COVER SHEET PSE CODE: HO-080 P W 9 4

COVER SHEET
PSE CODE: HO-080
P W 9 4
S.E.C. Registration Number
P A
L
H O L D
I
N G S
,
I
N C
.
(Company’s Full Name)
.
7
T H
6
7
5
F L O O R
4
A L L
A Y A L A
I
A V E
E D
B A N K
C E N T R E
.
M A K A T
I
C
I
T Y
(Business Address: No. Street City / Town / Province)
0
SUSAN TCHENG LEE
7368466
Contact Persons
Company Telephone Number
3
Month
3
1
Day
DEFINITIVE INFORMATION
STATEMENT 2008
Last working day
of September
Form Type
Month
Day
Annual Meeting
Fiscal Year
Secondary License Type, If Applicable
Dept. Requiring this Doc.
Amended Articles Number/Section
Total Amount of Borrowings
Total No. of Stockholders
Domestic
Foreign
-----------------------------------------------------------------------------------------------------------------------------To be accomplished by SEC Personnel concerned
File Number
Document I.D.
STAMPS
Remarks = pls. use black ink for scanning purposes
LCU
Cashier
NOTICE OF ANNUAL STOCKHOLDERS’ MEETING
To All Stockholders:
Please be informed that the Annual Stockholders’ Meeting of PAL HOLDINGS,
INC. will be held on Tuesday, 30 September 2008, at 2:00 p.m. at the Kachina Room,
Century Park Hotel, Malate, Manila, for the following purposes:
I.
II.
III.
IV.
V.
VI.
VII.
VII.
Call to order
Proof of the required notice of the meeting
Proof of the presence of quorum
Reading and approval of the minutes of the previous meeting
Report of Management and the Board of Directors
Ratification of All Acts, Transactions and Resolutions by the Board of
Directors and Management
Election of Directors
Adjournment
The Board of Directors has fixed the close of business on 29 August 2008 as the
record date of shareholders in good standing entitled to receive notice of, and to vote at,
the meeting and any adjournment thereof.
All shareholders are cordially invited to attend the meeting in person. However, if
you are unable to attend, you may send us a proxy not later than the close of business on
19 September 2008 at the office of the Corporate Secretary, Atty. Ma. Cecilia L. Pesayco,
at the 2nd Floor Allied Bank Center, 6754 Ayala Avenue, Makati City.
Registration shall begin at 1:00 p.m. In order to facilitate registration,
shareholders attending in person or their proxy should bring appropriate identification
cards bearing a picture such as a driver’s license, company ID, and the like.
29 August 2008.
MA. CECILIA L. PESAYCO
Corporate Secretary
SECURITIES AND EXCHANGE COMMISSION
SEC FORM 20-IS
Information Statement Pursuant to Section 20
of the Securities Regulation Code
1.
Check the appropriate box:
[ ] Preliminary Information Statement
[ ] Definitive Information Statement
2.
Name of Registrant as specified in its charter:
PAL HOLDINGS, INC.
3.
Province, country or other jurisdiction of
incorporation or organization
:
Metro Manila, Philippines
4.
SEC Identification Number
:
PW-94
5.
BIR Tax Identification Number
:
430-000-707-922
6.
Address of principal office
:
7/F Allied Bank Center
6754 Ayala Avenue, Makati
7.
Registrant’s telephone number,
including area code
:
(632) 736-8466
8.
Date of meeting
Time of meeting
Place of meeting
:
:
:
30 September 2008
2:00 p.m.
Kachina Room, Century Park
Hotel, Malate, Manila
9.
Approximate date on which the Information
Statement is first to be sent or given
to security holders
:
10.
Securities registered pursuant to Sections 8 and 12 of the Code or Sections 4 and 8 of
the RSA (information on number of shares and amount of debt is applicable only to
corporate Registrant):
Title of Each Class
Common Stock
11.
9 September 2008
Number of Shares of Common Stock
Outstanding or Amount of Debt Outstanding
5,421,512,096
Are any or all Registrant’s securities listed in a Stock Exchange?
Yes [ ]
No [ ]
If yes, disclose the name of such Stock Exchange and the class of securities listed
therein:
Philippine Stock Exchange/ Common Stock
2
INFORMATION STATEMENT
A
GENERAL INFORMATION
Item 1.
Date, time and place of meeting of stockholders
(a)
(b)
Date
Time
Place
:
:
:
Mailing address of the
Principal Office of the
Corporation
:
30 September 2008
2:00 p.m.
Kachina Room, Century Park
Hotel, Vito Cruz, Manila
7/F Allied Bank Center
6754 Ayala Avenue, Makati City
This Information Statement and a copy of the Corporation’s
Management Report will be first sent out to all qualified stockholders
on 9 September 2008.
WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY
Item 2.
Dissenter’s Right of Appraisal
Title X of the Corporation Code of the Philippines grants in favor of a
shareholder the right to dissent and demand payment of the fair value of his
share in certain instances, to wit: (1) in case an amendment to the articles of
incorporation will change or restrict the rights of such stockholder or
otherwise extend or shorten the term of the Corporation; (2) in case of the sale,
lease, exchange, transfer, mortgage, pledge, or other disposition of all or
substantially all of the Corporation’s properties; or (3) in case of merger or
consolidation. Under Section 42 of the Corporation Code, a stockholder is
likewise given an appraisal right in case a corporation decides to invest its
funds in another corporation or business. The stockholder must have voted
against the proposed corporate action in order to avail himself of the appraisal
right.
None of the proposed corporate actions qualifies as an instance for the
exercise of the stockholder appraisal right.
Item 3.
Interest of Certain Persons In Matters to be Acted Upon
(a)
The interests of incumbent Directors and nominees to the Board in the
matters to be acted upon in the meeting consist solely of security
holdings to the extent described in Item 4(d).
3
(b)
B.
The Corporation has not received any information from any Director
that he/she intends to oppose any matter to be acted upon in the
meeting.
CONTROL AND COMPENSATION INFORMATION
Item 4.
Voting Securities and Principal Holders Thereof
(a)
The number of shares outstanding and entitled to vote in the
stockholders’ meeting is 5,421,512,096.
Each share is entitled to one (1) vote. With respect to the election of
directors, however, the stockholder may vote such number of shares
for as many persons as there are directors to be elected, or he may
cumulate said shares and give one candidate as many votes as the
number of directors to be elected, or he may distribute them on the
same principle among as many candidates as he shall see fit; provided
the total number of votes cast by him shall not exceed the number of
shares owned by him multiplied by the number of directors to be
elected.
Title of
Class
Common
(b)
All stockholders of record as of the close of business on 29 August
2008 are entitled to notice of, and to vote at, the Annual Stockholders’
Meeting.
(c)
Security ownership of certain record and beneficial owners (more than
5% of voting securities) as of 31 July 2008:
Name and
Address of
Record Owner
and Relationship
with Issuer
Trustmark
Holdings
Corporation
• SMI Compound, C.
Raymundo Ave.,
Maybunga, Pasig City
• Shareholder
Name of Beneficial
Owner and
Relationship with
Record Owner
J ai me J . Ba ut i st a
a p p ea r s on re c or d a s
9 9. 9 9 % own e r of
Tr u s t mar k a n d wh o
t oge t h e r wi t h He n r y
Si t ost a,
T on n y
C hi n le e, P et e r S o o
and
Vi c t or
Yu
c om p r i se t h e B oa r d
of
Dir e c t or s
(a l l
a ct i n g as n omi n ee s /
r e p r e se nt a t i ve s
of
t h e Lu c i o Ta n Gr ou p
o f C om p a n i e s)
4
Citizenship
Filipino
No. of Shares
%age
Held
5,297,280,230 97.708%
(d)
Security Ownership of Management as of 31 July 2008:
Title of
Class
Common
Name of Beneficial
Owner
Lucio C. Tan
Common
Mariano C. Tanenglian
Common
Harry C. Tan
Common
Jaime J. Bautista
Common
Wilson T. Young
Position
Amount and
Nature of
Owner-ship
Chairman
Director/
Treasurer
Director
Director/
President
Director
Citizenship
Filipino
%age Held
Filipino
Nil
1,000
(R) Direct
Filipino
Nil
500
Filipino
Nil
Filipino
Nil
Filipino
Nil
Filipino
Nil
Filipino
Nil
Filipino
Nil
Filipino
Nil
Filipino
Nil
1,000
(R) Direct
1,000
(R) Direct
Nil
(R) Direct
500
(R) Direct
Common
Macario Te
Director
Common
Juanita Tan Lee
Director
1
(R) Direct
500
(R) Direct
Common
Enrique O. Cheng
Director
1,000
(R) Direct
Common
Antonino L. Alindogan, Jr.
Director
500
(R) Direct
Common
Lucio K. Tan, Jr.
Director
Common
Michael Tan
Director
1,000
(R) Direct
1,000
(R) Direct
Common
(e)
All directors and
officers as a group
8,001
0.00016%
(R) Direct
Voting Trust Holders of 5% or More
The Corporation has no recorded stockholder holding more than 5% of the
Corporation’s common stock under a voting trust agreement.
(f)
Changes In Control
No change in control has occurred since the beginning of the last fiscal year.
5
Item 5.
Directors & Executive Officers
(a)
Directors of the Corporation
The directors named hereunder were elected to office at the Annual
Stockholders’ Meeting held on 17 September 2007 to hold office until
the next succeeding annual meeting and until their respective
successors have been elected.
Name/Position
Current Affiliations and
Term of
Business Experience in the last 5
Office/Period
years
Served
Chairman of Philippine Airlines, 1 year/ served as
Inc., Asia Brewery Inc., Himmel Chairman since 30
Industries Inc., Fortune Tobacco October 2000
Corp., Tanduay Holdings, Inc.,
Tanduay
Distillers,
Inc.,
Grandspan Development Corp.,
Lucky Travel Corp., and Eton
Properties Philippines, Inc.;
Director of Phil. National Bank;
majority stockholder of Allied
Banking Corp., Century Park
Hotel and Charter House, Inc.
Age
Citizenship
Lucio C. Tan/
Chairman
74
Filipino
Jaime J. Bautista/
Director and
President
51
Filipino
Chairman and President of Basic 1 year/served as
Capital
Investments
Corp.; director/President
President of Cube Factor Holdings, since 05 July 2000
Inc.; Vice Chairman, Board of
Trustees of University of the East;
Member, Board of Trustees of
UERM Medical Center; Director
of MacroAsia Corp.
Mariano C.
Tanenglian/
Treasurer and
Director
68
Filipino
Vice Chairman of Philippine 1 year/served as
Airlines, Inc., Director and director since 30
Treasurer of Asia Brewery Inc., October 2000
Allied Banking Corp., Basic
Holdings Corp., Himmel Industries
Inc., Fortune Tobacco Corp.,
Tanduay Holdings, Inc. Tanduay
Distillers, Inc., Tanduay Brands
International, Inc., Charter House
Inc., Grandspan Development
Corp., and Eton Properties
Philippines, Inc.
Harry C. Tan/
Director
62
Filipino
Chairman of the Tobacco Board; 1 year/served as
Vice
Chairman
of
Eton director since 30
Properties Philippines, Inc.; October 2000
Managing Director of Century
Park Hotel; Director of Allied
Banking Corp., Basic Holdings
6
Corp., Philippine Airlines, Inc.,
Fortune Tobacco Corp., Asia
Brewery Inc., Tanduay Distillers,
Inc., Tanduay Holdings, Inc. and
Foremost Farms, Inc.
Lucio K. Tan Jr./
Director
42
Filipino
EVP of Fortune Tobacco Corp. 1 year/served as
and Foremost Farms, Inc.; Director director since 26
of Allied Bankers Insurance Corp., July 2006
Philippine Airlines, Inc., Tanduay
Holdings, Inc., Tanduay Brands
International, Inc., Air Philippines
Corp., and Eton Properties
Philippines, Inc.
Michael G. Tan/
Director
42
Filipino
Chief Operating Officer of Asia 1 year/served as
Brewery, Inc.; Director of Allied director since 26
Bankers
Insurance
Corp., July 2006
Philippine
Airlines,
Inc.,
Philippine Airlines Foundation,
Inc., Tanduay Holdings, Inc.; Air
Philippines Corp. and Eton
Properties Philippines, Inc.
Macario U. Te/
Director
78
Filipino
Chairman of MT Holdings Corp.; 1 year/served as
Director of Philippine National director since June
Bank, PNB Remittance Center 1999
Inc., PNB General Insurers Inc.,
PNB Holding Corporation, PNB
Investment, Ltd., PNB Capital &
Investment
Corp.,
Oriental
Petroleum & Minerals Corp.,
Waterfront Phils., Beneficial PNBLife Corp., Bulawan Mining
Corp., Nissan North Edsa, Fontana
Golf Club, Inc.
Wilson T. Young/
Director
52
Filipino
Director
and
President
of 1 year/served as
Tanduay Holdings, Inc, Tanduay director since 28
Brands International Inc.; Director June 2000
of Air Philippines Corp., Flor De
Caña Shipping, Inc.; ViceChairman, Board of Trustees of
UERM Medical Center; Member,
Board of Trustees of University of
the East, Chief Operating Officer
of Tanduay Distillers, Asian
Alcohol Corp., and Total Bulk
Corp.
Juanita Tan Lee
Director
64
Filipino
Director of Eton Properties 1 year/served as
Philippines,
Inc.;
Corporate director since 2
Secretary of Asia Brewery, Inc., August 2007.
Asian Alcohol Corp., Charter
7
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., Nugget Food
Corp., Tanduay Distillers, Inc.,
Tanduay Brands International Inc.,
Tobacco Recyclers Corp., Total
Bulk Corp., Zebra Holdings, Inc.;
Assistant Corp. Secretary of Basic
Holdings,
Inc.,
Tanduay
Holdings, Inc.
Antonino L.
Alindogan, Jr.
69
Filipino
Independent Director of Philippine
Airlines, Inc., Eton Properties
Philippines, Inc., and Rizal
Commercial Banking Corp.,;
Director of House of Investments;
President of C55, Inc., Chairman
of An-Cor Holdings, Inc.; Former
Chairman of Development Bank of
the Philippines; Former member of
the Monetary Board of the Bangko
Sentral ng Pilipinas.
1 year/served as
independent director
since 17 September
2007
Enrique O. Cheng
75
Filipino
Independent Director of Philippine
Airlines, Inc.; Chairman of
Landmark
Corporation;
Chairman/President of Philippine
Trade
Center;
Director/ViceChairman of Hideco Sugar
Milling, Co., Inc.
1 year/served as
independent director
since 17 September
2007
(*Note: Unless otherwise indicated or qualified, the term “Director” refers to a regular director of the corporation.
Corporations written in bold font style are Listed Companies)
In accordance with Section II (5) of the Code of Corporate Governance, all of
the foregoing were nominated and approved by the Nomination and
Compensation Committee for re-election to the Board of Directors for 20082009 upon determination that they possess all of the qualifications and none of
the disqualifications of a director provided for in the Code of Corporate
Governance, and the adopted Manual of Corporate Governance of the
Corporation.
8
Nominated as independent Directors are Messrs. Antonino L. Alindogan, Jr.
and Enrique Cheng, both of whom have been duly evaluated by the
Nomination and Compensation Committee which has certified that said
nominees are duly qualified in accordance with Rule 38 of the Securities
Regulation Code, and suffer from no disqualification under Section 6.B. of
Rule 38. They have been nominated by Mr. Jaime J. Bautista. Mr. Bautista is
not related to either Mr. Alindogan or Mr. Cheng. The members of the
Nomination and Compensation Committee of the Corporation are: Messrs.
Mariano C. Tanenglian (Chairman), Jaime J. Bautista, and Enrique O. Cheng
(Independent Director).
On 16 October 2007, the Securities and Exchange Commission approved the
amendment of the corporate by laws to include the requirements of SRC Rule
38 on independent directors.
(b)
Executive Officers of Registrant
Citizenship
Previous Affiliations
(past 5 years)
Term of
Office/Period
Served
1 year/served
since 30
October 2000
1 year/served
since 5 July
2000
Name/Position
Age
Lucio C. Tan/
Chairman
74
Filipino
See above
Jaime J.
Bautista/
Director and
President
51
Filipino
See above
Mariano C.
Tanenglian/
Treasurer and
Director
Ma. Cecilia L.
Pesayco/
Corporate
Secretary
68
Filipino
See above
55
Filipino
Corporate Secretary of Allied 1 year/served
Banking Corp., Allied Savings since 5 July
Bank,
Eton
Properties 2000
Philippines, Inc., Tanduay
Holdings Inc., Air Philippines
Corp., Zuma Holdings and
Management
Corp.,
East
Silverlane Realty, Flor De Caña
Shipping, Inc.
Susan T. Lee/
Chief Finance
Officer
38
Filipino
Tanduay Holdings, Inc. – Asst.
Vice President - Asst. CFO
(Note:
Corporations written in bold font style are Listed Companies.)
9
1 year/served
since 30
October 2000
1 year/served
since 3
February
2003
(c)
Significant Employees
While Management values all of its employees, it does not expect any
extraordinarily significant contribution to the business of the
Corporation by any single employee.
(d)
Family Relationships
Directors Lucio C. Tan, Mariano C. Tanenglian and Harry C. Tan are
brothers. Directors Lucio K. Tan, Jr. and Michael G. Tan are the sons
of Director Lucio C. Tan.
Except for the foregoing, there are no other family member or relations
within the fourth degree of consanguinity or affinity that is a member
of the Board or holding any executive position.
(e)
Involvement in Certain Legal Proceedings
None of the directors and executive officers of the Corporation are
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, in a criminal proceeding, domestic or
foreign, or being subject to a pending 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.
Item 6.
Certain Relationships and Related Transactions
Identification of the related parties transaction business and nature of
relationship
In addition to Note 18 of the Notes to the Consolidated Financial Statements
on pages 44 to 46, the following are relevant related party disclosures:
1.
The Corporation’s cash and cash equivalents are deposited/placed with
Allied Banking Corporation, an affiliate, at competitive interest rates.
The Corporation also has a lease and stock transfer agency agreement
with the said bank at prevailing rates. There exists no preferential
treatment in any of its transactions with the Bank. There are no special
10
risks or contingencies involved since the transactions are done under
normal business practice.
2.
The Corporation has investments in MacroAsia Corporation, a related
party.
Business is transacted with related parties for purposes of easy coordination
due to stronger ties based on trust and confidence.
There are no parties that fall outside the definition “related parties” with whom
the Corporation 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.
Item 7.
Compensation of Directors and Executive Officers
(a)
CEO and Top Four Compensated Executive Officers
Since the Corporation has no significant commercial operations at
present, the Corporation’s Chairman and CEO, President, as well as
the other officers of the Corporation did not receive a fixed basic
monthly salary for the last three (3) years. For 2008, a fixed basic
monthly salary shall be provided for the aforementioned officers. The
Corporation has no contract with any of its executive officers.
(b)
Directors and Executive Officers
The directors of the Corporation are entitled to a per diem of Twenty
Five Thousand Pesos (P25,000.00) for their attendance in the Annual
Stockholders’ Meeting. A transportation and monthly allowance of
Thirty Thousand Pesos (P30,000.00) is given to the Board members as
well.
The directors and executive officers received no other
remuneration in cash or in kind. None of the directors and executive
officers holds any outstanding warrant or option.
Summary Compensation Table
Name and
Principal
Position
CEO and TOP
FOUR (4)
Management
Year
Salary
Bonus
2006
N/A
N/A
P480,000.00
2007
N/A
N/A
P1,720,000.00
N/A
P120,000.00
2008
P1,740,000.00
(estimate)
11
Other Annual
Compensation
Name and
Principal
Position
All other officers
as a group
unnamed
Year
Salary
Bonus
2006
N/A
N/A
P960,000.00
2007
N/A
N/A
P3,210,000.00
N/A
P1,110,000.00
2008
P2,490,000.00
(estimate)
Other Annual
Compensation
The following constitute the Corporation’s five (5) most highly compensated
executive officers (on a consolidated basis):
1.
2.
3.
4.
5.
Item 8.
Mr. Lucio C. Tan is the Chairman of the Board of Directors and Chief
Executive Officer of the Corporation.
Mr. Mariano C. Tanenglian is the Treasurer of the Corporation.
Mr. Jaime J. Bautista is the President of the Corporation.
Ms. Ma. Cecilia L. Pesayco is the Coporate Secretary of the
Corporation.
Ms. Susan T. Lee is the Chief Finance Officer of the Corporation.
(a)
Standard Arrangements – Other than the stated allowance and per diem
of the directors, there are no other standard arrangements to which the
directors of the Corporation 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
Independent Public Accountants
At present, the Corporation’s external auditor is the auditing firm of SGV &
Co.. The audit partner in charge of the Corporation, Ms. Cynthia Manlapig,
was appointed in 2007. In accordance with SRC Rule 68 (3)(b)(iv), there is no
need at this time to change the audit partner for the Corporation. The authority
to appoint, remove and replace the external auditor of the Corporation was
delegated by the stockholders to the Board of Directors during last year’s
annual stockholders’ meeting held on 17 September 2007.
Representatives from SGV & Co. are expected to be present at the scheduled
meeting of stockholders, where they will have the opportunity to make a
statement if they desire to do so and are likewise expected to be available to
respond to appropriate questions raised by stockholders.
12
There were no changes in, or disagreement with, the registrant’s accountants
on any accounting and financial disclosure during the two most recent fiscal
years or any subsequent interim period.
Information on Independent Accountant and other Related Matters
External Audit Fees and Services
a.)
Audit and Audit-Related Fees
1.
The audit of the Corporation’s annual financial statements or services that
are normally provided by the external auditor in connection with statutory and
regulatory filings or engagements for 2008, 2007, and 2006.
Year 2008 – Estimated at P400,000.00 inclusive of out-of-pocket expenses for the
audit of 2008 financial statements.
Year 2007 – P833,525.00 audit fee and out-of-pocket expenses for the audit of
2007 financial statements
Year 2006 – P140,560.00 audit fee and out-of-pocket expenses for the audit of
2006 financial statements.
2.
Other assurance and related services by the external auditor that are
reasonably related to the performance of the audit or review of the registrant’s
financial statements:
Not applicable
b.)
Tax Fees
Year 2008 – None
Year 2007 – P757,120.00 for various tax consultation services on equity
restructuring
Year 2006 – None
c.)
All Other Fees
None
d.)
The Audit Committee’s approval policies and procedures for the
above services
Management presents proposals on possible external auditors to be engaged
together with their respective proposed audit fees to the Audit Committee for
proper consideration. The Audit Committee evaluates and thereafter, upon its
recommendation, the appointment of the external auditor is presented to the
Board of Directors and/or Stockholders for confirmation. However, financial
statements duly approved by the Audit Committee are still subject to the
confirmation of the Board of Directors prior submission to the respective
13
government regulatory agencies. The members of the Audit Committee of the
Corporation are: Messrs. Antonino L. Alindogan, Jr. (Chairman, Independent
Director), Enrique O. Cheng (Independent Director), and Wilson T. Young.
C. OTHER MATTERS
Item 9.
Action with Respect to Reports
Reading and Approval of the Minutes of the 2007 Annual Shareholders’
Meeting.
The minutes of the previous meeting of the shareholders held on 17 September
2007 will be presented for approval at the Annual Shareholders’ Meeting. The
following were the significant matters discussed at the said meeting:
(i) the Minutes of the Shareholders’ Meeting held on 19 September 2006 were
approved; (ii) the Audited Financial Statements of the Corporation and the
Report of Management and the Board of Directors were approved; (iii) all the
acts of Management from date of the last shareholders’ meeting and up to the
date of said shareholders’ meeting were confirmed and ratified; (iv) the
issuance of shares from the Corporation’s unissued capital stock was
approved; (v) requirements of the Revised Listing Rules regarding the public
offering of new shares to be listed were waived; (vi) members of the Board of
Directors were elected; and (vii) the authority to appoint, remove and replace
the external auditor of the Corporation for the ensuing year was delegated to
the Board of Directors.
Item 10.
Matters Not Required to be Submitted
The following matters are not required to be submitted to the stockholders but
are nevertheless presented for good corporate governance:
(a)
Approval of the Chairman’s Report on the Results of Operations and
Management Reports for the year 2007-2008
The President will report on the significant business transactions
undertaken by the Corporation in 2007-2008. The audited financial
statements for the period ending 31 March 2008 of the Corporation
will also be presented for approval of the stockholders.
(b)
Ratification of Acts, Resolutions and Transactions Entered into by the
Board of Directors and Management of the Corporation from the date
of the last annual stockholders’ meeting as reflected in the minutes The major resolutions approved by the Board in the preceding year are
as follows:
14
DATE OF MEETING
08-28-2007
-
08-31-2007
-
MATTERS DISCUSSED
Approval of the 1st Quarter Management Report for the
period ended June 30, 2007.
1. Acceptance of the resignation of Messrs. Regnar
C. Rivera and Delfin C. Gargantiel, Jr. as
Independent Directors of the Corporation.
2. Election of Messrs. Antonino L. ALindogan, Jr.
and Enrique O. Cheng as the new Independent
Directors of the Corporation.
3. Appointment of new members of the Board
Committees (Audit Committee and Nomination
and Compensation Committee)
09-17-2007
-
1. Annual Stockholders’ Meeting
a. Audited Financial Statements as of March 31,
2007.
b. All acts, resolutions and transactions entered
into by the Board of Directors and
Management.
c. Issuance of shares from the Corporation’s
unissued capital stock.
d. Waiver of the requirements of the Revised
Listing Rules
e. Election of Directors
f. Delegation to the Board of the authority to
appoint, remove and replace the external
auditor.
2. Organizational Meeting
a. Election of Officers
b. Appointment of the members of the Board
Committees
10-03-2007
-
The following matters were approved:
1. Authority of the Corporation to enter into an
Underwriting
Agreement
with
Macquarie
Securities (Asia) Pte Limited and Trustmark
Holdings Corporation.
2. Authority of the Corporation to accept the
subscription and issue new shares to Trustmark
Holdings Corporation.
3. Authority of the Corporation to subscribe to new
shares of Philippine Airlines, Inc.
4. Amendment of the Corporation’s By-Laws to
delete outdated provisions and include provisions
required under the Code of Corporate Governance
provided by the Securities and Exchange
Commission.
15
DATE OF MEETING
11-13-2007
02-13-2008
-
07-17-2008
MATTERS DISCUSSED
Approval of the 2nd Quarter Management Report for
the period ended September 30, 2007.
Approval of the 3rd Quarter Management Report for
the period ended December 31, 2007.
1. Calling of the Annual Stockholders’ Meeting to
be held on September 30, 2008 at 2:00p.m. at the
Century Park Hotel, Malate, Manila.
2. All Shareholders in good standing on the close of
business on the record date of August 29, 2008
shall be entitled to receive notice of, and to vote
at, the meeting and any adjournment thereof.
3. Approval of the Audited Consolidated Financial
Statements of PAL Holdings, Inc. and
Subsidiaries for the fiscal year ended March 31,
2008.
Copies of the minutes of the last Annual Shareholders’ Meeting held
on 17 September 2007 will be made available for inspection at the
Annual Shareholders’ Meeting by any shareholder desiring to review
the same.
Item 11.
Other Proposed Actions
(a)
Item 12.
Election of Directors - A Board composed of eleven (11) directors will
be elected at the meeting.
Voting Procedures
(a)
Every shareholder shall be entitled to one (1) vote for each share of
stock standing in his name in the books of the Registrant, unless the
law provides otherwise. Cumulative voting may be used in the
election of the members of the Board of Directors.
(b)
Votes required for election of directors – the eleven (11) nominees
garnering the highest number of votes shall be elected directors. The
stockholder may vote such number of shares for as many persons as
there are directors to be elected, or he may cumulate said shares and
give one candidate as many votes as the number of directors to be
elected, or he may distribute them on the same principle among as
many candidates as he shall see fit; provided the total number of votes
cast by him shall not exceed the number of shares owned by him
multiplied by the number of directors to be elected.
16
Item 13.
(c)
Votes required for ratification of reports, acts and resolutions of the
Board of Directors and Management – majority vote of the
shareholders.
(d)
Voting shall be done orally and counting of votes shall be conducted
by the Corporate Secretary (or her duly authorized representative) to be
assisted by the Corporation’s independent accountant or by the
representatives of SGV & Co.
Incorporation by Reference
The Corporation has incorporated by reference the audited financial
statements for the period ending 31 March 2008 contained in its 2008
Management Report prepared in accordance with Rule 68 of the Securities
Regulation Code.
The Corporation shall, on written request, provide to shareholders, without
charge, the Annual Report prepared pursuant to SEC Form 17-A. All such requests for
a copy of the Annual Report should be directed to the Office of the Corporate
Secretary, Atty. Ma. Cecilia L. Pesayco, at the 2/F Allied Bank Center, 6754 Ayala
Avenue, Makati City, Metro Manila, Philippines.
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I certify that the
information set forth in this report is true, complete and correct. This report is signed in the
City of Makati on 29 August 2008.
PAL HOLDINGS, INC.
By:
MA. CECILIA L. PESAYCO
Corporate Secretary
17
PAL HOLDINGS, INC.
7/F Allied Bank Center, 6754 Ayala Avenue, Makati
MANAGEMENT REPORT
PART I - BUSINESS
A.
Description of Business
1.)
Business Development
PAL Holdings, Inc. (the “Corporation”) was incorporated in 1930 as “Baguio
Gold Mining Company”. In 1996, the Securities and Exchange Commission
approved the change in the Corporation’s name to “Baguio Gold Holdings
Corporation” and the change in its primary purpose to that of a holding
company.
In 2007, the Corporation again amended its name to “PAL
Holdings, Inc.” by which it is known today.
In 1997, the stockholders approved the increase in the authorized capital stock
of the Corporation from 200 million common shares to 4 billion common
shares both at P1 par value per share. In 1998, the stockholders amended said
increase from 4 billion common shares to 2.8 billion common shares and 1.2
billion preferred shares both at P1 par value per share. Subsequently, or in
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 Securities and
Exchange Commission (SEC) on 2 October 2000.
The Board of Directors (BOD) approved the increase in authorized capital
stock of the Corporation 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 in 2006. This was approved by the SEC ion 19 January 2007.
The Board of Directors (BOD) had also approved in 2006 the acquisition of
the Six Holding Companies which collectively control 84.67% of Philippine
Airlines (PAL or Airline); The Six Holding Companies are as follows: Pol
Holdings, Inc., Cube Factor Holdings, Inc., Ascot Holdings, Inc., Sierra
Holdings & Equities, Inc., Network Holdings & Equities, Inc., and Maxell
Holdings Corporation.
On August 13, 2007, the Corporation 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 Ascot Holdings, Inc., Cube Factor Holdings, Inc., Pol Holdings,
Inc., Network Holdings & Equities, Inc., and Sierra Holdings & Equities, Inc.
(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
2
satisfied by an equivalent reduction of the liability owning to the Corporation
from the Six Holding Companies. Shortly thereafter, the Corporation
transferred its shares in each of the Six Holding Companies to Trustmark
Holdings Corporation.
On October 16, 2007, the SEC approved the Amended By-Laws of the
Corporation 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 SEC likewise approved the equity restructuring of
the Corporation. This allowed the Corporation 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 incurred in the future without prior approval of the SEC.
2)
Business of Issuer
i.)
Description of Subsidiaries
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 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 2008, PAL’s route
network covered 17 points in the Philippines and 33 international destinations.
PR Holdings, Inc.
PR Holdings, Inc. (PR) was organized by a consortium of investors for the
purpose of bidding for and acquiring the shares of stock of PAL in accordance
with the single-buyer requirement of the bidding guidelines set by the seller,
the Government of the Republic of the Philippines. On 25 March 1992 PR
acquired 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 a 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.
3
ii.)
Principal products or services and their markets indicating their
relative contributions to sales or revenues of each product or service:
Percentage of sales or revenues and net income contributed by foreign
sales
PAL'
s operations for FY2008-07 are described as follows:
During the year, PAL carried an average of 20,935 passengers (11,371
domestic and 9,564 international) and 336 tons of cargo (174 tons domestic
and 162 tons international) per day.
Operations Summary: Systemwide
FY 2008 (in billion PHP)
Dom
Intl
Sys
Total Transport Revenues
12,371
52,428
64,799
% to Total Systemwide
Transport Revenues
19.1%
80.90%
100%
Aside from the core business, PAL also generated revenues from ancillary
businesses including ground handling, inflight sales, and flight & ground
training. These non-transport operations generated PHP 608.0 million in
revenues.
NET REVENUES BY ROUTE
Based on FY 2008-07 results, the revenue contribution by route is shown
below.
Transpacific
Asia & Australia
Total International
Total Domestic
Total System
35.8%
45.1%
80.9%
19.1%
100.0%
International Passenger Services
As of 31 March 2008, PAL'
s international route network covered 33 cities
(including 8 under joint service/code share arrangements with other
international carriers) in 16 countries.
25 on-line points: Guam, Honolulu, Las Vegas, Los Angeles, San Francisco,
Vancouver, Melbourne, Sydney, Fukuoka, Nagoya, Osaka, Tokyo, Pusan,
Seoul, Hongkong, Beijing, Chengdu, Chongqing, Shanghai, Xiamen, Taipei,
Bangkok Jakarta, Saigon, Singapore
4
8 points under joint service/code share arrangement: Abu Dhabi Bahrain,
Bandar Seri Begawan, Doha, Dubai, Kota Kinabalu, Kuala Lumpur, Macau,
Transpacific
During the year, PAL flew an average of 25 flights a week to North America
utilizing B747-400s and A340-300s; 11 times weekly non-stop flights to Los
Angeles; 9 times weekly non-stop services to San Francisco; and 5 times a
week to Vancouver, with an extension to Las Vegas. Technical stop on the
return flights of Transpacific services are required in either Honolulu or Guam
at certain times of the year to compensate for adverse wind conditions.
PAL also operated a 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 160 departures per week out of Manila and Cebu to 9 countries
in Asia and Australia. The Airline flew 28 times a week to Hongkong; 21
times a week to Singapore; 18 times a week to Seoul; 12 times a week to
Tokyo; 11 times a week to Bangkok; 9 times a week to Taipei; 7 times a week
each to Nagoya, Saigon, Shanghai, and Xiamen; 5 times a week to Osaka; 4
times a week each to Beijing, Fukuoka and Pusan; and 2 times a week each to
Chengdu and Chongqing. Jakarta is served 7 times a week with four flights
via Singapore and three flights direct. PAL also operated thrice weekly on the
Manila-Melbourne-Sydney-Manila route and twice weekly on the ManilaSydney-Melbourne-Manila route.
Domestic Passenger Services
The domestic network covered 18 cities and towns in the Philippines. In
FY2007-08, PAL flew approximately 3.4 billion Available Seat Kilometers
(ASKs) on its domestic routes which represented 15.2 % 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, serving the following
domestic destinations : Bacolod, Butuan, Cagayan de Oro, Cebu, Cotabato,
Davao, Dipolog, General Santos, Iloilo, Kalibo, Legazpi, Laoag, Manila,
Puerto Princesa, Roxas, Tacloban, Tagbilaran, and Zamboanga.
Joint Services and Code Share Agreements
The Airline continues to employ codesharing and tactical alliances to broaden
5
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.
PAL also codeshares 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 5 times weekly flights between Bandar Seri
Begawan and Manila; with Air Macau (in place since September 2004) on 4
times weekly service between Macau 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 with a
codeshare agreement with Vietnam Airlines (in place since July 2001). PAL
also has a similar agreement with Garuda Indonesia (since March 2001) on 4
weekly 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
the 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. This allows members to check on individual account balance,
view latest activity statement, update personal profile, refer to the award
charts, download important forms, request for retroactive crediting of miles,
and be informed on latest promotions and offers.
The SportsPlus Card is a privilege card designed for sports enthusiasts, which
grants members the benefit of extra free baggage allowance.
iii.)
Distribution methods of the products or services
There are a total of seven (7) sales and ticket offices in Manila, eighteen (18)
in other cities in the Philippines, and twenty-five (25) located in foreign
stations. There are thirty two (32) general sales agents in selected international
6
points and four (4) domestic sales agents which handle the promotions and
sales of PAL'
s products and services.
PAL'
s website, "www.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.
Flight information via SMS/text messaging continues to be available to
passengers. Cellphone subscribers can download the exact flight departure
and arrival information through text messaging.
iv.)
Status of any publicly-announced new product or service
During the year, PAL also introduced improvements in its product and service
offerings.
PAL has completed the implementation of electronic ticketing for all flights.
The e-ticket is an electronic version of the paper ticket which is stored in the
Airline'
s computer system. E-ticketing eliminates the need for the passenger
to carry a paper ticket, replacing it with an itinerary receipt which can either
be e-mailed to, faxed to, or can be picked-up by the passenger at any PAL
ticket office.
The Mabuhay Lounge in the new Bacolod Silay Airport was inaugurated in
January 2008. The new lounge is open to all Business Class passengers,
Premier Elite and Elite members of the PAL Mabuhay Miles.
The PAL Swingaround and PALakbayan are the Airline'
s tour programs
which continue to offer holiday packages to 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.
v.)
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
7
PAL'
s Market and Capacity Share
Route
Market
Share
Capacity Airline Competitors
Share
Transpacific
36.6%
34.5%
Northwest Airlines, Air Canada,
Korean Airlines, Asiana Airlines,
Japan Airlines, Cathay Pacific, Eva
Airways, China Airlines, Continental
Airlines.
31.6%
32.2%
Japan Airlines, Cathay Pacific,
Singapore Airlines, Thai Airways,
Korean Airlines Asiana Airlines,
China Airlines, Eva Airways, Qantas
Airways, China Southern Airlines,
China Eastern Airlines, Air Macau,
Royal Brunei, Northwest Airlines,
Malaysia Airlines, Cebu Pacific,
Jetstar Asia, Kuwait airways, Air
Niugini
Asia and
Australia
PAL competes with the biggest carriers in the airline industry. Northwest
Airlines, Continental Airlines and Japan Airlines are among the world'
s ten
biggest airlines in terms of fleet size, passengers carried and total sales.
Cathay Pacific, Singapore Airlines, China Airlines, Korean Airlines, Thai
Airways, and Qantas Airways are 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, Wings, Sky Team and One World).
Based on CAB reports, PAL held a 38.8% share in the domestic market in the
fiscal year ending March 2008. Competitors include Cebu Pacific, Air
Philippines, Asian Spirit, and Seair.
The continuous enhancement of products and services, competitive fares, and
an excellent safety record enables PAL to keep its dominant position in the
market served. On the trans-Pacific routes, 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.
vi.)
Sources and availability of raw materials and the names of
principal suppliers
PAL’s jet fuel suppliers are: Petron Corporation, Chevron Global Aviation,
Pilipinas Shell Petroleum Corp., Singapore (HK) Petroleum Co., Ltd.,
8
Singapore Petroleum Company Ltd., PTT Public Company Ltd., PT Pertamina
(Persero), Shanghai Pudong International Airport Aviation Fuel Supply Co.,
Ltd., China Aviation Oil Supply Corporation Ltd., Air BP, Pacific Fuel
Trading Corp., Hyundai Oilbank Co., Ltd., World Fuel Services (Singapore)
Pte. Ltd., S-Oil Corporation, Japan Energy Corporation, SK Networks Co.,
Ltd., Subic Bay Energy Company Ltd., Vitol Asia Pte. Ltd.
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.
vii.) 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.
viii.) Transactions with and/or dependence on related parties
The Corporation’s significant transactions with related parties are described in
detail in Note 18 of the Notes to Consolidated Financial Statements.
ix.)
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 Philippines (LTP) which started in September 2000 for the
maintenance and overhaul requirements of its fleet.
PAL'
s Aircraft
Engineering Department provides planning, monitoring and control of all
maintenance activities and technical compliance of aircraft, engines and
accessories with airworthiness standards and industry accepted standards for
safety, reliability, and customer acceptability.
Manhour rates for maintenance requirements are negotiated with LTP in
accordance with the terms of the PAL-LTP Technical Service Agreement
(TSA). Maintenance materials and parts are sourced from the original
equipment manufacturers which include Airbus Industries, Boeing, General
Electric, CFM International, Honeywell, Goodrich, Nordam Singapore,
Panasonic Aviation, Recaro Aircraft Seating, and Thales Avionics.
9
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 annual net taxable income, or
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 of financial
statements). 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 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 the
next three years effective on November 1, 2005, and 30%
starting on January 1, 2009 and thereafter; and
e.
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
10
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.
x.)
Need for 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; the Civil Aviation Authority of the Philippines (CAAP) formerly
Air Transport Office (RP-ATO) for aircraft and operating standards; and
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 airports to conform with international standards
and enhance safety of PAL'
s operations.
PAL earned the IOSA accreditation in May 2006. IOSA (International Air
Transport Association Operational Safety Audit) is an internationally
recognized and accepted evaluation system designed to assess airlines’
operational areas and control systems using internationally recognized quality
audit principles. Audit were regularly conducted by an IOSA accredited
organization on PAL'
s different operational areas including organization and
management, flight operations, operations control and flight dispatch, cabin
operations, aircraft engineering and maintenance, ground handling, cargo
operations, and operational security.
xi.)
Effects of existing or probable government regulations on the
business
The Corporation strictly complies with and adheres to existing and probable
government regulations.
xii.) 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
11
xiii.) Cost and effects of compliance with environmental laws
PAL, the Corporation’s major subsidiary has fully complied with the
following major environmental laws:
1.
Republic Act (RA) 8749 “Clean Air Act”
No cost to PAL for FY2007-2008 since the monthly air
sampling was done by fuel supplier (Petron)
2.
DENR Administrative Order (AO) No.34 “Revised Water
Usage and Classification”
No cost to PAL for period covering FY2007-2008
3.
DENR Administrative Order No. 35 “Revised Effluent
Regulations of 1990”
Cost: P56,000.00 annually
4.
Presidential Decree No. 1152 “Philippine Environmental Code”
No cost to PAL for period covering FY2007-2008
5.
Presidential Decree No. 1586 “Establishing an Environmental
Impact Assessment System”
Cost not determined yet pending completion of checklist for
ECC (Environmental Compliance Certificate) application for
fuel farm at MBC
6.
Republic Act No. 6969 “Toxic and Hazardous Waste
Management”
No cost to PAL as disposal of hazardous wastes was done
through Bantay Baterya and Bantay Langis Projects of Bantay
Kalikasan
7.
Presidential Decree No. 1067 “The Water Code of the
Philippines”
Cost: P15,000.00 penalty for late revalidation of Discharge
Permit at LLDA (Laguna Lake Dev. Authority)
8.
Republic Act 9003 “The Ecological Waste Management Act of
2000”
No costs to PAL as solid wastes with recyclable materials were
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
12
5.
Improved public image and community relations
6.
Improved positive perception of regulators and NGOs
7.
Strengthening of the Corporation’s commitment to continually
improve its environmental performance in all aspects of its
operations
8.
Forging a partnership with ABS CBN’s Bantay Kalikasan,
DENR, PRI and Gulf Oil in “Do-the- Environment-Good”
projects
9.
Appreciation and recognition from the DENR for the
Corporation’s participation in Earth Day 2008 celebration
10.
Cost cutting through energy and resource conservation
xiv.) Total number of employees and number of full time employees
The Corporation has no regular employees. The Corporation does not have
any plan of hiring employees within the ensuing twelve months.
PAL Employees:
A.
All budgeted and approved organizational changes, including
headcount additions and replacements, are approved by the
Management Committee of PAL.
B.
Count of Employees per Category (as of March 31, 2008)
EMPLOYEES
Number of
Employees
With Without
CBA
CBA
TOTAL
Rank & File Ground*
Operations*
Aircraft Engineering
Airworthiness
Management
Airport Services
Flight Operations
Cabin Services
Catering Services
2534
4
3
1990
65
17
455
0
2534
4
3
1990
65
17
455
0
CBA
Expiration
Date
Remarks
10-year
moratorium
starting 1998,
ending Sept.
2008
13
Inflt Planning &
Standards
Other Depts.-Clerical**
Sub-total
Other Employees
Foreign Local Hires
Line Pilots
Cabin Crew**
1555
1555
4089
69
134
447
1471
1515
26
Administrative
203
447
1471 07/16/200607/14/2007
1515
26
7751
Employees Expatriates
Only SIN,
JPN & USA
have CBA
CBA
negotiations
ongoing
TOTAL
* PALEA members (Philippine Airlines Employees’ Association)
** FASAP members (Flight Attendants and Stewards Association of the Philippines)
C.
List of Supplemental Benefits
Travel Benefits
Monthly Rice Allocation
13th and 14th Month Bonus
Vacation Leave (15-20 days)
Sick Leave (15-20 days)
Birthday Leave (1 day)
Emergency Leave (5 days)
Enrollment in the PAL Dependents’ Medical Plan
Burial Aid
Group Protection Insurance
Group Personal Accident Insurance
Eyeglasses
Perfect Attendance Incentive Award
Note: No strike or threatened industrial action for the last 10 years.
xv.) 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 Corporation has available-for-sale investment which has
unpredictable market prices.
Price risk - price fluctuations in cost of fuel is based primarily in the
14
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 – the financial market risk consists of fluctuations of
interest and currency rates.
Economic slowdown - reduces the demand or need for air travel for both
business and leisure.
Procedures undertaken to manage risks
B.
-
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 remains 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 Corporation. Cash
flows and financial risks are managed to provide adequate liquidity to
the Corporation.
Properties
The Corporation does not own any property. It has an annual lease contract for
its office space with a monthly rental of P19,200.00. The lease contract was
renewed for another two years which expires in May 2010. The Corporation
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.
15
The PAL’s operating fleet as of March 31, 2008 consists of:
Owned:
Boeing 747-400
1
Capital leases:
Boeing 747-400
Airbus 340-300
Airbus 330-300
Airbus 320-200
3
4
8
6
Operating leases:
Boeing 747-400
Boeing 737-300
Airbus 320-200
Airbus 319-100
Total
1
1
7
4
35
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 12 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 sixmonth London Interbank Offered Rate (LIBOR), as applicable.
Aircraft covered by operating lease agreements contain terms ranging from 5
to 11 years. Total operating lease payments amounted to PHP 1, 973.5 million
for 2008 and PHP 1,393.3 million in 2007.
PAL owns land and buildings located at various domestic and foreign stations.
A.
1.
2.
3.
4.
5,
6.
7.
8.
9.
10.
Domestic Properties
Bacolod City
Mandurriao, Iloilo
Maasin, Iloilo
Makati
Somerset Millenium, Makati
Malate
Paranaque City
Quezon City
Bacoor, Cavite
Ozamiz City
200,042 sq.m. (mortgaged)
1,300 & 1,700 sq.m. (mortgaged)
3,310 & 9,504 sq.m.
853 & 879 sq.m.
39 sq.m.
266.40 sq.m.
375 sq.m. (mortgaged)
627.1 sq.m.
126 sq.m.
10,000 sq.m.
16
B.
Foreign Properties
1.
2.
3.
4.
5.
6.
Two (2) condominium units, San Mateo, Daly City, California
Walnut farm in Glen County, California
Two (2) condominium units, Hongkong
Two (2) office units, Sydney, Australia
Three (3) office units, Singapore
One (1) shop unit, Singapore
In addition, the Company 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 Air
Transportation Office (ATO).
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 2008 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 Manager-Philippines, 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-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 (FMGSAirbus); Frasca 172R simulator room; inflight service simulators for B747,
A340, B737 and cabin safety simulator; a grooming room, a speech laboratory
17
for personality development; 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 approximately 4.182 million
meals annually to service PAL’s catering requirements. PAL held 54% market
share in terms of meal tray production while 46% 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 and building are leased from Manila International
Airport Authority (MIAA).
The modern NAIA Centennial Terminal 2 in Pasay is the home of PAL’s
flight operations. For the first time since PAL was founded 67 years ago,
PAL’s entire flight operation is housed in one terminal. This gives PAL a
genuine hub for its operations where passengers from domestic flights connect
seamlessly onto international flights and vice versa.
The terminal boasts of complete facilities for PAL’s passengers’ comfort and
convenience; two Mabuhay Lounges – one each for domestic and international
passengers, a big ticket office and spacious check-in and pre-departure areas.
It is also the home of the Airport Services Group and other support offices,
i.e., Operations Control Center, Line Maintenance International Division,
Aircraft Interior Maintenance Division, Flight Dispatch, Ticket Office,
Treasury, Safety and Medical office.
Various airport support offices servicing PAL’s foreign airline customers were
retained at the NAIA 1, together with the Sampaguita Lounge. The areas
occupied by PAL are leased from MIAA
The PAL Cargo Terminal (PCT) near NAIA 1 in Pasay which houses PAL’s
domestic and international cargo operations and sales offices at the NAIA
measures 5,727.55 sq.m.(warehouse) and 1,050.88 sq.m. (office space). PCT
handles 132.48 tonnes of outbound cargo and 99.24 tonnes of inbound cargo
daily (includes the 4 other international carriers coming in and out of Manila
that are serviced by PAL). The land on which the PCT 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 also the
18
hub of PAL’s domestic network, connecting the various PAL ticket offices
and airports. The DCB, comprising 3,588.35 sq.m., is leased from the MIAA.
Other major ground facilities include a Maintenance Base Complex (MBC)
in Nichols, Pasay City. It 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, Ticket Vault and other
support offices. MBC also houses the K-9 Kennel Facility.
PAL transferred its head office from the PAL Center in Legaspi St., Makati to
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, Internal Audit, Corporate
Communications, Government Relations, and the Domestic and International
Ticket Offices. The Contact Center and Data Center are being proposed to be
transferred to the same location. Total area being leased from the PNB is
15,080.08 sq.m.
The former Bacolod Domestic Airport is situated in a land that is PALowned. During the last quarter of fiscal year 2008, the Bacolod Domestic
Airport transferred to a new location. The owned land where the old airport
was located was vacated by PAL and the carrying value of subject property
was reclassified from property & equipment to investment properties.
C.
Legal Proceedings
The Corporation or any of its subsidiaries is not involved in, and none of its
properties is the subject of, any legal proceeding involving an amount
exceeding PHP 2.7 billion (10% of its current assets) as at the end of fiscal
year March 31, 2008.
19
PART II - OPERATIONAL AND FINANCIAL INFORMATION
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:
2008
HIGH
Php
LOW
Php
First Quarter
4.80
3.60
2007
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
6.30
8.50
8.20
4.75
4.20
5.10
4.10
3.30
2006
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
4.20
4.00
5.40
1.68
3.10
2.80
1.20
0.80
As of July 23, 2008, the latest practicable trading date, PAL Holdings’ was
traded at P3.50.
2. Holders
The number of shareholders of record as of June 30, 2008, was 6,756 and
common shares outstanding as of the same date were 5,421,512,096.
The top 20 stockholders as of June 30, 2008 are as follows:
1
2
3
4
5
6
7
8
9
Stockholders’ Name
Trustmark Holdings Corp.
Pan Asia Securities Corp.
Wonderoad Corporation
Anthony Te
Emmanuel P. Te
Cynthia Manalang
RCBC Securities, Inc.
Citisecurities, Inc.
Fisher Tan Chua
No. of Shares Held
5,297,280,230
37,150,176
10,251,679
5,000,000
5,000,000
4,139,000
3,366,192
2,790,800
2,003,182
% to Total
97.7075%
0.6852%
0.1891%
0.0922%
0.0922%
0.0763%
0.0621%
0.0515%
0.0369%
20
10
11
12
13
14
15
16
17
18
19
20
Tower Securities, Inc.
Mandarin Securities Corp.
Triton Securities Corp.
BPI Securities Corp.
R. Coyiuto Securities, Inc.
Ansaldo, Godinez & Co., Inc.
R. S. Lim & Company, Inc.
Quality Investment & Securities Corp
Abacus Securities Corp.
Luys Securities Company, Inc.
Intra-Invest Securities, Inc.
1,681,157
1,447,907
1,348,561
1,348,099
1,310,092
1,183,970
1,173,000
1,095,464
966,522
866,276
773,586
0.0310%
0.0267%
0.0249%
0.0249%
0.0242%
0.0218%
0.0216%
0.0202%
0.0178%
0.0160%
0.0143%
* The Corporation has no preferred shares.
3. Dividends
a.) The Corporation did not declare any cash dividends during the past
three years in the period ended March 31, 2008. The Board of Directors
may declare dividends only from surplus profits arising from the business
of the Corporation 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)
a) Date of sale and the title and amount of securities sold
On 22 January 2007, the Corporation issued 5,021,567,685 new common
shares to Trustmark Holdings Corporation (Trustmark) as subscription to
the increase in capital pursuant to a debt-to equity transaction between the
Corporation and Trustmark on October 6, 2006.
b) Names of the Underwriters or identity of persons to whom the securities
were sold
The new common shares were issued to Trustmark, a shareholder of the
Corporation.
c) Nature of the transaction and the type and amount of consideration
received
The shares were issued to Trustmark as a subscription to the increase in
the capital of the Corporation pursuant to the conversion of the
PHP9,038,821,834 debt into equity.
21
d) Exemption from Registration Claimed
The exemption from registration was claimed under paragraphs (e) and
(k), Section 10.1 of the Securities Regulation Code as the sale was made
by the Corporation exclusively to one of its own stockholders during a
twelve-month period, and no commission or other remuneration was paid
or given directly or indirectly in connection with such sale.
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.
PART III FINANCIAL INFORMATION
A.
Management’s Discussion and Analysis (MD&A) or Plan of Operation.
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 of 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 Corporation is in
Philippine peso, for purposes of combination of the financial statements in
accordance with PAS 27, Business Combination, 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 Parent 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 Parent 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 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.
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.
22
Early Adoption of Amendments to PAS 1, Presentation of Financial
Statements
Effective April 1, 2007, the Corporation decided on the early adoption of the
amendments to PAS 1, Presentation of Financial Statements, which is
supposed to be effective for annual periods beginning on or after January 1,
2009. The key change is the introduction of a new Statement of
Comprehensive Income that combines all items of income and expense
currently recognized in the income statement and all non-owner changes in
equity such as unrealized gains or losses on available for sale investments and
derivative financial instruments. The objective of this change is to enable
readers of the financial statements to analyze changes in equity arising from
transactions with owners in their capacity as owners (such as dividends and
share repurchases) separately from non owner changes (such as transactions
with third parties and other events).
Results of Operations
a.)
FY 2008 vs. FY 2007
The Corporation’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 PHP 5,807.6 million. As a result of the early adoption of the
Amendments to PAS 1, Presentation of Financial statements, the Corporation
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 30 October 2006, and the recognition as other revenue in
November 2006 of 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.
23
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 than 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 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%.
24
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.
b.)
FY 2007 vs. FY 2006
The Corporation recorded a consolidated comprehensive income of PHP
5,807.6 million for the fiscal year ended 2007, or an increase of 270% from
the previous year’s income of PHP 1,568.3 million.
This is so far PAL’s highest comprehensive income earned in its 66 years
history. The significant growth in the Corporation’s financial performance
can be attributed to the continued growth in profit margin coupled with the
increase in the net benefit from PAL’s income tax position.
Consolidated revenues for the current fiscal year increased to PHP 69,716.7
million from last years’ figure of PHP 66,956.8 million. The 4.1% growth
was brought about mainly by the increase in net yield per Revenue Passenger
Kilometer (RPK) and in the number of passengers carried. Revenue also
includes, among others, recoveries from surcharges recognized; credit
memorandum received from Boeing with respect to the Settlement Agreement
and Release in relation to the Boeing 747-400 Purchase Agreement; and the
difference between the face amount of the MIAA claims, as stipulated in the
compromise agreement, versus the fair value of the liability. Full discussion
on this can be read in Note 15 of the Notes to consolidated financial
statements.
Consolidated expenses for 2007 dropped by 1.6%. The decrease in expenses
was brought about mainly by the effect of the appreciation of the Philippine
peso vis-à-vis the US dollar from an average of level, expenses against the
previous year would have resulted to higher expenses related to flying
operations, maintenance, aircraft & traffic servicing, and passenger service
offset by the decrease in other expenses.
The increase in flying operations can be attributed to increases in fuel
expenses, aircraft leases and cockpit crew cost. Fuel cost grew by PHP
1,949.2 million or 9.8 % over last year’s total of PHP 19,880.3 million as a
result of the escalation in jet fuel prices per barrel from an average of US$
71.79 in 2006 to US$ 79.81 in 2007. The phasing in of various A320-200
aircraft during the last six months of the previous fiscal year as well as the
arrival of new A319-100s and the corresponding phase-out of various B737s
had the effect of increasing aircraft lease charges by PHP 279.1 million.
Likewise, improvements implemented by PAL in the pilots’ pay increased
cockpit crew cost by PHP 475.4 million or 41.7%.
Higher aircraft, component and engine repair costs contributed mainly to the
increase in maintenance expenses. As a result of more flights operated in
2007, aircraft and traffic servicing expenses slightly increased as well. Growth
in passenger traffic as well as improvements implemented by PAL in cabin
crew benefits likewise increased passenger service expenses.
25
The continued appreciation of the Philippine Peso vis a vis the US Dollar
resulted in a lower foreign exchange loss recognized, consequently reducing
“other expenses” by PHP 1,363.7 million or 61% from the 2006 figure of PHP
2,247.9 million.
In accordance with PAS 12, Income Taxes, a reassessment was done on
deferred tax assets and liabilities on all deductible temporary differences
which resulted in the recognition of a deferred benefit from income tax
amounting to PHP 2,768.2 million.
Financial Condition
FY 2008 vs FY 2007
As of March 31, 2008, the Corporation’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 re-measurement 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
26
1,472.3 million, thus the increase in investment properties by 2015%.
Likewise, the effect of the re-measurement to fair value of certain financial
assets and derivative instruments increased other non current assets by 34 % as
compared to 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 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
Corporation’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 Corporation’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 they were 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.
PHI’s decrease in total comprehensive income from PHP 5.807 billion as of
27
March 31, 2007 to (PHP 528.54) million as of March 31, 2008 was mainly due to
the effect of the Corporation’s decision to adopt early the Amendments to PAS 1
on the Presentation of Financial Statements. The key change is the introduction
of a new Statement of Comprehensive Income that combines all items of income
and expense currently recognized in the income statement and all non-owner
changes in equity such as unrealized gains or losses on available for sale
investments, derivative financial instruments, increase in revaluation increment
due to increase in property and the effect of foreign exchange translation. The
reason for the decrease in comprehensive net income was the effect of the foreign
exchange translation of PHP 2.4 billion in 2008. Since PAL is using the US $ as
its functional currency in its financial statements, there is a need to restate its
financial statements to the Philippine peso. The applicable yearend exchange
rates used to US$1 were PHP48.217 as of March 31, 2007 and PHP41.756 as of
March 31, 2008. This foreign exchange translation adjustment however resulted
into a gain of PHP 1.2 billion as of June 30, 2008 since the monthly average
US $ rate used for the quarter increased to PHP44.896. This dramatically
improved the Company’s quarterly consolidated total comprehensive income to
PHP 3.2 billion. (Please see Annex “A” – First Quarter Report).
Since the airline industry is expecting the year to remain challenging as jet fuel
remain above US$100 per barrel, PAL has undertaken some measures to face
these challenging times by increasing fuel surcharges and reducing their baggage
weight allowance from 70 to 50 lbs. since by lightening the load of the aircraft,
the latter will be using less fuel. PAL is also looking into other viable alternatives
to reduce fuel consumption.
FY 2007 vs FY 2006
The Corporation’s consolidated assets as of March 31, 2007 amounted to PHP
92,837.8 million, an 8% decrease over the March 31, 2006 balance of PHP
100,984.5 million. The decline was a result of the net decrease in available-forsale investments, property and equipment, advance payments to aircraft and
engine manufacturers, and current and other non current assets.
The decline in the fair values of available-for sale investments resulted to the
decline of 67% in available –for –sale investments.
Property, plant and equipment decreased by 8% from PHP 58,088.8 million as of
March 31, 2006 to PHP 53,013.1 million as of March 31, 2007. This is on
account of higher depreciation expense recognized during the year, which had the
effect of reducing the net carrying values of the property plant and equipment.
The Settlement Agreement and Release entered into with Boeing with respect to
the Boeing 747-400 purchase agreement reduced the advance payments to aircraft
& engine manufacturers balance as of March 31, 2007 to zero or 100%.
The restatement of foreign currency denominated current assets to the current
exchange rates resulting from the appreciation of the Philippine peso vis-a-vis the
US dollar contributed to the decrease in the total current assets. Other current and
noncurrent assets as of March 31, 2007 dropped by 29% to PHP 2,960.4 million
and by 20% to PHP 2,941.7 million respectively. This was primarily due to the
effect of re-measurement to fair value of certain financial assets as well as
derivative instruments.
28
The Corporation’s decrease in notes payable by 74% and loans payable by 100%
is related to the increase in advances from related parties by 205% as a result of
the acquisition of the six holding companies which has liabilities amounting to
PHP 23.0 million, PHP 9.0 million of which was assumed by the Corporation to
Trustmark and was converted into equity at PHP 1.80 per share.
The increase in income tax payable by 399% is due to higher consolidated net
income for the year.
Total liabilities decreased by 17% from PHP 109,621 million in 2006 to PHP
91,442.9 million in 2007. Liabilities covered by the rehabilitation plan (current
and non-current portion) decreased by PHP 10,574.5 million or 19% over the
March 31, 2006 amount. This was mainly due to servicing of outstanding debts in
accordance with the Amended and Restated Rehabilitation plan.
The decrease in deferred tax liabilities (net) by 76% is due to the recognition of
deferred tax assets on all deductible temporary differences considering the
improvement in the current and forecasted results of operations of PAL and the
lower deferred tax liability in 2007 in relation to the changes in exchange rates
affecting non-monetary assets and liabilities in accordance with PAS 12, Income
taxes.
The net decline in the reserves and other noncurrent liabilities balances by 18%
was primarily due to the Settlement Agreement and Release entered into with
Boeing with respect to the Boeing 747-400 purchase agreement; adjustment on
the liability under frequent flyer program based on awards earned and awards
redeemed offset by the effect of the difference between the face amount and fair
value of MIAA claims (refer to Note 16 of the notes to consolidated financial
statements).
Consolidated stockholders’ equity as of March 31, 2007 amounted to PHP
1,394.9 million, up by 116% from PHP 8,636.7 million in March 31, 2006. The
improvement was a result of the net income after tax generated for the fiscal year
2007 and the increase in authorized capital stock of PAL Holdings from PHP 400
million to PHP 20 billion, PHP 5.0 billion of which was subscribed by Trustmark
by way of conversion of loan to equity in October 2006. A minority interest in
consolidated subsidiaries amounting to PHP 2,367 million was recognized upon
the consolidation of the 6 holding companies and PR.
TOP FIVE KEY PERFORMANCE INDICATORS OF PAL
Mission Statement
To maintain aircraft with the
highest degree of
airworthiness, reliability and
presentability in the most
cost-effective 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
29
To achieve On-Time
Performance on all flights
operated
Percentage Division from
Industry Standards (OTP
Participation)
To provide safe, on time,
quality and cost effective
inflight service for total
passenger satisfaction
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
Number of safety violations
incurred by cabin crew
Number of flights operated
less number of flights
delayed over total flights
operated
Number of incidents of
safety violation incurred by
cabin crew per month
Net Revenues generated
Percentage Deviation from
from passengers and cargoes Budget/Forecasted
carried
Revenues
In addition to the Qualitative Key Performance Indicators of PAL, the
following comprise its Quantitative Financial Ratios:
Profitability Factors:
March 31,
2008
March 31, 2007
1. Return on Total Assets
Net Income/Average Total Assets
0.01%
7.34%
5.99%
5.58%
10.21
11.08
35.85
32.95
0.64
2.04
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
30
Commitments for capital expenditures:
As part of its refleeting program PAL entered into a Purchase Agreement with
Airbus for nine (9) Airbus A320-200 on firm order for delivery in 2008 and
2009 with options for five (5) more aircraft for delivery from 2010 to 2013. As
of July 2008, six (6) Airbus A 320-200 are already part of PAL’s operating
fleet, four of which were delivered in FY 07-08 and the other two delivered in
April and July 2008. In support of the acquisitions in April and July 2008,
PAL entered into a 12-year finance lease agreement that provides for fixed
quarterly principal and interest payments. The remaining three (3) Airbus 320200 are scheduled for delivery in August, October and December 2008.
Also, two (2) brand new Boeing 777-300ER aircraft on operating leases are
scheduled to be delivered in fiscal year 2010; while four (4) new Boeing 777300ER aircraft directly ordered by PAL from Boeing are scheduled to be
delivered in fiscal years 2010 to 2012.
On April 15, 2008, PAL formally announced the launching of its new, low
fare unit that will operate a fleet of turbo-prop aircraft to service domestic
island points under the brand name “PAL Express”. The Parent Company is in
the process of acquiring nine turbo-prop aircraft (three Bombardier Q300
aircraft and six Bombardier Q400 aircraft) to comprise PAL Express’ initial
fleet which will be based both in Manila and Cebu. PAL Express started its
operations on May 2, 2008.
As of July 2008, three (3) Bombardier Q 300 aircraft and four (4) Bombardier
Q 400 aircraft have been delivered to and accepted by PAL.
(i)
There are no known trends, demands, commitments, events or
uncertainties that may have a material impact on the Corporation’s
liquidity.
(ii)
There are no known events that will trigger direct or contingent
financial obligation that is material to the Corporation, including any
default or acceleration of an obligation.
(iii)
There are no known material off-balance sheet transactions,
arrangements, obligations (including contingent obligations), and other
relationships of the Corporation with unconsolidated entities or other
persons created during the reporting period.
(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 of income from continuing operations.
(v)
There are no significant elements 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:
31
Results of our Horizontal (H) and Vertical (V) analyses showed the
following material changes:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
Cash and cash equivalents - H- (28%)
Available-for-sale- investment – H – (86%)
Expendable parts, fuel, materials & supplies - H –16%
Other current assets – H - 82%
Property, plant and equipment – cost H – (9%)
Property, plant and equipment – at appraised values – H-(88%)
Deposits on aircraft leases- H- (9%)
Deferred tax assets – H- 100%
Investment properties –net H-2015%
Other noncurrent assets – H-34%
Notes payable – H -177%
Accrued liabilities – H-19%
Advances from related parties H –(97%) V- (15%)
Income tax payable – H-(15%)
Unearned transportation revenue – H- (7%)
Long-term obligations –net of current portion H-(20%)
Deferred tax liabilities – net H-(100%)
Reserves and other noncurrent liabilities – H -19%
Additional paid in capital – H – 335% V – 16%
Income before income tax – H- (130%) V - (9%)
Benefit from income tax – H –(45%)
Total Other Comprehensive income – H- (57%)
Total Comprehensive income – H- (109%) V-( 9%)
All of these material changes were explained in the management’s
discussion and analysis of financial condition and results of operations
stated above.
B.
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, 2008 or in any subsequent interim period.
PART IV
MANAGEMENT AND CERTAIN SECURITY HOLDERS
Please refer to pages 4 to 13 of the Information Statement.
32
PART V CORPORATE GOVERNANCE
A.
The evaluation system established by the Company to measure or
determine the level of compliance of the Board of Directors and top-level
Management with its Manual of Corporate Governance.
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 Corporation to properly evaluate compliance to the Manual.
B.
Measures being undertaken by the Company to fully comply with the
adopted leading practices on good corporate governance.
Measures are slowly being undertaken by the Corporation to fully comply
with the adopted leading practices on good corporate governance and one of
them is ensuring attendance by Corporate Directors in Corporate Governance
seminars.
C.
Any deviation from the Company’s Manual of Corporate Governance. It
shall include a disclosure of the name and position of the person(s)
involved and the sanctions imposed on said individual.
The Corporation is taking steps towards full compliance of its Corporate
Governance Manual.
D.
Any plan to improve corporate governance of the Company.
The Corporation continues to improve its Corporate Governance when
appropriate and warranted, in its best judgment.
COVER SHEET
P W -
9
S.E.C. Registration Number
P
A
L
H O L D I
N G S
,
I
N C
.
(Company’s Full Name)
7
T H
6
7
F
L O O R
A L L I
E D
B A N K
C E N T E R
.
M A K A T I
.
0
3
5
4
A Y A L A
A V E
(Business Address: No. Street City / Town / Province)
3
C I
T Y
SUSAN LEE
7368466
Contact Persons
Company Telephone Number
1
1
7
-
Q
Month
Day
Fiscal Year
Month
Day
Annual Meeting
Secondary License Type, If Applicable
Dept. Requiring this Doc.
Amended Articles Number/Section
Total Amount of Borrowings
Total No. of Stockholders
Domestic
-----------------------------------------------------------------------------------------------------------------------------To be accomplished by SEC Personnel concerned
File Number
Document I.D.
STAMPS
Remarks = pls. use black ink for scanning purposes
LCU
Cashier
Foreign
4
SECURITIES AND EXCHANGE COMMISSION
SEC FORM 17-Q
QUARTERLY REPORT PURSUANT TO
SECTION 17 OF THE SECURITIES REGULATION CODE
June 30, 2008
1.
For the quarter period ended
2.
SEC Identification Number PW- 94
4.
its
Exact name of registration as specified in
charter
5.
3. BIR Tax Identification No. 430-000-707-922
Metro Manila, Philippines
(Province, country or other jurisdiction of
incorporation or organization)
PAL HOLDINGS, INC.
6.
( SEC Use Only)
Industry Classification Code:
7.
7/F Allied Bank Center, 6754 Ayala Avenue, Makati City
Address of principal office including postal code
8.
(632) 816-33-11 loc. 3785; 736-8466
Registrant’s telephone number, including area code
9.
10.
1200
Postal Code
Not Applicable
Former name, former address, former fiscal year, if changed since last report
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
11. Are any or all of these securities listed on the Philippine Stock Exchange?
Yes [ X ]
12.
No [
]
Check whether the registrant:
(a) has filed all reports required to be filed by Section 17 of the SRC and SRC Rule 17
thereunder or Sections 11 of the RSA and RSA Rule 11(a)-1 thereunder, and Sections 26
and 141 of the Corporation Code of the Philippines, during the preceding twelve (12)
months (or for such shorter period the registrant was required to file such reports)
Yes [ X ]
(b)
No [
]
has been subject to such filing requirements for the past 90 days.
Yes [ X ]
No [ ]
Annex “A”
PAL HOLDINGS, INC.
AND SUBSIDIARIES
Quarterly Consolidated Financial Statements
For the Three Months Ended June 30, 2008
PAL HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Amounts in Thousands)
Jun 30,
March 31,
2008
2008
(UNAUDITED)
(AUDITED)
ASSETS
Current Assets
P
P
!
"
# $%
%
!
%%
&
Total Current Assets
35,036,357
27,516,131
Noncurrent Assets
'
%
( %
%!
) %
)
$
!
*
!
%
%
&
Total Noncurrent Assets
72,704,283
TOTAL ASSETS
P
107,740,640
57,669,130
P
85,185,261
LIABILITIES AND EQUITY
Current Liabilities
+
P
% (
%
,
P
!
% (
)
%
*
!
$% (
-
%
Total Current Liabilities
44,163,310
32,323,570
Noncurrent Liabilities
Long-term liabilities - net of current portion
!% (
30,511,652
% (
"
Total Noncurrent Liabilities
45,778,836
38,253,590
TOTAL LIABILITIES
89,942,146
70,577,160
Equity
Attributable to the equity holders of the parent:
%
.
%
&
1
!%
(2
%
(
/
.
0
/
/
0
15,029,613
Minority interest
Total Equity
TOTAL LIABILITIES AND EQUITY
P
0
/
0
12,324,583
2,768,881
2,283,518
17,798,494
14,608,101
107,740,640
P
85,185,261
P A L H O L D IN G S , IN C .
A N D S U B S ID IA R IE S
C O N S O L ID A T E D S T A T E M E N T S O F C O M P R E H E N S IV E IN C O M E
(A m o u n ts in T h o u sa n d s)
( U N A U D IT E D )
F o r T h re e M o n th s E n d e d J u n e 3 0 ,
2007
2008
REVENUE
Passenger
C a rg o
In te re s t in c o m e
O th e rs
P
1 6 ,5 5 2 ,5 6 5
1 ,2 8 7 ,6 0 3
9 1 ,2 3 2
1 ,0 8 9 ,5 4 5
P
1 4 ,8 9 4 ,7 7 7
1 ,2 1 5 ,1 7 5
2 1 1 ,8 5 1
1 ,1 8 2 ,8 2 0
1 9 ,0 2 0 ,9 4 5
1 7 ,5 0 4 ,6 2 3
1 0 ,1 4 4 ,9 3 6
2 ,4 8 8 ,0 4 5
2 ,0 3 2 ,3 1 9
9 3 0 ,9 1 8
1 ,2 5 6 ,8 6 0
1 ,2 2 8 ,0 0 3
8 3 7 ,0 9 7
2 ,2 6 4 ,9 5 7
7 ,2 9 4 ,4 8 1
2 ,0 0 9 ,8 5 2
2 ,0 1 2 ,8 2 3
1 ,0 8 5 ,9 1 1
1 ,2 6 2 ,4 4 3
8 9 4 ,9 6 5
6 9 5 ,6 8 4
6 3 5 ,7 2 6
2 1 ,1 8 3 ,1 3 5
1 5 ,8 9 1 ,8 8 5
EXPENSES
F ly in g O p e ra tio n s
M a in te n a n c e
A irc ra ft a n d tra ffic s e rv ic in g
F in a n c in g c h a rg e s
P a s s e n g e r s e rv ic e
R e s e rva tio n a n d s a le s
G e n e ra l a n d a d m in is tra tiv e
O th e rs
N E T IN C O M E (L O S S )
P
(2 ,1 6 2 ,1 9 0 ) P
1 ,6 1 2 ,7 3 8
O T H E R C O M P R E H E N S IV E IN C O M E
N e t c h a n g e s in fa ir v a lu e o f a v a ila b le -fo r-s a le
In v e s tm e n ts
N e t c h a n g e s in fa ir v a lu e o f d e riva tive a s s e ts
In c re a s e in re v a lu a tio n in c re m e n t d u e to a p p ra is a l
(7 6 8 )
4 ,1 1 0 ,7 5 7
3 4 ,6 2 7
1 2 8 ,5 1 4
(9 1 ,2 7 4 )
(6 1 )
E ffe c t o f fo re ig n e xc h a n g e tra n s la tio n
1 ,2 0 7 ,9 6 7
(6 4 5 ,2 5 8 )
5 ,3 5 2 ,5 8 3
T O T AL C O M P R E H E N S IV E IN C O M E
P
3 ,1 9 0 ,3 9 3
(6 0 8 ,0 7 9 )
P
1 ,0 0 4 ,6 5 9
N e t in c o m e (lo s s ) a ttrib u ta b le to :
E q u ity H o ld e rs o f th e P a re n t
M in o rity In te re s t
P
T o ta l c o m p re h e n s iv e in c o m e a ttrib u ta b le to :
E q u ity H o ld e rs o f th e P a re n t
M in o rity In te re s t
(1 ,8 3 0 ,3 1 5 )
(3 3 1 ,8 7 5 )
1 ,3 6 4 ,6 5 1
2 4 8 ,0 8 7
(2 ,1 6 2 ,1 9 0 ) P
1 ,6 1 2 ,7 3 8
2 ,7 0 5 ,0 3 0
4 8 5 ,3 6 3
P
3 ,1 9 0 ,3 9 3
8 6 9 ,3 5 9
1 3 5 ,3 0 0
P
1 ,0 0 4 ,6 5 9
E A R N IN G S (L O S S ) P E R S H A R E
C o m p u te d b a s e d o n n e t in c o m e (lo s s )
C o m p u te d b a s e d o n T o ta l C o m p re h e n s iv e In c o m e
P
(0 .3 4 ) P
0 .5 0
E a rn in g s p e r s h a re is d e te rm in e d b y d iv id in g n e t in c o m e /to ta l c o m p re h e n s ive in c o m e b y th e n u m b e r o f
s h a re s o u ts ta n d in g
C o m p u te d b a s e d o n n e t in c o m e
6 /3 0 2 0 0 8 = (1 ,8 3 0 ,3 1 5 )/5 ,4 2 1 ,5 6 8
6 /3 0 /2 0 0 7 = 1 ,3 6 4 ,6 5 1 /5 ,4 2 1 ,5 6 8
C o m p u te d b a s e d o n T o ta l C o m p re h e n s iv e In c o m e
6 /3 0 /2 0 0 8 = 2 ,7 0 5 ,0 3 0 /5 ,4 2 1 ,5 6 8
6 /3 0 /2 0 0 7 = 8 6 9 ,3 5 9 /5 ,4 2 1 ,5 6 8
0 .2 5
0 .1 6
PAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED JUNE 30,2008 AND 2006
(Amounts in thousands)
(Unaudited)
Capital Stock
BALANCES AT MARCH 31, 2006
P
Deposit from
future stock
subscription
Capital in Excess
of Par
400,000
P
12,033
P
Net Changes
in Fair Values
for Availablefor-sale
Cummulative
Translation
Adjustment
4,814,850
P
(1,860,443)
P
(1,471,143)
Total comprehensive income for the year
Revaluation
Increment in
Property
27,511
P
170,176
Treasur
y Stock
Deficit
1,020,824
P
287,908
(14,537,023)
P
(56)
5,939,284
property realized through depreciation - net of
-
Total income and expense for the year
-
-
(1,471,143)
170,176
(38,339)
38,339
249,569
5,977,623
P
Minority Interest
(10,122,304)
P
4,926,225
Transfer of portion of revaluation increment in
related deferred tax and foreign exchange adjustment
Total
Total
1,485,616
P
881,409
(8,636,688)
5,807,634
-
-
-
-
-
-
4,926,225
881,409
5,807,634
Conversion of deposits for future stock subscription to
advances from related parties
(4,814,850)
(4,814,850)
5,021,568
Conversion of advances from parent company to equity
BALANCES AT MARCH 31, 2007
4,017,254
5,421,568
4,029,287
-
(3,331,586)
197,687
(623,614)
Total comprehensive income for the year
1,270,393
128,374
(8,559,400)
(52)
(56)
1,364,651
property realized through depreciation - net of
related deferred tax and foreign exchange adjustment
-
-
BALANCES AT JUNE 30, 2007
5,421,568
4,029,287
BALANCES AT MARCH 31, 2007
5,421,568
4,029,287
Conversion of advances from parent company to equity
-
-
27,927
(27,979)
1,392,578
(623,614)
128,374
-
(3,955,200)
326,061
1,242,414
(7,166,822)
-
(3,331,586)
197,687
1,270,393
(8,559,400)
3,079,567
Conversion of advances from parent company to equity
(27,927)
-
-
-
-
-
-
-
-
(253,729)
Total comprehensive income for the year
-
-
-
-
(734,781)
253,729
2,367,025
1,394,918
135,300
1,004,659
-
-
-
-
(56)
869,359
135,300
1,004,659
(102,748)
2,502,325
(56)
(972,107)
2,367,025
-
3,079,567
3,079,567
10,662,158
10,662,158
10,662,158
Additional paid-in capital applied against deficit
9,038,822
(972,107)
869,359
Transfer of portion of revaluation increment in
Total income and expense for the year
(4,814,850)
9,038,822
-
2,399,577
1,394,918
-
-
(445,035)
72,552
223,294
(6,100)
-
(83,507)
(528,542)
-
(69,420)
69,420
-
-
317,049
-
13,296,690
(56)
12,324,583
2,283,518
14,608,101
2,705,030
485,363
3,190,393
Transfer of portion of revaluation increment in
-
property realized through depreciation - net of
-
related deferred tax and foreign exchange adjustment
-
-
-
and other changes
Total income and expense for the year
-
BALANCES AT MARCH 31, 2008
5,421,568
Total comprehensive income for the year
13,487,996
-
(734,781)
72,552
153,874
17,517,283
-
(4,066,367)
270,239
1,424,267
(8,242,351)
4,503,304
2,723
29,318
(1,830,315)
4,503,304
2,723
-
-
-
-
-
-
(83,507)
13,213,183
Transfer of portion of revaluation increment in
property realized through depreciation - net of
related deferred tax and foreign exchange adjustment
Total income and expense for the year
BALANCES AT JUNE 30, 2008
P
5,421,568
P
17,517,283
(30,891)
P
-
P
436,937
P
272,962
P
1,422,694
-
30,891
(1,573)
(1,799,424)
P
(10,041,775) P
(56) P
-
2,705,030
15,029,613
-
485,363
P
2,768,881
3,190,393
P
17,798,494
PAL HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
For Three Months Ended June 30,
2008
CASH FLOWS FROM OPERATING ACTIVITIES
+
*
! /3
0
4 !
5
) %
6
,
,
*
!
)
!
6
, $
,
/, 0
"
7
,
,
Taxes and licenses paid relating to increase in capital stock
3
/, 0
%
% %
(
%!
&%
,
! /
0
8 . , %
,
)
/
0 5
"
# $%
%
!
%%
&
*
/
0 5
% (
%
+
!
'
+
/
0
!% (
Increase (decrease) in other noncurrent liabilities
Net cash generated from operations
Financing charges paid
Interest received
Dividend received
Income taxes paid (including final and withheld taxes)
Net cash provided by (used in) operating activities
P
% (
2007
(2,162,190) P
1,612,738
1,254,756
(28)
(133,570)
(1,041,032)
1,451,862
1,085,911
(211,851)
(209,333)
458,152
(363,309)
9,039
18,540
3,851,749
225,916
295,100
151,344
68,746
338,194
(536,932)
(55,436)
205,624
176,441
61,777
2,780,640
2,800,374
28
4,400
2,804,802
23,579
(155,882)
(133,706)
261,125
115,763
211,091
(92,429)
3,951,311
(478,008)
167,013
209,333
(233,536)
3,616,100
CASH FLOWS FROM INVESTING ACTIVITIES
% %
(
%!
*
!
!
'
!
%
5
' %
(
%!
Return of various deposits
Net changes in other noncurrent assets
Net cash used in investing activities
(4,691,766)
(1,288,740)
(1,046,487)
-
(22,583)
(6,003,089)
2,596
165,824
474,128
(403,939)
CASH FLOWS FROM FINANCING ACTIVITIES
' (!
,
!
,
!
% (
' (!
% (
1 $
%
,
Net cash used in financing activities
(1,308,314)
1,854,743
546,429
(953,915)
425,879
(994,487)
(9,039)
(1,531,562)
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS
NET INCREASE IN CASH AND CASH EQUIVALENTS
910,983
(1,740,875)
(908,243)
772,356
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
14,783,695
%
.
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD
P
13,042,820
20,573,060
P
21,345,416
PAL HOLDINGS, INC. AND SUBSIDIARIES
SELECTED EXPLANATORY NOTES
AS OF JUNE 30, 2008 AND 2007
Par. 7 (d) Selected Explanatory Notes Required Under SRC Rule 68.1
i)
The Company’s consolidated interim financial reports are in compliance with generally
accepted accounting principles (GAAP) in the Philippines as set forth in the Philippine
Financial Reporting Standards (PFRS). The financial statements of Philippine Airlines, Inc
were originally presented in United States dollars, which is their functional currency were
restated to Philippine peso for purposes of business combination in accordance with PAS
27.
ii)
Explanatory comments on the seasonality or cyclicality of interim operations.
PAL experiences a peak in holiday travel during the months of January, April, May, June
and December.
iii)
The nature and amount of items affecting assets, liabilities, equity, net income, or cash
flows which are unusual because of their nature, size, or incidence.
Not applicable. There were no items affecting assets, liabilities, equity, net income,
or cash flows that are unusual because of their nature, size, or incidence.
iv)
The nature and amount of changes in estimates of amounts reported in prior interim
periods of the current financial year or changes in estimates of amounts reported in prior
financial years, if those changes have a material effect in the current interim period.
Not Applicable. There were no changes in estimates of amounts reported in prior
interim periods of the current financial year or changes in estimates of amounts reported
in prior financial years.
v)
Issuances, repurchases, and repayments of debt and equity securities.
Not Applicable. There were no issuances, repurchases, and repayments of debt and
equity securities.
vi)
Dividends paid (aggregate or per share) separately for ordinary shares and other shares.
Not applicable. There were no dividends paid during the period.
vii)
Segment revenue and segment result for business segments or geographical segments,
whichever is the issuer’s primary basis of segment reporting.
Segment Information of Philippine Airlines, Inc. :
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:
International
Revenue
Income
Domestic
Revenue
Income
System
Revenue
Income
Quarter Ended
June 2008
Quarter Ended
June 2007
PHP 14,326,661
468,094
PHP13,636,817
1,116,759
4,309,258
404,029
3,133,133
90,599
18,635,919
872,123
16,769,950
1,867,358
The reconciliation of the total income reported by reportable segments to the net income in the
Consolidated Statements of Comprehensive Income from April to June 2008 is presented as follows:
Income
Add(Deduct) Unallocated Items:
Non-transport revenues and other
Income
Non-transport & other charges
Net Income (Loss)
Other Comprehensive Income
Total Comprehensive Income
viii)
Quarter Ended
June 2008
PHP 872,123
Quarter Ended
June 2007
PHP 1,867,358
380,597
( 3,417,432 )
( 2,164,712 )
4,122,616
1,957,904
520,020
( 769,182)
1,618,196
( 90,361 )
1,527,835
Material events subsequent to the end of the interim period that have not been reflected in
the financial statements for the interim period.
Not applicable. The Company has no material event subsequent to the end of the interim
period that have not been reflected in the financial statements for the interim period.
ix)
The effect of changes in the composition of the issuer during the interim period, including
business combinations, acquisition or disposal of subsidiaries and long-term investments,
restructurings, and discontinuing operations.
Not applicable. There were no changes in the composition of the Company during the
interim period.
x)
Changes in contingent liabilities or contingent assets since the last annual balance sheet
date.
Not applicable. The Company has no contingent liabilities or assets.
xi)
Existence of material contingencies and any other events or transactions that are material
to an understanding of the current interim period.
Not applicable. There were no contingencies and any other events or transactions
that are material to an understanding of the current interim period.
Annex “B”
PAL HOLDINGS, INC.
AND SUBSIDIARIES
Management Discussion and Analysis of
Financial Condition and Results of Operations
PART I – FINANCIAL INFORMATION
ITEM 1. Financial Statements
The financial statements form part of this 17Q.
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).
Future Changes in Accounting Policies
The following are the new and revised accounting standards and Philippine Interpretations that
will become effective to the Group subsequent to March 31, 2008.
•
Amendments to PAS 23, Borrowing Costs (Revised) (effective for annual periods beginning
on or after January 1, 2009). PAS 23 has been revised to require capitalization of borrowing
costs related to a qualifying asset.
•
PFRS 3R, Business Combinations, and PAS 27R, Consolidated and Separate
Financial Statements (effective for financial years beginning on or after July 1, 2009). PFRS
3R introduces a number of changes in the accounting for business combinations that will
impact the amount of goodwill recognized, the reported results in the period that an
acquisition occurs, and future reported results. PAS 27R requires that a change in the
ownership interest of a subsidiary is accounted for as an equity transaction. Therefore, such a
change will have no impact on goodwill, nor will it give rise to a gain or loss. Furthermore,
the amended standard changes the accounting for losses incurred by the subsidiary as well as
the loss of control of a subsidiary.
•
PFRS 8, Operating Segments (effective for annual periods beginning on or after
January 1, 2009), requires a 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 with the
Philippine SEC for purposes of issuing any class of instruments in a public market.
•
Philippine Interpretation IFRIC 12, Service Concession Arrangements (effective for annual
periods beginning on or after January 1, 2008), covers contractual arrangements arising from
private entities providing public services.
•
Philippine Interpretation IFRIC 13, Customer Loyalty Programmes (effective for annual
periods beginning on or after July 1, 2008), requires disclosure of 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 award
credits and deferred over the period that the award credits are fulfilled.
•
Philippine Interpretation IFRIC 14, IAS 19: The Limit on a Defined Benefit Asset, Minimum
Funding Requirement and their Interaction (effective for annual periods beginning on or
after January 1, 2008), 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.
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.
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 following are subsidiaries of the Parent
Company as of June 30, 2008.
Nature of Operations
Percentage of Ownership
Through direct holdings:
PAL
PR
Air transport
Holding company
81.57%
82.33%*
Through indirect holdings:
Abacus Distribution Systems
Philippines, Inc.
Pacific Aircraft Ltd.
Lessor of computerized
reservations systems
Aircraft financingrelated company
Aircraft financiangrelated company
84.67%
Peerless Aircraft Ltd.
Aircraft financingrelated company
84.67%
Synergy Services Corp.
Manpower supply
54.19%
Pearl Aircraft Ltd.
70.23%
84.67%
* Indirect holdings in PAL is 3.8%
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.
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, 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 for 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 asking prices are not available, the price of the most
recent transaction is used since it provides evidence of the current fair value as long as there has
not been a significant change in economic circumstances since the time of the transaction.
For all other financial instruments not listed in an active market, the fair value is determined by
using appropriate valuation techniques. Valuation techniques include discounted cash flow
methodologies, comparison to similar instruments for which market observable prices exist,
option pricing models, and other relevant valuation models. In the absence of a reliable basis of
determining fair value, investments in unquoted equity securities are carried at cost, net of
impairment.
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 as 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 year-end.
“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
statement 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 (FVPL)
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 FVPL, except where the embedded derivative does not
significantly modify the cash flows or it is clear that separation of the embedded derivative is
prohibited.
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.
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 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.
Held-to-Maturity Investments
Held-to-maturity investments are 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-tomaturity, 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 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 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 and as noncurrent assets if
maturity date is more than a year from the statement of financial position date.
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.
Other Financial Liabilities
Other financial liabilities pertain to financial liabilities that are not held for trading nor
designated as at fair value through profit or loss upon the inception of the liability. These include
liabilities arising from operations (e.g., payables and accruals) or borrowings (e.g., Long-term
obligations).
The liabilities are recognized initially at fair value and are subsequently carried at amortized cost,
taking into account the impact of applying the effective interest rate method of amortization (or
accretion) for any related premium, discount and any directly attributable transaction costs.
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); or 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 hedge of a net investment in a foreign operation. The Group did not
designate any of its derivatives as fair value hedges. The Group designated its pay-fixed, receivefloating interest rate swaps and certain fuel derivatives as cash flow hedges.
At the inception of a hedge relationship, the Group formally designates and documents the hedge
relationship to which the Group wishes to apply hedge accounting and the risk management
objective and strategy for undertaking the hedge. The documentation includes identification of
the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and
how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to
changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such
hedges are assessed on an ongoing basis to determine that they actually have been highly
effective throughout the financial reporting periods for which they were designated.
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 tax. The ineffective portion
is immediately recognized as part of “Other Income or Expense” in the consolidated statement of
comprehensive income. The early adoption of the amendments to PAS 1, Presentation of
Financial Statements, allowed all non owner changes in equity, included under the “Cumulative
translation adjustment” account in the statement of changes in equity, to be recognized as other
comprehensive income in the Group’s consolidated statement of comprehensive income. This
non owner changes in equity represents mainly the net gains arising from fair value changes of
outstanding derivative instruments which qualify for hedge accounting.
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 derivatives 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 FVPL. 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.
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
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
reliably measured, 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 (AFS) investments
In case of equity investments classified as AFS 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 AFS, impairment is assessed based on the same
criteria as financial assets carried at amortized cost. Interest continues to be accrued at the
original effective interest rate on the reduced carrying amount of the asset and is recorded in
income. If, in subsequent year, the fair value of a debt instrument increased and the increase can
be objectively related to an event occurring after the impairment loss was recognized in income,
the impairment loss is reversed through income.
Offsetting 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.
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.
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. Effective April 1, 2007, 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 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.
Depreciation, which commences when the asset is available for use, is computed on a straight-line
basis over the following estimated useful lives of the assets:
Buildings and improvements
Passenger aircraft (owned and under finance lease)
Other aircraft
Spare engines
Rotable and reparable parts
Other ground property and equipment
Number of Years
8 to 40
18 to 20
10
18 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 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
The Parent Company 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. The Parent Company provides for these costs over the terms of the leases, based
on aircraft hours flown until the next scheduled checks.
Investment Properties
Investment properties include parcels of land and building and building improvements not used in
operations.
Investment properties are measured initially at cost, including any transaction costs. The carrying
amount includes the cost of replacing part of an existing investment property at the time that cost
is incurred if the recognition criteria are met; and excludes the costs of day-to-day servicing of an
investment property.
Investment properties are subsequently measured at cost less accumulated depreciation (except
land) and any impairment in value. Land is subsequently carried at cost less any impairment in
value.
Depreciation and amortization of building and building improvements 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 owneroccupation or commencement of development with a view to sale.
When an item of property and equipment previously carried at revalued amount is transferred to
investment properties, the carrying value at the date of reclassification is treated as the deemed
cost of the investment property. The corresponding revaluation increment, net of the related
deferred 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).
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 (i) the Group has a present obligation (legal or constructive) as a
result of a past event, (ii) it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation, and (iii) a reliable estimate can be made of the
amount of the obligation. 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 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 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.
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
ofcomprehensive 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 includes 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.
Income Taxes
Current tax
Current 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 tax
Deferred 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 tax liabilities are recognized for all taxable temporary differences, including asset
revaluations. Deferred 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 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 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 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 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 tax asset to be utilized. Unrecognized deferred 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 tax asset to be
recovered.
Deferred tax assets and 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 tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set
off current tax assets against current tax liabilities and the deferred taxes relate to the same
taxable entity and the same taxation authority.
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 in 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 balance sheet date. All
differences are taken to profit or loss. 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 the Philippine peso presentation currency, which is the functional and presentation currency
of the Parent Company, are translated into the presentation currency as follows:
a. assets and liabilities for each financial position presented are translated at the closing rate at
the closing rate at statement of financial position date;
b. income and expenses for each income statement 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 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 quarter, as applicable, by the number of issued and outstanding shares of stock during the
quarter.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Results of Operations
PAL Holdings’ consolidated comprehensive income for the three months ended June 30, 2008
amounted to PHP3,190.4 million, an increase of 218% from the same period of the previous fiscal
year of PHP 1,004.7 million. Consolidated net income (loss) from operations however showed a
decline of 234% from PHP 1,612.7 million as of june 30, 2007 to (PHP 2,162.1) million in the current
period.
Consolidated revenues for the quarter amounted to PHP 19,020.9 million, 9% higher than last year’s
same quarter figure. The increase was brought about mainly by the increase in passenger revenues
due to higher net yield per Revenue Passenger Kilometer (RPK) and in the number of passengers
carried. Revenues also include cargo, recoveries arising from surcharges; interest income and other
income earned during the quarter.
Consolidated expenses for the first quarter of the current fiscal year rose by PHP5,291.2 million or
33% versus the previous year’s quarter total of PHP 15,891.9 million. This was largely due to higher
expenses related to flying operations, maintenance, reservation and sales and other expenses.
Flying operations grew by 39%. This was attributable mainly to the increase in fuel costs. The rise in
fuel expenses for the quarter ended June 2008 was a result of the escalation in average price per
barrel of aviation fuel from US$ 78.17 in 2007 to US$ 133.05 in 2008 as well as higher fuel
consumption as a result of the increase in flights.
Higher aircraft, component and engine repair costs contributed mainly to the increase in maintenance
expenses by 24%.
Increase in selling expenses recognized related to transportation service provided as well as in the
cost incurred under the frequent flyer program resulted in an increase in reservation and sales by
37%.
The changes in the fair value of outstanding derivative instruments which did not qualify for hedge
accounting net of foreign exchange gains recognized arising from the movements of the Philippine
peso vis a vis the US dollar, contributed mainly to the increase in “Other Expenses” by 256 % over the
same quarter figure of the previous year. These expenses were offset to a large extent by the
corresponding gains recognized from changes in the fair valuation of outstanding derivative assets
amounting to PHP 4,110.8 million classified as part of “Other Comprehensive Income”.
Another significant portion of the other comprehensive income is the effect of foreign exchange
translation which resulted to a gain of PHP 1,208 million or an increase of 287% from last year. This
is due to the increase in the monthly average of the US $ rates vis-à-vis the Philippine peso from PHP
41.756 as of March 31, 2008 to PHP 44.896 as of June 30, 2008.
Financial Condition
As of June 30, 2008, the Company’s consolidated total assets amounted to PHP 107,740.6 million or
27% higher than the March 31, 2008 balance of PHP 85,185.3 million.
Total current assets grew by PHP 7,520.2 million or 27% as compared with the March 31, 2008
balance of PHP 27,516.1 million. This is attributable mainly to the upward movement in other current
assets by PHP 8,064.4 million. This was principally due to the recognition of current derivative assets
resulting from the remeasurement to fair value of certain financial assets as well as derivative
instruments. These increases, however, were partly reduced by the decrease in cash and cash
equivalents by 12% due to servicing of debts; payments made for the acquisition of Bombardier
Q300 and Q400 aircraft; and advance payments made for the B 777-300 aircraft and for the
remaining four Q400 aircraft to be acquired. In May 2008, PAL launched its “PAL Express” flights
using a fleet of smaller Q300 and Q400 aircraft for the purpose of serving domestic inter-island tourist
destinations and other cities.
Consolidated total non current assets rose by 26%. This is due to the increase in property and
equipment balance by PHP 10,365.6 million or 21%. The increase is attributable mainly to the
acquisition of five turboprop aircraft (three Q300s and two Q400s) which PAL took delivery in May and
June 2008 and for one A320 aircraft delivered in April 2008. The increase was also due to the predelivery payments made for B 777-300 aircraft scheduled for delivery in March 2010 and for the
remaining four Q400 aircraft scheduled for delivery in July and August 2008. However, the increases
were offset in part by the depreciation expense recognized during the period, which had the effect of
reducing the carrying values of the assets. Likewise, the effect of the remeasurement to fair value of
certain financial assets and derivative instruments caused the increase in other non-current assets
balance to PHP 8,097.6 million or 111%.
Consolidated total liabilities increased by 27% or PHP 19,364.9 million over the March 31, 2008
balance of PHP 70,577.2 million. The upward movement in liabilities, among others, was due to the
availment of short term notes payable from several local banks as well as additional long term
obligations incurred during the same period in support of the acquisition of one A320 aircraft under
capital lease. The effect of the remeasurement to fair value of certain derivative instruments resulted in
the increase in the accrued liabilities balance grouped under current liabilities and in the other liabilities
balance by 75% grouped under reserves and other liabilities.
As of June 30, 2008, the Company’s equity balance amounted to PHP 17,798.57 million, up by PHP
3,165.9 million or 22% from the March 31, 2008 balance of PHP 14,608.1 million. The
improvement was brought about mainly by the effect of the changes in fair value of outstanding
derivative instruments which directly had an impact on the stockholders’ equity , included under the
cumulative translation adjustment caption.
The Company’s key performance indicators are the following:
1. Total Comprehensive Income
The Company’s consolidated total comprehensive income attributable to parent for the quarter
ended June 30, 2008 amounted to PHP 2,705 million higher by 211% from last years’ level of
PHP 869.4 million.
2. Current Ratio
The Company has a current ratio of 0..79 as of June 30, 2008 compared to 0.85 as of March 31,
2008.
3. Debt to Equity ratio
Debt to Equity ratio as of June 30, 2008 was 5.05 compared to 4.83 as of March 31, 2008
4. Earnings Per Share
The Company reported an Earnings per share based on net income (loss) of ( PHP0.34 ) as of
June 30, 2008 as compared to PHP 0..25 as of June 30, 2007 and based on total comprehensive
income of PHP 0.50 per share as of June 30, 2008 as compared to of PHP 0.16 as of June 30,
2007.
The manner by which the Company calculates the above indicator is as follows:
Current ratio – Current assets/Current liabilities
Debt to equity ratio – Total liabilities/Total Equity
Earnings (Loss) per share – Net income (loss) / total comprehensive income attributable to holders of parent
company over common shares issued and outstanding
PAL’S TOP FIVE KEY PERFORMANCE INDICATORS –QUALITATIVE FACTORS
Mission
Statement
To maintain aircraft with the
highest degree of airworthiness,
reliability and presentability in the
most cost-effective manner
To conduct & maintain safe,
reliable, cost & effective flight
operations
To achieve On Time Performance
on all flights operated
Key Performance Indicator
Measurement Methodology
Aircraft Maintenance Check
Completion
Number of checks performed
less number of maintenance
delay over number of checks
performed
By occurrence and monitoring
by Flight Operations Safety
Office
Number of flights operated
less number of flights delayed
over total flights operated
Number of incidents of safety
violation incurred by cabin
crew per month
Percentage Deviation from
Budget/Forecasted Revenues
Number of aircraft related
accidents/ incidents
Percentage Deviation from
Industry Standards (OTP
Particpation)
Number of safety violations
incurred by cabin crew
To provide safe, on time, quality
and cost effective inflight service
or total passenger satisfaction
To maximize the revenue
Net Revenues generated from
passengers and cargoes carried
generation in passenger and
cargo sales through increased
yields by diversifying market
segments and efficient
management of seat inventory
and cargo space
I There are no known trends, demands, commitments, events or uncertainties that may have a
material impact on the Group’s liquidity.
ii. There are no known events that will trigger direct or contingent financial obligation that is material to
the Group, including any default or acceleration of an obligation.
iii. There are no material off-balance sheet transactions, arrangements, obligations (including
contingent obligations), and other relationships of the Group with unconsolidated entities or other
persons created during the reporting period.
iv. Commitments for capital expenditures
As part of its refleeting program PAL entered into a Purchase Agreement with Airbus for nine (9)
Airbus A320-200 on firm order for delivery in 2008 and 2009 with options for five (5) more aircraft
for delivery from 2010 to 2013. As of July 2008 , six (6) Airbus A 320-200 are already part of
PAL’s operating fleet, four of which were delivered in FY 07-08 and the other two delivered in April,
and July 2008. The remaining three (3) Airbus 320-200 are scheduled for delivery in August,
October and December 2008.
In May 2008, PAL started the operations of “PAL Express” . This low fare unit of PAL will operate
a fleet of turbo-prop aircraft to service inter-island routes and provincial points. PAL is in the process
of acquiring nine turbo-prop aircraft (three Bombardier Q300 aircraft and six Bombardier Q400
aircraft) to comprise PAL Express’ initial fleet which will be based both in Manila and Cebu. As of
July 2008, three (3) Bombardier Q 300 aircraft and four (4) Bombardier Q 400 aircraft have been
delivered to and accepted by PAL. The remaining two (2) Bombardier Q 400 are scheduled for
delivery in August 2008.
Also, two (2) brand new Boeing 777-300ER aircraft on operating leases are scheduled to be delivered
in fiscal year 2010; while four (4) new Boeing 777-300ER aircraft directly ordered by PAL from
Boeing are scheduled to be delivered in fiscal years 2010 to 2012.
PAL is also in the midst of a comprehensive cabin refurbishment on its current wide body fleet,
which will see a new bi-class product alongside a major upgrade of interiors and amenities.
iv. There are no known trends, events or uncertainties that have had or that are reasonably expected
to have a material favorable or unfavorable impact on net sales/revenues/income from the Group’s
continuing operations.
v.
There are no significant elements of income or loss that did not arise from the Company’s
continuing operations.
vi. The causes for any material change from period to period which shall include vertical and
horizontal analyses of any material item:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
Cash and cash equivalents- H-(12%) V-(5%)
Available-for-sale- investments – H-(1403%)
Expendable parts, fuel, materials and supplies – H-(12%)
Other Current Assets – H- 149%
Property, plant and equipment –net – H- 21%
Deposits on aircraft leases –H-9%
Deferred tax assets –H -8%
Other noncurrent assets – H –111%
Notes payable – H- 57%
Accounts payable– H-16%
Accrued liabilities – H-75%
Income tax payable – H-(100%)
Unearned transportation revenue – H- 11%
Long-term liabilities –net of current portion – H-10%
Accrued employee benefits payable – H-8%
Reserves and other noncurrent liabilities –H- 91%
Other components of equity– H-25%-V-5%
Passenger – H-11%
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
Cargo H-6%
Interest income – H-(57%)
Others – H- (8%)
Flying Operations – H-39% V-12%
Maintenance – H-24%
Financing charges – H- (14%)
Reservation and sales – H-37%
General and administrative – H –20%
Others – H- 256% V- 8%
Net income (loss) – H-(234%) V -(21%)
Net changes in fair value of available-for-sale investments – H-(101%)
Net changes in fair value of derivative assets – H-4604% V 22%
Increase in revaluation increment due to appraisal incme – H-56865%
Effect of foreign exchange translation – H-(287%) V-10%
Total Comprehensive income – V- 11% H-218%
All of these material changes were explained in detail in the management’s discussion and
analysis of financial condition and results of operations stated above.
vi. Generally, PAL experiences a peak in holiday travel during the months of January, April, May,
June and December.
PAL HOLDINGS, INC. AND SUBSIDIARIES
SUMMARY OF RECEIVABLES
AS OF JUNE 30, 2008 (UNAUDITED)
(in thousand PHP)
Total
Current
TYPE OF ACCOUNTS RECEIVABLE
1
+
"
1
"
1
3
5
8
)
NET RECEIVABLES
,
+
!
5,840,790
'
&%
, (
(
9
(
31-90
91-180
181-360
over 360
Past Due accounts
Days
Days
Days
Days
& Items in Litigation