China Southern Airlines Announces Consolidation & Restructuring

 Below is a mostly unedited version of the announcement received from China Southern Airlines regarding its consolidation and restructuring :

Reference is made to the announcement dated April 27, 2001 made by China Southern Airlines (the Company). Southern Airlines Group (SA Group) informed the Company that the consolidation and restructuring proposal (the "Proposal") of the PRC aviation industry has been approved in principle by the State Council of The People's Republic of China (PRC).

As a result of the Approval, all equity of China Northern Airlines and Xinjiang Airlines will be transferred to the SA Group, and liabilities of China Northern Airlines and Xinjiang Airlines will be assumed by the SA Group. 

SA Group, China Northern Airlines and Xinjiang Airlines will form one entity and the name of such new entity shall be China Southern Air Holding Company. Airlines and airline-related businesses, assets and liabilities of China Northern Airlines and Xinjiang Airlines may be transferred to the Company. The Company will conduct negotiations with China Southern Air Holding Company in connection with such transfer. If any of such transactions occur, the Company shall promptly inform the public in accordance with the Listing Rules.

The Board has noted the recent increase in trading volume of the Company and wish to state that, save as otherwise disclosed in this announcement, the Board is not aware of any reasons for such increase.

The Board also confirms that there are no negotiations or agreements relating to intended acquisitions or realizations which are disclosable under paragraph 3 of the Listing Agreement, neither the Board is aware of any matter disclosable under the general obligation imposed by paragraph 2 of the Listing Agreement, which is or may be of a price-sensitive nature.

Reference is made to the announcement dated April 27, 2001 made by the Company. SA Group informed the Company that the Proposal has been approved in principle by the State Council of the PRC. As a result of the Approval, all the equity of China Northern Airlines and Xinjiang Airlines will be transferred to the SA Group, and all the liabilities of China Northern Airlines and Xinjiang Airlines will be assumed by the SA Group. SA Group, China Northern Airlines and Xinjiang Airlines will form one entity and the name of such new entity is China Southern Air Holding Company, alternatively, known as CS Air Holding or CSAH in abbreviation.

The Board expects that the Consolidation and Restructuring will have a positive effect on the operating efficiency of the Company.

The Company will procure evaluation of the assets and liabilities of China Northern Airlines and Xinjiang Airlines at the appropriate stage. Airlines and airline-related businesses, assets and liabilities of China Northern Airlines and Xinjiang Airlines may be transferred to the Company.

The Company will conduct negotiations with China Southern Air Holding Company in connection with such transfer. If any of such transactions occur, the Company shall promptly inform the public in accordance with the Listing Rules.

China Northern Airlines

China Northern Airlines is principally engaged in commercial airline services in the PRC with headquarters based in Shenyang in the Northeaster region of the PRC. China Northern Airlines currently has 55 routes in operation that is in competition with that of the Company. The annual revenue generated by the Company from such 55 routes comprises 21.6% of the total annual revenue of the Company for the year ended December 31, 2001. The Company is not aware of other existing business operations of China Northern Airlines that are in competition with that of the Company.

Xinjiang Airlines

Xinjiang Airlines is principally engaged in commercial airline services in the PRC with its headquarters based in Urumqi, Xinjiang. Xinjiang Airlines currently has eight routes in operation that is in competition with that of the Company. The annual revenue generated by the Company from such eight routes comprises 7.38% of the total annual revenue of the Company for the year ended December 31, 2001. The Company is not aware of other existing business operations of Xinjiang Airlines that are in competition with that of the Company.

China Southern Air Holding Company

Prior to the airlines and airline-related businesses, assets and liabilities of China Northern Airlines and Xinjiang Airlines are transferred to the Company, CS Air Group will take the following actions to ensure fair competition with the Company:

1. Revenue sharing scheme will be implemented on the competing routes operated by the Group, China Northern Airlines and Xinjiang Airlines. Revenue arising from those routes will be allocated in proportion to the traffic capacity, calculated by reference to the model of the aircraft, frequency of the flights and also the seats capacity, deployed by the Group, China Northern Airlines and Xinjiang Airlines respectively. The traffic capacity is determined by the respective airlines. The corresponding operating costs will be borne by the respective airlines. The revenue sharing scheme will be implemented based on the policy of General Administration of Civil Aviation of China ("CAAC"). The scheme has the effect of protecting the Company's interests in the operation of the competing routes.

2. Code sharing arrangements will be adopted on the competing routes operated by the Group, China Northern Airlines and Xinjiang Airlines. Under code sharing arrangements, the flight codes of any one of the Group, China Northern Airlines and Xinjiang Airlines will apply to the flight of the others on the competing routes. The air tickets for the relevant routes will be jointly sold by airlines concerned. The arrangements have the effect of protecting the Company's interests in the operation of the competing routes. In participating the revenue sharing scheme and code sharing arrangements, there is no consideration payable by the Group to China Northern Airlines and Xinjiang Airlines respectively or by China Northern Airlines and Xinjiang Airlines to the Group. There is no material adverse impact on the revenue of the Group as a result of entering into the scheme or arrangement. The Company will comply with the Listing Rules in respect of the aforesaid scheme or arrangement. Further announcement, when necessary, will be made in compliance with the Listing Rules.

Ongoing Transactions

The Group and China Northern Airlines have certain arrangements in place in relation to the provision of in-flight meals and tickets sales for their respective flights. The Group and Xinjiang Airlines have similar arrangements in place for their respective flights. The following is a summary of these transactions.

Following the Consolidation and Restructuring, each of the following transactions will continue although the party to the agreement concerned may be changed from China Northern Airlines to a company within CS Air Group and from Xinjiang Airlines to a company within CS Air Group (as appropriate). 

As SA Group (that is, China Southern Air Holding Company after the Consolidation and Restructuring) is the 65.2% controlling shareholder of the Company, each of the following transactions will constitute a connected transaction under the Listing Rules.

In-flight Meals Arrangements with China Northern Airlines

Guangzhou Nanland Air Catering Company Limited ("Nanland") (51% of which is owned by the Company and 49% of which is owned by an independent third party) has been providing and will provide in-flight meals to China Northern Airlines. 

Pursuant to an agreement dated June 23, 2000, Nanland has been providing in-flight meals to China Northern Airlines from time to time for a period of one year. The agreement will then be automatically extended annually. The annual amount paid by China Northern Airlines to Nanland for the year ended December 31, 2001 was approximately RMB 1,356,262 (equivalent to approximately HK $1,281,063). For the period between January 1 and June 30, 2002, the amount paid by China Northern Airlines to Nanland for the provision of in-flight meals was approximately RMB 2,568,775 (equivalent to approximately HK $2,426,348).

Pursuant to an agreement dated October 30, 2001, China Northern Airlines has been providing and will provide in-flight meals to the Company from time to time for a period of one year. The agreement will then be automatically extended annually. For the period between January 1 and June 30, 2002, the amount paid by the Company to China Northern Airlines for the provision of in-flight meals was approximately RMB 1,082,238 (equivalent to approximately HK $1,022,233).

The amounts payable under the above aforesaid transactions were determined after arm's length negotiation among the parties thereto and having regard to the prevailing market rate of the provision of similar services which are subject of the transactions.

Ticket Sales Arrangements with China Northern Airlines

The Group has entered into ticket agency arrangements with China Northern Airlines for the sale of the Group's air tickets by China Northern Airlines and for the sale of China Northern Airlines' air tickets by the Group. The selling party charges a commission in the amount of 3% of the ticket price for domestic tickets and 5% to 12% of the ticket price for Hong Kong regional and international tickets. 

These commission rates are based on the rates stipulated by the CAAC and the International Air Transport Association (IATA).

The amount of commission paid by China Northern Airlines to the Group for the period ended December 31, 2001 was approximately RMB 1,356,263 (equivalent to approximately HK $1,281,065) and for the period between January 1 and June 30, 2002, was approximately RMB 848,565 (equivalent to approximately HK $801,516). 

The amount of commission paid by the Group to China Northern Airlines for the period ended December 31, 2001 was approximately RMB 5,120,802 (equivalent to approximately HK $4,836,877), and for the period between January 1 and June 30, 2002, was approximately RMB 504,035 (equivalent to approximately HK $476,089).

The amounts payable under the above aforesaid transactions is based on the rates stipulated by the CAAC and IATA.

In-flight Meals Arrangements with Xinjiang Airlines

Pursuant to an agreement dated March 24, 2001, Nanland has been providing and will provide in-flight meals to the Xinjiang Airlines from time to time for a period of one year. The agreement will then be automatically extended annually.

For the period between January 1 and June 30, 2002, the amount paid by Xinjiang Airlines to Nanland for the provision of in-flight meals was approximately RMB 973,221 (equivalent to approximately HK $919,260).

Pursuant to an agreement dated September 20, 1999, Xinjiang Airlines has been providing and will provide in-flight meals to the Company for a period of one year. The agreement will then be automatically extended annually. 

The amount paid by the Company to Xinjiang Airlines for the provision of in-flight meals for the period ended December 31, 2001 was approximately RMB 1,409,844 (equivalent to approximately HK $1,331,674), and for the period between January 1 and June 30, 2002 was approximately RMB 646,985 (equivalent to approximately HK $611,113).

The amounts payable under the above aforesaid transactions were determined after arm's length negotiation among the parties thereto and having regard to the prevailing market rate of the provision of similar services which are subject of the transactions.

Ticket Sales Arrangement with Xinjiang Airlines

The Group has entered into ticket agency arrangement with Xinjiang Airlines for the sale of the Group's air tickets by Xinjiang Airlines and for the sale of Xinjiang Airlines' air tickets by the Group. The selling party charges a commission in the amount of 3% of the ticket price for domestic tickets and 5% to 12% of the ticket price for Hong Kong regional and international tickets. These commission rates are based on the rates stipulated by the CAAC and IATA.

The amount of commission paid by Xinjiang Airlines to the Group for the period ended December 31, 2001 was approximately RMB 818,628 (equivalent to approximately HK $773,239) and for the period between January 1 and June 30, 2002, was approximately RMB 224,309 (equivalent to approximately HK $212,434).

The amount of commission paid by the Group to Xinjiang Airlines for the period ended December 31, 2001 was approximately RMB 213,562 (equivalent to approximately HK $201,721) and for the period between January 1 and June 30, 2002 was approximately RMB 154,897 (equivalent to approximately HK $146,308).

The amounts payable under the above aforesaid transactions is based on the rates stipulated by the CAAC and IATA.

Reasons for the Ongoing Transactions

By maintaining the in-flight meals and ticket sales arrangements with CS Air Group, the Company believes it is able to reduce administrative and overhead costs and to increase efficiency and reliability in serving customers.

Waiver Application

The Transactions are envisaged to take place on a continuing basis. While the necessity of future similar arrangements will depend on the prevailing business needs of the Group and CS Air Group, it is anticipated that the Transactions are and will be regarded as connected transactions for the Company under the Listing Rules. The Board (including independent non-executive directors) is of the view that the Transactions are and will be on normal commercial terms and fair and reasonable so far as the Company and the shareholders of the Company are concerned and in the best interests of the Company and the shareholders of the Company as a whole.

Based on the aggregate amount paid for the respective Transactions for the six month period ended June 30, 2002 and the historical amounts paid for the respective Transactions, the Board considers that the aggregate annual amount to be paid by the Group to CS Air Group under the in-flight meals arrangements and ticket sales arrangements is also anticipated to be less than 3% of the book value of the Company's NTA in the relevant financial year. 

The Board also considers that the aggregate annual amount to be paid by CS Air Group to the Group under the in-flight meals arrangements and ticket sales arrangements is also anticipated to be less than 3% of the book value of the Company's NTA in the relevant financial year. It would be impracticable and unduly burdensome for the Company to make separate press announcements on each occasion such requirements arise.

Accordingly, the Company applied for a conditional waiver from the Stock Exchange from complying with the connected transactions requirements under Rule 14.25(1) of the Listing Rules in respect of the Transactions on each occasion such requirements arise, such that the Transactions need only be disclosed in the respective published annual reports and accounts and no press announcement will be required with respect to the Transactions on the conditions that the aggregate amount payable to CS Air Group under the in-flight meals and ticket sales arrangements for each financial year shall not exceed 3% of the book value of the Company's NTA in the relevant financial year or HK $10 Million, whichever is the higher (the "Relevant Cap Amount"); and the aggregate amount payable by CS Air Group to the Group under the in-flight meals and the ticket sales arrangements for each financial year shall not exceed the Relevant
Cap Amount.

The Company will apply to the Stock Exchange for a waiver from complying with the connected transactions requirements under Rule 14.25(1) of the Listing Rules in respect of the Transactions, subject to the following conditions:

1. the Transactions shall be:

(a) entered into by the Group in their ordinary and usual course of businesses;

(b) conducted on normal commercial terms or if there are not sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favorable than terms available from independent third parties as appropriate; and (c) in accordance with the relevant agreements on terms that are fair and reasonable so far as the shareholders of the Company are concerned and in the interest of the Company as a whole;

2. the aggregate annual amount payable by the Group to CS Air Group under the in-flight meals and the ticket sales arrangements for each financial year shall not exceed the Relevant Cap Amount; and the aggregate amount payable by CS Air Group to the Group under the in-flight meals and the ticket sales arrangements for each financial year shall not exceed the Relevant Cap Amount.

3. details of the Transactions as required under Rule 14.25(1) (A) to (D) of the Listing Rules shall be disclosed in the Company's annual reports;

4. the independent non-executive directors of the Company shall review the Transactions annually and confirm in the Company's annual report for each of the relevant financial year that the Transactions have been conducted in the manner as stated in paragraph 1(a) to (c) above and comply with the Relevant Cap Amount as stated in paragraph 2 above;

5. the auditors of the Company shall review the Transactions annually and provide the Board of Directors of the Company with a letter in respect of the Transactions occurring during each of the relevant financial year, stating that:

(i) the Transactions have received the approval of the Board of Directors of the Company;

(ii) the Transactions have been entered into in accordance with the terms of the agreements relating to the transactions in question;

(iii) the aggregate annual amount payable by the Group to CS Air Group under the in-flight meals and the ticket sales arrangements for each financial year shall not exceed the Relevant Cap Amount; and the aggregate amount payable by CS Air Group to the Group under the in-flight meals and the ticket sales arrangements for each financial year shall not exceed the Relevant Cap Amount; and

(iv) the Transactions are in accordance with the pricing policy of the Company and/or its subsidiaries;

6. where, for whatever reason, the auditors decline to accept the engagement or are unable to provide the letter, the Directors shall contact the Listing Division immediately; and

7. CS Air Group shall provide to the Stock Exchange an undertaking that, for so long as the Company's shares are listed on the Stock Exchange, it will provide the Company's auditors with full access to its relevant records for the purpose of the auditors' review of the Transactions described above; The Board has noted the recent increase in trading volume of the Company and wish to state that, save as otherwise disclosed in this announcement, the Board is not aware of any reasons for such increase. The Board also confirms that there are no negotiations or agreements relating to intended acquisitions or realizations which are discloseable under paragraph 3 of the Listing Agreement, neither the Board is aware of any matter discloseable under the general obligation imposed by paragraph 2 of the Listing Agreement, which is or may be of a price-sensitive nature.

DEFINITIONS

"Approval" Approval dated October 11, 2002 by the State Council of PRC on the
Consolidation and Restructuring;

"Board" the board of directors of the Company;

"Company" China Southern Airlines Company Limited, a joint stock limited company incorporated with limited liability in the PRC and listed on the Stock Exchange;

"Consolidation and the consolidation and restructuring among SA Group, China Northern Airlines Restructuring" and Xinjiang Airlines;

"CS Air Group" China Southern Air Holding Company and its subsidiaries (apart from the Company);

"Directors" the directors of the Company;

"Group" the Company and its subsidiaries;

"Listing Rules" Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited;

"NTA" net tangible assets as disclosed in the latest published audited consolidated accounts of the Company;

"PRC" People's Republic of China;

"RMB" Renminbi, the lawful currency of PRC;

"SA Group" Southern Airlines (Group), a state-owned economic entity established under the laws of the PRC and the direct controlling shareholder of the Company;

"Stock Exchange" The Stock Exchange of Hong Kong Limited

"Transactions" the ongoing connected transactions between the Group and CS Air Group in connection with in-flight meals and ticket sales arrangements as described in this announcement;

By order of the Board the directors of which individually and jointly accept responsibility for the accuracy of this statement.