to pay:
2016 Contractual undiscounted cash outflow More than More than Within 1 year but 2 years but Carrying 1 year or less than less than More than amount at on demand 2 years 5 years 5 years Total December 31 RMB million RMB million RMB million RMB million RMB million RMB million
Borrowings 27,654 1,039 19,124 61 47,878 45,504 Obligations under finance leases 10,663 8,683 24,795 27,247 71,388 62,222 Trade and other payables and accrued charges 19,015 - - - 19,015 19,015 57,332 9,722 43,919 27,308 138,281 126,741
2015 Contractual undiscounted cash outflow More than More than Within 1 year but 2 years but Carrying 1 year or less than less than More than amount at on demand 2 years 5 years 5 years Total December 31 RMB million RMB million RMB million RMB million RMB million RMB million
Borrowings 30,789 7,110 8,700 744 47,343 45,886 Obligations under finance leases 7,864 8,613 19,515 26,731 62,723 55,824 Trade and other payables and accrued charges 17,505 - - - 17,505 17,505 56,158 15,723 28,215 27,475 127,571 119,215
F-29 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
4 Financial risk management and fair values (continued)
(b) Interest rate risk
The interest rates and maturity information of the Group’s borrowings and obligations under finance leases are disclosed in Note 36 and Note 37, respectively. The Group’s borrowings and obligations under finance leases issued at floating and fixed interest rates expose the Group to cash flow interest rate risk and fair value interest rate risk, respectively. The Group determines the ratio of fixed-rate and floating-rate instruments according to the market environment, and maintains an appropriate combination of fixed-rate and floating-rate instruments by reviewing and monitoring it on a regular basis.
Interest rate swaps, denominated in United States Dollars (“USD”), have been entered into to mitigate its cash flow interest rate risk. Under the interest rate swaps, the Group agrees with other third parties to exchange, at specified intervals (primarily quarterly), the difference between fixed contract rates and floating-rate interest amounts calculated by reference to the agreed notional amounts (Note 29).
As at December 31, 2016, it is estimated that a general increase/decrease of 100 basis points in interest rates, with all other variables held constant, would have decreased/increased the Group’s profit after tax and retained profits by approximately RMB376 million (2015: RMB416 million; 2014: RMB569 million). Other components of consolidated equity would not be affected (2015 and 2014: Nil) by the changes in interest rates.
The sensitivity analysis above indicates the instantaneous change in the Group’s profit after tax and retained profits and other components of consolidated equity that would arise assuming that the change in interest rates had occurred at the end of the reporting period and had been applied to re-measure those financial instruments held by the Group which expose the Group to fair value interest rate risk at the end of the reporting period. In respect of the exposure to cash flow interest rate risk arising from floating rate non-derivative instruments held by the Group at the end of the reporting period, the impact on the Group’s profit after tax (and retained profits) and other components of consolidated equity is estimated as an annualized impact on interest expense or income of such a change in interest rates. This analysis is performed on the same basis as that for 2015 and 2014.
(c) Foreign currency risk
Renminbi is not freely convertible into foreign currencies. All foreign exchange transactions involving Renminbi must take place either through the PBOC or other institutions authorized to buy and sell foreign exchange or at a swap center.
The Group has significant exposure to foreign currency risk as majority of the Group’s obligations under finance leases (Note 37) and certain of the bank borrowings (Note 36) are denominated in foreign currencies, principally USD, Euro and Japanese Yen. Depreciation or appreciation of Renminbi against foreign currencies affects the Group’s results significantly because the Group’s foreign currency liabilities generally exceed its foreign currency assets.
F-30 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
4 Financial risk management and fair values (continued)
(c) Foreign currency risk (continued)
The following table indicates the instantaneous change in the Group’s profit after tax and retained profits that would arise if foreign exchange rates to which the Group has significant exposure at the end of the reporting period had changed at that date, assuming all other risk variables remained constant.
2016 Appreciation/(depreciation) of Increase/(decrease) on profit Renminbi against foreign after tax and retained profits currency RMB million
USD 1% 305 (1)% (305)
Euro 1% 31 (1)% (31)
Japanese Yen 10% 134 (10)% (134)
2015 Appreciation/(depreciation) of Increase/(decrease) on profit Renminbi against foreign after tax and retained profits currency RMB million
USD 1% 453 (1)% (453)
Euro 1% 38 (1)% (38)
Japanese Yen 10% 135 (10)% (135)
2014 Appreciation/(depreciation) of Increase/(decrease) on profit Renminbi against foreign after tax and retained profits currency RMB million
USD 1% 767 (1)% (767)
Singapore Dollars 2% 6 (2)% (6)
Japanese Yen 10% 145 (10)% (145)
Results of the analysis as presented in the above table represent an aggregation of the instantaneous effects on each of the group entities’ profit after tax and retained profits measured in the respective functional currencies, translated into Renminbi at the exchange rate ruling at the end of the reporting period for presentation purposes.
The sensitivity analysis assumes that the change in foreign exchange rates had been applied to re-measure those financial instruments, borrowings, and finance lease obligations held by the Group which expose the Group to foreign currency risk at the end of the reporting period, including inter-company payables and receivables within the Group which are denominated in a currency other than the functional currencies of the lender or the borrower. The analysis excludes differences that would result from the translation of the financial statements of foreign operations into the Group’s presentation currency. The analysis is performed on the same basis for 2015 and 2014.
(d) Credit risk
The Group’s credit risk is primarily attributable to cash and cash equivalents, trade receivables and the guarantees on personal bank loans provided to the Group’s pilot trainees.
F-31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
4 Financial risk management and fair values (continued)
(d) Credit risk (continued)
Substantially all of the Group’s cash and cash equivalents are deposited with major reputable PRC financial institutions, which management believes are of high credit quality.
A significant portion of the Group’s air tickets are sold by agents participating in the Billing and Settlement Plan (“BSP”), a clearing scheme between airlines and sales agents organized by International Air Transportation Association. The use of the BSP reduces credit risk to the Group. As at December 31, 2016, the balance due from BSP agents amounted to RMB1,267 million (2015: RMB1,054 million). The credit risk exposure to BSP and the remaining trade receivables balance are monitored by the Group on an ongoing basis and the allowance for impairment of doubtful debts is within management’s expectations. Further quantitative disclosures in respect of the Group’s exposure to credit risk arising from trade receivables is set out in Note 33.
The Company and its subsidiary, Xiamen Airlines Company Limited (“Xiamen Airlines”), entered into agreements with their pilot trainees and certain banks to provide guarantees on personal bank loans amounting to RMB696 million (December 31, 2015: RMB627 million) that can be drawn by the pilot trainees to finance their respective flight training expenses. As at December 31, 2016, total personal bank loans of RMB409 million (December 31, 2015: RMB454 million), under these guarantees, were drawn down from the banks. During the year, the Group has paid RMB4 million (2015: RMB4 million) to the banks due to the default of payments of certain pilot trainees (Note 52(b)).
(e) Jet fuel price risk
The Group’s results of operations may be significantly affected by fluctuations in fuel prices since the jet fuel expenses are a significant cost for the Group. A reasonable possible increase/decrease of 10% (2015 and 2014:10%) in jet fuel price, with volume of fuel consumed and all other variables held constant, would have increased/decreased the fuel costs by approximately RMB2,380 million (2015: RMB2,627 million; 2014: RMB3,773 million). The sensitivity analysis indicates the instantaneous change in the Group’s jet fuel costs that would arise assuming that the change in fuel price had occurred at the beginning of the financial year.
(f) Capital management
The Group’s primary objectives in managing capital are to safeguard the Group’s ability to continue as a going concern, and to generate sufficient profit to maintain growth and provide returns to its shareholders, by securing access to finance at a reasonable cost.
The Group manages the amount of capital in proportion to risk and manages its debt portfolio in conjunction with projected financing requirements. The Group monitors capital on the basis of the debt ratio, which is calculated as total liabilities divided by total assets. During 2016, the Group’s strategy, which was unchanged from 2015, was to maintain a debt ratio at a range of levels to support the operations and development of the Group’s business in the long run. In order to maintain or adjust the debt ratio, the Group may adjust the amount of dividends paid to shareholders, issue new shares, return capital to shareholders, raise new debt financing or sell assets to reduce debt.
The Group’s debt ratio was 73% as at December 31, 2016 (2015: 73%).
Except for the compliance of certain financial covenants for maintaining the Group’s banking facilities and borrowings, the Group is not subject to any externally imposed capital requirements. The Group complied with the financial covenants attached to borrowings as at December 31, 2016.
F-32 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
4 Financial risk management and fair values (continued)
(g) Fair value
(i) Financial instruments carried at fair value
Fair value hierarchy
The following table presents the carrying value of financial instruments measured at the end of the reporting period on a recurring basis, categorized into the three-level fair value hierarchy as defined in IFRS 13, Fair value measurement. The level into which a fair value measurement is classified is determined with reference to the observability and significance of the inputs used in the valuation technique as follows:
x Level 1 valuations: Fair value measured using only Level 1 inputs i.e. unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date
x Level 2 valuations: Fair value measured using Level 2 inputs i.e. observable inputs which fail to meet Level 1, and not using significant unobservable inputs. Unobservable inputs are inputs for which market data are not available
x Level 3 valuations: Fair value measured using significant unobservable inputs
Fair value measurements as at December 31, 2016 categorized into Fair value at December 31 2016 Level 1 Level 2 Level 3 Recurring fair value RMB RMB RMB RMB measurement Note million million million million Financial assets: Available-for-sale equity securities: -Listed shares 28 88 88 - - -Non-tradable shares 28 411 - - 411 Derivative financial instruments: -Interest rate swaps 29 21 - 21 -
Fair value measurements as at December 31, 2015 categorized into Fair value at December 31 2015 Level 1 Level 2 Level 3 Recurring fair value RMB RMB RMB RMB measurement Note million million million million Financial assets: Available-for-sale equity securities: -Listed shares 28 104 104 - - Derivative financial instruments: -Interest rate swaps 29 13 - 13 -
During the years ended December 31, 2016 and 2015, there were no transfers among level 1, level 2 and level 3. The Group’s policy is to recognize transfers between levels of fair value hierarchy as at the end of the reporting period in which they occur.
F-33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
4 Financial risk management and fair values (continued)
(g) Fair value (continued)
(i) Financial instruments carried at fair value (continued)
Valuation techniques and inputs used in Level 2 fair value measurements
Fair value of interest rate swaps in derivative financial instruments is measured by discounting the expected receivable or payable amounts under the assumption that these swaps had been terminated at the end of the reporting period. The discount rates used are the US Treasury bond yield curve as at the end of the reporting period.
Information about Level 3 fair value measurements
Significant Valuation unobservable technique inputs Range Available-for-sale equity securities: -Non-tradable shares Discounted cash flow Expected profit growth rate during the projection period 8% to 10%
Terminal growth rate 8%
Expected dividend payout rate 30%
Discount rate 12.03%
The fair value of non-tradable available-for-sale equity securities is determined by discounting a projected cash flow series associated with the investments. The valuation takes into account the expected profit growth rate and expected dividend payout rate of the investee. The discount rate used have been adjusted to reflect specific risks relating to the investments. The fair value measurement is positively correlated to the expected profit growth rate and expected dividend rate of the investee, and negatively correlated to the discount rate.
For the year ended December 31, 2016, the net unrealized gains of RMB378 million relating to the available-for-sale equity securities – non-tradable shares are recognized in fair value reserve in other comprehensive income.
(ii) Financial instruments not carried at fair value
(a) Other investments in equity securities represent investments in equity securities that do not have a quoted price in an active market for an identical instrument and whose fair value cannot otherwise be reliably measured. Accordingly, they are recognized in the consolidated statement of financial position at cost less impairment losses.
(b) All other financial instruments, including cash and cash equivalents, amounts due from/to related companies, trade and other receivables, trade and other payables, borrowings and obligations under finance leases are carried at amounts not materially different from their fair values as at December 31, 2016 and 2015.
5 Traffic revenue 2016 2015 2014 RMB million RMB million RMB million
Passenger 97,135 94,677 84,740 Cargo and mail 6,760 6,122 5,842 Fuel surcharge income 5,798 6,300 13,746 109,693 107,099 104,328
F-34 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
6Segment reporting
(a) Business segments
The Group has two reportable operating segments “airline transportation operations” and “other segments”, according to internal organization structure, managerial needs and internal reporting system. “Airline transportation operations” comprises the Group’s passenger and cargo and mail operations. “Other segments” includes hotel and tour operation, ground services, cargo handling and other miscellaneous services.
For the purposes of assessing segment performance and allocating resources between segments, the Group’s chief operating decision maker (“CODM”) monitors the results, assets and liabilities attributable to each reportable segment based on financial results prepared under the People’s Republic of China Accounting Standards for Business Enterprises (“PRC GAAP”). As such, the amount of each material reconciling item from the Group’s reportable segment revenue, profit before taxation, assets and liabilities arising from different accounting policies are set out in Note 6(c). The comparative figures in the Group’s financial statements prepared in accordance with PRC GAAP are restated as the Group acquired a subsidiary under common control in 2016 (Note 24(a)(v)). Management considered the impact of the above restatement is not material. Therefore, the Group’s segment results for the year ended December 31, 2015 and 2014, and its segment assets and liabilities as at December 31, 2015 as disclosed in these financial statements have not been restated.
Inter-segment sales and transfers are transacted with reference to the selling prices used for sales made to third parties at the then prevailing market prices.
Information regarding the Group’s reportable segments as provided to the Group’s CODM for the purposes of resource allocation and assessment of segment performance is set out below.
F-35 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
6Segment reporting (continued)
(a) Business segments (continued)
The segment results of the Group for the year ended December 31, 2016 are as follows:
Airline transportation Other operations segments Elimination Unallocated* Total RMB million RMB million RMB million RMB million RMB million
Revenue from external customers 113,490 1,302 - - 114,792 Inter-segment sales 101 2,231 (2,332) - - Reportable segment revenue 113,591 3,533 (2,332) - 114,792 Reportable segment profit before taxation 6,471 459 - 717 7,647 Reportable segment profit after taxation 4,834 337 - 717 5,888 Other segment information Income tax 1,637 122 - - 1,759 Interest income 79 10 - - 89 Interest expense 2,458 7 - - 2,465 Depreciation and amortization 12,693 96 - - 12,789 Impairment loss 127 3 - - 130 Share of associates’ results - - - 511 511 Share of joint ventures’ results - - - 102 102 Gain on deemed disposal of a subsidiary - - - 90 90 Non-current assets additions during the year (other than goodwill, interests in associates and joint ventures, other investments in equity securities, available-for-sale financial assets, derivative financial instruments and deferred tax assets) 29,126 120 - - 29,246
F-36 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
6 Segment reporting (continued)
(a) Business segments (continued)
The segment results of the Group for the year ended December 31, 2015 are as follows:
Airline transportation Other operations segments Elimination Unallocated* Total RMB million RMB million RMB million RMB million RMB million
Revenue from external customers 110,067 1,400 - - 111,467 Inter-segment sales 114 1,528 (1,642) - - Reportable segment revenue 110,181 2,928 (1,642) - 111,467 Reportable segment profit before taxation 5,480 279 - 582 6,341 Reportable segment profit after taxation 4,199 205 - 582 4,986 Other segment information Income tax 1,281 74 - - 1,355 Interest income 244 9 - - 253 Interest expense 2,156 32 - - 2,188 Depreciation and amortization 11,915 97 - - 12,012 Impairment loss 105 3 - - 108 Share of associates’ results - - - 462 462 Share of joint ventures’ results - - - 107 107 Non-current assets additions during the year (other than interests in associates and joint ventures, other investments in equity securities, available-for-sale financial assets, derivative financial instruments and deferred tax assets) 24,242 98 - - 24,340
F-37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
6 Segment reporting (continued)
(a) Business segments (continued)
The segment results of the Group for the year ended December 31, 2014 are as follows:
Airline transportation Other operations segments Elimination Unallocated* Total RMB million RMB million RMB million RMB million RMB million
Revenue from external customers 107,790 523 - - 108,313 Inter-segment sales - 1,364 (1,364) - - Reportable segment revenue 107,790 1,887 (1,364) - 108,313 Reportable segment profit before taxation 2,422 257 - 416 3,095 Reportable segment profit after taxation 1,800 202 - 416 2,418 Other segment information Income tax 622 55 - - 677 Interest income 369 7 - - 376 Interest expense 2,155 38 - - 2,193 Depreciation and amortization 10,915 88 - - 11,003 Impairment loss 205 - - - 205 Share of associates’ results - - - 263 263 Share of joint ventures’ results - - - 140 140 Non-current assets additions during the year (other than interests in associates and joint ventures, other investments in equity securities, available-for-sale financial assets, derivative financial instruments and deferred tax assets) 29,523 98 - - 29,621
F-38 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
6 Segment reporting (continued)
(a) Business segments (continued)
The segment assets and liabilities of the Group as at December 31, 2016 and December 31, 2015 are as follows:
Airline transportation Other operations segments Elimination Unallocated* Total RMB million RMB million RMB million RMB million RMB million
As at December 31, 2016 Reportable segment assets 192,881 3,201 (376) 4,755 200,461 Reportable segment liabilities 144,768 1,355 (370) - 145,753 As at December 31, 2015 Reportable segment assets 180,753 2,795 (1,004) 3,706 186,250 Reportable segment liabilities 136,391 1,290 (1,004) - 136,677
* Unallocated assets primarily include goodwill, interest in associates and joint ventures, available-for-sale financial assets, derivative financial instruments and other investments in equity securities. Unallocated results primarily include the share of results of associates and joint ventures, dividend income from available-for-sale financial assets and other investments in equity securities and the gain on deemed disposal of a subsidiary.
(b) The Group’s business segments operate in three main geographical areas, even though they are managed on a worldwide basis.
The Group’s revenues by geographical segment are analyzed based on the following criteria:
(1) Traffic revenue from services of both origin and destination within the PRC (excluding Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan (“Hong Kong, Macau and Taiwan”)), is classified as domestic revenue. Traffic revenue with origin and destination among PRC, Hong Kong, Macau and Taiwan is classified as Hong Kong, Macau and Taiwan revenue; while that with origin and destination from/to other overseas markets is classified as international revenue.
(2) Revenues from commission income, hotel and tour operation, ground services, cargo handling and other miscellaneous services are classified on the basis of where the services are performed.
2016 2015 2014 RMB million RMB million RMB million
Domestic 84,380 82,981 82,764 International 28,096 25,872 22,952 Hong Kong, Macau and Taiwan 2,316 2,614 2,597 114,792 111,467 108,313
The major revenue earning assets of the Group are its aircraft fleet which is registered in the PRC and is deployed across its worldwide route network. Majority of the Group’s other assets are located in the PRC. CODM considers that there is no suitable basis for allocating such assets and related liabilities to geographical locations. Accordingly, geographical segment assets and liabilities are not disclosed.
F-39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
6 Segment reporting (continued)
(c) Reconciliation of reportable segment revenues, profit before income tax, assets and liabilities to the consolidated figures as reported in the consolidated financial statements.
2016 2015 2014 RMB RMB RMB Note million million million Revenue Reportable segment revenue 114,792 111,467 108,313 Reclassification of expired sales in advance of carriage (i) 376 459 459 Reclassification of sales tax (ii) (161) (274) (188) Adjustments arising from business combinations under common control (v) (26) - - Consolidated revenue 114,981 111,652 108,584
2016 2015 2014 RMB RMB RMB Note million million million Profit before income tax Reportable segment profit before taxation 7,647 6,341 3,095 Capitalization of exchange difference of specific loans (iii) 48 (222) (28) Government grants (iv) 1 1 1 Adjustments arising from business combinations under common control (v) (35) (2) (2) Consolidated profit before income tax 7,661 6,118 3,066
2016 2015 RMB RMB Note million million Assets Reportable segment assets 200,461 186,250 Capitalization of exchange difference of specific loans (iii) 149 101 Government grants (iv) (316) (342) Adjustments arising from business combinations under common control (v) 184 - Others (36) (20) Consolidated total assets 200,442 185,989
2016 2015 RMB RMB Note million million Liabilities Reportable segment liabilities 145,753 136,677 Government grants (iv) (287) (312) Consolidated total liabilities 145,466 136,365
F-40 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
6 Segment reporting (continued)
(c) Reconciliation of reportable segment revenues, profit before income tax, assets and liabilities to the consolidated figures as reported in the consolidated financial statement. (continued)
Notes:
(i) In accordance with the PRC GAAP, expired sales in advance of carriage are recorded under non-operating income. Under IFRSs, such income is recognized as other operating revenue.
(ii) In accordance with the PRC GAAP, sales tax is separately disclosed rather than deducted from revenue under IFRSs.
(iii) In accordance with the PRC GAAP, exchange difference arising on translation of specific loans and related interest denominated in a foreign currency is capitalized as part of the cost of qualifying assets. Under IFRSs, such exchange difference is recognized in income statement unless the exchange difference represents an adjustment to interest.
(iv) In accordance with the PRC GAAP, special funds such as investment grants allocated by the government, if clearly defined on official documents as part of “capital reserve”, are credited to capital reserve. Otherwise, government grants related to assets are recognized as deferred income and amortized to profit or loss on a straight line basis over the useful life of the related assets. Under IFRSs, government grants relating to purchase of fixed assets are deducted from the cost of the related fixed assets.
(v) In accordance with the PRC GAAP, the Group accounts for the business combination under common control by applying the pooling-of-interest method. Under the pooling-of-interest method, the difference between the historical carrying amount of the acquiree and the consideration paid is accounted for as an equity transaction. Business combinations under common control are accounted for as if the acquisition had occurred at the beginning of the earliest comparative year presented or, if later, at the date that common control was established; for this purpose, comparative figures are restated under PRC GAAP. Under IFRSs, the Group adopts the purchase accounting method for acquisition of business under common control. In addition, adjustments are made to make its associate’s accounting policy of business combination under common control conform to the policy of the Group when the associate’s financial statements are used by the Group in applying the equity method when preparing its financial statements in accordance with IFRSs.
7 Other operating revenue
2016 2015 2014 RMB million RMB million RMB million
Commission income 2,518 1,545 1,335 Expired sales in advance of carriage 376 459 459 Hotel and tour operation income 625 621 508 General aviation income 461 490 576 Ground services income 384 345 293 Air catering income 253 239 272 Cargo handling income 201 230 236 Rental income 179 182 156 Others 291 442 421 5,288 4,553 4,256
F-41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
8 Flight operation expenses
2016 2015 2014 RMB million RMB million RMB million
Jet fuel costs 23,799 26,274 37,728 Flight personnel payroll and welfare 9,215 8,070 6,803 Aircraft operating lease charges 7,330 6,153 5,383 Air catering expenses 2,965 2,680 2,497 Civil Aviation Development Fund 2,565 2,482 2,279 Training expenses 1,120 1,003 1,003 Aircraft insurance 197 168 202 Others 4,270 3,582 3,006 51,461 50,412 58,901
9 Maintenance expenses
2016 2015 2014 RMB million RMB million RMB million
Aviation repair and maintenance charges 7,952 7,396 5,525 Staff payroll and welfare 2,363 2,131 1,966 Maintenance materials 1,003 880 813 11,318 10,407 8,304
10 Aircraft and transportation service expenses
2016 2015 2014 RMB million RMB million RMB million
Landing and navigation fees 13,109 11,510 10,496 Ground service and other charges 7,106 6,398 5,906 20,215 17,908 16,402
11 Promotion and selling expenses
2016 2015 2014 RMB million RMB million RMB million
Sales commissions 1,926 3,150 4,263 Ticket office expenses 2,875 2,605 2,465 Computer reservation services 777 605 542 Advertising and promotion 173 122 116 Others 553 494 455 6,304 6,976 7,841
12 General and administrative expenses
2016 2015 2014 RMB million RMB million RMB million
General corporate expenses 2,671 2,325 2,195 Auditors’ remuneration 13 15 18 - Audit services 13 15 18 - Non-audit services - - - Other taxes and levies 131 124 124 2,815 2,464 2,337
F-42 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
13 Depreciation and amortization
2016 2015 2014 RMB million RMB million RMB million
Depreciation – Owned assets 7,569 7,082 8,021 – Assets acquired under finance leases 4,849 4,684 2,768 Amortization of deferred benefits and gains (131) (148) (156) Other amortization 332 227 195 12,619 11,845 10,828
14 Staff costs
2016 2015 2014 RMB million RMB million RMB million
Salaries, wages and welfare 18,774 16,636 14,667 Defined contribution retirement scheme 1,886 1,726 1,554 Other retirement welfare subsidy 183 177 167 Early retirement benefits (Note 44) 3 3 7 20,846 18,542 16,395
Staff costs relating to flight operation and maintenance are also included in the respective total amounts disclosed separately in Note 8 and Note 9 above.
Staff costs arising from the SARs, which have all been expired in 2015 (Note 50(c)), were included in “salaries, wages and welfare” above.
15 Other net income
2016 2015 2014 RMB million RMB million RMB million
Government grants (Note) 2,837 2,331 1,700 Gains/(losses) on disposal of property, plant and equipment and construction in progress – Aircraft and spare engines and relating construction in progress 523 414 344 – Other property, plant and equipment 34 (102) (77) Others 441 635 223 3,835 3,278 2,190
Note:
Government grants mainly represent (i) subsidies based on certain amount of tax paid granted by governments to the Group; (ii) subsidies granted by various local governments to encourage the Group to operate certain routes to cities where these governments are located.
There are no unfulfilled conditions and other contingencies related to subsidies that have been recognized during the year ended December 31, 2016.
F-43 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
16 Interest expense
2016 2015 2014 RMB million RMB million RMB million
Interest on borrowings 1,444 1,320 1,628 Interest relating to obligations under finance leases 1,598 1,248 978 Interest relating to provision for early retirement benefits (Note 44) 1 2 4 Less: interest expense capitalized (Note) (624) (382) (417) Interest rate swaps: cash flow hedge, reclassified from equity (Note 18) 46 - - 2,465 2,188 2,193
Note:
The weighted average interest rate used for interest capitalization was 3.22% per annum in 2016 (2015: 2.77%; 2014: 2.37%).
17 Income tax
(a) Income tax expense in the consolidated income statements
2016 2015 2014 RMB million RMB million RMB million
PRC income tax –Provision for the year 2,203 1,700 430 –Under/(over)-provision in prior year 47 (41) (29) 2,250 1,659 401 Deferred tax (Note 30) Origination and reversal of temporary differences (487) (359) 267
Tax expense 1,763 1,300 668
In respect of majority of the Group’s airlines operation outside mainland China, the Group has either obtained exemptions from overseas taxation pursuant to the bilateral aviation agreements between the overseas governments and the PRC government, or has sustained tax losses in those overseas jurisdictions. Accordingly, no provision for overseas income tax has been made for overseas airlines operation in the current and prior years.
Under the Corporate Income Tax Law of the PRC, the Company and majority of its PRC subsidiaries are subject to PRC income tax at 25% (2015: 25%; 2014: 25%). Certain PRC subsidiaries of the Group are subject to preferential income tax rate at 15% according to the preferential tax policy in locations, where those subsidiaries are located.
F-44 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
17 Income tax (continued)
(b) Reconciliation between actual tax expense and calculated tax based on accounting profit at applicable tax rates
2016 2015 2014 RMB million RMB million RMB million
Profit before income tax 7,661 6,118 3,066
Notional tax on profit before taxation, calculated at the rates applicable to profits in the tax jurisdictions concerned (Note 17(a)) 1,857 1,482 738
Adjustments for tax effect of: Non-deductible expenses 4 3 11 Share of results of associates and joint ventures and other non-taxable income (154) (144) (104) Unused tax losses and deductible temporary differences for which no deferred tax assets were recognized 48 23 63 Utilization of unused tax losses and deductible temporary differences for which no deferred tax assets were recognized in prior years (39) (18) (11) Under/(over)-provision in prior year 47 (41) (29) Others - (5) - Tax expense 1,763 1,300 668
F-45 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
18 Other comprehensive income
2016 2015 2014 RMB million RMB million RMB million
Cash flow hedges: Effective portion of changes in fair value of hedging instruments recognized during the year (38) 13 - Reclassification adjustments for amounts transferred to profit or loss: - interest expense (Note 16) 46 - - Net deferred tax debited to other comprehensive income (2) (3) - Net movement in the fair value reserve during the year recognized in other comprehensive income 6 10 -
Available-for-sale financial assets: Changes in fair value recognized during the year 362 - 43 Net deferred tax debited to other comprehensive income (90) - (11) Net movement in the fair value reserve during the year recognized in other comprehensive income 272 - 32
19 Earnings per share
The calculation of basic earnings per share for the year ended December 31, 2016 is based on the profit attributable to equity shareholders of the Company of RMB5,044 million (2015: RMB3,736 million; 2014: RMB1,777 million) and the weighted average of 9,817,567,000 shares in issue during the year (2015 and 2014: 9,817,567,000 shares).
The amounts of diluted earnings per share are the same as basic earnings per share as there were no dilutive potential ordinary shares in existence for the years ended December 31, 2016, 2015 and 2014.
F-46 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
20 Property, plant and equipment, net
Aircraft Acquired Other flight under equipment Machinery, Investment finance including equipment properties Buildings Owned leases rotables and vehicles Total RMB RMB RMB RMB RMB RMB RMB million million million million million million million Cost: At January 1, 2015 646 9,205 85,121 79,873 18,570 5,883 199,298 Additions - 138 1,564 5,901 660 353 8,616 Transfer from construction in progress (Note 21) - 849 1,777 8,174 896 103 11,799 Transfer from lease prepayments 6 - - - - - 6 Transfer to buildings upon cease of lease intention (8) 8 - - - - - Transfer to investment properties upon lease out 88 (88) - - - - - Reclassification on exercise of purchase option - - 6,700 (6,700) - - - Disposals (2) (38) (1,454) (416) (1,156) (230) (3,296) At December 31, 2015 730 10,074 93,708 86,832 18,970 6,109 216,423
At January 1, 2016 730 10,074 93,708 86,832 18,970 6,109 216,423 Acquisitions through business Combinations (Note 24(a)(v)) - 5 - - - 2 7 Additions - 39 1,675 5,112 1,148 453 8,427 Transfer from construction in progress (Note 21) - 1,145 - 6,745 203 143 8,236 Transfer to lease prepayments (21) - - - - - (21) Transfer to buildings upon cease of lease intention (64) 64 - - - - - Transfer to investment properties upon lease out 148 (148) - - - - - Reclassification on exercise of purchase option - - 4,470 (4,470) - - - Disposals - (32) (2,536) (347) (751) (466) (4,132) Deemed disposal of a subsidiary (Note 24(a)(vi)) (124) (79) - - - (41) (244) At December 31, 2016 669 11,068 97,317 93,872 19,570 6,200 228,696
F-47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
20 Property, plant and equipment, net (continued)
Aircraft Acquired Other flight under equipment Machinery, Investment finance including equipment properties Buildings Owned leases rotables and vehicles Total RMB RMB RMB RMB RMB RMB RMB million million million million million million million Accumulated depreciation and impairment losses: At January 1, 2015 187 3,028 34,800 12,579 10,566 3,685 64,845 Depreciation charge for the year 19 351 5,089 4,684 1,104 519 11,766 Transfer from lease prepayments 2 - - - - - 2 Transfer to buildings upon cease of lease intention (2) 2 - - - - - Transfer to investment properties upon lease out 18 (18) - - - - - Reclassification on exercise of purchase options - - 2,301 (2,301) - - - Disposals (1) (14) (1,315) (416) (1,087) (191) (3,024) Provision for impairment losses - - 15 40 35 - 90 Impairment losses written off on disposal - - (108) - (18) - (126) At December 31, 2015 223 3,349 40,782 14,586 10,600 4,013 73,553
At January 1, 2016 223 3,349 40,782 14,586 10,600 4,013 73,553 Depreciation charge for the year 20 358 5,476 4,849 1,159 556 12,418 Transfer to lease prepayments (5) - - - - - (5) Transfer to buildings upon cease of lease intention (21) 21 - - - - - Transfer to investment properties upon lease out 39 (39) - - - - - Reclassification on exercise of purchase options - - 2,141 (2,141) - - - Disposals - (18) (2,468) (347) (736) (426) (3,995) Deemed disposal of a subsidiary (Note 24(a)(vi)) (27) (25) - - - (39) (91) Provision for impairment losses (Note 20(c)) - - 21 50 - - 71 Impairment losses written off on disposal - - - - (1) - (1) At December 31, 2016 229 3,646 45,952 16,997 11,022 4,104 81,950
Net book value: At December 31, 2016 440 7,422 51,365 76,875 8,548 2,096 146,746 At December 31, 2015 507 6,725 52,926 72,246 8,370 2,096 142,870
F-48 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
20 Property, plant and equipment, net (continued)
(a) As at December 31, 2016, the accumulated impairment provision of aircraft and flight equipment of the Group is RMB1,641 million and RMB124 million respectively (2015: RMB1,570 million and RMB125 million respectively).
(b) As at December 31, 2016, certain aircraft of the Group with an aggregate carrying value of approximately RMB78,318 million (2015: RMB88,060 million) were mortgaged under certain loans or certain lease agreements (Note 36 and Note 37).
(c) As at December 31, 2016, the Group reviewed the recoverable amounts of the aircraft and related assets and made an additional impairment provision of RMB71 million for its EMB 145 aircraft and EMB 190 aircraft. The estimates of recoverable amounts were based on the higher of the assets’ fair value less costs of disposal and the value in use. The fair value was determined by reference to the recent observable market prices for the aircraft fleet and flight equipment.
(d) As at December 31, 2016 and up to the date of approval of these financial statements, the Group is in the process of applying for the property title certificates in respect of the properties located in Guangzhou (including Guangzhou Baiyun International Airport), Xiamen, Heilongjiang, Jilin, Dalian, Guangxi, Hunan, Beijing, Shanghai, Zhuhai, Shenzhen, Shenyang, Xinjiang, Henan, Chengdu, Guizhou, Hainan, Hubei and Shantou, in which the Group has interests and for which such certificates have not been granted. As at December 31, 2016, carrying value of such properties of the Group amounted to RMB4,294 million (2015: RMB3,615 million). The Directors of the Company are of the opinion that the use of and the conduct of operating activities at the properties referred to above are not affected by the fact that the Group has not yet obtained the relevant property title certificates.
(e) The Group leased out investment properties and certain flight training facilities under operating leases. The leases typically run for an initial period of one to fourteen years, with an option to renew the leases after that date at which time all terms are renegotiated. None of the leases includes contingent rentals. In this connection, rental income totaling RMB179 million (2015: RMB182 million) was received by the Group during the year in respect of the leases. Directors estimated the fair value of these investment properties approximate the carrying amount.
The properties are reclassified between investment properties and other property, plant and equipment, upon the intention of commencement or cease of lease.
The Group’s total future minimum lease income under non-cancellable operating leases are as follows:
2016 2015 RMB million RMB million
Within 1 year 91 53 After 1 year but within 5 years 59 77 After 5 years 54 20 204 150
(f) As at December 31, 2016, certain investment properties of the Group with an aggregate carrying value of approximately RMB34 million (2015: RMB50 million) were mortgaged for certain bank borrowings (Note 36(a)(ii)).
F-49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
21 Construction in progress
Advance payment for aircraft and flight equipment Others Total RMB million RMB million RMB million
At January 1, 2015 17,754 1,593 19,347 Additions 13,671 1,287 14,958 Transferred to property, plant and equipment (Note 20) (10,787) (1,012) (11,799) Transferred to other assets upon completion of development (Note 31) - (123) (123) Disposals (2,938) (12) (2,950) At December 31, 2015 17,700 1,733 19,433
At January 1, 2016 17,700 1,733 19,433 Additions 18,930 1,362 20,292 Transferred to property, plant and equipment (Note 20) (6,948) (1,288) (8,236) Transferred to other assets upon completion of development (Note 31) - (128) (128) Disposals (2,415) (36) (2,451) At December 31, 2016 27,267 1,643 28,910
22 Lease prepayments
Lease prepayments relate to the Group’s land use rights. In 2016, the amount of amortization charged to consolidated income statement was RMB75 million (2015: RMB64 million; 2014: RMB61 million).
A majority of the Group’s properties are located in the PRC. The Group was formally granted the rights to use certain parcels of land in Guangzhou, Shenzhen, Zhuhai, Beihai, Changsha, Shantou, Haikou, Zhengzhou, Jilin, Guiyang and other PRC cities by the relevant PRC authorities for periods of 30 to 70 years, which expire between 2020 and 2073.
As at December 31, 2016 and up to the date of approval of these financial statements, the Group is in the process of applying for certain land use right certificates. As at December 31, 2016, carrying value of such land use rights of the Group amounted to RMB866 million (2015: RMB1,359 million). The Directors of the Company are of the opinion that the use of and the conduct of operating activities at the land use rights referred to above are not affected by the fact that the Group has not yet obtained the relevant land use right certificates.
As at December 31, 2016, certain land use rights of the Group with an aggregate carrying value of approximately RMB79 million (2015: RMB66 million) were mortgaged for certain bank borrowings (Note 36(a) (ii)).
F-50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
23 Goodwill
2016 RMB million
Cost and carrying amount: At January 1 - Acquisitions through business combination (Note 24(a)(v)) 182 At December 31 182
Impairment tests for cash-generating units containing goodwill
The recoverable amount of the CGU is determined based on value-in-use calculation. The calculation uses cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using an estimated weighted average growth rate which does not exceed the long-term average growth rates for the business in which the CGU operates. The cash flows are discounted using a discount rate of 13.40%.
F-51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
24 Subsidiaries
(a) All the subsidiaries of the Company are unlisted. The following list contains only the particulars of subsidiaries which principally affect the results, assets or liabilities of the Group.
Proportion of ownership Place of interest establishment/ Registered held by the Principal Name of company operation capital Company activity
Airline China Southern Airlines Henan Airlines Company Limited (i) PRC RMB6,000,000,000 60% transportation
Airline Xiamen Airlines Company Limited (i)&(iv) PRC RMB8,000,000,000 55% transportation
Airline Chongqing Airlines Company Limited (i) PRC RMB1,200,000,000 60% transportation
Airline Shantou Airlines Company Limited (i) PRC RMB 280,000,000 60% transportation
Airline Zhuhai Airlines Company Limited (i) PRC RMB 250,000,000 60% transportation
Airline Guizhou Airlines Company Limited (i) PRC RMB 650,000,000 60% transportation
Guangzhou Nanland Air Catering Company Limited (ii) PRC RMB 120,000,000 55% Air catering
Logistics Guangzhou Baiyun International Logistic Company Limited (i) PRC RMB 50,000,000 61% operations
Airport ground Beijing Southern Airlines Ground Services Company Limited (i) PRC RMB 18,000,000 100% services
China Southern Airlines Group Air Catering Company Limited (i) PRC RMB 10,200,000 100% Air catering
Freight Nan Lung International Freight Limited Hong Kong HKD 3,270,000 51% services
Import and export agent Southern Airlines Group Import and Export Trading Company (i)&(v) PRC RMB 15,000,000 100% service
General Southern Airlines General Aviation Company Limited (i) PRC RMB1,000,000,000 100% aviation
(i) These subsidiaries are PRC limited liability companies.
(ii) This subsidiary is a Sino-foreign equity joint venture company established in the PRC.
(iii) Certain subsidiaries of the Group are PRC equity joint ventures which have limited terms pursuant to the PRC law.
(iv) On September 5, 2016, the Board of the Company approved the plan for the increase in registered capital in Xiamen Airlines, pursuant to which, the registered capital of Xiamen Airlines increased from RMB5 billion to RMB8 billion. The Company and the other 2 third party non-controlling interests holders converted their portions of reserves and retained earnings in Xiamen Airlines that amounted to RMB1,650 million, RMB1,020 million and RMB330 million, respectively into the share capital of Xiamen Airlines. As a result, the percentage of equity interests held by the three parties in Xiamen Airlines remains unchanged before and after the capital injection.
F-52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
24 Subsidiaries (continued)
(a) All the subsidiaries of the Company are unlisted. The following list contains only the particulars of subsidiaries which principally affect the results, assets or liabilities of the Group. (continued)
(v) Pursuant to the equity transfer agreement entered into between the Company and China Southern Air Holding Company (“CSAHC”, the Company’s holding company) on February 2, 2016, the Company acquired 100% equity interests in Southern Airlines (Group) Import and Export Trading Company (“SAIETC”), a wholly owned subsidiary of CSAHC, at a cash consideration of RMB400 million in August 2016. SAIETC became a wholly owned subsidiary of the Company upon completion of the acquisition. The acquisition of SAIETC enables the Group to engage in import and export trading transactions.
In the period from the acquisition date to December 31, 2016, SAIETC contributed revenue of RMB68 million and profit of RMB14 million to the Group’s results. If the acquisition had occurred on January 1, 2016, management estimate that consolidated revenue would have been increased by RMB154 million, and consolidated profit for the year would have been increased by RMB39 million. In determining these amounts, management have assumed that the fair value adjustments that arose on the acquisition date would have been the same if the acquisition had occurred on January 1, 2016. The information above is the amount before inter-company eliminations.
The above acquisitions had the following effect on the Group’s assets and liabilities on acquisition date:
Recognized values on Note acquisition RMB million Property, plant and equipment 20 7 Trade and other receivables 124 Cash and cash equivalents 211 Trade and other payables (124) Total net identifiable assets 218
Consideration, satisfied by cash 400
Analysis of the net outflow of cash and cash equivalents in respect of the acquisitions:
Cash consideration paid 400 Cash and cash equivalents acquired (211) Net cash outflow 189
Goodwill
Goodwill was recognized as a result of the acquisitions as follows:
Recognized values on acquisition RMB million Total consideration transferred 400 Fair value of identifiable net assets (218) Goodwill (Note 23) 182
F-53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
24 Subsidiaries (continued)
(a) All the subsidiaries of the Company are unlisted. The following list contains only the particulars of subsidiaries which principally affect the results, assets or liabilities of the Group. (continued)
(vi) The Company previously held 51.84% equity interests in Xinjiang Civil Aviation Property Management Limited (“XJCAPM”) and XJCAPM used to be the subsidiary of the Company. During the year of 2016, a third party non-controlling interests holder of XJCAPM injected capital amounting to RMB73 million to XJCAPM. This diluted the Company’s interest in XJCAPM from 51.84% to 42.80%. XJCAPM became an associate of the Company since December 2016. Details are as follows:
Net book value as of the deemed disposal date Note RMB million
Assets deemed disposed of: Property, plant and equipment 20 153 Other non-current assets 15 Trade and other receivables 5 Cash and cash equivalents 67 Other current assets 15 Trade and other payables (32) Other current liabilities (48) Non-current liabilities (2) Net identifiable assets 173
Non-controlling interests in the former subsidiary (83) 90 Fair value of the remaining 42.80% equity interests 180
Net gain on deemed disposal and losing control 90
Net cash outflow from the deemed disposal 67
F-54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
24 Subsidiaries (continued)
(b) Material non-controlling interests
As at December 31, 2016, the balance of total non-controlling interests is RMB11,520 million, of which RMB7,623 million is for Xiamen Airlines. The rest of non-controlling interests are not individually material.
Set out below are the summarized financial information for Xiamen Airlines that has non-controlling interests that are material to the Group.
2016 2015 RMB million RMB million Non-controlling interests percentage 45% 45%
Current assets 2,386 2,435 Non-current assets 41,689 35,628 Current liabilities (13,739) (12,148) Non-current liabilities (13,997) (11,336) Net assets 16,339 14,579
2016 2015 2014 RMB million RMB million RMB million Revenue 21,874 19,915 17,831 Profit for the year 1,223 1,170 755 Total comprehensive income 1,500 1,165 787 Dividend paid to non-controlling interests - - 3
Net cash generated from operating activities 4,510 4,412 2,243 Net cash used in investing activities (7,776) (3,521) (4,866) Net cash generated from/(used in) financing activities 2,764 (3,296) 1,850
The information above is the amount before inter-company eliminations.
F-55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
25 Interest in associates
2016 2015 RMB million RMB million
Share of net assets 2,590 1,995
All the Group’s associates are unlisted without quoted market price. The particulars of the Group’s principal associates as at December 31, 2016 are as follows:
Proportion of ownership interest held by Proportion Place of Group’s of voting establishment effective The rights held / operation interest Company Subsidiaries by the Group Principal activity
Provision of Airlines Southern Airlines Group Finance Co.,Ltd (“SA Finance”) PRC 33.98% 21.09% 12.89% 33.98% financial services
Airline Sichuan Airlines Co.,Ltd (“Sichuan Airlines”) PRC 39% 39% - 39% transportation
Southern Airlines Culture and Media Co., Ltd. (“SACM“) PRC 40% 40% - 40% Advertising services
Xinjiang Civil Aviation Property Management Limited (Note Property 24 (a)(vi)) PRC 42.80% 42.80% - 42.80% management
There is no associate that is individually material to the Group.
The Group has interests in a number of individually immaterial associates that are accounted for using the equity method. The aggregate financial information of these associates is summarized as following:
2016 2015 2014 RMB million RMB million RMB million
Aggregate carrying amount of individually immaterial associates 2,590 1,995 1,583 Aggregate amounts of the Group’s share of: Profit from continuing operations 509 460 261 Other comprehensive income (2) (7) 21 Total comprehensive income 507 453 282
F-56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
26 Interest in joint ventures
2016 2015 RMB million RMB million
Share of net assets 1,522 1,440
All the Group’s joint ventures are unlisted without quoted market price. The particulars of the Group’s principal joint ventures as at December 31, 2016 are as follows:
Proportion of ownership interest held by Proportion Place of Group’s of voting establishment/ effective The rights held operation interest Company Subsidiaries by the Group Principal activity
Aircraft repair and Guangzhou Aircraft Maintenance Engineering Co.,Ltd maintenance (”GAMECO”) PRC 50% 50% - 50% services
Zhuhai Xiang Yi Aviation Technology Company Limited Flight simulation (“Zhuhai Xiang Yi”) PRC 51% 51% - 50% services
Guangzhou China Southern Zhongmian Dutyfree Store Co., Sales of duty free Limited PRC 50% 50% - 50% goods in flight
China Southern West Australian Flying College Pty Limited Pilot training (“Flying College”) Australia 48.12% 48.12% - 50% services
There is no joint venture that is individually material to the Group.
The Group has interest in a number of individually immaterial joint ventures that are accounted for using the equity method. The aggregate financial information of these joint ventures is summarized as following:
2016 2015 2014 RMB million RMB million RMB million
Aggregate carrying amount of individually immaterial joint ventures 1,522 1,440 1,338 Aggregate amounts of the Group’s share of: Profit from continuing operations and total comprehensive income 102 108 140
F-57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
27 Other investments in equity securities
2016 2015 RMB million RMB million
Unlisted equity securities, at cost 103 136
Dividend income from unlisted equity securities of the Group amounted to RMB1 million during the year ended December 31, 2016 (2015 and 2014: RMB10 million).
28 Available-for-sale financial assets
2016 2015 RMB million RMB million
Available-for-sale financial assets - Listed shares 88 104 - Non-tradable shares 411 - 499 104
Dividend income from available-for-sale financial assets of the Group amounted to RMB13 million during the year ended December 31, 2016 (2015 and 2014: RMB3 million).
29 Derivative financial instruments
2016 2015 RMB million RMB million
Interest rate swaps 21 13
In 2015, the Company entered into interest rate swaps to mitigate its cash flow interest rate risk. The interest rate swaps allow the 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, 2016 amounted to USD527 million (2015: USD581 million).
30 Deferred tax assets/(liabilities)
(a) The analysis of deferred tax assets and deferred tax liabilities is as follows:
2016 2015 RMB million RMB million
Net deferred tax assets recognized in the consolidated statement of financial position: – Deferred tax asset to be utilized after 12 months 511 525 – Deferred tax asset to be utilized within 12 months 1,174 862 1,685 1,387
Net deferred tax liabilities recognized in the consolidated statement of financial position: – Deferred tax liability to be realized after 12 months (841) (938) Net deferred tax assets 844 449
F-58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
30 Deferred tax assets/(liabilities) (continued)
(b) Movements of net deferred tax assets are as follows:
(Charged)/ credited to At the consolidated Charged to other beginning income comprehensive At the end of of the year statement income the year RMB million RMB million RMB million RMB million For the year ended December 31, 2016 Deferred tax assets: Accrued expenses 751 314 - 1,065 Provision for major overhauls 472 33 - 505 Deferred revenue 82 5 - 87 Provision for impairment losses 201 (27) - 174 Others 62 24 - 86 1,568 349 - 1,917
Deferred tax liabilities: Provision for major overhauls (384) 123 - (261) Depreciation allowances under tax in excess of the related depreciation under accounting (687) 28 - (659) Change in fair value of derivative financial instruments (3) - (2) (5) Change in fair value of available-for-sale equity securities (20) - (90) (110) Others (25) (13) - (38) (1,119) 138 (92) (1,073)
Net deferred tax assets 449 487 (92) 844
F-59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
30 Deferred tax assets/(liabilities) (continued)
(b) Movements of net deferred tax assets are as follows (continued):
(Charged)/ credited to At the consolidated Charged to other beginning income comprehensive At the end of of the year statement income the year RMB million RMB million RMB million RMB million For the year ended December 31, 2015 Deferred tax assets: Accrued expenses 561 190 - 751 Provision for major overhauls 296 176 - 472 Deferred revenue 76 6 - 82 Provision for impairment losses 235 (34) - 201 Others 82 (20) - 62 1,250 318 - 1,568
Deferred tax liabilities: Provision for major overhauls (363) (21) - (384) Depreciation allowances under tax in excess of the related depreciation under accounting (689) 2 - (687) Change in fair value of derivative financial instruments - - (3) (3) Change in fair value of available-for-sale equity securities (20) - - (20) Others (85) 60 - (25) (1,157) 41 (3) (1,119)
Net deferred tax assets 93 359 (3) 449
(c) Deferred tax assets not recognized
Tax losses in the PRC are available for carrying forward to set off future assessable income for a maximum period of five years. As at December 31, 2016, the Group’s unused tax losses of RMB704 million (2015: RMB843 million) have not been recognized as deferred tax assets, as it was determined by management that it is not probable that future taxable profits against which the losses can be utilized will be available before they expire. The expiry dates of unrecognized unused tax losses are analyzed as follows:
2016 2015 RMB million RMB million Expiring in: 2016 - 230 2017 200 200 2018 214 214 2019 194 194 2020 - 5 2021 96 - 704 843
As at December 31, 2016, the Group’s other deductible temporary differences amounting to RMB626 million (2015: RMB371 million) have not been recognized as deferred tax assets as it was determined by management that it is not probable that future taxable profits will be available for these deductible temporary differences to reverse in the foreseeable future.
F-60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
31 Other assets
Prepayment for exclusive use right of an airport Leasehold terminal Software improvement Others Total RMB RMB RMB RMB RMB million million million million million
At January 1, 2015 250 187 137 346 920 Additions - 29 3 7 39 Transferred from construction in progress (Note 21) - 106 17 - 123 Disposal - - - (31) (31) Amortization for the year (10) (75) (39) (39) (163) At December 31, 2015 240 247 118 283 888
At January 1, 2016 240 247 118 283 888 Additions - 4 5 268 277 Transferred from construction in progress (Note 21) - 91 36 1 128 Disposal - (2) - (26) (28) Amortization for the year (10) (85) (40) (122) (257) At December 31, 2016 230 255 119 404 1,008
32 Inventories
2016 2015 RMB million RMB million
Consumable spare parts and maintenance materials 1,534 1,519 Other supplies 198 197 1,732 1,716
Less: impairment (144) (110)
1,588 1,606
Impairment of inventory is shown as below:
2016 2015 RMB million RMB million
At January 1 110 104 Provision for impairment of inventories 44 13 Provision written off in relation to disposal of inventories (10) (7) At December 31 144 110
F-61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
33 Trade receivables
2016 2015 RMB million RMB million
Trade receivables 3,026 2,613 Less: allowance for doubtful debts (37) (33) 2,989 2,580
(a) Ageing analysis
Credit terms granted by the Group to sales agents and other customers generally range from one to three months. Ageing analysis of trade receivables based on transaction date is set out below:
2016 2015 RMB million RMB million
Within 1 month 2,536 2,157 More than 1 month but less than 3 months 321 383 More than 3 months but less than 12 months 142 30 More than 1 year 27 43 3,026 2,613 Less: allowance for doubtful debts (37) (33) 2,989 2,580
All of the trade receivables are expected to be recovered within one year.
(b) Impairment of trade receivables
(i) Impairment loss in respect of trade receivables is recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against trade receivables directly (Note 2(l)(i)).
The movements in the allowance for doubtful debts during the year are as follows:
2016 2015 RMB million RMB million
At January 1 33 33 Impairment loss recognized 14 4 Impairment loss written back (1) - Uncollectible amounts written off (9) (4) At December 31 37 33
(ii) As at December 31, 2016, trade receivables of RMB31 million (2015: RMB47 million) were past due but not impaired. These relate to a number of independent customers for whom there is no significant financial difficulty and based on past experience, the overdue amounts can be recovered.
The ageing analysis of these trade receivables is as follows:
2016 2015 RMB million RMB million
3 to 12 months 26 19 Over 12 months 5 28 31 47
F-62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
33 Trade receivables (continued)
(b) Impairment of trade receivables (continued)
(iii) As at December 31, 2016, trade receivables of RMB50 million (2015: RMB48 million) were impaired. The amount of the provision was RMB37 million as at December 31, 2016 (2015: RMB33 million). The impaired receivables mainly relate to customers which are in unexpectedly difficult economic situations. It was assessed that a portion of the receivables is expected to be recovered. The ageing of these receivables is as follows:
2016 2015 RMB million RMB million
3 to 12 months 28 30 Over 12 months 22 18 50 48
(c) Trade receivables that are not impaired
The ageing analysis of trade receivables that are neither individually nor collectively considered to be impaired is as follows:
2016 2015 RMB million RMB million
Neither past due nor impaired 2,945 2,518
Trade receivables that were neither past due nor impaired relate to customers for whom there was no recent history of default.
(d) Trade receivables by currencies
The carrying amounts of the Group’s trade receivables are denominated in the following currencies:
2016 2015 RMB million RMB million
Renminbi 2,303 2,016 USD 268 218 Euro 129 129 Australian Dollar 53 49 Taiwan Dollar 40 33 UK Pound 23 28 Other currencies 210 140 3,026 2,613
As at December 31, 2016, the fair value of trade receivables approximate its carrying amount.
F-63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
34 Other receivables
2016 2015 RMB million RMB million
VAT recoverable 1,404 1,596 Rebate receivables on aircraft acquisitions 749 901 Term deposit (Note) 568 761 Deposits for aircraft purchase 13 - Interest receivables 33 66 Others 623 702 3,390 4,026 Less: allowance for doubtful debts (3) (2) 3,387 4,024 Less: non-current portion of term deposit recognized as non-current assets (Note) - (304) Current portion of other receivables 3,387 3,720
Note:
As at December 31, 2016, the balance represents the term deposit amounting to RMB568 million at bank with maturity over 3 months at acquisition (2015: RMB761 million). Term deposit with maturity over 1 year amounting to RMB304 million is classified as non-current asset as at December 31, 2015. The weighted average annualized interest rate of term deposit as at December 31, 2016 is 3.22% (2015: 3.26%).
As at December 31, 2016, the fair value of other receivables approximates its carrying amount.
35 Cash and cash equivalents
(a) Cash and cash equivalents comprise:
2016 2015 RMB million RMB million
Deposits in banks and other financial institutions 26 98 Cash at bank and on hand 4,126 4,462 Cash and cash equivalents in the consolidated statement of financial position 4,152 4,560
As at December 31, 2016, the Group’s deposits with SA Finance, which is a qualified financial institution, amounted to RMB3,759 million (2015: RMB2,934 million) (Note 49(d)(ii)).
As at December 31, 2016, the fair value of cash and cash equivalents approximate its carrying amount.
The carrying amounts of the Group’s cash and cash equivalents are denominated in the following currencies: 2016 2015 RMB million RMB million
Renminbi 3,494 3,756 USD 472 587 Euro 31 69 Japanese Yen 15 15 Hong Kong Dollars 13 12 Others 127 121 4,152 4,560
F-64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
35 Cash and cash equivalents (continued)
(b) Reconciliation of profit before income tax to cash generated from operating activities:
2016 2015 2014 RMB RMB RMB Note million million million
Profit before income tax 7,661 6,118 3,066 Depreciation charges 13 12,418 11,766 10,789 Other amortization 13 332 227 195 Amortization of deferred benefits and gains 13 (131) (148) (156) Impairment losses on property, plant, equipment 20 71 90 215 Share of associates' results 25 (509) (460) (261) Share of joint ventures' results 26 (102) (108) (140) Gain on disposal of property, plant and equipment and construction in progress 15 (557) (312) (267) Gain on deemed disposal of equity interest in a subsidiary 24(a)(vi) (90) - - Other non-operating income - - (26) Interest income (89) (253) (376) Interest expense 16 2,465 2,188 2,193 Dividend income from other investments in equity securities and available-for-sale financial assets 27 & 28 (14) (13) (13) Exchange losses, net 3,368 5,516 292 Decrease in inventories 18 55 15 (Increase)/decrease in trade receivables (409) 103 (391) Decrease in other receivables 637 418 108 Increase in prepaid expenses and other current assets (224) (184) (203) Increase/(decrease) in net amounts due to related companies 186 (153) (154) (Decrease)/increase in trade payables (597) 843 45 Increase in sales in advance of carriage 1,289 1,030 261 Increase in accrued expenses 2,066 695 308 (Decrease)/increase in other liabilities (186) (277) 369 Increase/(decrease) in deferred revenue 86 (75) (410) Increase in provision for major overhauls 194 630 244 Decrease in provision for early retirement benefits (7) (20) (28) (Decrease)/increase in deferred benefits and gains (195) 181 151 Cash generated from operating activities 27,681 27,857 15,826
F-65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
36 Borrowings
(a) As at December 31, 2016 and 2015, borrowings are analyzed as follows: 2016 2015 RMB million RMB million
Non-current
Long-term bank borrowings – secured (Note (i)&(ii)) 755 7,819 – unsecured 314 5,065 1,069 12,884 Corporate Bond –unsecured (Note (iii)) 13,000 3,000
Medium-term notes –unsecured (Note (iv)) 4,689 - 18,758 15,884
Current
Current portion of long-term bank borrowings – secured (Note (i)&(ii)) 220 1,696 – unsecured 345 823 Short-term bank borrowings – unsecured 4,195 19,483 Ultra short-term financing bills – unsecured (Note (v)) 21,986 8,000 26,746 30,002 Total borrowings 45,504 45,886
The borrowings are repayable:
Within one year 26,746 30,002 In the second year 440 6,774 In the third to fifth year inclusive 18,260 8,381 After the fifth year 58 729 Total borrowings 45,504 45,886
Notes:
(i) As at December 31, 2016, bank borrowings of the Group totaling RMB660 million (2015: RMB9,100 million) were secured by mortgages over certain of the Group’s aircraft with aggregate carrying amounts of RMB1,443 million (2015: RMB15,814 million).
(ii) As at December 31, 2016, bank borrowings of the Group amounting to RMB315 million (2015: RMB415 million) were secured by certain land use rights of RMB79 million (2015: RMB66 million) and investment properties of RMB34 million (2015: RMB50 million).
F-66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
36 Borrowings (continued)
(a) As at December 31, 2016, borrowings are analyzed as follows (continued):
Notes (continued):
(iii) The Group issued corporate bonds with aggregate nominal value of RMB3,000 million on November 20, 2015 at a bond rate of 3.63%. The corporate bonds mature in five years. The Group will be entitled at its option to adjust its bond rate and the investors will be entitled to request the Group to redeem all or a portion of the bonds after three years of the issue date.
The Group issued corporate bonds with aggregate nominal value of RMB5,000 million on March 3, 2016 at a bond rate of 2.97%. The corporate bonds mature in three years.
The Group issued corporate bonds with aggregate nominal value of RMB5,000 million on May 25, 2016 at a bond rate of 3.12%. The corporate bonds mature in five years. The Group will be entitled at its option to adjust its bond rate and the investors will be entitled to request the Group to redeem all or a portion of the bonds after three years of the issue date.
(iv) Xiamen Airlines issued medium-term notes with aggregate nominal value of RMB1,300 million on August 15, 2016 and August 16, 2016 at an interest rate of 2.97%. The medium-term notes mature in three years.
Xiamen Airlines issued medium-term notes with aggregate nominal value of RMB1,600 million on October 20, 2016 at an interest rate of 3.11%. The medium-term notes mature in five years.
Xiamen Airlines issued medium-term notes with aggregate nominal value of RMB1,800 million on November 21, 2016 at an interest rate of 3.38%. The medium-term notes mature in three years.
(v) As at December 31, 2016, the Group’s outstanding ultra-short-term financing bills are of interest rates ranging from 2.49% to 3.71% per annum and with original maturity ranging from 88 days to 270 days.
(b) As at December 31, 2016, the Group’s weighted average interest rates on short-term borrowings were 3.92% per annum (2015: 3.66% per annum).
F-67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
36 Borrowings (continued)
(c) Details of borrowings with original maturity over one year are as follows:
2016 2015 RMB million RMB million
Renminbi denominated loans Fixed interest rate at 1.20% per annum as at December 31, 2016, with maturities through 2027 20 20 Corporate Bond - Fixed bond rate at 2.97%~3.63% 13,000 3,000 Medium-term notes- Fixed interest rate at 2.97%~3.38% 4,689 - Floating interest rates 90%, 95% of benchmark interest rate (stipulated by PBOC) as at December 31, 2016, with maturities through 2023 1,406 783
USD denominated loans Floating interest rates ranging from one-month LIBOR + 1.20% to one-month LIBOR + 2.20% per annum as at December 31, 2015 - 1,097 Floating interest rates ranging from three-month LIBOR + 0.59% to three-month LIBOR + 2.80% per annum as at December 31, 2015 - 10,327 Floating interest rates at six-month LIBOR + 0.45% to six-month LIBOR + 2.55% per annum as at December 31, 2015 - 3,176 Floating interest rates at three-month LIBOR + 2.1% per annum as at December 31, 2016, with maturities through 2018 208 - 19,323 18,403 Less: loans due within one year classified as current liabilities (565) (2,519) 18,758 15,884
(d) The carrying amounts of the borrowings are denominated in the following currencies:
2016 2015 RMB million RMB million
Renminbi 45,296 30,145 USD 208 15,110 Euro - 631 45,504 45,886
The Group has certain borrowings as well as significant obligations under finance leases (Note 37) which are denominated in USD as at December 31, 2016. The net exchange loss of RMB3,276 million for the year ended December 31, 2016 (2015: net exchange loss of RMB5,953 million; 2014: net exchange loss of RMB292 million) was mainly attributable to the exchange loss arising from translation of borrowings balances and finance lease obligations denominated in USD.
(e) As at December 31, 2016, entrusted loans from CSAHC via SA Finance to the Group amounted to RMB105 million (2015: RMB105 million) (Note 49(d)(i)).
(f) As at December 31, 2016, the fair value of borrowings approximate their carrying amount. The fair value is within level 2 of the fair value hierarchy.
(g) Certain of the Group’s banking facilities are subject to the fulfilment of covenants relating to certain of the Group’s balance sheet ratios, as are commonly found in lending arrangements with financial institutions. If the Group were to breach the covenants, the drawn down facilities would become payable on demand. The Group regularly monitors its compliance with these covenants. Further details of the Group’s management of liquidity risk are set out in Note 4(a). As at December 31, 2016 and 2015 none of the covenants relating to drawn down facilities had been breached.
F-68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
37 Obligations under finance leases
The Group has commitments under finance lease agreements in respect of aircraft and related equipment. The majority of these leases have terms of 10 to 15 years expiring during the years 2017 to 2030. The Group has made careful assessment on the classification of leased aircraft pursuant to IAS 17 and believes all leased aircraft classified as finance lease meet one or more of the criteria as set out in IAS 17 that would lead to a lease being classified as a finance lease (i.e. the lease transfers ownership of the asset to the lessee by the end of the lease term; the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised; at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset).
As at December 31, 2016 and 2015, future payments under these finance leases are as follows:
2016 2015 Present Present value of the Total value of the Total minimum minimum minimum minimum lease lease lease lease payments payments Interest payments payments Interest RMB RMB RMB RMB RMB RMB million million million million million million
Within 1 year 8,695 10,663 1,968 6,416 7,864 1,448 After 1 year but within 2 years 6,973 8,683 1,710 7,369 8,613 1,244 After 2 years but within 5 years 21,583 24,795 3,212 16,818 19,515 2,697 After 5 years 24,971 27,247 2,276 25,221 26,731 1,510
62,222 71,388 9,166 55,824 62,723 6,899 Less: balance due within one year classified as current liabilities (8,695) (6,416) 53,527 49,408
F-69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
37 Obligations under finance leases (continued)
Details of obligations under finance leases are as follows:
2016 2015 RMB million RMB million
USD denominated obligations Fixed interest rates ranging from 2.09% to 6.01% per annum as at December 31, 2016 9,761 9,570 Floating interest rates ranging from three-month LIBOR + 0.18% to three-month LIBOR + 3.30% per annum as at December 31, 2016 15,878 21,168 Floating interest rates ranging from six-month LIBOR + 0.03% to six-month LIBOR + 3.30% per annum as at December 31, 2016 15,720 16,744 Singapore Dollars denominated obligations Floating interest rate at six-month SIBOR + 1.44% per annum as at December 31, 2016 341 368 Japanese Yen denominated obligations Floating interest rate at three-month TIBOR + 0.75% to three-month TIBOR + 1.90% per annum as at December 31, 2016 1,502 1,524 Floating interest rate at six-month TIBOR + 3.00% per annum as at December 31, 2016 332 325 Renminbi denominated obligations Floating interest rate at 130% of five-year RMB loan benchmark interest rate announced by the PBOC per annum as at December 31, 2015 - 369 Floating interest rate ranging from 84% to 106.5% of five-year RMB loan benchmark interest rate announced by the PBOC per annum as at December 31, 2016 13,852 677 Floating interest rate at three-month CHN HIBOR + 0.38% 503 551 Euro denominated obligations Floating interest rate ranging from three-month EURIBOR + 0.32% to three-month EURIBOR + 2.70% per annum as at December 31, 2016 2,785 2,951 Floating interest rate ranging from six-month EURIBOR + 1.45% to six-month EURIBOR + 1.80% per annum as at December 31, 2016 1,548 1,577 62,222 55,824
F-70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
37 Obligations under finance leases (continued)
As at December 31, 2016, certain of the Group’s aircraft with carrying amounts of RMB76,875 million (2015: RMB72,246 million) secured finance lease obligations totaling RMB62,222 million (2015: RMB55,824 million).
As at December 31, 2016, the fair value of obligation under finance leases approximate their carrying amount. The fair value is within level 2 of the fair value hierarchy.
38 Trade payables
Ageing analysis of trade payables based on transaction date is set out below:
2016 2015 RMB million RMB million
Within 1 month 612 735 More than 1 month but less than 3 months 529 504 More than 3 months but less than 6 months 484 843 More than 6 months but less than 1 year 173 314 More than 1 year 105 104 1,903 2,500
As at December 31, 2016, the fair value of trade payables approximate their carrying amounts.
The carrying amounts of the Group’s trade payables are denominated in the following currencies:
2016 2015 RMB million RMB million
Renminbi 1,809 2,418 USD 85 69 Others 9 13 1,903 2,500
39 Deferred revenue
Deferred revenue represents the unredeemed credits under the frequent flyer award program.
40 Amounts due from/to related companies
(a) Amounts due from related companies
2016 2015 Note RMB million RMB million
CSAHC and its affiliates 7 21 Associates 15 226 Joint ventures 76 86 49(c) 98 333
The amounts due from related companies are unsecured, interest free and have no fixed terms of repayment. They are expected to be recovered within one year.
F-71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
40 Amounts due from/to related companies (continued)
(b) Amounts due to related companies
2016 2015 Note RMB million RMB million
CSAHC and its affiliates 20 59 A joint venture of CSAHC 1 18 An associate 4 13 Joint ventures 76 60 Other related companies 2 2 49(c) 103 152
The amounts due to related companies are unsecured, interest free and have no fixed terms of repayment. They are expected to be settled within one year.
41 Accrued expenses
2016 2015 RMB million RMB million
Repairs and maintenance 5,290 5,179 Jet fuel costs 1,530 1,179 Salaries and welfare 2,851 2,434 Landing and navigation fees 2,327 2,003 Computer reservation services 436 340 Provision for major overhauls (Note 43) 768 470 Interest expense 844 385 Air catering expenses 504 307 Provision for early retirement benefits (Note 44) 7 12 Others 590 772 15,147 13,081
F-72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
42 Other liabilities
2016 2015 RMB million RMB million
Civil Aviation Development Fund and airport tax payable 1,559 1,335 Payable for purchase of property, plant and equipment 900 767 Sales agent deposits 430 384 Other taxes payable 508 395 Deposit received for chartered flights 216 103 Payable due to the former shareholder of a subsidiary - 658 Others 1,359 1,516 4,972 5,158
As at December 31, 2016, the fair value of the balance approximate their carrying amount.
43 Provision for major overhauls
Details of provision for major overhauls in respect of aircraft held under operating leases are as follows:
2016 2015 RMB million RMB million
At January 1 2,365 1,735 Additional provision 1,020 823 Utilization (528) (193)
At December 31 2,857 2,365 Less: current portion (Note 41) (768) (470)
2,089 1,895
44 Provision for early retirement benefits
Details of provision for early retirement benefits in respect of obligations to early retired employees are as follows:
2016 2015 RMB million RMB million
At January 1 25 45 Provision for the year (Note 14) 3 3 Financial cost (Note 16) 1 2 Payments made during the year (16) (25)
At December 31 13 25 Less: current portion (Note 41) (7) (12)
6 13
F-73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
44 Provision for early retirement benefits (continued)
The Group has implemented an early retirement plan for certain employees. The benefits of the early retirement plan are calculated based on factors including the remaining number of years of service from the date of early retirement to the normal retirement date and the salary amount on the date of early retirement of the employees. The present value of the future cash flows expected to be required to settle the obligations is recognized as provision for early retirement benefits.
45 Deferred benefits and gains
2016 2015 RMB million RMB million
Leases rebates (Note (i)) 77 145 Maintenance rebates (Note (ii)) 419 455 Gains relating to sale and leaseback (Note (iii)) 51 77 Government grants 127 190 Others 17 19 691 886
Notes:
(i) The Group was granted rebates by the lessors under certain lease arrangements when it fulfilled certain requirements. The rebates are deferred and amortized using the straight line method over the remaining lease terms.
(ii) The Group was granted rebates by the engine suppliers under certain arrangements when it fulfilled certain requirements. The rebates are deferred and amortized over the beneficial period.
(iii) The Group entered into sale and leaseback transactions with certain third parties under operating leases. The gains are deferred and amortized over the lease terms of the aircraft.
46 Share capital
2016 2015 RMB million RMB million
Registered, issued and paid up capital: 4,039,228,665 domestic state-owned shares of RMB1.00 each (2015: 4,039,228,665 shares of RMB1.00 each) 4,039 4,039 2,983,421,335 A shares of RMB1.00 each (2015: 2,983,421,335 shares of RMB1.00 each) 2,984 2,984 2,794,917,000 H shares of RMB1.00 each (2015: 2,794,917,000 shares of RMB1.00 each) 2,795 2,795 9,818 9,818
All the domestic state-owned, H and A shares rank pari passu in all material respects.
F-74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
47 Reserves
2016 2015 RMB million RMB million
Share premium At January 1 and December 31 14,131 14,131
Fair value reserve At January 1 55 44 Change in fair value of available-for-sale equity securities 148 1 Change in fair value of derivative financial instruments 6 10
At December 31 209 55
Statutory and discretionary surplus reserve At January 1 1,552 1,306 Appropriations to reserves (Note (a)) 405 246
At December 31 1,957 1,552
Other reserve At January 1 123 180 Share of an associate’s reserves movement (2) (5) Acquisition of non-controlling interests in a subsidiary - (52) At December 31 121 123
Retained profits At January 1 13,366 10,269 Profit for the year 5,044 3,736 Appropriations to reserves (Note (a)) (405) (246) Dividends approved in respect of the previous year (785) (393)
At December 31 17,220 13,366
Total 33,638 29,227
(a) Appropriations to reserves
According to the PRC Company Law and the Articles of Association of the Company and certain of its subsidiaries, the Company and the relevant subsidiaries are required to transfer 10% of their annual net profits after taxation, as determined under the PRC accounting rules and regulations, to a statutory surplus reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribution of dividend to shareholders and when there are retained profits at the end of the financial year.
Statutory surplus reserve can be used to offset prior years’ losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholding or by increasing the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital.
F-75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
47 Reserves (continued)
(b) Dividends
Dividends payable to equity shareholders of the Company attributable to the year:
2016 2015 RMB million RMB million
Final dividend proposed after the end of the reporting year of RMB1.0 per 10 ordinary shares (2015: RMB0.8 per 10 ordinary shares) (inclusive of applicable tax) 982 785
A dividend in respect of the year ended December 31, 2016 of RMB1.0 per 10 shares (inclusive of applicable tax) (2015: RMB0.8 per 10 shares (inclusive of applicable tax)), amounting to a total dividend of RMB982 million (2015: RMB785 million), was proposed by the directors on March 30, 2017. The dividend proposed after the end of the financial year has not been recognized as a liability at the end of the financial year.
48 Commitments
(a) Capital commitments
Capital commitments outstanding as at December 31, 2016 and 2015 not provided for in the financial statements were as follows:
2016 2015 RMB million RMB million Commitments in respect of aircraft and flight equipment – authorized and contracted for 83,532 83,427
Investment commitments – authorized and contracted for –capital contributions for acquisition of interests in associates 170 34 – share of capital commitments of a joint venture 25 56
195 90
– authorized but not contracted for – share of capital commitments of a joint venture 19 41
214 131
Commitments for other property, plant and equipment – authorized and contracted for 2,297 2,550 – authorized but not contracted for 19,312 4,183
21,609 6,733
105,355 90,291
F-76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
48 Commitments (continued)
(a) Capital commitments (continued)
As at December 31, 2016 and 2015, the approximate total future payments, including estimated amounts for price escalation through anticipated delivery dates for aircraft and flight equipment are as follows:
2016 2015 RMB million RMB million
2016 - 19,074 2017 25,971 22,359 2018 24,355 18,898 2019 17,878 14,309 2020 and afterwards 15,328 8,787 83,532 83,427
(b) Operating lease commitments
As at December 31, 2016 and 2015, the total future minimum lease payments under non-cancellable operating leases in respect of properties, aircraft and flight equipment are as follows:
2016 2015 RMB million RMB million
Payments due: Within 1 year 7,948 6,560 After 1 year but within 5 years 27,140 18,582 After 5 years 26,127 10,967 61,215 36,109
49 Material related party transactions
(a) Key management personnel remuneration
Remuneration for key management personnel of the Group, including amounts paid to the Company’s directors (excluding independent non-executive directors) as disclosed in Note 56, is as follows:
2016 2015 2014 RMB ’000 RMB ’000 RMB ’000
Salaries, wages and welfare 8,219 8,907 13,013 Retirement scheme contributions 1,594 1,868 2,359 9,813 10,775 15,372
2016 2015 2014 RMB ’000 RMB ’000 RMB ’000
Directors and supervisors (Note 56) 2,159 2,471 3,241 Senior management 7,654 8,304 12,131 9,813 10,775 15,372
Total remuneration is included in “staff costs” (Note 14).
F-77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
49 Material related party transactions (continued)
(b) Transactions with CSAHC and its affiliates (the “CSAHC Group”), associates, joint ventures and other related companies of the Group
The Group provided or received various operational services to or by the CSAHC Group, associates, joint ventures and other related companies of the Group during the normal course of its business.
Details of the significant transactions carried out by the Group are as follows:
2016 2015 2014 RMB RMB RMB Note million million million
Income received from the CSAHC Group Charter flight and pallet income (i) - 19 32 Cargo handling income and rental income (i) 6 1 - Others 1 2 1
Expenses paid to the CSAHC Group Cargo handling charges (i) 117 109 46 Commission expenses (i) 99 98 8 Air catering supplies expenses (ii) 124 100 89 Repairing charges (iii) 1,877 1,324 780 Lease charges for land and buildings (iv) 193 193 173 Handling charges (v) 60 114 119 Property management fee (vi) 70 73 61 Others 14 6 4
Expenses paid to joint ventures and associates Repairing charges (vii) 2,032 1,714 1,335 Maintenance material purchase expenses (vii) 41 29 24 Flight simulation service charges (viii) 342 324 316 Training expenses (ix) 110 112 169 Ground service expenses (x) 120 119 111 Air catering supplies (xi) 115 108 102 Advertising expenses (xii) 71 67 75 Others 3 4 29
Income received from joint ventures and associates Handling income (v) 10 - - Disposal of equipment (vii) 39 - - Rental income (viii) 37 37 33 Entrustment income for advertising media business (xii) 22 21 34 Repairing income (xiii) 12 12 17 Air catering supplies income (xiii) 23 23 10 Commission income (xiv) 26 17 40 Ground service income (xv) 9 8 8 Others 4 3 5
Income received from other related company Air tickets income (xvi) 9 10 12
Expenses paid to other related company Advertising expenses (xvi) 9 - 20 Computer reservation services (xvii) 523 515 435 Aviation supplies expenses (xviii) 36 - -
Acquisition from CSAHC Group Acquisition of a subsidiary (v) 400 - - Acquisition of property, plant and equipment (xix) 56 - -
F-78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
49 Material related party transactions (continued)
(b) Transactions with CSAHC and its affiliates (the “CSAHC Group”), associates, joint ventures and other related companies of the Group (continued)
(i) China Southern Airlines Group Ground Services Co., Ltd. ("GSC"), a wholly-owned subsidiary of CSAHC, purchases cargo spaces and charter flights from the Group. In addition, cargo handling income/charges are earned/payable by the Group in respect of the cargo handling services with GSC.
Commission is earned by GSC in connection with the air tickets sold by them on behalf of the Group. Commission is calculated based on the rates stipulated by the Civil Aviation Administration of China and International Air Transportation Association.
In addition, the Group leased certain equipment to GSC under operating lease agreements.
(ii) Shenzhen Air Catering Co., Ltd. (“SACC”), a joint venture of CSAHC.
Air catering supplies income/expenses are earned/payable by the Group in respect of certain in-flight meals and related services with SZ catering.
(iii) MTU Maintenance Zhuhai Co., Ltd, a joint venture of CSAHC, provides comprehensive maintenance services to the Group.
(iv) The Group leases certain land and buildings in the PRC from CSAHC Group. The amount represents rental payments for land and buildings paid or payable to CSAHC Group.
(v) The Group acquires aircraft, flight equipment and other airline-related facilities through SAIETC and pays handling charges to SAIETC, which used to be a wholly owned subsidiary of CSAHC. In August 2016, the Company acquired 100% equity interests in SAIETC from CSAHC at a consideration of approximately RMB400 million. SAIETC became a wholly owned subsidiary of the Company since then (Note 24(a)(v)).
SAIETC provides import service to GAMECO and earns handling income.
(vi) China Southern Airlines Group Property Management Company Limited, a wholly-owned subsidiary of CSAHC, provides property management services to the Group.
(vii) GAMECO and Shenyang Northern Aircraft Maintenance Limited, joint ventures of the Group, provide comprehensive maintenance services to the Group.
The Group purchases maintenance material from GAMECO. The Group disposes of equipment to GAMECO.
(viii) Zhuhai Xiang Yi, a joint venture of the Group, provides flight simulation services to the Group.
In addition, the Group leased certain flight training facilities and buildings to Zhuhai Xiang Yi under operating lease agreements.
(ix) Flying College, a joint venture of the Group, provides training services to the Group.
(x) Beijing Aviation Ground Services Co.,Ltd., and Shenyang Konggang Logistic Company Limited, associates of the Group provides ground service to the Group .
F-79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
49 Material related party transactions (continued)
(b) Transactions with CSAHC and its affiliates (the “CSAHC Group”), associates, joint ventures and other related companies of the Group (continued)
(xi) Air catering supplies income/expenses are earned/payable by the Group in respect of certain in-flight meals and related services with Beijing Airport Inflight Kitchen Co.,Ltd., which is an associate of the Group.
(xii) SACM, an associate of the Group, provides advertising services to the Group.
In addition, Xiamen Airlines provides certain media resources to Xiamen Airlines Media Co., Ltd., a subsidiary of SACM.
(xiii) The Group provides air catering services and aircraft repairing services to Sichuan Airlines, an associate of the Group.
(xiv) The Group provides certain website resources to SA Finance and Sichuan Airlines for the sales of air insurance.
(xv) The Group provides ground services to Shenyang Konggang Logistic Co.,Ltd and Sichuan Airlines, which are associates of the Group.
(xvi) Phoenix Satellite Television Holdings Limited ("the Phoenix Group") is a related party of the Group as the board chairman of the Phoenix Group was appointed as a non-executive director of the Group. It provides advertising services to the Group.
In addition, the Group Sells tickets to the Phoenix Group on market price.
(xvii) China Travel Sky Holding Company is a related party of the Group as a director of the Group was appointed as the director of China Travel Sky Holding Company. It provides computer reservation services to the Group.
(xviii) The Chairman of Guangdong Southern Airline Pearl Aviation Services Company Limited (“Pearl Aviation Services”), Mr. Li Shao Bin is the executive director of the Company. The Group purchases aviation supplies from Pearl Aviation Services.
(xix) The Group acquires properties from Citic Southern Airlines Construction and Development Company Limited, which is an associate of CSAHC.
F-80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
49 Material related party transactions (continued)
(c) Balances with the CSAHC Group, associates, joint ventures and other related companies of the Group
Details of amounts due from/to the CSAHC Group, associates, joint ventures and other related companies of the Group:
2016 2015 Note RMB million RMB million
Receivables: The CSAHC Group 7 21 Associates 15 226 Joint ventures 76 86 40(a) 98 333
2016 2015 Note RMB million RMB million
Payables: The CSAHC Group 21 77 Associates 4 13 Joint ventures 76 60 Other related companies 2 2 40(b) 103 152
2016 2015 RMB million RMB million
Accrued expenses: The CSAHC Group 1,117 571 Associates 121 97 Joint ventures 864 931 Other related companies 256 282 2,358 1,881
The amounts due from/to the CSAHC Group, associates, joint ventures and other related companies of the Group are unsecured, interest free and have no fixed terms of repayment.
F-81 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
49 Material related party transactions (continued)
(d) Loans from and deposits placed with related parties
(i) Loans from related parties
At December 31, 2016, loans from SA Finance to the Group amounted to RMB105 million (2015: RMB105 million).
In 2016, CSAHC, SA Finance and the Group entered into an entrusted loan agreement, pursuant to which, CSAHC, as the lender, entrusted SA Finance to lend RMB105 million to the Group from April 28, 2016 to April 28, 2017. The interest rate is 90% of benchmark interest rate stipulated by PBOC per annum.
The unsecured loans are repayable as follows:
2016 2015 Note RMB million RMB million
Within 1 year 36(e) 105 105
Interest expense paid on such loans amounted to RMB11 million (2015: RMB4 million; 2014: RMB11 million) at interest rates 3.92% per annum during the year ended December 31, 2016 (2015: 3.92% to 4.14% per annum; 2014: 5.04% to 5.70% per annum).
(ii) Deposits placed with SA Finance
As at December 31, 2016 and 2015, the Group’s deposits with SA Finance are presented in the table below. The applicable interest rates are determined in accordance with the rates published by the PBOC.
2016 2015 Note RMB million RMB million
Deposits placed with SA Finance 35 3,759 2,934
Interest income received on such deposits amounted to RMB37 million during the year ended December 31, 2016 (2015: RMB70 million; 2014: RMB68 million).
(e) Commitments to CSAHC
As at December 31, 2016, the Group had operating lease commitments to CSAHC in respect of lease payments for land and buildings of RMB476 million (2015: RMB320 million).
F-82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
50 Employee benefits plan
(a) Retirement benefits
Employees of the Group participate in several defined contribution retirement schemes organized separately by the PRC municipal and provincial governments in regions where the major operations of the Group are located. The Group is required to contribute to these schemes at rates ranging from 13% to 20% (2015: 13% to 21%; 2014: 11% to 21%) of salary costs including certain allowances. A member of the retirement schemes is entitled to pension benefits from the Local Labor and Social Security Bureau upon his/her retirement. The retirement benefit obligations of all retired staff of the Group are assumed by these schemes. The Group, at its sole discretion, had made certain welfare subsidy payments to these retirees.
In 2014, the Company and its major subsidiaries joined a new defined contribution retirement scheme (“Pension Scheme”) that was implemented by CSAHC. 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 2016 was approximately RMB486 million (2015: RMB438 million).
(b) Housing benefits
The Group contributes on a monthly basis to housing funds organized by municipal and provincial governments based on certain percentages of the salaries of employees. The Group’s liability in respect of these funds is limited to the contributions payable in each year.
The Group also pays cash housing subsidies on a monthly basis to eligible employees. The monthly cash housing subsidies are charged to income statement.
(c) Share Appreciation Rights Scheme
On November 30, 2011, the Company’s General Meeting approved the “H Share Appreciation Rights Scheme of China Southern Airlines Company Limited” and “Initial Grant under the H Share Appreciation Rights Scheme of China Southern Airlines Company Limited” (“the Scheme”).
Under the Scheme, 24,660,000 units of SARs were granted to 118 employees of the Group. No shares will be issued under the Scheme and each SAR is notionally linked to one existing H share of the Company. Upon exercise of the SARs, a recipient will receive an amount of cash equal to the difference between the market share price of the relevant H share and the exercise price.
The SARs will have an exercise period of six years from the date of grant. Upon the satisfaction of certain performance conditions after the second, third and fourth anniversary of the date of grant, each one third of the SARs will become exercisable.
All of the 24,660,000 units of SARs granted by the Company have been expired by the end of 2015.
F-83 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
51 Supplementary information to the consolidated cash flow statement
Non-cash transactions-acquisition of aircraft
During the year ended December 31, 2016, aircraft acquired under finance leases amounted to RMB10,487 million (2015: RMB11,251 million; 2014:RMB19,163 million).
52 Contingent liabilities
(a) The Group leased certain properties and buildings from CSAHC which located in Guangzhou, Wuhan and Haikou, etc. However, to the knowledge of the Group, such properties and buildings lack adequate documentation evidencing CSAHC’s rights thereto.
Pursuant to the indemnification agreement dated May 22, 1997 between the Group and CSAHC, CSAHC has agreed to indemnify the Group against any loss or damage arising from any challenge of the Group’s right to use such properties and buildings.
In addition, as disclosed in Note 20 and Note 22, the Group is applying title certificates for certain of the Group’s properties and land use rights certificates for certain properties and parcels of land. The Company is of the opinion that the use of and the conduct of operating activities at these properties and these parcels of land are not affected by the fact that the Group has not yet obtained the relevant certificates.
(b) The Company and its subsidiary, Xiamen Airlines, entered into agreements with certain pilot trainees and certain banks to provide guarantees on personal bank loans amounting to RMB696 million (December 31, 2015: RMB627 million) that can be drawn by the pilot trainees to finance their respective flight training expenses. As at December 31, 2016, total personal bank loans of RMB409 million (December 31, 2015: RMB454 million), under these guarantees, were drawn down from the banks. During the year, the Group paid RMB4 million (2015: RMB4 million) to the banks due to the default of payments of certain pilot trainees.
(c) The Company is engaged in International Court of Arbitration proceedings (“ICC arbitration proceedings”) in London against a lessor SASOF TR-81 AVIATION IRELAND LIMITED, arising out of the redelivery of two Boeing 737 aircraft. The lessor has made various claims of approximately USD13 million in the arbitration proceedings relating to the redelivery condition of the aircraft, and the Company has counterclaimed against the lessor for the recovery of approximately USD9.8 million. As of the issuance date of these financial statements, a further hearing before the Arbitral Tribunal in the ICC arbitration proceedings has not yet commenced. The directors are of the opinion that the Company cannot reasonably predict the result and potential financial impact of this pending arbitration, if any. Therefore, no provision has been made against this pending arbitration.
(d) A claim was raised by a construction company in the Hainan Province of the PRC (the “claimant”) in 2016 against a wholly-owned subsidiary of CSAHC, the Company and its Sanya Branch for the alleged non-payment of construction fees of RMB45 million and the relating interests. The directors are of the opinion that the claims and the civil judgment of the first trial are without merit and have instructed its legal advisor to defend the claims vigorously. As of the issuance date of these financial statements, the directors consider that given the preliminary status of the second trial, the Company cannot reasonably predict the result and potential financial impact of this pending claim, if any. Therefore, no provision has been made against this pending claim.
F-84 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
52 Contingent liabilities (continued)
(e) The Company received a claim dated October 18, 2016 from two PRC sales agents located in Guangzhou and Guangxi respectively (the “claimants”) against the Company for the alleged breach of certain terms and conditions of a flight routes cooperative agreement (the “cooperative agreement”). The claimants have made a claim against the Company for a total sum of approximately RMB141 million in respect of the alleged non-payment relating to cooperative sales, the refund of the down payments of RMB5.8 million and the relating interests on the above late payment. The directors are of the opinion that the claims are without merit and have instructed its legal advisor to defend the claims vigorously. As of the issuance date of these financial statements, the directors consider that given the nature of the claims and the preliminary status of the proceedings, the Company cannot reasonably predict the result and potential financial impact of this pending claim, if any. Therefore, no provision has been made against this pending claim.
53 Immediate and ultimate controlling party
As at December 31, 2016, the Directors of the Company consider the immediate parent and ultimate controlling party of the Group to be CSAHC, a state-owned enterprise established in the PRC. CSAHC does not produce financial statements available for public use.
54 Approval of financial statements
The financial statements were approved by the Board of Directors on April 27, 2017.
55 Non-adjusting events after the financial year end
(a) On March 27, 2017, according to the authorization under the 2015 General Mandate and as approved by the Board of Directors, the Company entered into the Subscription Agreement with American Airlines, Inc. (the “Subscriber”), pursuant to which the Company has agreed to issue, and the Subscriber has agreed to subscribe for 270,606,272 new H Shares of the Company (the “Subscription”), at the subscription price of HK$1,553.28 million, representing HK$5.74 per subscription share. The Subscription is subject to the approval of relevant authorities.
(b) On March 30, 2017, the Directors of the Company proposed a final dividend in respect of the year ended December 31, 2016. Further details are disclosed in Note 47(b).
(c) On April 26, 2017, the Company entered into an agreement with Airbus S.A.S. to purchase 20 A350-900 aircraft at a predetermined price, which are scheduled for delivery from 2019 to 2022.
F-85 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
56 Directors’ and supervisors’ emoluments
The remuneration of every director and supervisor for the year ended December 31, 2016 is set out below:
Emoluments paid or receivable in respect of a person’s services as a director or supervisor, whether of the Company or its subsidiary undertaking:
Emoluments paid or receivable in respect of director’s Remunerations or supervisor’s other Employer’s paid or receivable services in connection contribution to in respect of with the management Salaries, a retirement accepting office of the affairs of the Directors’ wages and Housing benefit as director or Company or its Name fees welfare allowance scheme supervisor subsidiary undertaking Total RMB RMB RMB RMB RMB RMB RMB ’000 ’000 ’000 ’000 ’000 ’000 ’000
Non-executive directors Wang Chang Shun (Note (i) & (vi)) ------Yuan Xin An (Note (i)) ------Yang Li Hua (Note (i)) ------
Executive directors ------Tan Wan Geng (Note (i)) ------Zhang Zi Fang (Note (i)) ------Li Shao Bin - 639 - 130 - - 769
Supervisors Pan Fu (Note (i)) ------Li Jia Shi - 711 - 133 - - 844 Zhang Wei (Note (i)) ------Yang Yi Hua (Note (v)) ------Wu De Ming - 413 - 133 - - 546
Independent non- executive directors Ning Xiang Dong 150 - - - - - 150 Liu Chang Le 150 - - - - - 150 Tan Jin Song 150 - - - - - 150 Guo Wei (Note (iv)) 150 - - - - - 150 Jiao Shu Ge (Note (iv)) 150 - - - - - 150
F-86 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
56 Directors’ and supervisors’ emoluments (continued)
For the year ended December 31, 2015:
Emoluments paid or receivable in respect of a person’s services as a director or supervisor, whether of the Company or its subsidiary undertaking:
Emoluments paid or receivable in respect of director’s Remunerations or supervisor’s other paid or receivable services in connection Employer’s in respect of with the management Salaries, contribution to accepting office of the affairs of the Directors’ wages and Housing a retirement as director or Company or its Name fees welfare allowance benefit scheme supervisor subsidiary undertaking Total RMB RMB RMB RMB RMB RMB RMB ’000 ’000 ’000 ’000 ’000 ’000 ’000
Non-executive directors Wang Quan Hua (Note (i) & (ii)) ------Yuan Xin An (Note (i)) ------Yang Li Hua (Note (i)) ------
Executive directors Tan Wan Geng (Note (i)) ------Zhang Zi Fang (Note (i)) ------Li Shao Bin - 636 - 137 - - 773
Supervisors Pan Fu (Note (i)) ------Li Jia Shi - 636 - 139 - - 775 Zhang Wei (Note (i)) ------Yang Yi Hua (Note (v)) - 240 - 92 - - 332 Wu De Ming - 451 - 140 - - 591
Independent non- executive directors Ning Xiang Dong 150 - - - - - 150 Liu Chang Le 150 - - - - - 150 Tan Jin Song 150 - - - - - 150 Wei Jin Cai (Note (iii)) 75 - - - - - 75 Guo Wei (Note (iv)) 75 - - - - - 75 Jiao Shu Ge (Note (iv)) 75 - - - - - 75
F-87 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
56 Directors’ and supervisors’ emoluments (continued)
For the year ended December 31, 2014:
Emoluments paid or receivable in respect of a person’s services as a director or supervisor, whether of the Company or its subsidiary undertaking:
Emoluments paid or receivable in respect of director’s Remunerations or supervisor’s other paid or receivable services in connection Employer’s in respect of with the management Salaries, contribution to accepting office of the affairs of the Directors’ wages and Housing a retirement as director or Company or its Name fees welfare allowance benefit scheme supervisor subsidiary undertaking Total RMB RMB RMB RMB RMB RMB RMB ’000 ’000 ’000 ’000 ’000 ’000 ’000
Non-executive directors Wang Quan Hua (Note (i) & (ii)) ------Yuan Xin An (Note (i)) ------Yang Li Hua (Note (i)) ------
Executive directors Tan Wan Geng (Note (i)) ------Zhang Zi Fang (Note (i)) ------Li Shao Bin - 636 - 130 - - 766
Supervisors Pan Fu (Note (i)) ------Li Jia Shi - 636 - 132 - - 768 Zhang Wei (Note (i)) ------Yang Yi Hua (Note (v)) - 294 - 140 - - 434 Wu De Ming - 367 - 140 - - 507
Independent non- executive directors Ning Xiang Dong 150 - - - - - 150 Liu Chang Le 150 - - - - - 150 Tan Jin Song 150 - - - - - 150 Wei Jin Cai (Note (iii)) 150 - - - - - 150
F-88 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
56 Directors’ and supervisors’ emoluments (continued)
Note:
(i) These directors or supervisors did not receive any remuneration for their services in the capacity of the directors or supervisors of the Company. They also held management positions in CSAHC and their salaries were borne by CSAHC.
(ii) Resigned on March 25, 2015.
(iii) Resigned on June 30, 2015.
(iv) Appointed on June 30, 2015.
(v) Ms. Yang Yi Hua retired in 2015 September, while still served as supervisor for the years ended December 31, 2015 and December 31, 2016. Ms. Yang Yi Hua did not receive any remuneration for her service in the capacity of the supervisor of the Company since 2015 September.
(vi) Appointed on May 27, 2016.
F-89 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
57 Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended December 31, 2016
Up to the date of issue of these financial statements, the IASB has issued a number of amendments and new standards which are not yet effective for the year ended December 31, 2016 and which have not been adopted in these financial statements. These include the following which may be relevant to the Group.
Effective for accounting periods beginning on or after
Amendments to IAS 7, Statement of cash flows: Disclosure initiative January 1, 2017
Amendments to IAS 12, Income taxes: Recognition of deferred tax assets for unrealised losses January 1, 2017
IFRS 9, Financial instruments January 1, 2018
IFRS 15, Revenue from contracts with customers January 1, 2018
Amendments to IFRS 2, Share-based payment: Classification and measurement of share-based payment transactions January 1, 2018
Amendments to IAS 40, Transfers of investment property January 1, 2018
IFRIC 22, Foreign currency transactions and advance consideration January 1, 2018
IFRS 16, Leases January 1, 2019
The Group is in the process of making an assessment of what the impact of these amendments and new standards is expected to be in the period of initial application. So far the Group has identified some aspects of the new standards which may have a significant impact on the consolidated financial statements. Further details of the expected impacts are discussed below. As the Group has not completed its assessment, further impacts may be identified in due course and will be taken into consideration when determining whether to adopt any of these new requirements before their effective date and which transitional approach to take, where there are alternative approaches allowed under the new standards.
IFRS 9, Financial instruments
IFRS 9 will replace the current standard on accounting for financial instruments, IAS 39, Financial instruments: Recognition and measurement. IFRS 9 introduces new requirements for classification and measurement of financial assets, calculation of impairment of financial assets and hedge accounting. On the other hand, IFRS 9 incorporates without substantive changes the requirements of IAS 39 for recognition and derecognition of financial instruments and the classification of financial liabilities. Expected impacts of the new requirements on the Group’s financial statements are as follows:
(a) Classification and measurement
IFRS 9 contains three principal classification categories for financial assets: measured at (1) amortized cost, (2) fair value through profit or loss (FVTPL) and (3) fair value through other comprehensive income (FVTOCI) as follows:
The classification for debt instruments is determined based on the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the asset. If a debt instrument is classified as FVTOCI then effective interest, impairments and gains/losses on disposal will be recognized in profit or loss.
F-90 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
57 Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended December 31, 2016 (continued)
IFRS 9, Financial instruments (continued)
(a) Classification and measurement (continued)
For equity securities, the classification is FVTPL regardless of the entity’s business model. The only exception is if the equity security is not held for trading and the entity irrevocably elects to designate that security as FVTOCI. If an equity security is designated as FVTOCI then only dividend income on that security will be recognized in profit or loss. Gains, losses and impairments on that security will be recognized in other comprehensive income without recycling.
Based on the preliminary assessment, the Group expects that its financial assets currently measured at amortized cost and FVTPL will continue with their respective classification and measurements upon the adoption of IFRS 9.
With respect to the Group’s financial assets currently classified as “available-for-sale”, these are investments in equity securities which the Group may classify as either FVTPL or irrevocably elect to designate as FVTOCI (without recycling) on transition to IFRS 9. The Group has not yet decided whether it will irrevocably designate these investments as FVTOCI or classify them as FVTPL. Either classification would give rise to a change in accounting policy as the current accounting policy for available-for-sale equity investments is to recognize fair value changes in other comprehensive income until disposal or impairment, when gains or losses are recycled to profit or loss in accordance with the group’s policies set out in Note 2(l) and Note 2(f). This change in policy will have no impact on the Group’s net assets and total comprehensive income but will impact on reported performance amounts such as profit and earnings per share.
(b) Impairment
The new impairment model in IFRS 9 replaces the “incurred loss” model in IAS 39 with an “expected credit loss” model. Under the expected credit loss model, it will no longer be necessary for a loss event to occur before an impairment loss is recognized. Instead, an entity is required to recognize and measure expected credit losses as either 12-month expected credit losses or lifetime expected credit losses, depending on the asset and the facts and circumstances. This new impairment model may result in an earlier recognition of credit losses on the Group’s trade receivables and other financial assets. However, a more detailed analysis is required to determine the extent of the impact.
(c) Hedge accounting
IFRS 9 does not fundamentally change the requirements relating to measuring and recognizing ineffectiveness under IAS 39. However, greater flexibility has been introduced to the types of transactions eligible for hedge accounting. The Group preliminarily assesses that its current hedge relationships will qualify as continuing hedges upon the adoption of IFRS 9 and therefore it expects that the accounting for its hedging relationships will not be significantly impacted.
IFRS 15, Revenue from contracts with customers
IFRS 15 is a comprehensive framework for recognizing revenue from contracts with customers, replacing IAS 18, Revenue, IAS 11, Construction contracts and IFRIC 13, Customer loyalty programmes. The overall requirement is to identify the performance obligations in a sales contract and allocate the total fair value of the consideration receivable to them and recognize revenue as each of the obligations are satisfied. The Group is currently assessing the impacts of adopting IFRS 15 on its financial statements, including on transition.
F-91 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi unless otherwise indicated)
57 Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended December 31, 2016 (continued)
IFRS 15, Revenue from contracts with customers (continued)
The Group’s revenue recognition policies are disclosed in Note 2(x). Generally, revenue relating to transportation service is recognized when services are provided. Under IFRS 15, revenue is recognized when the customer obtains control of the promised good or service in the contract. Further analysis is required to determine whether this change in accounting policy may have a material impact on the amounts reported in any given financial reporting period.
The Group maintains frequent flyer award programmes. Currently, as disclosed in Note 2(x)(ii), the amount received in relation to mileage earning flights is allocated, based on fair value, between the flight and mileage earned by members of the Group’s frequent flyer award programmes. IFRS 15 requires that the fair value of consideration receivable under a sales contract will be allocated to the performance obligations under it in proportion to their estimated standalone selling prices, notwithstanding the sales prices indicated in the contract. The Group is assessing whether this requirement will affect the recognition of frequent flyer revenue compared to its current allocation methodologies.
IFRS 16, Leases
As disclosed in Note 2(k), currently the Group classifies leases into finance leases and operating leases and accounts for the lease arrangements differently, depending on the classification of the lease. The Group enters into some leases as the lessor and others as the lessee.
IFRS 16 is not expected to impact significantly on the way that lessors account for their rights and obligations under a lease. However, once IFRS 16 is adopted, lessees will no longer distinguish between finance leases and operating leases. Instead, subject to practical expedients, lessees will account for all leases in a similar way to current finance lease accounting, i.e. at the commencement date of the lease the lessee will recognize and measure a lease liability at the present value of the minimum future lease payments and will recognize a corresponding “right-of-use” asset. After initial recognition of this asset and liability, the lessee will recognize interest expense accrued on the outstanding balance of the lease liability, and the depreciation of the right-of-use asset, instead of the current policy of recognizing rental expenses incurred under operating leases on a systematic basis over the lease term. As a practical expedient, the lessee can elect not to apply this accounting model to short-term leases (i.e. where the lease term is 12 months or less) and to leases of low-value assets, in which case the rental expenses would continue to be recognized on a systematic basis over the lease term.
IFRS 16 will primarily affect the Group’s accounting as a lessee of leases for properties, plant and equipment, aircraft and flight equipment which are currently classified as operating leases. The application of the new accounting model is expected to lead to an increase in both assets and liabilities and to impact on the timing of the expense recognition in the income statement over the period of the lease. As disclosed in Note 48(b), at December 31 2016 the Group’s future minimum lease payments under non-cancellable operating leases amount to RMB61,215 million for properties, aircraft and flight equipment, the majority of which is payable either between 1 and 5 years after the reporting date or in more than 5 years. Some of these amounts may therefore need to be recognized as lease liabilities, with corresponding right-of-use assets, once IFRS 16 is adopted. The Group will need to perform a more detailed analysis to determine the amounts of new assets and liabilities arising from operating lease commitments on adoption of IFRS 16, after taking into account the applicability of the practical expedient and adjusting for any leases entered into or terminated between now and the adoption of IFRS 16 and the effects of discounting.
The Group is considering whether to adopt IFRS 16 before its effective date of 1 January 2019. However, early adoption of IFRS 16 is only permitted if this is no earlier than the adoption of IFRS 15. It is therefore unlikely that IFRS 16 will be adopted before the effective date of IFRS 15, being January 1, 2018.
F-92 Exhibit 4.35
Financial Service Framework Agreement
This Agreement is made on 29 August 2016 in Guangzhou, between: China Southern Airlines Company Limited (hereinafter referred to as “Party A”) Address: No. 278, Ji Chang Road, Guangzhou Legal Representative: Wang Chang Shun (王昌顺)
Southern Airlines Group Finance Company Limited (hereinafter referred to as “Party B”) Address: No. 17, Hang Yun Nan Street, Baiyun District, Guangzhou Legal Representative: Wang Jianjun (王建军)
In connection with Party B’s provision of deposit, loan business, insurance agent business and other relevant financial services to Party A (In this Agreement, Party A shall include China Southern Airlines Company Limited and its controlled subsidiaries), Party A and Party B, based on the principle of equality and mutual benefit, and through friendly negotiation, hereby reach a framework agreement as follows:
Section 1 Deposit Services
1. Party A shall, in accordance with this Agreement, deposit a part of its temporarily idle working capital and a part of operating return funds to its bank account opened with Party B in the principle of free deposits and withdrawals.
2. Party B shall pay to Party A the interest for Party A’s deposits on a regular basis at a rate no less than the deposit interest rates provided by the People’s Bank of China during the same period.
3. Party B shall provide the transfer settlement services to Party A for its normal operation activities according to Party A's need and relevant state provisions.
4. Party B shall provide online financial services to Party A in order to speed up Party A’s fund settlements and increase the settlement efficiency.
1 Section 2 Loan Services
1. Party B shall, as practical as possible, give priorities to meet Party A’s loan needs according to its own financial ability. Under this Agreement, the loan services Party B shall provide to Party A shall include loans, commercial bill discounting service and other credit services.
2. If Party A applies to Party B for loans, Party A and Party B shall sign loan contracts to specify the amount, purpose and duration of loans and other matters.
3. Party A shall pay to Party B the interest on its loans from Party B at a rate no higher than the loan interest rates provided by the People’s Bank of China during the same period .
4. Party A shall repay the principal of the loans and pay the interest thereof as scheduled according to the loan service contracts both parties sign.
Section 3 Other Finance Services
1. Party B may, upon acceptance of Party A’s entrustment, provide the following financial services to Party A according to the needs of Party A’s normal operation activities. However, Party A and Party B shall further sign separate contracts to agree upon specific provision of such services.
(1) Insurance agency business: Both parties agree to cooperate on insurance sales business related to air transportation through certain sales platforms. Such platforms shall include ground counters in all areas within the jurisdiction of Party A, 95539 call centers and corporate websites, mobile platforms and other online and offline channels;
(2) Guarantee business;
(3) Financial and financing adviser, credit assurance and related consultation and agency business;
(4) Other businesses that Party B may be engaged in after obtaining approval from China Banking Regulatory Commission.
2. In the case that Party A is approved to issue bonds, Party B may, upon acceptance of Party A’s entrustment, provide bond issuance and underwriting services to Party A. However, Party A and Party B shall further sign separate contracts to agree upon specific provision of such services.
2 3. Party A shall provide insurance sales platforms to Party B; while Party B shall pay fees to Party A for using such sales platforms.
4. Any fees Party B charges for providing any of the foregoing financial services to Party A shall be in compliance with any relevant fee standards as provided by the People’s Bank of China or China Banking Regulatory Commission, China Insurance Regulatory Commission and other regulatory authorities (if any) and shall not be higher than any fees any independent third party charges for providing such financial services to Party A.
5. With respect to the insurance agency business, Party A shall be only liable for providing insurance sales platforms and shall not be liable for any disputes arising among the insurers, insurance agents, policy holders, the insured and other parties. Party B shall ensure that it has the agency authority to sell the insurance in the place where the insurance is sold. Party A shall not bear any obligations or liabilities arising therefrom.
Section 4 Special Agreements
1. In order to better control the fund risks, Party B undertakes to only deposit its idle funds to state-owned commercial banks and listed joint-equity commercial banks. Meanwhile, Party B also undertakes to meet any Party A’s needs for using the deposits within Party A’s deposit limits at any time.
2. In order to ensure the performance of this Agreement, Party A agrees to provide a total loan limit no more than the total amount of Party B’s equity capital, common reserve fund and other companies' deposits (excluding Party A) to China Southern Air Holding Company and its subsidiaries (excluding Party A).
3. Both parties of the transaction shall follow a fair and reasonable pricing principle which is based on fair market price and not higher than any independent third party’s pricing or fee standards.
4. Both parties shall sign any specific agreements in which relevant terms shall be provided based on general commercial terms or better terms and shall meet relevant requirements of the listing rules of the places where the companies are listed.
3 Section 5 Liability for Breach of Contract
Any violation of any provisions of this Agreement by either party, or non-performance or incomplete performance of any of its obligations under this Agreement by either party shall be deemed to constitute a breach of this Agreement. Therefore, the defaulting party shall assume its default liabilities according to relevant provisions of the Contract Law of the People’s Republic of China; while the other party shall have the right to terminate this Agreement. For the avoidance of doubt, this Agreement shall not constitute any obligations of Party A to deposit money to or borrow money from Party B.
Section 6 Dispute Resolution
Both parties shall settle, through friendly negotiation, any dispute arising from or in connection with the interpretation, effect and performance of this Agreement. If such dispute cannot be settled through negotiation, either party may submit such dispute to a competent People’s Court in Guangzhou City.
Section 7 Validity and Duration of this Agreement
1. This Agreement has a validation period of 3 years from 1 January 2017 to 31 December 2019. This Agreement shall be legally binding on both parties from the effective date hereof.
2. Both parties agree that from the effective date of this Agreement, all previously signed relevant financial service framework agreements between them shall be automatically terminated.
Section 8 Transaction Caps
1. Both parties hereto agree that from the effective date of this Agreement, the balance of Party A’s deposit with Party B (including any accrued interest) on any day shall not exceed RMB 8 billion; the balance of any loan service provided by Party B (including total interest expense) on any day shall not exceed the foregoing same amount.
2. Both parties hereto agree that during the term of this Agreement, in relation to other financial service business, the total transaction amount Party A shall pay to Party B in any fiscal year shall not exceed RMB5 million; while the total transaction amount Party B shall pay to Party A shall not exceed RMB68.60 million in 2017, RMB79.35 million in 2018 and RMB91.67 million in 2019.
4 Section 9 Risk Control
In order to control the fund risk, Party B shall be obliged to assist Party A to complete the following measures:
1. Prior to conducting related transactions with Party B, Party A shall have the right to have access to Party B’s effective Financial License and Business License of Enterprise Legal Person. If Party B cannot provide relevant licenses or relevant licenses have expired, Party A will terminate any business cooperation with Party B.
2. Prior to deposition of any funds with Party B, Party A shall have the right to obtain and review Party B’s annual reports for the most recent fiscal year, which has been audited by an accountants’ firm qualified to audit securities and futures business activities. Party A shall start business cooperation with Party B if Party A confirms the risk can be controlled.
3. Party A shall be entitled to inspect Party B’s operation and financial status on a regular basis and check with Party B whether there is any violation of any provisions of the Measures for the Administration of Financial Companies of Enterprise Groups published by China Banking Regulatory Commission. Party A shall be entitled to request Party B to provide Party A’s finance department with all information regarding its regulatory indicators within fifteen working days after the end of each quarter. If any relevant indicators are found to be non-compliant with relevant provisions of the Measures for the Administration of Financial Companies of Enterprise Groups, Party A will terminate all deposit business cooperation with Party B.
4. In any one of the following cases, Party A shall have to right to withdraw all or any part of its deposits with Party B or suspend depositing to Party B or request Party B to perform and complete a rectification or take other risk management measures to effectively ensure the safety of Party A’s deposits with Party B:
(1) Party B’s asset-liability ratio indicators are non-compliant with the provisions of Section 34 of the Measures for the Administration of Financial Companies of Enterprise Groups;
(2) Party B is unable to pay due debts, or an occurrence of bank runs, or with a large amount of overdue loans or guarantees advances, serious failure of computer system, being robbed or defrauded, or directors or senior management personnel being involved in serious violation of discipline, criminal cases and other major issues;
5 (3) Party B has suffered a great loss in the securities investment business and the loss has reached 50% of the registered capital of Party B;
(4) There is an occurrence of significant changes in the organization, equity transactions or operation risks and other matters which may affect the normal operation of Party B;
(5) The proportion of Party A’s deposit balance with Party B in Party B’s balance of the deposits absorbed by Party B exceeds the limit as provided by relevant securities regulatory authorities;
(6) Party B is imposed to administrative sanctions by China Banking Regulatory Commission or other regulatory authorities for violation of laws or regulations;
(7) Party B is ordered to rectify by China Banking Regulatory Commission; and
(8) Other matters Party A considers may bring potential security risks to Party A.
5. Party A shall have the right to withdraw all or any part of its deposits with Party B at any time in order to ensure the security and liquidity of relevant deposits.
Section 10 Miscellaneous
1. Unless for compliance with any mandatory requirements of any laws or any legal regulators, without the consent of the other party, either party shall not disclose to any other parties any information about other party being obtained through this Agreement or any content of this Agreement.
2. Both parties shall strictly comply with the Anti Money Laundering Law of the People’s Republic of China, Provisions of Anti Money Laundering of Financial Institutions, Measures for Administration of Client Identity Identification and Materials and Transaction Records of Financial Institutions, Measures for Administration of Anti Money Laundering in Insurance Industry and other relevant anti money laundering laws, regulations and administrative rules and shall not participate in any money laundering activities or provide any facilitating conditions for any money laundering activities conducted by any others.
3. Without prior written consents of both parties hereto, any party shall not alter or modify any terms or contents of this Agreement. Any supplements or modifications shall be agreed by both parties and formed a written supplementary agreement to have legal binding effect on both parties.
6 4. Both parties shall further negotiate to sign any written supplementary agreement for any matters not covered in this Agreement. Such written supplementary agreement shall have same legal effect as this Agreement.
5. This Agreement is made in six copies, with each party holding two copies. Each copy shall have equal legal effect.
Party A: China Southern Airlines Company Limited Authorized Representative: Xiao Lixin (肖立新)
Party B: Southern Airlines Group Finance Company Limited Authorized Representative: Xu Yanqing (徐燕青)
7 Exhibit 4.36
Insurance Business Platform Cooperation Framework Agreement
This Agreement is made on 19 November 2015 in Guangzhou, between:
Party A: China Southern Airlines Company Limited Company Address: Economic and Technological Zone of Guangzhou, Guangdong Province Legal Representative: Si Xianmin (司献民)
Party B: Southern Airlines Group Finance Company Limited Company Address: No. 17, Hangyunnan Street, Baiyun District, Guangzhou Legal Representative: Wang Jianjun (王建军)
General Provisions
According to the Contract Law of the People’s Republic of China, the Insurance Law of the People’s Republic of China and the relevant provisions of the laws and regulations, China Southern Airlines Company Limited (hereinafter referred to as “Party A”) and Southern Airlines Group Finance Company Limited (hereinafter referred to as “Party B”), in order to cooperate in the insurance business to share resources and have complementary advantages, Party A and Party B, based on the principle of equality and mutual benefit, complementary advantages and common development, and through friendly negotiation, hereby agree as follows, by which both parties shall be bound.
Section 1 Contents of Cooperation
1.1 Both parties agree to cooperate on insurance sales business related to air transportation through certain sales platforms. Such platforms shall include ground counters in all areas within the jurisdiction of Party A, 95539 call centers and corporate websites, as well as other online and offline channels.
1.2 Party A shall provide insurance sales platforms to Party B; while Party B shall pay fees to Party A for using such sales platforms. 1.3 Both parties shall, under this Framework Agreement, further sign corresponding specific agreements as to the type of insurance, the allocation of agency fees and platform fees, specific rights and obligations of both parties and many other matters.
1.4 Both parties shall sign any specific agreements in which relevant terms shall be provided based on general commercial terms or better terms and shall meet relevant requirements of the listing rules of the places where the companies are listed.
1.5 In this Agreement, Party A shall include China Southern Airlines Company Limited and its wholly-owned and controlled subsidiaries.
Section 2 Agreement Duration
2.1 This Agreement shall be effective from 1 January 2015 to 31 December 2016. This Agreement shall be legally binding on both parties from the effective date hereof.
Section 3 Transaction Amount Cap
3.1 Both parties agree that the transaction amount of this Agreement shall not exceed the cap of RMB 40 million in 2015 and the cap of RMB 60 million in 2016.
3.2 During the performance of this Agreement, both parties shall comply with relevant provisions of listing rules as to the transaction amount caps.
Section 4 Liability Exemption
4.1 Party A shall be only liable for providing insurance sales platforms and shall not be liable for any disputes arising among the insurers, insurance agents, policy holders, the insured and other parties.
4.2 Party B shall ensure that it has the agency authority to sell the insurance in the place where the insurance is sold. Party A shall not bear any obligations or liabilities arising therefrom. Section 5 Dispute Resolution
5.1 Any violation of any provisions of this Agreement by either party, or non-performance or incomplete performance of any of its obligations under this Agreement by either party shall be deemed to constitute a breach of this Agreement. Therefore, the defaulting party shall assume its default liabilities according to relevant provisions of the Contract Law of the People’s Republic of China; while the other party shall have the right to terminate this Agreement.
5.2 Without prior written consents of both parties hereto, any party shall not alter or modify any terms or contents of this Agreement. Any supplements or modifications shall be agreed by both parties and formed a written supplementary agreement to have legal binding effect on both parties.
5.3 Both parties shall settle, through friendly negotiation, any dispute arising from or in connection with the interpretation, effect and performance of this Agreement. If such dispute cannot be settled through negotiation, either party may submit such dispute to a competent People’s Court.
Section 6 Miscellaneous
6.1 Unless for compliance with any mandatory requirements of any laws or any legal regulators, without the consent of the other party, either party shall not disclose to any other parties any information about other party being obtained through this Agreement or any content of this Agreement.
6.2 Both parties shall strictly comply with the Anti Money Laundering Law of the People’s Republic of China, Provisions of Anti Money Laundering of Financial Institutions, Measures for Administration of Client Identity Identification and Materials and Transaction Records of Financial Institutions, Measures for Administration of Anti Money Laundering in Insurance Industry and other relevant anti money laundering laws, regulations and administrative rules and shall not participate in any money laundering activities or provide any facilitating conditions for any money laundering activities conducted by any others.
6.3 Both parties shall further negotiate to sign any written supplementary agreement for any matters not covered in this Agreement. Such supplementary agreement shall have same legal effect as this Agreement.
6.4 This Agreement is made in six copies, with each party holding three copies. Each copy shall have equal legal effect. Party A: China Southern Airlines Company Limited
Authorized Representative: Xiao Lixin (肖立新)
19 November 2015
Party B: Southern Airlines Group Finance Company Limited
Authorized Representative: Xu Yanqing (徐燕青)
19 November 2015 Exhibit 4.37
Property and Land Lease Framework Agreement
This Agreement is made on 31 December 2016 in Guangzhou by and between:
Party A: China Southern Air Holding Company
Address: Guangzhou Baiyun International Airport, Guangdong Province
Party B: China Southern Airlines Company Limited
Address: Unit 301, 3/F, Office Tower, Guanhao Science Park Phase I, 12 Yuyan Street, Huangpu District, Guangzhou, Guangdong Province
Whereas, the Parties agree that Party A shall lease the property and land in Shenyang, Chaoyang, Dalian, Changchun, Harbin, Xinjiang, Beijing, Shanghai and foreign offices to Party B, NOW THEREFORE, the Parties enter into the following Framework Agreement on the principles of equality, freewill and making compensation with respect to the property and land lease:
Chapter 1 General Provisions
1 The land ownership of the property and land leased to Party B under this Agreement belongs to the People 's Republic of China, and Party A is the legal owner of the land use right. Underground resources, buried objects and municipal utilities are not within the rental scope of land use right.
2 The legal rights and interests of Party B shall be protected by State laws in the use of property and land use right under this Agreement.
3 Party A of this Agreement shall include China Southern Air Holding Company and its wholly-owned and controlled subsidiaries, and Party B shall include China Southern Airlines Company Limited and its wholly- owned and controlled subsidiaries.
Chapter 2 Specific Agreements
4 Party A shall lease the property and land use right to Party B, and the transaction pricing to follow shall be fair and reasonable, with reference to the fair price in the market.
5 In accordance with this Framework Agreement, both Parties shall further discuss and agree on the scope and details of leasing hereof. Specific contracts shall be signed otherwise. 6 The use of the leased property and land under this Agreement shall not violate the relevant state regulations or be beyond the scope of the agreements. During the period of lease, Party B shall obtain Party A's permission if Party B wishes to change the use of the leased property and land prescribed under this Agreement.
Chapter 3 Validity and Duration of this Agreement
7 This Agreement shall be valid for 3 years, from 1 January 2017 to 31 December 2019. This Agreement shall be legally binding on both parties from the effective date hereof.
Chapter 4 Special Agreements
8 The parties shall follow a fair and reasonable pricing principle which is based on fair market price in accordance with the provisions of the state or local pricing regulations, with reference to the asset appraisal report. Party A undertakes to offer Party B a price not higher than the price or fee standards from any independent third party.
9 Both parties agree that the total transaction amount under this Agreement shall not exceed the cap of RMB130 million for 2017, 2018 and 2019, respectively. During the performance of this Agreement, both parties shall comply with relevant provisions of listing rules as to the transaction amount caps.
Chapter 5 Liability for Breach of Contract
10 Any party’s violation of this Agreement shall constitute a breach of this Agreement, and shall bear the liability for breach of contract under the relevant provisions of the Contract Law of the People 's Republic of China and the other party shall have the right to terminate this Agreement.
11 If one party only violates a specific agreement signed in accordance with this Framework Agreement, its liability shall be determined in accordance with the specific agreement and shall not affect the continuing performance of this Framework Agreement and other specific agreem
Chapter 6 Supplementary Provisions
12 Without prior written consents of both parties hereto, any party shall not alter or modify any terms or contents of this Agreement. To have legal binding effect on both parties, any supplements or modifications shall be agreed by both parties and formed a written supplementary agreement.
13 Both parties shall further negotiate to sign any written supplementary agreement for any matters not covered under this Agreement. Such written supplementary agreement shall have same legal effect as this Agreement. 14 Both parties shall settle, through friendly negotiation, any dispute arising from or in connection with the interpretation, effect and performance of this Agreement. If such dispute cannot be settled through negotiation, either party shall have the right to submit such dispute to a competent People’s Court in Guangzhou City.
15 This Agreement is made in six copies, with each party holding three copies. Each copy shall have equal legal effect.
Party A: China Southern Air Holding Company
Authorized Representative: Wu Rongxin (吴榕新)
31 December 2016
Party B: China Southern Airlines Company Limited
Authorized Representative: Meng Qingbai (孟庆柏)
31 December 2016 Exhibit 4.38
Passenger and Cargo Sales And Ground Services Framework Agreement
This Agreement is made on 16 December 2016 in Guangzhou by and between the legal representative or authorized representative on behalf of Party A and Party B as described below.
Party A: China Southern Airlines Company Limited
Company Address: Unit 301, Office Tower, Guanhao Science Park Phase I, 12 Yuyan Street, Huangpu District, Guangzho
Legal Representative: Wang Chang Shun (王昌顺)
Party B: China Southern Airlines Group Ground Services Co., Ltd.
Company Address: 1/F, Building 618, Bagualing Industrial Zone, Futian District, Shenzhen
Legal Representative: Sun Yizhang (孙宜章)
Whereas:
1. Party A is a legal entity and duly existing in PRC, which has obtained business license from Administration for Industry and Commerce according to relevant requirements under PRC laws and regulations, and fulfilled its annual inspection obligations in accordance with relevant regulations.
2. Party B is a legal entity and duly existing in PRC, which has obtained business license from Administration for Industry and Commerce according to relevant requirements under PRC laws and regulations, and fulfilled its annual inspection obligations in accordance with relevant regulations. Party B has the qualification to engage in various services agreed under this Agreement.
3. Party B has obtained the CATA passenger and cargo sales agency qualification certificate (both class I and class II) and IATA international (or domestic) passenger and cargo sales agency certificate and notice of approval.
4. Party B has necessary facilities which are equipped with qualified sales agents, other service personnel and a relatively fixed business premises. Based on the aforesaid, in order to clarify the rights and obligations of the parties in respect of the transactions, Party A and Party B enter into this Framework Agreement in accordance with the principles established through the friendly negotiations, and shall jointly observe and guide the operation of the transactions agreed under this Agreement, including the signing and implementation of specific contracts. Party A and Party B agreed to the following terms:
I. Scope of this Agreement
The terms of this Agreement shall apply to the transactions contemplated under Article 2 of this Agreement between Party A and Party B.
Party A of this Agreement shall include China Southern Airlines Company Limited and its wholly-owned or controlled subsidiaries, and Party B shall include China Southern Airlines Group Ground Services Co., Ltd. and its wholly-owned or controlled subsidiaries.
II. Main Contents of Related Party Transactions
1. Party A entrusts Party B to act on behalf of Party A in the designated area for the international or domestic ticket sales business;
2. Party A entrusts Party B to act on behalf of Party A in the designated areas to provide international or domestic ticket sales and after-sales services to Patty A’s direct key client;
3. Party A entrusts Party B to act on behalf of Party A in the designated area for the international or domestic air cargo transportation and sales business;
4. Party A agrees that Party B shall act as Party A's agent for the sales business of the air charter and air board package in the designated area under the condition that China Southern Air Holding Company provides sufficient economic guarantee to Party B;
5. Party A agrees that Party B shall provide Party A with some important simplified services business, which are productive, operational and procedural, including but not limited to, import / export and transit operations related to cargo and mail transport, aircraft maintenance, aircraft cabin cleaning, cabin textiles cleaning / sending and receiving, on-board entertainment equipment maintenance, aircraft surface cleaning, ground integrated services and other services related to the maintenance;
6. Party A agrees that the premises and equipments required for production shall be leased to Party B for its use and Party B shall pay the lease to Party A. Specific business scope and related fees of the above transactions shall be agreed and signed under separate agreements by and between Party A and Party B in accordance to the actual needs. Specific rights and obligations of both Parties shall be agreed under the separate agreements.
III. Rights and Obligations of Both Parties
(I) Rights and Obligations of Party A
1. Party A shall have the right to conduct business inspection and business supervision on Party B;
2. Party A shall pay agent fees and related service fees to Party B in accordance with the individual entrustment agreement signed by both parties, and charge Party B for the lease;
3. Party A shall have the right to request Party B to provide necessary guarantee for the performance of this Agreement; and
4. Party A shall have the right to charge Party B for the air charter and air package board service fees and ticket fares in full.
(II) Rights and Obligations of Party B
1. Party B shall have the right to receive agent fees and related service fees from Party A in accordance with the individual entrustment agreement signed by both parties and pay lease to Party A;
2. Party B shall pay the air charter and air package board service fees and ticket fares to Party A in accordance with the individual entrustment agreement signed by both parties;
3. Party B shall accept Party A's business inspection and business supervision;
4. Party B shall not advertise and publicize itself in the name of Party A without Party A's written permission. Party B shall not harm Party A's interests and corporate image when publicize itself;
5. Party B shall comply with the relevant rules and regulations of Party A;
6. Party B has the duty of confidentiality with respect to information provided by Party A; and
7. Party B shall not engage in any act or activity in the name of Party A outside the scope of entrusted matters under this Agreement. IV. Transaction Pricing and Caps
1. Both parties shall follow a fair and reasonable pricing principle which is based on fair market price in accordance with the provisions of the state or local pricing regulations. Party B undertakes to offer Party A a price or fee standard favorable than or equal to those offered to any independent third party.
2. Party A and Party B agreed that the amount of agent fees and other service fees paid under this Agreement shall not exceed the cap of RMB270 million for 2017; the cap of RMB330 million for 2018; the cap of RMB400 million for 2019.
Both parties hereby agree that the amount of the lease charged to Party B by Party A under this Agreement shall not exceed the cap of RMB10 million for each year from 2017 to 2019.
V. Force Majeure
1. Neither party shall be held responsible for failure to perform this Agreement due to force majeure, in that case this Agreement is terminated naturally. If certain part of this Agreement cannot be performed due to force majeure, the corresponding liability of the affected part shall be waived depending on the degree of force majeure. The performance of other part of the Agreement is not subject to force majeure. The liability incurred by force majeure shall not be exempt on condition that performance of this Agreement has already been delayed.
Force majeure means an unforeseeable, unavoidable and insurmountable objective situation, including but not limited to war, plague, strike, earthquake, flood, etc.
2. If any party fails to perform the Agreement due to force majeure, it shall promptly notify the other party within 48 hours in order to mitigate the losses that the other party may occur and shall provide proof within fifteen business days. If the notification obligation and the provision of proof cannot be fulfilled on reasonable grounds, the time prescribed in this paragraph may be extended based on the actual situation.
VI. Liabilities and Indemnification
1. The breaching party shall indemnify the non-breaching party for the actual loss incurred due to mistakes in working, if additional expenses incurred.
2. Any breach of this Agreement and any supplemental agreement constitute a breach of contract and the defaulting party shall be liable for the breach.
VII.Termination of this Agreement
This Agreement shall be terminated, if:
1. This Agreement is terminated as expired; 2. This Agreement is terminated when one party does not have the required qualifications to fulfill the Agreement;
3. This Agreement shall be terminated when Party B fails to meet the conditions of the agent business agreed upon by both Parties;
4. The non-breaching party is entitled to terminate this Agreement unilaterally due to the other Party's default.
VIII.Dispute Resolution
Both parties shall settle, through friendly negotiation, any dispute arising from the execution or performance of this Agreement. If such dispute cannot be settled through negotiation, either party shall have the right to submit such dispute to a competent Peoplet sCourt.
IX. Miscellaneous
1. This Agreement has a validation period of 3 years, with effect from 1 January 2017.
2. Both parties shall sign supplementary agreements for any matters not covered under this Agreement. Such supplementary agreements shall have equal legal effect to this Agreement;
3. This Agreement is made in four copies, with each party holding two copies. Each copy shall have equal legal effect.
Party A: China Southern Airlines Company Limited Party B: China Southern Airlines Group Ground Services Co., Ltd. Authorized Representative: Luo Laijun (罗来君) Authorized Representative: Zhang Xingjin (张兴金) Exhibit 4.39
SUPPLEMENTAL AGREEMENT NO. 3
to
Purchase Agreement No. 03586
between
THE BOEING COMPANY
and
XIAMEN AIRLINES
Relating to Boeing Model 787 Aircraft
THIS SUPPLEMENTAL AGREEMENT is made between THE BOEING COMPANY, a Delaware corporation (Boeing), and Xiamen Airlines, with its principal office in the city of Xiamen, Fujian Province, People’s Republic of China (Customer);
Customer and Boeing entered into Purchase Agreement No. 03586, dated May 9, 2011, as amended, and supplemented, (Purchase Agreement) relating to the purchase and sale of Boeing Model 787 aircraft; and this Supplemental Agreement is an amendment to and is incorporated into the Purchase Agreement:
WHEREAS, the parties desire to further amend the Purchase Agreement as set forth herein in order to add the sale of four (4) Model 787-9 aircraft,
NOW, THEREFORE, the parties agree that the Purchase Agreement is amended as set forth below and otherwise agree as follows:
1. Title Page.
Remove and replace, in its entirety, the current title page with the new title page (attached hereto), to reflect the incorporation of this Supplemental Agreement No. 3 into the Purchase Agreement.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586 SA-3 BOEING PROPRIETARY 2. Table of Contents.
Remove and replace, in its entirety, the current Table of Contents with the new Table of Contents (attached hereto), to reflect the incorporation of this Supplemental Agreement No. 3 into the Purchase Agreement.
3. Tables.
Incorporate a new Table 2 (attached hereto) to reflect the incorporation of this Supplemental Agreement No. 3 into the Purchase Agreement.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586 SA-3 BOEING PROPRIETARY 4. Letter Agreements.
Incorporate the Letter Agreements listed below to reflect the incorporation of this Supplemental Agreement No. 3 into the Purchase Agreement.
Letter Agreement Number Subject
XIA-PA-03586-LA-1501312 Applicability Matters – Model 787-9 XIA-PA-03586-LA-1501313 Open Configuration Matters – Model 787-9 XIA-PA-03586-LA-1501314 Special Escalation Program – Model 787-9 XIA-PA-03586-LA-1501315 Customer Support Matters – Model 787-9 XIA-PA-03586-LA-1501316 Special Matters – Model 787-9 XIA-PA-03586-LA-1501317 Liquidated Damages – Non-Excusable Delay – Model 787-9 XIA-PA-03586-LA-1501318 Performance Guarantees – Model 787-9 XIA-PA-03586-LA-1501319 Agreement for Deviation from the Block Fuel Guarantee – Model 787-9 – Model 787-9 XIA-PA-03586-LA-1501320 Delivery Flight Fuel Mile Verification – Model 787-9 XIA-PA-03586-LA-1501321 Promotional Support – Model 787-9 XIA-PA-03586-LA-1501322 Purchase Rights – Model 787-9
5. Miscellaneous.
5.1 The Purchase Agreement is amended as set forth above, and all other terms and conditions of the Purchase Agreement remain unchanged and are in full force and effect. Any Tables of Contents, Tables, Supplemental Exhibits, Letter Agreements or other documents that are listed in the Sections above are incorporated into this Supplemental Agreement by this reference.
5.2 This Supplemental Agreement will become effective upon execution and receipt by both Parties.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586 SA-3 BOEING PROPRIETARY AGREED AND ACCEPTED this
Date
THE BOEING COMPANY XIAMEN AIRLINES
Signature Signature
Printed name Printed name
Attorney-in-Fact Title Title
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586 SA-3 BOEING PROPRIETARY PURCHASE AGREEMENT NUMBER PA-03586 between THE BOEING COMPANY and Xiamen Airlines Relating to Boeing Model 787 Aircraft
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586 SA-3 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
Purchase Agreement No. PA-03586
between
The Boeing Company
and
Xiamen Airlines
This Purchase Agreement No. PA-03586 between The Boeing Company, a Delaware corporation, (Boeing) and Xiamen Airlines, a Chinese corporation, (Customer) relating to the purchase and sale of Model 787 aircraft together with all tables, exhibits, supplemental exhibits, letter agreements and other attachments thereto, if any, (Purchase Agreement) incorporates and amends the terms and conditions (except as specifically set forth below) of the Aircraft General Terms Agreement dated as of November 10, 2003 between the parties, identified as AGTA-XIA (AGTA).
1. Quantity, Model, Description and Inspection.
The aircraft to be delivered to Customer will be designated as Model 787-8 aircraft and Model 787-9 aircraft (collectively, Aircraft). Boeing will manufacture and sell to Customer Aircraft conforming to the configuration described in Exhibit A and Exhibit A-1 in the quantities listed in Table 1 and Table 2 (collectively, Tables) to the Purchase Agreement. [***************] to delivery of Customer’s first Aircraft, Boeing will provide Customer a Boeing document defining a customer inspection process appropriate to the 787 manufacturing process (787 Inspection Process) which will apply in lieu of inspection processes traditionally applicable to other models of aircraft and will supersede the provisions of Article 5.2 of the AGTA.
2. Delivery Schedule.
The scheduled months of delivery of the Aircraft are listed in the attached Tables. Exhibit B describes certain responsibilities for both Customer and Boeing in order to accomplish the delivery of the Aircraft.
3. Price.
3.1 Aircraft Basic Price. The Aircraft Basic Price is listed in the Tables and is subject to escalation in accordance with the terms of this Purchase Agreement.
3.2 Advance Payment Base Prices. The Advance Payment Base Prices listed in the Tables were calculated utilizing the latest escalation factors available to Boeing on the date of this Purchase Agreement projected to the month of scheduled delivery.
4. Payment.
4.1 Boeing acknowledges receipt of a deposit in the amount shown in the Tables for each Aircraft (Deposit).
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
BOEING PROPRIETARY 4.2 The standard advance payment schedule for the Aircraft requires Customer to make certain advance payments, expressed in a percentage of the Advance Payment Base Price of each Aircraft beginning with a payment of [*****************], on the effective date of the Purchase Agreement for the Aircraft. Additional advance payments for each Aircraft are due as specified in and on the first business day of the months listed in the attached Tables.
4.3 For any Aircraft whose scheduled month of delivery is [********************************] from the date of this Purchase Agreement, the total amount of advance payments due for payment upon signing of this Purchase Agreement will include all advance payments which are past due in accordance with the standard advance payment schedule set forth in paragraph 4.2 above.
4.4 Customer will pay the balance of the Aircraft Price of each Aircraft at delivery.
5. Additional Terms.
5.1 Aircraft Information Table. The Tables consolidate information contained in Articles 1, 2, 3 and 4 with respect to (i) quantity of Aircraft, (ii) applicable Detail Specification, (iii) month and year of scheduled deliveries, (iv) Aircraft Basic Price, (v) applicable escalation factors and (vi) Advance Payment Base Prices and advance payments and their schedules.
5.2 Escalation Adjustment/Airframe and Optional Features. Supplemental Exhibit AE1 contains the applicable airframe and optional features escalation formula.
5.3 Customer Support Variables. Information, training, services and other things furnished by Boeing in support of introduction of the Aircraft into Customer’s fleet are described in Supplemental Exhibit CS1. Supplemental Exhibit CS1 supersedes in its entirety Exhibit B to the AGTA, and, for clarity, all references to Exhibit B to the AGTA shall be deemed to refer to Supplemental Exhibit CS1 to the Purchase Agreement.
5.4 Engine Escalation Variables. Supplemental Exhibit EE1 contains the applicable engine escalation formula, the engine warranty and the engine patent indemnity for the Aircraft.
5.5 Service Life Policy Component Variables. Supplemental Exhibit SLP1 lists the SLP Components covered by the Service Life Policy for the Aircraft.
5.6 Public Announcement. Boeing reserves the right to make a public announcement regarding Customer’s purchase of the Aircraft upon approval of Boeing’s press release by Customer’s public relations department or other authorized representative.
5.7 Negotiated Agreement; Entire Agreement. This Purchase Agreement, including the provisions of Article 8.2 of the AGTA relating to insurance, and Article 11 of Part 2 of Exhibit C of the AGTA relating to DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES, has been the subject of discussion and negotiation and is understood by the parties; the Aircraft Price and other agreements of the parties stated in this Purchase Agreement were arrived at in consideration of such provisions. This Purchase Agreement, including the AGTA, contains the entire agreement between the parties and supersedes all previous proposals, understandings, commitments or representations whatsoever, oral or written, and may be changed only in writing signed by authorized representatives of the parties.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 2 BOEING PROPRIETARY AGREED AND ACCEPTED this
Date
THE BOEING COMPANY XIAMEN AIRLINES
Signature Signature
Printed name Printed name
Attorney-in-Fact Title Title
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 3 BOEING PROPRIETARY ARTICLES SA NUMBER
1 Quantity, Model, Description and Inspection 2 Delivery Schedule 3 Price 4 Payment 5 Additional Terms
TABLES
1 Aircraft Information Table 2 Aircraft Information Table – Model 787-9 SA-3
EXHIBITS
A Aircraft Configuration A-1 Aircraft Configuration – Model 787-9 SA-3 B Aircraft Delivery Requirements and Responsibilities
SUPPLEMENTAL EXHIBITS
AE1 Escalation Adjustment/Airframe and Optional Features CS1 Customer Support Document EE1 Engine Escalation/Engine Warranty and Patent Indemnity SLP1 Service Life Policy Components
LETTER AGREEMENTS SA NUMBER
LA-1002938 Payment Matters LA-1002939 787 e-Enabling Software Matters LA-1002940 EULA Special Matters LA-1002941 Liquidated Damages Non-Excusable Delay LA-1002943-R1 Performance Guarantees SA-1 LA-1002944 Post Delivery Software and Data Loading LA-1002945 Promotional Support LA-1002946 Seats and IFE Special Provisions
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 4 BOEING PROPRIETARY LETTER AGREEMENTS (continued) SA NUMBER
LA-1002947 787 Spare Parts Commitments LA-1002948 Spare Parts Initial Provisioning LA-1002949 Special Matters LA-1002951-R1 Special Escalation Program SA-1 LA-1002992 AGTA Terms Revisions LA-1003255 Government Approval Matters LA-1104435 Delivery Flight Fuel Mileage Verification LA-1104525 Clarifications and Understandings LA-1104526 Purchase Rights LA-1104527 Cruise Range Remedy LA-1300551 Boeing Purchase of BFE SA-2 LA-1501312 Applicability Matters – Model 787-9 SA-3 LA-1501313 Open Configuration Matters Model 787-9 SA-3 LA-1501314 Special Escalation Program – Model 787-9 SA-3 LA-1501315 Customer Support Matters – Model 787-9 SA-3 LA-1501316 Special Matters – Model 787-9 SA-3 LA-1501317 Liquidated Damages Non-Excusable Delay – Model 787-9 SA-3 LA-1501318 Performance Guarantees – Model 787-9 SA-3 LA-1501319 Agreement for Deviation from the Block Fuel Guarantee – Model 787-9 SA-3 LA-1501320 Delivery Flight Fuel Mileage Verification – Model 787-9 SA-3 LA-1501321 Promotional Support – Model 787-9 SA-3 LA-1501322 Purchase Rights – Model 787-9 SA-3
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 5 BOEING PROPRIETARY (REFERENCE ONLY)
REMOVED TABLES & LETTER AGREEMENTS REMOVED BY SA NUMBER
Table 2 Aircraft Information Table_Trent 1000-A SA-1
EE2. Engine Esc/Engine Warranty & Patent Indemnity_Trent 1000-A SA-1
LA-1003275 Alternate Engine Selection SA-1
LA-1002942 787 Open Configuration Matters SA-2
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 6 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
Table 2 to Purchase Agreement No. PA-03586 787-9 Aircraft Delivery, Description, Price and Advance Payments
Airframe Model/MTOW: 787-9 545,000 pounds Detail Specification: 787B1-4102 Rev. R (12/5/2014) Engine Model/Thrust: GENX-1B74/75 74,100 pounds Airframe Price Base Year/Escalation Formula: [***************] [***************] Airframe Price: [***************] Engine Price Base Year/Escalation Formula: [***************] [***************] Optional Features: [***************] Sub-Total of Airframe and Features: [***************] Airframe Escalation Data: Engine Price (Per Aircraft): [***************] Base Year Index (ECI): [***************] Aircraft Basic Price (Excluding BFE/SPE): [***************] Base Year Index (ICI): [***************] Buyer Furnished Equipment (BFE) Estimate: [***************] Engine Escalation Data: In-Flight Entertainment (IFE) Estimate: [***************] Base Year Index (ECI): [***************] Base Year Index (ICI): [***************]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
Escalation Escalation Escalation Estimate Advance Payment Per Aircraft (Amts. Due/Mos. Prior to Delivery): Delivery Number of Factor Factor Adv Payment Base At Signing 24 Mos. 21/18/12/9/6 Mos. Total Date Aircraft (Airframe) (Engine) Price Per A/P [***********] [***********] [***********] [***********] Jan-2017 1 [***********] [***********] [***********] [***********] [***********] [***********] [***********] Jul-2017 1 [***********] [***********] [***********] [***********] [***********] [***********] [***********] Sep-2017 1 [***********] [***********] [***********] [***********] [***********] [***********] [***********] Mar-2017 1 [***********] [***********] [***********] [***********] [***********] [***********] [***********] Total: 4
[***********] [***********] [***********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
June 12, 2015 XIA-PA-03586 72214-1F.TXT BOEING PROPRIETARY Page 1 The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
AIRCRAFT CONFIGURATION between THE BOEING COMPANY and Xiamen Airlines Exhibit A-1 to Purchase Agreement Number PA-03586
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
BOEING PROPRIETARY Exhibit A-1
AIRCRAFT CONFIGURATION
relating to
BOEING MODEL 787-9 AIRCRAFT
The Detail Specification is Boeing document number [************************] Revision [*******], to be released on [*********************]. The Detail Specification provides further description of Customer’s configuration set forth in this Exhibit A. Such Detail Specification will be comprised of [*********************************], as amended to incorporate the optional features (Options) listed below, if any, including the effects on Manufacturer's Empty Weight (MEW) and Operating Empty Weight (OEW). As soon as practicable, Boeing will furnish to Customer copies of the Detail Specification, which copies will reflect such Options. The Aircraft Basic Price reflects and includes all effects of such Options, except such Aircraft Basic Price [***********************************************************************].
The content of this Exhibit A-1 will be defined pursuant to the provisions of Letter Agreement XIA-PA-03586-LA-1501313 to the Purchase Agreement, entitled “Open Configuration Matters”.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 2 BOEING PROPRIETARY XIA-PA-03586-LA-1501312
Xiamen Airlines 22 Dailiao Road Xiamen, 361006 Fujian Province People’s Republic of China
Subject: Applicability Matters – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
1. Applicability of 787-9 Aircraft.
For Customer’s purchase of the 787-9 Aircraft, the following Exhibits, Supplemental Exhibits, and letter agreements to the Purchase Agreement are applicable for the 787-9 Aircraft and are amended to include the terms, “Model 787-9” in all places where stated, “Model 787-85C” or “Model 787-8”.
Exhibits & Supplemental Exhibits Title Exhibit B Aircraft Delivery Requirements and Responsibilities Supplemental Exhibit AE1 Escalation Adjustment Airframe and Optional Features Supplemental Exhibit CS1 787 Customer Support Document Supplemental Exhibit EE1 Engine Escalation, Engine Warranty and Patent Indemnity Supplemental Exhibit SLP1 Service Life Policy Components
Letter Agreement Number Subject XIA-PA-03586-LA-1002940 Special Matters relating to COTS Software and End User Licensing Agreements XIA-PA-03586-LA-1002946 Special Terms – Seats and In-Flight Entertainment XIA-PA-03586-LA-1002947 Spare Parts Commitments
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 3 BOEING PROPRIETARY Letter Agreement Number Subject XIA-PA-03586-LA-1002948 Spare Parts Initial Provisioning XIA-PA-03586-LA-1002992 AGTA Terms Revisions XIA-PA-03586-LA-1300551 Boeing Purchase of Buyer Furnished Equipment XIA-PA-03586-LA-1002938 Payment Matters XIA-PA-03586-LA-1003255 Government Approval Matters XIA-PA-03586-LA-1104525 Clarifications and Understandings
2. Confidentiality
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing. In addition to any equitable relief that may be available to Boeing in the event of a breach of this clause, Boeing may rescind the Basic Credit Memorandum contained in paragraph 1.1 above, in the event of any unauthorized disclosure by Customer.
Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 4 BOEING PROPRIETARY XIA-PA-03586-LA-1501313
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Open Configuration Matters – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 Aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
1. Aircraft Delivery Schedule.
The scheduled delivery positions for the Aircraft listed in Table 2 of the Purchase Agreement with delivery dates of [**************************], as of the date of this Letter Agreement, provide the delivery schedule in nominal delivery months (Nominal Delivery Month), [*********************************] ([*********************************]). No [**********************] to the Nominal Delivery Month Boeing will provide written notice to Customer with a revised Table 2 of the scheduled delivery month, as necessary, for each Aircraft. Such notice provided by Boeing will constitute an amendment to the Table 2 of the Purchase Agreement.
2. Aircraft Configuration.
2.1 Initial Configuration. The initial configuration of Customer's Model 787-9 Aircraft has been defined by Boeing Model 787 Airplane [******************************************************], which reflects the Boeing baseline Model 787-9 [**********] A as described in Article 1 and Exhibit A1 of the Purchase Agreement. Given [*********************] Purchase Agreement signing and delivery of the first Aircraft, the final configuration of the Customer’s Aircraft [********************].
2.2 Final Configuration Schedule. Customer and Boeing hereby agree to complete the configuration of the Aircraft using the then-current Boeing configuration documentation (Final Configuration) in accordance with the following schedule:
2.2.1 [***********************************] to the first Aircraft's scheduled delivery month, Boeing and Customer will discuss potential optional features.
2.2.2 [*****************************************], Boeing will provide Customer with a [***********************] that can be incorporated into the Aircraft during production.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 5 BOEING PROPRIETARY 2.2.3 Customer will [*****************************] to accept or reject the [****************].
3. Amendment of the Purchase Agreement.
Within [******************] days following Final Configuration, Boeing and Customer will execute a written amendment to the Purchase Agreement which will reflect the following:
3.1 Changes applicable to the basic Model 787 aircraft which are developed by Boeing between the date of signing of the Purchase Agreement and date of Final Configuration;
3.2 Incorporation into Exhibit A1 of the Purchase Agreement, by written amendment, those optional features which have been agreed to by Customer and Boeing pursuant to Article 1.2 above (Customer Configuration Changes);
3.3 Revisions to the Performance Guarantees to reflect the effects, if any, on Aircraft performance resulting from the incorporation of the Customer Configuration Changes and inclusion of a mission payload guarantee representing Customer’s operation on the Fuzhou (FOC) to New York (JFK) route; and
3.4 Changes to the [****************************************************] to [***************************************] estimated in Table 2 of the Purchase Agreement for [*******************************] and the [*************************] reflected in the Customer Configuration Changes.
4. Assignment.
Except for an assignment by Customer to a wholly-owned subsidiary as permitted under Article 9, entitled “Assignment, Resale, or Lease” of the AGTA, this Letter Agreement is provided as an accommodation to Customer in consideration of Customer becoming the operator of the 787-9 Aircraft and cannot be assigned in whole or in part.
5. Confidential Treatment.
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 6 BOEING PROPRIETARY Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 7 BOEING PROPRIETARY XIA-PA-03586-LA-1501314
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Special Escalation Program – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
787-9 Aircraft Applicability.
Per the terms of letter agreement to the [***********************************], the terms of this Letter Agreement are applicable [*********************] 787-9 Aircraft included in Table 2 of the Purchase Agreement at the time of signing (Program 787-9 Aircraft).
1. [******************].
Boeing will release an [**************] in [****************************] based on Boeing’s then current standard [************************]. Only one [******************] shall be used to conduct the [******************] performed in accordance with Article 2.1, below, for a given Program 787-9 Aircraft. The escalation forecast applicable to a given Program 787-9 Aircraft is set forth in the Attachment.
2. [******************].
2.1 If the escalation forecast above, projects a [********************] that exceeds the cumulative annual [********************] [********************], as set forth in the Attachment, for the scheduled delivery month of any Program 787-9 Aircraft that is scheduled to deliver within the time period applicable to such [********************], as set forth in the Attachment, then Boeing shall issue an [********************] to the Customer by the date set forth in the Attachment. Such [********************] shall, in Boeing's sole discretion, either:
2.1.1 [********************] applicable to the Airframe Price and Optional Features Prices for such affected Program 787-9 Aircraft to [********************] cumulative [********************] as set forth in the Attachment; or
2.1.2 propose a mutually agreeable alternative escalation solution.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 8 BOEING PROPRIETARY 2.1.3 If neither 2.1.1 or 2.1.2 occurs, then either party has the option [********************] the [********************].
2.2 If Boeing provides Customer the option described in Article 2.1 above, then Customer shall notify Boeing in writing of its election to exercise the option contained in Article 2.1.1 or 2.1.2 above [********************] of its receipt of the Escalation Notice from Boeing. In the event Customer exercises its option in accordance with Article 2.1.3 above, then: (i) Boeing will [********************], [********************], an [********************] [********************], and (ii) Customer [********************] for any and all [********************] by the engine manufacturer [********************]. If requested, Boeing will assist Customer in working with the engine manufacturer [********************].
2.2.1 Within [********************] of Boeing’s receipt of Customer’s [********************] for any such [********************] 787-9 Aircraft under Article 2.2 above, Boeing may elect by written notice to Customer to purchase from Customer any [********************] Program 787-9 Aircraft at the [********************], or contracted to [********************].
2.2.2 Should Customer fail to issue any notice to Boeing in accordance with Article 2.2 above, then the Escalation Adjustment for the Airframe Price and Optional Features Prices for such Program 787-9 Aircraft shall be calculated in accordance with Supplemental Exhibit AE1.
2.2.3 If Customer and Boeing accept an [********************], as described in Article 2.1.2 above, and the [********************]is less than or equal to [********************] [********************] at delivery of such Program Aircraft, then the [********************] will be determined as described in paragraph 3 below for such Program Aircraft.
3. [******************].
If the escalation forecast projects a [********************] that is [********************] to the [********************], as set forth in the Attachment, for the scheduled delivery month of any Program 787-9 Aircraft that is scheduled to deliver within the time period applicable to such [********************], as set forth in the Attachment, then Boeing will [********************] for the [********************] and [********************] of each Program 787-9 Aircraft, in accordance with the terms in both 3.1 and 3.2 below.
3.1 The [********************] for the [********************] and [********************] of each Program 787-9 Aircraft will [********************] during the [********************] at a [********************] per [********************] resulting in the [********************] set forth in the Attachment (Capped Factor(s)).
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 9 BOEING PROPRIETARY 3.2 In case the [********************] may drop below the [********************], Boeing will, at time of the Program 787-9 Aircraft delivery, calculate the [********************] of the [********************] and [********************] using (i) [********************] in accordance with the provisions of Supplemental Exhibit AE1 to the Purchase Agreement ([********************]) and (ii) the [********************]. The final [********************] will include the [********************] and [********************] utilizing the [********************] or the [********************], whichever is [********************].
4. Applicability to Other Financial Consideration.
The [********************] for any other sum, identified in the Purchase Agreement as [********************] pursuant to Supplemental Exhibit AE1, and which pertains to the Program 787-9 Aircraft shall be calculated using the [********************] established in this Letter Agreement for such Program 787-9 Aircraft notwithstanding any other provisions of the Purchase Agreement to the contrary.
5. Assignment.
Except for an assignment by Customer to a wholly-owned subsidiary as permitted under Article 9, entitled “Assignment, Resale, or Lease” of the AGTA, this Letter Agreement is provided as an accommodation to Customer in consideration of Customer becoming the operator of the Program 787-9 Aircraft and cannot be assigned in whole or in part.
6. Confidential Treatment.
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 10 BOEING PROPRIETARY Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
Attachment
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 11 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
ATTACHMENT to XIA-PA-03586-LA-1501314
Escalation Forecast & Escalation Notice Date
Escalation Applicable to Program 787-9 Aircraft Escalation Forecast Delivering in Time Period Notice Date Feb 2015 August 2016 through January 2017 15 Apr 2015 Aug 2015 February 2017 through July 2017 15 Oct 2015 Feb 2016 August 2017 through January 2018 15 Apr 2016 Aug 2016 February 2018 through July 2018 15 Oct 2016
Escalation Factors
2.9% 4.5% Delivery Escalation Escalation Date Factors Factors Dec-16 1.0715 1.1122 Jan-17 1.0741 1.1163 Feb-17 1.0766 1.1204 Mar-17 1.0792 1.1245 Apr-17 1.0818 1.1287 May-17 1.0844 1.1328 Jun-17 1.0870 1.1370 Jul-17 1.0895 1.1412 Aug-17 1.0921 1.1454 Sep-17 1.0948 1.1496 Oct-17 1.0974 1.1538 Nov-17 1.1000 1.1580 Dec-17 1.1026 1.1623 Jan-18 1.1052 1.1666 Feb-18 1.1079 1.1708 Mar-18 1.1105 1.1751
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
BOEING PROPRIETARY XIA-PA-03586-LA-1501315
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Customer Support Matters – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 Aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
1. Customer currently operates a Model 787-8 aircraft, the same model type as the 787-9 Aircraft. In support of the 787-9 Aircraft, Boeing offers the additional customer support provided in this Letter Agreement.
2. As presented in letter agreement to the Purchase Agreement XIA-PA-03586-LA-1501316, Special Matters – Model 787-9, Customer is [*************************************]. Customer may exchange [**********************] for any of the training courses described on the Attachment to this Letter Agreement at the [******************] on the Attachment or for any of the training courses described in Supplemental Exhibit CS1 (CS1) to the Purchase Agreement. At the end of the Training Program Period, as defined in CS1, [***********************].
3. Minor Model Difference Training and Entitlements.
3.1 Maintenance Planning Assistance. Upon request, Boeing will provide assistance [***********************************] resulting from minor model differences between the 787-9 Aircraft and Customer’s Model 787-8 aircraft.
3.2 ETOPS Maintenance Planning Assistance. Upon request, Boeing [*******************************************************] resulting from minor model differences between the 787-9 Aircraft and Customer’s Model 787-8.
3.3 GSE/Shops/Tooling Consulting. Upon request, Boeing will provide [******************************************************] resulting from the minor model differences between the 787-9 Aircraft and Customer’s Model 787-8 aircraft.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 2 BOEING PROPRIETARY 3.4 Flight Operations Services. Boeing will [**********************************] provided with previously delivered Model 787-8 aircraft.
3.5 Technical Data and Maintenance Information. Boeing will [*******************************************] equivalent to that traditionally provided. Boeing (i) will provide such [*********************] through [******************], and (ii) reserves the right to [***************************], both at its sole discretion. Boeing may elect to fulfill this obligation by revising, as applicable, previously provided [*********************] information.
3.6 Spares. Boeing will [***********************************************].
4. Assignment.
Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer becoming the owner or operator of the 787-9 Aircraft and cannot be assigned in whole or, in part.
5. Confidential Treatment.
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who are under an obligation not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 3 BOEING PROPRIETARY Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
Attachment
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 4 BOEING PROPRIETARY ATTACHMENT 787 DIFFERENCES TRAINING POINTS MENU
Per Class Student 787 Training Courses Maximum [*********]* Maintenance 787-8 to 787-9 or 787-9 to 787-8 Maintenance Training Differences Class [***] [***]
[*********] are based upon training conducted according to Boeing’s standard training courses. Extended or modified courses will require point adjustment to reflect altered work statement or duration.
The courses and products listed in this Attachment are subject to change from time to time as new courses are added and courses are removed. Boeing reserves the right to change course offering at its own discretion.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 5 BOEING PROPRIETARY XIA-PA-03586-LA-1501316
Xiamen Airlines 22 Dailiao Road Xiamen, 361006 Fujian Province People’s Republic of China
Subject: Special Matters – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
1. [***************].
1.1 [*********************]. At the time of delivery of each 787-9 Aircraft, Boeing will [*******************************] in the [*********************************].
1.2 [*********************]. At the time of delivery of each 787-9 Aircraft, Boeing will [*******************************] in the [*********************************].
1.3 [*********************]. At the time of delivery of each 787-9 Aircraft, Boeing will [*******************************] in the [*********************************].
1.4 [*********************]. At the time of delivery of each 787-9 Aircraft, Boeing will [*******************************] in the [*********************************].
1.5 [*********************]. At the time of delivery of each 787-9 Aircraft, Boeing will [*******************************] in the [*********************************].
1.6 [*********************]. At the time of delivery of each 787-9 Aircraft, Boeing will [*******************************] in the [*********************************].
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 6 BOEING PROPRIETARY 2. [******************].
Unless otherwise noted, the amounts of the [***************] stated in paragraphs 1.1 through 1.6 of this Letter Agreement are in [***************] and will [***************] to the [***************] of the respective 787-9 Aircraft delivery pursuant to the [***************] set forth in the Purchase Agreement applicable to the 787-9 Aircraft. The [***************] may, at the election of Customer, be (i) applied against the 787-9 [***************] of the respective 787-9 Aircraft at the [***************], or (ii) used for the [***************] ([***************]).
3. [*************].
As a special consideration for [***************] of the [***************] 787-9 Aircraft listed in Table 2 to the Purchase Agreement which support Customer’s launch of international operations, Boeing is pleased to [***************] in accordance with the terms under letter agreement to the Purchase Agreement XIA-PA-03586-LA-1501314, [***************]. Generally, under the terms of the above [***************] letter agreement, there is a [***************] and [***************] for [***************].
4. 787-9 Customer Support Matters.
As a special consideration for Customer’s purchase of the 787-9 Aircraft which supplement its fleet of six (6) Model 787-8 aircraft and to address the Customer’s additional training requirements a larger 787 fleet demands, Boeing is pleased to [***************] an [***************] per [***************] 787-9 Aircraft for [***************] for use in accordance with the terms under letter agreement to the Purchase Agreement XIA- PA-03586-LA-1501315, Customer Support Matters – Model 787-9 Aircraft.
5. Purchase Right 787-9 Aircraft Credit Memorandum.
At time of delivery of any Purchase Right 787-9 Aircraft, under the terms of letter agreement to the Purchase Agreement XIA-PA-03586-LA-1501321 title “Right to Purchase Additional Model 787-9 Aircraft”, Boeing will provide a [***************] that will be determined by [***************] [***************] at the [***************] for the [***************] 787-9 aircraft by [***************]. This [***************] will be [***************] and will [***************] in accordance with the [***************].
6. Assignment.
Unless otherwise noted herein, the [***************] described in this Letter Agreement are provided as a financial accommodation to Customer and in consideration of Customer’s taking title to the 787-9 Aircraft at time of delivery and becoming the operator of the 787-9 Aircraft. This Letter Agreement cannot be assigned, in whole or in part, without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 7 BOEING PROPRIETARY 7. Confidentiality
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing. In addition to any equitable relief that may be available to Boeing in the event of a breach of this clause, Boeing may rescind the Basic Credit Memorandum contained in paragraph 1.1 above, in the event of any unauthorized disclosure by Customer.
Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 8 BOEING PROPRIETARY XIA-PA-03586-LA-1501317
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Liquidated Damages – Non-Excusable Delay – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 Aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
Definition of Terms:
Non-Excusable Delay: Delay in delivery of any 787-9 Aircraft beyond the last day of the delivery month (Scheduled Delivery) established in the Purchase Agreement by any cause that is not an Excusable Delay pursuant to Article 7 of the AGTA and for which Customer is otherwise entitled to a remedy from Boeing pursuant to applicable law.
1. [****************].
Boeing agrees to [********] Customer [************] for [************] of Non-Excusable Delay in [************] (collectively the [************]). The amount of liquidated damages will be derived from data in the most recent [************], [************], and [************] (together, "[************]") publications at the time Customer receives notice of a Non-Excusable Delay from Boeing. The [************] for the [************] published [************] for the Boeing Model 787-9 aircraft will be [************] to determine the [************] ([************]). In no event will [************] exceed an aggregate sum of [************] ([************]). Liquidated Damages will [************] of the Aircraft.
2. [*************].
In addition to the Liquidated Damages in paragraph 1, for [************] of Non-Excusable Delay commencing [************] after the Scheduled Delivery, Boeing will [************] as follows ([************]):
The product of the [************] ([************]) [************], or [************], as the case may be) [************] received by Boeing for such 787-9 Aircraft. The [************] in effect for [************] shall be computed [************] as [************], effective the [************] of the [************] of the scheduled delivery date of the 787-9 Aircraft and reset [************].
Such interest will be [************] and [************] at actual delivery.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
Page 9 BOEING PROPRIETARY 3. [********************].
Customer will not [************] to [************] of any 787-9 Aircraft because of a Non-Excusable Delay unless and until the aggregate duration of the Non-Excusable Delay for such 787-9 Aircraft [************] ([************]). Within [************] of receipt of written notice from Boeing that delivery of an 787-9 Aircraft will be [************] the Non-Excusable [************], either party [************] the Purchase Agreement as to such 787-9 Aircraft [************] notice [************]. If neither Party [************] within [************], then the Purchase Agreement will remain in effect for that 787-9 Aircraft.
4. [*******************].
If the Purchase Agreement [************] with respect to any 787-9 Aircraft for a Non-Excusable Delay, [************]:
(i) [************] at the later to occur of: ([************] of the Scheduled Delivery [************], or (b) [************] the effective date of the [************].
(ii) Promptly for [************] and [************] as described above, except the period [************] will end on the date Boeing [************], excluding the [************].
(iii) Promptly for the [******************************] by Boeing for such 787-9 Aircraft.
5. Exclusive Remedies.
The remedies set forth in this Letter Agreement are Customer’s exclusive remedies for a Non-Excusable Delay and are in lieu of all other damages, claims, and remedies of Customer arising at law or otherwise for any Non-Excusable Delay in the 787-9 Aircraft delivery. Customer hereby waives and renounces all other claims and remedies arising at law or otherwise for any such Non-Excusable Delay.
6. Assignment.
Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer’s becoming the operator of the 787-9 Aircraft and cannot be assigned in whole or, in part.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
Page 10 BOEING PROPRIETARY 7. Confidential Treatment.
The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
Page 11 BOEING PROPRIETARY XIA-PA-03586-LA-1501318
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Aircraft Performance Guarantees – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
Boeing agrees to provide Customer with the performance guarantees in the Attachment. These guarantees are exclusive and expire upon delivery of the Aircraft to Customer.
8. Assignment.
Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer becoming the operator of the Aircraft and cannot be assigned in whole or, in part.
9. Confidential Treatment.
The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
Page 12 BOEING PROPRIETARY Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
Attachment
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
Page 13 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
MODEL 787-9 PERFORMANCE GUARANTEES
FOR XIAMEN AIRLINES
SECTION CONTENTS
1 AIRCRAFT MODEL APPLICABILITY
2 FLIGHT PERFORMANCE
3 AIRCRAFT CONFIGURATION
4 GUARANTEE CONDITIONS
5 GUARANTEE COMPLIANCE
6 EXCLUSIVE GUARANTEES
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
BOEING PROPRIETARY 1 AIRCRAFT MODEL APPLICABILITY
The guarantees contained in this Attachment (the "Performance Guarantees") are applicable to the 787-9 Aircraft with a maximum takeoff weight of [***************], a maximum landing weight of [***************], and a maximum zero fuel weight of [***************], and equipped with Boeing furnished GEnx-1B74/75 engines.
2 FLIGHT PERFORMANCE
2.1 Takeoff
The FAA approved takeoff gross weight at the start of ground roll, at a temperature of [***************], at an altitude of [***************] and satisfying the conditions defined below, and using maximum takeoff thrust, shall not be less than the following guarantee value:
GUARANTEE: [***************]
Conditions:
The takeoff runway available (TORA) is [***************].
The takeoff distance available (TODA) is [***************].
The accelerate-stop distance available (ASDA) is [***************].
The runway slope is [***************].
2.2 Landing
The FAA approved landing gross weight on a [***************] runway, at a temperature of [***************] and at an altitude of [***************], shall not be less than the following guarantee value:
GUARANTEE: [***************]
2.3 Mission
2.3.1 Mission Block Fuel
The block fuel for a stage length of [***************] in still air with a [***************] using the conditions and operating rules defined below, shall not be more than the following guarantee value:
NOMINAL: [***************] TOLERANCE: [***************] GUARANTEE: [***************]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 2 BOEING PROPRIETARY Conditions and operating rules:
Stage Length: The stage length is defined as the sum of the distances for the climbout maneuver, climb, cruise, and descent.
Block Fuel: The block fuel is defined as the sum of the fuel used for taxi-out, takeoff and climbout maneuver, climb, cruise, descent, approach and landing maneuver, and taxi-in.
Takeoff: The airport altitude is sea level.
The takeoff gross weight is not limited by the airport conditions.
Maximum takeoff thrust is used for the takeoff.
The takeoff gross weight shall conform to FAA Regulations.
Climbout Following the takeoff to 35 feet, the Aircraft accelerates to the recommended speed of 250 KCAS while climbing to 1,500 feet above the Maneuver: departure airport altitude and retracting flaps and landing gear.
Climb: The Aircraft climbs from 1,500 feet above the departure airport altitude to 10,000 feet altitude at the recommended speed of 250 KCAS.
The Aircraft then accelerates at a rate of climb of 500 feet per minute to the recommended climb speed for minimum block fuel.
The climb continues at the recommended climb speed for minimum block fuel until 0.85 Mach number is reached. The climb continues at 0.85 Mach number to the initial cruise altitude.
The temperature is standard day during climb.
Maximum climb thrust is used during climb.
Cruise: The Aircraft cruises at 0.85 Mach number.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 3 BOEING PROPRIETARY The initial cruise altitude is 36,000 feet.
A step climb or multiple step climbs of 2,000 feet altitude may be used when beneficial to minimize fuel burn.
The temperature is standard day during cruise.
The cruise thrust is not to exceed maximum cruise thrust except during a step climb when maximum climb thrust may be used.
Descent: The Aircraft descends from the final cruise altitude at 250 KCAS to an altitude of 1,500 feet above the destination airport altitude.
Throughout the descent, the cabin pressure is controlled to a maximum rate of descent equivalent to 300 feet per minute at sea level.
The temperature is standard day during descent.
Approach The Aircraft decelerates to the final approach speed while extending landing gear and flaps, then descends and lands. and Landing Maneuver:
The destination is a sea level airport.
Fixed Allowances: For the purpose of this guarantee and for the purpose of establishing compliance with this guarantee, the following shall be used as fixed quantities and allowances:
Taxi-Out: Fuel 438 Kilograms
Takeoff and Climbout Maneuver: Fuel 592 Kilograms Distance 4.1 Nautical Miles
Approach and Landing Maneuver: Fuel 141 Kilograms
Taxi-In (shall be consumed from the reserve fuel): Fuel 132 Kilograms
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 4 BOEING PROPRIETARY Usable reserve fuel remaining upon completion of the approach and landing maneuver: 9,793 Kilograms
For information purposes, the reserve fuel is based on a standard day temperature and a) a contingency fuel allowance equivalent to 10 percent of the trip time from takeoff through the completion of the approach and landing maneuver at the destination airport, starting at the end of the mission cruise at an LRC Mach number, b) a missed approach and flight to a 200 nautical mile alternate, c) an approach and landing maneuver at the alternate airport, and d) a 30 minute hold at 1,500 feet above a sea level alternate airport.
2.3.2 Operational Empty Weight Basis
The Operational Empty Weight (OEW) derived in Paragraph 2.3.3 is the basis for the mission guarantee of Paragraph 2.3.1.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 5 BOEING PROPRIETARY 2.3.3 787-9 Weight Summary - Xiamen Airlines
Kilograms
Standard Model Specification MEW [***************] 787 Airplane Configuration Specification 787B1-4102 Rev P, dated December 5, 2014 Baseline Airplane Improvements and Production Changes [***************] 320 (36 CC / 284 YC) Interior GEnx Engines [***************] Maximum Taxi Weight [***************] Fuel Capacity
Changes for Xiamen Airlines* Interior Change to 286 Passengers ( 30 CC / 256 YC ) [***************] Reference LOPA B8711967 Selected MTW: 248115 kg [***************] In-Flight Entertainment System Less Seat Mounted Equipment [***************] Flight Crew Rest [***************]6 Attendant Crew Rest [***************] Customer Options Allowance [***************] Xiamen Airlines Manufacturer's Empty Weight (MEW) [***************]
Standard and Operational Items Allowance (Paragraph 2.3.4) [***************]
Xiamen Airlines Operational Empty Weight (OEW) [***************]
Quantity Kilograms Kilograms
Seat Weight Included* [*********]
Business Class Double [*********] [*********]
Economy Class Double - Aft Row [*********] [*********] Economy Class Triple - Front Row [*********] [*********] Economy Class Triple [*********] [*********] Economy Class Triple in Front of Double [*********] [*********] Economy Class Triple - Aft Row [*********] [*********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 6 BOEING PROPRIETARY 2.3.4 Standard and Operational Items Allowance
Quantity Kilograms Kilograms Kilograms
Standard Items Allowance [*******]
Unusable Fuel [*****] Oil [*****] Oxygen Equipment [*****] Miscellaneous Equipment [*****] Galley Structure & Fixed Inserts [*****]
Operational Items Allowance [*****]
Crew and Crew Baggage [*****] [*****] Flight Crew (Inc. Pilot Flight Bag) (3 @ 95.3 kg. ea.) [*****] [*****] Cabin Crew (Inc. Flight Att. Kit) (12 @ 81.6 kg. ea.) [*****] [*****] Baggage (15 @ 13.6 kg. ea.) [*****] [*****] Catering Allowance & Removable Inserts: 2 Meal Service [*****] Business Class [*****] [*****] Economy Class [*****] [*****] Passenger Service Equipment (286 @ 1.36 kg. ea.) [*****] Potable Water - (794 Liters) [*****] Waste Tank Disinfectant [*****] Emergency Equipment (Includes Over Water Equip.) [*****] Cargo System [*****] Pallets (6 @ 131.5 kg ea.) [*****] Containers (16 @ 90.7 kg ea.) [*****] Total Standard and Operational Items Allowance [*****]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 7 BOEING PROPRIETARY 3 AIRCRAFT CONFIGURATION
3.1 The guarantees contained in this Attachment are based on the Aircraft configuration as defined in Boeing Document [*******************], "787 Airplane Configuration Specification", dated [****************], plus any changes mutually agreed to or otherwise allowed by the Purchase Agreement to be incorporated into the original release of the Customer’s Detail Specification (hereinafter referred to as the Detail Specification). Appropriate adjustment shall be made for changes in such Detail Specification approved by the Customer and Boeing or otherwise allowed by the Purchase Agreement which cause changes to the flight performance and/or weight and balance of the Aircraft. Such adjustment shall be accounted for by Boeing in its evidence of compliance with the guarantees.
3.2 The specified payload of the Paragraph 2.3.1 block fuel guarantee will be adjusted by Boeing for the effect of the following on OEW in its evidence of compliance with the guarantees:
(1) Changes to the Detail Specification or any other changes mutually agreed upon between the Customer and Boeing or otherwise allowed by the Purchase Agreement.
(2) The difference between the component weight allowances given in Appendix E of the Detail Specification and the actual weights.
4 GUARANTEE CONDITIONS
4.1 All guaranteed performance data are based on the International Standard Atmosphere (ISA) and specified variations therefrom; altitudes are pressure altitudes.
4.2 The Federal Aviation Administration (FAA) regulations referred to in this Attachment are, unless otherwise specified, the 787-9 Certification Basis regulations specified in the Type Certificate Data Sheet T00021SE, Revision 12, dated July 16, 2014.
4.3 In the event a change is made to any law, governmental regulation or requirement, or in the interpretation of any such law, governmental regulation or requirement that affects the certification basis for the Aircraft as described in Paragraph 4.2, and as a result thereof, a change is made to the configuration and/or the performance of the Aircraft in order to obtain certification, the guarantees set forth in this Attachment shall be appropriately modified to reflect any such change.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 8 BOEING PROPRIETARY 4.4 The takeoff and landing guarantees, and the takeoff portion of the mission guarantee are based on hard surface, level and dry runways with no wind or obstacles, no clearway or stopway, [*************], with anti-skid operative, and with the Aircraft center of gravity at the most forward limit unless otherwise specified. The takeoff performance is based on engine power extraction for normal operation of the air conditioning with thermal anti-icing turned off and the Auxiliary Power Unit (APU) turned off unless otherwise specified. The improved climb performance procedure will be used for takeoff as required. The landing performance is based on the use of automatic spoilers.
4.5 The climb, cruise and descent portions of the mission guarantee include allowances for normal power extraction and engine power extraction for normal operation of the air conditioning system. Normal operation of the air conditioning system shall be defined as pack switches in the "Auto" position, the temperature control switches in the "Auto" position that results in a nominal cabin temperature of 75°F, and all air conditioning systems operating normally. No engine power extraction for thermal anti-icing is provided unless otherwise specified. The APU is turned off unless otherwise specified.
4.6 The climb, cruise and descent portions of the mission guarantee are based on an Aircraft center of gravity location of [**************] of the mean aerodynamic chord.
4.7 Performance, where applicable, is based on a fuel Lower Heating Value (LHV) of [*******************] and a fuel density of [******************]
5 GUARANTEE COMPLIANCE
5.1 Compliance with the guarantees of Section 2 shall be based on the conditions specified in those sections, the Aircraft configuration of Section 3 and the guarantee conditions of Section 4.
5.2 Compliance with the takeoff and landing guarantees and the takeoff portion of the mission guarantee shall be based on the FAA approved Airplane Flight Manual for the Model 787-9.
5.3 Compliance with the climb, cruise and descent portions of the mission guarantee shall be established by calculations based on flight test data obtained from an aircraft in a configuration similar to that defined by the Detail Specification.
5.4 The OEW used for compliance with the mission guarantee shall be the actual MEW plus the Standard and Operational Items Allowance in Appendix E of the Detail Specification.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 9 BOEING PROPRIETARY 5.5 The data derived from tests shall be adjusted as required by conventional methods of correction, interpolation or extrapolation in accordance with established engineering practices to show compliance with these guarantees.
5.6 Compliance shall be based on the performance of the airframe and engines in combination, and shall not be contingent on the engine meeting its manufacturer's performance specification.
6 EXCLUSIVE GUARANTEES
The only performance guarantees applicable to the Aircraft are those set forth in this Attachment.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 10 BOEING PROPRIETARY XIA-PA-03586-LA-1501319
Xiamen Airlines 22 Dailiao Road Xaimen, Fujian Province, 361006 People’s Republic of China
Subject: Agreement for Deviation from the Block Fuel Guarantee – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 Aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
The Attachment to letter agreement No. XIA-PA-03586-LA-1501318 to the Purchase Agreement contains performance guarantees (Performance Guarantees). Paragraph 2.3.1 of the Performance Guarantees includes a mission block fuel guarantee (Block Fuel Guarantee) applicable to the 787-9 Aircraft in accordance with such Performance Guarantees. Boeing offers the following items in the event that the guarantee compliance report furnished to Customer for any 787-9 Aircraft pursuant to Article 5.4 of the AGTA shows a demonstrated value worse than the Block Fuel Guarantee value (Compliance Deviation).
1. Demonstration of Compliance.
Article 5.4 of the AGTA and the Performance Guarantees provide a procedure for demonstration of compliance with the Performance Guarantees prior to 787-9 Aircraft delivery. That method will be used to demonstrate compliance with the Block Fuel Guarantee.
2. Rights and Obligations in the Event of a Compliance Deviation.
2.1 787-9 Aircraft Delivery. In the event of a Compliance Deviation for any 787-9 Aircraft, at the time Boeing tenders that 787-9 Aircraft for delivery, Boeing will provide the applicable remedies set forth in paragraph 2.2 and/or section 3. Customer cannot refuse to accept delivery of such 787-9 Aircraft because of such Compliance Deviation.
2.2 Post Delivery Improvement to Reduce or Eliminate the Compliance Deviation. In the event of a Compliance Deviation for any 787-9 Aircraft, the following terms and conditions will apply:
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 11 BOEING PROPRIETARY 2.2.1 Boeing may design, or may cause to be designed by the engine manufacturer, airframe improvement parts and/or engine improvement parts (Improvement Parts) which, when installed in such 787-9 Aircraft, would reduce or eliminate the Compliance Deviation.
2.2.2 If Boeing elects to provide, or to cause to be provided, Improvement Parts for such 787-9 Aircraft, then Customer and Boeing will mutually agree upon the details of an Improvement Parts program. Improvement Parts will be [**************]; except Improvement Parts that are provided by the engine manufacturer will [******************] proportional to the remaining useful life of the part being replaced. Boeing and/or engine manufacturer, as applicable, will provide reasonable support for such a program at no charge to Customer.
2.2.3 If Customer elects to install Improvement Parts in such 787-9 Aircraft, they will be installed within [**************] after the delivery of such Improvement Parts to Customer if such installation can be accomplished during 787-9 Aircraft line maintenance. Improvement Parts which cannot be installed during 787-9 Aircraft line maintenance will be installed within a mutually agreed period of time. All Improvement Parts will be installed in accordance with Boeing and engine manufacturer instructions.
2.2.4 Boeing will provide and/or will cause engine manufacturer to [****************] of Customer’s reasonable [********************] to install Improvement Parts at the [*************************************] between Boeing and Customer or engine manufacturer and Customer, as applicable. Improvement Parts related to engines will apply also to spare engines on terms not less favorable to Customer. Boeing and/or the engine manufacturer, as applicable, will give Customer reasonable advance written notice of the estimated on-dock date at Customer’s maintenance base for any such Improvement Parts. Customer’s claim for reimbursement must reference this Letter Agreement and be submitted to Boeing Warranty and Product Assurance Contracts using established warranty procedures and other terms identified in the Improvement Parts program contemplated in paragraph 2.2.2 herein.
3. Payments.
In the event Boeing has not provided, or caused to be provided by the engine manufacturer, Improvement Parts which eliminate the Compliance Deviation, then Boeing will provide only the remedies described in this section 3.
3.1 Annual Excess Fuel Burn Amount. Boeing will pay to Customer, for a period not exceeding [**************] the delivery of each 787-9 Aircraft, [***************************************] for the immediately preceding calendar year (Annual Period), as adjusted, if at all, pursuant to paragraph 3.3 below.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 12 BOEING PROPRIETARY 3.1.1 The Annual Excess Fuel Burn Amount is the sum of each Monthly Excess Fuel Burn Amount (as defined below) for all months in such Annual Period. The Monthly Excess Fuel Burn Amount is defined as and will be calculated in accordance with the following formula:
Monthly Excess Fuel Burn Amounty = [****************************************]
The following definitions will apply herein:
BFD = the average block fuel deviation, in percent. Only positive values of BFD will be used.
BFg = The Block Fuel Guarantee value for paragraph 2.3.1 of the Performance Guarantees shown in the guarantee compliance report and calculated in accordance with section 1 above.
BFd = The demonstrated block fuel value for paragraph 2.3.1 of the Performance Guarantees shown in the guarantee compliance report and calculated in accordance with section 1 above.
FLTFUELy = Total fuel burned (USG) by the applicable 787-9 Aircraft for month (y) as determined by Customer’s monthly fuel records.
FUELCOSTy = The average fuel cost in each month (y) for the applicable 787-9 Aircraft in U.S. Dollars per USG as determined by Customer’s monthly fuel records.
3.1.2 Customer will provide to Boeing, within [***************] following the end of each Annual Period, the FLTFUELy and FUELCOSTy data (Fuel Data) in a single summarized submittal for all applicable 787-9 Aircraft.
3.1.3 Boeing will review the Fuel Data. At its option, Boeing may request additional information from Customer to further substantiate the Fuel Data. Such additional information will not be unreasonably requested by Boeing, nor unreasonably withheld by Customer.
3.1.4 In the event Customer does not provide the Fuel Data within the [*************] requirement set forth above for any Annual Period, Customer will forfeit any and all rights to payment from Boeing for any such non-provided Fuel Data, and Boeing will have no further obligation to pay Customer for such non-provided Fuel Data.
3.2 Credit Memorandum. Amounts payable to Customer pursuant to this section 3 will be [*****************] issued by [*********************], which may be used [*************************************************************], as applicable. In no event will the total aggregate amount of such credit memoranda exceed [******************************************] for each 787-9 Aircraft [***************]. No payments will be made pursuant to this section 3 for any 787-9 Aircraft not operated by Customer.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 13 BOEING PROPRIETARY 3.3 Credit Adjustments. The amount of performance improvement attributable to any Improvement Parts will be determined by Boeing analysis based on data certified to be correct by Boeing. The amount of such improvement will be deemed to be the amount of improvement as calculated using reasonable engineering interpretations based on the data furnished pursuant to Article 5.4 of the AGTA and the data furnished pursuant to this paragraph 3.3. If Improvement Parts are installed in an 787-9 Aircraft as set forth in paragraph 2.2 above, [********************] of the [******************************] will be reduced by an amount consistent with the reduction in the Compliance Deviation after such Improvement Parts are installed. If Customer elects not to install Improvement Parts in any applicable 787-9 Aircraft as set forth in paragraph 2.2 above, subsequent [**********************] will be [**************] consistent with the [**************************] which would have been realized had such Improvement Parts been installed.
4. Duplication of Benefits.
Boeing and Customer agree it is not the intent of the parties to provide benefits hereunder that duplicate benefits to be provided (a) by Boeing under the Purchase Agreement, or any other agreement between Boeing and Customer, or (b) by engine manufacturer under any agreement between engine manufacturer and Customer, due to the 787-9 Aircraft not satisfying any performance metric similar to the Block Fuel Guarantee or any performance metric that otherwise impacts fuel burn. Boeing may offset its obligation to provide benefits hereunder against the benefits provided or to be provided to Customer by engine manufacturer or Boeing pursuant to such other guarantee.
5. Exclusive Remedy.
Customer agrees that the remedies contained in Sections 2 and 3 herein are Customer’s exclusive remedies for purposes of resolving all issues with respect to the Performance Guarantees of Customer’s 787-9 Aircraft and are in lieu of all other rights, remedies, claims and causes of action Customer may have, arising at law or otherwise, in connection therewith and will constitute complete, full and final settlement and satisfaction of any and all of Boeing’s obligations and liabilities to Customer in connection therewith. Customer releases Boeing and its successors, affiliates and subsidiaries from all present, past and future rights, remedies, claims and causes of action, whether arising at law or otherwise, known or unknown, relating to or arising from such Performance Guarantees.
6. Assignment.
Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer becoming the operator of the 787-9 Aircraft and cannot be assigned in whole or, in part.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 14 BOEING PROPRIETARY 7. Confidential Treatment.
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who are under an obligation not to disclose its contents to any other person or entity without the prior written consent of Boeing.
If the foregoing correctly sets forth your understanding of our agreement with respect to the matters treated above, please indicate your acceptance and approval below.
Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 15 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
XIA-PA-03586-LA-1501320
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Delivery Flight Performance Evaluation Program – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used herein and in the Purchase Agreement, and not defined herein, shall have the same meaning as in the Purchase Agreement.
In this offer, the term “787-9 Aircraft” means the first Boeing model 787-9 aircraft delivered to Customer under Purchase Agreement No. PA-03586.
1. Delivery Flight Performance Evaluation Program.
In order for Boeing to support Customer’s request for delivery flight cruise fuel mileage data on the 787-9 Aircraft, Customer has agreed to allow Boeing employee(s) on its delivery flight of the 787-9 Aircraft for the purpose of gathering cruise fuel mileage data (Delivery Flight Performance Evaluation Program).
1.1 Statement of Work.
1.1.1 Boeing will provide the services of [**************************] Boeing performance engineer(s) (Boeing Employees) to accompany the delivery flight of the 787-9 Aircraft for the purpose of acquiring cruise fuel mileage data. (Evaluation Data).
1.1.2 Boeing will [**************************] in accordance with the normal engineering practices as detailed in Boeing [**************************] and as may be revised by Boeing from time to time.
1.1.2.1 Boeing will use the procedures defined in Boeing [**************************] to collect data and will use reasonable efforts to collect such data during times when atmospheric and airplane stability best meets the criteria set forth in such document.
1.1.2.2 Relevant data will be recorded from airplane systems with appropriate calibration corrections applied to such data. The applicable instruments shall be calibrated in Boeing laboratories or equivalent prior to the test.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
BOEING PROPRIETARY 1.1.3 The Boeing Employees, working with Customer flight crew, will seek to obtain a minimum of [**************************] Mach number conditions at [**************************] subject to air traffic control and operational restrictions. Boeing understands that Customer’s flight plan will take precedence over the collection of data by Boeing Employees. The performance level will be established using the procedure documented above in paragraph 1.1.2.
1.1.4 Upon Customer’s request the Boeing Employees will meet with Customer and provide Customer with a preliminary report of the analysis of the Evaluation Data [**************************] following the delivery flight.
1.1.5 As soon as practicable, but not more than [**************************] following the delivery flight of the 787-9 Aircraft, Boeing will provide to Customer a final written report for the 787-9 Aircraft delivery flight, containing a detailed analysis of Evaluation Data.
1.2 Customer Responsibilities. Customer will ensure that the Boeing Employees have the needed access to the flight deck prior to and during the delivery flight and that the customer’s operating crew are briefed on the nature and scope of the Boeing Employees’ responsibilities and methods. The customer is also responsible for acquiring regulatory authority approval for delivery flight use of the [***********************************************]. Up to [**************************] of Customer’s personnel (including at least one performance engineer) may be aboard such flight as witnesses.
1.3 Evaluation Period. The Boeing Employee(s) will obtain Delivery Data on the delivery flight of the 787-9 Aircraft as specified herein.
2. Price.
The activities described herein are provided by each of the parties [**************************].
3. Entire Agreement.
This Letter Agreement contains the entire agreement between the parties and supersedes all previous proposals, understandings, commitments or representations whatsoever, oral or written, with respect to the subject matter hereof, and may be changed only in writing signed by authorized representatives of the parties.
4. Confidential Treatment.
Customer understands and agrees that this Letter Agreement is considered by Boeing to be confidential. Customer agrees that it will treat this Letter Agreement and the information contained herein as confidential and will use the same degree of care to prevent unauthorized disclosure to and use of the information contained herein by any third party as Customer would use to prevent disclosure and use of its own data, documents and information of the same or similar nature and which it considers proprietary or confidential.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 2 BOEING PROPRIETARY Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 3 BOEING PROPRIETARY XIA-PA-03586-LA-1501321
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Promotional Support – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
Boeing and Customer wish to enter into an agreement pursuant to which each party will contribute equally to promotional programs in support of the entry into service of the 787-9 Aircraft as more specifically provided below.
1. Definitions.
1.1 Commitment Limit shall have the meaning set forth in Article 2, below.
1.2 Covered 787-9 Aircraft shall mean those 787-9 Aircraft identified on Table 2 to the Purchase Agreement as of the date of signing of this Letter Agreement.
1.3 Performance Period shall mean the period beginning at the date of this Letter Agreement and ending [******************] after the scheduled delivery month of the first Covered 787-9 Aircraft.
1.4 Promotional Support shall mean mutually agreed marketing and promotion programs that promote the entry into service of the Covered 787-9 Aircraft such as marketing research, tourism development, corporate identity, direct marketing, videotape or still photography, planning, design and production of collateral materials, management of promotion programs, advertising campaigns or such other marketing and promotional activities as the parties may mutually agree.
1.5 Qualifying Third Party Fees shall mean fees paid by Customer to third party providers for Promotional Support provided to Customer anytime after signing of this Purchase Agreement and continuing thru the end of the Performance Period.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 4 BOEING PROPRIETARY 2. Commitment.
As more particularly set forth in this Letter Agreement, Boeing agrees to provide Promotional Support to Customer during the Performance Period in a value not to exceed [**************************************] for the [*********************] and not to [**************************] per [******************] each Covered 787-9 Aircraft delivered to Customer thereafter.
3. Methods of Performance.
3.1 Subject to the Commitment Limit, Boeing will [******************] of Customer’s payments of Qualifying Third Party Fees provided that Customer provides Boeing copies of paid invoices for such Qualifying Third Party Fees no earlier than commencement of the Performance Period and no later than [******************] the delivery of the first Covered 787-9 Aircraft.
3.2 Notwithstanding the above, at Customer’s request and subject to a mutually agreed project, Boeing will provide certain Promotional Support during the Performance Period directly to Customer. The full value of such Boeing provided Promotional Support will be accounted for as part of the Commitment Limit and will correspondingly reduce the amount of Qualifying Third Party [******************] pursuant to Article 3.1 above.
3.3 In the event Customer does not (i) utilize the full amount of the Commitment Limit within the Performance Period or (ii) [******************] for Qualifying Third Party Fees within the required time, as set forth in Article 3.1, Boeing shall [******************] to Customer for such unused Commitment Limit or to [******************] for such Qualifying Third Party Fees, respectively.
4. Project Approval.
Following the execution of this Letter Agreement, a Boeing Airline Marketing Services representative will meet with Customer’s designated representative to review and approve the extent, selection, scheduling, and funds disbursement process for the Promotional Support to be provided pursuant to this Letter Agreement.
5. Assignment.
Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer’s becoming the operator of the 787-9 Aircraft and cannot be assigned in whole or, in part.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 5 BOEING PROPRIETARY 6. Confidential Treatment.
The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 Page 6 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
XIA-PA-03586-LA-1501322
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Right to Purchase Additional Model 787-9 Aircraft
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
1. Right to Purchase Incremental Aircraft.
Subject to the terms and conditions contained herein, in addition to the Aircraft described in Table 2 to the Purchase Agreement as of the date of execution of this Letter Agreement, Customer will have the right to purchase (Purchase Right) [********************] Boeing Model 787-9 aircraft as purchase right aircraft (787-9 Purchase Right Aircraft).
2. Delivery.
The Purchase Right Aircraft are offered subject to available position for delivery during the period [*****************] (Delivery Period).
3. Configuration.
3.1 Subject to the provisions of Article 3.2, below, the configuration for the Purchase Right Aircraft will be the Detail Specification for Model 787-9 aircraft at the revision level in effect at the time of the Notice of Exercise. Such Detail Specification will be revised to include (i) changes applicable to such Detail Specification that are developed by Boeing between the date of the Notice of Exercise (as defined below) and the signing of the Definitive Agreement (as defined below), (ii) changes required to obtain required regulatory certificates, and (iii) other changes as mutually agreed.
3.2 Boeing reserves the right to configure the Purchase Right Aircraft starting from a different configuration specification, provided that it can achieve the same configuration which would result pursuant to the provisions of Article 3.1
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
BOEING PROPRIETARY 4. Price.
4.1 The Airframe Price, Engine Price, if applicable, Optional Features Prices, and Aircraft Basic Price for the Purchase Right Aircraft will be determined in accordance with the provisions of the Purchase Agreement using Boeing’s then current prices as of the date of execution of the Definitive Agreement
4.2 The Airframe Price, Engine Price, if applicable, Optional Features Prices, and Aircraft Basic Price for each of the Purchase Right Aircraft will be adjusted for escalation in accordance with Supplemental Exhibit AE1 of the Purchase Agreement.
5. Payment.
At Definitive Agreement, advance payments will be payable as set forth in Table 2 of the Purchase Agreement. The remainder of the Aircraft Price for each Purchase Right Aircraft will be paid at the time of delivery. The Advance Payment Base Price used to determine the advance payment amounts will be developed in accordance with the terms of the Purchase Agreement and determined at the time of Definitive Agreement.
6. Notice of Exercise and Payment of Deposit.
6.1 Customer may exercise a Purchase Right by giving written notice to Boeing on [*************************************************] prior to the desired delivery month within the Delivery Period, specifying the desired month(s) of delivery within the Delivery Period (Notice of Exercise). Such Notice of Exercise will be accompanied by payment, by electronic transfer to the account specified below, of Boeing’s then standard proposal deposit for model 787-9 aircraft (Deposit) for each Purchase Right Aircraft subject to the Notice of Exercise. The Deposit will be applied against the first advance payment due for each such Purchase Right Aircraft.
JPMorgan Chase Bank SWIFT No. CHASUS33 ABA No. 021000021 Bank Account No. 9101012764
At the time of its receipt of each Notice of Exercise and related Deposit(s), Boeing will advise Customer as to the availability of the delivery month(s) requested.
6.2 If Boeing must make production decisions which would affect the delivery of any or all Purchase Right Aircraft during the Delivery Period, Boeing will provide written notification to Customer and the Delivery Period will be adjusted accordingly. If the new Delivery Period begins [***************************] from the date of Boeing’s notification, Customer will have [*************] from the date of Boeing’s notification in which to submit its Notice of Exercise and Deposit for any eligible delivery month(s) that is [*************************] or less from Boeing’s notification. Upon receipt, Boeing will advise Customer as to the availability of the delivery month(s) requested.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
Page 2 BOEING PROPRIETARY 7. Definitive Agreement.
Following Customer’s exercise of a Purchase Right in accordance with the terms and conditions stated herein and Boeing’s identification of an available delivery position acceptable to Customer, the parties will sign a definitive agreement for the purchase of such Purchase Right Aircraft (Definitive Agreement) [******************************] of such exercise (Purchase Right Exercise). The Definitive Agreement will include the provisions then contained in the Purchase Agreement as modified to reflect the provisions of this Letter Agreement and any additional mutually agreed terms and conditions.
8. General Expiration of Rights.
Each Purchase Right will expire at the time of execution of the Definitive Agreement for the applicable Purchase Right Aircraft, or, if no such Definitive Agreement is executed, [********************].
9. Assignment.
Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer’s becoming the operator of the 787-9 Aircraft and cannot be assigned in whole or, in part.
10. Confidential Treatment.
The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
Page 3 BOEING PROPRIETARY Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
Page 4 BOEING PROPRIETARY Exhibit 4.40
The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
SUPPLEMENTAL AGREEMENT NO. 4
to
Purchase Agreement No. 03586
between
THE BOEING COMPANY
and
XIAMEN AIRLINES
Relating to Boeing Model 787 Aircraft
THIS SUPPLEMENTAL AGREEMENT is made between THE BOEING COMPANY, a Delaware corporation (Boeing), and Xiamen Airlines, with its principal office in the city of Xiamen, Fujian Province, People’s Republic of China (Customer);
Customer and Boeing entered into Purchase Agreement No. 03586, dated May 9, 2011, as amended, and supplemented, (Purchase Agreement) relating to the purchase and sale of Boeing Model 787 aircraft; and this Supplemental Agreement is an amendment to and is incorporated into the Purchase Agreement:
WHEREAS, the parties desire to further amend the Purchase Agreement as set forth herein in order to add the sale of two (2) Model 787-9 aircraft,
NOW, THEREFORE, the parties agree that the Purchase Agreement is amended as set forth below and otherwise agree as follows:
1. Table of Contents.
Remove and replace, in its entirety, the current Table of Contents with the new Table of Contents (attached hereto), to reflect the incorporation of this Supplemental Agreement No. 4 into the Purchase Agreement.
2. Tables.
Remove and replace, in its entirety, the current Table 2 with the new Table 2 (attached hereto) to reflect the incorporation of this Supplemental Agreement No. 4 into the Purchase Agreement.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
BOEING PROPRIETARY 3. Letter Agreements.
Remove, in their entirety, the following Letter Agreements listed below to reflect the incorporation of this Supplemental Agreement No. 4 into the Purchase Agreement.
Removed Letter Agreements Subject
[****************************] [****************************]– Model 787-9
[****************************] [****************************]– Model 787-9
[****************************] [****************************]– Model 787-9
[****************************] [****************************] – Model 787-9
Add, in their entirety, the following Letter Agreements listed below to reflect the incorporation of this Supplemental Agreement No. 4 into the Purchase Agreement.
Added Letter Agreements Subject
[****************************] [****************************]– Model 787-9
[****************************] [****************************]– Model 787-9
[****************************] [****************************]– Model 787-9
[****************************] [****************************]– Model 787-9
4. Miscellaneous.
4.1 The Purchase Agreement is amended as set forth above, and all other terms and conditions of the Purchase Agreement remain unchanged and are in full force and effect. Any Tables of Contents, Tables, Supplemental Exhibits, Letter Agreements or other documents that are listed in the Sections above are incorporated into this Supplemental Agreement by this reference.
4.2 This Supplemental Agreement will become effective upon execution and receipt by both Parties.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501313 R1 SA-4 Open Configuration Matters – Model 787-9 Page 2 BOEING PROPRIETARY AGREED AND ACCEPTED this
Date
THE BOEING COMPANY XIAMEN AIRLINES
Signature Signature
Printed name Printed name
Attorney-in-Fact Title Title
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501313 R1 SA-4 Open Configuration Matters – Model 787-9 Page 3 BOEING PROPRIETARY SA NUMBER ARTICLES
1 Quantity, Model, Description and Inspection 2 Delivery Schedule 3 Price 4 Payment 5 Additional Terms
TABLES
1 Aircraft Information Table 2 Aircraft Information Table – Model 787-9 SA-4
EXHIBITS
A Aircraft Configuration A-1 Aircraft Configuration – Model 787-9 SA-3 B Aircraft Delivery Requirements and Responsibilities
SUPPLEMENTAL EXHIBITS
AE1 Escalation Adjustment/Airframe and Optional Features CS1 Customer Support Document EE1 Engine Escalation/Engine Warranty and Patent Indemnity SLP1 Service Life Policy Components
SA NUMBER LETTER AGREEMENTS
LA-1002938 Payment Matters LA-1002939 787 e-Enabling Software Matters LA-1002940 EULA Special Matters LA-1002941 Liquidated Damages Non-Excusable Delay LA-1002943-R1 Performance Guarantees SA-1 LA-1002944 Post Delivery Software and Data Loading LA-1002945 Promotional Support LA-1002946 Seats and IFE Special Provisions
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501313 R1 SA-4 Open Configuration Matters – Model 787-9 Page 4 BOEING PROPRIETARY SA NUMBER LETTER AGREEMENTS (continued) LA-1002947 787 Spare Parts Commitments LA-1002948 Spare Parts Initial Provisioning LA-1002949 Special Matters LA-1002951-R1 Special Escalation Program SA-1 LA-1002992 AGTA Terms Revisions LA-1003255 Government Approval Matters LA-1104435 Delivery Flight Fuel Mileage Verification LA-1104525 Clarifications and Understandings LA-1104526 Purchase Rights LA-1104527 Cruise Range Remedy LA-1300551 Boeing Purchase of BFE SA-2 LA-1501312 Applicability Matters – Model 787-9 SA-3 LA-1501313 R1 Open Configuration Matters – Model 787-9 SA-4 LA-1501314 R1 Special Escalation Program – Model 787-9 SA-4 LA-1501315 R1 Customer Support Matters – Model 787-9 SA-4 LA-1501316 R1 Special Matters – Model 787-9 SA-4 LA-1501317 Liquidated Damages Non-Excusable Delay – Model 787-9 SA-3 LA-1501318 Performance Guarantees – Model 787-9 SA-3 LA-1501319 Agreement for Deviation from the Block Fuel Guarantee – Model 787-9 SA-3 LA-1501320 Delivery Flight Fuel Mileage Verification – Model 787-9 SA-3 LA-1501321 Promotional Support – Model 787-9 SA-3 LA-1501322 Right to Purchase Additional Model 787-9 Aircraft SA-3
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501313 R1 SA-4 Open Configuration Matters – Model 787-9 Page 5 BOEING PROPRIETARY (REFERENCE ONLY)
REMOVED TABLES & LETTER AGREEMENTS REMOVED BY SA NUMBER
Table 2 Aircraft Information Table_Trent 1000-A SA-1
EE2. Engine Esc/Engine Warranty & Patent Indemnity_Trent 1000-A SA-1
LA-1003275 Alternate Engine Selection SA-1
LA-1002942 787 Open Configuration Matters SA-2
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501313 R1 SA-4 Open Configuration Matters – Model 787-9 Page 6 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
Table 2 to Purchase Agreement No. PA-03586 787-9 Aircraft Delivery, Description, Price and Advance Payments
Airframe Model/MTOW: 787-9 545,000 pounds Detail Specification: 787B1-4102 Rev. R (12/5/2014) Engine Model/Thrust: GENX-1B74/75 74,100 pounds Airframe Price Base Year/Escalation Formula: [**************] [**************] Airframe Price: [**************] Engine Price Base Year/Escalation Formula: [**************] 787 ECI-W Eng Optional Features: [**************] Sub-Total of Airframe and Features: [**************] Airframe Escalation Data: Engine Price (Per Aircraft): [**************] [**************] [**************] Aircraft Basic Price (Excluding BFE/SPE): [**************] [**************] [**************] Buyer Furnished Equipment (BFE) Estimate: [**************] Engine Escalation Data: In-Flight Entertainment (IFE) Estimate: [**************] [**************] [**************] [**************] [**************]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
Escalation Escalation Escalation Estimate Advance Payment Per Aircraft (Amts. Due/Mos. Prior to Delivery): Delivery Number of Factor Factor Adv Payment Base At Signing 24 Mos. 21/18/12/9/6 Mos. Total Date Aircraft (Airframe) (Engine) Price Per A/P [**************] [**************] [**************] [**************] Dec-2016 1 [**************] [**************] [**************] [**************] [**************] [**************] [**************] Jan-2017 1 [**************] [**************] [**************] [**************] [**************] [**************] [**************] Apr-2017 1 [**************] [**************] [**************] [**************] [**************] [**************] [**************] Sep-2017 1 [**************] [**************] [**************] [**************] [**************] [**************] [**************] *Mar-2018 1 [**************] [**************] [**************] [**************] [**************] [**************] [**************] *Apr-2018 1 [**************] [**************] [**************] [**************] [**************] [**************] [**************] Total: 6
Any revision to the above Aircraft deliveries is subject to Boeing’s confirmation related to providing the[*****************************************], Special Escalation Program.
* Delivery date is Nominal and subject to adjustment one month earlier or later at 24 months notice per [**************************************].
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-4 Page 1 BOEING PROPRIETARY XIA-PA-03586-LA-1501313 R1
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Open Configuration Matters – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 Aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
1. Aircraft Delivery Schedule.
The scheduled delivery positions for the Aircraft listed in Table 2 of the Purchase Agreement with delivery dates of March 2018 and April 2018, as of the date of this Letter Agreement, provide the delivery schedule in nominal delivery months (Nominal Delivery Month), [******************************************************]. [***************************] to the Nominal Delivery Month Boeing will provide written notice to Customer with a revised Table 2 of the scheduled delivery month, as necessary, for each Aircraft. Such notice provided by Boeing will constitute an amendment to the Table 2 of the Purchase Agreement.
2. Aircraft Configuration.
2.1 Initial Configuration. The initial configuration of Customer's Model 787-9 Aircraft has been defined by Boeing [******************************************************************************], which reflects the Boeing baseline Model 787-9 [*************************] of the Purchase Agreement. Given the period of time between Purchase Agreement signing and delivery of the first Aircraft, the final configuration of the Customer’s Aircraft has not yet been defined.
2.2 Final Configuration Schedule. Customer and Boeing hereby agree to complete the configuration of the Aircraft using the then-current Boeing configuration documentation (Final Configuration) in accordance with the following schedule:
2.2.1 [**********************************] Aircraft's scheduled delivery month, Boeing and Customer will discuss potential optional features.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501313 R1 SA-4 Open Configuration Matters – Model 787-9 Page 2 BOEING PROPRIETARY 2.2.2 Within [*******************************************************], Boeing will provide Customer with a proposal for those optional features that can be incorporated into the Aircraft during production.
2.2.3 Customer will then have [*****************************] to accept or reject the optional features.
3. Amendment of the Purchase Agreement.
Within [*********************************] Final Configuration, Boeing and Customer will execute a written amendment to the Purchase Agreement which will reflect the following:
3.1 Changes applicable to the basic Model 787 aircraft which are developed by Boeing between the date of signing of the Purchase Agreement and date of Final Configuration;
3.2 Incorporation into [****************] of the Purchase Agreement, by written amendment, those optional features which have been agreed to by Customer and Boeing pursuant to Article 1.2 above (Customer Configuration Changes);
3.3 Revisions to the Performance Guarantees to reflect the effects, if any, on Aircraft performance resulting from the incorporation of the Customer Configuration Changes and inclusion of a mission payload guarantee representing Customer’s operation on the Fuzhou (FOC) to New York (JFK) route; and
3.4 Changes to the [**********************************************************] of the Aircraft to adjust for the difference, if any, [*******************************************************] for [******************************************] and [*************************************] Customer Configuration Changes.
4. Assignment.
Except for an assignment by Customer to a wholly-owned subsidiary as permitted under Article 9, entitled “Assignment, Resale, or Lease” of the AGTA, this Letter Agreement is provided as an accommodation to Customer in consideration of Customer becoming the operator of the 787-9 Aircraft and cannot be assigned in whole or in part.
5. Confidential Treatment.
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501313 R1 SA-4 Open Configuration Matters – Model 787-9 Page 3 BOEING PROPRIETARY Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501313 R1 SA-4 Open Configuration Matters – Model 787-9 Page 4 BOEING PROPRIETARY XIA-PA-03586-LA-1501314 R1
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Special Escalation Program – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
787-9 Aircraft Applicability.
Per the terms of letter agreement to the Purchase Agreement XIA-PA-03586-LA-1501316R1, Special Matters, the terms of this Letter Agreement are applicable only to the six (6) firm 787-9 Aircraft included in Table 2 of the Purchase Agreement (Capped Period) at the time of signing (Program 787-9 Aircraft).
1. [******************].
Boeing will [**********************] in [****************************************] based on Boeing’s then current standard [************************]. Only [**********************] shall be used to conduct the [*********************] performed in accordance with Article 2.1, below, for a given Program 787-9 Aircraft. The [***************************] applicable to a given Program 787-9 Aircraft is set forth in the Attachment.
2. [**********************************************************]
2.1 If [*********************], projects a [*********************] that [*********************] the cumulative [*********************] [*********************], as set forth in the Attachment, for the [*********************] of any Program 787-9 Aircraft that is scheduled to deliver within the time period applicable to [*********************], as set forth in the Attachment, then Boeing [*********************] to the Customer by the [*********************]. Such [*********************] shall, in Boeing's sole discretion, either:
2.1.1 [*********************] applicable to the [*********************] for such affected Program 787-9 Aircraft to [*********************] cumulative [*********************]as set forth in the Attachment; or
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501314 R1 SA-4 Special Escalation Program – Model 787-9 Page 5 BOEING PROPRIETARY 2.1.2 propose a mutually agreeable [*********************].
2.1.3 If neither 2.1.1 or 2.1.2 occurs, then [*********************] to [*********************] Program 787-9 Aircraft.
2.2 If Boeing provides Customer the option described in Article 2.1 above, then Customer shall notify Boeing in writing of its election to exercise the option contained in Article 2.1.1 or 2.1.2 above [*********************] of its receipt of the [*********************] Boeing. In the event Customer exercises its option in accordance with Article 2.1.3 above, then: (i) Boeing [*********************], without [*********************] to [*********************] [*********************] for the [*********************] 787-9 Aircraft, and (ii) Customer [*********************] for any and all [*********************] levied by [*********************] for [*********************]. If requested, Boeing will [*********************] in working with [*********************] to [*********************].
2.2.1 Within [*********************] of Boeing’s receipt of Customer’s [*********************] for any such [*********************] 787-9 Aircraft under Article 2.2 above, Boeing may elect by written notice to Customer [*********************] Customer [*********************] to [*********************] 787-9 Aircraft at [*********************], or [*********************], by Customer.
2.2.2 Should Customer [*********************] to Boeing in accordance with Article 2.2 above, then the [*********************]for the [*********************] and [*********************] for such Program 787-9 Aircraft [*********************] in accordance with [*********************].
2.2.3 If Customer and Boeing [*********************], as described in Article 2.1.2 above, and the [*********************]is [*********************]to the [*********************] [*********************] at delivery of such Program Aircraft, then the [*********************] will be determined as described in paragraph 3 below for such Program Aircraft.
3. [*********************]
If the escalation forecast projects a [*********************] that is [*********************] to the [*********************] [*********************], as set forth in the Attachment, for the scheduled [*********************] of any Program 787-9 Aircraft that is scheduled to deliver within the time period applicable to such [*********************], as set forth in the Attachment, then Boeing [*********************] for the [*********************] and [*********************] of each Program 787-9 Aircraft, in accordance with the terms in both 3.1 and 3.2 below.
3.1 The [*********************] for the [*********************] and [*********************] of each Program 787-9 Aircraft will be capped during the Capped Period at a fixed rate [*********************][*********************] resulting in the [*********************] set forth in the Attachment ([*********************]).
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501314 R1 SA-4 Special Escalation Program – Model 787-9 Page 6 BOEING PROPRIETARY 3.2 In case the [*********************] may drop below the Capped Factor, Boeing will, at time of the Program 787-9 Aircraft [*********************], calculate the [*********************] of the [*********************] and [*********************] using (i) [*********************] in accordance with the provisions of Supplemental Exhibit AE1 to the Purchase Agreement ([*********************]) and (ii) the [*********************]. The [*********************] will include the [*********************] and [*********************] utilizing the [*********************] or the [*********************], whichever [*********************].
4. Applicability to Other Financial Consideration.
The [*********************] for any other sum, identified in the Purchase Agreement as subject to [*********************] pursuant to Supplemental Exhibit AE1, and which pertains to the Program 787-9 Aircraft shall be calculated using the [*********************] established in this Letter Agreement for such Program 787-9 Aircraft notwithstanding any other provisions of the Purchase Agreement to the contrary.
5. Assignment.
Except for an assignment by Customer to a wholly-owned subsidiary as permitted under Article 9, entitled “Assignment, Resale, or Lease” of the AGTA, this Letter Agreement is provided as an accommodation to Customer in consideration of Customer becoming the operator of the Program 787-9 Aircraft and cannot be assigned in whole or in part.
6. Confidential Treatment.
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501314 R1 SA-4 Special Escalation Program – Model 787-9 Page 7 BOEING PROPRIETARY Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
Attachment
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501314 R1 SA-4 Special Escalation Program – Model 787-9 Page 8 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
ATTACHMENT to XIA-PA-03586-LA-1501314 R1
Escalation Forecast & Escalation Notice Date
Applicable to Program 787-9 Aircraft [******] [******] Delivering in Time Period Notice Date Feb 2015 August 2016 through January 2017 [******] Aug 2015 February 2017 through July 2017 [******] Feb 2016 August 2017 through January 2018 [******] Aug 2016 February 2018 through July 2018 [******]
Escalation Factors
Delivery Date [******] [******] Dec-16 [******] [******] Jan-17 [******] [******] Feb-17 [******] [******] Mar-17 [******] [******] Apr-17 [******] [******] May-17 [******] [******] Jun-17 [******] [******] Jul-17 [******] [******] Aug-17 [******] [******] Sep-17 [******] [******] Oct-17 [******] [******] Nov-17 [******] [******] Dec-17 [******] [******] Jan-18 [******] [******] Feb-18 [******] [******] Mar-18 [******] [******] Apr-18 [******] [******] May-18 [******] [******]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
BOEING PROPRIETARY XIA-PA-03586-LA-1501315 R1
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Customer Support Matters – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 Aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
1. Customer currently operates a Model 787-8 aircraft, the same model type as the 787-9 Aircraft. In support of the 787-9 Aircraft, Boeing offers the additional customer support provided in this Letter Agreement.
2. As presented in letter agreement to the Purchase [*********************************************************************************]. Customer may [*****************************] for any of the training courses described on the Attachment to this Letter Agreement [*********************************] on the Attachment or [**************************] described in [*******************************] to the Purchase Agreement. At the end of the [******************************************].
3. Minor Model Difference Training and Entitlements.
3.1 Maintenance Planning Assistance. Upon request, Boeing will provide [*********************************************************************************] resulting from [************************************************] Aircraft and Customer’s [*****************].
3.2 ETOPS Maintenance Planning Assistance. Upon request, Boeing will provide assistance in [********************************************] [***************************] resulting from [*********************************] between the [***************************].
3.3 GSE/Shops/Tooling Consulting. Upon request, Boeing will provide [*********************************************************************************************** *******************************************************************************************].
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501315 R1 SA-4 Customer Support Matters – Model 787-9 Page 2 BOEING PROPRIETARY 3.4 Flight Operations Services. Boeing will [*************************************************************] provided with previously delivered Model 787-8 aircraft.
3.5 Technical Data and Maintenance Information. Boeing will provide [*************************************************] to that traditionally provided. Boeing (i) will provide such data and information through [*********************************], and (ii) [******************************************************************], both at its sole discretion. Boeing may [**************************************************], as applicable, previously provided technical data and maintenance information.
3.6 Spares. Boeing [********************************], the customized Recommended Spares Parts List (RSPL).
4. Assignment.
Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer becoming the owner or operator of the 787-9 Aircraft and cannot be assigned in whole or, in part.
5. Confidential Treatment.
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who are under an obligation not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501315 R1 SA-4 Customer Support Matters – Model 787-9 Page 3 BOEING PROPRIETARY Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
Attachment
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501315 R1 SA-4 Customer Support Matters – Model 787-9 Page 4 BOEING PROPRIETARY ATTACHMENT 787 DIFFERENCES TRAINING POINTS MENU
Per Class Student 787 Training Courses Maximum [*****]* Maintenance 787-8 to 787-9 or 787-9 to 787-8 Maintenance Training Differences Class [***] [***]
*[*************] are based upon training conducted according to Boeing’s standard training courses. Extended or modified courses will require point adjustment to reflect altered work statement or duration.
The courses and products listed in this Attachment are subject to change from time to time as new courses are added and courses are removed. Boeing reserves the right to change course offering at its own discretion.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501315 R1 SA-4 Customer Support Matters – Model 787-9 Page 5 BOEING PROPRIETARY XIA-PA-03586-LA-1501316 R1
Xiamen Airlines 22 Dailiao Road Xiamen, 361006 Fujian Province People’s Republic of China
Subject: Special Matters – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
1. Credit Memoranda.
1.1 [**************************]. At [**************************] of each 787-9 Aircraft, Boeing [**************************] in the amount of [**************************].
1.2 [**************************]. At [**************************] of each 787-9 Aircraft, Boeing [**************************] in the amount of [**************************].
1.3 [**************************]. At [**************************] of each 787-9 Aircraft, Boeing [**************************] in the amount of [**************************].
1.4 [**************************]. At [**************************] of each 787-9 Aircraft, Boeing [**************************] in the amount of [**************************].
1.5 [**************************]. At [**************************] of each 787-9 Aircraft, Boeing [**************************] in the amount of [**************************].
1.6 [**************************]. At [**************************] of each 787-9 Aircraft, Boeing [**************************] in the amount of [**************************].
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501316 R1 SA-4 Special Matters – Model 787-9 Page 6 BOEING PROPRIETARY 2. [**************************].
Unless otherwise noted, the amounts of the Credit Memoranda stated in paragraphs 1.1 through 1.6 of this Letter Agreement are [**********************] and will be [**********************] of the respective 787-9 Aircraft delivery pursuant to the [**********************] set forth in the Purchase Agreement applicable to the 787-9 Aircraft. The [**********************] may, at the election of Customer, be (i) applied against the 787-9 [**********************] respective 787-9 Aircraft [**********************], or (ii) used for the [**********************] ([**********************]).
3. [**************************].
As a special consideration for Customer’s purchase of the [**********************] to the Purchase Agreement which support Customer’s launch of international operations, Boeing is pleased to provide the [**********************] in accordance with the terms under [**********************] to the Purchase Agreement [**********************], [**********************]. Generally, under the terms of the above [**********************] letter agreement, there is a [**********************] and [**********************] for [**********************].
4. [**************************].
As a special consideration for Customer’s purchase of the [**********************] Aircraft which supplement its fleet of [**********************] aircraft and to address the Customer’s [**********************] a [**********************], Boeing is pleased to provide to Customer an [**********************] for use in accordance with the terms under [**********************] to the [**********************], [**********************].
5. [**************************].
At time of delivery of any Purchase Right 787-9 Aircraft, under the terms of letter agreement to the Purchase Agreement [**********************] title “[**********************]”, Boeing will provide a [**********************] that will be determined [**********************] at [**********************] for the [**********************] 787-9 aircraft [**********************] [**********************]. This [**********************] will be [**********************] and will [**********************] in accordance with the [**********************].
6. Assignment.
Unless otherwise noted herein, the Credit Memoranda described in this Letter Agreement are provided as a financial accommodation to Customer and in consideration of Customer’s taking title to the 787-9 Aircraft at time of delivery and becoming the operator of the 787-9 Aircraft. This Letter Agreement cannot be assigned, in whole or in part, without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501316 R1 SA-4 Special Matters – Model 787-9 Page 7 BOEING PROPRIETARY 7. Confidentiality
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing. In addition to any equitable relief that may be available to Boeing in the event of a breach of this clause, Boeing may rescind the Basic Credit Memorandum contained in paragraph 1.1 above, in the event of any unauthorized disclosure by Customer.
Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501316 R1 SA-4 Special Matters – Model 787-9 Page 8 BOEING PROPRIETARY XIA-PA-03586-LA-1501316 R1
Xiamen Airlines 22 Dailiao Road Xiamen, 361006 Fujian Province People’s Republic of China
Subject: Special Matters – Model 787-9
Reference: Purchase Agreement No. PA-03586 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 787-9 aircraft (787-9 Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
1. Credit Memoranda.
1.1 [**************************]. At [**************************] of each 787-9 Aircraft, Boeing [**************************] in the amount of [**************************].
1.2 [**************************]. At [**************************] of each 787-9 Aircraft, Boeing [**************************] in the amount of [**************************].
1.3 [**************************]. At [**************************] of each 787-9 Aircraft, Boeing [**************************] in the amount of [**************************].
1.4 [**************************]. At [**************************] of each 787-9 Aircraft, Boeing [**************************] in the amount of [**************************].
1.5 [**************************]. At [**************************] of each 787-9 Aircraft, Boeing [**************************] in the amount of [**************************].
1.6 [**************************]. At [**************************] of each 787-9 Aircraft, Boeing [**************************] in the amount of [**************************].
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501316 R1 SA-4 Special Matters – Model 787-9 Page 9 BOEING PROPRIETARY 2. [**************************].
Unless otherwise noted, the amounts of the Credit Memoranda stated in paragraphs 1.1 through 1.6 of this Letter Agreement are [**********************] and will be [**********************] of the respective 787-9 Aircraft delivery pursuant to the [**********************] set forth in the Purchase Agreement applicable to the 787-9 Aircraft. The [**********************] may, at the election of Customer, be (i) applied against the 787-9 [**********************] respective 787-9 Aircraft [**********************], or (ii) used for the [**********************] ([**********************]).
3. [**************************].
As a special consideration for Customer’s purchase of the [**********************] to the Purchase Agreement which support Customer’s launch of international operations, Boeing is pleased to provide the [**********************] in accordance with the terms under [**********************] to the Purchase Agreement [**********************], [**********************]. Generally, under the terms of the above [**********************] letter agreement, there is a [**********************] and [**********************] for [**********************].
4. [**************************].
As a special consideration for Customer’s purchase of the [**********************] Aircraft which supplement its fleet of [**********************] aircraft and to address the Customer’s [**********************] a [**********************], Boeing is pleased to provide to Customer an [**********************] for use in accordance with the terms under [**********************] to the [**********************], [**********************].
5. [**************************].
At time of delivery of any Purchase Right 787-9 Aircraft, under the terms of letter agreement to the Purchase Agreement [**********************] title “[**********************]”, Boeing will provide a [**********************] that will be determined [**********************] at [**********************] for the [**********************] 787-9 aircraft [**********************] [**********************]. This [**********************] will be [**********************] and will [**********************] in accordance with the [**********************].
6. Assignment.
Unless otherwise noted herein, the Credit Memoranda described in this Letter Agreement are provided as a financial accommodation to Customer and in consideration of Customer’s taking title to the 787-9 Aircraft at time of delivery and becoming the operator of the 787-9 Aircraft. This Letter Agreement cannot be assigned, in whole or in part, without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501316 R1 SA-4 Special Matters – Model 787-9 Page 10 BOEING PROPRIETARY 7. Confidentiality
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing. In addition to any equitable relief that may be available to Boeing in the event of a breach of this clause, Boeing may rescind the Basic Credit Memorandum contained in paragraph 1.1 above, in the event of any unauthorized disclosure by Customer.
Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
XIA-PA-03586-LA-1501316 R1 SA-4 Special Matters – Model 787-9 Page 11 BOEING PROPRIETARY Exhibit 4.41
Supplemental Agreement No. 3
to
Purchase Agreement No. PA-03757
between
The Boeing Company
and
Xiamen Airlines
Relating to Boeing Model 737-800 Aircraft
THIS SUPPLEMENTAL AGREEMENT (Supplemental Agreement) is entered into by and between The Boeing Company (Boeing) and Xiamen Airlines (Customer);
Customer and Boeing entered into Purchase Agreement No. PA-03757 dated August 8, 2012, as amended, and supplemented, (Purchase Agreement) relating to the purchase and sale of Boeing Model 737-800 aircraft (the Aircraft); and this Supplemental Agreement is an amendment to and is incorporated into the Purchase Agreement:
WHEREAS the Parties desire to amend the existing Purchase Agreement to add the purchase of [********] additional Model 737-800 aircraft, and
NOW, THEREFORE, the parties agree that the Purchase Agreement, relating to the [********] Aircraft, is amended as set forth below and otherwise agree as follows:
1. Table of Contents.
The Table of Contents to the Purchase Agreement is hereby deleted in its entirety and replaced by a new Table of Contents (attached hereto), to reflect the incorporation of this Supplemental Agreement No. 3 into the Purchase Agreement. Note that a correction to the Purchase Rights Letter Agreement to “XIA-PA-03757-LA-1208905” is also included.
2. Tables.
A new Table 2 to the Purchase Agreement is hereby added (attached hereto) to reflect the incorporation of this Supplemental Agreement No. 3 into the Purchase Agreement.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 EXA Page 1 BOEING PROPRIETARY 3. Aircraft Configuration – Exhibit A.
Exhibit A to the Purchase Agreement is hereby deleted in its entirety and replaced by a new Exhibit A (attached hereto), to reflect the incorporation of this Supplemental Agreement No. 3 into the Purchase Agreement.
4. Letter Agreements.
4.1 Letter Agreement XIA-PA-03757-LA-1207440, titled “Special Matters” is hereby deleted in its entirety and replaced by a new Letter Agreement XIA-PA-03757-LA-1207440R1 titled “Special Matters – Table 1” (attached hereto) to reflect the incorporation of this Supplemental Agreement No. 3 into the Purchase Agreement.
4.2 Letter Agreement XIA-PA-03757-LA-1504497 titled “Applicability Matters – Table 2” is hereby added to the Purchase Agreement to reflect the incorporation of this Supplemental Agreement No. 3 into the Purchase Agreement.
4.3 Letter Agreement XIA-PA-03757-LA-1504498 titled “Special Matters – Table 2” is hereby added to the Purchase Agreement to reflect the incorporation of this Supplemental Agreement No. 3 into the Purchase Agreement.
4.4 Letter Agreement XIA-PA-03757-LA-1504499 titled “Special Escalation Program – Table 2” is hereby added to the Purchase Agreement to reflect the incorporation of this Supplemental Agreement No. 3 into the Purchase Agreement.
5. Miscellaneous.
5.1 The Purchase Agreement is amended as set forth above, and all other terms and conditions of the Purchase Agreement remain unchanged and are in full force and effect. Any Tables of Contents, Tables, Supplemental Exhibits, Letter Agreements or other documents that are listed in the Sections above are incorporated into this Supplemental Agreement by this reference.
5.2 This Supplemental Agreement will become effective upon execution and receipt by both Parties.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 EXA Page 2 BOEING PROPRIETARY EXECUTED as of , 2016.
XIAMEN AIRLINES THE BOEING COMPANY
By: By:
Name: Name:
Title: Title: Attorney-in-fact
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 EXA Page 3 BOEING PROPRIETARY TABLE OF CONTENTS
ARTICLES Article 1. Quantity, Model and Description Article 2. Delivery Schedule Article 3. Price Article 4. Payment Article 5. Additional Terms
TABLES 1. Aircraft Information Table SA-2 2. Aircraft Information Table SA-3
EXHIBIT A. Aircraft Configuration SA-3 B. Aircraft Delivery Requirements and Responsibilities
SUPPLEMENTAL EXHIBITS AE1. Escalation Adjustment/Airframe and Optional Features BFE1. BFE Variables CS1. Customer Support Variables EE1. Engine Warranty and Patent Indemnity SLP1. Service Life Policy Components
LETTER AGREEMENTS LA-1207432 LA-Aircraft Model Substitution LA-1207433 R1 LA-Payment Matters SA-2 LA-1207434 LA-Special Escalation Program LA-1207435 LA-Government Approval Matters LA-1207436 LA-Liquidated Damages Non-Excusable Delay LA-1207437 LA-Performance Guarantee LA-1207438 LA-Significant Improvement-737NG LA-1207439 LA-Spare Parts Initial Provisioning LA-1207440R1 LA-Special Matters – Table 1 Aircraft SA-3 LA-1207452 LA-Clarification and Understanding LA-1207453R1 LA-Volume Agreement SA-1 LA-1207481 LA-Boeing Purchase of BFE
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 EXA Page 4 BOEING PROPRIETARY LA-1207482 LA-Loading of Customer Software LA-1207483R1 LA-Promotional Support Follow On Aircraft SA-1 LA-1207484 LA-Seller Purchase Equipment LA-1208905 LA-Right to Purchase Additional Aircraft SA-3
LETTER AGREEMENTS (continued) LA-1208937 LA-Open Configuration Matters SA-2 LA-1504497 LA-Applicability Matters – Table 2 Aircraft SA-3 LA-1504498 LA-Special Matters – Table 2 Aircraft SA-3 LA-1504499 LA-Special Escalation Program – Table 2 Aircraft SA-3
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 EXA Page 5 BOEING PROPRIETARY Table 2 To Purchase Agreement No. PA-03757 Aircraft Delivery, Description, Price and Advance Payments
Airframe Model/MTOW: 737-800 [********] Detail Specification: [********] Engine Model/Thrust: [********] [********] Airframe Price Base Year/Escalation Formula: [********] [********] Airframe Price: [********] Engine Price Base Year/Escalation Formula: [********] [********] Optional Features Estimate: [********] Sub-Total of Airframe and Features: [********] Airframe Escalation Data: Engine Price (Per Aircraft): [********] Base Year Index (ECI): [********] Aircraft Basic Price (Excluding BFE/SPE): [********] Base Year Index (ICI): [********] Buyer Furnished Equipment (BFE) Estimate: [********] Seller Purchased Equipment (SPE) Estimate: [********]
Escalation Estimate Advance Payment Per Aircraft (Amts. Due/Mos. Prior to Delivery): Delivery Number of Escalation Adv Payment Base At Signing [********] [********] Total Date Aircraft Indices (Estimate) Price Per A/P [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] Total: [********] 2%
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 XIA-PA-03757 79976-1F.TXT EXA Page 6 BOEING PROPRIETARY AIRCRAFT CONFIGURATION
between
THE BOEING COMPANY
and
XIAMEN AIRLINES
Exhibit A to Purchase Agreement Number PA-03757
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 EXA Page 7 BOEING PROPRIETARY Exhibit A
AIRCRAFT CONFIGURATION
relating to
BOEING MODEL 737-800 AIRCRAFT
The Detail Specification is Boeing document number [********],[********], dated as of [********]. The Detail Specification provides further description of Customer’s configuration set forth in this Exhibit A. Such Detail Specification will be comprised of Customer’s existing Boeing detail specification as amended to incorporate the optional features (Options) listed below, including the effects on Manufacturer's Empty Weight (MEW) and Operating Empty Weight (OEW). As soon as practicable, Boeing will furnish to Customer copies of the Detail Specification, which copies will reflect such Options. The Aircraft Basic Price reflects and includes all effects of such Options, except such Aircraft Basic Price does not include the price effects of any Buyer Furnished Equipment or Seller Purchased Equipment.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
SA-3 EXA Page 8 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
Optional Features Number Title [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
BOEING PROPRIETARY Number Title [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
LA Page 2 BOEING PROPRIETARY Number Title [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
LA Page 3 BOEING PROPRIETARY Number Title [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
LA Page 4 BOEING PROPRIETARY Number Title [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
LA Page 5 BOEING PROPRIETARY Number Title [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
LA Page 6 BOEING PROPRIETARY Number Title [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
LA Page 7 BOEING PROPRIETARY Number Title [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
LA Page 8 BOEING PROPRIETARY Number Title [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********]
OPTIONS: [***] TOTAL - SPECIAL FEATURES - EXHIBIT A: [********] [********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
LA Page 9 BOEING PROPRIETARY XIA-PA-03757-LA-1207440R1
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Special Matters – Table 1 Aircraft
Reference: Purchase Agreement No. PA-03757 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 737-800 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
1. Credit Memoranda. In consideration of Customer’s purchase of the Aircraft listed in Table 1 to the Purchase Agreement (Table 1), at the time of delivery of each such Aircraft in Table 1, Boeing will provide to Customer the following credit memoranda:
1.1 [********] Credit Memorandum. Boeing will issue to Customer a [********] memorandum ([********] Credit Memorandum) in an amount of [********].
1.2 [********] Credit Memorandum. Boeing will issue to Customer a [********] credit memorandum ([********] Credit Memorandum) in an amount of [********] at the time of delivery of each 737- 800 Aircraft. This credit memorandum may only be used for the purchase of Boeing goods and services and may not be applied against the Aircraft Price at time of delivery.
1.3 [********] Credit Memorandum. In recognition of Customer [********], Boeing will issue to Customer a [********] credit memorandum ([********] Credit Memorandum) in an amount of [********] at the time of delivery of each 737-800 Aircraft.
1.4 [********] Credit Memorandum. In recognition of Customer’s [********], Boeing will issue to Customer a [********] credit memorandum ([********] Credit Memorandum) in an amount of [********] at the time of delivery of each Aircraft.
1.5 [********] Credit Memorandum. To address Customer’s [********], Boeing will issue to Customer a [********] credit memorandum ([********] Credit Memorandum) at delivery of each 737-800 Aircraft, as scheduled at signing of this Purchase Agreement, as follows:
x Aircraft delivering in [********]: [********] x Aircraft delivering in [********]: [********] x Aircraft delivering in [********]: [********] x Aircraft delivering in [********]: [********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
LA Page 10 BOEING PROPRIETARY 2. Substitution Aircraft.
If Customer elects to substitute into [********] aircraft from the Aircraft in Table 1, Customer will receive at least [********] as in Purchase Agreement No. 3217 for the purchase of [********] aircraft. Boeing and Customer will discuss in good faith to determine the credit memoranda amount at the time Customer requests to make the substitution.
3. Purchase Right Aircraft.
If Customer exercises the right to make Purchase Right Aircraft firm 737-800 Aircraft from the Aircraft in Table 1 as described in Letter Agreement XIA-PA-03757-LA-1208905, Customer will receive the [********] as the firm thirty-one (31) 737-800 Aircraft described in this Letter Agreement, [********************************************************].
4. Escalation of Credit Memoranda.
Unless otherwise noted, the amounts of the Credit Memoranda stated in paragraphs 1.1 through 1.5 and paragraph 2 are in [********] base year dollars and will be escalated to the scheduled month of the respective Aircraft delivery pursuant to Supplemental Exhibit AE1 of the Purchase Agreement and shall be subject to the same provisions set forth in Letter Agreement XIA-PA-03758-LA-1207434. The Credit Memoranda may, at the election of Customer, be (i) applied against the Aircraft Price of the respective Aircraft at the time of delivery, or (ii) used for the purchase of other Boeing goods and services (but shall not be applied to advance payments).
5. Assignment.
Unless otherwise noted herein, the Credit Memoranda described in this Letter Agreement are provided as a financial accommodation to Customer and in consideration of Customer’s taking title to the Aircraft at time of delivery and becoming the operator of the Aircraft. This Letter Agreement cannot be assigned, in whole or in part, without the prior written consent of Boeing.
6. Confidentiality.
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
LA Page 11 BOEING PROPRIETARY Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
LA Page 12 BOEING PROPRIETARY XIA-PA-03757-LA-1504497
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Applicability Matters – Table 2 Aircraft
Reference: Purchase Agreement No. PA-03757 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 737-800 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
1. Purchase Agreement Terms – Applicability. Boeing and Customer have agreed upon the additional purchase of Aircraft listed in Table 2 to the Purchase Agreement (Table 2). As stated below, the following defines the applicability for the provisions of the Purchase Agreement to the Aircraft listed in Table 2 at time of signing this Letter Agreement. This Letter Agreement is not applicable the Aircraft listed in Table 1 to the Purchase Agreement.
1.1 Unless otherwise excluded or revised below, the terms of the Purchase Agreement will apply to the Aircraft listed in Table 2, where “Table 1” is listed or, when not, the terms of the Purchase Agreement are applicable to the Aircraft:
i. Purchase Agreement – Article 1 through Article 5, excluding 4.1 related to the Deposit;
ii. Exhibit A and B, and Supplemental Exhibits AE1, BFE1, SLP1 and CS1, except that under Supplemental Exhibit CS1, Boeing is [******************];
iii. Letter Agreement XIA-PA-03757-LA-1207484, Seller Purchased Equipment
iv. Letter Agreement XIA-PA-03757-LA-1207481, Boeing Purchase of Buyer Furnished Equipment;
v. Letter Agreement XIA-PA-03757-LA-1207439, Spare Parts Initial Provisioning;
vi. Letter Agreement XIA-PA-03757-LA-1207482, Loading of Customer Software;
vii. Letter Agreement XIA-PA-03757-LA-1207432, Aircraft Model Substitution
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
LA Page 13 BOEING PROPRIETARY viii. Letter Agreement XIA-PA-03757-LA-1207433R1, Payment Matters, with the exception that paragraph 1, titled Advance Payment Schedule does not apply to the Aircraft in Table 2, paragraph 2, titled Advance Payments for the Aircraft – Due on the Effective Date of the Purchase Agreement applies to Table 2 payment of [********] and paragraph 7, titled Default Interest, is amended to replace the last sentence with, “The rate of interest for Customer’s delayed payment of the advance payments shall be [********].”
ix. Letter Agreement XIA-PA-03757-LA-1207435, Government Approval Matters;
x. Letter Agreement XIA-PA-03757-LA-1207436, Liquidated Damages – Non-Excusable Delay, with the exception that paragraph 1, Liquidated Damages, is revised to read as follows:
The amount of liquidated damages will be derived from [********************************************************************************** *********************************************************************************** *********************************************************************************** *********************************************************************************** *********************************************************************************** ******************************************************************] (Liquidated Damages).
xi. Letter Agreement XIA-PA-03757-LA-1207437, Aircraft Performance Guarantees;
xii. Letter Agreement XIA-PA-03757-LA-1207438, Significant Aircraft Improvement;
xiii. Letter Agreement XIA-PA-03757-LA-1207452, Clarification and Understanding;
1.2 The following terms of the Purchase Agreement do not apply to the Aircraft listed in Table 2:
i. Letter Agreement XIA-PA-03757-LA-1207434, Special Escalation Program;
ii. Letter Agreement XIA-PA-03757-LA-1207440, Special Matters;
iii. Letter Agreement XIA-PA-03757-LA-1207453R1, Volume Agreement
iv. Letter Agreement XIA-PA-03757-LA-1207483R1, Promotional Support – Follow On Aircraft; and
v. Letter Agreement XIA-PA-03757-LA-1208905, Right to Purchase Additional Aircraft.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
March 14, 2016 Page 14 BOEING PROPRIETARY 2. Confidentiality.
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
March 14, 2016 Page 15 BOEING PROPRIETARY XIA-PA-03757-LA-1504498
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Special Matters – Table 2 Aircraft
Reference: Purchase Agreement No. PA-03757 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 737-800 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
1. Credit Memoranda. In consideration of Customer’s purchase of the Aircraft listed in Table 2 of the Purchase Agreement (Table 2), at the time of delivery of each such Aircraft, unless otherwise noted below, Boeing will provide to Customer the following credit memoranda:
1.1 Basic Credit Memorandum. Boeing will issue to Customer a basic credit memorandum (Basic Credit Memorandum) in an amount of[********].
1.2 Customer Support Credit Memorandum. Boeing will issue to Customer a customer support credit memorandum (Customer Support Credit Memorandum) in an amount of [********].
1.3 Customer Loyalty Credit Memorandum. Boeing will issue to Customer a customer loyalty credit memorandum (Customer Loyalty Credit Memorandum) in an amount of [********].
1.4 2018 Aircraft Delivery Credit Memorandum. For Aircraft delivering in 2018, Boeing will issue to Customer a 2018 aircraft delivery credit memorandum (2018 Aircraft Delivery Credit Memorandum) in an amount of [********].
1.5 Executive Closing Credit Memorandum. Boeing will issue to Customer an executive closing credit memorandum (Executive Closing Credit Memorandum) in an amount of [********].
1.6 Unless otherwise noted, the amounts of the credit memoranda stated in paragraphs 1.1 through 1.5 above are in [********] base year dollars and will be escalated to the scheduled delivery month of the respective Aircraft pursuant to Supplemental Exhibit AE1 of the Purchase Agreement and will be subject to the provisions set forth in letter agreement XIA-PA-03757-LA-1504499 to the Purchase Agreement titled, Special Escalation Program – Table 2 Aircraft. In addition, unless otherwise noted, the credit memoranda may, at Customer’s election, be (i) applied against the Aircraft Price of the respective Aircraft at the time of delivery or (ii) used for the purchase of other Boeing goods and services (but will not be applied to advance payments).
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
March 14, 2016 Page 16 BOEING PROPRIETARY 1.7 [********************] Credit Memoranda. As an additional consideration for Customer’s purchase of the Aircraft in Table 2, Boeing will issue to Customer a fleet introduction credit memorandum (Fleet Introduction Credit Memorandum) in the fixed amount of [********] each at or about the following dates:
[********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********]
The Fleet Introduction Credit Memoranda may, at Customer’s election, be (i) applied against the [**************************] or (ii) used for the purchase of other Boeing goods and services (but will not be applied to any advance payments).
1.8 Special Consideration – Promotional Support. As an additional consideration for Customer’s purchase of the Aircraft in Table 2, Boeing will expand the definition of “Covered Aircraft” in letter agreement XIA-PA-03757-LA-1207483R1 to the Purchase Agreement titled, Promotional Support – Follow On Aircraft, to also include the Aircraft in Table 2, notwithstanding the terms of letter agreement XIA-PA-03757- LA-1504497 to the Purchase Agreement titled, Applicability Matters – Table 2 Aircraft. Therefore, Boeing agrees to provide Promotional Support to Customer during the Performance Period in a value not to exceed [********] for each of the Aircraft in Table 2. The Performance Period of the Promotional Support for the Aircraft in Table 2 will begin on [********].
1.9 [********] Credit Memorandum. As an additional consideration for Customer’s purchase of the Aircraft in Table 2, Boeing will issue to Customer a [********] credit memorandum ([********] Credit Memorandum) in the fixed amount of [********]. The [********] Credit Memorandum may be used for the purchase of other Boeing goods and services (but will not be applied to any advance payments).
2. Assignment.
Unless otherwise noted herein, the Credit Memoranda described in this Letter Agreement are provided as a financial accommodation to Customer and in consideration of Customer’s taking title to the Aircraft at time of delivery and becoming the operator of the Aircraft. This Letter Agreement cannot be assigned, in whole or in part, without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
March 14, 2016 Page 17 BOEING PROPRIETARY 3. Confidentiality.
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
March 14, 2016 Page 18 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
XIA-PA-03757-LA-1504499
Xiamen Airlines 22 Dailiao Road Xiamen, Fujian Province, 361006 People’s Republic of China
Subject: Special Escalation Program – Table 2 Aircraft
Reference: Purchase Agreement No. PA-03757 (Purchase Agreement) between The Boeing Company (Boeing) and Xiamen Airlines (Customer) relating to Model 737-800 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
1. Definitions.
Program Aircraft means each Aircraft specified in Table 2 of the Purchase Agreement as of the date of this Letter Agreement.
2. Applicability.
Notwithstanding any other provision of the Purchase Agreement to the contrary, the parties agree that the Escalation Adjustment for the Airframe Price and Optional Features Prices for each Program Aircraft shall be determined in accordance with this Letter Agreement.
3. Capped Escalation.
Boeing will cap the Escalation Adjustment for the Airframe Price and Optional Features Prices of each Program Aircraft in accordance with the terms of this Letter Agreement.
3.1 The Escalation Adjustment for the Airframe Price and Optional Features Prices of each Program Aircraft will be capped at a fixed rate of [********] per year compounded annually resulting in the escalation factors set forth in the Attachment (Capped Factors).
3.2 If the actual escalation factor, as determined in accordance with Supplemental Exhibit AE1 at time of delivery of an Program Aircraft, produces an escalation rate less than or equal to [********] cumulative annual escalation factor, then the escalation rate so produced shall apply for such Program Aircraft.
3.3 If the actual escalation factor, as determined in accordance with Supplemental Exhibit AE1 at time of delivery of an Program Aircraft, produces an escalation rate more than [********] cumulative annual escalation factor, then the Escalation Adjustment will be determined using the Capped Factors.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
BOEING PROPRIETARY 4. Affect on Advance Payments.
The amount and timing of advance payments Customer is required to pay to Boeing pursuant to the Purchase Agreement shall be unaffected by any terms set forth in this Letter Agreement.
5. Aircraft Applicability.
Unless otherwise stated, the terms of this Letter Agreement shall only apply to the firm Aircraft set forth in Table 2 of the Purchase Agreement as of the execution date of this Letter Agreement.
6. Applicability to Other Financial Consideration.
The escalation adjustment for any other sum, identified in the Purchase Agreement as subject to escalation pursuant to Supplemental Exhibit AE1, and which pertains to the Program Aircraft shall be calculated using the escalation methodology established in this Letter Agreement for such Program Aircraft notwithstanding any other provisions of the Purchase Agreement to the contrary.
7. Assignment.
This Letter Agreement is provided as an accommodation to Customer in consideration of Customer becoming the operator of the Program Aircraft and cannot be assigned in whole or in part.
8. Confidential Treatment.
The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
Page 2 BOEING PROPRIETARY Very truly yours,
THE BOEING COMPANY
By
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date:
XIAMEN AIRLINES
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
Page 3 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
ATTACHMENT
Escalation Factors - [********] Base Year
[********] Month Factors [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
BOEING PROPRIETARY Exhibit 4.42 PURCHASE AGREEMENT NUMBER GUN-PA-04455 between THE BOEING COMPANY and CHINA SOUTHERN AIRLINES COMPANY LIMITED with CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD. as Consenting Party Relating to Boeing Model 787-9 Aircraft
(Contract Reference No. 16SIES2017US)
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455 BOEING PROPRIETARY TABLE OF CONTENTS
ARTICLES Article 1. Quantity, Model, Description and Inspection Article 2. Delivery Schedule Article 3. Price Article 4. Payment Article 5. Additional Terms
TABLE 1. Aircraft Information Table
EXHIBIT A. Aircraft Configuration B. Aircraft Delivery Requirements and Responsibilities
SUPPLEMENTAL EXHIBITS AE1. [****************************************************] BFE1. BFE Variables CS1. Customer Support Document EE1. Engine Escalation/Engine Warranty and Patent Indemnity SLP1. Service Life Policy Components
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455 BOEING PROPRIETARY LETTER AGREEMENTS
LA-1600105 LA-AGTA Terms Updates
LA-1600109 LA-Customer Support-Code 3-787
LA-1600110 LA-e-Enabling Software Matters-787
LA-1600111 LA-Escalation-Capped Factors
LA-1600112 LA-EULA Special Matters
LA-1600113 LA-Government Approval
LA-1600114 LA-Liquidated Damages Non-Excusable Delay
LA-1600116 LA-Open Configuration Matters
LA-1600117 LA-Performance Guarantees
LA-1600118 LA-Post-Delivery Software and Data Loading-787
LA-1600119 LA-Promotional Support
LA-1600123 LA-Seats and IFE Special Provisions-787
LA-1600124 LA-Used Aircraft Trade-In Matters
LA-1600125 LA-Framework Agreement
LA-1600126 LA-Special Matters
LA-1603083 LA-Cabin Systems Equipment
LA-1603084 LA-Payment Matters
LA-1603085 LA-Clarifications and Understandings
LA-1603086 LA-Customer Support Matters
LA-1603087 LA-Integrated Performance Remedy
LA-1603088 Shareholder Meeting Process
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455 BOEING PROPRIETARY PURCHASE AGREEMENT NO. PA-04455
between
THE BOEING COMPANY
and
CHINA SOUTHERN AIRLINES COMPANY LIMITED
with
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
as Consenting Party
This Purchase Agreement No. PA-04455 between The Boeing Company, a Delaware corporation, (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. As consenting party (Consenting Party), binding and in full force and effect on the date executed below (Effective Date), relating to the purchase and sale of Model 787-9 aircraft together with all tables, exhibits, supplemental exhibits, letter agreements and other attachments thereto, if any, (Purchase Agreement) incorporates and amends the terms and conditions (except as specifically set forth below) of the Aircraft General Terms Agreement dated as of September 19, 2000, between Boeing and Consenting Party (formerly known as China Southern Airlines Group Import and Export Trading Corp., Ltd.), identified as AGTA- GUN (AGTA). All capitalized terms used but not defined in this Purchase Agreement have the same meaning as in the AGTA, except that the term “Buyer” in the AGTA shall mean “Customer” in this Purchase Agreement.
1. Quantity, Model, Description and Inspection.
The aircraft to be delivered to Customer will be designated as Model 787-9 aircraft (Aircraft). Boeing will manufacture and sell to Customer Aircraft conforming to the configuration described in Exhibit A in the quantities listed in Table 1 to the Purchase Agreement. [*************] prior to delivery of Customer’s first Aircraft, Boeing will provide Customer a Boeing document defining a customer inspection process appropriate to the 787 manufacturing process (787 Inspection Process) which will apply in lieu of inspection processes traditionally applicable to other models of aircraft and will supersede the provisions of Article 5.2 of the AGTA.
2. Delivery Schedule.
The scheduled months of delivery of the Aircraft are listed in the attached Table 1. Exhibit B describes certain responsibilities for both Customer and Boeing in order to accomplish the delivery of the Aircraft.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455 BOEING PROPRIETARY 3. Price.
3.1 Aircraft Basic Price. The Aircraft Basic Price is listed in Table 1 and is subject to escalation in accordance with the terms of this Purchase Agreement.
3.2 Advance Payment Base Prices. The Advance Payment Base Prices listed in Table 1 were calculated utilizing the latest escalation factors available to Boeing on the date of this Purchase Agreement projected to the month of scheduled delivery.
4. Payment.
4.1 Boeing acknowledges receipt of a deposit in the amount shown in Table 1 for each Aircraft (Deposit).
4.2 The standard advance payment schedule for the Model 787-9 aircraft requires Customer to make certain advance payments, expressed in a percentage of the Advance Payment Base Price of each Aircraft beginning with a payment of [***************************], less the Deposit, due within five (5) days of the Effective Date. Additional advance payments for each Aircraft are due as specified in and on the first business day of the months listed in the attached Table 1.
4.3 For any Aircraft whose scheduled month of delivery is less than twenty-four (24) months from the Effective Date, the total amount of advance payments due within five (5) days of the Effective Date will include all advance payments which are past due in accordance with the standard advance payment schedule set forth in paragraph 4.2 above.
4.4 Customer will pay the balance of the Aircraft Price of each Aircraft at delivery.
5. Additional Terms.
5.1 Aircraft Information Table. Table 1 consolidates information contained in Articles 1, 2, 3 and 4 with respect to (i) quantity of Aircraft, (ii) applicable Detail Specification, (iii) month and year of scheduled deliveries, (iv) Aircraft Basic Price, (v) applicable escalation factors and (vi) Advance Payment Base Prices and advance payments and their schedules.
5.2 Escalation Adjustment/Airframe and Optional Features. Supplemental Exhibit AE1 contains the applicable airframe and optional features escalation formula
5.3 Customer Support Variables. Information, training, services and other things furnished by Boeing in support of introduction of the Aircraft into Customer’s fleet are described in Supplemental Exhibit CS1. Supplemental Exhibit CS1 supersedes in its entirety Exhibit B to the AGTA as incorporated in the Purchase Agreement, and, for clarity, all references to Exhibit B to the AGTA in the Purchase Agreement will be deemed to refer to Supplemental Exhibit CS1 to the Purchase Agreement.
5.4 Engine Escalation Variables. Supplemental Exhibit EE1 contains the applicable engine escalation formula, the engine warranty and the engine patent indemnity for the Aircraft.
5.5 Service Life Policy Component Variables. Supplemental Exhibit SLP1 lists the SLP Components covered by the Service Life Policy for the Aircraft.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455 BOEING PROPRIETARY 5.6 Public Announcement. Boeing reserves the right to make a public announcement regarding Customer’s purchase of the Aircraft upon approval of Boeing’s press release by Customer’s public relations department or other authorized representative.
5.7 Negotiated Agreement; Entire Agreement. This Purchase Agreement, including the provisions of Article 8.2 of the AGTA relating to insurance, and Article 11 of Part 2 of Exhibit C of the AGTA relating to DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES, has been the subject of discussion and negotiation and is understood by the parties; the Aircraft Price and other agreements of the parties stated in this Purchase Agreement were arrived at in consideration of such provisions. This Purchase Agreement, including the AGTA, contains the entire agreement between the parties and supersedes all previous proposals, understandings, commitments or representations whatsoever, oral or written, and may be changed only in writing signed by authorized representatives of the parties.
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
Table 1 To Purchase Agreement No. PA-04455 Aircraft Delivery, Description, Price and Advance Payments
Airframe Model/MTOW: 787-9 560000 pounds Detail Specification: 787B1-4102-S (12/11/2015) Engine Model/Thrust: GENX-1B74/75 74100 pounds Airframe Price Base Year/Escalation Formula: [***********] [***********] Airframe Price: [***********] Engine Price Base Year/Escalation Formula: [***********] [***********] Optional Features: [***********] Sub-Total of Airframe and Features: [***********] Airframe Escalation Data: Engine Price (Per Aircraft): [***********] Base Year Index (ECI): [***********] Aircraft Basic Price (Excluding BFE/SPE): [***********] Base Year Index (ICI): [***********] Buyer Furnished Equipment (BFE) Estimate: [***********] Engine Escalation Data: In-Flight Entertainment (IFE) Estimate: [***********] Base Year Index (ECI): [***********] Base Year Index (ICI): [***********] Deposit per Aircraft at Proposal Acceptance: [***********]
“[***]”This information is subject to confidential treatment and has been omitted and filed separately
Escalation Escalation Escalation Estimate Advance Payment Per Aircraft (Amts. Due/Mos. Prior to Delivery): Delivery Number of Factor Factor Adv Payment Base At Signing 24 Mos. 21/18/12/9 Mos. 6 Mos. Total Date Aircraft (Airframe) (Engine) Price Per A/P [***********] [***********] [***********] [***********] [***********] Apr-2018 1 [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] May-2018 1 [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] Jun-2018 2 [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] Jul-2018 1 [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] Apr-2019 1 [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] May-2019 1 [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] Jul-2019 1 [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] Aug-2019 1 [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] Apr-2020 1 [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] May-2020 1 [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] Jul-2020 1 [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] Total: 12
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455 Table 1 91616-1F.TXT
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 1 BOEING PROPRIETARY AIRCRAFT CONFIGURATION between THE BOEING COMPANY and CHINA SOUTHERN AIRLINES COMPANY LIMITED with CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD. as Consenting Party Exhibit A to Purchase Agreement Number PA-04455
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 2 BOEING PROPRIETARY Exhibit A
AIRCRAFT CONFIGURATION
Dated ______
relating to
BOEING MODEL 787-9 AIRCRAFT
The content of this Exhibit A will be defined pursuant to the provisions of Letter Agreement GUN-PA-04455-LA-1600116 to the Purchase Agreement, entitled “Open Configuration Matters”.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 3 BOEING PROPRIETARY AIRCRAFT DELIVERY REQUIREMENTS AND RESPONSIBILITIES between THE BOEING COMPANY and CHINA SOUTHERN AIRLINES COMPANY LIMITED with CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD. as Consenting Party Exhibit B to Purchase Agreement Number PA-04455
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 4 BOEING PROPRIETARY Exhibit B
AIRCRAFT DELIVERY REQUIREMENTS AND RESPONSIBILITIES
relating to
BOEING MODEL 787-9 AIRCRAFT
Both Boeing and Customer have certain documentation and approval responsibilities at various times during the construction cycle of the Aircraft that are critical to making the delivery of each Aircraft a positive experience for both parties. This Exhibit B documents those responsibilities and indicates recommended completion deadlines for the actions to be accomplished.
1. GOVERNMENT DOCUMENTATION REQUIREMENTS.
Certain actions are required to be taken by Customer in advance of the scheduled delivery month of each Aircraft with respect to obtaining certain government issued documentation.
1.1 Airworthiness and Registration Documents. Not later than [************************] of each Aircraft, Customer will notify Boeing of the registration number to be painted on the side of the Aircraft. If required by the regulatory authority, Customer will authorize, by letter to the regulatory authority having jurisdiction, the display of such registration numbers by Boeing during the pre-delivery testing of the Aircraft, no later than [************************]of each Aircraft.
Customer is responsible for furnishing any temporary or permanent registration certificates required by any governmental authority having jurisdiction to be displayed aboard the Aircraft after delivery.
1.2 Certificate of Sanitary Construction.
1.2.1 U.S. Registered Aircraft. Boeing will obtain from the United States Public Health Service, a United States Certificate of Sanitary Construction to be displayed aboard each Aircraft after delivery to Customer. The above Boeing obligation only applies to commercial passenger aircraft.
1.2.2 Non-U.S. Registered Aircraft. If Customer requires a United States Certificate of Sanitary Construction at the time of delivery of the Aircraft, Customer will give written notice thereof to Boeing at least [************************]. Boeing will then use commercially reasonable efforts to obtain the certificate from the United States Public Health Service and present it to Customer at the time of Aircraft delivery. The above Boeing obligation only applies to commercial passenger aircraft.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 5 BOEING PROPRIETARY 1.3 Customs Documentation.
1.3.1 Import Documentation. If the Aircraft is intended to be exported from the United States, Customer must notify Boeing not later than [************************] of each Aircraft of any documentation required by the customs authorities or by any other agency of the country of import.
1.3.2 General Declaration - U.S. If the Aircraft is intended to be exported from the United States, Boeing will prepare Customs Form 7507, General Declaration, for execution by U.S. Customs immediately prior to the ferry flight of the Aircraft. For this purpose, Customer will furnish to Boeing not later than [************************] all information required by U.S. Customs and Border Protection, including without limitation (i) a complete crew and passenger list identifying the names, birth dates, passport numbers and passport expiration dates of all crew and passengers and (ii) a complete ferry flight itinerary, including point of exit from the United States for the Aircraft.
If Customer intends, during the ferry flight of an Aircraft, to land at a U.S. airport after clearing Customs at delivery, Customer must notify Boeing not later than [************************] of such intention. If Boeing receives such notification, Boeing will provide to Customer the documents constituting a customs permit to proceed, allowing such Aircraft to depart after any such landing. Sufficient copies of completed Form 7507, along with passenger manifest, will be furnished to Customer to cover U.S. stops scheduled for the ferry flight.
1.3.3 Export Declaration - U.S. If the Aircraft is intended to be exported from the United States following delivery, and (i) Customer is a non-U.S. customer, Boeing will file an export declaration electronically with U.S. Customs and Border Protection (CBP), or (ii) Customer is a U.S. customer, it is the responsibility of the U.S. customer, as the exporter of record, to file the export declaration with CBP.
2. INSURANCE CERTIFICATES.
Unless provided earlier, Customer will provide to Boeing not later than [************************] of the first Aircraft, a copy of the requisite annual insurance certificate in accordance with the requirements of Article 8 of the AGTA.
3. NOTICE OF FLYAWAY CONFIGURATION.
Not later than [************************] of the Aircraft, Customer will provide to Boeing a configuration letter stating the requested "flyaway configuration" of the Aircraft for its ferry flight. This configuration letter should include:
(i) the name of the company which is to furnish fuel for the ferry flight and any scheduled post-delivery flight training, the method of payment for such fuel, and fuel load for the ferry flight;
(ii) the cargo to be loaded and where it is to be stowed on board the Aircraft, the address where cargo is to be shipped after flyaway and notification of any hazardous materials requiring special handling;
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 6 BOEING PROPRIETARY (iii) any BFE equipment to be removed prior to flyaway and returned to Boeing BFE stores for installation on Customer's subsequent Aircraft;
(iv) a complete list of names and citizenship of each crew member and non-revenue passenger who will be aboard the ferry flight; and
(v) a complete ferry flight itinerary.
4. DELIVERY ACTIONS BY BOEING.
4.1 Schedule of Inspections. All FAA, Boeing, Customer and, if required, U.S. Customs Bureau inspections will be scheduled by Boeing for completion prior to delivery or departure of the Aircraft. Customer will be informed of such schedules.
4.2 Schedule of Demonstration Flights. All FAA and Customer demonstration flights will be scheduled by Boeing for completion prior to delivery of the Aircraft.
4.3 Schedule for Customer's Flight Crew. Boeing will inform Customer of the date that a flight crew is required for acceptance routines associated with delivery of the Aircraft.
4.4 Fuel Provided by Boeing. Boeing will provide to Customer, without charge, the amount of fuel shown in U.S. gallons in the table below for the model of Aircraft being delivered and full capacity of engine oil at the time of delivery or prior to the ferry flight of the Aircraft.
Aircraft Model Fuel Provided 787 [************************]
4.5 Flight Crew and Passenger Consumables. Boeing will provide reasonable quantities of food, coat hangers, towels, toilet tissue, drinking cups and soap for the first segment of the ferry flight for the Aircraft.
4.6 Delivery Papers, Documents and Data. Boeing will have available at the time of delivery of the Aircraft certain delivery papers, documents and data for execution and delivery. If the Aircraft will be registered with the FAA, Boeing will pre-position in Oklahoma City, Oklahoma, for filing with the FAA at the time of delivery of the Aircraft an executed original Form 8050-2, Aircraft Bill of Sale, indicating transfer of title to the Aircraft from Boeing to Customer.
4.7 Delegation of Authority. If specifically requested in advance by Customer, Boeing will present a certified copy of a delegation of authority, designating and authorizing certain persons to act on its behalf in connection with delivery of the Aircraft.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 7 BOEING PROPRIETARY 5. DELIVERY ACTIONS BY CUSTOMER.
5.1 Aircraft Radio Station License. At delivery Customer will provide its aircraft radio station license to be placed on board the Aircraft following delivery.
5.2 Aircraft Flight Log. At delivery Customer will provide the aircraft flight log for the Aircraft.
5.3 Delegation of Authority. Customer will present to Boeing at delivery of the Aircraft an original or certified copy of Customer's delegation of authority designating and authorizing certain persons to act on its behalf in connection with delivery of the specified Aircraft.
5.4 TSA Waiver Approval. Customer may be required to have an approved Transportation Security Administration (TSA) waiver for the ferry flight depending upon the Customer’s en-route stop(s) and destination unless the Customer already has a TSA approved security program in place. Customer is responsible for application of the TSA waiver and obtaining TSA approval. Customer will provide a copy of the approved TSA waiver to Boeing upon arrival at the Boeing delivery center.
5.5 Electronic Advance Passenger Information System. Should the ferry flight of an Aircraft leave the United States, the Department of Homeland Security office requires Customer to comply with the Electronic Advance Passenger Information System (eAPIS). Customer needs to establish their own account with US Customs and Border Protection in order to file for departure. A copy of the eAPIS forms is to be provided by Customer to Boeing upon arrival of Customer’s acceptance team at the Boeing delivery center.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 8 BOEING PROPRIETARY ESCALATION ADJUSTMENT AIRFRAME AND OPTIONAL FEATURES between THE BOEING COMPANY and CHINA SOUTHERN AIRLINES COMPANY LIMITED with CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD. as Consenting Party Supplemental Exhibit AE1 to Purchase Agreement Number PA-04455
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 9 BOEING PROPRIETARY ESCALATION ADJUSTMENT AIRFRAME AND OPTIONAL FEATURES
relating to
BOEING MODEL 787-9 AIRCRAFT
1. Formula.
Airframe and Optional Features price adjustments (Airframe Price Adjustment) are used to allow prices to be stated in current year dollars at the signing of this Purchase Agreement and to adjust the amount to be paid by Customer at delivery for the effects of economic fluctuation. The Airframe Price Adjustment will be determined at the time of Aircraft delivery in accordance with the following formula:
[************************]
Where:
Pa = Airframe Price Adjustment.
P = Airframe Price plus the price of the Optional Features (as set forth in Table 1 of this Purchase Agreement).
[**********] [***] [***]
Where:
[*******] is the base year airframe escalation index (as set forth in Table 1 of this Purchase Agreement);
[******] is a value determined using the U.S. Department of Labor, Bureau of Labor Statistics, Employment Cost Index for [************************************] [*******************************], calculated by establishing a three-month arithmetic average value (expressed as a decimal and rounded to the nearest tenth) using the values for the 11th, 12th and 13th months prior to the month of scheduled delivery of the applicable Aircraft. As the Employment Cost Index values are only released on a quarterly basis, the value released for the first quarter will be used for the months of January, February, and March; the value released for the second quarter will be used for the months of April, May, and June; the value released for the third quarter will be used for the months of July, August, and September; the value released for the fourth quarter will be used for the months of October, November, and December.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 10 BOEING PROPRIETARY [**********] [***] [***]
Where:
[***] is the base year index (as set forth in Table 1 of this Purchase Agreement); and
[***] is a value determined using the U.S. Department of Labor, Bureau of Labor [************************]**************], calculated as a three (3) month arithmetic average of the released monthly values (expressed as a decimal and rounded to the nearest tenth) using the values for the 11th, 12th, and 13th months prior to the month of scheduled delivery of the applicable Aircraft.
[************************]
Where:
N is the number of calendar months which have elapsed from the Airframe Price base year and month up to and including the month of delivery, both as shown in Table 1 of the Purchase Agreement. The entire calculation of [************************] will be rounded to 4 places, and the final value of B will be rounded to the nearest dollar.
As an example, for an Aircraft scheduled to be delivered in the month of July, the months of June, July, and August of the preceding year will be utilized in determining the value of [*********].
Note:
(i) In determining the values of L and M, all calculations and resulting values will be expressed as a decimal rounded to the nearest ten-thousandth.
(ii) [***] is the numeric ratio attributed to labor in the Airframe Price Adjustment formula.
(iii) [***] is the numeric ratio attributed to materials in the Airframe Price Adjustment formula.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 11 BOEING PROPRIETARY (iv) The denominators (base year indices) are the actual average values reported by the U.S. Department of Labor, Bureau of Labor Statistics. The actual average values are calculated as a three (3) month arithmetic average of the released monthly values (expressed as a decimal and rounded to the nearest tenth) using the values for the 11th, 12th and 13th months prior to the airframe base year. The applicable base year and corresponding denominator is provided by Boeing in Table 1 of this Purchase Agreement.
(v) The final value of Pa will be rounded to the nearest dollar.
(vi) The Airframe Price Adjustment will not be made if it will result in a decrease in the Aircraft Basic Price.
2. Values to be Utilized in the Event of Unavailability.
2.1 If the Bureau of Labor Statistics substantially revises the methodology used for the determination of the values to be used to determine the ECI and ICI values (in contrast to benchmark adjustments or other corrections of previously released values), or for any reason has not released values needed to determine the applicable Airframe Price Adjustment, the parties will, prior to the delivery of any such Aircraft, select a substitute from other Bureau of Labor Statistics data or similar data reported by non-governmental organizations. Such substitute will result in the same adjustment, insofar as possible, as would have been calculated utilizing the original values adjusted for fluctuation during the applicable time period. However, if within twenty-four (24) months after delivery of the Aircraft, the Bureau of Labor Statistics should resume releasing values for the months needed to determine the Airframe Price Adjustment; such values will be used to determine any increase or decrease in the Airframe Price Adjustment for the Aircraft from that determined at the time of delivery of the Aircraft.
2.2 Notwithstanding Article 2.1 above, if prior to the scheduled delivery month of an Aircraft the Bureau of Labor Statistics changes the base year for determination of the ECI and ICI values as defined above, such re-based values will be incorporated in the Airframe Price Adjustment calculation.
2.3 In the event escalation provisions are made non-enforceable or otherwise rendered void by any agency of the United States Government, the parties agree, to the extent they may lawfully do so, to equitably adjust the Aircraft Price of any affected Aircraft to reflect an allowance for increases or decreases consistent with the applicable provisions of paragraph 1 of this Supplemental Exhibit AE1 in labor compensation and material costs occurring since August of the year prior to the price base year shown in the Purchase Agreement.
2.4 If within twelve (12) months of Aircraft delivery, the published index values are revised due to an acknowledged error by the Bureau of Labor Statistics, the Airframe Price Adjustment will be re- calculated using the revised index values (this does not include those values noted as preliminary by the Bureau of Labor Statistics). A credit memorandum or supplemental invoice will be issued for the Airframe Price Adjustment difference. Interest charges will not apply for the period of original invoice to issuance of credit memorandum or supplemental invoice.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 12 BOEING PROPRIETARY Note:
(i) The values released by the Bureau of Labor Statistics and available to Boeing thirty (30) days prior to the first day of the scheduled delivery month of an Aircraft will be used to determine the ECI and ICI values for the applicable months (including those noted as preliminary by the Bureau of Labor Statistics) to calculate the Airframe Price Adjustment for the Aircraft invoice at the time of delivery. The values will be considered final and no Airframe Price Adjustments will be made after Aircraft delivery for any subsequent changes in published index values, subject always to paragraph 2.4 above.
(ii) The maximum number of digits to the right of the decimal after rounding utilized in any part of the Airframe Price Adjustment equation will be 4, where rounding of the fourth digit will be increased to the next highest digit when the 5th digit is equal to five (5) or greater.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 13 BOEING PROPRIETARY BUYER FURNISHED EQUIPMENT VARIABLES between THE BOEING COMPANY and CHINA SOUTHERN AIRLINES COMPANY LIMITED with CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD. as Consenting Party Supplemental Exhibit BFE1 to Purchase Agreement Number PA-04455
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 14 BOEING PROPRIETARY BUYER FURNISHED EQUIPMENT VARIABLES
relating to
BOEING MODEL 787-9 AIRCRAFT
This Supplemental Exhibit BFE1 contains supplier selection dates, on-dock dates and other requirements applicable to the Aircraft.
1. Supplier Selection.
Customer will:
Select and notify Boeing of the suppliers and model/part of the following BFE items by the first day of the following months:
Upholstery [****************] Galley Carts [****************] Life Vests [****************] Bar Units [****************] Misc. Monuments [****************] Non-Standard Closeout Furniture [****************] Seats & IFE (All Classes) [****************]
2. On-dock Dates and Other Information.
On or before [**************], Boeing will provide to Customer the BFE Requirements electronically in My Boeing Fleet (MBF), through My Boeing Configuration (MBC). These requirements may be periodically revised, setting forth the items, quantities, on-dock dates and shipping instructions and other requirements relating to the in-sequence installation of BFE. For planning purposes, preliminary BFE on-dock dates are set forth below:
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 15 BOEING PROPRIETARY Customer’s First Aircraft: BFE Premium Class Seat and Non-Standard Closeout Furniture Program Milestones (First Aircraft Delivery Only)
Milestone Completion Date Initial Technical Coordination Meeting (ITCM) [****************] Preliminary Design Review (PDR) [****************] Critical Design Review (CDR) [****************] Final Seat Review (FSR) [****************] Seats & IFE (All Classes) On-Dock Date for 1st Aircraft delivery [****************]
The above schedule dates are subject to change based on the dates negotiated and agreed to at the ITCM.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 16 BOEING PROPRIETARY Preliminary On-Dock (Note: All requirements are set forth below. If a month is listed, then the due date is the first day of the month. If no date is listed, then there is no requirement.)
BFE Hardware Contract Aircraft Delivery Upholstery * On-Dock Date at Month On-Dock Date at Supplier Boeing 1 Apr-2018 [****************] [****************] 2May-2018 [****************] [****************] 3Jun-2018 [****************] [****************] 4Jun-2018 [****************] [****************] 5Jul-2018 [****************] [****************] 6 Apr-2019 [****************] [****************] 7May-2019 [****************] [****************] 8Jul-2019 [****************] [****************] 9 Aug-2019 [****************] [****************] 10 Apr-2020 [****************] [****************] 11 May-2020 [****************] [****************] 12 Jul-2020 [****************] [****************] * or as negotiated at ITCM with Seat Supplier.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 17 BOEING PROPRIETARY 3. Additional Delivery Requirements - Import.
Customer will be the “importer of record” (as defined by the U.S. Customs and Border Protection) for all BFE imported into the United States, and as such, it has the responsibility to ensure all of Customer’s BFE shipments comply with U.S. Customs Service regulations. In the event Customer requests Boeing, in writing, to act as importer of record for Customer’s BFE, and Boeing agrees to such request, Customer is responsible for ensuring Boeing can comply with all U.S. Customs Import Regulations by making certain that, at the time of shipment, all BFE shipments comply with the requirements in the “International Shipment Routing Instructions”, including the Customs Trade Partnership Against Terrorism (C-TPAT), as set out on the Boeing website referenced below. Customer agrees to include the International Shipment Routing Instructions, including C-TPAT requirements, in each contract between Customer and BFE supplier. http://www.boeing.com/companyoffices/doingbiz/supplier_portal/index_general.html
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 18 BOEING PROPRIETARY 787 CUSTOMER SUPPORT DOCUMENT
between
THE BOEING COMPANY
and
CHINA SOUTHERN AIRLINES COMPANY LIMITED
with
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
as Consenting Party
Supplemental Exhibit CS1 to Purchase Agreement Number PA-04455
This document contains:
Part 1 Boeing Maintenance and Flight Training Programs; Operations Engineering Support Part 2 Field and Engineering Support Services Part 3 Technical Information and Materials Part 4 Alleviation or Cessation of Performance Part 5 Protection of Proprietary Information and Proprietary Materials
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 19 BOEING PROPRIETARY 787 CUSTOMER SUPPORT DOCUMENT
PART 1: BOEING MAINTENANCE AND FLIGHT TRAINING PROGRAMS; OPERATIONS ENGINEERING SUPPORT
1. Boeing Training Programs.
Boeing will provide maintenance training, cabin attendant training, and flight training programs to support the introduction of the Aircraft into service as provided in this Supplemental Exhibit CS1.
1.1 Customer is awarded [**************]. At any time before [**************] after delivery of Customer’s last Aircraft [**************] Customer may exchange [**************] for any of the training courses described on Attachment A at the point values described on Attachment A. At the end of the Training Program Period any unused [**************]will expire.
2. Training Schedule and Curricula.
2.1 Customer and Boeing will together define and schedule a mutually acceptable plan for the maintenance training, flight training and cabin attendant training programs. At the conclusion of each planning discussion the parties will document Customer’s course selection and training requirements, and, if applicable, Training Point application and remaining Training Point balance.
2.2 Customer may also request training by written notice to Boeing identifying desired courses, dates and locations. [**************]of Boeing’s receipt of such request Boeing will provide written response to Customer confirming whether the requested courses are available at the times and locations requested by Customer.
3. Location of Training.
3.1 Boeing will conduct flight, dispatcher, performance engineering and maintenance training at any of its appropriately equipped training facilities. Customer will decide on the location or mix of locations for training, subject to space being available in the desired courses at the selected training facility on the dates desired.
3.2 If requested by Customer, Boeing will conduct training (except dispatcher performance engineering training and courses designated with a # on Attachment A) at a mutually acceptable alternate training site, subject to the following conditions:
3.2.1 Customer will provide acceptable classroom space and training equipment required to present the courses;
3.2.2 Customer will pay Boeing’s portal to portal actual expenses for lodging, ground transportation, laundry, baggage handling, communication costs and per diem meal charge for each Boeing instructor for each day, or fraction thereof, that the instructor is away from his home location, including travel time;
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 20 BOEING PROPRIETARY 3.2.3 Customer will reimburse Boeing for the actual costs of round-trip transportation for Boeing's instructors and the shipping costs of training Materials which must be shipped to the alternate training site;
3.2.4 Customer will be responsible for all taxes, fees, duties, licenses, permits and similar expenses incurred by Boeing and its employees as a result of Boeing’s providing training at the alternate site or incurred as a result of Boeing providing revenue service training; and
3.2.5 Customer will be responsible for additional expenses, if any, which result from the use of such alternate site.
4. Training Materials.
Training Materials will be provided for each student. Training Materials may be used only for (i) the individual student’s reference during Boeing provided training and for review thereafter and (ii) Customer’s provision of training to individuals directly employed by Customer.
5. Additional Terms and Conditions.
5.1 All training will reflect an airplane configuration defined by (i) Boeing’s standard configuration specification for 787 aircraft, (ii) Boeing’s standard configuration specification for the minor model of 787 aircraft selected by Customer, and (iii) any optional features selected by Customer from Boeing’s standard catalog of optional features. Upon Customer’s request, Boeing may provide training customized to reflect other elements of Customer’s Aircraft configuration subject to a mutually acceptable price, schedule, scope of work and other applicable terms and conditions.
5.2 All training will be provided in the English language. If translation is required, Customer will provide interpreters. Customer will be responsible for the additional cost associated with an increase in Boeing’s standard course length to accommodate translation and may use training points to offset such additional costs.
5.3 Customer will be responsible for all expenses of Customer’s personnel except that in the Puget Sound region of Washington State Boeing will transport Customer’s personnel between their local lodgings and Boeing’s training facility.
5.4 Boeing flight instructor personnel will not be required to work more than five (5) days per week, or more than eight (8) hours in any one twenty-four (24) hour period, of which not more than five (5) hours per eight (8) hour workday will be spent in actual flying (Pilot Day). These foregoing restrictions will not apply to ferry flight assistance or revenue service training services, which will be governed by FAA rules and regulations.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 21 BOEING PROPRIETARY 5.5 Normal Line Maintenance is defined as line maintenance that Boeing might reasonably be expected to furnish for flight crew training at Boeing’s facility, and will include ground support and Aircraft storage in the open, but will not include provision of spare parts. Boeing will provide Normal Line Maintenance services for any Aircraft while the Aircraft is used for flight crew training at Boeing’s facility in accordance with the [**************]and the [**************]. Customer will provide such services if flight crew training is conducted elsewhere. Regardless of the location of such training, Customer will be responsible for providing all maintenance items (other than those included in Normal Line Maintenance) required during the training, including, but not limited to, fuel, oil, landing fees and spare parts.
5.6 If the training is based at Boeing’s facility and the Aircraft is damaged during such training, Boeing will make all necessary repairs to the Aircraft as promptly as possible. Customer will pay Boeing’s reasonable charge, including the price of parts and materials, for making the repairs. If Boeing’s estimated labor charge for the repair exceeds [***********************************], Boeing and Customer will enter into an agreement for additional services before beginning the repair work.
5.7 If the flight training is based at Boeing’s facility, several airports in the surrounding area may be used, at Boeing’s option. Unless otherwise agreed in the flight training planning conference, it will be Customer’s responsibility to make arrangements for the use of such airports.
5.8 If Boeing agrees to make arrangements on behalf of Customer for the use of airports for flight training, Boeing will pay on Customer’s behalf any landing fees charged by any airport used in conjunction with the flight training. At least thirty (30) days before flight training, Customer will provide Boeing an open purchase order against which Boeing will invoice Customer for any landing fees Boeing paid on Customer’s behalf. The invoice will be submitted to Customer approximately sixty (60) days after flight training is completed, when all landing fee charges have been received and verified. Customer will pay the invoiced amount to Boeing within thirty (30) days of the date of the invoice.
5.9 If requested by Boeing, in order to provide the flight training or ferry flight assistance, Customer will make available to Boeing an Aircraft after delivery to familiarize Boeing instructor or ferry flight crew personnel with such Aircraft. If flight of the Aircraft is required for any Boeing instructor or ferry flight crew member to maintain an FAA license for flight proficiency or landing currency, Boeing will be responsible for the costs of fuel, oil, landing fees and spare parts attributable to that portion of the flight.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 22 BOEING PROPRIETARY 787 CUSTOMER SUPPORT DOCUMENT
PART 2: FIELD AND ENGINEERING SUPPORT SERVICES
1. Field Service Representation.
Boeing will furnish field service representation to advise Customer with respect to the maintenance and operation of the Aircraft (Field Service Representatives).
1.1 Field service representation will be available at or near Customer’s main maintenance or engineering facility beginning before the scheduled delivery month of the first Aircraft and [******************************]of the last Aircraft covered by a specific purchase agreement.
1.2 Customer will provide, at no charge to Boeing, suitable enclosed office space with walls and a lockable door that is separated from other OEMs and the airline, located at the Customer’s facility or other site as mutually agreed. Customer will provide the necessary infrastructure (i.e. local area network (LAN) lines) to enable wired high-speed internet capability in the office. As required, Customer will assist each Field Service Representative with visas, work permits, customs, mail handling, identification passes and formal introduction to local airport authorities.
1.3 Boeing’s Field Service Representatives are assigned to various airports and other locations around the world. Whenever Customer’s Aircraft are operating through any such airport, the services of Boeing’s Field Service Representatives are available to Customer.
2. Engineering Support Services.
2.1 Boeing will, if requested by Customer, provide limited (as determined by Boeing) technical advisory assistance from the Puget Sound area or from an alternate location, at Boeing’s sole discretion, for any Aircraft or Boeing Product (as defined in Part 1 of Exhibit C of the AGTA). Technical advisory assistance, provided, will include:
2.1.1 Analysis of the information provided by Customer to determine the probable nature and cause of operational problems and a suggestion of possible solutions.
2.1.2 Analysis of the information provided by Customer to determine the nature and cause of unsatisfactory schedule reliability and a suggestion of possible solutions.
2.1.3 Analysis of the information provided by Customer to determine the nature and cause of unsatisfactory maintenance costs and a suggestion of possible solutions.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 23 BOEING PROPRIETARY 2.1.4 Analysis and commentary on Customer’s engineering releases relating to structural repairs not covered by Boeing’s Structural Repair Manual including those repairs requiring advanced composite structure design.
2.1.5 Analysis and commentary on Customer’s engineering proposals for changes in, or replacement of, systems, parts, accessories or equipment manufactured to Boeing’s detailed design. Boeing will not analyze or comment on any major structural change unless Customer’s request for such analysis and comment includes complete detailed drawings, substantiating information (including any information required by applicable government agencies), all stress or other appropriate analyses, and a specific statement from Customer of the substance of the review and the response requested.
2.1.6 Maintenance Engineering. Boeing will provide the following Maintenance Engineering support:
2.1.6.1 Maintenance Planning Assistance. Upon request, Boeing will provide [**************] resulting from minor model differences between the Aircraft and an aircraft of the same model currently operated by Customer.
2.1.6.2 ETOPS Maintenance Planning Assistance. Upon request, Boeing will provide [**************] resulting from minor model differences between the Aircraft and an aircraft of the same model currently operated by Customer.
2.1.6.3 GSE/Shops/Tooling Consulting. Upon request, Boeing will [**************]resulting from the minor model differences between the Aircraft and an aircraft of the same model currently operated by Customer.
2.1.7 Flight Operations Engineering Support. Boeing will provide the following Flight Operations Engineering support:
2.1.7.1 Assistance with [**************] to be used in establishing operating practices and policies for Customer’s operation of Aircraft.
2.1.7.2 Assistance with interpretation of the minimum equipment list, the definition of the configuration deviation list and the analysis of individual Aircraft performance.
2.1.7.3 Assistance with solving operational problems associated with delivery and route-proving flights.
2.1.7.4 Information regarding significant service items relating to Aircraft performance or flight operations.
2.1.7.5 If requested by Customer, Boeing will provide operations engineering support during the ferry flight of an Aircraft. Such support will be provided from the Puget Sound area or from an alternate location, at Boeing’s sole discretion.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 24 BOEING PROPRIETARY 2.1.7.6 Assistance in developing an Extended Operations (ETOPs) plan for regulatory approval.
2.1.7.7 Flight Operations Services. Boeing will revise, as applicable, flight data, documents and software provided with previously delivered aircraft.
2.1.7.8 Spares. Boeing will revise, as applicable, the customized Recommended Spares Parts List (RSPL).
2.2 Post Delivery/Service Support. Boeing will, if requested by Customer, perform work on an Aircraft after delivery but prior to the initial departure flight or upon the return of the Aircraft to Boeing’s facility prior to completion of that flight. The following conditions will apply to Boeing’s performance:
2.2.1 Boeing may rely upon the commitment authority of the Customer’s personnel requesting the work.
2.2.2 As title and risk of loss has passed to Customer, the insurance provisions of Article 8.2 of the AGTA apply.
2.2.3 The provisions of the Boeing warranty in Part 2 of Exhibit C of the AGTA apply.
2.2.4 Customer will pay Boeing for requested work not covered by the Boeing warranty, if any.
2.2.5 The DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES provisions in Article 11 of Part 2 of Exhibit C of the AGTA apply.
2.3 Boeing may, at Customer’s request, provide services other than those described in Articles 2.1 and 2.2 of this Part 2 of Supplemental Exhibit CS1 for an Aircraft after delivery, which may include, but not be limited to, retrofit kit changes (kits and/or information), training, flight services, maintenance and repair of Aircraft (Additional Services). Such Additional Services will be subject to a mutually acceptable price, schedule, scope of work and other applicable terms and conditions. The DISCLAIMER AND RELEASE and the EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES provisions in Article 11 of Part 2 of Exhibit C of the AGTA and the insurance provisions in Article 8.2 of the AGTA will apply to any such work. Title to and risk of loss of any such Aircraft will always remain with Customer.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 25 BOEING PROPRIETARY 787 CUSTOMER SUPPORT DOCUMENT
PART 3: TECHNICAL INFORMATION AND MATERIALS
1. General.
Materials are defined as any and all items that are created by Boeing or a third party, which are provided directly or indirectly from Boeing and serve primarily to contain, convey or embody information. Materials may include either tangible embodiments (for example, documents or drawings), or intangible embodiments (for example, software and other electronic forms) of information but excludes Aircraft Software. Aircraft Software is defined as software that is installed on and used in the operation of the Aircraft.
Customer Information is defined as that data provided by Customer to Boeing which falls into one of the following categories: (i) aircraft operational information (including, but not limited to, flight hours, departures, schedule reliability, engine hours, number of aircraft, aircraft registries, landings, and daily utilization and schedule interruptions for Boeing model aircraft); (ii) summary and detailed shop findings data; (iii) aircraft readiness log data; (iv) non-conformance reports; (v) line maintenance data; (vi) airplane message data, (vii) scheduled maintenance data; (viii) service bulletin incorporation; and (ix) aircraft data generated or received by equipment installed on Customer’s aircraft in analog or digital form including but not limited to information regarding the state, condition, performance, location, setting, or path of the aircraft and associated systems, sub-systems and components
Upon execution by Customer of Boeing’s standard form Customer Services General Terms Agreement, Supplemental Agreement for Electronic Access and, as required, the applicable Boeing licensed software order, Boeing will provide to Customer through electronic access certain Materials to support the maintenance and operation of the Aircraft. Such Materials will, if applicable, be prepared generally in accordance with Aerospace Industries Association Specification 1000D (S1000D) and Air Transport Association of America (ATA) iSpec 2200, entitled “Information Standards for Aviation Maintenance.” Materials not covered by iSpec 2200 will be provided in a structure suitable for the Material’s intended use. Materials will be in English and in the units of measure used by Boeing to manufacture an Aircraft.
2. Technical Data and Maintenance Information.
Boeing will provide technical data and maintenance information equivalent to that traditionally provided by Boeing to Customer. Boeing (i) will provide such data and information through electronic access or other means, and (ii) reserves the right to change the format of such data and information, both at its sole discretion. Boeing may elect to fulfill this obligation by revising, as applicable, previously provided technical data and maintenance information.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 26 BOEING PROPRIETARY 3. Advance Representative Materials.
Boeing will select all advance representative Materials from available sources and whenever possible will provide them through electronic access. Such advance Materials will be for advance planning purposes only.
4. Configured Maintenance Engineering Materials.
All configured Materials will reflect the configuration of each Aircraft as delivered.
5. Revisions.
5.1 The schedule for updating certain Materials will be identified in the planning conference. Such updates will reflect changes to Materials developed by Boeing.
5.2 If Boeing receives written notice that Customer intends to incorporate, or has incorporated, any Boeing service bulletin in an Aircraft, Boeing will update Materials reflecting the effects of such incorporation into such Aircraft.
6. Supplier Technical Data.
6.1 For supplier-manufactured programmed airborne avionics components and equipment classified as Seller Furnished Equipment (SFE) which contain computer software designed and developed in accordance with Radio Technical Commission for Aeronautics Document No. RTCA/DO-178B dated December 1, 1992 (with an errata issued on March 26, 1999), or later as available, Boeing will request that each supplier of the components and equipment make software documentation available to Customer.
6.2 The provisions of this Article will not be applicable to items of BFE.
6.3 Prior to the scheduled delivery month of the first Aircraft, Boeing will furnish to Customer copies of the documents which identify the terms and conditions of the product support agreements between Boeing and its suppliers Product Support and Assurance Agreements (PSAA).
7. Buyer Furnished Equipment Data.
Boeing will incorporate BFE maintenance information, as applicable, into the configured Materials provided Customer makes the information available to Boeing at least nine (9) months prior to the scheduled delivery month of each Aircraft. Boeing will incorporate such BFE maintenance information into the Materials prior to delivery of each Aircraft reflecting the configuration of that Aircraft as delivered. Upon Customer’s request, Boeing may provide update service after delivery to such information subject to the terms of Part 2, Article 2.3 relating to Additional Services. Customer agrees to furnish all BFE maintenance information in Boeing’s standard digital format, ATA Spec 2000.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 27 BOEING PROPRIETARY 8. Customer’s Shipping Address.
From time to time Boeing may furnish certain Materials or updates to Materials by means other than electronic access. Customer will specify a single address and Customer will promptly notify Boeing of any change to that address. Boeing will pay the reasonable shipping costs of the Materials. Customer is responsible for any customs clearance charges, duties, and taxes.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 28 BOEING PROPRIETARY 787 CUSTOMER SUPPORT DOCUMENT
PART 4: ALLEVIATION OR CESSATION OF PERFORMANCE
Boeing will not be required to provide any services, training or other things at a facility designated by Customer if any of the following conditions exist:
1. a labor stoppage or dispute in progress involving Customer;
2. wars or warlike operations, riots or insurrections in the country where the facility is located;
3. any condition at the facility which, in the opinion of Boeing, is detrimental to the general health, welfare or safety of its personnel or their families;
4. the United States Government refuses permission to Boeing personnel or their families to enter into the country where the facility is located, or recommends that Boeing personnel or their families leave the country; or
After the location of Boeing personnel at the facility, Boeing further reserves the right, upon the occurrence of any of such events, to immediately and without prior notice to Customer relocate its personnel and their families.
Boeing will not be required to provide any Materials at a facility designated by Customer if the United States Government refuses permission to Boeing to deliver Materials to the country where the facility is located.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 29 BOEING PROPRIETARY 787 CUSTOMER SUPPORT DOCUMENT
PART 5: PROTECTION OF PROPRIETARY INFORMATION AND PROPRIETARY MATERIALS
1. General.
All Materials provided by Boeing to Customer and not covered by a Boeing CSGTA or other agreement between Boeing and Customer defining Customer’s right to use and disclose the Materials and included information will be covered by and subject to the terms of the AGTA as amended by the terms of the Purchase Agreement. Title to all Materials containing, conveying or embodying confidential, proprietary or trade secret information (Proprietary Information) belonging to Boeing or a third party (Proprietary Materials), will at all times remain with Boeing or such third party. Customer will treat all Proprietary Materials and all Proprietary Information in confidence and use and disclose the same only as specifically authorized in the AGTA as amended by the terms of the Purchase Agreement.
2. License Grant.
2.1 Boeing grants to Customer a worldwide, non-exclusive, non-transferable license to use and disclose Proprietary Materials in accordance with the terms and conditions of the AGTA as amended by the terms of the Purchase Agreement. Customer is authorized to make copies of Materials (except for Materials bearing the copyright legend of a third party), and all copies of Proprietary Materials will belong to Boeing and be treated as Proprietary Materials under the AGTA as amended by the terms of the Purchase Agreement. Customer will preserve all proprietary legends, and all copyright notices on all Materials and insure the inclusion of those legends and notices on all copies.
2.2 Customer grants to Boeing a perpetual, world-wide, non-exclusive license to use and disclose Customer Information or derivative works thereof in Boeing data and information products and services provided indicia identifying Customer Information as originating from Customer is removed from such Customer Information. This grant is in addition to any other grants of rights in the agreements governing provision of such information to Boeing regardless of whether that information is identified as Customer Information in such agreement.
3. Use of Proprietary Materials and Proprietary Information.
Customer is authorized to use Proprietary Materials and Proprietary Information for the purpose of: (a) operation, maintenance, repair, or modification of Customer’s Aircraft for which the Proprietary Materials and Proprietary Information have been specified by Boeing and (b) development and manufacture of training devices and maintenance tools for use by Customer.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 30 BOEING PROPRIETARY 4. Providing of Proprietary Materials to Contractors.
Customer is authorized to provide Proprietary Materials to Customer’s contractors for the sole purpose of maintenance, repair, or modification of Customer’s Aircraft for which the Proprietary Materials have been specified by Boeing. In addition, Customer may provide Proprietary Materials to Customer’s contractors for the sole purpose of developing and manufacturing training devices and maintenance tools for Customer’s use. Before providing Proprietary Materials to its contractor, Customer will first obtain a written agreement from the contractor by which the contractor agrees (a) to use the Proprietary Materials only on behalf of Customer, (b) to be bound by all of the restrictions and limitations of this Part 5, and (c) that Boeing is a third party beneficiary under the written agreement. Customer agrees to provide copies of all such written agreements to Boeing upon request and be liable to Boeing for any breach of those agreements by a contractor. A sample agreement acceptable to Boeing is attached as Appendix VII to the AGTA.
5. Providing of Proprietary Materials and Proprietary Information to Regulatory Agencies.
5.1 When and to the extent required by a government regulatory agency having jurisdiction over Customer or an Aircraft, Customer is authorized to provide Proprietary Materials and to disclose Proprietary Information to the agency for use in connection with Customer’s operation, maintenance, repair, or modification of such Aircraft. Customer agrees to take all reasonable steps to prevent the agency from making any distribution, disclosure, or additional use of the Proprietary Materials and Proprietary Information provided or disclosed. Customer further agrees to notify Boeing immediately upon learning of any (a) distribution, disclosure, or additional use by the agency, (b) request to the agency for distribution, disclosure, or additional use, or (c) intention on the part of the agency to distribute, disclose, or make additional use of Proprietary Materials or Proprietary Information.
5.2 In the event of an Aircraft or Aircraft systems-related incident, the Customer may suspend, or block access to Customer Information pertaining to its Aircraft or fleet. Such suspension may be for an indefinite period of time.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 31 BOEING PROPRIETARY 787 CUSTOMER SUPPORT DOCUMENT
ATTACHMENT A 787 TRAINING POINTS MENU Revision Date December 2014
Per Class Total Student Points Per 787 Training Courses Maximum Class* Flight - All Flight courses must be taught at a Boeing facility 787 Pilot Transition Course – FAA # [***] [***] 787 Pilot Shortened Transition Course – FAA (STAR) # [***] [***] 787 Pilot Additional Type Rating – EASA # [***] [***] 787 Pilot Prior Experience Course - EASA # [***] [***] 777 to 787 Pilot Differences Course # [***] [***] 787 Pilot Recurrent Course # [***] [***] 787 Pilot Transition Course during Non-social Sessions** # [***] [***] 787 Pilot Shortened Transition Course (STAR) during Non-social Sessions** # [***] [***] 777 to 787 Pilot Differences Course during Non-social Sessions** # [***] [***] 787 Pilot Recurrent Course during Non-social Sessions** # [***] [***] Additional 787 Four Hour Simulator Session (with or without Boeing instructor) # [***] [***] Additional 787 Ground School Training Day (with or without FTD) # [***] [***]
Cabin Crew/Door Training 787 Cabin Safety Training (includes Exits/Door Training) [***] [***] 787 Emergency Exits/Doors Training Course [***] [***]
Maintenance 787 General Familiarization Maintenance Course (web-based) [***] [***] 787 General Familiarization Maintenance Course (instructor-led) [***] [***] 787 Operations/Handling (web-based) [***] [***] 787 Airframe/Powerplant/Electrical/ Avionics (B1/B2 Compliant) Systems Line & Base Maintenance Course # [***] [***] 787 EASA Part 147 Approved B2 Electrical/Avionics Line & Base Maintenance Course # [***] [***] 787 Engine Run-Up Course # [***] [***] 787 Aircraft Rigging Course [***] [***] 787 Fiber Optics Course # [***] [***]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 32 BOEING PROPRIETARY 787 Repair of Advanced Composite Structures for Technicians Course # [***] [***] 787 Composite Repair & Design for Engineers # [***] [***] 787 Composite Repair for Inspectors # [***] [***] 787-8 to 787-9 or -9 to -8 Maintenance Training Differences Class [***] [***]
Generic Training Courses Corrosion Prevention & Control Course [***] [***] Composite/Metal Bond Part I - Introduction to Advanced Composite Materials and Metal Bond Repair # [***] [***] Composite/Metal Bond Part II - Basic Composite Repair for Technicians # [***] [***] Composite/Metal Bond Part III - Advanced Composite Component Repair # [***] [***] Composite/Metal Bond Part IV - Advanced Composite Repair for Technicians # [***] [***] Composite/Metal Bond Part V - Metal Bond Repair for Technicians # [***] [***] Repair of Advanced Composite Structures for Engineers [***] [***] Composite Repair Design with Practical Application # [***] [***]
For Customer’s Internal Use Only CBT Products CBT License Flight [********************]Or
Initial Transition CBT [********************]
[********************]Or
STAR CBT [********************]
787 Cabin Safety Training CBT [********************] Maintenance Line and Base Systems CBT (excludes Line Oriented Scenarios) [********************]
*[********************].
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 33 BOEING PROPRIETARY **Non-social Sessions are those in which any part of the session falls between midnight and 06:00 A.M. local time. To qualify for this discount all simulator sessions for a given course must be scheduled as Non-social Sessions.
# Courses must be taught at a Boeing facility.
The courses and products listed in this Attachment A are subject to change from time to time as new courses are added and courses are removed. Boeing reserves the right to change course offering at its own discretion.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 34 BOEING PROPRIETARY ENGINE ESCALATION, ENGINE WARRANTY AND PATENT INDEMNITY between THE BOEING COMPANY and CHINA SOUTHERN AIRLINES COMPANY LIMITED with CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD. as Consenting Party Supplemental Exhibit EE1 to Purchase Agreement Number PA-04455
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 35 BOEING PROPRIETARY ENGINE ESCALATION ENGINE WARRANTY AND PATENT INDEMNITY
relating to
BOEING MODEL 787-9 AIRCRAFT
1. ENGINE ESCALATION.
The Aircraft Basic Price of each Aircraft set forth in Table 1 of the Purchase Agreement includes an aggregate price for General Electric Aircraft GEnx series engines and all accessories, equipment and parts provided by the engine manufacturer (Engines). The adjustment in Engine Price applicable to each Aircraft (Engine Price Adjustment) will be determined at the time of Aircraft delivery in accordance with the following formula:
[*****] [*****]
Where:
[*****] [*****]
[*****] [*****]
[*****] [*****] [*****]
Where:
[*****] [*****]
[*****] is a value determined using the U.S. Department of Labor, Bureau of Labor Statistics, Employment Cost Index for NAICS Aircraft Manufacturing - Wages and Salaries (Series ID CIU2023211000000I), calculated by establishing a three (3) month arithmetic average value (expressed as a decimal and rounded to the nearest tenth) using the values for the 11th, 12th and 13th months prior to the month of scheduled delivery of the applicable Aircraft. As the Employment Cost Index values are only released on a quarterly basis, the value released for the first quarter will be used for the months of January, February and March; the value released for the second quarter will be used for the months of April, May and June; the value released for the third quarter will be used for the months of July, August and September; the value released for the fourth quarter will be used for the months of October, November and December.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 36 BOEING PROPRIETARY [*****] [*****] [*****]
Where:
[*****] [*****]
[*****] is a value determined using the U.S. Department of Labor, Bureau of Labor Statistics, Producer Prices and Price Index - Industrial Commodities Index (BLS Series ID WPU03THRU15), calculated as a three (3) month arithmetic average of the released monthly values (expressed as a decimal and rounded to the nearest tenth) using the values for the 11th, 12th and 13th months prior to the month of scheduled delivery of the applicable Aircraft.
[*****] [*****]
Where:
[*****] is the number of calendar months which have elapsed from the Airframe Price Base Year and month up to and including the month of delivery, both as shown in Table 1 of the Purchase Agreement. The entire calculation of [*****] will be rounded to four (4) places, and the final value of B will be rounded to the nearest dollar.
As an example, for an Aircraft scheduled to be delivered in the month of July, the months June, July and August of the preceding year will be utilized in determining the value of [*****].
NOTE:
(i) In determining the values of [*****], all calculations and resulting values will be expressed as a decimal rounded to the nearest ten-thousandth.
(ii) [*****] is the numeric ratio attributed to labor in the Engine Price Adjustment formula.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 37 BOEING PROPRIETARY (iii) [*****] is the numeric ratio attributed to materials in the Engine Price Adjustment formula.
(iv) The [*****]are the actual average values reported by the U.S. Department of Labor, Bureau of Labor Statistics. The actual average values are calculated as a three (3) month arithmetic average of the released monthly values (expressed as a decimal and rounded to the nearest tenth) using the values for the 11th, 12th and 13th months prior to the Engine Price base year. The applicable base year and corresponding denominator is provided by Boeing in Table 1 of this Purchase Agreement.
(v) The final value of [*****] will be rounded to the nearest dollar.
(vi) The Engine Price Adjustment will not be made if it will [*****] Engine Price.
2. Values to be Utilized in the Event of Unavailability.
2.1 If the Bureau of Labor Statistics substantially revises the methodology used for the determination of the values to be used to determine the [*****] values (in contrast to benchmark adjustments or other corrections of previously released values), or for any reason has not released values needed to determine the applicable Engine Price Adjustment, General Electric Aircraft agrees to meet jointly with Boeing and the Customer (to the extent such parties may lawfully do so) prior to the delivery of any such Aircraft, select a substitute from other Bureau of Labor Statistics data or similar data reported by non-governmental organizations. Such substitute will result in the same adjustment, insofar as possible, as would have been calculated utilizing the original values adjusted for fluctuation during the applicable time period. However, if within [*****] after delivery of the Aircraft, the Bureau of Labor Statistics should resume releasing values for the months needed to determine the Engine Price Adjustment, such values will be used to determine any increase or decrease in the Engine Price Adjustment for the Engine from that determined at the time of delivery of the Aircraft.
2.2 Notwithstanding Article 2.1 above, if prior to the scheduled delivery month of an Aircraft the Bureau of Labor Statistics changes the base year for determination of the [*****] as defined above, such re- based values will be incorporated in the Engine Price Adjustment calculation.
2.3 In the event escalation provisions are made non-enforceable or otherwise rendered void by any agency of the United States Government, the parties agree, to the extent they may lawfully do so, to equitably adjust the Engine Price of any affected Aircraft to reflect an allowance for increases or decreases consistent with the applicable provisions of paragraph 1 of this Supplemental Exhibit EE1 in labor compensation and material costs occurring since August of the year prior to the price base year shown in the Purchase Agreement.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 38 BOEING PROPRIETARY 2.4 If [**************] of Aircraft delivery, the published index values are revised due to an acknowledged error by the Bureau of Labor Statistics, the Engine Price Adjustment will be re-calculated using the revised index values (this does not include those values noted as preliminary by the Bureau of Labor Statistics). A credit memorandum or supplemental invoice will be issued for the Engine Price Adjustment difference. Interest charges will not apply for the period of original invoice to issuance of credit memorandum or supplemental invoice.
NOTE:
(i) The values released by the Bureau of Labor Statistics and available to Boeing thirty (30) days prior to the first day of the scheduled delivery month of an Aircraft will be used to determine the [*****] values for the applicable months (including those noted as preliminary by the Bureau of Labor Statistics) to calculate the Engine Price Adjustment for the Aircraft invoice at the time of delivery. The values will be considered final and no Engine Price Adjustments will be made after Aircraft delivery for any subsequent changes in published Index values, subject always to paragraph 2.4 above.
(ii) The maximum number of digits to the right of the decimal after rounding utilized in any part of the Engine Price Adjustment equation will be four (4), where rounding of the fourth digit will be increased to the next highest digit when the 5th digit is equal to five (5) or greater.
3. Engine Warranty.
Boeing has obtained from General Electric Company (GE) the right to extend to Customer the provisions of GE's warranty as set forth below (herein referred to as Warranty); subject, however, to Customer's acceptance of the conditions set forth herein. Accordingly, Boeing hereby extends to Customer and Customer hereby accepts the provisions of GE's Warranty as hereinafter set forth, and such Warranty will apply to all GEnx type engines (including all Modules and Parts thereof), as such terms are defined in the Warranty (GEnx type Engines) installed in the Aircraft at the time of delivery or purchased from Boeing by Customer for support of the Aircraft except that, if Customer and GE have executed, or hereinafter execute, a general terms agreement (Engine GTA), then the terms of the Engine GTA will be substituted for and supersede the provisions of the Warranty and the Warranty will be of no force or effect and neither Boeing nor GE will have any obligation arising there from. In consideration for Boeing's extension of the GE Warranty to Customer, Customer hereby releases and discharges Boeing from any and all claims, obligations and liabilities whatsoever arising out of the purchase or use of such GEnx type Engines and Customer hereby waives releases and renounces all its rights in all such claims, obligations and liabilities.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 39 BOEING PROPRIETARY The Warranty is contained in the Warranty and Product Support Plan set forth in Exhibit C to the applicable purchase contract between GE and Boeing. Copies of the Warranty and Product Support Plan will be provided to Customer by Boeing upon request.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 40 BOEING PROPRIETARY SERVICE LIFE POLICY COMPONENTS between THE BOEING COMPANY and CHINA SOUTHERN AIRLINES COMPANY LIMITED with CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD. as Consenting Party Supplemental Exhibit SLP1 to Purchase Agreement Number PA-04455
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 41 BOEING PROPRIETARY SERVICE LIFE POLICY COMPONENTS
relating to
BOEING MODEL 787-9 AIRCRAFT
This is the listing of SLP Components for the Aircraft which relate to Part 3, Boeing Service Life Policy of Exhibit C, Product Assurance Document to the AGTA and is a part of Purchase Agreement No. PA- 04455.
1. Wing.
(i) Upper and lower wing skins and stiffeners between the forward and rear wing spars.
(ii) Wing spar webs, chords and stiffeners.
(iii) Inspar wing ribs.
(iv) Inspar splice plates and fittings.
(v) Main landing gear support structure.
(vi) End ribs removable outboard wingbox, including spars and skins.
(vii) Wing center section lower beams, spanwise beams and floor beams, but not the seat tracks attached to floor beams.
(viii) Wing-to-body structural attachments.
(ix) Engine pylon support fittings attached directly to wing primary structure.
(x) Support structure in the wing for spoilers and spoiler actuators; for aileron hinges and reaction links; and for leading edge devices and trailing edge flaps/flapperon.
(xi) Leading edge device and trailing edge flap support system.
(xii) Aileron leading edge device and trailing edge flap internal, fixed attachment and actuator support structure.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 42 BOEING PROPRIETARY 2. Body.
(i) External surface skins and doublers, longitudinal stiffeners, longerons and circumferential rings and frames between the forward pressure bulkhead and the vertical stabilizer rear spar bulkhead and structural support and enclosure for the APU but excluding all system components and related installation and connecting devices, insulation, lining, and decorative panels and related installation and connecting devices.
(ii) Window and windshield structure but excluding the windows and windshields.
(iii) Fixed attachment structure of the passenger doors, cargo doors and emergency exits, excluding door mechanisms and movable hinge components. Sills and frames around the body openings for the passenger doors, cargo doors and emergency exits, excluding scuff plates and pressure seals.
(iv) Nose wheel well structure, including the wheel well walls, pressure deck, forward and aft bulkheads, and the gear support structure.
(v) Main gear wheel well pressure deck, bulkheads and landing gear beam structure.
(vi) Floor beams and support posts in the control cab and passenger cabin area, but excluding seat tracks.
(vii) Forward and aft pressure bulkheads.
(viii) Keel structure between the wing front spar bulkhead and the main gear wheel well aft bulkhead, including splices.
(ix) Wing front and rear spar support bulkheads, and vertical and horizontal stabilizer front and rear spar support bulkheads including terminal fittings but excluding all system components and related installation and connecting devices, insulation, lining, and decorative panels and related installation and connecting devices.
(x) Support structure in the body for the stabilizer pivot and stabilizer screw.
3. Vertical Stabilizer.
(i) External skins between front and rear spars.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 43 BOEING PROPRIETARY (ii) Front, rear and auxiliary spars including stiffeners.
(iii) Attachment fittings between vertical stabilizer and body.
(iv) Inspar ribs.
(v) Rudder hinges and supporting ribs, excluding bearings.
(vi) Support structure in the vertical stabilizer for rudder hinges, reaction links and actuators.
(vii) Rudder internal, fixed attachment and actuator support structure.
4. Horizontal Stabilizer.
(i) External skins between front and rear spars.
(ii) Horizontal stabilizer main torque box spars.
(iii) Stabilizer splice fittings, rib, pivot and screw support structure.
(iv) Support structure in the horizontal stabilizer for the elevator hinges, reaction links and actuators.
(v) Elevator internal, fixed attachment and actuator support structure.
(vi) Elevator hinges and supporting ribs, excluding bearings.
5. Engine Pylon.
(i) Pylon skins, webs, doublers and stiffeners.
(ii) Internal pylon chords, frames and bulkheads.
(iii) Pylon to wing fittings, diagonal brace and links.
(iv) Engine mount support attached directly to pylon structure.
(v) Fuse pins.
6. Main Landing Gear.
(i) Outer cylinder.
(ii) Inner cylinder.
(iii) Upper and lower side brace, including spindles
(iv) Upper and lower drag brace, including spindles and shackle.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 44 BOEING PROPRIETARY (v) Downlock links including spindles.
(vi) Torsion links.
(vii) Truck beam.
(viii) Axles.
7. Nose Landing Gear.
(i) Outer cylinder.
(ii) Inner cylinder, including axle.
(iii) Upper and lower drag brace.
(iv) Downlock links.
(v) Steering support plates, tube and collar.
(vi) Torsion links.
NOTE: The Service Life Policy does not cover any bearings, bolts, bushings, clamps, brackets, actuating mechanisms or latching mechanisms used in or on the SLP Components.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 45 BOEING PROPRIETARY GUN-PA-04455-LA-1600105
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: AGTA Terms Updates
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
1. AGTA Basic Articles.
Article 2.1.1, “Airframe Price”, of the basic articles of the AGTA is revised to read as follows:
2.1.1 Airframe Price is defined as the price of the airframe for a specific model of aircraft described in a purchase agreement. (For certain model aircraft, as reflected in the purchase agreement, the Airframe Price includes the engine price at its basic thrust level).
Article 2.1.3, “Engine Price”, of the basic articles of the AGTA is revised to read as follows:
2.1.3 Engine Price is defined as the price set by the engine manufacturer for a specific engine to be installed on the model of aircraft described in a purchase agreement (not applicable to certain models of aircraft as reflected in the purchase agreement).
Article 2.1.5, “Escalation Adjustment”, of the basic articles of the AGTA is revised to read as follows:
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 46 BOEING PROPRIETARY 2.1.5 Escalation Adjustment is defined as the price adjustment to the Airframe Price (which includes the basic engine price for certain models of aircraft as reflected in the purchase agreement) and the Optional Features Prices resulting from the calculation using the economic price formula contained in the Airframe and Optional Features Escalation Adjustment supplemental exhibit to the applicable purchase agreement. The price adjustment to the Engine Price will be calculated using the economic price formula in the Engine Escalation Adjustment supplemental exhibit to the applicable purchase agreement when the Airframe Price does not include the engine price at its basic thrust level as reflected in the purchase agreement.
2. AGTA – Appendix I “Sample Insurance Certificate”.
Appendix I, entitled “SAMPLE Insurance Certificate”, under the LIMITS OF LIABILITY section, the aircraft models and corresponding insurance amounts are hereby revised as follows:
737 [*****************] 747, 767, 777, & 787 [*****************]
3. AGTA - Exhibit C “Product Assurance Document”.
Warranty Periods. Part 2, Article 3.1, of Exhibit C to the AGTA is amended to read as follows:
3.1 Warranty. The warranty period begins on the date of aircraft or Boeing Product delivery (Delivery) and ends at the applicable time specified in subsections 3.1 (i) through 3.1 (iii) below:
(i) for all Boeing aircraft models except 767 model aircraft, the warranty period ends forty-eight (48) months after Delivery;
(ii) in addition, for a Boeing Product installed at the time of delivery in a 787 model aircraft but not inspected during the initial forty-eight (48) month warranty period, the warranty period continues until the date upon which Customer first inspects such Boeing Product pursuant to its Boeing Maintenance Planning Data Document but not later than twelve (12) years after Delivery of such 787 aircraft;
(iii) for Boeing aircraft model 767, the warranty period ends thirty-six (36) months after such Delivery.
Filing a Claim. Part 2, Article 6.2.1, of Exhibit C to the AGTA is amended to add the following provision:
(xi) for 787 model aircraft claims submitted after the forty-eight (48) month warranty period, the specific reference within the Boeing Maintenance Planning Data Document to the inspection requirement for such Boeing Product.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 47 BOEING PROPRIETARY Service Life Policy. Part 3, Article 2.2, of Exhibit C to the AGTA is amended and inserted for 787 model aircraft to read as follows:
2.2 SLP Policy Periods.
2.2.1 The policy period for SLP Components initially installed on a 787 model aircraft is [***********] after the date of delivery of the aircraft.
2.2.2 The policy period for SLP Components purchased from Boeing by Customer as spare parts for 787 model aircraft is [***********]from delivery of such SLP Component or [***********] from the date of delivery of the last 787 model aircraft produced by Boeing, whichever first expires.
Price. Part 3, Article 3, of Exhibit C to the AGTA is amended and inserted to read as follows:
3. Price.
The price Customer will pay for replacement of a failed SLP Component will be calculated pursuant to the following formulas:
(i) For 787 aircraft only:
[****] [****] [****]
where:
[****] price to Customer for the replacement part
[****] SLP Component sales price at time of Correction
[****] total age in months of the defective or failed SLP Component from the date of delivery to Customer to the date of discovery of such condition and is greater than 48 months.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 48 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600105 AGTA Terms Updates LA Page 49 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1600109
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: 787 Customer Support – Additional Minor Model 787-9 Aircraft
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
1. Customer currently operates an aircraft of the same model type as the Aircraft. In support of the Aircraft, Boeing offers the additional customer support provided in this Letter Agreement.
2. Customer is awarded a total of [***********] in accordance with Supplemental Exhibit CS1. Customer may exchange Training Points for any of the training courses described on Attachment A to this Letter Agreement at the point values described on Attachment A or for any of the training courses described in Supplemental Exhibit CS1 (CS1) to the Purchase Agreement. At the end of the Training Program Period, as defined in CS1, any unused Training Points will expire.
3. Minor Model Difference Training and Entitlements.
3.1 Maintenance Planning Assistance. Upon request, Boeing will provide assistance in identifying the impact to Customer’s maintenance program resulting from minor model differences between the Aircraft and an aircraft of the same model currently operated by Customer.
3.2 ETOPS Maintenance Planning Assistance. Upon request, Boeing will provide assistance in identifying the impact to Customer’s ETOPS maintenance program resulting from minor model differences between the Aircraft and an aircraft of the same model currently operated by Customer.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600109 Customer Support-Code 3-787 LA Page 1 BOEING PROPRIETARY 3.3 GSE/Shops/Tooling Consulting. Upon request, Boeing will provide assistance to Customer in identifying the impact to Customer’s maintenance tools and ground support equipment resulting from the minor model differences between the Aircraft and an aircraft of the same model currently operated by Customer.
3.4 Flight Operations Services. Boeing will revise, as applicable, flight data, documents and software provided with previously delivered aircraft.
3.5 Technical Data and Maintenance Information. Boeing will provide technical data and maintenance information equivalent to that traditionally provided. Boeing (i) will provide such data and information through electronic access or other means, and (ii) reserves the right to change the format of such data and information, both at its sole discretion. Boeing may elect to fulfill this obligation by revising, as applicable, previously provided technical data and maintenance information.
3.6 Spares. Boeing will revise, as applicable, the customized Recommended Spares Parts List (RSPL).
4. Assignment.
Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer becoming the owner or operator of the Aircraft and cannot be assigned in whole or, in part.
5. Confidential Treatment.
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who are under an obligation not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600109 Customer Support-Code 3-787 LA Page 2 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600109 Customer Support-Code 3-787 LA Page 3 BOEING PROPRIETARY ATTACHMENT A 787 DIFFERENCES TRAINING POINTS MENU
Per Class Total Student Points Per 787 Training Courses Maximum Class* Maintenance [******************************************] [***] [***]
* Points per Class are based upon training conducted according to Boeing’s standard training courses. Extended or modified courses will require point adjustment to reflect altered work statement or duration.
The courses and products listed in this Attachment A are subject to change from time to time as new courses are added and courses are removed. Boeing reserves the right to change course offering at its own discretion.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600109 Customer Support-Code 3-787 LA Page 4 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1600110
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Model 787 e-Enabling Software Matters
Reference: a) Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
b) Customer Services General Terms Agreement No. CSGTA-1B-1 (CSGTA) between Boeing and Customer, including Supplemental Agreement for Electronic Access (SA-EA), Supplemental Agreement for e-Enabling (SA-eE), and 787-9 Software License Orders (collectively referred to herein as the CSGTA)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement.
1. Customer’s Aircraft is equipped with onboard loadable hardware, including such hardware as the [**************] and the [*******************]. Boeing will load certain data and install certain Boeing e- Enabling software, as set forth in the Purchase Agreement and the 787 Software License Orders, on the loadable hardware. All such e-Enabling software licensed from Boeing will be considered “Materials”, and not “Aircraft Software”, as these terms are defined in the Purchase Agreement.
2. Certain technical data and maintenance information specified in Article 3 of Part 3 of Supplemental Exhibit CS1 to the Purchase Agreement may be provided in software media, made available for loading onto Customer’s maintenance laptop or conveyed through electronic access. Such data and the software required to access such data and information will be considered “Materials”, and not “Aircraft Software” even when used onboard the Aircraft.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600110 e-Enabling Software Matters-787 LA Page 1 BOEING PROPRIETARY 3. Additional Terms and Conditions.
Boeing will license and load or install the above Materials on the following conditions:
(i) Notwithstanding any provision in the Purchase Agreement to the contrary, the license and access to the Materials referred to in Articles 1 and 2, above, as well as the provision and license of the Software Developer Kits (SDKs) for the EFB and the Core Network, will be pursuant to the terms and conditions of the CSGTA; and
(ii) The DISCLAIMER AND RELEASE in Article 11.1 and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES provisions in Article 11.2 of Part 2 of Exhibit C of the AGTA and the insurance provisions of Article 8.2 of the AGTA will apply to Boeing’s loading/installation of the Materials.
The CSGTA must be executed between Boeing and Customer no later than [**************] prior to delivery of Customer’s first 787 Aircraft.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600110 e-Enabling Software Matters-787 LA Page 2 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600110 e-Enabling Software Matters-787 LA Page 3 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1600111
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Special Escalation Program
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
1. Definitions.
Escalation Notice means the written communication provided by Boeing to Customer in accordance with the requirements of Article 8.1, below.
Program Aircraft means each Aircraft specified in Table 1 of the Purchase Agreement as of the date of this Letter Agreement.
2. Applicability.
Notwithstanding any other provision of the Purchase Agreement to the contrary, the parties agree that the Escalation Adjustment for the Airframe Price and Optional Features Prices for each Program Aircraft will be determined in accordance with this Letter Agreement.
3. Escalation Forecast.
Boeing will release an escalation forecast in February and August of each year based on Boeing’s then current standard [***********] escalation formula. Only one escalation forecast will be used to conduct the escalation analysis performed in accordance with Article 8.1, below, for a given Program Aircraft. The escalation forecast applicable to a given Program Aircraft is set forth in Attachment A of this Letter Agreement.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600111 Special Escalation Program LA Page 1 BOEING PROPRIETARY 4. Capped Escalation
4.1. Boeing will cap the Escalation Adjustment for the Airframe Price and Optional Features Prices of each Program Aircraft for the period beginning [*****************], in accordance with the terms of this Letter Agreement.
4.2. The Escalation Adjustment for the Airframe Price and Optional Features Prices of each Program Aircraft will be capped during the Capped Period at a variable rate between [***********] and [***********] unless the escalation forecast, as set forth in Article 3, projects a cumulative annual escalation factor that exceeds [***********] cumulative annual escalation factor for the scheduled delivery month of any Program Aircraft that is scheduled to deliver within the time period applicable to such escalation forecast. See attachment B (Capped Factor).
5. Equal to [**************************] Cumulative Annual Escalation during the Capped Period.
If the cumulative annual escalation factor, as determined in accordance with Supplemental Exhibit AE1 at time of delivery of Program Aircraft, produces an escalation rate of [***********************************] cumulative annual escalation for such Program Aircraft, then the escalation rate so produced shall apply to the Airframe Price and the Optional Features Prices for such Program Aircraft.
6. Greater than [******************************] [**********************] Cumulative Annual Escalation during the Capped Period
If the cumulative annual escalation factor, as determined in accordance with Supplemental Exhibit AE1 at time of delivery of Aircraft, produces an escalation rate of greater than [**********************] [*************************] cumulative annual escalation for such Program Aircraft, then the escalation rate shall be equal to [***********] cumulative annual escalation.
7. Greater than [*****************************] [******************************] Cumulative Annual Escalation during the Capped Period.
If the cumulative annual escalation factor, as determined in accordance with Supplemental Exhibit AE1 at time of delivery of Aircraft, [*******************] cumulative annual escalation [***************************************] cumulative annual escalation for such Aircraft, then the escalation rate shall be [**************************] cumulative annual escalation [*******************] [************************], up to a maximum of [***********] cumulative annual escalation.
8. Greater than [***********] Cumulative Annual Escalation forecasted for the Capped Period.
8.1. If the escalation forecast, as set forth in Article 3, above, projects a cumulative annual escalation factor that exceeds [***********] cumulative annual escalation factor, as set forth in Attachment B, for the scheduled delivery month of any Program Aircraft that is scheduled to deliver within the time period applicable to such escalation forecast, as set forth in Attachment A, then Boeing shall issue an Escalation Notice to the Customer by the date set forth in Attachment A. Such Escalation Notice shall either:
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600111 Special Escalation Program LA Page 2 BOEING PROPRIETARY 8.1.1. Limit the rate of escalation applicable to the Airframe Price and Optional Features Prices for such affected Program Aircraft to [***********] cumulative annual escalation; or
8.1.2. Provide Customer [***************************************************] cumulative annual escalation plus a calculation methodology to account for any escalation over [***********], and this formula must be mutually agreed to by both parties.
8.1.3. If neither 8.1.1 nor 8.1.2 occurs, then [*************************************].
8.2. If Boeing or Customer exercise the option described in Article 8.1.3 above, then [*********************] shall notify the other in writing of its election to exercise the option contained in Article 8.1.3 above within [*********] days of its receipt of the Escalation Notice from Boeing. In the event Customer exercises its option in accordance with Article 8.1.3 above, then Boeing will promptly return to Customer, without interest, an amount equal to all advance payments paid by Customer for the terminated Program Aircraft.
8.2.1. Within [******************************************************************] under Article 8.2 above, Boeing may elect by written notice to Customer to purchase from Customer any BFE related to such [*************************] at the invoice prices paid, or contracted to be paid, by Customer.
8.2.2. Should Customer fail to issue any notice to Boeing in accordance with Article 8.2 above, then the Escalation Adjustment for the Airframe Price and Optional Features Prices for such Program Aircraft shall be calculated in accordance with Supplemental Exhibit AE1.
8.3. Should Boeing fail to issue an Escalation Notice to Customer in accordance with Article 8.1, then the escalation adjustment for the Airframe Price and Optional Features Prices for such Program Aircraft shall be calculated in accordance with Article 8.1.1 above.
9. Applicability to Other Financial Consideration.
The escalation adjustment for any other sum, identified in the Purchase Agreement as subject to escalation pursuant to Supplemental Exhibit AE1, and which pertains to the Program Aircraft will be calculated using the escalation methodology established in this Letter Agreement for such Program Aircraft notwithstanding any other provisions of the Purchase Agreement to the contrary.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600111 Special Escalation Program LA Page 3 BOEING PROPRIETARY 10. Assignment.
Except for an assignment by Customer to a wholly-owned subsidiary as permitted under Article 9, entitled “Assignment, Resale, or Lease” of the AGTA, this Letter Agreement is provided as an accommodation to Customer in consideration of Customer becoming the operator of the Aircraft and cannot be assigned in whole or in part.
11. Confidential Treatment.
The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer will limit the disclosure of its contents, except for as required by applicable laws or regulations, to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600111 Special Escalation Program LA Page 4 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600111 Special Escalation Program LA Page 5 BOEING PROPRIETARY ATTACHMENT A
Escalation Forecast & Escalation Notice Date
Escalation Applicable to Program Aircraft Escalation Forecast Delivering in Time Period Notice Date [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600111 Special Escalation Program LA Page 6 BOEING PROPRIETARY ATTACHMENT B
Escalation Factors
Airframe Price Base Year: [***********]
Beginning of Capped Period: [***********]
End of Capped Period: [***********]
[***********] [***********] Delivery Escalation Escalation Date Factors Factors [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600111 Special Escalation Program LA Page 7 BOEING PROPRIETARY [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600111 Special Escalation Program LA Page 8 BOEING PROPRIETARY [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600111 Special Escalation Program LA Page 9 BOEING PROPRIETARY [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********] [***********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600111 Special Escalation Program LA Page 10 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1600112
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Special Matters relating to COTS Software and End User License Agreements
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
Recitals
1. Certain third party, commercial off-the-shelf software products are available to perform various functions required in the Aircraft (COTS Software).
2. The industry practice with respect to COTS Software is to permit manufacturers to install the software in products for sale to customers. The manufacturer is required to pass to the customer an End User License Agreement (EULA), which covers the right to use the COTS Software. The EULA’s also require each user of the product to further license the software and pass the EULA to any user to whom he transfers the product.
3. Because of the described industry practice with respect to COTS Software, Boeing does not acquire title to COTS Software and cannot pass title to COTS Software at the time of delivery of the Aircraft.
4. Therefore, the parties desire to amend certain provisions of the Purchase Agreement to properly reflect the respective rights and obligations of the parties with respect to the COTS Software included in the Aircraft.
GUN-PA-04455-LA-1600112 EULA Special Matters LA Page 1 BOEING PROPRIETARY Agreement
1. Prior to delivery of the Aircraft, Boeing will make available to Customer copies of all EULA’s applicable to the Aircraft, and Customer agrees to comply with all provisions of the applicable EULA’s.
5. Notwithstanding the provisions of Article 6.3 of the AGTA, at delivery of each Aircraft, Boeing will provide Customer [*******************************************].
6. In connection with any sale or other transfer of the Aircraft, Customer agrees to comply with all provisions of the applicable EULA’s, including without limitation the re-licensing of the software to Customer’s transferee and the flow down within such license of the further requirement that Customer’s transferee comply with and flow to other transferees the obligations of the EULA.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600112 EULA Special Matters LA Page 2 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600112 EULA Special Matters LA Page 3 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1600113
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Government Approval Matters
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
1. Government Approval. Boeing and Customer both acknowledge that it is necessary for Customer to obtain government approval to import the Aircraft into [************************************]. Customer agrees to use best efforts to obtain Government Approval and notify Boeing promptly in writing as soon as approval has been obtained. In cooperation with Customer, Boeing shall provide reasonable assistance to Customer in preparing informational materials relating to the Purchase Agreement and the Aircraft which Customer advises are reasonably required for the Government Approval process. Customer shall advise Boeing as soon as practical of the specific assistance which Customer plans to request from Boeing.
2. Flexibility. Boeing and Customer will work together, to help Customer [*********************************************]. If Customer is not current with advance payments for all Aircraft per the Purchase Agreement, then Boeing may, after consultation with Customer [****************************], take one or more of the actions set forth below for the Aircraft as it deems appropriate based on Boeing’s production considerations and requirements, while expressly reserving all of Boeing’s rights and remedies under law.
2.1. Reschedule Aircraft. Boeing may reschedule any or all of the Aircraft. Boeing, after consultation with Customer, will give [***************************] advance notice of any such Aircraft rescheduling, and will not reschedule Aircraft for which Customer becomes current with advance payments prior to the expiration of such [***************************]notification period.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600113 Government Approval Matters LA Page 1 BOEING PROPRIETARY The following terms shall apply to the rescheduled Delivery Period Aircraft.
2.1.1. The [***************************] for each such rescheduled Aircraft will be calculated to the revised delivery month in accordance with the provisions of the Purchase Agreement.
2.1.2. Advance payments for each such rescheduled Aircraft will be [***************************] in accordance with the provisions of the Purchase Agreement.
2.1.3. The Advance Payment Base Price [***************************] in accordance with the provisions of the Purchase Agreement. The credit memoranda Boeing provides to the Customer which are noted as [***************************]in accordance with the provisions of the Purchase Agreement.
2.1.4. In the event of any delivery reschedule performed under this Letter Agreement, Boeing will [***************************] for a particular Aircraft prior to the reschedule of that Aircraft and apply those payments towards the future advance payments for that same rescheduled Aircraft. In no case will Boeing pay interest on any advance payment amounts or early payment resulting from the reschedule of the relevant Aircraft.
2.2. Terminate Aircraft. Boeing, after consultation with Customer, may terminate the Aircraft by providing Customer with written notice of such termination and shall promptly return to Customer, [***************************] by Customer for the terminated Aircraft.
3. Confidential Treatment.
Boeing and Customer understand that certain information contained in this Letter Agreement is considered to be confidential. The parties agree that they will treat this Letter Agreement and the information contained herein as confidential and will not, without the prior written consent of the other party, disclose this Letter Agreement or any information contained herein to any other person or entity.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600113 Government Approval Matters LA Page 2 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600113 Government Approval Matters LA Page 3 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1600114
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Liquidated Damages – Non-Excusable Delay
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
Definition of Terms:
Non-Excusable Delay: Delay in delivery of any Aircraft beyond the last day of the delivery month (Scheduled Delivery Month) established in the Purchase Agreement by any cause that is not an Excusable Delay pursuant to Article 7 of the AGTA and for which Customer is otherwise entitled to a remedy from Boeing pursuant to applicable law.
1. Liquidated Damages.
Boeing agrees to pay Customer liquidated damages for each day of Non-Excusable Delay [************************] (collectively the Non-Excusable Delay Payment Period) at a rate of [*******************]not to [********************] of [**************************] (Liquidated Damages). Liquidated Damages will be payable at actual delivery of the Aircraft.
2. Interest.
In addition to the Liquidated Damages in section 1, for each day of Non-Excusable Delay in [**********************] days after the Scheduled Delivery Month, Boeing will pay Customer interest calculated as follows (Interest):
The product of the daily interest rate (computed by dividing the interest rate in effect for each day by [*******************] [********************], as the case may be) times the entire amount of advance payments received by Boeing for such Aircraft. The interest rate in effect for each day shall be computed using the [*************************************************], effective the first business day of the calendar quarter and reset each calendar quarter.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600114 Liquidated Damages Non-Excusable Delay LA Page 1 BOEING PROPRIETARY Such interest will be calculated on a simple interest basis and paid in full at actual delivery of the Aircraft.
3. [****************]
Customer will not have the right to refuse to accept delivery of any Aircraft because of a Non-Excusable Delay unless and until the aggregate duration of the Non-Excusable Delay for such Aircraft [***********************] (Non-Excusable Delay Period). Within [***************] of receipt of written notice from Boeing that delivery of an Aircraft will be delayed beyond the Non-Excusable Delay Period, [**********************] Purchase Agreement as to such Aircraft by written or telegraphic notice given to the other. [******************************] within said [********************], then the Purchase Agreement will remain in effect for that Aircraft.
4. [**********************]
If the Purchase Agreement is terminated with respect to any Aircraft for a Non-Excusable Delay, Boeing will pay Customer:
4.1.1.1.1. Liquidated Damages at the later to occur of: (a) [***********], or (b) [***********].
4.1.1.1.2. for Interest calculated and paid in full as described above, except the period of interest calculation will end on the date Boeing returns such advance payments, excluding the actual day of return [***********] days after the effective date of the termination.
4.1.1.1.3. for the entire principal amount of the advance payments received by Boeing for such Aircraft, [***********] days after the effective date of the termination.
5. Exclusive Remedies.
The remedies set forth in this Letter Agreement are Customer’s exclusive remedies for a Non-Excusable Delay and are in lieu of all other damages, claims, and remedies of Customer arising at law or otherwise for any Non-Excusable Delay in the Aircraft delivery. Customer hereby waives and renounces all other claims and remedies arising at law or otherwise for any such Non-Excusable Delay.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600114 Liquidated Damages Non-Excusable Delay LA Page 2 BOEING PROPRIETARY 6. Assignment.
Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer becoming the operator of the Aircraft and cannot be assigned in whole or, in part.
7. Confidential Treatment.
The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600114 Liquidated Damages Non-Excusable Delay LA Page 3 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600114 Liquidated Damages Non-Excusable Delay LA Page 4 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1600116
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Open Configuration Matters
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
1. Aircraft Delivery Schedule.
1.1. The scheduled delivery position of the Aircraft, as of the date of this Letter Agreement is listed in Table 1 of the Purchase Agreement and provides the delivery schedule in [*********************************] consisting of a nominal delivery month as listed in Table 1 in the Delivery Date column (Nominal Delivery Month [***********************]. No later than [*********************]prior to the Nominal Delivery Month of Customer’s first Aircraft in each calendar year, Boeing will provide written notice with a revised Table 1 of the scheduled delivery month for each Aircraft with a Nominal Delivery Month in such calendar year. Such notice provided by Boeing will constitute an amendment to Table 1 of the Purchase Agreement.
2. Aircraft Configuration.
2.1. Initial Configuration. The initial configuration of Customer's Model 787-9 Aircraft has been defined by Boeing Model 787 [******************************************************] as described in Article 1 and Exhibit A of the Purchase Agreement. Given the long period of time between Purchase Agreement signing and delivery of the first Aircraft, the final configuration of the Customer’s Aircraft has not yet been defined.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600116 Open Configuration Matters LA Page 1 BOEING PROPRIETARY 2.2. Final Configuration Schedule. Customer and Boeing hereby agree to complete the configuration of the Aircraft using the then-current Boeing configuration documentation (Final Configuration) in accordance with the following schedule:
2.2.1. No later than [******************************] prior to the first Aircraft's scheduled delivery month, Boeing and Customer will discuss potential optional features.
2.2.2. Within [****************************] after that meeting, Boeing will provide Customer with a proposal for those optional features that can be incorporated into the Aircraft during production.
2.2.3. Customer will then have [********************************] to accept or reject the optional features.
2.2.4. If Customer wishes to include installation of Customer’s BFE premium class seats in the configuration of the Aircraft, Customer will give written notice to Boeing no later than [***************] prior to delivery of the first Aircraft, and final configuration of Customer’s BFE premium Class seats will be completed no later than [********************] prior to delivery of the first Aircraft.
3. Amendment of the Purchase Agreement. Within [*****************************] following Final Configuration, Boeing and Customer will execute a written amendment to the Purchase Agreement which will reflect the following:
3.1. Changes applicable to the basic Model 787-9 aircraft which are developed by Boeing between the date of signing of the Purchase Agreement and date of Final Configuration.
3.2. Incorporation into Exhibit A of the Purchase Agreement, by written amendment, those optional features which have been agreed to by Customer and Boeing pursuant to Article 2.2 above (Customer Configuration Changes);
3.3. Revisions to the Performance Guarantees to reflect the effects, if any, on Aircraft performance resulting from the incorporation of the Customer Configuration Changes;
3.4. Changes to the Optional Features Prices, Aircraft Basic Price and Advance Payment Base Price of the Aircraft to adjust for the difference, if any, between the prices estimated in Table 1 of the Purchase Agreement for optional features reflected in the Aircraft Basic Price and the actual prices of the optional features reflected in the Customer Configuration Changes; and
3.5. Changes to the Advance Payment Base Price of the Aircraft to adjust for the difference between the estimated amount included in Table 1 of the Purchase Agreement for Cabin Systems Equipment (CSE) and the price of the CSE reflected in the Customer Configuration Changes.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600116 Open Configuration Matters LA Page 2 BOEING PROPRIETARY 4. Other Letter Agreements.
Boeing and Customer acknowledge that as the definition of the Aircraft progresses, there may be a need to execute letter agreements addressing one or more of the following subjects:
4.1. Software. Additional provisions relating to software.
4.2. Installation of Cabin Systems Equipment. Additional provisions relating to the terms under which Boeing will offer and install in-flight entertainment systems in the Aircraft.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600116 Open Configuration Matters LA Page 3 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600116 Open Configuration Matters LA Page 4 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1600117
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Aircraft Performance Guarantees
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
Boeing agrees to provide Customer with the performance guarantees in the Attachment. These guarantees are exclusive and expire upon delivery of the Aircraft to Customer. Customer agrees to limit the remedy for non-compliance of any performance guarantee to the terms in Letter Agreement [***************************].
1. Assignment.
Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer becoming the operator of the Aircraft and cannot be assigned in whole or, in part.
2. Confidential Treatment.
The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 1 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 2 BOEING PROPRIETARY MODEL 787-9 PERFORMANCE GUARANTEES
FOR CHINA SOUTHERN AIRLINES COMPANY LIMITED
SECTION CONTENTS
1 AIRCRAFT MODEL APPLICABILITY
2 FLIGHT PERFORMANCE
3 AIRCRAFT CONFIGURATION
4 GUARANTEE CONDITIONS
5 GUARANTEE COMPLIANCE
6 EXCLUSIVE GUARANTEES
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 1 BOEING PROPRIETARY 1 AIRCRAFT MODEL APPLICABILITY
The guarantees contained in this Attachment (the "Performance Guarantees") are applicable to the 787-9 Aircraft with a maximum takeoff weight of [***********], a maximum landing weight of [***********], and a maximum zero fuel weight of [***********], and equipped with Boeing furnished GEnx-1B76A engines.
2 FLIGHT PERFORMANCE
2.1 Takeoff
2.1.1 The FAA approved takeoff gross weight at the start of ground roll, at a temperature of [***********], at an altitude of [***********] and satisfying the conditions defined below, with an alternate forward center of gravity limit of [***********] of the mean aerodynamic chord, and using maximum takeoff thrust, shall not be less than the following guarantee value:
GUARANTEE: [***********]
Conditions:
The takeoff runway available (TORA) is [***********].
The takeoff distance available (TODA) is [***********].
The accelerate-stop distance available (ASDA) [***********].
The lineup allowance adjustment to TORA and TODA [***********].
The lineup allowance adjustment to ASDA is [***********].
The runway slope is [***********].
The following obstacle definition is based on a straight-out departure where obstacle height and distance are specified with reference to the liftoff end of the runway:
Distance Height 1. [***********] 13 feet 2. [***********] 24 feet 3. [***********] 60 feet
2.1.2 The FAA approved takeoff gross weight at the start of ground roll, at a temperature of [***********], at an altitude of [***********] and satisfying the conditions defined below, with an alternate forward center of gravity limit of [***********] of the mean aerodynamic chord, and using maximum takeoff thrust, shall not be less than the following guarantee value:
GUARANTEE: [***********]
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 2 BOEING PROPRIETARY Conditions:
The takeoff runway available (TORA) is [***********].
The takeoff distance available (TODA) is [***********].
The accelerate-stop distance available (ASDA) is [***********].
The lineup allowance adjustment to TORA and TODA is [***********].
The lineup allowance adjustment to ASDA is [***********].
The runway slope is [***********].
The following obstacle definition is based on a straight-out departure where obstacle height and distance are specified with reference to the liftoff end of the runway:
Distance Height 1. [***********] 18 feet 2. [***********] 56 feet 3. [***********] 85 feet 4. [***********] 180 feet 5. [***********] 420 feet 6. [***********] 558 feet 7. [***********] 640 feet
2.2 Landing
The FAA approved landing field length at a gross weight of [***********] and at a sea level altitude, shall not be more than the following guarantee value:
GUARANTEE: [***********]
2.3 Mission
2.3.1 Mission Payload
The payload for a stage length of [***********] in still air (equivalent to a distance of [***********] with a [***********], representative of a [***********] route) using the conditions and operating rules defined below, shall not be less than the following guarantee value:
NOMINAL: [***********] TOLERANCE: [***********] GUARANTEE: [***********]
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 3 BOEING PROPRIETARY Conditions and operating rules:
Stage Length: The stage length is defined as the sum of the distances for the climbout maneuver, climb, cruise, and descent.
Takeoff: The airport altitude is [***********].
The airport temperature is [***********].
The takeoff runway available (TORA) is [***********].
The takeoff distance available (TODA) is [***********].
The accelerate-stop distance available (ASDA) is [***********].
The lineup allowance adjustment to TORA and TODA is [***********].
The lineup allowance adjustment to ASDA is [***********].
The runway slope is [***********].
The following obstacle definition is based on a straight out departure where obstacle height and distance are specified with reference to the liftoff end of the runway:
Distance Height 1. [***********] 13 feet 2. [***********] 24 feet 3. [***********] 60 feet
Takeoff performance is based on an alternate forward center of gravity limit of [***********] of the mean aerodynamic chord.
Maximum takeoff thrust is used for the takeoff.
The takeoff gross weight shall conform to FAA Regulations.
Climbout Maneuver: Following the takeoff to 35 feet, the Aircraft accelerates to the recommended speed of 250 KCAS while climbing to 1,500 feet above the departure airport altitude and retracting flaps and landing gear.
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 4 BOEING PROPRIETARY Climb: The Aircraft climbs from 1,500 feet above the departure airport altitude to 10,000 feet altitude at the recommended speed of 250 KCAS.
The Aircraft then accelerates at a rate of climb of 500 feet per minute to the recommended climb speed for minimum block fuel.
The climb continues at the recommended climb speed for minimum block fuel until 0.85 Mach number is reached.
The climb continues at 0.85 Mach number to the initial cruise altitude.
The temperature is ISA+10°C during climb.
Maximum climb thrust is used during climb.
Cruise: The Aircraft cruises at 0.85 Mach number.
The initial cruise altitude is at least 33,000 feet.
A step climb or multiple step climbs of 2,000 feet altitude may be used when beneficial to minimize fuel burn. The final cruise altitude shall not exceed 40,000 feet.
The temperature is ISA+10°C during cruise.
The cruise thrust is not to exceed maximum cruise thrust except during a step climb when maximum climb thrust may be used.
Descent: The Aircraft descends from the final cruise altitude at 250 KCAS to an altitude of 1,500 feet above the destination airport altitude.
Throughout the descent, the cabin pressure will be controlled to a maximum rate of descent equivalent to 300 feet per minute at sea level.
The temperature is ISA+10°C during descent.
Minimum flight idle thrust is used during descent.
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 5 BOEING PROPRIETARY Approach and Landing Maneuver: The Aircraft decelerates to the final approach speed while extending landing gear and flaps, then descends and lands.
The destination airport altitude is 50 feet.
Fixed Allowances: For the purpose of this guarantee and for the purpose of establishing compliance with this guarantee, the following shall be used as fixed quantities and allowances:
Apu: Fuel 195 Kilograms
Taxi-Out: Fuel 219 Kilograms
Takeoff and Climbout Maneuver: Fuel 655 Kilograms Distance 5.6 Nautical Miles
Approach and Landing Maneuver: Fuel 141 Kilograms
Taxi-In (shall be consumed from the reserve fuel): Fuel 219 Kilograms
Usable reserve fuel remaining upon completion of the approach and landing maneuver: 9,350 Kilograms
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 6 BOEING PROPRIETARY For information purposes, the reserve fuel is based on a standard day temperature and a) a contingency fuel allowance equivalent to 10 percent of the trip time from the redispatch point through the completion of the approach and landing maneuver at the final destination airport, starting at the end of the mission cruise at an LRC Mach number, or a 15 minute hold whichever is greater, b) a missed approach and flight to a 312 nautical mile alternate, c) an approach and landing maneuver at the alternate airport, and d) a 30 minute hold at 1,500 feet above a 571 foot alternate airport. Reserve fuel will not be less than 9,350 kg.
2.3.2 Mission Payload
The payload for a stage length of [***********] in still air (equivalent to a distance of [***********] with a [***********], representative of a [***********] route) using the conditions and operating rules defined below, shall not be less than the following guarantee value:
NOMINAL: [***********] TOLERANCE: [***********] GUARANTEE: [***********]
The above payload may require special attention to payload distribution and operational procedures.
Conditions and operating rules:
Stage Length: The stage length is defined as the sum of the distances for the climbout maneuver, climb, cruise, and descent.
Takeoff: The airport altitude is [***********].
The airport temperature is [***********].
The takeoff runway available (TORA) is [***********].
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 7 BOEING PROPRIETARY The takeoff distance available (TODA) is [***********].
The accelerate-stop distance available (ASDA) is [***********].
The lineup allowance adjustment to TORA and TODA is [***********].
The lineup allowance adjustment to ASDA is 48 meters.
The runway slope is [***********].
The following obstacle definition is based on a straight out departure where obstacle height and distance are specified with reference to the liftoff end of the runway:
Distance Height 1. [***********] 51 feet 2. [***********] 55 feet 3. [***********] 56 feet 4. [***********] 58 feet 5. [***********] 80 feet 6. [***********] 165 feet 7. [***********] 212 feet 8. [***********] 269 feet 9. [***********] 271 feet 10. [***********] 336 feet
Takeoff performance is based on an alternate forward center of gravity limit of [***********] of the mean aerodynamic chord.
Maximum takeoff thrust is used for the takeoff.
The takeoff gross weight shall conform to FAA Regulations.
Climbout Maneuver: Following the takeoff to 35 feet, the Aircraft accelerates to the recommended speed of 250 KCAS while climbing to 1,500 feet above the departure airport altitude and retracting flaps and landing gear.
Climb: The Aircraft climbs from 1,500 feet above the departure airport altitude to 10,000 feet altitude at the recommended speed of 250 KCAS.
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 8 BOEING PROPRIETARY The Aircraft then accelerates at a rate of climb of 500 feet per minute to the recommended climb speed for minimum block fuel.
The climb continues at the recommended climb speed for minimum block fuel until 0.85 Mach number is reached.
The climb continues at 0.85 Mach number to the initial cruise altitude.
The temperature is ISA+10°C during climb.
Maximum climb thrust is used during climb.
Cruise: The Aircraft cruises at 0.85 Mach number.
The initial cruise altitude is at least 32,000 feet.
A step climb or multiple step climbs of 2,000 feet altitude may be used when beneficial to minimize fuel burn.
The final cruise altitude shall not exceed 40,000 feet.
The temperature is ISA+10°C during cruise.
The cruise thrust is not to exceed maximum cruise thrust except during a step climb when maximum climb thrust may be used.
Descent: The Aircraft descends from the final cruise altitude at 250 KCAS to an altitude of 1,500 feet above the destination airport altitude.
Throughout the descent, the cabin pressure will be controlled to a maximum rate of descent equivalent to 300 feet per minute at sea level.
The temperature is ISA+10°C during descent.
Minimum flight idle thrust is used during descent.
Approach The Aircraft decelerates to the final approach speed while extending landing gear and flaps, then descends and lands. and Landing Maneuver:
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 9 BOEING PROPRIETARY The destination airport altitude is 50 feet.
Fixed Allowances: For the purpose of this guarantee and for the purpose of establishing compliance with this guarantee, the following shall be used as fixed quantities and allowances:
Apu: Fuel 195 Kilograms
Taxi-Out: Fuel 219 Kilograms
Takeoff and Climbout Maneuver: Fuel 663 Kilograms Distance 4.7 Nautical Miles
Approach and Landing Maneuver: Fuel 141 Kilograms
Taxi-In (shall be consumed from the reserve fuel): Fuel 219 Kilograms
Usable reserve fuel remaining upon completion of the approach and landing maneuver: 9,350 Kilograms
For information purposes, the reserve fuel is based on a standard day temperature and a) a contingency fuel allowance equivalent to 10 percent of the trip time from the redispatch point through the completion of the approach and landing maneuver at the final destination airport, starting at the end of the mission cruise at an LRC Mach number, or a 15 minute hold whichever is greater, b) a missed approach and flight to a 312 nautical mile alternate, c) an approach and landing maneuver at the alternate airport, and d) a 30 minute hold at 1,500 feet above a 571 foot alternate airport. Reserve fuel will not be less than 9,350 kg.
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 10 BOEING PROPRIETARY 2.3.3 Mission Block Fuel
The block fuel for a stage length of [***********] in still air (equivalent to a distance of [***********] with a 39 knot headwind, representative of a [***********] route) with a [***********] payload using the conditions and operating rules defined below, shall not be more than the following guarantee value:
NOMINAL: [***********] TOLERANCE: [***********] GUARANTEE: [***********]
Conditions and operating rules:
Stage Length: The stage length is defined as the sum of the distances for the climbout maneuver, climb, cruise, and descent.
Block Fuel: The block fuel is defined as the sum of the fuel used for taxi-out, takeoff and climbout maneuver, climb, cruise, descent, approach and landing maneuver, and taxi-in.
Takeoff: The airport altitude is [***********].
The airport temperature is [***********].
The takeoff runway available (TORA) is [***********].
The takeoff distance available (TODA) is [***********].
The accelerate-stop distance available (ASDA) is [***********].
The lineup allowance adjustment to TORA and TODA is [***********].
The lineup allowance adjustment to ASDA is [***********].
The runway slope is [***********].
The following obstacle definition is based on a straight out departure where obstacle height and distance are specified with reference to the liftoff end of the runway:
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 11 BOEING PROPRIETARY Distance Height 1. [***********] 18 feet 2. [***********] 56 feet 3. [***********] 85 feet 4. [***********] 180 feet 5. [***********] 420 feet 6. [***********] 558 feet 7. [***********] 640 feet
Takeoff performance is based on an alternate forward center of gravity limit of [***********] of the mean aerodynamic chord.
Maximum takeoff thrust is used for the takeoff.
The takeoff gross weight shall conform to FAA Regulations.
Climbout Maneuver: Following the takeoff to 35 feet, the Aircraft accelerates to the recommended speed of 250 KCAS while climbing to 1,500 feet above the departure airport altitude and retracting flaps and landing gear.
Climb: The Aircraft climbs from 1,500 feet above the departure airport altitude to 10,000 feet altitude at the recommended speed of 250 KCAS.
The Aircraft then accelerates at a rate of climb of 500 feet per minute to the recommended climb speed for minimum block fuel.
The climb continues at the recommended climb speed for minimum block fuel until 0.85 Mach number is reached.
The climb continues at 0.85 Mach number to the initial cruise altitude.
The temperature is ISA+10°C during climb.
Maximum climb thrust is used during climb.
Cruise: The Aircraft cruises at 0.85 Mach number.
The initial cruise altitude is at least 32,000 feet.
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 12 BOEING PROPRIETARY A step climb or multiple step climbs of 2,000 feet altitude may be used when beneficial to minimize fuel burn.
The final cruise altitude shall not exceed 40,000 feet.
The temperature is ISA+10°C during cruise.
The cruise thrust is not to exceed maximum cruise thrust except during a step climb when maximum climb thrust may be used.
Descent: The Aircraft descends from the final cruise altitude at 250 KCAS to an altitude of 1,500 feet above the destination airport altitude.
Throughout the descent, the cabin pressure is controlled to a maximum rate of descent equivalent to 300 feet per minute at sea level.
The temperature is ISA+10°C during descent.
Minimum flight idle thrust is used during descent.
Approach and Landing Maneuver: The Aircraft decelerates to the final approach speed while extending landing gear and flaps, then descends and lands.
The destination airport altitude is 392 feet.
Fixed Allowances: For the purpose of this guarantee and for the purpose of establishing compliance with this guarantee, the following shall be used as fixed quantities and allowances:
Apu: Fuel 195 Kilograms
Taxi-Out: Fuel 219 Kilograms
Takeoff and Climbout Maneuver: Fuel 624 Kilograms Distance 4.4 Nautical Miles
Approach and Landing Maneuver: Fuel 141 Kilograms
Taxi-In (shall be consumed from the reserve fuel): Fuel 219 Kilograms
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 13 BOEING PROPRIETARY Usable reserve fuel remaining upon completion of the approach and landing maneuver: 9,350 Kilograms
For information purposes, the reserve fuel is based on a standard day temperature and a) a contingency fuel allowance equivalent to 10 percent of the trip time from the redispatch point through the completion of the approach and landing maneuver at the final destination airport, starting at the end of the mission cruise at an LRC Mach number, or a 15 minute hold whichever is greater, b) a missed approach and flight to a 277 nautical mile alternate, c) an approach and landing maneuver at the alternate airport, and d) a 30 minute hold at 1,500 feet above a 571 foot alternate airport. Reserve fuel will not be less than 9,350 kg.
2.3.4 Operational Empty Weight Basis
The Operational Empty Weight (OEW) derived in Paragraph 2.3.5 is the basis for the mission guarantees of Paragraphs 2.3.1, 2.3.2, and 2.3.3.
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 14 BOEING PROPRIETARY 2.3.5 Weight Summary - China Southern Airlines
Kilograms
Standard Model Specification MEW [***********]
787 Airplane Configuration Specification [***********] Baseline Airplane Improvements and Production Changes [***********] [***********] Interior GEnx Engines [***********] Maximum Taxi Weight [***********] Fuel Capacity
Changes for China Southern Airlines: Interior Change to 297 Passengers ( 28 CC / 269 YC ) * 4,112 Reference LOPA B8713094 Selected MTW: [***********] 0 In-Flight Entertainment System Less Seat Mounted Equipment 227 Flight Crew Rest (2 Berths and 1 Seat) 386 Attendant Crew Rest (6 Berths) 454 Customer Options Allowance 499
China Southern Airlines Manufacturer's Empty Weight (MEW) [***********]
Standard and Operational Items Allowance (Paragraph 2.3.6) [***********]
China Southern Airlines Operational Empty Weight (OEW) [***********]
Quantity Kilograms Kilograms
* Seat Weight Included [*******]
Business Class Furniture [*******] [*******] Business Class Single [*******] [*******] [*******] [*******] Economy Class Double [*******] [*******] Economy Class Triple [*******] [*******]
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 15 BOEING PROPRIETARY 2.3.6 Standard and Operational Items Allowance
Qty kg kg kg
Standard Items Allowance 2,461
Unusable Fuel 292 Oil 96 Oxygen Equipment 24 Miscellaneous Equipment 28 Galley Structure and Fixed Inserts 2,021
Operational Items Allowance 8,991
Crew and Crew Baggage 1,483 Flight Crew (Inc. Pilot Flight Bag) (4 @ 95.3 kg. ea.) 4 381 Cabin Crew (Inc. Flight Att. Kit) (11 @ 81.6 kg. ea.) 11 898 Baggage (15 @ 13.6 kg. ea.) 15 204 Catering Allowance & Removable Inserts: 2 Meal Service 3,243 Business Class 28 559 Economy Class 269 2,684 Passenger Service Equipment (297 @ 1.36 kg. ea.) 404 Potable Water - (943 Liters) 297 Passengers @ 3.18 kg. ea. 943 Waste Tank Disinfectant 1 Emergency Equipment (Includes Over Water Equip.) 677 Cargo System 2,240 Pallets (6 @ 131.5 kg ea.) 789 Containers (16 @ 90.7 kg ea.) 1,451
Total Standard and Operational Items Allowance 11,452
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 16 BOEING PROPRIETARY 3 AIRCRAFT CONFIGURATION
3.1 The guarantees contained in this Attachment are based on the Aircraft configuration as defined in Boeing Document 787B1 4102, Revision S, "787 Airplane Configuration Specification", dated December 11, 2015, plus any changes mutually agreed to or otherwise allowed by the Purchase Agreement to be incorporated into the original release of the Customer’s Detail Specification (hereinafter referred to as the Detail Specification). Appropriate adjustment shall be made for changes in such Detail Specification approved by the Customer and Boeing or otherwise allowed by the Purchase Agreement which cause changes to the flight performance and/or weight and balance of the Aircraft. Such adjustment shall be accounted for by Boeing in its evidence of compliance with the guarantees.
3.2 The guarantee payloads of Paragraph 2.3.1 and 2.3.2 and the specified payload of the Paragraph 2.3.3 block fuel guarantee will be adjusted by Boeing for the effect of the following on OEW in its evidence of compliance with the guarantees:
(1) Changes to the Detail Specification or any other changes mutually agreed upon between the Customer and Boeing or otherwise allowed by the Purchase Agreement.
(2) The difference between the component weight allowances given in Appendix E of the Detail Specification and the actual weights.
4 GUARANTEE CONDITIONS
4.1 All guaranteed performance data are based on the International Standard Atmosphere (ISA) and specified variations therefrom; altitudes are pressure altitudes.
4.2 The Federal Aviation Administration (FAA) regulations referred to in this Attachment are, unless otherwise specified, Code of Federal Regulations 14, Part 25 amended by Amendments 25-1 through 25- 128, subject to the approval of the Federal Aviation Administration.
4.3 In the event a change is made to any law, governmental regulation or requirement, or in the interpretation of any such law, governmental regulation or requirement that affects the certification basis for the Aircraft as described in Paragraph 4.2, and as a result thereof, a change is made to the configuration and/or the performance of the Aircraft in order to obtain certification, the guarantees set forth in this Attachment shall be appropriately modified to reflect any such change.
4.4 The takeoff and landing guarantees, and the takeoff portion of the mission guarantees are based on hard surface, level and dry runways with no wind or obstacles, no clearway or stopway, 235 mph tires, with anti-skid operative, and with the Aircraft center of gravity at the most forward limit unless otherwise specified. The takeoff performance is based on engine power extraction for normal operation of the air conditioning with thermal anti-icing turned off and the Auxiliary Power Unit (APU) turned off unless otherwise specified. Unbalanced field length calculations and the improved climb performance procedure will be used for takeoff as required. The landing performance is based on the use of automatic spoilers.
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 17 BOEING PROPRIETARY 4.5 The climb, cruise and descent portions of the mission guarantees include allowances for normal power extraction and engine power extraction for normal operation of the air conditioning system. Normal operation of the air conditioning system shall be defined as pack switches in the "Auto" position, the temperature control switches in the "Auto" position that results in a nominal cabin temperature of 75°F, and all air conditioning systems operating normally. No engine power extraction for thermal anti-icing is provided unless otherwise specified. The APU is turned off unless otherwise specified.
4.6 The climb, cruise and descent portions of the mission guarantees are based on an Aircraft center of gravity location, as determined by Boeing, not to be aft of 28 percent of the mean aerodynamic chord.
4.7 Performance, where applicable, is based on a fuel Lower Heating Value (LHV) of 18,580 BTU per pound and a fuel density of 0.779 kilogram per liter.
5 GUARANTEE COMPLIANCE
5.1 Compliance with the guarantees of Section 2 shall be based on the conditions specified in those sections, the Aircraft configuration of Section 3 and the guarantee conditions of Section 4.
5.2 Compliance with the takeoff and landing guarantees and the takeoff portion of the mission guarantee shall be based on the FAA approved Airplane Flight Manual for the Model 787-9.
5.3 Compliance with the takeoff guarantees and the takeoff portion of the mission guarantee shall be shown using an alternate forward center of gravity limit of 21 percent of the mean aerodynamic chord.
5.4 Compliance with the climb, cruise and descent portions of the mission guarantees shall be established by calculations based on flight test data obtained from an aircraft in a configuration similar to that defined by the Detail Specification.
5.5 The OEW used for compliance with the mission guarantees shall be the actual MEW plus the Standard and Operational Items Allowance in Appendix E of the Detail Specification.
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 18 BOEING PROPRIETARY 5.6 The data derived from tests shall be adjusted as required by conventional methods of correction, interpolation or extrapolation in accordance with established engineering practices to show compliance with these guarantees.
5.7 Compliance shall be based on the performance of the airframe and engines in combination, and shall not be contingent on the engine meeting its manufacturer's performance specification.
6 EXCLUSIVE GUARANTEES
The only performance guarantees applicable to the Aircraft are those set forth in this Attachment.
GUN-PA-04455-LA-1600117 Performance Guarantees LA Page 19 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1600118
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Model 787 Post-Delivery Software & Data Loading
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
Letter Agreement LA-1600110 entitled “Model 787 e-Enabling Software Matters” between Boeing, Customer and Consenting Parties relating to the Aircraft
Customer Services General Terms Agreement No. CSGTA-1B-1 (CSGTA) between Boeing and Customer, including Supplemental Agreement for Electronic Access (SA-EA), Supplemental Agreement for e-Enabling (SA-eE), and 787 Software License Orders
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement.
Introduction.
Prior to title transfer of the Aircraft to Customer, Boeing baseline production software will be installed in the Aircraft. Such production software will be used by Boeing, and may be used by Customer during standard customer inspection activities, to test and validate applicable e-enabling features and associated hardware, including but not limited to features such as: a Boeing offered catalogue IFE system, electronic flight bag (EFB), electronic documents, airline modifiable information (AMI) and electronic checklist (ECL). Operational software, as set out in Article 1 and Article 2 below, will not be installed temporarily or permanently, prior to Aircraft title transfer.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600118 Post-Delivery Software and Data Loading-787 LA Page 1 BOEING PROPRIETARY 1. Boeing-Provided Operational Software and Data.
Pursuant to the Purchase Agreement and applicable 787 software license order(s), immediately following title transfer of the Aircraft to Customer, Boeing will, upon Customer’s request, load Boeing-provided operational software and data onto onboard loadable hardware that enable the Aircraft to operate certain e-enabled features as described in the Purchase Agreement and applicable 787 software license order(s).
2. Customer Provided Operational Software and Data.
2.1. Airline Modifiable Software. If Customer has elected to customize software or modify settings and features of selected onboard software or databases from what is set forth in Exhibit A of the Purchase Agreement, at Customer’s request, Boeing will [***************************] following title transfer of the Aircraft. Boeing will load Customer’s operational software if it is provided to Boeing within specified lead times and schedule. If Customer fails to provide the operational software in accordance with Boeing’s instructions, the Aircraft will be solely configured with the Boeing baseline production software in lieu of Customer’s operational software.
2.2. Jeppesen, Inc. (Jeppesen) and/or Other Third Party Operational Software and Databases. If Customer provides Customer-developed software applications or has licensed additional software or databases from Jeppesen and/or other third party supplier for installation onto an onboard loadable system, at Customer’s request, Boeing will [***************************] following title transfer of the Aircraft. If Customer fails to provide such operational software in accordance with Boeing’s instructions, Boeing [****************].
2.3. IFE Customer Software. IFE Customer Software will mean any software which is obtained by the Customer from a source other than Boeing for installation in the IFE system. Boeing will make [***************************] following title transfer of the Aircraft. The time required for the IFE supplier to complete the loading of the IFE Customer Software is estimated to be [****************************]. If Customer fails to make appropriate arrangements with its IFE supplier in accordance with Boeing instructions, the Aircraft will be solely configured with Boeing’s baseline production software for the Boeing catalogue selected IFE configuration. Boeing’s FAA approved Repair Station will not be available to Customer or its IFE supplier to revise the IFE system hardware or IFE Customer Software while the Aircraft is on Boeing property prior to delivery flyaway, even if an FAA approved service bulletin is available for such revision.
3. Additional Terms and Conditions.
3.1. With respect to Customer provided operational software and data referenced in Article 2.1 and 2.2, above, Customer will grant, and/or will obtain from the suppliers, a non-exclusive, perpetual, royalty- free, irrevocable license for Boeing to copy and load such software on the Aircraft. Boeing will retain a copy of such software/data for loading on future Aircraft deliveries, however, Boeing expects Customer to provide updated operational software applications and databases for each Aircraft delivery. Boeing will treat all copies of this software/data in confidence and use the same only as specifically authorized under the terms of this Letter Agreement.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600118 Post-Delivery Software and Data Loading-787 LA Page 2 BOEING PROPRIETARY 3.2. The loading services performed by Boeing pursuant to this Letter Agreement will be performed in a workmanlike manner. The time required to complete the Boeing performed loading services is estimated to be approximately [***************************]. Customer’s sole remedy and Boeing’s sole obligation and liability for the loading services performed by Boeing are limited to the no-charge re- performance of the courtesy load, on a one-time-only basis.
3.2.1. If any Customer-provided operational software referred to in Article 2.1 above, fails to reload successfully, the Aircraft will be solely configured with the Boeing baseline production software.
3.2.2. If any Customer-provided operational software referred to in Article 2.2 fails to reload successfully, Boeing will not be responsible to make further loading attempts and Aircraft fly-away will occur as scheduled.
3.3. If any IFE Customer Software fails to load successfully, Customer will make alternate loading arrangements with its IFE supplier for loading after the Aircraft has flown-away. In such an event, and upon Customer’s request, Boeing will install the Boeing baseline production software for the Boeing catalogue selected IFE configuration prior to Aircraft fly-away.
3.4. Customer is responsible for functional testing, verification, quality assurance, and operational approval of all Customer provided operational software.
3.5. A dual signature (Boeing and Customer) Onboard Authentication System (OAS) Airplane Modifiable Information (AMI) will be installed on the Aircraft giving access to Boeing and Customer, which is required to perform data and software loads after title transfer of the Aircraft. After fly-away, Customer will remove Boeing’s access key and certificates from the OAS.
3.6. Customer will defend and indemnify Boeing from and against all claims, suits, and liabilities arising out of any actual or alleged infringement of any patent or other intellectual property rights through the installation or use of Customer provided operational software by Boeing pursuant to this Letter Agreement. For the purposes of this Article 3.6, Boeing is defined as The Boeing Company, its divisions, subsidiaries, affiliates, the assignees of each and their respective directors, officers, employees and agents.
3.7. The DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES provisions in Article 11 of Part 2 of Exhibit C of the Aircraft General Terms Agreement (AGTA) and the insurance provisions of Article 8.2 of the AGTA will apply to Boeing’s loading of all software and data pursuant to this Letter Agreement. For purposes of this Article 3.7, all software and data provided directly by Boeing will be defined as Materials (and not “Aircraft Software”). Title to and risk of loss of the Aircraft will always remain with Customer during Boeing’s performance of all post title transfer services.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600118 Post-Delivery Software and Data Loading-787 LA Page 3 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600118 Post-Delivery Software and Data Loading-787 LA Page 4 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1600119
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Promotional Support
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
Boeing and Customer wish to enter into an agreement pursuant to which each party will contribute equally to promotional programs in support of the entry into service of the Aircraft as more specifically provided below.
1. Definitions.
1.1. Commitment Limit will have the meaning set forth in Article 2, below.
1.2. Covered Aircraft will mean those Aircraft identified on Table 1 to the Purchase Agreement as of the date of signing of this Letter Agreement.
1.3. Performance Period will mean the period beginning [****] before the scheduled delivery month of the first Covered Aircraft and ending [****] after the scheduled delivery month of the last Covered Aircraft.
1.4. Promotional Support will mean mutually agreed marketing and promotion programs that promote the entry into service of the Covered Aircraft such as marketing research, tourism development, corporate identity, direct marketing, videotape or still photography, planning, design and production of collateral materials, management of promotion programs, advertising campaigns or such other marketing and promotional activities as the parties may mutually agree.
1.5. Qualifying Third Party Fees will mean fees paid by Customer to third party providers for Promotional Support provided to Customer during the Performance Period.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600119 Promotional Support LA Page 1 BOEING PROPRIETARY 2. Commitment.
As more particularly set forth in this Letter Agreement, Boeing agrees to provide Promotional Support to Customer during the Performance Period in a value not to exceed [***************************] for the first Covered Aircraft delivered to Customer and not to exceed [***************************] per Covered Aircraft for each Covered Aircraft delivered to Customer thereafter.
3. Methods of Performance.
3.1. Subject to the Commitment Limit, Boeing will reimburse [*************]Customer’s payments of Qualifying Third Party Fees provided that Customer provides Boeing copies of paid invoices for such Qualifying Third Party Fees no later than [******************] after the delivery of the last Covered Aircraft.
3.2. Notwithstanding the above, at Customer’s request and subject to a mutually agreed project, Boeing will provide certain Promotional Support during the Performance Period directly to Customer. The full value of such Boeing provided Promotional Support will be accounted for as part of the Commitment Limit and will correspondingly reduce the amount of Qualifying Third Party Fees that are subject to reimbursement pursuant to Article 3.1 above.
3.3. In the event Customer does not (i) utilize the full amount of the Commitment Limit within the Performance Period or (ii) submit its paid invoices for Qualifying Third Party Fees within the required time, as set forth in Article 3.1, Boeing will have no further obligation to Customer for such unused Commitment Limit or to reimburse Customer for such Qualifying Third Party Fees, respectively.
4. Project Approval.
Following the execution of this Letter Agreement, a Boeing Airline Marketing Services representative will meet with Customer’s designated representative to review and approve the extent, selection, scheduling, and funds disbursement process for the Promotional Support to be provided pursuant to this Letter Agreement.
5. Assignment.
Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer becoming the operator of the Aircraft and cannot be assigned in whole or, in part.
6. Confidential Treatment.
The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600119 Promotional Support LA Page 2 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600119 Promotional Support LA Page 3 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1600123
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Special Terms – Seats and In-flight Entertainment
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
1. Definitions.
1.1. Covered Seats will mean those seats which are not otherwise identified in Exhibit A to the Purchase Agreement as Buyer Furnished Equipment.
1.2. In-flight Entertainment (IFE) System will mean the IFE identified in the Detail Specification of the Aircraft, inclusive of the IFE software which is required to test and certify the IFE system on the Aircraft, but exclusive of IFE Customer Software.
1.3. IFE Customer Software will mean any software which is obtained by the Customer from a source other than Boeing for installation in the IFE System.
2. Applicability of Supplemental Exhibit CS1 to the Purchase Agreement.
2.1. Boeing did not enter into product support agreements with the suppliers of the [***************************]. Customer is responsible to enter into such product support agreements directly with the suppliers of such [***************************], and such provisions will apply in lieu of the provisions of Supplemental Exhibit CS1 to the Purchase Agreement.
2.2. Boeing will incorporate the Covered Seats and IFE System line maintenance information, received from the suppliers of such Covered Seats and IFE System/, into Customer’s customized Materials prior to delivery of each Aircraft reflecting the configuration of that Aircraft as delivered. Upon Customer’s request, Boeing may provide update service after delivery to such information subject to the terms of the Purchase Agreement, Supplemental Exhibit CS1 (787 Customer Support Document), Part 2, Article 2.3 relating to Additional Services.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600123 Seats and IFE Special Provisions-787 LA Page 1 BOEING PROPRIETARY 3. Applicability of the Provisions of Exhibit C to the AGTA.
In lieu of the provisions of Part 4 of Exhibit C to the AGTA, the following warranty and patent and copyright indemnities will apply to Covered Seats and IFE System:
“Boeing will obtain warranties and indemnities against patent and copyright infringement enforceable by Customer from the suppliers of the Covered Seats and IFE System/ installed on the Aircraft at the time of delivery. If requested by Customer, Boeing will provide copies of such warranties and indemnities to Customer upon request.”
4. IFE Customer Software.
Customer is responsible for and assumes all liability with respect to IFE Customer Software.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600123 Seats and IFE Special Provisions-787 LA Page 2 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600123 Seats and IFE Special Provisions-787 LA Page 3 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1600124
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Used Aircraft Trade-In Matters
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft
This letter agreement (Letter Agreement) amends the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement.
1. Used Aircraft Acquisition Agreement.
Boeing and Customer have entered into the acquisition agreement for used aircraft [***************************]. Boeing’s purchase of the Used Aircraft and Used Aircraft Equipment as defined in the Acquisition Agreement shall be in accordance with the provisions of the Acquisition Agreement.
2. 777-200 Aircraft, and Spare Engines; Trade-In Delivery and Title Transfer; Trade-in delivery conditions.
2.1. In consideration of Customer purchasing and taking delivery [***************************] Model 787-9 aircraft (New Aircraft), Boeing agrees to take in [***************************] in accordance with the Acquisition Agreement, including Schedules 1 and 2.
2.2. Trade-in delivery and title transfer to Boeing of the Used Aircraft Equipment will take place according to the provisions of Article 3 of the Acquisition Agreement, but no later than [*************] after the associated trade-in delivery date. The trade-in delivery and title transfer of such Used Aircraft Equipment shall be delivered on the date specified in the Acquisition Agreement and Customer shall ensure that the Used Aircraft Equipment meet the return conditions per the Acquisition Agreement at the time of the trade-in date.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600124 Used Aircraft Trade-in Matters LA Page 1 BOEING PROPRIETARY 2.3. Price. Boeing agrees to purchase the Used Aircraft Equipment according to the provisions of [***************************].
3. Exclusive Right to Sell.
Boeing shall have the exclusive right to sell or dispose Used Aircraft Equipment as defined in Article 1.9 of Acquisition Agreement.
4. Non-Transferable.
Boeing’s agreement to purchase the Used Aircraft Equipment is provided as a financial accommodation to the Customer in consideration of Customer purchasing the New Aircraft and the purchase of the Used Aircraft Equipment by Boeing is non-transferable to a third party.
5. Assignment.
Boeing reserves the unrestricted right to transfer or assign all or a portion of its rights, title and interest in the Used Aircraft and its obligations and benefits under any Acquisition Agreement to third parties. Customer shall cooperate with Boeing in complying with reasonable documentation and insurance/indemnity requirements. Boeing agrees that no such transfer or assignment will materially change the duty of or materially increase the burden or risk imposed on Customer.
6. Confidential Treatment.
The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600124 Used Aircraft Trade-in Matters LA Page 2 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600124 Used Aircraft Trade-in Matters LA Page 3 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1600125
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Purchase and Trade-in Framework Agreement
Reference: 1) Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (New Aircraft)
2) Acquisition Agreement for Used Aircraft No. A0206/GUN-04 between Boeing Aircraft Holding Company and China Southern Airlines Company Limited with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Acquisition Agreement)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement.
1. Definition of Parties. For the purposes of this Letter Agreement only, the parties shall be defined as follows:
1.1. China Southern Airlines Company Limited and China Southern Airlines Group Import and Export Trading Corp., Ltd. are collectively defined as China Southern.
1.2. The Boeing Company and Boeing Aircraft Holding Company (BAHC) are collectively defined as Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600125 Purchase and Trade-in Framework Agreement LA Page 1 BOEING PROPRIETARY 2. [**************]
In addition to Article 3.11 of the Acquisition Agreements and as a sole remedy, if BAHC breaches its obligations under the Acquisition Agreements to purchase Used Aircraft despite China Southern being in full compliance with its obligations under the Purchase Agreement and the Acquisition Agreements, China Southern [**************]with prior written notice to Boeing [*******************************] before [*****************************] in order to reestablish the intended [*********************************************]. [*******************] by China Southern of such terminated New Aircraft, Boeing shall return to China Southern all advanced payments received [*********************] within [*****************************************************].
3. Confidential Treatment.
The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. China Southern will limit the disclosure of its contents to employees of China Southern with a need to know the contents for purposes of helping China Southern perform its obligations under the Purchase Agreement and the Acquisition Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600125 Purchase and Trade-in Framework Agreement LA Page 2 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY CHINA SOUTHERN AIRLINES CO., LTD.
By By
Its Attorney-In-Fact Its
BOEING AIRCRAFT HOLDING COMPANY CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By By
Its Attorney-In-Fact Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600125 Purchase and Trade-in Framework Agreement LA Page 3 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1600126
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Special Matters
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
1. Credit Memoranda.
1.1. Basic Credit Memorandum. At the time of delivery of each Aircraft, Boeing will issue to Customer a basic credit memorandum (Basic Credit Memorandum) [***************************].
1.2. Customer Support Credit Memorandum. At the time of delivery of each Aircraft, Boeing will issue to Customer a customer support credit memorandum (Customer Support Credit Memorandum) [********************************************].
1.3. Goods & Services Credit Memorandum. At the time of delivery of each Aircraft, Boeing will issue to Customer a goods & services credit memorandum (Goods & Services Credit Memorandum) [***************************].
1.4. Quantity Bonus Credit Memorandum. At the time of delivery of each Aircraft, Boeing will issue to Customer a quantity bonus credit memorandum (Quantity Bonus Credit Memorandum) [***************************].
1.5. Incremental 787 Purchase Credit Memorandum. At the time of delivery of each Aircraft, Boeing will issue to Customer an incremental 787 purchase credit memorandum (Incremental 787 Purchase Credit Memorandum) [***************************].
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600126 Special Matters LA Page 1 BOEING PROPRIETARY 1.6. Features Support Credit Memorandum. For each Aircraft where Customer purchases both of the following: (i) overhead flight deck crew rest, and (ii) overhead flight attendant crew rest, Boeing will issue to Customer, at the time of delivery, a features support credit memorandum (Features Support Credit Memorandum) [***************************].
1.7. MTOW Support Credit Memorandum. For each Aircraft where Customer purchases the maximum take-off weight (MTOW) of Five Hundred Sixty Thousand (560,000) pounds, Boeing will issue to Customer, at the time of delivery, an MTOW support credit memorandum (MTOW Support Credit Memorandum) [***************************]. For the avoidance of doubt, MTOW Support Credit Memorandum is only available for each Aircraft with an MTOW [***************************].
1.8. Modified PDP Bonus Credit Memorandum. If Customer provides a payment of [***************************] in addition to the standard [***************************] of the Advance Payment Base Price for each Aircraft on the effective date of the Purchase Agreement, then at the time of delivery of each Aircraft, Boeing will issue to Customer a modified PDP bonus credit memorandum (Modified PDP Bonus Credit Memorandum) [***************************].
1.9. Entry-Into-Service Support Credit Memorandum. As a consideration and to address Customer concerns on potential manufacturing change costs and airworthiness directive costs related to entry-into- service of the Aircraft, at the time of delivery of each Aircraft, Boeing will issue to Customer an entry-into-service support credit memorandum (Entry-Into-Service Support Credit Memorandum) [***************************].
1.10. Delivery Support Credit Memorandum. As a consideration and to address Customer concerns on costs related to delivery of the Aircraft, at the time of delivery of each Aircraft, Boeing will issue to Customer a delivery support credit memorandum (Delivery Support Credit Memorandum) in an amount of [***************************] and may only be used for the purchase of Boeing goods and services or applied toward aircraft storage costs.
1.11. Training Support Credit Memorandum. As a consideration and to address Customer concerns on training costs, at the time of delivery of each Aircraft, Boeing will issue to Customer a training support credit memorandum (Training Support Credit Memorandum) in an amount of [***************************]where any Training Support Credit Memorandum issued prior to [***************************] may only be used for the purchase of Boeing training services, and any Training Support Credit Memorandum issued on or [***************************] may only be used for the purchase of Boeing goods and services which include Boeing training services.
1.12. Configuration Support Credit Memorandum. At the time of delivery of each Aircraft, Boeing will issue to Customer a configuration support credit memorandum (Configuration Support Credit Memorandum [***************************].
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600126 Special Matters LA Page 2 BOEING PROPRIETARY 1.13. Management Education Support Credit Memorandum. At the time of delivery of each Aircraft, Boeing will issue to Customer a management education support credit memorandum (Management Education Support Credit Memorandum) [***************************].
1.14. Dispatcher Training Support Credit Memorandum. As a consideration and to address Customer concerns on flight dispatcher training costs, Boeing will issue to Customer a dispatcher training support credit memorandum (Dispatcher Training Support Credit Memorandum) in the fixed, not subject to escalation, amount of [***************************]. For the avoidance of doubt, the Dispatcher Training Support Credit Memorandum is a one-time, not subject to escalation, fixed-amount credit memorandum and may only be used for the purchase of Boeing training services.
1.15. Performance Training Support Credit Memorandum. As a consideration and to address Customer concerns on performance engineer and software training costs, Boeing will issue to Customer a performance training support credit memorandum (Performance Training Support Credit Memorandum) in the fixed, not subject to escalation, [***************************]. For the avoidance of doubt, the Performance Training Support Credit Memorandum is a one-time, not subject to escalation, fixed-amount credit memorandum and may only be used for the purchase of Boeing training services.
1.16. FCOM/QRH Support Credit Memorandum. As a consideration and to address Customer concerns on FCOM/QRH change costs, Boeing will issue to Customer an FCOM/QRH support credit memorandum (FCOM/QRH Support Credit Memorandum) in the fixed, not subject to escalation, [***************************]. For the avoidance of doubt, the FCOM/QRH Support Credit Memorandum is a one- time, not subject to escalation, fixed-amount credit memorandum and may only be used for the purchase of Boeing goods and services.
1.17. ECL Support Credit Memorandum. As a consideration and to address Customer concerns on electronic checklist (ECL) change costs, Boeing will issue to Customer an ECL support credit memorandum (ECL Support Credit Memorandum) in the fixed, not subject to escalation, amount of [***************************]. For the avoidance of doubt, the ECL Support Credit Memorandum is a one-time, not subject to escalation, fixed-amount credit memorandum and may only be used for the purchase of Boeing goods and services.
1.18. Engineering Technical Support Credit Memorandum. As a consideration and to address Customer concerns on engineering technical support, Boeing will issue to Customer an engineering technical support credit memorandum (Engineering Technical Support Credit Memorandum) in the fixed, not subject to escalation, amount of [***************************]. For the avoidance of doubt, the Engineering Technical Support Credit Memorandum is a one-time, not subject to escalation, fixed-amount credit memorandum and may only be used for the purchase of Boeing goods and services.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600126 Special Matters LA Page 3 BOEING PROPRIETARY 2. Escalation of Credit Memoranda.
Unless otherwise noted, the amounts of the Credit Memoranda stated in Paragraphs 1.1 through 1.13 are in 2015 base year dollars and will be [***************************] of the respective Aircraft delivery pursuant to the airframe escalation formula set forth in the Purchase Agreement applicable to the Aircraft. The Credit Memoranda may, at the election of Customer, be (i) applied against the Aircraft Price of the respective Aircraft at the time of delivery, or (ii) used for the purchase of other Boeing goods and services (but will not be applied to advance payments).
3. Assignment.
Unless otherwise noted herein, the Credit Memoranda described in this Letter Agreement are provided as a financial accommodation to Customer and in consideration of Customer’s taking title to the Aircraft at time of delivery and becoming the operator of the Aircraft. This Letter Agreement cannot be assigned, in whole or in part, without the prior written consent of Boeing.
4. Confidentiality
Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing. In addition to any equitable relief that may be available to Boeing in the event of a breach of this clause, Boeing may rescind the Customer Support Memorandum contained in paragraph 1.2 above, in the event of any unauthorized disclosure by Customer.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600126 Special Matters LA Page 4 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1600126 Special Matters LA Page 5 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1603083
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Installation of Cabin Systems Equipment
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
Customer has requested that Boeing install in the Aircraft the In-Flight Entertainment and communications systems described in Attachment A to this Letter Agreement (collectively referred to as Cabin Systems Equipment or CSE). CSE is BFE that Boeing purchases for Customer and that is identified in the Detail Specification for the Aircraft.
The complexity of the CSE requires special attention and additional resources during the development, integration, and certification of the CSE and manufacture of the Aircraft to achieve proper operation of the CSE at the time of delivery of the Aircraft. To assist Customer, Boeing will perform the functions of [***************************] as set forth in Attachment B.
1. Responsibilities.
1.1. Customer will:
1.1.1. provide Customer's CSE system requirements to Boeing;
1.1.2. select the CSE suppliers (Supplier(s)) and system configuration) from among those identified in the Option(s) listed in Attachment A to this Letter Agreement, on or [***************]; or as otherwise available in the then current Standard Selections Catalog and formally offered by Boeing;
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603083 Installation of Cabin Systems Equipment Page 1 BOEING PROPRIETARY 1.1.3. promptly after selecting the Options, participate with Boeing in meetings with Suppliers to ensure that Supplier's functional system specifications meet Customer's and Boeing's respective requirements. Such functional system specifications define functionality to which Boeing will test prior to delivery but are not a guarantee of functionality at delivery;
1.1.4. select Supplier part numbers;
1.1.5. negotiate and obtain agreements on product assurance, product support following Aircraft delivery (including spares support), and any other special business arrangements directly with Suppliers;
1.1.6. provide pricing information for CSE part numbers selected to Boeing by a mutually selected date;
1.1.7. negotiate and obtain agreements with any required service providers;
1.1.8. include in Customer's contract with any seat supplier a condition causing such seat supplier to enter a bonded stores agreement with Boeing. This bonded stores agreement will set forth the terms concerning the use, handling. storage, and risk of loss of CSE during the time such equipment is under the seat supplier's control;
1.1.9. cause Suppliers to:
1.1.9.1. assist the seat suppliers in the preparation of seat assembly functional test plans;
1.1.9.2. coordinate integration testing, and provide seat assembly functional test procedures for seat electronic parts to seat suppliers and Boeing, as determined by Boeing; and
1.1.9.3. comply with Boeing’s 787 procurement processes (e.g. for transmission of technical data, transmission of purchase orders, and processing of non-conformances) (787 Procurement Processes). 787 Procurement Processes will be provided to Customer and may be updated from time to time; and
1.1.9.4. comply with Boeing’s type design and type certification data development and protection requirements where the Supplier has type design/certification responsibility. The requirements will require Suppliers to (i) maintain type design/certificate data for the life of such type certificate for all type design and (ii) entitle Boeing to access, review, and receive such type design/certification data. These requirements will be provided to Customer and included in any applicable contracts between Customer and Supplier.
1.2. Boeing will:
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603083 Installation of Cabin Systems Equipment Page 2 BOEING PROPRIETARY 1.2.1. [****************************************************************];
1.2.2. [****************************************************************];
1.2.3. [****************************************************************];
1.2.4. [****************************************************************];
1.2.5. [****************************************************************];
1.2.6. ensure that at the time of Aircraft delivery the CSE configuration meets the requirements of the Option(s) contained in Attachment A to this Letter Agreement as such Attachment A may be amended from time to time; and
1.2.7. obtain FAA certification of the Aircraft with the conforming CSE installed therein.
2. Software.
CSE systems may contain software of the following two types:
2.1. Certification Software. The software required to functionally test, operate and certify the CSE systems on the Aircraft is the Certification Software and is part of the CSE.
2.2. Customer's Software. The software which is defined by the Customer to support specified features and appearance is Customer's Software and is not part of the CSE.
2.2.1. Customer is solely responsible for specifying Customer's Software functional and performance requirements and ensuring that Customer's Software meets such requirements. Customer and Customer's Software supplier will have total responsibility for the writing, certification, modification, revision, or correction of any of Customer's Software. Boeing will not perform the functions and obligations described in paragraph 1.2 above, or the Project Manager's functions described in Attachment B, for Customer's Software.
2.2.2. The omission of any Customer's Software or the lack of any functionality of Customer's Software will not be a valid condition for Customer's rejection of the Aircraft at the time of Aircraft delivery.
2.2.3. Boeing has no obligation to approve any documentation to support Customer's Software certification. Boeing will only review and operate Customer's Software if in Boeing's reasonable opinion such review and operation is necessary to certify the CSE on the Aircraft.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603083 Installation of Cabin Systems Equipment Page 3 BOEING PROPRIETARY 2.2.4. Boeing will not be responsible for obtaining FAA certification for Customer's Software.
3. Changes.
3.1. After Customer’s acceptance of this Letter Agreement, any changes to CSE may only be made by and between Boeing and the Supplier. Any Customer request for changes to the CSE specification after execution of this Letter Agreement will be made in writing directly to Boeing for approval and for coordination by Boeing with the Supplier. Any such change to the configuration of the Aircraft will be subject to price and offerability through Boeing’s master change or other process for amendment of the Purchase Agreement. Any Supplier price increase or decrease resulting from such change will be negotiated between Customer and Supplier.
3.2. Boeing and Customer recognize that the developmental nature of the CSE may require changes to the CSE or the Aircraft in order to ensure (i) compatibility of the CSE with the Aircraft and all other Aircraft systems, and (ii) FAA certification of the Aircraft with the CSE installed therein. In such event Boeing will notify Customer and recommend to Customer the most practical means for incorporating any such change. If within fifteen (15) days after such notification Customer and Boeing cannot mutually agree on the incorporation of any such change or alternate course of action, the remedies available to Boeing in Paragraph 6 will apply.
4. Supplier Defaults.
Boeing will notify Customer in a timely manner in the event of a default by a Supplier under the Supplier's purchase order with Boeing. Within fifteen (15) days of Customer's receipt of such notification, Boeing and Customer will agree on an alternate Supplier or other course of action. If Boeing and Customer are unable to agree on an alternate Supplier or course of action within such time, the remedies available to Boeing in Paragraph 6 will apply.
5. Exhibits B and C to the AGTA.
CSE is deemed to be BFE for the purposes of Exhibit B, Customer Support Document, and Exhibit C, the Product Assurance Document, of the AGTA.
6. Boeing’s Remedies.
If Customer does not perform its obligations as provided in this Letter Agreement or if Supplier fails (for any reason other than a default by Boeing under the purchase order terms) to deliver conforming CSE per the schedule set forth in the purchase order, then, in addition to any other remedies which Boeing may have by contract or under law, Boeing may:
6.1. revise the [***************************] to accommodate the delay in delivery of the conforming CSE and base the calculation of the Escalation Adjustment on such [***************************];
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603083 Installation of Cabin Systems Equipment Page 4 BOEING PROPRIETARY 6.2. deliver the Aircraft without part or all of the CSE installed, or with part or all of the CSE inoperative; and/or
6.3. increase the [***************************], including but not limited to, [****************************************************************] by Boeing, [********************************************************************************************************************************************************************************].
7. Advance Payments.
7.1. Estimated Price for the CSE. An estimated price for the CSE purchased by Boeing will be included in the [***************************]to establish the advance payments for each Aircraft. The estimated price for the Boeing purchased CSE installed on each Aircraft is identified in Table 1 of the Purchase Agreement.
7.2. Aircraft Price. The Aircraft Price will include the [***************************] charged Boeing by Suppliers or otherwise incurred by Boeing.
8. Customer's Indemnification of Boeing.
Customer will indemnify and hold harmless Boeing from and against all claims and liabilities, including costs and expenses (including attorneys' fees) incident thereto or incident to successfully establishing the right to indemnification, for injury to or death of any person or persons, including employees of Customer but not employees of Boeing, or for loss of or damage to any property, including Aircraft, arising out of or in any way connected with any nonconformance or defect in any CSE, or in the installation thereof or in the provision of services hereunder, and whether or not arising in tort or occasioned in whole or in part by the negligence of Boeing. This indemnity will not apply with respect to any nonconformance or defect caused solely by Boeing's installation of the CSE.
9. Title and Risk of Loss.
Title of CSE will remain with Boeing until the Aircraft title is transferred to Customer. Risk of loss will remain with the entity that is in possession of the CSE prior to Aircraft delivery
If the foregoing correctly sets forth your understanding of our agreement with respect to the matters treated above, please indicate your acceptance and approval below.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603083 Installation of Cabin Systems Equipment Page 5 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603083 Installation of Cabin Systems Equipment Page 6 BOEING PROPRIETARY Attachment A Cabin Systems Equipment
The following optional features (Option(s)) describe(s) the items of equipment that under the terms and conditions of this Letter Agreement are considered to be CSE. Each such Option is fully described in the Detail Specification and Option Document as described in Exhibit A to the Purchase Agreement. Final configuration will be based on Customer acceptance of any or all Options listed below.
Option Request Number and Title
(To be added upon completion of Customer’s configuration)
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603083 Installation of Cabin Systems Equipment Page 7 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN- PA-04455-LA-1603084
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Payment Matters
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
12. Advance Payments for the Aircraft – Due on the Effective Date of the Purchase Agreement.
It is understood that Customer’s ability to make advance payments described in Articles 4.2 and 4.3 of the Purchase Agreement may be impacted due to monetary issues. Therefore Boeing agrees all advance payments due on the effective date of the signing of the Purchase Agreement, as specified in Articles 4.2 and 4.3, may be deferred without interest until [***************************], by which time Customer will pay all advance payments specified in the Purchase Agreement as being due on or before that date.
13. Other Scheduled Advance Payments.
As defined in Article 4.2 of the Purchase Agreement, advance payments are required for each Aircraft in the percentages and at the times shown in Table 1 of the Purchase Agreement. For all advance payments due to Boeing, Boeing will provide Customer with an invoice about [***************************]prior to the date the advance payment is due. This is done as an accommodation for Customer and does not relieve Customer from providing advance payments to Boeing at the times shown in Table 1 of the Purchase Agreement.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1503084 Payment Matters LA Page 1 BOEING PROPRIETARY 14. Payment at Aircraft Delivery.
Pursuant to Article 4.4 of the Purchase Agreement, Customer will pay, or cause to be paid, the balance of the Aircraft Price of each Aircraft at delivery. Boeing will provide the invoice for such payment about [************] prior to Aircraft delivery.
15. Rescheduling of Aircraft.
Concerning Letter Agreement [***************************], if Customer does not make all advance payments as specified in the Purchase Agreement, Boeing may reschedule any or all of the Aircraft at any time thereafter as it deems necessary based on Boeing’s production considerations and constraints. Boeing, after consultation with Customer for no less than [***************************], will give Customer [***************************] advance notice of any such Aircraft rescheduling, and will not reschedule such Aircraft if advance payments on all Aircraft are current prior to the expiration of [***************************]. Boeing will work with Customer in good faith to explore alternatives to such Aircraft rescheduling as may be available.
16. Effect of Aircraft Rescheduling.
If Boeing reschedules any or all of the Aircraft pursuant to the provisions of Paragraph 4 above, then Customer and Boeing will complete a Supplemental Agreement to document the revised Aircraft delivery schedules within [*********************************] advance notice is given.
17. Assignment.
Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer becoming the operator of the Aircraft and cannot be assigned in whole or, in part.
18. Confidential Treatment.
The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer will limit the disclosure of its contents, except for as required by applicable laws or regulations, to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1503084 Payment Matters LA Page 2 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1503084 Payment Matters LA Page 3 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1603085
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Clarifications and Understandings
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement.
1. Clarifications and Understandings. The following clarifications and understandings pertain to the indicated provisions of the Purchase Agreement:
1.1 Purchase Agreement, Article 1. Quantity, Model and Description. As set forth in the AGTA, Boeing will manufacture each Aircraft to conform to the appropriate Type Certificate issued by the United States Federal Aviation Administration (FAA) for the specific model of aircraft and will obtain from the FAA and furnish to Buyer at delivery of each Aircraft either a Standard Airworthiness Certificate or an Export Certificate of Airworthiness issued pursuant to Part 21 of the Federal Aviation Regulations.
The Civil Aviation Authority of China (CAAC) has indicated to the FAA that Boeing’s manufacturing procedures meet the bi-lateral agreements between the responsible parties. The FAA uses FAR Part 25 to establish the Type Certificate. Similarly, the CAAC uses its CCAR 25 for its Type Certificate. CCAR 25 is not identical to the FAA, but the CAAC considers both to be sufficiently equivalent to recognize the FAA Type Certificate to be valid.
In the issuance of an Export Certificate of Airworthiness, the FAA complies with any additional CAAC requirements through the use of Advisory Circular 21-2 (AC 21-2). Such additional requirements are documented by the FAA in AC 21-2.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603085 Clarifications and Understandings LA Page 1 BOEING PROPRIETARY 1.2 Purchase Agreement, Article 4. Payment.
Article 4.2 refers to payments due on the “effective date” of the Purchase Agreement. Article 4.3 refers to payments due “upon signing” of the Purchase Agreement. The effective date of the Purchase Agreement is the day it is signed by Boeing, Customer and the Consenting Party. Such date appears in the first sentence of the Purchase Agreement and again just above the signature blocks of the parties to the Purchase Agreement. For clarification purposes, Boeing will provide invoices in advance for all payments due under the Purchase Agreement to facilitate payment by Customer.
1.3 Purchase Agreement, Article 5.6. Public Disclosure.
For clarity, Customer may make a public announcement regarding Customer’s purchase of the Aircraft upon approval of Customer’s press release by Boeing’s public relations department or other authorized representative.
1.4 Purchase Agreement, Article 5.7. Negotiated Agreement; Entire Agreement.
For clarity, to the extent there is any inconsistency between the terms of the AGTA and the Purchase Agreement, in each case, relating to the Aircraft, the terms of this Purchase Agreement shall prevail.
2. AGTA Article 5.3 Demonstration Flights.
For clarity, demonstration flights are to demonstrate the function of the Aircraft only to Customer and not for marketing or commercial activities with Boeing’s other customers.
3. AGTA Article 5.5 Special Aircraft Test Requirements.
Customer is concerned for the potential that flight and ground test hours on any Aircraft could [***************************]. As an accommodation for Customer’s concern, Boeing will notify Customer for any flight and ground testing that would [***************************]on an Aircraft. Customer and Boeing agree to discuss the matter if tests are for purposes other than the flight and ground tests described in Article 5.5 (i) and (ii) of the AGTA. For the avoidance of doubt, Boeing flight and ground tests will not [***************************].
4. AGTA Article 8.2 Insurance.
Customer is concerned about aircraft insurance requirements under Article 8.2 of AGTA after Customer has sold an Aircraft to a new owner. For clarity, after Customer has transferred the title of an Aircraft to the new owner, Customer will be released from [***************************] for that specific Aircraft after Customer has provided Boeing the notification of such post-delivery sale (AGTA Appendix III provides such a reference notice). Notwithstanding the foregoing, Customer is not released from its obligation under Article 8.2 of AGTA any period which Customer has control or possession of an Aircraft.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603085 Clarifications and Understandings LA Page 2 BOEING PROPRIETARY 5. AGTA Exhibit A, Buyer Furnished Equipment,
5.1 Article 7. Title and Risk of Loss. For clarification purposes, the last sentence of Article 7.1 of Exhibit A of the AGTA will provide Customer [***************************************************************]. In either case, Boeing will not be liable for loss of use.
5.2 Article 9 Indemnification of Boeing. This last sentence of Article 9 shall be modified to read: “This indemnity will not apply with respect to any nonconformance or defect caused solely by Boeing's storage, handling, and installation of the BFE.”
6. Purchase Agreement Exhibit B, Aircraft Delivery Requirements and Responsibilities.
6.1 Article 1.1, Airworthiness and Registration Documents. The first sentence of Article 1.1 shall be modified to read: “Airworthiness and Registration Documents. Not later than [***************************] of each Aircraft, Customer will notify Boeing of the registration number to be painted on the side of the Aircraft.” Customer and Boeing also agree to work together to minimize the impact related to Customer’s notification to Boeing of the aircraft SELCAL and Mode-S information.
6.2 Article 1.2, Certificate of Sanitary Construction. For clarification purposes and pursuant to Article 1.2.2, Customer has elected to receive the Certificate of Sanitary Construction at the time of Aircraft delivery.
6.3 Article 1.3.1, Import Documentation. For clarification purposes, Boeing will provide reasonable assistance if requested by Customer in connection with the import of the Aircraft into the country of import.
6.4 Article 4.1, Schedule of Inspections, Article 4.2, Schedule for Demonstration Flights, and Article 4.3 Schedule for Customer’s Flight Crew. Articles identify parties that participate in such actions, and the Civil Aviation Authority of China (CAAC) may also participate in these actions. It’s noted that Boeing will provide advance notice of such actions.
6.5 Article 4.4, Fuel Provided by Boeing. In addition to the fuel provided by Boeing pursuant to Article 4.4, Boeing assists its customers with certain unique services or accommodation items at [***************************]. If requested, Boeing provides oil and hydraulic fluid for the ferry flight. Also, if Customer does not load its own navigation database for ferry flight, Boeing will provide a limited- time use database for the ferry flight.
6.6 Article 4.6 Delivery Papers, Documents and Data. Replace the first sentence with the following:
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603085 Clarifications and Understandings LA Page 3 BOEING PROPRIETARY “Boeing will have available at the time of delivery of the necessary Aircraft delivery papers, delivery agenda, documents and data for execution and delivery. Such documents may include, but are not limited to the following:
1. Aircraft Bill of Sale 2. FAA Export Certificate of Airworthiness 3. Weight and Balance Supplement 4. Engine Brochure 5. Miscellaneous Delivery Record Brochure 6. Aircraft Readiness Log 8. Auxiliary Power Unit Log 9. FAA Airworthiness Directive Compliance Record Status”
6.7 Article 4.7, Delegation of Authority. Boeing will present a delegation of authority, designating and authorizing certain persons to act on its behalf in connection with delivery of the Aircraft. For clarity, if required to complete the delivery of Aircraft, Boeing will provide a legal opinion in form and substance satisfactory to the Customer in connection with delivery of the Aircraft.
7. Purchase Agreement Supplemental Exhibit BFE1, Aircraft Delivery Requirements and Responsibilities.
Customer and Boeing agree to work together to help Customer fulfill the requirements under Supplemental Exhibit BFE1.
8. Purchase Agreement – Redacted Versions.
Customer has concerns regarding the confidential treatment of the Purchase Agreement when the relevant stock exchanges require certain disclosure from Customer. To accommodate Customer, Boeing will provide redacted version of the Purchase Agreement if requested by Customer for the purpose of providing disclosure of the Purchase Agreement to relevant stock exchanges.
9. AGTA Terms Revisions.
AGTA terms revisions in Letter Agreement 6-1165-CKR-1223 under Purchase Agreement No. 03107 will apply to Purchase Agreement No. 04455 where applicable.
10. Purchase Agreement Letter Agreement LA-1603083 Cabin Systems Equipment (CSE).
10.1 For clarification purposes concerning CSE changes, Customer may provide written request to Boeing for review and approval subject to price and offerability through Boeing’s master change or other process for amendment of the Purchase Agreement. In addition, Boeing agrees to work with Customer and suppliers in the event Boeing determines CSE changes are necessary to fulfill the Boeing’s obligations under the Purchase Agreement.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603085 Clarifications and Understandings LA Page 4 BOEING PROPRIETARY 10.2 Delay of an aircraft delivery caused by an event or events set out in Section 7.1 of the AGTA No. AGTA-GUN is subject to the provisions under section 7 of the AGTA. Delay of an aircraft delivery as defined in the Non-Excusable Delay Letter Agreement is subject to the provisions of the Non-Excusable Delay Letter Agreement LA-1600114. This applies to all Boeing aircraft and Boeing’s obligations under the Purchase Agreement including but not limited to Boeing obligations under the CSE Letter Agreement LA-1603083.
10.3 Article 8. Customer’s Indemnification of Boeing. This last sentence of CSE Letter Agreement LA-1603083 Article 8 shall be modified to read: “This indemnity will not apply with respect to any nonconformance or defect caused solely by Boeing's storage, handling, and installation of the CSE.”
11. Purchase Agreement Letter Agreement LA-1600111 Special Escalation Program.
11.1 Customer has concerns regarding the length of time period Boeing [**********] Escalation Adjustment for the Airframe, Price and Optional Features of each Aircraft in Table 1 of the Purchase Agreement. For the avoidance of doubt [****************************] by mutual agreement between Customer and Boeing in the event of [*************************].
11.2 In the event the Aircraft with the Nominal Delivery Month in July 2020 is rescheduled as [*******************] in accordance with the Open Configuration Matters LA-1600116, Article 1.1, then the [***************] will be [********************************].
12. CAAC regulatory information
It is recognized that the Civil Aviation Authority of China (CAAC) works with certain aircraft-related information, including Type Certificate Data Sheets (TCDS), Validation of Type Certificate Data Sheets (VTCDS), Aircraft Letter of Definition (ALOD) in order to issue to Customer the necessary aircraft certificates for operating the Aircraft in China. Boeing agrees to work with the relevant regulatory entities on a timely basis to support the process providing such information to the CAAC.
13. Assignment
13.1 Notwithstanding any other provisions of the Purchase Agreement, whereby this clause takes precedence, if Customer requests to assign an Aircraft under the Purchase Agreement to an assignee which Customer or China Southern Airlines Holding Company directly controls or holds [***************************], Customer will work with Boeing in accordance with the lead-time and charges required for configuration changes and Boeing will not unreasonably withhold its consent to the assignment of Customer’s rights and obligations under the Purchase Agreement as relates to the specific Aircraft or post- delivery entitlements (collectively “Assigned Rights”), including but not limited to all rights and obligations with respect to advance payments already paid to Boeing under the Purchase Agreement.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603085 Clarifications and Understandings LA Page 5 BOEING PROPRIETARY 13.2 Any such assignment will be in the form acceptable to Boeing (AGTA Appendix II provides such a reference form), including the undertaking by Customer to be bound by the DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES provisions set forth in Article 11 of Part 2 of Exhibit C to the AGTA.
14. Regulatory Approval, Validated Type Certificate (VTC).
It is recognized that obtaining the 787-9 Validated Type Certificate (VTC) is necessary for Customer to import and use the Aircraft in China. Customer has requested that Boeing take responsibility for obtaining the VTC for the 787-9. While Boeing recognizes Customer’s concern regarding VTC for the 787-9, Boeing is not able to accept responsibility for obtaining the VTC from the CAAC. If the lack of VTC approval results in the delay of an Aircraft delivery, such a delay would be an Excusable Delay (as defined in Article 7.1 of the AGTA). However, Boeing commits to support the process of obtaining the VTC and Customer’s efforts (as applicable) towards the same as described herein. In support of obtaining VTC approval, Boeing will be responsible for: (1) assessing the applicable regulatory requirements, (2) generating data and analysis to reasonably support the approval requirements, (3) submitting such information to the applicable regulatory agency, and (4) supporting discussions with regulators to assist in the evaluation of the Boeing submittal.
This will be accomplished through an Option (similar to Options [***************************] in Exhibit A-1 and Exhibit A-2 of Purchase Agreement No. PA-3263) to support an Export Certificate of Airworthiness for the Aircraft.
15. Aircraft and Engines.
15.1 Customer has concerns regarding the General Electric GEnx type engines installed in the Aircraft at the time of delivery. For clarity, Boeing will manufacture each Aircraft and install the appropriate engines to conform to the appropriate Type Certificate issued by the FAA and in accordance with Boeing’s production process and requirement.
15.2 At the time of delivery, if Boeing and Customer mutually agree that the condition of an Aircraft requires borescope inspections, such inspection will be conducted in accordance with the relevant aircraft engine maintenance procedures.
15.3 The Aircraft Basic Price contained in the Purchase Agreement reflects an Engine Price per Aircraft [*****************************] representing [********************************] obtained by Boeing for the benefit of Customer from the engine list price per Aircraft of [************************************]. This discount does not preclude Customer from negotiating directly with the engine manufacturer [************************], as well as for technical and/or support issues.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603085 Clarifications and Understandings LA Page 6 BOEING PROPRIETARY 16. Confidential Treatment.
Customer and Boeing understand and agree that the information contained in the Purchase Agreement represents confidential business information and has value precisely because it is not available generally or to other parties. The parties agree that they will to limit the disclosure of its contents except as required by applicable laws, regulations, to its employees and its professional advisers with a need to know the contents for purposes of helping perform its respective obligations under the Purchase Agreement and who are under an obligation not to disclose its contents to any other person or entity without the prior written consent of the parties hereto.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603085 Clarifications and Understandings LA Page 7 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603085 Clarifications and Understandings LA Page 8 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1603086
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Customer Support Matters
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement.
1. Customer Support Document.
1.1. AGTA Exhibit B, Part 1, Article 5.3 is clarified as follows:
If the training is based at Boeing’s facility and the aircraft is damaged during such training, Boeing will make all necessary repairs to the aircraft as promptly as possible at the request of Customer. Customer will pay Boeing’s reasonable charge, including the price of parts and materials, for making the repairs. If Boeing’s estimated labor charge for the repair exceeds [***************************], Boeing and Customer will enter into an agreement for additional services before beginning the repair work. For the avoidance of doubt, any training using an aircraft will occur only after delivery and will be at the request of Customer.
1.2. Purchase Agreement Supplemental Exhibit CS1, Part 1, Article 1.1 is clarified as follows:
Customer has [***************************] after delivery of Customer’s [****] Aircraft (Training Program Period) to exchange Training Points for any of the training courses described on Attachment A. In addition, Customer may also exchange Training Points for training courses not listed on Appendix A but available for exchange using Training Points, including training courses customized to meet CAAC’s maintenance training requirements.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603086 Customer Support Matters LA Page 1 BOEING PROPRIETARY 1.3. Purchase Agreement Supplemental Exhibit CS1, Part 3, Article 2 is clarified as follows:
Planning conference between Boeing and Customer will be held at an agreed time to discuss various maintenance and material matters related to entry-into-service, including 787-9 unique data such as Airplane Flight Manual, Weight and Balance Manual (Chapter 1, Control and Loading), and Structural Repair Manual. In the event Boeing changes the format of technical data and maintenance information, Boeing will provide advance notice of the format change, and may reasonably assist customer in the timely access of data and information if requested.
1.4. Purchase Agreement Supplemental Exhibit CS1, Part 3, Article 4’s heading is clarified to mean as follows:
Configured Materials.
1.5. Purchase Agreement Supplemental Exhibit CS1, Part 1, Article 5.7 is clarified as follows:
Boeing will provide reasonable assistance in making arrangements for the use of airports for flight training if agreed to in the flight training planning conference.
1.6. Purchase Agreement Supplemental Exhibit CS1, Part 2, Article 2.1.7.8 is clarified as follows:
Boeing will provide the applicable differences list and an updated RSPL.
1.7. Purchase Agreement Supplemental Exhibit CS1, Part 2, Article 1.2 is clarified as follows:
Customer will provide reasonable assistance to Field Service Representative with visa, work permits, customs, mail handling, identification passes and formal introduction to local airport authorities.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603086 Customer Support Matters LA Page 2 BOEING PROPRIETARY 1.8. Purchase Agreement Supplemental Exhibit CS1, Part 1, Article 3.2 is clarified as follows:
The conditions in Articles 3.22, 3.23, 3.24, and 3.25, are as stated unless agreed otherwise in writing between Boeing and Customer.
2. Assignment.
Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer becoming the operator of the Aircraft and cannot be assigned in whole or, in part.
3. Confidential Treatment.
The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer will limit the disclosure of its contents, except for as required by applicable laws or regulations, to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603086 Customer Support Matters LA Page 3 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603086 Customer Support Matters LA Page 4 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1603087
China Southern Airlines Company Limited No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Integrated Performance Remedy
Reference: Purchase Agreement No. PA-04455 (Purchase Agreement) between The Boeing Company (Boeing) and China Southern Airlines Company Limited (Customer) with China Southern Airlines Group Import and Export Trading Corp., Ltd. (Consenting Party) relating to Model 787-9 aircraft (Aircraft)
This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement will have the same meaning as in the Purchase Agreement. For the avoidance of doubt, this Letter Agreement survives delivery of the Aircraft as set forth herein.
1. Compliance Deviation.
The Attachment to [***************************]contains performance guarantees (Performance Guarantees) for Aircraft with configuration of a maximum takeoff weight of [***************************]and equipped with Boeing furnished GEnx-1B76A engines (Aircraft). The Performance Guarantees include mission payload guarantees (Mission Payload Guarantee) and mission block fuel guarantees (Block Fuel Guarantee) applicable to the Aircraft in accordance with such Performance Guarantees. Boeing offers the following remedies in the event that the guarantee compliance report furnished to Customer for the Aircraft pursuant to Article 5.4 of the AGTA shows a demonstrated value [***************************] (each a Compliance Deviation). Article 5.4 of the AGTA and the Performance Guarantees provide a procedure for demonstration of compliance with the Performance Guarantees prior to Aircraft delivery. That method will be used to demonstrate compliance with the Performance Guarantees. Customer cannot refuse to accept delivery of such Aircraft because of such Compliance Deviation.
2. Cure Period.
2.1. Within [***************************] from the delivery of an Aircraft with a Compliance Deviation (Cure Period), Boeing or the engine manufacturer may design airframe improvement parts or engine improvement parts (Improvement Parts) which, when installed on such Aircraft, would reduce or eliminate the Compliance Deviation. Such Improvement Parts may include, but are not limited to, increased maximum take-off weight (MTOW).
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603087 Integrated Performance Remedy LA Page 1 BOEING PROPRIETARY 2.2. If Boeing elects to provide, or to cause to be provided, Improvement Parts for such Aircraft, then Customer and Boeing will mutually agree upon the details of an Improvement Parts program. Improvement Parts will be provided to Customer [***************************] at a location to be mutually agreed. Boeing or the engine manufacturer, as applicable, will provide reasonable support for an Improvement Parts program at no charge to Customer.
2.3. If Customer elects to install Improvement Parts in such Aircraft, then they will be installed within [***************************]days after the delivery of such Improvement Parts to Customer if such installation can be accomplished during aircraft line maintenance (ALM). Improvement Parts which cannot be installed during ALM will be installed within a mutually agreed to period of time. All Improvement Parts will be installed in accordance with Boeing and the engine manufacturer instructions.
2.4. Boeing will provide or will cause the engine manufacturer to provide reimbursement of Customer’s reasonable Direct Labor and Direct Material costs to install Improvement Parts at the warranty labor rate in effect at the time of installation between Boeing and Customer or the engine manufacturer and Customer, as applicable. Improvement Parts related to engines will apply also to spare engines on terms not less favorable to Customer. Boeing or the engine manufacturer, as applicable, will give Customer reasonable advance written notice of the estimated on-dock date at Customer’s maintenance base for any such Improvement Parts.
3. Performance Remedy Credit Memorandum.
For a Compliance Deviation which has not been remedied during the Cure Period, Boeing shall provide Customer with a credit memorandum in the amounts determined in paragraphs 3.1 and 3.2, below (Performance Remedy Credit Memorandum). The Performance Remedy Credit Memorandum may be used for the purchase of Boeing goods and services or engine manufacturer goods and services, as applicable, but shall not be applied to advance payments.
3.1. Block Fuel Adjustment
The following definitions will apply herein:
[***************************]= the average block fuel deviation, in percent. Only positive values of BFD will be used.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603087 Integrated Performance Remedy LA Page 2 BOEING PROPRIETARY [***************************]= The Block Fuel Guarantee value for paragraph 2.3.3 of the Performance Guarantees shown in the guarantee compliance report and calculated in accordance with section 1 above.
[***************************] = The demonstrated block fuel value for paragraph 2.3.3 of the Performance Guarantees shown in the guarantee compliance report and calculated in accordance with section 1 above.
In the event of a Compliance Deviation from the Block Fuel Guarantee for an Aircraft, Boeing will credit to the Performance Remedy Credit Memorandum [*************************** ]for each [***************************] deviation from such Block Fuel Guarantee, prorated for partial percentage points, up to a maximum total amount of [***************************] per Aircraft.
3.2. Mission Payload Adjustment
In the event of a Compliance Deviation from the Mission Payload Guarantee for an Aircraft, with the Compliance Deviation being the average amount of payload by which the Mission Payload Guarantee of paragraphs 2.3.1 and 2.3.2 shown in the guarantee compliance report and calculated in accordance with section 1 above failed to meet the Performance Guarantees, Boeing will credit to the Performance Remedy Credit Memorandum [***************************] for each [***************************] of such Mission Payload Guarantee Compliance Deviation up to a maximum total amount of [***************************] per Aircraft.
4. Duplication of Benefits.
Boeing and Customer agree it is not the intent of the parties to provide benefits hereunder that duplicate the benefits to be provided (a) by Boeing under the Purchase Agreement, or any other agreement between Boeing and Customer, or (b) by the engine manufacturer under any agreement between engine manufacturer and Customer, due to the Aircraft not satisfying any performance metric similar to the Mission Payload Guarantee, Block Fuel Guarantee or any performance metric that otherwise impacts payload. Boeing may offset its obligation to provide benefits hereunder against the benefits provided or to be provided to Customer by the engine manufacturer or Boeing pursuant to such other guarantee.
5. Exclusive Remedy.
Customer agrees that the remedies contained in this Letter Agreement herein are Customer’s exclusive remedies for purposes of resolving all issues with respect to the Performance Guarantees and are in lieu of all other rights, remedies, claims and causes of action Customer may have, arising at law or otherwise, in connection therewith and shall constitute complete, full and final settlement and satisfaction of any and all of Boeing’s obligations and liabilities to Customer in connection therewith. Customer releases Boeing and its successors, affiliates and subsidiaries from all present, past and future rights, remedies, claims and causes of action, whether arising at law or otherwise, known or unknown, relating to or arising from such Performance Guarantees.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603087 Integrated Performance Remedy LA Page 3 BOEING PROPRIETARY 6. Assignment.
Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer’s becoming the operator of the Aircraft and cannot be assigned in whole or, in part.
7. Confidential Treatment.
The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer will limit the disclosure of its contents, except for as required by applicable laws or regulations, to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603087 Integrated Performance Remedy LA Page 4 BOEING PROPRIETARY Very truly yours,
AGREED AND ACCEPTED this
Date
THE BOEING COMPANY
By
Its Attorney-In-Fact
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By
Its
CHINA SOUTHERN AIRLINES GROUP IMPORT AND EXPORT TRADING CORP., LTD.
By
Its
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603087 Integrated Performance Remedy LA Page 5 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207
GUN-PA-04455-LA-1603088
Date ______
China Southern Airlines Company Limited (“China Southern”) No. 278, Jichang Road, Baiyun District, Guangzhou, People's Republic of China, 510406
Subject: Shareholder Meeting Process
Gentlemen,
Regarding China Southern’s purchase of Boeing 787-9 aircraft, the China Southern team has identified that at the end of the year there is a shareholder meeting review of the business concluded for [***************************]. If, by [***************************], China Southern cannot proceed with the agreement, the parties will enter into discussions to reach an appropriate resolution with respect to the commitment that was made.
We look forward to concluding the purchase of the 787-9 aircraft with China Southern.
Sincerely,
Adam Y. Weng Regional Director Commercial Airplanes Contracts The Boeing Company
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
“[***]” This information is subject to confidential treatment and has been omitted and filed separately with the commission
GUN-PA-04455-LA-1603087 Integrated Performance Remedy LA Page 1 BOEING PROPRIETARY Exhibit 8.1
SUBSIDIARIES OF CHINA SOUTHERN AIRLINES COMPANY LIMITED
The particulars of the Company’s principal subsidiaries as of December 31, 2016 are as follows:
Jurisdiction of Name of Company Incorporation Shantou Airlines Company Limited PRC
Zhuhai Airlines Company Limited PRC
Xiamen Airlines Company Limited PRC
Guizhou Airlines Company Limited PRC
Chongqing Airlines Company Limited PRC
Guangzhou Nanland Air Catering Company Limited PRC
Guangzhou Baiyun International Logistic Company Limited PRC
China Southern Airlines Group Air Catering Company Limited PRC
Nan Lung International Freight Limited Hong Kong
Beijing Southern Airlines Ground Services Company Limited PRC
China Southern Airlines Henan Airlines Company Limited PRC
Southern Airlines Group Import and Export Trading Company PRC
Southern Airlines General Aviation Company Limited PRC Exhibit 12.1
CERTIFICATION
I, Tan Wan Geng, certify that:
1. I have reviewed this annual report on Form 20-F of China Southern Airlines Company Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
Date: April 27, 2017 By: /s/ Tan Wan Geng Name: Tan Wan Geng Title: President Exhibit 12.2
CERTIFICATION
I, Xiao Li Xin, certify that:
1. I have reviewed this annual report on Form 20-F of China Southern Airlines Company Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
Date: April 27, 2017 By: /s/ Xiao Li Xin Name: Xiao Li Xin Title: Chief Financial Officer Exhibit 13.1
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of China Southern Airlines Company Limited (the “Company”) on Form 20-F for the year ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Tan Wan Geng, President of the Company, hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 27, 2017 By: /s/ Tan Wan Geng Name: Tan Wan Geng Title: President
* This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.
* A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 13.2
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of China Southern Airlines Company Limited (the “Company”) on Form 20-F for the year ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Xiao Li Xin, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 27, 2017 By: /s/ Xiao Li Xin Name: Xiao Li Xin Title: Chief Financial Officer
* This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.
* A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 15.1
April 27, 2017
Securities and Exchange Commission 100 F Street, N.E. Washington, DC 20549
Commissioners:
We have read the statements made by China Southern Airlines Company Limited (copy attached), which we understand will be filed with the Securities and Exchange Commission, pursuant to Item 16F of Form 20-F, as part of the Form 20-F of China Southern Airlines Company Limited dated April 27, 2017. We agree with the statements concerning our Firm in such Form 20-F.
Very truly yours,
/s/PricewaterhouseCoopers Zhong Tian LLP Attachment:
ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
On March 30, 2016, our board of the directors resolved, as recommended by our audit committee, to propose to dismiss our independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, or PwC, effective upon the completion of their audit of our consolidated financial statements as of and for the year ended December 31, 2015 and the effectiveness of internal control over financial reporting as of December 31, 2015 and to appoint KPMG Huazhen LLP, or KPMG, as our new independent registered public accounting firm effective upon the approval by our shareholders at the forthcoming annual general meeting. In this connection, our Company, a listed company controlled by a stated-owned enterprise, did not reappoint PwC as our independent registered public accounting firm at the forthcoming annual general meeting. On May 27, 2016, our shareholders approved the appointment of KPMG as our new independent registered public accounting firm for the year ending December 31, 2016.
The audit reports of PwC on our consolidated financial statements as of and for the fiscal years ended December 31, 2014 and 2015 contain no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles.
During the two fiscal years ended December 31, 2014 and 2015 and through April 28, 2016, there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PwC, would have caused them to make reference to the subject matter of the disagreements in connection with their report, nor were there any reportable events (as defined in Item 16F(a)(1)(v) of Form 20-F). We have provided a copy of the foregoing disclosure to PwC and requested that PwC furnish a letter addressed to the SEC stating whether or not PwC agrees with such disclosure. A copy of the letter from PwC addressed to SEC, dated April 27, 2017, is filed as Exhibit 15.1 to this Form 20-F.
During the fiscal years ended December 31, 2014 and 2015 and the subsequent interim period through May 27, 2016, neither we, nor anyone on our behalf, had consulted KPMG regarding (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, and neither a written report nor oral advice was provided to us that KPMG concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a) (1)(iv) of Regulation S-K and the related instructions) or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).