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COVER SHEET
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S.E.C. Registration Number
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(Company’s Full Name)
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(Business Address: No. Street City / Town / Province)
SUSAN TCHENG LEE
Contact Persons
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736-8466
Company Telephone Number
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Month
Day
Fiscal Year
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Secondary License Type, If Applicable
Dept. Requiring this Doc.
Amended Articles Number/Section
Total Amount of Borrowings
Total No. of Stockholders
Domestic
-----------------------------------------------------------------------------------------------------------------------------To be accomplished by SEC Personnel concerned
File Number
Document I.D.
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Remarks = pls. use black ink for scanning purposes
LCU
Cashier
Foreign
SECURITIES AND EXCHANGE COMMISSION
SEC FORM 17-A
ANNUAL REPORT PURSUANT TO SECTION 17
OF THE SECURITIES REGULATION CODE AND SECTION 141
OF THE CORPORATION CODE OF THE PHILIPPINES
1.For the fiscal year ended
March 31, 2010
2.SEC Identification Number PW- 94
3. BIR Tax Identification No. 430-000-707-922
4.Exact name of registration as specified in its charter
5.
Philippines
6.
(Province, country or other jurisdiction of
incorporation or organization)
PAL HOLDINGS, INC.
(SEC Use Only)
Industry Classification Code:
7. 7/F Allied Bank Center, 6754 Ayala Avenue, Makati City
Address of principal office
8.
(632) 816-3421 local 3453 / 736-8466
Registrant’s telephone number, including area code
9.
Not Applicable
Former name, former address, former fiscal year, if changed since last report
1200
Postal Code
10. Securities registered pursuant to Section 8 and 12 of the SRC
Title of Each Class
Number of Shares of Common Stock Outstanding
and Amount of Debt Outstanding
Common Stock
5,421,512,096 shares
2
11. Are any or all of these securities listed on the Philippine Stock Exchange?
Yes [ X ]
No [
]
12. Check whether the registrant:
(a) has filed all reports to be filed by Section 17 of the SRC and SRC Rule 17 thereunder or
Section 11 of the Revised Securities Act (RSA) and RSA Rule 11 (a)-1 thereunder and
Section 26 and 141 of the Corporation Code of the Philippines during the preceding 12
months (or for such shorter period that the registrant was required to file such reports);
Yes [ X ]
No [
]
(b) has been subject to such filing requirements for the past 90 days.
Yes [ X ]
No [ ]
13. Aggregate market value of the voting stock held by non-affiliates of the registrant is
PHP 459,624,604 as of March 31, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
3
PART I - BUSINESS AND GENERAL INFORMATION
Item 1. Business
a) Corporate History
PAL Holdings, Inc., (the Company), was incorporated on May 10, 1930 as “Baguio Gold Mining
Company”. On September 23, 1996, the Securities and Exchange Commission approved the
change in the Company’s name to “Baguio Gold Holdings Corporation” and the change in its
primary purpose to that of a holding company.
On May 30, 1997, the stockholders approved the increase in the Company’s authorized capital
stock from 200 million common shares to 4 billion common shares both at P1 par value per share.
On April 13, 1998, the stockholders amended the increase in the Company’s authorized capital
stock from 4 billion common shares to 2.8 billion common shares and 1.2 billion preferred shares
both at P1 par value per share. On August 30, 1999, the stockholders further amended the
authorized capital stock from 2.8 billion common shares and 1.2 billion preferred shares to 400
million common shares at P1 par value per share this was approved by the SEC on October 2,
2000.
On July 26, 2006 and September 19, 2006, the Board of Directors (BOD) approved the increase in
authorized capital stock of the Company from P400 million divided into 400 million common
shares with a par value of P1 per share to P 20 billion divided into 20 billion common shares.
On August 17, 2006, the Board of Directors (BOD) approved the acquisition of the following
holding companies which collectively control 84.67% of Philippine Airlines (PAL); Pol Holdings,
Inc., Cube Factor Holdings, Inc., Ascot Holdings, Incorporated, Sierra Holdings & Equities, Inc.,
Network Holdings & Equities, Inc., and Maxell Holdings Corporation.
On January 19, 2007 the Securities and Exchange Commission (SEC) approved the increase in
authorized capital stock and change in corporate name of Baguio Gold Holdings Corporation to
PAL Holdings, Inc.
On August 13, 2007, the Company acquired directly from the Six Holding Companies
8,823,640,223 shares in PAL, which is equivalent to 81.57% of the issued and outstanding
common shares in the Airline. At the same time, it acquired from the Five Holding Companies
50,591,155 shares in PR Holdings, Inc., equivalent to 82.33% of the outstanding shares in PR
Holdings, Inc. Both acquisitions were made by way of a dacion en pago, whereby the total
acquisition price of PHP 12,550 million for the shares in the Airline and PR Holdings, Inc. was
satisfied by an equivalent reduction of the liability owning to the Company from the Six
Companies.
On August 14, 2007, the Company assigned its shares in each of the Six Holding Companies to
Trustmark Holdings Corporation.
On October 16, 2007, The Securities and Exchange Commission approved the Amended By-Laws
of the Company, which consist of the deletion of outdated provisions and the inclusion of the
provisions required under the Code of Corporate Governance provided by the SEC.
On October 17, 2007, the Securities and Exchange Commission approved the equity restructuring
of the Company. This allowed the Company to wipe out the deficit as of March 31, 2007
amounting to P253.73 million using the Additional Paid-In Capital amounting to P4,029.3 billion
subject to the condition that the remaining additional paid-in capital will not be used to wipe out
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losses that may be incurred in the future without prior approval of the SEC.
b) Description of Subsidiaries
Philippine Airlines, Inc.
Philippine Airlines, Inc. (PAL), a corporation organized and existing under the laws of the
Republic of the Philippines, was incorporated on February 25, 1941. It is the national flag carrier
of the Philippines and its principal activity is to provide air transportation for passengers and cargo
within and outside the Philippines.
PAL continues to fly to the most popular domestic jet routes and the international and regional
points that are either most visited by Filipinos or provide a good source of visitors to the
Philippines. As of 31 March 2010, PAL’s route network covered 20 points in the Philippines and
33 international destinations.
PR Holdings, Inc.
PR Holdings, Inc. (PR) was organized by a consortium of investors for the purpose of bidding for
and acquiring the shares of stock of PAL in accordance with the single-buyer requirement of the
bidding guidelines set by the seller, the National Government of the Republic of the Philippines.
PR acquired on March 25, 1992 67% of the outstanding capital stock of PAL.
PR was partially dissolved or liquidated on November 9, 1998 with a decrease in its authorized
capital stock and retirement of some of its shares in exchange of PAL shares to retiring
stockholders as return of capital.
As a holding company, PR’s primary purpose is to purchase, subscribe, acquire, hold, use,
manage, develop, sell, assign, exchange or dispose of real and personal property, including shares
of stocks, debentures, notes and other securities of any domestic or foreign corporation.
Principal products or services and their markets indicating their relative contributions to sales
or revenues of each product or service:
i) Percentage of sales or revenues and net income contributed by foreign sales
PAL's operations for FY2009-10 are described as follows:
During the year, the Airline carried an average of 25,630 passengers (16,253 domestic and 9,377
international) and 336 tons of cargo (196 tons domestic and 140 tons international) per day.
Net Revenues by Route
Based on FY2009-2010 results, the revenue contribution by route is shown below:
Transpacific
Asia & Australia
Total International
Total Domestic
Total System
32.6%
42.6%
75.2%
24.8%
100.0%
International Passenger Services
As of March 31, 2010, PAL's international route network covered 33 cities (including 7 under
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jointservice/code share arrangements with other international carriers) in 17 countries.
26 on-line points:
Guam, Honolulu, Las Vegas, Los Angeles, San Francisco,
Vancouver, Riyadh, Brisbane, Melbourne, Sydney, Fukuoka, Nagoya,
Osaka, Tokyo, Pusan, Seoul, Hongkong, Macau, Beijing, Shanghai,
Xiamen, Taipei, Bangkok, Saigon, Singapore, Jakarta
7 points under joint
service/codeshare
arrangements:
Abu Dhabi, Bahrain, Bandar Seri Begawan, Doha, Dubai, Kota
Kinabalu, Kuala Lumpur
Transpacific
During the year, PAL flew an average of 22 flights a week to North America utilizing B747-400s and
A340-300s: 8 times weekly non-stop flights to Los Angeles; 7 times weekly non-stop services to San
Francisco; and 7 times a week to Vancouver, five of which fly onward to Las Vegas and back..
Technical stops either in Guam or Honolulu are required on the return flights of Transpacific services
at certain times of the year to compensate for adverse wind conditions.
PAL also operates a regular thrice weekly direct service to Honolulu while Guam is served five times
a week.
Middle East
PAL started to offer services to Riyadh on March 28, 2010. Riyadh is served 4 times weekly using
the B747-400 aircraft.
Asia and Australia
PAL operated 174 departures per week out of Manila and Cebu to 9 countries in Asia and Australia.
The Airline flew 35 times a week to Hongkong; 28 times a week to Singapore; 14 times a week to
Seoul; 14 times a week to Bangkok; 12 times a week to Tokyo; 8 times a week to Taipei; 7 times a
week each to Nagoya, Osaka, Saigon, Shanghai, and Xiamen; 5 times a week each to Beijing and
Fukuoka; and 4 times a week each to Macau and Pusan. Jakarta is served 4 times a week via
Singapore and three flights direct. PAL also operated 3 times weekly service on the ManilaMelbourne-Sydney-Manila route, 2 times weekly service on the Manila-Melbourne-Brisbane-Manila
route, and 2 times weekly service on the Manila-Sydney v.v. route.
Domestic Passenger Services
PAL's domestic network covered 20 cities and towns in the Philippines. In FY2009-2010, it flew
about 4.8 billion ASKs on its domestic routes which represented 20% of the Airline's total capacity.
PAL operated its jet aircraft (B747-400, A340-300, A330-300, A320-200, and A319-100) on its
domestic routes. It serves the following domestic destinations: Bacolod, Butuan, Cagayan de Oro,
Cebu, Cotabato, Davao, Dipolog, Dumaguete, General Santos, Iloilo, Kalibo, Laoag, Legaspi, Manila,
Ozamiz, Puerto Princesa, Roxas, Tacloban, Tagbilaran, and Zamboanga.
Joint Services and Code Share Agreements
The Airline continues to employ codesharing and tactical alliances to broaden its route network and
establish presence in cities where it does not fly.
PAL maintains codeshare agreements with Malaysia Airlines (in place since February 1999) covering
a total of 9 weekly flights between Kuala Lumpur and Manila, Kota Kinabalu and Manila, Kota
Kinabalu and Cebu, and Kuala Lumpur and Cebu; with Emirates Airlines (in place since September
6
1999) on 14 times weekly non-stop flights between Dubai and Manila; with Cathay Pacific (in place
since November 2001) on daily services between Hongkong and Cebu; with Qatar Airways (in place
since August 2002) on 14 times weekly service between Doha and Manila; with Royal Brunei Airlines
(in place since March 2004) on 8 times weekly flights between Bandar Seri Begawan and Manila; with
Gulf Air (in place since March 2006) on 10 times weekly service between Bahrain and Manila; and
with Etihad Airways (in place since October 2007) on 12 times weekly services between Abu Dhabi
and Manila.
PAL's daily services between Manila and Saigon are operated under a codeshare agreement with
Vietnam Airlines (in place since October 2001) with PAL as the operating airline. PAL also has a
similar agreement with Garuda Indonesia (since March 2001) on PAL operated flights between Manila
and Jakarta. PAL codeshares with Air Philippines (in place since May 2002) on regular domestic
services which the latter operates. Effective October 2009, PAL revived its codeshare partnership with
Air Macau on its 4 times weekly service between Macau and Manila.
Frequent Flyer Programs
The PAL Mabuhay Miles provides opportunities for travel rewards through accumulation of mileage
credits earned on flights with PAL and partner airlines. Members also earn miles through purchases
and availment of services from partner establishments including credit cards, banks,
telecommunications, hotels and resorts, tour operators, cruise services, insurance, car rentals, and other
merchandise companies. PAL Mabuhay Miles has a website "www.mabuhaymiles.com", which
provides access to account information, and details on promotions and offers.
Mabuhay Miles Elite or Premier Elite members enjoy exclusive travel privileges including priority
reservation waitlist, dedicated reservation telephone lines, priority check-in, additional free luggage
allowance, priority luggage handling, access to Mabuhay Lounges and participating VIP lounges, and
additional discounts and amenities from program partners.
The SportsPlus Card is a privilege card designed for sports enthusiasts, which grants members the
benefit of extra free baggage allowance for sports equipment.
(ii) Distribution methods of products or services
PAL maintains a total of twelve (12) ticket offices in Manila, twenty four (24) in other cities in the
Philippines, and twenty nine (29) located in foreign stations. Also, the promotions and sales of PAL's
products and services are handled by thirty one (31) general sales agents in selected international
points, Bank Settlement Plan member agents in twenty three (23) countries, Airline Reporting
Corporation member agents in the United States, and in the Philippines by twelve (12) domestic sales
agents and three hundred sixty five (365) agents under the domestic ticketing program.
The Airline's website, "www.philippineairlines.com", has a booking facility which provides interactive
booking of flights and ticket purchases. It also contains additional web pages that feature detailed
descriptions of PAL destinations and a calendar of destination festivities. Functionalities include fares
and tour modules, online training registration, route maps, flight schedules, and online cargo booking.
Real time flight information on all PAL flights may also be accessed by logging on to the PAL
website.
Flight information via SMS/text messaging continue to be available to passengers. Cellphone
subscribers can download the exact flight departure and arrival information through text messaging.
The PAL Mobile site “www.philippineairlines.mobi” allows web-enabled mobile phones to access
flight schedules, track Mabuhay Miles mileage, and know more about the latest PAL news, advisories,
travel information, and promos.
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(iii) Status of any publicly-announced new product or service
PAL completed the reconfiguration and refurbishment of four of its B747-400s. Aside from the new
interiors, state-of-the-art seats and the latest in inflight entertainment were installed in the aircraft.
PAL took delivery of two (2) B777-300ER in November 2009 and January 2010. This fuel – efficient
aircraft is the world’s largest long range twin-engine jetliner that can accommodate forty two (42)
passengers in Mabuhay Class (business) and three hundred twenty eight (328) passengers in Fiesta
Class (economy). PAL’s B777-300ER is a state -of -the -art aircraft, which features a cutting-edge
inflight entertainment system, luxurious seats, and a soothing, coastal resort-themed cabin design that
evokes the tranquil seas of the Philippines. Each seat is outfitted with a personal television with Audio
Video on Demand (AVOD) capability. The fully digital inflight entertainment system enables
passengers to choose from a broad range of media content. Mabuhay Class seats, supplied by Recaro
of Germany, boast a generous 78-inch pitch and are adjustable to a variety of positions, including full,
lie-flat recline with a 15-degree angle. Each seat in Mabuhay Class is equipped with individual
“gooseneck” reading lights, a laptop charging port, and a USB port enabling passengers to listen to
their MP3 collection or view their PDF files. In Fiesta Class, passengers also experience enhanced
comfort with their Weber-designed seats that feature a 34-inch pitch and an actuating seat pan that
enables the bottom cushion to move up or forward when reclining, adding to the comfort level.
PAL Mabuhay Lounges are available in selected international and domestic stations for Mabuhay
class passengers and Mabuhay Miles Elite and Premier Elite members. Passengers can unwind, dine,
and freshen up in these facilities before boarding their flights.
The PAL Swingaround and PALakbayan are the Airline's tour programs which continue to offer
holiday packages in PAL's international and domestic destinations.
PAL's RHUSH (Rapid Handling of Urgent Shipments) is the airport-to-airport cargo service which
provides the fastest way to ship cargo domestically or overseas. It offers high priority in cargo,
guaranteed space, and quick acceptance and release time.
The Fiesta Boutique is a selection of duty free products offered in all international flights. The
service provides the convenience of duty free shopping during the flight. Products for sale include
imported and local liquor, cigarettes, perfumes, and other high quality gift items
(iv) Competitive business conditions and the registrant’s competitive positions in the industry
and methods of competition
PAL continues to maintain a strong market share in its international routes despite competition with
flag carriers of the host countries where PAL flies and with the 'sixth freedom' carriers which fly to the
Philippines en route to their final destinations.
The following table shows the Airline’s main competitors and PAL's total market and capacity share
per route.
PAL's Market and Capacity Share
Route
Market
Share
Capacity
Share
Transpacific
35.4%
33.9%
Airline Competitors
Northwest Airlines, Hawaiian Airlines, Air
Canada, Korean Airlines, Asiana Airlines,
Japan Airlines, Cathay Pacific, Eva Airways,
China Airlines, Continental Airlines
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Asia and
Australia
30.8%
32.2%
Japan Airlines, Cathay Pacific, Singapore
Airlines, Thai Airways, Korean Airlines,
Asiana Airlines, China Airlines, Eva
Airways, Qantas Airways, Air Niugini,
China Southern Airlines, Dragon Air, Air
Macau, Royal Brunei, Kuwait Airways,
Northwest Airlines, Malaysia Airlines, Cebu
Pacific, Jetstar Asia, Hong Kong Express
PAL competes with the biggest carriers in the airline industry. Northwest Airlines and Continental
Airlines are among the world's largest in fleet size. Singapore Airlines and Cathay Pacific are among
the world's biggest in terms of passengers carried. China Airlines, Korean Airlines, Thai Airways, and
Qantas Airways are in the list of leading carriers in the Asia and Pacific region. Most of these
international airlines belong to the largest alliances in the industry (including the Star Alliance, Sky
Team and One World).
PAL held a 43% share in the domestic market in the fiscal year ending March 2010. Competitors
include Cebu Pacific, Air Philippines, Zest Air, and Sea Air.
The competition between airlines was further intensified by the global recession.
The continuous enhancement of products and services, competitive fares, and an excellent safety
record, enables PAL to hold its market leadership. Over the TransPacific, PAL has the advantage of
providing the only nonstop service to mainland USA and Canada. The distinct Filipino flavor in the
PAL inflight service, which appeals strongly to Filipino ethnic passengers, is another advantage over
the non-Filipino carriers.
(v.) Sources and availability of raw materials and the names of principal suppliers
PAL’s jet fuel suppliers are: Air BP Limited, Petron Corporation, Pilipinas Shell Petroleum
Corporation, Chevron Products Company, PT Pertamina (Persero), World Fuel Services (Singapore)
Pte. Ltd., Win Both International Corporation, PTT Public Company Limited, China National
Aviation Fuel Supply Co., Ltd., Japan Energy Corporation, Shanghai Pudong International Airport
Aviation Fuel Supply Co., Ltd., Pacific Fuel Trading Corporation, Hyundai Oilbank Company
Limited, S-Oil Corporation, Singapore Petroleum Co. Ltd., Sinopec (HK) Petroleum Co. Ltd. and
Saudi Arabian Oil Company (SAUDI ARAMCO).
PAL’s inflight catering requirements are provided by its own inflight kitchen in Manila for all
outgoing flights. For incoming flights, the suppliers include Flying Foods in San Francisco ; Hacor in
Los Angeles; International Inflight Catering Co., Ltd. in Honolulu; LSG Sky Chefs in Guam and
Bangkok; CLS Catering Services Ltd. in Vancouver; Q Catering in Australia; Saudi Arabian Airlines
Catering in Riyadh; Singapore Airport Terminal Services Ltd. (SATS) in Singapore and Tokyo Flight
Kitchen in Narita; AAS Catering Services in Osaka; Nagoya Air Catering, Inc. in Nagoya; Fukuoka
Inflight Catering Co., Ltd. in Fukuoka; Beijing Airport Inflight Kitchen, Ltd. in Beijing; Shanghai
Eastern Air Catering Co., Ltd. in Shanghai; Xiamen Int’l Airport Catering Co., Ltd. in Xiamen;
Aerofood ACS in Jakarta; Cathay Pacific Catering Services, Ltd. in Hongkong; Korean Air Catering
in Korea; VN/CX Catering Services, Ltd. in Saigon; and China Pacific Catering in Taipei.
(vi) Dependence on one or a few major customers and identify any such major customers
PAL has a large network of customers all over the world and is not dependent on one or a few major
customers.
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(vii) Transactions with and/or dependence on related parties
The Company’s significant transactions with related parties are described in detail in Note 18 of the
Notes to Consolidated Financial Statements.
(viii) Patents, trademarks, licenses, franchises, concessions, royalty, agreements or labor
contracts, including duration;
PAL has a ten year Technical Services Agreement (TSA) with Lufthansa Technik Philippines (LTP)
which started in September 2000 for the maintenance and overhaul requirements of its fleet. PAL's
Aircraft Engineering Department (AED) undertakes planning, monitoring and control of all
maintenance activities and technical compliance of aircraft, engines and accessories with airworthiness
standards and industry accepted standards for safety, reliability, and customer acceptability.
Manhour rates for maintenance requirements are negotiated with LTP in accordance with the terms of
the PAL-LTP Technical Services Agreement (TSA). Maintenance materials and parts are sourced
from the original equipment manufacturers which include Airbus Industrie, Boeing, General Electric,
CFM International, Honeywell, Goodrich, Nordam Singapore, Panasonic Aviation, Recaro Aircraft
Seating, and Thales Avionics .
The PAL Fleet is maintained in accordance with a Continuous Airworthiness Maintenance Program
(CAMP) that is approved by the Airworthiness Authorities and is based on Maintenance Planning
Documents provided by the Airframe Manufacturers. This ensures that PAL aircraft and equipment
are always in airworthy condition, making them safe and reliable. AED established the General
Maintenance Manual (GMM) which describes the processes required to achieve the intent of the
CAMP as required by the Airworthiness Authorities.
PAL also operates a small fleet of trainer aircraft that is managed by the PAL Aviation School.
Maintenance of these aircraft is performed by another MRO, Asian Aeronautics Services, Inc. (AASI).
PAL has a similar TSA with AASI signed in July 2007. AED assists the Aviation School in its
oversight of the maintenance activities of the trainer fleet.
Development Plans
Amidst the influence of the global recession, unpredictable and rising fuel prices, and fierce
competition from aggressive domestic carriers, PAL will focus its business activities on its key results
areas, namely product improvement, asset and cost efficiency, business efficiency, and financial
performance.
The Airline will continue to look for other profitable markets and destinations, adopt more efficient
passenger management systems, upgrade its revenue managements systems, spin-off non-core
activities, strengthen corporate accounts, and freshen up its communications campaigns. PAL will
also intensify its focus on the more stable higher yield traffic both on its international and domestic
networks.
To avoid further losses and improve its financial position, the Airline will restructure operations and
control cost without compromising safety and customer satisfaction.
Franchise
The Company operates under a franchise, which extends up to the year 2034, granted by the Philippine
Government under Presidential Decree No. 1590. As provided for under the franchise, the Company
is subject to:
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a.
b.
corporate income tax based on net taxable income, or
franchise tax of two percent (2%) of the gross revenue derived from non transport ,
domestic transport and outgoing international transport operations, whichever is
lower, in lieu of all other taxes, duties, fees and licenses of any kind, nature, or
description, imposed by any municipal, city, provincial or national authority or
government agency, except real property tax.
As further provided for under its franchise, the Company can carry forward as a deduction from
taxable income net loss incurred in any year up to five years following the year of such loss (see Note
23 of the Notes to the Consolidated Financial Statements). In addition, the payment of principal,
interest, fees, and other charges on foreign loans obtained by the Company, and all rentals, interests,
fees and other charges paid by the Company to lessors for the lease of aircraft, engines, spares, other
flight or ground equipment, and other personal property are exempt from all taxes, including
withholding tax, provided that the liability for the payment of said taxes is assumed by the Company.
On May 24, 2005, the Expanded-Value Added Tax (E-VAT) law was signed as Republic Act (RA)
No. 9337 or the E-VAT Act of 2005. The E-VAT law took effect on November 1, 2005 following the
approval on October 19, 2005 of Revenue Regulation (RR) No. 16-2005 which provides for the
implementation of the rules of the E-VAT law. Among the relevant provisions of RA No. 9337 are
the following:
a. The franchise tax of the Company is abolished;
b. The Company shall be subject to the corporate income tax;
c. The Company shall remain exempt from any taxes, duties, royalties, registration license, and other
fees and charges, as may be provided by the Company’s franchise;
d. Change in corporate income tax rate from 32% to 35% for the next three years effective on
November 1, 2005, and 30% starting on January 1, 2009 and thereafter;
e. Change in unallowable deduction for interest expense from 38% to 42% of interest income subject
to final tax for three years effective on November 1, 2005, and 33% starting on January 1, 2009; and
f. Increase in the VAT rate imposed on goods and services from 10% to 12% effective on
February 1, 2006.
On November 21, 2006, the President signed into law RA No. 9361 which amends
Section 110(B) of the Tax Code. This law, which became effective on December 13, 2006, provides
that if the input tax, inclusive of the input tax carried over from the previous quarter exceeds the
output tax, the excess input tax shall be carried over to the succeeding quarter or quarters. The
Department of Finance through the Bureau of Internal Revenue issued RR No. 2-2007 to implement
the provisions of the said law. Based on the regulation, the amendment shall apply to the quarterly
VAT returns to be filed after the effectivity of RA No. 9361, except VAT returns covering taxable
quarters ending earlier than December 2006.
ix) Need of any government approval of principal products or services
Airline operations are regulated by the Philippine Government through the Civil Aeronautics Board (CAB)
with regard to new routes, tariffs, and schedules; through the Civil Aviation Authority of the Philippines
(CAAP) formerly Air Transport Office (RP-ATO) for aircraft and operating standards; and through airport
authorities for airport slots. PAL also conforms to the standards and requirements set by different foreign
civil aviation authorities of countries where the airline operates.
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In coordination with the different government air transport agencies - the CAAP and the Department of
Transportation and Communications (DOTC) - PAL initiates improvement programs for the facilities in the
country's domestic and international airport.
x) Effects of existing or probable government regulations on the business
Airline operations are regulated by the Philippine Government through the Civil Aeronautics Board
(CAB) with regard to new routes, tariffs, and schedules; through the Civil Aviation Authority of the
Philippines (CAAP), formerly the Philippine Air Transport Office (RP-ATO), for aircraft and
operating standards; and through airport authorities for airport slots. PAL also conforms to the
standards and requirements set by different foreign civil aviation authorities of countries where the
airline operates.
In coordination with the different government air transport agencies - the CAAP and the Department
of Transportation and Communications (DOTC) - PAL initiates improvement programs for facilities
in the country's domestic and international airports to conform with international standards and
enhance safety of the Airline's operations.
The US Department of Transportation’s Federal Aviation Administration (FAA) had previously
assessed the Philippines’s Civil Aviation Authority in September 2002 and found it in compliance with
the international safety standards set by the International Civil Aviation Organization (ICAO).
However, after consultation in November 2007, the agency determined that the Philippines was no
longer overseeing the safety of its airlines in accordance with international standards. The Philippines
safety rating has been lowered from Category 1 to Category 2 under the agency’s International
Aviation Safety Assessment program. A Category 2 rating means a country either lacks laws or
regulations necessary to oversee air carriers in accordance with minimum international standards, or
that civil aviation authority – equivalent to the FAA – is deficient in one or more areas, such as
technical expertise, trained personnel, record-keeping or inspection procedures. This subpar ratings
negatively affected PAL particularly on its planned flight expansions. Because the country is in
Category 2 status, PAL is prohibited from increasing its flights to the US and from changing the type
or number of aircraft used in these services.
The Company strictly complies with and adheres to existing and probable government regulations.
xi) Estimate of the amount spent during each of the last three fiscal years on research and
development activities, and if applicable the extent to which the cost of such activities are borne
directly by customers;
NOT APPLICABLE
xii) Cost and effects of compliance with environmental laws
PAL has fully complied with the following major environmental laws:
1.
Republic Act (RA) 8749 “Clean Air Act” - No cost to PAL for FY2009-2010 due monthly
air sampling done by fuel supplier (Petron).
2.
DENR Administrative Order (AO) No.34 “Revised Water Usage and Classification”.
No cost to PAL for period covering FY2009-2010
3.
DENR Administrative Order No. 35 “Revised Effluent Regulations of 1990”
Cost: P56,000 annually for water quality analysis; approx P1,200,000/annum for electricity
consumption of sewage treatment plant operation P720,000/annum for enzyme used to dissolve
grease in the catering/kitchen area, control odor and enhance STP biological reaction.
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4.
Presidential Decree No. 1152 “Philippine Environmental Code”- No cost to PAL for period
covering FY2009-2010
5.
Presidential Decree No. 1586 “Establishing an Environmental Impact Assessment System”
DENR Administrative Order No. 96-37. Cost not determined yet due to on- going processing of
Certificate of Non-Coverage (CNC) for Inflight Center (IFC), Maintenance Base Complex
(MBC), Data Center Building (DCB) and other outlying stations with fuel farms.
6.
Republic Act No. 6969 “Toxic and Hazardous Waste Management”. DENR Administrative
Order No. 90-29. Cost: approximately P45,000 for disposal of busted fluorescent lamps.
7.
Presidential Decree No. 1067 “The Water Code of the Philippines”. Cost: P5,005.50 for renewal
of annual Water Permit.
8.
Republic Act 9003 “The Ecological Waste Management Act of 2000”. No cost to PAL due solid
wastes with recyclable materials are segregated and recycled by the service provider.
9.
Department of Health (DOH) Administrative Order 124, s. 1992 “License to Operate an
Industrial X-ray Facility”. Cost: P6,400 permit application for eight (8) X-ray facilities
nationwide (PAL Cargo Terminal, Mactan- Cebu, Davao and General Santos Cargo Services),
and P12,100 for film badge monitoring of X-ray operators and screeners
The effects of PAL’s compliance with environmental laws are as follows:
1.
2.
3.
4.
5.
6.
7.
Regulatory compliance
Resource utilization
Waste generation reduction
Environmental cost reduction
Improved public image and community relations
Improved positive perception of regulators and NGOs
Enhancing PAL’s commitment to continually improve its environmental
performance in all aspects of its operations
8. Appreciation and recognition from the DENR for PAL’s participation in Earth Day ,
Environment Month and International Coastal Cleanup celebrations.
9. Cost cutting through energy and resource conservation.
(xiii) Total number of employees and number of full time employees
The Company’s employees are only the 11 directors who are employed by the company. The
Company does not have any plan of hiring employees within the ensuing twelve months.
PAL Employees :
To survive the global financial crisis plaguing airlines worldwide, part of the cost control initiatives
implemented by PAL was the rationalization of its workforce. PAL offered an early retirement
package and four hundred forty four (444) employees availed of the program in September and
October 2009.
As of March 31, 2010, the Company has a total workforce of 7,488 as follows:
Classification
Ground Employees
Philippine
Number of Employees
5,218
13
Foreign
Flight Crew
Pilots
Cabin Crew
226
470
1,574
The Company recognizes two local labor unions, one for the rank & file ground employees and
another for the cabin crew. In addition, it also recognizes foreign labor unions in the United States,
Singapore, and Japan.
The company has 4,009 rank and file ground employees in the Philippines, United States, Singapore
and Japan; and 1,557 cabin crew who are covered by a collective bargaining agreement (CBA).
The 10 year moratorium on the CBA for the local rank & file ground employees ended in September
2008, afterwhich, an agreement has been reached that any improvement on concerns/proposals on the
CBA will be discussed/implemented after October 2009. Renegotiations on the CBA has not yet
started.
The CBA negotiations for the cabin crew which expired in July 2007 is still pending negotiation and is
now under the preventive mediation by the National Conciliation Mediation Board (NCMB) of the
Department of Labor and Employment.
Meanwhile, the CBA for PAL – International Association of Machinists (IAM-US) is currently in
place and is effective from July 1, 2008 until June 30, 2011. The current PAL – Singapore Air
Transport Workers’ Union (SATU) CBA is effective from January 1, 2009 until December 31, 2011.
Lastly, the CBA between PAL – PAL Labor Union (Japan) expired on May 31, 2010 and the Airline is
in the process of renegotiating a new agreement.
In FY 2009-2010, the Company gave its employees all benefit entitlements in accordance with
stipulations in the respective collective bargaining agreements.
Major risk/s involved in each of the businesses of the Company and subsidiaries. and the
procedures being undertaken to identify, assess and manage such risks.
Investment risk – the Company has available-for-sale investment which has unpredictable
market prices.
Price risk- price fluctuations in cost of fuel which is based primarily in the international
price of crude oil. Substantial increases in fuel costs or the unavailability of sufficient
quantities of fuel is harmful to the business.
Regulatory risk – PAL is subject to extensive regulations which may restrict growth or
operations or increase their costs.
Competition - PAL is exposed to increased competition with major international and
regional airlines.
Security and safety risk - the impact of terrorist attacks on the airline industry severely
affected the overall air travel of passengers.
Financial market risk- fluctuations of interest and currency rates.
Economic slowdown – reduces the demand or need for air travel for both business and
leisure.
Procedures undertaken to manage risks
14
- PAL continues to comply with applicable statutes, rules and regulations pertaining to the
airline industry in order to maintain the required foreign and domestic governmental
authorizations needed for their operations.
- Increase in fuel cost and shortage in fuel can sometimes be offset by increase in
passenger fares or the curtailment of some scheduled services.
-Airlines have been required to adopt numerous additional security measures in an effort
to prevent any future terrorist attacks, and are required to comply with more rigorous
security guidelines.
- PAL sees to it that it has remain competitive in the areas of pricing, scheduling
(frequency and flight times), on-time performance, frequent flyer programs and other
services.
- Proper fund management and monitoring is being done to avoid the adverse effects in
the results of operations of the Company, cash flows and financial risks are managed to
provide adequate liquidity to the Company.
Item 2. Properties
The Company does not own any property. It has an annual lease contract for its office space with a
monthly rental of P22,050. The lease contract was renewed for another two years, which expires in
May 2012. The Company has no plans of acquiring any property in the next twelve months.
PAL’s properties and equipment include its aircraft fleet, various parcels of land, and buildings.
The Company’s fleet as of March 31, 2010 consists of :
Owned
Boeing 737-300
Bombardier DHC 8-400
Bombardier DHC 8-300
Finance leases:
Boeing 747-400
Airbus 340-300
Airbus 330-300
Airbus 320-200
1
5
3
4
4
8
10
Operating leases:
Boeing 747-400
Boeing 777-300-ER
Airbus 320-200
Airbus 319-100
Total
1
2
8
4
50
Aircraft covered by capital lease agreements that transfer substantially all the risks and give rights
equivalent to ownership are treated as if these had been purchased outright, and the corresponding
liabilities to the lessors, net of interest charges, are classified as obligations under finance leases
included under the caption long term obligations in the Consolidated Statements of Financial Position.
The capital leases provide for quarterly or semi-annual installments, generally ranging over 6 to 16
years including balloon payments for certain capital leases at the end of the lease term, at fixed rates
and/or floating interest rates based on certain margins over three-month or six-month London
15
Interbank Offered Rate (LIBOR), as applicable.
Aircraft covered by operating lease agreements contain terms ranging from 5 to 12.3 years. Total
operating lease payments amounted to PHP 2,673.0 million for 2010 and PHP 1,992.7 million for
2009.
PAL leased to APC its owned B737-300 aircraft in January 2008 for a period of thirty-six (36)
months. Three (3) Bombardier DHC 8-300 and five (5) Bombardier DHC 8-400 aircraft were dry
leased to Air Philippines Corporation (APC) commencing October 27, 2009 for a term of sixty (60)
months. Likewise, two A320-200 aircraft were subleased to APC in March 2010 for a period of
seventy-four (74) and seventy–five (75) months.
PAL owns land and buildings located at various domestic and foreign stations.
A. Domestic Properties
1. Bacoor, Cavite
2. Maasin, Iloilo City
3. Somerset Millennium Makati City
4. Makati City
5. Malate
6. Ozamiz City
7. Quezon City
8. Bacolod City
9. Mandurriao, Iloilo City
10. Paranaque City
126 sq.m. (house and lot)
3,310 sq.m & 9,504 sq.m . (parcels of land)
39 sq.m. (condominium unit)
853 sq.m. & 879 sq.m. (parcel of land)
266.40 sq.m. (lot)
10,000 sq.m. (parcel of land)
627 sq.m. (parcel of land)
200,042 sq.m. (parcel of land)
1,300 sq.m. & 1,700 sq.m. (parcels of land)
375 sq.m. (parcel of land)
B. Foreign Properties
1. Glenn County, San Francisco, California
2. Hongkong
3. San Mateo, Daly City, California
4. Singapore
5, Singapore
6. Sydney, Australia
83 acres ( walnut farm)
977 sq.ft & 3,701 sq.ft. (condominium units)
1,760 sq.ft. & 1,193 sq.ft. (condominium units)
85 sq.m.; 126 sq.m., and 68 sq.m. (office units)
65 sq.m. (shop unit)
177 sq.m. and 229 sq.m. (office units)
In addition, the Company owns cargo buildings located at the following domestic stations:
1. Zamboanga
2. Cebu
3. Puerto Princesa
4. Butuan
5. Kalibo
6. Legaspi
300 sq.m.
1,215 sq.m.
192 sq.m.
192 sq.m,.
192 sq.m.
192 sq.m.
The land where these buildings are situated are leased from the Civil Aviation Authority of the Philippines
(CAAP).
PAL’s existing ground facilities service the Airline’s own requirements and some of the requirements
of the foreign airlines that fly to the Philippines. These major ground facilities as of March 31, 2010
are as follows:
The PAL Learning Center (PLC) in Ermita, Manila is a modern training facility. The Center aims to
continue to provide world-class training to every employee regardless of area of specialization,
16
reinforce the culture of service, and develop every employee into a total PAL professional committed
to the Airline’s corporate values.
The facility serves as the home for the Airline’s Human Resource Training & Development SubDepartment, with the Airline’s eight training units, namely: Commercial Training & Development
Division, Flight Deck Crew Training Sub-department, Inflight Services Training Division, Human
Factor Division, Management & People Development Division, Aviation School, External Training &
Development Services, and Training Administration & Logistics Division.
Likewise, the PLC is the headquarters of PAL’s sales offices under the Office of the Country
Manager-Philippines, i.e., Passenger Sales, Agency Sales, Metro Manila and Luzon Sales & Services,
Corporate Account Office and the Ticket Office.
The PLC boasts of new and modern training equipment and facilities, such as 13 classrooms, two (2)
computer-based training (CBT) rooms; one (1) cockpit mock-up trainer (CMT) room as follows: one
(1) flight management system (FMS-747) and three (3) flight management guidance system trainer
(FMGS-Airbus); Frasca 172R simulator room; inflight service simulators for B747, A340, B737 and
cabin safety simulator; a grooming room, a speech laboratory for personality development; and five
(5) computer training rooms. Support facilities include an auditorium/ projection room, canteen and a
medical clinic. The PLC building with a total floor area of 6,787.56 sq. m. is leased from the Tan Yan
Kee Foundation. A 4,328.80 sq.m. lot space is used for parking and driveway, with a 1,539.00 sq.m.
annex parking.
The PAL Inflight Center (IFC) along Baltao St., Pasay houses PAL’s inflight kitchen which is
capable of producing more than 3.7 million meals annually to service PAL’s catering requirements.
PAL held 48% market share in terms of meal tray production while 52% was the combined share of
MacroAsia and Miascor.
PAL IFC has a total land area of 22,093.00 sq.m. of which 68% is allocated to Catering Services and
the remaining 32% for Cabin Services, warehouse and other offices. The land where the building
stands is leased from the Manila International Airport Authority (MIAA).
The modern NAIA Centennial Terminal 2 in Pasay is where the Airline’s entire flight operation is
housed in one terminal for the first time since it was founded 69 years ago. This gives PAL a genuine
hub for its operations where passengers from domestic flights connect seamlessly onto international
flights and vice versa.
The terminal boasts of complete facilities for PAL’s passengers’ comfort and convenience; two
Mabuhay Lounges – one each for domestic and international passengers, a big ticket office and
spacious check-in and pre-departure areas.
It is also the home of the Airport Services Group and other support offices, i.e., Operations Control
Center, Line Maintenance International Division, Aircraft Interior Maintenance Division, Flight
Dispatch, Ticket Office, Treasury, Safety and Medical office.
Various airport support offices servicing PAL’s foreign airline customers were retained at the NAIA
1, together with the Sampaguita Lounge. The areas occupied by PAL are leased from MIAA.
The PAL Cargo Terminal (PCT) near NAIA 1 in Pasay which houses PAL’s domestic and
international cargo operations and sales offices at the NAIA measures 5,727.55 sq.m.(warehouse) and
1,050.88 sq.m. (office space). The land on which it stands is leased from the MIAA.
PAL’s Data Center Building (DCB) along Airport Road, Pasay, is the core of one of the most
extensive computer systems in the Philippines. It houses two (2) Mainframe Computers, one hundred
twenty (120) Unix systems, and PC servers. These equipment run the sophisticated systems like
17
Reservations and Departure Control which are used in the daily operation of the airline. The DCB is
also the center of applications development and maintenance, housing close to one hundred thirty six
(136) analysts and programmers. It is the hub of PAL’s domestic network, connecting the various
PAL ticket offices and airports. The DCB, comprising 3,588.35 sq.m., is leased from the MIAA.
Other major ground facilities include a Maintenance Base Complex (MBC) in Nichols, Pasay City. It
is composed of the North and South sectors which refer to the areas north and south of Andrews
Avenue, respectively. It covers an area of 104,531.87 sq.m. (open) and 1,768.01 sq.m. (covered) land
space leased from the MIAA. It also covers a Local Area Network (LAN) and Wide Area Network
(WAN) that links together all of PAL’s domestic on-line and office stations as well as the other major
offices in Metro Manila.
MBC houses the Operations Group. Other facilities located in the MBC include Flight Operations and
the B737 Flight Simulator Building, Aircraft Engineering, Airworthiness Management,
Communications Operations, Fuel Management, Employee Benefits, Medical, Sports Complex,
Corporate Logistics & Services, Operations Accounting, Ground Property, Material Sales
Management, Comat Handling, Safety, Security, Ground Equipment Management, Communications
Maintenance, Network Management & Telecom System, Construction and Facilities Management,
Reservations Control Center/Telesales, General Materials Warehouse, Central Finance Records
Warehouse, Aircraft Records Warehouse and other support offices. MBC also houses the K-9 Kennel
Facility.
PAL’s head office is located at the PNB Financial Center along President Macapagal Avenue, Pasay
City. It houses the Executive Offices, Commercial Group, Finance Group, Legal, Corporate
Secretary’s Office, Human Resources, Corporate Audit, Corporate Communications, Government
Relations, Domestic and International Ticket Offices, Facilities Management Division, Satellite Office
and Security Office of PAL. Total area being leased from the PNB is 15,080.08 sq.m.
Item 3. Legal Proceedings
PAL is currently under anti-trust investigation by the U.S. Department of Justice (DOJ) and is likewise
a defendant in a private anti-trust class-action lawsuit brought before the Northern District of
California. Both the DOJ investigation and the lawsuit are focused on possible anti-trust violations by
PAL in respect of its passenger and cargo services to and from the U.S. Violations of U.S. Anti-trust
laws may carry fines over PHP4,529.1 million or imprisonment not exceeding 10 years or both.
PAL is likewise a plaintiff in various cases pending before the Court of Tax Appeals for the refund of
excise taxes paid by PAL under protest in connection with its importation of aviation fuel for its
operations. The total amount involved in the subject refund cases is PHP 2,452.4 million.
Except for the foregoing, PAL or any of its subsidiaries or affiliates is not involved in, nor any of its
properties the subject of any legal proceeding and has no knowledge of any contemplated proceeding
by any government authorities involving an amount exceeding PHP 1,224.0 million (10% of its total
current assets) for fiscal year ended March 31, 2010.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal
year ended March 31, 2010.
18
PART II - OPERATIONAL AND FINANCIAL INFORMATION
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
(a) Market Price of and Dividends on Registrant’s Common Equity and Related Stockholder
Matters
1. Market Information
The market for the registrant’s common equity is the Philippine Stock Exchange. The
high and low sales prices for each quarter for the past three years are as follows:
2010
Second Quarter
First Quarter
2009
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2008
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
HIGH
Php
3.10
3.70
LOW
Php
2.65
2.70
2.90
3.00
3.10
3.00
2.04
2.70
2.55
2.90
3.50
3.80
4.80
6.30
2.10
3.25
3.60
4.20
As of July 13, 2010, the latest practicable trading date, PAL Holdings’ was traded at
P 4.35.
2. Holders
The number of shareholders of record as of June 30, 2010, was 6,727 and
common shares outstanding as of the same date were 5,421,512,096.
The top 20 stockholders as of June 30, 2010 are as follows :
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Stockholders’ Name
Trustmark Holdings Corp.
Pan Asia Securities Corp.
Wonderoad Corporation
Anthony M. Te
Emmanuel P. Te
Cynthia Manalang
Citiseconline.com, Inc.
Tower Securities, Inc.
Fisher Tan Chua
RCBC Securities, Inc.
BPI Securities Corp.
R. Coyiuto Securities, Inc.
Mandarin Securities Corp.
Abacus Securities Corp.
Ansaldo, Godinez & Co., Inc
Triton Securities Corp.
No. of Shares Held
5,297,280,230
40,669,250
10,251,679
5,144,000
5,000,000
3,000,000
2,611,308
2,406,157
1,503,182
1,492,563
1,425,768
1,414,518
1,393,907
1,393,856
1,255,228
1,223,561
% to Total
97.7075%
0.7501%
0.1891%
0.0949%
0.0922%
0.0553%
0.0482%
0.0444%
0.0277%
0.0275%
0.0263%
0.0261%
0.0257%
0.0257%
0.0232%
0.0226%
19
17
18
19
20
R. S. Lim & Company, Inc.
Quality Investment & Securities Corp
Luys Securities Company, Inc.
Intra-Invest Securities, Inc.
1,159,000
1,005,378
866,276
823,212
0.0214%
0.0185%
0.0160%
0.0152%
* The Company has no preferred shares.
3. Dividends
a.) The Company did not declare any cash dividends during the past three years in the
period ended March 31, 2010. The Board of Directors may declare dividends only from
the surplus profits arising from the business of the Company and in accordance with the
preferences constituted in favor of preferred stock when and if such preferred stock be
issued and outstanding.
b.) There are no other restrictions that limit the ability to pay dividends on common equity
or that are likely to do so in the future.
4. Recent Sales of Unregistered or Exempt Securities, Including Recent Issuance of Securities
Constituting an Exempt Transaction (for the past three years)
On 22 January 2007, the Company issued 5,021,567,685 new shares to Trustmark
Holdings Corporation (Trustmark) as subscription to the increase in capital pursuant to a
debt-to equity transaction.
On 01 March 2007 the Securities and Exchange Commission confirmed that the issuance
of these new shares to Trustmark is exempt from the registration requirements of Section
8 of SRC.
Item 6. Management’s Discussion and Analysis (MDA)
Restatement to Philippine Peso
In line with the adoption of PAS 21, The Effects of Changes in Foreign Currency Rates, PAL
determined that its functional currency is the US dollar. On May 20, 2005, the Philippine Securities
and Exchange Commission approved PAL’s use its functional currency, the US dollar, as its
presentation currency. Accordingly, effective April 1, 2005, PAL proceeded in measuring its results of
operations and financial position in US dollar.
Since the functional and presentation currency of the Company is in Philippine peso, for purposes of
combination of the financial statements in accordance with PAS 27, Consolidated and Separate
Financial Statements, there is a need for PAL and its subsidiaries to restate its financial statements to
the Philippine peso.
Consolidation
The consolidated financial statements referred to consist of the financial statements of the Company
and its subsidiaries. The financial statements of the subsidiaries are prepared as of March 31 of each
year using consistent accounting policies as those of the Company. Companies included in the
consolidation are PAL and PR Holdings, Inc. As a result of the restructuring in fiscal year 2008 (see
note 2 of the notes to consolidated financial statements), the Company still owns 84.67% of PAL,
20
through a direct ownership in 81.57% of PAL’s shares and an indirect ownership in 3.10% of PAL’s
shares through an 82.33% direct ownership in PR. Subsidiaries are consolidated from the date on
which control is transferred to the Group and cease to be consolidated from the date on which control
is transferred out of the Group. All intercompany accounts and transactions with subsidiaries are
eliminated in full.
Results of Operations
a.) FY 2010 vs FY 2009
The Group’s consolidated financial statements for FY 2009-2010 showed a total comprehensive loss
of PHP 862.9 million, a significant reduction of 93% from the last fiscal year's restated total
comprehensive loss of PHP 12,081.4 million.
Total revenues for the current fiscal year totaled PHP 64,087.8 million or 13% lower than last year’s
figure of PHP 73,793.9 million. The decrease was brought about mainly by the decline in passenger
revenues by 15.9% offset in part by the increase of 20% in other income earned during the period.
Lower net yields per Revenue Passenger Kilometer (RPK) affected PAL’s revenue generation.
Revenues also include recoveries arising from surcharges, cargo, interest income and other income
earned during the period. The increase in other income was attributable mainly to higher excess
baggage revenues and charter revenues on account of more flights mounted .
In FY 2009-2010, PAL adopted Philippine Interpretation IFRIC 13, Customer Loyalty Programmes
where a portion of the revenue attributable to the customer loyalty award credits is deferred over the
period that the award credits are redeemed. The prior years’ financial information has been restated to
reflect the adoption.
Total expenses and other charges (income) dropped by 26.0% or PHP 22,354.4 million from the
previous year’s total of PHP 86,043.6 million. This was largely due to lower expenses related to flying
operations, passenger service, reservation & sales , financing charges, general & administrative and
other expenses offset by the increase in maintenance expense.
The reduction in flying operations by 29.4% over last year’s same period total of PHP 49,506.4
million was attributable mainly to the decrease in fuel cost offset by the increase in depreciation and
lease charges . For FY 2009-2010, fuel expenses declined by 42.4% as a result of the significant drop
in average price per barrel of aviation fuel from US$ 123.80 in 2009 to US$ 86.94 in 2010. Fuel cost
in 2009 also includes the recognition of losses as a result of the early termination of several hedging
contracts before maturity date. The cabin reconfiguration of the B747 aircraft and acquisitions of
rotable & reparable parts resulted in a higher depreciation expense by PHP 959.1 million. Likewise,
the phase in of the two (2) B777-300 ER aircraft had the effect of increasing aircraft lease charges by
28.1% as compared to the previous year’s total of PHP 1,992.7 million.
Cost cutting measures implemented by PAL in FY 2009-2010 resulted in the reduction of passenger
service, reservation & sales and general & administrative expenses to PHP 4,778.0 million,
PHP 3,868.0 million and PHP 2,610.6 million respectively.
Principal payments made on various loans including the debt buyback of certain unsecured claims
from various debt holders during the current fiscal year had the effect of decreasing financing charges
by 31.4% or PHP 1,176.9 million over last year’s figure of PHP 3,746.4 million.
Higher aircraft, engine and component repair costs increased maintenance expenses by PHP 899.2
million over the previous fiscal year’s figure of PHP 9,957.4 million.
In the current fiscal year, the Group recognized “Other Income” of PHP 4,889.8 million versus “Other
21
Expenses” of PHP 1,147.6 million incurred during the last fiscal year. The significant improvement of
PHP 6,037.4 million was accounted for mainly by the unrealized gains resulting from changes in the
fair valuation of outstanding derivative instruments which did not qualify for hedge accounting. In FY
2008-2009, PAL incurred unrealized losses due to the aforementioned changes. The increase in other
income by 20% also included, among others, the gain on debt buyback of certain unsecured claims.
These claims were carried in PAL’s books at amortized cost. The difference between the purchase
price and the cost was recognized as part of “Other Income”.
In fiscal year 2009-2010, the Group recognized a lower provision for income tax by PHP 332.1
million as compared with the previous year’s deferred income tax of PHP 543.3 million on account of
the reassessment done on deferred tax assets and liabilities on all deductible temporary differences in
accordance with PAS 12, Income Taxes.
The reduction in the net changes in the value of derivative assets resulting from the fair valuation of
outstanding fuel hedges recognized in equity had the effect of decreasing the “Other Comprehensive
Income” account in the current fiscal year by 28.7% and the net changes in fair value of available-forsale investments by 57.6%. The Group recognized a foreign exchange translation loss amounting to
PHP 105 million as compared to 1,915 in 2009. This is due to the decrease in exchange rates from Php
48.422 as of March 31, 2009 to PHP 45.291 as of March 31, 2010
b.) FY 2009 vs. FY 2008 (As restated)
The Group’s restated consolidated comprehensive loss amounted to PHP12,081.4 million for the fiscal
year ended March 31,2009 a significant increase from the previous years’ comprehensive loss of PHP
690.3 million.
Total revenues for the current fiscal year amounted to PHP 73,793.9 million or 13% increase from last
year’s same period figure of PHP 65,157.6 million. The increase in revenues by PHP 8,636.3 million
was brought about mainly by the increase in passenger revenues which increased by 16% due to
higher net yield per Revenue Passenger Kilometers (RPK) and by the number of passengers carried.
Revenues also include cargo, recoveries arising from surcharges; interest income; and other income
earned during the period. In FY 08-09 “Other Income” included among others the foreign exchange
gain recognized as a result of the depreciation of the Philippine peso versus the US dollar from PHP
44.2068 per US$1.00 in 2008 to PHP 46.1994 per US$1.00 in 2009.
Total consolidated expenses increased by 29% or PHP 19,378.3 million from the previous year’s total
of PHP 66,665.4 million. The growth in expenses was primarily due to higher expenses related to
flying operations, maintenance, and aircraft & traffic servicing offset by the decrease in other
expenses.
The increase in flying operations by 64% was attributable mainly to higher fuel costs. The rise in fuel
cost by 88.2% over last year’s figure of PHP 20,637.6 million was a result of the increase in average
fuel price per barrel from US$ 89.52 in 2008 to US$ 123.80 in 2009 and higher fuel consumption as a
result of the increase in flights. Fuel cost also includes the recognition of losses as a result of the early
termination of several hedging contracts before maturity date.
Higher aircraft, engine and component repair costs had the effect of increasing maintenance expenses
by 11% or PHP 957.8 million from a total of PHP 8,999.6 million of the previous fiscal year.
As a result of more flights operated in 2009 aircraft & traffic servicing expenses increased by 9.7 % or
PHP 777.2 million above last year’s figure of PHP 8,009.3 million.
In FY 08-09, PAL recognized a net foreign exchange translation gain of PHP 731.1 million and this
22
has been included as part of Others- net. However, in fiscal year 2008 PAL incurred a net foreign
exchange translation loss of PHP 1,001.7 million and this was recognized as part of Others- net. This
basically explains the reduction in Other Expenses from 2008 to 2009 by 60% .These foreign
exchange gains and losses arise as a result of the movement of the Philippine peso and other
currencies vis a vis the US dollar. Changes in the fair valuation of outstanding derivative instruments
that did not qualify as cash flow hedges also contributed to the decrease in “Other Expenses”.
The reassessment done by PAL on deferred tax assets and liabilities on all deductible temporary
differences in accordance with PAS 12, Income Taxes, resulted in the recognition of a deferred income
tax of PHP 543.3 million for the period.
In compliance with the amended provisions of PAS 1, Presentation of Financial Statements, the Group
recognized a total other comprehensive income of PHP 711.75 million. This primarily reflects the
movements of all non-owner changes in equity, which showed a significant decline in value of
derivative assets by 183% resulting from the fair valuation of outstanding fuel hedges recognized in
equity and in the net changes in fair value of available-for-sale investments which declined by 297%.
The increase in revaluation increment due to appraisal also decreased by 30%. The Group recognized
a foreign exchange translation gain amounting to PHP 1,915.4 billion in 2009. This is due to the
significant increase in exchange rates from Php 41.756 as of March 31, 2008 to PHP 48.422 as of
March 31, 2009.
Financial Condition
FY 2010 vs FY 2009
As of March 31, 2010 the Company’s consolidated total assets amounted to PHP 76,755.8 million or
20% lower than the March 31, 2009 balance of PHP 95,503.7 million. The difference was primarily
brought about by the downward movement in total current assets by 41% as a result of the decrease in
cash and cash equivalents by 42%, short-term investments by 100% and other current assets by 79%.
The decline in cash and cash equivalent balance was mainly due to servicing of various debts, offset in
part by the advances received from affiliates. The decrease in other current assets was due to the
effect of the remeasurement to fair value of certain financial assets and derivative instruments and
reduction in security deposits used as collateral for certain derivative instruments.
Total noncurrent assets declined by 14% as a result of the decrease in property and equipment by 14%
due mainly to the depreciation expense recognized during the period , which had the effect of reducing
the carrying values of the assets. The decline in “Other Non-current Assets” by 33% was principally
brought about by the effect of the remeasurement to fair value of certain financial assets and derivative
instruments as well as reduction in certain deposits.
Total liabilities declined by 19% from the March 31, 2009 balance of PHP 92,945.3 million. This was
attributable mainly to the decrease in the long term liabilities due to principal payments made on
various loans and the effect of the debt buyback of certain unsecured claims from Trustmark. The
remeasurement to fair value of certain derivative instruments also had the effect of decreasing the
accrued liabilities balance grouped under “Current Liabilities” and in the other liabilities balance
grouped under “Reserves and Other Liabilities”.
As of March 31, 2010, the stockholders’ equity balance amounted to PHP 1,695.5 million, down by
PHP 862.9 million or 34% from the March 31, 2009 balance of PHP 2,558.4 million. The decrease
was brought about mainly by the total comprehensive loss recognized during the period as well as by
the movements of all non owner changes in equity.
23
FY 2009 vs FY 2008
The Group’s restated consolidated total assets as of March 31, 2009, amounted to PHP 95,503.7
million or an increase of 12% from the previous years’ balance of PHP 84,987.6 million. The increase
was mainly due to the effect of the depreciation of the Philippine peso vis a vis the US dollar from
PHP 41.756 per US$1.00 in 2008 to PHP 48.422 per US$1.00 in 2009. Had there been no change in
the exchange rate, the total assets balance would have decreased by 3% or PHP 2,479.0 million. The
difference was primarily brought about by the downward movement in total current assets by PHP
6,598.8 million or 24% as compared with the March 31, 2008 balance of PHP 27,332.9 million. This
was attributable to the decline in cash and cash equivalent balance by 61% due to servicing of debts,
payments made for security deposits used as collateral for certain derivative instruments, purchase of
turbo-prop aircraft and advance payments made for the purchase of B777-300ER and A320 option
aircraft. The receivable balance also dropped by 10% from the March 31, 2008 figure of PHP 5,573.7
million as a result of lower passenger and cargo ticket sales coupled with the effect of the provision for
doubtful account recognized during the fiscal year. A lower fuel inventory balance as of March 31,
2009 contributed significantly to the decline as well of the “expendable parts, fuel, materials &
supplies” account by 37%. The aforementioned decreases on the other hand were offset by the
increase in other current assets by 58% mainly as a result of the additional security deposits made to
collateralize certain derivative instruments.
Total noncurrent assets rose by PHP 17,114.9 million as a result of the net increase in property and
equipment balance by PHP 16,927.9 million resulting from the acquisition of four (4) A320 aircraft
delivered in April , July, October and December 2008 as part of PAL’s refleeting program; and eight
(8) turbo-prop aircraft (three Q300s and five Q400s) delivered in May, June, July and August 2008
used in PAL’s “PAL Express” flights. The increase was also due to the pre delivery payments made
for the B777-300ER scheduled for delivery in fiscal years 2010 to 2011 and A320 option aircraft for
delivery on the 3rd and 4th quarter of 2010.The conversion from a US dollar based amount of the
Property and Equipment account to Philippine Peso, also had the effect of increasing the 2009 balance
by PHP 7,982.1 million. The above increases were offset in part by the drop in other non current assets
by 11% from the March 31, 2008 balance of PHP 3,841.0 million principally due to the effect of the
remeasurement to fair value of certain financial assets and derivative instruments.
Total liabilities increased by 32% or by PHP 22,597.5 million over the March 31, 2008 balance of
PHP 70,347.8 million. Of this increase, PHP 10,002.1 million was brought about by the effect of the
depreciation of the Philippine peso vis a vis the US dollar in converting the US dollar based figures to
Philippine peso. The rest was attributable to the availment of additional uncollateralized short term
notes payable from several local banks as well as additional long term obligations in support of the
acquisition of the turboprops and the Airbus A320 aircraft under capital lease. This increased longterm liabilities-net of current portion by 38%. The remeasurement to fair value of certain derivative
instruments also had the effect of increasing the accrued liabilities balance grouped under current
liabilities and in the other liabilities balance grouped under reserves and other liabilities.
As of March 31, 2009 the Company’s stockholders’ equity balance amounted to PHP 2,558.4 million,
down by PHP 12,081.4 million or 83% from the March 31, 2008 balance of PHP 14,639.8. The
significant decline was brought about mainly by the net loss recognized during the fiscal year 20082009.
24
TOP FIVE KEY PERFORMANCE INDICATORS OF PAL
Mission Statement
To maintain aircraft with the
highest degree of
airworthiness, reliability and
presentability in the most costeffective manner
To conduct & maintain safe,
reliable, cost & effective flight
operations
Key Performance Indicator
Aircraft Maintenance Check
Completion
Measurement Methodology
Number of checks performed
less number of maintenance
delays over number of checks
performed
Number of aircraft related
accidents/incidents
By occurrence and monitoring
by Flight Operations Safety
Office
To achieve On-Time
Performance on all flights
operated
Percentage Deviation from
Industry Standards (OTP
Participation)
Number of flights operated less
number of flights delayed over
total flights operated
To provide safe, on time,
quality and cost effective
inflight service for total
passenger satisfaction
Number of safety violations
incurred by cabin crew
Number of incidents of safety
violation incurred by cabin crew
per month
To maximize revenue
generation in passenger and
cargo sales through increased
yields by diversifying market
segments and efficient
management of seat inventory
and cargo space
Net Revenues generated from
passengers and cargoes carried
Percentage Deviation from
Budget/Forecasted Revenues
25
In addition to the Qualitative Key Performance Indicators of PAL, the following comprise its
Quantitiative Financial Ratios:
03/31/10
03/31/09
Profitability Factors:
1. Return on Total Assets
Net Income (loss)/Average Total Assets
0.22%
-14.22%
-4.48%
-11.49%
2. Percentage of Operating Income
Operating Income (loss)/Total Revenues
Asset Management:
3. Receivable Turnover
10.83
10.73
33.71
34.12
1.16
-2.27
Net Sales/Average Trade Receivables
4. Number of Days Sales in Receivables
( General Traffic)
# of Days in a year/Receivable turnover
Financial Leverage:
5. Interest Coverage Ratio
Earnings before interest & taxes/Interest Charges
Other than those that have already been disclosed, there are no known trends, demands, commitments,
events or uncertainties that may have a material impact on the Company’s liquidity.
i. PAL is a defendant in a case filed by the Flight Attendants and Stewards Association of the
Philippines (FASAP) against PAL for illegal dismissal, reinstatement and payment of back wages. In
a decision dated October 02, 2009, the Supreme Court dismissed the motion for reconsideration has
been filed by PAL and is currently pending with the Court. Other than this, there are no known events
that will trigger direct or contingent financial obligation that is material to the Company’s, including
any default or acceleration of an obligation.
ii. There are no known material off-balance sheet transactions, arrangements, obligations (including
contingent obligations), and other relationships of the Company with unconsolidated entities or other
persons created during the reporting period.
iii. Commitments for capital expenditures
As part of its refleeting program, a purchase agreement with Boeing was finalized on
October 30, 2006 wherein PAL placed on order four (4) new Boeing 777-300ER aircraft scheduled to
be delivered in fiscal years 2010 to 2012. On June 2, 2009, PAL and Boeing agreed to reschedule the
deliveries of these aircraft from their aforementioned original delivery schedules to fiscal years 2013
and 2014.
PAL on July 28, 2008 exercised its right to purchase two (2) of the five (5) option Airbus 320-200
aircraft scheduled for delivery in fiscal year ending March 2011.
26
PAL embarked on a comprehensive renovation of its long-range wide body fleet, highlighted by the
reconfiguration of the passenger cabin from a tri-class to bi-class layout, along with a major upgrade
of the interiors and amenities. As of March 31, 2010 the passenger cabins of the four (4) B747-400
aircraft have already been reconfigured.
In April 2009, PAL’s Board of Directors authorized management to finalize the terms of the sale of
one of its parcels of land. The related Deed of Absolute Sale was subsequently executed in June 2010
and the proceeds from the sale collected.
To improve its financial condition and results of operations, PAL has lined up various revenue
enhancement programs, cash generation strategies and cost control initiatives. Part of these initiatives
is the spin-off of its Inflight Catering operations, Airport Services operations and Call Center
Reservation operations. In April 2010, PAL released a memorandum informing its employees and the
general public of its plan to spin-off a significant number of employees. Members of the employees’
union lobbied for reconsideration to the Department of Labor and Employment (DOLE). On June 15,
2010, PAL received a favorable decision from the DOLE confirming the legality of the spinoff/outsourcing program.
iv. There are no known trends, events or uncertainties that have had or that are reasonably expected to
have material favorable or unfavorable impact on net sales or revenues or income from continuing
operations.
v .There are no significant element of income that did not arise from continuing operations.
vi. The causes for any material change from period to period which shall include vertical and
horizontal analyses of any material item:
Results of our Horizontal (H) and Vertical (V) analyses showed the following material
changes:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
Cash and cash equivalents- H- (42%)
Short-term investments- H- (100%)
Receivables-net- H- 16%
Expendable parts, fuel, materials & supplies- H- 32%
Other current assets- H- (79%) V- (7%)
Property, plant and equipment- net- H- (14%) V- 5%
Deferred tax assets- H- 47%
Available-for-sale- investment- non-current- H– (35%)
Investment properties- H- (7%)
Other non-current assets- H- (33%)
Notes payable- H- (7%)
Accounts payable- H- 47%
Accrued expenses- H- (24%)
Unearned transportation revenue- H- 18%
Current portion of long-term liabilities- H- (19%)
Long-term liabilities- net of current portion- H- (31%) V- (6%)
Accrued employee benefits payable- H- 12%
Reserves and other non-current liabilities- H- (34%)
Other components of equity- H- (57%)
Minority interest- H- (29%)
Revenue –H-(13%)
Expenses – H- (26%) V- (17%)
Income before income tax- H- 103% V- 17%
27
24. Provision for income tax- H- (61%)
25. Total Other Comprehensive income- H- (248%)
26. Total Comprehensive loss- H- (93%) V- (15%)
All of these material changes were explained in the management’s discussion and analysis
of financial condition and results of operations stated above.
vii.
PAL experiences a peak in holiday travel during the months of January, April, May, June
and December.
B. Information on Independent Accountant and other Related Matters
(1) External Audit Fees and Services
a.)
Audit and Audit-Related Fees
1. The audit of the Company’s annual financial statements or services that are normally
provided by the external auditor in connection with statutory and regulatory filings or
engagements for 2010 and 2009.
.
Yr. 2010 - Estimated at P 450,000 exclusive of out-of-pocket expenses for the audit of
2010 financial statements.
Yr.2009 - P 495,211 audit fee and out-of-pocket expenses for the audit of 2009 financial
statements.
b.)
Tax Fees – None
c.)
All Other Fees – None
d.)
The audit committee’s approval policies and procedures for the above services:
Upon recommendation and approval of the audit committee, the appointment of the external
auditor is being confirmed in the annual stockholders’ meeting. On the other hand, financial
statements should be approved by the Board of Directors before its release.
Item 7. Financial Statements
See accompanying Index to Financial Statements and Supplementary Schedules
Item 8. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
There are no changes in, and disagreements with the registrant’s accountants on any accounting and
financial disclosure during the three most recent fiscal years in the period ended March 31, 2010 or
in any subsequent interim period.
PART III - CONTROL AND COMPENSATION INFORMATION
Item 9. Directors and Executive Officers of the Registrant
1.
Directors, Executive Officers, Promoters and Control Persons
28
At present, the Company has eleven (11) directors. Hereunder are the Company’s incumbent
directors and executive officers, their names, ages, citizenship, positions held, term of office
as director/officer, period served as director/officer, business experience for the past five
years, and other directorships held in other companies:
Name
Age
Citizenship
Lucio C. Tan
75
Filipino
Jaime J. Bautista
53
Harry C. Tan
64
Position /Term of
Office/Period Served
Chairman/ 1 year/ 1 year
Business Experience/Other Directorship
within the last 5 years
Chairman of Philippine Airlines, Inc.,
Asia Brewery Inc., Fortune Tobacco
Corp., PMFTC Inc., The Charter House,
Inc., Grandspan Development Corp.,
Himmel Industries Inc., Lucky Travel
Corp., Eton Properties Philippines, Inc.,
Eton City, Inc., Belton Communities, Inc.,
Tanduay Holdings, Inc., Tanduay
Distillers,
Inc.,
Tanduay
Brands
International, Inc., Asian Alcohol Corp.,
Absolut Chemicals, Inc., Progressive
Farms, Inc., Manufacturing Services &
Trade Corp., REM Development Corp.,
Foremost Farms, Inc., Basic Holdings
Corp., Dominium Realty & Construction
Corp., Shareholdings, Inc., Sipalay
Trading Corp., and Fortune Tobacco
International Corp.; Director of Philippine
National Bank, majority stockholder of
Allied Banking Corp., and Century Park
Hotel
Filipino
President and Director/ 1
year/ 1 year
President and Chief Operating Officer of
Philippine Airlines, Inc.; President of
Basic Capital Investments Corp. and Cube
Factor Holdings, Inc; President and Board
of Trustees Member of University of the
East; Director of MacroAsia Corp.,
Macroasia-Eurest Catering Services and
Macroasia Menzies Airport Services
Corp.; Board of Trustees Member of
UERM Medical Center Foundation
Filipino
Director/ 1 year/ 1 year
Vice Chairman of Eton Properties
Philippines, Inc., Eton City, Inc., Belton
Communities, Inc., Pan Asia Securities,
Inc., Lucky Travel Corp., and Tanduay
Holdings, Inc.,; Managing Director of The
Charter House, Inc.; Director/Chairman
for Tobacco Board of Fortune Tobacco
Corp., Director/President of Century Park
Hotel, and Landcom Realty Corp.,
Director of Allied Banking Corp.,
PMFTC Inc., Asia Brewery Inc., Basic
Holdings Corp., Philippine Airlines Inc.,
Foremost Farms, Inc., Himmel Industries,
Inc., Asian Alcohol Corp., Absolut
29
Chemicals, Inc., Progressive Farms, Inc.,
Manufacturing Services & Trade Corp.,
REM Development Corp., Grandspan
Development Corp., Dominium Realty &
Construction Corp., Fortune Tobacco
International Corp., Shareholdings, Inc.,
Sipalay Trading Corp., Tanduay Brands
International, Inc., and Tanduay Distillers,
Inc.
Domingo T. Chua
68
Filipino
Director/ 1 year/ since
September 30, 2009
Chairman of Allied Banking Corp., Air
Philippines Corp., and PNB Securities,
Inc.; Vice Chairman of PNB General
Insurers
Co.,
Inc.;
Managing
Director/Treasurer of Himmel Industries,
Inc.; Director/Treasurer of Dominium
Realty & Construction Corp., Asia
Brewery, Inc., Manufacturing Services &
Trade Corp., Grandspan Development
Corp., Foremost Farms, Inc., The Charter
House, Inc., Progressive Farms, Inc.,
Fortune Tobacco Corp., Fortune Tobacco
International Corp., Lucky Travel Corp.,
Eton Properties Philippines, Inc., Tanduay
Holdings, Inc., Tanduay Distillers, Inc.,
Tanduay Brands International, Inc.,
Absolut Chemicals, Inc., Asian Alcohol
Corp., Eton City, Inc., and Belton
Communities, Inc.; Director of Pan Asia
Securities Corp., Allied Commercial
Bank, Allied Bankers Insurance Corp.,
Maranaw Hotels & Resort Corp.,
Eurotiles Industrial Corp., and PNB Life
Insurance Inc.; Former Director of
Philippine National Bank
Lucio K. Tan, Jr.
43
Filipino
Director/ 1 year/ 1 year
Director/President of Tanduay Distillers,
Inc., Director/EVP of Fortune Tobacco
Corp.; Director of Eton City, Inc., Belton
Communities,
Inc.,
AlliedBankers
Insurance Corp., Philippine Airlines, Inc.,
Philippine National Bank, Eton Properties
Philippines, Inc., Tanduay Holdings, Inc.,
MacroAsia Corporation, PMFTC Inc.,
Lucky Travel Corp., Air Philippines
Corp., Tanduay Brands International, Inc,
Asian Alcohol Corp., Absolut Chemicals,
Inc., Asia Brewery, Inc., Foremost Farms,
Inc., Himmel Industries, Inc., Progressive
Farms, Inc., The Charter House, Inc.,
REM
Development
Corporation,
Grandspan Development Corporation,
Dominium Realty & Construction Corp.,
Manufacturing Services & Trade Corp.,
30
Fortune Tobacco International Corp., and
Shareholdings, Inc.
Michael G. Tan
44
Filipino
Director/1 year/ 1 year
Director/President of Tanduay Holdings,
Inc.; Director/Chief Operating Officer of
Asia Brewery, Inc., Director of Eton City,
Inc., Allied Banking Corporation,
AlliedBankers Insurance Corp., Air
Philippines Corp., Eton Properties
Philippines, Inc., PMFTC Inc., Grandway
Konstruct, Inc., Lucky Travel Corp.,
Philippine Airlines, Inc., Philippine
Airlines Foundation, Inc., Tanduay
Brands International, Inc., Absolut
Chemicals, Inc., and Shareholdings, Inc.
Wilson T. Young
53
Filipino
Director/ 1 year/ 1 year
Managing Director/Deputy CEO of
Tanduay
Holdings,
Inc.;
Director/President of Tanduay Brands
International, Inc.; Chief Operating
Officer of Tanduay Distillers, Inc., Asian
Alcohol Corp., Absolut Chemicals, Inc.,
and Total Bulk Corp.; Director of Flor De
Caña Shipping, Inc., Air Philippines
Corp., Eton Properties Philippines, Inc.,
and Victorias Milling Co., Inc.; Vice
Chairman of the Board of Trustees of
UERM Medical Center; and Member
Board of Trustees of the University of the
East
Juanita Tan Lee
67
Filipino
Director/1 year/ 1 year
Director of Eton Properties Philippines,
Inc. and Air Philippines Corp.;
Director/Corporate Secretary of Asia
Brewery, Inc., Dominium Realty and
Construction Corp., and Shareholdings,
Inc.; Corporate Secretary of Asian
Alcohol Corp., Absolut Chemicals, Inc.,
The Charter House, Inc., Far East
Molasses Corp., Foremost Farms, Inc.,
Fortune Tobacco Int’l Corp., Grandspan
Development Corp., Himmel Industries,
Inc., Landcom Realty Corp., Lucky
Travel Corp., Manufacturing Services &
Trade Corp., Marcuenco Realty &
Development Corp., Progressive Farms,
Inc., REM Development Corp., Tanduay
Distillers,
Inc.,
Tanduay
Brands
International Inc., Tobacco Recyclers
Corp., Total Bulk Corp., Zebra Holdings,
Inc.; Corporate Secretary of Fortune
Tobacco Corp. and PMFTC Inc.;
Assistant Corporate Secretary of Basic
Holdings Corp. and Tanduay Holdings,
31
Inc.
Antonio L.
Alindogan, Jr.
71
Filipino
Independent Director/ 1 year/
1 year
Chairman of An-Cor Holdings, Inc.;
Independent Director of Philippine
Airlines, Inc., Rizal Commercial Banking
Corp., Eton Properties Philippines, Inc.,
House of Investments, Inc.; President of
C55, Inc.
Enrique O. Cheng
77
Filipino
Independent Director/ 1 year/
1 year
Chairman of Landmark Corporation;
Chairman/President of Philippine Trade
Center;
Director/Vice-Chairman
of
Hideco Sugar Milling, Co., Inc.;
Independent Director of Philippine
Airlines, Inc.
Johnip G. Cua
53
Filipino
Independent Director/ 1 year/
since September 30, 2009
Chairman of Advertising Foundation of
the Philippines; Director of Banco De Oro
Private Bank, MacroAsia Corporation,
MacroAsia Catering Services, Board of
Trustees Member of Xavier School, and
Xavier School Educational & Trust Fund
Ma. Cecilia L.
Pesayco
57
Filipino
Corporate Secretary/ 1 year/ 1
year
Corporate Secretary of Allied Banking
Corp.,
Allied Savings Bank, Eton
Properties Philippines, Inc., Eton City,
Inc., Belton Communities, Inc., Tanduay
Holdings Inc., Air Philippines Corp., Flor
De Caña Shipping, Inc., and East
Silverlane Realty and Dev’t Corp..
Susan T. Lee
39
Filipino
Chief Finance Officer/ 1 year/
1 year
AVP and Asst. CFO of Tanduay
Holdings, Inc.
2. Significant Employees
There are no other significant employees who are expected by the registrant to make a
significant contribution to the business.
3. Family Relationship
Chairman Lucio C. Tan is the father of Mr. Lucio K. Tan Jr. and Mr. Michael Tan while
Messrs. Lucio C. Tan and Harry C. Tan are brothers. Mr. Domingo Chua is a brother-in-law of
Chairman Lucio C. Tan and Mr. Harry C.Tan.
4.
Pending Legal Proceedings (last 5 years)
The Directors and Executive Officers of the Corporation are not involved in any bankruptcy
petition by or against any business of which such person was a general partner or executive
officer either at the time of the bankruptcy or within two years prior to that time; any
conviction by final judgment, including the nature of the offense, in a criminal proceeding,
domestic or foreign, excluding traffic violations and other minor offenses; being subject to any
order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, domestic or foreign, permanently or temporarily enjoining, barring
suspending or otherwise limiting his involvement in any type of business, securities,
32
commodities or banking activities; and being found by a domestic or foreign court of
competent jurisdiction ( in a civil action), the Commission or comparable foreign body, or a
domestic or foreign Exchange or other organized trading market or self regulatory
organization, to have violated a securities or commodities law or regulation, and the judgment
has not been reversed, suspended, or vacated.
Item 10. Executive Compensation
The Company’s president and chief executive officer as well as the other officers receive a fixed
basic monthly salary. Pursuant to Section 13, Article II of the Company’s By-laws, the directors of
the Corporation are entitled to a per diem. Approved per diem amounted to twenty five thousand
Pesos (P 25,000.00) for the directors’ attendance in the Annual Stockholders’ Meeting. The directors
and executive officers received no bonus or any other remuneration in cash or in kind. The directors
and executive officers hold no outstanding warrant or option.
a.) Standard Arrangements – Other than the stated salaries & wages and per diem of the
directors, there are no other standard arrangements to which the directors of the Company
are compensated, or are to be compensated, directly or indirectly, for any services
provided as a director, including any additional amounts payable for committee
participation or special assignments, for the last completed fiscal year and the ensuing
year.
b.) Other Arrangements – None
c.) Employment contract or compensatory plan or arrangement - None
Warrants and Options Outstanding: Repricing
a.) There are no outstanding warrants or options held by the Company’s CEO, the named
executive officers, and all officers and directors as a group.
b.) This is not applicable since there are no outstanding warrants or options held by the
Company’s CEO, executive officers and all officers and directors as a group.
Item 11. Security Ownership of Certain Beneficial Owners and Management as of
June 30, 2010
(1) Security Ownership of Certain Record and Beneficial Owners of more than 5%
Title of
class
Name, address of record owner
and relationship with Issuer
Name of
Beneficial
Owner and
No. of
Shares Held
Percent
5,297,280,230
97.708%
Citizenship
Relationship
with Record
Owner
Common
Trustmark Holdings
Corporation*
SMI Compound, C. Raymundo
Ave., Maybunga, Pasig
City/(Shareholder)
Filipino
*
* Trustmark Holdings Corp.(TMHC) is owned and controlled by the Lucio Tan Group of
Companies. Mr. Lucio Tan shall have the voting power over the shareholdings of TMHC.
(2)
Security Ownership of Management as of June 30, 2010
33
Title of class
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Name of
beneficial
owner
Lucio C. Tan
Harry C. Tan
Jaime J. Bautista
Domingo T. Chua
Wilson T. Young
Lucio K. Tan, Jr.
Michael G. Tan
Juanita Tan Lee
Antonino L.
Alindogan, Jr.
Enrique O. Cheng
Johnip G. Cua
Amount and
nature of
record/beneficial
ownership *
1,000 “r”
1,000 “r”
500 “r”
1,000 “r”
500 “r”
1,000” r”
1,000 “r”
500 “r”
500 “r”
1,000 “r”
1,000 “r”
Citizenship
Percent of
Class
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Filipino
Filipino
Nil
Nil
* All shares held by management are of record.
Security ownership of all directors and officers as a group is 9,000 representing 0.00% of
the Company’s total outstanding capital stock.
3. Voting Trust Holders of 5% or More
The Company has no recorded stockholder holding more than 5% of the Company’s
common stock under a voting trust agreement.
4. Changes in Control
There are no arrangements which may result in a change in control of the registrant.
Item 12. Certain Relationships and Related Transactions
In addition to Note 18 of the Notes to the Consolidated Financial Statements on pages 93 to 96, the
following are additional relevant related party disclosures:
The Company’s cash and cash equivalents are deposited/placed with Allied Banking Corporation, an
affiliate, at competitive interest rates. The Company also has a lease and stock transfer agency
agreement with the said bank at prevailing rates. There are no preferential treatment in any of its
transactions with the Bank. There are no special risk or contingencies involved since the transactions
are done under normal business practice.
a.) Business purpose of the arrangements:
We do business with related parties due to stronger ties which is based on trust and
confidence and easier coordination.
b.) Identification of the related parties transaction business and nature of relationship:
1. Allied Banking Corporation – deposits, rental and stock transfer services
2. MacroAsia Corporation – investments
34
c.) Transaction prices are based on prevailing market rates.
d.) Transactions have been fairly evaluated since the Company adhere to industry standards
and practices.
e.) There are no any ongoing contractual or other commitments as a result of the
arrangement.
2.) Not applicable – there are no parties that fall outside the definition of “ related
parties” with whom the Company or its related parties have a relationship that enables
the parties to negotiate terms of material transactions that may not be available from
other, more clearly independent parties on an arm’s length basis.
3.) Not applicable – the Company has no transactions with promoters.
35
PART IV - EXHIBITS AND SCHEDULES
Item 13. Exhibits and Reports on SEC Form 17-C
(a) Exhibits - The other exhibits, as indicated in the Index to Exhibits are either not applicable to
the Company or require no answer.
(b) Reports on SEC Form 17-C
SEC Form 17-C (Current Reports) which have been filed during the year are no longer filed
as part of the exhibits.
LIST OF ITEMS REPORTED UNDER SEC FORM 17-C (DURING THE LAST 6
MONTHS) – OCTOBER 2009 TO MAY 2010
Date of Report
April 19, 2010
Subject Matter Disclosed
Press Release of Philippine Airlines, Inc. (PAL)
April 19, 2010 – PAL Official Statement on the implementation
of the next phase of its restructuring program
PART V - CORPORATE GOVERNANCE
Item 14. Evaluation System
The Compliance Officer is currently in charge of evaluating the level of compliance of the Board of
Directors and top-level management of the Corporation. The implementation of the Corporate
Governance Scorecard allows the Company to properly evaluate compliance to the Manual.
Item 15. Measures undertaken to Fully Comply
Measures are slowly being undertaken by the Company to fully comply with the adopted leading
practices on good corporate governance and one of them is attending seminars by our Corporate
Directors.
Item 16. Deviations
The Company is taking steps towards full compliance of its Corporate Governance Manual.
Item 17. Plan to improve
The Company continues to improve its Corporate Governance when appropriate and warranted, in
its best judgment.
36
37
PAL HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
SEC FORM 17-A
Page No.
FINANCIAL STATEMENTS
Statement of Management’s Responsibility for Financial Statements
Report of Independent Auditors
39-40
42-43
Statements of Financial Position - March 31, 2010 and 2009
Statements of Comprehensive Income for the Period Ended March 31, 2010, 2009 and
2008
Statements of Changes in Equity for the Years Ended March 31, 2010, 2009 and 2008
44-45
46-47
48-50
Statements of Cash Flows for the Years Ended March 31, 2010, 2009 and 2008
51-52
Notes to Financial Statements
53-118
SUPPLEMENTARY SCHEDULES
Report of Independent Auditors on Supplementary Schedules
A.
Marketable Equity Securities and Other Short-Term Cash Investments
B.
Amounts Receivable from Directors, Officers, Employees, Related Parties,
and Principal Stockholders (Other than Related Parties)
Non-Current Marketable Equity Securities, Other Long-Term Investments
in Stock, and Other Investments
Indebtedness of Unconsolidated Subsidiaries and Related Parties
Intangible Assets and Other Assets
Long- Term Debt
Indebtedness to Related Parties
Guarantees of Securities of Other Issuers
Capital Stock
Reconciliation of Retained Earnings
Index to Exhibits
C.
D.
E.
F.
G.
H.
I.
J.
K.
119
*
*
*
*
*
120-123
*
*
124
125
*
* These schedules, which are required by Part IV(e) of SRC Rule 68, have been omitted because
they are either not required, not applicable or the information required to be presented is included in
the Company’s financial statements.
38
39
40
COVER SHEET
P W - 9 4
SEC Registration Number
P A L
H O L D I N G S ,
I N C .
A N D
S U B S I D I A R I E S
(Company’s Full Name)
7 t h
F l
6 7 5 4
o o r
,
A l
A y a l a
l
i
e d
A v e n u e
B a n k
,
C e n t e r
M a k a t
i
C i
t y
(Business Address: No. Street City/Town/Province)
SUSAN TCHENG-LEE
736-8466
(Contact Person)
(Company Telephone Number)
0 3
3 1
A A C F S
Month
Day
(Form Type)
Month
(Calendar Year)
Day
(Annual Meeting)
Not Applicable
(Secondary License Type, If Applicable)
Dept. Requiring this Doc.
Amended Articles Number/Section
Total Amount of Borrowings
Total No. of Stockholders
Domestic
Foreign
To be accomplished by SEC Personnel concerned
File Number
LCU
Document ID
Cashier
STAMPS
Remarks: Please use BLACK ink for scanning purposes.
41
SyCip Go rres Velayo & Co.
6760 Ayala Avenue
1226 Makati City
Philippines
Phone: (632) 891 0307
Fax:
(632) 819 0872
www.sgv.com.ph
BOA/PRC Reg. No. 0001
SEC Accreditation No. 0012-FR-2
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
PAL Holdings, Inc.
We have audited the accompanying financial statements of PAL Holdings, Inc. and subsidiaries,
which comprise the consolidated statements of financial position as at March 31, 2010, 2009 and
2008 and the consolidated statements of comprehensive income, consolidated statements of changes in
equity and consolidated statements of cash flows for each of the three years in the period ended
March 31, 2010, and a summary of significant accounting policies and other explanatory notes.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with Philippine Financial Reporting Standards. This responsibility includes: designing,
implementing and maintaining internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error; selecting
and applying appropriate accounting policies; and making accounting estimates that are reasonable in
the circumstances.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with Philippine Standards on Auditing. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
42
A member firm of Ernst & Young Global Limited
-2-
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of PAL Holdings, Inc. and subsidiaries as of March 31, 2010, 2009 and 2008, and
their financial performance and their cash flows for each of the three years in the period ended
March 31, 2010 in accordance with Philippine Financial Reporting Standards.
SYCIP GORRES VELAYO & CO.
Josephine H. Estomo
Partner
CPA Certificate No. 46349
SEC Accreditation No. 0078-AR-2
Tax Identification No. 102-086-208
PTR No. 2087534, January 4, 2010, Makati City
July 7, 2010
43
PAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Amounts in Thousands)
March 31
2009
(As restated,
Note 3)
2008
(As restated,
Note 3)
P
=3,397,021
–
–
5,839,686
1,234,497
1,775,350
12,246,554
=5,836,988
P
374,205
–
5,030,852
938,806
8,553,245
20,734,096
=14,783,695
P
–
92,364
5,573,675
1,486,013
5,397,117
27,332,864
56,400,973
68,842
3,152,118
532,677
1,352,163
722,844
65,065,900
384,955
3,154,548
819,510
1,450,045
491,774
48,261,877
261,100
2,534,673
916,797
1,533,364
305,946
2,279,632
64,509,249
3,402,856
74,769,588
3,840,967
57,654,724
P
=76,755,803
=95,503,684
P
=84,987,588
P
P
=6,432,590
=6,888,223
P
=3,440,235
P
8,378,382
5,262,182
11,032,328
481,090
–
5,997,253
37,583,825
10,296,454
3,577,514
14,574,625
481,090
–
5,068,912
40,886,818
5,368,235
5,583,487
11,136,180
481,090
187,109
5,943,967
32,140,303
2010
ASSETS
Current Assets
Cash and cash equivalents (Notes 5, 18, 27 and 28)
Short-term investments (Notes 27 and 28)
Available-for-sale investments (Notes 6, 27 and 28)
Receivables (Notes 7, 18, 27 and 28)
Expendable parts, fuel, materials and supplies (Note 8)
Other current assets (Notes 9, 27 and 28)
Total Current Assets
Noncurrent Assets
Property and equipment (Notes 10, 13, 15,
18, 24 and 25)
At cost
At appraised values
Deposits on aircraft leases (Notes 18, 25, 27 and 28)
Available-for-sale investments (Notes 6, 18, 27 and 28)
Investment properties (Notes 10 and 11)
Deferred income tax assets - net (Note 23)
Other noncurrent assets (Notes 12, 16, 18, 25,
27 and 28)
Total Noncurrent Assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Current Liabilities
Notes payable (Notes 13, 18, 27 and 28)
Current portion of long-term obligations (Notes 15, 18,
25, 27 and 28)
Accounts payable (Notes 18, 27 and 28)
Accrued expenses (Notes 14, 16, 18, 27 and 28)
Due to related parties (Notes 2, 18, 24, 27 and 28)
Income tax payable (Note 23)
Unearned transportation revenue
Total Current Liabilities
(Forward)
44
-2-
March 31
2009
(As restated,
Note 3)
2008
(As restated,
Note 3)
P
=28,941,764
4,724,440
=42,112,420
P
4,200,028
=30,511,652
P
3,237,802
3,810,242
37,476,446
5,746,045
52,058,493
4,458,079
38,207,533
75,060,271
92,945,311
70,347,836
Minority interests
Total Equity
5,421,568
17,517,283
(2,967,170)
(18,595,127)
(56)
1,376,498
319,034
1,695,532
5,421,568
17,517,283
(1,887,866)
(18,941,013)
(56)
2,109,916
448,457
2,558,373
5,421,568
17,517,283
(2,394,772)
(8,192,642)
(56)
12,351,381
2,288,371
14,639,752
TOTAL LIABILITIES AND EQUITY
P
=76,755,803
=95,503,684
P
=84,987,588
P
2010
Noncurrent Liabilities
Long-term obligations - net of current portion
(Notes 15, 18, 25, 27 and 28)
Accrued employee benefits (Note 21)
Reserves and other noncurrent liabilities
(Notes 3, 16 and 18)
Total Noncurrent Liabilities
Total Liabilities
Equity
Attributable to the equity holders of the parent:
Capital stock (Notes 2 and 17)
Additional paid-in capital (Notes 2 and 17)
Other components of equity (Note 17)
Deficit (Notes 2, 17, and 19)
Treasury stock - at cost (Note 17)
See accompanying Notes to Consolidated Financial Statements.
45
PAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands, Except Earnings Per Share)
Years Ended March 31
2009
2008
(As restated,
(As restated,
Note 3)
Note 3)
2010
REVENUE
Passenger (Note 3)
Cargo
Interest income (Note 18)
Others (Note 18)
EXPENSES AND OTHER CHARGES
(INCOME) (Note 20)
Flying operations (Note 28)
Maintenance (Note 18)
Aircraft and traffic servicing
Passenger service
Reservation and sales (Note 3)
General and administrative (Notes 7 and 16)
Financing charges (Notes 13, 15 and 18)
Others - net (Notes 15, 16 and 28)
P
= 54,427,666
4,606,314
240,499
4,813,301
64,087,780
34,928,708
10,856,593
8,957,125
4,777,994
3,868,047
2,621,065
2,569,540
(4,889,814)
63,689,258
INCOME (LOSS) BEFORE INCOME TAX
398,522
PROVISION FOR (BENEFIT FROM)
INCOME TAX (Note 23)
211,281
NET INCOME (LOSS)
187,241
OTHER COMPREHENSIVE INCOME (LOSS)
(Note 19)
Net changes in fair values of available-for-sale
investments, net of deferred income tax (Note 6)
Net realized losses (gains) on sale of available-for-sale
investments, net of deferred income tax (Note 6)
Net changes in deferred gain (loss) on cash flow hedges,
net of deferred income tax (Note 28)
Increase in revaluation increment due to appraisal, net
of deferred income tax (Note 10)
Effect of foreign exchange translation*
=
P64,727,834
4,597,819
461,819
4,006,403
73,793,875
=
P55,808,530
5,266,635
839,662
3,242,755
65,157,582
49,506,426
9,957,436
8,786,530
5,099,346
4,037,930
3,761,948
3,746,429
1,147,599
86,043,644
30,226,745
8,999,604
8,009,326
4,872,743
4,070,802
3,743,995
3,862,407
2,879,732
66,665,354
(12,249,769)
(1,507,772)
543,364
(12,793,133)
(1,359,392)
(148,380)
(13,058)
(151,075)
64,662
(53,885)
(6,749)
15,449
(878,189)
(1,231,650)
1,492,058
–
(105,002)
185,779
1,915,449
263,726
(2,377,853)
TOTAL OTHER COMPREHENSIVE
INCOME (LOSS)
(1,050,134)
711,754
(541,958)
TOTAL COMPREHENSIVE LOSS
(P
= 862,893)
Net income (loss) attributable to:
Equity holders of the parent
Minority interests
P
= 157,743
29,498
P
= 187,241
(P
=12,081,379)
(P
=10,832,633)
(1,960,500)
(P
=12,793,133)
(P
=690,338)
(P
=127,878)
(20,502)
(P
=148,380)
(Forward)
46
-2Years Ended March 31
2009
2008
(As restated,
(As restated,
Note 3)
Note 3)
2010
Total comprehensive loss attributable to:
Equity holders of the parent
Minority interests
Basic/Diluted Earnings (Loss) Per Share**
Computed based on Net Income (Loss)
Computed based on Total Comprehensive Loss
(P
= 733,418)
(129,475)
(P
= 862,893)
(P
=10,241,465)
(1,839,914)
(P
=12,081,379)
(P
=582,026)
(108,312)
(P
=690,338)
P
=0.0291
(0.1353)
(P
=1.9981)
(1.8890)
(P
=0.0236)
(0.1074)
* Represent the effect of translating the US Dollar consolidated financial statements of Philippine Airlines, Inc., a subsidiary,
using the applicable year-end exchange rates to US$1 of =
P 45.291, =
P 48.422 and =
P 41.756 as of March 31, 2010, 2009
and 2008, respectively, and the monthly average exchange rates for the years then ended. As of July 7, 2010, the
applicable exchange rate to US$1 is =
P 46.555.
**Computed using the weighted average number of issued and outstanding shares of stock of 5,421,512,096 in 2010, 2009
and 2008 (see Note 17).
See accompanying Notes to Consolidated Financial Statements.
47
PAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED MARCH 31, 2010, 2009 AND 2008
(Amounts in Thousands)
Capital
Stock
(Notes 2
and 17)
BALANCES AT MARCH 31, 2007,
AS PREVIOUSLY REPORTED
Effect of change in accounting policy,
net of tax (Note 3)
BALANCES AT MARCH 31, 2007,
AS RESTATED
Net loss for the year, as previously reported
Effect of change in accounting policy,
net of tax (Note 3)
Net loss for the year, as restated
Other comprehensive income (loss),
as previously reported
Effect of change in accounting policy,
net of tax (Note 3)
Other comprehensive income (loss), as restated
Total comprehensive income (loss) for the year,
as restated (Notes 3 and 19)
Conversion of advances from parent company
to equity
Additional paid-in capital applied against deficit
Net effect of transfer of portion of revaluation
increment in property realized through
depreciation, net of deferred income tax,
foreign exchange adjustment and other changes
BALANCES AT MARCH 31, 2008,
AS RESTATED
Additional
Paid-in
Capital
(Notes 2
and 17)
Cumulative
Translation
Adjustment
(Notes 19
and 28)
Other Components of Equity
Net Changes
in Fair Values
of Availablefor-sale
Investments, Revaluation
Net of
Increment
Deferred
in Property
Income Tax
(Notes 10
(Note 6)
and 11)
Subtotal
Deficit
(Notes 17
and 19)
Treasury
Stock
(Note 17)
(P
= 8,559,400)
(P
=56)
P
= 5,421,568
P
= 4,029,287
(P
=3,331,586)
P
= 197,687
P
=1,270,393
(P
=1,863,506)
–
–
(7,698)
–
–
(7,698)
5,421,568
–
4,029,287
–
(3,339,284)
–
197,687
–
1,270,393
–
(1,871,204)
–
(8,387,913)
(6,100)
–
–
–
–
–
–
–
–
–
–
–
–
(121,778)
(127,878)
–
–
(734,781)
72,552
223,294
(438,935)
–
–
–
–
(15,213)
(749,994)
–
72,552
–
223,294
(15,213)
(454,148)
–
–
(749,994)
72,552
223,294
(454,148)
–
–
–
–
–
–
–
–
–
= 17,517,283
P
= 5,421,568 P
(P
=4,089,278)
P
= 270,239
–
–
–
13,741,725
(253,729)
(69,420)
P
=1,424,267
–
–
(69,420)
(P
=2,394,772)
171,487
Total Equity
Attributable
to Equity
Holders of
the Parent
(P
= 972,107)
Minority
Interests
Total
P
= 2,367,025
P
= 1,394,918
29,658
193,447
–
163,789
(56)
–
(808,318)
(6,100)
–
–
(121,778)
(127,878)
(22,051)
(20,502)
(143,829)
(148,380)
–
–
(438,935)
(85,056)
(523,991)
–
–
–
(15,213)
(454,148)
(2,754)
(87,810)
(17,967)
(541,958)
(127,878)
–
(582,026)
(108,312)
(690,338)
–
253,729
–
–
13,741,725
–
–
–
13,741,725
–
69,420
–
–
–
–
P
=12,351,381
P
= 2,288,371
P
= 14,639,752
(P
= 8,192,642)
(P
=56)
2,396,683
1,549
1,588,365
(4,551)
(Forward)
48
-2-
Additional
Paid-in
Capital
(Notes 2
and 17)
Cumulative
Translation
Adjustment
(Notes 19
and 28)
P
= 5,421,568 P
= 17,517,283
(P
= 4,066,367)
P
= 270,239
Capital
Stock
(Notes 2
and 17)
BALANCES AT MARCH 31, 2008,
AS PREVIOUSLY REPORTED
Effect of change in accounting policy,
net of tax (Note 3)
BALANCES AT MARCH 31, 2008,
AS RESTATED
Net loss for the year, as previously reported
Effect of change in accounting policy,
net of tax (Note 3)
Net loss for the year, as restated
Other comprehensive income (loss),
as previously reported
Effect of change in accounting policy,
net of tax (Note 3)
Other comprehensive income (loss), as restated
Total comprehensive income (loss) for the year,
as restated (Notes 3 and 19)
Net effect of transfer of portion of revaluation
increment in property realized through
depreciation, net of deferred income tax,
foreign exchange adjustment and
other changes
BALANCES AT MARCH 31, 2009,
AS RESTATED
Other Components of Equity
Net Changes
in Fair Values
of Availablefor-sale
Investments, Revaluation
Net of
Increment
Deferred
in Property
Income Tax
(Notes 10
(Note 6)
and 11)
Subtotal
Deficit
(Notes 17
and 19)
Treasury
Stock
(Note 17)
Total Equity
Attributable
to Equity
Holders of
the Parent
=
P1,424,267
(P
=2,371,861)
(P
= 8,242,351)
(P
= 56)
P
=12,324,583
P
= 2,283,518
P
= 14,608,101
–
26,798
4,853
31,651
–
–
(22,911)
–
–
(22,911)
5,421,568
–
17,517,283
–
(4,089,278)
–
270,239
–
1,424,267
–
(2,394,772)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
567,938
(145,096)
157,297
–
–
–
–
11,029
578,967
–
(145,096)
–
–
578,967
(145,096)
–
–
–
–
P
= 5,421,568 P
= 17,517,283
(P
= 3,510,311)
P
= 125,143
49,709
Minority
Interests
Total
(8,192,642)
(12,958,801)
(56)
–
12,351,381
(12,958,801)
2,288,371
–
14,639,752
(12,958,801)
140,269
(12,818,532)
–
–
140,269
(12,818,532)
25,399
25,399
165,668
(12,793,133)
580,139
1,985,899
–
2,566,038
(1,867,310)
698,728
–
157,297
11,029
591,168
–
1,985,899
–
11,029
2,577,067
1,997
(1,865,313)
13,026
711,754
157,297
591,168
(10,832,633)
–
(10,241,465)
(1,839,914)
(84,262)
(84,262)
=
P1,497,302
84,262
(P
=1,887,866) (P
= 18,941,013)
–
(P
=56)
(12,081,379)
–
–
–
P
=2,109,916
P
= 448,457
P
= 2,558,373
(Forward)
49
-3-
Additional
Paid-in
Capital
(Notes 2
and 17)
Cumulative
Translation
Adjustment
(Notes 19
and 28)
= 17,517,283
P
= 5,421,568 P
(P
= 3,498,429)
P
= 125,143
=
P1,497,302
–
–
(11,882)
Capital
Stock
(Notes 2
and 17)
BALANCES AT MARCH 31, 2009,
AS PREVIOUSLY REPORTED
Effect of change in accounting policy,
net of tax (Note 3)
BALANCES AT MARCH 31, 2009,
AS RESTATED
Adjustment in capital stock issued
Net income for the year
Other comprehensive income (loss)
Total comprehensive income (loss) for the year
(Notes 3 and 19)
Net effect of transfer of portion of revaluation
increment in property realized through
depreciation, net of deferred income tax,
foreign exchange adjustment and
other changes
BALANCES AT MARCH 31, 2010
Other Components of Equity
Net Changes
in Fair Values
of Availablefor-sale
Investments, Revaluation
Net of
Increment
Deferred
in Property
Income Tax
(Notes 10
(Note 6)
and 11)
Deficit
(Notes 17
and 19)
Treasury
Stock
(Note 17)
Total Equity
Attributable
to Equity
Holders of
the Parent
(P
=1,875,984) (P
= 19,130,991)
(P
=56)
P
=1,931,820
P
= 416,208
P
=2,348,028
–
178,096
32,249
210,345
(56)
–
–
–
2,109,916
–
157,743
(891,161)
448,457
52
29,498
(158,973)
2,558,373
52
187,241
(1,050,134)
–
(733,418)
(129,475)
(862,893)
Subtotal
–
–
(11,882)
5,421,568
–
–
–
17,517,283
–
–
–
(3,510,311)
–
–
(832,458)
125,143
–
–
(58,703)
1,497,302
–
–
–
(1,887,866)
–
–
(891,161)
–
–
(832,458)
(58,703)
–
(891,161)
157,743
–
–
–
–
(188,143)
188,143
P
= 5,421,568 P
= 17,517,283
(P
= 4,342,769)
P
= 66,440
(188,143)
=
P1,309,159
189,978
(18,941,013)
–
157,743
–
(P
=2,967,170) (P
= 18,595,127)
–
(P
=56)
Minority
Interests
Total
–
–
–
P
=1,376,498
P
= 319,034
P
=1,695,532
See accompanying Notes to Consolidated Financial Statements.
50
PAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Years Ended March 31
2009
2008
(As restated, (As restated,
2010
Note 3)
Note 3)
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) before income tax
Adjustments for:
Depreciation and amortization (Notes 10, 11, 18
and 20)
Realization of non-hedge derivatives (Note 28)
Financing charges (Note 20)
Foreign exchange loss (gain) - net
Interest income
Dividend income
Loss (gain) on disposal of available-for-sale investments
and settlement of liability (Note 15)
Loss (gain) on disposal of property and equipment,
and others
Net increase (decrease) in accrued employee
benefits (Note 21)
Increase (decrease) in other noncurrent liabilities
(Note 16)
Operating income before working capital changes
Decrease (increase) in:
Receivables
Expendable parts, fuel, materials and supplies
Other current assets
Increase (decrease) in:
Accounts payable
Accrued expenses
Unearned transportation revenue
Due to related parties
Net cash settlement on derivative transactions
Net cash generated from operations
Financing charges paid
Interest received
Income taxes paid (including final and withholding taxes)
Net cash flows from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (Notes 10 and 24)
Investments in:
Short-term investments
Available-for-sale investments
Proceeds from disposal of:
Short-term investments
Available-for-sale investments (Note 6)
Property and equipment
Dividend received
(P
=12,249,769)
(P
=1,507,772)
7,390,024
(1,935,664)
2,569,540
226,228
(240,499)
(303,232)
6,218,287
4,532,003
3,746,429
(1,092,910)
(461,819)
(163,776)
5,619,022
1,836,642
3,862,407
836,036
(839,662)
(206,075)
(1,650,868)
(15,939)
15,428
(32,298)
(225,369)
P
=398,522
757,788
220,841
1,497,270
(621,547)
759,576
8,192,256
231,885
2,209,363
(382,492)
8,386,618
(1,954,915)
(295,691)
3,489,289
8,578
546,645
6,568,620
(496,139)
(200,162)
(722,808)
1,253,548
843,547
928,341
–
(2,927,711)
9,528,664
(1,879,689)
29,760
(102,460)
7,576,275
(2,051,993)
2,676,609
(818,924)
–
(2,140,423)
6,998,475
(2,347,820)
243,295
(278,847)
4,615,103
(295,556)
(681,884)
(287,562)
(9,687)
497,309
6,190,129
(2,610,492)
698,846
(270,872)
4,007,611
(2,627,688)
(9,685,763)
(4,049,834)
–
(326)
(374,205)
(121)
–
(226,596)
–
113,713
61,386
163,776
–
749,459
516,333
206,075
374,205
295,141
39,451
303,232
(Forward)
51
-2-
Payments for deposits (Note 9)
Return of various deposits (Note 9)
Proceeds from cancellation of predelivery
payments (Note 10)
Net cash flows used in investing activities
Years Ended March 31
2009
2008
(As restated,
(As restated,
Note 3)
Note 3)
2010
=20,103,873)
(P
=309,492) (P
(P
=918,929)
1,059,118
8,342,324
1,366,657
940,082
(20,542,681)
–
(2,356,835)
668,573
–
3,245,322
13,461,218
8,605,201
–
3,004,790
–
–
(1,057,753)
(11,419,440)
(829,229)
(9,392,527)
(8,049,410)
(6,827,281)
–
7,189,728
(780,000)
(9,937,614)
–
(7,712,824)
(208,857)
272,683
(2,439,967)
(8,946,707)
(5,789,365)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR
5,836,988
14,783,695
20,573,060
CASH AND CASH EQUIVALENTS
AT END OF YEAR (Note 5)
P
=3,397,021
=
P5,836,988
=
P14,783,695
CASH FLOWS FROM FINANCING ACTIVITIES
Availments of:
Notes payable (Note 13)
Long-term obligations (Notes 15 and 24)
Advances from affiliates (Notes 15 and 18)
Payments of:
Notes payable (Note 13)
Long-term obligations (Notes 15 and 24)
Advances from affiliates (Notes 15 and 18)
Net cash flows from (used in) financing activities
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS
NET DECREASE IN CASH AND CASH
EQUIVALENTS
–
(866,359)
242,644
See accompanying Notes to Consolidated Financial Statements.
52
PAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information
PAL Holdings, Inc. (the Parent Company) was incorporated in the Philippines on May 10, 1930
under the name “Baguio Gold Mining Company” originally to engage in mining and other mineral
exploration activities. On September 23, 1996, the Parent Company changed its primary purpose
to that of engaging in the business of a holding company and changed its corporate name to
Baguio Gold Holdings Corporation.
The Parent Company’s Board of Directors (BOD) and its stockholders approved the change of the
Parent Company’s name to PAL Holdings, Inc. in separate meetings held on October 20 and
December 13, 2000, respectively. The change of the Parent Company’s name was approved by
the Philippine Securities and Exchange Commission (SEC) on January 19, 2007.
The Parent Company is a subsidiary of Trustmark Holdings Corporation (Trustmark), a domestic
corporation, and is part of the Lucio Tan Group of Companies (LT Group).
The Parent Company’s registered office address is 7th Floor, Allied Bank Center, 6754 Ayala
Avenue, Makati City.
The Parent Company and its subsidiaries (collectively referred to herein as “the Group”), through
Philippine Airlines, Inc. (PAL), the Philippine national flag carrier and the major subsidiary of the
Parent Company, is primarily engaged in air transport of passengers and cargo within the
Philippines and between the Philippines and several international destinations. These business
activities are further described in Note 29 to the consolidated financial statements.
The consolidated financial statements as of March 31, 2010, 2009 and 2008 and for each of the
three years in the period ended March 31, 2010 were authorized for issue by the BOD on
July 7, 2010.
2. Status of Operations and Reorganizations
a. Increase in capital stock of the Parent Company
On July 26 and September 19, 2006, at separate meetings, the Parent Company’s BOD, by a
vote of at least a majority of its entire membership, and the stockholders of at least two thirds
(2/3) of the outstanding shares of stock, approved the increase in authorized capital stock of
the Parent Company from =
P400.00 million divided into 400 million shares with par value of
=1.00 per share to P
P
=20.00 billion divided into 20 billion shares with par value of P
=1.00 per
share. Out of the increase in the authorized capital stock, 5.02 billion shares with a total par
value of P
=5.02 billion have been subscribed and in payment thereof, the Parent Company
agreed to convert to equity a part of its debt to Trustmark, in the amount of P
=9.04 billion, at a
rate of P
=1.80 per share. Accordingly, as a result of the conversion, Trustmark’s ownership
over the Parent Company increased from 69.16% to 97.73%.
The increase in authorized capital stock was approved by the Philippine SEC on
January 19, 2007.
53
As a result of the above transactions, the Parent Company had a P
=4.03 billion additional paidin capital as of March 31, 2007. On October 17, 2007, the Philippine SEC approved the
Parent Company’s request to undergo equity restructuring to wipe out the deficit of the Parent
Company as of March 31, 2007 amounting to P
=253.73 million against the additional paid-in
capital (see Note 17).
b. Group reorganizations
Transactions in Fiscal Year 2007
In fiscal year 2007, the Parent Company undertook the following business restructuring
activities that were accounted for under the pooling of interests method:
On August 17, 2006, the BOD of the Parent Company approved the acquisition of 100% of the
total voting shares of its then subsidiaries, Cube Factor Holdings, Inc., Ascot Holdings,
Incorporated, POL Holdings, Inc., Sierra Holdings & Equities, Inc., Network Holdings &
Equities, Inc. and Maxell Holdings Corp. (collectively, the Holding Companies) for
=136.00 million from the individual stockholders representing interests of LT Group of
P
Companies (Nominees of the LT Group). The Holding Companies collectively owned 81.57%
of PAL. These Holding Companies also owned 82.33% of PR Holdings, Inc. (PR), 3.76%
owner of PAL.
Also on August 17, 2006, the Parent Company’s BOD approved the Parent Company’s
assumption of a portion of the liabilities of the Holding Companies to Trustmark aggregating
to about P
=9.04 billion. The BOD of Trustmark accepted the said assumption by the Parent
Company on August 18, 2006.
On October 2, 2006, the Nominees of the LT Group assigned their interests in the Holding
Companies to the Parent Company. Following the assignment, the Parent Company
effectively owned 84.67% of PAL through the Holding Companies and PR.
Transactions in Fiscal Year 2008
In fiscal year 2008, the Company’s management, realizing that the 2007 restructuring may not
have resulted in a corporate structure that is in line with their strategy, executed the following
additional series of corporate restructuring actions:
On June 27, 2007, the BOD of the Parent Company approved the assumption by the Parent
Company of the outstanding liability of the Holding Companies to Trustmark, amounting to
=14.08 billion as of June 27, 2007. Trustmark agreed to convert such receivable from the
P
Parent Company (after the assumption) into additional paid-in capital of the Parent Company.
On July 19, 2007, the Parent Company’s BOD approved the Parent Company’s acquisition of
the 81.57% aggregate ownership of the Holding Companies in PAL, and their 82.33%
ownership in PR. This gave the Parent Company the same effective ownership of 84.67% in
PAL that existed as of March 31, 2007.
As approved by the BOD, the acquisition will be made by way of a dacion en pago to pay-off
=12.12 billion out of the =
P
P23.12 billion liabilities of the Holding Companies to the Parent
Company (after the assumption by the Parent Company of the P
=14.08 billion receivable of
Trustmark from the Holding Companies). The remaining receivable of the Parent Company
from the Holding Companies after the dacion en pago, amounting to P
=11.00 billion, will be
54
converted into additional paid-in capital in the Holding Companies. The additional paid-in
capital resulting from the conversion into equity of the Parent Company’s obligation to
Trustmark will be used to wipe out the Parent Company’s deficit.
On August 2, 2007, the BOD of the Parent Company resolved to amend the June 27, 2007
resolution so that the Parent Company only assumes P
=3.08 billion (instead of P
=14.08 billion)
out of the P
=23.12 billion liabilities of the Holding Companies, as originally planned on
June 27, 2007. The remaining liabilities of the Holding Companies amounting to
P
=11.00 billion are thus retained with the Holding Companies as a result of the amendment.
Pursuant to the approval of the BOD on July 19, 2007 to acquire direct ownership in PAL and
PR, the Parent Company and the Holding Companies entered into various deeds of assignment
on August 13, 2007 for the Holding Companies to assign to the Parent Company their
respective ownerships in PAL and PR. As a result thereof, the Holding Companies assigned to
the Parent Company their respective investments in PAL and PR aggregating to
P
=12.44 billion and P
=108.66 million, respectively, in exchange for the full payment of the
Holding Companies’ liabilities to the Parent Company totaling to P
=12.12 billion, including the
P
=9.04 billion receivables of the Parent Company from the Holding Companies, as of
March 31, 2007. This resulted in the recognition of a liability to Maxell Holding Corp.
(Maxell), one of the Holding Companies, amounting to P
=431.60 million as of March 31, 2008.
On August 2, 2007, the BOD approved, upon concurrence of Trustmark, that the Parent
Company shall sell/assign its shares in the Holding Companies to Trustmark. In payment
thereof, Trustmark agreed to assume the obligations of the Parent Company to the previous
stockholders of the Holding Companies aggregating to P
=136.00 million.
On August 14, 2007, the Parent Company and Trustmark executed a memorandum of
agreement and entered into a deed of assignment effecting the assignment of shares to and
assumption of liabilities by Trustmark.
As a result of the restructuring in fiscal year 2008, the Parent Company still owns 84.67% of
PAL, through direct ownership of 81.57% and an indirect ownership of 3.10% through PR.
The Company owns 82.33% of PR, which in turn owns 3.77% of PAL shares.
The release of the investments in the Holding Companies to Trustmark was accounted for as a
disposal of “legal rights” to the Holding Companies as said investee companies did not have
assets that were derecognized in the process other than the investment in shares of stock of
PAL that has no carrying value at consolidated level. The disposal though relieved the Group
with the liabilities that were settled as they were assumed by Trustmark, the ultimate parent
company. Accordingly, the transaction was accounted for as an equity transaction where the
reduction in consolidated liabilities was treated as an additional equity investment (or
additional paid-in capital of the Parent Company) by Trustmark.
c. Status of PAL’s rehabilitation and operations
On June 7, 1999, the Philippine SEC confirmed its approval of PAL’s Amended and Restated
Rehabilitation Plan (Rehabilitation Plan) dated March 15, 1999. The Philippine SEC also
appointed a Permanent Rehabilitation Receiver (PRR) to, among other things, monitor and
supervise the strict and faithful implementation of the Rehabilitation Plan. With the approval
of the Rehabilitation Plan, the exercise of creditors’ and third parties’ rights under various
agreements became subject to Philippine SEC jurisdiction. As part of the Rehabilitation Plan,
various liabilities were restructured (reflected as part of “Long-term obligations” in the
consolidated statements of financial position, see Note 15).
55
On May 28, 2007, the BOD of PAL authorized management to initiate action, obtain required
approvals and file necessary applications and other documents for the proposed exit from
rehabilitation and quasi-reorganization of PAL.
On September 7, 2007, the Philippine SEC approved PAL’s request to undergo an equity
restructuring to wipe out its deficit as of March 31, 2007 (see Note 17).
On September 14, 2007, the members of the PRR endorsed to the Philippine SEC PAL’s
application for exit from rehabilitation. Finding the recommendations of the PRR and The
Office of the General Accountant of the Philippine SEC meritorious, the Philippine SEC
approved the termination of the rehabilitation proceedings with the successful implementation
of PAL’s rehabilitation plan. Accordingly, on September 28, 2007, PAL went out of
rehabilitation.
Subsequent to PAL’s exit from rehabilitation, PAL incurred consolidated total comprehensive
loss of P
=739.50 million and P
=13.93 billion in 2010 and 2009, respectively, and generated
consolidated total comprehensive income of P
=1.43 billion in 2008. Moreover, PAL reported
retained earnings (deficit) of (P
=9.05 billion), (P
=9.46 billion) and P
=3.22 billion, and total current
liabilities exceeding total current assets by P
=24.86 billion, P
=19.68 billion and P
=4.34 billion as
of March 31, 2010, 2009 and 2008, respectively. To improve its financial condition and
results of operations, PAL has lined up various revenue enhancement programs, cash
generation strategies and cost control initiatives. Part of these initiatives is the spinoff/outsourcing of the non-core activities such as catering, airport services and reservation
services. On June 15, 2010, PAL received a favorable decision from the Department of Labor
and Employment confirming the legality of the spin-off/outsourcing program.
The consolidated financial statements do not include any adjustments relating to the
recoverability and classification of the assets’ carrying amount or the amount and classification
of liabilities that might result from the uncertainties surrounding the matters discussed above.
3. Summary of Significant Accounting and Financial Reporting Policies
Basis of Preparation
The consolidated financial statements have been prepared using the historical cost convention,
except for land and buildings and improvements which are carried at revalued amounts and
available-for-sale investments and derivative financial instruments which are carried at fair value.
The consolidated financial statements are presented in Philippine peso, the Parent Company’s
functional and presentation currency, and rounded to the nearest thousand, except when otherwise
indicated.
Statement of Compliance
The consolidated financial statements have been prepared in compliance with Philippine Financial
Reporting Standards (PFRS).
Changes in Accounting Policies
The accounting policies adopted are consistent with those of the previous financial years except
for the adoption of the following new and revised standards, amendments to existing standards and
new and amendments to Philippine Interpretations which became effective January 1, 2009.
56
•
PFRS 8, Operating Segments, adopts a full management approach to reporting segment
information. PFRS 8 replaces Philippine Accounting Standard (PAS) 14, Segment Reporting,
and is required to be adopted only by entities whose debt or equity instruments are publicly
traded, or are in the process of filing its financial statements with a securities commission or
similar party. The adoption of this standard resulted to additional disclosures as presented in
Note 29.
•
Amendments to PFRS 7, Financial Instruments: Disclosures - Improving Disclosures about
Financial Instruments, require additional disclosures about fair value measurement and
liquidity risk. Fair value measurements related to items recorded at fair value are to be
disclosed by source of inputs using a three level fair value hierarchy, by class, for all financial
instruments recognized at fair value. In addition, reconciliation between the beginning and
ending balance for Level 3 fair value measurements along with reasons for the transfer is now
required, as well as significant transfers between levels in the fair value hierarchy.
The amendments also clarify the requirements for liquidity risk disclosures with respect to
derivative transactions and financial assets used for liquidity management. These additional
disclosures are presented in Notes 27 and 28.
•
Philippine Interpretation IFRIC 13, Customer Loyalty Programmes, requires customer loyalty
award credits to be accounted for as a separate component of the sales transaction in which
they are granted and therefore part of the fair value of the consideration received is allocated to
the award credits and deferred over the period that the award credits are redeemed.
Prior to the adoption of Philippine Interpretation IFRIC 13, the Group recognizes liability
under the frequent flyer program using the incremental cost of providing awards in exchange
for redemption of miles earned by members. The liability, which is charged to operating cost,
is based on the estimated incremental costs (e.g. food and insurance).
As Philippine Interpretation IFRIC 13 has no specific provisions on transition, the Group
followed PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, applying
the changes retrospectively. The prior years’ financial information (including the opening
statement of financial position as of March 31, 2008) has been restated to reflect the adoption.
The impact of the adoption of IFRIC 13 on the major line items of the consolidated financial
statements is presented below:
March 31, 2009
Total current assets
Total noncurrent assets
Total current liabilities
Total noncurrent liabilities
Deficit
Revenue
Expenses
Provision for (benefit from)
income tax
Net loss
Total comprehensive loss
(As previously
reported)
=20,734,096
P
74,859,750
40,886,818
52,359,000
(19,130,991)
75,310,991
87,796,518
473,274
(12,958,801)
(12,260,073)
Adjustments
=
P–
(90,162)
–
(300,507)
189,978
(1,517,116)
(1,752,874)
70,090
165,668
178,694
March 31, 2008
(As previously
(As restated)
reported)
=
P20,734,096
=
P27,332,864
74,769,588
57,669,130
40,886,818
32,140,303
52,058,493
38,253,590
(18,941,013)
(8,242,351)
73,793,875
66,317,813
86,043,644
67,678,031
543,364
(12,793,133)
(12,081,379)
(1,355,667)
(4,551)
(528,542)
Adjustments
=
P–
(14,406)
–
(46,057)
49,709
(1,160,231)
(1,012,677)
(As restated)
=
P27,332,864
57,654,724
32,140,303
38,207,533
(8,192,642)
65,157,582
66,665,354
(3,725)
(143,829)
(161,796)
(1,359,392)
(148,380)
(690,338)
57
The following changes in PFRS are either not applicable or did not have a material impact on the
Group’s consolidated financial statements:
•
•
•
•
•
•
•
Amendments to PFRS 1, First-time Adoption of Philippine Financial Reporting Standards and
PAS 27, Consolidated and Separate Financial Statements - Cost of an Investment in a
Subsidiary, Jointly Controlled Entity or Associate
Amendment to PFRS 2, Share-based Payment - Vesting Condition and Cancellations
Revised PAS 23, Borrowing Costs, requires capitalization of borrowing costs when such costs
relate to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale. The adoption of this standard did not
have an impact on the Group’s consolidated financial statements because it is already the
Group’s policy to capitalize borrowing costs related to a qualifying asset.
Amendments to PAS 32, Financial Instruments: Presentation and PAS 1, Presentation of
Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation
Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation
Philippine Interpretation IFRIC 18, Transfers of Assets from Customers
Amendments to Philippine Interpretation IFRIC 19, Reassessment of Embedded Derivatives,
and PAS 39, Financial Instruments: Recognition and Measurement - Embedded Derivatives
Improvements to PFRSs 2008
The omnibus amendments to PFRSs released in 2008 were issued primarily to remove
inconsistencies and clarify wordings. There are separate transitional provisions for each standard.
The adoption of these amendments did not impact the financial position or performance of the
Group.
Future Changes in Accounting Policies
Following are the new and amended accounting standards and interpretations that will become
effective subsequent to March 31, 2010 and have not been early adopted by the Group.
Effective in fiscal year 2011
•
Revised PFRS 3, Business Combinations and PAS 27, Consolidated and Separate Financial
Statements, introduces a number of changes in the accounting for business combinations that
will impact the amount of goodwill recognized, the reported results in the period that an
acquisition occurs, and future reported results. The revised PAS 27 requires, among others,
that (a) change in ownership interests of a subsidiary (that do not result in loss of control) will
be accounted for as an equity transaction and will have no impact on goodwill nor will it give
rise to a gain or loss; (b) losses incurred by the subsidiary will be allocated between the
controlling and non-controlling interests (previously referred to as “minority interests”); even
if the losses exceed the non-controlling equity investment in the subsidiary; and (c) on loss of
control of a subsidiary, any retained interest will be remeasured to fair value and this will
impact the gain or loss recognized on disposal. The changes introduced by the revised
PFRS 3 must be applied prospectively, while the revised PAS 27 must be applied
retrospectively, with certain exceptions. These changes will affect future acquisitions and
transactions with non-controlling interests.
•
Amendments to PFRS 2, Share-based Payment - Group Cash-settled Share-based Payment
Transactions, clarifies the scope and the accounting for group cash-settled share-based
payment transactions.
58
•
Amendment to PAS 39, Financial Instruments: Recognition and Measurement - Eligible
Hedged Items, addresses only the designation of a one-sided risk in a hedged item, and the
designation of inflation as a hedged risk or portion in particular situations. The amendment
clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow
variability of a financial instrument as a hedged item.
•
Philippine Interpretation IFRIC 17, Distributions of Non-cash Assets to Owners, covers
accounting for all non-reciprocal distribution of non-cash assets to owners. It provides
guidance on when to recognize a liability, how to measure it and the associated assets, and
when to derecognize the asset and liability and the consequences of doing so. This
interpretation does not apply to a distribution of a non-cash asset that is ultimately controlled
by the same party or parties before and after the distribution.
Improvements to PFRSs 2009
The omnibus amendments to PFRSs released in 2009 were issued primarily to remove
inconsistencies and clarify wordings. The amendments are effective for annual periods beginning
January 1, 2010, except otherwise stated. There are separate transitional provisions for each
standard.
•
PFRS 2, Share-based Payment, clarifies that the contribution of a business on formation of a
joint venture and combinations under common control are not within the scope of PFRS 2
even though they are out of scope of PFRS 3, Business Combinations (Revised).
•
PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations, clarifies that the
disclosures required in respect of non-current assets and disposal groups classified as held for
sale or discontinued operations are only those set out in PFRS 5. The disclosure requirements
of other PFRSs only apply if specifically required for such non-current assets or discontinued
operations.
•
PFRS 8, Operating Segments, clarifies that segment assets and liabilities need only be
reported when those assets and liabilities are included in measures that are used by the chief
operating decision maker.
•
PAS 1, Presentation of Financial Statements, clarifies that the terms of a liability that could
result at anytime in its settlement by the issuance of equity instruments at the option of the
counterparty do not affect its classification.
•
PAS 7, Statement of Cash Flows, explicitly states that only expenditure that results in a
recognized asset can be classified as a cash flow from investing activities.
•
PAS 17, Leases, removes the specific guidance on the classification of leases of land. Prior to
the amendment, leases of land were classified as operating leases. The amendment now
requires that leases of land are classified as either “finance” or “operating” in accordance with
the general principles of PAS 17. The amendments will be applied retrospectively.
•
PAS 36, Impairment of Assets, clarifies that the largest unit permitted for allocating goodwill,
acquired in a business combination, is the operating segment as defined in PFRS 8 before
aggregation for reporting purposes.
59
•
PAS 38, Intangible Assets, clarifies that if an intangible asset acquired in a business
combination is identifiable only with another intangible asset, the acquirer may recognize the
group of intangible assets as a single asset provided the individual assets have similar useful
lives. Also clarifies that the valuation techniques presented for determining the fair value of
intangible assets acquired in a business combination that are not traded in active markets are
only examples and are not restrictive on the methods that can be used.
•
PAS 39, Financial Instruments: Recognition and Measurement, clarifies the following:
(a) that a prepayment option is considered closely related to the host contract when the
exercise price of a prepayment option reimburses the lender up to the approximate present
value of lost interest for the remaining term of the host contract; (b) that the scope exemption
for contracts between an acquirer and a vendor in a business combination to buy or sell an
acquiree at a future date applies only to binding forward contracts, and not derivative contracts
where further actions by either party are still to be taken; and (c) that gains or losses on cash
flow hedges of a forecast transaction that subsequently results in the recognition of a financial
instrument or on cash flow hedges of recognized financial instruments should be reclassified
in the period that the hedged forecast cash flows affect profit or loss.
•
Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives, clarifies that it
does not apply to possible reassessment at the date of acquisition, to embedded derivatives in
contracts acquired in a business combination between entities or businesses under common
control or the formation of joint venture.
•
Philippine Interpretation IFRIC 16, Hedge of a Net Investment in a Foreign Operation, states
that, in a hedge of a net investment in a foreign operation, qualifying hedging instruments may
be held by any entity or entities within the group, including the foreign operation itself, as
long as the designation, documentation and effectiveness requirements of PAS 39 that relate to
a net investment hedge are satisfied.
•
PAS 32, Classification of Rights Issues, addresses the accounting for rights issues (rights,
options or warrants) that are denominated in a currency other than the functional currency of
the issuer. Previously such rights issues were accounted for as derivative liabilities. However,
this amendment requires that, provided certain conditions are met, such rights issues are
classified as equity regardless of the currency in which the exercise price is denominated. The
amendment is effective for annual periods beginning on or after February 1, 2010, with earlier
application is permitted.
•
PFRS 1: Additional Exemptions for First-Time Adopters, addresses the retrospective
application of PFRS to particular situations and are aimed at ensuring that entities applying
PFRS will not face undue cost or effort in the transition process. Additional exemption
includes (i) entities using the full cost method from retrospective application of PFRS for oil
and gas assets and (ii) entities with existing leasing contracts from reassessing the
classification of those contracts in accordance with Philippine Interpretation IFRIC 4,
Determining whether an Arrangement contains a Lease, when the application of their national
accounting requirements produced the same result
Effective in fiscal year 2012
•
PAS 24, Related Party Disclosures (Revised), provides a partial exemption for governmentrelated entities, simplifies the definition of a related party and removes inconsistencies.
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•
Philippine Interpretation IFRIC 19: Extinguishing Financial Liabilities with Equity
Instruments, provides guidance on how to account for the extinguishment of a financial
liability by the issue of equity instruments. These transactions are often referred to as debt for
equity swaps. The interpretation clarifies the requirements of PFRS when an entity
renegotiates the terms of a financial liability with its creditor and the creditor agrees to accept
the entity’s shares or other equity instruments to settle the financial liability fully or partially.
•
Amendment to Philippine Interpretation IFRIC 14: Prepayments of a Minimum Funding
Requirement. IFRIC 14, which is itself an interpretation of PAS 19, The Limit on a Defined
Benefit Asset, Minimum Funding Requirements and their Interaction, applies in the limited
circumstances when an entity is subject to minimum funding requirements and makes an early
payment of contributions to cover those requirements. The amendment permits such an entity
to treat the benefit of such an early payment as an asset.
•
Amendment to PFRS 1: Limited Exemption from Comparative PFRS 7 Disclosures for Firsttime Adopters, relieves first-time adopters of PFRSs from providing the additional disclosures
introduced in Amendments to PFRS 7: Improving Disclosures about Financial Instruments. It
thereby ensures that first-time adopters benefit from the same transition provisions that
Amendments to PFRS 7 provides to current PFRS preparers.
Effective in fiscal year 2013
•
Philippine Interpretation IFRIC 15, Agreement for Construction of Real Estate, covers
accounting for revenue and associated expenses by entities that undertake the construction of
real estate directly or through subcontractors. This interpretation requires that revenue on
construction of real estate be recognized only upon completion, except when such contract
qualifies as construction contract to be accounted for under PAS 11, Construction Contracts,
or involves rendering of services in which case revenue is recognized based on stage of
completion.
The Group is currently assessing the impact of these accounting standards, amendments and
interpretations. The effects and required disclosures of the adoption of the relevant standards,
amendments and interpretations, if any, will be included in the consolidated financial statements
when these are adopted subsequent to fiscal year 2010.
Consolidation
The consolidated financial statements consist of the financial statements of the Parent Company
and its subsidiaries. The financial statements of the subsidiaries are prepared using consistent
accounting policies as those of the Parent Company.
The subsidiaries and the related percentages of ownership (see Note 2) of the Parent Company as
of March 31, 2010 and 2009 are as follows:
PAL
Abacus Distribution
Systems Philippines, Inc. (ADSPI)
Synergy Services Corporation (SSC)
Percentages of Ownership
Direct
Indirect
81.57%
–
–
–
70.23%
54.19%
(Forward)
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Pacific Aircraft Ltd.
Pearl Aircraft Ltd.
Peerless Aircraft Ltd
PR
PAL
Percentages of Ownership
Direct
Indirect
–
84.67%
–
84.67%
–
84.67%
82.33%
–
–
3.10%
Subsidiaries are consolidated from the date on which control is transferred to the Group and cease
to be consolidated from the date on which control is transferred out of the Group. All
intercompany accounts and transactions with subsidiaries are eliminated in full.
The equity and net income attributable to minority interests of the consolidated subsidiaries are
recognized and, where material, are shown separately in the consolidated statement of financial
position and consolidated statement of comprehensive income, respectively.
Minority interest represents the interest in a subsidiary, which is not owned, directly or indirectly
through subsidiaries, by the Parent Company. If losses applicable to the minority interest in a
subsidiary exceed the minority interest’s equity in the subsidiary, the excess, and any further
losses applicable to the minority interest, are charged against the majority interest except to the
extent that the minority has a binding obligation to, and is able to, make good the losses. If the
subsidiary subsequently reports profits, the majority interest is allocated all such profits until the
minority interest’s share of losses previously absorbed by the majority interest has been recovered.
Minority interests represent the interests in PAL and PR not held by the Group.
Cash and Cash Equivalents
Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash with original maturities of three
months or less from dates of acquisition and that are subject to an insignificant risk of change in
value.
Financial and Derivative Instruments
The Group recognizes a financial asset or a financial liability in the consolidated statement of
financial position when it becomes a party to the contractual provisions of the instrument. All
regular way purchases and sales of financial assets are recognized on the trade date, i.e., the date
the Group commits to purchase the assets. Regular way purchases or sales are purchases or sales
of financial assets that require the delivery of assets within the period generally established by
regulation or convention in the market place.
The fair value of financial instruments including derivatives traded in active markets at the
statement of financial position date is based on their quoted market prices or dealer price
quotations (bid price for long positions and ask price for short positions), without any deduction
for transaction costs. When current bid and ask prices are not available, the price of the most
recent transaction is used since it provides evidence of the current fair value as long as there has
not been a significant change in economic circumstances since the time of the transaction.
For all other financial instruments not listed in an active market, the fair value is determined by
using appropriate valuation techniques. Valuation techniques include discounted cash flow
methodologies, comparison to similar instruments for which market observable prices exist, option
pricing models, and other relevant valuation models. In the absence of a reliable basis of
determining fair value, investments in unquoted equity securities are carried at cost, net of
impairment.
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Financial instruments are classified as debt or equity in accordance with the substance of the
contractual arrangement. Interest, dividends, gains, and losses relating to a financial instrument
classified as a debt, are reported as expense or income. Distributions to holders of financial
instruments classified as equity are charged directly to equity.
Financial assets are classified as either financial assets at fair value through profit or loss, loans
and receivables, held-to-maturity investments or available-for-sale investments, as appropriate.
Financial liabilities are classified as either financial liabilities at fair value through profit or loss or
other financial liabilities.
When financial assets and financial liabilities are recognized initially, they are measured at fair
value. In the case of financial assets not classified at fair value through profit or loss and other
liabilities, fair value at initial recognition includes any directly attributable transaction cost. The
Group determines the classification of its financial instruments upon initial recognition and, where
allowed and appropriate, reevaluates this designation at each reporting date.
Financial assets and financial liabilities carried in the Group’s consolidated statement of financial
position include cash and cash equivalents, short-term investments, receivables, available-for-sale
investments, deposits on aircraft leases, short-term and long-term loans, and derivative
instruments such as fuel, interest rate and currency derivative instruments.
“Day 1” difference
Where the transaction price in a non-active market is different to the fair value from other
observable current market transactions in the same instrument or based on a valuation technique
whose variables include only data from observable market, the Group recognizes the difference
between the transaction price and the fair value (a “Day 1” difference) in profit or loss unless it
qualifies for recognition as some other type of asset. In cases where use is made of data which is
not observable, the difference between the transaction price and model value is only recognized in
profit or loss of the consolidated statements of comprehensive income when the inputs become
observable or when the instrument is derecognized. For each transaction, the Group determines
the appropriate method of recognizing the “Day 1” difference amount.
Financial Assets and Financial Liabilities at Fair Value through Profit or Loss
Financial assets and financial liabilities at fair value through profit or loss include financial
instruments held for trading and financial instruments or those designated upon initial recognition
as at fair value through profit or loss.
Financial assets are classified as held for trading if they are acquired for the purpose of selling in
the near term. Derivatives, including separated embedded derivatives, are also classified as held
for trading unless they are designated as effective hedging instruments or a financial guarantee
contract. Gains or losses on investments held for trading are recognized in profit or loss. Interest
earned or incurred and dividend income is recorded when the right to received payment has been
established.
Where a contract contains one or more embedded derivatives, the hybrid contract may be
designated as financial asset at fair value through profit or loss, except where the embedded
derivative does not significantly modify the cash flows or it is clear that separation of the
embedded derivative is prohibited.
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Financial instruments may be designated as at fair value through profit or loss by management on
initial recognition if any of the following criteria are met:
•
•
•
The designation eliminates or significantly reduces the inconsistent treatment that would
otherwise arise from measuring the assets and liabilities or recognizing gains or losses on
them on a different basis;
The assets or liabilities are part of a group of financial assets or financial liabilities, or both
financial assets and financial liabilities, which are managed and their performance is evaluated
on a fair value basis, in accordance with a documented risk management or investment
strategy; or
The financial instrument contains an embedded derivative, unless the embedded derivative
does not significantly modify the cash flows or it is clear, with little or no analysis, that it
would not be separately recorded.
Assets and liabilities classified under this category are carried at fair value in the consolidated
statement of financial position, with any gains or losses being recognized in the consolidated net
income or loss in the consolidated statement of comprehensive income.
The Group accounts for its derivative transactions (including embedded derivatives) under this
category with fair value changes being reported directly to profit or loss, except when the
derivative is treated as an effective accounting hedge, in which case the fair value change is either
reported in profit or loss with the corresponding adjustment from the hedged transaction (fair
value hedge) or deferred in equity (cash flow hedge) under “Cumulative Translation Adjustment”
account.
Loans and Receivables
Loans and receivables are nonderivative financial assets with fixed or determinable payments that
are not quoted in an active market. This category includes short-term investments, trade
receivables arising from operations, deposits for aircraft leases and security and refundable
deposits. Such assets are carried at amortized cost using the effective interest rate method. Gains
and losses are recognized in profit or loss when the loans and receivables are derecognized or
impaired, and through the amortization process. Loans and receivables are included in current
assets if maturity is within 12 months from the statement of financial position date. Otherwise,
these are classified as noncurrent assets.
The Group classified its cash equivalents, short-term investments, accounts receivable, margin
deposits and lease deposits as loans and receivables. Information regarding the Group’s
outstanding receivables is included under Note 7.
Held-to-maturity Investments
Quoted nonderivative financial assets with fixed or determinable payments and fixed maturities
are classified as held-to-maturity when the Group has the positive intention and ability to hold
them to maturity. Investments intended to be held for an undefined period are not included in this
classification. Where the Group sells other than an insignificant amount of held-to-maturity
investments, the entire category would be tainted and reclassified as available-for-sale
investments. Other long-term investments that are intended to be held-to-maturity, such as bonds,
are subsequently measured at amortized cost. This cost is computed as the amount initially
recognized minus principal repayments, plus or minus the cumulative amortization using the
effective interest rate method of any difference between the initially recognized amount and the
maturity amount. This calculation includes fees paid or received between parties to the contract
that are an integral part of the effective interest rate, issuance costs and all other premiums and
64
discounts. For investments carried at amortized cost, gains and losses are recognized in profit or
loss when the investments are derecognized or impaired, and through the amortization process.
Assets under this category are classified as current assets if maturity is within 12 months from the
statement of financial position date. Otherwise, these are classified as noncurrent assets.
The Group has no held-to-maturity investments as of March 31, 2010 and 2009.
Available-for-sale Investments
Available-for-sale investments are nonderivative financial assets that are designated as availablefor-sale or are not classified in any of the three preceding categories. After initial recognition,
available-for-sale investments are measured at fair value with gains or losses being recognized in
the consolidated statement of comprehensive income and as a separate component of equity
(“Cumulative change in fair value of available-for-sale investments”) until the investment is
derecognized or until the investment is determined to be impaired at which time the cumulative
gain or loss previously reported in equity is included in profit or loss of the consolidated statement
of comprehensive income. The effective yield and (where applicable) results of foreign exchange
restatement for available-for-sale investments are reported immediately in profit or loss. These
financial assets are classified as noncurrent assets unless the intention is to dispose such assets
within 12 months from the statement of financial position date.
Available-for-sale investments represent the Group’s investment in United States (US) Treasury
bonds, shares of stock of MacroAsia Corporation (MAC) and other equity instruments as shown in
Note 6.
Other Financial Liabilities
Other financial liabilities pertain to financial liabilities that are not held for trading nor designated
as at fair value through profit or loss upon the inception of the liability. These include liabilities
arising from operations (e.g., payables and accruals) or borrowings (e.g., long-term obligations).
The liabilities are recognized initially at fair value and are subsequently carried at amortized cost,
taking into account the impact of applying the effective interest rate method of amortization (or
accretion) for any related premium, discount and any directly attributable transaction costs.
Included under this category are the Group’s accounts payable and accrued expenses, notes
payable, obligations under finance leases, long-term obligations and due to related parties.
Derivatives and Hedge Accounting
Freestanding derivatives
For the purpose of hedge accounting, hedges are classified primarily either as: (a) a hedge of the
fair value of an asset, liability or a firm commitment (fair value hedge); (b) a hedge of the
exposure to variability in cash flows attributable to an asset or liability or a forecasted transaction
(cash flow hedge); or (c) hedge of a net investment in a foreign operation. The Group did not
designate any of its derivatives as fair value hedges. The Group designated its pay-fixed, receivefloating interest rate swaps and certain fuel derivatives as cash flow hedges.
At the inception of a hedge relationship, the Group formally designates and documents the hedge
relationship to which the Group wishes to apply hedge accounting and the risk management
objective and strategy for undertaking the hedge. The documentation includes identification of the
hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how
the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes
in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are
assessed on an ongoing basis to determine that they actually have been highly effective throughout
the financial reporting periods for which they were designated.
65
In cash flow hedges, changes in the fair value of a hedging instrument that qualifies as a highly
effective cash flow hedge are included in the consolidated statement of changes in equity under
“Cumulative translation adjustment” account, net of related deferred income tax. The ineffective
portion is immediately recognized in the consolidated statement of comprehensive income.
For cash flow hedges with critical terms that match those of the hedged items and where there are
no basis risks (such as the pay-fixed, receive-floating interest rate swaps), the Group expects the
hedges to exactly offset changes in expected cash flows relating to the hedged risk
(e.g., fluctuations in fuel price and benchmark interest rates). This assessment on hedge
effectiveness is performed on a quarterly basis by the Group by comparing the critical terms of the
hedges and the hedged items to ensure that they continue to match and by evaluating the continued
ability of the counterparties to perform their obligations under the derivative contracts.
For cash flow hedges with basis risks (such as crude oil derivatives entered into as proxy hedges
for forecasted jet fuel purchases), the Group assesses the effectiveness of its hedges (both on a
prospective and retrospective basis) by using a regression model to determine the correlation of
the percentage change in prices of underlying commodities used to hedge jet fuel to the percentage
change in prices of jet fuel over a specified period that is consistent with the hedge time horizon or
30 data points whichever is longer.
If the hedged cash flow results in the recognition of an asset or a liability, gains and losses initially
recognized in equity are transferred from equity to profit or loss in the same period or periods
during which the hedged forecasted transaction or recognized asset or liability affect profit or loss
of the consolidated statement of comprehensive income.
When the hedge ceases to be highly effective, hedge accounting is discontinued prospectively. In
this case, the cumulative gain or loss on the hedging instrument that has been reported directly in
equity is retained in equity until the forecasted transaction occurs. When the forecasted
transaction is no longer expected to occur, any net cumulative gain or loss previously reported in
equity is charged against profit or loss of the consolidated statement of comprehensive income.
For derivatives that are not designated as effective accounting hedges, any gains or losses arising
from changes in fair value of derivatives are recognized directly in profit or loss of the
consolidated statement of comprehensive income.
Embedded derivatives
Embedded derivatives are accounted for at fair value through profit or loss when the entire hybrid
contracts (composed of the host contract and the embedded derivative) are not accounted for at
fair value through profit or loss, the economic risks of the embedded derivatives are not closely
related to those of their respective host contracts, and a separate instrument with the same terms as
the embedded derivative would meet the definition of a derivative.
Embedded derivatives that are bifurcated from the host contracts are accounted for as financial
assets at fair value through profit or loss. Changes in fair values are included in profit or loss of
consolidated statement of comprehensive income. Derivatives are carried as assets when the fair
value is positive and as liabilities when the fair value is negative.
The Group assesses whether an embedded derivative is required to be separated from the host
contract and accounted for as a derivative when the entity first becomes a party to the contract.
Subsequent reassessment is prohibited unless there is a change in the terms of the contract that
significantly modifies the cash flows that otherwise would be required under the contract, in which
66
case reassessment is required. The Group determines whether a modification to cash flows is
significant by considering the extent to which the expected future cash flows associated with the
embedded derivative, the host contract or both have changed and whether the change is significant
relative to the previously expected cash flows on the contract.
Derecognition of Financial Assets and Financial Liabilities
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar
financial assets) is derecognized when:
•
•
•
the rights to receive cash flows from the asset have expired;
the Group retains the right to receive cash flows from the asset, but has assumed an obligation
to pay them in full without material delay to a third party under a “pass-through” arrangement;
or
the Group has transferred its rights to receive cash flows from the asset and either (a) has
transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor
retained substantially all the risks and rewards of the asset, but has transferred control of the
asset.
When the Group has transferred its rights to receive cash flows from an asset and has neither
transferred nor retained substantially all the risks and rewards of the asset nor transferred control
of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the
asset.
A financial liability is derecognized when the obligation under the liability is discharged,
cancelled or has expired.
When an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such modification is
treated as a derecognition of the carrying value of the original liability and the recognition of a
new liability at fair value, and any resulting difference is recognized in profit or loss.
Impairment of Financial Assets
The Group assesses at each reporting period whether there is objective evidence that a financial
asset may be impaired. If such evidence exist, any impairment loss is recognized in profit or loss.
Financial assets carried at amortized cost
For financial assets carried at amortized cost, whenever it is probable that the Group will not
collect all amounts due according to the contractual terms of receivables, an impairment loss has
been incurred. The amount of the 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. The carrying amount of the asset is reduced either directly or
through the use of an allowance account. Any loss determined is recognized in profit or loss.
The Group initially assesses whether objective evidence of impairment exists individually for
financial assets that are individually significant, and individually or collectively for financial
assets that are not individually significant. If it is determined that no objective evidence of
impairment exists for an individually assessed financial asset, whether significant or not, the asset
is included in a group of financial assets with similar credit risk characteristics and that group of
financial assets is collectively assessed for impairment. Assets that are individually assessed for
impairment and for which an impairment loss is or continues to be recognized are not included in
a collective assessment of impairment.
67
In relation to trade receivables, a provision for impairment is made when there is objective
evidence (such as the probability of insolvency or significant financial difficulties of the debtor)
that the Group will not be able to collect all of the amounts due under the original terms of the
invoice. The carrying amount of the receivable is reduced through the use of an allowance
account. Impaired receivables are derecognized when they are assessed as uncollectible.
Receivables, together with the associated allowance accounts, are written off when there is no
realistic prospect of future recovery and all collateral has been realized. If, in a subsequent period,
the amount of the estimated impairment loss decreases because of an event occurring after the
impairment was recognized, the previously recognized impairment loss is reversed. Any
subsequent reversal of an impairment loss is recognized in profit or loss, to the extent that the
carrying value of the asset does not exceed its amortized cost at the reversal date.
Assets carried at cost
If there is objective evidence that an impairment loss on financial assets carried at cost such as an
unquoted equity instrument that is not carried at fair value because its fair value cannot be
measured reliably, or on a derivative asset that is linked to and must be settled by delivery of such
an unquoted equity instrument has been incurred, the amount of the loss is measured as the
difference between the asset’s carrying amount and the present value of estimated future cash
flows discounted at the current market rate of return for a similar financial asset.
Available-for-sale investments
In case of equity investments classified as available-for-sale investments, impairment would
include a significant or prolonged decline in the fair value of the investments below their cost.
Where there is evidence of impairment loss, the cumulative loss - measured as the difference
between the acquisition cost and the current fair value, less any impairment loss on that financial
asset previously recognized in income - is removed from equity and recognized in profit or loss.
Impairment losses on equity investments are not reversed through profit or loss. Increases in fair
value after impairment are recognized directly as other comprehensive income in the consolidated
statement of comprehensive income and consolidated statement of changes in equity.
In the case of debt instruments classified as available-for-sale, impairment is assessed based on the
same criteria as financial assets carried at amortized cost. Future interest income is based on the
reduced carrying amount and is accrued based on the rate of interest used to discount cash flows
for the purpose of measuring impairment loss. If, in subsequent year, the fair value of a debt
instrument increases and the increase can be related objectively to an event occurring after the
impairment loss was recognized in income, the impairment loss is reversed through profit or loss.
Offsetting of Financial Instruments
Financial assets and financial liabilities are offset and the net amount reported in the consolidated
statement of financial position if, and only if, there is a currently enforceable legal right to offset
the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and
settle the liability simultaneously. This is not generally the case with master netting agreements,
and the related assets and liabilities are presented gross in the consolidated statement of financial
position.
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Expendable Parts, Fuel, Materials and Supplies
Expendable parts, fuel, materials and supplies are stated at the lower of cost and net realizable
value. Cost is determined using the weighted average method. Net realizable value represents the
current replacement cost.
Asset Held for Sale
Noncurrent assets and disposal groups are classified as held for sale if their carrying amount will
be recovered principally through a sale transaction rather than through continuing use. This
condition is considered met only when the sale is highly probable and the asset (or disposal group)
is available for immediate sale at its present condition. Management must be committed to the
sale, which should be expected to qualify for recognition as a completed sale within one year from
the date of classification. However, events or circumstances may extend the period to complete the
sale beyond one year. An extension of the period required to complete a sale does not preclude an
asset (or disposal group) from being classified as held-for-sale if the delay is caused by events or
circumstances beyond the Group’s control and there is sufficient evidence that the entity remains
committed to its plan to sell the asset (or disposal group).
Property and Equipment
Property and equipment (except land and buildings and improvements) are stated at cost less
accumulated depreciation and any impairment in value. Land is stated at revalued amount, less
any impairment in value. Buildings and improvements are stated at revalued amounts less
accumulated depreciation and any impairment in value. Revalued amounts were determined based
on valuations undertaken by professionally qualified appraisers. Revaluations are made with
sufficient regularity. The latest appraisal report obtained by PAL is as of March 31, 2009.
For subsequent revaluations, the accumulated depreciation at the date of the revaluation is
eliminated against the gross carrying amount of the asset and the net amount restated to the
revalued amount of the asset. Any resulting increase in the asset’s carrying amount as a result of
the revaluation is recognized as other comprehensive income credited directly to equity as
“Revaluation increment”, net of the related deferred income tax liability. Any resulting decrease
is directly charged against the related revaluation increment to the extent that the decrease does
not exceed the amount of the revaluation increment in respect of the same asset.
The initial cost of property and equipment comprises its purchase price, any related capitalizable
borrowing costs attributed to progress payments incurred on account of aircraft acquisition and
other significant assets under construction and other directly attributable costs of bringing the asset
to its working condition and location for its intended use. Manufacturers’ credits that reduce the
price of the aircraft, received from aircraft and engine manufacturers are recorded upon delivery of
the related aircraft and engines. Such credits are applied as a reduction from the cost of the
property and equipment (including those under finance lease).
Expenditures incurred after the property and equipment have been put into operation, such as
repairs and maintenance costs, are normally charged to income in the period in which the costs are
incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in
an increase in the future economic benefits expected to be obtained from the use of an item of
property and equipment beyond its originally assessed standard of performance, the expenditures
are capitalized as additional cost of property and equipment.
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Depreciation, which commences when the asset is available for its intended use, is computed on a
straight-line basis over the following estimated useful lives of the assets:
Buildings and improvements
Passenger aircraft (owned and under finance lease)
Other aircraft
Spare engines
Rotable and reparable parts
Other ground property and equipment
Number of Years
8 to 40
12 to 20
5 to 10
12 to 20
3 to 18
3 to 8
Expenditures for heavy maintenance on passenger aircraft are capitalized at cost and depreciated
over the estimated number of years until the next major overhaul or inspection. Generally, heavy
maintenance visits are required every five to six years for airframe and 10 years for landing gear.
Other maintenance and repair costs are expensed as incurred.
The estimated useful lives, depreciation method and residual values are reviewed periodically to
ensure that the periods and method of depreciation and residual values are consistent with the
expected pattern of economic benefits from items of property and equipment. Any changes in
estimate arising from the review are accounted for prospectively.
When assets are sold or retired, their costs, accumulated depreciation, any impairment in value and
related revaluation increment are eliminated from the accounts. Any gain or loss resulting from
their disposal is recognized and included in profit or loss of the consolidated statement of
comprehensive income.
The portion of “Revaluation increment, net of related deferred income tax”, realized through
depreciation or upon the disposal or retirement of the property is transferred to retained earnings.
Construction in progress represents the cost of aircraft and engine modifications in progress and
buildings and improvements and other ground property under construction. Construction in
progress is not depreciated until such time when the relevant assets are completed and available
for use.
Asset Retirement Obligation
PAL is required under various aircraft lease agreements to restore the leased aircraft to their
original condition and to bear the cost of dismantling and restoration at the end of the lease term.
PAL provides for these costs over the terms of the leases, based on aircraft hours flown until the
next scheduled checks.
Investment Properties
Investment properties include parcels of land and building and building improvements not used in
operations.
Investment properties are measured initially at cost, including any transaction costs. The carrying
amount includes the cost of replacing part of an existing investment property at the time that cost
is incurred if the recognition criteria are met; and excludes the costs of day-to-day servicing of an
investment property.
Investment properties are subsequently measured at cost less accumulated depreciation (except
land) and any impairment in value. Land is subsequently carried at cost less any impairment in
value.
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Depreciation and amortization of depreciable investment properties is calculated on a straight-line
basis over the estimated useful lives ranging from six to eight years.
Transfers are made to investment properties when, and only when, there is a change in use,
evidenced by cessation of owner-occupation, commencement of an operating lease to another
party or completion of construction or development. Transfers are made from investment
properties when, and only when, there is a change in use, evidenced by commencement of owneroccupation or commencement of development with a view to sale.
When an item of property and equipment previously carried at revalued amount is transferred to
investment properties, the carrying value at the date of reclassification is retained as the new cost
of the investment property.
Investment properties are derecognized when they are either disposed of or permanently
withdrawn from use and no future economic benefit is expected from their disposal. Any gains or
losses on the retirement or disposal of an investment property are recognized in profit or loss of in
the consolidated statement of comprehensive income in the year of retirement or disposal.
Impairment of Property and Equipment and Investment Properties
The carrying values of property and equipment and investment properties are reviewed for
impairment when events or changes in circumstances indicate that the carrying values may not be
recoverable. If any such indication exists and where the carrying values exceed the estimated
recoverable amounts, the assets or cash generating units are written down to their recoverable
amounts. The recoverable amount is the greater of fair value less cost to sell and value-in-use. In
assessing value-in-use, the estimated future cash flows are discounted to their present value using
a pretax discount rate that reflects current market assessments of the time value of money and the
risks specific to the asset. For an asset that does not generate largely independent cash inflows,
the recoverable amount is determined for the cash generating unit to which the asset belongs.
Impairment losses, if any, are recognized in profit or loss of the consolidated statement of
comprehensive income.
An assessment is made at each reporting period as to whether there is any indication that
previously recognized impairment losses may no longer exist or may have decreased. If such
indication exists, the recoverable amount is estimated. A previously recognized impairment loss is
reversed only if there has been a change in the estimates used to determine the asset’s recoverable
amount since the last impairment loss was recognized. If that is the case, the carrying amount of
the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying
amount that would have been determined, net of depreciation and amortization, had no impairment
loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss
unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation
increase. After such reversal, the depreciation charge is adjusted in future periods to allocate the
asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining
useful lives.
Leases
The determination of whether the arrangement is, or contains a lease is based on the substance of
the arrangement at inception date of whether the fulfillment of the arrangement depends on the use
of a specific asset or assets or the arrangement conveys a right to use the asset. A reassessment is
made after the inception of the lease if any of the following applies: (a) there is a change in
contractual terms, other than a renewal or extension of the arrangement; (b) a renewal option is
exercised or extension granted, unless the term of the renewal or extension was initially included
in the lease term; (c) there is a change in the determination of whether fulfillment is dependent on
a specified asset; or (d) there is substantial change to the asset.
71
Where the reassessment is made, lease accounting shall commence or cease from the date when
the change in circumstances gave rise to the reassessment for scenarios (a), (c), or (d) above, and
at the date of renewal or extension period for scenario (b).
Group as Lessee
Finance leases, which transfer to the Group substantially all the risks and benefits incidental to
ownership of the leased item, are capitalized at the inception of the lease at the fair value of the
leased property or, if lower, at the present value of the minimum lease payments. Obligations
arising from aircraft under finance lease agreements are classified in the consolidated statement of
financial position as part of “Long-term obligations”.
Lease payments are apportioned between financing charges and reduction of the lease liability so
as to achieve a constant rate of interest on the remaining balance of the liability. Financing
charges are charged directly against profit or loss.
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are
classified as operating leases. Operating lease expense is recognized in profit or loss of the
consolidated statement of comprehensive income on a straight-line basis over the terms of the
lease agreements.
Group as Lessor
Leases where the Group does not transfer substantially all the risks and rewards of ownership of
the assets are classified as operating leases. Initial direct costs incurred in negotiating operating
leases are added to the carrying amount of the leased asset and recognized over the lease term on
the same basis as the rental income. Contingent rents are recognized as revenue in the period in
which they are earned.
Provisions and Contingencies
Provisions are recognized when (a) the Group has a present obligation (legal or constructive) as a
result of a past event; (b) it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation; and (c) a reliable estimate of the amount of the obligation
can be made. Where the Group expects a provision to be reimbursed, for example under an
insurance contract, the reimbursement is recognized as a separate asset but only when the
reimbursement is virtually certain. If the effect of the time value of money is material, provisions
are determined by discounting the expected future cash flows at a pretax rate that reflects current
market assessments of the time value of money and, where appropriate, the risks specific to the
liability. Where discounting is used, the increase in the provision due to the passage of time is
recognized as interest expense.
Contingent liabilities are not recognized in the consolidated statement of financial position. They
are disclosed in the notes to consolidated financial statements unless the possibility of an outflow
of resources embodying economic benefits is remote. A contingent asset is not recognized in the
consolidated statement of financial position but disclosed in the notes when an inflow of economic
benefits is probable. If it is virtually certain that an inflow of economic benefits will arise, the
asset and the related income are recognized in the consolidated financial statements.
Equity
Capital stock is measured at par value for all shares issued. Incremental costs incurred directly
attributable to the issuance of new shares are shown in equity as a deduction from proceeds, net
of tax.
When the shares are sold at premium, the difference between the proceeds and the par value is
credited to the “Additional-paid in capital” account. When shares are issued for a consideration
other than cash, the proceeds are measured by the fair value of the consideration received. In case
the shares are issued to extinguish or settle the liability, the shares shall be measured either at
the fair value of the shares issued or fair value of the liability settled, whichever is more reliably
determinable.
72
Deficit represents the cumulative balance of net income or loss, net of any dividend declaration
and other capital adjustments.
Revenue and Related Commissions
Passenger ticket and cargo waybill sales, excluding portion relating to awards under the Frequent
Flyer Program, are initially recorded as “Unearned transportation revenue” in the consolidated
statement of financial position until recognized as “Revenue” in the consolidated statement of
comprehensive income when the transportation service is rendered (e.g., when passengers and
cargo are flown/lifted). Revenue is measured at fair value of the consideration received or
receivable. Revenue also includes recoveries from surcharges during the year.
The related commission is recognized as expense in the same period when the transportation
service is provided and is included as part of “Reservation and sales” in the consolidated statement
of comprehensive income.
Liability Under Frequent Flyer Program
The Group operates a frequent flyer program called “Mabuhay Miles.” A portion of passenger
revenue attributable to the award of frequent flyer miles, estimated based on expected utilization
of these benefits, is deferred until utilized. The miles expected to be redeemed are measured at
fair value which is estimated using the applicable fare based on the historical redemption. The
deferred revenue is included under “Reserves and other noncurrent liabilities” in the consolidated
statement of financial position. Any remaining unutilized benefits are recognized as revenue upon
redemption or expiry.
Other Comprehensive Income
Other comprehensive income comprises items of income and expense (including items previously
presented under the consolidated statement of changes in equity) that are not recognized in profit
or loss for the year in accordance with PFRS. Other comprehensive income of the Group includes
changes in revaluation increment in property, gains and losses on remeasuring available-for-sale
financial assets, and any effective portion of gains, movements in cumulative translation
adjustment and losses on hedging instruments in cash flow hedges.
Interest and Dividend Income
Interest on cash, cash equivalents and other short-term cash investments is recognized as the
interest accrues using the effective interest rate method. Dividend income from available-for-sale
equity investments is recognized when the Group’s right to receive payment is established.
Retirement Benefits Cost
Retirement benefits cost under the defined benefit plan is actuarially determined using the
projected unit credit method. This method reflects services rendered by employees up to the date
of valuation and incorporates assumptions concerning employees’ projected salaries. Actuarial
valuations are conducted with sufficient regularity with option to accelerate when significant
changes to underlying assumptions occur. Actuarial gains and losses are recognized as income or
expense when the net cumulative unrecognized actuarial gains and losses for the plan at the end of
the previous reporting year exceeded 10% of the higher of the present value of defined benefit
obligation and the fair value of plan assets at that date. These gains or losses are recognized over
the expected average remaining working lives of the employees participating in the plan.
Past service cost is recognized as an expense on a straight-line basis over the average period when
the benefits become vested. If the benefits are already vested immediately following the
introduction of, or changes to, the retirement plan, past service cost is recognized immediately.
Retirement benefits cost includes current service cost, interest cost, amortization of unrecognized
past service costs, actuarial gains and losses, experience adjustments, effect of any curtailment or
settlement and changes in actuarial assumptions over the expected average remaining working
lives of covered employees. The defined benefit liability is the aggregate of the present value of
the defined benefit obligation and actuarial gains and losses not recognized, reduced by past
73
service cost not yet recognized, and the fair value of plan assets out of which the obligations are to
be settled directly. If such aggregate is negative, the asset is measured at the lower of such
aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost
and the present value of any economic benefits available in the form of refunds from the plans or
reductions in the future contributions to the plan.
Retirement benefits cost under the defined contribution plan is based on the established amount of
contribution and is recognized as expense in the same year as the related employee services are
rendered.
Borrowing Costs
Borrowing costs are generally expensed as incurred. Borrowing costs are capitalized if they are
directly attributable to the acquisition or construction of a qualifying asset. Capitalization of
borrowing costs commences when the activities to prepare the qualifying asset are in progress and
expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the
assets are substantially ready for their intended use.
Income Taxes
Current income tax
Current income tax assets and liabilities for the current and prior periods are measured at the
amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax
laws used to compute the amounts are those that have been enacted or substantively enacted as of
the end of reporting period.
Deferred income tax
Deferred income tax is provided, using the balance sheet liability method, on all temporary
differences at the end of reporting period between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences, including
asset revaluations. Deferred income tax assets are recognized for all deductible temporary
differences, carryforward benefits of unused tax credits and unused net operating loss carryover
(NOLCO), to the extent that it is probable that sufficient future taxable profit will be available
against which the deductible temporary differences and carryforward benefits of unused tax credits
and unused NOLCO can be utilized. Deferred income tax, however, is not recognized when it
arises from the initial recognition of an asset or liability in a transaction that is not a business
combination and, at the time of the transaction, affects neither the accounting profit nor taxable
profit or loss.
Deferred income tax liabilities are not provided on nontaxable temporary differences associated
with investments in domestic subsidiaries and associates. With respect to investments with other
subsidiaries and associates, deferred income tax liabilities are recognized except where the timing
of reversal of the temporary differences can be controlled and it is probable that the temporary
difference will not reverse in the foreseeable future.
The carrying amount of deferred income tax assets is reviewed at each reporting period and
reduced to the extent that it is no longer probable that sufficient taxable profit will be available to
allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax
assets are reassessed at each reporting period and are recognized to the extent that it has become
probable that future taxable profit will allow the deferred income tax asset to be recovered.
Deferred income tax assets and deferred income tax liabilities are measured at the tax rates that are
expected to apply to the period when the asset is realized or the liability is settled, based on tax
rates and tax laws that have been enacted or substantively enacted at the end of reporting period.
74
Income tax relating to items recognized directly in equity is recognized in equity and not included
in the calculation of net income for the period.
Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable
right exists to set off current income tax assets against current income tax liabilities and the
deferred income taxes relate to the same taxable entity and the same taxation authority.
Functional Currency and Foreign Currency-Denominated Transactions and Translations
Each entity in the Group determines its own functional currency and the items included in the
separate financial statements of each entity are measured using the functional currency.
Transactions in foreign currencies are initially recorded using the functional currency rate at the
date of the transaction. Outstanding monetary assets and liabilities denominated in foreign
currencies are translated using the functional currency rate of exchange at the end of reporting
period. All differences are taken to other comprehensive income. Non-monetary items that are
measured in terms of historical cost in a foreign currency are translated using the exchange rates at
the dates of the transactions. Non-monetary items measured at fair value in a foreign currency are
translated using the exchange rates at the date when the fair value was determined.
The results of operations and financial position of all Group entities (none of which has the
functional currency of a hyperinflationary economy) that have functional currencies different from
Philippine peso, which is the functional and presentation currency of the Parent Company, are
translated to Philippine peso as follows:
a. assets and liabilities for each statement of financial position presented are translated at the
closing rate at the end of reporting period;
b. comprehensive income items for each consolidated statement of comprehensive income
presented are translated at the monthly average exchange rates (unless this average is not a
reasonable approximation of the cumulative effect of the rates prevailing on the transaction
dates, in which case income and expenses are translated at the dates of the transactions);
c. capital stock and other equity items resulting from transactions with equity holders
(i.e., additional paid-in capital) and equity items resulting from income and expenses directly
recognized in equity (i.e., revaluation increment in property) are translated using the rates
prevailing on the transaction dates; and
d. all resulting exchange differences are recognized as other comprehensive income and a
separate component of equity, in the account “Cumulative translation adjustment”.
On consolidation, exchange differences arising from the translation of the net investment in
foreign operations are taken to equity and recorded as other comprehensive income. When a
foreign operation is sold or disposed of, exchange differences that were previously recorded in
equity are recognized in profit or loss.
Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) is calculated based on net income (loss) and total
comprehensive income for the year. EPS is calculated by dividing net income (loss) before other
comprehensive income or total comprehensive income for the year, as applicable, by the weighted
average number of issued and outstanding shares of stock during the year, after giving retroactive
effect to any stock dividends declared or stock rights exercised. The Group has no dilutive
potential common shares.
Events after the Reporting Period Date
Post year-end events that provide additional information about the Group’s position at the end of
the reporting period (adjusting events), if any, are reflected in the consolidated financial
statements. Post year-end events that are not adjusting events are disclosed in the notes to
consolidated financial statements when material.
75
4. Summary of Significant Accounting Judgments, Estimates and Assumptions
The preparation of the consolidated financial statements in accordance with PFRS requires the
Group’s management to make judgments, estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. These judgments,
estimates and assumptions are based on management’s evaluation of relevant facts and
circumstances as of the date of the comparative consolidated financial statements. Future events
may occur which will cause the assumptions used in arriving at the estimates to change. The
effects of any change in estimates are reflected in the consolidated financial statements as they
become reasonably determinable. 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
In the process of applying the Group’s accounting policies, management has made the following
judgments, apart from those involving estimations, which have the most significant effect on
amounts recognized in the consolidated financial statements.
Determination of functional currency
Judgment is exercised in assessing various factors in determining the functional currency of each
entity within the Group, including prices of goods and services, competition, cost and expenses
and other factors including the currency in which financing is primarily undertaken by the entity.
Additional factors are considered in determining the functional currency of a foreign operation,
including whether its activities are carried as an extension of that of the Parent Company rather
than being carried out with significant autonomy.
The Parent Company, based on the relevant economic substance of the underlying circumstances,
has determined its functional currency to be Philippine peso. It is the currency of the primary
economic environment in which it operates. The functional currency of PAL, its major subsidiary,
has been determined to be the US dollar (USD).
Classification of financial instruments
The Group exercises judgment in classifying a financial instrument, or its component parts, on
initial recognition as either a financial asset, a financial liability or an equity instrument in
accordance with the substance of the contractual arrangement and the definitions of a financial
asset, a financial liability or an equity instrument. The substance of a financial instrument, rather
than its legal form, governs its classification in the consolidated statement of financial position.
The classification of the Group’s financial assets and financial liabilities are presented in Note 28.
Application of hedge accounting
The Group applies hedge accounting treatment for certain qualifying derivatives after complying
with hedge accounting requirements, specifically on hedge documentation designation and
effectiveness testing. Judgment is involved in these areas, which include management
determining the appropriate data points for evaluating hedge effectiveness, establishing that the
hedged forecasted transaction in cash flow hedges are probable of occurring, and assessing the
credit standing of hedging counterparties (see Note 28).
Impairment of available-for-sale equity investments
The Group treats available-for-sale equity investments as impaired when there has been a
significant or prolonged decline in the fair value below its cost or where other objective evidence
of impairment exists. The determination of what is “significant” or “prolonged” requires
76
judgment. The Group considers the decline in value as “significant” when the value generally
decreased by 20% or more and “prolonged” if the decline persisted for a period greater than 12
months for quoted equity securities. In addition, the Group evaluates other factors, including
normal volatility in share price for quoted equity shares and the future cash flows and the discount
factors for unquoted equity shares.
The carrying value of the Group’s available-for-sale equity investments amounted to
=532.68 million and P
P
=819.51 million as of March 31, 2010 and 2009, respectively (see Note 6).
Classification of leases - Group as lessee
Management exercises judgment in determining whether substantially all the significant risks and
rewards of ownership of the leased assets are transferred to the Group. Lease contracts, which
transfer to the Group substantially all the risks and rewards incidental to ownership of the leased
items are classified as finance leases. Otherwise, they are considered as operating leases.
PAL has lease agreements (as lessee) covering some of its aircraft where the lease terms
approximate the estimated useful lives of the aircraft or the risks and rewards related to the asset
are transferred to PAL. These leases are classified by the Group as finance leases. The net
carrying value of these aircraft amounted to P
=42.71 billion and P
=49.80 billion as of March 31,
2010 and 2009, respectively (see Note 10).
The Group also has lease agreements (as lessee) where it has determined that the risks and rewards
related to the properties are retained with the lessors (e.g., no bargain purchase option and transfer
of ownership at the end of the lease term). The leases are, therefore, accounted for as operating
leases (see Notes 18 and 25).
Classification of leases - Group as lessor
PAL has lease agreements (as lessor) where it has determined that it has retained substantially al
the risks and rewards incidental to ownership of the leased assets. These leases are classified as
operating leases (see Note 18).
Contingencies
The Group is involved in various labor disputes, litigations, claims, and tax assessments that are
normal to its business. Based on the opinion of the Group’s legal counsels on the progress and
legal grounds of these cases, the Group believes that it may have a present obligation arising from
a past event but that their likely outcome and estimated potential cash outflow cannot be
determined reasonably as of this time. As such, no provision was made for these other
contingencies.
Estimates
The key assumptions concerning the future and other key sources of estimation and uncertainty at
the end of reporting period, that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year are discussed below.
Estimation of allowance for doubtful accounts
The allowance for doubtful accounts relating to receivables is estimated as the difference between
the carrying amount of the receivables (at amortized cost) and the present value of estimated
future cash flows (using the original effective interest rate). The amount and timing of recorded
expenses for any period could therefore differ based on the judgments or estimates made. An
increase in the Group’s allowance for doubtful accounts would increase its recorded general and
administrative expenses and decrease its current assets.
77
The carrying value of receivables, net of allowance for doubtful accounts, as of March 31, 2010
and 2009 amounted to P
=5.84 billion and P
=5.03 billion, respectively. The allowance for doubtful
accounts as of March 31, 2010 and March 31, 2009 amounted to P
=4.11 billion and P
=4.45 billion,
respectively (see Note 7).
Application of effective interest rate method of amortization
and impact of revisions in cash flow estimates
The Group carries certain financial assets and financial liabilities at amortized cost, which is
determined at inception of the instrument, taking into account any fees, points paid or received,
transaction costs and premiums or discounts, along with the cash flows and the expected life of the
instrument. In cases where the Group revises its estimates of cash flow receipts or payments and
projection of changes in its financial assets or financial liabilities, the Group adjusts the carrying
amounts to reflect actual and revised estimated cash flows. The Group recalculates the carrying
amount by discounting the estimated future cash flows using the financial asset or financial
liability’s original effective interest rate, with the resulting adjustment being recognized in profit
or loss.
Determination of fair value of financial instruments (including derivatives)
The Group initially records all financial instruments at fair value and subsequently carries certain
financial assets and financial liabilities at fair value, which requires extensive use of accounting
estimates and judgment. Valuation techniques are used particularly for financial assets and
financial liabilities (including derivatives) that are not quoted in an active market. Where
valuation techniques are used to determine fair values (e.g., discounted cash flow, option models),
they are periodically reviewed by qualified personnel who are independent of the trading function.
All models are calibrated to ensure that outputs reflect actual data and comparative market prices.
To the extent practicable, models use only observable data as valuation inputs. However, other
inputs such as credit risk (whether that of the Group or the counterparties), forward prices,
volatilities and correlations, require management to develop estimates or make adjustments to
observable data of comparable instruments. The amount of changes in fair values would differ if
the Group uses different valuation assumptions or other acceptable methodologies. Any change in
fair value of these financial instruments (including derivatives) would affect either the
consolidated statement of comprehensive income or consolidated statement of changes in equity.
The Group uses the following hierarchy for determining and disclosing the fair value of financial
instruments by valuation technique: (a) Level 1 - quoted (unadjusted) prices in active markets for
identical assets or liabilities; (b) Level 2 - other techniques for which all inputs which have a
significant effect on the recorded fair value are observable, either directly or indirectly; and
(c) Level 3 - techniques which use inputs which have a significant effect on the recorded fair value
that are not based on observable market data.
The fair values of the Group’s financial assets and financial liabilities are presented in Note 28.
Determination of net realizable value of expendable parts, fuel, materials and supplies
The Group’s estimates of the net realizable values of expendable parts, fuel, materials and supplies
are based on the most reliable evidence (e.g., age and physical condition of the inventory)
available at the time the estimates are made, of the amount that the expendable parts, fuel,
materials and supplies are expected to be realized. A new assessment is made of the net realizable
value in each subsequent period. When the circumstances that previously caused expendable
parts, fuel, materials and supplies to be written down below cost no longer exist or when there is a
clear evidence of an increase in net realizable value because of change in economic circumstances,
the amount of the write-down is reversed so that the new carrying amount is the lower of the cost
and the revised net realizable value. The expendable parts, fuel, materials and supplies as of
March 31, 2010 and 2009 amounting to P
=1.23 billion and P
=938.81 million, respectively, are stated
at the lower of cost and net realizable value (see Note 8).
78
Valuation of property and equipment under revaluation basis
The Group’s land and buildings and improvements are carried at revalued amounts, which
approximate their fair values at the date of the revaluation, less any subsequent accumulated
depreciation and any accumulated impairment losses. The valuations of property and equipment
are performed by professionally qualified independent appraisers using generally acceptable
valuation techniques and methods. Revaluations are made regularly to ensure that the carrying
amounts do not differ materially from those which would be determined using fair values at the
end of reporting period.
The resulting revaluation increment, net of related deferred income tax, in the valuation of these
assets based on appraisal reports amounted to P
=1.31 billion (net of minority interests’ share
amounting to P
=237.05 million) and P
=1.50 billion (net of minority interests’ share amounting to
=271.12 million) as of March 31, 2010 and 2009, respectively (see Note 17). These are presented
P
as “Revaluation increment, net of the related deferred income tax”, and the portion transferred to
deficit resulting from their realization, in the equity section of the consolidated statement of
financial position and in the consolidated statement of changes in equity, respectively. Increase in
the value of property resulting from revaluation is treated as other comprehensive income. The
carrying value of property and equipment carried at appraised value amounted to P
=68.84 million
and P
=384.96 million as of March 31, 2010 and 2009, respectively (see Note 10).
Estimation of useful lives and residual values of property and equipment and investment
properties
The Group estimates the useful lives of property and equipment and investment properties based
on internal technical evaluation and experience with similar assets. The estimated useful lives and
residual values are reviewed periodically and updated if expectations differ from previous
estimates due to physical wear and tear, technical and commercial obsolescence and other limits
on the use of the assets. The carrying amount of property and equipment, net of accumulated
depreciation, as of March 31, 2010 and 2009 amounted to P
=56.47 billion and P
=65.45 billion,
respectively (see Note 10). The carrying amount of investment properties, net of accumulated
depreciation, as of March 31, 2010 and 2009 amounted to P
=1.35 billion and P
=1.45 billion,
respectively (see Note 11).
Impairment of property and equipment and investment properties
The Group determines whether its property and equipment and investment properties are impaired,
when events or changes in circumstances indicate that the carrying values may not be recoverable.
If any such indication exists and where the carrying values exceed the estimated recoverable
amounts, the assets are written down to their recoverable amounts. The recoverable amount is the
greater of net selling price and value-in-use. Determination of impairment requires an estimation
of the value-in-use of the cash-generating units to which the assets belong. Estimating the value in
use requires the Group to make an estimate of the expected future cash flows from the cashgenerating unit and also to choose a suitable discount rate in order to calculate the present value of
those cash flows. In discounting, the Group uses an applicable discount rate specific to these
assets. Other assumptions used in projecting the future cash flows include passenger load factor,
passenger yield, fuel surcharge rate and fuel cost, among others. As of March 31, 2010 and 2009,
the aggregate net carrying value of the Group’s nonfinancial assets amounted to P
=57.82 billion and
=66.90 billion, respectively (see Notes 10 and 11). No impairment loss was recognized in 2010,
P
2009 and 2008.
Estimation of liability for tickets sold but not yet serviced
The Group assesses at each reporting period its liability for tickets sold but not yet serviced
(unearned transportation revenue) based on historical trends, the timing and amount of tickets used
for travel on other airlines and the amount of tickets sold that will not be used. Unearned
transportation revenue amounted to P
=6.00 billion and P
=5.07 billion as of March 31, 2010 and
2009,respectively.
79
Estimation of liability under the Frequent Flyer Program
A portion of passenger revenue attributable to the award of frequent flyer miles is deferred until
they are utilized. The deferment of the revenue is estimated based on historical trends of breakage
and redemption, which is then used to project the estimated utilization of the miles earned. Any
remaining unredeemed miles are recognized as revenue upon expiration. The remaining
unredeemed miles is measured at fair value estimated using the applicable fare based on the
historical redemption. Changes in the estimates of expected redemption could have a significant
effect on the Parent Company’s financial results. Deferred revenue included as part of “Other
noncurrent liabilities” amounted to P
=184.15 million and P
=191.22 million as of March 31, 2010 and
2009, respectively (see Note 16).
Estimation of retirement and other benefits cost
The Group’s retirement and other benefits cost relating to its defined benefit plan is actuarially
computed. This entails using certain assumptions like salary increases, return on plan assets and
discount rates. Accrued employee benefits as of March 31, 2010 and 2009 amounted to
=4.72 billion and P
P
=4.20 billion, respectively. Unrecognized net actuarial gain (loss) amounted to
(P
=300.77 million) and P
=257.78 million as of March 31, 2010 and 2009, respectively, which
resulted from changes in actuarial assumptions (see Note 21).
Provisions
The Group provides for present obligations (legal or constructive) where it is probable that there
will be an outflow of resources embodying economic benefits that will be required to settle the
said obligations. Management exercises judgment in assessing the probability of the Group
becoming liable. An estimate of the provision is based on known information at the end of
reporting period. The amount of provision is being reassessed at least on an annual basis to
consider new and relevant information. Accrued provisions amounted to P
=2.61 billion and
=1.58 billion as of March 31, 2010 and 2009, respectively (see Note 16).
P
Recognition of deferred income tax assets
The Group assesses at each reporting period and recognizes deferred income tax assets to the
extent of probable sufficient taxable profit and reversing taxable temporary differences that will
allow the deferred income tax assets to be utilized. Management uses judgment and estimates in
assessing the probability of future taxable profit, including the timing of reversal of deferred
income tax liability, aided by forecasting and budgeting techniques. Deferred income tax assets
recognized amounted to P
=4.81 billion and P
=6.74 billion as of March 31, 2010 and 2009,
respectively (see Note 23).
5. Cash and Cash Equivalents
Cash (Note 18)
Cash equivalents (Note 18)
2009
2010
(In Thousands)
=1,069,407
P
P
=1,946,622
4,767,581
1,450,399
=5,836,988
P
P
=3,397,021
80
6. Available-for-sale Investments
The Group’s available-for-sale investments include investments in MAC (amounting to
P242.00 million and P
=
=255.20 million as of March 31, 2010 and 2009, respectively), certain quoted
equity investments (amounting to P
=6.79 million and P
=261.09 million as of March 31, 2010 and
2009, respectively) and unquoted equity investments (amounting to P
=283.88 million and
=303.22 million as of March 31, 2010 and 2009, respectively).
P
The carrying value of these investments includes accumulated unrealized gain of P
=66.44 million
and P
=125.14 million (net of related deferred income tax) as of March 31, 2010 and 2009,
respectively, that is reflected in “Net changes in fair values of available-for-sale investments, net
of deferred income tax” of the consolidated statements of changes in equity and the consolidated
statements of comprehensive income. The movements in “Net changes in fair values of availablefor-sale investments, net of deferred income tax” are as follows:
Balance at beginning of year
Movements during the year recognized as other
comprehensive income:
Mark-to-market loss
Amount in equity transferred to profit and loss
Less share of minority interests
Balance at end of year
2009
2010
(In Thousands)
=291,286
P
P
=133,463
(13,058)
(53,885)
(66,943)
66,520
80
P
=66,440
(151,075)
(6,749)
(157,824)
133,462
8,319
=125,143
P
The fair values of available-for-sale investments were determined based on published prices in the
active market. Available-for-sale investments with no market prices are measured at cost, net of
impairment losses, if any.
7. Receivables
2009
2010
(In Thousands)
General traffic:
Passenger
Cargo
International Air Transport Association (IATA)
Others
Non-trade* (Note 18)
Less allowance for doubtful accounts
P
=3,735,194
575,060
198,827
83,018
5,354,212
9,946,311
4,106,625
P
=5,839,686
=3,500,136
P
330,383
324,234
68,130
5,255,772
9,478,655
4,447,803
=5,030,852
P
* Non-trade receivables include accounts under litigation, accounts of defaulted agents, dividend and
receivables from lessors.
81
Movements in allowance for doubtful accounts, presented by class, are as follows:
Balance at beginning of year
Charges for the year (Note 20)
Recoveries/reversal
Foreign exchange difference
Balance at end of year
2010
General Traffic
Passenger
Cargo
Others Non-trade
Total
(In Thousands)
P
= 121,878
P
=92,631
P
=60,092 P
=4,173,202 P
=4,447,803
59,417
27,986
20,529
515,595
623,527
(20,010)
(26,665) (13,497)
(619,186)
(679,358)
(9,470)
(6,042)
(4,170)
(265,665)
(285,347)
P
= 151,815
P
=87,910
P
=62,954 P
=3,803,946 P
=4,106,625
Collective impairment
Individual impairment
Balance at end of year
P
= 63,407
88,408
P
=151,815
Balance at beginning of year
Charges for the year (Note 20)
Recoveries
Foreign exchange difference
Balance at end of year
2009
General Traffic
Passenger
Cargo
Others
Non-trade
(In Thousands)
=
P9,061 =
P2,874,649
=
P116,123 =
P119,339
47,308
801,098
–
–
(12,197)
(43,658)
–
–
17,952
16,950
3,723
497,455
=
P121,878
=
P92,631
=
P60,092 =
P4,173,202
=
P3,119,172
848,406
(55,855)
536,080
=
P4,447,803
Collective impairment
Individual impairment
Balance at end of year
=
P23,339
98,539
=
P121,878
=
P887,140
3,560,663
=
P4,447,803
P
=28,398
59,512
P
=87,910
=
P73,553
19,078
=
P92,631
P
=14,719
48,235
P
=62,954
P
=26,812
3,777,134
P
=3,803,946
=
P730,156
=
P60,092
– 3,443,046
P4,173,202
=
P60,092 =
P
=133,336
3,973,289
P
=4,106,625
Total
Impairment assessment
The main considerations for impairment assessment include whether any payments are overdue or
if there are any known difficulties in the cash flows of the counterparties. The Group assesses
impairment into two areas: (a) individually assessed allowances; and (b) collectively assessed
allowances.
The Group determines allowance for each significant receivable on an individual basis. Among
the factors that the Group considers in assessing impairment is the inability to collect from the
counterparty based on the contractual terms of the receivables. Receivables included in the
specific assessment are the accounts that have been endorsed to the legal department, non-moving
account receivables, accounts of defaulted agents and accounts from closed stations.
For collective assessment, allowances are assessed for receivables that are not individually
significant and individually significant receivables where there is no objective evidence of
individual impairment. Impairment losses are estimated by taking into consideration the age of
the receivables, past collection experience and other factors that may affect collectibility.
The total impairment losses on the receivables (net of recoveries of previously written-off
accounts) recognized in profit or loss of the consolidated statements of comprehensive income
under “General and administrative expenses” amounted to (P
=55.83 million), P
=792.55 million and
=550.55 million in 2010, 2009 and 2008, respectively.
P
82
8. Expendable Parts, Fuel, Materials and Supplies
2009
2010
(In Thousands)
At cost:
Fuel
Materials and supplies
Expendable parts
P
=643,495
217,487
342,853
1,203,835
30,662
P
=1,234,497
At net realizable value - expendable parts
=440,834
P
294,067
171,123
906,024
32,782
=938,806
P
The cost of expendable parts carried at net realizable value amounted to P
=89.59 million and
=95.78 million as of March 31, 2010 and 2009, respectively.
P
9. Other Current Assets
2009
2010
(In Thousands)
=3,087,048
P
P
=193,211
3,168,799
495,184
Derivative assets (Notes 27 and 28)
Deposits
Prepayments and others - net of allowance
for probable losses of P
=1,883 in 2010 and P
=527 in
2009 (Note 18)
1,086,955
P
=1,775,350
2,297,398
=8,553,245
P
In line with the various purchase agreements and fuel hedging transactions (see Note 28), PAL has
short-term standby letters of credit amounting to =
P338.14 million and P
=3.09 billion as of
March 31, 2010 and 2009, respectively, which serve as security or margin deposits to the various
fuel suppliers and hedging counterparties. Prepayments and others pertain to advance payments of
materials and supplies, various prepaid rentals, property for sale, and miscellaneous prepayments.
10. Property and Equipment
2010
April 1,
2009
At Cost
Cost
Passenger aircraft
(Notes 15 and 25)
Other aircraft
Spare engines (Note 15)
Rotable and reparable parts
(Notes 13 and 15)
Other ground property and
equipment (Note 13)
Disposals/ Reclassifications
Additions Retirements
and Others
(In Thousands)
Foreign
Exchange
Difference
March 31,
2010
P
=93,804,309
330,964
6,329,143
P
=1,128,083
–
–
P
=–
–
–
P
=458,905
–
–
(P
=6,150,318)
(21,400)
(409,247)
P
=89,240,979
309,564
5,919,896
7,635,907
1,407,028
(796,916)
–
(523,722)
7,722,297
10,575,268
118,675,591
381,074
2,916,185
(190,803)
(987,719)
66,535
525,440
(694,137)
(7,798,824)
10,137,937
113,330,673
(Forward)
83
2010
April 1,
2009
Accumulated Depreciation
Passenger aircraft
Other aircraft
Spare engines
Rotable and reparable parts
Other ground property and
equipment
Net Book Value
Construction in progress
Predelivery payments
(Notes 13 and 25)
Total
At Appraised Value - Buildings
and improvements
Appraised value (Note 13)
Accumulated depreciation
Net Book Value
Disposals/ Reclassifications
and Others
Additions Retirements
(In Thousands)
(P
=40,395,521) (P
=5,853,502)
(298,908)
(778)
(2,753,082)
(339,842)
(4,314,448)
(528,317)
(9,459,722)
(57,221,681)
61,453,910
651,663
2,960,327
P
=65,065,900
P
=408,731
(23,776)
P
=384,955
P
=–
–
–
479,115
(356,269)
(7,078,708)
(4,162,523)
14,710
189,400
668,515
(319,204)
–
526,269
(P
=3,621,544)
–
(P
=319,204)
P
=–
(307,021)
(P
=307,021)
P
=–
–
P
=–
P
=–
–
–
–
(259)
(259)
525,181
(646,104)
Foreign
Exchange
Difference
P
=2,848,062
19,380
191,718
288,366
(P
=43,400,961)
(280,306)
(2,901,206)
(4,075,284)
618,425
3,965,951
(3,832,873)
(5,187)
(9,008,425)
(59,666,182)
53,664,491
15,082
(183,936)
(581,260)
(P
=702,183) (P
=4,021,996)
P
=3,562
–
P
=3,562
March 31,
2010
2,721,400
=
P56,400,973
(P
=26,595)
13,941
(P
=12,654)
P
=385,698
(316,856)
P
=68,842
Foreign
Exchange
Difference
March 31,
2009
2009
April 1,
2008
At Cost
Cost
Passenger aircraft
(Notes 15 and 25)
Other aircraft
Spare engines (Note 15)
Rotable and reparable parts
(Notes 13 and 15)
Other ground property and
equipment (Note 13)
Accumulated Depreciation
Passenger aircraft
Other aircraft
Spare engines
Rotable and reparable parts
Other ground property
and equipment
Net Book Value
Construction in progress
Predelivery payments
(Notes 13 and 25)
Total
At Appraised Value - Buildings
and improvements
Appraised value (Note 13)
Accumulated depreciation
Net Book Value
Disposals/ Reclassifications
Additions Retirements
and Others
(In Thousands)
=70,461,246
P
286,571
3,804,306
=9,824,902
P
–
1,839,864
(P
=180,380)
(1,188)
(128)
6,427,042
1,196,168
(1,041,288)
–
1,053,985
7,635,907
8,923,340
89,902,505
544,852
13,405,786
(330,326)
(1,553,310)
2,462
2,135,790
1,434,940
14,784,820
10,575,268
118,675,591
(30,255,479)
(253,876)
(2,100,870)
(4,251,053)
(5,247,756)
(5,589)
(290,465)
(213,538)
161,099
1,188
128
800,359
(5,053,385)
(40,631)
(361,875)
(650,216)
(40,395,521)
(298,908)
(2,753,082)
(4,314,448)
(8,176,827)
(45,038,105)
44,864,400
33,196
(305,233)
(6,062,581)
7,343,205
562,303
326,437
1,289,211
(264,099)
–
78
78
2,135,868
(5,265)
(1,304,177)
(7,410,284)
7,374,536
61,429
(9,459,722)
(57,221,681)
61,453,910
651,663
–
(P
=264,099)
(3,248,253)
(P
=1,117,650)
512,431
=7,948,396
P
2,960,327
=65,065,900
P
P56,157
=
(22,476)
=33,681
P
=408,731
P
(23,776)
=384,955
P
3,364,281
=48,261,877
P
=351,711
P
(90,611)
=261,100
P
2,331,868
=10,237,376
P
=164
P
(151,319)
(P
=151,155)
=–
P
–
=–
P
=2,133,328 P
P
=11,565,213
–
45,581
–
685,101
–
–
–
–
=699
P
240,630
=241,329
P
=93,804,309
P
330,964
6,329,143
84
If buildings and improvements were carried at cost less accumulated depreciation, the amounts as
of March 31, 2010 and 2009 would have been as follows:
Cost
Accumulated depreciation
2009
2010
(In Thousands)
=5,472
P
P
=8,560
(4,213)
(4,076)
=1,259
P
P
=4,484
Property and equipment used to secure notes payable and obligations under finance leases are
described in Notes 13 and 15.
Outstanding liabilities pertaining to purchase of property and equipment amounted to
P790.52 million, P
=
=13.23 billion and P
=6.62 billion as of March 31, 2010, 2009 and 2008,
respectively.
Fleet (see Notes 15 and 25)
Owned (Note 18)
Boeing 737-300
Bombardier DHC 8-400
Bombardier DHC 8-300
Under finance leases
Boeing 747-400
Airbus 340-300
Airbus 330-300
Airbus 320-200
Under operating leases
Boeing 777-300ER
Boeing 747-400
Airbus 320-200 (Note 18)
Airbus 319-100
2010
2009
1
5
3
1
5
3
4
4
8
10
4
4
8
10
2
1
8
4
50
–
1
8
4
48
Boeing 777-300ER
PAL took delivery of two Boeing 777-300ER aircraft under an operating lease arrangement with
GE Capital Aviation Services (GECAS) in November 2009 and January 2010 (see Note 25).
Land and Building and Improvements
In October 2007, PAL transferred its principal offices to its current business address, and
accordingly reclassified the vacated property, with a carrying value (based on revalued amounts)
of P
=288.39 million, to investment properties. In April 2009, management was authorized to
finalize the terms of the sale of the property. The related Deed of Absolute Sale was subsequently
executed in June 2010 (see Note 18).
Following the transfer of a domestic airport to a new location in 2008, the owned land where the
old airport was located that was vacated by PAL was reclassified from property and equipment to
investment properties. This property had a carrying value, based on revalued amounts, of
=1.16 billion at date of reclassification. Following the Group’s policy in accounting for
P
investment properties which is the cost model, PAL treated the revalued amounts at
reclassification dates as the deemed cost of these investment properties. As of the date of
85
reclassification, the aggregate carrying value of these investment properties amounted to
=1.47 billion includes an appraisal increase of P
P
=1.46 billion (see Note 11). The portion of
revaluation increment in property relating to these investment properties, net of related deferred
tax, amounted to P
=1.37 billion and P
=1.46 billion.
11. Investment Properties
2010
April 1,
2009
Cost
Land (Note 13)
Buildings and improvements
(Note 13)
Accumulated Depreciation
Buildings and improvements
Net Book Value
Accumulated Depreciation
Buildings and improvements
Net Book Value
Foreign
Exchange
Difference
March 31,
2010
P
= 1,445,251
P
=–
P
=–
(P
= 93,451)
= 1,351,800
P
38,496
1,483,747
–
–
–
–
(2,489)
(95,940)
36,007
1,387,807
–
P
=–
2,353
(P
= 93,587)
(33,702)
P
= 1,450,045
April 1,
2008
Cost
Land (Note 13)
Buildings and improvements
(Note 13)
Reclassifications
Additions
and Others
(In Thousands)
(4,295)
(P
= 4,295)
Additions
(35,644)
= 1,352,163
P
2009
Reclassifications
and Others
(Note 18)
(In Thousands)
Foreign
Exchange
Difference
March 31,
2009
=
P1,525,263
=
P–
(P
=346,400)
=
P266,388
=
P1,445,251
33,197
1,558,460
–
–
–
(346,400)
5,299
271,687
38,496
1,483,747
(4,219)
=
P267,468
(33,702)
=
P1,450,045
(25,096)
=
P1,533,364
(4,387)
(P
=4,387)
–
(P
=346,400)
Investment properties pertain to properties not used in operations with a total net book value
amounting to P
=1.35 billion and P
=1.45 billion as of March 31, 2010 and 2009, respectively. The
fair values of investment properties amounted to P
=1.46 billion and P
=1.57 billion as of March 31,
2010 and 2009. These have been determined based on valuations performed by various qualified
and independent appraisers. In the valuation process, the appraisers compared the fair market
value of similar assets and considered the best use of the investment properties at hand.
Direct costs related to these investment properties (e.g., depreciation, property taxes, etc.)
amounted to P
=4.30 million, P
=4.39 million and P
=4.47 million in 2010, 2009 and 2008, respectively.
12. Other Noncurrent Assets
Derivative assets (Note 28)
Long-term security deposits (Note 5)
Others - net (Note 16)
2009
2010
(In Thousands)
=179,065
P
P
=–
2,533,149
1,713,404
690,642
566,228
=3,402,856
P
P
=2,279,632
86
As of March 31, 2010 and 2009, long-term security deposits include certain cash and cash
equivalents amounting to P
=168.17 million and P
=172.43 million that were used to collateralize
various surety bonds issued (as required under the legal proceedings) in connection with certain
litigations.
Other noncurrent assets include other security deposits and miscellaneous receivable from aircraft
manufacturer.
13. Notes Payable
The Group has an omnibus credit facility with Allied Banking Corporation (ABC), a related party
(see Note 18), which is covered by a real estate mortgage on some real properties and chattel
mortgage on some land and rotable and reparable parts having an aggregate net carrying value of
=1.28 billion and P
P
=1.48 billion as of March 31, 2010 and 2009, respectively.
In 2010 and 2009, PAL availed of uncollateralized short-term loans from various local banks
amounting to P
=200.00 million and P
=8.20 billion, respectively.
Interest rates on these notes payable range from 3.87% to 8.25% in 2010, 4.22% to 8.00% in 2009
and 4.37% to 7.33% in 2008. The related interest expense pertaining to all notes payable
amounted to P
=391.15 million in 2010, P
=571.53 million in 2009 and P
=71.26 million in 2008.
Interest payable relating to short-term notes payable amounted to P
=29.58 million and
=46.58 million as of March 31, 2010 and 2009, respectively, included in “Accrued expenses P
others” (see Note 14).
Notes payable as of March 31, 2010 include portion used to finance predelivery payments
amounting to P
=330.76 million (see Note 10). This predelivery payments relate to PAL’s
acquisition of Airbus 320-200 aircraft (see Note 25). These notes payable carry fixed rates
ranging from 1.57% to 6.40% per annum in 2010 and 2009. Cumulative interest relating to these
notes payable amounting to P
=6.02 million and P
=53.31 million in 2010 and 2009, respectively, was
capitalized as part of property and equipment (see Note 10).
14. Accrued Expenses
2009
2010
(in Thousands)
Landing and take-off fees and
ground handling charges (Note 16)
Maintenance (Note 18)
Derivative liabilities
Others (Notes 14 and 18)
P
=5,753,452
2,558,489
286,556
2,433,831
P
=11,032,328
=5,526,839
P
3,999,464
2,588,931
2,459,391
=14,574,625
P
Other accrued expenses pertain to accruals for the following expenses: passenger food/supplies,
salaries and wages, foreign station expenses, interest expense and other operating expense.
87
15. Long-term Obligations
Obligations under aircraft finance leases (Note 25)
Long-term debts:
Secured loans (Note 18)
Terminated operating lease claims
Unsecured claims (Note 18)
Less current portion
2009
2010
(In Thousands)
=36,971,165
P
P
=28,675,906
5,661,375
278,494
2,704,371
8,644,240
37,320,146
8,378,382
P
=28,941,764
6,052,750
837,894
8,547,065
15,437,709
52,408,874
10,296,454
=42,112,420
P
Note 27 presents the undiscounted contractual maturity analysis of financial liabilities, including
long-term obligations.
Obligations Under Aircraft Finance Leases
Relating to Boeing 747-400 Aircraft
In fiscal year 2009, PAL sold all of its four owned Boeing 747-400 aircraft and immediately
leased them back under finance lease agreements. PAL recognized a total amount of P
=4.69 billion
as liability arising from the four Boeing 747-400 aircraft finance leases. Interests on the finance
leases are paid based on three-month LIBOR plus margin. Principal payments for these leases as
of March 31, 2010 amounted to P
=761.29 million.
Relating to Airbus 320-200 Aircraft
Obligations under finance leases as of March 31, 2010 and 2009 include obligations covering
eight Airbus 320-200 aircraft acquired in accordance with the Purchase Agreement signed
with Airbus as discussed in Note 25. As of March 31, 2010 and 2009, the aggregate future
minimum lease payments for these leases amounted to P
=11.07 billion (with current portion of
=996.86 million) and P
P
=12.84 billion (with current portion of P
=1.01 billion), respectively. These
finance leases require rental payments over the lease term of 12 years.
The finance lease arrangements covering the Airbus 320-200 aircraft provide for aircraft purchase
or remarketing options. In either case, PAL guarantees to the lessor a certain aircraft value at the
end of the lease term. It also provides for quarterly or semi-annual installments, with maturities
generally ranging from 12 to 15 years, including balloon payments for certain finance leases at the
end of the lease term, at fixed rates ranging from 2.30% to 6.58% and/or floating interest rates
based on certain margins over three-month or six-month LIBOR, as applicable.
Relating to Airbus 340-300 and Airbus 330-300 Aircraft
Finance lease agreements pertaining to Airbus 340-300 and Airbus 330-300 aircraft provide for
semi-annual installments, with restructured maturities of 15 years, including balloon payments for
certain finance leases at the end of the lease term, at fixed rates ranging from 7.71% to 7.96%
and/or floating interest rates based on certain margins over six-month LIBOR, as applicable.
As a result of the restructuring of the finance leases, the differences between the actual amount of
principal and interest under the original agreements and the principal, including capitalized
interest payable amounting to an aggregate of P
=5.21 billion, were treated as a separate tranche.
Interests on these amounts are paid based on three-month or six-month LIBOR plus margin.
Contractual interest rates under the original agreements remain unchanged.
88
PAL assigned to the lessor its rights and interest over the Japanese yen (JPY)-denominated
deposits with the initial deposit amount aggregating to JPY6.39 billion or P
=3.19 billion and
JPY6.39 billion or P
=3.25 billion as of March 31, 2010 and 2009, respectively, and all interest
accruing thereon maintained by PAL to secure the payment of the obligations for Japanese
Leveraged Lease (JLLs) on two Airbus 340-300, and one Airbus 330-300 aircraft. Under the
Rehabilitation Plan, the integrity of the JLLs was not affected by the financial restructuring of the
underlying loans and the JLLs are therefore treated as unimpaired claims.
The original lease agreements contain, among other things, provisions regarding merger and
consolidation, disposal of all or substantially all of PAL’s assets and ownership and control by the
present managing stockholder company.
PAL’s minimum lease commitments for obligations under finance leases are as follows:
Year Ending March 31
2010
2011
2012
2013
2014
2015 and thereafter
Net minimum lease payments
Interest and others
Present value of net minimum lease payments
2009
2010
(In Thousands)
=7,869,301
P
P
=–
7,484,637
7,067,751
6,538,132
6,039,147
3,437,187
3,242,020
8,579,991
8,074,072
9,106,484
8,529,246
43,015,732
32,952,236
(6,044,567)
(4,276,330)
=36,971,165
P
P
=28,675,906
As of March 31, 2010 and 2009, current portion of obligations under finance lease amounted to
P6.18 billion and P
=
=6.49 billion, respectively.
Long-term Debts
Secured loans (Note 18)
Terminated operating lease claims
Unsecured claims (Note 18)
Less current portion
2009
2010
(In Thousands)
P
=6,052,750
P
=5,661,375
837,894
278,494
8,547,065
2,704,371
15,437,709
8,644,240
3,805,727
2,203,362
=11,631,982
P
P
=6,440,878
Secured Loans
Long-term debts totaling P
=5.66 billion pertain to loans obtained from a local bank and a syndicate
of local banks. The loan from a local bank amounting to P
=3.01 billion consists of two tranches
(P
=2.86 billion for tranche one and P
=147.20 million for tranche two) and is secured by aircraft and
various aircraft engines. The loan agreement requires quarterly payments of principal and interest
based on three-month LIBOR rate plus margin. The first and second tranche will mature in 2015
and 2013, respectively, inclusive of a two-year grace period.
The loan with the syndicate of local banks (including affiliate banks, see Note 18) amounting to
=2.65 billion also requires quarterly payments of principal and interest based on three-month
P
LIBOR plus margin and will mature in September 2015. Aircraft and various aircraft engines
were used as collateral for this syndicated loan.
89
Terminated Operating Lease Claims
In accordance with the Rehabilitation Plan, PAL terminated 26 operating leases relating to
Boeing 747-200, Airbus 340-200, Airbus 300-B4, Fokker 50, and Shorts 360 aircraft. Any claims,
net of security deposits and maintenance reserves held by the lessors, resulting from the
termination of operating leases (Terminated Operating Lease Claims) are treated as unsecured
claims.
Unsecured Claims
The restructured unsecured claims are noninterest-bearing and constitute 100% of the principal
and 100% of accrued but unpaid interest as of June 23, 1998.
For purposes of valuation of the unsecured claims (including Terminated Operating Lease Claims)
for statement of financial position carrying value, PAL used a discount rate of 12% per annum
(PAL’s estimated borrowing cost for instruments of similar type and tenor at the time of deemed
issuances of the restructured unsecured claims) to restate the unsecured claims (including
Terminated Operating Lease Claims) to present value. Adjustments in present value resulting
from the passage of time and the interest portion of prepayments made amounted to
=474.58 million in 2010, P
P
=998.51 million in 2009 and P
=989.57 million in 2008 and were
recognized as part of “Financing charges” in profit or loss of the consolidated statements of
comprehensive income.
The amounts payable on the unsecured claims (including Terminated Operating Lease Claims)
under the restructured terms are as follows:
Maturity Dates
June 7, 2009
June 7, 2010
June 7, 2011
Face value
Less imputed interest
Less current portion
Percentages of
Face Value
31
32
32
2009
2010
(In Thousands)
=3,805,727
P
P
=–
3,928,477
1,834,195
2,906,579
1,363,304
10,640,783
3,197,499
1,255,824
214,634
9,384,959
2,982,865
3,805,727
1,834,195
=5,579,232
P
P
=1,148,670
In May 2009, Trustmark purchased certain unsecured claims against PAL from various debt
holders amounting to P
=5.26 billion in face value. These claims are carried in the books at
amortized cost amounting to P
=4.73 billion. In June 2009, PAL purchased these unsecured claims
from Trustmark at the same price that they were bought by Trustmark (see Note 18). The
difference of P
=1.53 billion between the carrying amount of the liability settled and the purchase
price of the unsecured claims was recognized as part of net income for 2010 (under “Others-net”
in the 2010 consolidated statement of comprehensive income).
Excess Cash Flow Recapture Mechanism of the Rehabilitation Plan
Under the Excess Cash Flow Recapture mechanism of the Rehabilitation Plan, at the end of any
six-month period starting September 30, 1999, any Excess Cash Flow (the remaining cash
balance, excluding certain funds, in excess of the greater of $50,000 and the average of the
preceding six months’ revenue of PAL) will be used to prepay Eligible Creditors on a pro rata
basis. Such prepayments in respect of indebtedness will be applied in inverse order of maturity of
claims.
90
PAL made prepayments under the Excess Cash Flow Recapture mechanism totaling P
=7.52 billion
(covering the years 2001, 2003, 2006, 2007 and 2008). The last payment relating to the Excess
Cash Flow Recapture mechanism amounted to P
=2.34 billion in 2008. There were no similar
payments made in fiscal years 2010 and 2009.
PAL’s obligations under the Excess Cash Flow Recapture mechanism shall terminate on the last to
occur of: (a) June 7, 2004 (five years after the implementation date of the Rehabilitation Plan);
(b) PAL’s public offering (as defined in the Rehabilitation Plan) of its shares; and (c) the end of
the fiscal year in which PAL has achieved profits calculated on a cumulative basis over the
preceding three fiscal years. With respect to each participating creditor class, rights to receive
prepayments under the Excess Cash Flow Recapture mechanism would also terminate on the date
on which creditors of that creditor class have been returned to their original pre-restructuring
repayment profiles.
16. Reserves and Other Noncurrent Liabilities
2009
(As restated,
Note 3)
(In Thousands)
=2,907,596
P
P
=166,897
1,583,593
2,611,389
1,254,856
1,031,956
=5,746,045
P
P
=3,810,242
2010
Derivative liabilities (Note 28)
Provisions
Other noncurrent liabilities (Note 3)
Provisions
Provisions consist substantially of probable claims and other litigations involving PAL. The
timing of the cash outflows of these provisions is uncertain as it depends upon the outcome of
PAL’s negotiations and/or legal proceedings, which are currently ongoing with the parties
involved.
In 2010, additional provision amounted to P
=1.04 billion (P
=48.00 million in 2009), reversal of
provisions recognized in prior years amounted to P
=3.12 million (P
=19.33 million in 2009) and
settlement of closed cases amounted to P
=1.04 million (P
=11.80 million in 2009). Revaluation due
to difference in exchange rates decreased the balance of provisions by P
=8.82 million (increase by
=161.76 in 2009).
P
Disclosure of additional details beyond the present disclosures may seriously prejudice PAL’s
position and negotiating strategy. Thus, as allowed by PAS 37, Provisions, Contingent Liabilities
and Contingent Assets, only general descriptions were provided.
Claims by Manila International Airport Authority (MIAA)
PAL and MIAA entered into a Compromise Agreement on November 14, 2006, which was
approved by the Court of Appeals on March 26, 2007. Under the Compromise Agreement, PAL
agreed to pay MIAA the total amount of $58,539 (P
=2.93 billion), including the related ValueAdded Tax (VAT), through equal monthly installments over a period of seven years. These
payments will serve as full and final settlement of MIAA’s claim against PAL for landing and
take-off fees, parking fees, lighting charges and tacking charges for the period December 1, 1995
to March 31, 2006. The liability was recognized at fair value at inception and the resulting
difference between the face amount and the fair value amounting to P
=855.57 million was
recognized as income for the year ended March 31, 2007.
91
As of March 31, 2010 and 2009, accrued expenses to MIAA, excluding the related VAT,
amounted to P
=1.42 billion and =
P1.69 billion, respectively. Of the amount, P
=823.35 million and
=813.39 million was included as part of “Accrued landing and take-off fees and ground handling
P
charges” (see Note 14) classified under “Current liabilities”, and P
=601.65 million and P
=876.97
million was included as part of “Other noncurrent liabilities” in the consolidated statements of
financial position as of March 31, 2010 and 2009, respectively.
17. Equity Items
The following summarizes the capital stock account as of March 31, 2010 and 2009:
Authorized (Note 1)
Issued
Treasury stock - 55,589 shares, at cost
Issued and outstanding
Number of
Shares
20,000,000,000
5,421,567,685
(55,589)
5,421,512,096
Amount
(In Thousands)
=20,000,000
P
=5,421,568
P
(56)
=5,421,512
P
The issued and outstanding shares are held by 6,738 and 6,934 equity holders as of March 31,
2010 and 2009, respectively.
The Parent Company has 55,589 treasury shares amounting to P
=0.06 million. Future earnings are
restricted from dividend declaration to the extent of the cost of these treasury shares.
On October 17, 2007, the Philippine SEC approved the wipe out of the Parent Company’s deficit
as of March 31, 2007 amounting to P
=253.73 million against the additional paid-in capital arising
from the conversion of liability to Trustmark into equity in fiscal year 2007 (see Note 2).
On June 21, 2007, the BOD of PAL approved the reduction in par value of PAL’s shares of stock
from P
=1.0 per share to P
=0.8 per share for the purpose of wiping out PAL’s deficit. On
September 7, 2007, the Philippine SEC approved PAL’s application to reduce the par value of
PAL’s shares of stock from P
=1.0 per share to P
=0.8 per share. PAL’s resulting reduction surplus
amounting to P
=2.16 billion was applied against the deficit as of March 31, 2007 amounting to
=1.54 billion. However, the approval of the request to undergo equity restructuring was
P
subjected to the condition that the balance of the reduction surplus amounting to P
=626.72 million
shall not be used to wipe out losses that may be incurred in the future without prior approval of
the Philippine SEC.
Details of other components of equity are as follows:
2010
2009
(As restated,
Note 3)
2008
(As restated,
Note 3)
(In Thousands)
Cumulative translation adjustment, net of related
deferred income tax (Note 19)
Net changes in fair values of available-for-sale
investments, net of related deferred income
tax (Notes 6 and 28)
Revaluation increment, net of related deferred
income tax (Note 10)
(P
=4,342,769)
66,440
1,309,159
(P
=2,967,170)
(P
=3,510,311)
125,143
1,497,302
(P
=1,887,866)
(4,089,278)
270,239
1,424,267
(P
=2,394,772)
92
18. Related Party Transactions
The Group, in the normal course of business, has transactions with its stockholders, entities under
common control, associated companies and related parties pertaining to leases of aircraft and
ground property, availment of loans, temporary investments of funds, and purchases of goods and
services, among others. The significant related party transactions are as follows:
a.
As of March 31, 2010 and 2009, the Parent Company’s liability to Maxell amounted to
=431.60 million. This resulted from the Parent Company’s August 2, 2007 BOD resolution
P
that resolved to amend its June 27, 2007 resolution so that the Parent Company only assumes
=3.08 billion (instead of P
P
=14.08 billion) out of the P
=23.12 billion liabilities of the Holding
Companies, as originally planned. The P
=3.08 billion assumed liability was converted to
additional paid-in capital, as approved by the BOD on the same date. This also resulted in a
total of P
=12.12 billion receivables of the Parent Company from the Holding Companies, which
were used in exchange for the Parent Company’s acquisition of the Holding Companies’
investment in PAL and PR amounting to P
=12.44 billion and P
=108.66 million, respectively (see
Note 1).
b.
As of March 31, 2010 and 2009, the Parent Company has advances from Trustmark
amounting to P
=49.49 million. These advances were used to pay filing fees and other expenses
relating to the acquisition of the Holding Companies and the Parent Company’s change in
corporate name and increase in the authorized capital stock.
c.
As of March 31, 2010 and 2009, the Parent Company owns 88 million common shares (7.04%
equity interest) of MAC. Controlling owners of the Company are also close family members
of certain members of the key management of MAC. Likewise, certain members of the
Company’s BOD are also officers and members of the BOD of MAC. Dividends received
from this investment amounted to P
=5.28 million and P
=4.40 million in 2010 and 2009,
respectively (see Note 6).
d. Accounting, statutory reporting and compliance, and administrative services are provided by
an affiliate at no cost to the Company.
e. PAL has finance lease agreements with entities under common control pertaining to three
Airbus 330-300 aircraft. Deposits on leases of said aircraft amounted to P
=3.13 billion and
=3.13 billion as of March 31, 2010 and 2009, respectively. Outstanding obligations under
P
finance lease of the said aircraft amounted to P
=4.15 billion and P
=5.50 billion as of March 31,
2010 and 2009, respectively. Financing charges attributable to these finance lease obligations
amounted to P
=128.09 million in 2010, P
=331.11 million in 2009 and P
=606.74 million in 2008.
Related accrued interest amounted to P
=23.28 million and P
=73.65 million as of March 31, 2010
and 2009, respectively.
f. PAL has a Technical Services Agreement (TSA) with Lufthansa Technik Philippines (LTP),
49% owned by MacroAsia Corporation (an entity under common control), which took effect
on September 1, 2000. The TSA provides that during the entire duration of the agreement,
LTP will serve as the sole and exclusive provider to PAL of aircraft-related technical services
and management of all required maintenance work necessary to achieve the sound operation
and optimal utilization of PAL’s fleet.
The TSA will remain effective for a period of 10 years until September 1, 2010, including the
Heavy Maintenance Service Agreement for D1-Checks (4C/5Y) of Airbus 340-300, Airbus
330-300 and Airbus 320-200 aircraft and Engine Maintenance Services for CFM56-5B
engines.
93
Total LTP-related maintenance and repair costs charged to operations amounted to
=9.04 billion, P
P
=8.03 billion and P
=7.71 billion in 2010, 2009 and 2008, respectively. In
addition, related expendable parts sold to LTP amounted to P
=32.85 million in 2010,
=26.15 million in 2009, and P
P
=75.73 million in 2008.
In connection with the sale of Maintenance and Engineering facilities to LTP in 2000, PAL
and LTP entered into several transition services agreements whereby PAL will render to LTP
various services such as information technology support, training and medical services, among
others. Revenue earned from the said transition services agreements (included under “Others net” in the revenue section of the consolidated statements of comprehensive income)
amounted to P
=60.88 million in 2010, P
=95.49 million in 2009 and P
=99.33 million in 2008.
As of March 31, 2010 and 2009, PAL has outstanding amounts payable to and estimated
unbilled charges from LTP totaling P
=3.04 billion and P
=1.99 billion, respectively, net of
unapplied credits from and advance payments to LTP amounting to P
=65.31 million and
=326.90 million as of March 31, 2010 and 2009, respectively. Receivables from LTP
P
amounted to P
=102.13 million and P
=112.78 million as of March 31, 2010 and 2009,
respectively.
g. The transactions of PAL with APC, an entity under common control, include joint services and
code share agreements, and endorsements of passengers during flight interruptions. In March
2010, PAL, APC and Trustmark entered into an arrangement whereby the Parent Company
assigns P
=1.36 billion of its receivables from APC to Trustmark. As of March 31, 2010 and
2009, PAL has net payable to APC (shown as part of “Accounts payable”) amounting to P
=
298.69 million and net receivable from APC (shown as part of “Non-trade receivable”)
amounting to P
=461.07 million, respectively.
In January 2008, PAL entered into an operating lease agreement with APC covering the
owned Boeing 737-300 aircraft at a fixed monthly rate, for a period of 36 months. In fiscal
year 2010, the PAL and APC agreed to amend the rate of lease charges from a fixed amount to
power-by-the-hour basis. In relation to this, certain spare parts and tools of the said aircraft
were included in the lease.
In October 2009, PAL leased out to APC three Bombardier DHC 8-300 and five Bombardier
DHC 8-400 owned aircraft under operating lease arrangement for 60 months. In March 2010,
PAL also subleased to APC two of its Airbus 320-200 aircraft for 74 and 75 months,
respectively. The related deposit received from APC amounted to P
=99.64 million, as of
March 31, 2010 (included under “Accounts payable”).
The future minimum lease income receivable from these contracts are as follows:
Due within one year
Due after one year but within five years
After more than five years
2009
2010
(In Thousands)
=29,053
P
P
=1,033,314
21,790
3,782,342
–
372,971
=50,843
P
P
=5,188,627
On April 30, 2008, PAL and APC entered into a TSA effective May 1, 2008 and will
remain in force for a period of five years. This agreement covers all aircraft-related technical
services and management of all required maintenance related to the Bombardier aircraft.
Total APC-related maintenance and repair cost amounted to P
=84.53 million and
=123.40 million in 2010 and 2009, respectively.
P
94
h. As of March 31, 2009, the P
=6.05 billion syndicated loan of PAL, presented under “Secured
loans”, include loans obtained from banks under common control, Philippine National Bank
(PNB) and ABC, amounting to P
=1.94 billion and P
=653.70 million, respectively. The related
financing charges on these loans obtained from related parties represent about P
=100.24 million
and P
=75.49 million of total financing charges of fiscal years 2010 and 2009 respectively. The
interest on these loans accrued as at the end of the fiscal year 2010 and 2009 amounted to
=1.45 million and P
P
=3.97 million, respectively.
i. Unsecured claims of PAL include loans from stockholders amounting to P
=243.76 million and P
=
341.96 million as of March 31, 2010 and 2009, respectively. The related financing charges on
these loans amounted to P
=28.41 million, P
=37.51 million and P
=37.80 million in 2010, 2009 and
2008, respectively.
j. As discussed in Note 13, PAL has outstanding short-term notes payable to ABC amounting to
=1.74 billion and P
P
=2.29 billion as of March 31, 2010 and 2009, respectively. Also, the
retirement fund of PAL is being managed by ABC.
As of March 31, 2010 and 2009, the Group’s cash and cash equivalents and short-term
investments (included under “Cash and cash equivalents”, “Short-term investments” and
“Other noncurrent assets” in the consolidated statements of financial position) with ABC
amounted to P
=1.30 billion and P
=4.96 billion, respectively. The related interest income on
these investments amounted to P
=17.42 million in 2010, P
=40.39 million in 2009, and
=124.04 million in 2008.
P
k. PAL maintains checking accounts and money placements with PNB. As of March 31, 2010
and 2009, total cash and cash equivalents maintained with PNB amounted to P
=510.38 million
and P
=140.23 million, respectively.
In 2009, PAL obtained short-term notes from PNB for additional working capital amounting
to P
=2.95 billion. Outstanding balance as of March 31, 2010 and 2009 amounted to
=180.85 million and P
P
=343.46 million, respectively.
In connection with the transfer of its principal office to a new location, PAL entered into an
operating lease agreement with PNB, for the lease of a portion of the PNB Financial Center
Building. The lease is for a period of 10 years commencing on November 1, 2007 and may be
renewed upon mutual agreement of the parties. There is no outstanding rental liability relating
to the said lease contract as of March 31, 2010 and 2009. Minimum rental commitments under
this lease contract are as follows:
Due within one year
Due after one year but within five years
After more than five years
l.
2009
2010
(In Thousands)
=29,053
P
P
=28,986
116,745
122,240
118,731
91,805
=264,529
P
P
=243,031
In June 2009, PAL obtained on demand noninterest-bearing advance from Trustmark amounting
to P
=3.26 billion. Total settlement during the year amounted to P
=2.25 billion, of which P
=835.19
million was paid in cash (see also Note 18.g). The outstanding balance as of March 31, 2010
amounting to P
=905.82 million is included under “Other noncurrent liabilities” account in the
2010 consolidated statement of financial position.
95
m.
In April 2009, PAL’s BOD authorized management to finalize terms of the sale of one of its
parcels of land with a carrying value of P
=323.37 million to an affiliate. This property is
included under “Other current assets” (see Notes 9 and 10).
In June 2010, PAL and the entity under common control executed a Deed of Absolute Sale
and PAL collected the proceeds from the sale.
m. As of March 31, 2010 and 2009, PAL has cash and standby letters of credit with Oceanic
Bank, an entity under common control, amounting to P
=303.63 million and P
=213.30 million,
respectively.
n. The compensation of key management personnel of the Group, consisting mainly of
short-term employee benefits, amounting to P
=39.93 million, P
=44.21 million and P
=45.18
million in 2010, 2009 and 2008, respectively, and retirement benefits of and P
=6.09 million,
=7.62 million and P
P
=8.09 million in 2010, 2009 and 2008, respectively.
19. Comprehensive Income
Comprehensive income consists of net income or loss for the year, together with other gains and
losses that are not recognized in profit or loss for the year as required or permitted by the PFRS
(collectively described as “Other comprehensive income”).
Other comprehensive income includes the following:
=0.14 million in
• Unrealized mark-to-market gains (losses) on available-for-sale investments of P
2010, (P
=76.28 million) in 2009, and P
=39.26 million in 2008. These amounts are net of the
related deferred income tax of P
=0.09 million in 2010, P
=32.57 million in 2009 and
=17.55 million in 2008. On the other hand, the realized mark-to-market losses (gains)
P
removed from equity and transferred to profit and loss amounted to (P
=53.90 million) in 2010,
(P
=6.75 million) in 2009 and P
=10.04 million in 2008. These amounts are net of the related
deferred income tax of P
=23.13 million in 2010, P
=3.42 million in 2009 and P
=5.39 million in
2008.
• Net changes in deferred gain (loss) on cash flow hedges comprise (i) net changes in the fair
values of derivative assets and derivative liabilities designated by management as cash flow
hedging instruments amounting to (P
=4.6 million) in 2010, P
=1.8 billion in 2009, and
=3.9 billion in 2008 and (ii) amount transferred from equity to profit and loss amounting to
P
(P
=1.3 billion) in 2010, (P
=3.4 billion) in 2009 and (P
=1.9 billion) in 2008. Of these amounts
(P
=1,282.5 million) in 2010, and (P
=3,362.5 million) in 2009 pertain to preteminated cash flow
hedges (see Note 28).
The related deferred income tax on these deferred gain (loss) amounted to P
=376.37 million,
=645.73 million and P
P
=678.49 million, in 2010, 2009 and 2008 respectively.
• Increase in revaluation increment in property arising from recognition of the results of an
updated appraisal or effect of exchange rate changes in the aggregate amount of
=167.76 million in 2009 and P
P
=26.86 million in 2008. These amounts are net of the related
deferred income tax of P
=66.30 million and P
=16.22 million, respectively. The latest appraisal
report is March 31, 2009.
• Effect of foreign exchange gains (losses) arising from the translation to Philippine peso of
the assets and liabilities of PAL amounting to (P
=105.00 million), P
=1.90 billion, and
(P
=2.36 billion) in 2010, 2009 and 2008, respectively.
96
Included under “Cumulative translation adjustment” in the consolidated statement of changes in
equity as of March 31, 2010 and 2009 are unrealized after-tax gains on hedging contracts
aggregating to P
=277.08 million and P
=1.16 billion, respectively. As discussed in Note 28, certain
derivative instruments (i.e., fuel derivatives and interest rate swaps) that were designated as
effective hedging instruments over the next two years are expected to protect PAL against the
impact of rising fuel prices and increasing interest rates. The related hedging gains or losses are
expected to be recognized in profit or loss at the same time as the corresponding hedged items are
recognized in profit or loss.
20. Expenses
The significant components of expenses by nature are as follows:
2010
Fuel and oil (Note 28)
Maintenance (Note 18)
Depreciation (Notes 10 and 11)
Crew and staff costs (Note 21)
Groundhandling charges
Financing charges (Notes 13, 15 and 18)
Aircraft lease rentals (Note 25)
Landing and take-off fees (Notes 14
and 16)
Passenger food
P
=22,363,479
10,441,625
7,392,404
7,304,860
3,467,515
2,569,540
2,531,820
2,276,526
1,561,801
2009
(In Thousands)
=38,838,517
P
9,480,925
6,218,287
7,955,141
3,295,370
3,746,429
1,992,666
2,300,914
1,719,498
2008
=20,637,573
P
8,533,665
5,619,022
6,980,017
2,941,541
3,862,407
1,890,923
2,130,622
1,604,503
21. Employee Benefits
As of March 31, the Group’s accrued employee benefits consisted of the following:
2009
2010
(In Thousands)
=3,248,381
P
P
=3,574,980
951,647
1,149,460
=4,200,028
P
P
=4,724,440
Regular retirement benefits
Other benefits
PAL has a noncontributory defined benefit retirement plan covering all its permanent and regular
employees with benefits based on years of service and latest compensation.
The following tables summarize the components of the retirement benefits cost recognized in the
consolidated statements of comprehensive income and the amounts recognized in the consolidated
statements of financial position.
The details of net retirement benefits cost under the defined benefit plan are as follows:
2009
(In Thousands)
=517,398
P
P
=283,161
371,823
496,095
(89,708)
(55,347)
2010
Current service cost
Interest cost on benefit obligation
Expected return on plan assets
Net actuarial loss (gain) recognized
during the year
(301,783)
259,805
2008
=424,661
P
319,170
(35,032)
28,797
(Forward)
97
2009
(In Thousands)
–
94,216
–
117,608
=1,059,318
P
P
=633,950
2010
Curtailment loss
Retirement premiums
Actual return (loss) on plan assets
P
=99,909
=206,624
P
2008
–
–
=737,596
P
(P
=50,876)
The details of net defined retirement benefits liability are as follows:
Defined benefit obligation
Fair value of plan assets
Unrecognized net actuarial gain (loss)
Net defined benefit liability
2009
2010
(In Thousands)
=4,318,578
P
P
=4,686,011
(1,327,979)
(810,259)
2,990,599
3,875,752
257,782
(300,772)
=3,248,381
P
P
=3,574,980
Changes in present value of defined benefit obligation are as follows:
Defined benefit obligation, April 1
Current service cost
Interest cost
Benefits paid
Effect of curtailment
Actuarial loss (gain) on obligation
Defined benefit obligation, March 31
2009
2010
(In Thousands)
=5,149,365
P
P
=4,318,578
517,398
283,161
371,823
496,095
(256,569)
(313,569)
–
(285,762)
(1,463,439)
187,508
=4,318,578
P
P
=4,686,011
Changes in fair value of plan assets are as follows:
Fair value of plan assets, April 1
Expected return on plan assets
Actual contributions to the plan
Benefits paid
Actuarial gain on plan assets
Fair value of plan assets, March 31
2009
2010
(In Thousands)
=1,121,355
P
P
=1,327,979
89,708
55,347
256,569
225,581
(256,569)
(808,551)
116,916
9,903
=1,327,979
P
P
=810,259
The major categories of plan assets as a percentage of the fair value of total plan assets are as
follows:
Investments in government securities
Cash
Receivables
2010
50%
49%
1%
100%
2009
71%
27%
2%
100%
The overall expected return on the plan assets is determined based on the market prices prevailing
on the date applicable to the period over which the obligation is to be settled.
98
The principal assumptions used at the beginning of the fiscal years in determining retirement
benefits cost for PAL’s plans are as follows:
2009
2010
9.86% to 14.45% 7.17% to 10.21%
8%
5%
10% to 12%
10%
Discount rate per annum
Expected annual rate of return on plan assets
Future annual increase in salary
As of March 31, 2010, following are the information with respect to the above assumptions:
discount rate per annum of 8.54% to 9.65%, expected annual rate of return on plan assets of 5%
and future annual increase in salary of 10%.
There are 7,237, 7,816 and 7,286 employees in the plan as of March 31, 2010, 2009 and 2008,
respectively.
Relevant amounts for the current and prior periods are as follows:
2010
Defined benefit obligations
Fair value of plan assets
Deficit
Experience adjustment on plan
liabilities - loss (gain)
Experience adjustment on plan
assets - gain (loss)
P
=4,686,011
(810,259)
3,875,752
2009
P4,318,578
=
(1,327,979)
2,990,599
2008
2007
(In Thousands)
=5,149,365
P
P4,480,529
=
(1,121,355)
(583,863)
4,028,010
3,896,666
2006
=4,131,138
P
(23,409)
4,107,729
506,156
(140,569)
(318,793)
227,546
–
44,562
114,133
(85,908)
15,023
–
Retirement benefits cost under the defined contribution plan amounted to P
=240.45 million in 2010,
P235.91 million in 2009 and P
=
=209.06 million in 2008.
The Group’s expected contribution to the retirement fund in fiscal year ending March 31, 2011 is
about P
=738.24 million.
22. PAL’s Franchise
PAL operates under a franchise, which extends up to the year 2034, granted by the Philippine
Government under Presidential Decree No. 1590. As provided for under the franchise, PAL is
subject to:
a. corporate income tax based on net taxable income; or
b. franchise tax of 2% of the gross revenue derived from nontransport, domestic transport and
outgoing international transport operations, whichever is lower, in lieu of all other taxes,
duties, fees, and licenses of any kind, nature, or description, imposed by any municipal, city,
provincial or national authority or government agency, except real property tax.
As further provided for under its franchise, PAL can carry forward as a deduction from taxable
income, net loss incurred in any year up to five years following the year of such loss (see
Note 23). In addition, the payment of the principal, interest, fees, and other charges on foreign
loans obtained by PAL, and all rentals, interest, fees and other charges paid by PAL to lessors for
the lease of aircraft, engines, spares, other flight or ground equipment, and other personal property
are exempt from all taxes, including withholding tax, provided that the liability for the payment of
said taxes is assumed by PAL.
99
On May 24, 2005, the Expanded-Value Added Tax (E-VAT) law was signed as Republic Act
(RA) No. 9337 or the E-VAT Act of 2005. The E-VAT law took effect on November 1, 2005
following the approval on October 19, 2005 of Revenue Regulation (RR) No. 16-2005 which
provides for the implementation of the rules of the E-VAT law. Among the relevant provisions of
RA No. 9337 are the following:
a. The franchise tax of PAL is abolished;
b. PAL shall be subject to the corporate income tax;
c. PAL shall remain exempt from any taxes, duties, royalties, registration license, and other fees
and charges, as may be provided by PAL’s franchise;
d. Change in corporate income tax rate from 32% to 35% for three years effective on
November 1, 2005, and 30% starting on January 1, 2009 and thereafter;
e. Change in unallowable deduction for interest expense from 38% to 42% of interest income
subject to final tax for three years effective on November 1, 2005, and 33% starting on
January 1, 2009; and
f.
Increase in the VAT rate imposed on goods and services from 10% to 12% effective on
February 1, 2006.
23. Income Taxes
a. The provision for (benefit from) income tax consists of the following:
2010
Current income tax
Deferred income tax
Provision for (benefit from) income tax
P
=100,872
110,409
P
=211,281
2009
(As restated,
Note 3)
(In Thousands)
=134
P
543,230
=543,364
P
2008
(As restated,
Note 3)
=342,260
P
(1,701,652)
(P
=1,359,392)
b. In accordance with PAS 12, Income Taxes, a deferred income tax asset or deferred income tax
liability is recognized related to temporary differences arising from changes in exchange rate
due to measurement of the Group’s nonmonetary assets and liabilities in its functional
currency, which is different from the currency used in determining the Group’s taxable
income or loss. As a result, the Group recognized net deferred income tax liability amounting
to P
=2.30 billion and P
=3.84 billion as of March 31, 2010 and 2009, respectively, in relation to
changes in exchange rates affecting its nonmonetary assets and liabilities.
100
c. The Group’s recognized net deferred income tax assets, all relating to PAL, are as follows:
2010
Deferred income tax assets on:
NOLCO
Accrued retirement benefits cost and
unamortized past service cost
contribution
Unrealized foreign exchange
adjustments - net
Cumulative translation and fair value
adjustments - net
Allowance for doubtful accounts and
inventory losses
Reserves and others
Deferred income tax liabilities on:
Changes in exchange rates related
to nonmonetary assets and
liabilities - net
Prepaid commission and others
Net present value adjustments on
financial liabilities
Revaluation increment in property
Cumulative translation and fair value
adjustments - net
Net deferred income tax assets
2009
(As restated,
Note 3)
(In Thousands)
2008
(As restated,
Note 3)
P
=2,826,113
=
P3,021,484
P
=–
488,192
1,471,206
1,119,395
1,410,905
1,196,459
2,633,760
16,712
503,686
–
17,663
55,210
4,814,795
18,885
532,448
6,744,168
957,173
436,976
5,147,304
(2,304,361)
(1,424,719)
(3,843,060)
(1,558,656)
(1,853,006)
(1,550,317)
(147,377)
(215,494)
(539,954)
(310,724)
(874,705)
(301,061)
–
(4,091,951)
P
=722,844
–
(6,252,394)
=
P491,774
(262,269)
(4,841,358)
P
=305,946
d. As of March 31, 2010 and 2009, the Parent Company did not recognize deferred income tax
asset on the carryforward benefits of NOLCO amounting to P
=34.91 million and
=96.06 million, respectively, as management believes that the Parent Company may not have
P
sufficient future taxable profit to allow all or part of the deferred income tax assets to be
utilized in the future.
As of March 31, 2010, the Parent Company’s NOLCO that are available for deduction against
future taxable income are as follows:
Incurred during fiscal year
ended March 31
2007
2008
2009
2010
Amount
=
P69,829
17,383
8,848
8,678
=
P104,738
Available until
fiscal year
Balance as of
ending
Expired
March 31, 2010
March 31
(In Thousands)
(P
=69,829)
=
P–
2010
–
17,383
2011
–
8,848
2012
–
8,678
2013
(P
=69,829)
=
P34,909
101
As of March 31, the deferred income tax assets on the following deductible temporary
differences were not recognized by PAL because management believes that PAL may not
have sufficient future taxable income against which these deductible temporary differences,
NOLCO and minimum corporate income tax (MCIT) may be utilized.
Accrued retirement benefits
Allowance for doubtful accounts (Note 7)
Provision for contingencies
NOLCO
MCIT
Unrealized foreign exchanges adjustments
long-term obligations
Fair value adjustments on noncurrent derivative liabilities
2009
2010
(In Thousands)
=–
P
P
=3,986,197
4,447,803
4,106,625
–
2,611,388
–
1,370,415
–
96,606
–
–
5,699,608
1,519,918
PAL’s NOLCO amounting to P
=2.02 billion incurred in 2010 and P
=10.07 billion incurred in
2009 can be used as deduction against taxable income until 2015 and 2014, respectively. The
MCIT incurred in 2010 can be used as credit against the regular income tax payable until
2013.
e. A reconciliation of the Group’s provision for (benefit from) income tax computed based on
income (loss) before income tax at the statutory tax rates to the benefit from income tax shown
in the consolidated statements of comprehensive income is as follows:
Provision for (benefit from) income tax
at statutory tax rates
Adjustments resulting from:
Movement in deductible temporary
differences for which no
deferred income tax assets were
recognized
Interest income subjected to final tax
and exempted from tax
Nondeductible portion of interest
expense
Deductible temporary differences
used/recognized in current year
but for which no deferred income
tax assets were recognized in
prior years
Nondeductible expenses and others
Provision for (benefit from) income tax
f.
2009
(As restated,
Note 3)
2010
(In Thousands)
2008
(As restated,
Note 3)
P
=119,963
(P
=4,134,297)
(P
=527,720)
3,808,854
3,759,991
6,084
(8,829)
(69,128)
(193,609)
2,926
27,489
81,296
(2,110,945)
(1,600,688)
P
=211,281
–
959,309
=543,364
P
–
(725,443)
(P
=1,359,392)
RR No. 10-2002 defines expenses to be classified as entertainment, amusement and recreation
(EAR) expenses and sets a limit for the amount that is deductible for tax purposes, i.e., 1% of
net revenue for sales of services and 0.50% of net sales for sales of goods. EAR expenses
amounted to P
=9.89 million in 2010, P
=16.03 million in 2009, and P
=16.10 million in 2008.
102
24. Note to Consolidated Statements of Cash Flows
Noncash investing and financing activities consist of:
2010
2009
2008
(In Thousands)
Investing activities
Purchases of property and equipment on
account (Note 10)
Claims from insurance set-off against long-term
obligation (Notes 10 and 15)
Liability to a related party incurred in relation to
the acquisition of investments in PAL and PR
shares (Note 2)
Liability of the Group assumed by Trustmark as
consideration for the disposal of the
investments in the Holding
Companies (Note 2)
Financing activities
Assignment of various receivables (Note 18)
Liability of the Parent Company to Trustmark
converted to additional paid-in
capital (Note 2)
Liability of the Group to Trustmark released upon
the disposal of the investments in the
Holding Companies (Note 2)
P
=790,517
=
P13,234,369
=
P6,625,406
–
–
814,113
–
–
431,600
–
–
(136,000)
1,358,730
–
–
–
–
3,079,567
–
–
10,998,766
25. Aircraft Lease Commitments and Purchases
Aircraft Purchases and Finance Leases
Airbus aircraft
On December 6, 2005, PAL finalized a Purchase Agreement with Airbus wherein the PAL placed
a firm order for nine Airbus 320-200 aircraft and options for five aircraft for delivery in 2010 to
2013. All nine aircraft on firm order were delivered to and accepted by the PAL during fiscal year
2008 to 2009.
PAL took delivery of five, out of this nine, Airbus 320-200 aircraft in fiscal year 2009. Four of
these five aircraft were acquired under finance leases. Carrying values of passenger aircraft under
finance leases amounted to P
=42.71 billion and P
=49.80 billion as of March 31, 2010 and 2009,
respectively. The acquisition of the fifth aircraft was financed through a Japanese Operating
Lease (JOL) structure and the related predelivery payment was cancelled. Total predelivery
payments returned to PAL in fiscal year 2009 amounted to P
=439.82 million.
On July 28, 2008, PAL exercised its right to purchase two of the five option aircraft for delivery in
fiscal year 2011 by virtue of an amendment agreement to the Purchase Agreement with Airbus.
PAL did not exercise its right, which lapsed in July 2009, to purchase the remaining three of the
five option aircraft.
Boeing aircraft
On October 30, 2006, PAL finalized a Purchase Agreement with Boeing wherein PAL placed a
firm order for two Boeing 777-300ER aircraft for delivery in fiscal year 2010 to fiscal year 2011
and purchase rights for two additional aircraft.
103
In May 2007, PAL finalized a supplemental agreement with Boeing relating to its exercise of
purchase rights for two Boeing 777-300ER aircraft for delivery in fiscal year 2012.
On June 2, 2009, PAL and Boeing agreed to reschedule the deliveries of four Boeing 777-300ER
aircraft from their original delivery schedules of fiscal year 2010, 2011 and 2012 to fiscal years
2013 and 2014 (see Note 10).
Bombardier aircraft
PAL took delivery of two Bombardier DHC 8-400 aircraft from Scandinavian Airlines System
Denmark-Norway-Sweden in May and August 2008. PAL also took delivery of another three
Bombardier DHC 8-400 from Wideroe’s Flyveselskap AS in June and July 2008. In September
2008, PAL received the predelivery payment made in 2008 amounting to P
=535.87 million for the
fourth DHC 8-400 which was cancelled.
In April 2008, Major Win Enterprises Limited assigned to PAL its right to purchase one
Bombardier DHC 8-300 Series aircraft under a purchase agreement with Bombardier, Inc. In the
same month, PAL also signed a purchase agreement with Major Win Enterprises Limited in
respect of two Bombardier DHC 8-300 Series aircraft. PAL accepted delivery of the three
Bombardier DHC 8-300 aircraft, in April and May 2008.
Operating Leases
In March 2010, PAL signed operating lease agreements for the lease of two brand new Airbus
320-200 aircraft for delivery in October and November 2010.
In December 2006, PAL signed operating lease agreements for the lease of two brand new
Boeing 777-300ER aircraft, also as part of its refleeting program. The two aircraft are scheduled
to be delivered in November 2009 and January 2010.
The future minimum lease payments related to the operating lease agreements are shown in the
following table:
Year Ending March 31
2009
2010
(In Thousands)
2010
2011
2012
2013
2014
2015 and thereafter
P
=–
3,508,014
3,457,787
3,457,787
3,154,382
13,735,447
P
=27,313,417
=2,729,839
P
3,607,633
3,334,000
3,334,000
3,024,632
14,125,036
=30,155,140
P
Capital Expenditure Commitments
PAL’s capital expenditure commitments relate principally to the acquisition of aircraft fleet,
aggregating to P
=60.33 billion and P
=64.50 billion as of March 31, 2010 and 2009.
26. Capital Management
The primary objective of the Group’s capital management is to ensure that it maintains a strong
credit and healthy capital ratios in order to support its business and maximize shareholder value.
104
The Group considers its equity as its capital. The Group manages its capital structure and makes
adjustment to it, in light of changes in economic conditions. To maintain or adjust capital
structure, the Group may issue new shares or return capital to shareholders. No changes were
made in the objectives, policies or processes from March 31, 2007 to March 31, 2010. As
mentioned in Note 2, the Philippine SEC has approved PAL’s request to undergo an equity
restructuring and to exit from rehabilitation on September 7, 2007 and September 28, 2007,
respectively.
The Group manages its capital by monitoring its cash flows, earnings before interest, taxes,
depreciation, amortization and rentals, and debt levels.
27. Financial Risk Management Objectives and Policies
Risk Management Structure
BOD
The BOD is mainly responsible for the overall risk management approach and for the approval of
risk strategies and policies of the Group.
Financial Risk Committee
The Financial Risk Committee has the overall responsibility for the development of financial risk
strategies, principles, frameworks, policies and limits. It establishes a forum of discussion of the
Group approach to financial risk issues in order to make relevant decisions.
Finance Risk Office
The Finance Risk Office is responsible for the comprehensive monitoring, evaluating and
analyzing of the Group financial risks in line with the policies and limits set by the Finance Risk
Committee.
Financial Risk Management
The Group’s principal financial instruments, other than derivatives, consist of loans, cash and
cash equivalents, short-term investments, investments in equities, and deposits. The main
purpose of these financial instruments is to raise financing for the Group’s operations. The Group
has various other financial assets and financial liabilities such as trade receivables, trade payables,
and accrued expenses, which arise directly from its operations.
The main risks arising from the use of financial instruments are market risk (consisting of foreign
exchange risk, cash flow interest rate risk, price interest rate risk, equity price risk and fuel price
risk), liquidity risk, counterparty risk and credit risk.
PAL uses derivative financial instruments to manage its exposures to currency, interest and fuel
price risks arising from PAL’s operations and its sources of financing. The details of PAL’s
derivative transactions, including the risk management objectives and the accounting results, are
discussed in this note.
Market risks
Increasing market fluctuations may result in significant equity, cash flow and profit volatility
risks for the Group. Its operating activities as well as its investing and financing activities are
affected by changes in foreign exchange rates, interest rates and fuel prices. The Group seeks to
manage and control these risks primarily through its regular operating and financing activities,
and through execution of a documented hedging strategy.
105
Management of financial market risk is a key priority for the Group. The Group generally applies
sensitivity analysis in analyzing and managing its market risks. Sensitivity analysis enables
management to identify the risk position of the Group as well as provide an approximate
quantification of the risk exposures. Estimates provided for foreign exchange risk, cash flow
interest rate risk, price interest rate risk and fuel price risk are based on the historical volatility for
each market factor, with adjustments being made to arrive at what the Group considers to be
reasonably possible.
Foreign exchange risk
The Group is exposed to foreign exchange rate fluctuations arising from its revenue, expenses and
borrowings in currencies other than its functional currency. The Group manages this exposure by
matching its receipts and payments for each individual currency. Any surplus is sold as soon as
practicable. PAL also uses foreign currency forward contracts and options to hedge a portion of
its exposure. PAL’s significant foreign currency-denominated monetary assets and liabilities as
of March 31 are as follows:
2009
2010
(In Thousands)
Financial assets and financial liabilities:
Financial Assets:
Cash
Receivables
Others*
Financial Liabilities:
Accounts payable
Accrued expenses
Others**
Net foreign currency-denominated
financial assets (liabilities)
Nonfinancial liabilities
Accrued employee benefits payable
Provisions
Net foreign currency-denominated monetary
liabilities
P
=1,320,821
5,522,920
1,686,320
8,530,061
=738,290
P
3,888,819
1,698,934
6,326,043
956,591
4,389,106
1,271,998
6,617,695
1,141,064
4,001,400
1,440,022
6,582,486
1,912,366
(256,443)
(4,724,440)
(2,611,388)
(7,335,828)
(4,200,028)
(1,583,593)
(5,783,621)
(P
=5,423,462)
(P
=6,040,064)
* Includes miscellaneous deposits and security deposits.
** Substantially pertaining to notes payable to a local bank.
The Group recognized P
=96.61 million foreign exchange loss in 2010, P
=752.73 million foreign
exchange gain in 2009 and =
P1.01 billion foreign exchange loss in 2008, arising from the
translation of these foreign currency-denominated financial instruments.
The Group’s foreign currency-denominated exposures comprise primarily of USD and JPY. Other
foreign currency exposures include Canadian Dollar (CAD), Euro (EUR), Australian Dollar
(AUD), Singaporean Dollar (SGD), and Hong Kong Dollar (HKD).
106
Sensitivity analysis
Shown below is the impact on the Group’s income before income tax of reasonably possible
changes in the exchange rates of foreign currencies against the USD, PAL’s functional currency
with all other variables held constant.
Currency
PHP
JPY
Others*
Net
Movement in Foreign
Exchange Rates
10.00%
13.11%
0.32% to 16.23%
2010
Net Loss (Gain) Effect on Income Before Tax
Increase in Foreign
Decrease in Foreign
Exchange Rates
Exchange Rates
(In Thousands)
P
=283,159
(P
=283,159)
(87,185)
87,185
(133,654)
133,654
P
=62,320
(P
=62,320)
*Includes various currencies (i.e. CAD, AUD, EUR, HKD, SGD and others).
Currency
PHP
JPY
Others*
Net
Movement in Foreign
Exchange Rates
15.25%
13.60%
0.00% to 26.73%
2009
Net Loss (Gain) Effect on Income Before Tax
Increase in Foreign
Decrease in Foreign
Exchange Rates
Exchange Rates
(In Thousands)
=
P458,847
(P
=458,847)
(9,345)
9,345
(149,188)
149,188
=
P300,314
(P
=300,314)
*Includes various currencies (i.e. CAD, AUD, EUR, HKD, SGD and others).
PAL’s major currency derivatives consist of options and forwards to buy USD and sell JPY.
Before taking into account the effect of income taxes, income for the period ended March 31, 2010
and 2009 would have either increased by P
=36.19 million and P
=81.35 million or decreased by
=25.18 million and P
P
=140.81 million, respectively.
Other currency derivatives consist of options and forward contracts in different currencies. Before
taking into account the effect of income taxes, income for the period ending March 31, 2010 and
2009 would either increase by =
P43.21 million and =
P36.12 million and decrease by P
=93.98 million
and P
=50.99 million, respectively, had the various foreign exchange rates changed with the range of
6.30% to 13.80% in 2010 and 9.30% to 15.28% in 2009. There is no other impact on the Group’s
equity other than those affecting profit and loss.
Cash flow interest rate risk
The Group’s policy on interest rate risk is designed to limit the Group’s exposure to fluctuating
interest rates. Before taking into account the effects of interest hedging, the ratio of floating rate
to the total borrowings is 0.72:1 and 0.67:1 as of March 31, 2010 and 2009, respectively.
PAL has interest rate swap (IRS) agreements (either as freestanding instruments or embedded in
certain long-term obligations) to manage its interest rate exposure relative to the financing of three
Airbus 330-300 and two Airbus 340-300. With respect to the junior loan financing of one
Airbus 330-300 and two Airbus 340-300, PAL agreed with the counterparties to exchange, at
semi-annual intervals, the difference between PAL’s floating interest rates and the counterparties’
fixed interest rates. The effect of these swap agreements (aggregate notional amounts of
$36.08 million as of March 31, 2009) is to effectively fix PAL’s interest rate exposure under these
financing agreements to rates ranging from 6.50% to 6.61%. There were no swap agreements
entered into in 2010.
107
Sensitivity analysis
The Group’s exposure to cash flow interest rate risk arises from the regular repricing of interest on
the floating rate loans. A sensitivity analysis to a reasonably possible change in the interest rates,
holding all other variables constant, would show the potential decrease or increase in the Group’s
profit and loss.
Income before income tax as of March 31, 2010 and 2009 would either decrease or increase by
=142.49 million and P
P
=54.86 million, respectively, if the USD interest rate for the periods had been
higher or lower by 54 basis points and 25 basis points, respectively. There is no other impact on
the Group’s equity other than those already affecting profit and loss. The Group assumes
concurrent movements in interest rates and parallel shifts in the yield curves.
Price interest rate risk
PAL’s interest rate swaps, designated as cash flow hedges and investments in US treasury bonds,
classified as available-for-sale, are subject to price interest rate risk. The prices of these
investments are monitored based on their current fair values, which are affected by the changes in
market factors such as interest rates.
As of March 31, 2010, the Group has no outstanding quoted debt investments and interest rate
swaps designated as cash flow hedge.
Sensitivity analysis
A sensitivity analysis to a reasonably possible change in the interest rates, holding all other
variables constant, would show the potential decrease or increase in the Group’s equity.
Before taking into account the effect of income taxes, equity as of March 31, 2009 would increase
by P
=1.99 million, and decrease by P
=1.99 million if the USD interest rate for the periods had been
25 basis points higher or lower in 2009. The Group assumes concurrent movements in interest
rates and parallel shifts in the yield curves. The impact on the Group’s equity already excludes the
impact of transactions affecting profit or loss.
Equity price risk
Equity price risk is the risk that the fair values of equity securities decrease as the result of changes
in the levels of equity indices and the value of individual stocks. The prices of these investments
are monitored based on their current fair values.
Sensitivity analysis
Before taking into account the effect of taxes, equity as of March 31, 2010 and 2009 would either
decrease or increase by P
=0.05 million and P
=69.78 million, respectively, had the indices changed by
19.03% in 2010 and 31.55% in 2009. The impact on the Group’s equity already excludes the
impact of transactions affecting profit or loss.
Fuel price risk
The Group is exposed to price risk on jet fuel purchases. This risk is managed by a combination
of strategies with the objective of managing price levels within an acceptable band through various
types of derivative and hedging instruments. In managing this significant risk, the Group has a
portfolio of swaps, collars, and compound structures with sold options or option combinations
with extendible or cancellable features. The Group implements such strategies to manage and
minimize the risks within acceptable risk parameters.
108
PAL’s fuel derivatives are viewed as economic hedges and are not held for speculative purposes.
Short-term exposures are hedged primarily with fuel derivatives indexed to jet fuel. On long-term
exposures, PAL also uses fuel derivatives indexed to crude oil as proxy hedges due to liquidity
constraints in the refined oil products market (i.e., jet fuel). PAL uses a Value-at-Risk (VaR)
computation to estimate the potential three-day loss in the fair value of its fuel derivatives. The
VaR computation is a risk analysis tool designed to statistically estimate the maximum potential
loss from adverse movement in fuel prices.
Assumptions and Limitations of VaR
The VaR methodology employed by PAL uses a three-day period due to the assumption that not
all positions could be undone in a single day given the size of the positions. The VaR computation
makes use of Monte Carlo simulation with multi-factor models. Multi-factor models ensure that
the simulation process takes into account mean reversion tendency and seasonality for fuel prices.
It captures the complex dynamics of the term structure of commodity markets, such as contango
and backwardation. The VaR estimates are made assuming normal market conditions using a 95%
confidence interval and are determined by observing market data movements over a 90-day
period.
The estimated potential three-day losses on its fuel derivative transactions, as calculated in the
VaR model amounted to P
=50.59 million and P
=83.30 million as of March 31, 2010 and 2009,
respectively.
The high, average and low VaR amounts are as follows:
High
April 1, 2009 to March 31, 2010
April 1, 2008 to March 31, 2009
P
=153,806
1,135,119
Average
(In Thousands)
P
=86,884
390,662
Low
P9,958
=
75,536
Liquidity risk
Liquidity risk arises from the possibility that the Group may encounter difficulties in raising funds
to meet commitments from financial instruments (e.g., long-term obligations) or that a market for
derivatives may not exist in some circumstances.
The Group’s objectives to manage its liquidity profile are: (a) to ensure that adequate funding is
available at all times; (b) to meet commitments as they arise without incurring unnecessary costs;
(c) to be able to access funding when needed at the least possible cost; and (d) to maintain an
adequate time spread of refinancing maturities.
The tables below summarize the maturity analysis of the Group’s financial assets and liabilities
based on contractual undiscounted payments (principal and interest):
As of March 31, 2010
<1 year >1-<2 years >2-<3 years >3-<4 years >4-<5 years
(In Thousands)
Accounts payable and accrued
expenses
Notes payable (noncurrent portion
is included under “Other
noncurrent liabilities”)
>5 years
Total
P
= 13,773,385
P
=–
P
=–
P
=–
P
=–
P
=–
P
= 13,773,385
6,103,098
19,876,483
–
–
–
–
–
–
–
–
–
–
6,103,098
19,876,483
(Forward)
109
<1 year >1-<2 years >2-<3 years >3-<4 years >4-<5 years
(In Thousands)
Obligation under finance lease
Other long-term liabilities
Other liability
(under “Accrued expense” and
“Other noncurrent liabilities”)
(Note 16)
Due to related parties
Derivative instruments:
Contractual receivable
Contractual payable
Fuel derivatives
>5 years
Total
P
= 7,067,751
2,439,102
P
= 6,039,147
2,343,039
P
= 3,242,020
1,008,585
P
= 8,074,072
965,423
P
= 1,936,870
907,315
P
= 6,592,377
2,513,288
P
= 32,952,237
10,176,752
414,005
481,090
414,005
–
414,005
–
414,005
–
34,557
–
–
–
1,690,577
481,090
–
–
166,897
8,963,088
P
= 8,963,088
–
–
–
4,664,610
P
= 4,664,610
–
–
–
9,453,500
P
= 9,453,500
–
–
–
2,878,742
P
= 2,878,742
–
–
–
9,105,665
P
= 9,105,665
(1,219,687)
1,327,072
97,285
10,606,618
P
= 30,483,101
(1,219,687)
1,327,072
264,182
45,672,223
P
= 65,548,706
The Group’s total financial liabilities due to be settled currently amounting to P
=30.48 billion
include liabilities aggregating to P
=19.88 billion that management considers as working capital.
Accounts payable and accrued expenses of P
=13.77 billion and due to related parties of
=481.09 million include liabilities that are payable on demand but are expected to be renegotiated
P
in the future. For the other liabilities amounting to P
=10.61 billion, management expects to settle
these from the Group’s cash to be generated from operations and the Group’s financial assets as
shown below:
Financial Assets
Cash
Loans and receivables
Cash equivalents
Receivables - net
<1 Year
>1-<2
Years
>2-<3
Years
>3-<4
Years
(In Thousands)
P
=1,946,622
P
=–
P
=–
P
=–
1,450,399
5,279,662
P
=8,676,683
–
–
P
=–
–
–
P
=–
–
–
P
=–
>4-<5
Years
>5
Years
Total
P
=–
P
=–
P
=1,946,622
–
–
P
=–
–
–
P
=–
1,450,399
5,279,662
P
=8,676,683
As of March 31, 2009
<1 year >1-<2 years >2-<3 years >3-<4 years >4-<5 years
(In Thousands)
Accounts payable and accrued
expenses
Notes payable (noncurrent portion
is included under “Other
noncurrent liabilities”)
Obligation under finance lease
Other long-term liabilities
Other liability
(under “Accrued expense” and
“Other noncurrent liabilities”)
(Note 16)
Due to related parties
Derivative instruments:
Contractual receivable
Contractual payable
Fuel derivatives
>5 years
Total
=12,086,131
P
P
=–
P
=–
P
=–
P
=–
P
=–
=
P12,086,131
6,918,535
7,869,350
4,110,205
–
7,484,637
4,537,384
–
6,538,084
3,989,973
–
3,437,187
1,064,509
–
8,579,991
1,000,108
–
9,106,483
3,597,512
6,918,535
43,015,732
18,299,691
414,008
481,090
414,008
–
414,008
–
414,008
–
414,008
–
34,525
–
2,104,565
481,090
–
–
2,690,811
P
=15,126,840
–
–
–
P
=10,942,065
–
–
–
P
=4,915,704
–
–
–
P
=9,994,107
–
–
–
P
=12,738,520
(1,483,021)
1,509,701
906,896
=32,812,895
P
(1,483,021)
1,509,701
3,597,707
=
P86,530,131
Counterparty risk
The Group’s counterparty risk encompasses issuer risk on investment securities; credit risk on
cash in bank, time deposits, and security deposits; and settlement risk on derivatives. The Group
manages its counterparty risk by transacting with counterparties of good financial condition and
selecting investment grade securities. Settlement risk on derivatives is managed by limiting
aggregate exposure on all outstanding derivatives to any individual counterparty, taking into
account its credit rating. Credit limits are set in line with the long-term rating of the counterparty
as determined by Standard & Poor’s and Moody’s. These limits are regularly monitored,
reviewed and adjusted as deemed necessary. PAL also enters into master netting arrangements
and implements counterparty and transaction limits to avoid concentration of counterparty risk.
110
The table below shows the maximum counterparty exposure before taking into account any
collateral and other credit enhancements of the Group as of March 31:
Cash in bank and cash equivalents,
excluding cash on hand
Short-term investments
Receivables - net
Investment in MAC
Derivative instruments
Margin deposits, lease deposits and others
2010
2009
(In Thousands)
P
=3,150,673
–
5,279,662
242,000
193,211
5,360,643
P
=14,226,189
=5,759,600
P
374,205
4,588,469
255,200
3,266,113
8,856,496
=23,100,083
P
Credit risk
The Group’s exposure to credit risk arises from the possibility that agents and other counterparties
may fail to fulfill their agreed obligations and that the collaterals held may not be sufficient to
cover the Group’s claims. To manage such risk, the Group, through its Credit and Collection
Department, employs a credit evaluation process prior to the accreditation or re-accreditation of its
travel and cargo agents. The Group considers, among other factors, the size, paying habits and the
financial condition of the agents. To further mitigate the risk, the Group requires from its agents
financial guarantees in the form of cash bonds, letters of credit and assignment of time deposits.
The carrying value of these collaterals held as of March 31, 2010 and 2009 amounted to
=1.11 billion and P
P
=1.16 billion, respectively.
The Group, to the best of its knowledge, has no significant concentration of credit risk with any
counterparty.
Credit quality per class of financial assets
The credit quality of receivables is managed by the Group using internal credit quality ratings.
High grade accounts consist of passenger and cargo receivables from agents with good financial
condition and which management believes to be reasonably assured to be recoverable. Standard
grade accounts consist of passenger and cargo receivables from agents with relatively low
defaults. Substandard grade accounts, on the other hand, are receivables from agents with history
of defaulted payments. Accounts from these agents are consistently monitored in order to identify
any potential adverse changes in the credit quality. Receivables from IATA which consist of
receivables from other airlines through the IATA clearing house are deemed high grade accounts
as the expectation of default is minimal.
Past due accounts include those accounts that are past due by only a few days. An analysis of past
due accounts, by age, is discussed in the succeeding section.
The table below shows the credit quality of receivables and an aging analysis of past due accounts:
High
Grade
Standard
Grade
Substandard
Grade
2010
Past Due but not Impaired
Over 30
Over 60
Over 90
Days
Days
Days
(In Thousands)
General traffic
Passenger
receivables
= 2,954,604
P
P
=334,701
P
=6,431
P
=39,131
Cargo receivables
473,563
13,633
–
–
IATA receivables
198,827
–
–
–
Others
–
–
8,922
7,020
Non-trade receivables*
–
–
278,404
120,474
Total
P
=3,626,994
P
=348,334
P
=293,757
P
= 166,625
*Excludes receivables arising from statutory requirements amounting to P3,227,301.
P
=126,679
–
–
3,170
10,734
P
=140,583
P
=43,434
–
–
951
365,544
P
=409,929
Impaired
Financial
Assets
P
=151,815
87,864
–
62,955
1,136,623
P
= 1,439,257
Others
Total
P
=78,399
–
–
–
215,132
P
=293,531
P
= 3,735,194
575,060
198,827
83,018
2,126,911
P
= 6,719,010
111
High Grade
Standard
Grade
Substandard
Grade
2009
Past Due but not Impaired
Over 30
Over 60
Over 90
Days
Days
Days
Impaired
Financial
Assets
Others
Total
P
=43,580
–
–
–
362,972
P
=406,552
P
=3,500,136
330,383
324,234
68,130
2,370,597
P
=6,593,480
(In Thousands)
General traffic
Passenger
receivables
=2,630,622
P
=515,549
P
P
=1,840
P
=160,713
Cargo receivables
101,202
69,050
23,243
13,800
IATA receivables
324,234
–
–
–
Others
–
–
–
8,038
Non-trade receivables*
–
–
–
14,914
Total
=3,056,058
P
=584,599
P
P
=25,083
P
=197,465
*Excludes receivables arising from statutory requirements amounting to P2,885,175.
P
=5,423
12,880
–
–
5,036
P
=23,339
P
=20,531
17,577
–
–
137,567
P
=175,675
P
=121,878
92,631
–
60,092
1,850,108
P
=2,124,709
28. Financial Instruments
Fair Values of Financial Instruments
The table below presents a comparison by category of the carrying amounts and fair values of the
Group’s financial instruments:
2010
Carrying Value
Financial Assets
Cash
Loans and Receivables:
Cash equivalents
Short-term investments
Accounts receivable - net
General traffic
Non-trade*
Margin deposits, lease deposits
and others
Available-for-sale Investments
Equity investments:
Quoted
Unquoted
Derivative assets - Fair value
through profit or loss
Financial Liabilities
Financial liabilities carried at
amortized cost
Accounts payable and accrued
expenses
Notes payable
Obligations under finance
leases
Other long-term liabilities
Due to related parties
Other liability
(under “Accrued expense” and
“Other noncurrent liabilities”)
2009
Carrying Value
Fair Value
(In Thousands)
Fair Value
P
= 1,946,622
P
=1,946,622
=1,069,407
P
=1,069,407
P
1,450,399
–
1,450,399
–
4,767,581
374,205
4,767,581
374,205
4,289,465
990,197
4,289,465
990,197
3,948,281
520,488
3,948,281
520,488
5,360,643
12,090,704
5,081,560
11,811,621
8,856,496
18,467,051
8,613,562
18,224,117
248,794
283,883
532,677
248,794
283,883
532,677
516,291
303,219
819,510
516,291
303,219
819,510
193,211
P
=14,763,214
193,211
P
=14,484,131
3,266,113
=23,622,081
P
3,266,113
=23,379,147
P
P
=13,773,385
6,101,830
P
= 13,773,385
6,101,830
=
P12,087,477
6,888,223
=
P12,087,477
6,888,223
28,675,906
8,644,240
481,090
29,350,153
8,830,432
481,090
36,971,165
15,437,709
481,090
37,408,513
16,503,573
481,090
1,424,991
59,101,442
1,521,687
60,058,577
1,690,364
73,556,028
1,705,229
75,074,105
(Forward)
112
2010
Carrying Value
Derivative Liabilities:
Fair value through profit or loss
Accounted for as cash flow
hedges
2009
Carrying Value
Fair Value
(In Thousands)
Fair Value
P
=453,453
P
= 453,453
=
P6,869,339
=
P6,869,339
–
453,453
P
=59,554,895
–
453,453
P
= 60,512,030
37,721
6,907,060
=
P80,463,088
37,721
6,907,060
=
P81,981,165
*Excludes receivables arising from statutory requirements (net of allowance amounting to =
P560,023 and =
P562,081 as of
March 31, 2010 and 2009, respectively).
The following methods and assumptions are used to estimate the fair value of each class of
financial instruments:
Cash and cash equivalents, short-term investments and receivables
The carrying amounts of cash and cash equivalents approximate fair value. The carrying amounts
of short-term investments and receivables approximate fair value due to their short-term settlement
period.
Current financial instruments
Similarly, the historical cost carrying amounts of miscellaneous deposits, accounts payable,
accrued expenses and due to related parties approximate their fair values due to the short-term
nature of these accounts.
Equity investments (available-for-sale investments)
The fair values of equity investments are generally based upon quoted market prices. Unquoted
equity investments are carried at cost (subject to impairment) if the fair value cannot be
determined reliably or where the variability in the range of fair value estimates is significant.
Security deposits
The fair value of refundable deposits is determined using discounted cash flow techniques
based on prevailing market rates. Discount rates used are 2.12% to 4.21% and 1.65% to 1.67%
for March 31, 2010 and 2009, respectively.
Long-term obligations and short-term, fixed rate notes payable
The fair value of long-term obligations (whether fixed or floating) is generally based on the
present value of expected cash flows with discount rates that are based on risk-adjusted benchmark
rates (in the case of floating rate liabilities with quarterly repricing, the carrying value
approximates the fair value in view of the recent and regular repricing based on current market
rates). The discount rates used range from 0.95% to 5.20% and 0.92% to 4.17% for
USD-denominated loans in 2010 and 2009, respectively. The discount rates used amounted to
1.6% and 2.25% for JPY-denominated loans for in 2010 and 2009, respectively.
The carrying value of the short-term, fixed rate notes payable approximates its fair value due to
the short-term settlement period of the notes (i.e., effect of discounting is minimal).
Derivatives
The fair value of forward exchange contracts is calculated by reference to current forward
exchange rates for contracts with similar maturity profiles.
113
The fair value of interest rate swap transactions is the net present value of estimated future cash
flows.
The fair values of fuel derivatives that are actively traded in an organized and liquid market are
based on published prices. In the absence of an active and liquid market, and depending on the
type of instrument and the underlying commodity, the fair value of fuel derivatives is determined
by the use of either present value methods or standard option valuation models. The valuation
inputs on these fuel derivatives are based on assumptions developed from observable information,
including (but not limited to) the forward curve derived from published or futures prices adjusted
for factors such as seasonality considerations and the volatilities that take into account the impact
of spot prices and the long-term price outlook of the underlying commodity. The fair values of
fuel derivatives with extendible or cancelable features are based on quotes provided by
counterparties.
Derivative Financial Instruments
The derivative financial instruments set out in this section have been entered into to achieve the
Group’s risk management objectives, as discussed in Note 27. PAL’s derivative financial
instruments are accounted for at fair value through profit or loss, except for interest rate swaps and
certain fuel derivatives (which are accounted for as cash flow hedges).
The following table provides information about PAL’s derivative financial instruments
outstanding as of March 31 and the related fair values:
2009
2010
Asset
Fuel derivatives
Interest rate swaps
Currency forwards
Structured currency derivatives
P
=179,307
–
13,451
453
P
=193,211
Asset
Liability
(In Thousands)
=3,231,733
P
P
=443,444
–
–
–
1,766
34,380
8,243
=3,266,113
P
P
=453,453
Liability
=6,829,390
P
37,721
–
39,949
=6,907,060
P
As of March 31, 2010 and 2009, the positive and negative fair values of derivative positions that
will settle in 12 months or less are classified under “Other current assets” (P
=193.21 million in
2010 and P
=3.09 billion in 2009) and “Accrued expenses” (P
=286.56 million in 2010 and
=4.00 billion in 2009), respectively. The positive and negative fair values of derivative positions
P
that will settle in more than 12 months are classified under “Other noncurrent assets”
(P
=179.07 million in 2009) and “Other noncurrent liabilities” (P
=166.90 million in 2010 and
=2.91 billion in 2009), respectively. The derivative asset (liability) balances include amounts
P
arising from derivative settlements that are currently due to (due from) the Group which amounted
to (P
=60.06 million) and (P
=249.28 million) as of March 31, 2010 and 2009, respectively.
Fuel derivatives
PAL is dependent on jet fuel to run its operation. Approximately 33.89% and 47.32% of its
operating expenses represent jet fuel consumption for 2010 and 2009, respectively.
The dramatic increase in all energy prices over the years is another reason why jet fuel and oil
have become a large portion of its expenses. In order to hedge against adverse market condition
and to be able to acquire jet fuel at the lowest possible cost, PAL enters into fuel derivatives. PAL
does not purchase or hold any derivative financial instruments for trading purposes.
114
As of March 31, 2010 and 2009, there are no outstanding fuel derivatives accounted for as cash
flow hedges. The unrealized positive fair value after tax included under “Cumulative translation
adjustment, net of deferred income tax” in the equity section of the consolidated statements of
financial position amounted to P
=277.08 million and P
=1.00 billion for the years ended March 31,
2010 and 2009, respectively.
PAL’s other fuel derivatives, which provide economic hedges against jet fuel price risk, are not
accounted for as accounting hedges. These derivatives include leveraged collars, written calls,
swaps and other structures with extendible or cancelable features and are carried at fair values in
the consolidated statement of financial position, with fair value changes being reported
immediately in the consolidated statement of comprehensive income. As of March 31, 2010, the
outstanding notional amounts of bought and sold options not accounted for as cash flow hedges
totaled 2,205,000 and 1,725,000 barrels, respectively. As of March 31, 2009, the outstanding
notional amounts of bought and sold options not accounted for as cash flow hedges totaled
9,435,000 and 9,705,000 barrels, respectively. The net negative fair value of these fuel derivatives
as of March 31, 2010 and 2009 amounted to P
=204.08 million and P
=3.35 billion, respectively.
During fiscal year 2009, PAL incurred P
=5.30 billion loss resulting from the early termination of
several fuel hedging contracts before maturity date and P
=2.85 billion loss from restructuring deals.
The pretermination includes fuel derivatives previously designated as cash flow hedges (see
discussion under Hedge effectiveness of cash flow hedges).
Interest rate swaps
The interest rate swap agreements relative to the financing of two Airbus 330-300 aircraft have
aggregate notional amounts of $36.08 million as of March 31, 2009 and have expiry dates from
August 27, 2009 and September 24, 2009. Under the agreements, PAL agreed with the
counterparties to exchange, at semi-annual intervals, the difference between PAL’s fixed interest
rates and the counterparties’ floating interest rates. The effect of these swap agreements is to
effectively fix PAL’s interest rate exposures under these financing agreements to rates ranging
from 6.50% to 6.61%. As discussed under “Aircraft secured claims”, the unpaid swap costs
amounting to P
=51.94 million as of March 31, 1999 were converted into long-term liabilities in
1999 and included as part of the outstanding principal balances of the related “Aircraft secured
claims” (see Note 15). There are no outstanding interest rate swaps as of March 31, 2010.
As of March 31, 2009, the estimated negative fair values for these interest rate swap agreements
amounted to P
=37.72 million. Financing charges in the consolidated statements of comprehensive
income include swap costs on the interest rate swap agreements of P
=38.75 million and
=77.99 million for the years ended March 31, 2010 and 2009, respectively.
P
The unrealized negative fair value after tax included under “Cumulative translation adjustment,
net of deferred income tax” in the equity section of the consolidated statements of financial
position amounted to P
=26.24 million as of March 31, 2009.
Currency forwards
The Group’s currency forwards are carried at fair value in the consolidated statements of financial
position, with the fair value changes being reported immediately in the consolidated statements of
comprehensive income. PAL’s outstanding currency forwards consist of short term buy USD and
sell various currencies (i.e., JPY, SGD, AUD). The aggregate notional amount in USD is equal to
$8.67 million as of March 31, 2010. The net positive fair value of these forwards amounts to
=11.69 million as of March 31, 2010.
P
As of March 31, 2010, PAL has no outstanding currency forwards.
115
Structured currency derivatives
PAL enters into structured currency derivatives consisting of option structures with combination of
long calls and short put. These contracts are carried at fair value in the consolidated statement of
financial position. The fair value changes of the derivative instruments are recognized directly in
the consolidated statement of comprehensive income. The outstanding structured currency
derivatives are composed of option to buy USD in various currencies (i.e., AUD, JPY, CAD and
SGD). As of March 31, 2010 and 2009, the contracts have bought and sold options with notional
amounts of $21.22 million, $17.20 million, $29.58 million and $29.23 million, respectively.
Aggregate negative net fair value of these structures as of March 31, 2010 and 2009 amounts to
=7.79 million and P
P
=5.57 million, respectively.
Hedge effectiveness of cash flow hedges
Below is a rollforward of PAL’s “Cumulative translation adjustments” on cash flow hedges for the
years ended March 31:
2009
2010
(In Thousands)
Beginning of year
Items recognized as other comprehensive income:
Changes in fair value of cash flow hedges*
Transferred to profit or loss**
Tax effects of items taken directly to or
transferred from equity
Foreign exchange difference
End of year
P
=1,155,266
=2,386,916
P
(4,578)
(1,282,505)
1,848,022
(3,367,120)
376,373
32,521
(878,189)
P
=277,077
645,729
(358,281)
(1,231,650)
P1,155,266
=
* Refers to the mark-to-market change of the IRS agreements during the year, which eventually matured and
settled in August and September 2009.
**The amount transferred to profit or loss is included in flying operations expense as hedging gain or loss
and the amount from interest rate swaps is included as part of financing charges as swap income or cost.
For the years ended March 31, 2010 and 2009, the effective portion of the positive fair
value changes on PAL’s cash flow hedges that were deferred in equity amounted to
=277.08 million and P
P
=1.16 billion (net of tax), respectively. These include P
=163.3 million and
=1.07 billion effective fair value changes in 2010 and 2009, respectively, on fuel derivatives
P
previously designated as cash flow hedges and which were preterminated in fiscal year 2009.
These amounts will be recognized in profit or loss at the same time as the corresponding hedged
items are recognized in profit or loss. The total mark-to-market loss relating to the ineffective
portion of cash flow hedges for the year ended March 31, 2009, which were recognized
immediately in profit or loss amounted to P
=6.93 million.
116
Fair value changes on derivatives
The net changes in the fair values of all derivative instruments for the years ended March 31 are
as follows:
Beginning of year
Net changes in fair values of derivatives:
Designated as accounting hedges
Not designated as accounting hedges
Fair value of settled instruments**
Foreign exchange difference
End of year*
2009
2010
(In Thousands)
=708,432
P
(P
=3,391,671)
(4,578)
1,467,170
1,462,592
1,634,473
94,420
(P
=200,186)
1,841,138
(12,134,596)
(10,293,458)
6,273,647
(80,292)
(P
=3,391,671)
* Excludes balances that are currently due from the Group amounting to =
P 60.06 million and =
P 249.28 million as of
March 31, 2010 and 2009, respectively.
** Includes fuel derivatives, interest rate swaps, currency forwards and structured currency derivatives.
Fair Value Hierarchy
As of March 31, 2010, the Group’s quoted available-for-sale financial investments measured at
fair value under the Level 1 hierarchy amounted to P
=248.79 million. The Group’s financial assets
measured at Level 2, which consist of derivative assets, amounted to P
=193.21 million, and
financial liabilities measured at Level 2, which consist of derivative liability of P
=453.45 million.
There were no transfers between the levels of hierarchies in 2010 and 2009.
29. Segment Information
The Group has one reportable operating segment, which is the airline business (system-wide).
This is consistent with how the Group’s management internally monitors and analyzes the
financial information for reporting to the chief operating decision-maker, who is responsible for
allocating resources, assessing performance and making operating decisions.
The revenue of the operating segment are mainly derived from rendering transportation services
and all sales are made to external customers.
Segment information for the reportable segment is shown in the following table:
Revenue
Interest income
Financing charges
Depreciation
Net income (loss)
2009
2008
(As restated, (As restated,
Note 3)
Note 3)
2010
(In Thousands)
=71,797,517 P
=63,047,117
P
=61,714,270 P
461,715
839,477
240,451
(3,746,429)
(3,862,407)
(2,569,540)
(6,195,231)
(5,606,044)
(7,359,557)
(10,847,949)
1,621,509
951,008
117
The reconciliation of total revenue reported by reportable operating segment to revenue in the
consolidated statements of comprehensive income is presented in the following table:
2010
Total segment revenue of reportable
operating segment
Nontransport revenue and other income
Total Revenue
P
=61,954,721
2,133,059
P
=64,087,780
2009
2008
(As restated, (As restated,
Note 3)
Note 3)
(In Thousands)
=72,259,232
P
1,534,643
=73,793,875
P
=63,886,594
P
1,270,988
=65,157,582
P
The reconciliation of total income reported by reportable operating segment to total
comprehensive loss in the consolidated statements of comprehensive income is presented in the
following table:
2010
Total segment income (loss) of
reportable segment
Add (deduct) unallocated items:
Nontransport revenue and
other income
Nontransport expenses and
other charges
Benefit from (provision for)
income tax
Net income (loss)
Other comprehensive income (loss)
Total comprehensive loss
P
=951,008
2009
2008
(As restated, (As restated,
Note 3)
Note 3)
(In Thousands)
(P
=10,847,949)
=1,621,509
P
2,133,059
1,534,643
1,270,988
(2,685,545)
(2,936,463)
(4,400,269)
(543,364)
(211,281)
(12,793,133)
187,241
711,754
(1,050,134)
=12,081,379)
(P
=862,893) (P
1,359,392
(148,380)
(541,958)
(P
=690,338)
The Group’s major revenue-producing asset is the fleet owned by the Group, which is employed
across its route network (see Note 10).
118
119
PAL HOLDINGS, INC. AND SUBSIDIARIES
Schedule F Long-term Obligations
March 31, 2010
(Amounts in Thousand Pesos)
Amount
Authorized by
Indenture
Type of Obligation
Obligations under finance leases relating to:
Boeing 747-400 aircraft
Airbus 320-200 aircraft
Airbus 340-300 aircraft
Airbus 330-300 aircraft
P
Long-term debt:
Secured loans
Estimated terminated operating lease claims*
Unsecured claims*
P
-
Amount
Shown as
Current
-
6,175,020
22,500,886
28,675,906
-
369,167
171,472
1,662,723
5,292,208
107,022
1,041,648
5,661,375
278,494
2,704,371
-
2,203,362
6,440,878
8,644,240
P
8,378,382
P
Total
730,589
996,855
1,600,946
2,846,630
-
P
Amount
Shown as
Long-term
P
2,922,311 P
10,077,565
2,663,201
6,837,809
3,652,900
11,074,420
4,264,147
9,684,439
28,941,764 P
Remarks
See Annex A
See Annex B
See Annex C
37,320,146
* Net of imputed interest
120
PAL HOLDINGS, INC. AND SUBSIDIARIES
Schedule F Long-term Obligations - ANNEX A
March 31, 2010
(Amounts in Thousand Pesos)
Type of Obligation
Amount Shown Amount Shown as
as Current
Long-term
Floating
Interest Rate
Payment
Term
Issue
Date
Maturity
Date
Secured Loans:
From a local bank
P
From a syndicate of local banks
P
203,583 P
2,808,268
3 month LIBOR plus
margin of 3%
quarterly
2008
2015
165,584
2,483,940
3 month LIBOR plus
margin of 3%
quarterly
2008
2015
369,167 P
5,292,208
121
PAL HOLDINGS, INC. AND SUBSIDIARIES
Schedule F Long-term Obligations - ANNEX B
March 31, 2010
(Amounts in Thousand Pesos)
Aircraft Type
Amount
Shown as Current
Net Present Value
Amount Shown
as Long-term
Net Present Value
Lease Expiry
Date
Early Lease Termination
Date
1997, 1999, 2000
1998
1999
1998
Estimated Terminated Operating Lease Claims
B747-200
P
SD-360
165,992
P
5,480
P
171,472
103,580
3,442
P
107,022
Restructured Payment terms:
June 7, 2000 - 5%
June 7, 2009 - 31%
June 7, 2010 - 32%
June 7, 2011 - 32%
122
PAL HOLDINGS, INC. AND SUBSIDIARIES
Schedule F
Long-term Obligations - ANNEX C
March 31, 2010
(Amounts in Thousand Pesos)
Original
Fixed
Interest Rate
Original Floating
Interest Rate
Original
Issue
Date
Original
Maturity
Date
707,627
-
2% per annum over
6 month LIBOR
01/16/97
01/16/00
420,074
262,144
10.75%
1.5-4.5% per annum over
1 month LIBOR
various
various
1,552,440
969,771
110,283
71,877
19.50%
weighted average yield rate for various
364-day treasury bill
various
Amount Shown
as Current
Net Present Value
Type of Obligation
Amount Shown
as Long-term
Net Present Value
Unsecured Claims
U.S. Dollar denominated loans:
US$178.5 floating rate note -
P
Others Loans
Peso denominated loans
P
1,132,366
1,662,723
P
P
1,041,648
Restructured payment terms:
June 7, 2000 - 5%
June 7, 2009 - 31%
June 7, 2010 - 32%
June 7, 2011 - 32%
123
PAL HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE I: CAPITAL STOCK
MARCH 31, 2010
Title of Issue
No. of shares
authorized
Common Stock
20,000,000,000
No. of shares issued
and outstanding
5,421,512,096
No. Of shares reserved
for options, warrants,
conversion and other
rights
-
Number of shares held by
Affiliates
5,297,280,230
Directors, Officers
and Employees
9,000
Others
124,222,866
124
PAL HOLDINGS, INC.
SUPPLEMENTARY SCHEDULE OF RETAINED EARNINGS
AVAILABLE FOR DIVIDEND DECLARATION
MARCH 31, 2010
(Amounts in Thousands)
Deficit as of March 31, 2009
Add: Net loss during the year closed to retained earnings
Deficit as of March 31, 2010
P
P
(20,064)
(5,165)
(25,229)
125