1. travel
2. transports
3. air travel
4. airlines

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
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Fiscal Year
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Total Amount of Borrowings
Total No. of Stockholders
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-----------------------------------------------------------------------------------------------------------------------------To be accomplished by SEC Personnel concerned
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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, 2009
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 372,671,595 as of March 31, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
PART I - BUSINESS AND GENERAL INFORMATION
Item 1. Business
a) Corporate History
PAL Holdings, Inc., (the Company), was incorporated in 1930 as “Baguio Gold Mining Company”. In
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 81.6% 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 82.3% 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 transferred 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 losses that may be
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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 2009, PAL’s route network covered 29 points in the Philippines and 31 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 FY2008-09 are described as follows:
During the year, the Airline carried an average of 24,508 passengers (14,699 domestic and 9,809 international)
and 297 tons of cargo (166 tons domestic and 131 tons international) per day.
Operations Summary: System wide
FY 2008-2009 (In Thousand PHP)
Total Transport Revenues
% to Total System wide Revenues
Domestic International
16,417,412
57,659,878
22.2 %
77.8 %
System
74,077,290
100.0 %
Aside from the core business, the Airline also generated revenues from ancillary businesses including ground
handling, inflight sales, and flight & ground training. These non-transport operations generated PHP 611.1
million in net revenues, contributing 0.8% to the Airline's total net revenues.
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Net Revenues by Route
Based on FY2008-2009 results, the revenue contribution by route is shown below:
Transpacific & Canada
Asia & Australia
Total International
Total Domestic
Total System
32.6%
45.2%
77.8%
22.2%
100.0%
International Passenger Services
As of March 31, 2009, PAL’s international route network covered 31 cities (including 7 under jointservice/code
share arrangements with other international carriers) in 16 countries.
24 on-line points :
Guam, Honolulu, Las Vegas, Los Angeles, San Francisco, Vancouver,
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 25 flights a week to North America utilizing B747-400s and A340300s: 10 times weekly non-stop flights to Los Angeles; 8 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 operated regular thrice-weekly direct service to Honolulu. Guam was served 5 times a week.
The Airline is entitled to fly to 33 other US cities for unlimited frequencies under certain terms and conditions of
the Philippines-US bilateral agreement.
Asia and Australia
PAL operated 181 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; 16 times a week to Seoul; 14 times a week to
Bangkok; 12 times a week to Tokyo; 9 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 4 times
weekly service on the Manila-Melbourne-Sydney-Manila route and 3 times weekly service on the ManilaSydney-Melbourne-Manila route.
Domestic Passenger Services
PAL's domestic network covered 29 cities and towns in the Philippines. In FY2008-2009, it flew about 3.9
billion ASKs on its domestic routes, which represented 16.6% of the Airline's total capacity. PAL operated all
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, Legazpi, Manila, Puerto Princesa, Roxas, Tacloban,
Tagbilaran, and Zamboanga. Aside from these, PAL Express serves an additional 10 domestic points including
Busuanga, Calbayog, Catarman, Caticlan, Ormoc, Ozamiz, San Jose, Surigao, Tuguegarao, and Virac, using
turbo prop aircraft (Bombardier Q300 and Q400). PAL Express flew approximately 0.3 billion ASKs (1.3% of
the Airline's total capacity) during the year.
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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
11 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 1999) on 10 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 11 times weekly service
between Doha and Manila; with Royal Brunei Airlines (in place since March 2004) on 6 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 daily 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 July 2001). 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.
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.
The SportsPlus Card is a privilege card designed for sports enthusiasts, which grants members the benefit of
extra free baggage allowance.
(ii) Distribution methods of products or services
PAL maintains a total of twelve (12) sales and ticket offices in Manila, twenty four (24) in other cities in the
Philippines, and twenty nine (29) located in foreign stations. There are thirty three (33) general sales agents in
selected international points and twelve (12) domestic sales agents who handle the promotions and sales of PAL's
products and services.
The Airline's website, "philippineairlines.com", has a booking facility which provides interactive booking of
flights and ticket purchase. 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, dropdown lists, and online cargo booking. Real time flight
information of 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.
(iii) Status of any publicly-announced new product or service
PAL completed the reconfiguration and refurbishment of two 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. The rest of the Airline's
B747-400s will also have the same features and improvement.
PAL Mabuhay Lounges are available in selected international and domestic stations for Mabuhay class
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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.
(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 'fifth freedom' carriers, which fly to the Philippines en route to
their final destinations.
The following table shows main competitors and PAL's total market and capacity share per route.
PAL's Market and Capacity Share
Route
Market
Share
Capacity
Share
Airline Competitors
Transpacific
36.6%
34.5%
Northwest Airlines, Air Canada, Korean Airlines, Asiana Airlines,
Japan Airlines, Cathay Pacific, Eva Airways, China Airlines,
Continental Airlines
Asia and
Australia
31.6%
32.2%
Japan Airlines, Cathay Pacific, Singapore Airlines, Thai Airways,
Korean Airlines, Asiana Airlines, China Airline, Eva Airways,
Qantas Airways, Air Niugini, China Southern Airlines, Dragon Air,
China Eastern Airlines, Air Macau, Royal Brunie, Kuwait Airways,
Northwest Airlines, Malaysia Airlines, Cebu Pacific, Jetstar Asia
PAL competes with the biggest carriers in the airline industry. Northwest Airlines and Continental Airlines are
among the worlds largest in fleet size. Singapore Airlines and Cathay Pacific are among the worlds 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 45.2% share in the domestic market in the fiscal year ending March 2009. Competitors include Cebu
Pacific, Air Philippines, Zest Air, and Seair.
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 the 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, 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 Company Ltd.,
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Sinopec (HK) Petroleum Company Limited, Lubwell Corporation, Safeair Corporation, SK networks Co., Ltd.
Subic Bay Energy Company Limited.
PAL’s inflight catering requirements are provided by its own inflight kitchen in Manila for all outgoing flights.
For incoming flights, the major suppliers include Flying Foods and Hacor in the United States, Singapore
Airport Terminal Services Ltd. (SATS) in Singapore and Tokyo Flight Kitchen in Narita.
(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.
(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;
Maintenance
PAL has a ten year Technical Services Agreement (TSA) with Lufthansa Technik Philipines (LTP), which
started in September 2000 for the maintenance and overhaul requirements of its fleet. PAL's Aircraft
Engineering Department 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.
Man-hour rates for maintenance requirements are negotiated with LTP in accordance with the terms of the PALLTP Technical Service 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.
Development Plans
The airline industry is experiencing slow business as a result of the global recession and the upswing in fuel
prices, PAL was not spared from these circumstances. With these challenges still prevailing, PAL plans to initiate
programs geared toward revenue generation, asset and cost management, and business efficiency.
The Airline will evaluate its route network and venture into other route possibilities. New service programs to
further enhance the customer experience will also be implemented. PAL also plans to maintain or further
improve its on-time performance.
New management systems will be adopted for operational efficiency. PAL will also control costs without
compromising safety and customer satisfaction.
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
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b.
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, 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
principal, interest, fees, and other charges on foreign loans obtained by PAL, and all rentals, interests, 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.
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 EVAT 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 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.
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
The Company strictly complies with and adheres to existing and probable government regulations.
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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.
2.
Republic Act (RA) 8749 “Clean Air Act” - No cost to PAL for FY2008-2009 due monthly
air sampling done by fuel supplier (Petron).
DENR Administrative Order (AO) No.34 “Revised Water Usage and Classification”.
No cost to PAL for period covering FY2008-2009
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.
4.
Presidential Decree No. 1152 “Philippine Environmental Code”- No cost to PAL for period
covering FY2008-2009
5.
Presidential Decree No. 1586 “Establishing an Environmental Impact Assessment System”
DENR Administrative Order No. 96-37. Cost not determined yet due completion of checklist for ECC
(Environmental Compliance Certificate) application for fuel farm at MBC (Maintenance Base
Complex).
6.
Republic Act No. 6969 “Toxic and Hazardous Waste Management”. DENR Administrative Order No.
90-29. Cost: approximately P432,000 for disposal of hazardous wastes; approx 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 purchased by lot..
The effects of PAL’s compliance with environmental laws are as follows:
1. Regulatory compliance
2. Resource utilization
3. Waste generation reduction
4. Environmental cost reduction
5. Improved public image and community relations
6. Improved positive perception of regulators and NGOs
7. 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.
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(xiii) Total number of employees and number of full time employees
The Company’s employees are only the 10 directors who are employed by the company. There
are no regular employees. The Company does not have any plan of hiring employees within the
ensuing twelve months.
PAL Employees :
As of March 31, 2009 PAL has a total workforce of 8,052 as follows:
Classification
Ground Employees
Philippine
Foreign
Flight Crew
Pilots
Cabin Crew
Number of Employees
5,757
230
472
1,593
PAL 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.
Of the total ground employees and flight crew, 4084 and 1509 respectively are covered by a collective
bargaining agreement (CBA). The CBA for the local rank & file ground employees is under moratorium while
negotiations are ongoing for Singapore (expired in December 2008) and Japan (expired in May 2009). The CBA
negotiations for the cabin crew which expired in July 2007 is likewise ongoing.
There has been no strike or threatened industrial action for the last 10 years.
In FY 2008-2009, PAL gave its employees all benefit entitlements in accordance with the 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.
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Procedures undertaken to manage risks
- 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 P19,200. The lease contract was renewed for another two years which expires in May
2010. 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 operating fleet as of March 31, 2009 consists of :
Owned:
Bombardier DHC-8-300
Bombardier DHC-8-400
Capital leases:
Boeing 747-400
Airbus 340-300
Airbus 330-300
Airbus 320-200
Operating leases:
Boeing 747-400
Airbus 320-200
Airbus 319-100
Total
3
5
4
4
8
10
1
8
4
47
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 15 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 Interbank Offered Rate (LIBOR), as applicable.
Aircraft covered by operating lease agreements contain terms ranging from 5 to 11 years. Total operating
13
lease payments amounted to PHP1,992.7 million for 2009 and PHP 1,890.9 million in 2008..
PAL owns land and buildings located at various domestic and foreign stations.
A. Domestic Properties
1. Bacoor, Cavite
2. Maasin, Iloilo City
3. Somerset Millenium 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 . (parcel 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. (parcel of land)
375 sq.m. (parcel of land)
B. Foreign Properties
1. Glenn County,San Francisco, California 83 acres ( walnut farm)
2. Hongkong
977 sq.ft & 3,701 sq.ft. (condominium units)
3. San Mateo, Daly City, California
1,760 sq.ft. & 1,193 sq.ft. (condominium units)
4. Singapore
85 sq.m.; 126 sq.m. & 68 sq.m. (office units)
5, Singapore
65 sq.m. (shop unit)
6. Sydney, Australia
177 sq.m. & 229 sq.m. (office units)
In addition, PAL owns cargo buildings located at the following domestic stations:
1.
2.
3.
4.
5.
6.
7.
Zamboanga
Cebu
Puerto Princesa
Iloilo
Butuan
Kalibo
Legaspi
300 sq.m.
1,215 sq.m.
192 sq.m.
1,000 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 April 2009 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, reinforce the culture of
service, and develop every employee into the total PAL professional committed to the Airline’s corporate values.
The facility serves as the home for the Airline’s Training and Development Department, with the Airline’s seven
training units, namely: Corporate & Commercial Training Sub-department, Flight Deck Crew Training Subdepartment, Inflight Services Training Division, Human Factor Division, PAL Personality Development
Division, 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 ManagerPhilippines, i.e., Passenger Sales, Agency Sales, Metro Manila and Luzon Sales & Services and the Ticket
Office.
The PLC boasts of new and modern training equipment and facilities, such as 13 classrooms, two (2) computer-
14
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, museum, gym, 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 ManiIa 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 68 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 predeparture 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 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 twenty (120) 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 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.
15
The Airlines’ 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, and the Domestic and
International Ticket Offices. It is being proposed that the Data Center be transferred to the same location. Total
area being leased from the PNB is 15,080.08 sq.m.PAL’s properties and equipment include its aircraft fleet,
various parcels of land, and buildings.
Item 3. Legal Proceedings
PAL is currently being investigated by the U.S. Department of Justice based in Washington D.C. for
possible violation of U.S. Anti-trust laws for both passenger and cargo services covering the period
January 1, 1999 to July 11, 2007, which carries for each violation a fine not exceeding PHP 4,842.2
million or imprisonment not exceeding 10 years or both.
Except for the foregoing, the Company and 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 2,085.4 million (10% of its current
assets) for fiscal year ended March 31, 2009.
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, 2009.
16
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:
2009
Second Quarter
First Quarter
2008
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2007
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
HIGH
Php
3.10
3.00
3.50
3.80
4.80
LOW
Php
2.55
2.90
6.30
2.10
3.25
3.60
4.20
8.50
8.20
4.75
4.20
5.10
4.10
3.30
3.10
As of July 10, 2009, the latest practicable trading date, PAL Holdings’ was traded at P 2.85.
2. Holders
The number of shareholders of record as of June 30, 2009, was 6,865 and common
shares outstanding as of the same date were 5,421,512,096.
The top 20 stockholders as of June 30, 2009 are as follows :
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
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.
Mandarin Securities Corp.
R. Coyiuto Securities, Inc.
Ansaldo, Godinez & Co., Inc
BPI Securities Corp.
Triton Securities Corp.
R. S. Lim & Company, Inc.
Abacus Securities Corp.
Quality Investment & Securities Corp
Luys Securities Company, Inc.
No. of Shares Held
5,297,280,230
40,699,176
10,251,679
5,144,000
5,000,000
4,139,000
2,699,375
1,955,157
1,393,907
1,389,692
1,358,902
1,341,774
1,223,561
1,154,000
1,028,779
1,005,378
866,276
% to Total
97.7075%
0.7507%
0.1891%
0.0949%
0.0922%
0.0763%
0.0498%
0.0361%
0.0257%
0.0256%
0.0251%
0.0247%
0.0226%
0.0213%
0.0190%
0.0185%
0.0160%
17
18
19
20
Intra-Invest Securities, Inc.
Investors Securities, Inc.
Irene Imee Lo Ting
776,212
768,121
686,000
0.0143%
0.0142%
0.0127%
* 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, 2009. 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, 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.
18
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 2009 vs. FY 2008
The Company’s consolidated comprehensive loss amounted to PHP12,260.1 million for the fiscal year
ended March 31,2009 a significant decline from the previous years’ comprehensive loss of PHP 528.5
million.
Total revenues for the current fiscal year amounted to PHP 75,311.0 million or 14% increase from last year’s
same period figure of PHP 66,317.8 million. The increase in revenues by PHP 8,993.2 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$1.00 in
2009.
Total consolidated expenses increased by 30% or PHP 20,118.5 million from the previous year’s total of
PHP 67,678.0 million. The growth in expenses was primarily due to higher expenses related to flying operations,
maintenance, and aircraft & traffic servicing offset by the decrease in other expenses.
.
The increase in flying operations by 64% was attributable mainly to higher fuel costs. The rise in fuel cost by
88.2% over last year’s figure of PHP 20,637.6 million was a result of the increase in average fuel price per barrel
from US$ 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 has been
included as part of “Other Income” under “ Revenues”. 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 “Other Expenses”. This
basically explains the reduction in Other Expenses from 2008 to 2009 by 31% and at the same time increased
“Other Revenues” in 2009 by 30%. 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” by PHP 108.6 million.
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 473.3
million for the period.
In compliance with the amended provisions of PAS 1, Presentation of Financial Statements, the Company
recognized a total other comprehensive income of PHP 698.7 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
19
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 Company recognized a foreign
exchange translation gain amounting to PHP 1,902.4 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
b.) FY 2008 vs. FY 2007
The Company’s consolidated comprehensive income for the fiscal year 2008 amounted to (PHP 528.5)
million or a decline of 72% from the previous fiscal year’s of PHP 5,807.6 million. As a result of the early
adoption of Amendments to PAS 1, Presentation of Financial statements, the Company recognized a foreign
exchange translation loss amounting to PHP 2.4 billion in 2008 and PHP 755.7 million in 2007. This is due
to the reduction in exchange rates from Php 48.217 as of March 31, 2007 to PHP 41.756 as of March 31,
2008.
Consolidated revenues for the current fiscal year amounted to PHP 66,317.8 million or 4.9% lower than
last year’s same period figure of PHP 69,716.7 million. The decrease in revenues was mainly due to the
effect of the appreciation of the Philippine peso vis a vis the US dollar from PHP 50.4825 per US$ 1.00 in
2007 to PHP 44.2068 per US$ 1.00 in 2008. Had there been no change in the exchange rate , there would
have been an increase in revenues of PHP 6,016.4 million brought about mainly by the increase in
passenger revenues. The increase in passenger revenues was due to higher net yield per Revenue Passenger
Kilometers (RPK) and by the number of passengers carried, offset by the decrease in other income. The
decrease in other income by 46% was a result of the PHP 3,139.6 million credit memorandum received
from Boeing with respect to the Settlement Agreement and Release entered into with Boeing on October
30, 2006; and the recognition as other revenue in November 2006 the amount of PHP 855.6 million
representing the difference between the face amount of the claims by Manila International Airport
Authority (MIAA) and fair value of the amount of the liability under the compromise agreement entered
into with MIAA. Revenues also include cargo, recoveries arising from surcharges; interest income; and
other income earned during the period.
Consolidated expenses grew by 4.0% from the previous year’s total of PHP 65,156.7 million to PHP
67,678.0 million in the current fiscal year. The increase was mainly due to higher expenses related to
passenger service, reservation & sales, general & administrative and other expenses offset by the decrease
in flying operations, maintenance and aircraft & traffic servicing costs.
Passenger service expenses increased by 11 % .The increase was brought about by the growth in volume of
passengers carried as well as improvements implemented by PAL in cabin crew benefits.
Higher selling expenses recognized related to the above transportation service provided as well as in the
cost incurred under the frequent flyer program resulted to the upward movement in reservation and sales
expenses by 4%.
Improvements in employee benefits implemented by PAL resulted in higher general and administrative
expenses by 23% in 2008.
The effect of the changes in the fair value of outstanding derivative instruments as well as the continued
appreciation of the Philippine peso versus the US dollar had the effect of increasing “Other Expenses” by
PHP 3,138.3 million or 407% higher compared with the previous fiscal year’s figure of PHP 771.2 million.
The substantial appreciation of the Philippine peso vis a vis the US dollar ,on the other hand , had the effect
of reducing the following expenses :
There was a slight decline in flying operations by 0.2% or PHP 50.9 million over last year's total of PHP
30,277.6 million. Had there been no change in the exchange rate, higher fuel, cockpit crew cost and aircraft
lease charges would have been recognized. The rise in fuel cost was a result of higher fuel consumption and
20
the escalation in average fuel price per barrel from US$ 79.81 in 2007 to US$ 89.52 in 2008. Improvements
in pilot’s pay implemented by PAL contributed to the increase in cockpit crew costs. The phase in of four
(4) A319 and two (2) A320 aircraft likewise resulted in higher lease rentals.
Maintenance expense decreased by 10% or PHP 1,019.3 million as compared with the previous year's
figure of PHP 10,018.9 million mainly on account of the appreciation of the Philippine peso vis a vis the US
dollar. Again, had the exchange rate remained at 2007 levels, aircraft, engine and component repair costs
would have increased by 2.6% or PHP 258.5 million.
There was a 2.6 % reduction in aircraft & traffic servicing cost over last year's total of PHP 8,219.5 million
inspite of the increase in number of flights operated in 2008. Had the exchange rate remained the same,
there would have been an increase in aircraft & traffic servicing cost by 11.3%.
As a result of the reassessment done on deferred tax assets and liabilities on all deductible temporary
differences in accordance with PAS 12, Income Taxes the Group recognized a deferred benefit from income
tax of PHP 1,697.9 million for the period.
Financial Condition
FY 2009 vs FY 2008
The Company’s consolidated total assets as of March 31, 2009, amounted to PHP 95,713.5 million or an
increase of 12% from the previous years’ balance of PHP 85,185.3 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 6,662.3 million or 24% as compared with the March 31, 2008 balance
of PHP 27,516.1 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 11% from the March 31, 2008 figure of PHP 5,756.9 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 17,190.6 million as a result of the net increase in property and equipment
balance by PHP 16,804.0 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 7,917.6 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 22,788.4 million over the March 31, 2008 balance of PHP 70,577.2
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
21
aircraft under capital lease. This increased long-term 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 2,348.0 million, down by
PHP 12,260.1 million or 84% from the March 31, 2008 balance of PHP 14,608.1 million. The significant decline
was brought about mainly by the net loss recognized during the fiscal year 2008-2009.
FY 2008 vs FY 2007
As of March 31, 2008, the Company’s consolidated assets amounted to PHP 85,185.3 million or 8% lower
than the March 31, 2007 balance of PHP 92,837.9 million. The decline was brought about mainly by the net
decrease in current and non current assets by 12% and 7% respectively.
The decrease in consolidated current assets by 12% over the March 31, 2007 balance of PHP 31,095.9
million was mainly due to the effect of the appreciation of the Philippine peso vis a vis the US dollar from
PHP 48.217 per US$ 1.00 in 2007 to PHP 41.756 per US$ 1.00 in 2008. Had there been no change in the
exchange rate, current assets balance would have increased by 2% or PHP 699.1 million.
The increase was mainly a result of the upward movement in other current assets due to the recognition of
current derivative assets resulting from the remeasurement to fair value of certain financial assets as well as
derivative instruments and prepayments made to repair entity on aircraft reconfiguration and engine repairs.
These increases, however, were partly reduced by the decrease in cash & cash equivalents by 28% due to
servicing of debts and the downward movement of available for sale investments by 86% resulting from the
remeasurement to fair value of certain financial assets.
The decrease in consolidated noncurrent assets by 7% was mainly due to the effect of the appreciation of
the Philippine peso vis a vis the US dollar. Again, had the exchange rate remained at 2007 levels,
noncurrent assets would have increased by 6% brought about by the net increase in property and equipment
balance by PHP 928.1 million resulting from the acquisition of four A320 aircraft, which PAL took delivery
in April, July and November 2007 as part of its refleeting program. This increase was in part offset by the
early retirement of one (1) A320-200 aircraft from PAL’s operating fleet as a result of the total damage
incurred by the aircraft while landing at a domestic point. The depreciation expense recognized during the
period also had the effect of reducing the carrying values of these assets. Following the transfer of PAL’s
principal offices to its current business address and the transfer of a domestic airport to a new location, the
vacated property as well as the owned land where the old airport was located that was vacated by PAL were
reclassified from property and equipment to investment properties in the amount of PHP 1,472.3 million,
thus the increase in investment properties by 2015%. Likewise, the effect of the remeasurement to fair value
of certain financial assets and derivative instruments increased other non current assets by 34 % as
compared with the March 31, 2007 figure of PHP 2,869.2 million.
Consolidated liabilities decreased by 23% from PHP 91,442.9 million in 2007 to PHP 70,577.2 million as
of March 31, 2008.This is mainly due to the decrease in advances by 97% and long-term obligations-net of
current portion by 20%. The decrease in advances was the result of the Group’s reorganization in 2007.
On August 2, 2007, the Parent Company assumed an additional PHP 3.08 billion out of the PHP 23.12
billion liabilities of the Holding companies to Trustmark. This totaled to PHP 12.12 billion, which was used
to acquire the PAL and PR Holdings’ shares from the 6 Holding Companies via dacion en pago. This
resulted in a liability to Maxell Holdings Corp., one of the Holding Companies amounting to PHP 431.6
million as of March 31,2008. Trustmark agreed to convert its receivable of PHP 3.08 billion into
additional paid-in capital of the Parent Company. Since the 6 Holding Companies no longer form part of the
consolidation, the remaining advances of PHP 11 billion remained in the books of the holding companies.
PAL’s increase in current liabilities was in part due to the availment of additional uncollateralized short
term notes payable from several local banks. This increased Notes payable by 177%. The remeasurement to
22
fair value of certain derivative instruments also had the effect of increasing the accrued liabilities grouped
under current liabilities by 19%. During the year, PAL consistently paid its outstanding debts, which
decreased the current portion of long-term obligations by 33%.
At the end of the fiscal year, long-term obligations recognized under Noncurrent Liabilities, dropped by 20
%. This downward movement is net of additional obligations incurred during the same period as a result of
the acquisition of four (4) A320 aircraft under capital leases. Further, the Company’s reassessment of its
deferred tax position resulted in a reduction of deferred tax liabilities by 100% as of March 31, 2008.
As of March 31, 2008, the Company’s stockholders’ equity amounted to PHP 14,608.1 million. The
significant increase of 947% is mainly attributable to the increase in Additional paid-in capital by 335%.
This was due to the disposal of the Parent Company of its shares in the 6 Holding companies to Trustmark.
The release of the investments in the Holding Companies to Trustmark was accounted for as a disposal of “
legal rights” to those 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 relieved the Group with the liabilities that were settled as theywere
assumed by Trustmark, the ultimate parent company. Accordingly, this 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.
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
23
In addition to the Qualitative Key Performance Indicators of PAL, the following comprise its Quantitiative
Financial Ratios:
03/31/09
03/31/08
Profitability Factors:
1. Return on Total Assets
Net loss/Average Total Assets
-14.37%
0.01%
-11.82%
5.99%
10.37
10.21
35.18
35.85
-2.33
0.64
2. Percentage of Operating Income
Operating Income/Total Revenues
Asset Management:
3. Receivable Turnover
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
In April 2009, PAL’s Board of Directors authorized management to finalize the terms of the sale of one of its
parcel of land with a carrying value of PHP 346.4 million. This property is included under the caption “Other
Current Assets” in the Statement of Financial Position as of March 31, 2009.
i. In May 2009, Trustmark purchased certain unsecured claims against PAL from various debt holders
amounting to PHP 5,264.9 million in face value. These claims are carried in the books at amortized cost
amounting to PHP 4,825.1 million. In June 2009, PAL purchased these unsecured claims from Trustmark at the
same price that they were bought by Trustmark.. Trustmark Holdings Corporation is the parent company of PAL
Holdings,Inc. which owns 84.67% of PAL.
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 PAL signed in December 2006 operating lease agreements for the lease of two
(2) brand new Boeing 777-300ER aircraft scheduled to be delivered in November 2009 and January 2010.
Also, on October 30, 2006 a purchase agreement with Boeing was finalized wherein PAL placed a firm order for
four (4) new Boeing 777-300ER aircraft scheduled to be delivered in fiscal years 2010 to 2012. Subsequent to
fiscal year 2009, the Parent Company and Boeing agreed to reschedule the deliveries of these aircraft from their
aforementioned original delivery schedules to fiscal years 2013 and 2014.
24
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 2011.
PAL also 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, 2009 the passenger cabin of the two (2) B747-400 aircraft have already
been reconfigured.
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.
24.
25.
26.
27.
28.
29.
30.
Cash and cash equivalents- H- (61%) V- (11%)
Available-for-sale- investment- current- H- (100%)
Short-term investments- H- 100%
Receivables-net- H- (11%)
Expendable parts, fuel, materials & supplies- H- (37%)
Other current assets- H- 58%
Property, plant and equipment- cost- H- 35% V- 11%
Property, plant and equipment- at appraised values- H- 47%
Deposits on aircraft leases- H- 24%
Deferred tax assets- H- 82%
Available-for-sale- investment- non-current- H– (11%)
Investment properties- H- (5%)
Other non-current assets- H- (11%)
Notes payable- H- 100%
Current portion of long term liabilities- H- 92%
Accounts payable- H- (36%)
Accrued expenses- H- 31%
Income tax payable- H- (100%)
Unearned transportation revenue- H- (15%)
Long-term liabilities- net of current portion- H- 38% V- 8%
Accrued employee benefits payable- H- 30%
Reserves and other non-current liabilities- H- 34%
Other components of equity- H-98% V- (9%)
Minority interest- H- (82%)
Revenue –H-14%
Expenses – H-30% V- 15%
Income (loss) before income tax- H- (818%) V- (15%)
Provision for income tax- H- 135%
Total Other Comprehensive income- H- 233%
Total Comprehensive loss- H- 2220% 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.
25
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 2009
and 2008.
.
Yr. 2009 - Estimated at P 450,000 exclusive of out-of-pocket expenses for the audit of 2009
financial statements.
Yr.2008 - P 439,514 audit fee and out-of-pocket expenses for the audit of 2008 financial
statements.
b.)
Tax Fees – None
Yr. 2008 -
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, 2009 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
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:
26
Age
Citizenship
Lucio C. Tan
74
Filipino
Jaime J. Bautista
52
Filipino
President and Director/ 1
year/ 1 year
Mariano C.
Tanenglian
69
Filipino
Treasurer & Director/ 1 year/
1 year
Harry C. Tan
63
Filipino
Director/ 1 year/ 1 year
Macario U. Te
79
Filipino
Director/ 1 year/ 1 year
Name
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., Himmel Industries
Inc., Fortune Tobacco Corp., Tanduay
Holdings, Inc., Tanduay Distillers, Inc.,
Eton
Properties
Philippines,
Inc.,
Grandspan Development Corp., Lucky
Travel Corp.; Director of Phil. National
Bank, majority stockholder of Allied
Banking Corp., Century Park Hotel and
The Charter House, Inc.
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
Vice Chairman of Philippine Airlines,
Inc., Director and Treasurer of Asia
Brewery Inc., Basic Holdings Corp.,
Charter House Inc., Himmel Industries
Inc., Fortune Tobacco Corp., Tanduay
Distillers,
Inc.,
Tanduay
Brands
International, Inc., and Grandspan
Development Corp.; Former Director
Treasurer of Allied Banking Corp., Eton
Properties Philippines, Inc., and Tanduay
Holdings, Inc.
Chairman of Tobacco Board; Vice
Chairman of Eton Properties Philippines,
Inc., Tanduay Holdings, Inc., and Lucky
Travel Corp.; Managing Director of
Charter House; Director of Allied Banking
Corp., Basic Holdings Corp., Philippine
Airlines Inc., Fortune Tobacco Corp.,
Asia Brewery Inc., Tanduay Distillers,
Inc., and Foremost Farms, Inc., President
of Century Park Hotel and Landcom
Realty Corp.,
Chairman of MT Holdings Corp.;
previously
director
of
Palawan
Consolidated Mining Corp., Traders
Royal Bank and Traders Hotel, Gotesco
Land, Alcorn Petroleum & Minerals
Corp., Associated Devt Corp. Pacific Rim
Oil Resources Corp., Link World
Construction Development Corp., Suricon
Resources Corp.; Former Director of
27
Wilson T. Young
52
Filipino
Director/ 1 Year/ 1 Year
Lucio K. Tan Jr.
43
Filipino
Director/ 1 year/ 1 year
Michael G. Tan
43
Filipino
Director/1 year/ 1 year
Juanita Tan Lee
66
Filipino
Director/1 year/ 1 year
Philippine
National
Bank,
PNB
Remittance Center Inc., PNB General
Insurers Inc., PNB Holding Corproration,
PNB Investment, Ltd, PNB Capital &
Investment Corp., PNB IFL and PNB
Europe PLC., Oriental Petroleum &
Minerals Corp., Waterfront Phils,
Beneficial PNB Life Corp., Bulawan
Mining Corp., Nissan North Edsa.
Director and President of Tanduay
Holdings, Inc,
Tanduay Brands
International Inc., Director of Eton
Properties Philippines, Inc., Flor De Cana
Shipping, Inc, Air Philippines Corp., and
Victorias Milling Co., Inc.; ,ViceChairman, Board of Trustees of UERM
Medical Center, Board of Trustees
Member of University of the East, Chief
Operating Officer of Tanduay Distillers,
Inc.,
Asian Alcohol Corp., Absolut
Chemicals, Inc. and Total Bulk Corp.
Director/EVP of Fortune Tobacco Corp.;
Director of Allied Bankers Insurance
Corp., Philippine Airlines, Inc., Philippine
National Bank, Tanduay Holdings, Inc.,
Tanduay Brands International, Inc., Air
Philippines
Corp.,
MacroAsia
Corporation, Lucky Travel Corp. and Eton
Properties Philippines, Inc.; EVP of
Foremost Farms, Inc.
Director/Chief Operating Officer of Asia
Brewery, Inc., Director of Allied Banking
Corporation, Allied Bankers Insurance
Corp., Philippine Airlines, Inc., Philippine
Airlines Foundation, Inc.,
Tanduay
Holdings, Inc; Air Philippines Corp.,
Lucky Travel Corp., and Eton Properties
Philippines, Inc.
Director of Eton Properties Philippines,
Inc.; Corporate Secretary of Asia
Brewery, Inc., Asian Alcohol Corp.,
Charter House, Inc., Dominium Realty &
Construction Corp., Far East Molasses
Corp., Foremost Farms, Inc., Fortune
Tobacco Corp., 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., Tanduay
Distillers,
Inc.,
Tanduay
Brands
International Inc., Tobacco Recyclers
Corp., Total Bulk Corp., Zebra Holdings,
Inc.; Assistant Corp. Secretary of Basic
28
Antonino L.
Alindogan, Jr.
70
Filipino
Independent Director/ 1 year/
1 year
Enrique O. Cheng
75
Filipino
Independent Director/ 1 year/
1 year
Ma. Cecilia L.
Pesayco
56
Filipino
Corporate Secretary/ 1 year/
1 year
Susan T. Lee
38
Filipino
Chief Finance Officer/ 1
year/ 1 year
Holdings Corp., and Tanduay Holdings,
Inc.
Chairman of An-Cor Holdings, Inc.;
Independent Director of Phil. Airlines,
Inc., Rizal Commercial Banking Corp.,
Eton Properties Philippines, Inc., House of
Investments, Inc.; President of C55, Inc.;
Former Chairman of Development Bank
of the Philippines (DBP); Former
Consultant for Microfinance of DBP;
Former Member of the Monetary Board of
Bangko Sentral ng Pilipinas.
Chairman of Landmark Corporation;
Chairman/President of Philippine Trade
Center;
Director/Vice-Chairman
of
Hideco Sugar Milling, Co., Inc.;
Independent Director of Philippine
Airlines
Corporate Secretary of Allied Banking
Corp.,
Allied Savings Bank, Eton
Properties Philippines, Inc., Tanduay
Holdings Inc., Air Philippines, Corp., East
Silverlane Realty and Dev’t Corp..
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.
Mariano C. Tanenglian and Harry C. Tan are brothers of Mr. Lucio 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, 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.
29
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, 2009
(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, 2009
30
Title of class
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Name of
beneficial
owner
Lucio C. Tan
Mariano C.
Tanenglian
Harry C. Tan
Jaime J. Bautista
Wilson T. Young
Lucio Tan, Jr.
Michael Tan
Macario U. Te
Juanita Tan Lee
Antonino
Alindogan, Jr.
Enrique O. Cheng
Amount and
nature of
record/beneficial
ownership *
1,000 “r”
1,000 “r”
Citizenship
Percent of
Class
Filipino
Nil
1,000 “r”
500 “r”
500 “r”
1,000” r”
1,000 “r”
1 “r”
500 “r”
500 “r”
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
1,000 “r”
Filipino
Nil
* All shares held by management are of record.
Security ownership of all directors and officers as a group is 8,001 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 89 to 92, 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
31
2. MacroAsia Corporation – investments
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.
32
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 2008 TO MAY 2009
Date of Report
November 19, 2008
Subject Matter Disclosed
Press Release of Philippine Airlines, Inc. (PAL)
November 20, 2008 – PAL reports $114-M loss
May 13, 2009
Trustmark Holdings Corporation (“Trustmark”), the controlling
stockholder of PAL Holdings, Inc., invited holders of the
US$200 million Zero Coupon Notes due 2011 (formerly,
Floating Rate Notes due 2000) issued by Philippine Airlines,
Inc. (the “PAL”) (hereafter, the “Notes”) and creditors in respect
of certain other unsecured indebtedness of PAL (hereafter, the
“Other Indebtedness”) to offer to tender such Notes and Other
Indebtedness for purchase by Trustmark.
The Tenders:
Dutch Auction tenders for unsecured indebtedness of PAL
comprised of the Notes (Reg S ISIN:XS0071784762) and the
Other Indebtedness. The Notes and the Other Indebtedness have
a current aggregate principal amount outstanding of
approximately US$220 million. Trustmark proposes to buy a
combination of the Notes and the Other Indebtedness up to an
aggregate principal amount of US$143 million, at its sole
discretion.
Key dates for tendering the Notes:
Early tender date
Final expiration date
:
Tuesday 19 May 2009 4pm
London Time
(Holders of the Notes must offer to
tender by this time to receive their
purchase price AND the early tender
premium. Holders of the Notes who
offer to tender after will receive their
purchase price without the early
tender premium.)
: Friday 22 May 2009 4pm GMT
33
Settlement date
: Friday May 29 [expected]
The Purchaser:
Trustmark, the primary shareholder in PAL Holdings Inc., in
turn the holder of 84% of the issued share capital of PAL. As
part of this transaction, Trustmark will become the beneficial
owner of the purchased Notes & Other Indebtedness, but intends
to advance all payments made by PAL in respect of the Notes
and Other Indebtedness for future equity subscriptions.
J.P. Morgan Securities Ltd. is sole dealer manager in respect to
this transaction.
May 20, 2009
Further to the earlier announcement regarding the invitation by
Trustmark Holdings Corporation (“Trustmark”), the controlling
stockholder of PAL Holdings, Inc., to the holders of US$200
million Zero Coupon Notes due 2011 (formerly, Floating Rate
Notes due 2000) (the “Notes”) issued by Philippine Airlines,
Inc. (“PAL”) and creditors in respect of certain other unsecured
indebtedness of PAL (the “Other Indebtedness”) to offer to
tender for purchase such Notes and Other Indebtedness, please
be informed that Trustmark has extended the Early Tender
Period to Friday, 22 May 2009, 4pm London Time.
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.
34
35
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
37-38
40-41
Statements of Financial Position - March 31, 2009 and 2008
Statements of Comprehensive Income for the Period Ended March 31, 2009, 2008 and
2007
Statements of Changes in Equity for the Years Ended March 31, 2009, 2008 and 2007
42-43
Statements of Cash Flows for the Years Ended March 31, 2009, 2008 and 2007
48-49
Notes to Financial Statements
50-114
44-45
46-47
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.
115
*
*
*
*
*
116-119
*
*
120
121
*
* 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.
36
37
38
PAL Holdings, Inc.
and Subsidiaries
Consolidated Financial Statements
March 31, 2009 and 2008
and Years Ended March 31, 2009, 2008
and 2007
and
Independent Auditors’ Report
SyCip Gorres Velayo & Co.
39
40
41
PAL HOLDINGS, INC. AND SUBSIDIARIES_________________________________
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Amounts in Thousands)
March 31
2009
2008
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, 18, 27 and 28)
Receivables (Notes 7, 18, 27 and 28)
Expendable parts, fuel, materials and supplies (Note 8)
Other current assets (Notes 8, 9 and 28)
Total Current Assets
P
=5,836,988
374,205
–
5,150,551
938,806
8,553,245
20,853,795
=
P14,783,695
–
92,364
5,756,942
1,486,013
5,397,117
27,516,131
Noncurrent Assets
Property and equipment (Notes 11, 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 5, 12, 16, 18, 25, 27 and 28)
Total Noncurrent Assets
65,065,900
384,955
3,154,548
819,510
1,450,045
581,936
3,402,856
74,859,750
48,261,877
261,100
2,534,673
916,797
1,533,364
320,352
3,840,967
57,669,130
P
= 95,713,545
=
P85,185,261
TOTAL ASSETS
LIABILITIES AND EQUITY
Current Liabilities
Notes payable (Notes 13, 18, 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
Current portion of long-term obligations (Notes 15, 18, 25,
27 and 28)
Total Current Liabilities
P
=6,888,223
3,577,514
14,574,625
481,090
–
5,188,611
=
P3,440,235
5,583,487
11,136,180
481,090
187,109
6,127,234
10,296,454
41,006,517
5,368,235
32,323,570
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 (Note 16)
Total Noncurrent Liabilities
42,112,420
4,200,028
6,046,552
52,359,000
30,511,652
3,237,802
4,504,136
38,253,590
93,365,517
70,577,160
Total Liabilities
(Forward)
42
-2-
March 31
2009
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)
Treasury stock - 55,589 shares, at cost (Note 17)
Minority interests
Total Equity
TOTAL LIABILITIES AND EQUITY
2008
P
= 5,421,568
17,517,283
(21,006,975)
(56)
1,931,820
416,208
2,348,028
=
P5,421,568
17,517,283
(10,614,212)
(56)
12,324,583
2,283,518
14,608,101
P
=95,713,545
=
P85,185,261
See accompanying Notes to Consolidated Financial StatementsSee accompanying Notes to Consolidated Financial Statements.
43
PAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands, Except Earnings Per Share and Number of Shares)
Years Ended March 31
2008
2009
REVENUE
Passenger
Cargo
Interest income (Note 18)
Others (Notes 16 and 18)
EXPENSES (Note 20)
Flying operations (Note 28)
Maintenance (Note 18)
Aircraft and traffic servicing
Passenger service
Reservation and sales
General and administrative (Notes 7 and 16)
Financing charges (Notes 13, 15 and 18)
Others - net (Notes 16 and 28)
INCOME (LOSS) BEFORE INCOMETAX
PROVISION FOR (BENEFIT FROM)
INCOME TAX (Note 23)
NET INCOME (LOSS)
OTHER COMPREHENSIVE
INCOME (LOSS) (Note 19)
Net changes in fair values of available-for-sale
investments, net of deferred income tax
(Note 6)
Net changes in fair values of derivative assets,
net of deferred income tax (Notes 19 and 28)
Increase in revaluation increment due to
appraisal, net of deferred income tax (Note 11)
Effect of foreign exchange translation*
TOTAL OTHER COMPREHENSIVE
INCOME (LOSS)
TOTAL COMPREHENSIVE
INCOME (LOSS)
Net income (loss) attributable to:
Equity holders of the parent
Minority interests
2007
64,699,241
4597819
461,819
5,552,112
75,310,991
55,938,984
5,266,635
839,662
4,272,532
66,317,813
54,593,744
6,016,554
1,264,069
7,842,320
69,716,687
49,506,426
9,957,436
8,786,530
5,099,346
4,245,095
3,761,948
3,746,429
2,693,308
87,796,518
30,226,745
8,999,604
8,009,326
4,872,743
4,053,702
3,743,995
3,862,407
3,909,509
67,678,031
30,277,639
10,018,924
8,219,496
4,389,934
3,913,230
3,046,797
4,519,446
771,182
65,156,648
(12,485,527)
(1,360,218)
4,560,039
473,274
(1,355,667)
(2,466,398)
(12,958,801)
(4,551)
7,026,437
(157,824)
80,111
178,682
(1,231,650)
1,492,058
(981,793)
185,779
1,902,423
263,726
(2,359,886)*
340,040
(755,732)
698,728
(523,991)
(1,218,803)
(12,260,073)
(528,542)
5,807,634
(10,972,902)
(1,985,899)
(12,958,801)
(6,100)
1,549
(4,551)
5,939,284
1,087,153
7,026,437
(Forward)
44
-2-
2009
Total comprehensive income attributable to:
Equity holders of the parent
Minority interests
Years Ended March 31
2008
2007
(10,392,763)
(1,867,310)
(12,260,073)
(445,035)
(83,507)
(528,542)
4,926,225
881,409
5,807,634
(2.0240)
(0.0011)
1.3574
(1.9169)
(0.0821)
1.1259
Basic/Diluted Earnings (Loss) Per Share**
Computed based on Net Income (Loss)
Computed based on Total Comprehensive
Income (Loss)
* 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 48.422, 41.756, and 48.217 as
of March 31, 2009, 2008 and 2007, respectively, and the monthly average exchange rates for the years
then ended. As of July 8, 2009, the applicable exchange rate to US$1 is 48.300.
**Computed using the weighted average number of issued and outstanding shares of stock of 5,421,512,096
in 2009 and 2008 and 4,375,351,766 in 2007.
See accompanying Notes to Consolidated Financial Statements.
45
PAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED MARCH 31, 2009, 2008 AND 2007
(Amounts in Thousands)
BALANCES AT APRIL 1, 2006
Total comprehensive income 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
Total income and expense for the year
Conversion of deposits for future stock
subscription to advances from related parties
Conversion of advances from
parent company to equity
BALANCES AT MARCH 31, 2007
Conversion of advances from parent company
to equity
Conversion of advances from parent company
to equity
Additional paid-in capital applied against deficit
Total comprehensive income for the year
(Notes 3 and 19)
Attributable to Equity Holders of the Parent
Net Changes
in Fair
Values
of Availablefor-sale
Investments Net of
Cumulative
Deferred Revaluation
Translation Income Tax
Increment
Adjustment
(Notes 6
in Property
(Note 19)
and 26)
(Note 11)
Capital
Stock
(Notes 2
and 17)
Additional
Paid-in
Capital
(Notes 2
and 17)
Deposit
for Future
Stock
Subscription
(Note 17)
400,000
12,033
4,814,850
(1,860,443)
27,511
1,020,824
(14,537,023)
–
–
–
(1,471,143)
170,176
287,908
–
–
–
–
–
–
–
(1,471,143)
–
170,176
–
–
(4,814,850)
–
–
Deficit Treasury
(Notes 17
Stock
and 21) (Note 17)
Total
Minority
Interests
Total
(56)
(10,122,304)
1,485,616
(8,636,688)
5,939,284
–
4,926,225
881,409
5,807,634
(38,339)
249,569
38,339
5,977,623
–
–
–
4,926,225
–
881,409
–
5,807,634
–
–
–
(4,814,850)
–
(4,814,850)
5,021,568
4,017,254
–
–
–
–
–
–
9,038,822
–
9,038,822
5,421,568
4,029,287
–
(3,331,586)
197,687
1,270,393
(8,559,400)
(56)
(972,107)
2,367,025
1,394,918
–
3,079,567
–
–
–
–
–
–
3,079,567
–
3,079,567
–
–
10,662,158
(253,729)
–
–
–
–
–
–
–
–
–
253,729
–
–
10,662,158
–
–
–
10,662,158
–
–
–
–
(734,781)
72,552
223,294
(6,100)
–
(445,035)
(83,507)
(528,542)
(Forward)
46
Attributable to Equity Holders of the Parent
Net Changes
in Fair
Values
of Availablefor-sale
Investments Net of
Cumulative
Deferred Revaluation
Translation Income Tax
Increment
Adjustment
(Notes 6
in Property
(Note 19)
and 26)
(Note 11)
Capital
Stock
(Notes 2
and 17)
Additional
Paid-in
Capital
(Notes 2
and 17)
Deposit
For Future
Stock
Subscription
(Note 17)
–
–
–
13,487,996
–
–
–
(734,781)
–
72,552
(69,420)
153,874
69,420
317,049
5,421,568
17,517,283
–
(4,066,367)
270,239
1,424,267
–
–
–
567,938
(145,096)
–
–
–
–
–
–
–
567,938
BALANCE AT MARCH 31, 2009
5,421,568 17,517,283
See accompanying Notes to Consolidated Financial Statements.
–
(3,498,429)
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
Total income and expense for the year
BALANCE AT MARCH 31, 2008
Total comprehensive income 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
Total income and expense for the year
Deficit Treasury
(Notes 17
Stock
and 21) (Note 17)
Total
Minority
Interests
Total
–
–
–
13,296,690
–
(83,507)
–
13,213,183
(8,242,351)
(56)
12,324,583
2,283,518
14,608,101
157,297
(10,972,902)
–
(10,392,763)
(1,867,310)
(12,260,073)
–
(145,096)
(84,262)
73,035
84,262
(10,888,640)
–
–
–
(10,392,763)
–
(1,867,310)
–
(12,260,073)
125,143
1,497,302
(19,130,991)
(56)
1,931,820
416,208
2,348,028
47
PAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
2009
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) before income tax
Adjustments for:
Depreciation and amortization (Notes 10, 11, 18
and 20)
Financing charges (Note 20)
Realization of hedge and non-hedge derivatives
Foreign exchange loss (gain) - net
Interest income
Dividend income
Gain on disposal of property and equipment,
and others
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
Due to related parties
Unearned transportation revenue
Net cash settlement on derivative transactions
Net increase (decrease) in accrued employee benefits
Increase (decrease) in other noncurrent liabilities
Net cash generated from (used in) operations
Financing charges paid
Interest received
Income taxes paid (including final and withholding taxes)
Net cash flows from (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (Notes 11 and 24)
Investments in:
Short-term investments
Available-for-sale investments
Proceeds from disposal of:
Available-for-sale investments
Property and equipment
Dividend received
Return of various deposits
Proceeds from cancellation of predelivery
payments (Note 11)
Additional various deposits made
Decrease (increase) in other noncurrent assets
Net cash flows used in investing activities
Years Ended March 31
2008
2007
(12,485,527)
(1,360,218)
6,218,287
3,746,429
4,532,003
(1,092,910)
(461,819)
(163,776)
5,619,022
3,862,407
1,836,642
836,036
(839,662)
(206,075)
6,259,453
4,519,446
(1,435,167)
378,567
(1,264,069)
(329,391)
(32,298)
260,389
(225,369)
9,522,783
(527,627)
12,161,251
128,277
546,645
(3,692,734)
(312,872)
(200,162)
(1,098,863)
(1,188,745)
158,030
554,906
(2,051,993)
2,676,609
–
(938,623)
(2,140,423)
1,497,270
467,643
(3,246,940)
(2,347,820)
243,295
(278,847)
(5,630,312)
(295,556)
(681,884)
(9,687)
(470,829)
497,309
(621,547)
(530,046)
5,798,646
(2,610,492)
698,846
(270,872)
3,616,128
454,178
1,081,058
–
729,155
1,629,373
144,438
275,088
15,998,732
(3,349,721)
1,028,149
(135,106)
13,542,054
(9,685,763)
(4,049,834)
(2,991,493)
(374,205)
(121)
–
(226,596)
97,774
61,386
163,776
–
764,887
516,333
206,075
98,427
940,082
(22,482)
(1,477,713)
(10,297,266)
–
(55,271)
780,627
(1,965,352)
4,560,039
–
–
953,295
124,154
329,391
110,888
–
(9,715)
(372,527)
(1,856,007)
(Forward)
48
-2-
2009
Years Ended March 31
2008
2007
CASH FLOWS FROM FINANCING ACTIVITIES
Availments of:
Notes payable (Note 13)
Long-term obligations (Notes 15 and 24)
Payments of:
Notes payable (Note 13)
Long-term obligations (Notes 15 and 24)
Advances from related parties
Net cash flows from (used in) financing activities
13,461,218
8,605,201
3,004,790
–
1,665,000
–
(8,049,410)
(6,827,281)
–
7,189,728
(780,000)
(9,937,614)
–
(7,712,824)
(1,615,000)
(8,839,181)
52,125
(8,737,056)
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS
(208,857)
272,683
(1,252,449)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
(8,946,707)
(5,789,365)
1,696,542
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR
14,783,695
20,573,060
18,876,518
CASH AND CASH EQUIVALENTS
AT END OF YEAR (Note 5)
5,836,988
14,783,695
20,573,060
See accompanying Notes to Consolidated Financial Statements.
49
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) 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.
The consolidated financial statements as of March 31, 2009 and 2008 and for each of the three
years in the period ended March 31, 2009 were authorized for issue by the Board of Directors
(BOD) on July 8, 2009.
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 =
P9.04 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.
As a result of the above transactions, the Parent Company had a =
P4.03 billion additional paid
in 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 =
P253.73 million against the additional
paid-in capital (see Note 17).
50
-2b. 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 then its 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 Lucio Tan Group
P
of 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
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
P12.12 billion out of the =
=
P23.12 billion liabilities of the Holding Companies to the Parent
Company (after the assumption by the Parent Company of the =
P14.08 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 =
P11.00 billion, will be
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 =
P3.08 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
=11.00 billion are thus retained with the Holding Companies as a result of the amendment.
P
51
-3-
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
=12.44 billion and P
P
=108.66 million, respectively, in exchange for the full payment of the
Holding Companies’ liabilities to the Parent Company totaling to =
P12.12 billion, including the
=9.04 billion receivables of the Parent Company from the Holding Companies, as of
P
March 31, 2007. This resulted in the recognition of a liability to Maxell Holding Corp.
(Maxell), one of the Holding Companies, amounting to =
P431.60 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 =
P136.00 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 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.
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
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).
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.
52
-4-
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.
3. Summary of Significant Accounting and Financial Reporting Policies
Basis of Preparation
The accompanying 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 Philippine Interpretation based on International Financial
Reporting Interpretation Committee (IFRIC) interpretation which became effective on
April 1, 2008, and amendments to an existing standard which became effective on
July 1, 2008.
•
Philippine Interpretation IFRIC 14, Philippine Accounting Standard (PAS) 19 - The Limit on
a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. This
interpretation provides guidance on how to assess the limit on the amount of surplus in a
defined benefit scheme that can be recognized as an asset under PAS 19, Employee Benefits.
This interpretation did not have an impact on the financial statements of the Group.
•
Amendments to PAS 39, Financial Instruments: Recognition and Measurement and PFRS 7,
Financial Instruments: Disclosures - Reclassification of Financial Assets.
These
amendments state that in rare circumstances, reclassification of certain financial instruments
from held-for-trading to either held-to-maturity, loans and receivables or available-for-sale
categories is allowed, as well as certain instruments from available-for-sale to loans and
receivables. Adoption of these amendments did not have an impact on the financial
statements as there was no reclassification of the Group’s available-for-sale financial
instruments.
53
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Future Changes in Accounting Policies
Following are the new and amended accounting standards and interpretations that will become
effective subsequent to March 31, 2009 and have not been early adopted by the Group.
Effective in fiscal year 2010
•
Revised PFRS 2, Share-based Payment - Vesting Condition and Cancellations, clarifies the
definition of a vesting condition and prescribes the treatment for an award that is effectively
cancelled.
•
PFRS 8, Operating Segments, adopts a full management approach to reporting
segment information. PFRS 8 will replace 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.
•
Revised PAS 23, Borrowing Costs, requires capitalization of borrowing costs when such
costs are directly attributed to the acquisition, construction or production of a qualifying
asset.
•
Amendments to PAS 27, Consolidated and Separate Financial Statements - Cost of an
Investment in a Subsidiary, Jointly Controlled Entity or Associate, has changes in respect of
the holding companies’ separate consolidated financial statements including (a) the deletion
of ‘cost method’, making the distinction between pre-acquisition and post-acquisition profits
no longer required, and (b) in cases of reorganizations where a new parent is inserted above
an existing parent of the group (subject to meeting specific requirements), the cost of the
subsidiary is the previous carrying amount of its share of equity items in the subsidiary rather
than its fair value. All dividends will be recognized in profit or loss. However, the payment
of such dividends requires the entity to consider whether there is an indicator of impairment.
•
Amendments to PAS 32, Financial Instruments: Presentation and PAS 1, Presentation of
Financial Statements - Puttable Financial Instruments and Obligations Arising on
Liquidation, specify, among others, that puttable financial instruments will be classified as
equity if they have all of the following specified features: (a) the instrument entitles the
holder to require the entity to repurchase or redeem the instrument (either on an ongoing
basis or on liquidation) for a pro-rata share of the entity’s net assets, (b) the instrument is in
the most subordinate class of instruments, with no priority over other claims to the assets of
the entity on liquidation, (c) all instruments in the subordinate class have identical features,
(d) the instrument does not include any contractual obligation to pay cash or financial assets
other than the holder’s right to a pro-rata share of the entity’s net assets, and (e) the total
expected cash flows attributable to the instrument over its life are based substantially on the
profit or loss, a change in recognized net assets, or a change in the fair value of the
recognized and unrecognized net assets of the entity over the life of the instrument.
•
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
fulfilled. Management has yet to complete its assessment of the impact of adopting IFRIC
13 in fiscal year 2010.
54
-6-
•
Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation,
provides guidance on identifying foreign currency risks that qualify for hedge accounting in
the hedge of net investment; where within the group the hedging instrument can be held in
the hedge of a net investment; and how an entity should determine the amount of foreign
currency gains or losses, relating to both the net investment and the hedging instrument, to
be recycled on disposal of the net investment.
Improvements to PFRS
In May 2008, the International Accounting Standards Board issued its first omnibus of
amendments to certain standards, primarily with a view to remove inconsistencies and clarify
wordings. There are separate transitional provisions for each standard.
•
PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations, specifies that
when a subsidiary is held for sale, all of its assets and liabilities will be classified as held for
sale under PFRS 5, even when the entity retains a noncontrolling interest in the subsidiary
after the sale.
•
PAS 1, Presentation of Financial Statements, clarifies that assets and liabilities classified as
held for trading are not automatically classified as current in the balance sheet.
•
Amendment to PAS 16, Property, Plant and Equipment, replaces the term ‘net selling price’
with ‘fair value less costs to sell’, to be consistent with PFRS 5, Noncurrent Assets Held for
Sale and Discontinued Operations and PAS 36, Impairment of Assets. It also clarifies that
items of property, plant and equipment held for rental that are routinely sold in the ordinary
course of business after rental, are transferred to inventory when rental ceases and they are
held for sale. Proceeds of such sales are subsequently shown as revenue. PAS 7, Statement
of Cash Flows, is also revised to require cash payments on initial recognition of such items,
the cash receipts from rents and subsequent sales to be shown as cash flows from operating
activities.
•
PAS 19, Employee Benefits, revises the definition of ‘past service costs’ to include
reductions in benefits related to past services (‘negative past service costs’) and to exclude
reductions in benefits related to future services that arise from plan amendments.
Amendments to plans that result in a reduction in benefits related to future services are
accounted for as a curtailment.
It also revises the definition of ‘return on plan assets’ to exclude plan administration costs if
they have already been included in the actuarial assumptions used to measure the defined
benefit obligation. It further revises the definition of ‘short-term’ and ‘other long-term’
employee benefits to focus on the point in time at which the liability is due to be settled. It
also deletes the reference to the recognition of contingent liabilities to ensure consistency
with PAS 37, Provisions, Contingent Liabilities and Contingent Assets.
•
PAS 23, Borrowing Costs, revises the definition of borrowing costs to consolidate the types
of items that are considered components of ‘borrowing costs’, i.e., components of the interest
expense calculated using the effective interest rate method.
55
•
•
-7PAS 28, Investment in Associates, clarifies that if an associate is accounted for at fair value
in accordance with PAS 39, only the requirement of PAS 28 to disclose the nature and extent
of any significant restrictions on the ability of the associate to transfer funds to the entity in
the form of cash or repayment of loans applies. It also defines an investment in an associate
as a single asset for the purpose of conducting the impairment test. Therefore, any
impairment test is not separately allocated to the goodwill included in the investment
balance.
PAS 31, Interest in Joint Ventures, clarifies that if a joint venture is accounted for at fair
value, in accordance with PAS 39, only the requirements of PAS 31 to disclose the
commitments of the venturer and the joint venture, as well as summary financial information
about the assets, liabilities, income and expense will apply.
•
PAS 36, Impairment of Assets, provides that when discounted cash flows are used to
estimate ‘fair value less cost to sell’, additional disclosure is required about the discount rate,
consistent with disclosures required when the discounted cash flows are used to estimate
‘value in use’.
•
PAS 38, Intangible Assets, provides that expenditure on advertising and promotional
activities is recognized as an expense when the Group either has the right to access the goods
or has received the services. Advertising and promotional activities now specifically include
mail order catalogues. It also deletes references to there being rarely, if ever, persuasive
evidence to support an amortization method for finite life intangible assets that results in a
lower amount of accumulated amortization than under the straight-line method, thereby
effectively allowing the use of the unit of production method.
•
PAS 39, Financial Instruments: Recognition and Measurement, provides that changes in
circumstances relating to derivatives, specifically derivatives designated or re-designated as
hedging instruments after initial recognition, are not reclassifications. It further removes the
reference to a ‘segment’ when determining whether an instrument qualifies as a hedge. It
also requires use of the revised effective interest rate (rather than the original effective
interest rate) when remeasuring a debt instrument on the cessation of fair value hedge
accounting.
•
PAS 40, Investment Properties, revises the scope (and the scope of PAS 16, Property, Plant
and Equipment) to include property that is being constructed or developed for future use as
an investment property. Where an entity is unable to determine the fair value of an
investment property under construction but expects to be able to determine its fair value on
completion, the investment under construction will be measured at cost until such time as
fair value can be determined or construction is complete.
PAS 41, Agriculture, removes the reference to the use of a pretax discount rate to
determine fair value, thereby allowing use of either a pretax or post-tax discount rate
depending on the valuation methodology used and removes the prohibition to take into
account cash flows resulting from any additional transformations when estimating fair value.
Instead, cash flows that are expected to be generated in the ‘most relevant market’ are taken
into account.
Effective in fiscal year 2011
•
•
Revised PFRS 3, Business Combinations and PAS 27, Consolidated and Separate Financial
Statements. The revised PFRS 3 introduces a number of changes in the accounting for
business combinations that will impact the amount of goodwill recognized, the reported
56
-8results 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
does 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. The amendment also changes the
accounting for losses incurred by the subsidiary and loss of control of a subsidiary.
•
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 Noncash Assets to Owners, provides
guidance on when to recognize a dividend payable, how to measure it, and the accounting
treatment for the difference between the carrying amount of the assets distributed and the
carrying amount of dividends payable when an entity settles the dividend payable. The
interpretation applies to all non-reciprocal distribution of noncash assets (e.g., items of
property, plant and equipment, businesses as defined in PFRS 3, ownership interests in
another entity or disposal groups as defined in PFRS 5), including those giving the owners a
choice of receiving either noncash or cash alternative, provided that all owners of the same
class of equity instruments are treated equally and the noncash assets distributed are not
ultimately controlled by the same party or parties both before and after the distribution. This
exclusion applies to the separate, individual and consolidated financial statements of an
entity that makes the distribution.
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 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 2009.
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, 2009 and 2008
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)
57
-9-
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 interest represents 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
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.
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.
58
- 10 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.
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 financial reporting date.
“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 the consolidated
statements of comprehensive income. 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
the consolidated net income or loss 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 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 the consolidated
statements of comprehensive income. Interest earned or incurred and dividend income is
recorded when the right of payments 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.
59
- 11 Financial instruments may be designated as at fair value through profit or loss by management on
initial recognition when 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, or
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 income 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.
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
60
- 12 discounts. For investments carried at amortized cost, gains and losses are recognized in income
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, 2009 and 2008.
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 as
part of other comprehensive income 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 the consolidated net income or loss in 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 the consolidated net
income 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., longterm 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, accrued expenses, notes payable,
obligations under finance leases, other long-term liabilities 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,
receive-floating 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
61
- 13 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.
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 income or loss in the same period or
periods during which the hedged forecasted transaction or recognized asset or liability affect 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 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 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 the 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.
62
- 14 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 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 statement of financial position date whether there is objective
evidence that a financial asset may be impaired.
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 income.
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
63
- 15 -
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.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be
related objectively to 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 the consolidated statement of comprehensive income, to the extent that the
carrying value of the asset does not exceed its amortized cost at the reversal date.
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 financial assets, impairment would
include a significant or prolonged decline in the fair value of the investments below its 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 income.
Impairment losses on equity investments are not reversed through income. Increases in fair value
after impairment are recognized directly in the 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 income.
64
- 16 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.
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.
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 in property”, 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.
65
- 17 Depreciation, which commences when the asset is available for use, is computed on a straightline 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 and any impairment in
value and related revaluation increment are eliminated from the accounts. Any gain or loss
resulting from their disposal is recognized as income and included in the consolidated statement
of comprehensive income.
The portion of “Revaluation increment in property, 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.
66
- 18 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.
Depreciation and amortization of depreciable investment properties is calculated on a straightline 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
owner-occupation 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 new cost of
the investment property. The corresponding revaluation increment, net of the related deferred
income tax liability, of the asset is retained in equity and released to retained earnings when the
asset is derecognized.
Investment properties are derecognized when they are either disposed of or permanently
withdrawn from use and no future economic benefit is expected from its disposal. Any gains or
losses on the retirement or disposal of an investment property are recognized as income 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 net selling price 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 as expense in the consolidated statement of
comprehensive income.
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.
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).
67
- 19 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 statements
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 income.
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 the consolidated
statement of comprehensive income on a straight-line basis over the terms of the lease
agreements.
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 to
consolidated financial statements 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.
Revenue and Related Commissions
Passenger ticket and cargo waybill sales 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 lifted). 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. The amount of commission not yet recognized as expense
is treated as a prepayment and is reflected as a reduction of “Unearned transportation revenue” in
the consolidated statement of financial position.
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
68
- 20 changes in revaluation increment in property, gains and losses on re-measuring available-for-sale
financial assets, and any effective portion of gains and losses on hedging instruments in cash
flow hedges.
Interest and Dividend Income
Interest on cash, cash equivalents and other short-term cash investments and investments in
bonds 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.
Liability Under Frequent Flyer Program
PAL operates a frequent flyer program called “Mabuhay Miles.” The incremental cost of
providing awards in exchange for redemption of miles earned by members is accrued in the
accounts as an operating cost and a liability after allowing for miles which are not expected to be
redeemed. The liability is adjusted periodically based on awards earned, awards redeemed, and
changes in the frequent flyer program.
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
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 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.
69
- 21 -
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 statement of financial position date.
Deferred income tax
Deferred income tax is provided, using the balance sheet liability method, on all temporary
differences at the statement of financial position date 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 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 non-taxable 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 statement of financial
position date 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 statement of financial position
date 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 as of statement of financial
position date.
Income tax relating to items recognized directly in equity is recognized in equity and not
included in the calculation of comprehensive 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.
70
- 22 Functional Currency and Foreign Currency Translation
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 statement of financial
position date. 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 statement of financial position date;
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 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. When a foreign operation is sold or disposed of, exchange
differences that were recorded in equity are recognized in the consolidated statement of
comprehensive income.
Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) is calculated based on net income (loss) before other
comprehensive income 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 Statement of Financial Position Date
Post year-end events that provide additional information about the Group’s position at the
statement of financial position date (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.
71
- 23 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
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.
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
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.
72
- 24 -
Classification of leases
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 capitalized. 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 =
P47.17 billion and =
P37.86 billion as of
March 31, 2009 and 2008, respectively (see Note 11).
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).
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
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.
The carrying value of receivables, net of allowance for doubtful accounts, as of March 31, 2009
and 2008 amounted to P
=5.15 billion and =
P5.76 billion, respectively. The allowance for doubtful
accounts as of March 31, 2009 and March 31, 2008 amounted to =
P4.45 billion and P
=3.12 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 income or loss.
73
- 25 -
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 (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 fair values of 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, 2009 and 2008 amounting to =
P938.81 million and
=1.49 billion, respectively, are stated at the lower of cost and net realizable value (see Note 8).
P
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 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 statement of
financial position date.
The resulting revaluation increment, net of related deferred income tax, in the valuation of these
assets based on appraisal reports amounted to =
P1.50 billion (net of minority interests’ share
amounting to P
=271.12 million) and =
P1.42 billion (net of minority interests’ share amounting to
=257.89 million) as of March 31, 2009 and 2008, respectively. These are presented as
P
“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. Increase in the values
of property resulting from revaluation is treated as other comprehensive income.
74
- 26 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, 2009 and 2008 amounted to =
P65.45 billion and P
=48.52 billion,
respectively (see Note 11). The carrying amount of investment properties, net of accumulated
depreciation, as of March 31, 2009 and 2008 amounted to =
P1.45 billion and P
=1.53 billion,
respectively (see Note 10).
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 non-financial 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 cash-generating 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 its non-financial assets. Other assumptions include fuel costs
and fuel surcharge rate. As of March 31, 2009 and 2008, the aggregate net carrying value of
the Group’s nonfinancial assets amounted to =
P66.90 billion and =
P50.05 billion, respectively
(see Notes 10 and 11). No impairment loss was recognized in 2009, 2008 and 2007.
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, 2009 and 2008 amounted to
=4.20 billion and P
P
=3.24 billion, respectively. Unrecognized net actuarial gain (loss) amounted to
=257.78 million and (P
P
=1.58 billion) as of March 31, 2009 and 2008, respectively, which resulted
from changes in actuarial assumptions (see Note 21).
Estimation of liability for tickets sold but not yet serviced
The Group assesses at each statement of financial position date its liability for tickets sold but
not yet serviced 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, net of the related prepaid commission, amounted to =
P5.19 billion and =
P6.13 billion as of
March 31, 2009 and 2008, respectively.
Estimation of liability under the Frequent Flyer Program
The incremental cost of providing awards in exchange for redemption of miles earned by
members is accrued in the accounts as an operating cost and a liability after considering the miles
which are not expected to be redeemed. The accrued cost is based on various estimates with
respect to the incremental food, insurance and other costs incurred in providing such schemes.
Additional assumptions are made, based on general customer behavior, regarding the likelihood
75
- 27 of a customer redeeming the miles from PAL. Changes in cost estimates or accrual methods,
among other factors, could have a significant effect on PAL’s financial results. Liability under
the frequent flyer program amounted to =
P491.77 million and =
P236.80 million as of March 31,
2009 and 2008, respectively (see Note 16).
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 statement of
financial position date. The amount of provision is being reassessed at least on an annual basis
to consider new and relevant information. Accrued provisions amounted to =
P1.58 billion and
=1.40 billion as of March 31, 2009 and 2008, respectively (see Note 16).
P
Recognition of deferred income tax assets
The Group assesses at each statement of financial position date and recognizes deferred income
tax assets to the extent of probable 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 =
P6.83 billion and =
P5.16 billion as of March 31, 2009 and
2008, respectively (see Note 23).
5. Cash and Cash Equivalents
Cash (Note 18)
Cash equivalents (Note 18)
2008
2009
(In Thousands)
P
=1,822,048
P
=1,069,407
12,961,647
4,767,581
P
=14,783,695
P
=5,836,988
Cash equivalents amounting to =
P506.69 million and =
P130.20 million as of March 31, 2009 and
2008, respectively, were used to collateralize standby letters of credit. These are shown as part
of “Other noncurrent assets” in the consolidated statements of financial position.
6. Available-for-sale Investments
The Group’s available-for-sale investments include investments in MAC (amounting to
=255.20 million and P
P
=330.00 million as of March 31, 2009 and 2008, respectively), certain
quoted equity investments (amounting to =
P261.09 million and =
P322.48 million as of March 31,
2009 and 2008, respectively), unquoted equity investments (amounting to =
P303.22 million and
=264.32 million as of March 31, 2009 and 2008, respectively) and investments in US Treasury
P
bonds (amounting to P
=92.36 million as of March 31, 2008).
The carrying value of these investments includes accumulated unrealized gain of =
P125.14 million
and P
=270.24 million (net of related deferred income tax) as of March 31, 2009 and 2008,
respectively, that is reflected in “Net changes in fair values of available-for-sale investments, net
76
- 28 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
available-for-sale investments, net of deferred income tax” are as follows:
2008
2009
(In Thousands)
Balance at beginning of year
P
=211,175
P
=291,286
Movements during the year recognized as other
comprehensive income:
Mark-to-market gain (loss)
64,662
(151,075)
Amount in equity transferred to consolidated
statements of comprehensive income
15,428
(6,745)
Foreign exchange difference
21
(4)
80,111
(157,824)
291,286
133,462
Less share of minority interests
21,047
8,319
Balance at end of year
P
=270,239
P
=125,143
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
General traffic:
Passenger
Cargo
International Air Transport Association (IATA)
Others
Non-trade* (Note 18)
Less allowance for doubtful accounts (Note 27)
2008
(In Thousands)
P
=3,619,835
330,383
324,234
62,222
5,261,680
9,598,354
4,447,803
P
=5,150,551
P
=3,560,117
560,741
347,744
25,429
4,382,083
8,876,114
3,119,172
P
=5,756,942
* Non-trade receivables include accounts under litigation, accounts of defaulted agents, dividend and
receivables from lessors.
Movements in allowance for doubtful accounts presented by class, are as follows (amounts in
Thousands):
Balance at beginning of year
Charges for the year
Recoveries
Foreign exchange difference
Balance at end of year
Collective impairment
Individual impairment
Balance at end of year
2009
General Traffic
Passenger
Cargo
Others Non-trade
P
=116,123 P
=119,339
P
=9,061 P
=2,874,649
–
–
47,308
801,098
(12,197) (43,658)
–
–
17,952
16,950
3,723
497,455
P
=92,631
P
=60,092 P
=4,173,202
P
=121,878
P
=23,339
98,539
P
=121,878
P
=73,553
19,078
P
=92,631
P
=730,156
P
=60,092
3,443,046
–
=4,173,202
P
=60,092 P
Total
P
=3,119,172
848,406
(55,855)
536,080
P
=4,447,803
P
=887,140
3,560,663
P
=4,447,803
77
- 29 -
Balance at beginning of year
Charges for the year
Recoveries
Accounts written off
Foreign exchange difference
Balance at end of year
Collective impairment
Individual impairment
Balance at end of year
2008
General Traffic
Passenger
Cargo
Others
=90,600
P
=91,419
P
P45,276
=
39,875
42,527
–
– (31,917)
–
–
–
–
(14,352) (14,607)
(4,298)
=116,123 P
P
=119,339
=9,061
P
=24,260
P
91,863
=116,123
P
=–
P
119,339
=119,339
P
=9,061
P
–
=9,061
P
Non-trade
P3,129,428
=
532,382
–
(358,163)
(428,998)
=2,874,649
P
Total
=3,356,723
P
614,784
(31,917)
(358,163)
(462,255)
=3,119,172
P
=281,728
P
2,592,921
=2,874,649
P
=315,049
P
2,804,123
=3,119,172
P
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 items 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, nonmoving 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 yet. 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 the consolidated statement of comprehensive income amounted to
=792.55 million, P
P
=550.55 million and =
P824.75 million for the years ended March 31, 2009, 2008
and 2007, respectively.
8. Expendable Parts, Fuel, Materials and Supplies
2009
(In Thousands)
At cost:
Fuel
Materials and supplies
Expendable parts
At net realizable value - expendable parts
P
=440,834
294,067
171,123
906,024
32,782
P
=938,806
2008
P
=1,179,148
220,847
57,749
1,457,744
28,269
P
=1,486,013
The expendable parts have an aggregate cost of =
P266.90 million and =
P140.34 million as of
March 31, 2009 and 2008, respectively.
78
- 30 In line with the various purchase agreements and fuel hedging transactions (see Note 28), PAL
has short-term standby letters of credit amounting to =
P3.09 billion and =
P77.62 million as of
March 31, 2009 and 2008, respectively, which serve as security or margin deposits to the various
fuel suppliers and hedging counterparties. These margin deposits are included under “Deposits”
in “Other current assets” in the consolidated statements of financial position (see Note 9).
9. Other Current Assets
Derivative assets (Note 28)
Deposits (Note 8)
Prepayments and others - net of allowance
for probable losses of =
P527 in 2009 (Note 18)
2008
2009
(In Thousands)
P
=3,074,453
P
=3,087,048
140,652
3,168,799
2,182,012
P
=5,397,117
2,297,398
P
=8,553,245
10. Investment Properties
April 1,
2008
Cost
Land (Note 13)
Buildings and
improvements (Note 13)
Accumulated Depreciation
Buildings and improvements
Net Book Value
Cost
Land (Note 13)
Buildings and
improvements (Note 13)
Accumulated Depreciation
Buildings and improvements
Net Book Value
2009
(In Thousands)
Reclassifications
and Others
Additions
(Note 18)
Foreign
Exchange
Difference
March 31,
2009
P
=1,525,263
P
=–
(P
=346,400)
P
=266,388
P
=1,445,251
33,197
1,558,460
–
–
–
(346,400)
5,299
271,687
38,496
1,483,747
(4,219)
P
=267,468
(33,702)
P
=1,450,045
(25,096)
P
=1,533,364
(4,387)
(P
=4,387)
–
(P
=346,400)
2008
(In Thousands)
Reclassifications
and Others
(Note 18)
April 1,
2007
Additions
=58,294
P
=2,677
P
=1,450,587
P
38,333
96,627
–
2,677
–
1,450,587
(24,109)
P72,518
=
(4,485)
(P
=1,808)
–
=1,450,587
P
Foreign
Exchange
Difference
March 31,
2008
=13,705
P
=
P1,525,263
(5,136)
8,569
3,498
=12,067
P
33,197
1,558,460
(25,096)
=
P1,533,364
Investment properties pertain to properties not used in operations with a total net book value
amounting to P
=1.45 billion and =
P1.53 billion as of March 31, 2009 and 2008, respectively. The
fair values of investment properties amounted to =
P1.57 billion as of March 31, 2009 and
=1.53 billion as of March 31, 2008. These have been determined based on valuations performed
P
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.
79
- 31 11. Property and Equipment
2009
(In Thousands)
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)
At Appraised Value - Buildings
and improvements
Appraised value (Note 13)
Accumulated depreciation
Net Book Value
Disposals/
Additions Retirements
Reclassifications
and Others
Foreign
Exchange
Difference
=
P70,461,246
286,571
3,804,306
=
P9,824,902
–
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
=
P7,948,396
2,960,327
=
P65,065,900
=
P56,157
(22,476)
=
P33,681
P
=408,731
(23,776)
P
=384,955
3,364,281
=
P48,261,877
=
P351,711
(90,611)
=
P261,100
2,331,868
=
P10,237,376
=
P164
(151,319)
(P
=151,155)
=
P–
–
P
=–
=
P2,133,328 =
P11,565,213
–
45,581
–
685,101
March 31,
2009
–
–
–
–
=
P699
240,630
=
P241,329
P
=93,804,309
330,964
6,329,143
2008
(In Thousands)
April 1,
2007
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
(Forward)
=
P77,589,205
346,439
4,393,678
Additions
Disposals/ Reclassifications
Retirements
and Others
=
P5,904,092 (P
=1,669,144)
–
(13,992)
–
(694)
7,520,261
623,716
(714,236)
9,891,910
99,741,493
561,331
7,089,139
(185,670)
(2,583,736)
(33,833,484)
(300,054)
(2,180,517)
(4,806,222)
(4,476,851)
(7,902)
(225,686)
(573,958)
(9,419,818)
(50,540,095)
49,201,398
(193,540)
(5,477,937)
1,611,202
797,686
13,992
694
479,855
173,719
1,465,946
(1,117,790)
Foreign
Exchange
Difference
March 31,
2008
(P
=434,669) (P
P70,461,246
=10,928,238) =
–
(45,876)
286,571
–
(588,678)
3,804,306
–
(1,002,699)
6,427,042
2,287
(1,346,518)
(432,382) (13,912,009)
8,923,340
89,902,505
2,481,018
–
–
–
4,776,152
40,088
304,639
649,272
(30,255,479)
(253,876)
(2,100,870)
(4,251,053)
(512)
1,263,324
2,480,506
7,033,475
2,048,124 (6,878,534)
(8,176,827)
(45,038,105)
44,864,400
80
- 32 -
2008
(In Thousands)
Construction in progress
Predelivery payments
(Notes 13 and 25)
At Appraised Values:
Appraised Value (Note 13)
Land
Buildings and improvements
Accumulated Depreciation
Buildings and improvements
Net Book Value
April 1,
2007
=
P297,451
3,514,296
=
P53,013,145
=
P1,700,228
530,724
2,230,952
(141,131)
=
P2,089,821
Additions
=
P47,993
Disposals/ Reclassifications
Retirements
and Others
=
P–
(P
=285,565)
2,119,641
–
=
P3,778,836 (P
=1,117,790)
=
P–
24,648
24,648
(136,600)
(P
=111,952)
Foreign
Exchange
Difference
(P
=26,683)
(1,819,024)
(450,632)
(P
=56,465) (P
=7,355,849)
March 31,
2008
=
P33,196
3,364,281
=
P48,261,877
=
P–
(130,901)
(130,901)
(P
=1,450,587)
–
(1,450,587)
(P
=249,641)
(72,760)
(322,401)
=
P–
351,711
351,711
130,901
=
P–
27,883
(P
=1,422,704)
28,336
(P
=294,065)
(90,611)
=
P261,100
If buildings and improvements were carried at cost less accumulated depreciation, the amounts
as of March 31, 2009 and 2008 would be as follows:
2008
(In Thousands)
P
=7,224
P
=5,472
(251)
(4,213)
P
=6,973
P
=1,259
2009
Cost
Accumulated depreciation
Property and equipment used to secure notes payable and obligations under finance leases are
described in Notes 13 and 15.
Operating Fleet
PAL’s operating fleet consists of:
2009
Owned
Boeing 747-400
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 747-400
Boeing 737-300
Airbus 320-200
Airbus 319-100
2008
–
5
3
1
–
–
4
4
8
10
3
4
8
6
1
–
8
4
47
1
1
7
4
35
81
- 33 Boeing 747-400
In March 2008, PAL took ownership of one Boeing 747-400 aircraft following the full payment
of the related finance lease obligation. In January to March 2009, PAL paid the remaining
finance lease obligation for the three remaining Boeing 747-400 aircraft and took ownership of
the said aircraft. Subsequently, PAL entered into finance lease agreements involving the four
Boeing 747-400 aircraft (see Note 15).
Boeing 737-300
In January 2008, PAL leased out to Air Philippines Corporation (APC), a related party, its owned
Boeing 737-300 aircraft under an operating lease arrangement for 36 months (see Note 18). This
aircraft is excluded from the operating fleet of PAL as of March 31, 2009 and 2008.
In addition, PAL also redelivered one Boeing 737-300 aircraft on operating lease in 2009.
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
=535.87 million for the fourth DHC 8-400 which was cancelled.
P
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 (see Note 25).
Airbus 320-200
As part of its purchase agreement with Airbus, PAL took delivery of five Airbus 320-200 aircraft
in 2009. The related predelivery payments for these aircraft have been paid in 2008. Four of
these aircraft were acquired under finance leases (see Note 25). Carrying values of passenger
aircraft under finance leases amounted to =
P47.17 billion and =
P37.86 billion as of March 31, 2009
and 2008, 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 amounted =
P404.22 million.
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. Also, 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 =
P1.16 billion at date of reclassification. Following
the Group’s policy in accounting for 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 March 31, 2008, the aggregate carrying value of these investment properties amounting to
=1.47 billion includes an appraisal increase of =
P
P1.46 billion. The portion of revaluation
increment in property relating to these investment properties, net of related deferred tax,
amounted to P
=1.26 billion.
82
- 34 12. Other Noncurrent Assets
Derivative assets (Note 28)
Long-term security deposits (Note 5)
Others - net (Note 16)
2008
2009
(In Thousands)
P
=1,756,007
P
=179,065
1,337,069
2,533,149
747,891
690,642
P
=3,840,967
P
=3,402,856
As of March 31, 2009 and 2008, long-term security deposits include certain cash and cash
equivalents amounting to =
P172.43 million and =
P130.24 million that were used to collateralize
various surety bonds issued (as required under the legal proceedings) in connection with certain
litigations.
13. Notes Payable
The Group enjoys an omnibus credit facility with Allied Banking Corporation (ABC), a related
party (see Note 18), which is covered by a real estate mortgage on certain real properties and
chattel mortgage on certain land and rotable and reparable parts, having an aggregate net
carrying value of P
=1.48 billion and =
P1.30 billion as of March 31, 2009 and 2008, respectively.
In 2009 and 2008, PAL availed of uncollateralized short-term loans from various local banks
amounting to P
=8.20 billion and =
P2.98 billion, respectively.
Fixed interest rates on these notes payable range from 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
=571.53 million in 2009, P
P
=71.26 million in 2008 and =
P19.89 million in 2007. Interest payable
relating to short-term notes payable amounted to =
P46.58 million and =
P18.16 million as of
March 31, 2009 and 2008, respectively.
Notes payable as of March 31, 2008 include portion of predelivery payments amounting to
=705.76 million (see Note 11), due in fiscal year 2009. This is in relation to PAL’s acquisition
P
of Airbus 320-200 aircraft (see Note 25). These notes payable carry fixed rates ranging from
5.90% to 6.40% per annum in 2009 and 2008. Cumulative interest relating to these notes
payable amounting to P
=53.31 million and =
P40.80 million as of March 31, 2009 and 2008,
respectively, was capitalized as part of property and equipment (see Note 11).
14. Accrued Expenses
2008
2009
(in Thousands)
Landing and take-off fees and
Ground handling charges (Note 16)
Derivative liabilities
Maintenance (Note 18)
Others (Notes 18 and 27)
P
=5,526,839
3,999,464
2,588,931
2,459,391
P
=14,574,625
=
P4,525,557
2,207,807
2,104,210
2,298,606
=
P11,136,180
83
- 35 -
15. Long-term Obligations
Obligations under aircraft finance leases (Note 25)
Long-term debts:
Secured loans
Other secured claims (Note 18)
Terminated operating lease claims
Unsecured claims (Note 18)
Less current portion
2008
2009
(In Thousands)
=
P28,417,172
P
=36,971,165
6,052,750
–
–
250,745
642,082
6,569,888
7,462,715
35,879,887
5,368,235
=
P30,511,652
837,894
8,547,065
15,437,709
52,408,874
10,296,454
P
=42,112,420
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 March 2008, PAL fully paid its obligation pertaining to the finance lease of a Boeing 747-400
aircraft under a Japanese Leveraged Lease (JLL) structure. As a result, the ownership of the
aircraft was transferred to PAL (see Note 11). In 2009, PAL also prepaid its outstanding
obligation pertaining to the remaining three Boeing 747-400 aircraft under finance leases. As a
result, the ownership of the aircraft was transferred to PAL (see Note 11).
In January to March 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 finance leases. Interests on the finance leases are to
be paid based on three-month LIBOR plus margin.
Relating to Airbus 320-200 Aircraft
Obligations under finance leases as of March 31, 2009 and 2008 include obligations covering
eight Airbus 320-200 aircraft acquired in accordance with the Purchase Agreement signed with
Airbus as discussed in Note 25. These aircraft were delivered in 2009 and 2008 (see Note 11).
As of March 31, 2009 and 2008, the aggregate future minimum lease payments for these leases
amounted to P
=12.84 billion (with current portion of =
P1.01 billion) and =
P6.61 billion (with current
portion of P
=552.06 million), 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.
84
- 36 -
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 =
P5.21 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.
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 =
P3.25 billion and
JPY6.39 billion or P
=2.48 billion as of March 31, 2009 and 2008, respectively, and all interest
accruing thereon maintained by PAL to secure the payment of the obligations for JLLs on two
Airbus 340-300, and one Airbus 330-300 aircraft. Under the Rehabilitation Plan, the integrity of
the JLLs is not to be 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
2009
2010
2011
2012
2013 and thereafter
Net minimum lease payments
Interest and others
Present value of net minimum lease payments
2008
2009
(In Thousands)
P
=6,973,419
P
=–
6,592,103
7,869,301
5,738,402
7,484,637
4,559,296
6,538,132
11,608,627
21,123,662
35,471,847
43,015,732
(7,054,675)
(6,044,567)
P
=28,417,172
P
=36,971,165
Long-term Debts
Secured loans
Other secured claims (Note 18)
Terminated operating lease claims
Unsecured claims (Note 18)
Less current portion
2008
2009
(In Thousands)
P
=–
P
=6,052,750
–
250,745
642,082
837,894
6,569,888
8,547,065
7,462,715
15,437,709
250,745
3,805,727
=
P7,211,970
P
=11,631,982
85
- 37 Secured Loans
Long-term debts totaling =
P6.05 billion pertain to loans obtained from a local bank and a
syndicate of local banks. The loan from a local bank amounting to =
P3.22 billion consists of two
tranches
(P
=3.06 billion for tranche one and =
P157.37 million for tranche two) and is secured by aircraft and
aircraft engines with a total appraised value of =
P4.39 billion. 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
=2.83 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
with appraised value totaling to =
P4.07 billion were used as collateral for this syndicated loan.
Other Secured Claims
The details of the other secured claims as of March 31, 2008 are as follows (in thousands):
$60,000 syndicated
loan facility (Note 18)
Others
Outstanding Loan
Securities
Balances Description
Collateral Trust Indenture over
certain engines, rotables
=
P205,189
45,556
and reparables
=
P250,745
Carrying Value
P
=560,157
P
=560,157
The other secured claims provide for monthly, quarterly or semi-annual installments, generally
ranging over five to eight years until fiscal year 2009 at a fixed interest rate of 8.3% per annum
or floating interest rates based on three-month LIBOR plus margin, as applicable.
In 2009, P
=250.75 million worth of other secured claims under the restructuring terms, gross of
effect of PAS 39 amounting to =
P2.66 million, matured and was fully paid.
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
=998.51 million in 2009, P
P
=989.57 million in 2008 and =
P1.03 billion in 2007 and were recognized
as part of “Financing charges” in the consolidated statements of comprehensive income.
86
- 38 The amounts payable on the unsecured claims (including Terminated Operating Lease Claims)
under the restructured terms are as follows (in thousands):
Maturity Dates
June 7, 2009
June 7, 2010
June 7, 2011
Face value
Less imputed interest
Percentages of
Face Value
31
32
32
Less current portion
2009
P
=3,805,727
3,928,477
2,906,579
10,640,783
1,255,824
9,384,959
3,805,727
P
=5,579,232
2008
P
=3,291,166
3,397,310
2,513,502
9,201,978
1,990,008
7,211,970
–
P
=7,211,970
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 =
P4.83 billion. In June 2009, PAL purchased these unsecured claims
from Trustmark at the same price as they were bought by Trustmark.
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.
PAL made prepayments under the Excess Cash Flow Recapture mechanism totaling P
=5.18 billion
in 2001, 2003, 2006 and 2007. Subsequent payments relating to the Excess Cash Flow
Recapture mechanism amounted to =
P2.34 billion in 2008.
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 prerestructuring repayment profiles.
16. Reserves and Other Noncurrent Liabilities
Derivative liabilities (Note 27)
Provisions
Liability under the Frequent Flyer Program
Other noncurrent liabilities
2008
2009
(In Thousands)
P
=1,605,769
P
=2,907,596
1,404,964
1,583,593
236,798
491,774
1,256,605
1,063,589
P
=4,504,136
P
=6,046,552
87
- 39 -
Provisions
Provisions consist substantially of probable claims under labor-related disputes 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 2009, additional provision amounted to =
P48.00 million (P
=112.79 million in 2008), reversal of
provisions recognized in prior years amounted to =
P19.33 million (P
=90.92 million in 2008) and
settlement of closed cases amounted to =
P11.80 million.
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 =
P2.93 billion, including the related Value-Added-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 fees 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 =
P855.57 million was
recognized as income for the year ended March 31, 2007.
As of March 31, 2009 and 2008, accrued expenses to MIAA, excluding the related VAT,
amounted to P
=1.69 billion and =
P1.93 billion, respectively. Of the amount, =
P813.39 million and
=745.55 million was included as part of “Accrued landing and take-off fees” (see Note 14)
P
classified under “Current liabilities”, and =
P876.97 million and =
P1.18 billion was included as part
of “Other noncurrent liabilities” in the consolidated statements of financial position as of
March 31, 2009 and 2008, respectively.
17. Equity Items
a. Capital stock
The following summarizes the capital stock account as of March 31, 2009 and 2008
(amounts in thousands, except number of shares):
Authorized (Note 1)
Issued
Treasury stock - 55,589 shares, at cost
Issued and outstanding
Number of
Shares
Amount
20,000,000,000
=
P20,000,000
5,421,567,685
(55,589)
5,421,512,096
=
P5,421,568
(56)
=
P5,421,512
88
- 40 The issued and outstanding shares are held by 6,934 and 6,769 equity holders as of March
31, 2009 and 2008, respectively.
The Parent Company has 55,589 treasury shares amounting to =
P0.06 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 =
P253.73 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 =
P0.8 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 =
P1.0 per share to =
P0.8 per share. PAL’s resulting reduction
surplus amounting to =
P2.16 billion was applied against the deficit as of March 31, 2007
amounting to P
=1.54 billion. However, the approval of the request to undergo equity
restructuring was 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.
b. Details of other components of equity are as follows:
2009
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 11)
Deficit
(P
=3,498,429)
125,143
1,497,302
(19,130,991)
(P
=21,006,975)
2008
(In Thousands)
(P
=4,066,367)
270,239
1,424,267
(8,242,351)
(P
=10,614,212)
18. Related Party Transactions
The Group, in the normal course of business, has transactions with its stockholders, 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. On August 2, 2007, the Parent Company’s BOD resolved to amend its June 27, 2007
resolution so that the Parent Company only assumes =
P3.08 billion (instead of P
=14.08 billion)
out of the P
=23.12 billion liabilities of the Holding Companies, as originally planned. This
resulted to 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
89
- 41 Holding Companies’ investment in PAL and PR amounting to =
P12.44 billion and
=108.66 million, respectively. This gave rise to a liability to Maxell amounting to P
P
=431.60
million as of March 31, 2009 and 2008. The =
P3.08 million assumed liability was converted
to additional paid-in capital, as approved by the BOD on the same date (see Note 2).
b. The Parent Company has advances from Trustmark amounting to =
P49.49 million as of
March 31, 2009 and 2008 which were used to pay filing fees and other expenses related 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, 2007, the Parent Company has an outstanding liability to related parties
totaling P
=136.00 million arising from its acquisition of the Holding Companies (see Notes 2
and 24). These related parties are the previous stockholders of the Holding Companies. On
August 14, 2007, the Parent Company assigned to Trustmark its investments in the shares of
stock of the Holding Companies. In payment thereof, Trustmark assumed the P
=136.00
million liability to the previous stockholders of the Holding Companies (see Note 2).
d. Management, accounting, statutory reporting and compliance, and administrative services
are provided by a related party at no cost to the Parent Company.
e. As of March 31, 2009 and 2008, the Parent Company owns 88 million common shares
(7.04% equity interest) of MAC. Controlling owners of the Parent Company are also close
family members of certain members of the key management of MAC. Likewise, certain
members of the Parent Company’s BOD are also officers and members of the BOD of MAC.
Dividends received from this investment amounted to =
P4.40 million in 2009 and 2008.
f.
PAL has finance lease agreements with certain related parties pertaining to three
Airbus 330-300 aircraft. Deposits on leases of said aircraft amounted to P
=3.13 billion
and P
=2.53 billion as of March 31, 2009 and 2008, respectively. Outstanding obligations
under finance lease of the said aircraft amounted to =
P5.50 billion and =
P5.58 billion as of
March 31, 2009 and 2008, respectively. Financing charges attributable to these finance
lease obligations amounted to =
P331.11 million in 2009, =
P606.74 million in 2008 and P
=621.49
million in 2007. Related accrued interest amounted to =
P73.65 million and =
P64.43 million as
of March 31, 2009 and 2008, respectively.
g. PAL has a Technical Services Agreement (TSA) with Lufthansa Technik Philippines (LTP),
a related party, 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. Within the
framework of the TSA, PAL entered into a Heavy Maintenance Service Agreement for
D1-Checks (4C/5Y) of Airbus 340-300, Airbus 330-300 and Airbus 320-200 aircraft for the
period June 1, 2002 to March 17, 2004. On April 20, 2005, PAL and LTP signed an
amendment to the Heavy Maintenance Service Agreement effective from January 1, 2004
until the expiry of the TSA, unless otherwise amended.
On February 20, 2009, PAL and LTP signed an additional attachment to the TSA to cover
the provision of Engine Maintenance Services for CFM56-5B engines. The attachment is
effective for a period of 12 years and LTP has the option to extend the agreement for another
two years by giving six months prior written notice.
90
- 42 Total LTP-related maintenance and repair costs charged to operations amounted to
=8.03 billion, P
P
=7.71 billion and =
P9.03 billion in 2009, 2008 and 2007, respectively. In
addition, related expendable parts sold to LTP amounted to =
P26.15 million in 2009,
=75.73 million in 2008 and =
P
P19.79 million in 2007.
In connection with the sale of Maintenance and Engineering facilities to LTP, 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” in the revenue section of the consolidated statements of comprehensive income)
amounted to P
=95.49 million in 2009, =
P99.33 million in 2008 and =
P73.05 million in 2007.
As of March 31, 2009 and 2008, PAL has outstanding amounts payable to and estimated
unbilled charges from LTP totaling =
P1.99 billion and =
P1.90 billion, respectively, net of
unapplied credits from and advance payments to LTP amounting to =
P326.90 million and
=292.00 million as of March 31, 2009 and 2008, respectively. Receivables from LTP
P
amounted to P
=112.78 million and =
P102.05 million as of March 31, 2009 and 2008,
respectively.
h. The transactions with APC, a related party, include joint services and code share agreements,
and endorsements of passengers during flight interruptions. As of March 31, 2009 and 2008,
PAL has a net receivable from APC (shown as part of “Non-trade receivables”) amounting to
=461.07 million and P
P
=320.10 million, respectively.
In fiscal year 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 relation
to this, certain spare parts and tools of the said aircraft were included in the lease.
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 =
P123.40 million in
2009.
i.
As of March 31, 2009, the =
P2.83 billion syndicated loan, presented under “Secured loans”,
include loans obtained from affiliate banks, Philippine National Bank (PNB) and ABC,
amounting to P
=1.94 billion and =
P653.70 million, respectively. The related financing charges
on these loans obtained from related parties represent about 2% of total financing charges
while interest on these loans accrued as at the end of the fiscal year 2009 amounted to
=3.97 million.
P
j.
Other secured claims include loans obtained from stockholders and related parties which
amounted to P
=102.59 million as of March 31, 2008. Moreover, unsecured claims include
loans from stockholders amounting to =
P341.96 million and =
P286.99 million as of March 31,
2009 and 2008, respectively. The related financing charges on these loans represent about
1% of total financing charges in 2009, about 3% in 2008 and 4% in 2007. Related accrued
interest on these loans amounted to =
P0.79 million as of March 31, 2008.
k. As discussed in Note 13, PAL has outstanding short-term notes payable to ABC amounting
to P
=2.29 billion and P
=1.06 billion as of March 31, 2009 and 2008, respectively. Also, the
retirement fund of PAL is being managed by ABC.
91
- 43 -
l.
In 2009, PAL obtained additional working capital from PNB amounting to =
P2.99 billion.
Outstanding balance as of March 31, 2009 amounted to =
P343.46 million.
m. As of March 31, 2009 and 2008, 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
=5.84 billion and =
P5.10 billion, respectively. The related interest income on these
investments amounted to =
P40.39 million in 2009, =
P124.22 million in 2008 and P
=258.77
million in 2007.
n. In October 2008, PAL obtained a short-term, noninterest-bearing loan from Trustmark in the
amount of P
=5.33 billion, which was fully paid during the year.
o. 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 =
P346.40 million to an affiliate. This property is
included under “Other current assets”.
p. As of March 31, 2009 and 2008, PAL has cash and standby letters of credit with Oceanic
Bank, a related party, amounting to =
P213.30 million and =
P198.63 million, respectively.
q. In connection with the transfer of its principal office to a new location, PAL entered into
an operating lease agreement with PNB, a related party, 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, 2009
(P
=11.98 million as of March 31, 2008).
Minimum rental commitments under this lease contract are as follows (amounts in
thousands):
Due within one year
Due after one year but within five years
After more than five years
2009
P
=29,053
116,745
118,731
P
=264,529
2008
P
=28,979
115,915
148,067
P
=292,961
PAL also maintains checking accounts and money placements with PNB. As of March 31,
2009 and 2008, total cash and cash equivalents maintained with PNB amounted to
=140.23 million and P
P
=61.80 million, respectively.
In 2009, PAL availed of a bridge financing loan from PNB in the amount of
=1.87 billion to support current working capital requirements. The amounts was fully paid
P
during the year.
r.
The compensation of key management personnel of the Group, consisting mainly of shortterm employee benefits, amounted to =
P46.06 million, =
P50.11 million and =
P42.74 million in
2009, 2008 and 2007, respectively, and retirement benefits of =
P7.62 million, P
=8.09 million
and P
=1.57 million in 2009, 2008 and 2007, respectively.
92
- 44 19. Comprehensive Income
Comprehensive income consists of net income or loss for the year, together with certain other
economic gains and losses, which are collectively described as “Other comprehensive income”
and excluded from the calculation of net income or loss for the year.
Other comprehensive income includes the following:
• Unrealized mark-to-market gains (losses) on available-for-sale investments of
(P
=157.82 million) in 2009, =
P80.11 million in 2008 and =
P178.68 million in 2007. These
amounts are net of the related deferred income tax of =
P37.72 million in 2009, P
=21.67 million
in 2008 and P
=25.03 million in 2007.
• Net changes in the fair values on derivative assets and derivative liabilities designated by
management as cash flow hedging instruments amounting to (P
=1.23 billion) in 2009,
=1.49 billion in 2008 and (P
P
=981.79 million) in 2007. These amounts are net of the related
deferred income tax of =
P676.79 million, =
P640.87 million and =
P504.78 million, 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
=185.78 million in 2009, =
P
P263.73 million in 2008 and =
P340.04 million in 2007. These
amounts are net of the related deferred income tax of =
P69.49 million, =
P15.32 million and
=183.32 million, respectively.
P
• Effect of foreign exchange gains (losses) arising from the translation to Philippine peso of
the assets and liabilities of PAL, amounting to =
P1.90 billion, (P
=2.36 billion) and
(P
=755.73 million) in 2009, 2008, and 2007, respectively.
Included under “Cumulative translation adjustment” in the consolidated statement of changes in
equity as of March 31, 2009 and 2008 are unrealized after-tax gains on hedging contracts
aggregating to P
=1.07 billion and =
P2.04 billion, respectively. As discussed in Note 27, 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 net income 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:
2009
Fuel and oil (Note 28)
Maintenance (Note 18)
Crew and staff costs (Note 21)
Depreciation (Notes 10 and 11)
Financing charges (Notes 13, 15
and 18)
Groundhandling charges
Landing and take-off fees (Note
14)
Aircraft lease rentals (Note 25)
Passenger food
2008
(In Thousands)
2007
P
=38,838,517
9,480,925
7,955,141
6,218,287
=
P
20,637,573
8,533,665
6,980,017
5,619,022
P
=
20,304,486
10,018,924
6,268,964
6,259,453
3,746,429
3,295,370
3,862,407
2,941,541
4,519,446
3,021,806
2,300,914
1,992,666
1,719,498
2,130,622
1,890,923
1,604,503
2,479,063
1,730,925
1,134,349
93
- 45 -
21. Employee Benefits
2008
2009
(In Thousands)
=
P2,445,632
P
=3,248,381
792,170
951,647
=
P3,237,802
P
=4,200,028
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
Current service cost
Interest cost on benefit obligation
Expected return on plan assets
Net actuarial loss recognized during
the year
Actual return (loss) on plan assets
P
=517,398
371,823
(89,708)
259,805
P
=1,059,318
P
=206,624
2008
(In Thousands)
=
P424,661
319,169
(35,032)
2007
P
=417,767
273,667
(2,108)
28,797
=
P737,595
33,259
P
=722,585
(P
=50,876)
P
=17,130
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
2008
2009
(In Thousands)
=
P5,149,365
P
=4,318,578
(1,121,355)
(1,327,979)
4,028,010
2,990,599
(1,582,378)
257,782
=
P2,445,632
P
=3,248,381
Changes in present value of defined benefit obligation are as follows:
Defined benefit obligation, April 1
Current service cost
Interest cost
Benefits paid
Actuarial loss (gain) on obligation
Defined benefit obligation, March 31
2008
2009
(In Thousands)
=
P4,480,529
P
=5,149,365
424,661
517,398
319,169
371,823
(221,892)
(256,569)
146,898
(1,463,439)
=
P5,149,365
P
=4,318,578
94
- 46 Changes in fair value of plan assets are as follows:
2008
2009
(In Thousands)
P
=583,863
P
=1,121,355
35,032
89,708
810,260
256,569
(221,892)
(256,569)
(85,908)
116,916
=
P1,121,355
P
=1,327,979
Fair value of plan assets, April 1
Expected return on plan assets
Actual contributions to the plan
Benefits paid
Actuarial gain (loss) on plan assets
Fair value of plan assets, March 31
The major categories of plan assets as a percentage of the fair value of total plan assets are as
follows:
2008
2009
Investments in government securities
83%
71%
Cash
11%
27%
Receivables
6%
2%
100%
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.
The principal assumptions used at the beginning of the fiscal year in determining retirement
benefits cost for PAL’s plans are as follows:
2008
2009
Number of employees (including those covered by
defined contribution plans)
Discount rate per annum
Expected annual rate of return on plan assets
Future annual increase in salary
7,367
7,377
7.17% to 10.21% 7.17% to 10.41%
6%
8%
7%
to
12%
10% to 12%
As of March 31, 2009, following are the information with respect to the above assumptions:
discount rate per annum of 9.86% to 14.45%, expected annual rate of return on plan assets of 5%
and future annual increase in salary of 10%.
Relevant amounts for the current and prior periods are as follows:
2008
2007
2006
(In Thousands)
=5,149,365 P
=4,480,529 =
P4,131,138
P
=4,318,578 P
(583,863)
(23,409)
(1,327,979) (1,121,355)
2,990,599 4,028,010 3,896,666 4,107,729
2009
Defined benefit obligations
Fair value of plan assets
Deficit
Experience adjustment on plan
liabilities - loss (gain)
Experience adjustment on plan assets - gain
(134,695)
116,916
(318,793)
(85,908)
227,546
15,023
–
–
Retirement benefits cost under the defined contribution plan amounted to =
P235.91 million in
2009, P
=209.06 million in 2008 and =
P313.14 million in 2007.
The Group expects to contribute about =
P1.03 billion to the retirement fund in fiscal year ending
March 31, 2010.
95
- 47 -
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.
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.
96
- 48 -
23. Income Taxes
a. The provision for (benefit from) income tax consists of the following:
2009
Current income tax
Deferred income tax
Provision for (benefit from) income tax
P
=134
473,140
P
=473,274
2008
2007
(In Thousands)
=
P342,260
P
=301,817
(2,768,215)
(1,697,927)
(P
=1,355,667)
(P
=2,466,398)
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
=3.84 billion and =
P1.85 billion as of March 31, 2009 and 2008, respectively, in
relation to changes in exchange rates affecting its nonmonetary assets and liabilities.
c. The Group’s recognized deferred income tax assets (liabilities), all relating to PAL, are as
follows:
2009
2008
(In
Thousands)
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
Net present value adjustments on
financial liabilities
Revaluation increment in property
Cumulative translation and fair value
adjustments - net
Prepaid commission and others
Net deferred income tax assets
P
=3,021,484
P
=–
1,471,205
1,196,460
1,119,395
2,633,760
503,686
–
18,885
622,610
6,834,330
957,173
451,382
5,161,710
(3,843,060)
(1,853,006)
(539,954)
(310,724)
(874,705)
(301,061)
–
(1,558,656)
(6,252,394)
P
=581,936
(262,269)
(1,550,317)
(4,841,358)
P
=320,352
PAL’s NOLCO amounting to =
P10.07 billion incurred in 2009 can be used as deduction
against taxable income until 2014.
97
- 49 d. As of March 31, 2009 and 2008, the Parent Company did not recognize deferred income tax
asset on the carryforward benefits of NOLCO amounting to =
P96.06 million and
=90.28 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, 2009, the Parent Company’s NOLCO that are available for deduction
against future taxable income are as follows (amounts in thousands):
Incurred during fiscal year ended
March 31, 2006
March 31, 2007
March 31, 2008
March 31, 2009
Amount
=
P3,063
69,829
17,383
8,848
=
P99,123
Expired
=
P3,063
–
–
–
=
P3,063
Balance as of
March 31, 2009
=
P–
69,829
17,383
8,848
=
P96,060
Available until
fiscal year
ending
March 31
2009
2010
2011
2012
In 2009, the deferred income tax assets on the following deductible temporary differences
were not recognized because management believes that the Group may not have sufficient
taxable income against which these deductible temporary differences may be utilized
(amounts in thousands).
Unrealized foreign exchange adjustments on
long-term obligations
Allowance for doubtful accounts (Note 7)
Fair value adjustments on noncurrent derivative liabilities
=
P5,699,608
4,447,803
1,519,918
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:
2009
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
(P
=4,213,866)
3,759,991
2008
2007
(In Thousands)
(P
=476,076)
6,084
P
=1,596,014
(924)
(69,128)
(193,609)
(372,969)
27,489
81,296
138,024
–
968,788
P
=473,274
–
(773,362)
(P
=1,355,667)
(3,894,846)
68,303
(P
=2,466,398)
98
f.
- 50 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 =
P15.52 million in 2009, =
P14.28 million in 2008 and =
P14.84 million in
2007.
24. Note to Consolidated Statements of Cash Flows
Noncash activities consist of:
Investing activities
Liabilities for purchases of property and
equipment (Note 11)
Claims from insurance set-off against long-term
obligation (Notes 11 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 (Note 2)
Liability of the Parent Company to Trustmark
converted to additional paid-in capital
Liability of the Group to Trustmark released upon
the disposal of the investments in the Holding
Companies
2009
2008
(In Thousands)
P
=13,234,369
=6,625,406
P
2007
=1,393,809
P
–
814,113
–
–
431,600
–
–
(136,000)
–
–
3,079,567
9,038,822
–
10,998,766
–
25. Aircraft Lease Commitments and Purchases
Operating Leases
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.
Also, PAL entered into operating lease agreements for the lease of Airbus 319-100,
Airbus 320-200 and Boeing 747-400 aircraft. The future minimum lease payments related to
these lease agreements are shown in the following table:
Year Ending March 31
2009
2010
2011
2012
2013
2014 and thereafter
2008
2009
(In Thousands)
P
=1,730,410
P
=–
2,131,059
2,729,839
2,780,657
3,607,633
2,544,736
3,334,000
2,544,736
3,334,000
13,338,954
17,149,668
=
P25,070,552
P
=30,155,140
99
- 51 -
Aircraft Purchases and Finance Leases
Airbus aircraft
On December 6, 2005, PAL finalized a Purchase Agreement with Airbus wherein PAL placed a
firm order for nine Airbus 320-200 aircraft and options for five aircraft for delivery in 2010 to
2013. As of March 31, 2009, all nine aircraft on firm order were delivered to and accepted by
PAL.
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.
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.
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.
Subsequent to fiscal year 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.
Capital Expenditure Commitments
PAL's capital expenditure commitments relate principally to the acquisition of aircraft fleet,
aggregating to P
=64.50 billion and =
P58.45 billion as of March 31, 2009 and 2008, respectively.
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.
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 adjust the dividend
payment to shareholders, return capital to shareholders or issue new shares. No changes were
made in the objectives, policies or processes from April 1, 2006 to March 31, 2009. 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 monitors its use of capital using leverage ratios, specifically, debt ratio and debt to
equity ratio. Included as debt are notes payable and long-term obligations. The table below
shows the leverage ratios of the Group as of March 31, 2009 and 2008.
Debt ratio
Debt to equity ratio
2009
0.62:1
25.25:1
2008
0.46:1
2.69:1
100
- 52 -
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 bonds and 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.
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.
101
- 53 -
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:
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
Unremitted tax collections
Provisions
Net foreign currency-denominated monetary
liabilities
2009
2008
(In Thousands)
P
=738,290
3,888,819
1,698,934
6,326,043
=
P1,181,068
4,401,834
1,509,813
7,092,715
1,141,064
4,001,400
1,440,022
6,582,486
759,625
4,021,854
1,069,413
5,850,892
(256,443)
1,241,823
(4,200,028)
(145,508)
(1,583,593)
(5,929,129)
(3,237,802)
(1,166,162)
–
(4,403,964)
P
=6,185,572
=
P3,162,141
* Includes miscellaneous deposits, security deposits and currency forwards.
** Substantially pertaining to notes payable to a local bank.
The Group recognized P
=752.73 million foreign exchange gain in 2009, =
P1.01 billion and
=193.25 million foreign exchange loss in 2008 and 2007, respectively, arising from the
P
translation of these foreign currency-denominated financial instruments.
The Group’s foreign currency-denominated exposures comprise primarily of USD and Japanese
yen (JPY). Other foreign currency exposures include Canadian Dollar (CAD), Euro (EUR),
Australian Dollar (AUD), Singaporean Dollar (SGD), and Hong Kong Dollar (HKD).
Sensitivity analysis
The following tables show 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 (amounts in thousands).
102
- 54 -
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
P
=458,847
(9,345)
(149,188)
P
=300,314
(P
=458,847)
9,345
149,188
(P
=300,314)
* Includes various currencies (i.e. CAD, AUD, EUR, HKD, SGD and others)
Currency
PHP
JPY
Others*
Net
Movement in foreign
exchange rates
8.02%
10.72%
0.00%-22.65%
2008
Net loss (gain) effect on income before tax
Increase in foreign
Decrease in foreign
exchange rates
exchange rates
=84,932
P
(31,568)
(165,604)
(P
=112,240)
(P
=84,932)
31,568
165,604
P
=112,240
* 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, 2009 and 2008 would have either increased by =
P81.35 million and =
P32.49 million or
decreased by P
=140.81 million and =
P45.64 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,
2009 and 2008 would either increase by =
P36.12 million and =
P6.56 million and decrease by
=50.99 million and P
P
=6.64 million, respectively, had the various foreign exchange rates changed
with the range of 9.30% to 15.28% in 2009 and 0.80% to 10.70% in 2008. 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 0.67:1 and 0.54:1 as of March 31, 2009 and 2008, respectively.
PAL has interest rate swap 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. The interest rate swap agreements relative to the
financing of two Airbus 330-300 aircraft require the exchange, at semi-annual intervals, the
difference between the Group’s fixed interest rates and the counterparties’ floating interest rates.
The effect of these swap agreements (aggregate notional amounts of $36.08 million and
$52.41 million as of March 31, 2009 and 2008, respectively) is to effectively fix the Group’s
interest rate exposure under these financing agreements to rates ranging from 6.50% to 6.61%.
With respect to the junior loan financing of one Airbus 330-300 and two Airbus 340-300, the
Group agreed with the counterparties to exchange, at semi-annual intervals, the difference
between the Group’s floating interest rates and the counterparties’ fixed interest rates. These
103
- 55 -
swap agreements (aggregate notional amounts of $5.42 million and $6.58 million as of March 31,
2009 and 2008, respectively) effectively convert the Group’s fixed interest rate exposure relative
to these junior loan financing agreements of 7.95% into floating rate exposure based on sixmonth LIBOR plus margin.
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, 2009 and 2008 would either decrease or increase by
=54.86 million and P
P
=102.97 million, respectively, if the USD interest rate for the periods had
been higher or lower by 25 basis points and 50 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, 2009, the Group has no outstanding quoted debt investments.
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 and 2008
would increase by P
=1.99 million and =
P23.55 million, respectively, and decrease by P
=1.99 million
and P
=23.42 million, respectively, if the USD interest rate for the periods had been 25 basis points
higher or lower in 2009 and 50 basis points higher or lower in 2008. 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, 2009 and 2008 would
either decrease or increase by =
P69.78 million and =
P55.13 million, respectively, had the indices
changed by 31.55% to 37.46% in 2009 and by 19.82% to 25.50% in 2008. The impact on the
Group’s equity already excludes the impact of transactions affecting profit or loss.
104
- 56 -
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.
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 longterm 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).
The Group 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
estimate statistically the maximum potential loss from adverse movement in fuel prices.
Assumptions and Limitations of VaR
The VaR methodology employed by the Group 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 and seasonality. 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
=83.30 million and =
P191.50 million as of March 31, 2009 and 2008,
respectively.
The high, average and low VaR amounts are as follows:
High
Average
Low
(In Thousands)
April 1, 2008 to March 31, 2009
April 1, 2007 to March 31, 2008
P
=1,135,119
322,621
P
=390,662
156,359
=
P75,536
92,878
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.
105
- 57 -
The tables below summarize the maturity analysis of the Group’s financial liabilities based on
contractual undiscounted payments (principal and interest):
March 31, 2009 (amounts in thousands)
<1 year >1-<2 years >2-<3 years >3-<4 years >4-<5 years
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
P
= 12,087,477
P
=–
P
=–
P
=–
P
=–
P
=–
P
= 12,087,477
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 year >1-<2 years >2-<3 years >3-<4 years >4-<5 years
>5 years
Total
(1,483,021)
1,509,701
906,896
P
= 32,814,241
(1,483,021)
1,509,701
3,597,707
P
= 86,531,477
March 31, 2008 (amounts 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
=11,731,286
P
=–
P
=–
P
=–
P
=–
P
=–
P
=11,731,286
P
3,464,871
6,973,419
250,745
–
6,592,103
3,291,166
–
5,738,402
3,397,310
–
4,559,296
2,513,502
–
1,804,569
–
–
9,804,058
–
3,464,871
35,471,847
9,452,723
414,011
481,090
414,011
–
414,011
–
414,011
–
414,011
–
448,501
–
2,518,556
481,090
(20,794)
50,065
234,794
=10,561,345
P
–
–
23,383
=9,573,106
P
–
–
–
=7,486,809
P
–
–
–
=2,218,580
P
–
–
–
=10,252,559
P
(1,758,178)
2,040,992
789,355
=24,387,591
P
(1,778,972)
2,091,057
1,047,532
=64,479,990
P
Note: Coupon cash flows on floating rate liabilities are determined using projected rates. In the case of derivatives, where the settlement
mechanism is gross, the contractual cash inflows and outflows are presented by time bucket. Where the settlement mechanism is net, the future
undiscounted cash flows are used, where the estimated forward or swap curve is compared against contractually agreed rates or prices.
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.
106
- 58 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:
2008
2009
(amounts in thousands)
Cash in bank and cash equivalents
=
P14,724,057
P
=5,759,600
Short-term investments
–
374,205
Receivables
5,323,305
4,588,469
Investment in US Treasury bonds
92,364
–
Investment in MAC
330,000
255,200
Derivative instruments
4,830,460
3,266,113
Margin deposits, lease deposits and others
4,012,394
8,856,496
=
P29,312,580
P
=23,100,083
Credit risks
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 reaccreditation 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, 2009
and 2008 amounted to P
=1.16 billion and =
P0.78 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 (amounts in thousands):
General traffic
Passenger
receivables
Cargo
receivables
2009
Past Due but not Impaired
Over 30
Over 60
Over 90
Days
Days
Days
High Grade
Standard
Grade
Substandard
Grade
P
= 2,630,622
P
= 515,549
P
= 121,539
P
= 160,713
P
= 5,423
P
= 20,531
101,202
69,050
23,243
13,800
12,880
17,577
Impaired
Financial
Assets
Others
Total
P
= 121,878
P
= 43,580
P
= 3,619,835
92,631
–
330,383
(Forward)
107
- 59 -
IATA
receivables
Others
Non-trade
receivables*
High Grade
Standard
Grade
Substandard
Grade
P
= 324,234
–
P
=–
–
P
=–
–
2009
Past Due but not Impaired
Over 30
Over 60
Over 90
Days
Days
Days
Total
P
=–
60,092
P
=–
–
P
= 324,234
62,222
–
–
–
14,914
5,036
137,567
P
= 3,056,058
P
= 584,599
P
= 144,782
P
= 191,557
P
= 23,339
P
= 175,675
*Non-trade receivables exclude receivables arising from statutory requirements amounting to P2,885,176.
1,850,108
P
= 2,124,709
368,879
P
= 412,459
2,376,504
P
= 6,713,178
General traffic
Passenger
receivables
Cargo receivables
IATA receivables
Others
Non-trade
receivables*
High Grade
Substandard
Grade
=2,472,080
P
398,394
347,744
–
=6,723
P
752
–
–
=148,568
P
42
–
–
P
=–
–
Others
P
=–
–
Standard
Grade
P
=–
2,130
Impaired
Financial
Assets
2008
Past Due but not Impaired
Over 30
Over 60
Over 90
Days
Days
Days
=591,140
P
–
–
543
=–
P
–
–
1,503
Impaired
Financial
Assets
Others
Total
=22,799
P
–
–
1,963
=116,123
P
119,339
–
9,061
=202,684
P
42,214
–
12,359
=3,560,117
P
560,741
347,744
25,429
–
–
–
108,733
47,560
77,165
P3,218,218
=
=7,475
P
=148,610
P
=700,416
P
=49,063
P
=101,927
P
*Non-trade receivables exclude receivables arising from statutory requirements amounting to P2,230,604.
1,077,681
=1,322,204
P
840,340
=1,097,597
P
2,151,479
=6,645,510
P
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 (amounts in thousands):
2009
Carrying Value
Fair Value
Financial Assets
Cash
Loans and Receivables
Cash equivalents
Short-term investments
Accounts receivable - net:
General traffic:
Passenger
Cargo
IATA
Others
Non-trade*
Margin deposits, lease deposits
and others
Available-for-sale investments:
Debt investments - quoted
Equity investments:
Quoted
Unquoted
Derivative Assets:
Fair value through profit or loss
Accounted for as cash flow
hedges
2008
Carrying Value
Fair Value
P
=1,069,407
P
=1,069,407
=
P1,822,048
P
=1,822,048
4,767,581
374,205
4,767,581
374,205
12,961,647
–
12,961,647
–
3,497,957
237,752
324,234
2,130
526,395
3,497,957
237,752
324,234
2,130
526,395
3,443,994
441,402
347,744
16,368
1,073,798
3,443,994
441,402
347,744
16,368
1,073,798
8,856,496
18,586,750
8,613,562
18,343,816
4,012,394
22,297,347
3,192,181
21,477,134
–
–
92,364
92,364
516,291
303,219
819,510
516,291
303,219
819,510
652,482
264,315
1,009,161
652,482
264,315
1,009,161
3,266,113
3,266,113
1,536,287
1,536,287
–
3,266,113
P
=23,741,780
–
3,266,113
P
=23,498,846
3,294,173
4,830,460
=29,959,016
P
3,294,173
4,830,460
=29,138,803
P
108
- 60 -
2009
Carrying Value
Fair Value
Financial Liabilities
Financial liabilities carried at
amortized cost:
Accounts payable and accrued
expenses
Notes payable
Obligations under finance
lease
Other long-term liabilities
Due to related parties
Other liability
(under “Accrued expense” and
“Other noncurrent liabilities”)
Derivative Liabilities:
Fair value through profit or loss
Accounted for as cash flow
hedges
2008
Carrying Value
Fair Value
P
=12,087,477
6,888,223
P
=12,087,477
6,888,223
=11,731,286
P
3,440,235
=11,731,286
P
3,440,235
36,971,165
15,437,709
481,090
37,408,513
16,503,573
481,090
28,417,172
7,462,715
481,090
29,968,908
8,913,486
481,090
1,690,364
73,556,028
1,705,229
75,074,105
1,929,169
53,461,667
1,956,519
56,491,524
6,869,339
6,869,339
3,549,177
3,549,177
37,721
6,907,060
P
=80,463,088
37,721
6,907,060
P
=81,981,165
264,399
3,813,576
=57,275,243
P
264,399
3,813,576
=60,305,100
P
* Excludes receivables arising from statutory requirements (net of allowance amounting to P562,083 and P433,636 as of March 31,
2009 and 2008, 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 and short-term investments approximate fair
value. The carrying amounts of receivables approximate fair value due to their short-term
settlement period.
Current financial instruments
Similarly, the historical cost carrying amounts of receivables, miscellaneous deposits, accounts
payable, accrued expenses and due to related parties approximate their fair values due to the
short-term nature of these accounts.
Debt investments (available-for-sale investments)
The fair values of debt investments are generally based upon quoted market prices. If market
prices are not readily available, fair values are estimated by obtaining quotes from counterparties
or from independent entities that offer pricing services, by adjusting the quoted market prices of
comparable investments.
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.
109
- 61 Security deposits
The fair value of refundable deposits is determined using discounted cash flow techniques based
on prevailing market rates. Discount rates used are 1.65% to 1.67% and 6.66% for
March 31, 2009 and 2008, 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 0.92% to 4.17% and 2.04% to 5.09% for
USD-denominated loans in 2009 and 2008, respectively. The discount rates used amounted to
2.25% and 2.10% for JPY-denominated loans in 2009 and 2008, 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.
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 on 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
Fuel derivatives
Interest rate swaps
Currency forwards
Structured currency derivatives
Asset
P
=3,231,733
–
–
34,380
P
=3,266,113
(In Thousands)
Asset
Liability
=
P4,823,570
P
=6,829,390
–
37,721
6,890
–
–
39,949
=
P4,830,460
P
=6,907,060
2008
Liability
P
=3,467,627
107,938
39,585
198,426
P
=3,813,576
110
- 62 As of March 31, 2009 and 2008, the positive and negative fair values of derivative positions that
will settle in 12 months or less are classified under “Other current assets” (P
=3.09 billion in 2009
and P
=3.07 billion in 2008) and “Accrued expenses” (P
=4.00 billion in 2009 and =
P2.21 billion in
2008), respectively. The positive and negative fair values of derivative positions that will settle
in more than 12 months are classified under “Other noncurrent assets" (P
=179.07 million in 2009
and P
=1.76 billion in 2008) and “Other noncurrent liabilities” (P
=2.91 billion in 2009 and P
=1.61
billion in 2008), respectively. The derivative asset (liability) balances include amounts arising
from derivative settlements that are currently due to (due from) the Group. The amounts totaled
(P
=249.28 million) and P
=308.45 million as of March 31, 2009 and 2008, respectively.
Fuel derivatives
PAL is dependent on jet fuel to run its operation. Approximately 47.32% and 32.03% of its
operating expenses represent jet fuel consumption for March 31, 2009 and 2008, 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.
PAL accounted for certain fuel derivatives as cash flow hedges as such instruments are utilized
to reduce the variability of the cash flows of forecasted jet fuel purchases. These hedges,
consisting of fuel caps and floors (collar structures), and fixed swaps are linked to specified fuel
indices and have various monthly maturities up to June 30, 2010.
As of March 31, 2009, there are no outstanding fuel derivatives accounted for as cash flow
hedges. As of March 31, 2008, the outstanding notional amounts of bought and sold options
accounted for as cash flow hedges totaled 3,855,000 barrels and 3,585,000 barrels, respectively.
The net positive fair value of these fuel derivatives as of March 31, 2008 amounted to
=3.14 billion. The unrealized positive fair value after tax included under “Cumulative
P
translation adjustment, net of deferred income tax” in the equity section of the consolidated
statements of financial position amounted to =
P1.00 billion and =
P2.54 billion for the years ended
March 31, 2009 and 2008, 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, 2009, the
outstanding notional amounts of bought and sold options not accounted for as cash flow hedges
totaled 9,435,000 barrels and 9,705,000 barrels, respectively. As of March 31, 2008, the
outstanding notional amounts of bought and sold options not accounted for as cash flow hedges
totaled 3,180,000 and 8,790,000 barrels, respectively. The net negative fair value of these fuel
derivatives as of March 31, 2009 and 2008 amounted to =
P3.35 billion and P
=2.09 billion,
respectively.
In 2009, PAL incurred P
=5.30 billion loss resulting from the early termination of several fuel
hedging contracts before maturity date and =
P2.85 billion loss from restructuring deals.
111
- 63 -
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 and $52.41 million as of March 31, 2009 and 2008,
respectively, and have expiry dates from August 27, 2009 to 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 =
P51.94 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).
As of March 31, 2009 and 2008, the estimated negative fair values for these interest rate swap
agreements amounted to P
=37.72 million and =
P107.94 million, respectively. Financing charges in
the consolidated statements of comprehensive income include swap costs on the interest rate swap
agreements of P
=77.99 million and =
P39.39 million for the years ended March 31, 2009 and 2008,
respectively.
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 and =
P74.20 million as of March 31, 2009 and 2008,
respectively.
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. The Group’s outstanding currency forwards consist of short term buy
USD and sell various currencies (i.e., JPY, HKD, CAD, AUD, PHP). The aggregate notional
amount in USD is equal to $10.52 million as of March 31, 2008. The net negative fair values of
these forwards amount to =
P37.71 million as of March 31, 2008. During 2008, PAL also entered
into currency forward contract to buy EUR and sell CAD, with an aggregate notional amount in
EUR 600. The net positive fair value of these currency forwards amounts to =
P5.01 million as of
March 31, 2008.
As of March 31, 2009, PAL has no outstanding currency forwards.
Structured currency derivatives
The Group entered into structured currency derivatives consisting of compound option structures
with combination of long calls with knockout and short put with leverage features. 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 EUR in USD and buy USD in various currencies (i.e., JPY, CAD and SGD). As of
March 31, 2009 and 2008, the contracts have aggregate notional amounts of $30.40 million and
$29.27 million, respectively, while negative net fair value of these structures amounts to P
=5.57
million and P
=198.42 million, respectively.
112
- 64 -
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:
2008
(In Thousands)
P
=781,061
P
=2,273,118
2009
Beginning of year
Items recognized as other comprehensive income:
Changes in fair value of cash flow hedges
Transferred to consolidated statements of
comprehensive income*
Tax effects of items taken directly to or
transferred from equity
Foreign exchange difference
End of year
1,848,022
3,908,235
(3,367,120)
(1,895,314)
645,729
(358,281)
(678,486)
157,622
(1,231,650)
P
=1,041,468
1,492,057
=
P2,273,118
* The amount transferred to the consolidated statements of comprehensive income 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, 2009 and 2008, the effective portion of the positive fair value
changes on the Group’s cash flows hedges that were deferred in equity amounted to P
=1.04 billion
(net of tax) and P
=2.27 billion (net of tax), respectively. The total mark-to-market gain (loss)
relating to the ineffective portion of cash flow hedges for the years ended March 31, 2009 and
2008, which were recognized immediately in profit and loss amounted to (P
=6.93) million and
=658.86 million, respectively.
P
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*
2008
2009
(In Thousands)
=
P1,268,734
P
=708,432
1,841,138
(12,134,596)
(10,293,458)
6,273,647
(80,292)
(P
=3,391,671)
4,567,093
(2,845,282)
1,721,811
(2,135,012)
(147,101)
P
=708,432
* Includes balances that are currently due to (from) the Group amounting to (P
=249,276) and P
=308.45 million as of
March 31, 2009 and 2008, respectively.
** Includes fuel derivatives, interest rate swaps, currency forwards and structured currency derivatives.
113
- 65 -
29. Segment Information
PAL’s domestic and international destinations constitute its reportable geographical segments,
which is consistent with how PAL’s management internally disaggregates financial information
for the purpose of evaluating performance and making operating decisions.
Segment information for each reportable geographical segment is shown in the following table:
2009
International:
Revenue
Net income (loss)
Domestic:
Revenue
Net loss
Total:
Revenue
Net income (loss)
2008
2007
(In Thousands)
P
=57,659,878
(4,608,683)
=
P52,428,497
3,911,198
P
=52,348,327
4,079,029
16,417,412
(3,109,682)
12,370,909
(456,140)
12,837,608
(269,470)
74,077,290
(7,718,365)
64,799,406
3,455,058
65,185,935
3,809,559
The reconciliation of total income reported by reportable geographical segment to net income
(loss) in the consolidated statements of comprehensive income is presented in the following
table:
2009
Total segment income (loss) of
reportable segments
Add (deduct) unallocated items:
Non-transport revenue and
other income
Non-transport expenses and
other charges
Benefit from (provision for)
income tax
Net income (loss)
2008
2007
(In Thousands)
=
P3,455,058
P
=3,809,559
1,233,701
1,518,408
4,225,586
(6,000,863)
(6,333,684)
(3,475,106)
(473,274)
(P
=12,958,801)
1,355,667
(P
=4,551)
2,466,398
P
=7,026,437
(P
=7,718,365)
The details of revenue earned from each business segment (passenger, cargo, and others) are
shown in the consolidated statements of comprehensive income.
PAL’s major revenue-producing asset is the fleet owned by PAL, which is employed across its
route network (see Note 11). Geographical and business segment assets, liabilities, and other
information on cash flows and capital expenditures are not disclosed since there is no
reasonable basis for allocating such assets and related liabilities and cash flows to geographical
and business segments.
114
115
PAL HOLDINGS, INC. & SUBSIDIARIES
Schedule F
Long-term Obligations
March 31, 2009
(Am ounts in Thousand Pes os )
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
Trade Creditor Claims
Estimated terminated operating lease claims*
Unsecured claims*
P
-
Amount
Shown as
Current
-
6,490,727
30,480,438
36,971,165
-
-
6,052,750
-
6,052,750
-
See Annex A
-
342,247
3,463,480
495,647
5,083,584
837,894
8,547,064
See Annex B
-
3,805,727
11,631,981
15,437,708
42,112,419 P
52,408,873
10,296,454
P
3,905,428 P
11,829,058
4,486,250
10,259,702
4,686,523
12,840,836
6,144,074
13,299,732
Remarks
-
P
P
Total
781,095
1,011,778
1,657,824
3,040,030
-
P
Amount
Shown as
Long-term
See Annex C
* Net of im pu ted interest
116
PAL HOLDINGS, INC. & SUBSIDIARIES
Schedule F
Long-term Obligations - ANNEX A
March 31, 2009
(Am ounts in Thous and Pes os )
Type of Obligation
Amount Shown Amount Shown as
as Current
Long-term
Floating
Interest Rate
Payment
Term
Issue
Date
Maturity
Date
3,220,063 3 m ont h LIBOR plus
quart erly
2008
2015
Secured Loans:
From a local bank
P
- P
syndicated loan
m argin of 3%
From a syndicate of local banks
-
2,832,687 3 m ont h LIBOR plus
quart erly
2008
2015
m argin of 3%
P
- P
6,052,750
117
PAL HOLDINGS, INC. & SUBSIDIARIES
Schedule F
Long-term Obligations - ANNEX B
March 31, 2009
(Am ounts in Thous and Pe s os )
Amount
Shown as Current
Net Present Value
Aircraft Type
Amount Shown
Terminated Operating
Lease Expiry
as Long-termLease Claim
Date
Net Present Value
Early Lease Termination
Date
Estimated Terminated Operating Lease Claims
B747-200
P
F50
SD-360
P
171,947
252,424
1997, 1999, 2000
1998
164,635
234,895
1998-2001
1998-1999
5,665
8,328
1999
1998
342,247
P
P
495,647
Restructured Payment terms:
June 7, 2000 - 5%
June 7, 2009 - 31%
June 7, 2010 - 32%
June 7, 2011 - 32%
118
PAL HOLDINGS, INC. & SUBSIDIARIES
Schedule F
Long-term Obligations - ANNEX C
March 31, 2009
(Am ounts in Thousand Pe sos )
Type of Obligation
Amount Shown
as Current
Net Present Value
Amount Shown
as Long-term
Net Present Value
Original
Fixed
Interest Rate
Original Floating
Interest Rate
Original
Issue
Date
Original
Maturity
Date
-
2% per annum over
6 m ont h LIBOR
01/16/97
01/16/00
10.75%
1.5-4.5% per annum over
various
various
various
various
Unsecured Claims
Foreign-currency denominated loans:
US$178.5 floating rate note -
P
Others Loans
2,769,109
P
596,075
4,065,947
873,533
1 m ont h LIBOR
Peso denominated loans
P
3,365,184
4,939,480
98,296
144,104
3,463,480
P
19.50%
weight ed average yield rat e for
364-day t reasury bill
5,083,584
Restructured payment terms:
June 7, 2000 - 5%
June 7, 2009 - 31%
June 7, 2010 - 32%
119
PAL HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE I: CAPITAL STOCK
MARCH 31, 2009
Title of Issue
No. of shares
authorized
Common Stock
20,000,000,000
No. Of shares reserved
No. of shares issued for options, warrants,
and outstanding
conversion and other
rights
5,421,512,096
-
Number of shares held by
Affiliates
Directors, Officers
Others
and Employees
5,297,280,230
8,001
124,223,865
120
PAL HOLDINGS, INC.
SUPPLEMENTARY SCHEDULE OF RETAINED EARNINGS
AVAILABLE FOR DIVIDEND DECLARATION
MARCH 31, 2009
(Amounts in Thousands)
Deficit as of March 31, 2008
Less net loss during the year closed to retained earnings
Deficit as of March 31, 2009
P
P
(14,662)
5,402
(20,064)
121