CHINA SOUTHERN AIRLINES CO LTD - 20-F - 20040630 - KEY_INFORMATION
ITEM 3.
KEY INFORMATION.
Selected Financial Data
The following selected data of consolidated statements of operations for each
of the years in the five-year period ended December 31, 2003 and consolidated
balance sheets for five years ended December 31,
2003 have been derived from the consolidated financial statements of the
Company. Such consolidated financial statements have been audited by KPMG,
Independent Registered Public Accounting Firm, and prepared in accordance with IFRS. IFRS differs in certain
significant respects from U.S. GAAP. See Note 33 to the Financial Statements
for the nature and effect of such differences related to the Group between IFRS
and U.S. GAAP as of December 31, 2002 and 2003 and for each of the years in the
three-year period ended December 31, 2003. The following information should be
read in conjunction with, and is qualified in its entirety by, the Financial
Statements of the Group.
Year ended December 31,
1999
2000
2001
2002
2003
2003
RMB
RMB
RMB
RMB
RMB
US$
(in million, except per share data)
Income Statement Data:
IFRS:
Operating revenue
13,299.6
15,178.3
16,879.7
18,018.6
17,470.1
2,110.8
Operating expenses
11,449.7
13,996.2
15,479.0
15,992.5
17,014.4
2,055.7
Operating income
1,849.9
1,182.1
1,400.7
2,026.1
455.7
55.1
Equity income of affiliated companies
36.1
45.9
53.0
37.0
47.8
5.8
Equity loss of jointly controlled entities
—
—
(4.0
)
(3.4
)
(39.5
)
(4.8
)
(Loss)/gain on sale of fixed assets
(18.7
)
372.6
(55.9
)
170.7
(22.2
)
(2.7
)
Interest expense
(1,192.2
)
(1,074.2
)
(933.7
)
(959.2
)
(823.7
)
(99.5
)
Exchange
(loss)/gain, net
(426.5
)
318.5
296.8
(175.4
)
(164.4
)
(19.9
)
Other, net
119.9
86.3
38.4
43.3
34.7
4.2
Income/(loss) before taxation and minority
interests
Notes payable, including current installments of
long term notes payable
613.3
783.1
2,177.5
5,240.7
7,096.8
857.4
Current installments of obligations under
capital leases
1,999.7
1,776.2
1,451.9
1,566.7
1,297.9
156.8
Notes payable, excluding current installments
4,424.2
3,788.7
3,627.6
5,835.4
4,521.7
546.3
Obligations under capital leases, excluding
current installments
11,490.9
9,416.3
7,691.6
6,631.8
5,543.1
669.7
Shareholders’ equity
8,379.7
8,881.4
9,221.7
9,613.2
11,895.7
1,437.3
U.S. GAAP:
Shareholders’ equity
8,227.4
8,527.3
8,958.0
9,287.3
11,568.5
1,397.7
Selected Operating Data
The following selected operating data of the Group for the five years
ended December 31, 2003 have been derived from consolidated financial
statements prepared in accordance with IFRS and other data provided by the
Group and have not been audited. In accordance with Order No. 88 of the Civil
Aviation Administration of China (the “CAAC”), titled Measures for the
Administration of China’s Civil Aviation Statistics, new statistical standards
have been implemented with effect from January 1, 2001. The Group has not
adjusted the operating data for the corresponding period in 1999 according to
the new standards. The main differences between the two sets of standards are
set forth below:
1.
The standard passenger weight has been changed from 75 kg per
person to 90 kg per person (luggage weight included). Luggage weight
will not be separately calculated;
2.
Number of scheduled flights has been changed to number of takeoffs;
3.
Any passenger carried on flights which fly international routes
will be counted as one domestic passenger and one international
passenger; however, any passenger carried on an irregular flight will
only be counted once; any cargo carried on flights which fly
international routes will be counted as one domestic and one
international cargo; however, cargo carried on an irregular flight
will only be counted once.
Apart
from the data set out in the table below for year 1999, the operating data and the
profit analysis and comparison for other years below is calculated
and disclosed in accordance with the new statistical standards. See “Glossary
of Airline Industry Terms” at the front of this Annual Report for definitions
of certain terms used herein.
The following table sets forth certain information concerning exchange
rates, based on the noon buying rates in New York City for cable transfers in
foreign currencies, as certified for customs purposes by the Federal Reserve
Bank of New York (the “Noon Buying Rate”), between Renminbi and U.S. dollars
for the five most recent financial years.
Average(1)
Period
Period
End
(RMB per US$)
High
Low
Annual Exchange Rate
1999
8.2793
8.2793
8.2917
8.2669
2000
8.2781
8.2784
8.2799
8.2768
2001
8.2766
8.2766
8.2910
8.2642
2002
8.2773
8.2773
8.2897
8.2152
2003
8.2767
8.2772
8.2800
8.2769
The following table sets out the range of high and low exchange rates,
based on the Noon Buying Rate, between Renminbi and U.S. dollars, for the
following periods.
Period
High
Low
Monthly Exchange Rate
December 2003
8.2772
8.2765
January 2004
8.2772
8.2767
February 2004
8.2773
8.2769
March 2004
8.2774
8.2767
April 2004
8.2772
8.2768
May 2004
8.2773
8.2768
June 2004
(up to June 25, 2004)
8.2768
8.2767
(1)
Determined by averaging the rates on the last business day of each month
during the relevant period.
Dividend Payments
No interim dividend was paid during the year ended December 31, 2003. The
Board of Directors of the Company (“Board of Directors”) does not recommend the payment of a final
dividend in respect of the year ended December 31, 2003.
All Chinese airlines are wholly- or majority-owned either by the Chinese
Government or by provincial or municipal governments in China. CSAHC, an
entity wholly-owned by the Chinese Government, holds and exercises the rights
of ownership of all of the Domestic Shares or 50.3% of the equity of the
Company. The interests of the Chinese Government in the Company and in other
Chinese airlines may conflict with the interests of the holders of the ADSs, H
Shares and A Shares. The public policy considerations of the Chinese
Government in regulating the Chinese commercial aviation industry may also
conflict with its indirect ownership interest in the Company.
High operating leverage and foreign exchange exposure
The airline industry is generally characterized by a high degree of
operating leverage. In addition, due to high fixed costs, the expenses
relating to the operation of any flight do not vary proportionately with the
number of passengers carried, while revenues generated from a flight are
directly related to the number of passengers carried and the fare structure of
such flight. Accordingly, a decrease in revenues could result in a
proportionately higher decrease in net income. Moreover, as the Group
has substantial obligations denominated in foreign currencies, its results of
operations are significantly affected by fluctuations in foreign exchange
rates, particularly for the US dollar and the Japanese Yen. The Company
incurred a net exchange loss of RMB175 million and RMB164 million for 2002 and
2003, respectively, mainly as a result of yen fluctuations. A majority of
these exchange losses were unrealized in nature.
Potential conflicts of interest
CSAHC will continue to be the controlling shareholder of the Company and
CSAHC and certain of its affiliated companies will continue to provide certain
important services to the Company, including the import and export of aircraft
spare parts and other flight equipment, housing services and financial
services. In addition, Mr. Yan Zhi Qing, the Chairman of the Board of
Directors, also serves as the President
of CSAHC. The interests of CSAHC may conflict with those of the Company. In
addition, any disruption of the provision of services by CSAHC’s affiliated
companies or a default by CSAHC of its obligations owed to the Company could
affect the Company’s operations and financial condition. In particular, as
part of its cash management system, the Company periodically places significant
amount of demand deposits to Southern Airlines Group Finance Company Limited
(“SA Finance”), a PRC authorized financial institution controlled by CSAHC and
an affiliated company of the Company. As a result, the Company’s deposits with
SA Finance are subject to the risks associated with the business of SA Finance
over which the Company does not exercise control. As of December 31, 2002 and
2003, the Group had short-term deposits of RMB901 million and RMB366 million,
respectively, with SA Finance.
Certain transactions between the Company and CSAHC or its affiliates (as
defined in the Rules Governing the Listing of Securities on the Stock Exchange
of Hong Kong Limited (the “Hong Kong Listing Rules”)) will constitute connected
transactions of the Company under the Hong Kong Listing Rules and, unless
exemptions are applicable or waivers are granted, will be subject to disclosure
requirements and/or independent shareholders’ approval in a general meeting.
Although systems for registration and transfer of land use rights and
related real property interests in China have been implemented, such systems do
not yet comprehensively account for all land and related property interests.
The land in Guangzhou on which the Company’s headquarters buildings and related
aircraft maintenance and other facilities are located and the buildings that
the Company uses at its route base in Wuhan, Haikou and Zhengzhou are leased by
the Company from CSAHC. However, CSAHC lacks adequate documentation evidencing
CSAHC’s rights to such land and buildings, and, as a consequence, the lease
agreements between CSAHC and the Company for such land have not been registered
with the relevant authorities. As a result, such lease agreements may not be
enforceable. Lack of adequate documentation for land use rights and ownership
of buildings subjects the Company to challenges and claims by third parties
with respect to the Company’s use of such land and buildings.
The Company has been occupying all of the land and buildings described
above without challenge. CSAHC has received written assurance from the CAAC to
the effect that CSAHC is entitled to continued use and occupancy of the land in
Guangzhou and certain related buildings and facilities. However, such
assurance does not constitute formal evidence of CSAHC’s right to occupy such
lands, buildings and facilities, or the right to transfer, mortgage or lease
such real property interests. The Company cannot predict the magnitude of the
adverse effect on its operations if its use of any one or more of these parcels
of land or buildings were successfully challenged. CSAHC has agreed to
indemnify the Company and Guangzhou Aircraft Maintenance Engineering Company
Limited (“GAMECO”), the Company’s jointly controlled entity, against any loss
or damage caused by any challenge of, or interference with, the use by the
Company and GAMECO of any of their respective land and buildings.
Risks associated with Hong Kong regional routes
The Company’s Hong Kong regional routes benefit from traffic originating
in Taiwan. The Company’s Hong Kong regional routes may be materially adversely
affected if direct flights between Taiwan and Mainland China were permitted in
the future. In such event, Xiamen Airlines Company Limited (“Xiamen
Airlines”), the Company’s subsidiary, may apply for route rights for direct
flights between Taiwan and mainland China, due partly to the proximity to
Taiwan of Fujian province, where Xiamen Airlines is based. However, there can
be no assurance that sufficient routes and flights between destinations in
Taiwan and mainland China could be obtained by Xiamen Airlines, if at all, or
as to the yields on these routes and flights.
Risks Relating to the Chinese Commercial Aviation Industry
Government regulation
The Company’s ability to implement its business strategy will continue to
be affected by regulations and policies issued or implemented by the CAAC,
which encompasses substantially all aspects of the Chinese commercial aviation
industry, including the approval of domestic, Hong Kong regional and
international route allocation, air fares, aircraft acquisition, jet fuel
prices and standards for aircraft maintenance, airport operations and air
traffic control. Such regulations and policies limit the flexibility of the
Company to respond to market conditions, competition or changes in the
Company’s cost structure. The implementation of specific CAAC policies could
from time to time adversely affect the Company’s operations. The CAAC has
confirmed in writing that the Company will be treated equally with other
Chinese airlines with respect to certain matters regulated by the CAAC.
Nevertheless, there can be no assurance that the CAAC will, in all
circumstances, apply its regulations and policies in a manner that results in
equal treatment of all airlines that are similarly situated.
Jet fuel supply and costs
The availability and cost of jet fuel have a significant impact on the
Group’s results of operations. The Group’s jet fuel costs for 2003 accounted
for 22.7% of its operating expenses. All of the domestic jet fuel requirements
of Chinese airlines (other than at the Shenzhen, Zhuhai and Sanya airports)
must be purchased from the exclusive providers, China Aviation Oil Supplies
Company (the “CAOSC”) and Bluesky Oil Supplies Company, companies controlled
and supervised by the CAAC. Chinese airlines may also purchase their jet fuel
requirements at the Shenzhen, Zhuhai and Sanya airports from joint ventures in
which the CAOSC is a partner. Jet fuel obtained from the CAOSC’s regional
branches is purchased at uniform prices throughout China that are determined
and adjusted by the CAOSC from time to time with the approval of the CAAC and
the pricing department of the State Planning Commission based on market
conditions and other factors. As a result, the costs of transportation and
storage of jet fuel in all regions of China are spread among all domestic
airlines. Prior to 1994, domestic jet fuel prices were generally below
international jet fuel prices. Since then, however, domestic jet fuel price
from CAOSC has always been higher than international jet fuel prices, sometimes
creating tension in fuel supply. In addition, jet fuel shortages have occurred
in China and, on limited occasions before 1993, required the Company to delay
or cancel flights. Although such shortages have not materially affected the
Company’s results of operations since 1993, there can be no assurance that such
shortage will not occur in the future. If such shortage occurs in the future
and the Company is forced to delay or cancel flights due to fuel shortage, its
operational reputation among passengers and results of operations may suffer.
The rapid increase in air traffic volume in China in recent years has put
pressure on many components of the Chinese commercial aviation industry,
including China’s air traffic control system, the availability of qualified
flight personnel and airport facilities. Airlines, such as the Company, which
have route networks that emphasize short- to medium-haul routes are generally
more affected by insufficient aviation infrastructure in terms of on-time
performance and high operating costs due to fuel inefficiencies resulting from
the relatively short segments flown, as well as the relatively high proportion
of time on the ground during turnaround. All of these factors may adversely
affect the perception of the service provided by an airline and, consequently,
the airline’s operating results. In recent years, the CAAC has placed
increasing emphasis on the safety of Chinese airline operations and has
implemented measures aimed at improving the safety record of the industry. The
ability of the Company to increase utilization rates and to provide safe and
efficient air transportation in the future will depend
in part on factors such as the improvement of national air traffic control
and navigation systems and ground control operations at Chinese airports, which
factors are beyond the control of the Company.
Competition
The CAAC’s extensive regulation of the Chinese commercial aviation
industry has had the effect of managing competition among Chinese airlines.
Nevertheless, competition has become increasingly intense in recent years due
to a number of factors, including relaxation of certain regulations by the
CAAC, and an increase in the capacity, routes and flights of Chinese airlines.
Competition in the Chinese commercial aviation industry has led to widespread
price-cutting practices that do not in all respects comply with applicable
regulations. Until the interpretation of these CAAC regulations has been
finalized and strictly enforced, discounted tickets from competitors will
continue to have an adverse effect on the Company’s sales.
The Company faces varying degrees of competition on its Hong Kong regional
routes from certain Chinese airlines and Dragon Air and on its international
routes, primarily from non-Chinese airlines, most of which have significantly
longer operating histories, substantially greater financial and technological
resources and greater name recognition than the Company. In addition, the
public’s perception of the safety and service records of Chinese airlines could
adversely affect the Company’s ability to compete against its Hong Kong
regional and international competitors. Many of the Company’s international
competitors have larger sales networks and participate in reservation systems
that are more comprehensive and convenient than those of the Company, or engage
in promotional activities, such as International Alliance programs, that may
enhance their ability to attract international passengers.
Limitation on foreign ownership
Chinese Government policies limit foreign ownership in Chinese airlines.
Under these policies, the percentage ownership of the Company’s total
outstanding ordinary shares held by investors in Hong Kong and any country
outside China (“Foreign Investors”) may not in the aggregate exceed 49%.
Currently, 26.8% of the total outstanding ordinary shares of the Company is
held by Foreign Investors. As a result of this limitation on foreign
ownership, the Company will have no meaningful access to the international
equity capital markets unless the restriction on foreign ownership is lifted.
In 2000, the CAAC announced a restructuring plan with respect to the PRC
aviation industry. Pursuant to such restructuring plan, domestic airlines are
directed to consolidate, on a voluntary basis, into three major airline groups
in China: CSAHC, China National Aviation Holding Company and China Eastern Air
Holding Group. The Company announced that it will also participate in such
consolidation and restructuring pursuant to the CAAC directives. The Company
has taken steps towards the purchase of the airline business of China Northern
Airlines Company and Xinjiang Airlines Company, two wholly owned subsidiaries
of CSAHC. These proposed acquisitions pursuant to the CAAC restructuring plan
may involve uncertainties and risks over a long period of time, including the
following:
-
failure to achieve the anticipated synergies, cost savings or
revenue enhancing opportunities resulting from the restructuring
activities;
-
diversion of management’s attention from existing business
concerns and other business opportunities of the Group;
-
difficulty in integrating the assets and business of other
airlines, including its employees, corporate culture, managerial
systems and processes, business information systems and services;
-
difficulty in exercising control and supervision over various new operations within the Group;
-
failure to retain key personnel; and
-
increase in financial pressure due to assumption of recorded/unrecorded liabilities of the acquired businesses.
The inability to manage additional businesses or integrate successfully
the acquired businesses without substantial expense, delay or other operational
or financial problems, or the occurrence of one or more of the events
enumerated above, could materially adversely affect the Group’s financial
condition and results of operations.
Risks relating to the PRC
Foreign exchange risks
Renminbi is not a freely convertible currency, and the Company’s ability
to obtain or retain foreign currencies is subject to regulation in China.
Limitations on the availability of foreign exchange could have a material
adverse effect on the Company’s operations and financial condition,
particularly in light of the Company’s substantial foreign currency
obligations.
The value of Renminbi is subject to changes in Chinese Government policies
and depends to a large extent on China’s domestic and international economic
and political developments, as well as supply and demand in the local market.
Since 1994, the official exchange rates for the conversion of Renminbi to US
dollars have been stable. There can be no assurance, however, that such rates
will not be volatile or that there will be no further devaluation of the
Renminbi against the foreign currencies in which the Company’s obligations are
denominated, principally the US dollar and the Japanese Yen. Based on the
Company’s foreign currency denominated obligations as of December 31, 2003, a
1% change in the exchange rate between the Renminbi and the US dollar, or
between the Renminbi and Japanese Yen, would have resulted in an unrealized
gain or loss of RMB152 million (US$18 million). As the Company is not able to
hedge effectively against the devaluation of the Renminbi other than by
retaining its foreign exchange-denominated earnings and receipts to the extent
permitted by applicable law, any future devaluation in the Renminbi could
adversely affect the Company’s results of operations and financial condition.
The Company’s results of operations and financial condition may also be
affected by changes in the value of currencies other than the Renminbi in which
the Company’s earnings and obligations are denominated.
The Chinese legal system is based on written statutes and is a system,
unlike common law systems, in which decided legal cases have little
precedential value. In 1979, China began to promulgate a more comprehensive
system of laws. On December 29, 1993, the Chinese National People’s Congress
promulgated the Company Law, which became effective on July 1, 1994. In August
1994, pursuant to the Company Law, the PRC State Council issued the PRC Special
Regulations on Overseas Offering and Listing of Shares by Companies Limited by
Shares to regulate joint stock companies that offer and list their shares
overseas. These laws, regulations and legal requirements are relatively
recent, and, like other laws, regulations and legal requirements applicable in
China (including with respect to the commercial aviation industry), their
interpretation and enforcement involve significant uncertainties.
Taxation of holders of H Shares or ADS by China
Chinese tax law generally provides for the imposition of a withholding tax
on dividends paid by a Chinese company to a non-Chinese shareholder at a rate
of 20%. In a notice issued by the State Taxation Bureau of the PRC and a
letter issued by the State Taxation Bureau, however, the Chinese tax
authorities confirmed that the imposition of this withholding tax on dividends
paid by joint stock companies, such as the Company, had been suspended.
Accordingly, any future dividends to be paid by the Company to holders of H
Shares or ADS who are foreign individuals not resident in China or which are
foreign enterprises with no permanent establishment in China will not be
subject to a Chinese withholding tax. In the event that the suspension of the
withholding tax is lifted, such payments will be subject to withholding tax at the
20% rate unless the holder is entitled to a tax waiver or a lower tax rate
under an applicable double-taxation treaty. See Item 10 “Additional
Information – Taxation”.
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