PHI-17A-December-2019.pdf - PAL Holdings, Inc.

C O V E R S H E E T

AUDITED FINANCIAL STATEMENTS

SEC Registration Number

P W – 9 4

C O M P A N Y N A M E

P A L H O L D I N G S , I N C .

( A S u b s i d i a r y o f T r u s t m a r k

H o l d i n g s C o r p o r a t i o n )

PRINCIPAL OFFICE ( No. / Street / Barangay / City / Town / Province )

8 t h F l o o r , P N B F i n a n c i a l

C e n t e r , P r e s i d e n t D i o s d a d o

M a c a p a g a l A v e . , C C P C o m p l e x

P a s a y C i t y

Form Type Department requiring the report Secondary License Type, If Applicable

1 7 - A C R M D N / A

C O M P A N Y I N F O R M A T I O N

Company’s Email Address Company’s Telephone Number Mobile Number

[email protected] (02) 8816-3451 N/A

No. of Stockholders Annual Meeting (Month / Day) Fiscal Year (Month / Day)

6,456 Last Thursday of May 12/31

CONTACT PERSON INFORMATION

The designated contact person MUST be an Officer of the Corporation

Name of Contact Person Email Address Telephone Number/s Mobile Number

Susan T. Lee [email protected] (02) 8816-3451 N/A

CONTACT PERSON’s ADDRESS

c/o 2/F Allied Bank Center, 6754 Ayala Avenue, Makati City

NOTE 1 : In case of death, resignation or cessation of office of the officer designated as contact person, such incident shall be reported to the Commission within thirty (30) calendar days from the occurrence thereof with information and complete contact details of the new contact person designated. 2 : All Boxes must be properly and completely filled-up. Failure to do so shall cause the delay in updating the corporation’s records with the Commission and/or non-receipt of Notice of Deficiencies. Further, non-receipt of Notice of Deficiencies shall not excuse the corporation from liability for its deficiencies.

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11. Are any or all of these securities listed on the Philippine Stock Exchange?

Yes [ ✓ ] No [ ]

Philippine Stock Exchange Common Stock – 10,502,320,021 shares

12. Check whether the registrant:

(a) has filed all reports to be filed by Section 17 of the SRC and SRC Rule 17.1 thereunder

or Section 11 of the Revised Securities Act (RSA) and RSA Rule 11 (a)-1 thereunder,

and Sections 26 and 141 of the Corporation Code of the Philippines during the

preceding 12 months (or for such shorter period that the registrant was required to file

such reports);

Yes [ ✓ ] No [ ]

(b) has been subject to such filing requirements for the past 90 days.

Yes [ ✓ ] No [ ]

13. Aggregate market value of the voting stock held by non-affiliates:

P=18.07 Billion as of December 31, 2019

14. Check whether the issuer has filed all documents and reports required to be filed by Section 17 of

the Code subsequent to the distribution of securities under a plan confirmed by a court or the

commission. Not Applicable

Yes [ ] No [ ]

DOCUMENTS INCORPORATED BY REFERENCE

15. Briefly describe documents incorporated by reference and identify the part of the SEC Form 17-A

into which the document is incorporated:

(a) Any annual report to security holders

2019 Audited Consolidated Financial Statements of PAL Holdings, Inc. and Subsidiaries

(Incorporated as reference for items 1 and 7 of SEC Form 17-A)

(b) Any information statement filed pursuant to SRC Rule 20

Not Applicable

(c) Any prospectus filed pursuant to SRC Rule 8.1

Not Applicable

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TABLE OF CONTENTS

Page No.

PART I - BUSINESS AND GENERAL INFORMATION

Item 1. Business 5

Item 2. Properties 19

Item 3. Legal Proceedings 22

Item 4. Submission of Matters to a Vote of Security Holders 23

PART II - OPERATIONAL AND FINANCIAL INFORMATION

Item 5. Market for Registrant’s Common Equity and Related Stockholder

Matters

23

Item 6. Management's Discussion and Analysis 25

Item 7. Financial Statements 34

Item 8. Changes in and Disagreements with Accountants on Accounting and

Financial Disclosure

34

PART III - CONTROL AND COMPENSATION INFORMATION

Item 9. Directors and Executive Officers of the Registrant 34

Item 10. Executive Compensation 38

Item 11. Security Ownership of Certain Beneficial Owners and Management 40

Item 12. Certain Relationships and Related Transactions 41

PART IV - CORPORATE GOVERNANCE AND SUSTAINABILITY REPORT

Item 13. Corporate Governance 42

Item 14. Sustainability Report 42

PART V- EXHIBITS AND SCHEDULES

Item 15. Exhibits and Reports on SEC Form 17-C 42

SIGNATURES 43

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND

SUPPLEMENTARY SCHEDULES

44

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PART I - BUSINESS AND GENERAL INFORMATION

Item 1. Business

a) Corporate History

PAL Holdings, Inc. (PHI, or the Company) was incorporated on May 10, 1930 as “Baguio Gold

Mining Company”. On September 23, 1996, the Philippine Securities and Exchange Commission

(SEC) approved the change in the Company’s name to “Baguio Gold Holdings Corporation” and

the change in its primary purpose to that of a holding company. On January 19, 2007, the Philippine

SEC approved the change in the Company’s name from Baguio Gold Holdings Corporation to “PAL

Holdings, Inc.”

On August 13, 2007, the Company acquired directly from the Six Holding Companies

8,823,640,223 shares in PAL, which is equivalent to 81.57% of the issued and outstanding common

shares in the Airline. At the same time, it acquired from the Six Holding Companies except Maxell

Holdings Corporation 50,591,155 shares in PR Holdings, Inc. (PR), equivalent to 82.33% of the

outstanding shares in PR. Both acquisitions were made by way of dacion en pago, whereby the total

acquisition price of P=12.55 billion for the shares in PAL and PR was satisfied by an equivalent

reduction of the liability owing to the Company from the Six Holding Companies.

In April 2012, San Miguel Equity Investments Inc. (SMEII), a wholly owned subsidiary of San

Miguel Corporation, acquired 49% equity interest in Trustmark Holdings Corporation (Trustmark).

Trustmark then owns 97.71% of the Company, which in turn beneficially owns (directly and

indirectly, thru PR) 84.67% of PAL. In May and June 2012, the proceeds from the investment of

SMEII to Trustmark flowed down to PAL with the subscription by Trustmark of 17.00 billion shares

in the Company for P=17.00 billion and subsequently, the subscription by the Company of 85 billion

shares in PAL for P=17.00 billion.

On June 26 and September 28, 2012, the BOD, by majority vote, and the stockholders representing

at least 2/3 of the outstanding capital stock, approved the increase in authorized capital stock from

P=20.0 billion divided into 20.00 billion shares with P=1 par value per share to P=23.00 billion divided

into 23.00 billion shares with P=1 par value per share. Out of the increase in the authorized capital

stock, P=2.42 billion have been subscribed and fully paid by way of cash infusion by Trustmark.

Accordingly, as a result of the infusion, Trustmark’s ownership in the Company increased from

97.71% to 99.45%. The increase in authorized capital stock was approved by the Philippine SEC on

December 12, 2012.

On February 4 and March 15, 2013, the BOD, by majority vote, and the stockholders representing

at least 2/3 of the outstanding capital stock, approved the increase in authorized capital stock from

P=23.00 billion divided into 23.00 billion shares with P=1 par value per share to P=30.00 billion divided

into 30.00 billion shares with P=1 par value per share. The increase in authorized capital stock was

approved by the Philippine SEC on June 28, 2013. Out of the increase in the authorized capital

stock, P=2.42 billion have been subscribed, of which P=603.75 million have been fully paid as of

December 31, 2015. As a result of the additional issuance of shares, Trustmark’s ownership in the

Company decreased from 99.45% to 89.78%.

On February 4, 2013, the BOD, pursuant to the authority duly delegated to it by the stockholders on

April 30, 1973, approved the Company’s change in accounting period from fiscal year ending March

31 to calendar year ending December 31. The Amended By-Laws in connection with the change in

accounting period was approved by the Philippine SEC on July 5, 2013. On October 31, 2013, the

Bureau of Internal Revenue (BIR) approved the request for change in accounting period.

In October 2014, Buona Sorte Holdings, Inc. (BSHI) and Horizon Global Investments Limited

(HGIL) acquired 9% and 40%, respectively, the 49% stake of SMEII in Trustmark. As of

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December 31, 2019 and 2018, Trustmark is 60% owned by BSHI and 40% owned by HGIL. BSHI

and Trustmark were likewise incorporated in the Philippines and are part of the Lucio Tan Group

of Companies while HGIL was incorporated in British Virgin Islands.

On September 26, 2016, the Company’s BOD approved and authorized the acquisition, in a share

swap transaction, of PAL shares from existing PAL shareholders. Relative thereto the BOD likewise

approved the share swap ratio of 5:1 or equivalent to five PAL shares to one PHI share. On

December 27, 2018 and December 18, 2017, the Philippine SEC approved the acquisition of 0.01%

and 0.64% non-controlling interest in PAL, respectively. The Company issued 0.75 million and

123.54 million new shares from its authorized but unissued capital stock in favor of PAL

shareholders who have participated in the PAL share swap transaction. As of December 31, 2019

and 2018, PHI has effective ownership interest in PAL of 98.92%.

On November 28, 2016, the Company’s BOD also approved the acquisition, through share swap

transaction, of the shares of Zuma Holdings Management Corporation (ZUMA), the holding

company of Air Philippines Corporation (APC), from its existing shareholders with a share swap

exchange ratio of 19:1 corresponding to 19 PHI shares to one ZUMA share. On December 21, 2017,

the Philippine SEC approved the acquisition of ZUMA through share swap transaction with its

existing shareholders. The Company issued 840.46 million new shares from its authorized but

unissued capital stock valued at P=5.00 per share in favor of Cosmic Holdings Corporation.

Accordingly, as of December 31, 2019 and 2018, the Company owns 51% of ZUMA.

As a result of the share swap transactions, Trustmark’s ownership in the Company decreased from

89.78% to 86.42% as of December 31, 2018.

In February 2019, ANA Holdings, Inc. (ANA HO), the parent company of All Nippon Airways

(ANA), acquired 1,103,042,933 shares held by Trustmark in PHI equivalent to 9.5% of the current

outstanding shares of PHI. As a result of this transaction, Trustmark’s ownership in the Company

decreased from 86.42% to 76.92% as of December 31, 2019.

b) 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 flies 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 December

31, 2019, PAL's route network covered 31 points in the Philippines and 40 international destinations.

PAL was certified as a 4-Star Airline by Skytrax, the international air transport rating organization.

PAL joined 40 other renowned air carriers in this prestigious service status, and is the first and only

airline in the Philippines to earn the 4-Star rating.

PR Holdings, Inc.

PR was organized by a consortium of investors for the purpose of bidding for and acquiring the

shares of stock of PAL in accordance with the single-buyer requirement of the bidding guidelines

set by the seller, the National Government of the Republic of the Philippines. PR acquired on

March 25, 1992, 67% of the outstanding capital stock of PAL.

PR was partially dissolved or liquidated on November 9, 1998 with a decrease in its authorized

capital stock and retirement of some of its shares in exchange of PAL shares to retiring stockholders

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as return of capital.

As a holding company, PR’s primary purpose is to purchase, subscribe, acquire, hold, use, manage,

develop, sell, assign, exchange or dispose of real and personal property, including shares of stocks,

debentures, notes and other securities of any domestic or foreign corporation.

Zuma Holdings and Management Corporation

ZUMA was incorporated and registered with the SEC on August 25, 1989. It was organized

primarily to engage in the business of a holding company. It has an investment in Air Philippines

Corporation (APC), a 99.97%-owned subsidiary. APC is primarily engaged in the business of air

transportation for the carriage of passengers and cargo within and outside the Philippines. APC is

currently doing business under the name and style of Philippine Airlines or PAL Express.

Principal products or services and their markets indicating their relative contributions to sales or

revenues of each product or service:

(i) Percentage of sales or revenues and net income contributed by foreign sales

PAL

PAL's operations for 2019 are described as follows:

During the year, PAL carried an average of 45,907 passengers per day (23,647 domestic including

codeshare with PAL Express, and 22,260 international) and 630 tons of cargo (344 tons domestic

and 286 tons international) per day.

Systemwide Operations: FY 2019

Net Passenger Revenues (in millions) P=134,292.0

Net Cargo Revenues (in millions) P=9,375.0

Revenue Passenger Kms (‘000) 42,308,826

Available Seat Kms (ASKs) (‘000) 55,271,369

Passenger Load Factor 76.55%

No. of Passengers 16,755,950

Freight Kilograms 229,827,868

Net Revenues by Route

Based on the results of operations for the years ended December 31, 2019, 2018 and 2017, the

comparative revenue contribution by route is shown below:

2019 2018 2017

Transpacific 29.5% 27.9% 26.7%

Europe 2.0% 2.7% 2.5%

Middle East 8.6% 9.2% 9.3%

Asia and Australia 38.8% 39.9% 40.1%

Total International 78.9% 79.7% 78.6%

Total Domestic 21.1% 20.3% 21.4%

Total System 100.0% 100.0% 100.0%

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International Passenger Services

As of December 31, 2019, PAL's international route network covered 40 cities in 19 countries.

40 PAL on-line points: Guam, Honolulu, Los Angeles, New York, San Francisco, Toronto,

Vancouver, London, Abu Dhabi, Dubai, Doha, Dammam, Riyadh,

Brisbane, Melbourne, Sydney, Auckland, Port Moresby, Fukuoka,

Nagoya, Osaka, Sapporo, Tokyo, Pusan, Seoul, Hong Kong, Macau,

Beijing, Guangzhou, Shanghai, Quanzhou, Xiamen, Taipei, Bangkok,

Kuala Lumpur, Phnom Penh, Saigon, Singapore, Jakarta, Denpasar

Bali

Transpacific

During the year, PAL flew an average of 52 non-stop flights a week to North America utilizing the

B777-300ERs and A350-900s: 17 times weekly to Los Angeles; 14 times weekly to San Francisco;

7 times weekly to New York; 7 times weekly to Vancouver; and 7 times weekly to Toronto.

In addition, PAL also operates a regular five weekly direct service to Honolulu, and daily to Guam.

The Airline is entitled to fly to other US cities for unlimited frequencies under certain terms and

conditions of the Philippines-US bilateral air transport agreement.

Europe

PAL flies to London five times weekly using the A350-900s.

Middle East

PAL operates daily flights each to Dubai and Riyadh, and five times weekly each to Dammam and

Doha. All flights to the Middle East utilize the A330-300 high gross weight aircraft.

Asia and Oceania

PAL operated 334 departures per week out of Manila, Clark, Cebu, and Kalibo to 13 countries in

Asia and Oceania. The Airline flew 35 times a week each to Hongkong; 32 times a week to Seoul;

28 times a week each to Singapore and Tokyo (Narita); 24 times a week to Bangkok; 21 times a

week to Osaka; 14 times a week each to Taipei and Tokyo (Haneda); 12 times a week to Nagoya;

10 times a week each to Jakarta and Kuala Lumpur; 9 times a week to Pusan; 8 times a week to

Saigon; 7 times a week each to Denpasar (Bali), Fukuoka, Guangzhou (Canton), Macau, Quanzhou

(Jinjiang), Shanghai, and Xiamen; 5 times a week to Phnom Penh; 4 times a week to Hanoi; and

3 times a week to Sapporo.

In Australia, PAL operates 6 times a week to Sydney; and 5 times a week each to Melbourne and

Brisbane.

The Airline also operates 3 times weekly direct services to Auckland in New Zealand, and 4 times

weekly to Port Moresby in Papua New Guinea.

APC

In 2019, APC operated 34,612 round trip flights (34,114 domestic and 498 international) under the

code share agreement with PAL. APC’s international route covered Incheon (code share with PAL).

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Systemwide Operations: FY 2019

Traffic Revenues (in millions) P=9,512.9

Traffic revenue pertains to billings to PAL in accordance with the code share agreement which is

recognized as revenue when the transportation service is rendered. It also includes revenue from

chartered flights under charter agreement with various third parties.

Domestic Passenger Services

PAL's domestic network covered 31 cities and towns in the Philippines (mostly under codeshare

and operated by partner APC). It served the following domestic destinations: Antique, Bacolod,

Basco, Butuan, Busuanga, Cagayan, Calbayog, Camiguin, Catarman, Caticlan, Cebu, Clark,

Cotabato, Davao, Dipolog, Dumaguete, General Santos, Iloilo, Kalibo, Laoag, Legazpi, Manila,

Ozamiz, Puerto Princesa, Roxas, San Vicente, Siargao, Tawi-Tawi, Tacloban, Tagbilaran, and

Zamboanga.

New route sectors including Cebu to Zamboanga, Cebu to Dipolog, and Zamboanga to Tawi-Tawi

were added to the domestic network.

Joint Services and Code Share Agreements

PAL

The Airline continues to employ tactical codeshare alliances to broaden its route network.

PAL maintains codeshare agreements with Malaysia Airlines (in place since February 1999)

covering a total of 21 weekly flights between Kuala Lumpur and Manila, and connections to several

cities in Malaysia, and on PAL operated flights between Kuala Lumpur and Manila; with Cathay

Pacific (in place since November 2001) on 14 times weekly services between Hong Kong and Cebu;

with Gulf Air (in place since March 2006) on 7 times weekly services between Bahrain and Manila;

with All Nippon Airways (in place since November 2014) on codeshare services between several

cities in Japan and Manila, and between domestic points in Japan; with West Jet (in place since

February 2015) on codeshare flights on selected points within Canada; with Turkish Airlines

(in place since July 2015) on 7 times weekly services between Istanbul and Manila; with China

Airlines (in place since December 2015) on 14 times weekly services between Taipei and Manila;

with Xiamen Airlines (in place since February 2016) on 14 times weekly services between

Quanzhou and Manila, 14 times weekly services between Xiamen and Manila, 3 times weekly

services between Xiamen and Cebu, 3 times weekly service between Quanzhou and Cebu; 2 times

weekly services between Quanzhou and Clark, and 2 times weekly service between Quanzhou and

Davao; with Hawaiian Airlines (in place since June 2016) on connection for PAL Honolulu

passengers with Hawaiian inter-island destinations including Hilo, Kona, Lihue and Maui, and on

PAL operated flights between Honolulu and Manila; with Royal Brunei Airlines (in place since

July 2017) on 7 times weekly services between Bander Seri Begawan and Manila; and with Bangkok

Airways (in place since October 2018) on services between Bangkok and several cities in Thailand,

and on PAL operated flights between Bangkok and Manila.

PAL's daily services between Manila and Saigon are operated under a codeshare agreement with

Vietnam Airlines (in place since July 2001) with PAL as the operating airline. PAL also has similar

agreements with Garuda Indonesia (since March 2001) on PAL operated flights between Manila

and Jakarta; and with Air Macau (since October 2009) on PAL operated flights between Manila and

Macau.

PAL also codeshares with APC on regular domestic services which the latter operates, while APC

likewise codeshares on domestic flights operated by PAL.

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APC

APC codeshares mainly with PAL for the former’s use of the name Philippine Airlines in its

marketing activities and operations. Under the codeshare agreement, PAL markets the codeshare

flights while APC operates the flights. It also has joint services and endorsements of passengers to

PAL during flight interruptions.

APC has an existing Special Re-Accommodation Agreement with Cebu Air, Inc. for the

endorsements of passengers during flight interruptions, effective since October 25, 2011.

Frequent Flyer Programs

The PAL Mabuhay Miles program 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 members access to their account information, and details

on promotions and offers.

The Mabuhay Miles Elite or Premier Elite members enjoy exclusive travel privileges including

priority reservation waitlist, dedicated reservation telephone lines, priority check-in, additional free

baggage allowance, priority luggage handling, priority airport standby, priority boarding, access to

Mabuhay Lounges and participating VIP lounges, and additional discounts and amenities from

program partners. The Mabuhay Million Milers enjoy the Premier Elite privileges plus other

exclusive benefits for life as a token of appreciation to members who have flown one million

cumulative flight miles.

The SportsPlus Card is a privilege card designed for sports enthusiasts, which grants members the

benefit of extra free baggage allowance for sports equipment.

(ii) Distribution Methods of Products or Services

PAL maintains a total of fourteen (14) sales and ticket offices in Manila, thirty-one (31) in other

cities in the Philippines, and twenty (20) located in foreign stations. There are thirty-four (34)

general sales agents in selected international points representing the Airline in ninety-six (96)

territories, Billing Settlement Plan subscription in seventy (70) different countries/territories, fifteen

(15) domestic sales agents, and one thousand seventy-three (1,073) agents under the domestic

ticketing program, that handle the promotions and sales of PAL’s products and services.

The PAL website, www.philippineairlines.com, has a booking facility which provides interactive

booking of flights and ticket purchases. It also contains additional web pages that feature detailed

descriptions of PAL destinations and a calendar of destination festivities. Functionalities include

fares and tour modules, online training registration, route maps, flight schedules, dropdown lists,

and online cargo booking. Real time flight information of all PAL flights may also be accessed by

logging on to the PAL website.

The PAL mobile app (application software) enables passengers to conveniently book and pay for

their flights, track flight status, and check-in on-line using their mobile services such as smartphones

and tablets.

PAL’s official accounts on the social network sites Facebook, Instagram, and Twitter, are venues

for communicating directly with the customers.

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(iii) Status of any Publicly-announced New Product or Service

PAL’s Business Class offers world class luxury service, with the full-flat seats, state-of-the-art

entertainment, chef-cooked meals, a wide range of complimentary drinks, and other privileges.

The ‘Premium Economy’ class is offered in the domestic and selected international flights. Aside

from the extra spacious seats and specially-crafted meal choices; the ‘Premium Economy’ service

includes product offerings such as priority treatment on ground, accrual of miles, increased free

baggage allowance, and flexibility in rebooking, refund, and ticket changes.

Complimentary meals and beverages, a variety of reading materials, and in-flight amenities are

provided in international and domestic flights. Special meals may be requested on all international

flights to satisfy the dietary requirements of passengers. Business Class overnight kits and the

‘Junior Jetsetter’ activity kits are offered in long haul international flights.

The ‘myPAL eSuite’, PAL’s inflight entertainment system which consists of a selection of choice

movies, TV shows, music, games, and informative features can be accessed through the passenger

in-seat video and audio facilities. Aside from these, the Apple iPad, a popular tablet, is part of PAL’s

inflight entertainment system offered on selected routes. The entertainment devise features a

selection of movies, television shows, music, games, reading materials, and the tablet version of the

PAL Mabuhay magazine.

The ‘myPAL Wi-Fi’ provides on-line internet connection while onboard. The ‘myPAL Mobile’

allows calls or text messaging using mobile devices. The ‘myPAL Player’ streams movies, TV

shows and music on smartphones or tablets.

The Sky Boutique is a selection of duty-free products, luxury brands, and PAL merchandise offered

in all international flights. The service provides the convenience of shopping during the flight.

PAL Mabuhay Lounges are available in selected international and domestic stations for Mabuhay

Class passengers and Mabuhay Miles Elite and Premier Elite members. Passengers can unwind,

dine, and freshen up in these facilities before boarding their flights.

Economy class passengers can purchase choice seats positioned at the bulkhead and exit rows which

provides the widest legroom or forward seats located in front rows for easy and priority embarkation.

The ‘myPAL Upgrade’ allows ticketed Economy Class passengers to bid for an upgrade to Business

Class or Premium Business Class.

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 times.

The PAL Boutique which covers ground, on-board, and on-line selling, offers exclusive PAL

merchandise designed and produced in collaboration with retail icons in the Philippines. The

products sold at special prices include leather goods, apparel, wi-fi service (‘myPAL Roam’), food

items, travel essentials, special souvenirs, and memorabilia items.

(iv) Competitive business conditions and the registrant’s competitive positions in the industry and

methods of competition

PAL continues to maintain a strong market share in its international routes despite competition with

legacy carriers and growing number of LCCs in the Asia Pacific region. Aside from point to point

traffic, these carriers also target beyond passengers via their home countries to their entire network.

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The following table shows the Airline’s main competitors and PAL's total market and capacity share

per route.

PAL's Market and Capacity Share:

(January to November 2019)

Market

Share

Capacity

Share

Airline Competitors

Transpacific 43% 42% Eva Air, Cathay Pacific, Korean Airlines,

Asiana Airlines, United Airlines, All Nippon

Airlines, Delta Airlines, China Airlines, China

Southern, Japan Airlines, Air China

Middle East 25% 23% Cebu Pacific, Emirates, Saudia Airlines,

Etihad, Qatar, Kuwait Airways, Gulf Air,

Cathay Pacific, Oman Air, Royal Brunei

United Kingdom 27% 33% Cathay Pacific, Emirates, Etihad, KLM,

Kuwait Airways, Singapore Airlines, Qatar,

Air China

Asia and Australia 27% 26% Japan Airlines, Cathay Pacific, Singapore

Airlines, Thai Airways, Korean Airlines,

Asiana Airlines, China Airlines, Eva Airways,

Qantas Airways, China Southern Airlines,

Dragon Air, Delta Air Lines, Cebu Pacific, All

Nippon Airways, Jetstar, Silk Air, Tiger

Airways, Air Asia Zest, Jeju Air, Jin Air, Air

Busan, Air China, Malaysia Airlines, United

Airlines, Air Niugini

Legacy carriers Emirates, Etihad, United Airlines, Delta Airlines, Cathay Pacific, and Singapore

Airlines are among the world's biggest in terms of passengers carried. Cathay Pacific, In the Asia

Pacific region, Singapore Airlines, Korean Air, and Thai Airways are still the leading carriers. Most

of these international airlines belong to the largest alliances in the industry (Star Alliance, Sky Team

and One World).

In the domestic market, PAL held a 34% share for the period January to December 2019. The biggest

competitors are the Cebu Pacific group (Cebu Pacific and CebGo) (47%), and Air Asia (19%). PAL

continues to expand its domestic network by opening new routes from its Cebu, Davao and Clark

hubs to increase market share and to offer service at airports other than the congested Manila.

The continuous enhancement of products and services, creativity in fare structuring, and an excellent

safety record enable PAL to hold its place in the market. In the transpacific market, PAL has the

unique advantage of providing the only nonstop service from the Philippines to mainland USA and

Canada. The nonstop attribute, together with the distinct Filipino flavor of the PAL inflight service,

appeal strongly to Filipino passengers, and cements the PAL edge over the non-Filipino carriers.

(v) Sources and availability of raw materials and the names of principal suppliers

PAL’s inflight catering requirements are provided by MacroAsia SATS Inflight Service (MSIS) for

domestic flights with business class and premium economy services, and outgoing flights ex- Manila

and for select Manila incoming flights originating from Hong Kong (HKG) and Phnom Penh (PNH),

depending on the type of aircraft utilized. For other incoming flights, the major suppliers include

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Flying Food Group (SFO, HNL), HACOR Inc. (LAX), International In-Flight Catering Co. Ltd.

(HNL), LSG Sky Chefs (JFK, AKL, GUM, BKK, PVG, YVR, YYZ), Dnata Catering (SYD, MEL,

BNE), Air Niugini (POM), Alpha Flight Services (LHR), Saudia Arabian Airlines Catering (RUH

& DMM), Emirates Flight Catering (DXB), Qatar Aircraft Catering Co. (DOH) Cebu Pacific

Catering Services Inc. (CEB), Fukuoka Inflight Catering (FUK), AAS Catering Services (KIX),

Nagoya Air Catering Co. Ltd. (NGO), Cosmo Enterprise Co. LTD. (NRT & HND), Hotel New Oji

(CTS), Korean Air Catering (ICN and PUS), Beijing Airport Inflight Kitchen Ltd. (PEK), China

Pacific Catering Services Ltd. (HKG, TPE), Xiamen Fliport Catering Ltd. (XMN), SERVAIR

Catering Services (MFM), Aerofood ACS (CGK, DPS), SATS Catering Pte. Ltd. (SIN), Brahim’s

SATS Food Services (KUL), Vietnam Airlines Caterers (SGN), Vietnam Air Catering Services

(HAN). For the outgoing international flight ex-Clark Global Catering (CRK, KLO).

(vi) Dependence on one or a few major customers and identify any such major customers

PAL has a large network of customers all over the world and is not dependent on one or a few major

customers.

(vii) Transactions with and/or dependence on related parties

The Company’s significant transactions with related parties are described in detail in Note 18 of the

Notes to Consolidated Financial Statements.

(viii) Patents, trademarks, licenses, franchises, concessions, royalty, agreements or labor

contracts, including duration;

PAL subcontracts the maintenance of its commercial fleet to Lufthansa Technik Philippines (LTP

Manila) for line, base, heavy maintenance and to HAECO (Xiamen) & GAMECO (Guangzhou) for

heavy maintenance. PAL's Aircraft Engineering Department (AED) undertakes planning,

monitoring and control of all maintenance activities and technical compliance of aircraft, engines

and accessories with airworthiness requirements and industry accepted standards for safety,

reliability, and customer acceptability.

The PAL Fleet is maintained in accordance with the standards and mandated by the aviation

authorities such as:

• Civil Aviation Authority of the Philippines (CAAP),

• US Federal Aviation Authority (US-FAA), and the

• European Aviation Safety Agency (EASA)

PAL complies with the International Civil Aviation Organization (ICAO) requirements and

currently holds IATA Operational Safety Audit (IOSA) certification. The Continuous Airworthiness

Maintenance Program (CAMP) of PAL is approved by the CAAP and is based on Aircraft

Manufacturer’s / Original Equipment Manufacturer’s approved and recommended documents and

Airworthiness Authorities’ mandatory requirements. This ensures that PAL aircraft and equipment

are always in an airworthy condition. AED established the General Maintenance Manual (GMM)

which describes the policies and processes required to achieve the intent of the CAMP, as required

by the CAAP.

PAL subcontracts the maintenance of its aircraft to competent Approved Maintenance Organizations

(AMO) to LTP for line and base maintenance in the Philippines, HAECO for base maintenance of

the PAL Boeing 777 fleet in Xiamen, China, and GAMECO for base maintenance for several of its

A321 aircraft. Line maintenance in overseas destination stations is subcontracted to CAAP approved

maintenance organizations such as KLM in London Heathrow, Cathay Pacific in Haneda and

Nagoya, and Singapore Airlines Engineering in the Los Angeles and San Francisco, among many

others. LTP and the outstation service providers are mandated to comply with the requirements of

PAL’s Maintenance Schedule and General Maintenance Manual approved by the CAAP. AED

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exercises oversight responsibilities to ensure compliance of the contracted maintenance providers

to the established policies and procedures and contractual obligations.

Man-hour rates for maintenance requirements are negotiated with the respective contracted

maintenance providers in accordance with the terms of the agreement. Maintenance materials and

parts are sourced from approved suppliers (which include original equipment manufacturers such as

Airbus Industries, Boeing, General Electric, CFM International, International Aero Engines (IAE),

Rolls-Royce, among others).

Shop maintenance and overhaul services of engines are provided by Lufthansa Technik AG (LHT),

Air France Industries (AFI), IAE, Pratt & Whitney, and Rolls-Royce while the same services for the

Auxiliary Power Units (APUs) are provided by Honeywell. Component pooling and repair services

are handled by HAECO, LHT, SR Technics Switzerland Lt., and Airbus.

PAL also operates a small fleet of trainer aircraft that is managed by the PAL Aviation Training

Center (PATC). Maintenance of these aircraft is performed by another MRO, Aviation Hub Asia

Inc. (AHAI). PAL has a Technical Services Agreement with AHAI. AED assists PATC in its

oversight of the maintenance activities of the trainer fleet.

Development Plans

The Airline will consistently deliver the quality of service empowered by its distinct service

culture, the ‘Buong Pusong Alaga’ or whole hearted service, leveraged on its brand equity ‘the

Heart of the Filipino’. PAL will continue to provide the excellent flying experience to its

passengers.

The technologically advanced and fuel efficient A321-271 NEO aircraft on order will be delivered

in the coming years. These new aircraft type will not only replace the older narrow body aircraft

but will result to operational efficiency and reliability, at the same time improve the product and

service offerings.

The Airline will continue to expand its route network. New destinations and city pairs will be

introduced in year 2020. Flight schedules and timings will also be improved to provide more

convenience and better connections, thus attracting more passengers.

PAL will further explore sales and business opportunities; invest on resource management

programs and efficient operating systems; optimize flight and ground operations; and constantly

prioritize safety.

Major plans include the implementation of improved sales strategies and revenue generation, cost

management, and manpower development, on its quest to bring back PAL’s profitability.

Franchise

PAL Franchise

PAL operates under a franchise, which extends up to the year 2034, granted by the Philippine

Government under Presidential Decree No. 1590. As provided for under the franchise, PAL is

subject to:

a. corporate income tax based on net taxable income; or

b. franchise tax of 2% of the gross revenue derived from nontransport, domestic transport and

outgoing international transport operations,

whichever is lower, in lieu of all other taxes, duties, royalties, registration licenses and other fees,

14

and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected

by any municipal, city, provincial or national authority or government agency, except real property

tax.

APC Franchise

APC operates under a franchise for a term of 25 years from August 8, 1997, the date of effectivity

of Republic Act (RA) No. 8339, with some provisions amended under RA No. 9215 effective

May 5, 2003. As provided for under the franchise, APC is subject to, among others:

a. corporate income tax based on net taxable income; or

b. franchise tax of 5% of the gross revenue derived from non-transport, domestic transport and


whichever is lower, in lieu of all other taxes, duties, fees, and licenses of any kind, nature, or

description, imposed, levied, established, assessed, or collected by any municipal, city, provincial

or national authority or government agency, except real property tax.

As further provided for under PAL’s and APC’s franchises, PAL and APC 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. In addition, the payment of the principal, interest, fees, and other charges on foreign loans

obtained by PAL and APC, and all rentals, interest, fees and other charges paid by PAL and APC to

their lessors for the lease of aircraft, engines, spares, other flight or ground equipment, and other

personal property are exempt from all taxes, including withholding tax, provided that the liability

for the payment of said taxes is assumed by the grantee (PAL or APC, as applicable). Under RA

No. 9337 or the E-VAT Act of 2005 which took effect on November 1, 2005, the franchise tax of

PAL and APC was abolished and PAL and APC became subject to the corporate income tax. PAL

and APC remain exempt from any taxes, duties, royalties, registration license, and other fees and

charges, as may be provided under PAL’s and APC’s franchises

(ix) Need of any government approval of principal products or services

Airline operations are regulated by the Philippine Government through the Civil Aeronautics Board

(CAB) with regard to new routes, tariffs, schedules and passenger rights; through the Civil Aviation

Authority of the Philippines (CAAP), formerly the Philippine Air Transport Office, for aircraft and

operating standards; and through a slot coordinator 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 (DOTr) - PAL initiates improvement programs for facilities

in the country's domestic and international airports to conform with international standards and

enhance safety of the Airline's operations. In particular, PAL is actively involved in and cooperating

with ongoing efforts by the government to address congestion problems at the Ninoy Aquino

International Airport and further develop the Clark International Airport as an international and

domestic gateway. With respect to passenger rights and protections, PAL assiduously complies with

existing regulations on the matter and continues to cooperate in various efforts to better define and/or

enhance the same.

(x) Effects of existing or probable government regulations on the business

Not Applicable

(xi) Estimate of the amount spent during each of the last three 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

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(xii) Cost and effects of compliance with environmental laws

PAL has fully complied with the following major environmental laws:

1. Republic Act (RA) 8749, “Clean Air Act”

In compliance to condition of Permit to Operate –Air Pollution Source Installation of PAL

MBC, PNB and PLC paid P=208,320.01 to third party stack tester for conducting Source

Emission Test for the 14 units generator sets above 300kW capacity and 2 boiler sets.

2. Republic Act (RA) 9275, “Clean Water Act”

Renewal of Discharge Permit of Jet Fuel Storage Facility MNL: P=13,225.40

Revalidation of Discharge Permit of Inflight Center: P=23,940.62

Application of Discharge Permit: P=14,666.35

3. DENR Administrative Order No. 2016-08, “Water Quality Guidelines and General Effluents

Standards”

Annual water quality analysis: P=84,739.20

Electricity consumption for operation of the sewage treatment plant (STP) - approximately

P=1,200,000.00/annum

Cost for enzyme used to dissolve grease in the catering/kitchen area, control odor and enhanced

STP biological reaction: P=420,000.00/annum

Manpower cost for the maintenance and operation of STP: P=960,000.00

4. Presidential Decree No. 1152, “Philippine Environmental Code”

No cost to PAL for period covering 2019.

5. Presidential Decree No. 1586, “Establishing an Environmental Impact Assessment System”,

DENR Administrative Order No. 96-37, Presidential Decree 813, Executive Order 927, LLDA

Board Resolution 224 and 408

Cost for application of LLDA Clearance: P=15,240.40

6. Republic Act No. 6969 “Toxic and Hazardous Waste Management” and DENR Administrative

Order No. 2013-22

Cost for the proper disposal of Infectious and Pathological Waste (M501): P=21,000.00

Income generated from proper disposal of hazardous waste: P=445,570.00

Cost for application of Permit to Transport: P=3,000.00

7. Presidential Decree No. 1067, “The Water Code of the Philippines”

Cost for the renewal of Water Permit for PAL Mactan Cebu: P=30,038.50

8. Republic Act 9003 “The Ecological Waste Management Act of 2000”

Cost for the proper disposal of solid waste: P=16,274,353.76

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9. DENR Administrative Order 2014 – 12 Revised Guidelines for Pollution Control Officer

Accreditation

Cost of trainings required for PCO Accreditation (New and Renewal)

▪ Laguna Lake Development Authority (LLDA): P=7,000.00

▪ DENR- Environmental Management Bureau: P=17,000.00

10. Department of Health (DOH) Administrative Order 29, s. 2000, “License to Operate an

Industrial X-ray Facility”

Cost of initial, renewal and amendment of License to Operate (LTO) of 12 X-ray facilities

nationwide (PAL Pre-Departure, Cargo Terminal, Mactan-Cebu, Davao and General Santos

Cargo Services, Iloilo X-ray Facility, Kalibo X-ray Facility, Bacolod X-ray Facility,

Zamboanga X-ray Facility, PAL Pre-Departure Terminal 1, MME-Kalibo and Cagaban X-ray

Facility Services): Php P=10,590.00

Cost of calibration of radiation survey meter: P=5,550.00

Cost of new subscription for OSL dosimeters (PAL Departure Area – Terminal 1): P=21,600.00

11. Code of PNRI Regulations Section 16 of RA 2067

Cost of amendment application of Radioactive Material License of PAL Pre-Departure and Cargo

Terminal: P=3,500.00

The effects of PAL’s compliance with environmental laws are as follows:

1. Compliance to national legislations

2. Resource recovery and recycling

3. Reduced waste generation

4. Improved public image and community relations

5. Improved relationship with the regulators (DENR-EMB, LLDA, DOH and PNRI)

6. Enhancing PAL’s commitment to continually improve its environmental performance in

all aspects of its operations

7. Appreciation and recognition from the DENR for PAL’s participation to International

Coastal Cleanup celebrations

8. Reduced cost through energy and resource conservation

(xiii) Total number of employees and number of full-time employees

The Company has three (3) compensated officers as of December 31, 2019. The Company does not

have any plan of hiring additional employees within the ensuing 12 months.

PAL Employees:

As of December 31, 2019, PAL has a total workforce of 6,901 as follows:

Classification Number of Employees

Ground Employees

Philippine 2,741

Foreign 305

Flight Crew

Pilots 1,075

Cabin Crew 2,780

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PAL recognizes two local labor unions, Philippine Airlines Employees’ Association (PALEA) for

the rank and file ground employees and Flight Attendants’ and Stewards’ Association of the

Philippines (FASAP) for the cabin crew. In addition, it also recognizes foreign labor unions in the

United States, Singapore and Japan.

PAL has 3,429 union members – PALEA (730), FASAP (2,638), U.S. (12), Singapore (12), and

Japan (37).

On July 5, 2017, a Memorandum of Agreement was entered into by PAL and FASAP which forms

part of the 2015-2020 PAL-FASAP Collective Bargaining Agreement (CBA). Whereas, on May 31,

2019, a new CBA with PALEA was concluded for the period of October 01, 2018 until September

30, 2023.

Likewise, the CBA for PAL – International Association of Machinists and Aerospace Workers

(IAMAW), which covers employees in the United States, is valid up to June 30, 2019. As agreed,

with U.S. Union, the CBA negotiation will resume after the U.S. Mediation Board has resolved the

petition to include the Sales Representative in the PAL-IAMAW Bargaining Unit. The current CBA

with the Singapore Manual and Mercantile Workers’ Union, which covers employees in Singapore

is valid up to December 31, 2020. The CBA with Airline’s Labor Union – Japan expired on

May 31, 2019.

PAL, as always, gives its employees all benefit entitlements in accordance with stipulations in the

respective CBAs.

APC Employees:

As of December 31, 2019, APC has a total workforce of 1,310 as follows:

Classification Number of Employees

Ground Employees

Philippine 643

Flight Crew

Pilots 261

Cabin Crew 406

Major risk/s involved in each of the businesses of the Company and subsidiaries and the

procedures being undertaken to identify, assess and manage such risks.

Investment risk - the Company has financial assets at fair value through other comprehensive income

which has unpredictable market prices.

Price risk - price fluctuations in cost of fuel which is based primarily in the international price of

crude oil. Substantial increases in fuel costs or the unavailability of sufficient quantities of fuel is

harmful to the business.

Regulatory risk - PAL is subject to extensive regulations which may restrict growth or operations

or increase their costs.

Competition - PAL is exposed to increased competition with major international and regional

airlines.

Security and safety risk - the impact of terrorist attacks on the airline industry severely affects the

overall air travel of passengers.

Financial market risk - fluctuations of interest and currency rates.

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Economic slowdown - reduces the demand or need for air travel for both business and leisure.

Procedures undertaken to manage risks

- PAL continues to comply with applicable statutes, rules and regulations pertaining to the airline

industry in order to maintain the required foreign and domestic governmental authorizations

needed for their operations.

- Increase in fuel cost and shortage in fuel can sometimes be offset by increase in passenger fares

or the curtailment of some scheduled services.

- Airlines have been required to adopt numerous additional security measures in an effort to

prevent any future terrorist attacks, and are required to comply with more rigorous security

guidelines.

- PAL sees to it that it has remain competitive in the areas of pricing, scheduling (frequency and

flight times), on-time performance, frequent flyer programs and other services.

- Proper fund management and monitoring is being done to avoid the adverse effects in the results

of operations of the Group. Cash flows and financial risks are managed to provide adequate

liquidity to the Group.

Item 2. Properties

The Company does not own any properties and equipment and has no plans of acquiring any property in

the next 12 months. The Company leases space from an entity under common control. In 2019, the

Company was billed at a monthly rate of P=34,650.00.

PAL’s properties and equipment include its aircraft fleet, various parcels of land, and buildings.

PAL’s fleet as of December 31, 2019 consists of:

Owned:

Airbus 320-200 5

Bombardier DHC 8-400 3

Bombardier DHC 8-300 4

Under Lease:

Boeing 777-300ER 10

Airbus 350-900 16

Airbus 330-300 15

Airbus 321-231 24

Airbus 321-271N 6

Airbus 321-271NX 1

Airbus 320-200 13

Bombardier DHC 8-400 NG 10

Total 97

There are six (6) A321-231 aircraft, thirteen (13) A320-200 aircraft, four (4) Bombardier DHC 8-300,

and thirteen (13) DHC 8-400 aircraft that are leased/subleased to PAL Express with lease terms ranging

from 36 to 144 months.

PAL owns land and buildings located at various domestic and foreign stations.

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A. Domestic Properties

1. Bacoor, Cavite 126 sq.m. (house and lot) and 212 sq.m. (parcel of land)

2. Maasin, Iloilo City 3,310 sq.m. and 9,504 sq.m. (parcels of land)

3. Somerset Millennium Makati City 39 sq.m. (condominium unit)

4. Malate 266.40 sq.m.(lot)

5. Ozamiz City 10,000 sq.m. (parcel of land)

6. Quezon City 627.1 sq.m. (parcel of land)

7. Bacolod City 200,042 sq.m. (parcel of land)

8. Mandurriao, Iloilo City 1,300 sq.m. and 1,700 sq.m. (parcels of land)

9. Paranaque City 375 sq.m. (parcel of land)

10. Lapu-Lapu City, Cebu 4,114 sq.m. (parcel of land with building)

11. Boracay, Aklan 17,470 sq.m.,1,412 sq.m., 115,611 sq. m., 6,238 sq.m., 5,166 sq.m., 23,312 sq.m. and 4,518 sq.m. (parcels of land) *

12. Carmona, Cavite 328 sq.m., 341 sq.m., 357 sq.m. and 433 sq.m. (parcels of land) *

*Transferring of title still in process

B. Foreign Properties

1. Hongkong 977 sq.ft. and 3,701 sq.ft. (condominium units)

2. San Mateo, Daly City, California 1,760 sq.m. and 1,193 sq.m. (condominium units)

3. Singapore 85 sq.m., 126 sq.m., and 68 sq.m. (office units)

4, Singapore 65 sq.m. (shop unit)

5. Sydney, Australia 177 sq.m. and 229 sq.m. (office units)

In addition, PAL owns cargo buildings located at the following domestic stations:

1. Zamboanga 300 sq.m.

2. Cebu 1,215 sq.m.

3. Puerto Princesa 192 sq.m.

4. Butuan 192 sq.m.

5. Kalibo 192 sq.m.

6. Legazpi 192 sq.m.

PAL’s existing ground facilities service the Airline’s own requirements. These major ground facilities

as of December 31, 2019 are as follows:

The PAL Learning Center (PLC) in Ermita, Manila is a training facility that aims to consistently

provide world-class training to every employee regardless of area of specialization, reinforce the culture

of service, and develop every employee into a total PAL professional committed to the Airline’s

corporate values.

The facility serves as the home for the Airline’s Human Capital's Training & Development Sub-

Department, with the Airline’s training units, namely: Commercial Training & Development Division,

Management & People Development Division, and Training Administration & Logistics Division.

The PLC boasts of new and modern training equipment and facilities such as cabin safety simulator; a

grooming room, a speech laboratory for personality development; and five (5) computer training rooms.

Support facilities include an auditorium/projection room, canteen and a medical clinic. The PLC

building with a total floor area of 6,787.56 sq.m. is leased from the Tan Yan Kee Foundation.

The PAL Inflight Center (IFC) along MIAA Road corner Baltao St., Pasay houses PAL’s inflight

kitchen which is capable of producing more than 4.06 million meals annually to service PAL’s catering

requirements. PAL’s inflight catering requirements are provided by MACROASIA SATS Inflight

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Services Corps., for all domestic flights and outgoing flights ex- Manila.

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 the buildings are

leased from the Manila International Airport Authority (MIAA).

The modern NAIA Centennial Terminal 2 in Pasay is where the Airline’s international flight with

domestic connectivity as well as domestic flight with international connectivity is housed in one

terminal. This gives PAL a genuine hub for its operations where passengers from domestic flights can

connect seamlessly unto international flights and vice versa. The terminal boasts of complete facilities

for PAL’s passenger’ 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. In April 2014

the domestic operations expanded to NAIA Terminal 3 due to the volume of domestic flights. Due to

the continuous growth in passenger traffic, NAIA Terminal 1 is being used for flights departing from

San Francisco and Los Angeles and flights departing and arriving from Middle East.

It is also the home of the Airport Operation Department and other support offices, i.e., Fleet Control

Center, Fuels, Ticket Office, Treasury and Medical office. The areas are leased from MIAA.

The PAL Cargo Terminal (PCT) near NAIA 1 in Pasay which houses PAL’s domestic and

international cargo operations and sales offices at the NAIA measures 5,727.55 sq.m. (warehouse) and

1,050.88 sq.m. (office space). The land on which it stands is leased from the MIAA.

PAL’s Data Center Building (DCB) along Airport Road, Pasay is the center of applications

development and support. It is where 180 technical staff are located managing the equipment, business

analysis and developer for providing application support. It also houses the oversight group for the

passenger services system. The DCB, comprising 3,588.35 sq.m. open area and 3,806.69 sq.m. covered

area is likewise leased from the MIAA.

Other major ground facilities include a Maintenance Base Complex (MBC) in Nichols, Pasay City. It

is composed of the North and South sectors which refer to the areas north and south of Andrews Avenue,

respectively. It covers an area of 104,531.87 sq.m. (open) and 1,768.01 sq.m. (covered) leased from

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. MBC-NORTH SIDE: PAL GATE 5 - PAL Operations

Accounting, PALEX Accounting; Corporate Logistics & Services, Corporate Logistics & Services

(General Materials & Inflight Purchasing Sub-Department,/Aircraft Operations Support Sub-

Department/Warehouse Management Sub-Department/Ground Handling & Inflight Contracts

Management); Medical (Medical/Flight Surgeon/Dental/Medical Laboratory); PAL Dependents

Medical Plan; Sports Center (Employees Welfare & Communications/Basketball Courts/Tennis Court);

Inflight Training Services Division Training Facility; PAL GATE 3 Area–Warehousing Compound –

Construction & Facilities Management Sub-Dept. (Construction Engineering Division and Facilities

Management Division); General Materials Warehousing Division; Material Sales Management

Division; COMAT Handling Division; Aviation School (Flying School); Inflight Services Training

Division (Cabin Services/Door Training Room); Redbird Flight Simulator; K9 Facility; Records

Warehouses (Financial Services Warehouse/Treasury Records Warehouse/AED-TPR Warehouse);

PAL GATE 4 Area – ISD/Technology Infrastructure Management (Network Management/Desktop

Management); PATC/Ground/Flight Training; Integrated Operations Control Center (Cabin Crew

Scheduling/Flight Dispatch/PALEX IOCC); MBC SOUTH SIDE: PAL GATE 1 – Flight Operations

Building (SVP-Airline Operations/VP-Flight Operations/Planning, Research Evaluation & Flight and

Fuel Analysis//Flight Technical Division/Flight Operations Sub- Department-B747/A340/A320/ Office

of the Chairman); Security Department (Pass Control/Briefing Room); Pilot Lounge-Flight Operations

Dept.; Flight Simulator Building-PAL Aviation Training Center (OAVP-PAL Aviation Training

Center/Flight Training Division/Ground Training Division/Flight Simulator – B320/B321); Aircraft

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Engineering Department (Technical Representatives/Technical Publication Records); Aircraft Assets

Management; Quality Department; Safety Department; Employee Benefits Services-HCD; Funds

Management & Cash Operations (Cashier)/PALEX Central Flight Dispatch; Fuel Management

Department; Aircraft Material Warehouse; PAL GATE 2 – Security Department (OVP); MBC Canteen;

PAL Foundation; Ground Equipment - ULD Maintenance Sub-Department.

PAL entered into a lease agreement with PAGCOR in August 2014 for 10 hectares of land situated at

Aviation Support Industrial Area 2 formerly Nayong Pilipino Pasay City for PAL’s aircraft parking

facility. This is in addition to the 8.1 hectares of land leased by PAL from MIAA in the same area and

for the same purpose.

PAL’s head office is located at the PNB Financial Center along President Macapagal Avenue, Pasay

City. It houses the Executive Offices, Commercial Group, Finance Group, Legal, Corporate Secretary’s

Office, Human Capital Department, Corporate Audit, Corporate Communications, Government

Relations, Domestic and International Ticket Offices, Reservation – Fulfillment Center, Office of the

Country Manager, Metro Manila/Luzon Sales and Services, Passenger Sales Philippines, Ancillary

Business Office, Corporate Planning and Business Development Office, PAL Foundation Inc., PAL

Holdings Inc., Office of the President and Office of the Chairman and Security Office. The total area

being leased from the Philippine National Bank is 17,349.31 square meters.

Item 3. Legal Proceedings

PAL

PAL is a defendant in a case entitled Transpacific Air Transportation Antitrust Litigation, a putative

class action also for possible violation of U.S. Anti-trust laws brought before the U.S. District Court for

the Northern District of California against air carriers operating passenger air services to and from the

U.S. From the time PAL was impleaded as defendant in this case in 2009, the Court has granted motions

filed and defended by the defendant airlines which effectively narrowed the claims of the plaintiffs. On

January 3, 2017, PAL and the plaintiffs signed a Settlement Agreement to resolve all claims in the

action. On October 11, 2018, the Court approved the Settlement Agreement and as a result, the case has

been finally dismissed with prejudice the case against PAL.

PAL is a petitioner in various cases pending before the Court of Tax Appeals (CTA) for the refund of

excise taxes paid by PAL under protest in connection with its importation of commissary items used for

operation in the amount of P=170.39 million. Up to date, the Supreme Court (SC) has affirmed a grant of

tax refund in a total amount of P=36.35 million. There is also a grant of refund in favor of PAL in the

amount of additional P=4.57 million which is subject for motion for reconsideration filed by the

Commissioner of Internal Revenue and Collector of Customs with the SC. All other cases are ongoing

with the CTA and the Court of Appeals (CA).

Aside from the importation of commissary items, PAL is also seeking refund of excise taxes paid under

protest on its importation of aviation fuel. PAL filed various cases with the CTA in the aggregate amount

of P=3.56 million and hearings are now ongoing with the CTA. As of this writing, the SC has affirmed a

grant of tax refund for aviation fuel in a total amount of P=2.96 million. The CTA has likewise granted

PAL a refund in a total amount of P=1.60 billion, which is now currently on appeal with the CTA En

Banc.

In line with its claims for refund of the foregoing taxes on fuel importation for its domestic operations,

PAL has likewise filed for the Declaration of Nullity of a 2002 Department of Energy (DOE)

Certification, a one-liner summation stating “there is locally available jet fuel in reasonable quantity,

quality and price”, thereby effectively overriding PAL’s exemption under its charter which states that

tax exemption is enjoyed by PAL if there is no locally available aviation fuel in “reasonable quantity,

quality or price.” On July 12, 2010, PAL obtained a Preliminary Injunction issued by the Regional Trial

Court (RTC) against the Department of Finance (DOF) and DOE, enjoining the latter from

implementing the 2002 DOE Certification. On February 27, 2014, PAL obtained a decision from the

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RTC declaring the aforementioned 2002 DOE certification as null and void and further declaring

permanent the preliminary injunction previously issued. In a Decision dated January 27, 2017, the CA

denied the appeal of DOF and DOE and affirmed the decision of the RTC. As of date, DOF and DOE

has not availed of any remedy available under the Rules.

Other than the foregoing refund cases for the excise taxes paid on PAL’s importations of commissary

items and aviation fuel, PAL has likewise been granted by the SC a total amount of P=2.70 million for

refund of other taxes, such as 5% withholding tax made by OWWA, 10% overseas Communication Tax

made by PLDT, 20% and 7 ½% final tax withheld by depositary banks on PAL’s interest income, and

20% final withholding tax on PAL’s bank deposits.

PAL is also a petitioner in a case filed with the Commission on Audit for money claim against Manila

International Airport Authority (MIAA) where PAL requested for the refund of a total amount of

P=2.09 billion representing the overpayment of rentals made by PAL to MIAA from June 1999 up until

October 2016. The basis of this case is the nullification of MIAA’s Resolution Nos. 98-30 and 99-11

which unilaterally increased the airport rental rates and MIAA’s approval of PAL’s claim as shown in

its Board Resolution No. 2010-026.

Except for the foregoing, PAL or any of its subsidiaries or affiliates is not involved in, nor any of its

properties the subject, of any legal proceeding and has no knowledge of any contemplated proceeding

by any government authority involving an amount exceeding P=4.98 billion (10% of its total current

assets) for the year ended December 31, 2019.

APC

APC has on-going claims for refund filed with the CTA pertaining to excise taxes paid on the

importation of Jet A-1 aviation fuel used for its domestic operations in the amount of P=707.9 million.

Up to date, the CTA in division has granted the refund. However, the Commissioner of Internal Revenue

and the Commissioner of Customs assailed this decision which is now pending with the SC and CTA

En Banc.

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the fourth quarter of the calendar

year ended December 31, 2019.

PART II - OPERATIONAL AND FINANCIAL INFORMATION

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

A. Market Price of and Dividends on Registrant’s Common Equity and Related Stockholder Matters

1. Market Information

The market for the registrant’s common equity is the Philippine Stock Exchange. The high, low

and closing prices for each quarter for the past three years are as follows:

HIGH LOW CLOSE

Php Php Php

2020

First Quarter 7.98 5.00 6.60

2019

Fourth Quarter 10.50 7.10 7.85

Third Quarter 9.49 7.99 8.24

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HIGH LOW CLOSE

Php Php Php

2019

Second Quarter 10.70 9.00 9.18


2018





2017





As of May 18, 2020, the latest practicable trading date, the Company’s shares were traded at

P6.98 per share.

2. Holders

The number of shareholders of record as of December 31, 2019 is 6,456 and common shares

outstanding as of the same date were 11,610,978,242. The Company has no preferred shares.

The top 20 stockholders as of December 31, 2019 are as follows:

Stockholders’ Name No. of Shares Held % to Total

1 Trustmark Holdings Corporation 8,930,733,170.00 76.9161%

2 ANA Holdings, Inc. 1,103,042,933.00 9.5000%

3 Top Direct Investments Ltd. 1 460,507,500.00 3.9661%

4 Cosmic Holdings Corporation 378,206,590.00 3.2573%

5 Fast Accurate Investments Ltd. 206,842,500.00 1.7814%

6 City Trade Investments Ltd. 176,400,000.00 1.5192%

7 Corporate Supreme Ltd. 171,000,000.00 1.4727%

8 PCD Nominee Corporation (Filipino) 59,239,637.00 0.5102%

9 One Corporate Grand Tours Inc. 2 36,000,000.00 0.3101%

10 Principal Grand Tours International Inc. 2 36,000,000.00 0.3101%

11 Pan-Asia Securities Corp. 16,058,709.00 0.1383%

12 Government of the Republic of the

Philippines

9,450,000.00 0.0814%

13 Land Bank of the Philippines 6,750,000.00 0.0581%

14 Wonderoad Corporation 4,613,255.00 0.0397%

15 AFP Retirement and Separation Benefits

System

2,981,797.00 0.0257%

16 AAA Strategic Investment Ltd. 1,581,817.00 0.0136%

17 PCD Nominee Corporation (Non-Filipino) 846,132.00 0.0073%

18 William Lee 314,172.00 0.0027%

19 Commercial Investment Co. Ltd. 229,708.00 0.0020%

20 Luisita P. Bothelho 181,124.00 0.0016%

1 Subscription rights were assigned to Videlo Holdings, Inc. (VHI) on October 23, 2014. The application for

clearance to register the subscription rights under the name of VHI is still pending approval with the BIR.

2 Subscription rights were assigned to Emelar Holdco, Inc. (EHI) on October 23, 2014. The application for

clearance to register the subscription rights under the name of EHI is still pending approval with the BIR.

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3. Dividends

a. The Company did not declare any cash dividends during the past 3 years. The Board of

Directors may declare dividends only from the surplus profits arising from the business of

the Company and in accordance with the preferences constituted in favor of preferred stock

when and if such preferred stock be issued and outstanding.

b. There are no other restrictions that limit the ability to pay dividends on common equity or

that are likely to do so in the future.

4. Recent Sales of Unregistered or Exempt Securities, Including Recent Issuance of Securities

Constituting an Exempt Transaction (for the past 3 years).

There was no recorded sale of unregistered securities during the past 3 years.

Item 6. Management’s Discussion and Analysis (MDA)

Restatement to Philippine Peso

In line with the adoption of PAS 21, The Effects of Changes in Foreign Currency Rates, PAL determined

that its functional currency is the US Dollar. On May 20, 2005, the Philippine SEC 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 Company is in Philippine Peso, for purposes of

combination of the financial statements in accordance with PFRS 10, Consolidated Financial

Statements, there is a need for PAL and its subsidiaries to restate its financial statements to the Philippine

Peso.

Consolidation

The consolidated financial statements referred to consist of the financial statements of the Company and

its subsidiaries. The financial statements of the subsidiaries are prepared using consistent accounting

policies as those of the Company. Companies included in the consolidation are PAL and PR and ZUMA.

The Company owns 98.92% of PAL, through a direct ownership in 98.57% of PAL’s shares and an

indirect ownership in 0.35% of PAL’s shares through an 82.33% direct ownership in PR. In turn, PR

owns 0.42% of PAL. The Company acquired 51% ownership interest in ZUMA in 2017, and thereby

obtaining control over ZUMA, the holding company of APC. Subsidiaries are consolidated from the

date on which control is transferred to the Company and cease to be consolidated from the date on which

control is transferred out of the Company. All intercompany accounts and transactions with subsidiaries

are eliminated in full.

Results of Operations

2019 vs 2018

The Company reported a consolidated total comprehensive loss of P=10.20 billion for the year ended

December 31, 2019, P=7.36 billion higher than last year’s consolidated total comprehensive loss of

P=2.84 billion.

Consolidated revenues amounted to P=154.54 billion for the year ended December 31, 2019, up by

P=4.06 billion or 2.7% higher than the same period last year. This was on account of the increase in

passenger revenues by 4.2% due to additional frequencies and new routes which resulted to the growth

in passenger numbers, partly offset by lower cargo revenues by 8.2% and ancillary revenues by 5.0%.

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Consolidated expenses for the year ended December 31, 2019 decreased by P=4.80 billion or 3.1% versus

the same period in 2018. The main contributors for the decrease were flying operations and passenger

service expenses, which were partly offset by the increase in aircraft and traffic servicing expenses.

Flying operations expenses decreased by P=4.72 billion or 5.4% on account of lower jet fuel costs due to

the decrease in jet fuel price from an average of US$ 94.38 per barrel in 2018 to US$ 86.93 per barrel

in 2019. The adoption of PFRS 16, Leases in 2019 resulted to the increase in depreciation by

P=16.92 billion and reduction in lease charges by P=16.87 billion due to changes in accounting for leases.

Passenger service expenses declined by P=245.71 million or 1.9% mainly due to lower expenses in flight

amenities.

Aircraft and traffic servicing expenses increased by P=180.23 million or 0.9% mainly due to higher

landing and take-off fees.

Total other charges amounted to P=14.07 billion in 2019, up by P=12.63 billion or 873.6% from

P=1.45 billion in 2018. Financing charges increased by P=6.76 billion or 128.4% mainly due to the

adoption of PFRS 16 and additional aircraft financing. There were also more charges incurred during

the year and significantly less one-off gains compared to 2018 where it booked income from reversal of

provision for contingency for the Flight Attendants and Stewards Association of the Philippines

(FASAP) case, reassessment of the carrying values of asset restoration obligations for certain aircraft

and credit memos received from various aircraft manufacturers.

Income tax benefit of P=1.50 billion was recognized during the current period as a result of the operations

of the Group as well as the movements of deferred tax assets and liabilities on all deductible temporary

differences in accordance with PAS 12, Income Taxes.

For the year ended December 31, 2019, the Company recognized other comprehensive loss of

P=496.24 million as against the other comprehensive income of P=864.15 million in 2018. The decline

was mainly due to the changes in actuarial assumptions of retirement benefits.

2018 vs 2017

The Company’s financial performance for the year ended December 31, 2018, showed a consolidated

total comprehensive loss of P=2.84 billion or 38.3% lower as compared with the consolidated total

comprehensive loss of P=4.61 billion in 2017.

Consolidated revenues for the year ended December 31, 2018 amounted to P=150.48 billion, up by

P=20.96 billion or 16.2% over the last year’s figure of P=129.52 billion. Passenger revenues which

contributed the biggest share of 85.7% of the total revenues grew by P=17.67 billion in 2018 as a result

of the increase in the volume of passengers carried and number of flights operated. PAL operated

112,072 flights and carried 15.9 million passengers in 2018 vis a vis 103,362 flights and 14.5 million

passengers in 2017. Cargo revenues increased by 21.7% or P=1.82 billion due to volume and

improvement in yields. Ancillary revenues likewise increased by 17.0% or P=1.63 billion as a result of

the growth in volume of passengers.

Consolidated expenses increased by 18.5% from P=132.09 billion for the year ended December 31, 2017

to P=155.47 billion in the same period in 2018. The increase in expenses was attributable to higher flying

operations, aircraft and traffic servicing, maintenance and reservation and sales expenses.

The increase in flying operations expenses was attributable to fuel costs and lease charges. Fuel

consumption increased by P=14.36 billion from P=38.43 billion in 2017 to P=52.79 billion in 2018. The

increase was mainly due to the escalation in jet fuel prices from an average of US$ 75.59 per barrel in

2017 to US$ 94.38 per barrel in 2018. Lease charges also increased by P=3.91 billion due to the delivery

of additional two aircraft in December 2017 and nine aircraft in 2018.

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Growth in number of flights operated in 2018 had the effect of increasing aircraft and traffic servicing

expenses by P=1.69 billion or 9.5% on account of ground handling charges and landing and take-off fees.

Maintenance costs increased by 7.9% or P=1.53 billion from P=19.44 billion in 2017 to P=20.97 billion in

2018 as a result of additional aircraft deliveries in 2018.

Higher booking fees and volume incentives as a result of the growth in sales in 2018 increased the

reservation and sales expenses to P=10.86 billion or 12.4% higher than the P=9.67 billion in 2017.

Total other charges amounted to P=1.45 billion in 2018 versus the P=3.90 billion incurred in 2017. The

reduction in expense by P=2.45 billion was primarily due to the reversal of provision for contingency for

the Flight Attendants and Stewards Association of the Philippines (FASAP) case as a result of Supreme

Court’s final decision dated September 18, 2018 in favor of PAL.

The reassessment done on deferred tax assets and liabilities on all deductible temporary differences in

accordance with PAS 12, Income Taxes during the year 2018, resulted in the recognition of income tax

benefit of P=3.72 billion.

For the year ended December 31, 2018, the Company recognized other comprehensive income of

P=864.15 million which was attributable mainly to the changes in actuarial assumptions primarily due to

the increase in discount rates. This was lower than last year’s other comprehensive income of

P=1.86 billion which was recognized as a result of the increase in market value of the Company’s quoted

investments.

Financial Condition

2019

The Company’s consolidated total assets as of December 31, 2019 amounted to P=317.83 billion, 59.6%

higher than the December 31, 2018 balance of P=199.20 billion. The significant increase was brought

about by the adoption of PFRS 16, Leases, effective January 1, 2019 as discussed in Note 3 of the Notes

to the Consolidated Financial Statements.

The increase in total current assets by P=8.13 billion or 20.5% from P=39.68 billion as of

December 31, 2018 to P=47.81 billion as of December 31, 2019 was primarily due to improved cash

levels which increased by 116.3%. Expendable parts, fuel, materials and supplies account increased by

5.4% driven by the build-up of flight equipment expendable parts. Likewise, assets held for sale

increased by 131.9% due to reclassification of two aircraft. Other current assets declined by 20.7%

mainly due to lower derivative assets and deposits and prepayments.

The increase in total noncurrent assets by P=110.50 billion or 69.3% was mainly due to the recognition

of right-of-use assets under property and equipment-at cost which increased by 84.1% due to the

adoption of PFRS 16. Deferred income tax assets increased by 52.0% or P=1.72 billion. Other noncurrent

assets likewise increased by 5.4% due to higher security deposits.

Consolidated total liabilities increased by 66.0% from P=188.51 billion as of December 31, 2018 to

P=312.93 billion as of December 31, 2019. This was on account of the increase in total current liabilities

by 8.8% from P=94.29 billion as of December 31, 2018 to P=102.59 billion as of December 31,2019 and

increase in total noncurrent liabilities of 123.2% from P=94.22 billion to P=210.34 billion.

Current liabilities increased by 8.8% primarily due to the increase in current portion of long-term

obligations and accrued expenses and other current liabilities, partly offset by the decrease in notes

payable and accounts payable. The increase in current portion of long-term obligations by P=9.57 billion

or 47.5% was due to the recognition of lease liabilities for right-of-use assets under PFRS 16. Accrued

expenses and other current liabilities went up by P=2.11 billion or 10.1% on account of higher

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maintenance and repair costs. Notes payable and accounts payable decreased as there were payments

made during the year.

Noncurrent liabilities grew by 123.2% as a result of the adoption of PFRS 16. The recognition of lease

liabilities for right-of-use assets increased the long-term obligations by P=101.34 billion or 129.3%.

Accrued employee benefits increased by 21.2% due to additional provision for retirement. Reserves and

other noncurrent liabilities increased by 21.3% mainly due to deferred revenue under frequent flyer

program.

In 2019, PAL received cash as deposits for future stock subscription from its shareholders totaling

₱11.41 billion with the intention to convert to equity upon approval by the SEC of PAL’s application

for the increase in authorized capital stock. As of December 31, 2019, the cash deposits are presented

as deposit from non-controlling interest of a subsidiary under noncurrent liabilities.

Consolidated total equity balance as of December 31, 2019 amounted to P=4.90 billion, down by 54.2%

from the December 31, 2018 balance of P=10.69 billion. This was on account of the increase in deficit

brought about by the reported net loss during the year and other comprehensive loss resulting from

remeasurement losses on defined benefits plans. Non-controlling interests increased by 183.5% due to

PAL’s disposal of partial interest in a subsidiary.

2018

As of December 31, 2018, the Company’s consolidated total assets amounted to P=199.20 billion or

P=19.24 billion higher than December 31, 2017 balance of P=179.96 billion. The increase was on account

of the upward movement in total current assets and noncurrent assets.

Total current assets grew by P=3.83 billion or 10.7% from P=35.86 billion as of December 31, 2017. This

was due to the increase in other current assets, receivables, and expendable parts, fuel, materials and

supplies offset in part by the decrease in cash and cash equivalents.

Cash and cash equivalents decreased by P=3.09 billion or 30.7% as compared to the previous year’s

balance of P=10.07 billion due to settlement of loans due in 2018.

Receivables went up by P=2.00 billion or 11.3% mainly from non-trade receivables.

Expendable parts, fuels materials and supplies grew by 39.1% or P=1.37 billion due to increase in flight

equipment expendable parts and fuel inventory.

Other current assets increased by P=3.60 billion versus the December 31, 2017 balance of P=3.75 billion

mainly attributed to the effect of remeasurement of outstanding fuel deals to fair value.

Assets held for sale was reduced by 5.3% due to sale of some aircraft.

Total noncurrent assets increased by P=15.42 billion or 10.7% higher than the December 31, 2017 balance

of P=144.10 billion. This was mainly due to the increase in property and equipment-at cost, other

noncurrent assets and deferred income tax assets-net.

Property and equipment-at cost grew to P=128.40 billion as of December 31, 2018, P=7.09 billion higher

than last year’s balance of P=121.31 billion, mainly due to acquisition of A321NEO aircraft offset by

return of pre-delivery payments made for delivered aircraft.

Deferred income tax assets-net increased to P=3.31 billion as of December 31, 2018 due to recognition

of net operating loss carry over.

Other noncurrent assets as of December 31, 2018 amounted to P=22.77 billion, up by P=5.52 billion from

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the previous year’s balance of P=17.25 billion, mainly attributed to the effect of remeasurement of

outstanding fuel deals to fair value and security deposits for aircraft deliveries.

Total liabilities increased to P=188.51 billion versus the December 31, 2017 balance of P=165.98 billion

as a result of the increase in current liabilities by 12.0% or P=10.13 billion and increase in noncurrent

liabilities by 15.2% or P=12.40 billion.

The 12.0% increase in current liabilities was mainly driven by the increase in accrued expenses by

P=5.90 billion or 39.3% due to the effect of remeasurement of outstanding fuel deals to fair value and

maintenance repair costs. Accounts payable likewise increased by P=5.28 billion or 46.3% on account of

maintenance, ground handling charges, and landing and take-off fees. Notes payable grew by

P=2.61 billion or 14.7% due to availments of short-term loans. These were offset in part by the decrease

in current portion of long-term obligations by P=3.41 billion or 14.5% due to settlement made.

The increase in noncurrent liabilities by 15.2% or P=12.40 billion from P=81.82 billion as of

December 31, 2017 to P=94.22 billion as of December 31, 3018 was mainly due to long term obligations

which increased by P=11.65 billion or 17.5% as a result of the delivery of six A321NEO aircraft under

finance lease. Reserves and other noncurrent liabilities grew by P=610.07 million or 12.5% due to the

effect of remeasurement of outstanding fuel deals to fair value.

The Company’s consolidated total equity was down by 23.5% from P=13.98 billion as of

December 31, 2017 to P=10.69 billion as of December 31, 2018. The decline was brought about mainly

by the total comprehensive loss for the year ended December 31, 2018. Additional paid-in capital (APIC)

decreased by P=25.34 billion as the SEC approved the Company’s equity restructuring to partially wipe

out the Company’s deficit using its APIC. Other equity reserves of P=1.36 billion was recognized as a

result of the change in ownership interest of PAL in Fortunate Star Limited (FSL) in 2018.

TOP FIVE KEY PERFORMANCE INDICATORS OF PAL

Mission Statement

Key Performance Indicator Measurement Methodology

To maintain aircraft with the

highest degree of airworthiness,

reliability and presentability in the

most cost and effective manner

Aircraft Maintenance Check

Completion

Number of checks performed

less number of maintenance

delays over number of checks

performed

To conduct and maintain safe,

reliable, cost and effective flight

operations

Number of aircraft related

accidents/incidents

By occurrence and

monitoring by Flight

Operations Safety Office

To achieve On-Time Performance

on all flights operated

Percentage Deviation from

Industry Standards (OTP

Participation)

Number of flights operated

less number of flights delayed

over total flights operated

To provide safe, on time, quality

and cost effective inflight service

for total passenger satisfaction

Number of safety violations

incurred by cabin crew

Number of incidents of safety

violation incurred by cabin

crew per month

To maximize revenue generation

in passenger and cargo sales

through increased yields by

diversifying market segments and

efficient management of seat

inventory and cargo space

Net Revenues generated from

passengers and cargoes carried

Percentage Deviation from

Budget/Forecasted Revenues

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In addition to the Qualitative Key Performance Indicators of PAL, the following comprise its

Quantitative Financial Ratios:

2019 2018

Profitability Factors:

1. Return on Total Assets

Net Income/Average Total Assets

(3.96%)

(2.25%)

2. Percentage of Operating Income

Operating Income/Total Revenues

1.57%

(4.16%)

Asset Management:

3. Receivable Turnover

Net Sales/Average Trade Receivables

23.95

24.44

4. Number of Days Sales in Receivables

(General Traffic)

Number of Days/Receivable Turnover

15.06

14.81

Financial Leverage:

5. Interest Coverage Ratio

Earnings Before Interest & Taxes/Interest Charges

0.02

(0.52)

Other than those that have already been disclosed, there are no known trends, demands, commitments,

events or uncertainties that may have a material impact on the Group’s liquidity.

i. Other legal proceedings

• On July 22, 2008, the SC rendered an adverse decision in the case entitled “Flight Attendants and

Stewards Association of the Philippines (FASAP) vs. the Philippine Airlines” ordering PAL to

reinstate the retrenched FASAP members and pay back wages inclusive of allowances and other

monetary benefits plus 10% attorney’s fees. PAL filed a Motion for Reconsideration. On

October 2, 2009, the Motion for Reconsideration was denied with finality and affirmed the

July 22, 2008 decision with modification in that the award of attorney’s fees and expenses of

litigation is reduced to P=2.0 million. On November 3, 2009, PAL filed a Second Motion for

Reconsideration. On September 7, 2011, the SC issued a resolution denying with finality PAL’s

Second Motion for Reconsideration.

In a subsequent turnaround, the SC, on October 4, 2011, issued another resolution recalling the

September 7, 2011 resolution which denied the Second Motion for Reconsideration due to

procedural lapses in arriving at the September 7, 2011 Resolution. The SC en banc thus accepted

and took cognizance of PAL’s Second Motion for Reconsideration and the case was re-raffled to a

new Member-in Charge.

FASAP filed a Motion for Reconsideration of the October 4, 2011 resolution of the SC en banc. In

30

a resolution dated March 13, 2012, the SC denied FASAP’s Motion for Reconsideration and

affirmed the recall of the September 7, 2011 resolution. FASAP filed Motion for Leave to Admit

the Motion for Reconsideration dated April 4, 2012, which was granted by the SC in a resolution

dated April 24, 2012.

On March 13, 2018, the SC en banc finally promulgated a decision on PAL’s Second Motion for

Reconsideration and FASAP’s Motion for Reconsideration. Affirming the decision of the Court of

Appeals dated August 23, 2006, the SC en banc confirmed the validity of the retrenchment in 1998

due to very serious business losses. The SC emphasized that retrenchment or downsizing is a mode

of terminating employment resorted to by management during periods of business recession,

industrial depression or seasonal fluctuations or during lulls over shortage of materials. It is a

reduction in manpower, a measure utilized by an employer to minimize business losses incurred in

the operation of its business. The SC noted that PAL was then in dire financial distress. In fact, the

SC recognized that PAL underwent corporate rehabilitation sufficiently indicates its fragile

financial condition. After having been placed under corporate rehabilitation and its rehabilitation

plan having been approved by the Philippine SEC on June 23, 2008, PAL's dire financial

predicament could not be doubted.

The SC went on to say that even FASAP admitted the financial situation of PAL then questioning

only the manner and lack of standard in carrying out the retrenchment. The SC, however, explained

that PAL observed good faith in implementing the retrenchment. As the SC puts it, as between

maintaining the number of its flight crew and the PAL’s survival, it was reasonable for PAL to

choose the latter alternative. The SC said that it cannot legitimately force PAL as a distressed

employer to maintain its manpower despite its dire financial condition. Moreover, the SC pointed

out that being under a rehabilitation program, PAL had no choice but to implement the measures

contained in the program, which included that of reducing its manpower.

Corollary, the SC affirmed that PAL resorted to both efficiency rating and inverse seniority in

selecting the employees to be subject of termination. It was ruled that there is no indication that

provisions of the Collective Bargaining Agreement have been grossly disregarded as to taint the

retrenchment with illegality. PAL relied on specific categories of criteria, such as merit awards,

physical appearance, attendance and check rides, to guide its selection of employees to be

removed. The SC did not find anything legally objectionable in the adoption of these

norms. Finally, the SC affirmed the validity of the quitclaims signed by the employees.

Thus, the dispositive portion of the March 13, 2018 ruling of the SC reads as follows:

“WHEREFORE, the Court:

(a) GRANTS the Motion for Reconsideration of the Resolution of October 2, 2009 and

Second Motion for Reconsideration of the Decision of July 22, 2008 filed by the

respondents Philippine Airlines, Inc. and Patria Chiong;

(b) DENIES the Motion for Reconsideration (Re: The Honorable Court's Resolution dated

March 13, 2012) filed by the petitioner Flight Attendants and Stewards Association of the

Philippines;

(c) SETS ASIDE the decision dated July 22, 2008 and resolution dated October 2, 2009;

and

(d) AFFIRMS the decision of the Court of Appeals dated August 23, 2006.”

• On September 9, 2010 FASAP filed a Notice of Strike for alleged Unfair Labor Practice on the

grounds of PAL’s refusal to submit counter proposal and/or conclude the remaining term of

2005-2010 CBA, address age and gender discrimination, salary increase and rice subsidy. Attempts

by the National Conciliation and Mediation Board (NCMB) to amicably settle the labor dispute

failed. Thus, on October 6, 2010 the DOLE Secretary assumed jurisdiction over the labor dispute

and directed the parties to submit their respective position papers and other pleadings.

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On December 23, 2010, the Department of Labor & Employment (DOLE) issued a Decision in

favor of FASAP granting salary increase and monthly rice allowance for the period July 16, 2007

to July 15, 2010 and higher compulsory retirement from 45 to 60 years old. On April 1, 2011 DOLE

Secretary issued a Decision on the PAL’s Motion for Partial Reconsideration and Motion for

Clarification. The DOLE Secretary affirmed with modification the December 23, 2010 DOLE

Decision in that the award of monthly rice allowance for the first year of the CBA effective

July 16, 2007 was reduced from P=1,800 to P=1,500. PAL was also directed to reinstate 9 flight

pursers who were retired at age 55 during the pendency of the case and to pay them full back wages

and benefits. The 9 flight pursers who were retired at age 55 were reinstated and those active cabin

attendants due for retirement at age 55 were allowed to continue until age 60 without prejudice to

further or other legal action on the issue. On May 17, 2011, PAL elevated the case to the CA via

a Petition for Certiorari with prayer for issuance of a Temporary Restraining Order and Preliminary

Mandatory Injunction. On June 18, 2013, the CA rendered a Decision which partly granted the

Petition insofar as the salary increase and the compulsory age retirement are concerned. FASAP

filed a Motion for Reconsideration against which PAL filed its Comment. FASAP filed its Reply.

On May 29, 2014, the CA denied FASAP’s Motion for Reconsideration. FASAP filed a Petition

for Review with the SC. The group of purser Pauline Gopez filed a Petition for Intervention. PAL

filed its Comment to the Petition. The Commission on Human Rights filed a Motion for Leave of

Court to file Petition for Intervention dated January 26, 2015.

On March 20, 2018, PAL received a copy of the Supreme Court’s resolution dated January 2, 2018

where the High Court resolved to:

NOTE and DEEM AS SERVED by substituted service the returned and unserved copy of the

Resolution dated 25 April 2017 sent to Ms. Veronica G. Han; and

REQUIRE the parties to MOVE IN THE PREMISES within 30 days from notice otherwise, the

case shall be deemed CLOSED and TERMINATED."

Per En Banc Resolution dated September 18, 2018, [G.R. No. 178083 (Flight Attendants and

Stewards Association of the Philippines vs. Philippine Airlines, Inc., et al.) and A.M. No. 11-10-1-

SC (Re: Letters of Atty. Estelito P. Mendoza)] the SC resolved to note the following:

“(a) Manifestation dated August 20, 2018 filed by counsel for respondents Philippine Airlines,

Inc. and Patricia Chiong, manifesting that the resolution dated June 05, 2018 was sent to

counsel's old address at 4th floor, Dynavision Building, 108 Rada Street, Legaspi Village,

Makati City, and that he only received the same by registered mail on August 20, 2018, hence,

his comment would be due on August 30, 2018; and

(b) Aforesaid 'Comment of Respondents Philippine Airlines, Inc. and Patricia Chiong as

Required by the Court's Resolution of June 05, 2018,' dated August 30, 2018.

Acting on the Motion for Reconsideration (Re: Resolution dated March 13, 2018) and Second

Motion for Reconsideration (Re: Resolutions dated October 4, 2011 and March 13, 2012), dated

April 10, 2018 filed by counsel for Flight Attendants and Stewards Association of the Philippines,

the Court resolved to DENY WITH FINALITY the said motions for reconsideration as the basic

issues raised therein have been passed upon by this Court and no substantial arguments were

presented to warrant the reversal of the questioned resolutions x x x” PAL is awaiting issuance of

Entry of Judgment.

Currently, there are other ongoing legal proceedings involving PAL (refer to Item 3. Legal

Proceedings on page 22). Other than this, 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.

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ii. There are no known material off-balance sheet transactions, arrangements, obligations (including

contingent obligations), and other relationships of the Company with unconsolidated entities or

other persons created during the reporting period.

iii. Commitments for capital expenditures

As of December 31, 2019, the remaining aircraft that are for delivery in the future include:

(i) fourteen (14) Airbus 321-231 NEO with two scheduled for delivery in February and October

2020 and the remaining twelve (12) aircraft to be delivered between 2021 and 2024 and (ii) two (2)

DHC 8-400 (Q400 NextGen) aircraft in January 2020.

iv. There are no known trends, events or uncertainties that have had or that are reasonably expected to

have material favorable or unfavorable impact on net sales or revenues or income from continuing

operations.

v. There are no significant 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:

Results of our Horizontal (H) and Vertical (V) analyses showed the following material changes as

of and for the years ended December 31, 2019 and 2018:

1. Cash and cash equivalents- H- 116.3%

2. Expendable parts, fuel, materials and supplies- H- 5.4%

3. Other current assets- H- (20.7%)

4. Assets held for sale- H- 131.9%

5. Property and equipment-at cost- H- 84.1%; V-9.9%

6. Investment properties- H- (8.1%)

7. Deferred income tax assets- H- 52.0%

8. Other noncurrent assets- H- 5.4%

9. Notes payable- H- (9.4%)

10. Accounts payable- H- (9.2%)

11. Accrued expenses and other current liabilities- H- 10.1%

12. Current portion of long-term obligations- H- 47.5%

13. Long-term obligations-net of current portion- H- 129.3%; V- 17.2%

14. Accrued employee benefits- H- 21.2%

15. Reserves and other noncurrent liabilities- H- 21.3%

16. Deposits from non-controlling interest of a subsidiary- H- 100%

17. Other components of equity- H- (30.5%)

18. Deficit- H- 147.3%

19. Non-controlling interests - H- 183.5%

20. Cargo- H- (8.2%)

21. Ancillary- H- (5.0%)

22. Other revenue- H- 85.1%

23. Flying operations- H- (5.4%)

24. Financing charges- H- 128.4%

25. Other charges-net – H- 153.4%

26. Income tax benefit - H- (59.8%)

27. Net loss - H- 161.7%

28. Total other comprehensive loss- H- 157.4%

29. Total comprehensive loss - H- 258.7%

The causes for these material changes are explained in the management’s discussion and analysis

of results of operations and financial condition stated above.

33

vii. PAL experiences a peak in holiday travel during the months of January, April, May, June and

December.

Information on Independent Accountant and other Related Matters

(1) External Audit Fees and Services

a. Audit and Audit-Related Fees

The audit of the Company’s annual financial statements or services is normally provided by the

external auditor in connection with statutory and regulatory filings or engagements for 2019.

Year Ended Fees

December 31, 2019 P=475,000 audit fee plus out-of pocket expenses

December 31, 2018 P=475,000 audit fee and P=46,875 out-of pocket expenses

b. Tax Fees

The Company made no payments to its external auditors in tax fees.

c. All Other Fees

The Company incurred P=1.0 million in 2019 for consultancy services engagement to its external

auditors.

d. The Audit Committee’s approval policies and procedures for the above services:

Upon recommendation and approval of the Audit Committee, the appointment of the external

auditor is being confirmed in the Annual Stockholders’ Meeting. On the other hand, financial

statements should be approved by the Board of Directors before its release.

Item 7. Financial Statements

See accompanying Index to Consolidated Financial Statements and Supplementary Schedules.

Item 8. Changes in and Disagreements with Accountants on Accounting and Financial

Disclosure

There are no changes in, and disagreements with the Company’s accountants on any accounting and

financial disclosure during the past two years ended December 31, 2019 or during any subsequent

interim period.

PART III - CONTROL AND COMPENSATION INFORMATION

Item 9. Directors and Executive Officers of the Registrant

1. Directors and Executive Officers

At present, the Company has nine (9) directors. Hereunder are the Company’s incumbent directors

and executive officers, their names, ages, citizenship, positions held, term of office as

director/officer, period served as director/officer, business experience for the past five years, and

other directorships held in other companies:

34

Name/

Position Age Citizenship

Current Affiliations and Business

Experience in the last 5 years

Term of Office

/Period Served

Lucio C. Tan/

Chairman,

President and

Chief Executive

Officer (CEO)

85 Filipino Chairman of Absolut Distillers, Inc.,

Alliedbankers Insurance Corporation,

Allianz PNB Life Insurance, Air

Philippines Corporation, Asia

Brewery, Inc., Asian Alcohol

Corporation, Basic Holdings

Corporation, Buona Sorte Holdings,

Inc., Eton Properties Philippines,

Inc., Fortune Tobacco Corporation,

Foremost Farms, Inc., Grandspan

Development Corporation, Himmel

Industries, Inc., Lucky Travel

Corporation, Mabuhay Maritime

Express Transport, Inc., MacroAsia

Corporation, Philippine Airlines,

Inc., PMFTC Inc., Progressive

Farms, Inc., LT Group, Inc.,

Tanduay Distillers, Inc., Tanduay

Brands International, Tangent

Holdings Corporation, The Charter

House, Inc., Trustmark Holdings

Corporation, University of the East,

Zuma Holdings and Management

Corporation. He is also a Director of

Philippine National Bank.

1 year/ Served as

Chairman since 30

October 2000

Carmen K. Tan/

Director

78 Filipino Vice Chairman of Philippine

Airlines, Inc. and Director of Air

Philippines Corporation, Asia

Brewery, Inc., Buona Sorte Holdings,

Inc., Foremost Farms, Inc., Dynamic

Holdings, Ltd, Eton City, Inc.,

Fortune Tobacco Corporation,

Himmel Industries, Inc., Lucky

Travel Corporation, MacroAsia

Corporation, LT Group, Inc.,

Philippine National Bank, PMFTC,

Inc., Progressive Farms, Inc.,

Tanduay Distillers, Inc.,

Manufacturing Services and Trade

Corporation, Sipalay Trading

Corporation, Saturn Holdings, Inc.,

Tangent Holdings Corporation,

Trustmark Holdings Corporation and

Zuma Holdings and Management

Corporation.

1 year/ Served as

Director since

23 October 2014

Lucio C. Tan III/

Director

27 Filipino Director, President and Chief

Operating Officer of Tanduay

Distillers, Inc., and Director of Air

Philippines Corporation, MacroAsia

Corporation, LT Group, Inc., and

Philippine Airlines, Inc.

Served as Director

since 17

December 2019

35

Name/




Term of Office

/Period Served

John G. Tan/

Director

51 Filipino Director of Tanduay Distillers, Inc.

from 2015 to 2018

Served as Director

since 17

December 2019

Joseph T. Chua/

Director

63 Filipino Chairman of J.F. Rubber Philippines,

Watergy Business Solutions, Inc.,

and Cavite Business Resources, Inc.;

Director/President and Chief

Operating Officer of MacroAsia

Corp.; Managing Director of

Goodwind Development Corporation

(Guam); Director/President of

MacroAsia Airport Services

Corporation, MacroAsia Air Taxi

Services, MacroAsia Catering

Services, Inc., MacroAsia Properties

Development Corp. and MacroAsia

Mining Corporation.

Served as Director

since 28 October

2019

Vivienne K. Tan/

Director

51 Filipino Director of LT Group, Inc.,

Philippine National Bank and

Philippine Airlines, Inc.; Member of

the Board of Trustees of University of

the East and University of the East

Ramon Magsaysay Memorial

Medical Center; Executive Vice

President of Philippine Airlines, Inc.;

Founding Chairperson of

Entrepreneurs School of Asia;

Founding Trustee of Philippines

Center for Entrepreneurship (Go

Negosyo), Phils.

Served as Director

since 04 October

2019

Ryuhei Maeda/

Director

66 Japanese

Senior Adviser of ANA Holdings

Inc.; Director of All Nippon Airways

Co., Ltd.

1 year/ served as

Director since 31

May 2019

Johnip G. Cua/

Independent

Director

62 Filipino Former President of Procter &

Gamble Philippines, Inc., currently

the Chairman of the Board of the

P&Gers Fund, Inc. and Xavier

School, Inc., and the Chairman &

President of Taibrews Corporation.

He is an Independent Director of

BDO Private Bank, PhilPlans First,

Inc., Eton Properties Philippines,

Inc., Asia Brewery, Inc., Tanduay

Distillers, Inc., MacroAsia

Corporation, MacroAsia Catering

Services, Inc., MacroAsia Airport

Services Corporation, LT Group,

Inc. and Philippine Airlines, Inc. He

is also a member of the Board of

Directors of Interbake Marketing

Corporation, Teambake Marketing

Corporation, Bakerson Corporation,

1 year/ served as

Independent

Director since 23

October 2014

36

Name/




Term of Office

/Period Served

Lartizan Corporation, Alpha

Alleanza Manufacturing, Inc., and

Allied Botanical Corporation, and a

member of the Board of Trustees of

Xavier School Educational & Trust

Fund.

Gregorio T. Yu/

Independent

Director

61 Filipino Chairman of the Board and President

of Philequity Fund, Inc., Lucky Star

Network Communications

Corporation, and Domestic Satellite

Corporation of the Philippines;

Chairman of CATS Automobile

Corp., American Motorcycles, Inc.,

and Auto Nation Group, Inc.; Vice

Chairman of Sterling Bank of Asia

Inc.; Director of ISM

Communications Corporation,

Unistar Credit and Finance

Corporation, CATS Asian Cars, Inc.,

Nexus Technologies, Inc., Jupiter

Systems, Inc., Wordtext Systems,

Inc., Prople BPO, Yehey

Corporation, National Reinsurance

Corp. of the Philippines, e-Ripple

Corporation, Philippine Bank of

Communications Inc., and WSI

Corporation; Director/ Treasurer of

CMB Partners Inc.; Independent

Director of Philippine Airlines, Inc.,

iRemit Inc., e-Business Services,

Inc., and Vantage Equities, Inc.;

Board Member of Ballet Philippines,

and Manila Symphony Orchestra.

1 year/ served as

Independent

Director since 23

October 2014

Ma. Cecilia L.

Pesayco/

Corporate

Secretary

67 Filipino Corporate Secretary of LT Group,

Inc., Asia Brewery, Inc., Air

Philippines Corporation, PNB

Savings Bank, Trustmark Holdings

Corporation, Zuma Holdings and

Management Corporation. She is

likewise the Chief Legal Counsel of

the Tan Yan Kee Foundation.

Served as

Assistant

Corporate

Secretary from 20

April 2012 to 10

February 2015

Served as

Corporate

Secretary since 11

February 2015

Susan T. Lee/

Chief Finance

Officer

49 Filipino Chief Finance Officer of Trustmark

Holdings Corporation and Zuma

Holdings and Management

Corporation; VP-Assistant Chief

Finance Officer of Tanduay

Distillers, Inc., and VP Finance for

LT Group, Inc.

Served as Chief

Finance Officer

since

11 February 2015

(*Note: Unless otherwise indicated or qualified, the term “Director” refers to a regular director of the Corporation. Corporations in bold

font style are Listed Companies.)

37

2. Significant Employees

The Company is not dependent on the services of any one key personnel. It values all of its employees

and expects them to contribute significantly to its business.

3. Family Relationships

Family relationships exist among the directors and Management of the Company in the following

instances:

The Company’s Chairman, President and Chief Executive Officer (CEO), Dr. Lucio C. Tan, married

to Mrs. Carmen K. Tan, is the father of Ms. Vivienne K. Tan and Mr. John G. Tan; the grandfather

of Mr. Lucio C. Tan, III and the father-in-law of Mr. Joseph T. Chua.

Except for the foregoing, there are no other family relationships among the board members and

Management known to the registrant.

4. Pending Legal Proceedings (last 5 years)

None of the directors nor any of the executive officers of the Company has been, for a period covering

the past five (5) years, 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 other than cases which arose out of the ordinary course of

business in which they may have been impleaded in their official capacity; 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 10. Executive Compensation

i. CEO and Top Four (4) Compensated Executive Officers

A fixed basic monthly salary is provided for the Company’s Chairman and CEO, President and

other officers of the Company and shall continue to be given in 2020. The Company has no contract

with any of its executive officers.

ii. Directors and Executive Officers

The directors of the Company are entitled to a per diem of P=25,000.00 for their attendance in every

board meeting and stockholders’ meeting. Additionally, the Independent Directors are provided

monthly transportation and representation allowances of P=30,000.00 while other directors are given

the monthly directors’ allowance of P=30,000.00. Moreover, attendance at a Board Committee

meeting, of which he is a member, entitles the director to a per diem of P=15,000.00.

Apart from the foregoing, the directors and executive officers of the Company receive no other

remuneration in cash or in kind. None of the directors and executive officers holds any outstanding

warrant or option.

38

Summary Compensation Table

Year Salary Bonus Others

CEO and Top Four (4)

Management

2020

(Estimate)

1,920,000

N/A

2,140,000

2019 2,280,000 N/A 1,685,000

2018 2,640,000 N/A 1,375,000

All other officers and directors

as a group unnamed

2020

(Estimate)

N/A

N/A

4,140,000

2019 270,000 N/A 3,527,500

2018 N/A N/A 3,750,000

The following constitute the Company’s Chairman and CEO and the four most highly compensated

directors/executive officers in 2019 (on a consolidated basis):

1. Mr. Lucio C. Tan is the Chairman of the Board of Directors, President and CEO.

2. Mrs. Carmen K. Tan is a Director.

3. Ms. Susan T. Lee is the Chief Finance Officer.

4. Atty. Ma. Cecilia L. Pesayco is the Corporate Secretary.

5. Mr. Michael G. Tan served as Treasurer and Director until August 27 and December 17,

2019, respectively.

a.) Standard Arrangements - Other than the stated salaries and wages and per diem of the

directors, there are no other standard arrangements to which the directors of the Company

are compensated, or are to be compensated, directly or indirectly, for any services provided

as a director, including any additional amounts payable for committee participation or

special assignments, for the last completed fiscal year and the ensuing year.

b.) Other Arrangements - None

c.) Employment contract or compensatory plan or arrangement - None

Warrants and Options Outstanding: Repricing

a.) There are no outstanding warrants or options held by the Company’s CEO, the named

executive officers, and all officers and directors as a group.

b.) This is not applicable since there are no outstanding warrants or options held by the

Company’s CEO, executive officers and all officers and directors as a group.

39

Item 11. Security Ownership of Certain Beneficial Owners and Management as of

December 31, 2019

1. Security Ownership of Certain Record and Beneficial Owners of more than 5%

Title of

class

Name, address of

record owner and

relationship with

Issuer

Name of

Beneficial

Owner and

Relationship

with Record

Owner

Citizenship No. of Shares

Held

Percent

Common Trustmark Holdings

Corporation*

SMI Compound, C.

Raymundo Ave.,

Maybunga, Pasig City

(Stockholder)

N/A Filipino 8,930,733,710 76.92%

Common ANA Holdings, Inc.

Shiodome City Centre,

1-5-2 Higashi-

Shimbashi, Minato-ku,

Tokyo, Japan, 105-7140

(Stockholder)

N/A Japanese 1,103,042,933 9.5%

* Trustmark Holdings Corporation (Trustmark) is 60% owned by Buona Sorte Holdings, Inc. (BSHI) and 40% by Horizon

Global Investments, Ltd. (HGIL). BSHI is a domestic company while HGIL is a BVI company. The right to vote or direct the

voting or disposition of PHI’s shares held by Trustmark is lodged in the latter’s Board of Directors, the members of which are Dr. Lucio C. Tan, Mrs. Carmen K. Tan, Ms. Shiela T. Pascual and Michael G. Tan. Dr. Lucio C. Tan is expected to be given

the proxy to vote the shares of Trustmark.

2. Security Ownership of Management as of December 31, 2019

Title of Class

Name of

Beneficial

Owner

Position

Amount and Nature

of Beneficial

Ownership

Citizenship Percent

of Class

Common Lucio C. Tan Chairman,

President

and CEO

450

R (direct)

Filipino Nil

Common Carmen K. Tan Director 450

R (direct)

Filipino Nil

Common Lucio C. Tan III Director 450

R (direct)

Filipino Nil

Common Vivienne K. Tan Director 1,000

R (direct)

Filipino Nil

Common John G. Tan Director 450

R (direct)

Filipino Nil

Common Joseph T. Chua Director

225

R (direct)

Filipino Nil

Common Ryuhei Maeda Director 1

R (direct)

Filipino Nil

Common Gregorio T. Yu Independent

Director

225

R (direct)

Filipino Nil

Common Johnip G. Cua Independent

Director

225

R (direct)

Filipino Nil

Total 3,476

40

Security ownership of all directors and officers as a group is 3,476 representing 0% of the

Company’s total outstanding capital stock.

3. Voting Trust Holders of 5% or More

The Company has no recorded stockholder holding more than 5% of the Company’s common stock

under a voting trust agreement.

4. Changes in Control

There are no arrangements which may result in a change in control of the Company.

Item 12. Certain Relationships and Related Transactions

In addition to Note 18 of the Notes to the Consolidated Financial Statements, the following are additional

relevant related party disclosures:

The Company’s cash and cash equivalents are deposited/placed with Philippine National Bank (the

“Bank”), an affiliate, at competitive interest rates. The Company also has a contract of lease of space

and stock transfer agency agreement with the Bank at prevailing rates. There is no preferential treatment

in any of its transactions with the Bank. There are no special risks or contingencies involved since the

transactions are done under normal business practice.

a) Business purpose of the arrangements:

The Company does business with related parties due to stronger ties based on trust and

confidence and easier coordination.

b) Identification of the related parties transaction business and nature of relationship:

Philippine National Bank Bank Deposits, Rental, Stock Transfer Services

MacroAsia Corporation Investments

c) Transaction prices are based on prevailing market rates.

d) Transactions have been fairly evaluated since the Company adheres to industry standards and

practices.

e) There are no any ongoing contractual or other commitments as a result of the arrangements.

There are no parties that fall outside the definition of “related parties” with whom the Company

or its related parties have a relationship that enables the parties to negotiate terms of material

transactions that may not be available from other, more clearly independent parties on an arm’s

length basis.

The Company has no transactions with promoters.

41

PART IV - CORPORATE GOVERNANCE

Item 13. Corporate Governance

This will be filed separately.

Item 14. Sustainability Report

Please refer to the attached Sustainability Report.

PART V - EXHIBITS AND SCHEDULES

Item 15. Exhibits and Reports on SEC Form 17-C

(a) Exhibits - The other exhibits, as indicated in the Index to Exhibits are either not applicable to the

Company or require no answer.

(b) Reports on SEC Form 17-C

SEC Form 17-C (Current Reports) which have been filed during the year are no longer filed as

part of the exhibits.

The major resolutions approved by the Board in 2019 from the last Annual Stockholders’ Meeting to

the present are as follows:

Date/ Type of Meeting Action/s Taken

October 28, 2019

Mr. Lucio K. Tan, Jr. (Deceased) was appointed as President and

Chief Operating Officer, and Mr. Joseph T. Chua was elected as

Director.

The Company likewise approved its Related Party Transactions

Policy.

December 17, 2019

Mr. Lucio C. Tan, III and Mr. John G. Tan were elected as Directors

of the Company in lieu of Mr. Lucio K. Tan, Jr. and Mr. Michael G.

Tan.

42

By:

SIGNATURES

Pursuant to the requirements of Section 17 of the Securities Regulation Code (SRC) and Section141 of the Corporation Code, this report is signed on behalf of the issuer by the undersignedthereunto dr-rly authorized in the City of Makati on MAY 1 R ?N?N

SUBSCRIBED AND SWORN to before me this MAY 1 I 202C affiantsexhibiting to me their Passport numbers, as follows:

Ii

NAMES

Lucio C. Tan

Susan T. Lee

Ma. Cecilia L. Pesayco

Doc. No. 't3SPage No. gg

Book No. ISeries of2020

PASSPORT NO.

P3645577A

P3633s84B

8C8362602

DATE OF'ISSUE PLACE OF ISSI'E

I l-Jul-l7 Manila, Philippines

25-&t-19 NCRWest,Philippines20-Jul-16 Manila"Philippines

,("^v,a*

President and Chief Executive Offrcer

Officer andiance Officer

PAL HOLDINGS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND SUPPLEMENTARY SCHEDULES

SEC FORM 17-A

Page No.

CONSOLIDATED FINANCIAL STATEMENTS

Statement of Management’s Responsibility for Financial Statements 45

Cover Sheet for Audited Consolidated Financial Statements 46

Independent Auditor’s Report 47-55

Consolidated Statements of Financial Position as of December 31, 2019 and 2018 56

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019,

2018 and 2017

57

Consolidated Statements of Changes in Equity for the Years Ended December 31, 2019, 2018

and 2017

58-60

Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and

2017

61-62

Notes to Consolidated Financial Statements 63-148

SUPPLEMENTARY SCHEDULES

Independent Auditor’s Report on the Supplementary Schedules 149

A. Financial Assets 150

B. Amounts Receivable from Directors, Officers, Employees, Related Parties, and

Principal Stockholders (Other than Related Parties)

151

C. Amounts Receivable from Related Parties which are Eliminated during the

Consolidation of Financial Statements

152

D. Intangible Assets and Other Assets 153

E. Long-term Obligations 154

F. Indebtedness to Related Parties 155

G. Guarantees of Securities of Other Issuers 156

H. Capital Stock 157

I. Index to Exhibits *

OTHER SCHEDULES

Reconciliation of Retained Earnings Available for Dividend Declaration (Annex 68-D) 158

Independent Auditor’s Report on Components of Financial Soundness Indicators 159

Schedule of Financial Soundness Indicators (Annex 68-E) 160

Corporate Organizational Chart 161

* These schedules, which are required by Part IV(e) of SRC Rule 68, have been omitted because

they are either not required, not applicable or the information required to be presented is included

in the Group’s financial statements.

44

PAL Holdings, Inc.STATEMENT OF MAI\AGEMENT'S RESPONSIBILITY

FOR FINAIICIAL STATEMENTS

The management of PAL Holdings, Inc. is responsible for the preparation and fair presentation of the

consolidated financial statements including the schedules attached therein, for the years ended

December 31,2019 and 2018, in accordance with the prescribed financial reporting framework indicatedtherein, and for such internal control as management determines is necessary to enable the preparation ofthe consolidated financial statements that are free from material misstatement. whether due to fraud oretTor.

In preparing the consolidated financial statements, management is responsible for assessing theCompany's ability to continue as a going concern, disclosing, as applicable matters related to goingconcern and using the going concern basis of accounting unless management either intends to liquidatethe Company or to cease operations, or has no realistic alternative but to do so.

The Board of Directors is responsible for overseeing the Company's financial reporting process.

The Board of Directors reviews and approves the consolidated financial statements including theschedules attached therein, and submits the same to the stockholders or members.

Sycip Gorres Velayo & Co., the independent auditor appointed by the stockholders, has audited theconsolidated financial statements of the Company in accordance with Philippine Standards on Auditing,and in its report to the stockholders or members, has expressed its opinion on the fairness of presentationupon completion of such audit.

President and Chief Executive Officer

SUBSCRIBED AND SWORN to before me thisexhibiting to me their respective Passports, to wit:

Name PassportNo. Date of IssueLucio C. Tan P3645577A 11-Jul-17Susan T. Lee P3633584B 25-Oct-I9

APR 0 1 ?02i, at Makati City, affrants

Place of IssueManila, PhilippinesNCR West, Philippines

Doc. No. 4OgPage No. 82-BookNo. ISeries of2020

/"-\).".{^FFRANCIS MARION EDEL V. MONFORT

l{otary Pubth untl 31 DecrmM 2021

19th,F BDO Pbza, 8737 Paseo de Roras, Halali Citr

PTR No. 8117099, ll*aii City,02 January 2020

IBP No. 0S370, [*di, 02 Januay 2020

Ro{ No. 72,|89, Cornrission No. M'12,|

8th Floor PNB Financial Center, Pres. Diosdado Macapagal Ave., CCP Complex, Pasay City, Philippines . Tel. +63(2) 816-3451 local 3453

*SGVFS038870*

C O V E R S H E E Tfor

AUDITED FINANCIAL STATEMENTS

SEC Registration Number

P W – 9 4

C O M P A N Y N A M E

P A L H O L D I N G S , I N C .

( A S u b s i d i a r y o f T r u s t m a r k

H o l d i n g s C o r p o r a t i o n )

A N D S U B S I D I A R I E S

PRINCIPAL OFFICE ( No. / Street / Barangay / City / Town / Province )

8 t h F l o o r , P N B F i n a n c i a l

C e n t e r , P r e s i d e n t D i o s d a d o

M a c a p a g a l A v e . , C C P C o m p l e x ,

P a s a y C i t y

Form Type Department requiring the report Secondary License Type, If Applicable

A A C F S C R M D N / A

C O M P A N Y I N F O R M A T I O N

Company’s Email Address Company’s Telephone Number Mobile Number

[email protected] (02) 816-3451 N/A

No. of Stockholders Annual Meeting (Month / Day) Fiscal Year (Month / Day)

6,456 Last Thursday of May 12/31

CONTACT PERSON INFORMATION

The designated contact person MUST be an Officer of the Corporation

Name of Contact Person Email Address Telephone Number/s Mobile Number

Susan T. Lee [email protected] (02) 816-3451 N/A

CONTACT PERSON’s ADDRESS

7/F Allied Bank Center, 6754 Ayala Avenue, Makati City

NOTE 1 : In case of death, resignation or cessation of office of the officer designated as contact person, such incident shall be reported to the Commission withinthirty (30) calendar days from the occurrence thereof with information and complete contact details of the new contact person designated.

2 : All Boxes must be properly and completely filled-up. Failure to do so shall cause the delay in updating the corporation’s records with the Commissionand/or non-receipt of Notice of Deficiencies. Further, non-receipt of Notice of Deficiencies shall not excuse the corporation from liability for its deficiencies.

46

*SGVFS038870*

INDEPENDENT AUDITOR’S REPORT

The Stockholders and the Board of DirectorsPAL Holdings, Inc.8th Floor, PNB Financial CenterPresident Diosdado Macapagal Ave.CCP Complex, Pasay City

Opinion

We have audited the consolidated financial statements of PAL Holdings, Inc. (a subsidiary of TrustmarkHoldings Corporation) and its subsidiaries (the Group), which comprise the consolidated statements offinancial position as at December 31, 2019 and 2018, and the consolidated statements of comprehensiveincome, consolidated statements of changes in equity and consolidated statements of cash flows for eachof the three years in the period ended December 31, 2019, and notes to consolidated financial statements,including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,the consolidated financial position of the Group as at December 31, 2019 and 2018, and its consolidatedfinancial performance and its consolidated cash flows for each of the three years in the period endedDecember 31, 2019 in accordance with Philippine Financial Reporting Standards (PFRSs).

Basis for Opinion

We conducted our audits in accordance with Philippine Standards on Auditing (PSAs). Ourresponsibilities under those standards are further described in the Auditor’s Responsibilities for the Auditof the Consolidated Financial Statements section of our report. We are independent of the Group inaccordance with the Code of Ethics for Professional Accountants in the Philippines (Code of Ethics)together with the ethical requirements that are relevant to our audit of the consolidated financialstatements in the Philippines, and we have fulfilled our other ethical responsibilities in accordance withthese requirements and the Code of Ethics. We believe that the audit evidence we have obtained issufficient and appropriate to provide a basis for our opinion.

Material Uncertainty Related to Going Concern

We draw attention to Note 29 to the consolidated financial statements, Events After Reporting Period,which indicate that on March 11, 2020, the World Health Organization declared coronavirus (COVID-19)outbreak as a global pandemic due to the significant number of cases and countries affected globally. In amove to contain the COVID-19 outbreak, on March 16, 2020, Presidential Proclamation Order No. 929was issued, declaring State of Calamity throughout the Philippines for a period of six months andimposed an enhanced community quarantine throughout the island of Luzon until April 12, 2020 unlessearlier lifted or extended. The COVID-19 outbreak and the measures taken have caused disruptions tobusinesses and economic activities, and its impact on businesses continue to evolve. Consequently, the

SyCip Gorres Velayo & Co.6760 Ayala Avenue1226 Makati CityPhilippines

Tel: (632) 891 0307Fax: (632) 819 0872ey.com/ph

BOA/PRC Reg. No. 0001, October 4, 2018, valid until August 24, 2021SEC Accreditation No. 0012-FR-5 (Group A), November 6, 2018, valid until November 5, 2021

A member firm of Ernst & Young Global Limited

47

*SGVFS038870*

- 2 -

Group’s passenger operations have also been disrupted, resulting to suspension of its flights both fordomestic and international routes, until such time that the quarantine period is lifted. In addition, theGroup reported net loss in 2019 which increased the deficit to P=17.22 billion and resulted to capitaldeficiency attributable to the equity holders of the Parent Company amounting to P=3.48 billion as ofDecember 31, 2019. The Group also has an excess current liabilities over current assets amounting toP=54.79 billion as of December 31, 2019. These events and conditions indicate that a material uncertaintyexists that may cast significant doubt on the Group’s ability to continue as a going concern. The Group’splans for future actions to mitigate the impact of these events and conditions, are disclosed in Note 2,Status of Operations and Management Action Plans, and Note 29 to the consolidated financial statements.Our opinion is not modified in respect of this matter.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in ouraudit of the consolidated financial statements of the current period. These matters were addressed in thecontext of our audit of the consolidated financial statements as a whole, and in forming our opinionthereon, and we do not provide a separate opinion on these matters. For each matter below, ourdescription of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of theConsolidated Financial Statements section of our report, including in relation to these matters.Accordingly, our audit included the performance of procedures designed to respond to our assessment ofthe risks of material misstatement of the consolidated financial statements. The results of our auditprocedures, including the procedures performed to address the matters below, provide the basis for ouraudit opinion on the accompanying consolidated financial statements.

Recognition and measurement of revenue and unearned transportation revenue

Passenger and cargo sales are recognized as revenue over time when the related passengers and cargoesare flown or lifted. The amount of passenger and cargo sales, for which the related transportation servicehas not yet been rendered at the end of the reporting period, is recorded as unearned transportationrevenue in the consolidated statement of financial position. Passenger tickets that are unused arerecognized as revenue based on the assessment of the ticket terms and conditions and the expectedexpiration of the unused passenger tickets (called the revenue from estimated breakage) in accordancewith the Group’s historical expiration experience. In 2019, the revenue from passenger and cargo salesamounted to P=134.29 billion and P=9.38 billion, respectively, while the unearned transportation revenueamounted to P=16.16 billion as of December 31, 2019.

The portion of passenger revenue attributable to the awards under the Group’s frequent flyer program isdeferred and estimated based on the expected redemption of the frequent flyer miles using the applicableticket fare. This deferred revenue is recognized as income when the awards under the Group’s frequentflyer program are redeemed by the passenger.

The Group uses a complex information technology system to determine the timing and the amount ofrevenue to be recognized for each flight, which involves exchanges of information with the industrysystems and partner airlines, and also to track the issuance and subsequent redemption of the awardsunder the frequent flyer program.


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We considered the recognition and measurement of revenue and unearned transportation revenue as a keyaudit matter because of the significant amount involved, large volumes of data being processed,complexity in determining the amount of revenue to be recognized for flown flights, and because itinvolves a complex accounting system. Further, the determination of the timing for recognition of unusedtickets and quantification of revenue allocable to the frequent flyer program require significant judgmentand estimates.

Refer to Notes 3 and 4 to the consolidated financial statements for relevant accounting policies and adiscussion of significant judgments and estimates.

Audit response

With the involvement of our internal specialist, we obtained an understanding of the revenue recognitionprocess and tested the relevant controls on the Group’s information technology system such as useraccess, program change and the relevant application controls on recognition and measurement of revenueand unearned transportation revenue. We reviewed sample journal entries related to the revenue andinspected the underlying documentation. We also performed substantive analytical procedures on theGroup’s passenger and cargo revenue and unearned transportation revenue.

For the estimate of the deferred revenue pertaining to the frequent flyer program, we compared theexpected redemption rate to the actual redemption rates in prior years and analyzed the allocated unit fairvalue of the miles with reference to the prices for third party frequent flyer miles sales and flightredemption values.

Adoption of PFRS 16, Leases

Effective January 1, 2019, the Group adopted PFRS 16, Leases, under the modified retrospectiveapproach which resulted in significant changes in the Group’s accounting policy for leases.

We considered the Group’s adoption of PFRS 16 as a key audit matter because the Group has highvolume of lease agreements; the recorded amounts are material to the consolidated financial statements;the change in accounting policy requires policy elections, which involves application of significantjudgment and estimation in determining whether the contract contains a lease; determining the lease term,including evaluating whether the Group is reasonably certain to exercise options to extend or terminatethe lease or to purchase the underlying asset; and determining the incremental borrowing rate. Thisresulted in transition adjustments to recognize right-of-use assets of P=234.18 billion and lease liability ofP=191.51 billion as of January 1, 2019 and the recognition of depreciation expense and interest expense ofP=23.83 billion and P=9.51 billion, respectively, for the year ended December 31, 2019.

Refer to Notes 3 and 4 to the consolidated financial statements for the relevant accounting policy and adiscussion of significant judgments, and Notes 15, 18 and 24 for the detailed disclosures of the leasedaircraft under lease arrangements.


49

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Audit response

We obtained an understanding of the Group’s process in implementing the new standard on leases,including the determination of the population of the lease contracts covered by PFRS 16, the applicationof the short-term and low value assets exemption, the selection of the transition approach and any electionof available practical expedients. We selected sample lease agreements (i.e., lease agreements existingprior to the adoption of PFRS 16 and new lease agreements in 2019) from the Master Lease Schedule andidentified their contractual terms and conditions. We traced these selected contracts to the leasecalculation prepared by management, which covers the calculation of financial impact of PFRS 16,including the transition adjustments.

We tested the underlying lease data used (e.g., lease payments, lease term) by agreeing the terms of theselected contracts with the lease calculation. For selected lease contracts with renewal and/or terminationoption, we reviewed the management’s assessment of whether it is reasonably certain that the Group willexercise the option to renew or not exercise the option to terminate. We tested the parameters used in thedetermination of the incremental borrowing rate by reference to market data. We test computed the leasecalculation prepared by management, including the transition adjustments.

We reviewed the disclosures related to leases, including the transition adjustments, based on therequirements of PFRS 16 and PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.

Accounting for aircraft and related equipment

The Group has aircraft and related equipment as at December 31, 2019 with a carrying amount ofP=105.39 billion. In accounting for these assets, the Group made estimates about their expected usefullives, expected residual values and potential impairment, based on the fair value of the assets and the cashflows they generate.

In evaluating the useful lives and residual values of the aircraft and related assets, management takes intoaccount the intended life of the fleet being operated, the estimate of the economic life from themanufacturer, the fleet deployment plans including the timing of fleet replacements, the changes intechnology, as well as the repairs and maintenance program, among others.

The lower market values of certain aircraft assets as compared with the respective amounts carried on theconsolidated statement of financial position, and the continuous earnings volatility have historicallyexposed the Group to potential asset impairment.

We considered the accounting for aircraft and related equipment subsequent to initial recognition as a keyaudit matter because the changes to the expected useful lives and/or residual values of the Group’s fleetand potential recognition of impairment loss could have material impact on the financial position andfinancial performance of the Group for the year. Further, the determination of useful lives and residualvalues and the assumptions for impairment assessment involve significant judgment and estimates.

Refer to Notes 3 and 4 to the consolidated financial statements for the relevant accounting policy and adiscussion of significant judgment and estimates, and Note 10 for the detailed disclosures about thecarrying amounts of the aircraft and related equipment.


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Audit response

We obtained an understanding of the Group’s process and controls over estimation of the useful lives ofaircraft. We compared the management’s estimates of the useful lives and residual values with theGroup’s fleet plan, recent aircraft transactions, and contractual rights. We also considered thedevelopments in the airline industry and compared the estimated useful lives used by the Group withcomparable airlines.

We reviewed the potential indicators of impairment that would require the impairment testing of theindividual assets and the cash generating units (CGUs). With the involvement of our internal specialist,we evaluated the key assumptions used to estimate the discounted cash flows of the CGU, which includethe forecasted revenues, operating costs and discount rates, based on our understanding of the Group’sbusiness plan and compared these assumptions to the relevant market data, as applicable. We alsoassessed the current year’s assumptions by comparing these assumptions with the assumptions made inprior years, as well as the actual results during the year.

Classification and measurement of repairs and maintenance costs

The Group entered into several agreements with maintenance service providers relating to the periodicinspections and overhauls during the life of the aircraft and aircraft parts. Management assessed andestimated which portion of the cost incurred for the repairs, maintenance and overhauls under theseagreements, has the economic effect of extending the useful lives of the aircraft and engines, hence, canbe capitalized. Other repairs and maintenance costs are expensed as incurred.

Moreover, actual billings from the repair entities are usually received at a later date after the cut-off date.Hence, management estimates certain repairs and maintenance costs to be accrued as of cut-off date basedon open work orders and other variable factors. Total aircraft-related repairs and maintenance costsrecognized in profit or loss for the year ended December 31, 2019 amounted to P=20.04 billion, while theaccrued repairs and maintenance costs as at December 31, 2019 amounted to P=13.31 billion.

We considered the classification and measurement of repairs and maintenance cost as a key audit matterbecause of the significant judgment involved in assessing whether a particular repair will be capitalized orexpensed, the inherent risks in assessing the variable factors in order to estimate the repairs andmaintenance costs at the cut-off date.

Refer to Notes 3 and 4 to the consolidated financial statements for the relevant accounting policy and adiscussion of significant estimates, and Notes 10, 14 and 16 for the detailed disclosures on the repairs,maintenance and overhaul cost and related accrual.


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Audit response

We obtained an understanding of the Group’s repairs and maintenance program and tested the relevantkey controls over repairs and maintenance process. We selected sample transactions of repairs,maintenance and overhauls, and inspected the underlying documentation. We evaluated the classificationof repairs, maintenance and overhauls based on their nature and by considering the Company’scapitalization and expensing policy. We reviewed the maintenance agreements with key maintenanceservice providers and tested the amounts accrued against the related open work orders.

Recognition of deferred income tax assets

The Group recognized deferred income tax assets amounting to P=52.42 billion, arising from thecarryforward benefits of the net operating losses carried over and certain deductible temporarydifferences. The Group recognizes these deferred income tax assets to the extent of probable futuretaxable profits and reversing taxable temporary differences that will allow the deferred income tax assetsto be utilized. The probability of recovery is affected by uncertainties regarding the likely timing andlevel of future taxable profits considering the expiration date of net operating losses carried over andtiming of reversal of temporary differences.

We considered the recognition of deferred income tax assets as a key audit matter because of thesignificant judgment and estimation involved in assessing the probability and level of future taxableprofits that will allow the deferred income tax assets to be utilized.

Refer to Notes 3 and 4 to the consolidated financial statements for the relevant accounting policy and adiscussion of significant judgment and estimates, and Note 22 for the detailed disclosures on deferredincome tax assets.

Audit Response

We evaluated the management’s assumptions and estimates, which include the forecasted revenues,operating costs and timing of reversal of temporary differences, in relation to the likelihood ofgenerating sufficient future taxable profits based on our understanding of the Group’s business planand compared these assumptions to the relevant market data, as applicable. We also assessed the currentyear’s assumptions by comparing these assumptions with the assumptions made in prior years, as well asthe actual results during the year.

Other Information

Management is responsible for the other information. The other information comprises the informationincluded in the SEC Form 20-IS (Definitive Information Statement), SEC Form 17-A and Annual Reportfor the year ended December 31, 2019, but does not include the consolidated financial statements and ourauditor’s report thereon. The SEC Form 20-IS (Definitive Information Statement), SEC Form 17-A andAnnual Report for the year ended December 31, 2019 are expected to be made available to us after thedate of this auditor’s report.

Our opinion on the consolidated financial statements does not cover the other information and we will notexpress any form of assurance conclusion thereon.


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In connection with our audits of the consolidated financial statements, our responsibility is to read theother information identified above when it becomes available and, in doing so, consider whether the otherinformation is materially inconsistent with the consolidated financial statements or our knowledgeobtained in the audits, or otherwise appears to be materially misstated.

Responsibilities of Management and Those Charged with Governance for the ConsolidatedFinancial Statements

Management is responsible for the preparation and fair presentation of the consolidated financialstatements in accordance with PFRSs, and for such internal control as management determines isnecessary to enable the preparation of consolidated financial statements that are free from materialmisstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group’sability to continue as a going concern, disclosing, as applicable, matters related to going concern andusing the going concern basis of accounting unless management either intends to liquidate the Group or tocease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as awhole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s reportthat includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that anaudit conducted in accordance with PSAs will always detect a material misstatement when it exists.Misstatements can arise from fraud or error and are considered material if, individually or in theaggregate, they could reasonably be expected to influence the economic decisions of users taken on thebasis of these consolidated financial statements.

As part of an audit in accordance with PSAs, we exercise professional judgment and maintainprofessional skepticism throughout the audit. We also:

· Identify and assess the risks of material misstatement of the consolidated financial statements,whether due to fraud or error, design and perform audit procedures responsive to those risks, andobtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk ofnot detecting a material misstatement resulting from fraud is higher than for one resulting from error,as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override ofinternal control.


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· Obtain an understanding of internal control relevant to the audit in order to design audit proceduresthat are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Group’s internal control.

· Evaluate the appropriateness of accounting policies used and the reasonableness of accountingestimates and related disclosures made by management.

· Conclude on the appropriateness of management’s use of the going concern basis of accounting and,based on the audit evidence obtained, whether a material uncertainty exists related to events orconditions that may cast significant doubt on the Group’s ability to continue as a going concern. Ifwe conclude that a material uncertainty exists, we are required to draw attention in our auditor’sreport to the related disclosures in the consolidated financial statements or, if such disclosures areinadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up tothe date of our auditor’s report. However, future events or conditions may cause the Group to ceaseto continue as a going concern.

· Evaluate the overall presentation, structure and content of the consolidated financial statements,including the disclosures, and whether the consolidated financial statements represent the underlyingtransactions and events in a manner that achieves fair presentation.

· Obtain sufficient appropriate audit evidence regarding the financial information of the entities orbusiness activities within the Group to express an opinion on the consolidated financial statements.We are responsible for the direction, supervision and performance of the audit. We remain solelyresponsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scopeand timing of the audit and significant audit findings, including any significant deficiencies in internalcontrol that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevantethical requirements regarding independence, and to communicate with them all relationships and othermatters that may reasonably be thought to bear on our independence, and where applicable, relatedsafeguards.

From the matters communicated with those charged with governance, we determine those matters thatwere of most significance in the audit of the consolidated financial statements of the current period andare therefore the key audit matters. We describe these matters in our auditor’s report unless law orregulation precludes public disclosure about the matter or when, in extremely rare circumstances, wedetermine that a matter should not be communicated in our report because the adverse consequences ofdoing so would reasonably be expected to outweigh the public interest benefits of such communication.


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The engagement partner on the audit resulting in this independent auditor’s report is Catherine E. Lopez.

SYCIP GORRES VELAYO & CO.

Catherine E. LopezPartnerCPA Certificate No. 86447SEC Accreditation No. 0468-AR-4 (Group A), February 19, 2019, valid until February 18, 2022Tax Identification No. 102-085-895BIR Accreditation No. 08-001998-65-2018, February 26, 2018, valid until February 25, 2021PTR No. 8125249, January 7, 2020, Makati City

April 1, 2020


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PAL HOLDINGS, INC.(A Subsidiary of Trustmark Holdings Corporation)AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Amounts in Thousands, Except Earnings (Loss) Per Share)

Years Ended December 312019 2018 2017

REVENUEPassenger (Note 4) P=134,292,006 P=128,910,320 P=111,244,460Cargo (Note 4) 9,375,035 10,216,876 8,396,718Ancillary (Note 4) 10,698,687 11,261,792 9,626,848Others (Note 18) 171,003 92,370 253,819

154,536,731 150,481,358 129,521,845EXPENSES (Note 20)Flying operations (Note 18) 82,178,379 86,896,254 67,306,585Maintenance (Notes 4 and 18) 20,854,392 20,972,885 19,442,234Aircraft and traffic servicing (Note 18) 19,726,567 19,546,341 17,852,316Passenger service (Note 18) 13,065,319 13,311,033 12,640,545Reservation and sales 10,939,525 10,864,513 9,668,670General and administrative (Note 6) 4,899,429 4,874,637 5,177,061

151,663,611 156,465,663 132,087,411OTHER INCOME (CHARGES)Financing charges (Notes 13, 15, 16 and 18) (12,030,520) (5,268,446) (3,618,996)Other income (charges) - net (Notes 5, 7, 10, 12, 16,

18, 24 and 26) (2,042,474) 3,822,972 (279,666)(14,072,994) (1,445,474) (3,898,662)

LOSS BEFORE INCOME TAX (11,199,874) (7,429,779) (6,464,228)INCOME TAX EXPENSE (BENEFIT) (Note 22) (1,497,158) (3,722,221) 2,893NET LOSS (9,702,716) (3,707,558) (6,467,121)OTHER COMPREHENSIVE INCOME (LOSS)

(Note 19)Other comprehensive income, net of deferred

income tax effect (496,238) 864,153 1,856,006TOTAL COMPREHENSIVE LOSS (P=10,198,954) (P=2,843,405) (P=4,611,115)

Net income (loss) attributable to:Equity holders of the Parent Company (P=10,310,901) (P=4,330,430) (P=7,333,595)Non-controlling interests (Note 9) 608,185 622,872 866,474

(P=9,702,716) (P=3,707,558) (P=6,467,121)

Total comprehensive income (loss) attributable to:Equity holders of the Parent Company (P=11,245,109) (P=3,666,048) (P=5,513,157)Non-controlling interest (Note 9) 1,046,155 822,643 902,042

(P=10,198,954) (P=2,843,405) (P=4,611,115)Basic/Diluted Loss Per Share*Computed based on Net Loss (P=0.8880) (P=0.3730) (P=0.6316)Computed based on Total Comprehensive Loss (0.9685) (0.3157) (0.4749)

*Computed using the weighted average number of issued and outstanding shares of stock of 11,610,978,242, 11,610,978,242 and 11,610,231,157for the years ended December 31, 2019, 2018 and 2017, respectively (see Notes 2 and 17)

See accompanying Notes to Consolidated Financial Statements.

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PAL HOLDINGS, INC.(A Subsidiary of Trustmark Holdings Corporation)AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN EQUITYFOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017(Amounts in Thousands)

Other Components of Equity

Capital Stock(Notes 2and 17)

AdditionalPaid-InCapital

(Notes 2, 17and 18)

Other EquityReserves

Effect of Changein Ownership

Interest

CumulativeTranslationAdjustment

(Note 27)

Net Changes inFair Values ofAvailable-for-

sale Investments -Net of Deferred

Income TaxEffect (Notes 12

and 19)

RevaluationIncrement-

Net ofDeferred

Income TaxEffect

(Notes 10and 19)

RemeasurementGains (Losses)

on DefinedBenefit Plan -

Net of DeferredIncome Tax

Effect(Notes 19and 21) Subtotal

Deficit(Notes 2and 17)

TreasuryStock -At Cost

(Note 17)

Total EquityAttributable to

the EquityHolders ofthe Parent

Non-Controlling

Interest(Note 9) Total

BALANCES AT JANUARY 1, 2017 P=23,025,318 P=7,308,860 P=4,427,932 P=520,769 P=1,328,073 P=37,662 P=370,808 (P=650,830) P=1,606,482 (P=22,812,859) (P=56) P=13,555,677 P=8,104,754 P=21,660,431Net loss for the year – – – – – – – – – (7,333,595) – (7,333,595) 866,474 (6,467,121)Other comprehensive income (loss) (Note 19) – – – – (442,418) 1,799,292 556,801 (93,237) 1,820,438 – – 1,820,438 35,568 1,856,006Total comprehensive income (loss) for the year – – – – (442,418) 1,799,292 556,801 (93,237) 1,820,438 (7,333,595) – (5,513,157) 902,042 (4,611,115)Acquisition of a subsidiary under common

control through share swap transactions 840,459 3,361,836 (4,202,295) – – – – – – – – – – –Acquisition of additional interest in a subsidiary

through a share swap transaction 123,543 479,006 – (528,410) 8,649 10 2,415 (4,140) (521,476) – – 81,073 (96,237) (15,164)Acquisition of non-controlling interest of a

subsidiary (Note 9) – – – – – – – – ––

– – (3,013,831) (3,013,831)Dividend attributable to non-controlling interest – – – – – – – – – – – – (17,063) (17,063)Reduction in authorized capital stock as a result

of equity restructuring (14,190,314) 14,190,283 – – – – – – – – 31 – – –Transfer of portion of revaluation increment in

property realized through depreciation, netof deferred income tax effect and foreignexchange adjustment – – – – – – (219,693) – (219,693) 193,952 – (25,741) (284) (26,025)

(13,226,312) 18,031,125 (4,202,295) (528,410) 8,649 10 (217,278) (4,140) (741,169) 193,952 31 55,332 (3,127,415) (3,072,083)

BALANCES AT DECEMBER 31, 2017 P=9,799,006 P=25,339,985 P=225,637 (P=7,641) P=894,304 P=1,836,964 P=710,331 (P=748,207) P=2,685,751 (P=29,952,502) (P=25) P=8,097,852 P=5,879,381 P=13,977,233

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Capital Stock(Notes 2

and 17)


(Notes 2,17 and 18)



Interest


(Note 27)

Net Changes inFair Values of

Financial Assetsat Fair Value

Through OtherComprehensive

Income(FVTOCI) -


Effect(Notes 12 and 19)


Net ofDeferred

Income TaxEffect

(Notes 10and 19)







(Note 17)



Non-Controlling


BALANCES AT JANUARY 1, 2018 P=9,799,006 P=25,339,985 P=225,637 (P=7,641) P=894,304 P=1,836,964 P=710,331 (P=748,207) P=2,685,751 (P=29,952,502) (P=25) P=8,097,852 P=5,879,381 P=13,977,233Effect of adoption of new accounting

standards (Note 3) – – – – – – – – – 1,915,584 – 1,915,584 20,933 1,936,517

BALANCES AT JANUARY 1, 2018,AS ADJUSTED 9,799,006 25,339,985 225,637 (7,641) 894,304 1,836,964 710,331 (748,207) 2,685,751 (28,036,918) (25) 10,013,436 5,900,314 15,913,750

Net income for the year – – – – – – – – – (4,330,430) – (4,330,430) 622,872 (3,707,558)Other comprehensive income (loss) (Note 19) – – – – (28,680) (65,446) – 758,509 664,383 – – 664,383 199,770 864,153Total comprehensive income (loss) for the year – – – – (28,680) (65,446) – 758,509 664,383 (4,330,430) – (3,666,047) 822,642 (2,843,405)Acquisition of non-controlling interest of a

subsidiary (Note 9) – – 1,355,924 – – – – – – – – 1,355,924 (3,766,990) (2,411,066)Acquisition of additional interest in a subsidiary

through a share swap transaction 747 3,010 – (3,127) 90 – 72 (76) (3,041) – – 716 (732) (16)Equity restructuring – partial wipe out of deficit

against additional paid-in capital – (25,339,985) – – – – – – – 25,339,985 – – – –Net effect of transfer of portion of revaluation

increment in property realized through saleand depreciation, net of deferred income taxand foreign exchange adjustment – – – – – – (39,301) – (39,301) 66,872 – 27,571 301 27,872

747 (25,336,975) 1,355,924 (3,127) 90 – (39,229) (76) (42,342) 25,406,857 – 1,384,211 (3,767,421) (2,383,210)

BALANCES AT DECEMBER 31, 2018 P=9,799,753 P=3,010 P=1,581,561 (P=10,768) P=865,714 P=1,771,518 P=671,102 P=10,226 P=3,307,792 (P=6,960,491) (P=25) P=7,731,600 P=2,955,535 P=10,687,135

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Capital Stock(Notes 2

and 17)


(Notes 2,17 and 18)



Interest


(Note 27)

Net Changes inFair Values of

Financial Assetsat Fair Value

Through OtherComprehensive

Income(FVTOCI) -


Effect(Notes 12 and 19)


Net ofDeferred

Income TaxEffect

(Notes 10and 19)







(Note 17)



Non-Controlling


BALANCES AT JANUARY 1, 2019 P=9,799,753 P=3,010 P=1,581,561 (P=10,768) P=865,714 P=1,771,518 P=671,102 P=10,226 P=3,307,792 (P=6,960,491) (P=25) P=7,731,600 P=2,955,535 P=10,687,135Net income for the year – – – – – – – – – (10,310,901) – (10,310,901) 608,185 (9,702,716)Other comprehensive income (loss) (Note 19) – – – – (291,745) (57,137) 80,748 (666,074) (934,208) – – (934,208) 437,970 (496,238)Total comprehensive income (loss) for the year – – – – (291,745) (57,137) 80,748 (666,074) (934,208) (10,310,901) – (11,245,109) 1,046,155 (10,198,954)Disposal of partial interest in a subsidiary (Note 9) – – 48,320 – – – – – – – 48,320 4,378,685 4,427,005Net effect of transfer of portion of revaluation

increment in property realized through sale anddepreciation, net of deferred income tax andforeign exchange adjustment – – – – – – (72,966) – (72,966) 55,561 – (17,405) (190) (17,595)

– – 48,320 – – – (72,966) – (72,966) 55,561 – 30,915 4,378,495 4,409,410

BALANCES AT DECEMBER 31, 2019 P=9,799,753 P=3,010 P=1,629,881 (P=10,768) P=573,969 P=1,714,381 P=678,884 (P=655,848) P=2,300,618 (P=17,215,831) (P=25) (P=3,482,594) P=8,380,185 P=4,897,591


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PAL HOLDINGS, INC.(A Subsidiary of Trustmark Holdings Corporation)AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in Thousands)


CASH FLOWS FROM OPERATING ACTIVITIESLoss before income tax (P=11,199,874) (P=7,429,779) (P=6,464,228)Adjustments for:

Depreciation and amortization (Notes 10, 11 and 20) 25,736,640 8,240,959 8,241,933Provision for impairment loss - net (Notes 10, 11 and 20) 1,033,703 629,156 1,853,931

Income on manufacturers’ credits (Note 24) (236,622) (756,164) (444,733)Financing charges (Notes 13, 15, 16 and 18) 12,030,520 5,047,741 3,484,374Interest income (Notes 5 and 12) (399,838) (362,554) (443,673)Fair value changes on derivatives (Note 20) (500,978) 920,022 (110,180)

Unrealized foreign exchange loss (gain) - net 1,450,926 (402,726) 91,694Movement in accrued employee benefits (Note 21) 878,757 1,284,039 1,149,114

Gains on disposal of property and equipment andothers (Note 10) (89,527) (55,954) –

Amortization of deferred lease charges (Note 12) – 201,116 75,294 Provision (reversal of provision) for litigations, asset

retirement obligation (ARO) and other noncurrentliabilities - net (Note 16) (64,198) (3,008,884) 109,889

Dividend income (Note 12) (22,880) – (12,320)Operating income before working capital changes 28,616,629 4,306,972 7,531,095Decrease (increase) in:

Receivables (3,844,483) 3,812,608 (747,379)Expendable parts, fuel, materials and supplies (407,955) (1,319,474) (542,800)

Other current assets 382,316 (877,883) 225,938Other noncurrent assets 70,345 – –

Increase (decrease) in:Accounts payable (938,479) (1,105,617) 3,031,789Accrued expenses and other current liabilities 4,187,841 3,100,799 (5,577,660)Unearned transportation revenue 3,319,965 1,921,326 1,513,093

Net movement on derivative transactions (233,171) (12,830) 56,070Cash generated from operations 31,153,008 9,825,901 5,490,146Financing charges paid (3,645,290) (5,015,321) (3,551,700)Interest received 419,544 188,381 281,265Income taxes paid (including final and creditable withholding taxes) (748,843) (1,074,575) (565,281)Net cash flows from operating activities 27,178,419 3,924,386 1,654,430

CASH FLOWS FROM INVESTING ACTIVITIESAdditions to property and equipment (Notes 10 and 23) (4,895,303) (6,039,884) (13,431,687)Additions to investment properties (Note 11) – – (492,853)Investments in:

Financial assets at FVTOCI (861) (5,416) –Money market placements – – (159,903)

Additions to security deposits (Note 12) (3,667,431) (1,149,793) (1,323,396)Proceeds from disposal of:

Property and equipment (Note 10) 306,401 270,744 –Refund of predelivery payments (Note 24) 4,951,698 12,790,348 970,389Return of various deposits (Note 12) 1,187,433 565,484 42,062Dividend received (Notes 12 and 18) 22,880 12,320 7,040Net cash flows from (used in) investing activities (2,095,183) 6,443,803 (14,388,348)

(Forward)

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CASH FLOWS FROM FINANCING ACTIVITIESAvailments of:

Notes payable (Notes 13 and 18) P=14,644,613 P=8,357,591 P=12,879,444Long-term obligations (Notes 15, 18 and 24) 10,940,336 7,887,000 19,737,728Advances from affiliate (Note 18) – 1,780,411 –

Proceeds from disposal of partial interest in a subsidiary (Note 9) 4,427,005 – –Receipt of deposits from non-controlling interest of a subsidiary 11,411,253 – –Payments of:

Notes payable (Notes 13 and 18) (15,809,218) (6,690,805) (2,781,101) Long-term obligations (Notes 15, 18 and 24) (41,895,270) (21,859,084) (13,645,544)Advances to an affiliate (Note 18) – (318,000) –Acquisition of non-controlling interest (Note 17) – (3,084,553) (3,030,894)Payment of stock issuance cost (Note 17) – – (15,164)Net cash flows from (used in) financing activities (16,281,281) (13,927,440) 13,144,469

EFFECT OF EXCHANGE RATE CHANGES ON CASH ANDCASH EQUIVALENTS (680,220) 467,875 (303,555)

NET INCREASE (DECREASE) IN CASH ANDCASH EQUIVALENTS 8,121,735 (3,091,376) 106,996

CASH AND CASH EQUIVALENTS ATBEGINNING OF YEAR 6,982,277 10,073,653 9,966,657

CASH AND CASH EQUIVALENTS ATEND OF YEAR (Note 5) P=15,104,012 P=6,982,277 P=10,073,653


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PAL HOLDINGS, INC.(A Subsidiary of Trustmark Holdings Corporation)AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in Thousands, Except When Otherwise Indicated)

1. Corporate Information and Authorization for Issuance of the Consolidated Financial Statements

Corporate InformationPAL Holdings, Inc. (the Parent Company or PHI) was incorporated in the Philippines on May 10, 1930to engage in the business of a holding company. On October 5, 1979, the Parent Company applied andwas granted an extension of its corporate life by the Philippine Securities and Exchange Commission(SEC) for another 50 years from May 1980.

The Parent Company and its subsidiaries (collectively referred to herein as “the Group”), is primarilyengaged in air transport of passengers and cargo within the Philippines and between the Philippinesand several international destinations. The Group operates through its major subsidiaries; PhilippineAirlines, Inc. (PAL), the Philippine national flag carrier, and Air Philippines Corporation (APC), asubsidiary under common control that was indirectly acquired by the Parent Company through ZumaHoldings Management Corporation (ZUMA) in 2017 (see Note 2). The Parent Company is 76.92% and86.42% owned by Trustmark Holdings Corporation (Trustmark) as of December 31, 2019 and 2018,respectively (see Note 2). As of December 31, 2019 and 2018, Trustmark is 60% owned by BuonaSorte Holdings, Inc. (BSHI) and 40% owned by Horizon Global Investments, Ltd. (HGIL). BSHI is theultimate parent of the Group. BSHI and Trustmark were likewise incorporated in the Philippines andare part of the Lucio Tan Group of Companies, while HGIL was incorporated in British Virgin Islands.

The Parent Company’s registered office address is 8th Floor, PNB Financial Center, PresidentDiosdado Macapagal Ave., CCP Complex, Pasay City, Metro Manila.

PAL FranchisePAL operates under a franchise, which extends up to the year 2034, granted by the PhilippineGovernment under Presidential Decree No. 1590. As provided for under the franchise, PAL is subjectto:

a. corporate income tax based on net taxable income; orb. franchise tax of 2% of the gross revenue derived from nontransport, domestic transport and


whichever is lower, in lieu of all other taxes, duties, royalties, registration licenses and other fees, andcharges of any kind, nature, or description, imposed, levied, established, assessed, or collected by anymunicipal, city, provincial or national authority or government agency, except real property tax.

APC FranchiseAPC operates under a franchise for a term of 25 years from August 8, 1997, the date of effectivity ofRepublic Act (RA) No. 8339, with some provisions amended under RA No. 9215 effectiveMay 5, 2003. As provided for under the franchise, APC is subject to, among others:

a. corporate income tax based on net taxable income; orb. franchise tax of 5% of the gross revenue derived from non-transport, domestic transport and


whichever is lower, in lieu of all other taxes, duties, fees, and licenses of any kind, nature, or description,imposed, levied, established, assessed, or collected by any municipal, city, provincial or nationalauthority or government agency, except real property tax.

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As further provided for under PAL’s and APC’s franchises, PAL and APC can carry forward as adeduction from taxable income, net loss incurred in any year up to five years following the year of suchloss (see Note 22). In addition, the payment of the principal, interest, fees, and other charges on foreignloans obtained by PAL and APC, and all rentals, interest, fees and other charges paid by PAL and APCto their lessors for the lease of aircraft, engines, spares, other flight or ground equipment, and otherpersonal property are exempt from all taxes, including withholding tax, provided that the liability forthe payment of said taxes is assumed by the grantee (PAL or APC, as applicable). Under RA No. 9337or the E-VAT Act of 2005 which took effect on November 1, 2005, the franchise tax of PAL and APCwas abolished and PAL and APC became subject to the corporate income tax. PAL and APC remainexempt from any taxes, duties, royalties, registration license, and other fees and charges, as may beprovided under PAL’s and APC’s franchises.

Board of Investments (BOI) RegistrationIn 2018, PAL registered with the BOI as a new operator of air transport services on a non-pioneer statusunder the Omnibus Investments Code of 1987 (Executive Order No. 226). Under the terms of theregistration with the BOI, PAL is entitled to certain fiscal and non-fiscal incentives available to theregistered project, including among others, an income tax holiday (ITH) which extends for a period offour years from the month following the delivery date or actual start of commercial operations of theaircraft, whichever is earlier. The availment of which, however, shall in no case be earlier than the dateof registration (see Note 22).

Authorization for Issuance of the Consolidated Financial StatementsThese accompanying consolidated financial statements as at December 31, 2019 and 2018 and for eachof the three years in the period ended December 31, 2019 were authorized for issue by the ParentCompany’s BOD on April 1, 2020.

2. Group Reorganizations, Equity Restructuring, Status of Operations and ManagementAction Plans

a. Group reorganizations

Acquisition of additional interest in PALOn September 26, 2016, the Parent Company’s BOD approved and authorized the acquisition, in ashare swap transaction, of PAL shares from then existing PAL shareholders. Relative thereto, theBOD likewise approved the share swap ratio of 5:1 or equivalent to five PAL shares to one PHIshare. On December 27, 2018 and December 18, 2017, the Philippine SEC approved the acquisitionof 0.01% and 0.64% non-controlling interest in PAL, respectively. The Parent Company issued0.75 million and 123.54 million new shares from its authorized but unissued capital stock in favorof PAL shareholders who have participated in the PAL share swap transaction. As ofDecember 31, 2019 and 2018, PHI has effective ownership interest in PAL of 98.92%.

Acquisition of APC through ZUMAOn November 28, 2016, the Parent Company’s BOD approved the acquisition, through share swaptransaction, of the shares of ZUMA, the holding company of APC, from its then existingshareholders, with a share swap exchange ratio of 19:1 corresponding to 19 PHI shares to oneZUMA share. On December 21, 2017, the Philippine SEC approved the acquisition of ZUMAthrough share swap transaction with its existing shareholders. The Parent Company issued840.46 million new shares from its authorized but unissued capital stock valued at P=5.00 per sharein favor of Cosmic Holdings Corporation. Accordingly, as of December 31, 2019 and 2018, theParent Company owns 51% of ZUMA (see Note 9).

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As a result of the above transactions, Trustmark’s ownership in the Parent Company decreasedfrom 89.78% to 86.42%.

In February 2019, ANA Holdings, Inc. (ANA HO), the parent company of All Nippon Airways(ANA), acquired 1,103,042,933 shares held by Trustmark in PHI equivalent to 9.5% of the currentoutstanding shares of PHI. As a result of this transaction, Trustmark’s ownership in the ParentCompany decreased from 86.42% to 76.92%.

b. Equity restructuring

On March 28 and May 25, 2017, the BOD, by majority vote, and by the vote of the stockholdersowning or representing at least 2/3 of the outstanding capital stock of the Parent Company,approved the decrease in authorized capital stock by changing the par value of the shares fromP=1.00 to P=0.45 per share. Simultaneously, the BOD approved to increase the par value per sharefrom P=0.45 to P=1.00 per share, without increasing the authorized capital, thus decreasing thenumber of shares corresponding to the authorized and subscribed capital stock. The decrease in theauthorized capital by reducing the par value per share to P=0.45 per share and the subsequentincrease in the par value to P=1.00 per share by reducing the number of shares corresponding to theauthorized capital stock were approved by the Philippine SEC on December 22, 2017. Accordingly,authorized capital stock as of December 31, 2019 and 2018 is composed of 13.50 billion shares,with 11.61 billion shares issued and outstanding (see Note 17).

c. Status of operations and management action plans

The Group reported consolidated total comprehensive loss of P=10.20 billion, P=2.84 billion andP=4.61 billion for the years ended December 31, 2019, 2018 and 2017, respectively, which resultedto capital deficiency attributable to equity holders of the Parent Company amounting toP=3.48 billion as of December 31, 2019 and equity attributable to equity holders of the ParentCompany amounting to P=7.73 billion as of December 31, 2018. In addition, the Group’s currentliabilities exceeded current assets by P=54.79 billion and P=54.61 billion as of December 31, 2019and 2018, respectively. The Group has lined up various revenue enhancement programs, cashgeneration strategies and cost control initiatives to further improve the results of its operations.

3. Summary of Significant Accounting and Financial Reporting Policies

Basis of PreparationThe consolidated financial statements have been prepared using the historical cost convention, exceptfor buildings and improvements under property and equipment which are carried at revalued amounts,and financial assets at fair value through other comprehensive income (FVTOCI), which are classifiedas available-for-sale (AFS) investments prior to January 1, 2018, and derivative financial instrumentswhich are carried at fair value through profit or loss (FVTPL). The consolidated financial statementsare presented in Philippine Peso, the Parent Company’s functional and presentation currency. Allamounts are rounded to the nearest thousands, except when otherwise indicated.

Statement of ComplianceThe consolidated financial statements have been prepared in accordance with Philippine FinancialReporting Standards (PFRSs).

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Changes in Accounting PoliciesThe accounting policies adopted are consistent with those of the previous financial year, except that theGroup has adopted the following new accounting pronouncements starting January 1, 2019. The newaccounting pronouncements do not have significant impact to the consolidated financial statements,unless otherwise indicated:

· PFRS 16, Leases

PFRS 16 supersedes Philippine Accounting Standards (PAS) 17, Leases, Philippine Interpretationbased on International Financial Reporting Interpretations Committee (IFRIC) 4, Determiningwhether an Arrangement contains a Lease, Philippine Interpretation Standard InterpretationsCommittee (SIC)-15, Operating Leases-Incentives and Philippine Interpretation SIC-27,Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard setsout the principles for the recognition, measurement, presentation and disclosure of leases andrequires lessees to recognize most leases on the balance sheet.

Lessor accounting under PFRS 16 is substantially unchanged from today’s accounting underPAS 17. Lessors will continue to classify all leases using the same classification principle as inPAS 17 and distinguish between two types of leases: operating and finance leases.

Transition to PFRS 16The Group adopted PFRS 16 using the modified retrospective approach and elected to apply thestandard to contracts that were previously identified as leases applying PAS 17 and PhilippineInterpretation IFRIC-4. The Group will therefore not apply the standard to contracts that werenot previously identified as containing a lease applying PAS 17 and Philippine InterpretationIFRIC-4.

The effect of adoption PFRS 16 as at 1 January 2019 is, as follows:

Increase (decrease)Assets:

Property and equipment P=128,143,158Other current assets (765,707)Other noncurrent assets (715,074)

Liabilities:Long-term obligations 126,662,377

· Property and equipment (see Note 10)· The Group recognized “Right-of-use assets” amounting to P=126.66 billion pertaining to

operating leases related to passenger aircraft, engines, and ground property and equipment.· The Group reclassified property and equipment under finance leases from “Passenger

aircrafts” and “Engines” with a carrying amount of P=106.02 billion to “Right-of-useassets”.

· Other current and noncurrent assets (see Notes 8, 10 and 12)· The Group reclassified portion of “Deposits and prepayments” and deferred lease (included

as under “Deposits on aircraft leases”) to “Right-of-use assets” amounting toP=765.71 million and P=715.07 million, respectively.

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· Long-term obligations (see Note 15)· The Group recognized “Lease liabilities” amounting to P=126.66 billion pertaining to

operating leases related to passenger aircraft, engines, and ground property and equipment.· The Group reclassified long-term obligations from obligations under aircraft finance lease

amounting to P=64.85 billion to “Lease liabilities”.

· Deferred income tax assets and liabilities (see Note 22)· Deferred income tax assets and liabilities amounting to P=38.00 billion were recognized

related to lease liabilities and deferred income tax liabilities amounting to P=38.00 billionwere recognized on right-of-use assets.

The Group has lease contracts for various items of property and equipment. Before the adoption ofPFRS 16, the Group classified each of its leases (as lessee) at the inception date as either a financelease or an operating lease. A lease was classified as a finance lease if it transferred substantiallyall of the risks and rewards incidental to ownership of the leased asset to the Group; otherwise itwas classified as an operating lease. Finance leases were capitalized at the commencement of thelease at the inception date fair value of the leased property or, if lower, at the present value of theminimum lease payments. Lease payments were apportioned between interest (recognized asfinance costs) and reduction of the lease liability. In an operating lease, the leased property was notcapitalized and the lease payments were recognized as rent expense in profit or loss on astraight-line basis over the lease term. Any prepaid rent and accrued rent were recognized under“Other current assets” and “Accrued expenses and other current liabilities”, respectively.

Upon adoption of PFRS 16, the Group applied a single recognition and measurement approach forall leases, except for short-term leases and leases of low-value assets. The standard providesspecific transition requirements and practical expedients, which has been applied by the Group.

Leases previously classified as finance leasesThe Group did not change the initial carrying amounts of recognized assets and liabilities at thedate of initial application for leases previously classified as finance leases (i.e., the right-of-useassets and lease liabilities equal the lease assets and liabilities recognized under PAS 17). Therequirements of PFRS 16 was applied to these leases from January 1, 2019.

Leases previously accounted for as operating leasesThe Group recognized right-of-use assets and lease liabilities for those leases previously classifiedas operating leases, except for short-term leases and leases of low-value assets. The right-of-useassets for most leases were recognized based on the on the amount equal to the lease liabilities,adjusted for any related prepaid and accrued lease payments previously recognized. Lease liabilitieswere recognized based on the present value of the remaining lease payments, discounted using theincremental borrowing rate at the date of initial application.

The Group has elected to apply the following practical expedients provided by the standard:

· Use of a single discount rate to a portfolio of leases with reasonably similar characteristics;· Apply the requirements of PFRS 16 to leases for which the lease term ends within 12 months

from the date of initial application;· Exclude initial direct costs from the measurement of the right-of-use asset at the date of initial

application; and· Use hindsight in determining the lease term where the contract contains options to extend or

terminate the lease.

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The lease liability at as January 1, 2019 as can be reconciled to the operating lease commitmentsas of December 31, 2018 follows:

Operating lease commitments as at December 31, 2018 P=158,229,310Add: Commitments relating to leases previously classified as obligations

under finance leases 76,102,452Less: Commitments relating to short-term leases (841,780)

Gross lease liability as at January 1, 2019 233,489,982Weighted average incremental borrowing rate at January 1, 2019* 4.96%Discounted operating lease commitments at January 1, 2019 (41,980,049)Lease liabilities recognized at January 1, 2019 P=191,509,933*Weighted average discount rate at the time of initial application

Due to the adoption of PFRS 16, the Group’s operating profit will improve, whilst its financingcharges will increase. This is due to the change in the accounting for expenses of leases that wereclassified as operating leases under PAS 17.

The adoption of PFRS 16 did not have an impact on equity, since the Group elected to measure theright-of-use assets at an amount equal to the lease liability, adjusted by the amount of any prepaidor accrued lease payments relating to that lease recognized in the consolidated statement offinancial position immediately before the date of initial application.

· Philippine Interpretation IFRIC-23, Uncertainty over Income Tax Treatments

The interpretation addresses the accounting for income taxes when tax treatments involveuncertainty that affects the application of PAS 12, Income Taxes, and does not apply to taxes orlevies outside the scope of PAS 12, nor does it specifically include requirements relating to interestand penalties associated with uncertain tax treatments.

The interpretation specifically addresses the following:

· Whether an entity considers uncertain tax treatments separately· The assumptions an entity makes about the examination of tax treatments by taxation

authorities· How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax

credits and tax rates· How an entity considers changes in facts and circumstances

An entity must determine whether to consider each uncertain tax treatment separately or togetherwith one or more other uncertain tax treatments. The approach that better predicts the resolution ofthe uncertainty should be followed.

Upon adoption of the Interpretation, the Group considered whether it has any uncertain tax position,particularly those relating to transfer pricing of intercompany transactions. The Group determined,based on its tax compliance and transfer pricing assessment, that it is probable that its tax treatmentswill be accepted by the taxation authority. The interpretation did not have an impact on theconsolidated financial statements.

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· Amendments to PFRS 9, Financial Instruments, Prepayment Features with NegativeCompensation

Under PFRS 9, a debt instrument can be measured at amortized cost or at fair value through othercomprehensive income, provided that the contractual cash flows are ‘solely payments of principaland interest on the principal amount outstanding’ (the SPPI criterion) and the instrument is heldwithin the appropriate business model for that classification. The amendments to PFRS 9 clarifythat a financial asset passes the SPPI criterion regardless of the event or circumstance that causesthe early termination of the contract and irrespective of which party pays or receives reasonablecompensation for the early termination of the contract.

These amendments had no impact on the consolidated financial statements.

· Amendments to PAS 19, Employee Benefits, Plan Amendment, Curtailment or Settlement

The amendments to PAS 19 address the accounting when a plan amendment, curtailment orsettlement occurs during a reporting period. The amendments specify that when a plan amendment,curtailment or settlement occurs during the annual reporting period, an entity is required to:

· determine current service cost for the remainder of the period after the plan amendment,curtailment or settlement, using the actuarial assumptions used to remeasure the net definedbenefit liability (asset) reflecting the benefits offered under the plan and the plan assets afterthat event; and

· determine net interest for the remainder of the period after the plan amendment, curtailment orsettlement using: the net defined benefit liability (asset) reflecting the benefits offered underthe plan and the plan assets after that event; and the discount rate used to remeasure that netdefined benefit liability (asset).

The amendments also clarify that an entity first determines any past service cost, or a gain or losson settlement, without considering the effect of the asset ceiling. This amount is recognized inprofit or loss. An entity then determines the effect of the asset ceiling after the plan amendment,curtailment or settlement. Any change in that effect, excluding amounts included in the net interest,is recognized in other comprehensive income.

The amendments had no impact on the consolidated financial statements as the Group did not haveplan amendments, curtailments or settlements during the period. These amendments will apply onfuture amendments, curtailments or settlements of the retirement benefits of the Group.

· Amendments to PAS 28, Investments in Associates and Joint Ventures, Long -term Interests inAssociates and Joint Ventures

The amendments clarify that an entity applies PFRS 9 to long-term interests in an associate or jointventure to which the equity method is not applied but that, in substance, form part of the netinvestment in the associate or joint venture (long-term interests). This clarification is relevantbecause it implies that the expected credit loss model in PFRS 9 applies to such long-term interests.

The amendments also clarified that, in applying PFRS 9, an entity does not take account of anylosses of the associate or joint venture, or any impairment losses on the net investment, recognizedas adjustments to the net investment in the associate or joint venture that arise from applyingPAS 28.

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Since the Group does not have associate and joint venture, the amendments will not have an impacton the consolidated financial statements.

Annual Improvements to PFRSs 2015-2017 Cycle

· Amendments to PFRS 3, Business Combinations, and PFRS 11, Joint Arrangements, PreviouslyHeld Interest in a Joint Operation

The amendments clarify that, when an entity obtains control of a business that is a joint operation,it applies the requirements for a business combination achieved in stages, including remeasuringpreviously held interests in the assets and liabilities of the joint operation at fair value. In doing so,the acquirer remeasures its entire previously held interest in the joint operation.

A party that participates in, but does not have joint control of, a joint operation might obtain jointcontrol of the joint operation in which the activity of the joint operation constitutes a business asdefined in PFRS 3. The amendments clarify that the previously held interests in that joint operationare not remeasured.

An entity applies those amendments to business combinations for which the acquisition date is onor after the beginning of the first annual reporting period beginning on or after January 1, 2019 andto transactions in which it obtains joint control on or after the beginning of the first annual reportingperiod beginning on or after January 1, 2019, with early application permitted. These amendmentshad no impact on the consolidated financial statements as there is no transaction, where joint controlis obtained.

· Amendments to PAS 12, Income Tax Consequences of Payments on Financial InstrumentsClassified as Equity

The amendments clarify that the income tax consequences of dividends are linked more directly topast transactions or events that generated distributable profits than to distributions to owners.

Therefore, an entity recognizes the income tax consequences of dividends in profit or loss, othercomprehensive income or equity according to where the entity originally recognized those pasttransactions or events.

These amendments are not relevant to the Group because dividends declared by the Group do notgive rise to tax obligations under the current tax laws.

· Amendments to PAS 23, Borrowing Costs, Borrowing Costs Eligible for Capitalization

The amendments clarify that an entity treats as part of general borrowings any borrowing originallymade to develop a qualifying asset when substantially all of the activities necessary to prepare thatasset for its intended use or sale are complete.

An entity applies those amendments to borrowing costs incurred on or after the beginning of theannual reporting period in which the entity first applies those amendments.

Since the Group’s current practice is in line with these amendments, the amendments did not havean effect on the consolidated financial statements.

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New Accounting Standards, Amendments to Existing Standardsand Interpretations Effective Subsequent to December 31, 2019Pronouncements issued but not yet effective as at December 31, 2019 are listed below. The Groupintends to adopt these standards and amendments, if applicable, when they become effective. Unlessotherwise stated, adoption of these pronouncements is not expected to have any significant impact onthe consolidated financial statements.

Effective beginning on or after January 1, 2020

· Amendments to PFRS 3, Definition of a Business

The amendments to PFRS 3 clarify the minimum requirements to be a business, remove theassessment of a market participant’s ability to replace missing elements, and narrow the definitionof outputs. The amendments also add guidance to assess whether an acquired process is substantiveand add illustrative examples. An optional fair value concentration test is introduced which permitsa simplified assessment of whether an acquired set of activities and assets is not a business.

An entity applies those amendments prospectively for annual reporting periods beginning on orafter January 1, 2020, with earlier application permitted.

These amendments will apply on future business combinations of the Group.

· Amendments to PAS 1, Presentation of Financial Statements, and PAS 8, Accounting Policies,Changes in Accounting Estimates and Errors, Definition of Material

The amendments refine the definition of material in PAS 1 and align the definitions used acrossPFRSs and other pronouncements. They are intended to improve the understanding of the existingrequirements rather than to significantly impact an entity’s materiality judgments.

An entity applies those amendments prospectively for annual reporting periods beginning on orafter January 1, 2020, with earlier application permitted.

Effective beginning on or after January 1, 2021

· PFRS 17, Insurance Contracts

PFRS 17 is a comprehensive new accounting standard for insurance contracts covering recognitionand measurement, presentation and disclosure. Once effective, PFRS 17 will replacePFRS 4, Insurance Contracts. This new standard on insurance contracts applies to all types ofinsurance contracts (i.e., life, non-life, direct insurance and re-insurance), regardless of the type ofentities that issue them, as well as to certain guarantees and financial instruments with discretionaryparticipation features. A few scope exceptions will apply.

The overall objective of PFRS 17 is to provide an accounting model for insurance contracts that ismore useful and consistent for insurers. In contrast to the requirements in PFRS 4, which are largelybased on grandfathering previous local accounting policies, PFRS 17 provides a comprehensivemodel for insurance contracts, covering all relevant accounting aspects. The core of PFRS 17 is thegeneral model, supplemented by:

· A specific adaptation for contracts with direct participation features (the variable fee approach)· A simplified approach (the premium allocation approach) mainly for short-duration contracts

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PFRS 17 is effective for reporting periods beginning on or after January 1, 2021, with comparativefigures required. Early application is permitted.

The standard is not relevant to the Group since none of the entities within the Group have activitiesthat are predominantly connected with insurance or issuance of insurance contracts.

Deferred effectivity

· Amendments to PFRS 10, Consolidated Financial Statements, and PAS 28, Sale or Contributionof Assets between an Investor and its Associate or Joint Venture

The amendments address the conflict between PFRS 10 and PAS 28 in dealing with the loss ofcontrol of a subsidiary that is sold or contributed to an associate or joint venture. The amendmentsclarify that a full gain or loss is recognized when a transfer to an associate or joint venture involvesa business as defined in PFRS 3. Any gain or loss resulting from the sale or contribution of assetsthat does not constitute a business, however, is recognized only to the extent of unrelated investors’interests in the associate or joint venture.

On January 13, 2016, the Financial Reporting Standards Council deferred the original effectivedate of January 1, 2016 of the said amendments until the International Accounting Standards Board(IASB) completes its broader review of the research project on equity accounting that may resultin the simplification of accounting for such transactions and of other aspects of accounting forassociates and joint ventures. The Group is currently assessing the impact of this newpronouncement.

Basis of ConsolidationThe consolidated financial statements comprise the financial statements of the Parent Company and itssubsidiaries as at December 31, 2019 and 2018 and for each of the three years in the period endedDecember 31, 2019. The financial statements of the subsidiaries are prepared using consistentaccounting policies as those of the Parent Company.

The subsidiaries and the respective percentages of ownership of the Parent Company as atDecember 31 are as follows:

2019 2018Direct Indirect Direct Indirect

PAL 98.57% 0.35% 98.57% 0.35%Sabre Travel Network (Philippines), Inc. (Sabre) – 82.10% – 82.10%PAL Receivables Co. Ltd. (PRC) – – – –Mabuhay Miles Inc. (MMI) – 98.92% – 98.92%Mabuhay Maritime Express Transport Inc. (MMET) – 98.92% – 98.92%Fortunate Star Limited (FSL) – 64.30% – 84.08%

PR Holdings, Inc. (PRI) 82.33% – 82.33% –ZUMA 51.00% – 51.00% –

APC − 50.98% − 50.98%GuidetothePhilippines Inc. (Guide) − 28.04% − 28.04%

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The subsidiaries’ operation and principal activity are as follows: PAL and APC are primarily engagedin air transport of passengers and cargo within the Philippines and between the Philippines and severalinternational destinations; Sabre engages in development and marketing of computerized airlinereservation system; PRC is a structured entity over which PAL has control; FSL is a holding companyof various entities with whom PAL has operating lease agreements; MMI is intended to promote thefrequent flyer program of PAL; PRI and ZUMA are holding companies; MMET is a companyestablished in 2016 which will engage in water transportation of passengers and cargoes. Guide is anewly established entity intended to develop and operate an inbound business-to-consumer (B2C)online travel marketplace. PAL, Sabre, MMI, MMET, PRI, ZUMA, APC and Guide are domiciled inthe Philippines while PRC and FSL are incorporated in Cayman Islands. MMI commenced itsoperations in 2018 and ceased its operations in 2019. MMET has started and ceased commercialoperations in 2019.

The Parent Company or its subsidiaries control an investee if and only if the following criteria are met:

· Power over the investee (i.e., existing rights that give it the current ability to direct the relevantactivities of the investee)

· Exposure, or rights, to variable returns from its involvement with the investee· The ability to use its power over the investee to affect its returns

When the Parent Company or its subsidiaries have less than a majority of the voting or similar rightsof an investee, the Parent Company or its subsidiaries consider all relevant facts and circumstances inassessing whether they have power over an investee, including:

· The contractual arrangement with the other vote holders of the investee· Rights arising from other contractual arrangements· The Parent Company or its subsidiaries’ voting rights and potential voting rights

The Parent Company or its subsidiaries reassess whether or not they control an investee if facts andcircumstances indicate that there are changes to one or more of the three elements of control.Consolidation of a subsidiary begins when the Parent Company or its subsidiaries obtain control overthe subsidiary and ceases when it ceases to have control of the subsidiary. Assets, liabilities, incomeand expenses of a subsidiary acquired or disposed of during the year are included in the consolidatedstatement of comprehensive income from the date the Group gains control until the date control is lost.

Profit or loss and each component of other comprehensive income are attributed to the equity holdersof the Parent Company and to the non-controlling interests, even if this results in the non-controllinginterests having a deficit balance.

The financial statements of the subsidiaries are prepared for the same reporting period as the ParentCompany. All intra-group balances, transactions, unrealized gains and losses, resulting from intra-group transactions and dividends are eliminated in full.

A change in the ownership interest in a subsidiary, without a loss of control, is accounted for as anequity transaction. When the Parent Company loses control of a subsidiary, it:

· Derecognizes the assets (including goodwill) and liabilities of the subsidiary· Derecognizes the carrying amount of any noncontrolling interests· Derecognizes the cumulative translation differences recorded in equity· Recognizes the fair value of the consideration received· Recognizes the fair value of any investment retained· Recognizes any surplus or deficit in profit or loss

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· Reclassifies the Parent Company’s share of components previously recognized in OCI to profit orloss or retained earnings, as appropriate, as would be required if the Parent Company had directlydisposed of the related assets or liabilities.

Non-controlling interest represents the interest in the subsidiaries not held by the Parent Company andare presented separately in the consolidated statement of comprehensive income and consolidatedstatement of changes in equity and within equity in the consolidated statement of financial position,separate from the equity attributable to the equity holders of the Parent Company.

Business Combination under Common ControlWhere there are business combinations in which all the combining entities within the Group areultimately controlled by the same ultimate parent (i.e., Controlling Shareholders) before and after thebusiness combination and that the control is not transitory (“business combinations under commoncontrol”), the Group accounts such business combinations similar to a pooling of interests. The assetsand liabilities of the acquired entities and that of the Group are reflected at their carrying values. Thedifference in the amount recognized and the fair value of the consideration given, is accounted for asan equity transaction, i.e., as either a contribution or distribution of equity. Further, when a subsidiaryis disposed in a common control transaction, the difference in the amount recognized and the fair valueof the consideration received, is also accounted for as an equity transaction. The Group recorded thedifference as other equity reserves and presented as separate component of equity in the consolidatedstatements of financial position. Comparatives shall be restated to include balances and transactions asif the entities had been acquired at the beginning of the earliest period presented as if the companieshad always been combined.

Cash and Cash EquivalentsCash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investmentsthat are readily convertible to known amounts of cash with original maturities of three months or lessfrom dates of acquisition and that are subject to an insignificant risk of changes in value. Cash and cashequivalents exclude any restricted cash (presented under “Other current assets” and “Other noncurrentassets”) that is not available for use by the Group and therefore is not considered highly liquid, such ascash set aside to collateralize various surety bonds.

For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist only ofcash and cash equivalents as defined above.

Fair Value MeasurementThe Group measures financial instruments, such as financial assets at FVTOCI (classified as AFSinvestments in 2017) and derivatives, and nonfinancial assets such as buildings and improvementscarried at revalued amounts, at fair value at the end of reporting period.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. The fair value measurement is basedon the presumption that the transaction to sell the asset or transfer the liability takes place either:

· in the principal market for the asset or liability, or· in the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible to the Group.

The fair value of an asset or a liability is measured using the assumptions that market participants woulduse when pricing the asset or liability, assuming that market participants act in their economic bestinterest.

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A fair value measurement of a nonfinancial asset takes into account a market participant’s ability togenerate economic benefits by using the asset in its highest and best use or by selling it to anothermarket participant that would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficientdata are available to measure fair value, maximizing the use of relevant observable inputs andminimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the consolidated financialstatements are categorized within the fair value hierarchy, described as follows, based on the lowestlevel of input that is significant to the fair value measurement as a whole:

· Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities· Level 2 - Valuation techniques for which the lowest level of input that is significant to the fair value

measurement is directly or indirectly observable· Level 3 - Valuation techniques for which the lowest level of input that is significant to the fair value

measurement is unobservable.

For assets and liabilities that are recognized in the consolidated financial statements on a recurringbasis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level of input that is significant to the fair valuemeasurement as a whole) at the end of each reporting period.

For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities onthe basis of the nature, characteristics and risks of the asset or liability and the level of the fair valuehierarchy.

Financial Instruments - Effective prior to January 1, 2018Initial recognitionThe Group recognizes a financial asset or a financial liability in the consolidated statement of financialposition when it becomes a party to the contractual provisions of the instrument. All regular waypurchases and sales of financial assets are recognized on the trade date, i.e., the date the Group commitsto purchase or sell the assets. Regular way purchases or sales are purchases or sales of financial assetsthat require the delivery of assets within the period generally established by regulation or conventionin the market place.

All financial assets and financial liabilities are recognized initially at fair value. In the case of financialassets and financial liabilities not classified as at fair value through profit or loss, fair value at initialrecognition includes any directly attributable transaction costs. Premiums on derivative instruments,representing the fair value of the instrument at inception, are included in the initial recognition.

Classification of financial instrumentsFinancial instruments are classified as debt or equity in accordance with the substance of the contractualarrangement. Interests, dividends, gains, and losses relating to a financial instrument classified as a debtare reported as expense or income. Distributions to holders of financial instruments classified as equityare charged directly to equity.

Financial assets are classified, at initial recognition, as financial assets at FVTPL, loans and receivables,held-to-maturity investments or AFS investments, or as derivatives designated as hedging instrumentsin an effective hedge as appropriate. Financial liabilities are classified as either financial liabilities atFVTPL or other financial liabilities. The Group determines the classification of its financial instrumentsupon initial recognition and, where allowed and appropriate, re-evaluates this designation at everyreporting date.

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Financial assets and financial liabilities at FVTPLFinancial assets and financial liabilities at fair value through profit or loss include financial instrumentsheld for trading, derivative financial instruments and those designated upon initial recognition asFVTPL.

Financial assets and financial liabilities are classified as held for trading if they are acquired for thepurpose of selling or repurchasing in the near term or are designated by management as at fair valuethrough profit or loss upon initial recognition. Derivatives, including separated embedded derivatives,are also classified as held for trading unless they are designated as effective hedging instruments asdefined in PAS 39.

Where a contract contains one or more embedded derivatives, the hybrid contract may be designatedas financial asset at FVTPL, except where the embedded derivative does not significantly modify thecash 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 uponinitial recognition if any of the following criteria is met:

· The designation eliminates or significantly reduces the inconsistent treatment that would otherwisearise from measuring the assets and liabilities or recognizing gains or losses on them on a differentbasis.

· The assets or liabilities are part of a group of financial assets or financial liabilities, or both financialassets and financial liabilities, which are managed and their performance is evaluated on a fair valuebasis, in accordance with a documented risk management or investment strategy.

· The financial instrument contains an embedded derivative, unless the embedded derivative doesnot significantly modify the cash flows or it is clear, with little or no analysis, that it would not beseparately recorded.

Financial assets and financial liabilities classified under this category are carried at fair value in theconsolidated statement of financial position, with any gains or losses on changes in fair valuesrecognized in profit or loss. Interest earned or incurred is recognized as the interest accrues and dividendincome is recorded when the right to receive payment has been established.

Included under this category are the Group’s derivative assets and liabilities.

Loans and receivablesLoans and receivables are nonderivative financial assets with fixed or determinable payments that arenot quoted in an active market. Such assets are carried at amortized cost using the effective interestmethod less impairment, gains and losses are recognized in profit or loss when the loans and receivablesare derecognized or impaired, and through the amortization process. Loans and receivables (or portionof loans and receivables) are included in current assets if maturity is within 12 months from thereporting date. Otherwise, these are classified as noncurrent assets.

Included under this category are the Group’s cash in banks and cash equivalents, receivables, securitydeposits, miscellaneous deposits and deposits on aircraft leases.

Held-to-maturity investmentsQuoted nonderivative financial assets with fixed or determinable payments and fixed maturities areclassified as held-to-maturity when the Group has the positive intention and ability to hold them tomaturity. 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 entirecategory would be tainted and reclassified as AFS investments. Other long-term investments that are

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intended to be held to maturity, such as bonds, are subsequently measured at amortized cost. This costis computed as the amount initially recognized minus principal repayments, plus or minus thecumulative amortization using the effective interest method of any difference between the initiallyrecognized amount and the maturity amount. This calculation includes fees paid or received betweenparties to the contract that are an integral part of the effective interest rate, issuance costs and all otherpremiums and discounts. For investments carried at amortized cost, gains and losses are recognized inprofit or loss when the investments are derecognized or impaired, and through the amortization process.Assets under this category are classified as current assets if maturity is within 12 months from thereporting date. Otherwise, these are classified as noncurrent assets.

AFS investmentsAFS investments are nonderivative financial assets that are designated as available-for-sale or are notclassified in any of the three preceding categories. After initial recognition, AFS investments aremeasured at fair value, with unrealized gains or losses recognized in OCI and as a separate componentof equity until the investment is derecognized or until the investment is determined to be impaired, atwhich time the cumulative gain or loss previously reported in equity is included in profit or loss. Theeffective yield and (where applicable) results of foreign exchange restatement for AFS debt investmentsare reported immediately in profit or loss. These financial assets (or portion of these financial assets)are classified as noncurrent assets unless the intention is to dispose such assets within 12 months fromthe reporting date.

Other financial liabilitiesOther financial liabilities pertain to financial liabilities that are not held for trading nor designated as atFVTPL 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 recognizedinitially at fair value and are subsequently carried at amortized cost, taking into account the impact ofapplying the effective interest method of amortization (or accretion) of any related premium, discountand any directly attributable transaction costs. Other financial liabilities (or portions of other financialliabilities) are included in current liabilities when they are expected to be settled within12 months from the reporting date or the Group does not have an unconditional right to defer settlementof the liabilities for at least 12 months from the reporting date.

Included under this category are the Group’s notes payable, accounts payable and accrued expenses,obligations under finance leases, long-term debt and deposits on subleased aircraft (included under“Reserves and other noncurrent liabilities” in the consolidated statement of financial position).

Financial Instruments - Effective starting January 1, 2018Date of recognitionThe Group recognizes a financial asset or a financial liability in the consolidated statement of financialposition when it becomes a party to the contractual provisions of the instrument. Purchases or sales offinancial assets, recognition and de-recognition, as applicable, that require delivery of assets within thetime frame established by regulation or convention in the market place are recognized on the settlementdate.

Initial recognition of financial instrumentsFinancial instruments are recognized initially at fair value, which is the fair value of the considerationgiven (in case of an asset) or received (in case of a liability). With the exception of trade receivablesor for which the Group has applied the practical expedient, the Group’s initial measurement of financialinstruments, except for those classified as FVTPL, includes transaction cost. Trade receivables or forwhich the Group has applied the practical expedient are measured at the transaction price determinedunder PFRS 15.

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Financial assetsAt initial recognition, the Group classifies its financial assets as follows:

· FVTPL· FVTOCI· Financial assets measured at amortized cost

The basis of the classification of the Group’s financial instruments depends on the following:

· The Group’s business model for managing its financial assets; and· The contractual cash flow characteristics of the financial assets

A financial asset is classified to be measured at amortized cost if following conditions were met:

· The financial asset is held to collect the contractual cash flows; and· Contractual terms of the financial asset give rise to cash flows that are solely payments of principal

and interest on the principal amount outstanding.

Financial assets are classified as FVTOCI if the following conditions were met:

· The financial asset is held within a business model whose objective is achieved by both collectingthe contractual cash flows and selling the financial asset; and

· Contractual terms of the financial asset give rise to cash flows that are solely payments of principaland interest on the principal amount outstanding.

Financial assets shall be classified as FVTPL unless it is measured at amortized cost or at FVTOCI.The Group may also irrevocably elect at the initial recognition of equity instruments that wouldotherwise be measured at FVTPL to be presented as FVTOCI.

Financial liabilitiesFinancial liabilities are classified as measured at amortized cost except for:

· Financial liabilities measured at FVTPL which include derivatives that liabilities measured at fairvalue;

· Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognitionor when the continuing involvement approach applies;

· Financial guarantee contracts;· Commitments to provide a loan at a below-market interest rate; and· Contingent considerations recognized by an acquirer in a business combination to which

PFRS 3 applies.

Subsequent measurementFinancial assets measured at amortized costAfter initial measurement, these financial assets are subsequently measured at amortized cost using theeffective interest method, less allowance for impairment. Amortized cost is calculated by consideringany discount or premium on acquisition and fees that are an integral part of the effective interest rate.Gains and losses are recognized in the consolidated statement of profit or loss when the loans andreceivables are derecognized and impaired, as well as through the amortization process. Loans andreceivables are included under current assets if realizability or collectability is within twelve monthsafter the reporting period. Otherwise, these are classified as noncurrent assets.

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The Group’s cash in banks and cash equivalents, receivables, security deposits, miscellaneous depositsand deposits on aircraft leases are classified under this category.

FVTOCI (equity instruments)Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognizedas other income in profit or loss when the right of payment has been established, except when the Groupbenefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, suchgains are recorded in OCI. Equity instruments designated at fair value through OCI are not subject toimpairment assessment.

The Group elected to classify irrevocably its equity investments under this category.

Financial liabilities measured at amortized costAfter initial recognition, these financial liabilities are carried at amortized cost, taking into account theimpact of applying the effective interest method of amortization (or accretion) for any related premium,discount and any direct attributable transaction cost. Gains or loss on financial liabilities are recognizedin profit or loss when the liabilities are derecognized, as well as through the amortization process.

The Group’s notes payable, accounts payable and accrued expenses, obligations under finance leases,long-term debt and deposits on subleased aircraft (included under “Reserves and other noncurrentliabilities” in the consolidated statement of financial position) are classified under this category.

“Day 1” differenceWhere the transaction price in a non-active market is different from the fair value from other observablecurrent market transactions in the same instrument or based on a valuation technique whose variablesinclude only data from observable market, the Group recognizes the difference between the transactionprice and the fair value (a “Day 1” difference) in profit or loss unless it qualifies for recognition assome other type of asset. In cases where data used is not observable, the difference between thetransaction price and model value is only recognized in profit or loss when the inputs becomeobservable or when the instrument is derecognized. For each transaction, the Group determines theappropriate method of recognizing the “Day 1” difference amount.

Derivatives and hedge accountingFreestanding derivativesFor the purpose of hedge accounting, hedges are classified primarily either as: (a) a hedge of the fairvalue of a recognized asset or liability or an unrecognized firm commitment (fair value hedge);(b) a hedge of the exposure to variability in cash flows attributable to an asset or liability or a forecastedtransaction (cash flow hedge); or (c) hedge of a net investment in a foreign operation. The Group didnot designate its derivative transactions as cash flow or fair value hedge for the years endedDecember 31, 2019 and 2018.

At the inception of a hedge relationship, the Group formally designates and documents the hedgerelationship to which the Group wishes to apply hedge accounting and the risk management objectiveand strategy for undertaking the hedge. The documentation includes identification of the hedginginstrument, the hedged item or transaction, the nature of the risk being hedged and how the entity willassess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’sfair value or cash flows attributable to the hedged risk. Such hedges are assessed on an ongoing basisto determine that they actually have been highly effective throughout the financial reporting periods forwhich they were designated.

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In cash flow hedges, changes in the fair value of a hedging instrument that qualifies as a highly effectivecash flow hedge are included in OCI, net of related deferred income tax. The ineffective portion isimmediately recognized in profit or loss.

If the hedged cash flow results in the recognition of an asset or a liability, gains and losses initiallyrecognized in equity are transferred from equity to profit or loss in the same period or periods duringwhich the hedged forecasted transaction or recognized asset or liability affect profit or loss.

When the hedge ceases to be highly effective, hedge accounting is discontinued prospectively. In thiscase, the cumulative gain or loss on the hedging instrument that has been reported directly in equity isrecognized in profit or loss.

For derivatives that are not designated as effective accounting hedges, any gains or losses arising fromchanges in fair value of derivatives are recognized directly in profit or loss.

Embedded derivativesEmbedded derivatives are separated from the hybrid contracts and accounted for at fair value throughprofit or loss when the entire hybrid contracts (composed of the host contract and the embeddedderivative) are not accounted for at fair value through profit or loss, the economic risks of the embeddedderivatives are not closely related to those of their respective host contracts, and a separate instrumentwith the same terms as the embedded derivative would meet the definition of a derivative.

Changes in fair values are included in profit or loss. Derivatives are carried as assets when the fairvalue 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 contractand accounted for as a derivative when the entity first becomes a party to the contract. Subsequentreassessment is prohibited unless there is a change in the terms of the contract that significantlymodifies the cash flows that otherwise would be required under the contract, in which case reassessmentis required. The Group determines whether a modification to cash flows is significant by consideringthe extent to which the expected future cash flows associated with the embedded derivative, the hostcontract or both have changed and whether the change is significant relative to the previously expectedcash flows on the contract.

Derecognition of Financial Assets and Financial LiabilitiesA financial asset (or, where applicable, a part of a financial asset or part of a group of similar financialassets) is derecognized when:

· the rights to receive cash flows from the asset have expired· the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation

to pay them in full without material delay to a third party under a “pass-through” arrangement· 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 ownership of the asset, or (b) has neither transferred norretained substantially all the risks and rewards of ownership of the asset, but has transferred controlof the asset.

When the Group has transferred its rights to receive cash flows from an asset and has neither transferrednor retained substantially all the risks and rewards of ownership of the asset nor transferred control ofthe asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset.

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If a transfer of financial asset does not result in derecognition since the Group has retained substantiallyall the risks and rewards of the ownership of the transferred asset, the Group continues to recognize thetransferred asset in its entirety and recognizes a liability for the consideration received.

A financial liability is derecognized when the obligation under the liability is discharged, cancelled orhas expired.

When an existing financial liability is replaced by another from the same lender on substantiallydifferent terms, or the terms of an existing liability are substantially modified, such modification istreated as the derecognition of the carrying value of the original liability and the recognition of a newliability at fair value, and any resulting difference is recognized in profit or loss.

Impairment of Financial Assets - Effective prior to January 1, 2018The Group assesses, at each reporting date, whether there is objective evidence that a financial asset orgroup of financial assets is impaired. If such evidence exists, any impairment loss is recognized inprofit or loss.

Financial assets carried at amortized costThe Group first assesses whether impairment exists individually for financial assets that areindividually significant, and individually or collectively for financial assets that are not individuallysignificant. If it is determined that no objective evidence of impairment exists for an individuallyassessed financial asset, whether significant or not, the asset is included in a group of financial assetswith similar credit risk characteristics and that group of financial assets is collectively assessed forimpairment. 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.

For financial assets carried at amortized cost, whenever it is probable that the Group will not collect allamounts due according to the contractual terms of the receivables, an impairment loss has beenincurred. In relation to 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 Groupwill not be able to collect all of the amounts due under the original terms of the invoice. The amount ofthe loss is measured as the difference between the asset’s carrying amount and the present value ofestimated future cash flows discounted at the financial asset’s original effective interest rate. Thecarrying amount of the asset is reduced either directly or through the use of an allowance account. Anyloss determined is recognized in profit or loss.

Impaired receivables are derecognized when there is no realistic prospect of future recovery and allcollateral has been realized.

If, in a subsequent period, the amount of the estimated impairment loss decreases because of an eventoccurring after the impairment was recognized, the previously recognized impairment loss is reversedto the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.Any subsequent reversal of an impairment loss is recognized in profit or loss.

AFS investmentsIn case of equity investments classified as AFS investments, objective evidence of impairment wouldinclude a significant or prolonged decline in the fair value of the investments below their cost. Whenthere is evidence of impairment loss, the cumulative loss, measured as the difference between theacquisition cost and the current fair value, less any impairment loss on that financial asset previouslyrecognized in profit or loss, is removed from OCI and recognized in profit or loss.

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Impairment losses on investment in equity instruments are not reversed through income. Increases infair value after impairment are recognized in OCI.

In the case of debt instruments classified as AFS, impairment is assessed based on the same criteria asfinancial assets carried at amortized cost. Future interest income continues to be accrued based on thereduced carrying amount using the rate of interest used to discount cash flows for the purpose ofmeasuring impairment loss. If, in subsequent year, the fair value of a debt instrument increases and theincrease can be objectively related to an event occurring after the impairment loss was recognized inprofit or loss, the impairment loss is reversed through profit or loss.

Impairment of Financial Assets - Effective starting January 1, 2018The Group recognizes an allowance for expected credit losses (ECLs) for all debt instruments not heldat FVTPL. ECLs are based on the difference between the contractual cash flows due in accordancewith the contract and all the cash flows that the Group expects to receive, discounted at anapproximation of the original effective interest rate. The expected cash flows will include cash flowsfrom the sale of collateral held or other credit enhancements that are integral to the contractual terms.

ECLs are recognized in two stages. For credit exposures for which there has not been a significantincrease in credit risk since initial recognition, ECLs are provided for credit losses that result fromdefault events that are possible within the next 12 months (a 12-month ECL). For those credit exposuresfor which there has been a significant increase in credit risk since initial recognition, a loss allowanceis required for credit losses expected over the remaining life of the exposure, irrespective of the timingof the default (a lifetime ECL).

For general trade receivables, the Group applies a simplified approach in calculating ECLs. Therefore,the Group does not track changes in credit risk, but instead recognizes a loss allowance based onlifetime ECLs at each reporting date. The Group has established a provision matrix that is based on itshistorical credit loss experience, adjusted for forward-looking factors specific to the debtors and theeconomic environment.

Offsetting of Financial InstrumentsFinancial assets and financial liabilities are offset and the net amount reported in the consolidatedstatement of financial position if there is a currently enforceable legal right to set off the recognizedamounts and there is intention to settle on a net basis, or to realize the asset and settle the liabilitysimultaneously. The Group assesses that it has a currently enforceable right of offset if the right is notcontingent on a future event, and is legally enforceable in the normal course of business, event ofdefault, and event of insolvency or bankruptcy of the Group and all of the counterparties.

Expendable Parts, Fuel, Materials and SuppliesExpendable parts, fuel, materials and supplies are stated at the lower of cost and net realizable value.Cost, which includes the purchase price and other costs incurred in bringing these expendable parts,fuel, materials and supplies to their present location or condition, is determined using the movingweighted average method. Net realizable value represents replacement cost of these expendable parts,fuel, materials and supplies, considering factors such as age and physical condition of these assets.

Deposits and PrepaymentsPrepayments include advance payments of various materials, various rentals and other services that areyet to be delivered and from which future economic benefits are expected to flow to the Group withinthe normal operating cycle or within 12 months from the reporting date. They are initially measured atthe amount paid in advance by the Group for the purchase of goods and services and are subsequentlydecreased by the amount of expense incurred. Prepayments are included in “Other current assets”account in the consolidated statement of financial position.

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Assets Held for SaleNoncurrent assets are classified as held for sale if their carrying amount will be recovered principallythrough a sale transaction rather than through continuing use. The asset must be available for immediatesale in its present condition subject only to terms that are usual and customary for sales of such assetand its sale must be highly probable. For the sale to be highly probable, (a) an appropriate level ofmanagement must be committed to a plan to sell the asset, (b) an active program must have beeninitiated, (c) the asset must be actively marketed for sale at a price that is reasonable in relation to itscurrent fair value, (d) the sale should be expected to qualify for recognition as a completed sale withinone year from the date of classification and (e) actions required to complete the plan should indicatethat it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.Noncurrent assets classified as held for sale are measured at the lower of their previous carryingamount, net of any impairment, and fair value less costs to sell.

Impairment loss is recognized for any subsequent write-down of the asset to fair value less costs to sell.Gain for any subsequent increase in fair value less costs to sell of an asset is also recognized, but not inexcess of the cumulative impairment loss that has been previously recognized.

If the Group has classified an asset as held for sale but the criteria as set out above are no longer met,the Group ceases to classify the asset as held for sale. The Group measures a noncurrent asset thatceases to be classified as held for sale at the lower of (a) its carrying amount before the asset wasclassified as held for sale, adjusted for any depreciation, amortization or revaluations that would havebeen recognized had the asset not been classified as held for sale, and (b) its recoverable amount at thedate of the subsequent decision not to sell.

Property and EquipmentProperty and equipment (except buildings and improvements) are stated at cost less accumulateddepreciation and any impairment in value. Buildings and improvements are stated at revalued amountsless accumulated depreciation and any impairment in value. Revalued amounts were determined basedon valuations performed by various qualified, independent and Philippine SEC-accredited appraisers.Revaluations are made with sufficient regularity.

For subsequent revaluations, the accumulated depreciation at the date of the revaluation is eliminatedagainst the gross carrying amount of the asset. The amount of adjustment to accumulated depreciationforms part of the increase or decrease in the carrying amount. Any resulting increase in the asset’scarrying amount as a result of the revaluation is recognized as OCI credited directly to equity as“Revaluation increment - net of deferred income tax effect”. Any resulting decrease is directly chargedagainst the related revaluation increment previously recognized in respect of the same asset and anyexcess is charged against profit or loss.

The portion of revaluation increment is transferred to deficit when these are realized throughdepreciation or upon the disposal or retirement of buildings and improvements.

The initial cost of property and equipment comprises its purchase price, any related capitalizableborrowing costs attributed to predelivery payments incurred on account of aircraft acquisition and otherqualifying assets under construction, and other directly attributable costs of bringing the asset to itsworking condition and location for its intended use. Manufacturers’ credits received from aircraft andengine manufacturers which were directly applied against the purchase price of the aircraft are recordedupon delivery of the related aircraft and engines as a reduction from the cost of the property andequipment (including those under finance lease). Manufacturer’s credits that are not applied to aircraftand engines purchased, and whose risks and rewards are retained with the Group, are recognized asincome as it is earned.

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Expenditures incurred after the property and equipment have been put into operation, such as repairsand maintenance costs, are normally charged to profit or loss in the period in which the costs areincurred. In situations where it can be clearly demonstrated that the expenditures have resulted in anincrease in the future economic benefits expected to be obtained from the use of an item of propertyand equipment beyond its originally assessed standard of performance, the expenditures are capitalizedas additional cost of property and equipment.

Expenditures for scheduled and mandatory heavy maintenance on aircraft’s airframe and landing gearare capitalized at cost and depreciated over the estimated number of years until the next major overhaul.Generally, heavy maintenance visits are required every six to eight years for airframe and ten years forlanding gear.

Depreciation, which commences when the asset is available for its intended use, is computed on astraight-line basis over the following estimated useful lives of the assets:

Number of YearsPassenger aircraft 4 to 20Engines 4 to 20Leasehold improvements 4 to 12Vessels 20Buildings and improvements 5 to 40Rotable and reparable parts 3 to 18Ground property and equipment 3 to 8

Depreciation ceases at the earlier of the date that the item is classified as held for sale (or included in adisposal group that is classified as held for sale) in accordance with PFRS 5, Noncurrent Assets Heldfor Sale and Discontinued Operations, and the date the asset is derecognized.

Leasehold improvements are amortized over the term of the lease or life of the improvements,whichever is shorter. Assets under lease arrangements are depreciated over the term of the lease or theuseful life of the asset, whichever is shorter, unless there is purchase option reasonably certain to beexercised by the Group. In which case, the asset is depreciated over its useful life.

The estimated useful lives, depreciation and amortization method and residual values are reviewedperiodically to ensure that the periods, method of depreciation and amortization and residual values areconsistent with the expected pattern of economic benefits from items of property and equipment. Anychanges in the estimates arising from the review are accounted for prospectively.

When items of property and equipment are sold or retired, their costs, accumulated depreciation andamortization, any impairment in value and related revaluation increment are eliminated from theaccounts. Any gain or loss resulting from their disposal is recognized in profit or loss.

“Construction in progress” represents aircraft, vessels, buildings and improvements and other groundproperty under construction, while “Predelivery payments” represent advance payments for aircraftacquisition. “Construction in progress” and “Predelivery payments” are not depreciated until such timewhen the construction of the relevant assets is completed and when assets are available for theirintended use.

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Leases - Effective starting January 1, 2019Right-of-use assetsThe Group recognizes right-of-use assets at the commencement date of the lease (i.e., the date theunderlying asset is available for use). Right-of-use assets are measured at cost, less any accumulateddepreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The costof right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred,and lease payments made at or before the commencement date less any lease incentives received.The right-of-use assets are classified in the consolidated financial position as part of property andequipment. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end ofthe lease term, the recognized right-of-use assets are depreciated on a straight-line basis over the shorterof its estimated useful life and the lease term, as follows:

Number of YearsPassenger aircraft 4 to 20Engines 4 to 20Leasehold improvements 4 to 12Ground property and equipment 3 to 8

If the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term,the right-of-use assets are depreciated based on the estimated useful life of the underlying assets.

Lease liabilitiesAt the commencement date of the lease, the Group recognizes lease liabilities measured at the presentvalue of lease payments to be made over the lease term, which are classified as long-term obligationsin the consolidated statement of financial position. The lease payments include fixed payments(including in substance fixed payments) less any lease incentives receivable, variable lease paymentsthat depend on an index or a rate, and amounts expected to be paid under residual value guarantees.The lease payments also include the exercise price of a purchase option reasonably certain to beexercised by the Group and payments of penalties for terminating a lease, if the lease term reflects theGroup exercising the option to terminate. The variable lease payments that do not depend on an indexor a rate are recognized as expense in the period on which the event or condition that triggers thepayment occurs.

In calculating the present value of lease payments, the Group uses the incremental borrowing rate atthe lease commencement date if the interest rate implicit in the lease is not readily determinable. Afterthe commencement date, the amount of lease liabilities is increased to reflect the accretion of interestand reduced for the lease payments made. In addition, the carrying amount of lease liabilities isremeasured if there is a modification, a change in the lease term, a change in the in-substance fixedlease payments or a change in the assessment to purchase the underlying asset.

Short-term leases and leases of low-value assetsThe Group applies the short-term lease recognition exemption to its short-term leases (i.e., those leasesthat have a lease term of 12 months or less from the commencement date and do not contain a purchaseoption). It also applies the lease of low-value assets recognition exemption to leases of office equipmentthat are considered of low value. Lease payments on short-term leases and leases of low-value assetsare recognized as expense on a straight-line basis over the lease term.

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Leases - Effective prior to January 1, 2019The determination of whether the arrangement is, or contains a lease, is based on the substance of thearrangement at inception date of whether the fulfillment of the arrangement depends on the use of aspecific asset or assets and the arrangement conveys a right to use the asset. A reassessment is madeafter 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 extensiongranted, unless the term of the renewal or extension was initially included in the lease term; (c) there isa change in the determination of whether fulfillment is dependent on a specified asset; or (d) there issubstantial change to the asset.

Where the reassessment is made, lease accounting shall commence or cease from the date when thechange in circumstances gave rise to the reassessment for scenarios (a), (c), or (d) above, and at thedate of renewal or extension period for scenario (b).

Group as LesseeFinance leases, which transfer to the Group substantially all the risks and rewards incidental toownership of the leased item, are capitalized at the inception of the lease at the fair value of the leasedproperty or, if lower, at the present value of the minimum lease payments. Obligations arising fromaircraft under finance lease agreements are classified in the consolidated statement of financial positionas part of “Long-term obligations”.

Lease payments are apportioned between financing charges and reduction of the lease liability so as toachieve a constant rate of interest on the remaining balance of the liability. Financing charges arecharged directly against profit or loss.

Leases where the lessor retains substantially all the risks and rewards of ownership of the asset areclassified as operating leases. Operating lease expense is recognized in profit or loss on a straight-linebasis over the terms of the lease agreements. Contingent rents (e.g., lease payments that are based onmarket indices) are charged as expense in the period in which they are incurred. The aggregate benefitof incentives provided by the lessor is recognized as a reduction of rental expense over the lease termon a straight-line basis.

A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. Ifa sale and leaseback transaction results in an operating lease, and it is clear that the transaction is at fairvalue, any profit or loss is recognized immediately. If the sale price is below fair value, any profit orloss is recognized immediately except that, if the loss is compensated for by future lease payments atbelow market price, it is deferred and amortized in proportion to the lease payments over the period forwhich the asset is expected to be used. If the sale price is above fair value, the excess over fair valueis deferred and amortized over the period for which the asset is expected to be used. If a sale andleaseback transaction results in a finance lease, any difference between the sales proceeds and thecarrying amount is deferred and amortized over the lease term.

Group as Lessor - Effective for both periodsLeases where the Group does not transfer substantially all the risks and rewards of ownership of theassets are classified as operating leases. Lease income is recognized on a straight-line basis over thelease term. Initial direct costs incurred in negotiating operating leases are added to the carrying amountof the leased asset and recognized over the lease term on the same basis as the rental income.Contingent rents are recognized as revenue in the period in which they are earned.

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Asset Restoration Obligation (ARO)The Group is required under various aircraft lease agreements to restore the leased aircraft to theiroriginal condition and to bear the cost of dismantling and restoration at the end of the lease term. Forcertain lease agreements, the Group provides for these costs over the terms of the leases throughcontribution to a maintenance reserve fund (MRF), based on aircraft hours flown and engine cyclesuntil the next scheduled checks. If the estimated cost of dismantling and restoration is expected toexceed the cumulative MRF or where the lease agreement does not require contribution of MRF, anadditional obligation is recognized over the remaining term of the leases. The amount of obligation iscarried at amortized cost using the effective interest method.

Investment PropertiesInvestment properties include parcels of land, buildings and improvements that are not used inoperations.

Investment properties are measured initially at cost, including any transaction costs. The carryingamount includes the cost of replacing part of an existing investment property at the time that cost isincurred (if the recognition criteria are met) and excludes the costs of day-to-day servicing of aninvestment property.

Investment properties (except land) are subsequently measured at cost less accumulated depreciationand any impairment in value. Land is subsequently carried at cost less any impairment in value.

Depreciation of depreciable investment properties, which commences when the asset is available forits intended use, is calculated on a straight-line basis over the estimated useful lives ranging from sixto eight years.

Depreciation ceases at the earlier of the date that the item is classified as held for sale (or included in adisposal group that is classified as held for sale) in accordance with PFRS 5 and the date the asset isderecognized.

Transfers are made to investment properties when, and only when, there is a change in use, evidencedby cessation of owner-occupation or commencement of an operating lease to another party. Transfersare made from investment properties when, and only when, there is a change in use, evidenced bycommencement of owner-occupation or commencement of development with a view to sell.

When an item of property and equipment previously carried at revalued amount is transferred toinvestment properties, the carrying value at the date of reclassification is retained as the new cost of theinvestment property. The related revaluation increment is closed to retained earnings or deficit.

Investment properties are derecognized when they are either disposed of or permanently withdrawnfrom use and no future economic benefit is expected from their disposal. Any gains or losses on theretirement or disposal of an investment property are recognized in profit or loss.

Impairment of Property and Equipment and Investment PropertiesThe carrying values of property and equipment, including right-of-use assets, and investment propertiesare reviewed for impairment when events or changes in circumstances indicate that the carrying valuesmay not be recoverable. If any such indication exists and where the carrying values exceed the estimatedrecoverable amounts, the assets or cash generating units (CGU) are written down to their recoverableamounts. The recoverable amount is the greater of fair value less costs to sell and value-in-use. Inassessing value-in-use, the estimated future cash flows are discounted to their present value using apretax discount rate that reflects current market assessments of the time value of money and the risksspecific to the asset. For an asset that does not generate largely independent cash inflows, the

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recoverable amount is determined for the CGU to which the asset belongs. Impairment losses, if any,are recognized in profit or loss.

Recovery of impairment losses recognized in prior periods is recorded when there is an indication thatthe impairment losses recognized for the asset no longer exist or have decreased. The recovery isrecognized in profit or loss. However, the increased carrying amount of the asset due to reversal of animpairment loss is recognized only to the extent that it does not exceed the carrying amount (net ofaccumulated depreciation and amortization) that would have been determined had impairment loss notbeen recognized for that asset in prior years.

Compensation from third parties for the items of property and equipment that were impaired is includedin profit or loss when the compensation becomes receivable (i.e., recovery becomes virtually certain).Impairment or losses of items of property and equipment, related claims for or payments ofcompensation from third parties and any subsequent purchase or construction of replacement assets areconsidered as separate economic events and are accounted for separately.

Provisions and ContingenciesProvisions are recognized when (a) the Group has a present obligation (legal or constructive) as a resultof a past event; (b) it is probable that an outflow of resources embodying economic benefits will berequired to settle the obligation; and (c) a reliable estimate of the amount of the obligation can be made.Where the Group expects a provision to be reimbursed, for example, under an insurance contract, thereimbursement 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 theexpected future cash flows at a pretax rate that reflects current market assessments of the time value ofmoney and, where appropriate, the risks specific to the liability. Where discounting is used, the increasein 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 aredisclosed in the notes to consolidated financial statements unless the possibility of an outflow ofresources embodying economic benefits is remote. A contingent asset is not recognized in theconsolidated statement of financial position but disclosed in the notes to consolidated financialstatements when an inflow of economic benefits is probable. If it is virtually certain that an inflow ofeconomic benefits will arise, the asset and the related income are recognized in the consolidatedfinancial statements.

Deposit from Non-controlling Interest of a SubsidiaryDeposit from non-controlling interest of a subsidiary generally represent funds received by PAL whichit records as such with a view to applying the same as payment for a future additional issuance of sharesor increase in capital stock.

The Group classifies deposit from non-controlling interest of a subsidiary under non-controlling interestas a separate account from capital stock if, and only if, all of the following elements are present as ofthe end of the reporting period:

• The unissued authorized capital stock of the entity is insufficient to cover the amount of sharesindicated in the contract;

• There is BOD’s approval on the proposed increase in authorized capital stock (for which a depositwas received by PAL);

• There is stockholders’ approval of said proposed increase; and• The application for the approval of said proposed increase has been filed with the Philippine SEC.

If any of the foregoing elements are not present, the deposit is recognized as a liability.

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Equity (Capital Deficiency)Capital stock is measured at par value of all shares issued. Incremental costs incurred directlyattributable to the issuance of new shares are shown in equity as a deduction from proceeds, net of tax.

When the shares are sold at premium, the difference between the proceeds and the par value is creditedto the “Additional paid-in capital” account.

Deficit represents the cumulative balance of net income or loss, net of any dividend declaration.

Treasury StockWhere the Parent Company purchases its own capital stock (treasury shares), the consideration paid,including any directly attributable incremental costs (net of related taxes), is deducted from equity untilthe shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued,any consideration received, net of any directly attributable incremental transaction costs and the relatedincome tax effect, is included in equity attributable to the Parent Company’s equity holders.

Revenue and Related Commissions - Effective prior to January 1, 2018Passenger ticket, cargo waybill sales and related fuel and insurance surcharges, excluding portionrelating to awards under the frequent flyer program, are initially recorded as “Unearned transportationrevenue” in the consolidated statement of financial position until recognized as “Revenue” in theconsolidated statement of comprehensive income when the transportation service is rendered (e.g.,when passengers and cargo are flown/lifted). Passenger tickets that are unused for extended period arerecognized as revenue based on an assessment of the ticket terms and conditions and refund processingperiod. Revenue from charter, mail, excess baggage and other transport-related and ancillary servicesrevenue are recognized upon completion of services rendered. Revenue from charter arrangements isrecognized when the related charter service is rendered. Commission income earned by Sabre isrecognized upon acceptance of bookings through Sabre’s computerized reservation system. Revenuefrom in-flight sales are recognized upon delivery to and acceptance of the goods by customers.Revenue is measured at the fair value of the consideration received or receivable, excluding sales taxes,discounts and commissions.

The related commission is recognized as expense when the transportation service is provided and isincluded as part of “Reservation and sales” in the consolidated statement of comprehensive income.

Commissions under codeshare arrangements where PAL is the marketing airline and is considered anagent are recognized as revenue when the passenger or cargo is flown or lifted by the operating airline.Revenue is recognized on a net basis.

The Group determines whether they are acting as principal or agent in their revenue arrangements.Considerations to determine that PAL and APC are acting as principal include: (1) the Group has theprimary responsibility to provide the service to the customer, (2) the Group bears the inventory andcredit risks, and (3) the Group has the latitude in establishing prices.

Revenue from Contracts with Customers - Effective starting January 1, 2018Revenue from contracts with customers is recognized when controls of goods or services are transferredto the customer at an amount that reflects the consideration to which the Group expects to be entitledin exchange for the goods and services. The specific recognition criteria for each type of revenue areas follows:

Passenger ticket, cargo way bills and related fuel and insurance surcharges are recognized as revenuewhen the related services are rendered (e.g. over time as the passengers and cargo are flown or lifted).Customer payments for services which have not yet been rendered are classified as contract liabilities

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under “Unearned transportation revenue” account in the consolidated statement of financial position.

Revenue from charter, mail, excess baggage and other transport-related and ancillary services revenueare recognized when the related services have been rendered.

Revenue from inflight sales is recognized at the point in time when control of the asset is transferred tothe customer, generally on the delivery and acceptance by the customers of the goods.

Revenue from estimated breakage (expiration) of unused passenger tickets are recognized based on thehistorical expiration experience of the Group on the unused passenger tickets.

Contract balancesContract assetsA contract asset is the right to consideration in exchange for goods or services transferred to thecustomer. If the Group performs by transferring goods or services to a customer before the customerpays consideration or before payment is due, a contract asset is recognized for the earned considerationthat is conditional.

Trade receivablesA receivable represents the Group’s right to an amount of consideration that is unconditional (i.e., onlythe passage of time is required before payment of the consideration is due). Refer to accounting policiesof financial assets in section “Financial instruments - initial recognition and subsequent measurement.”

Contract liabilitiesA contract liability is the obligation to transfer goods or services to a customer for which the Group hasreceived consideration (or an amount of consideration is due) from the customer. If a customer paysconsideration before the Group transfers goods or services to the customer, a contract liability isrecognized when the payment is made or the payment is due (whichever is earlier). Contract liabilitiesare recognized as revenue when the Group performs under the contract.

Contract Liability Under Frequent Flyer ProgramPAL operates a frequent flyer program called “Mabuhay Miles”. A portion of passenger revenueattributable to the award of frequent flyer miles, estimated based on expected utilization of thesebenefits, is deferred until utilized. The fair value of the consideration received in respect of the initialsale is allocated to the award credits based on its relative fair value. The deferred revenue is includedunder “Reserves and other noncurrent liabilities” in the consolidated statement of financial position.Any remaining unutilized benefits are recognized as revenue upon redemption or expiry.

Interest and Dividend IncomeInterest on cash, cash equivalents and other short-term and long-term cash investments is recognizedas interest accrues using the effective interest method. Dividend income from financial assets atFVTOCI is recognized when the Group’s right to receive payment is established.

Short-term Employee BenefitsShort-term employee benefits include items such as salaries and wages, social security contributionsand nonmonetary benefits, if expected to be settled wholly within 12 months after the reporting date inwhich the employees rendered the related services. Short-term employee benefits are recognized asexpense as incurred. When an employee has rendered service to the Group during the reporting period,the Group recognizes the undiscounted amount of short-term employee benefits expected to be paid inexchange for that service as a liability (accrued expense), after deducting any amount already paid.

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Retirement Benefits Cost and Other Long-term Employee BenefitsAccrued employee benefits, as presented in the consolidated statement of financial position, consist ofretirement benefits under defined benefit plans and other long-term employee benefits.

Retirement benefits - defined benefit plansAccrued retirement benefits is the present value of the defined benefit obligation at the end of thereporting period reduced by the fair value of plan assets, adjusted for any effect of limiting a net definedbenefit asset to the asset ceiling. The asset ceiling is the present value of any economic benefitsavailable in the form of refunds from the plan or reductions in future contributions to the plan.

The cost of providing benefits under the defined benefit plans is actuarially determined using theprojected unit credit method. The retirement benefits cost comprises of service cost, net interest on thenet defined benefit liability or asset and remeasurements of net defined benefit liability or asset.

Service costs which include current service costs, past service costs and gains or losses on non-routinesettlements are recognized as expense in profit or loss. Past service costs are recognized when planamendment or curtailment occurs. These amounts are calculated periodically by independent qualifiedactuaries.

Net interest on the net defined benefit liability or asset is the change during the period in the net definedbenefit liability or asset that arises from the passage of time which is determined by applying thediscount rate based on government bonds to the net defined benefit liability or asset at the beginning ofthe year, taking account of any changes in the net defined benefit liability or asset during the period asa result of contribution or benefit payment. Net interest on the net defined benefit liability or asset isrecognized as expense or income in profit or loss.

Remeasurements comprising actuarial gains and losses, difference between interest income and actualreturn on plan assets and any change in the effect of the asset ceiling (excluding net interest on definedbenefit liability) are recognized immediately in OCI in the period in which they arise. Remeasurementsare not reclassified to profit or loss in subsequent periods.

Plan assets are assets that are held by a long-term employee benefit fund. Plan assets are not availableto the creditors of the Group, nor can they be paid directly to the Group. The fair value of plan assetsis based on market price information. When no market price is available, the fair value of plan assets isestimated by discounting expected future cash flows using a discount rate that reflects both the riskassociated with the plan assets and the maturity or expected disposal date of those assets (or, if theyhave no maturity, the expected period until the settlement of the related obligations). If the fair valueof the plan assets is higher than the present value of the defined benefit obligation, the measurement ofthe resulting defined benefit asset is limited to the present value of economic benefits available in theform of refunds from the plan or reductions in future contributions to the plan.

The Group’s right to be reimbursed of some or all of the expenditures required to settle a defined benefitobligation is recognized as a separate asset at fair value when and only when reimbursement is virtuallycertain.

Termination benefitsTermination benefits are employee benefits provided in exchange for the termination of an employee’semployment as a result of either the Group’s decision to terminate an employee’s employment beforethe normal retirement date or an employee’s decision to accept an offer of benefits in exchange for thetermination of employment.

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A liability and expense for termination benefit is recognized at the earlier of when the entity can nolonger withdraw the offer of those benefits and when the entity recognizes related restructuring costs.Initial recognition and subsequent changes to termination benefits are measured in accordance with thenature of the employee benefit, as either post-employment benefits, short-term employee benefits, orother long-term employee benefits.

Other long-term employee benefitsOther long-term employee benefits such as vacation leave and sick leave commutation and retentionprograms are measured using the projected unit credit method. Actuarial gains and losses on theseemployee benefits are recognized in full in profit or loss.

Borrowing CostsBorrowing costs are capitalized if they are directly attributable to the acquisition or construction of aqualifying asset. Capitalization of borrowing costs commences when the activities to prepare the assetare in progress and expenditures and borrowing costs are being incurred. Borrowing costs arecapitalized until the assets are substantially ready for their intended use.

To the extent that the Group borrows funds generally and uses them for the purpose of obtaining aqualifying asset, the Group determines the amount of borrowing costs eligible for capitalization byapplying a capitalization rate to the expenditures on that asset. The capitalization rate shall be theweighted average of the borrowing costs applicable to the borrowings of the Group that are outstandingduring the period, other than borrowings made specifically for the purpose of obtaining a qualifyingasset. The amount of borrowing costs that the Group capitalizes during a period shall not exceed theamount of borrowing costs it incurred during that period. All other borrowing costs are expensed asincurred.

ExpensesExpenses are recognized when incurred. These are measured at the fair value of the consideration paidor payable.

Other Comprehensive Income (Loss)Other comprehensive income (loss) comprises items of income and expense (including itemspreviously presented under the consolidated statement of changes in equity) that are not recognized inprofit or loss for the year in accordance with PFRS. Other comprehensive income (loss) of the Groupincludes gains and losses on changes in fair value of financial assets at FVTOCI, changes in revaluationincrement of property and equipment, remeasurement gains or losses on defined benefit plans and effectof foreign exchange translation of the assets and liabilities of PAL and FSL from its functional currencyinto presentation currency of the Group.

Income TaxesCurrent income taxCurrent income tax assets and liabilities for the current and prior periods are measured at the amountexpected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used tocompute the amounts are those that have been enacted or substantively enacted as of end of reportingperiod.

Current income tax relating to items recognized directly in equity is recognized in equity and not inprofit or loss. Management periodically evaluates positions taken in the tax returns with respect tosituations in which applicable tax regulations are subject to interpretation and establishes provisionswhere appropriate.

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Deferred income taxDeferred income tax is provided using the liability method on all temporary differences between thetax bases of assets and liabilities and their carrying amounts for financial reporting purposes at thereporting date.

Deferred income tax liabilities are recognized for all taxable temporary differences, including assetrevaluations. Deferred income tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits from the excess of minimum corporate income tax (MCIT) overthe regular corporate income tax and unused net operating loss carryover (NOLCO), to the extent thatit is probable that sufficient future taxable profits will be available against which the deductibletemporary differences and carry forward benefits of unused tax credits and unused NOLCO can beutilized. Deferred income tax, however, is not recognized when it arises from the initial recognition ofan asset or liability in a transaction that is not a business combination and, at the time of the transaction,affects neither the accounting profit nor taxable profit or loss. Deferred income tax liabilities are notprovided on nontaxable temporary differences associated with investments in domesticsubsidiaries. With respect to investments with other subsidiaries, deferred income tax liabilities arerecognized except where the timing of reversal of the temporary differences can be controlled by theparent or investor and it is probable that the temporary difference will not reverse in the foreseeablefuture.

The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced tothe extent that it is no longer probable that sufficient future taxable profits will be available to allow allor part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets arereassessed at each reporting date and are recognized to the extent that it has become probable thatsufficient future taxable profits will allow the deferred income tax asset to be recovered.

Deferred income tax assets and deferred income tax liabilities are measured at the tax rates that areexpected to apply in the period when the asset is realized or the liability is settled, based on tax ratesand tax laws that have been enacted or substantively enacted as of reporting date.

Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss.Deferred tax items are recognized in correlation to the underlying transaction either in OCI or directlyin equity.

Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable rightexists to set off current income tax assets against current income tax liabilities and the deferred incometaxes relate to the same taxable entity and the same taxation authority.

Creditable Withholding Taxes (CWTs)CWTs, included in “Other current assets” account in the statement of financial position, are amountswithheld from income subject to expanded withholding taxes. CWTs can be utilized as payment forincome taxes provided that these are properly supported by certificates of creditable tax withheld atsource subject to the rule on Philippine income taxation. CWTs which are expected to be utilized aspayment for income taxes within twelve (12) months are classified as current assets, otherwise theseare classified as noncurrent assets.

Foreign Currency-denominated Transactions and TranslationsTransactions denominated in currencies other than the Philippine Peso are recorded using the exchangerate prevailing at the date of the transaction. Outstanding monetary assets and liabilities denominatedin foreign currencies are translated using the closing rate of exchange at the end of the reporting period.Any resulting foreign exchange gains or losses are taken to income or loss in the consolidated statementof comprehensive income.

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The functional currency of PAL is the US Dollar (USD). As of the reporting date, the assets andliabilities of this subsidiary are translated into the presentation currency of the Group at the rate ofexchange ruling at the reporting date and its statement of comprehensive income accounts are translatedat the weighted average exchange rates for the year. The exchange differences arising on the translationare recognized in the consolidated statement of comprehensive income and reported as a separatecomponent of equity as “Cumulative translation adjustment”. On disposal of a foreign subsidiary, thedeferred cumulative amount recognized in equity relating to that particular foreign operation shall berecognized in profit or loss. Exchange differences arising from elimination of intragroup balances andintragroup transactions are recognized in profit or loss.

Basic/Diluted Earnings (Loss) Per ShareBasic earnings (loss) per share is calculated based on net income (loss) and total comprehensive income(loss) for the period. Earnings (loss) per share is calculated by dividing net income (loss) before othercomprehensive income or total comprehensive income (loss) for the period by the weighted averagenumber of issued and outstanding shares of stock during the period, after giving retroactive effect toany stock dividends declared or stock rights exercised. The Group has no dilutive potential commonshares.

Events After the Reporting DatePost year-end events that provide additional information about the Group’s position at the reportingdate (adjusting events), if any, are reflected in the consolidated financial statements. Post year-endevents that are not adjusting events are disclosed in the notes to consolidated financial statements whenmaterial.

4. Summary of Significant Accounting Judgments, Estimates and Assumptions

The preparation of these consolidated financial statements in accordance with PFRSs requiresmanagement to make judgments, estimates and assumptions that affect the amounts reported in theconsolidated financial statements. These judgments, estimates and assumptions are based onmanagement’s evaluation of relevant facts and circumstances as of the end of the reporting period.Future events may occur which will cause the assumptions used in arriving at the estimates to change.The effects of any change in estimates are reflected in the consolidated financial statements as theybecome reasonably determinable. Revisions to accounting estimates are recognized in the period inwhich the estimate is revised if the revision affects only that period, or in the period of the revision andfuture periods if the revision affects both current and future periods.

JudgmentsIn the process of applying the Group’s accounting policies, management has made the followingjudgments, apart from those involving estimations, which have the most significant effect on amountsrecognized in the consolidated financial statements:

Use of going concern assumptionThe use of the going concern assumption involves management making judgments, at a particular pointin time, about the future outcome of events or conditions that are inherently uncertain. The underlyingassumption in the preparation of consolidated financial statements is that the Group has neither theintention nor the need to liquidate. Management takes into account a whole range of factors whichinclude, but are not limited to, expected operations and profitability and potential sources of additionalfinancing. Management prepares the consolidated financial statements on a going concern basis asmanagement has future plans regarding the Group, as discussed in Note 2.

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Determination of functional currencyJudgment is exercised in assessing various factors in determining the functional currency of each entitywithin the Group, including prices of goods and services, competition, cost and expenses and otherfactors including the currency in which financing is primarily undertaken by each entity. Additionalfactors are considered in determining the functional currency of a foreign operation, including whetherits activities are carried as an extension of that of the Parent Company rather than being carried out withsignificant autonomy.

The Parent Company, based on the relevant economic substance of the underlying circumstances, hasdetermined its functional currency to be the Philippine peso. It is the currency of the primary economicenvironment in which it operates. The functional currency of PAL, its major subsidiary, has beendetermined to be USD.

Recognition and measurement of revenue from contracts with customers and determination of thetiming of satisfaction of performance obligation - Effective starting January 1, 2018The Group applied the following judgements that significantly affect the determination of the amountand timing of revenue from contracts with customers:

· The Group assessed that performance obligation for passenger, cargo, ancillary and other servicesare rendered to the customers over time. As a result, the Group recognized revenue based on theextent of progress towards completion of the performance obligation. The selection of the methodto measure progress towards completion requires judgement.

· For the sale of goods, the Group assessed that performance obligation for sale of goods are satisfiedat a point in time. The Group uses its judgement on when a customer obtains control of thepromised goods. The Group has assessed that the actual delivery of the goods to the customer isthe point in time when the performance obligation has been satisfied.

Assessment of control on investeesThe Group makes an assessment whether or not it controls an investee by considering all relevant factsand circumstances that indicates that the Group is exposed, or has rights, to variable returns from itsinvolvement with the investee and has the ability to affect those returns through its power over theinvestee. A reassessment is made if circumstances indicate that there are changes in these controlelements. The Group has significant influence over an investee if it only has the power to participate inthe financial and operating policy decisions, but not control or joint control over it. The Parent Companyhas determined that it controls its subsidiaries.

An entity is considered a structured entity and included in consolidation even in case where the Groupowns less than one-half or none of the structured entity’s equity, when the substance of the relationshipindicates that the structured entity is being controlled by the Group. While PAL has no ownershipinterest in PRC, the latter’s purpose is to facilitate PAL’s sale of receivables and obtain financing froma third-party bank. In substance, the majority of the benefits from the activities of PRC flow to PALand ultimately to the Parent Company. Based on these facts and circumstances, management hasconcluded that PAL has control over PRC, and therefore, included PRC in the consolidated financialstatements of the Group.

Assessment of business combination under common controlIn 2017, the Parent Company acquired Zuma and FSL (through PAL) as part of the groupreorganization plan. The Parent Company, Zuma and FSL are under the common control of the TanFamily before and after the business combination. Thus, management assessed that the acquisition ofZuma and FSL are considered business combination under common control for which pooling ofinterest method was applied in the preparation of the consolidated financial statements (see Note 9).

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Classification of financial instrumentsIn 2015, 2017 and 2019, the Group sold its rights to the cash flows arising from certain credit cardreceivables including future credit card receivables from sales in United States, for a cash considerationof P=15.31 billion, P=12.98 billion and P=5.06 billion, respectively. In 2015, 2018 and 2019, the Groupalso sold its rights to the cash flows arising from passenger and cargo receivables denominated inJapanese Yen through certain agents in Japan, including future receivables, for a cash consideration ofP=9.42 billion, P=7.89 billion and P=5.06 billion, respectively. The Group has determined that substantiallyall the risks and rewards of the portfolios sold in 2015, 2017, 2018 and 2019 have been retained andconsequently, the receivables were not derecognized. The Group accounted for the transaction as acollateralized borrowing and recorded the cash received as a financial liability. The carrying value ofthese financial liabilities amounted to P=33.35 billion and P=30.32 billion as of December 31, 2019 and2018, respectively (see Note 15).

Classification of assets held for saleThe Group classifies a noncurrent asset as held for sale if its carrying amount will be recoveredprincipally through a sale transaction rather than through continuing use. For this to be the case, theasset must be available for immediate sale in its present condition and its sale must be highly probable.

In 2019 and 2018, management determined that certain aircraft and engines are available for sale intheir present condition within the next 12 months. Management reclassified these aircraft and enginesfrom “Property and equipment - at cost” into “Assets held for sale” in the consolidated statements offinancial position as of December 31, 2019 and 2018 (see Note 10).

Determination of whether the Group is acting as principal or agentManagement exercises judgment in determining whether the Group is acting as a principal or as anagent under its arrangements. Management has determined that PAL is acting as principal under theJoint Marketing and Licensing Agreement and Block Space Code Share Agreement (Code ShareAgreement) considering that it has the primary responsibility of providing the service to the passengers,bears the seat utilization and credit risks, and has significant control in setting the prices of the ticket(see Note 18). Management, on the other hand, has determined that PAL is acting as an agent on othercodeshare arrangements where it is acting as the marketing airline considering that the risks and rewardsare with the operating airlines.

Determination of whether an arrangement contains a leaseManagement exercises judgment in determining whether an arrangement is, or contains, a lease, whichrequires an assessment of whether the fulfillment of the arrangement is dependent on the use of aspecific asset or assets and the arrangement conveys a right to use the asset. Management hasdetermined that its Code Share Agreement with Air Philippines Corporation (APC) does not contain alease considering that the fulfillment of the obligation is not restricted in the use of specific aircraft andAPC maintains the right to control and operate the aircraft (see Note 18).

Determination of lease term of contracts with renewal options - Effective starting January 1, 2019The Group determines the lease term as the non-cancellable term of the lease, together with any periodscovered by an option to extend the lease if it is reasonably certain to be exercised, or any periodscovered by an option to terminate the lease, if it is reasonably certain not to be exercised.

The Group considers all relevant factors that create an economic incentive for it to exercise the renewal.After the commencement date, the Group reassesses the lease term if there is a significant event orchange in circumstances that is within its control and affects its ability to exercise (or not to exercise)the option to renew (e.g., a change in business strategy).

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Classification of leases - Group as lessee - Effective prior to January 1, 2019Management exercises judgment in determining whether substantially all the significant risks andrewards of ownership of the leased assets are transferred to the Group. Lease contracts which transferto the Group substantially all the risks and rewards incidental to ownership of the leased items areclassified as finance leases. Otherwise, they are considered as operating leases.

The Group has lease agreements covering some of its aircraft and engines where the lease termsapproximate the estimated useful lives of the assets, the present value of the minimum lease paymentamounts to at least substantially all of the fair value of the leased assets or has bargain purchase option,which indicate that the risks and rewards related to the assets are transferred to the Group or thatthe purchase option is reasonably certain to be exercised. These leases are classified as financeleases. The net carrying value of these aircraft and engines amounted to P=101.84 billion, whilethe related obligation under finance lease amounted to P=64.85 billion as of December 31, 2018(see Notes 10, 15 and 24).

The Group also has lease agreements covering some of its aircraft and engines, and certain groundproperties where it has determined, based on certain criteria (e.g., no bargain purchase option andtransfer of ownership at the end of the lease term), that the risks and rewards related to the assets areretained with the lessors. These leases are accounted for as operating leases. These lease agreementsinclude aircraft sale and operating leaseback transactions that the Group entered into, as discussed inNote 24.

Classification of leases - Group as lessor - Effective prior to January 1, 2019PAL has sublease agreements covering some of its aircraft under operating and finance leases with theoriginal lessors where it has determined that it has retained substantially all the risks and rewardsincidental to ownership of the leased assets. These leases are classified as operating leases(see Note 24).

Determination of taxable profit (loss)Upon adoption of the Philippine Interpretation IFRIC 23, the Group has assessed whether it has anyuncertain tax position. The Group applies significant judgement in identifying uncertainties over itsincome tax treatments. The Group determined, based on its consultation with its tax counsel, that it isprobable that its current income tax treatments will be accepted by the taxation authorities. Accordingly,the interpretation did not have an impact on the consolidated financial statements.

ContingenciesThe Group is involved in various labor disputes, litigations, claims and tax assessments that are normalto its business. Based on the opinion of the Group’s legal counsels on the progress and legal groundsof these cases, the Group believes that it may have a present obligation arising from a past event onsome cases but that their likely outcome and estimated potential cash outflow cannot be determinedreasonably as of this time. As such, no provision was made for these contingencies (see Note 16).

EstimatesThe key assumptions concerning the future and other key sources of estimation and uncertainty at theend of the reporting period, that have a significant risk of causing a material adjustment to the carryingamounts of assets and liabilities within the next financial year are discussed as follows:

Recognition and measurement of passenger and cargo revenue - Effective starting January 1, 2018Passenger and cargo sales are recognized as revenue over time when the related passengers and cargoesare flown or lifted. Passenger tickets that are unused are recognized as revenue based on the expectedbreakage (expiration) of the passenger ticket using the Group’s historical expiration experience. Thecarrying amount of unearned transportation revenue as of December 31, 2019 and 2018 amounted to

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P=16.16 billion and P=16.09 billion, respectively. In 2019 and 2018, the Group earned revenue from itscontract liabilities as at January 1, 2019 and 2018 amounting to P=15.85 billion and P=17.23 billion,respectively.

A portion of passenger revenue attributable to the award of frequent flyer miles is deferred until theyare utilized. The deferment of the revenue is estimated based on historical trends of breakage andredemption, which are then used to project the estimated utilization of the miles earned. Any remainingunredeemed miles are recognized as revenue upon expiration. The remaining unredeemed miles aremeasured at fair value estimated using the applicable fare based on the historical redemption. Changesin the estimates of expected redemption could have a significant effect on the Group’s financial results.Deferred revenue included as part of “Reserves and other noncurrent liabilities” amounted toP=3.42 billion and P=741.12 million as of December 31, 2019 and 2018, respectively (see Note 16).

Recognition and measurement of passenger and cargo revenue - Effective prior to January 1, 2018Passenger and cargo sales are recognized as revenue when the related passengers and cargoes are flownor lifted. Passenger tickets that are unused for an extended period are recognized as revenue based onan assessment of the ticket terms and conditions and refunds processing period. These are estimatedbased on historical trends and experiences by the Group whereby the ticket uplift occurs within oneyear.

Provision for ECL of trade receivables and contract assets - Effective starting January 1, 2018The Group uses a provision matrix to calculate ECLs for trade receivables and contract assets. Theprovision rates are based on days past due for groupings of various agents and customer segments thathave similar loss patterns (i.e., by geography, customer type and rating).

The provision matrix is initially based on the Group’s historical observed default rates. The Group willcalibrate the matrix to adjust the historical credit loss experience with forward-looking information.For instance, if forecast economic conditions (e.g., gross domestic product) are expected to deteriorateover the next year which can lead to an increased number of defaults in the airline sector, the historicaldefault rates are adjusted. At every reporting date, the historical observed default rates are updated andchanges in the forward-looking estimates are analyzed.

The assessment of the correlation between historical observed default rates, forecast economicconditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes incircumstances and of forecast economic conditions. The Group’s historical credit loss experience andforecast economic conditions may also not be representative of debtor’s actual default in the future.

The carrying value of receivables, net of allowance for ECL, as of December 31, 2019 and 2018amounted to P=20.03 billion and P=19.75 billion, respectively. The allowance for ECL as ofDecember 31, 2019 and 2018 amounted to P=4.54 billion and P=6.12 billion, respectively (see Note 6).

Estimation of allowance for doubtful accounts - Effective prior to January 1, 2018The Group maintains allowance for doubtful accounts at a level considered adequate to provide foruncollectible receivables. The Group reviews the age and the status of receivables, designed to identifyaccounts with objective evidence of impairment, and provide the appropriate allowance for impairment.

The allowance for doubtful accounts relating to receivables which were individually assessed asimpaired is estimated as the difference between the carrying amount of the receivables (at amortizedcost) and the present value of estimated future cash flows (using the original effective interest rate).Accounts which were not subject to specific impairment are collectively assessed for impairment andthe amount of allowance is determined based on historical loss rate and age of receivables. The amountand timing of recorded expenses for any period could therefore differ based on the estimates made.

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Determination of fair value of financial instruments (including derivatives)The Group initially records all financial instruments at fair value and subsequently carries certainfinancial assets and financial liabilities at fair value, which requires use of estimates and judgment.Valuation techniques are used particularly for financial assets and financial liabilities (includingderivatives) that are not quoted in an active market. Where valuation techniques are used to determinefair values (e.g., discounted cash flow, option models), they are periodically reviewed by qualifiedpersonnel who are independent of the trading function. All models are calibrated to ensure that outputsreflect actual data and comparative market prices. To the extent practicable, models use onlyobservable data as valuation inputs. However, other inputs such as credit risk (whether that of theGroup or the counterparties), forward prices, volatilities and correlations, require management todevelop estimates or make adjustments to observable data of comparable instruments. The amount ofchanges in fair values would differ if the Group uses different valuation assumptions or other acceptablemethodologies. Any change in fair value of these financial instruments (including derivatives) wouldaffect either profit or loss or other comprehensive income. The fair value of the Group’s financial assetsand financial liabilities are presented in Note 27.

Determination of net realizable value of expendable parts, fuel, materials and suppliesThe Group’s estimates of the net realizable values of expendable parts, fuel, materials and supplies arebased on the most reliable evidence (e.g., age and physical condition of the inventory) available at thetime the estimates are made of the amount that these assets are expected to be realized. A newassessment is made of the net realizable value in each subsequent period. When the circumstances thatpreviously caused expendable parts, fuel, materials and supplies to be written down below cost nolonger exist or when there is a clear evidence of an increase in net realizable value because of changein economic circumstances, the amount of the write-down is reversed so that the new carrying amountis the lower of the cost and the revised net realizable value. The carrying amount of expendable parts,fuel, materials and supplies as of December 31, 2019 and 2018 amounted to P=5.12 billion andP=4.86 billion, respectively. The allowance for expendable parts obsolescence amounted toP=833.29 million and P=468.79 million as of December 31, 2019 and 2018, respectively (see Note 7).

Valuation of property and equipment under revaluation basisThe Group’s buildings and improvements are carried at revalued amounts, which approximate their fairvalues at the date of the revaluation, less any subsequent accumulated depreciation and anyaccumulated impairment losses. The valuations of buildings and improvements are performed byprofessionally qualified independent appraisers using generally acceptable valuation techniques andmethods. The key assumptions used to determine the fair value of these assets and sensitivity analysesare disclosed in Note 10. Revaluations are made regularly to ensure that the carrying amounts do notdiffer materially from those which would be determined using fair values at reporting date.Management believes that the basis of fair market value is still appropriate considering that there areno significant changes in the properties and the surrounding area from the date of valuation up to andfrom the financial reporting date. The revaluation increment, net of related deferred income tax, in thevaluation of these assets based on appraisal reports in December 2019 and 2017 amounted to P=678.88 million and P=710.33 million as of December 31, 2019 and 2018, respectively (see Note 19).The carrying value of property and equipment carried at appraised value amounted to P=1.16 billion andP=1.22 billion as of December 31, 2019 and 2018, respectively (see Note 10).

Valuation of assets held for saleThe Group measures its assets held for sale at the lower of their carrying amount and fair value lesscosts to sell. Management has determined the fair value less costs to sell of the Group’s assetsheld for sale based on offer price of prospective buyers. In 2019, the Group recognized an impairmentloss of P=72.95 million for the aircraft and engine intended to be sold in 2020. The carrying value ofassets held for sale as of December 31, 2019 and 2018 amounted to P=1.72 billion and P=743.38 million,respectively (see Note 10).

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Classification and measurement of repairs and maintenance cost and AROThe Group entered into several agreements with maintenance service providers relating to the periodicinspections and overhauls during the life of the aircraft and aircraft parts. Management assessed andestimated which portion of the cost incurred for the repairs, maintenance and overhauls under theseagreements has the economic effect of extending the useful lives of the aircraft and engines, hence, canbe capitalized. Other repairs and maintenance costs are expensed as incurred.

Moreover, management estimates certain repairs and maintenance costs to be accrued as of cut-off datebased on the open work orders and other variable factors. Total aircraft-related repairs and maintenancecosts recognized in profit or loss amounted to P=20.04 billion in 2019, P=19.69 billion in 2018 andP=18.34 billion in 2017 (see Note 20). Accrued maintenance as of December 31, 2019 and 2018amounted to P=13.31 billion and P=11.05 billion, respectively (see Note 14).

The Group is also contractually committed to return a number of aircraft held under operating leases tothe lessors in a physical condition agreed at the inception of each lease. The Group estimates the costsof heavy maintenance on the leased aircraft and engines required on the redelivery to the lessor, andrecognizes an obligation for the excess of estimated costs over the cumulative MRF or for the totalestimated costs where the lease agreement does not require contribution of MRF. In 2018, the Groupreversed the provision for ARO as the existing MRF has been assessed to be sufficient to cover therestoration cost upon redelivery of the related aircraft to the lessors (see Note 16).

Estimation of useful lives and residual values of property and equipmentThe Group estimates the useful lives of property and equipment, including right-of-use assets, basedon internal technical evaluation and experience with similar assets. The estimated useful lives andresidual values are reviewed periodically and updated if expectations differ from previous estimatesdue to physical wear and tear, technical and commercial obsolescence and other limits on the use of theassets. In 2018, management recognized impairment loss amounting to P=629.16 million on certainpassenger aircraft that will be early retired (see Note 10). The carrying amount of depreciable propertyand equipment, net of accumulated depreciation and impairment, amounted to P=231.65 billion andP=119.31 billion as of December 31, 2019 and 2018, respectively (see Note 10).

Impairment of property and equipment and investment propertiesThe Group determines whether its property and equipment, including right-of-use assets, andinvestment properties are impaired, when events or changes in circumstances indicate that the carryingvalues may not be recoverable. If any such indication exists and where the carrying values exceed theestimated recoverable amounts, the assets are written down to their recoverable amounts. Therecoverable amount of property and equipment, including right-of-use assets, and investment propertiesis the greater of the asset’s fair value less costs to sell and value-in-use. Determination of impairmentof property and equipment, including right-of-use assets, and investment properties requires anestimation of the value-in-use of the CGU to which the assets belong. Estimating the value-in-userequires the Group to make an estimate of the expected future cash flows from the CGU and applyingan appropriate discount rate in order to calculate the present value of those cash flows. In discounting,the Group uses a discount rate based on the weighted average cost of capital adjusted to reflect the waythat the market would assess the specific risks associated with the cash flow and exclude risks that arenot relevant to the cash flow. Other assumptions used in projecting the future cash flows includepassenger load factor, passenger yield, fuel surcharge rate and fuel costs, among others.

The Group recognized impairment loss amounting to P=286.85 million for the two aircraft retired in2017. In addition, the Group recognized impairment loss amounting to P=988.60 million for certainaircraft and engines that are intended to be sold in 2018 and P=865.33 million for the aircraft that willbe early retired (see Note 10). In 2018, the Group also recognized impairment loss amounting toP=629.16 million for the additional aircraft that will be early retired (see Note 10). In 2019, the Group

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recognized an impairment loss for the vessels and terminal under construction of MMET totaling to₱773.70 million (see Note 10).

As of December 31, 2019 and 2018, the aggregate net carrying value of the Group’s property andequipment, including right-of-use assets, and investment properties amounted to P=240.99 billion andP=133.44 billion, respectively (see Notes 10 and 11).

Valuation of lease liabilities and right-of-use assetsThe application of PFRS 16 requires the Group to make judgments that affect the valuation of the leaseliabilities and the valuation of right-of-use assets. These include (a) determining contracts in scope ofPFRS 16, (b) determining the contract term, (c) determining the interest rate used for discounting offuture cash flows.

The lease term determined by the Group comprises non-cancellable period of lease contracts, togetherwith any periods covered by an option to extend the lease if it is reasonably certain to be exercised, orany periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.For lease contracts with indefinite term the Group estimates the length of the contract to be equal to theeconomic useful life of non-current assets located in the leased property and physically connected withit or determines the length of the contract to be equal to the average or typical market contract term ofparticular type of lease. The same economic useful life is applied to determine the depreciation rate ofright-of-use assets.

The present value of the lease payment is determined using the discount rate representing the rate ofinterest rate swap applicable for currency of the lease contract and for similar tenor, corrected by theaverage credit spread of entities with rating similar to the Group’s rating, observed in the period whenthe lease contract commences or is modified.

The carrying value of lease liabilities and right-of-use assets as of December 31, 2019 amounted toP=174.60 billion and P=216.73 billion, respectively (see Notes 10 and 15).

Estimation of retirement and other long-term employee benefits costThe Group’s retirement and other long-term benefits costs relating to its defined benefit plans areactuarially computed. These entail using certain assumptions like discount rates and future salaryincreases. Due to the complexities involved in the valuation and its long-term nature, a defined benefitobligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at eachreporting date.

In determining the appropriate discount rate, management considers the interest rates of long termPhilippine government bonds to correspond with the expected term of the defined benefit obligation.Further details about pension obligations are given in Note 21. Accrued employee benefits as ofDecember 31, 2019 and 2018 amounted to P=12.54 billion and P=10.34 billion, respectively(see Note 21).

ProvisionsThe Group provides for present obligations (legal or constructive) where it is probable that there willbe an outflow of resources embodying economic benefits that will be required to settle the saidobligations. Management exercises judgment in assessing the probability of the Group becomingliable. An estimate of the provision is based on known information as of reporting date. The amountof provision is being reassessed at least on an annual basis to consider new and relevant information.Provisions recognized amounted to P=97.75 million and P=130.33 million as of December 31, 2019 and2018, respectively (see Note 16).

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Recognition of deferred income tax assetsThe Group assesses at each reporting date and recognizes deferred income tax assets to the extent ofprobable future taxable profits and reversing taxable temporary differences that will allow the deferredincome tax assets to be utilized. Management uses judgment and estimates in assessing the probabilityand level of future taxable profits, considering management’s future plan of actions, including thetiming of reversal of deferred income tax liability, aided by forecasting and budgeting techniques.Deferred income tax assets recognized amounted to P=52.42 billion and P=7.43 billion as ofDecember 31, 2019 and 2018, respectively (see Note 22).

5. Cash and Cash Equivalents

2019 2018Cash on hand and in banks (Note 18) P=9,065,868 P=6,742,588Cash equivalents (Note 18) 6,038,144 239,689

P=15,104,012 P=6,982,277

Cash in banks and cash equivalents earned interest at the respective bank deposit rates totalingP=190.59 million, P=106.47 million and P=76.33 million for the years ended December 31, 2019, 2018and 2017, respectively (included under “Other income (charges) - net” in the consolidated statementsof comprehensive income).

Cash and cash equivalents used to collateralize margin call requirements on fuel derivatives arepresented as part of “Other current assets” (see Note 8), while those used to collateralize various suretybonds issued in connection with certain litigations and sinking fund related to asset-backed securitiesare presented as part of “Other noncurrent assets” (see Note 12).

6. Receivables

2019 2018General traffic (Note 15)* P=7,752,325 P=8,389,732Related parties (Note 18) 9,290,318 7,667,888Non-trade** 7,528,224 9,812,500

24,570,867 25,870,120Less allowance for ECL (4,537,325) (6,121,811)

P=20,033,542 P=19,748,309*General traffic includes receivables pledged as collateral for secured loans amounting to P=389,687 and P=496,408 as of

December 31, 2019 and 2018, respectively.**Non-trade receivables include, among others, accounts under litigation, receivables from employees and other receivables.

Receivables attributable to general traffic are noninterest-bearing and are generally on a 5 to 60-dayterm.

Movements in allowance for ECL as of December 31, 2019 and 2018, presented by class, are as follows:

2019General Traffic Related Parties Non-trade Total

Balance at beginning of year P=1,136,219 P=26,711 P=4,958,881 P=6,121,811Charges for the year 102,256 36,450 172,619 311,325Reversal (160,657) – (330,844) (491,501)Accounts written off (141,605) – (1,075,889) (1,217,494)Foreign exchange difference (29,340) (1,791) (155,685) (186,816)Balance at end of year P=906,873 P=61,370 P=3,569,082 P=4,537,325

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Balance at beginning of year P=1,543,762 P=58,718 P=4,202,808 P=5,805,288Charges for the year 127,149 1,209 701,154 829,512Reversal (604,577) (36,333) (168,151) (809,061)Foreign exchange difference 69,885 3,117 223,070 296,072Balance at end of year P=1,136,219 P=26,711 P=4,958,881 P=6,121,811


Balance at beginning of year P=1,662,038 P=52,458 P=4,095,292 P=5,809,788Charges for the year 211,349 6,154 81,461 298,964Reversal and write-off (295,654) – (25,926) (321,580)Foreign exchange difference (33,971) 106 51,981 18,116Balance at end of year P=1,543,762 P=58,718 P=4,202,808 P=5,805,288

Individual impairment P=1,154,525 P=– P=3,671,153 P=4,825,678Collective impairment 389,237 58,718 531,655 979,610Balance at end of year P=1,543,762 P=58,718 P=4,202,808 P=5,805,288

The net provision for (reversal of) impairment loss on the receivables recognized in the consolidatedstatements of comprehensive income under “General and administrative expenses” amounted to(P=180.18 million), P=20.45 million and (P=22.62 million) in 2019, 2018 and 2017, respectively.

Impairment assessment - Effective starting January 1, 2018Effective January 1, 2018, the Group uses a provision matrix to calculate ECLs (provisioning rates)based on days past due for groupings of various agents and customer segments that have similar losspatterns. The historical loss rates are credit adjusted by forward-looking estimates (called overlay).

Impairment assessment - Effective prior to January 1, 2018The main considerations for impairment assessment include whether any payments are overdue or ifthere are any known difficulties in the cash flows of the counterparties. The Group assesses impairmentinto two areas: (a) individually assessed allowances and (b) collectively assessed allowances.

The Group determines allowance for each significant receivable on an individual basis. Among thefactors that the Group considers in assessing impairment is the inability to collect from the counterpartybased on the contractual terms of the receivables. Receivables included in the specific assessment arethe accounts that have been endorsed to the legal department, nonmoving accounts receivable, accountsof defaulted agents and accounts from closed stations.

For collective assessment, allowances are assessed for receivables that are not individually significantand for individually significant receivables where there is no objective evidence of individualimpairment. Impairment losses are estimated by taking into consideration the age of the receivables,historical losses, collection experience and other factors that may affect recoverability. The fair valueof any collateral is considered in the evaluation.

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7. Expendable Parts, Fuel, Materials and Supplies

2019 2018At cost:

Expendable parts P=2,546,406 P=2,478,777Fuel 1,500,941 1,449,428Materials and supplies 485,953 529,504

4,533,300 4,457,709At net realizable value - expendable parts 587,704 401,357

P=5,121,004 P=4,859,066

The cost of expendable parts carried at net realizable value amounted to P=1.42 billion andP=870.15 million as of December 31, 2019 and 2018, respectively. Provisions for inventoryobsolescence amounted to P=364.50 million in 2019 and P=29.01 million in 2017. Reversal of provisionfor inventory obsolescence amounted to P=59.47 million in 2018. Expendable parts recognized asmaintenance expense amounted to P=1.06 billion in 2019, P=1.11 billion in 2018 and P=949.24 million in2017 (see Note 20).

8. Other Current Assets

2019 2018Derivative assets (Notes 26 and 27) P=2,204,918 P=2,974,124Deposits and prepayments 2,195,562 2,576,013Security deposits (Notes 5 and 27) 833,371 970,010Others - net of allowance for probable loss of

P=8,056 and P=7,555 as of December 31, 2019and 2018, respectively (Note 18) 591,603 827,823

P=5,825,454 P=7,347,970

Deposits and prepayments pertain to advance payments for materials and supplies, prepaid rentals andmiscellaneous payments.

“Others” includes claims for compensation on damaged assets, other insurance claims and short-terminvestments with maturity of more than three months.

9. Investments in Subsidiaries with Material Non-controlling Interest

APC and FSL are significant subsidiaries with material non-controlling interest. In 2017, the ParentCompany acquired 51% ownership in ZUMA (see Note 2), which in turn owns 99.97% interest in APC,giving the Parent Company an effective interest of 50.98% in APC. The Group, through PAL, alsoobtained control in FSL, previously accounted for as investment in associate, by increasing PAL’sownership interest in FSL from 40% to 65%, giving the Parent Company an effective interest of 64.29%in FSL. The acquisitions of ZUMA and FSL have been accounted for in the consolidated financialstatements as business combination under common control using pooling of interest method ofaccounting (see Note 4). Accordingly, the Group presented as non-controlling interest the ownershipinterests which were not acquired by the Group. In 2018, PAL acquired 20% interest in FSL from anon-controlling shareholder, thereby increasing PAL’s ownership interest to 85% and giving the ParentCompany an effective interest of 84.08% in FSL. The Group recognized P=1.36 billion in equity under“Other equity reserves” as a result of change in ownership interest in 2018, which pertains to the excess

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of the net assets acquired over the consideration paid by the Group for the additional 20% ownershipinterest in FSL. In 2019, PAL sold its 20% ownership interest in FSL to Trustmark HoldingsCorporation, thereby decreasing its ownership interest to 65% and the Parent Company’s effectiveinterest to 64.30%. The Group recognized ₱48.32 million in equity under “Other equity reserves” as aresult of the change in ownership interest in 2019 which pertains to the excess of the considerationreceived over net assets disposed.

The following are the summarized financial information of APC and the Group’s share in equity, netincome and total comprehensive income of APC as of and for the years ended December 31:

2019 2018Current assets P=3,696,682 P=5,245,207Noncurrent assets 17,648,536 1,243,969Current liabilities 2,329,434 5,055,145Noncurrent liabilities 17,591,481 181,300Equity 1,424,303 1,252,731Equity attributable to:

Equity holders of the parent 726,177 638,701Non-controlling interest 698,126 614,030

2019 2018 2017Revenue P=9,524,572 P=10,917,211 P=10,256,411Net income 114,856 550,536 588,636Total comprehensive income 230,439 609,352 588,185Net income attributable to:

Equity holders of the parent 58,559 280,689 300,115Non-controlling interest 56,297 269,847 288,521

Total comprehensive incomeattributable to:Equity holders of the parent 117,489 310,676 299,884Non-controlling interest 112,950 298,676 288,301

The following are the summarized financial information of FSL translated to Philippine peso and theGroup’s share in equity, net income and total comprehensive income of FSL as of and for the yearsended December 31:

2019 2018Current assets P=9,195,838 P=9,615,132Noncurrent assets 38,651,938 42,631,655Current liabilities 5,382,737 5,657,713Noncurrent liabilities 17,467,117 22,793,854Equity 24,997,922 23,795,220Equity attributable to:

Equity holders of the parent 16,073,164 20,007,497Non-controlling interest 8,924,758 3,787,723

2019 2018 2017Revenue P=5,844,839 P=5,980,800 P=5,693,027Net income 2,130,413 2,017,345 1,912,600Net income/Total comprehensive income

attributable to:Equity holders of the parent 1,369,813 1,696,224 1,243,190Non-controlling interest 760,600 321,121 669,410

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10. Property and Equipment

2019

January 1,2019

Effect ofadoption of

PFRS 16At January 1,

as adjusted AdditionsDisposals/

RetirementsReclassification

and OthersTranslationadjustment

December31, 2019

At CostCost: Passenger aircraft, engines and

improvements (Notes 15,16 and 24) P=138,361,868 (₱134,203,043) P=4,158,825 P=1,310,278 P=– P=3,768,487 (P=251,671) P=8,985,919

Rotable and reparable parts (Note 15) 13,617,347 (12,211) 13,605,136 1,194,932 (1,162,897) 13,422 (602,719) 13,047,874 Ground property and equipment 13,772,127 – 13,772,127 677,320 (290,546) 74,793 (867,690) 13,366,004

Vessels 1,163,853 – 1,163,853 – – – – 1,163,853Right-of-use assets:

Passenger aircraft, engines andleasehold improvements – 259,751,969 259,751,969 18,217,175 – (8,484,893) (6,962,914) 262,521,337

Ground property and equipment – 2,606,443 2,606,443 702,421 (3,343) – (110,029) 3,195,492166,915,195 128,143,158 295,058,353 22,102,126 (1,456,786) (4,628,191) (8,795,023) 302,280,479

Accumulated Depreciation: Passenger aircraft, engines and

leasehold improvements (29,841,825) 28,170,115 (1,671,710) (219,367) – (2,032,433) 112,642 (3,810,868)Rotable and reparable parts (6,688,410) 10,928 (6,677,482) (850,314) 490,305 (284,942) 412,161 (6,910,272)Ground property and equipment (11,474,509) – (11,474,509) (675,925) 258,685 99,827 722,429 (11,069,493)

Vessels (26,912) – (26,912) (59,289) – – 2,317 (83,884)Right-of-use assets:

Passenger aircraft and engines – (28,181,043) (28,181,043) (23,429,966) – 4,121,560 (1,101,896) (48,591,345)Ground property and equipment – – – (404,363) 561 – 8,833 (394,969)

(48,031,656) – (48,031,656) (25,639,224) 749,551 1,904,012 156,486 (70,860,831)Accumulated Impairment:

Passenger aircraft and engines (629,156) – (629,156) – – 629,156 – –Vessels – – – (539,487) – – – (539,487)Construction-in-progress – – – (234,210) – – – (234,210)Rotable and reparable parts (160,442) – (160,442) – – – 5,916 (154,526)

(789,598) – (789,598) (773,697) – 629,156 5,916 (928,223)Net book value 118,093,941 128,143,158 246,237,099 (4,310,795) (707,235) (2,095,023) (8,632,621) 230,491,425Construction in progress 10,309,285 – 10,309,285 6,442,985 – (10,632,236) (287,959) 5,832,075Total P=128,403,226 P=128,143,158 P=256,546,384 P=2,132,190 (P=707,235) (P=12,727,259) (P=8,920,580) P=236,323,500

At Revalued AmountBuildings and improvements:

Revalued amount P=1,368,281 – P=1,368,281 P=– P=– (P=43,993) (P=132,515) P=1,191,773 Accumulated depreciation and

amortization (152,728) – (152,728) (97,434) – 166,184 49,564 (34,414)Net Book Value P=1,215,553 – P=1,215,553 (P=97,434) P=– P=122,191 (P=82,951) P=1,157,359

2018December 31,

2017 AdditionsDisposals/



December 31,2018

At CostCost: Passenger aircraft, engines and

leasehold improvements(Notes 15, 16 and 24) P=119,267,237 P=20,524,392 (P=1,441,613) (P=2,047,354) P=2,059,206 P=138,361,868

Rotable and reparable parts (Note 15) 12,436,927 1,918,802 (1,399,769) (65,732) 727,119 13,617,347Ground property and equipment 12,976,090 422,278 (283,402) (5,115) 662,276 13,772,127Vessels – 161,662 – 1,002,191 – 1,163,853

144,680,254 23,027,134 (3,124,784) (1,116,010) 3,448,601 166,915,195Accumulated Depreciation: Passenger aircraft, engines and

leasehold improvements (27,755,941) (6,496,234) 897,551 2,351,592 1,161,207 (29,841,825)Rotable and reparable parts (5,979,713) (986,384) 465,313 91,518 (279,144) (6,688,410)

Ground property and equipment (10,767,802) (597,020) 266,240 175,261 (551,188) (11,474,509)Vessels – (26,912) – – – (26,912)

(44,503,456) (8,106,550) 1,629,104 2,618,371 330,875 (48,031,656)

(Forward)

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2018December 31,

2017 AdditionsDisposals/



December 31,2018

Accumulated Impairment: Passenger aircraft, engines and

leasehold improvements (P=865,333) (P=629,156) P=– P=911,260 (P=45,927) (P=629,156)Rotable and reparable parts (152,355) – – – (8,087) (160,442)

(1,017,688) (629,156) – 911,260 (54,014) (789,598)Net book value 99,159,110 14,291,428 (1,495,680) 2,413,621 3,725,462 118,093,941Construction in progress 22,148,603 6,381,044 – (20,354,099) 2,133,737 10,309,285Total P=121,307,713 P=20,672,472 (P=1,495,680) (P=17,940,478) P=5,859,199 P=128,403,226

At Revalued AmountBuildings and improvements: Revalued amount P=1,281,525 P=22,133 P=– P=– P=64,623 P=1,368,281 Accumulated depreciation and

amortization (38,362) (114,102) – – (264) (152,728)Net Book Value P=1,243,163 (P=91,969) P=– P=– P=64,359 P=1,215,553

In 2019, the Group recognized a total impairment loss of P=773.70 million which pertains to vessels andconstruction in progress for terminals amounting to P=539.49 million and P=234.21 million, respectively.The Group also recognized an impairment loss of P=629.16 million and P=865.33 million in 2018 and2017, respectively, for the aircraft that will be early retired. In 2017, the Group recognized write downamounting to P=286.85 million for the aircraft retired and P=988.60 million for certain aircraft and enginesthat were reclassified to “Assets held for sale”.

Construction in progress mainly includes predelivery payments for aircraft acquisitions. Predeliverypayments include capitalized borrowing costs (see Notes 13 and 15).

Outstanding liabilities pertaining to purchases of property and equipment, excluding lease liabilitiesand obligations under finance lease, amounted to P=88.21 million and P=297.08 million as ofDecember 31, 2019 and 2018, respectively (see Note 23). These are included under “Accounts payable”in the consolidated statements of financial position.

Property and equipment with carrying value of P=540.48 million and P=2.24 billion as ofDecember 31, 2019 and 2018, respectively, used to secure long-term debt are described in Note 15.

Movements in FleetAirbus 350-900In 2019 and 2018, the Group accepted the delivery of two and four, respectively, Airbus A350-900aircraft under sale and leaseback arrangements with third party lessors. These aircraft are now utilizedfor non-stop flights to North America and Europe.

Airbus 340-300In 2019 and 2018, the Group sold two and four Airbus 340-300 aircraft resulting to a gain ofP=90.74 million and P=1.04 million, respectively, recognized in “Other income (charges) - net” in theconsolidated statements of comprehensive income.

Airbus 321-231 NEO (Airbus 321-271N and Airbus 321-271NX)In 2019, the Group accepted delivery of on Airbus 321-271NX aircraft under aircraft lease with athird-party lessor. In 2018, the Group accepted delivery of six Airbus 321-271N aircraft under leaseagreement with third-party lessors. These aircraft are now utilized for flights to destinations such asSapporo, Brisbane and Sydney.

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Airbus 320-200In 2019, the Group redelivered one Airbus 320-200 aircraft to its lessor and exercised its option topurchase five Airbus 320-200 at the end of their respective lease terms.

DHC 8-400 NGIn 2018, the Group accepted the delivery of five Bombardier DHC 8-400 NG under sale and leasebackagreements with third-party lessors.

The fleet as of December 31 follows (see Notes 15, 18 and 24):

2019 2018Owned:

Airbus 340-300 – 2Airbus 320-200 5 –Bombardier DHC 8-400 3 3Bombardier DHC 8-300 4 4

Under lease:Boeing 777-300ER(1)(2) 10 10Airbus 350-900(1) 6 4Airbus 330-300(1) 15 15Airbus 321-231(1)(2) 24 24Airbus 321-271N(2) 6 6Airbus 321-271NX 1 –Airbus 320-200(1)(2) 13 19Bombardier DHC 8-400 NG(1)(2) 10 10

97 97(1) Six (6) Boeing 777-300ER, four (4) Airbus 350-900, ten (10) Airbus 330-300, fourteen (14) Airbus 321-231, eleven (11) Airbus

320-200 and five (5) Bombardier DHC 8-400 NG were classified as operating lease in 2018.(2) Four (4) Boeing 777-300ER, five (5) Airbus 330-300, ten (10) Airbus 321-231, six (6) Airbus 321-271N, eight (8) Airbus 320-200,

and five (5) Bombardier DHC 8-400 NG were classified as finance lease in 2018.

Assets Held for SaleIn 2019 and 2018, PAL’s BOD approved the sale of certain passenger aircraft and engines within12 months. Management determined that the fair value less costs to sell of these passenger aircraft andengines based on offer price of prospective buyers amounted to P=1.72 billion and P=743.38 million asof December 31, 2019 and 2018, respectively. Accordingly, these were classified under “Assets heldfor sale” in the consolidated statements of financial position. An impairment loss amounting toP=72.95 million, nil and P=988.42 million was recognized in 2019, 2018 and 2017, respectively

Buildings and ImprovementsBuildings and improvements, whose fair value can be measured reliably, are carried at appraised valuesdetermined based on valuations performed by various qualified, independent and PhilippineSEC-accredited appraisers. The appraised values as of December 31, 2019 and 2018 are based onappraisal studies done in December 2019 and 2017, respectively. In the valuation process using marketcomparison method (a market approach), the appraisers compared the fair market value of similar assetsadjusted for dissimilarities and considered the best use of the properties at hand (Level 3). Significantunobservable valuation input in determining the fair value of buildings and improvements includesadjusted offer prices of similar properties. Increases (decreases) in estimated inputs would result in asignificantly higher (lower) fair value.

The additional revaluation increase, net of deferred income tax effect of P=34.99 million, recorded forthe year ended December 31, 2019 amounted to P=81.62 million (see Note 19).

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If buildings and improvements were carried at cost less accumulated depreciation, the amounts as ofDecember 31 would be as follows:

2019 2018Cost P=8,810 P=9,149Accumulated depreciation (8,810) (9,149)

P=– P=–

11. Investment Properties

2019

LandBuildings and

Improvements TotalCostBeginning of year P=3,607,568 P=257,462 P=3,865,030Reclassifications – 14,080 14,080Translation adjustment (133,440) (9,524) (142,964)End of year 3,474,128 262,018 3,736,146Accumulated depreciationBeginning of year – (41,780) (41,780)Impairment loss during the year (24,049) (159,315) (183,364)Translation adjustment – 1,536 1,536End of year (24,049) (199,559) (223,608)Net book value P=3,450,079 P=62,459 P=3,512,538

2018

LandBuildings andImprovements Total

CostBeginning of year P=3,438,180 P=244,531 P=3,682,711Reclassifications (12,457) – (12,457)Translation adjustment 181,845 12,931 194,776End of year 3,607,568 257,462 3,865,030Accumulated depreciationBeginning of year – (39,684) (39,684)Translation adjustment – (2,096) (2,096)End of year – (41,780) (41,780)Net book value P=3,607,568 P=215,682 P=3,823,250

In 2019, improvements amounting to P=14.08 million initially capitalized as property and equipmentwas reclassed to investment property. In 2018, MMET reclassified its land with a carrying value ofP=12.46 million to owner-occupied property presented as part of “Property and equipment”.

In 2019, the Group recognized an impairment loss on certain land and buildings and improvementsamounting to P=183.36 million.

The aggregate fair value of investment properties amounted to P=8.08 billion and P=4.42 billion as ofDecember 31, 2019 and 2018, respectively. The fair value of investment properties with carrying valueof P=3.51 billion and P=1.52 billion as of December 31, 2019 and 2018, respectively, has been determined

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based on valuation reports by various qualified, independent and Philippine SEC-accredited appraisersdated December 2019 and 2017, respectively. The valuation undertaken considered the fair marketvalue of similar or substitute properties and related market data and established estimated value byprocesses involving comparison (Level 3).

The valuation techniques used and key inputs to valuation on investment properties are as follows:

Valuation technique Significant unobservable inputLand Sales comparison approach

and income approachAdjusted sales price of comparable

properties, rental ratesBuildings and

improvementsSales comparison approach Adjusted sales price of comparable

properties

Significant increases (decreases) in estimated inputs above would result in a significantly higher (lower)fair value of the properties.

These properties were held by the Group for capital appreciation, which also represents their currentuse. The appraisers determined that the highest and best use of these properties is for residential,agricultural and commercial utility. For strategic reasons, the properties are not currently used in thismanner.

The Group has no restrictions on the realizability of its investment properties and no contractualobligations to either purchase, construct or develop investment properties or for repairs, maintenanceand enhancements.

Direct costs related to these investment properties (e.g., property taxes, among others) amounted toP=11.60 million, P=18.94 million and P=2.97 million for the years ended December 31, 2019, 2018 and2017, respectively.

12. Other Noncurrent Assets

2019 2018Long-term security deposits (Notes 5, 15 and 18) P=14,246,730 P=12,488,989Derivative assets (Notes 26 and 27) 2,842,928 4,044,116Creditable withholding tax 2,676,067 –Deposits on aircraft leases (Notes 18, 24, 26 and 27) 1,687,492 2,307,845Financial assets at FVTOCI (classified as AFS

investments in prior years) (Note 27) 1,955,453 2,014,252Manufacturers’ credits (Note 24) 595,556 1,843,527Others 292 70,916

P=24,004,518 P=22,769,645

Long-term Security DepositsLong-term security deposits include the following, among others:

· Cash amounting to P=44.46 million and P=44.64 million as of December 31, 2019 and 2018,respectively, set aside to collateralize various surety bonds issued (as required under the legalproceedings) in connection with certain litigations;

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· Standby letters of credit amounting to P=2.38 billion and P=2.44 billion as of December 31, 2019 and2018, respectively;

· Security deposits required under certain lease agreements to cover qualifying maintenance events,which amounted to P=5.20 billion and P=4.33 billion as of December 31, 2019 and 2018, respectively;

· Hold-out deposits for bank merchant services amounting to P=2.51 billion and P=1.55 billion as ofDecember 31, 2019 and 2018, respectively; and

· Sinking fund amounting to P=1.35 billion and P=1.50 billion as of December 31, 2019 and 2018,respectively, set aside to guarantee the periodic payments of asset-backed securities(see Note 15).

Total interest income earned on long-term security deposits amounted to P=75.42 million in 2019,P=79.61 million in 2018 and P=50.69 million in 2017.

Deposits on Aircraft LeasesThe Group’s deposits on aircraft leases are carried at amortized cost. Accretion on these deposits,included under “Other income (charges) - net” in the consolidated statements of comprehensive income,amounted to P=184.02 million in 2019, P=174.39 million in 2018 and P=149.18 million in 2017.

Financial assets at FVTOCIThe Group’s financial assets at FVTOCI include investments in MacroAsia Corporation (MAC)amounting to P=1.89 billion and P=1.94 billion as of December 31, 2019 and 2018, respectively. Thisaccount also includes certain quoted equity investments and club shares amounting to P=6.19 millionand P=5.70 million, and unquoted equity investments amounting to P=61.66 million and P=63.75 millionas of December 31, 2019 and 2018, respectively.

The fair value of quoted equity investments and club shares is determined by reference to quoted marketprices as of the end of each reporting period.

The movements in “Net changes in fair values of financial assets at FVTOCI” (previously “Net Changesin AFS Investments”), net of deferred income tax effect are as follows:

2019 2018 2017Balance at beginning of year P=1,771,548 P=1,836,988 P=37,690Mark-to-market gain (loss) recognized as OCI (57,136) (65,440) 1,799,298

1,714,412 1,771,548 1,836,988Less share of non-controlling interests (31) (30) (24)Balance at end of year P=1,714,381 P=1,771,518 P=1,836,964

The fair values of investment in share of stock of MAC were determined based on published prices inthe active market while other quoted equity investments were determined by reference to quoted marketprices as of the end of each reporting period. As of December 31, 2019 and 2018, the unquoted equityinvestments are carried at fair value, which is based on significant unobservable inputs (see Note 27).

Dividend income from investment in shares of stock of MAC amounting to P=22.88 million in 2019,nil in 2018 and P=12.32 million in 2017 are included as part of “Other revenue” in the consolidatedstatements of comprehensive income (see Note 18).

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13. Notes Payable

Notes payable as of December 31, 2019 and 2018 consist of unsecured short-term loans from localbanks totaling to P=18.53 billion and P=20.45 billion, respectively.

Interest rates on these notes payable range from 4.00% to 5.59% in 2019, from 3.25% to 5.15% in 2018and from 2.9% to 4.25% in 2017. Interests incurred on these loans for the year endedDecember 31, 2018 amounting to P=45.01 million were capitalized as part of property and equipmentbased on 4.75% capitalization rate (see Note 10). The related interest expense that was charged to profitor loss amounted to P=862.68 million in 2019, P=684.54 million in 2018 and P=376.75 million in 2017.Interest payable relating to short-term notes payable amounting to P=48.46 million and P=27.29 millionas of December 31, 2019 and 2018, respectively, are included in “Accrued expenses - others” (seeNote 14).

Unsecured short-term loans from local banks amounting to P=7.29 billion were subsequently paid inJanuary and February 2020.

14. Accrued Expenses and Other Current Liabilities

2019 2018Accrued expenses:

Maintenance (Note 18) P=13,313,895 P=11,053,873Ground handling charges (Note 18) 1,549,789 1,552,613Landing and take-off fees 1,459,136 1,269,908Salaries and Wages 897,116 613,855Passenger food and supplies 614,434 484,858Foreign station 432,064 305,328Income taxes 368,803 307,238Others (Note 13) 2,217,185 1,856,092

Derivative liabilities (Note 26 and 27) 2,175,604 3,472,426P=23,028,026 P=20,916,191

Other accrued expenses pertain to accruals for advertising expenses, interest expense and otheroperating expenses.

In November 2017, PAL paid its disputed liabilities with Civil Aviation Authority of the Philippines(CAAP) and Manila International Airport Authority (MIAA) amounting to P=5.68 billion andP=258.59 million, respectively.

15. Long-term Obligations

2019 2018Lease liabilities (Note 24) P=174,602,512 P=64,847,546Long-term debt (Note 18) 34,810,874 33,661,557

209,413,386 98,509,103Less current portion 29,712,836 20,143,871

P=179,700,550 P=78,365,232

Lease liabilities as of December 31, 2019 include the effect of adoption of PFRS 16 while the leaseliabilities as of December 31, 2018 pertain to obligations under finance leases.

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Note 26 presents the undiscounted contractual maturity analysis of financial liabilities, includinglong-term obligations.

Lease LiabilitiesAircraft and engine leasesThe present value of minimum lease commitments for the Group’s lease liabilities as ofDecember 31, 2019 and obligations under finance lease as of December 31, 2018 follows:

2019 (1) 2018 (2)

Minimumlease

commitments

Presentvalue of leasecommitments

Minimumlease

commitments


Due within one year P=31,703,238 P=23,838,511 P=14,093,440 P=11,280,461Due after one year but within

five years 109,681,615 89,681,356 44,126,608 37,667,208More than five years 64,992,593 58,196,928 17,882,405 15,899,877Minimum lease payments 206,377,446 171,716,795 76,102,453 64,847,546Interest and others (34,660,651) – (11,254,907) –

171,716,795 171,716,795 64,847,546 64,847,546Less current portion 23,838,511 23,838,511 11,280,461 11,280,461

P=147,878,284 P=147,878,284 P=53,567,085 P=53,567,085(1)Include obligations under lease with bargain purchase option (previously classified as obligations under finance lease) amounting to

P=52.2 million as of December 31, 2019.(2)Pertains to obligation under finance lease

Details of the aircraft and engine leases are presented in Note 24.

The carrying value of the aircraft and engine leases amounted to P=213.93 billion and P=106.02 billionas of December 31, 2019 and 2018, respectively (see Note 10).

Ground propertyThe present value of minimum lease commitments for the Group’s ground property leases as ofDecember 31, 2019 follows:

2019

Minimum leasecommitments


Due within one year P=637,124 P=455,982Due after one year but within five years 1,559,104 1,078,789More than five years 1,831,856 1,350,946Minimum lease payments 4,028,084 2,885,717Interest and others (1,142,367) –

2,885,717 2,885,717Less current portion 455,982 455,982

P=2,429,735 P=2,429,735

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As of December 31, 2019, the Group has various ground property lease agreements which werepreviously accounted for as operating leases under PAS 17. As of January 1, 2019, right-of-use assetsand lease liabilities related to ground property amounting to P=2.61 billion were recognized as a resultof adoption of PFRS 16. The carrying value of the ground property leases amounted to P=2.80 billionas of December 31, 2019 (see Note 10).

Interest paid on these leases are based on 6.75% as of December 31, 2019. Principal paymentsamounted to P=323.16 million in 2019.

Long-term Debt

2019 2018Secured loans, net of debt issuance costs (Note 18) P=34,810,874 P=33,661,557Less current portion 5,418,343 8,863,410

P=29,392,531 P=24,798,147

Secured Loans$325.00 million, $260.00 million and $100.00 million asset-backed securitiesIn August 2015, PAL obtained P=15.31 billion ($325.00 million) asset-backed security from a foreignbank for additional working capital. The security is secured by future collections from passenger salesmade in the United States through designated credit card companies. The security is repaid throughmonthly installment for 60 months subject to interest of one-month LIBOR plus margin.

In September 2017, PAL obtained additional P=12.98 billion ($260.00 million) from the same foreignbank and entered into an amendment agreement to extend the term up to 48 months from the originalmaturity.

In December 2019, PAL obtained additional P=5.06 billion ($100,000) from the same foreign bank andentered into an amendment agreement to extend the term up by an additional 18 months, effectivelyextending the maturity of the loan to February 2026.

As of December 31, 2019 and 2018, outstanding balance of these securities amounted to P=20.34 billionand P=19.29 billion, with current portion amounting to P=3.29 billion and P=3.42 billion, respectively.Total financing charges related to these securities amounted to P=874.03 million in 2019,P=972.16 million in 2018 and P=528.22 million in 2017.

The debt issuance costs incurred amounting to P=49.93 million in 2019, P=88.91 million in 2018 andP=64.77 million in 2017 were included in the amortization of the security. The unamortized debt issuancecosts amounted to P=85.86 million and P=89.70 million as of December 31, 2019 and 2018, respectively.

The outstanding pledged receivables amounted to P=9.87 million and P=81.29 million as ofDecember 31, 2019 and 2018, respectively (see Note 6). The receivables collected through the creditcard companies will be applied against the monthly installment due. As discussed in Note 12, a sinkingfund amounting to P=1.12 billion and P=1.27 billion as of December 31, 2019 and 2018, respectively,were set aside to guarantee these securities. These securities are subject to certain covenants whichinclude, among others, maintenance of a coverage ratio. As of December 31, 2019 and 2018, PAL is incompliance with the covenants.

$200 million, $150 million and $100 million asset-backed securityIn June 2015, PAL obtained a P=9.42 billion ($200.00 million) asset-backed security from a third party.The security is secured by current and future passenger and cargo receivables which are sold in JapaneseYen through identified agents in Japan. The security is repaid through monthly installment for 60months subject to interest of one-month LIBOR plus margin.

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In March 2018, PAL obtained an additional P=7.89 billion ($150.00 million) asset-backed security fromthe same third party and entered into an agreement to extend the term up to 48 months from originalmaturity.

In August 2019, PAL obtained additional P=5.06 billion ($100.00 million) asset-backed security fromthe same third party and entered into an amendment agreement to extend the term up by an additional30 months, effectively extending the maturity of the loan to August 2026.

As of December 31, 2019 and 2018, outstanding balance of this asset-backed security amounted toP=13.66 billion and P=11.03 billion, with current portion amounting to P=2.03 billion and P=2.10 billion,respectively. Total financing charges related to this security amounted to P=601.07 million in 2019,P=558.54 million in 2018 and P=314.25 million in 2017.

The debt issuance costs incurred amounting to P=6.89 million in 2019, P=10.15 million in 2018 andP=10.28 million in 2017 were included in the amortization of the security. The unamortized debt issuancecosts amounted to P=12.81 million and P=12.51 million as of December 31, 2019 and 2018, respectively.

As of December 31, 2019 and 2018, the outstanding pledged receivables amounted to P=379.81 millionand P=415.12 million, respectively (see Note 6). The receivables collected through the identified agentsin Japan will be applied against the monthly installment due. As discussed in Note 12, a sinking fundamounting to P=230.49 million and P=229.62 million was set aside to guarantee this security as ofDecember 31, 2019 and 2018, respectively. This security is subject to certain covenants which includemaintenance of a coverage ratio. As of December 31, 2019 and 2018, PAL is in compliance with thecovenants.

$127.14 million term loan from a local bankIn December 2016, a facility for P=6.33 billion was obtained from a local bank to finance predeliverypayments related to the acquisition of four Airbus 350-900 aircraft due for delivery in 2018 and 2019.PAL availed half of the loan amounting to P=3.16 billion in the same month with the remaining balanceavailed in 2017. The loan requires quarterly payments of interest based on three-month LIBOR plusmargin. PAL accepted the delivery of two of the related aircraft and made principal paymentsamounting to ₱3.22 billion and ₱3.34 billion in 2019 and 2018, respectively.

The loan is secured by aircraft and spare engine with aggregate carrying value of P=2.24 billion as ofDecember 31, 2018. Interests incurred on this loan amounting to P=255.22 million in 2018 werecapitalized as part of property and equipment (see Note 10) while interest amounting toP=71.30 million in 2019 and P=83.90 million in 2018 were included under “Financing charges” in theconsolidated statement of comprehensive income. Total accrued financing charges related to this loanamounted to P=17.88 million as of December 31, 2018.

The loan is subject to certain covenants which include, among others, maintenance of an interestcoverage and Net Debt to Earnings before interest, taxes, depreciation and amortization (EBITDA)ratio. The outstanding balance of the loan amounting to ₱3.22 billion as of December 31, 2018 wassettled by PAL in 2019.

$71.74 million term loan from a foreign bankIn June 2017, PAL obtained a facility for P=3.58 billion from a foreign bank to finance predeliverypayments related to the acquisition of two Airbus 350-900 due for delivery in 2018. The loan requiresquarterly payments of interest based on three-month LIBOR plus margin. PAL accepted the deliveryof the related aircraft and paid the outstanding balance in 2018.

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Interests and debt issuance costs incurred on this loan amounting to P=86.68 million in 2018 werecapitalized as part of property and equipment (see Note 10) while interest amounting toP=76.44 million in 2018 were included under “Financing charges” in the consolidated statements ofcomprehensive income.

$15.35 million term loan from a local bankIn 2019, MMET obtained a facility for ₱813.30 million from a bank to finance payments related toacquisition of vessels. The loan requires quarterly principal payments starting January 2020 until 2026with 5% annual interest. The loan is secured by the two vessels of MMET. As of December 31, 2019,the outstanding balance of the loan amounted to ₱813.30 million including current portion amountingto ₱101.68 million.

16. Reserves and Other Noncurrent Liabilities

2019 2018Derivative liabilities P=3,041,541 P=4,497,483Deferred revenue under frequent flyer program (Note 4) 3,419,834 741,115Provisions 97,746 130,327Other noncurrent liabilities (Note 18) 126,193 141,045

P=6,685,314 P=5,509,970

ProvisionsProvisions consist substantially of probable claims and other litigations involving the Group.The timing of the cash outflows of these provisions is uncertain as it depends upon the outcome of theGroup’s negotiations and/or legal proceedings, which are currently ongoing with the parties involved.

2019 2018Balance at beginning of year P=130,327 P=2,255,246Additions 5,902 255,181Settlement – (64,994)Reversal (37,796) (2,271,876)Translation adjustment (687) (43,230)Balance at end of year P=97,746 P=130,327

Disclosure of additional details beyond the present disclosures may seriously prejudice the Group’sposition. Thus, as allowed by PAS 37, only general descriptions were provided.

AROIn 2017, the additions to provisions for ARO pertain to accretion which amounted to₱43.83 million. These are presented as part of “Financing charges.”

In 2018, PAL reversed the provision for ARO amounting to ₱1.31 billion as the existing MRF has beenassessed to be sufficient to cover the restoration cost upon redelivery of the related aircraft to the lessors.The reversal of ARO in 2018 is presented as part of “Other income (charges) - net” in the consolidatedstatements of comprehensive income.

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17. Equity

The Parent Company’s capital stock as of December 31, 2019 and 2018 consists of:

No. of Shares Amount2019 2018 2019 2018

Authorized (P=1 par value) 13,500,000,000 13,500,000,000 P=13,500,000 P=13,500,000

Issued and subscribed 11,611,003,257 11,611,003,257 P=9,799,753 P=9,799,753Treasury stock (25,015) (25,015) (25) (25)

11,610,978,242 11,610,978,242 P=9,799,728 P=9,799,728

a. Issued and outstanding shares are held by 6,456 equity holders as of December 31, 2019 and 2018.

b. The Parent Company has 25,015 treasury shares amounting to P=25.00 as of December 31, 2019and 2018. Future earnings are restricted from dividend declaration to the extent of the cost of thesetreasury shares.

c. The Parent Company’s track record of registration of securities under the Securities RegulationCode is as follows:

Date of approval Number of Shares Licensed Issue/Offer PriceAugust 2, 1930 18,000 P=100.00August 2, 1930 2,000,000 0.10January 6, 1951 7,000,500 0.10December 4, 1957 30,000,000 0.10March 25, 1970 200,000,000 0.10April 14, 1975 5,000,000,000 0.01March 7, 1977 12,500,000,000 0.01

In 1996, the Philippine SEC approved the decrease in authorized capital stock from 20 billionshares to 200 million shares while the par value was increased from P=0.01 per share to P=1.00 pershare. In 2000, the Philippine SEC approved the increase in the authorized capital stock from200 million shares to 400 million shares with P=1.00 par value per share. The authorized capitalstock was again increased from 400 million shares to 20 billion shares in 2007.

The Parent Company’s BOD and stockholders approved the increase in the Parent Company’sauthorized capital stock from P=20.00 billion divided into 20.00 billion shares at P=1.00 par value pershare to P=23.00 billion divided into 23.00 billion shares at P=1.00 par value per share in separatemeetings held on June 26, 2012 and September 28, 2012, respectively. Out of the increase in theauthorized capital stock, P=2.42 billion have been subscribed and fully paid by way of cash infusionby Trustmark. The increase in authorized capital stock and the amended Articles of Incorporationwere approved by the Philippine SEC on December 12, 2012. The Parent Company incurred filingfees of P=6.09 million and Documentary Stamp Tax (DST) of P=85.00 million on the issuance ofshares, which were recognized as a reduction from additional paid-in capital.

d. In fiscal year 2013, Trustmark subscribed to 17.00 billion shares at P=1.00 per share amounting toP=17.00 billion, of which 14.58 billion shares were issued out of the unissued capital stock of theParent Company, and the balance of 2.42 billion shares were issued out of the increase in theauthorized capital stock.

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e. On February 4 and March 15, 2013, the BOD and the stockholders approved the increase in theParent Company’s authorized capital stock from P=23.00 billion divided into 23.00 billion shares atP=1.00 par value per share to P=30.00 billion divided into 30.00 billion shares at P=1.00 par value pershare and the amendment of its Articles of Incorporation to reflect the aforementioned increase.The Parent Company’s application for the increase in authorized capital stock was approved by thePhilippine SEC on June 28, 2013. Out of the increase in capital stock, 2.42 billion shares weresubscribed, of which, 603.75 million shares have been fully paid for. The Parent Company incurredfiling fees of P=14.14 million and DST of P=12.08 million on the issuance of shares, which wererecognized as a reduction from additional paid-in capital.

f. On September 26, 2016, the Parent Company’s BOD approved and authorized the acquisition, in ashare swap transaction, of PAL shares from existing PAL shareholders. Relative thereto the BODlikewise approved the share swap ratio of 5:1 or equivalent to five PAL shares to one PHI share.On December 27, 2018 and December 27, 2017, the Philippine SEC approved the acquisition of0.01% and 0.64% non-controlling interest in PAL, respectively. The Parent Company issued0.75 million and 123.54 million new shares from its authorized but unissued capital stock in favorof PAL shareholders who have participated in the PAL share swap transaction. As ofDecember 31, 2019 and 2018, the Parent Company has effective ownership interest in PAL of98.92%.

The Parent Company incurred filing fees of P=1.25 million and DST of P=1.06 million on the issuanceof shares, which were recognized as a reduction from additional paid-in capital.

g. On November 28, 2016, the Parent Company’s BOD also approved the acquisition, through shareswap transaction, of the shares of ZUMA from its existing shareholders with a share swap exchangeratio of 19:1 corresponding to 19 PHI shares to one ZUMA share. On December 21, 2017, thePhilippine SEC approved the acquisition of ZUMA through share swap transaction from its existingshareholders. The Parent Company issued 840.46 million new shares from its authorized butunissued capital stock valued at P=5.00 per share in favor of Cosmic Holdings Corporation.Accordingly, as of December 31, 2019 and 2018, the Parent Company owns 51% of ZUMA.

The Parent Company also incurred filing fees of P=8.49 million and DST of P=4.37 million on theissuance of shares, which were recognized as a reduction from additional paid-in capital in 2017.

h. On March 28 and May 25, 2017, the BOD, by majority vote and by the vote of the stockholdersowning or representing at least 2/3 of the outstanding capital stock of the Parent Company,approved the decrease in authorized capital stock by changing the par value of the shares fromP=1.00 to P=0.45 per share. Simultaneously, the BOD approved to increase the par value per sharefrom P=0.45 to P=1.00 per share, without increasing the authorized capital, thus decreasing thenumber of shares corresponding to the authorized and subscribed capital stock. The decrease in theauthorized capital by reducing the par value per share to P=0.45 per share and the subsequentincrease in the par value to P=1.00 per share by reducing the number of shares corresponding to theauthorized capital stock were approved by the Philippine SEC on December 22, 2017. Accordingly,authorized capital stock as of December 31, 2019 and 2018 is composed of 13.50 billion shares,with 10.52 billion shares issued and outstanding and 1.09 billion shares subscribed.

i. On August 23, 2018, the SEC approved the Parent Company’s equity restructuring to partially wipeout the Parent Company’s deficit amounting to P=29.34 billion as of December 31, 2017 against theAPIC of P=25.34 billion.

j. On March 25 and May 30, 2019, the BOD, by majority vote of the Board of Directors, and thestockholders, owning or representing at least 2/3 of the outstanding capital stock of the Parent

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Company, respectively, approved the increase in authorized capital stock from 13.50 billioncommon shares with par value of P=1.00 per share to 20.00 billion common shares with par valueof P=1.00 per share.

k. On October 4, 2019, PAL’s BOD approved the amendment of PAL’s Articles of Incorporation toincrease the authorized capital stock from 13.0 billion shares with par value of P=1.00 per share to30.0 billion shares with par value of P=1.00 per share. Relative to the said proposed increase incapital, PAL received deposits totaling P=11.41 billion from BSHI.

As of December 31, 2019, the deposits received from BSHI to be used for subscription of capitalstock of PAL are presented as “Deposit from non-controlling interest of a subsidiary” undernoncurrent liabilities.

On February 18, 2020, the stockholders approved to increase the authorized capital stock from13.0 billion shares valued at P=1.00 par value per share to 30.0 billion shares with P=1.00 par valueper share.

18. Related Party Transactions

Related party relationship exists when one party has the ability to control, directly or indirectly, throughone or more intermediaries, or exercise significant influence over the other party in making financial andoperating decisions. Such relationships also exist between and/or among entities which are under commoncontrol with the reporting entity and its key management personnel, directors or stockholders. Keymanagement personnel, including directors and officers of the Parent Company and close members of thefamily of these individuals, and companies associated with these individuals also constitute relatedparties. In considering each possible related party relationship, attention is directed to the substance of therelationship and not merely the legal form.

The following tables present the amounts and outstanding balances of the Group’s transactions with itsrelated parties which are not eliminated:

2019

Transactions Volume

OutstandingReceivable

(Payable) Terms and ConditionsEntities under common controlCash and money placements, including interest

income (Notes 5 and 12) P=4,394 P=8,990,149 Partly secured; unimpairedDividend Income 22.88 – Non-interest bearing; unsecured;

unimpaired

Receivables (Note 6) – 8,746,813Non-interest bearing; unsecured;

unimpaired

Accounts payable 476,707 (563,013)Non-interest bearing; unsecured;

unimpairedNotes payable (Note 13)

Bears interest based on prevailing marketrates; secured; payable in 180 days

Principal 1,398,319 (4,405,245)Financing charges 143,297 (6,352)

Short term investment, including interest income (3,152) 170,961 Interest bearing; unimpairedSales and other income (Note 6) 21,127 91,180 Receivable in 30 days; unimpairedGroundhandling and other charges

(Notes 14 and 20) 2,687,651 (754,337) Payable after 30 daysEntities under significant shareholder groupSales and other income (Note 6) (245,160) 446,682 Receivable in 30 daysAircraft maintenance and other charges

(Notes 14 and 20) 11,506,226 (2,090,511) Payable after 15 to 30 Days

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2018

Transactions Volume


(Payable) Terms and ConditionsEntities under common controlCash and money placements, including interest

income (Notes 5 and 12) P=58,946 P=5,920,100 Partly secured; unimpaired


unimpaired

Accounts payable 1,780,411 (1,780,411)Non-interest bearing; unsecured;



Principal 962,214 3,154,800Financing charges 121,095 (1,864)

Short term investment, including interest income 4,793 198,413 Interest bearing; unimpairedSales and other income (Note 6) 315,266 390,303 Receivable in 30 days; unimpairedGroundhandling and other charges

(Notes 14 and 20) 2,304,150 553,057 Payable after 30 daysEntities under significant shareholder groupSales and other income (Note 6) 8,622 182,272 Receivable in 30 daysAircraft maintenance and other charges


2017

Transactions Volume


(Payable) Terms and ConditionsImmediate parent

Receivable (Note 6) P=– P=265,289Non-interest bearing; unsecured;

unimpairedEntities under common controlCash and money placements, including interest

income (Notes 5 and 12) 52,696 7,740,310 Partly secured; unimpairedDividend receivable 12,320 12,320 AFS investment; unsecured




Principal 2,411,619 (3,909,519)Financing charges 56,552 (999)

Short term investment, including interest income 866 186,677 Interest bearing; unimpairedSales and other income (Note 6) 259,699 386,398 Receivable in 30 days; unimpairedGroundhandling and other charges

(Notes 14 and 20) 1,635,506 (321,544) Payable after 30 daysEntities under significant shareholder groupSales and other income (Note 6) 10,521 110,328 Receivable in 30 daysAircraft maintenance and other charges


a. The Parent Company owns 88 million common shares (7.04% ownership interest) of MAC in 2017and 114.4 million common shares (7.07% ownership interest) in 2018 and 2019. The increase innumber of shares is a result of the 30% stock dividend declared by MAC in March 2018. Certainmembers of the Parent Company’s BOD are also officers and members of the BOD of MAC.Dividends received or receivable from this investment amounted to P=22.88 million in 2019 and nilin 2018 and P=12.32 million in 2017 (see Note 6).

b. As of December 31, 2019 and 2018, cash and cash equivalents (included under “Cash and cashequivalents” and “Other noncurrent assets” in the consolidated statements of financial position)with banks under common control amounted to P=8.99 billion and P=6.02 billion, respectively (seeNotes 5 and 12). The related interest income on these investments and cash deposits amounted toP=4.39 million in 2019, P=58.94 million in 2018 and P=52.42 million in 2017. These cash and cash

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equivalents with entities under common control include money placements for standby letters ofcredit amounting to P=236.84 million and P=240.19 million as of December 31, 2019 and 2018,respectively (see Note 12).

The retirement plan assets of PAL are managed by a bank under common control (see Note 21).

c. As of December 31, 2019 and 2018, PAL has outstanding short-term notes payable amounting toP=4.41 billion and P=3.16 billion, respectively, which bear interest based on prevailing market rates,with entities under common control (see Note 13). The related financing charges on these short-term notes payable amounted to P=143.30 million in 2019, P=121.07 million in 2018 andP=56.55 million in 2017.

d. PAL has a lease agreement with an entity under common control for the lease of a portion of thePNB Financial Center Building. Rental expenses incurred by PAL amounted to nil in 2019,P=43.73 million in 2018 and P=43.76 million in 2017. As of December 31, 2019 and 2018, theoutstanding rental liability relating to the said lease contract amounted to nil andP=3.21 million, respectively (see Note 24).

e. In September 2015, PAL entered into a five-year General Terms and Agreement for Maintenance,Repair and Overhaul services (GTA) with Lufthansa Technik Philippines (LTP) covering linemaintenance, component maintenance, C-check, D-check and other support services. The GTA willautomatically renew unless terminated by either party.

In February 2009, PAL and LTP also entered into an Engine Maintenance Services (EMS) forCFM56-5B Engines agreement for a period of 12 years. LTP has the option to extend the agreementfor another two years by giving six-month prior notice.

Total LTP-related maintenance and repair costs charged to operations amounted to P=8.79 billion in2019, P=9.22 billion in 2018 and P=8.23 billion in 2017. In addition, related expendable parts soldto LTP amounted to P=3.22 million in 2019, P=7.95 million in 2018 and P=6.01 million in 2017. As ofDecember 31, 2019 and 2018, PAL has outstanding amounts payable to and estimated unbilledcharges from LTP totaling P=1.93 billion and P=2.26 billion (included under “Accounts payable” inthe consolidated statements of financial position), net of revolving fund and unapplied credits fromand advance payments to LTP amounting to P=239.10 million and P=93.77 million, respectively.

PAL, in the normal course of its business, renders various services to LTP. Revenues earned fromthese services are included under “Other income (charges) - net” in the consolidated statements ofcomprehensive income. Receivables from LTP amounted to P=94.66 million and P=57.79 million asof December 31, 2019 and 2018, respectively (see Note 6).

f. PAL has a ground handling and catering agreement with MacroAsia Airport Services Corporation(MASC) and MacroAsia SATS Inflight Services Corporation (MSISC), entities under commonshareholder group. On October 1, 2011, the parties executed a supplement to the agreementspecifying the locations, agreed services and charges with MASC. While on March 16, 2019, PALexecuted a service catering agreement with MSISC.

Related ground handling expenses amounted to ₱1.49 billion in 2019, ₱616.02 million in 2018 and₱458.29 million in 2017. Outstanding payable to MASC amounting to ₱101.57 million and₱3.63 million as of December 31, 2019 and 2018, respectively, is included under “Accountspayable” in the consolidated statements of financial position.

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Catering expenses related to MSISC amounted to ₱789.15 million in 2019. Outstanding payable toMSISC amounting to ₱112.51 million as of December 31, 2019 is included under “Accountspayable” in the consolidated statements of financial position.

g. APC has a ground handling agreement with MASC to provide ramp, passenger and cargo handling,and other ground services to APC. Related ground handling expenses amounted to P=563.54 millionin 2019, P=493.53 million in 2018 and P=313.15 million in 2017. Outstanding payable to MASCamounting to P=175.19 million and P=166.71 million as of December 31, 2019 and 2018,respectively, is included under “Accounts payable” in the consolidated statements of financialposition.

h. The compensation of key management personnel of the Group consisted of short-term employeebenefits amounting to P=61.47 million, P=48.20 million and P=47.55 million and retirement benefitsamounting to P=9.14 million, P=5.92 million and P=6.42 million in 2019, 2018 and 2017, respectively.

The following are the balances among related parties which are eliminated in the consolidated financialstatements:

AssetsRecognizedby:

LiabilitiesRecognizedby: Terms


PAL PHI Noninterest-bearing, unsecured,not impaired P=3,600,000 P=3,600,000 P=91,091

APC PAL Non-interest bearing,unsecured, not impaired 925,295 2,557,494 2,279,970

APC PAL Noninterest-bearing, due andrefundable at the end of the lease term, notimpaired 8,045 12,185 11,090

Amortized over the lease term,not impaired – – 2,790

Noninterest-bearing, due and refundable at the end of the lease term, not impaired 329,535 337,969 335,526

PAL APC Noninterest-bearing, unsecured,not impaired 9,001,879 3,264,584 6,250,479

APC ZUMA Noninterest-bearing, due and demandable, not

impaired 62,972 62,972 62,972APC GUIDE Noninterest-bearing, due and

demandable, not impaired 8,578 – –

GUIDE APC Noninterest-bearing, due and demandable, not

impaired 26 – –

a. As of December 31, 2019 and 2018, PAL has various aircraft and engines lease agreements withthe subsidiaries of FSL covering Airbus 330-300, Airbus 321-231 and Boeing 777-300ER aircraftand spare engines (see Notes 10 and 24).

b. The transactions between APC and PAL pertain mainly to joint services and code share agreements,and maintenance services.

Effective March 2014, PAL entered into the Code Share Agreement with APC. This arrangementsuperseded the existing Reciprocal Free Flow Code Share Agreement. Under the Code ShareAgreement, PAL markets the codeshare flights while APC operates the flights based on agreedrates.

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As of December 31, 2019 and 2018, PAL has outstanding lease agreements with APC coveringAirbus 321-231, Airbus 320-200 aircraft, Bombardier DHC 8-300 and Bombardier DHC 8-400aircraft, for a period of 36 to 144 months (see Notes 10 and 24). In 2019, five additionalAirbus 320-200 were subleased to APC.

19. Other Comprehensive Income

Movements in other comprehensive income are as follows:

2019 2018 2017OCI to be reclassified to profit or loss in subsequent periods:

Cumulative translation adjustments:Balance at beginning of year P=2,066,678 P=1,931,547 P=2,357,741Effect of foreign exchange translation* 126,015 135,131 (426,194)End of year 2,192,693 2,066,678 1,931,547

Net changes in fair values of financial assets at FVTOCI(previously classified as AFS investments) (Note 12):

Balance at beginning of year, net of deferred income tax effect 1,771,548 1,836,988 37,690Gain (loss) on changes in fair values (57,167) (65,470) 1,799,322Deferred income tax effect on the fair value changes for the year 30 30 (24)End of year 1,714,411 1,771,548 1,836,988

3,907,104 3,838,226 3,768,535OCI not to be reclassified to profit or loss in subsequent periods:

Revaluation increment (Note 10):Balance at beginning of year, net of deferred income tax effect 678,425 P=718,155 P=377,335Revaluation increment for the year 116,615 – 804,196Deferred income tax effect on the revaluation increment for the year (34,985) – (241,259)

Transfer of portion of revaluation increment in property realized through sale and depreciation, net of deferred

income tax effect and foreign exchange adjustment (73,763) (39,730) (222,117)End of year 686,292 678,425 718,155

Remeasurement losses on defined benefit obligation (Note 21):Balance at beginning of year, net of deferred income tax effect 36,456 (758,007) (677,972)Remeasurement losses for the year (948,251) 1,109,547 (126,923)Deferred income tax effect on remeasurement losses for the year 301,506 (315,084) 46,888End of year (610,289) 36,456 (758,007)

76,003 714,881 (39,852)Total other comprehensive income at the end of the year P=3,983,107 P=4,553,107 P=3,728,683Other comprehensive income attributable to:

Equity holders of the Parent Company P=3,297,566 P=3,318,560 P=2,693,389Non-controlling interests 685,541 1,234,547 1,035,294

P=3,983,107 P=4,553,107 P=3,728,683*Represent the effect of translating the US Dollar consolidated financial statements of Philippine Airlines, Inc., a subsidiary, using the applicable year-end

exchange rates of P=50.635, P=52.58, P=49.93 and to US$1 as of December 31, 2019, 2018 and 2017, respectively, and the monthly average exchange rates forthe years then ended.

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20. Expenses

The significant components of expenses by nature are as follows:

2019 2018 2017Fuel and oil (Note 27) P=48,077,094 P=52,794,958 P=38,427,675Depreciation, amortization and obsolescence

(Notes 7 and 10) 25,743,649 8,309,684 8,267,662Repairs and maintenance (Note 7 and 18) 20,036,964 19,717,625 18,337,606Crew and staff costs (Note 21) 14,991,195 14,962,092 14,204,181Ground handling charges (Note 18) 9,655,860 9,740,655 8,569,688Landing and take-off fees 7,273,314 6,981,462 6,610,049Passenger food (Note 18) 4,347,155 4,266,613 4,579,620Reservation and selling costs 3,375,400 3,166,000 2,924,371Flight amenities 2,372,426 2,966,949 2,389,556Aircraft lease rentals (Notes 18 and 24) 1,010,149 17,878,851 13,967,727

Fuel and oil includes the effect of fair value gain (loss) of various fuel derivatives used as economichedges of fuel cost amounting to P=508.03 million in 2019, (P=920.02 million) in 2018 andP=584.82 million in 2017.

21. Accrued Employee Benefits

Characteristics of the PlanThe Group’s Retirement Plans are noncontributory defined benefit plans covering all regularemployees. Benefits are based on the employees’ years of service and final plan salary.

The Trustee is responsible for the administration of the plan assets and for the definition of theinvestment strategy.

The retirement plans meet the minimum retirement benefit specified under Republic Act 7641,The Retirement Pay Law.

The Group’s accrued employee benefits as of December 31 consisted of the following:

2019 2018Regular retirement benefits P=5,617,838 P=4,308,706Other long-term benefits:

Sick leave and vacation leave 1,161,896 907,735Others 5,760,472 5,126,674

P=12,540,206 P=10,343,115

“Others” includes benefits from pilot loyalty program, pilot occupational disability program, pilots’retirement plan and retirement benefits for foreign stations’ employees.

The components of retirement costs (income) included under “Expenses” in the consolidated statementsof comprehensive income are as follows:

Regular retirement benefits Sick leave and vacation leave benefits2019 2018 2017 2019 2018 2017

Current service cost P=363,545, P=410,053 P=395,036 P=271,409 P=148,173 P=43,733Net interest cost 309,805 284,991 237,279 65,604 47,843 40,067Remeasurements on other

long-term benefits – – – 240,058 (29,487) 81,768P=673,350 P=695,044 P=632,315 P=577,071 P=166,529 P=165,568

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Remeasurement gains (losses) on regular retirement benefits recognized in OCI are as follows:

2019 2018 2017Defined benefit obligation (P=899,638) P=1,096,910 (P=111,470)Plan assets (48,613) 12,637 (15,453)

(P=948,251) P=1,109,547 (P=126,923)

The net amounts in the consolidated statements of financial position arising from the Group’s obligationin respect of its defined benefit plan and sick leave and vacation leave benefits are as follows:

Regular retirement benefits Sick leave and vacation leave benefits2019 2018 2019 2018

Present value of obligation(PVBO) P=6,273,358 P=4,969,103 P=1,270,293 P=1,021,711

Fair value of plan assets(FVPA) (655,520) (660,397) (P=108,397) (P=113,976)

P=5,617,838 P=4,308,706 P=1,161,896 P=907,735

Changes in the PVBO are as follows:


Beginning of year P=4,969,103 P=5,637,949 P=5,043,982 P=1,021,711 P=948,126 P=902,497Current service cost 363,545 410,053 395,036 68,673 148,173 43,733Interest expense 345,542 299,332 260,402 73,834 54,082 45,503Benefits paid (304,470) (281,321) (172,941) (120,174) (97,708) (120,741)Remeasurement loss (gain)

arising from:Financial assumptions 1,020,299 (404,568) (175,738) 226,249 (30,962) 77,134Experience adjustments (81,579) (658,061) 288,923 – – –Change in demographic

assumption (39,082) (34,281) (1,715) – – –End of year P=6,273,358 P=4,969,103 P=5,637,949 P=1,270,293 P=1,021,711 P=948,126

Changes in the FVPA are as follows:


Beginning of year P=660,397 P=626,056 P=607,554 P=113,976 P=109,212 P=108,410Interest income 35,737 14,341 23,123 8,230 6,239 5,436Contributions 309,442 278,435 178,523 63,567 61,698 46,746Benefits paid (301,443) (271,072) (167,691) (63,567) (61,698) (46,746)Remeasurement gain (loss)

arising from return on planassets (48,613) 12,637 (15,453) (13,809) (1,475) (4,634)

Reallocated assets – – – – – –End of year P=655,520 P=660,397 P=626,056 P=108,397 P=113,976 P=109,212

The movements in accrued employee benefits are as follows:


Beginning of year P=4,308,706 P=5,011,893 P=4,436,428 P=907,735 P=838,914 P=794,087Retirement cost 673,350 695,044 632,315 134,277 196,016 83,800Remeasurement losses (gains)

recognized in OCI 948,251 (1,109,547) 126,923 240,058 (29,487) 81,768(Forward)

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Contributions (₱309,442) (₱278,435) (₱178,523) (₱63,567) (₱61,698) (₱46,746)Benefits paid (3,027) (10,249) (5,250) (56,607) (36,010) (73,995)Reallocated Assets – – – – – –End of year P=5,617,838 P=4,308,706 P=5,011,893 P=1,161,896 P=907,735 P=838,914

The retirement plan’s assets and investments, which are being maintained by a trustee bank undercommon control (see Note 18), consist of the following:

· Cash and cash equivalents, which include regular savings and time deposits, earning interest at theirrespective bank deposit rates; and

· Investments in debt instruments, consisting of both short and long-term corporate notes of foreigncommercial banks, which earn interest at 9.03% and will mature on March 15, 2029.

The major categories of the plan assets of the Group as percentages of the fair value of total plan assetsas of December 31 are as follows:

2019 2018Cash and cash equivalents 87% 95%Investment in debt securities 13% 4%Receivables – 1%

100% 100%

The discount rates and future salary increase rates used in determining retirement obligation for thedefined benefit plans are as follows:

2019 2018 2017Discount rate 7.09% to 7.70% 5.67% to 5.79% 4.67% to 5.55%Future salary increase rate

Ground employees 5% to 7% 5.00% 5.00%Cabin crew P=2,500 to P=3,500 P=3,000 to P=5,500 10.00%Pilots P=2,000 to P=10,000 P=5,500 P=2,500 to P=10,000

As of December 31, 2019, the discount rate ranges from 4.42% to 5.54% per annum.

The sensitivity analysis below has been determined based on reasonably possible changes of eachsignificant actuarial assumption on the defined benefit obligation as of December 31 assuming all otherassumptions were held constant:

2019 2018Increase

(decrease)Effect on

PVBOIncrease

(decrease)Effect on

PVBODiscount rate per annum 1.00% (397,932) 1.00% (264,117)

(1.00%) 453,025 (1.00%) 296,574Future annual salary increase rate:

Ground employees 1.00% 277,359 1.00% 137,656(1.00%) (103,776) (1.00%) (123,604)

Cabin crew +P=4,000 390,241 +P=4,000 264,581+P=2,000 194,419 +P=2,000 132,224

Pilots +P=4,000 229,821 +P=4,000 151,669+P=2,000 114,911 +P=2,000 75,834

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The weighted average duration of the defined benefit obligation of the Group as of December 31, 2019is 9.90 years to 15 years (9.90 to 15.24 years as of December 31, 2018). Expected contribution to theretirement plan in 2020 amounts to P=1.15 billion.

The table below shows the payments that are to be made in the future years out of the defined benefitobligation as of December 31:

2019 2018Within one year P=850,279 P=867,618More than one year to 5 years 2,831,737 2,838,444More than 5 years to 10 years 3,773,292 3,816,262More than 10 years to 15 years 3,872,205 3,986,068More than 15 years to 20 years 2,452,717 2,601,415More than 20 years 5,389,832 5,269,306

The funds are invested significantly in short-term investments and corporate and government bonds.The Group’s management ensures that there will be sufficient assets to pay retirement benefits as theyfall due.

22. Income Taxes

a. The income tax expense consists of the following:

2019 2018 2017Current income tax P=149,701 P=63,143 P=59,681Deferred income tax (1,646,859) (3,785,364) (56,788)

(P=1,497,158) (P=3,722,221) P=2,893

b. The Group’s recognized net deferred income tax assets, all relating to PAL, as of December 31 areas follows:

2019 2018Deferred income tax items recognized in profit or loss:

Deferred income tax assets on:Lease liabilities ₱42,096,088 ₱–NOLCO and MCIT 8,542,753 5,619,105Reserves and others 1,025,939 222,334Allowance for inventory losses 188,712 103,310Impairment loss on investment property 54,988 –Unamortized past service cost 50,836 103,849Fair value adjustments - net 50,786 280,041Unrealized foreign exchange adjustments - net – 992,339

52,010,102 7,320,978Deferred income tax liabilities on:

Right-of-use assets (42,070,517) – Changes in exchange rates related to

nonmonetary assets andliabilities - net (2,992,346) (2,499,475)

Estimated breakage for unutilized passengertickets (1,000,370) (919,762)

(Forward)

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2019 2018Unrealized foreign exchange adjustments - net (603,300) –Prepaid commission and others (274,789) (269,683)

(46,941,322) (3,688,920)5,068,780 3,632,058

Deferred income tax items recognized in OCI: Deferred income tax assets on remeasurement

losses on defined benefit retirement plan 408,563 113,625Deferred income tax liabilities on:

Revaluation increment in property (357,929) (340,383) Net changes in fair value of financial assets at

FVTOCI (1,671) (1,710) Investment property carried at

deemed cost (93,824) (97,412)(44,861) (325,880)

Net deferred income tax assets P=5,023,919 P=3,306,178

Deferred income tax assets on lease liabilities and deferred income tax liabilities on right-of-useassets for tax reporting purposes.

In accounting for deferred tax relating to such operating leases, the Group considers both the right-of-use asset and liability separately. The Group separately accounts for deferred taxation on thetaxable temporary difference and deductible temporary difference, which upon initial recognitionare equal and offset to zero. Deferred tax is recognized on subsequent changes to taxable anddeductible temporary differences.

The utilization of the net deferred income tax assets is dependent on future taxable income in excessof the income arising from the reversal of the taxable temporary differences. The future taxableincome is based on the forecast prepared by management considering the revenue enhancementprograms (see Notes 2 and 4).

The Group did not recognize deferred income tax assets on the following deductible temporarydifferences as of December 31:

2019 2018NOLCO P=285,084 P=2,439,397Excess of MCIT over RCIT 160,487 311,734Allowances for:

ECL 4,541,262 6,121,811Obsolescence 204,323 124,423

Accrued retirement benefits 11,199,203 9,959,366Impairment loss on assets held for sale and

property and equipment1,997,099 1,426,468

Provisions 97,746 130,327Accrued expenses and others 3,786 160,054

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c. As of December 31, 2019, the Parent Company’s NOLCO that are available for deduction againstfuture taxable income are as follows:

Year incurred Amount Expired Balance Available UntilDecember 31, 2019 ₱11,083 ₱− ₱11,083 December 31, 2022December 31, 2018 20,177 − 20,177 December 31, 2021December 31, 2017 26,780 − 26,780 December 31, 2020December 31, 2016 17,427 − 17,427 December 31, 2019December 31, 2015 29,386 (29,386) − December 31, 2018December 31, 2014 8,975 (8,975) − December 31, 2017

P=113,828 (P=38,361) P=75,467

As of December 31, 2019, PAL’s outstanding NOLCO that are available for deduction againstfuture taxable income are as follows:

Year incurred Amount Applied Expired Balance Available UntilDecember 31, 2019 ₱8,760,733 ₱– ₱– ₱8,760,733 December 31, 2024December 31, 2018 10,540,615 – – 10,540,615 December 31, 2023December 31, 2017 8,743,702 – – 8,743,702 December 31, 2022December 31, 2014 477,183 – (477,183) – December 31, 2019December 31, 2013 2,122,150 (7,588) (2,114,562) – December 31, 2018March 31, 2013 1,399,643 (1,399,643) – – December 31, 2017

P=32,044,026 (P=1,407,231) (P=2,591,745) P=28,045,050

As of December 31, 2019, Zuma’s NOLCO that can be claimed as deduction from future taxableincome are as follows:

Year Incurred Amount Applied Expired Balance Available UntilDecember 31, 2019 ₱61,561 P=– P=– P=61,561 December 31, 2022December 31, 2018 61,452 – – 61,452 December 31, 2021December 31, 2017 61,449 – – 61,449 December 31, 2020December 31, 2016 61,298 – (61,298) – December 31, 2019December 31, 2015 63,174 – (63,174) – December 31, 2018

P=308,934 P=– (P=124,472) P=184,462

APC’s NOLCO incurred in 2014, 2013, and 2012 amounting to P=1.28 billion, P=269.59 million andP=479.44 million were applied against taxable income in 2019, 2018 and 2017, respectively.NOLCO incurred in 2013 and 2012 amounting to P=2.57 billion and P=1.66 billion expired in 2018and 2017, respectively.

d. PAL’s outstanding MCIT as of December 31, 2019 is available for application against futureincome tax dues as follows:

Year incurred Amount Expired Balance Available UntilDecember 31, 2019 P=60,509 P=– P=60,509 December 31, 2022December 31, 2016 187,349 (187,349) – December 31, 2019December 31, 2015 266,708 (266,708) – December 31, 2018December 31, 2014 186,409 (186,409) – December 31, 2017

P=700,975 (P=640,466) P=60,509

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APC’s outstanding MCIT as of December 31, 2019 is available for application against futureincome tax dues:

Year Incurred Amount Applied Expired Balance Available UntilDecember 31, 2019 P=13,186 P=– P=– P=13,186 December 31, 2022December 31, 2018 42,870 – – 42,870 December 31, 2021December 31, 2017 43,883 – – 43,883 December 31, 2020December 31, 2016 37,581 – – 37,581 December 31, 2019December 31, 2015 33,468 – (33,468) – December 31, 2018December 31, 2014 1,237 – (1,237) – December 31, 2017

P=172,225 P=– (P=34,705) P=137,520

e. The reconciliation between the statutory tax rate and the Group’s effective tax rate follows:

2019 2018 2017Statutory tax rate (30.00%) (30.00%) (30.00%)Adjustments resulting from: Movement in deductible temporary

differences for which no deferredincome tax assets were recognized 1.05% (12.27%) 12.47%

Derecognition of deferred income taxassets on NOLCO and MCIT – 1.95% 17.20%

Deductible temporary differencesused/recognized in currentyear but for which no deferredincome tax assets were recognizedin prior years – – 0.14%

Interest income subjected to final tax orexempted from tax (0.33%) (0.40%) (0.31%)

Nondeductible portion of interestexpense 1.13% 0.12% 0.10%

Nondeductible expenses (nontaxableincome) and others - net 14.78% (9.50%) 0.44%

Effective income tax rate (13.37%) (50.10%) 0.04%

f. RR No. 10-2002 defines expenses to be classified as entertainment, amusement and recreation(EAR) expenses and sets a limit for the amount that is deductible for tax purposes, i.e., 1% of netrevenue for sales of services and 0.50% of net sales for sales of goods. EAR expenses amounted toP=13.56 million, P=19.24 million and P=21.07 million in 2019, 2018 and 2017, respectively.

g. As discussed in Note 1, PAL has been registered with the BOI as new operator of air transportservices on non-pioneer status under the Omnibus Investment Codes of 1987 (Executive OrderNo. 226). For the six aircraft registered with the BOI in 2018, PAL can avail bonus years in certaincases, if applicable, provided that the aggregate ITH entitlement (regular and bonus years) shall notexceed eight (8) years.

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23. Notes to Consolidated Statements of Cash Flows

Changes in liabilities arising from financing activities are as follows:

For the year ended December 31, 2019

AtJanuary 1,

2019, aspreviously

reported

Cash flows

Effect ofadoption of

PFRS 16

AtJanuary 1,

2019, asrestated Availments Payments

TranslationAdjustment Net

Newleases Others

December 31,2019

Notes payable ₱20,450,991 ₱– ₱20,450,991 ₱14,644,613 (₱15,809,218) (₱756,508) (₱1,921,113) ₱– ₱– ₱18,529,878Current portion of lease liabilities – 32,939,906 32,939,906 – (33,359,728) (1,201,621) (34,561,349) – 25,915,936 24,294,493Current portion of long-term loans 8,863,410 – 8,863,410 – (8,535,542) (327,868) (8,863,410) – 5,418,343 5,418,343Current portion of obligations under finance lease 11,280,460 (11,280,460) – – – – – – – –Noncurrent portion of lease liabilities – 159,144,404 159,144,404 – – (5,903,819) (5,903,819) 14,587,842 (17,520,408) 150,308,019Noncurrent portion of long-term loans 24,798,147 – 24,798,147 10,940,336 – (917,311) 10,023,025 – (5,428,641) 29,392,531Noncurrent portion of obligations under finance lease 53,567,085 (53,567,085) – – – – – – – –Total liabilities fromfinancing activities ₱118,960,093 ₱127,236,765 ₱246,196,858 ₱25,584,949 (₱57,704,488) (₱9,107,127) (₱41,226,666) ₱14,587,842 ₱8,385,230 ₱227,943,264

For the year ended December 31, 2018

Cash flowsJanuary 1,

2018 Availments PaymentsTranslationAdjustment Net New leases Others

December 31,2018

Notes payable P=17,837,493 P=8,357,591 (P=6,690,805) P=946,712 P=2,613,498 P=– P=– P=20,450,991Current portion of

long-term loans 15,172,619 – (12,635,395) 805,286 (11,830,109) – 5,520,900 8,863,410Current portion of

obligations underfinance lease 8,380,377 – (9,223,689) 444,755 (8,778,934) – 11,679,017 11,280,460

Noncurrent portionof long-term loans 21,217,853 7,887,000 – 1,126,123 9,013,123 – (5,432,829) 24,798,147

Noncurrent portionofobligations underfinance lease 45,494,786 – – 2,414,585 2,414,585 17,336,678 (11,678,964) 53,567,085

Total liabilities fromfinancing activities P=108,103,128 P=16,244,591(P=28,549,889) P=5,737,461 (P=6,567,837) P=17,336,678 P=88,124 P=118,960,093

“Others” includes the effect of reclassification of non-current portion to current due to the passage oftime and amortization of direct costs capitalized. The Group classifies interest paid as cash flows fromoperating activities.

Noncash investing activities include unpaid acquisition of property and equipment amounting toP=88.21 million, P=297.10 million and P=5.15 billion as of December 31, 2019, 2018 and 2017,respectively.

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24. Commitments

Aircraft Purchase Agreements and Finance LeasesAirbus aircraftIn August 2012, the Group entered into two separate Purchase Agreements with Airbus. The firstPurchase Agreement is for a firm order of 44 Airbus “A320 family” aircraft and options for 20 Airbus“A320 family” aircraft for delivery in years 2013 to 2020. The “A320 family” consist of 34 Airbus321-231 CEO and 10 Airbus 321-231 NEO. The other Purchase Agreement is for a firm order of 10Airbus 330-300 aircraft and options for 10 Airbus 330 -300 aircraft for delivery in years 2013 to 2016.In September 2012, the Group exercised its right to purchase all of the 10 Airbus 330-300 option aircraftby virtue of an amendment agreement to the Purchase Agreement. In March 2014, the Group enteredinto an amendment agreement with Airbus and reduced its Airbus 330-300 aircraft orders by five andsimultaneously exercised eight of its options for the Airbus “A320 family” aircraft and purchasedAirbus 321-231 NEO aircraft for delivery in years 2020 to 2022. The Group did not exercise theremaining 12 options.

In January 2015, by virtue of another amendment to the Purchase Agreement, the Group purchased twoadditional Airbus 321-231 NEO aircraft and revised the delivery of its firm orders of 10 Airbus321-231 CEO aircraft from the original schedule of delivery in years 2015 to 2016 to years 2020 to2024, and converted the same into Airbus 321-231 NEO aircraft.

In February 2016, the Group entered into a Memorandum of Understanding with Airbus for thepurchase of six Airbus 350-900 aircraft with an option to acquire six additional aircraft. This firm orderof six aircraft was delivered in 2018 and 2019 (see Note 10). The Group also signed a term sheet withan engine manufacturer for maintenance support and purchase of spare engines to power the Airbus350-900 aircraft. The cost of the engines to be installed on the aircraft are included in the aircraftpurchase price. The definitive Purchase Agreement was executed in April 2016 for six firm A350-900aircraft for delivery in 2018 (four aircraft) and 2019 (two aircraft) with purchase options for sixadditional aircraft. The purchase of the six firm A350-900 aircraft also coincided with the reduction ofnine A321-231 NEO aircraft from PAL’s existing order, thereby reducing the total A321-231 NEOorder from 30 to 21 aircraft, deliveries of which are scheduled between 2018 and 2024. In the sameyear, the agreements with an engine manufacturer for maintenance support and purchase of spareengines to power the Airbus 350-900 aircraft was also executed. As of December 31, 2019, theremaining aircraft that are for delivery in the future include 14 Airbus 321-271 NEO.

Total predelivery payments relating to the acquisition of the remaining undelivered Airbus aircraftunder the Purchase Agreements amounted to P=3.60 billion and P=7.90 billion as of December 31, 2019and 2018, respectively (see Note 10). Predelivery payments amounting to P=4.95 billion andP=11.80 billion were returned in 2019 and 2018, respectively, upon delivery of the aircraft.

Boeing aircraftIn October 2006, the Group finalized a Purchase Agreement with Boeing wherein the Group placed afirm order for two Boeing 777-300ER aircraft for delivery in 2010 to 2011 and purchase options fortwo additional aircraft. In May 2007, the Group exercised its purchase option for two Boeing 777-300ER aircraft for delivery in 2012.

Bombardier aircraftIn December 2016, the Group signed a Purchase Agreement with Bombardier, Inc. for the acquisitionof five DHC 8-400 (Q400 NextGen) turbo propeller aircraft for delivery from July to November 2017,with purchase rights for an additional seven aircraft. In June 2017, the Group exercised the purchaserights for an additional seven aircraft.

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Total predelivery payments relating to the acquisition of remaining undelivered Bombardier aircraftunder the Purchase Agreements amounted to P=394.80 million and P=307.22 million as of December 31,2019 and 2018, respectively (see Note 10). Predelivery payments amounting to P=993.34 million werereturned in 2018 upon delivery of the aircraft.

Aircraft and Engine Leases - Group as Lessee (Effective starting January 1, 2019)The future minimum lease payments related to the lease agreements in aircraft and engines as ofDecember 31 are as follows:

2018

2019Finance

LeaseOperating

LeaseDue within one year ₱31,703,238 ₱14,093,440 P=20,092,869Due after one year but within five years 109,681,615 44,126,608 73,328,436More than five years 64,992,593 17,882,405 61,752,528

₱206,377,446 ₱76,102,453 P=155,173,833

Airbus aircraftAs of December 31, 2019, the Group has 24 Airbus 321-231 CEO, 15 Airbus 330-300, six Airbus350-900 and seven Airbus 321-271 NEO aircraft under lease arrangements (see Note 10). The carryingvalue of these Airbus aircraft under lease arrangements amounted to ₱143.52 billion as ofDecember 31, 2019 (see Note 10).

The Group recognized manufacturer’s credit amounting to ₱125.17 million in 2019, covering threeAirbus aircraft, with a third-party lessor. The manufacturers’ credits were recognized under “Othercharges (income) - net” in the consolidated statements of comprehensive income.

Boeing aircraftAs of December 31, 2019, the Group has 10 Boeing 777-300ER aircraft under lease arrangementswith total carrying value amounting to ₱51.90 billion as of December 31, 2019 (see Note 10).

Bombardier aircraftAs of December 31, 2019, the Group has 13 DHC 8-400 (Q400 NextGen) under lease arrangementswith total carrying value amounting to ₱4.75 billion as of December 31, 2019 (see Note 10).

Aircraft engineAs of December 31, 2019, the Group has various engines under lease arrangements. The carrying valueof these engines amounted to ₱2.11 billion as of December 31, 2019 (see Note 10).

Short-term aircraft and engine leasesAs of December 31, 2019, the Group has short-term lease agreements on various aircraft and enginesranging from three to 12 months.

As disclosed in Note 3, the Group has elected to apply the practical expedient provided by the standardwhere the Group will not apply the requirements of PFRS 16 to leases for which the lease term endswithin 12 months from the date of initial application.

Aircraft and engine lease rentals from short-term leases amounted to ₱935.53 million in 2019.

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Aircraft and Engine Finance Leases - Group as Lessee (Effective prior to January 1, 2019)Airbus AircraftThe Group has existing finance lease agreements for 15 Airbus 330-300, four Airbus 350-900 and sixAirbus 321-231 Neo under August 2012 purchase agreements and eight Airbus 320-200 under the 2005Purchase Agreement as of December 31, 2018 (see Note 15). The carrying value of these aircraft underfinance lease amounted to ₱69.46 billion as of December 31, 2018 (see Note 10).

Boeing aircraftThe Group has four Boeing 777-300ER aircraft under finance lease as of December 31, 2018. Theseaircraft orders were covered by a Purchase Agreement executed in 2006. The carrying values of theseBoeing aircraft under finance lease amounted to ₱27.12 billion as of December 31, 2018 (see Note 10).

Bombardier aircraftThe Group has five DHC 8-400 (Q400 NextGen) aircraft under finance lease. The carrying value ofthese aircraft under finance lease amounted to ₱5.27 billion as of December 31, 2018 (see Note 10).

Aircraft and Engine Operating Leases - Group as Lessee (Effective prior to January 1, 2019)Airbus aircraftIn connection with the August 2012 Purchase Agreement with Airbus, the Group accepted thedeliveries of additional four Airbus 321-231 CEO in 2016 under sale and operating leasebackarrangements with third party lessors.

As presented in Note 10, the Group has operating lease agreements covering 39 Airbus aircraft as ofDecember 31, 2018. Aircraft and engine lease rentals amounted to ₱12.44 billion in 2018. Securitydeposits amounted to ₱1.04 billion as of December 31, 2018.

The Group recognized gain from sale and operating leaseback arrangements amounting to ₱1.15 billionin 2018, inclusive of unapplied manufacturers’ credit, covering four Airbus aircraft, with a third-partylessor. Both the gain on sale and leaseback and the manufacturers’ credits were recognized under“Other charges (income) - net” in the consolidated statements of comprehensive income.

Boeing aircraftThe Group has existing operating lease agreements covering six Boeing 777-300ER aircraft as ofDecember 31, 2018. Aircraft and engine lease rentals amounted to ₱5.24 billion in 2018.

Bombardier aircraftThe Group has existing operating lease agreements covering five Bombardier DHC 8-400 NG aircraftas of December 31, 2018. Aircraft and engine lease rentals amounted to ₱204.7 million in 2018.

Aircraft engineAs of December 31, 2018, the Group has short-term lease agreements on various aircraft enginesranging from three to 13 months.

Ground Property LeasesMinimum rental commitments under these lease contracts as of December 31 are as follows:

2019 2018Due within one year P=637,124 P=351,971Due after one year but within five years 1,559,104 1,017,791More than five years 1,831,856 1,685,715

P=4,028,084 P=3,055,477

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PAL has an operating lease agreement with an entity under common control for the lease of a portionof the PNB Financial Center Building. The lease is for a period of 10 years commencing onNovember 1, 2007 and may be renewed upon mutual agreement of the parties. On November 1, 2017,the lease agreement was renewed for another 10 years.

In 2013, PAL entered into an operating lease agreement with Manila International Airport Authority(MIAA) for a parcel of land situated at Aviation Support Industrial Area 2 (formerly Nayong Pilipino)to be utilized as an aircraft parking facility. In 2014, PAL required additional space and entered into alease agreement with PAGCOR for another parcel of land which is part of Airport Property for thesame purpose. The leases are for a period of 25 years and 20 years commencing on December 23, 2013and August 1, 2014, respectively, and may be renewed upon mutual agreement of the parties.

The carrying value of these ground property under lease amounted to P=2.72 billion as ofDecember 31, 2019 (see Note 10).

As of December 31, 2019, the Group has short-term lease agreements on various ground propertiesranging from three to 12 months.

Ground property lease rentals from short-term leases amounted to P=373.98 million in 2019 andP=771.25 million in 2018.

Set out below are the expenses recognized in the statements of comprehensive income in relation to theGroup’s lease arrangement:

2019 2018 2017Depreciation expense of right-of-use assets (P=23,834,329) P=– P=–Interest expense on lease liabilities (9,510,279) (2,610,474) (2,190,380)Lease charges under PAS 17 – (18,622,207) (15,415,897)Lease charges - short-term leases (1,355,822) – –Lease charges - variable lease payments (389,556) (366,022) (299,528)Total amount recognized in profit or loss (P=35,089,986) (P=21,598,703) (P=17,905,805)

25. Capital Management

The primary objective of the Group’s capital management is to ensure that it maintains a strong creditrating and healthy capital ratios in order to support its business and maximize shareholder value.

The Group considers its equity of P=4.90 billion and P=10.69 billion as of December 31, 2019 and 2018,respectively, presented in the consolidated statements of financial position, as its capital. The Groupmanages its capital structure and makes adjustment to it, in light of changes in economic conditions.To maintain or adjust capital structure, the Group may issue new shares or return capital to shareholders.The Group manages its capital by monitoring its cash flows and debt levels. No changes were made inthe objectives, policies or processes in 2019 and 2018.

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26. Financial Risk Management Objectives and Policies

Risk Management StructureBODThe BOD is mainly responsible for the overall risk management approach and for the approval of riskstrategies and policies of the Group.

Treasury Risk CommitteeThe Treasury Risk Committee has the overall responsibility for the development of financial riskstrategies, principles, frameworks, policies and limits. It establishes a forum of discussion of theGroup’s approach to financial risk issues (fuel price and foreign exchange risk, in particular) in orderto make relevant decisions.

Treasury Risk OfficeThe Treasury Risk Office is responsible for the comprehensive monitoring, evaluation and analysis ofthe Group’s financial risks in line with the policies and limits set by the Treasury Risk Committee. TheTreasury Risk Office conducts mark-to-market of derivative positions and daily calculation andreporting of Value-at-Risk (VaR) amounts.

Financial Risk ManagementThe Group’s principal financial instruments, other than derivatives, consist of loans and borrowingsand cash and cash equivalent. The main purpose of these financial instruments is to raise financing forthe Group’s operations. The Group has various other financial assets and financial liabilities such asreceivables, short-term investments, accounts payable, accrued expenses and deposits which arisedirectly from its operations. The main risks arising from the use of financial instruments are marketrisks (consisting of foreign exchange risk, cash flow interest rate risk and fuel price risk), liquidity risk,counterparty risk and credit risk.

The Group uses derivative instruments to manage its exposures to foreign exchange and fuel price risksarising from the Group’s operations and its sources of financing. The details of PAL’s derivativetransactions, including the risk management objectives and the accounting results, are discussed in thisnote.

Market risksThe Group’s operating, investing and financing activities are directly affected by changes in foreignexchange rates, interest rates and fuel prices. Increasing market fluctuations in these variables mayresult in significant equity, cash flow and profit volatility risks for the Group. For this reason, theGroup seeks to manage and control these risks primarily through its regular operating and financingactivities, and through the execution of a documented hedging strategy. Management of financialmarket risk is a key priority for the Group. The Group generally applies sensitivity analysis in assessingand monitoring its market risks. Sensitivity analysis enables management to identify the risk positionof the Group as well as provide an approximate quantification of the risk exposures. Estimates providedfor foreign exchange risk, cash flow interest rate risk and fuel price risk are based on the historicalvolatility for each market factor, with adjustments being made to arrive at what the Group considers tobe reasonably possible.

Foreign exchange riskThe Group is exposed to foreign exchange rate fluctuations arising from its revenue, expenses andborrowings in currencies other than its functional currency. The Group manages this exposure bymatching its receipts and payments for each individual currency. Any surplus is sold as soon aspracticable. PAL also uses foreign currency forward contracts and options to economically hedge aportion of its exposure.

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The Group’s significant foreign currency-denominated monetary assets and liabilities (in PhilippinePeso equivalent) as of December 31 are as follows:

2019 2018Financial Assets and Financial LiabilitiesFinancial assets:

Cash P=3,453,017 P=4,904,833Receivables 14,909,712 15,647,054Others* 2,645,322 1,438,752

21,008,051 21,990,639Financial liabilities:

Accounts payable and accrued expenses (6,637,943) (6,582,800)Others** (1,446,642) (1,666,050)

(8,084,585) (8,248,850)Net foreign currency-denominated financial assets 12,923,466 13,741,789Nonfinancial Liabilities

Accrued employee benefits (12,397,321) (10,177,174)Provisions (97,726) (130,346)

(12,495,047) (10,307,520)Net Foreign Currency-denominated Monetary Assets

(Liabilities) P=428,419 P=3,434,269* Includes miscellaneous deposits and security deposits.** Substantially pertaining to passenger taxes.

The Group recognized net foreign exchange (loss) gain amounting to (P=576.10 million) in 2019,(P=213.32 million) in 2018 and P=896.77 million in 2017 included under “Other income (charges) - net”in the consolidated statements of comprehensive income arising from the translation and settlement ofthese foreign currency-denominated financial and nonfinancial instruments. The Group’s foreigncurrency-denominated exposures comprise primarily of Philippine peso (PHP) and Japanese Yen(JPY). Other foreign currency exposures include Canadian dollar (CAD), Euro (EUR), Australiandollar (AUD), Singaporean dollar (SGD), Chinese Yuan (CNY), Thai Baht (THB) and Hong Kongdollar (HKD), Saudi riyal (SAR) and Emirati dirham (AED).

Shown below is the impact on the Group’s income before income tax of reasonably possible changesin the exchange rates of foreign currencies (CCY) against the USD, with all other variables heldconstant.

December 31, 2019

CurrencyMovement in Foreign

Exchange Rates

Net Gain (Loss) Effect onIncome before Income Tax

Increase in ForeignExchange Rates

Decrease in ForeignExchange Rates

PHP 3.96% to 5.05% P=312,831 (P=312,831)JPY 6.47% (59,597) 59,597Others* 0.40% to 9.21% (189,172) 189,172Net P=64,062 (P=64,062)* Includes various currencies (i.e., CAD, EUR, AUD, SGD, CNY, THB, HKD, SAR, AED and others).

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December 31, 2018

CurrencyMovement in Foreign

Exchange Rates

Net Gain (Loss) Effect onIncome before Income Tax

Increase in ForeignExchange Rates

Decrease in ForeignExchange Rates

PHP 3.70% to 6.04% P=270,999 (P=270,999)JPY 8.33% (16,456) 16,456Others* 0.88% to 10.65% (246,495) 246,495Net P=8,048 (P=8,048)* Includes various currencies (i.e., CAD, EUR, AUD, SGD, CNY, THB, HKD, SAR, AED and others).

The Group’s major currency derivatives consist of options to buy USD and sell JPY. As ofDecember 31, 2019, all foreign exchange derivative expired and no new foreign exchange derivativeswere entered into in 2019. In 2018, other currency derivatives consist of options to buy USD and sellAUD, CAD and SGD. Before taking into account the effect of income taxes, income would have eitherincreased by P=48.40 million or decreased by P=4.90 million had the percentage change in JPY been at8.61%. There is no other impact on the Group’s equity other than those affecting profit and loss.

Cash flow interest rate riskThe Group’s exposure to cash flow interest rate risk arises from the regular repricing of interest on itsfloating-rate loans. The Group’s policy on interest rate risk is designed to limit the Group’s exposureto fluctuating interest rates. The ratio of floating-rate long-term loans to the total borrowings is 0.83:1and 0.80:1 as of December 31, 2019 and 2018, respectively.

Income before income tax in 2019 and 2018 would either decrease by P=499.84 million andP=524.37 million or increase by P=499.84 million and P=524.37 million, respectively, if the USD interestrate for the periods had been higher or lower by 91 basis points and 100 basis points, respectively.There is no other impact on the Group’s equity other than those already affecting profit or loss. TheGroup assumes concurrent movements in interest rates and parallel shifts in the yield curves.

Fuel price riskThe Group is exposed to price risk on jet fuel purchases. This risk is managed by a combination ofstrategies with the objective of managing price levels within an acceptable band through various typesof derivatives and hedging instruments. The Group implements such strategies to manage and minimizethe risks within acceptable risk parameters.

The Group’s fuel derivatives are viewed as economic hedges and are not held for speculative purposes.The Group uses a VaR computation to estimate the potential three-day loss in the fair value of its fuelderivatives. The VaR computation is a risk analysis tool designed to statistically estimate the maximumpotential loss at a given confidence interval from adverse movement in fuel prices.

Assumptions and limitations of VaRThe VaR methodology employed by the Group uses a three-day period due to the assumption that notall positions could be undone in a single day given the size of the positions. The VaR computationmakes use of Monte Carlo simulation with multi-factor models. Multi-factor models ensure that thesimulation process takes into account mean reversion tendency and seasonality of fuel prices. Itcaptures the complex dynamics of the term structure of commodity markets, such as contango andbackwardation. The VaR estimates are made assuming normal market conditions using a 95%confidence interval and are determined by observing market data movements over a 90-day period.

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The estimated potential three-day losses on its fuel derivative transactions, as calculated in the VaRmodel, amounted to P=119.86 million, P=281.52 million and P=7.21 million as of December 31, 2019,2018 and 2017, respectively.

The high, average and low VaR amounts for the period January 1 to December 31 are as follows:

High Average Low2019 P=443,817 P=268,610 P=103,3952018 281,516 35,973 4742017 157,753 69,200 7,207

Liquidity riskLiquidity risk arises from the possibility that the Group may encounter difficulties in raising funds tomeet commitments from financial instruments (e.g., long-term obligations) or that a market forderivatives may not exist in some circumstances.

The Group’s objectives to manage its liquidity profile are: (a) to ensure that adequate funding isavailable at all times; (b) to meet commitments as they arise without incurring unnecessary costs;(c) to be able to access funding when needed at the least possible cost; and (d) to maintain an adequatetime spread of refinancing maturities.

The tables below summarize the maturity analysis of the Group’s financial liabilities as ofDecember 31 based on contractual undiscounted payments (principal and interest):

2019<1 Year >1-<2 Years >2-<3 Years >3-<4 Years >4-<5 Years >5 Years Total

Notes payable* P=18,599,147 P=– P=– P=– P=– P=– P=18,599,147Accounts payable and accrued

expenses** 17,166,775 – – – – – 17,166,77535,765,922 – – – – – 35,765,922

Lease liabilities *** 32,340,374 31,116,940 29,267,494 27,879,145 22,977,100 66,824,477 210,405,530Long-term debt**** 6,861,619 6,637,084 6,375,858 6,145,013 5,910,826 7,935,973 39,866,373Derivative instruments:

Fuel derivatives (29,317) 198,590 – – – – 169,273Premium liability 265,682 – – – – – 265,682

39,438,358 37,952,614 35,643,352 34,024,158 28,887,926 74,760,450 250,706,858P=75,204,280 P=37,952,614 P=35,643,352 P=34,024,158 P=28,887,926 P=74,760,450 P=286,472,780

*Includes interest amounting to P=69,269**Excludes nonfinancial liabilities amounting to P=7,159,232***Includes interest amounting to P=35,803,018****Includes interest amounting to P=5,055,500


Notes payable* P=20,547,528 P=– P=– P=– P=– P=– P=20,547,528Accounts payable and accrued

expenses** 32,817,948 – – – – – 32,817,94853,365,476 – – – – – 53,365,476

Obligation under finance lease*** 14,093,438 12,246,986 11,238,554 10,673,433 9,967,643 17,882,404 76,102,458Long-term debt**** 7,123,433 6,804,483 6,443,311 6,135,558 5,835,171 2,854,148 35,196,104Derivative instruments:

Contractual receivable (551,038) – – – – – (551,038)Contractual payable 507,607 – – – – – 507,607Fuel derivatives 497,608 454,061 – – – – 951,669Premium liability 18,193 – – – – – 18,193

21,689,241 19,505,530 17,681,865 16,808,991 15,802,814 20,736,552 112,224,993P=75,054,717 P=19,505,530 P=17,681,865 P=16,808,991 P=15,802,814 P=20,736,552 P=165,590,469

*Includes interest amounting to P=96,537.**Excludes nonfinancial liabilities, advances from charterer and statutory liabilities amounting to P=4,434,124, P=31,647 and P=323,863,

respectively.***Includes interest amounting to P=11,254,906.****Includes interest amounting to P=1,534,547.

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The Group’s total financial liabilities to be settled currently amounting to P=75.20 billion andP=75.05 billion as of December 31, 2019 and 2018, include liabilities aggregating to P=35.77 billion andP=53.37 billion, respectively that management considers as working capital. Accounts payable andaccrued expenses of P=17.17 billion and P=32.82 billion as of December 31, 2019 and 2018, respectively,include liabilities that are payable on demand but are expected to be renegotiated in the future. For theother liabilities amounting to P=39.44 billion and P=21.69 billion as of December 31, 2019 and 2018,respectively, management expects to settle these from the Group’s cash to be generated fromoperations.

The following are the Group’s financial assets as of December 31, 2019 and 2018 used to manageliquidity risk, particularly those financial liabilities that will mature in less than a year:


Cash P=9,013,994 P=– P=– P=– P=– P=– P=9,013,994Loans and receivables:

Cash equivalents 6,038,144 – – – – – 6,038,144Short-term investments 170,961 – – – – – 170,961Receivables - net* 20,306,894 – – – – – 20,306,894

P=35,529,993 P=– P=– P=– P=– P=– P=35,529,199 *Excludes receivables arising from statutory requirements, net of allowance, amounting to P=4,263,973.


Cash P=6,742,588 P=– P=– P=– P=– P=– P=6,742,588Loans and receivables:

Cash equivalents 239,689 – – – – – 239,689Short-term investments 198,413 – – – – – 198,413Receivables - net* 22,176,778 – – – – – 22,176,778

P=29,357,468 P=– P=– P=– P=– P=– P=29,357,468 *Excludes receivables arising from statutory requirements, net of allowance, amounting to P=3,693,342.

Counterparty riskThe Group’s counterparty risk encompasses issuer risk on investment securities, credit risk on cash inbanks, time deposits and security deposits and settlement risk on derivatives. The Group manages itscounterparty risk by transacting with counterparties of good financial condition and selectinginvestment grade securities. Settlement risk on derivatives is managed by limiting aggregate exposureon all outstanding derivatives to any individual counterparty, taking into account its credit rating. TheGroup also enters into master netting arrangements and implements counterparty and transaction limitsto avoid concentration of counterparty risk.

The tables below show the maximum counterparty exposure as of December 31 after taking intoaccount information about rights of offset and related arrangements for financial instruments subject tomaster netting agreements:

2019

GrossMaximumExposure

Grossamountsoffset in

accordancewith the

offsettingcriteria

Net amountpresented in

statements offinancial

position

Masternetting

agreement

Fair value offinancial

collateral Net exposureFinancial AssetsCash in banks and cash equivalents P=15,007,071 P=– P=15,007,071 P=– P=– P=15,007,071Receivables – net 24,570,867 – 24,570,867 – 2,300,297 22,270,570Derivative assets 5,047,846 – 5,047,846 5,016,612 – 31,234Margin deposits, lease deposits and others 15,616,886 – 15,616,886 – – 15,616,886

P=60,242,670 ₱– P=60,242,670 P=5,016,612 P=2,300,297 P=52,925,761

Financial LiabilitiesDerivative liabilities P=5,217,145 P=– P=5,217,145 P=– P=– P=5,217,145

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2018

GrossMaximumExposure

GrossAmounts offset in

accordance with the

offsettingcriteria

Net amountpresented in

statements offinancialposition

Masternetting

agreement

Fair value offinancialcollateral Net exposure

Financial AssetsCash in banks and cash equivalents P=6,929,069 P=– P=6,929,069 P=– P=– P=6,929,069Receivables – net 25,870,120 – 25,870,120 – 2,129,648 23,740,472Derivative assets 7,018,240 – 7,018,240 6,946,712 – 71,528Margin deposits, lease deposits and others 14,302,935 – 14,302,935 – – 14,302,935

P=54,120,364 P=– P=54,120,364 P=6,946,712 P=2,129,648 P=45,044,004

Financial LiabilitiesDerivative liabilities P=7,969,909 P=– P=7,969,909 P=6,946,712 P=– P=1,023,197

In an event of default or pre-termination of derivative contracts, the parties can apply master nettingagreements. In 2019 and 2018, there was no default or pre-termination event which require theapplication of the master netting agreements.

Credit riskThe Group’s exposure to credit risk arises from the possibility that agents, financial institutions andother counterparties may fail to fulfill their agreed obligations and that the collaterals held may not besufficient to cover the Group’s claims. To manage such risk, the Group, through its Credit andCollection Department, employs a credit evaluation process prior to the accreditation orre-accreditation of its travel and cargo agents. The Group considers, among other factors, the size,paying habits and the financial condition of the agents. To further mitigate the risk, the Group requiresfrom its agents financial guarantees in the form of cash bonds, letters of credit and assignment of timedeposits. The carrying value of these collaterals held as of December 31, 2019 and 2018 amounted toP=2.30 billion and P=2.13 billion, respectively.

The Group, to the best of its knowledge, has no significant concentration of credit risk with anycounterparty.

Credit quality per class of financial assetsThe credit quality of receivables is managed by the Group using internal credit quality ratings. Highgrade accounts consist of passenger and cargo receivables from agents with good financial conditionand which management believes to be reasonably assured to be recoverable. Standard grade accountsconsist of passenger and cargo receivables from agents with relatively low defaults. Substandard gradeaccounts, on the other hand, are receivables from agents with history of defaulted payments. Accountsfrom these agents are consistently monitored in order to identify any potential adverse changes in thecredit quality. Receivables from IATA which consist of receivables from other airlines through theIATA clearing house are deemed high grade accounts as the expectation of default is minimal.

The Group considers its other financial assets as high grade as they consist of accounts with goodfinancial standing and with relatively low defaults.

Past due accounts include those accounts that are past due by a few days. An analysis of past dueaccounts, by age, is discussed in the succeeding section.

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The tables below show the credit quality of receivables and an aging analysis of past due accounts asof December 31:

2019Past Due but not Impaired

Expectedcredit lossesHigh Grade

StandardGrade

SubstandardGrade

Over 30Days

Over 60Days

Over 90Days Others Total

General traffic P=3,719,393 P=1,127,990 P=207,553 P=1,063,031 P=102,543 P=1,531,815 (P=906,924) P=− P=6,845,401Related parties 385,045 4,537,869 13,114 14,178 16,153 4,323,959 (61,370) − 9,228,948Non-trade − 106,595 1,777,339 77,674 331,421 5,235,195 (3,569,031) − 3,959,193Total P=4,104,438 P=5,772,454 P=1,998,006 P=1,154,883 P=450,117 P=11,090,969 (P=4,537,325) P=− P=20,033,542

2018Past Due but not Impaired

Expectedcredit lossesHigh Grade

StandardGrade

SubstandardGrade

Over 30Days

Over 60Days

Over 90Days Others Total

General traffic P=3,809,414 P=2,652,787 P=214,526 P=691,848 P=53,264 P=967,893 (P=1,136,223) P=− P=7,253,509Related parties 215,883 3,103,792 202,275 189,866 225,726 3,730,346 (26,716) − 7,641,172Non-trade − 250,382 7,270,868 40,293 161,946 2,089,011 (4,958,872) − 4,853,628Total P=4,025,297 P=6,006,961 P=7,687,669 P=922,007 P=440,936 P=6,787,250 (P=6,121,811) P=− P=19,748,309

27. Fair Value Measurement

Fair ValuesThe table below presents the Group’s financial instruments as of December 31 measured at fair valueand financial instruments for which fair values are disclosed:

2019 2018Carrying

Value Fair ValueCarrying

Value Fair ValueFinancial AssetsFinancial assets at amortized cost- margin deposit,

lease deposits and others P=15,616,886 P=15,618,158 P=14,620,935 P=14,615,123Financial assets at FVTOCI 1,955,453 1,955,453 2,014,252 2,014,252Derivative asset - fair value through profit or loss 5,047,846 5,047,846 7,018,240 7,018,240

Financial LiabilitiesDerivative liabilities - fair value through profit

or loss 5,217,145 5,217,145 7,969,909 7,969,909Financial liabilities carried at amortized cost:

Lease liabilities (Note 15) 159,932,271 205,157,374 64,847,552 67,459,877Long-term debt 34,810,873 36,152,479 33,661,557 35,503,173

The carrying amounts of cash and cash equivalents, short-term investments, receivables, notes payable,accounts payable and accrued expenses approximate their fair value due to the short-term nature ofthese accounts.

The following methods and assumptions are used to estimate the fair value of each class of financialinstruments that is different from their carrying amount:

Financial assets at FVTOCIThe fair values of quoted equity investments are based on market prices in active markets.

As of December 31, 2019 and 2018, the fair value of unquoted equity investments is based on Level 3.Significant inputs in determining the fair value are the market prices of the shares of comparablecompanies.

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Margin deposits, lease deposits and othersThe fair value of margin deposits, lease deposits and others is determined using discounted cash flowtechniques based on prevailing market rates. Discount rates used are nil and 1.87% as ofDecember 31, 2019 and 2018, respectively.

Long-term obligationsThe fair value of long-term obligations (whether fixed or floating) is generally based on the presentvalue of expected cash flows with discount rates that are based on risk-adjusted benchmark rates(in the case of floating rate liabilities with quarterly repricing, the carrying value approximates the fairvalue in view of the recent and regular repricing based on current market rates). The discount ratesused for USD-denominated loans ranged from 2.65% to 5.00% and 1.96% to 4% as of December 31,2019 and 2018, respectively.

DerivativesThe fair values of derivatives is determined by the use of either present value methods or standardoption valuation models. The valuation inputs on these fuel derivatives are based on assumptionsdeveloped from observable information, including, but not limited to, the forward curve derived frompublished or futures prices adjusted for factors such as seasonality considerations and the volatilitiesthat take into account the impact of spot prices and the long-term price outlook of the underlyingcommodity and currency.

Fair Value Hierarchy

As of December 31, 2019

Fair value measurement using

Total

Quoted prices inactive markets

(Level 1)

Significantobservable

inputs(Level 2)

Significantunobservable

inputs(Level 3)

Assets and liabilities measured at fair value:Financial assets at FVTOCI (Note 12):

Quoted equity shares P=1,893,789 P=1,893,789 P=– P=–Unquoted equity shares 61,664 – – 61,664

Derivative financial assets (Notes 8 and 12):Fuel derivatives 5,047,846 – 5,047,846 –

Derivative financial liabilities(Notes 14 and 16):Fuel derivatives 5,217,145 – 5,217,145 –

Property and equipment (Note 10) 1,157,364 – – 1,157,364Assets held for sale 1,723,615 – – 1,723,615Assets and liabilities for which fair values are

disclosed:Margin deposits, lease deposits

and others (Note 12) 15,616,886 – 15,616,886 –Lease liabilities (Note 15) 205,157,374 – 205,157,374 –Long-term debt (Note 15) 36,152,479 – 36,152,479 –Investment properties (Note 11) 8,080,637 – – 8,080,637

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Fair value measurement using

Total

Quoted prices inactive markets

(Level 1)

Significantobservable

inputs(Level 2)

Significantunobservable

inputs(Level 3)

Assets and liabilities measured at fair value:Financial assets at FVTOCI (Note 12):

Quoted equity shares P=1,950,497 P=1,950,497 P=– P=–Unquoted equity shares 63,755 – – 63,755Derivative financial assets (Notes 8 and 12): – –Fuel derivatives 7,001,395 – 7,001,395 –

Structured currency derivatives 16,845 – 16,845 –Derivative financial liabilities(Notes 14 and 16):

Fuel derivatives 7,967,949 – 7,967,949 –Structured currency derivatives 1,960 – 1,960 –Property and equipment (Note 10) 1,273,067 – – 1,273,067Assets held for sale 743,376 – – 743,376Assets and liabilities for which fair values are disclosed:Margin deposits, lease deposits

and others (Note 12) 14,297,123 – 14,297,123 –Obligations under financeleases (Note 15) 67,459,877 – 67,459,877 –Long-term debt (Note 15) 35,503,173 – 35,503,173Investment properties (Note 11) 4,422,451 – – 4,422,451

There were no transfers between hierarchy levels during the years ended December 31, 2019 and 2018.

Derivative Financial InstrumentsThe derivative financial instruments set out in this section have been entered into to achieve PAL’s riskmanagement objectives. PAL’s derivative financial instruments are accounted for as fair value throughprofit or loss.

The following table provides information about PAL’s outstanding derivative financial instruments andtheir related fair values as of December 31:

2019 2018Asset Liability Asset Liability

Fuel derivatives P=5,047,846 P=5,217,145 P=7,001,395 P=7,967,949Structured currency derivatives – – 16,845 1,960

P=5,047,846 P=5,217,145 P=7,018,240 P=7,969,909

As of December 31, 2019 and 2018, the positive and negative fair values of derivative positions thatwill be settled in 12 months or less are classified under “Other current assets” (P=2.20 billion as ofDecember 31, 2019 and P=2.97 billion as of December 31, 2018) and “Accrued expenses”(P=2.18 billion as of December 31, 2019 and P=3.45 billion as of December 31, 2018). The positive andnegative fair values of derivative positions that will be settled in more than 12 months are classifiedunder “Other Non-current assets” (P=2.84 billion as of December 31, 2019 and P=4.04 billion as ofDecember 31, 2018) and “Other Non-current liabilities” (P=3.04 billion as of December 31, 2019 andP=4.50 billion as of December 31, 2018).

Fuel derivativesPAL is dependent on jet fuel to run its operations, and jet fuel costs have become a larger portion of theGroup’s expenses due to the increase in all energy prices over the years. Jet fuel consumption is 31.28%,32.45% and 27.91% of its operating expenses for the years ended December 31, 2019, 2018 and 2017,respectively. In order to hedge against adverse market condition and to be able to acquire jet fuel at the

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lowest possible cost, PAL enters into fuel derivatives. PAL does not purchase or hold any derivativefinancial instruments for trading purposes.

There are no outstanding fuel derivatives accounted for as cash flow hedges as of December 31, 2019and 2018.

PAL’s fuel derivatives not accounted for as cash flow hedges still provide economic hedges against jetfuel price risk. These fuel derivatives are carried at fair values in the consolidated statements of financialposition, with fair value changes reported immediately in profit or loss. The outstanding notionalamounts of long fuel derivative assets and liabilities not accounted for as cash flow hedges totaled13,860,000 and 21,500,000 barrels as of December 31, 2019, and 11,460,000 and 18,630,000 barrelsas of December 31, 2018, respectively.

The outstanding notional amounts of short fuel derivative assets and liabilities not accounted for ascash flow hedges totaled 19,320,000 and 27,460,000 barrels as of December 31, 2019 and 14,500,000and 20,820,000 barrels as of December 31, 2018, respectively.

Structured currency derivativesPAL enters into structured currency derivatives consisting of option structures with combination ofcalls and puts. These contracts are carried at fair value in the consolidated statements of financialposition and the fair value changes from these derivatives are recognized directly in profit or loss.Outstanding structured currency derivatives as of December 31, 2019 and 2018 are composed ofoptions to buy USD and sell various currencies (i.e., AUD, JPY). The contracts have bought and soldoptions with translated notional amounts of nil, respectively, as of December 31, 2019 andP=507.67 million and P=551.04 million, respectively, as of December 31, 2018. The net fair value ofthese option structures as of December 31, 2019 and 2018 amounts to nil and P=15.56 million,respectively.

Fair value changes on derivativesThe net changes in the fair values of all derivative instruments are as follows:

2019 2018 2017Beginning of year (P=951,669) (P=43,689) (P=494,903)Net changes in fair values of derivatives 654,846 (923,018) (457,212)Fair value of settled instruments 127,550 15,038 908,426End of year (P=169,273) (P=951,669) (P=43,689)

28. Segment Information

The Group has one reportable operating segment, which is the airline business (system-wide). This isconsistent with how the Group’s management internally monitors and analyzes the financialinformation for reporting to the chief operating decision-maker, who is responsible for allocatingresources, assessing performance and making operating decisions.

The revenue of the operating segment are mainly derived from rendering transportation services andall sales are made to external customers.

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Segment information for the reportable segment is shown in the following table:

2019 2018 2017Revenue P=154,536,731 P=150,481,358 P=129,521,845Interest income 394,440 362,554 443,673Financing charges 12,019,048 4,827,036 3,618,996Depreciation, amortization and

obsolescence 25,706,551 8,500,202 8,301,857Net loss (5,658,081) (6,963,460) (2,691,549)Reportable segment assets 317,829,480 199,198,850 179,955,554Reportable segment liabilities 312,931,889 188,511,715 165,978,321

The reconciliation of total revenue reported by reportable operating segment to revenue in theconsolidated statements of comprehensive income is presented in the following table:

2019 2018 2017Total segment revenue of

reportable operating segments P=154,271,601 P=150,256,735 P=129,366,777Nontransport revenue 265,130 224,623 155,068Total revenue P=154,536,731 P=150,481,358 P=129,521,845

The reconciliation of total loss reported by the reportable operating segment to total comprehensiveloss in the consolidated statements of comprehensive income is presented in the following table:

2019 2018 2017Total segment loss of reportable

segments (P=5,658,081) (P=6,963,460) (P=2,691,549)Add (deduct) unallocated items: Nontransport revenue and

other income265,130 224,623 155,068

Nontransport expenses andother charges

(5,806,923) (690,942) (3,927,747)

Income tax benefit (expense) 1,497,158 3,722,221 (2,893)Net loss (9,702,716) (3,707,558) (6,467,121)Other comprehensive income (loss) (496,238) 864,153 1,856,006Total comprehensive loss (P=10,198,954) (P=2,843,405) (P=4,611,115)

The Group’s major revenue-producing asset is the fleet owned by the Group, which is employed acrossits route network (see Note 10).

Disaggregation of RevenueThe disaggregation of the total segment revenue is presented in the consolidated statements ofcomprehensive income.

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29. Events After Reporting Period

Retrenchment and Voluntary Separation ProgramOn February 28, 2020, PAL announced a retrenchment program affecting its employees. In addition,PAL initiated a voluntary separation program (VSP) for eligible long-servicing employees as a firstcrucial step in a necessary restructuring effort to reduce overhead costs.

Impact of Coronavirus (COVID-19) OutbreakOn March 11, 2020, the World Health Organization declared the COVID-19 outbreak as a globalpandemic due to the significant number of cases and countries affected globally. In a move to containthe COVID-19 outbreak, on March 16, 2020, Presidential Proclamation Order No. 929 was issued,declaring State of Calamity throughout the Philippines for a period of six months and imposed anenhanced community quarantine (ECQ) throughout the island of Luzon until April 12, 2020 unlessearlier lifted or extended. The COVID-19 outbreak and the measures taken have caused disruptions tobusinesses and economic activities, and its impact on businesses continue to evolve. Consequently, theGroup’s passenger operations have also been disrupted, resulting to suspension of its flights both fordomestic and international routes, until such time that the quarantine period is lifted. These events andconditions, including the status of operations as discussed in Note 2, indicate that a material uncertaintyexists that may cast significant doubt on the Group’s ability to continue as a going concern. TheGroup’s plans for future actions to mitigate the impact of these events and conditions are disclosed inNote 2. In addition, the Group expects an infusion from the shareholders amounting to $600.00 millionas additional capital, which was approved by the BOD on October 4, 2019. Of the $600.00 millionexpected capital infusion, P=11.41 billion was received by the Group from BSHI as of December 31,2019 (see Note 2) and an additional $93.00 million was received during the first quarter of 2020.

Furthermore, on March 24, 2020, the President signed into law Republic Act (RA) 11469, referred toas Bayanihan to Heal as One Act (the Bayanihan Law), which is valid for three months unless extendedby the Congress of the Philippines. Under Section 4 of RA 11469, the President has the power to adopttemporary emergency measures to respond to crisis brought by the pandemic. These authorized powersinclude the following, among others which are cited in Section 4 of RA 11469:

· Adopt and implement the measures to prevent further spread of the coronavirus, following theWorld Health Organization (WHO) guidelines;

· Ensure the availability of credit to the productive sectors of the economy by lowering the lendinginterest rates and reserve requirements of lending institutions; and

· Direct all banks and other financial institutions, including GSIS, SSS and Pag-IBIG Fund, toimplement a 30-day grace period for payments of loans and credit card bills (underSection 4 aa).

On April 1, 2020, the Department of Finance signed the Implementing Rules and Regulations (IRR) onthe 30-day extension for loan payments as mandated under Section 4 (aa) of the Bayanihan Law. TheIRR provides, among others, that all covered institutions, which shall mean all lenders, but not limitedto banks, shall implement a 30-day grace period for all loans with principal and/or interest falling duewithin the ECQ without incurring interest on interest, penalties, fees and other charges. The initial30-day grace period shall be extended if the ECQ period is extended by the President pursuant to hisemergency powers under RA 11469.

In addition, the IRR provides that no documentary stamp taxes (DST) shall be imposed as aconsequence of the relief granted and for credit extensions and credit restructuring during the ECQperiod. Also, the accrued interest for the 30-day grace period may be paid by the borrower on staggeredbasis over the remaining life of the loan.

147

- 86 -

*SGVFS038870*

The Group considers the events surrounding the outbreak as non-adjusting subsequent events, whichdo not impact the Group’s financial position and performance as of and for the year endedDecember 31, 2019. However, the outbreak could have a material impact on its 2020 financial resultsand even periods thereafter. Considering the evolving nature of this outbreak, the Group cannotdetermine at this time the impact to its financial position, performance and cash flows.

Subscription for increase in authorized capital stock of PALOn various dates in 2019, PAL received cash as deposits for future stock subscription from BSHItotaling ₱11.41 billion with the intention to convert to equity upon approval by the Philippine SEC ofPAL’s application for the increase in authorized capital stock. On October 4, 2019 andFebruary 18, 2020, PAL’s BOD and stockholders, respectively, approved to increase the authorizedcapital stock from 13.0 billion shares with ₱1.00 par value per share to 30.0 billion shares with ₱1.00par value per share.

As of December 31, 2019, the cash deposits are presented as “Deposit from non-controlling interest ofa subsidiary” under noncurrent liabilities.

148

*SGVFS038870*

INDEPENDENT AUDITOR’S REPORTON SUPPLEMENTARY SCHEDULES


We have audited, in accordance with Philippine Standards on Auditing, the consolidated financialstatements of PAL Holdings, Inc. (the Company), a subsidiary of Trustmark Holdings Corporation, andits subsidiaries as at December 31, 2019 and 2018 and for each of the three years in the period endedDecember 31, 2019, included in this Form 17-A and have issued our report thereon datedApril 1, 2020. Our audits were made for the purpose of forming an opinion on the basic financialstatements taken as a whole. The schedules listed in the Index to Consolidated Financial Statements andSupplementary Schedules are the responsibility of the Company’s management. These schedules arepresented for purposes of complying with Revised Securities Regulation Code Rule 68, and are not partof the basic financial statements. These schedules have been subjected to the auditing procedures appliedin the audit of the basic financial statements and, in our opinion, fairly state, in all material respects, theinformation required to be set forth therein in relation to the basic financial statements taken as a whole.



April 1, 2020


Tel: (632) 891 0307Fax: (632) 819 0872ey.com/ph

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149

PAL HOLDINGS, INC. AND SUBSIDIARIES

Schedule A. Financial Assets

December 31, 2019

(Amounts in Thousands)

Number of Shares

Name of Issuing Entity and or Principal Amount of

Association of Each Issue Bonds and Notes

MacroAsia Corporation 114,400 1,887,600₱ 22,880₱

Golf La Moraleja 2 4,744 -

Medical Doctors, Inc. 10,164 10,060 -

Societe Internationale de Telecommunications (SITA) 30 36,102 -

Tanah Merah Country Club (L corp) 1 6,160 -

Others 78,206 10,787 -

1,955,453₱ 22,880₱

See Note 12 of the Notes to Consolidated Financial Statements

Amount Shown

in the

Balance Sheet

Income

Received

and Accrued

150

PAL HOLDINGS, INC. AND SUBSIDIARIESSchedule B. Amounts Receivable from Directors, Officers and Employees, Related Parties and Principal StockholdersDecember 31, 2019(Amounts in Thousands)

Additions Amounts Forex Current Non- Balance atCollected Adjustments current End of Period

Various Pilot Trainees - Employees 28,752₱ 10,590₱ (11,012) -₱ -₱ 28,330₱ -₱ 28,330₱

Receivable from Various Employees 7,634 16,516 (17,771) - - 6,379 - 6,379

36,386₱ 27,106₱ (28,783) -₱ -₱ 34,709₱ -₱ 34,709₱

Name and Designation of Debtor Beg. of PeriodBalance at Amounts

Written-off

151

PAL HOLDINGS, INC. AND SUBSIDIARIESSchedule C. Amounts Receivable from Related Parties which are Eliminated during the Consolidation of Financial StatementsDecember 31, 2019(Amounts in Thousands)

Name and Designation of DebtorBalance at Beg. of

PeriodNet Movement Current Non- current

Balance at End

of Period

PAL Holdings, Inc. 3,600,000₱ -₱ 3,600,000₱ -₱ 3,600,000₱

Philippine Airlines, Inc. 2,557,494 (1,632,199) 925,295 - 925,295

Zuma Holdings Management Corporation 62,972 - 62,972 - 62,972

Air Philippines Corporation - 7,594,661 1,298,163 6,296,498 7,594,661

152

PAL HOLDINGS, INC. AND SUBSIDIARIESSchedule D. Intangible Assets - Other AssetsDecember 31, 2019

Description Beginning Balance Additions of CostCharged to Cost and

Expenses

Charged to Other

Accounts

Other Changes

Additions

(Deductions)

Ending Balance

``

NOT APPLICABLE

153


Schedule E. Long-term Obligations

December 31, 2019

(Amounts in Thousands)

Amount Amount

Shown as Shown asType of Obligation Current Long-term

Lease liabilities 24,294,493₱ 150,308,019₱ 174,602,512₱ 5.3% discounted rate Various dates through 2031

1.89% to 6.58% and

3-month LIBOR plus margin

Long-term debts 5,418,343 29,392,531 34,810,874 1-month LIBOR plus margin Various dates through 2026

29,712,836₱ 179,700,550₱ 209,413,386₱

See Note 15 of the Consolidated Financial Statements.

Interest Rates Maturity DatesTotal

154


Schedule F. Indebtedness to Related Parties (Long-term Obligations)

December 31, 2019

Balance at Balance at

Name of Related Party Beginning of Period End of Period RemarksRemarks

NOT APPLICABLE

155

PAL HOLDINGS, INC. AND SUBSIDIARIESSchedule G. Guarantees of Securities of Other IssuersDecember 31, 2019

Name of issuing entity of

securities guaranteed by the

company for which this

statement is filed

Title of issue of each class of

securities guaranteed

Total amount guaranteed

and outstanding

Amount owned by person

for which statement is filedNature of guarantee

NOT APPLICABLE

156


Schedule H. Capital Stock

December 31, 2019

No. of Shares Reserved

for Options, Warrants,

Authorized and Outstanding Conversion and Other Related Directors, Officers Others

Rights Parties and Employees

Common Stock 13,500,000,000 11,610,978,242 - 9,308,939,760 3,476 2,302,035,006

See Note 17 of the Notes to Consolidated Financial Statements

Number of Shares Held by

Title of IssueNo. of Shares No. of Shares Issued

157


SUPPLEMENTARY SCHEDULE OF RETAINED EARNINGS

AVAILABLE FOR DIVIDEND DECLARATION (ANNEX 68-D)

FOR THE YEAR ENDED DECEMBER 31, 2019 (Amounts in Thousands)

Deficit, beginning (P=6,081,616)

Accumulated equity in net losses, beginning 35,002,659

Application of additional paid-in capital against deficit as a result

of equity restructuring

(25,339,985)

Excess of net assets acquired over cost (3,699,923)

Deficit, as adjusted, beginning (118,865)

Add net income actually incurred during the year

Net loss for the year (10,653,522)

Deduct share in net losses of subsidiaries 10,666,240

Net income actually incurred during the year 12,718

Total deficit, as adjusted, ending (P=106,147)

158

*SGVFS038870*

INDEPENDENT AUDITOR’S REPORT ONCOMPONENTS OF FINANCIAL SOUNDNESS INDICATORS


We have audited in accordance with Philippine Standards on Auditing, the consolidated financialstatements of PAL Holdings, Inc. (the Company), a subsidiary of Trustmark Holdings Corporation,and its subsidiaries as at December 31, 2019 and 2018 and for each of the three years in the periodended December 31, 2019, and have issued our report thereon dated April 1, 2020. Our audits weremade for the purpose of forming an opinion on the basic financial statements taken as a whole. TheSupplementary Schedule on Components of Financial Soundness Indicators, including theirdefinitions, formulas, calculation, and their appropriateness or usefulness to the intended users, are theresponsibility of the Company’s management. These financial soundness indicators are not measuresof operating performance defined by Philippine Financial Reporting Standards (PFRS) and may notbe comparable to similarly titled measures presented by other companies. This schedule is presentedfor the purpose of complying with the Revised Securities Regulation Code Rule 68 issued by theSecurities and Exchange Commission, and is not a required part of the basic financial statementsprepared in accordance with PFRS. The components of these financial soundness indicators havebeen traced to the Company’s consolidated financial statements as at December 31, 2019 and 2018and for each of the three years in the period ended December 31, 2019 and no material exceptionswere noted.



April 1, 2020


Tel: (632) 891 0307Fax: (632) 819 0872ey.com/ph

BOA/PRC Reg. No. 0001, October 4, 2018, valid until August 24, 2021SEC Accreditation No. 0012-FR-5 (Group A),

November 6, 2018, valid until November 5, 2021


159


SCHEDULE OF FINANCIAL SOUNDNESS INDICATORS (ANNEX 68-E)

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

Ratio

Formula

2019

2018

Current Ratio Current Assets / Current Liabilities 0.47 0.42

Quick Asset Ratio (Cash and Cash Equivalents +

Receivables) / Current Liabilities 0.34 0.28

Debt-to-Equity Ratio Total Debt* / Total Equity 46.54 11.13

Asset-to-Equity Ratio Total Assets / Total Equity 64.90 18.64

Receivable Turnover Revenues /Average Trade

Receivables 19.15 18.58

Number of Days Sales in

Receivables (General Traffic)

365 Days / Receivable Turnover 19.06 19.64

Interest Rate Coverage Ratio EBIT / Interest Expense 0.07 (0.41)

Solvency Ratio Net Income (Loss) + Depreciation /

Total Debt* 0.08 0.04

Profitability Ratios:

Profit Margin Net Income (Loss) / Revenues (0.06) (0.02)

Return on Assets Net Income (Loss) / Total Assets (0.03) (0.02)

Return on Equity Net Income (Loss) / Total Equity (1.98) (0.35)

* Total debt includes notes payable, current and noncurrent portion of long-term obligations. In 2019, current and long-

term obligations include lease liabilities recognized due to the adoption of PFRS 16, Leases.

160


CORPORATE ORGANIZATIONAL CHART

AS OF DECEMBER 31, 2019

161

PAL Holdings, Inc.Sustainability Report 2019

Contents

Chairman’s Message

About PAL Holdings, Inc.Philippine AirlinesPAL expressOur Vision, Mission and Core ValuesBuong-Pusong Alaga

Company HighlightsAwards and RecognitionCustomer SatisfactionFleet InformationRoute NetworkEconomic PerformanceChallenges and Outlook

About this ReportPurpose, Reporting Standards, Scope and CoverageMateriality Assessment

Health and Safety

Employee Training and Development

Energy Efficiency

Other Essential TopicsCorporate Governance Data Privacy and SecurityOur People and ValuesLabor Management PracticesCorporate Social Responsibilities

03

04

12

27

30

58

41

51

2

To our dear stakeholders,

PAL Holdings, Inc. (PHI)’s flight path to a higher level of service excellence was affirmed by Skytrax in 2019 when we won the World’s Most Improved Airline award after being re-certified as a 4-Star Global Airline - all thanks to the combined efforts of our two airline companies, Philippine Airlines (PAL) and PAL express (PALex). Our investments have produced an enhanced safety and service culture, upgraded products and processes, and a stronger global network anchored on a young fleet of advanced aircraft and highly professional flight and ground crews.

Sustainability Begins with the Focus on PeopleWe commit to a sustainable business that focuses on the health, safety, knowledge, skills, values and attitudes of our most valuable assets – our employees, supported by robust training, state-of-the-art equipment and cutting-edge innovations such as virtual training modules.

Responsible Citizenship in the Aviation IndustryPAL and PALex are active participants in the Carbon Offsetting and Reduction Scheme for International DR. LUCIO C. TAN

Chairman and Chief Executive Officer

Aviation (CORSIA). It is a global climate change initiative that sets a rigorous target of “carbon-neutral growth” by capping future jet engine carbon emissions at 2020 levels and cutting net emissions to half of the 2005 levels by 2050.

Environment: The Engine of Our Sustainable SuccessWe seek to achieve those targets by maximizing fuel-saving measures and deepening a company-wide culture of environmental protection. Having replaced gas-guzzling older fleet with new-generation fuel-efficient aircraft, PHI will prepare over the long term for a switch to sustainable aviation fuels.

Winning with The Heart of the FilipinoThe flag carrier works constantly to boost tourism, facilitate trade, and uplift the national economy by bridging our island nation, providing direct links to key international markets, and serving the worldwide diaspora of Filipinos along with business and leisure travelers from all over. In carrying out this sacred mission, we will employ discipline, creativity and technology to ensure sustainability for our stakeholders, always representing the Best of the Filipino.

The Chairman's Message

3

PAL Holdings, Inc. (the Parent Company or PHI) was incorporated in the Philippines on May 10, 1930 to engage in the business of a holding company. On October 5, 1979, the Parent Company applied and was granted an extension of its corporate life by the Philippine Securities and Exchange Commission (SEC) for another 50 years from May 1980.

The Parent Company and its subsidiaries are primarily engaged in air transport of passengers and cargo within the Philippines and between the Philippines and several international destinations. The Group operates through its major subsidiaries: Philippine Airlines, Inc., the Philippine national flag carrier, and Air Philippines Corporation, a subsidiary under common control that was indirectly acquired through Zuma Holdings Management Corporation in 2017.

PHI's registered office address is 8th Floor, PNB Financial Center, President Diosdado Macapagal Ave., CCP Complex, Pasay City, Metro Manila.

About PAL Holdings, Inc.

4

Pioneering in end-to-end airline operations that constitute an industry of its own, Philippine Airlines, Inc. (PAL) lives on with its original name and the national colors, shining through for almost eight decades. PAL stemmed from the Philippine Aerial Taxi Company established in 1931 by co-founder Andres Soriano, who shut it down in 1939 and replaced it with Philippine Air Lines two years later. Braving the imminence of war, PAL had its inaugural flight with only five passengers from Makati to Baguio on March 15, 1941.

A private entity for much of its existence, PAL was brought under government ownership in the 1970s and 1980s, reverting to private hands in the early 1990s. Today, PAL is the only privately-owned major flag carrier in Southeast Asia. Its Chairman and CEO, Dr. Lucio C. Tan, is PAL's longest-serving chief executive.

Through the years, designated as the "national flag carrier" by R.A. 2232, PAL has been recognized to play a central role in boosting the growth of the Philippine economy and the emergence of a nation-wide tourism industry.

PAL's flights helped to bridge the various regions of the archipelagic nation, while forging links to the rest of the world that promoted trade, commerce and public mobility. PAL is a major partner to nation-building as it brings the best of the Philippines to the world and the best of the world to the country.

PAL also had the privilege of flying Philippine presidents on most of their state visits, as well as both St. John Paul II and Pope Francis during their respective visits to the Philippines and beyond. A multitude of beauty queens, celebrities and other VIPs also availed PAL's services through the years.

About PAL Holdings, Inc.Philippine Airlines

5

During calamities and times of urgent public need, PAL has engaged in relief services by flying home Filipino evacuees from crisis-torn countries in the Middle East, Africa and elsewhere, while providing critical services to communities in need after typhoons and other natural disasters.

Today, PAL is the Philippines' largest international airline and the only full-service Filipino air carrier offering Business Class, Premium Economy and Regular Economy services. Its growing fleet, one of the world's youngest, consists of modern high-technology aircraft such as the Boeing 777 along with the Airbus A350 and A330 for long-haul routes and the A320/A321 family for regional and domestic routes.

PAL's network now stretches across the world. The flag carrier operates from four hub airports (Manila, Cebu, Clark and Davao) in the Philippines to an inclusive total of 32 domestic destinations and 41 points in Asia, Australia/Oceania, the Middle East, Europe and North America. PAL operates the country's only direct air links to mainland U.S.A., Hawaii, Canada, New Zealand and Western Europe, as well as to Sapporo (Japan) and Brisbane (Australia).

PAL is a member of the International Air Transport Association (IATA), Association of Asia Pacific Airlines (AAPA), Air Carriers Association of the Philippines (ACAP), Flight Safety Foundation (FSF), and the National Fire Safety (NFS).

PAL is part of the AAPA Environment Working Group, a sponsor of the Philippine Eagle Foundation. PAL also signed up with the United for Wildlife Transport Taskforce Buckingham Palace Declaration, which aims to reduce illegal trade of wildlife.

About PAL Holdings, Inc.Philippine Airlines (cont’d)

6

First airline in Asia (1941)First Asian airline to cross the Pacific (1946)

First South East Asian airline to fly to Europe (1947)

First airline to be honored by Les Chaines de Rotisseurs (1979)

First Asian airline to fly to China (1979)

First to have B747-200 with Skybeds (1980)

First Philippine carrier to be IOSA-certified (2006)

First to launch PAL Mobile App in the Philippines (2009)

First to accept BancNet ATM cards as form of payment online (2009)

First to show nationwide crowd-sourced inflight safety video (2017)

First to have a Skytrax 4-star rating in the Philippines (2018)

PAL...Shining Through the Years

February 1941

Philippine Airlines was established as a private company

September 1948

Government became the

majority stockholder

January 1965

Government relinquished control over PAL, only to be reassumed in 1977

January 1992

PAL was privatized thru PR

Holdings

September 1998

Asian financial crisis led to suspension of

operations, but resumed two weeks

after

June 1999

PAL is placed under a 10-

year rehabilitation program

October 2007

PAL exits from receivership two

years ahead of the 10-year plan

April 2012

San Miguel Corporation takes

management control of PAL

October 2014

Lucio Tan Group reassumes

management control of PAL

Change of hands over the years

About PAL Holdings, Inc.

7

Air Philippines Corporation, currently doing business under the name and style of Philippine Airlines or PAL express (PALex), was incorporated in the Philippines on February 8, 1995 while commercial operation began on February 1, 1996.

It is the 3rd biggest airline in the country operating Airbus A321-200s, A320-200s, and De Havilland DASH 8-400s and DASH 8-300s. It was in 1999 when the Lucio Tan Group of Companies took over management of PALex. The Lucio Tan Group of Companies’ entry into picture resulted in a big improvement in the Company as it allowed PALex to continue to provide low-cost air travel to the riding public.

The increase in routes and passenger sales allowed PALex to significantly increase its partnership with Philippine Airlines, including the merging of timetables and ticket sales. The strong relationship with the country’s flag carrier also allowed PALex to move into the PAL terminal at the Ninoy Aquino International Airport. PALex was known for its safety, professionalism and first-class service.

PALex is the 2nd Philippine carrier that was included in the IATA Operational Safety Audit Registry in 2014.

The airline was also certified by SGS last December 2018 on the ISO 9001:2015 Quality Management System. This certification is renewed annually.

About PAL Holdings, Inc.PAL express (PALex)

8

PAL express is a member of the Air Carriers Association of the Philippines (ACAP), Philippine Society for Quality (PSQ), People Management Association of the Philippines (PMAP), Philippine Society for Talent Development (PSTD), and the Employers Confederation of the Philippines (ECOP).

February1995

Air Philippines Corporation (APC)

incorporation

December 1995

Issuance of an Air Carrier Operating Certificate by the

Air Transportation Office (ATO)

February 1996

APC first commercial flight from Manila (T4)

to Zamboanga City

August 1997

R.A. 8339 was enactedAPC’s 25- year

franchise to establish, operate and maintain

domestic & international air

transport services

April 2008

Under Dr. Lucio C. Tan’s leadership,

APC was rebranded as PAL express

February2018

PAL express / Philippine Airlineswas awarded the

4-Star Airline Ratings by

Skytrax

March2018

PAL express renewed IATA

Operational Safety Audit or

IOSA

December2018

APC/PAL express was certified ISO

9001:2015 Quality Management System (QMS)

About PAL Holdings, Inc.PAL express (PALex) (cont’d)

9

• To deliver safe, reliable, efficient and pleasant travel experience exceeding passenger expectations• To provide a satisfying career to our employees and adequate returns to stockholders• To represent the Best of the Philippines, the Best of Filipino to the world

• To be the airline of choice in all markets we serve• To be the source of pride for Filipinos everywhere

• We put our customers first• We grow a successful and

empowered team• We act with passion and aim

for excellence• We embrace and drive

change• We exemplify the Best of the

Filipino spirit

Vision

Mission

Core Values

Our Vision, Mission and Core Values

10

Our signature Buong-Pusong Alaga (wholehearted service) is our unwavering promise to every traveler. More than ever, we are dedicated to giving above-and-beyond service in each flight. With rigorous training programs and leadership empowerment workshops, our partners and crew members always ensure that each passenger feels the Heart of the Filipino.

To deliver our service aspiration of a Heartwarming Filipino Travel Experience, we created stronger employee engagement and frontliner service training programs. Through these training programs, our Frontliners learn five service attributes that guide our behavior:

Magaling (Efficient and Skillful)Maaasahan (Reliable and Trusted)Maalaga (Caring and Hospitable)Magalang (Polite)Malambing (Affectionate)

Our Frontliners continue to exhibit these attributes in theirdaily interactions to build strongerties with customers and to endearus to many.

Buong-Pusong Alaga

11

Company Highlights

12

How we got that Star...In 2016, we embarked on a company-wide journey to provide best in-class experience in four key aspects of our passengers’ journey. In 2018, the PAL Group, received a 4-Star rating from Skytrax, the international air transport rating organization. Across Skytrax's global quality metrics that measure product and service quality, we have proven our excellence and commitment to world-class standards. In 2019, Skytrax has re-certified the PAL Group as a 4-Star Global Airline based on comprehensive quality audits performed last December 2018 and January 2019.

The PAL Group won the "World’s Most Improved Airline Award" for 2019 as the carrier that achieved the biggest leap in product and service quality among a survey of over 350 leading airlines worldwide.

Skytrax also revealed that PAL is now ranked as the Top 30 Airline in the world, rising 19 spots from Top 49 in 2018 and a full 60 spots from Top 90 in 2013. PAL is also ranked high in other important categories:

1. Top 10 World's Best Business Class Comfort Amenities2. Top 10 Best Airline Staff in Asia3. Top 11 World's Best Cabin Crew4. Top 11 World's Best Airport Services5. Top 11 World's Best Premium Economy Class6. Top 14 World's Best Economy Class

Buong-Pusong Alagaas our Service Culture

Aircraft Fleet Modernization

Product Upgrades and Innovation

Facility Upgrades

Awards & Recognition


About PHI

Company HighlightsAwards & RecognitionCustomer SatisfactionFleet InformationRoute NetworkEconomic PerformanceChallenges & Outlook

About This Report

Health & Safety

Employee Training & Dev’t

Energy Efficiency

Other Essential Topics

13

2019 Asia Pacific Tambuli Awards for Christmas CampaignPAL's 2018 Christmas video "Regalo" bagged the Bronze award under Humanity and Culture - Seasons Celebration category at the prestigious 2019 Asia Pacific TambuliAwards last June 2019.

The Asia Pacific Tambuli Awards recognizes creative and effective brands with purpose. The video, a collaboration with PAL’s award-winning partner-agency, McCann World Group Philippines, promotes the importance of OFWs coming home and reuniting with their families during Christmas. It has gained 5.5 million views on Facebook and YouTube and was highly talked about online during the holidays.

Other entries for the 2019 Asia Pacific Tambuli came from Australia, New Zealand, Middle East, India, Japan, Singapore, Malaysia and other Asia Pacific (APAC) countries.

Talent Accelerator Award for Immerse Virtual Reality Cabin Crew TrainingThe PAL Group has been named "Talent Accelerator for Immersive Virtual Reality Cabin Crew Training" in the 3rd Annual IDC Digital Transformation (DX) Awards Philippines. IDC DX Awards recognizes outstanding organizations that have made critical breakthroughs in business transformation.

As part of its digital transformation program, the PAL Group started using Virtual Reality (VR) technology for cabin crew training in March 2018.

Through collaboration with Veer Immersive Technologies, Inc., training modules on aircraft familiarization and cabin door operations for Airbus A320 and A321 aircraft were developed. The program - approved by the Civil Aviation Authority of the Philippines - simulates inflight situations that allow trainees to acquire and practice thought processes and skills under realistic, safe, and virtual environment. This program has helped cabin crew members acquire needed skills to respond more effectively to inflight situations.



About PHI


About This Report

Health & Safety


Energy Efficiency


14

Dr. Tan Receives ‘ALAB’ Award for Business ExcellenceThe Anvil Business Club (formerly the Association of Young Filipino-Chinese Entrepreneurs), conferred on PAL Chairman and CEO Dr. Lucio C. Tan the “Anvil Leadership Award for Business Excellence" or ALAB award in recognition of his inspiring business success, outstanding community leadership and philanthropy. The Anvil Business Club is an organization of dynamic entrepreneurs and professionals committed to propagate positive Confucian and Filipino values and to pursue excellence in their own fields for the economic and social progress of the country.

For Anvil, Dr. Tan represents a 'burning flame' ('alab' in Filipino) which galvanizes the cause-oriented organizations and foundations he leads to take concrete action for the benefit of sectors who need help the most -- the marginalized and the underprivileged. The awarding rites were held on June 2019 at the Century Park Hotel - Manila.


Dr. Tan, who is the Chairman Emeritus of the Federation of Filipino Chinese Chambers of Commerce and Industry, Inc., was cited for being a "positive role model of philanthropy, hard work, humility, resourcefulness and leadership".

Aside from being PAL Chairman, he is also the chairman of LT Group, Inc., Philippine National Bank (PNB), Asia Brewery, Tanduay Distillers, the Tan Yan Kee Foundation named in memory of his late father, University of the East (UE) and many others.


About PHI


About This Report

Health & Safety


Energy Efficiency


15

In the image: PAL express President, Bonifacio Sam, with Lora Liza S. Dioquino in our Manila office. Mr. Sam further explained this recognition: “The award is significant as it recognizes our commitment to take care of our people by developing new talent and strengthening skills of the current workforce. This accolade is the result of strong collaboration between PAL express management and our workforce."

Asia’s Top 100 in the 10th Employer Branding AwardsPAL express, owned by PAL Holdings, Inc., gained recognition recently as one of the Top 100 Employers in the region. The Employer Branding Institute of India held this year’s 10th Asia’s Best Employer Brand Awards at the Pan Pacific Hotel in Singapore to honor top performing companies who adopted the best practices in Employer Branding, Talent Management, Talent Development and Talent Innovation.

Specifically, the international awards program recognized PAL express for its efforts to promote employee welfare and engagement through social media, simplify employment processes with the use of automation, nurture talents through career development programs and boost talent acquisition to become a top-of-mind employer choice.

Last August 2019, the same award-giving body included PAL express in the Philippines Best Employer Brand Awards because of the airline’s successful efforts to combine vision with action in the execution of HR strategy, cultivating competencies vital for a “future-ready” company and initiating effective Employee Benefits and Employee Engagement programs.

The Asia’s Best Employer Brand Award proves that PAL express is recognized in the international arena for its commitment to create a high potential organization shaping future leaders and innovators, aside from being a desirable Asian workplace.

PAL express AVP for Human Resources Lora Liza S. Dioquinoreceives the award from the Employer Branding Institute - India at the 10th Asia's Best Employer Brand Awards ceremony in Singapore last August 2019



About PHI


About This Report

Health & Safety


Energy Efficiency


Source: https://business.mb.com.ph/2019/09/20/pal-express-among-asias-top-employers/

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ISO 9001:2015 Certification from SGSThe ISO 9001:2015 certification demonstrates a company's compliance to the set of guidelines developed by the International Organization for Standardization. The standard is used by organizations to evidence their ability to consistently provide products and services that meet customer and regulatory requirements and to demonstrate continuous improvement.

With this, our customers and stakeholders can be assured that we will continue to deliver excellent customer service beyond our signature Buong-Pusong Alaga brand of service.

Air Philippines Corporation, doing business as PAL express, is the first full-service carrier in the country to be awarded the prestigious ISO 9001 certification last December 2018.



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PAL express President Bonifacio U. Sam during the kickoff ceremonies of the program in 2017.

Celebration when PAL express passed the 2nd phase of the ISO 9001:2015 audit last Dec 15, 2018 and was recommended for the certification.

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Copy of the ISO 9001:2015 (Quality Management System Standard) Certification awarded by SGS.

Philippine Airlines and PAL express solicit close-to-real-time customer feedback through the Post Trip Survey. The survey is conducted through a self-accomplished questionnaire designed to measure overall customer experience metrics, to determine touchpoint customer satisfaction with drill-down to airport and inflight experience and to draw customer feedback and identify improvement areas. E-mail survey invitations are sent daily to all customers who have flown with Philippine Airlines and have provided valid e-mail addresses. Over the years, we have seen continuous improvement in our metrics.

50% 51%

58%62%

CSAT has been continuously improving

2016

2019

31%

43% 45% 45%48%

30% 26% 24%

Over the years, detractors have significantly reduced while promoters have increased

2016 2019

Promoter

Detractor

+2%Intent to Fly With PAL

Increased from 73% (2018) to 75% (2019)

Customer Satisfaction (CSAT)


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18

Boeing 777-300ER Airbus A350-900 Airbus A330-300

Airbus A321 CEO Airbus A321 NEO SR Airbus A321 NEO XR Airbus A320-200

10 6 15

18 6 1 5

Fleet Size:

61Average Age:

4.8 years

Fleet Information

Philippine AirlinesChairman’s Message

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19


Airbus A321 NEO Airbus A320-200

Dash 8-400 Dash 8-300

Fleet Size:

36Average Age:

8 years

Fleet Information

PAL express

6 13

13 4


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20


Route Network - International

41 International DestinationsAuckland / Bali (Denpasar) / Bangkok / Beijing / Brisbane / Busan / Dammam / Doha / Dubai / Fukuoka / Guam / Guangzhou / Hanoi / Ho Chi Minh / Hong Kong / Honolulu / Jakarta / Kuala Lumpur / London / Los Angeles / Macau / Manila / Melbourne / Nagoya / New York / Osaka / Phnom Penh / Port Moresby / Quanzhou / Riyadh / San Francisco / Sapporo / Seoul / Shanghai / Singapore / Sydney / Taipei / Tokyo (Haneda/Narita) / Toronto / Vancouver / Xiamen


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21

Route Network - Domestic

32 Domestic DestinationsAntique (San Jose) / Bacolod / Basco / Busuanga / Butuan / Cagayan de Oro / Calbayog / Camiguin / Catarman / Caticlan / Cebu / Clark / Cotabato / Davao / Dipolog / Dumaguete / General Santos / Iloilo / Kalibo / Laoag / Legazpi / Manila / Ozamiz / Pagadian / Puerto Princesa / Roxas / San Vicente / Siargao / Tacloban / Tagbilaran / Tawi-Tawi / Zamboanga


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22

Revenues rose in 2019 primarily due to increase in passengers. The Company introduced several new routes that serve as feeder for the core routes, thereby increasing the number of roundtrips and available seat kilometers. As we develop the new routes, available seat kilometers increased by 6% while revenue passenger kilometers grew by 5%, thereby resulting in a slightly lower passenger load factor. Cargo revenues suffered a slight setback in 2019 due to reduced demand for cargo transport.

Operating expenses dropped mainly due to the reduction of flying operations costs. Overall, the expenses and other financing charges which grew significantly because of the impact of the Philippine Financial Reporting Standard (PFRS) 16 on Leases overtook revenues, leading to a total comprehensive loss of Php10.2billion.

Economic Performance


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Year-on-Year Change 2018 2019

Number of Roundtrips 9% 56,525 61,396

Revenue Hours 7% 320,209 343,256

Number of Passengers 4% 16,085,975 16,761,050

Revenue Passenger Kilometer (000) 5% 40,365,999 42,329,104

Available Seat Kilometer (000) 6% 52,122,143 55,308,139

Passenger Load Factor 1% 77.4% 76.5%

Freight Ton Kilometer (000) 1% 683,906 676,956

Revenue Ton Kilometer (000) 1% 4,599,367 4,631,557

Available Ton Kilometer (000) 5% 7,284,446 7,626,934

Revenue Kilometers (Distance Flown) 8% 198,952,791 214,669,083

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For 2020, amidst the COVID-19 challenges, PAL and PALex are exploring new sources of income while implementing cost saving initiatives.

150,481

154,537

Revenue

2018

2019

-1,445 -14,073

Other Charges

2018

2019

156,466

151,664

Expenses

2018

2019

-2,843 -10,199

Total Comp. Loss

2018

2019

Financial Performance (in millions of Pesos)

Key Operating Statistics

Taal Volcano Eruption

Just about two weeks into the year 2020, on January 12, TaalVolcano in Batangas, Philippines had a phreatic eruption from its main crater that spewed ashes across Calabarzon, Metro Manila, and some parts of Central Luzon, resulting in the suspension of flights in the area. Manila International Airport Authority (MIAA) closed the airport in the evening of January 12 due to ash fall on the airport runways, taxi ways, and ramp as ash poses great safety risk to aircraft operations.

PAL and PALex immediately activated their contingency plan to protect the passengers, crew, employees, and their aircraft from the hazards and risks associated with volcanic activity. For the duration of the airport closure, PAL and PALex have cancelled nearly 100 domestic and international flights, experienced delays and diversions to other airports on some flights.

Prior to the partial reopening of the airport on January 13, 2020, PAL and PALex have commenced a cleanup operation for all their affected aircraft as well as provided assistance for the cleanup of the airport ramp. Operations resumed gradually with the announcement by MIAA of a “partial operations” reopening on January 13, 2020. PAL and PALex continue to monitor status of the volcanic alert level.


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Stiff competition, matched with ever increasing costs, have caused the PAL Group to incur losses over the last three years. The PAL Group has lined up various revenue enhancement programs, cash generation strategies and cost control initiatives to improve the results of its operations.

COVID-19

On March 11, 2020, the World Health Organization (WHO) declared the COVID-19 outbreak as a global pandemic due to the significant number of cases and countries affected globally. In a move to contain the COVID-19 outbreak, on March 16, 2020, Presidential Proclamation Order No. 929 was issued, declaring State of Calamity throughout the Philippines for a period of six months and imposed an enhanced community quarantine (ECQ) throughout the island of Luzon until April 12, 2020, which was further extended to May 15, 2020.

The COVID-19 outbreak and the measures taken have caused disruptions to businesses and economic activities, and its impact on businesses continue to evolve. Consequently, the Company's passenger operations have also been disrupted, resulting in suspension of its flights both for domestic and international routes, until such time that the quarantine period is lifted.

Even prior to the declaration of the COVID-19 pandemic, PAL and PALex have since taken massive efforts to put measures in place to protect its customers, crew, and employees, as well as to adhere with the government’s response against COVID-19.

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Challenges and Outlook

COVID-19 (cont'd)

Our Crisis Management Program for Public Health Emergency has been activated as early as January 2020. The Emergency Response Team (ERT), together with the Medical team, are the 24/7 response teams which supervise all safety and health initiatives and activities related to the COVID-19 crisis to ensure everything is carried out effectively. The ERT is also in direct communication with the country’s health authority as well as different health authorities of other countries to provide the required health information to assist in the efforts for contact tracing.

Our Crisis Management Program consists of several layers of protection for all passengers, crew, employees, and its service providers. We promote proper health and hygiene etiquette as well as crucial information through our regular information dissemination campaign. The use of Personal Protective Equipment (PPE) such as masks for all frontliners, employees, service providers, pilots, and cabin crew is mandatory. Alcohol dispensers are installed at strategic locations at the airport and in the aircraft.

At the airport, thermal screening is being done by governmentauthorities on arriving international passengers while we conduct thermal screening to departing passengers to ensure their health and welfare even prior to boarding the aircraft. For the aircraft, an enhanced disinfection program has been in place as early as January 2020 which involves the use of disinfecting agents for every turn-around cleaning in between flights, a thorough disinfection of every aircraft once it lays-over at the Manila hub and a weekly top-to-bottom disinfection.


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Thermal screening is also being conducted at all entry points in PAL and PALex offices and facilities. Alcohol dispensers are installed at strategic locations in all the offices. All buildings and facilities, including all ticket offices, have multiple daily disinfection schedule and a thorough disinfection is being performed on the weekends.

PAL President, Mr. Gilbert Santa Maria, with the ground and flight crew in theirpersonal protective equipment as they carry out their duties in these extraordinary times.

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Outlook

While PAL and PALex have ceased operating regular flights, we continue to partner with international governments to operate various sweeper flights which will ferry stranded nationals from various places in the Philippines and bring them back to their home country. In the same way, we are partnering with the Philippine government to bring home our Overseas Filipino Workers (OFWs) from various countries.

Since the ECQ started, we have been operating cargo-only flights to bring essential medicines, food supplies, and other crucial shipments. To maximize the volume of essential goods to be transported, some cargoes are loaded inside the cabin.

Both airlines continue to prepare for the resumption of flights, although likely on a much-reduced scale of scheduled flights, which will gradually ramp up as demand recovers.


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26


About This Report

27

PURPOSEThe PAL Holdings, Inc. has published this Sustainability Report 2019 to provide prompt and transparent disclosure about business, activity outcomes and major sustainable management performances for that year in order to earn long-term trust from its stakeholders and achieve sustainable growth that benefits society.

REPORTING STANDARDThis report was prepared in accordance with the SEC guidelines. The GRI Standard issued by the Global Reporting Initiative (GRI) was used as reference for Economic, Environmental, Social and Governance (EESG) information.

SCOPE AND COVERAGEOur 2019 Annual and Sustainability Report cover the domestic and international business operations and activities of Philippine Airlines and PAL express for the calendar year 2019 with some parts covering information updated until April 2020.

The economic data are based on the consolidated financial statements in the 2019 Annual Report which incorporates the financial performance of PAL Holdings, Philippine Airlines and PAL express.

FEEDBACKWe enjoin our stakeholders to send their feedback regarding matters in this Sustainability Report via email to [email protected]

ABOUT THE COVEROur brand-new A350-900 fleet is a testament of how science and nature can inspire another significant evolution in the ongoing mission to conceive and manufacture the perfect aircraft. Its all-new design and state-of-the-art technology enable us to deliver quality and efficient service to our passengers while maximizing fuel economy and minimizing environmental impact. Through these, we were also able to set new standards with the longest route flown among Philippine carriers.

In this spirit of setting new feats, we aspire through this first sustainability report to showcase our relentless passion for excellence, our commitment for sustainability, and our bestowed honor to always represent the Best of the Filipino.

About This Report


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About This ReportPurpose, Reporting Standard, Scope and CoverageMateriality Assessment

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28

A Materiality Assessment workshop was held and a survey was conducted among 50 representatives of PAL Holdings, Inc., Philippine Airlines and PAL express to determine the material topics to be included in the Sustainability Report. Material topics were identified based on their economic, environmental and social impact on the organization, as well as their substantive influence on the assessments and decisions of stakeholders. Materiality assessment ensures that reports are more relevant, more credible and more user-friendly.

After further evaluation and deliberation with top management, the following were deemed material for the Company and are priority topics for this report:

On top of these priorities from the top management, other essential topics are also discussed in this report:

Corporate GovernanceData Privacy and SecurityOur People and ValuesLabor Management PracticesCorporate Social Responsibility

Health & Safety12

3

Employee Training & Development

Energy Efficiency

About This ReportMateriality Assessment PHI’s Material Topics


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About This ReportPurpose, Reporting Standard, Scope and CoverageMateriality Assessment

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29

Health and Safety

30

PAL and PALex Medical provides in-house medical services handled by our full-time medical practitioners and retainer specialists. We maintain our primary and satellite medical clinics with facilities that serve both employees in various offices and airline passengers in the airport. Our partnership with other medical institutions supports our aim to provide healthcare services to our employees as well as their dependents in various parts of the country.

To provide excellent care, we send our doctors and nurses to Occupational Health and Safety trainings held by primary health organizations. Our Medical Team undergoes customer service training to further enhance its service delivery. Medical services are being improved through feedback from employees and dependents as inspired by desired employee experience framework.

Our employees receive preventive and out-patient in-house medical services. For patient care beyond what PAL and PALex Medical offer, endorsements are made to our partner clinics and hospitals. Our passengers in the airport may also avail of our medical services for any emergencies needing immediate attention.

We continuously boost our Health Awareness Programs through Medical Forums, Mental Health Awareness, Info-bulletins, Annual Medical Exams, Weight Monitoring for Cabin Crew, etc. We also do collaborative efforts with various departments in handling emerging cases to formulate a unified process in handling possible cases such as the COVID-19. A collaboration with Safety and Security Department comprises the COVID-19 Monitoring Team. The team constantly disseminates information for everyone’s awareness on preventive measures and communicate with official governing bodies for updates.

Our Health Program


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Health & SafetyOur Health ProgramOur Safety ProgramCustomer's SafetyOccupational Health & SafetyEmergency Response


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It is our policy to ensure the health and safety of our personnel. Thus, PAL and PALex implement programs and provide necessary medical and dental benefits to our employees. Through the "Live Well, Work Well Program", our employees enjoy modern and holistic approach of wellness activities including physical, psychological, financial, and spiritual well-being.

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The PAL Group created a 4-point enhancement on responding to health emergencies in the workplace to have an effective preparedness, response, and recovery from any medical-related incident or emergency.

Trained employees who may be involved in emergency response. A CPR-AED Training extended not just to Medical Practitioners but also to laymen in collaboration with UST-Faculty of Medicine, an American Heart Association-Accredited Training Facility for CPR-AED. Identified employees were trained to be ‘rescuers’ as first responders in key areas.

Aligned Medical Emergency Response Process. PAL Physicians with varying specializations formulated a 4-step process during a medical emergency. It is vital to follow a standard process to ensure uniformity and alignment for the whole Company. Collaborated with Admin Support Staff and Security

Personnel. Briefings were conducted for identified employees and security personnel tapped to be part of Medical Emergency Response Team. Effective communication is the key to any medical emergency response. To achieve quality communication, Admin Support Staff from each department were briefed of their crucial role during a medical emergency.

Positioned Medical Equipment in identified locations. Stretchers and wheelchairs are placed on Security Guard Stations/Clinic of each key area and agreement was made with Lifeline Ambulance Services. To ensure proper transport of patients to the clinic, necessary medical equipment are provided to strategic places and locations.

1

2

3

4

Our Health Program


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To respond to health emergencies in the workplace, an Emergency Response Team is created that empowers different employees from various departments through basic first aid training.

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4-Step Process during a Medical Emergency


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Energy Efficiency


Our Safety ProgramPAL and PALex Safety Management System (SMS) complies with Philippine Civil Air Regulations (PCAR) and International Civil Aviation Organization (ICAO) Document 9859 Safety Management Manual. This covers Flight Operations, Simulator Training providers, Inflight Services, Maintenance and Engineering, Ground Operations, Cargo, and Training. Our SMS also interacts with local government authorities, all applicable Aviation Authorities and Aerodrome Operators where we operate, service providers and suppliers, and other airlines.

Framework and CommitmentPAL and PALex are committed to effectively administer and implement SMS by defining responsibilities and accountabilities, providing adequate resources during normal and emergency operations, ensuring skilled, trained, and informed personnel are available to perform, placing acceptable risk management process, having a non-punitive environment to promote empowered safety culture, and supporting conduct of audits for continuous improvement.

Safety GoalA working SMS will effectively prevent accidents and yield profitability by minimizing loss, while being compliant with the Company policies and regulatory standards to ensure safe operational practices and keep airworthy airplanes under a balanced allocation of organizational resources. One of our safety goals is to maintain zero (0) high consequence events (fatal and non-fatal accidents) and serious incidents. Both Philippine Airlines and PAL express had no fatal accidents for the last 22 years and 20 years, respectively.

The Four PillarsOur Safety Management System is structured upon the four basic components of safety management in accordance with PCAR and ICAO Document 9859 namely: Safety Policy and Objectives, Safety Risk Management, Safety Assurance, and Safety Promotion.

1. Safety Policy and ObjectivesOur SMS incorporates policies and procedures in place that explicitly describe our responsibility, authority, accountability, and expectation. It is integrated into "the way things are done" in our organizational structure and activities because every employee contributes to the safety and health of our organization.

Safety Policy and Objectives

Safety AssuranceSafety Risk Management

Safety Promotion

Safety is the cornerstone of PAL and PALex operations. The Management is committed to continuously improve strategies to ensure a high level of safety performance. Safety is everybody's responsibility. All employees share the responsibility to comply with national and international laws and requirements, Company standards and delivery of high level of safety performance.

Our Safety Program

33

Our Safety Program


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Flight Data Analysis (FDA)We also identify hazards in flight through Flight Data Analysis (FDA) which involves real-time downloading of aircraft data which are then collected and analyzed by Flight Safety Division.

The program is in compliance with RP-CAR regulation which covers all fleet. It is in-house and managed by Safety Department and utilizes AirFASE that is jointly developed by Teledyne Controls and Airbus. Flight Safety Division, being the process owners of FDA Program, manages the FDAP and performs the analysis on a regular basis.

Fa gue Management We also collect and analyze fatigue reports submitted by operational personnel regarding any fatigue-related impairments experienced during their duty period. This type of proactive report is important to be recognized as fatigue may affect the safety of our operations. Just CultureTo encourage proactive safety reporting, we ensure that no actions are taken against any employee who reports a safety concern. PAL Group has come up with non-punitive guidelines and a Just Culture model which are being used by different department heads to determine the culpability of personnel involved in accidents and incidents.

Other sources of hazard identification include feedback from training, group review, safety audits and inspections for flight, cabin, airport, and facilities.

Safety CouncilThe Safety Council, the highest safety review committee, during its trimester meetings, reviews the performance of the SMS if themanagement of safety and its established action plans are effective to meet the safety objectives and safety goals which were established by the PAL Group Senior Management.

Safety Action GroupsAnother venue in which employee participation on safety is required is in the Safety Action Groups (SAGs). The SAG is a venue to review specific major occurrences to ensure that appropriate actions have taken place. This is a high-level committee composed of the SAG head, designated safety officer, line manager and representative of front-line personnel.

Line Safety Team (LST)Employee participation is also manifested in the monthly Line Safety Team (LST) Meetings where attendees identify hazards, manage risks, formulate and implement strategies to address such risks. It is composed of representatives from sub departments, divisions, outstations, service providers, and concerned employees.

2. Safety Risk ManagementManagement of risks includes a Hazard Identification process which involves the identification and analysis of hazards in order to identify its safety consequences in terms of its effects to operations. We use tools to identify hazards such as our safety reporting forms and eReports which for 2019 resulted in 2,422 safety reports received and recorded in Aviation Quality Database (AQD) and all were addressed.

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Our Safety Program


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4. Safety PromotionPAL and PALex have developed formal means of safety communication to ensure that relevant personnel are fully aware of the SMS program, safety critical and generic information.

SMS TrainingsWe also ensure that all personnel, supervisors, manager, senior officers and accountable managers are trained and competent to perform their safety management duties.

In 2019, there were a total of 3,514 employees who completed the SMS Training, 2,138 employees are from PAL and 1,376 are from PALex. LMS (Learning Module System) for SMS Level 1 Training had been launched last January 2020. It is an e-learning tool that aims to reach participants despite geographical challenges faced by our offices across all our outstations, both domestic and international.

3. Safety AssuranceSafety performance indicators and targets are in place to validate our performance in the safety risk management we designed. We have assessments, checks, inspections, investigations, reviews, surveys, management of change, and observance of best practices. All of these ensure the effectiveness of our safety program.

Safety assurance gives the Company confidence that its set safety standards are met with quality. The Company checks if the organizational and regulatory procedures are consistently practiced towards the set performance targets.

Quality Management SystemAnother integral part of continuous monitoring of our performance is our Quality Assurance Program. The Program includes all planned and unplanned audits necessary to enhance confidence that our management system, all operations and maintenance processes are conducted in accordance with the Aviation Authority regulations and PAL Group standards.

IOSA CertificationThe International Air Transport Association (IATA) guides airlines on aviation activities to operate safely, securely, efficiently and economically on established standards. PAL and PALex, to conform with IATA standards, validate their activities through internal and external IATA Operational Safety Audits (IOSA). PAL had its 1st IOSA Certification in 2006 while PALex had its first IOSA Certification in 2014 which is being renewed every two years.

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Aircraft MaintenanceOur team of aircraft engineers is responsible for ensuring that PAL and PALex fleet are well-maintained based on technical requirements by aircraft manufacturers and regulatory authorities. Proper maintenance of our fleet is crucial to the safe operation of the aircraft, leading to safe transport of crew and passengers.

Lufthansa Technik Philippines (LTP) provides line maintenance up to A-check maintenance services for all PAL A350, A330, A321, A320, and B777 aircraft, as well as for PALex A321 and A320 fleet. LTP is part of the Lufthansa Technik Group, a global network with numerous maintenance stations worldwide. The Civil Aviation Authority of the Philippines (CAAP), US Federal Aviation Administration (FAA), European Union Aviation Safety Agency (EASA) and other countries have certified LTP as a qualified provider of aircraft Maintenance and Repair Organization (MRO) services.

PALex is certified by the CAAP as an Approved Maintenance Organization for De Havilland Dash 8-300 and Dash 8-400 Classics and Next Generation. PALex conducts scheduled and unscheduled maintenance both in Manila and Cebu. It provides line and base maintenance up to C-check for the De Havilland fleet. LTP handles

technical management and line maintenance up to A check for the A321 fleet of PALex.Line maintenance services at foreign outstations are provided by contracted CAAP approved maintenance handlers.

Heavy maintenance requirements of PAL and PALex for the jets, engine overhaul services and other related services are outsourced to Maintenance and Repair Organizations that are approved by CAAP, FAA and EASA.

Our Safety Program

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Customers' SafetyOur Inflight MealsOur Catering is committed to provide safe,reliable, efficient and professional services toall PAL and PALex flights.

We have 44 online caterers globally. In 2019,we loaded 18M meals for 73,000 flights.

Our inflight meals are produced by our reliable caterers who follow and practice GMP (Good Manufacturing Practices)and HACCP (Hazard Analysis Critical Control Point) principles. Most of them are also ISO (International Organization for Standardization) certified and FSSC (Food Safety Management System) certified .

Our caterers use World Food Safety Guidelines for Airline Catering as their comprehensive guide for meeting and exceeding food safety standards, which classifies effective food safety control as part and parcel to inflight catering. It sets the following standards by which all relevant companies must abide:

1. Accountability from top management to its employees

“44 caterers globally,18 Million meals, 73,000 flights”

Customers' Safety


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2. Prerequisite programs like Good Manufacturing Practices, Vendor Management, Training, Allergen Management, etc.

3. Hazard Analysis and Critical Control Point (HACCP) principles. HACCP, as described by IFSA World Food Safety Guidelines, “is a management tool that provides a more structured approach to the control of identified hazards than that achievable by traditional inspection and quality control procedures”.

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Features of the Brimstone Explosion and Fire Containment Bag:• Withstands internal temperatures of up to

1,200⁰F• One of its layer is Carbon Filter which works

towards denying oxygen• Another layer is Kevlar which protects against

shrapnel/projectiles in the event of battery explosion

• Absorbs the toxic fumes emitted during a lithium battery fire.

and PAL express equipped all aircraft with Brimstone Explosion and Fire Containment bag which is an effective tool in containing onboard battery fires. Each bag comes with gloves for handling hot devices. These bags are placed strategically inside the aircraft.

Customers' Safety

Regular inspections and audits are conducted to ensure caterers comply with food safety standards. As a result, our rate of food hygiene concerns decreased from 0.00231% in 2018 to 0.00203% in 2019, which means we had only 2 concerns for every 100,000 meals. We work closely with our caterers to mitigate and control contamination. Currently, we do not have food safety concerns that lead to payment of fees, penalties or warnings.

Explosion and Fire Containment Bag (FCB)The risks that lithium battery fires pose to inflight safety are increasing with the growing use of digital devices. To mitigate the risk and to keep our flights and customers safe, PAL

0.00231%

0.00203%

Food Hygiene Concerns

2018

2019

Customer ComplaintsThe Company received substantiated complaints from our customers relating to safety. Substantiated complaints include complaints from customers that went through the organization's formal channels and grievance mechanisms as well as complaints that were lodged to and acted upon by government agencies. In 2019, there were seven (7) substantiated complaints received and all were addressed. Most of the customer complaints were incidents during flight such as injuries sustained due to severe turbulence.

Customers' Safety


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PAL and PALex have a high regard for the safety and health of its workers. All workers are provided with appropriate training and resources to ensure that each task is accomplished safely and efficiently.

Occupational Safety and Health Committee (OSHCOM) is well-represented by decision-makers of our departments, as well as their individual contributors. The OSHCOM convenes every month to discuss all issues and programs related to the safety and health of workers.

Safety Officers are appointed, giving the assurance that safety concerns will be dealt with accordingly. These personnel are provided with continuous training as well.

In 2019, there were 74 cases of work-related injuries and 32 cases of work-related illnesses for PAL. On the other hand, there were 25 cases of work-related injuries and no cases of work-related illness for PALex. All employees who were injured and got ill were taken care of by PAL and PALex Medical. Both PAL and PALex had zero work-related fatalities for 2019.

18,090,240 Safe man-hours

There were 99 cases of work-related injuries

for 2019

There were 32 cases of work-related illnesses

for 2019

In 2019, there were ZERO work related fatalities for both PAL &

PALex

Occupational Health & Safety


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05S ProgramOur primary office buildings are located in various areas of the different cities in Metro Manila. Despite this, we ensure that our canteen facilitiesare maintained to bring in safe and healthy food to our employees.

We continue to uphold 5S program to ensure orderly and safe workplace for our employees. To reinforce this, we have organized a pool ofdepartmental champions who ensure that the program is being observed in their own departments.

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With the emergence of the COVID-19 pandemic, PAL Group has activated its protocols to respond and mitigate the COVID-19 threat to its operations, passengers, and employees. These protocols comply with applicable health regulations promulgated by the Philippine Department of Health and the different health authorities from countries in which PAL operates, the World Health Organization and International Air Transport Association.

Our main objective in any emergency situation, including a public health emergency, will always be to protect and save lives, and attend to the welfare of passengers and employees, the emergency responders, the organization, its properties and the environment.

Planning and preparation are the key elements for an effective management and successful resolution of an emergency situation or similar incidents. In an emergency, the succession of events is unpredictable; therefore, published procedures and operational plans will serve as a guide and checklist and may require field modification in order to meet the requirements of a specific emergency. These procedures and plans are documented in our Crisis Management Manual.

The policies and procedures described in the Crisis Management Manual are expected to be followed by all Philippine Airlines and PAL express personnel, and those personnel with designated roles and responsibilities to respond to emergency situations or provide humanitarian assistance to victims and their family.

The Crisis Management Manual has a whole chapter dedicated to responding to Public Health Emergencies such as the COVID-19 pandemic.

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TotalEmergencyExerciseconducted

20Table Top Exercise

1 Evacuation Drill

2 Earthquake Drills

In 2019, the group conducted a total of 23 emergency exercise which consists of 20 table top exercises of an aviation disaster scenario; one (1) simultaneous evacuation drill held annually in Inflight Center, NAIA Terminal 2, Maintenance Base Complex, Data Center Building, and in PAL PNB Financial Center Building; and two (2) earthquake drills.

PAL and PAL express also comply with the ICAO requirement and CAAP requirement to have an emergency response plan. This, along with business continuity plans, prepares the Company for an emergency. Furthermore, PAL and PAL express periodically test for the effectivity of the emergency response plans and constantly review opportunities for improvement towards faster and more efficient recovery from an emergency or a crisis.

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Employee Training and Development

41

The following divisions ensure the efficiency of flight trainings:

1. Flight Training Division- Upholds training standards of the Company by training, guiding, and monitoring the performance of pilots and flight instructors using flight training devices. The division provides type-rating and instructor courses.

2. Ground Training Division- Provides theoretical and practical instructions, periodic refresher, recurrent, and special courses to flight crew and dispatchers. Supports ground training needs of pilots for type-rating and instructor courses.

3. Quality and Standards- Plans, organizes, and implements the quality management system of PATC. This office ensures that the highest standards of training are given to the flight crew members and flight dispatchers.

Training PolicyIt is our policy to provide initial and continuous trainings and to develop each employee into a person who possesses the right Knowledge, Skills, Values and Attitudes (KSVA) needed to deliver the performance called for by his duties and responsibilities.

Pilot TrainingPAL Aviation Training Center (PATC) is responsible for the training and development of flight deck crew and flight dispatchers of the PAL Group. The training center ensures all training and qualification requirements of pilots and dispatchers are compliant with: (a) Civil Aviation Authority of the Philippines (CAAP); (b) International Civil Aviation Organization (ICAO); (c) IATA Operational Safety Audit (IOSA); and (d) other needs by (but not limited to) Flight Operations Department (FOD), Integrated Operations Control Center (IOCC), and Safety Department.

Pilot Training

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About PHI

Company Highlights

About This Report

Health & Safety

Employee Training & Dev’tPilot TrainingCabin Crew TrainingOur Trainers & Front linesHolistic Training Program

Energy Efficiency


A320 Full Flight Simulator

Training is mostly done in classrooms, Flight Training Devices, and blended learning using Learning Management System (LMS) or e-learning.

The Company has invested on various equipment for the training of our pilot roster. An Airbus A320 Full Flight Simulator was purchased for the training of our roster of A320/A321 pilots. Other training equipment include the Airbus Procedure Trainer and B777 Enhanced Virtual Procedure Trainer.

Simulator trainings for Airbus and Boeing Wide Body aircraft are performed in other training venues in Clark, Haneda, Singapore, Vietnam and Thailand while ground training are all done at PATC in Manila.

PATC is a holder of Approved Training Organization Certificate (ATOC) given by the Civil Aviation Authority of the Philippines (CAAP) which allows the Sub-department to conduct pilot and dispatcher training for the Company and external clients.

Non-compliance with training-related regulatory requirement would not allow pilots and dispatchers to fulfill their duties. This would result in shortage of manning and penalties from regulators not only in the Philippines, but also in outstations where PAL flies. PATC also uses training performance to gauge the skill level of our trainees and determine areas of improvement. Training must be as dynamic as how the aviation industry evolves. Data gathered from all stakeholders are used to draw up a training solution for the improvement of our trainees. This ensures high standards of safety and efficiency of our crew.

Pilot Training

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Management has always been supportive to the training and development of the crew. We not only adhere and comply with regulatory or mandated requirements, but also work on the improvement on the quality of our training.

Management has supported our thrust to standardize and improve the quality of our ground and flight instructors by giving them valuable workshops and additional trainings.

All instructors undergo Airbus Instructor Pilot Course (AIPC), which comprises the Core Course (given to all instructors), and the type-specific courses (given to all Airbus simulator instructors). An instructor’s workshop entitled “Effective Performance Coaching” is being given to all instructors and is expected to be completed by mid-2021.

The good collaboration between PATC and Safety Department has resulted in the improvement in training methodologies and evaluation.

PATC started working on digital transformation into Competency-Based Training (CBT) and will eventually go into Evidence-Based Training (EBT).

Pilot Training


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B777 Full Flight Simulator

PAL Aviation SchoolTo ensure continuous supply of pilots, PAL maintain its own Aviation School. Founded in 1960, the PAL Aviation School aims to produce highly competent and airline-oriented pilots by delivering a holistic training package using modern equipment, facilities and methodologies.

The PAL Aviation School specializes in several courses, each developed to suit the career goals of pilot trainees. Other than programs intended for pilot trainees destined for employment in Philippine Airlines or other local/foreign airlines and agencies, programs for paying students are available in both single-engine and twin-engine courses with actual flight training done on the Cessna 172R Skyhawk and the Piper Seminole PA 144 respectively. These programs can be amended to incorporate the requirements of sponsoringairlines subject to Approved Training Organization (ATO) approval.

The PAL Aviation School utilizes a Redbird SD Instrument Trainer and Redbird Citation Mustang for the trainee's simulator training. The ab initio training curriculum qualifies a trainee to apply for a Private Pilot License and Commercial Pilot License with Instrument Rating.

Pilot Training


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The CFST mimics the layout of an actual aircraft cabin based on a realistic cabin footprint with an aisle, galley, seats, overhead stowage bins and a lavatory where fire scenarios are simulated and addressed through modern training methods. During the training proper, crew members are asked to play various roles: as fire fighter, communication channel between the crew and the cockpit/flight deck and assisting fire fighter

Safety is paramount to PAL and PALex. Cabin crew training are done in-house and the Inflight Services Training (IFST) Division handles the training requirements to ensure that the crew meet all regulatory requirements and are equipped with the needed Knowledge, Skills, Values and Attitudes (KSVA) to perform their task safely and exceeding customers' expectation.

Apart from the training mandated by regulators, IFST also conducts other forms of training for our crew such as Inflight Service Trainings which place PAL and PALex crew at par with the industry’s best cabin crew, trainings on the requirements of World Health Organization (WHO), Transportation Security Administration (TSA), Office of Transport Security (OTS) and First Aid requirements for cabin health and security. Other trainings conducted pertain to positions and qualification upgrades.

As part of its efforts in innovation, the Company has invested in a state-of-the-art Cabin Fire and Smoke Trainer (CFST) which is a special structural equipment that simulates inflight fire scenarios.

Cabin Crew Training

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Energy Efficiency


The Company also acquired Cabin Door and Window trainers for the use of all cabin crew for their training. These trainers strengthen the knowledge of crew in cabin and window door opening, giving them the opportunity to learn and practice without having to do it in an actual aircraft.

Cabin crew training metrices, such as response time, test scores, and behavioral tendencies, are recorded, measured, and reviewed to ensure that standards are met.

The VR training solution is a testament to the airline’s commitment in providing quality customer service and safety to its passengers.

Following the steps of CFST is the virtual reality (VR) training program, an innovation which marked another first in Philippine Aviation for the use and training of cabin crew members. In collaboration with a local tech start-up and the local aviation authority, an immense VR training program was developed to improve the standards of learning and service. The solution has provided cabin crew members an enhanced and immersive learning experience that not only resulted in higher retention rates but also more interactive and fun training.

The VR-enhanced training has also helped the cabin crew members acquire stronger skills to respond more effectively to real-world challenges when under pressure, while productively cutting logistical requirements and dependency to aircraft availability.

Cabin Crew Training

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Trainings for knowledge, skills, values and attitude for all employees' professional and personal development co-exists with the Company's goal to enhance the growth and development of its people. Business continuity is achieved when performance is enhanced by necessary training of all our individual contributors and leaders from different groups, namely, Commercial, Office of the President, Operations, Finance & Administration, and third-party providers in both international and domestic areas.

Our Trainers For the trainer's continuous competency enhancement, regular attendance to training is observed. Some trainers also attend initial and recurrent Dangerous Goods Regulations training at the International Airline Transport Association (IATA), a governing body for airlines, as a mandatory requirement to meet regulatory compliance. Attendance to internal and external training and line trainer development for in-house and third-party trainers allow continuous growth and leads to the acquisition of the latest trends and best practices on learning and development that ensure ready support for our agents.

Our Front linesOur employees from both Philippine Airlines and PAL express, as well as our third-party handlers, assigned at the airport particularly at the check-in counters, gates, ramp, baggage and cargo offices, and third-party handlers for sales such as those in our contact centers, are well equipped with the necessary skills to perform their duties with a ‘Buong-Pusong Alaga’ service.

In order for Airport and Sales personnel to be fully equipped and compliant with all regulations governing airlines, Commercial Training and Development Division (CTDD) trainers provide regular trainings to the personnel. Trainers ensure that permits of airport personnel are maintained and current as a requirement.

Our Trainers & Front Lines


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Annual published courses are provided to all interested employees. These courses provide a general learning and development solution, which addresses personally and professionally directed learning needs.

Essential skills are embedded in the curriculum of frontline personnel courses which include customer service, personality development, communication, values formation, and new employee indoctrination for a more holistic development of new employees.

Adaptation of the Learning Management System (LMS) and other training methodologies (virtual training, self-paced/distance learning) are offered to ensure fast and efficient delivery and reach as many employees.

ACE It!The Group implemented a new program called Assess, Consult, Engage (ACE) It. It is a needs-specific, function-targeted intervention in learning and development that provides more tailored training solutions that address training gaps in specific functions within departments.

For behavioral skills, Management and People Development Division (MPDD) ensures regular consultation with each department for their team's professional development.

Holistic Training Program

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Energy Efficiency


More of Training and DevelopmentTraining and Development is a strategic partner in business growth which include opening of new stations, implementing new systems (Passenger Services System) for Airport and Sales operations and providing a holistic training approach to employee learning and development.

Line Performance Observations, a post-training activity, is conducted to ensure learning application at work. We participate in the monthly Ground Operations Safety Action Group (GOSAG) of Airport Operations Department discussing operational situations and concerns. We are also recipients of updated policies and procedures pertaining to line operations to ensure courses are current.

The management recognizes the critical function of learning and development in achieving its business objectives through people. We maintain updated operations manuals that serve as our reference in addition to the strong partnership with the client departments in the design and delivery of our training programs.

PAL Group commits to incorporate the latest trends and best practices on learning and development in their training programs. Attendance to these internal and external trainings, including the line trainer development training, allows for employee's continuous growth.

Other Management Approaches:1. Program implementation has been integrated in the trainer's commitment

setting, monitoring, and coaching activity.2. Technology has been used for collaboration, faster coordination, and close

monitoring of performance. Cloud-based drives, software, and systems havebeen utilized for communication, documentation, file storage, etc.

3. Regular employee touchpoint and commitment setting for a more people-centric approach for improved performance.

2019 Training Hours for PAL and PALex employees

167,461 hours is the total training hours provided to male employees

41 hours/employeeis the average training hours provided to male employees

186,578 hours is the total training hours provided to female employees

45 hours/employeeis the average training hours provided to female employees

Holistic Training Program

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Energy Efficiency


Energy Efficiency

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Based on the Global Climate Risk Index 2020, the Philippines ranked 2nd as the most affected by climate change in 2018 and the 4th

among the long-term climate impacted countries in the last two decades (1999-2018).

The global aviation industry contributes roughly 2% of all man-made carbon dioxide (CO2) emissions. Flights worldwide produced 915 million tons of carbon dioxide (CO2) in 2019.

Philippine Airlines and PAL express recognize the impact of our operations to the environment and the country. We have signified our commitment thru our environmental policy.

We are fully committed to protect the environment by reducing the environmental impact of our operations through the development of environmental management system.

We comply with the local and international regulatory requirements and develop environmental protection programs to properly implement the law.

We have also adopted various industry best practices to further enhance our programs and reduce our environmental impact.


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Energy EfficiencyOur PolicyFour Pillar StrategyResource Management


Our Policy

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Philippine Airlines and PAL express recognize that their operations contribute to climate change. As part of our responsibility, we have adoptedIATA's Four Pillar Strategy to help achieve the targets to mitigate carbon dioxide emissions from air transport.

Improved technology, including the deployment of sustainable alternative fuels

More efficient aircraft operations

Infrastructure improvements, including modernized air traffic management system

A single global market-based measure to fill the remaining emissions gap

Pillar 1: Improved Technology PAL and PALex continue to invest in a fuel-efficient and modern fleet.

PAL currently has six Airbus A350 that are more fuel-efficient, with lower carbon emissions and lesser noise compared to previous-generation aircraft. The Airbus A350 is also equipped with the most efficient aero-engine flying today. PAL also invested in New Engine Option of Airbus A321. With its new engines, the A321neo and A321neo SR generate less noise and carbon emissions while being more fuel efficient as against the previous-generation aircraft. PAL has also retired its last two Airbus A340 last 2019.

PAL express invested in procuring a quiet and fuel-efficient turboprop- DASH 8 - Q400NG aircrafts from the De Havilland Aircraft of Canada (formerly known as Bombardier).

IATA's Three TargetsThe aviation value chain including airlines, airports, air navigations service providers and manufacturers has agreed to three sequential targets on climate change:

• An Average improvement in fuel efficiency of 1.5% per year from 2009 to 2020

• A cap on net aviation CO2 emissions from 2020 (carbon-neutral growth)

• A reduction in net aviation CO2 emissions of 50% by 2050, relative to 2005 levels.

IATA’s Four-Pillar Strategy Philippine Airlines and PAL express adopt IATA’s four-pillar strategy to lessen our operational environmental impact. The strategy includes:

Four Pillar Strategy

1 2

3 4


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Other Essential TopicsAirline No. of aircraft as of 31 Dec 2019

Fleet Average Age (in Years)

61 4.8

36 8.0

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Pillar 2: Operational MeasuresPAL and PALex continuously improve our existing fuel efficiency programs. We adopt the industry's best practices in fuel and carbon emissionreductions. PAL Group has invested in Rolls Royce Efficiency Management System to accurately measure performance of the implementation of itsfuel efficiency initiatives.

PAL’s and PALex’s current key drivers on fuel efficiency programs include:

EngineeringOptimized Engine Core WashShortened interval between corewashes to maintain efficiency of our engines.

Optimization of Potable Water LoadingRevise water loading orders to satisfy the historical water usage inflight based on routes and passenger load.

Use of Ground Support Equipment instead of Auxiliary Power Unit (APU) during ground timeReduces the fuel burn of aircraft's APU.

GroundFlightZero Fuel Weight (ZFW) Planning Accuracy New procedures are in place ensuring that Planned and Actual ZFW would have minimal variance preventing over-fueling.

Single Engine Taxi-In (SETI)The current primary procedure for taxi-in that significantly reduces fuel consumption during taxi-in.

Data AnalyticsUse of Efficiency Management System to monitor and measure fuel efficiency.

Modern and fuel-efficient fleetPAL invested in fuel efficient aircraft with latest engines such as Airbus A350 and A321neo. Currently, it has six A350, six A321neo and two A321neo SR.

PAL express invested in procuring 12 DASH 8 -Q400NG aircrafts from the De Havilland Aircraft of Canada (formerly known as Bombardier) which will eventually replace DASH 8 - Q300 and DASH 8 – 400 Classics. The first aircraft was delivered in 2017 and the last one on February 2020.

Fleet



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Pillar 3: Improved InfrastructurePAL and PALex continue to work with Air Traffic Management for navigational improvements. We subscribed to Wind Updates to enable further optimization of flights especially for long haul flights. We are also currently streamlining the routes taken by our aircraft to shorten flight time.

Pillar 4: Global Market-Based Measure (MBM)In 2016, the International Civil Aviation Organization (ICAO) Assembly adopted the MBM scheme in the form of Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) to address CO2 emissions from international aviation.

CORSIA aims to stabilize net CO2 emissions from international civil aviation at 2020 levels by requiring airlines to offset growth of their emissions from international aviation.Philippines has voluntarily participated in the Pilot Phase of CORSIA. All operators in the Philippines including PAL and PAL express are required to monitor its CO2 Emissions for international flights starting 01 January 2019. By 2021, airlines are required to purchase and cancel “emission units” to offset the growth in CO2 emissions covered by the scheme for flights operated between volunteering states.



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Other Environmental Measures

Ground EmissionsIn line with the aviation industry’s thrust for carbon neutral growth, and in support to the Department of Transportation’s plan to implement controls on greenhouse gas emissions, Philippine Airlines and PAL express have initially started replacing its transport shuttle buses to a more environment-friendly vehicle. We currently operate 16 units of COBUS used as airport shuttle bus. These transport vehicles are equipped with EURO V compliant diesel engines with low emission of gaseous and particulate pollutants. Further, these vehicles use fuel of EURO IV standard specifications with significantly low sulfur content. Staff are also encouraged to adhere to anti-idling engine by switching off the engines when not in use to conserve fuel and promote cleaner air.

Aircraft NoisePAL and PALex continue to modernize its fleet that emits less noise and complies with ICAO Chapter 4 Noise Standard.

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Resource Management


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Energy Consumption and ReductionPAL and PALex are committed to help the environment by implementing efficient use of energy and resources. Our environmental management system reviews the environmental objectives and target by reducing total energy (kWh) and total water (cubic meters) consumption by 5% from 2018 baseline. The ongoing conservation efforts on energy and water consumption in buildings, offices, facilities owned and operated by PAL and PALex are monitored by the respective Facilities Management team.

Energy Consumption (Electricity)In 2019, our energy consumption increased by 0.6 million kilowatt-hour (kWh) from 2018 due to increase in occupied areas. The total electricity consumption includes those in PAL and PALex major facilities, catering, and ground maintenance service providers.

We began shifting from fluorescent lamps to LED lights to improve our energy efficiency. In 2019, PAL Maintenance Base Complex has completed replacement of 25% of lights to LED. For PALex, a total of 3,362 of LED bulbs were replaced in the entire main hub expecting a 40% reduction in wattage compared to CFL tubes.

We have also adopted simple yet effective measures to further reduce energy consumption. This includes the setting of room temperature from 22°C to 25°C in all offices, regulating the time of turning on of office appliances and equipment, and conducting of regular preventive maintenance.

Energy Consumption (Gasoline and Diesel)In 2019, PAL and PALex used 148,708 liters of gasoline and 2.7 million liters of diesel for its operations. This serves as fuel for Company service vehicles, ground service equipment, and generator sets. This consumption only includes the gasoline and diesel supplied by PAL's Fuel Storage Facility in Pasay City.

Energy Consumption (Jet A-1 Fuel)With the increase in domestic and international flights of both PAL and PALex in 2019, the consumption of Jet A-1 fuel has likewise increased. To help achieve the aviation industry targets, PAL has adopted the four-pillar strategy of IATA which is discussed in pages 53 to 55 of this report. Fuel conservation measures are in place to ensure reductions in fuel consumption and carbon emissions.

4,987 Gigajoules

2019 Gasoline Consumption

1.35 million-ton

2019 Jet A-1 Fuel Consumption

13.8 million-ton

2019 CO2 Emissions from Purchased Electricity

19.4 million kilowatt-hour

2019 Electricity Consumption

103,727 Gigajoules

2019 Diesel Consumption

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Water ConsumptionIn 2019, our water consumption increased by 9 thousand cubic meters (m3) from 2018 due to increase in meal production. The water consumption includes the consumption of PAL's and PALex's major facilities, including their respective fleets, catering and ground maintenance service providers. We also adopted simple effective measures to raise awareness in reducing water consumption such as placing signages across various areas about water conservation and regularly checking pipelines for leaks.

Effluents and WastePAL and PALex had also implemented environmental protection programs to properly manage our solid and hazardous wastes and wastewater.

EffluentPAL has also invested in a Sewage Treatment Plant (STP) to treat the wastewater from its catering operations. In 2019, the STP was able to treat 1,350 cubic meters of wastewater. Wastewater reduction measures have been implemented inflight to reduce the wine disposal which is treated in the STP. Lavatory waste of aircraft is treated in the STP managed by Manila International Airport Authority.

Solid WasteIn 2019, our solid waste generation rose to 524 tons compared from our 2018 generation. Main contributing factor is the increase in the number of flights, passengers, and meals produced in the facility.PAL and PALex implement waste management strategies such as waste reduction and segregation at source. PAL offices, led by Catering operation, are strictly monitoring its implementation. PAL cabin crew also started the implementation of inflight waste segregation in selected flight routes. All waste are segregated into different categories: Recyclable, Compostable, Food Waste, and Residual. Food waste and compostable materials are decomposed through bokashi and vermicomposting. Recyclable materials are recovered and sold to various recycling facilities and residual waste are disposed to a sanitary landfill.

Hazardous WastePAL and PALex comply with the Toxic Substances and Hazardous and Nuclear Wastes Control Act of 1990. Hazardous waste generated such as used lead acid batteries, busted fluorescent lamps, and used industrial oil are transported, treated, and disposed through a DENR accredited transporter and Treatment, Storage, and Disposal Facility (TSDF).

1,350 cubic meters

2019 Treated Effluent

4,377 tons

2019 Solid Waste Generation27%

RecyclableMaterials

9%Compostable

Materials

12%Food

Waste

52%Residual Waste

22.91 tons

2019 Hazardous Waste Generation

306,397 cubic meters

2019 Water Consumption

Resource Management


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The BoardPAL Holdings, Inc. (PHI), together with Philippine Airlines, Inc. (PAL) and Air Philippines Corporation (APC), recognize that good Corporate Governance is vital in its pursuit towards the continued growth and enhancement of the Corporation’s value, mainly for the benefit of its shareholders and stakeholders. To help them achieve their goal, the companies placed both men and women with vast and diverse knowledge, experience, competence, and expertise in their respective fields as part of its Board of Directors. The chosen members of the respective Boards, and its officers and employees, are committed to maintain a high level of corporate governance through the implementation of rigid internal control processes and enterprise risk management systems to continuously enhance shareholder value.

The members of the companies’ Board of Directors are elected during their respective Annual Stockholders’ Meetings. PHI’s Board is composed of nine (9) Directors, two (2) of whom are Independent Directors; PAL’s Board is composed of fourteen (14) Directors, four (4) of whom are Independent Directors; while APC’s Board is composed of six (6) Directors. Dr. Lucio C. Tan serves as the Chairman of the Board for all three companies.

It is the Board’s responsibility to foster the long-term success of the Corporation and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the best interests of the Corporation as a whole, including its Shareholders and Stakeholders. It shall ensure that all its actions are within its scope of power and authority as prescribed in its respective Articles of Incorporation, By-Laws, and in existing laws, rules and regulations.

Corporate Governance


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Energy Efficiency

Other Essential TopicsCorporate GovernanceData Privacy and SecurityOur People and ValuesLabor Management PracticesSocial Responsibility

Education and TrainingTo ensure that incoming Directors are appropriately apprised of their duties and responsibilities prior to their assumption of office, each Director shall undergo an orientation program to allow them to be fully informed of the Company’s business, corporate structure, vision, mission, Articles of Incorporation, Code of Business Conduct, and Ethics and all other matters necessary for the effective performance of their functions. Said orientation program likewise includes SEC-mandated topics on Corporate Governance.

Moreover, Management Officers receive appropriate orientation on their respective duties and responsibilities as management executives when they are first appointed as such. This ensures that incoming Senior Management Officers are familiar with the Corporation’s business and governance processes. Each Director and key Officer is also required to annually attend a training program/seminar on Corporate Governance where relevant and necessary topics are discussed to ensure that they are continuously informed of the developments in the business and regulatory environments, including emerging risks relevant to the Company as well as Corporate Governance matters including audit, internal controls, risk management, sustainability, and strategy.

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Internal ControlThe Board oversees the establishment of an internal control system to ensure that:

• the Corporation is properly and effectively managed and supervised;

• the Management actively manages and operates the Corporation in a sound and prudent manner;

• the organizational and procedural controls are supported by effective management of information and risk management reporting systems;

• there is an independent audit mechanism to monitor the adequacy and effectiveness of the Corporation’s governance, operations, and information systems, including the reliability and integrity of financial and operational information, the safeguarding of assets, and compliance with laws, rules, regulations, and contracts.

Internal AuditInternal Audit provides an independent objective and risk-based assurance within the Corporation in order to add value and improve the Corporation’s operations. It examines and evaluates whether the Corporation’s controls and processes, as designed by Management, are adequate, efficient, and functioning in a manner that ensures programs, plans, goals, and objectives are achieved; and that the employees’ actions are in compliance with policies, code of conduct, standards, procedures, and applicable laws and regulations. This will help the Corporation accomplish its objectives by providing a systematic and disciplined approach for the evaluation and improvement of the effectiveness of risk management, control, and

Corporate Governance


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governance processes. Internal Audit has an independent status and the Head reports functionally to the Audit Committee and administratively to the CEO.

WhistleblowerThe Group has a Whistleblower Program and Covered Persons and Stakeholders are encouraged to come forward and raise serious concerns about any and all actual or perceived wrongdoing, malpractice or risk involving the Group. Reports may be made through email add [email protected], mobile number 0917-508-8942, or landline 83510454.

Enterprise Risk ManagementAn Enterprise Risk Management Committee (ERMC), which consists of the Board of Directors, was created precisely to aid the Board in fulfilling its risk oversight responsibility by leading the Company’s strategic direction in the management of material business risks; overseeing the establishment and implementation of a risk management framework; and reviewing the effectiveness of that risk management framework in identifying and managing risks and controlling internal processes.

In executing its duties, the ERMC shall have unlimited access to Senior Management. It likewise has the Board’s authority to seek information it requires from employees and external parties; obtain outside legal or other professional advice at the expense of the Company; and ensure that Company officers attend Committee meetings, as necessary.

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Corporate GovernanceAn Enterprise Risk Management (ERM) Group was likewise formed within PAL and PALex, consisting of executives and officers from various departments in the Company. The ERM Group shall assist the ERMC in performing its responsibility of institutionalizing a sustainable risk management process within the Company.

Code of Business Conduct and EthicsThe Group promotes and upholds the highest standards of ethical behavior among its directors, officers, consultants, employees, suppliers, trainees, and third-party agents (Covered Persons). The Code of Business Conduct and Ethics (Code) sets the expectations of acceptable behavior and serves as guidelines for Covered Persons to make ethical decisions; act for the best interest of the Group in the course of their work; and exercise proper conduct towards its customers, competitors, vendors, regulators, and each other.

Covered persons have the responsibility to uphold the Group’s standards. Any violation of the Code shall be dealt with in accordance with the procedures and reporting guidelines put in place, without prejudice to the requirements of due process.

Conflict of InterestA conflict of interest arises in any situation wherein a Covered Person is in a position to exploit a corporate benefit in some way for their personal benefit such as:

• when the covered person can directly or indirectly benefit from the transaction;

• when the covered person can directly or indirectly influence the transaction for which he/she can have personal gains; and

• when the covered person accepts, whether directly or indirectly, payments, commissions, rebates, services, or gifts of more than nominal value or improper favors from suppliers, contractors, sub-contractors, customers, clients, or other entities with which PAL or PALex does business.

Covered Persons should:• avoid involvement in actual or potential situations wherein conflict

of interest is present or where it may arise;

• always put the interest of PAL or PALex above all and not engage in transactions that will be detrimental to the PAL Group

• seek authorization when publishing books, articles, or papers relating to the Company’s business or based on covered person's knowledge or information acquired by being in the Group.

Duty to DiscloseCovered Persons who have personal or pecuniary interest on any enterprise with which the Group has an existing or intended transaction shall fully disclose the relevant facts of the situation to the Chairman of the Board, in the case of the directors; and to the President and Chief Operating Officer (COO), and the Group Head and Department Heads, in the case of employees.

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Data Privacy and Security


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Energy Efficiency


Data Privacy ProgramPAL and PALex handle numerous employee and customer personal information. The information are collected from various touch points, including our ticket offices, our contact center, our website, our applications, and our offices. Both airlines have established a Data Privacy Policy to show that we recognize and value privacy rights.

A Data Protection Officer has been appointed to each airline to ensure that we are compliant with the Data Privacy Act of 2012. Compliance Officers for Privacy were also appointed to help the Data Protection Officers ensure that the Data Privacy Act is complied with by everyone in the organization. We have established reporting and complaint-handling mechanisms and have conducted regular briefings for new employees as well as refresher programs for existing employees to ensure the policy is understood so that disclosure to unauthorized entities are avoided.

For 2019, both airlines have zero substantiated complaints raised to the National Privacy Commission.

Data Security ProgramWe recognize the risk for Loss of Data, Data Breaches, Malware Attacks, Employee Data Theft, and System unavailability. While there has been no reported incident of data breach in 2019, we recorded 23,150 malware occurrences and 440 phishing incidents. Policies and procedures have been developed to mitigate and to address such risks. The PAL Information Security Manual is in place to guide employees' behavior pertaining to the security of our data, assets, IT systems, etc.

Data Privacy and Security for CustomersWe have established appropriate physical, technical, and organizational security measures to protect the personal information provided to us. We use several security techniques including secure servers, firewalls, and encryption in safeguarding the storage of data. These safeguards are regularly reviewed to protect against unauthorized access, disclosure, and improper use of Personal Information, and to maintain the accuracy and integrity of the data. We will adapt and implement the necessary changes in security measures to ensure continuous integrity of Personal Information.

Data Privacy and Security for Employees We use employees’ personal information for a variety of personnel administration and employee, work, and general business management purposes, including: 1) administration of payroll; 2) improvement, maintenance, and administration of employee benefits; 3) management of work and employees; 4) operation of performance and salary reviews and the Company’s IT and communications systems; and 5) compliance with record keeping and other legal obligations. The Company has security measures in place which ensure the confidentiality of the information contained in our databases. These measures are reviewed and regularly upgraded in line with technological developments.

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Thumbs Up is the program that strengthens the culture of recognition in the organization and enables our leaders, within their respective units, to give prompt recognition for notable acts of deserving employees who make an impact to the division or department.

Our People and Values


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STAR (Shining Through Appreciation and Recognition) Awards is the employee recognition program of PAL and PALex. It aims to acknowledge employees who exemplify our Company’s values. The award categories are Pilot of the Year, Flight Purser of the Year, Cabin Crew of the Year, Sales Frontliner of the Year, Airport Frontliner of the Year, Manager of the Year, Assistant Manager of the Year, and Individual Contributor of the Year. The process leading to the determination of winners involves rigorous validation, evaluation, interview, and deliberation.

We often receive feedback from customers who experience random acts of Buong-Pusong Alaga (BPA) care of PAL and PALex employees. These "acts of BPA" are featured through the Company's various internal communication platforms to recognize employees and encourage others to do the same.

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Labor Management Practices


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We recognize two local labor unions: (1) Philippine Airlines Employees’ Association (PALEA) for the rank and file ground employees, and (2)Flight Attendants’ and Stewards’ Association of the Philippines (FASAP) for the cabin crew. In addition, we also recognize foreign labor unions in the United States, Singapore, and Japan. We also ensure the timely conclusion of different Collective Bargaining Agreements (CBAs) to achieve sound and lasting industrial peace.

All employees benefit from a harmonious labor management relationship. This harmonious relationship between the labor and management leads to increased efficiency, which, in turn, leads to higher productivity and growth. The Human Capital Department ensures that regular communication is observed between various unions and employees to maintain a harmonious relationship. We sit down in the union negotiations scheduled by both parties to discuss and arrive at agreements that are amenable and beneficial to both labor and management. On an average, there are 12 consultations conducted annually concerning employee-related policies.

Aside from the direct consultations, management also seeks to further improve its relationship with the employees through employee engagement activities and townhalls. Employee engagement activities such as sports, health and wellness, among all others help employees pursue their interests while being in the Company. Quarterly townhalls are also held for management to update everyone on the initiatives of the Company as well as to serve as an avenue for everyone to raise their concerns to management

The spirit of respect and collaboration harmonized the relationship between labor and management in navigating the aviation industry. In the end, this kind of relationship aids the Company in addressing the operational and strategic concerns of the business.

We comply with existing Labor Laws, Collective Bargaining Agreements, as well as Company Policies and Procedures. Labor and management conducts regular dialogue to discuss and clarify certain concerns of employees. This is key to ensuring a positive work environment. It is also management's way of showing that it values its employees. We also strive to maintain the timely conclusion of the different collective bargaining agreements.

“12 consultations conducted annually concerning employee-related policies“

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The Philippine Airlines Foundation, our corporate social responsibility arm, extends humanitarian assistance for the welfare of the underprivileged communities in the Philippines. In pursuing its objectives, the Foundation continued to make use of the Airline’s transport capacity to serve the neglected sectors and disaster-stricken areas in the country.

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Humanitarian Cargo GrantThe Foundation’s Humanitarian Cargo Grant helps provide aid to disaster-stricken and neglected areas by facilitating the airlift of essential supplies and relief goods.

The Foundation, in partnership with the Tan Yan Kee Foundation and PAL’s Human Capital Department, also extended assistance to the victims of the Taal Volcano eruption in January 2020 by distributing relief goods to more than 1,500 families in Batangas who were left homeless.



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PAL Foundation flew and distributed relief supplies for victims of one of the world's most powerful tropical cyclones, Haiyan that hit Visayas region in 2013

The Foundation has flown donations for communities who were affected by different types of calamities including Typhoon Haiyan (Yolanda) in Tacloban, Bohol earthquake and Zamboanga crisis in 2013, Marawi siege in 2017, earthquakes that struck Cotabato and other parts of Mindanao in 2019, etc.

PAL Cagayan staff received boxes of donations from PAL Foundation and other donors for the victims of Marawi siege 2018.

PAL Cotabato personnel accepted relief supplies from PAL Foundation and other generous donors for the victims of earthquake that struck Cotabato and other regions in Mindanao in 2019



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Medical Travel GrantThe Foundation’s Medical Travel Grant program helps transport underprivileged patients afflicted with serious diseases, and their escorts, to destinations in the Philippines and abroad for the appropriate free medical treatment.

The Foundation also flies volunteers to serve the poor and underserved communities in the country. The Foundation has flown an average of 60 patients per year for life-saving surgeries in Manila and abroad.

John Rey Yabut, a young boy from Mindanao, is one of PAL Foundation's Medical Travel Grant beneficiaries who had completed a craniofacial operation in Manila.

#RPRSNTPinoy!The Foundation’s flagship CSR program, #RPRSNTPinoy!, encourages talented young people to enhance their artistic or athletic talents and skills and showcase them in the world stage as the Best of the Filipino. The aim is also to inspire other youth to aspire for excellence and actualize their potential. Travel assistance was provided to about 300 underprivileged but outstanding Filipinos who represented the country in global competitions in the fields of sports, arts, academics, etc.

Street kids turned into award-winning global ballet dancers with support from PAL Foundation through its flagship CSR program, #RPRSNTPinoy



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Environmental AwarenessPAL Foundation together with PAL and PALex have also supported various projects of the Tan Yan Kee Foundation including tree planting and other activities with farmers, in partnership with the Safety and Inflight Catering offices. The Foundation is also a regular supporter of the advocacies of major Philippine broadcast networks (e.g., ABS-CBN) covering child protection, disaster assistance, and education support programs.

The Foundation is involved in various environmental protection programs. Among these programs are the preservation of Philippine Eagles and their habitat, a program with the aim to provide sustenance to surrounding communities, and various environmental awareness programs initiated by the PAL and PALex Safety Department including the International Coastal Clean-up, a program for saving the world’s oceans and important waterways, and the annual Earth Hour, an activity which promotes awareness of the environmental effects of energy consumption and recycling programs.

PAL and PALex employee volunteers, together with PAL Foundation, participate in the annual International Coastal Clean-up activity held in Las Piñas/Parañaque (right photo) and Pasay (left photo) in 2017 and 2018 respectively.

PAL Foundation and PAL and PALex employee volunteers, in partnership with Tan Yan Kee Foundation (the foundation of the Lucio Tan Group of Companies), participated in a tree planting activity in Northern Luzon in 2017.



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PAL Foundation facilitated the transport of two Philippine Eagles, Geothermica and Sambisig, to Singapore in June 2019 for the promotion of wildlife conservation.


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Other Essential TopicsCorporate GovernanceData Privacy and SecurityOur People and ValuesLabor Management PracticesSocial ResponsibilityIn January 2019, PAL express Inflight Team collab-

orated with the show Kapuso Mo, Jessica Soho of GMA 7 to delight Xiona, a young girl with a rare medical condition that makes her skin rough, flaky, and darker. Her dream of being a flight attendant was granted as we let her experience flying the Flag for a day. This heartwarming episode aired in the same month.

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In September 2019, the Inflight Team hosted an educational event for Our Lady of Perpetual Help College Students and Faculty, providing industry familiarization and inspiration in a fulfilling and heartwarming whole day of mentorship and fun interaction.

Last October 2019, the Inflight Team helped college students from the Philippines State College of Aeronautics (PHILSCA) with their project by entertaining interviews and providing mentorship.

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SEC Guidelines Disclosure Title Page Reference and Remarks

Social

Health and Safety Substantiated complaints on products or services Customers' Safety p. 38

Occupational Health and Safety

Safe Man-Hours, No. of work-related injuries and illnesses Occupational Health and Safety, p. 39

Employee Management Employee Training and Development Training Hours for PAL and PALex Employees

p. 50

Environment

Resource Management Resource Management

Energy Consumption (Electricity) p. 56Energy Consumption (Gasoline & Diesel) p. 56Energy Consumption (Jet A-1 Fuel) p. 56Water Consumption p. 57Effluents and Waste p. 57Effluent p. 57Solid Waste p. 57Hazardous Waste p. 57

Material Topic Disclosure Index

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PHI-17A-December-2019.pdf - PAL Holdings, Inc.

Documents

Transcript of PHI-17A-December-2019.pdf - PAL Holdings, Inc.